ACCA FA Exam 1

✅ Correct answer: Partners are personally liable for the firm's debts; A company is a legal entity separate from its owners

📌 Explanation: Partners, like sole traders, have unlimited liability, so their personal assets can be used to settle the firm's debts. A company is a separate legal person: it owns its assets, owes its debts and continues regardless of changes in its owners, which is why incorporation protects Wanjiru's private wealth.

❌ Why the other options are wrong: Filing audited accounts with a registrar is a duty of companies, not of an ordinary partnership; shareholders' liability is limited to the amount unpaid on their shares, so they are not liable for the company's debts; a company has perpetual succession and continues when a shareholder dies.

📋 Objective: 1.1 (Context and purpose of financial statements for external reporting)

✅ Correct answer: Ability to pay interest and repay the loan when due

📌 Explanation: Lenders are concerned with the security of their loan. The bank will look at Tana Freight's cash flows, profitability, existing borrowings and assets available as security to judge whether interest and capital can be paid on time, which is the lender's specific information need.

❌ Why the other options are wrong: Directors' pay compared with other companies is mainly of interest to shareholders and the public; dividend growth is the investor's concern about returns rather than the lender's concern about repayment; compliance with employment and safety rules is chiefly of interest to employees, regulators and the public.

📋 Objective: 1.2 (Stakeholders' needs)

✅ Correct answer: It assumes the company will keep trading for the foreseeable future; If it does not apply, assets may be measured at break-up values

📌 Explanation: The going concern concept assumes that the entity will continue in operation for the foreseeable future, so assets are carried at cost-based amounts and liabilities are classified as current or non-current. If trading is expected to stop, that basis is no longer appropriate and assets are measured at what they would realise on a break-up.

❌ Why the other options are wrong: Matching costs with the revenue they help earn describes the accrual basis; keeping the owners' private assets out of the records is the business entity concept; reporting income only when cash is received is cash accounting, which IFRS Accounting Standards do not permit for the statement of profit or loss.

📋 Objective: 2.1 (Key principles and concepts of accounting)

✅ Correct answer: Comparability

📌 Explanation: Comparability lets users identify similarities and differences between periods and between entities. Restating 20X5 on the same AVCO basis means that the change in reported profit and inventory between the two years reflects performance rather than a change of accounting method, so users can compare the years meaningfully.

❌ Why the other options are wrong: Timeliness is about providing information in time to influence decisions, which a restatement does not improve; verifiability means independent observers could reach consensus on the figures, a separate issue from consistent methods; understandability concerns clear classification and presentation rather than a common basis across periods.

📋 Objective: 2.2 (Qualitative characteristics of useful financial information)

✅ Correct answer: $283,000

📌 Explanation: Closing equity = assets − liabilities = 640,000 − 150,000 − 95,000 = 395,000. Opening equity = closing equity − shares issued − profit + dividends paid = 395,000 − 60,000 − 82,000 + 30,000 = 283,000, because the share issue and profit increased equity during the year while the dividend reduced it.

❌ Why the other options are wrong: $223,000 deducts the dividends again instead of adding them back; $343,000 ignores the $60,000 share issue that increased equity during the year; $433,000 leaves out the non-current liabilities when calculating closing equity, treating long-term debt as if it were owners' funds.

📋 Objective: 3.1 (Double-entry principles and the maintenance of accounting records)

✅ Correct answer: $42,000 debit balance brought down

📌 Explanation: Trade receivables is an asset account: the opening balance and credit sales are debits, while cash received, sales returns and irrecoverable debts written off are credits. Debits 36,500 + 210,000 = 246,500; credits 198,400 + 4,100 + 2,000 = 204,500. The balance of 42,000 is a debit brought down on the asset side.

❌ Why the other options are wrong: $46,100 omits the sales returns credited to the account; a $42,000 credit balance puts the correct figure on the wrong side, as though customers were owed money; $50,200 adds the sales returns to the balance instead of deducting them.

📋 Objective: 3.2 (General ledger accounts and journal entries)

✅ Correct answer: Credit note

📌 Explanation: A credit note is issued by the seller to reduce or cancel an amount previously invoiced, for example for returned or faulty goods. Sabi records it in the sales returns day book and credits the hotel's receivable, so the customer's balance falls by the value of the returned tiles.

❌ Why the other options are wrong: A debit note is raised by the buyer to request a credit from a supplier, so it would come from the hotel rather than Sabi; a remittance advice accompanies a customer's payment; a goods received note records goods arriving at the buyer's premises, not a reduction in the debt.

📋 Objective: 3.1 (Double-entry principles and the maintenance of accounting records)

✅ Correct answer: $12,420

📌 Explanation: The trade discount is deducted before anything is recorded: 12,000 × 90% = 10,800 net revenue. Sales tax is charged on the discounted price: 10,800 × 15% = 1,620. The customer owes the gross amount 10,800 + 1,620 = 12,420, and because the settlement discount is not expected to be taken, no reduction is made at the invoice date.

❌ Why the other options are wrong: $13,800 charges tax on the list price and ignores the trade discount; $10,800 is revenue net of sales tax, not the amount the customer owes; $12,600 adds tax calculated on the list price to the discounted net amount, mixing two bases.

📋 Objective: 4.1 (Sales and purchases)

✅ Correct answer: $264

📌 Explanation: Under the imprest system the float is topped up by the amount spent, which equals the total of the vouchers: 142 + 58 + 64 = 264. This agrees with the cash check: imprest 350 − cash held 86 = 264. The sales tax is part of the cash paid out, even though it is later posted to the sales tax account.

❌ Why the other options are wrong: $250 excludes the $14 of sales tax, but that cash has still left the box; $86 is the cash remaining rather than the amount spent; $350 would restore the full imprest as though the box were empty, leaving the float overstated by $86.

📋 Objective: 4.2 (Cash)

✅ Correct answer: $4,980

📌 Explanation: Continuous AVCO recalculates the average after each purchase. After 8 March: (400 × 5.00 + 600 × 6.00) ÷ 1,000 = 5.60 per kg. The 700 kg issued leave 300 kg × 5.60 = 1,680. Adding 500 kg × 6.60 = 3,300 gives 800 kg valued at 4,980.

❌ Why the other options are wrong: $5,100 applies FIFO, leaving the 300 kg at $6.00 rather than at average cost; $4,747 uses a periodic average of all 1,500 kg bought or held (8,900 ÷ 1,500) instead of recalculating after each receipt; $5,280 values the whole 800 kg at the latest price.

📋 Objective: 4.3 (Inventories)

✅ Correct answer: Delivery and installation at the Nakuru warehouse; Testing that the machine works before production starts

📌 Explanation: IAS 16 includes in cost the purchase price and any costs directly attributable to bringing the asset to the location and condition needed for it to operate as intended. Delivery, installation and testing before use are directly attributable, so they are debited to the machine's cost account and depreciated over its useful life.

❌ Why the other options are wrong: Staff training is specifically excluded from the cost of property, plant and equipment and is expensed; routine servicing maintains the machine rather than bringing it into use, so it is revenue expenditure; insurance for the first year of operation is a running cost charged to profit or loss over the period covered.

📋 Objective: 4.4 (Tangible non-current assets)

✅ Correct answer: $31,000

📌 Explanation: A change in useful life or residual value is applied prospectively to the carrying amount. Annual charge to date (180,000 − 20,000) ÷ 10 = 16,000, so three years give 48,000 and a carrying amount of 132,000 at 1 January 20X7. New charge = (132,000 − 8,000) ÷ 4 = 31,000.

❌ Why the other options are wrong: $43,000 spreads original cost less the new residual value over four years, ignoring depreciation already charged; $28,000 keeps the old $20,000 residual value; $33,000 ignores the residual value and depreciates the whole carrying amount.

📋 Objective: 4.5 (Depreciation)

✅ Correct answer: $52,500

📌 Explanation: Research costs are expensed as incurred: 45,000. The development costs of 150,000 are capitalised because the criteria were met, and amortisation starts when the app is available for use: 150,000 ÷ 5 × 3/12 = 7,500. Total expense = 45,000 + 7,500 = 52,500.

❌ Why the other options are wrong: $7,500 is the amortisation alone and leaves out the research costs, which cannot be capitalised; $75,000 charges a full year's amortisation although the app was available for only three months; $39,000 capitalises research and development together and amortises the total for a full year.

📋 Objective: 4.6 (Intangible non-current assets and amortisation)

✅ Correct answer: $31,900

📌 Explanation: The closing accrual covers November and December: 11,400 × 2/3 = 7,600. Expense = payments − opening accrual + closing accrual = 31,500 − 7,200 + 7,600 = 31,900. The opening accrual relates to 20X5 usage that was paid in 20X6, so it is removed from this year's charge.

❌ Why the other options are wrong: $39,100 fails to deduct the opening accrual, charging 20X5 electricity twice; $35,700 accrues the whole three-month bill, including January 20X7; $46,300 adds the opening accrual instead of deducting it.

📋 Objective: 4.7 (Accruals, prepayments, accrued income and deferred income)

✅ Correct answer: $8,800

📌 Explanation: The written-off debt is expensed in full: 8,000. The new allowance is 4% × (268,000 − 8,000) = 10,400, so the allowance rises by 10,400 − 9,600 = 800, and only this movement is charged. Total expense = 8,000 + 800 = 8,800.

❌ Why the other options are wrong: $18,400 charges the whole closing allowance rather than the increase; $800 records only the movement and leaves out the debt written off; $9,120 calculates the allowance on receivables before deducting the $8,000 written off.

📋 Objective: 4.8 (Receivables and payables)

✅ Correct answer: Provide $420,000 and do not disclose the supplier claim

📌 Explanation: IAS 37 requires a provision when there is a present obligation from a past event, an outflow is probable and a reliable estimate can be made, so $420,000 is provided. A contingent asset is disclosed only when an inflow is probable and recognised only when virtually certain, so a merely possible claim is neither recognised nor disclosed.

❌ Why the other options are wrong: Recognising a $150,000 receivable treats a possible gain as an asset; disclosing the $420,000 only as a contingent liability ignores the fact that the outflow is probable, which requires a provision; netting the two claims to $270,000 breaks the offsetting rule and recognises the uncertain claim.

📋 Objective: 4.9 (Provisions and contingencies)

✅ Correct answer: $190,000

📌 Explanation: Rights issue: 800,000 ÷ 4 = 200,000 shares; premium 200,000 × (1.20 − 0.50) = 140,000, so share premium becomes 290,000. Bonus issue: 1,000,000 ÷ 5 = 200,000 shares × 0.50 = 100,000 transferred from share premium to share capital. Closing share premium = 290,000 − 100,000 = 190,000.

❌ Why the other options are wrong: $290,000 records the rights issue but ignores the bonus issue funded from share premium; $210,000 bases the bonus issue on the 800,000 shares held before the rights issue; $50,000 omits the premium received on the rights issue.

📋 Objective: 4.10 (Capital structure and finance costs)

✅ Correct answer: Dr Bank $19,200, Dr Revenue $800, Cr Receivables $20,000

📌 Explanation: Under IFRS 15 a settlement discount is variable consideration. Because it was not expected to be taken, revenue was recorded at 20,000; when the customer does take it, revenue is reduced by 20,000 × 4% = 800. The cash received is 19,200 and the full receivable of 20,000 is cleared.

❌ Why the other options are wrong: Debiting a discount allowed expense is the pre-IFRS 15 treatment that shows the discount as a cost rather than a reduction in revenue; crediting receivables with only $19,200 leaves $800 outstanding that the customer does not owe; the last entry records cash that was not received and increases revenue.

📋 Objective: 4.1 (Sales and purchases)

✅ Correct answer: Coding a payments app after feasibility and funding were confirmed

📌 Explanation: IAS 38 requires development expenditure to be capitalised once the entity can show technical feasibility, intention and ability to complete and use or sell the asset, probable future benefits, adequate resources and reliable measurement. Coding the app after feasibility and funding were confirmed meets these conditions, so the cost is recognised as an intangible asset.

❌ Why the other options are wrong: Surveying users to explore ideas is research, which is expensed as incurred; internally generated customer lists are specifically barred from recognition because their cost cannot be separated from developing the business as a whole; staff training is an expense because the entity does not control the skills its employees gain.

📋 Objective: 4.6 (Intangible non-current assets and amortisation)

✅ Correct answer: $15,350

📌 Explanation: Only items the business has not yet recorded adjust the cash book: 14,380 − bank charges 180 − dishonoured cheque 1,250 + direct credit 2,400 = 15,350. This corrected cash book balance is reported in the statement of financial position. Unpresented cheques and the outstanding lodgement are timing differences that adjust the bank statement side.

❌ Why the other options are wrong: $17,690 is the balance the bank statement would show, which is before the timing differences clear; $17,850 adds the dishonoured cheque back instead of deducting it; $13,010 wrongly adjusts the cash book for the unpresented cheques and the outstanding lodgement.

📋 Objective: 5.1 (Bank reconciliations)

✅ Correct answer: $14,055

📌 Explanation: Her ledger must be corrected for items she has not recorded: 12,205 + unrecorded invoice 1,850 = 14,055. The supplier statement reconciles to this figure after deducting the items the supplier has not yet recorded: 18,640 − payment in transit 4,200 − contra 385 = 14,055. The corrected ledger balance is reported as the payable.

❌ Why the other options are wrong: $14,440 deducts the payment in transit but not the contra, so the statement side is not fully reconciled; $9,855 also deducts the payment in transit from her ledger, where it has already been recorded; $12,205 is her ledger before recording the missing invoice.

📋 Objective: 5.2 (Payables account reconciliations)

✅ Correct answer: 2 and 3 only

📌 Explanation: The cash book is updated for items the bank has processed but the business has not yet recorded, such as standing orders, direct debits, bank charges and interest. The standing order and the interest credited are therefore entered in the cash book before the corrected balance is reconciled to the bank statement.

❌ Why the other options are wrong: Unpresented cheques and outstanding lodgements are timing differences already recorded in the cash book, so they adjust the bank statement balance, making the combination of 1 and 4 wrong; including item 1 with 2 and 3 double counts the cheques; pairing 3 with 4 treats a timing difference as a cash book correction.

📋 Objective: 5.1 (Bank reconciliations)

✅ Correct answer: An invoice omitted from both ledger accounts could still exist

📌 Explanation: A trial balance only proves that total debits equal total credits. An error of omission, where a transaction is left out of both accounts, keeps the trial balance in agreement, as do errors of commission, principle, original entry, complete reversal and compensating errors. A balanced trial balance is not proof of accurate records.

❌ Why the other options are wrong: A debit without a matching credit is a single-sided entry that would make the totals disagree; a casting error in one account changes one side only, so the trial balance would not balance; a balance left out of the extraction would also create a difference between the columns.

📋 Objective: 6.1 (Trial balance)

✅ Correct answer: $182,560

📌 Explanation: Repairs are revenue expenditure: expensing them reduces profit by 7,800, while removing the depreciation charged on them adds back 7,800 × 20% = 1,560. Overstated closing inventory overstated profit, so deduct 3,200. The omitted sale adds 5,600. Corrected profit = 186,400 − 7,800 + 1,560 − 3,200 + 5,600 = 182,560.

❌ Why the other options are wrong: $181,000 forgets to reverse the depreciation charged on the wrongly capitalised repairs; $188,960 adds the inventory overstatement instead of deducting it; $171,360 deducts the omitted sale although recording it increases profit.

📋 Objective: 6.2 (Correction of errors)

✅ Correct answer: $1,050 credit

📌 Explanation: The suspense account opens with a credit of 1,340 to balance the excess debits. Debiting 460 instead of crediting it overstated debits by 920, so the correction is Dr Suspense 920, Cr Discount received 920. The rent was under-debited by 630, so Dr Rent 630, Cr Suspense 630. Balance = 1,340 − 920 + 630 = 1,050 credit, still to be investigated.

❌ Why the other options are wrong: $1,630 credit reverses the direction of both corrections; $1,510 credit corrects the discount by only $460, ignoring that the entry was on the wrong side; $210 debit posts the rent correction to the debit side of suspense as well, so both corrections are debited to it.

📋 Objective: 6.3 (Suspense accounts)

✅ Correct answer: $207,000

📌 Explanation: Only the portion of the loan due within twelve months of the reporting date is current: 150,000. The overdraft is repayable on demand and the accrued interest is payable shortly, so both are current. Total = 150,000 + 45,000 + 12,000 = 207,000; the remaining 750,000 of the loan is a non-current liability.

❌ Why the other options are wrong: $957,000 treats the whole loan as current although most of it is due after more than a year; $162,000 leaves out the overdraft, which is repayable on demand; $195,000 omits the accrued interest, which is a liability at the year end.

📋 Objective: 7.1 (Statement of financial position)

✅ Correct answer: Expense $79,200 and liability $84,000

📌 Explanation: The 20X5 liability was over-provided by 71,000 − 66,200 = 4,800, which reduces the 20X6 expense: 84,000 − 4,800 = 79,200. The liability at the year end is the full current estimate of 84,000, because the 20X5 balance has been cleared and the over-provision affects only the expense.

❌ Why the other options are wrong: An expense of $88,800 treats the over-provision as an under-provision and adds it; swapping the figures to show an $84,000 expense and $79,200 liability misplaces the prior-year adjustment in the statement of financial position; showing $79,200 for both reduces the liability, which should equal the current year's estimate.

📋 Objective: 7.2 (Statement of profit or loss and other comprehensive income)

✅ Correct answer: 1, 2 and 4 only

📌 Explanation: IAS 16 requires disclosure, for each class of property, plant and equipment, of the measurement basis, depreciation methods, useful lives or rates, and a reconciliation of carrying amounts showing additions, disposals, depreciation and revaluations. For revalued assets it also requires the effective date of the revaluation and whether an independent valuer was involved.

❌ Why the other options are wrong: Any combination including the replacement cost of each machine is wrong, because this information is not required and would be costly to obtain; omitting the depreciation methods and useful lives, as in the combination of 1 and 3 only, leaves out a required disclosure; leaving out the revaluation details ignores the extra disclosure needed for revalued assets.

📋 Objective: 7.3 (Disclosure notes)

✅ Correct answer: 1 and 3 only

📌 Explanation: IAS 10 defines adjusting events as those providing evidence of conditions that existed at the reporting date. The bankruptcy shows the receivable was irrecoverable at 31 December, and the sale below cost shows the vehicles' net realisable value was already below cost, so both are adjusted in the 20X6 figures.

❌ Why the other options are wrong: The fire arose after the year end and is a non-adjusting event to be disclosed if material, so any answer including item 2 is wrong; the share issue on 1 March is also a non-adjusting event, so including item 4 is wrong; items 1 and 3 must both be adjusted.

📋 Objective: 7.4 (Events after the reporting period)

✅ Correct answer: $510,000

📌 Explanation: Start from profit before tax, add back non-cash and financing items, then adjust for working capital: 412,000 + depreciation 96,000 − profit on disposal 14,000 + finance costs 22,000 + fall in inventories 18,000 − rise in receivables 35,000 + rise in payables 11,000 = 510,000.

❌ Why the other options are wrong: $538,000 adds the profit on disposal back instead of deducting it; $522,000 reverses the direction of each working capital movement; $488,000 fails to add back the finance costs, which are shown separately as interest paid.

📋 Objective: 7.5 (Statement of cash flows)

✅ Correct answer: The hosting company only

📌 Explanation: A subsidiary is an entity the parent controls. Mpingo holds under half of the hosting company's votes, but its right to appoint the majority of the board gives it power over the company's activities, so the hosting company is a subsidiary and is consolidated in full with a non-controlling interest.

❌ Why the other options are wrong: The payments company is not controlled because non-voting preference shares carry no power and 10% of the ordinary shares is a trade investment; including the payments company adds a non-controlled entity; the design studio, with 30% and one board seat, is an associate under significant influence, accounted for by the equity method.

📋 Objective: 8.1 (Subsidiaries)

✅ Correct answer: $86,250

📌 Explanation: Only post-acquisition profit is consolidated: 480,000 × 9/12 = 360,000. Sabi was the seller, so its profit is reduced by the unrealised profit: 120,000 × 25% × 1/2 = 15,000. NCI share = (360,000 − 15,000) × 25% = 86,250.

❌ Why the other options are wrong: $90,000 ignores the unrealised profit that reduces the selling subsidiary's profit; $116,250 uses a full year of Sabi's profit, including nine months that pre-date control; $82,500 eliminates profit on all the goods, including those already sold outside the group.

📋 Objective: 8.1 (Subsidiaries)

✅ Correct answer: $594,000

📌 Explanation: Under the equity method the investment starts at cost and is increased by the investor's share of the associate's profit and reduced by dividends received: 540,000 + 30% × 260,000 − 30% × 80,000 = 540,000 + 78,000 − 24,000 = 594,000.

❌ Why the other options are wrong: $618,000 adds the share of profit but does not deduct the dividend received, which returns part of the investment as cash; $540,000 leaves the investment at cost as a trade investment would be; $720,000 adds the bottler's whole profit less whole dividend instead of Acacia's 30% share.

📋 Objective: 8.2 (Associates)

✅ Correct answer: Different accounting policies can distort comparisons between them

📌 Explanation: Ratio analysis is useful only when like is compared with like. If the two companies use different depreciation, inventory or revaluation policies, their margins, asset turnover and gearing can differ for accounting reasons rather than real performance, so Salma must adjust for or at least consider these differences before drawing conclusions.

❌ Why the other options are wrong: Ratios can still be calculated for a loss-making company, and losses are an important signal; audited figures still contain estimates such as depreciation and allowances, so auditing does not remove that uncertainty; the notes explain policies and figures, and ratios are no substitute for reading them.

📋 Objective: 9.1 (Importance and purpose of analysis of financial statements)

✅ Correct answer: Selling wine from inventory on credit at a profit; Receiving cash from a new five-year bank loan

📌 Explanation: The quick ratio is (current assets − inventory) ÷ current liabilities. A credit sale at a profit raises receivables by more than the cost of inventory removed, and inventory is excluded from quick assets anyway, so quick assets rise. Cash from a five-year loan increases quick assets while adding only a non-current liability, so the ratio rises.

❌ Why the other options are wrong: Paying a supplier reduces quick assets and current liabilities by the same amount, which lowers a ratio already below 1; buying inventory on credit increases current liabilities without changing quick assets, so the ratio falls; collecting a receivable swaps one quick asset for another and leaves the ratio unchanged.

📋 Objective: 9.2 (Ratios)

✅ Correct answer: $770,000

📌 Explanation: Goodwill = consideration + fair value of NCI − fair value of net assets at acquisition. Consideration = 1,200,000 cash + (1,600,000 ÷ 2) × 2.50 = 1,200,000 + 2,000,000 = 3,200,000. Net assets = 2,000,000 + 900,000 + 250,000 = 3,150,000. Goodwill = 3,200,000 + 720,000 − 3,150,000 = 770,000.

❌ Why the other options are wrong: $1,020,000 leaves out the $250,000 fair value uplift on the land; $680,000 measures NCI as 20% of net assets instead of at its fair value of $720,000; $370,000 uses Lulu's retained earnings at the year end instead of at the acquisition date.

📋 Objective: 8.1 (Subsidiaries)

✅ Correct answer: $5,160,000

📌 Explanation: Unrealised profit = 480,000 × 20/120 × 1/4 = 20,000. Adinkra was the seller, so the whole adjustment reduces the parent's retained earnings. Group retained earnings = Adinkra 4,860,000 + 80% × Lulu's post-acquisition profit (1,300,000 − 900,000) − 20,000 = 4,860,000 + 320,000 − 20,000 = 5,160,000.

❌ Why the other options are wrong: $5,156,000 treats the 20% mark-up on cost as a 20% margin on sales, giving an unrealised profit of $24,000; $5,164,000 deducts only 80% of the unrealised profit, although the parent was the seller and bears all of it; $5,240,000 includes all of Lulu's post-acquisition profit instead of the group's 80% share.

📋 Objective: 8.1 (Subsidiaries)

✅ Correct answer: $1,065,000

📌 Explanation: The cheque in transit is first treated as received by the group: Dr Cash 15,000, Cr Receivables 15,000, which reduces Adinkra's intra-group receivable to 50,000 to match Lulu's payable. Both intra-group balances are then cancelled. Receivables = 820,000 + 310,000 − 65,000 = 1,065,000, with the 15,000 added to consolidated cash.

❌ Why the other options are wrong: $1,080,000 cancels only the $50,000 shown by Lulu and leaves the cheque in transit in receivables; $1,130,000 adds the two companies' receivables with no intra-group elimination; $1,050,000 deducts the $15,000 cheque a second time after removing the full $65,000.

📋 Objective: 8.1 (Subsidiaries)

✅ Correct answer: $800,000

📌 Explanation: NCI at the year end = fair value at acquisition + NCI share of post-acquisition retained earnings = 720,000 + 20% × (1,300,000 − 900,000) = 720,000 + 80,000 = 800,000. The unrealised profit does not affect NCI because the parent, not the subsidiary, made the sale.

❌ Why the other options are wrong: $796,000 charges the NCI with 20% of the unrealised profit, which is appropriate only when the subsidiary is the seller; $710,000 measures NCI as 20% of year-end net assets, a proportionate approach the group does not use; $980,000 gives the NCI a share of pre-acquisition retained earnings as well.

📋 Objective: 8.1 (Subsidiaries)

✅ Correct answer: 24%, up from 18%, so financial risk to lenders has increased

📌 Explanation: Total equity including NCI = share capital 2,000,000 + share premium 1,500,000 + retained earnings 5,160,000 + NCI 800,000 = 9,460,000. Borrowings = 2,400,000 + 600,000 = 3,000,000. Gearing = 3,000,000 ÷ (3,000,000 + 9,460,000) = 24%. The rise from 18% reflects consolidating Lulu's loan and means a larger share of fixed claims ahead of shareholders.

❌ Why the other options are wrong: 32% divides debt by equity alone, which is not the group's definition; 26% excludes the NCI from equity although the group definition includes it; the final option reads the ratio wrongly, because debt of 24% of long-term finance means the group is still financed mainly by equity.

📋 Objective: 9.3 (Analysis of financial statements)

✅ Correct answer: $2,795,000

📌 Explanation: Cost of sales = trial balance 2,150,000 + turbine depreciation (12,000,000 × 5% = 600,000) + maintenance accrual 45,000 = 2,795,000. Straight-line depreciation is based on cost, and the December maintenance must be accrued because the service was received in 20X6 even though it has not yet been invoiced.

❌ Why the other options are wrong: $2,750,000 omits the $45,000 maintenance accrual for December; $2,195,000 omits the turbine depreciation charge of $600,000; $2,855,000 also includes the office equipment depreciation, which the case charges to administrative expenses rather than cost of sales.

📋 Objective: 7.2 (Statement of profit or loss and other comprehensive income)

✅ Correct answer: Write it off in 20X6 as an adjusting event

📌 Explanation: Under IAS 10 the liquidation after the year end provides evidence that the customer could not pay at 31 December 20X6, so it is an adjusting event. The $30,000 is written off as an irrecoverable debt in the 20X6 statement of profit or loss and removed from receivables before the 2% allowance is calculated.

❌ Why the other options are wrong: Note disclosure applies to non-adjusting events arising after the reporting date, but this one confirms a year-end condition; writing it off in 20X7 would overstate 20X6 profit and receivables; a 2% general allowance would cover only a small part of a specific debt that is known to be irrecoverable.

📋 Objective: 7.4 (Events after the reporting period)

✅ Correct answer: $735,000

📌 Explanation: First remove the irrecoverable debt: 780,000 − 30,000 = 750,000. The allowance is 2% × 750,000 = 15,000, so net receivables = 750,000 − 15,000 = 735,000. The allowance is reduced from 18,000 to 15,000, a credit of 3,000 to administrative expenses, while the write-off of 30,000 is an expense.

❌ Why the other options are wrong: $762,000 deducts the opening allowance of $18,000 and ignores both the write-off and the new allowance; $750,000 writes off the debt but does not deduct any allowance; $764,400 applies the 2% allowance to the full $780,000 and never writes off the $30,000 debt.

📋 Objective: 7.1 (Statement of financial position)

✅ Correct answer: $1,876,000

📌 Explanation: Gross profit = 6,400,000 − 2,795,000 = 3,605,000. Administrative expenses = 840,000 + office depreciation (240,000 × 25% = 60,000) − insurance prepaid (40,000 × 9/12 = 30,000) + irrecoverable debts (30,000 − 3,000 = 27,000) = 897,000. Finance costs = 100,000 + 100,000 accrued = 200,000. Profit before tax = 2,508,000. Tax = 620,000 + 12,000 under-provision = 632,000. Profit = 1,876,000.

❌ Why the other options are wrong: $1,900,000 deducts the $12,000 under-provision from the tax charge instead of adding it; $1,976,000 omits the $100,000 of accrued interest for the second half-year; $1,846,000 ignores the $30,000 insurance prepayment and charges the whole premium to 20X6.

📋 Objective: 7.2 (Statement of profit or loss and other comprehensive income)

✅ Correct answer: $7,980,000

📌 Explanation: Turbines: 12,000,000 − (3,600,000 + 600,000) = 7,800,000. Office equipment: reducing balance on the opening carrying amount, (400,000 − 160,000) × 25% = 60,000, so 400,000 − 220,000 = 180,000. Total carrying amount = 7,800,000 + 180,000 = 7,980,000, which the note reconciles from the opening carrying amounts.

❌ Why the other options are wrong: $8,640,000 shows the carrying amounts before the 20X6 depreciation charges; $7,800,000 includes the turbines only and leaves out the office equipment; $7,940,000 applies the 25% reducing balance rate to office equipment cost instead of to its carrying amount.

📋 Objective: 7.3 (Disclosure notes)