Class Test #1

Full marks 10

Time: 50 Minutes

1. How should unallocated overhead be treated in IAS 2? 2. A company has direct costs of production of Tk. 230000 and indirect costs of Tk. 320000. The company makes 10000 and has a normal operating capacity of 8000 units. What is the unit cost as per the requirements of IAS 2? (Para 13) 3. The general basis of inventory measurement in IAS 2 follows the doctrine that holds that gains are not recognized until they are realized, while losses should be recognized in the period in which they first become foreseeable. What is the name of this doctrine? (net realizable value) 4. In selecting a cost-flow method, management must exercise judgment to ensure that the method chosen provides the most practical accounting reflection of the real situation. The weighted- average method is appropriate when: 5. Ernest Ltd. Has the following inventory transactions for the year ending 30 June, 2005 Opening inventory at 1 July 2004 3000 units @ $4 Tk. 12000 Purchase on 1 October 2004 7000 units @ $5 Tk. 35000 Purchase on 1 February 2005 8000 units @ $6 Tk. 48000 Purchase on 1 June 2005 2000 units @ $7 Tk. 14000 Total 20000 units Tk. 109,000 At year end, there were 4000 units in hand with a cost attached of Tk. 21,800. What is the costing method used? (Weighted average) 6. Under what circumstances would a revaluation of a non-current asset be considered as revenue? 7. When is revenue normally recognized in relation to an FOB shipping point? 8. Where a put option is provided by the vendor as a means of enhancing the prospect of a sale taking place, under what circumstances would the transaction be considered a financing arrangement and not revenue generating? 9. Equipment is sold by travel limited on 1 July, 2005 on the basis of four annual payments of Tk. 5000. The first payment is due on 30 June, 2006. The interest implicit in the financing arrangement is 14 percent per annum. What would be the cash price for this item? 10. With percentage of completion construction contracts, how is the balance of construction in progress determined? 11. An entity involved in construction contracts shall disclose: 12. On 1 January 2001, entity X sells entity Y goods for tk. 3600, receivable on 1 January 2013. Determine the fair value of revenue for entity X, assuming entity Y can borrow at 10 percent per annum. 13. Entity A is negotiating with the local government to build a new bridge after demolishing the existing bridge near the city Centre. At the initial meeting, it was indicated that the government would not be willing to pay for both components of the contract more than Tk. 3m. the government representative insisted that separate proposals should be submitted and negotiated, the contractor should maintain separate records for components of the contract and upon request furnish details of the contract cost incurred by component. Upon submission of the separate proposals, it was agreed that the contract price of Tk. 3m would be split in the

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ratio of 70 percent for the construction of the new bridge and 30 per cent for demolishing the old bridge. The question arises whether the contract for the construction of the new bridge and the contract for demolishing the existing bridge are treated as separate contracts or as single contract? Why? (Separate) Entity A sells one type of car and, in addition, provides a maintenance service for a year. The price of the car and the maintenance package is Tk. 200,000. Entity A also provides the car and maintenance services separately. The price of the maintenance package is Tk. 20,000 per annum and the cost of the car when sold separately is Tk. 190,000. Therefore, the car and maintenance package, if purchased separately, would cost Tk. 210,000. How should the sale of the car and the maintenance package be accounted for assuming the delivery took place on 1 July 2010 and the accounting period end is 31 December? Entity A sells cars for Tk. 90,000 each. It also provides maintenance service for Tk. 6,000 per annum. Entity A sells these cars and services separately. If a purchaser of a car also buys the maintenance service for a year there is a 5 percent discount on the whole package. Thus the package costs Tk. 91,200. How should Entity A recognize revenue? Entity J sells a racehorse to Entity K. As part of the arrangement Entity J continues to house and train the horse, determine which races the horse will enter and set stud fees of the horse. Should entity J recognize revenue for the sale of the horse to Entity K? Entity B manufactures telecommunications equipment in three stages. There is a market for the semi-finished product for each stage, but the entity only sells the completed product. The following are the details of the cost structure of the telecommunication equipment as at 31 December 2010 (financial year end) Cost/unit Selling price/unit Stage 1 Stage 2 conversion cost 300 80 380 120 500 240 180 420 140 560

Stage 3 conversion cost

Assuming that the selling costs are immaterial, what is the NRV of the semi-finished product in stage 1 as at 31 December 2010? 18. The Financial statement of Entity H for 2010 and 2011 had the following errors: 2009 2010 Ending Inventory Rent expense 8000 overvalued 4800 overstated 16000 undervalued 2600 understated

By what amount will the 2010and 2011 profits before taxes be overstated or understated if these errors are not corrected? 19. A contractor is negotiating two contracts with a single customer. The customer would either accept both contracts or reject both. The first contract would be for the design of a chemical plant and second one for the plants construction. The planner profit margin on the design contract is 20 percent and the planned profit margin for the construction is 10 percent. How should the contracts be accounted for?