Question 1

An entity undertakes an issue of new debt which has the effect of reducing the entity's weighted average cost of capital (WACC).

Which of the following would best explain why the WACC will have fallen?

Options :

A : The entity was 100% equity financed prior to the issue of the debt.

B : The risk to the shareholders has reduced leading to a fall in the cost of equity.

C : The new debt is being used to replace existing debt that had a lower cost.

D : The new debt is being used to replace existing debt that had the same cost.

Answer: A

Question 2

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale.

Which of the following describes the value of the financial asset on the date ofacquisition?

Options :

A : Fair value excluding transaction costs.

B : Fair value including transaction costs.

C : Present value including transaction costs.

D : Present value excluding transaction costs.

Answer: B

Question 3

GG's gearing is currently 50% compared to the industry average of 40% (both measured as debt/equity). GG's debt is all in the form of a single bank loan that is repayable in five years' time. The directors of GG are seeking to raise finance for a new project and they are considering an additional bank loan from the same bank.

Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?

Options :

A : A covenant on the existing bank loan that restricts the level of dividend that can be paid.

B : A projected decrease in interest cover that would breach a covenant on the existing loan.

C : The revaluation of GG-s property that shows an increase in its value since the existing bank loan was taken out.

D : A projected lack of profits to be able to claim tax relief on the additional interest arising from the new loan.

Answer: B

Question 4

RST sells computer equipment and prepares its financial statements to 31 December.

On 30 September 20X5 RST soldcomputer software along with a two year maintenance package to a customer. The customer is given the right to return the goods within six months and claim a full refund if they are not satisfied with the computer software. The risk of return is considered to be insignificant for RST.

How should the revenue from this transaction and the right of return be recognised in thefinancial statements for the year ended 31 December 20X5?

Options :

A : Recognise 100% of the revenue from both the sale of goods and the maintenance contract and create aprovision for the anticipated level of returns.

B : Do not recognise any revenue from the sale of goods or the maintenance contract and do not create aprovision for the anticipated level of returns.

C : Recognise 12.5% of the revenue from both the sale of goods and the maintenance contract and do not create aprovision for the anticipated level of returns.

D : Recognise 100% of the revenue from the sale of goods,12.5% of the revenue from the maintenance contract and create aprovision for the anticipated level of returns.

Answer: D

Question 5

STacquired 70% of the equitysharesofDE for $87,500 on 30 September 20X5. Atthe date of acquisition the net assets of DE were $54,700 and the fair value of the non controlling interest wasmeasured at $19,700. There has been no impairment of goodwill.

On 30 September 20X9 ST disposedofits entire investmentinDE for $262,500 whenthe net assets of DEwere $96,250.

What is the gain or loss on disposal of DEthat will be included in ST'sconsolidated profit or lossfor the year ended30 September 20X9?

Options :

A : $113,750 loss

B : $166,250 loss

C : $166,250 gain

D : $113,750 gain

Answer: D

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