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9706 · 3.2.1

International accounting standards (IAS) — practice questions

Practice and worked examples for 9706 International accounting standards (IAS). Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Gamma plc bought a machine for $80,000 on 1 January 2022. The machine has an estimated useful life of eight years and a residual value of $8,000, and is depreciated on the straight-line basis. On 1 January 2024 the directors revalued the machine to $75,000; its remaining useful life and residual value were unchanged.

(a) Calculate the carrying amount of the machine at 31 December 2023. (b) Calculate the revaluation surplus and state where it is recorded, in accordance with IAS 16. (c) Calculate the depreciation charge for the year ended 31 December 2024.

Show solution outline

Step 1 — Annual depreciation before the revaluation: (80,000 − 8,000) ÷ 8 = $9,000 a year.

Step 2 — Carrying amount at 31 December 2023 (a): 80,000 − (2 × 9,000) = $62,000.

Step 3 — Revaluation surplus (b): 75,000 − 62,000 = $13,000. Under IAS 16 the surplus is credited to a revaluation reserve within equity (reported as other comprehensive income). It is not taken to profit or loss, because the gain is unrealised.

Step 4 — Depreciation after the revaluation (c): the revalued amount is depreciated over the remaining six years: (75,000 − 8,000) ÷ 6 = $11,167 (to the nearest dollar).

Step 5 — Optional transfer: IAS 16 permits the excess depreciation (11,167 − 9,000 = $2,167) to be transferred each year from the revaluation reserve to retained earnings as the surplus is realised through use.

Common errors: continuing to charge $9,000 after the revaluation, or crediting the $13,000 surplus to the Statement of Profit or Loss.

Worked example 2

A company holds inventory which cost $50,000. Due to a warehouse flood, the goods were slightly damaged. The company estimates it can sell the inventory for $45,000 after incurring repair costs of $3,000 and sales commission of $1,500.

Calculate the value at which the inventory should be reported in the financial statements, in accordance with IAS 2.

Show solution outline

In accordance with IAS 2, inventory must be valued at the lower of cost and Net Realisable Value (NRV).

Step 1: Identify the cost. Cost = $50,000

Step 2: Calculate the Net Realisable Value (NRV). NRV = Estimated Selling Price - Costs of Completion - Selling Costs NRV = $45,000 - $3,000 - $1,500 NRV = $40,500

Step 3: Compare cost and NRV. Cost = $50,000 NRV = $40,500 The lower value is $40,500.

Step 4: Determine the final inventory valuation. The inventory should be reported in the Statement of Financial Position at $40,500.

An inventory write-down of $9,500 ($50,000 - $40,500) will be recognised as an expense in the Statement of Profit or Loss.

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