Financial Reporting Flashcards
50-75%
Which of the following statements regarding not-for-profit financial statements is true?
a)
The terms used to describe the financial statements of a not-for-profit organization (NPO) are the same as the terms used in profit-oriented financial statements.
b)
The statement of cash flows for an NPO is similar to the statement of financial position for a profit-oriented company.
c)
The statement of financial position for an NPO is similar to the income statement for a profit-oriented company.
d)
The statement of changes in net assets or fund balances for an NPO is similar to the statement of retained earnings for a profit-oriented company.
D - the statement of changes in net assets or fund balances for an NPO is similar to the statement of retained earnings for a profit-oriented company.
Nickel Mining Co. (NMC) has just secured a loan from the bank to help finance a development project at its newest nickel mine. The bank has requested that 30% of the value of the mine’s annual production be hedged to protect against volatility in the price of nickel. NMC expects to mine and sell about 500,000 pounds of nickel annually.
NMC has decided to use a forward contract to hedge the price of nickel on 30% of its sales. Currently, the spot price is $6 per pound. NMC will settle the contract on July 31, 20X6. The company has entered into a forward contract to deliver 150,000 pounds of nickel on July 31, 20X6, at a forward price of $7 per pound.
Which of the following statements BEST describes what this contract means for NMC?
a)
NMC will purchase 150,000 pounds of nickel on July 31, 20X6, and will have to pay $1,050,000.
b)
NMC will deliver 150,000 pounds of nickel on July 31, 20X6, and receive cash of $900,000 on delivery.
c)
NMC will deliver 150,000 pounds of nickel on July 31, 20X6, and receive the higher of the $7 per pound or the spot price per pound.
d)
NMC will deliver 150,000 pounds of nickel on July 31, 20X6, and receive $1,050,000 on delivery.
D - A forward contract requires each party to perform, so delivery must be made and NMC will receive cash on delivery of $1,050,000 (= 150,000 × $7).
Amtrek Inc. is planning to dispose of a collection of assets. Amtrek has designated these assets as a disposal group. The carrying amount of these assets immediately before classification as held for sale was $20 million. Upon being classified as held for sale, the assets were revalued to their fair value of $18 million. Amtrek has estimated that it will cost $1 million to sell the group of assets.
What is the carrying amount of the disposal group after it is classified as held for sale?
a)
$20 million
b)
$18 million
c)
$17 million
d)
$19 million
C - When the disposal group is classified as held for sale, the disposal group is remeasured to the lower of its carrying value ($20 million) and its fair value ($18 million) less the costs to sell ($1 million).
Ninja Frog Inc., a publicly traded company, has seven operating segments all producing different products with the following results:
Segments Sales Profit (Loss) Assets Orange $100 $50 $500 Yellow 15 (50) 60 Purple 200 25 100 Blue 125 10 10 Red 65 15 5 Pink 200 50 100 White 65 20 50 $770 $120 $825
Based on the quantitative thresholds, how many reportable segments are there?
a)
3
b)
4
c)
5
d)
6
D - The orange, yellow, purple, blue, pink and white segments are all reportable. Proof:
Note: Greater of absolute profit or absolute loss= total profit (170) or total loss (50) = $170.
Segments Sales Profit (Loss) Assets Reportable? Orange 13% 29% 61% Y Yellow 2% (23%) 7% Y Purple 26% 15% 12% Y Blue 16% 3% 1% Y Red 8% 9% 1% N Pink 26% 29% 12% Y White 8% 12% 6% Y 100% N/A 100%
Brown Inc. (BI) reports an investment in bonds using the amortized cost method. The bonds have a face value of $1,000,000 and were purchased on January 1, 20X7. The market interest rate is 8% and the bonds pay interest at a rate of 6%. Interest payments are made every June 30 and December 31. The bonds mature 10 years from the date of purchase, on December 31.
What journal entry records the acquisition of the bonds on January 1, 20X7?
a)
Dr. Investment in bonds $864,100
Cr. Cash $864,100
b)
Dr. Cash $864,100
Cr. Bonds payable $864,100
c)
Dr. Investment in bonds $1,000,000
Cr. Cash $1,000,000
d)
Dr. Investment in bonds
$664,496
Cr. Cash
$664,496
A - $1,000,000 × (P/F 4%, 20) = $1,000,000 × 0.45639 = $456,390
$30,000 interest × (P/A 4%, 20) = $30,000 × 13.59033 = $407,710
Issuance price (fair value) = $456,390 + $407,710 = $864,100
*4% = 8% / 2 to reflect 20 half-year periods
Jaden Enterprises Ltd. has recently completed their year ended May 31, Year 2. They are now preparing interim statements for their first quarter and have just acquired a new company, Kaden Inc., effective September 15, Year 2. Which of the following is LEAST likely to be included in the interim statements?
a)
A statement of comprehensive income, statement of changes in equity, and statement of cash flows for the three months ended August 31, Year 1 and Year 2.
b)
A statement of financial position for the three months as at August 31, Year 1 and Year 2.
c)
The most recent set of annual audited financial statements.
d)
Information regarding subsequent events.
B - Annual audited financial statements are required in the preparation of the interim statements to ensure interim policies follow the same policies as the annual audited statements. While they are not included in the interim financial statements, they are required for reference when preparing the interim statements. Answer b) is correct. The statement of financial position is not required for the three months as at August 31, Year 1 and Year 2. Per IAS 34.20(a), the statement of financial position is required as at the end of the current interim period and a comparative statement as at the end of the immediately preceding financial year is also required. In this case, the statement of financial position is required as at August 31, Year 2 with comparatives as at May 31, Year 2.
Which of the following statements is false?
a)
Consolidated ending retained earnings is impacted by amortization to date of fair value differentials that arose at acquisition.
b)
Consolidated retained earnings is impacted by unrealized profit in closing inventory on intercompany inventory sales.
c)
Consolidated retained earnings is impacted by intercompany management fees recognized in the current year.
d)
Consolidated retained earnings is impacted by an unrealized loss on an intercompany sale of equipment.
C - This statement is false. One of the companies will have reported management fee revenue while the other company will have reported an expense in the same amount. The net impact on net income and retained earnings is nil.
Leroy Corp. started a defined contribution plan in 20X2. In 20X3, the company amended the plan. To pay for the plan amendments, the company agreed to contribute $100,000 for each of the years 20X4, 20X5, and 20X6.
What will be the journal entry required to record the last payment in 20X6, assuming a discount rate of 4%?
a)
Dr. Pension payable $104,000; Cr. Pension expense $4,000; Cr. Cash $100,000
b)
Dr. Pension expense $96,154; Dr. Interest expense $$3,846; Cr. Cash $100,000
c)
Dr. Prepaid past service costs $96,154; Dr. Interest expense $3,846; Cr. Cash $100,000
d)
Dr. Pension payable $96,154; Dr. Interest expense $3,846; Cr. Cash $100,000
D - because the remaining pension payable amount prior to the final payment would be $100,000 discounted for one year at 4%: $100,000 / 1.04 = $96,154. The difference between the payment and the payable is interest expense.
Company A has significant influence over Company B. Under IFRS, which one of the following factors could cause Company A’s investment account to decrease?
a)
Purchase price
Incorrect Response
b)
Goodwill
c)
Net income
Correct Answer
d)
Unrealized profit in inventory
D - Goodwill and negative goodwill do not impact equity income; rather, it is an account created from the acquisition differential after any fair value differentials. Answer d) is correct because, until the inventory has been sold to a third party, profit in inventory is considered to be unrealized and needs to be reduced from equity income.
An employee of Riker Goods Ltd. (Riker) is suing the company for termination without cause.
· The employee is suing for $2,700,000 for severance and defamation of character.
· Riker’s lawyers estimate that the company will be held liable with an 80% probability.
· Counsel estimates that there is a 35% probability that the court would award $1,500,000, a 35% probability that $1,000,000 would be awarded, and a 30% probability that $800,000 would be awarded.
· Riker follows IFRS.
Which of the following is the proper accounting treatment for this lawsuit?
a)
Record a provision for $800,000 and disclose the nature of the lawsuit.
b)
Record a provision for $1,115,000 and disclose the nature of the lawsuit.
c)
Record a provision for $1,500,00 and disclose the nature of the lawsuit.
d)
Record a provision for $2,700,000 and disclose the nature of the lawsuit.
B - Since it is probable (the probability being greater than 50%) that Riker will have to pay, a provision is recorded equal to the weighted average of the expected outcomes. The provision is calculated as: (35% × $1,500,000) + (35% × $1,000,000) + (30% × $800,000) = $1,115,000.
Which of the following items would not be required in the note disclosure on the acquisition of a business?
a)
Gross proceeds paid
b)
Values assigned to assets acquired
c)
Details of contingent payments
d)
Prior-period income of the acquired business
D - Prior-period income of the acquired business is not required in the note disclosure on the acquisition of a business. Disclosure is required for the period in which the income of the acquired company is included in the income statement. However, no information is required to be disclosed on the past results.
Quencor Inc. started a new defined contribution plan this year. During the year, the company paid $250,000 into this pension plan. At the end of the year, the current service cost was determined to be $210,000, lower than expected. Any excess payment can be used to reduce next year’s payment. What is the journal entry required to recognize the current service cost and the payment made during the year?
a)
Dr. Pension expense $210,000; Dr. Prepaid asset $40,000; Cr. Cash $250,000
b)
Dr. Pension expense $250,000; Cr. Cash $250,000
c)
Dr. Pension expense $210,000; Dr. Net defined pension liability $40,000; Cr. Cash $250,000
d)
Dr. Pension plan assets $250,000; Dr. Pension expense $210,000; Cr. Pension benefit obligation $210,000; Cr. Cash $250,000
A - Since the payment made was greater than the amount required, and any excess can be applied to next year’s payment, a prepaid is set up for the overpayment. The pension expense is equal to the current service cost for the year.
Which of the following statements regarding functional currency is true?
a)
It is the currency that a company reports its financial results in.
b)
It is the currency that a company primarily uses in its daily operations.
c)
It is the currency that a company’s key management receives remuneration in.
d)
It is the currency that a company primarily invests in.
B - Functional currency is the currency that a company primarily uses in its daily operations.
<p>Which of the following represents the correct order of the four stages of a financial statement audit?
a) Client acceptance and continuance; planning; execution; reporting
b) Planning; client acceptance and continuance; execution; reporting
c) Client acceptance and continuance; planning; reporting; execution
d) Planning; client acceptance and continuance; reporting; execution</p>
<p>A</p>
Chance and Risk Inc. (CRI) needs a calculation of basic and diluted EPS performed for its Year 1 fiscal year-end financial statements.
Information related to CRI is as follows:
Year 1 net income $565,000
Number of common shares issued and outstanding on January 1, Year 1 150,000
Number of common shares issued on September 1, Year 1 30,000
Number of cumulative preferred shares outstanding throughout Year 1 10,000
CRI had:
• 12,000 written call options outstanding during Year 1, exercise price of $10 and
• average market price of CRI’s common shares during the year was $13.33.
• no options were exercised during the year.
• On December 1, Year 1, a 20% common stock dividend was issued.
• The preferred shares have an annual dividend entitlement of $5 per share; this was declared and paid in Year 1.
What are CRI’s basic and diluted EPS for Year 1, respectively?
a)
$2.68 and $2.68
b)
$3.16 and $3.16
c)
$3.16 and $3.10
d)
$2.68 and $2.63
D - Proof of correct answer:
Basic:
= ($565,000 – $50,000) / 192,000*
= $2.68
*Calculation of WACSO:
Dates
Shares outstanding
Fraction of year
Restatement due to stock dividend
Weighting
Jan. 1 - Aug. 31
150,000
8/12 months
1.2
120,000
Sept. 1 - Nov. 30
180,000
3/12 months
1.2
54,000
Dec. 1-31
216,000
1/12 months
18,000
192,000*
Diluted:
Proceeds from exercise of 12,000 options:
$120,000
Shares issued from exercise
12,000 common shares
Treasury shares acquired with proceeds
9,002 ($120,000 / $13.33)
Incremental earnings
$0
Incremental common shares
2,998
Taking stock split into account
3,598 (2,998 × 1.2)
Incremental EPS
$0
= ($565,000 – $50,000) / (192,000 + 3,598)
= $2.63
<p>A compilation engagement:
a) Is also known as a Notice to Reader engagement
b) Has specific documentation requirements per the CPA Handbook – Assurance
c) Requires a practitioner to gain an understanding of the client’s business
d) Is costly and time consuming to produce</p>
<p>A</p>
On February 22 of Year 1, an NPO with a March 31 year end is given $200,000 cash to buy land. At the end of Year 1, it had revenues of $1,000,000. The NPO uses the cash to purchase land on April 2 of Year 2. The NPO has a depreciation policy where long-lived assets greater than $50,000 in value are amortized evenly over 10 years.
The NPO uses the deferral method to account for contributions.
One of the journal entries required for April 2 of Year 2 is: Dr. Deferred contribution 200,000; Cr. Cash 200,000. What is the other entry required for April 2 of Year 2?
a)
Dr. Land 200,000; Cr. Deferred capital assets 200,000
b)
Dr. Land 200,000; Cr. Net assets 200,000
c)
Dr. Net assets 200,000; Cr. Land 200,000
d)
Dr. Deferred capital assets 200.000; Cr. Net assets 200,000
B - The entries required to record the asset when it is purchased are:
Dr. Deferred contribution 200,000; Cr. Cash 200,000
Dr. Land 200,000; Cr. Net assets 200,000
Which of the following is considered to be a non-monetary item?
a)
Accounts payable
b)
Customer list
c)
Foreign exchange gain/loss
d)
Sales
B - A customer list is an intangible asset and is considered to be a non-monetary item.
You, CPA, are teaching your firm’s co-op student about passive investments. You decide to compare how ASPE and IFRS account for passive investments. Which of the following statements is true?
a)
IFRS reports all passive investments at fair value, and ASPE reports passive investments at any of cost, fair value, or amortized cost.
b)
Under both ASPE and IFRS, investments adjusted to fair value at each reporting date require the changes in fair value to be reported in net income.
c)
For amortized cost investments, IFRS requires the use of the effective interest method, and ASPE permits a choice between the straight-line and effective interest methods.
d)
Accounting is the same under IFRS and ASPE for passive investments.
C - IFRS does not permit this choice, but ASPE does.
When booking annual depreciation on a decommissioning obligation, the debit side of the entry would be:
a)
A fixed asset
b)
A decommissioning obligation
c)
An accretion expense
d)
A depreciation expense
D
<p>Cheeky’s Coconuts Inc. (Cheeky’s) purchased equipment for a total cost of $180,000. Management believes that the machine will have a residual value of $30,000. Over the life of the machine, management believes that the machine will produce 300,000 units.
The expected number of units produced each year are as follows:
~~~
Year Units
1 25,000
2 75,000
3 75,000
4 75,000
5 50,000
Total 300,000
~~~
What is the ending closing carrying amount of the equipment in Year 2?
a) $130,000
b) $120,000
c) $167,500
d) $80,000</p>
<p>A - The calculation of the per-unit depreciation rate is as follows:
$180,000 – $30,000 = = $0.50 per unit
300,000 units </p>
On November 1 of the current year, Bait Co. sold inventory to its wholly owned subsidiary, Tackle Ltd.; 80% of these goods were then sold by Tackle to customers of Tackle prior to the December 31 year end. What are all of the adjustments required for the preparation of the consolidated financial statements related to this transaction? (Ignore the effects of income taxes.)
a)
Decrease sales and cost of sales by the intercompany selling price, and increase cost of sales and decrease inventory by the unrealized profit in ending inventory.
b)
Decrease cost of sales by the unrealized profit in ending inventory and increase inventory by the same amount.
c)
Increase cost of sales by the unrealized profit in ending inventory and decrease inventory by the same amount.
d)
Decrease sales and cost of sales by the intercompany selling price of the inventory.
A - Sales are overstated by the full intercompany selling price.
<p>Nuts and Bolts Inc. (NBI) reports its financial statements in accordance with ASPE. Manufacturing equipment used to manufacture products that have not been selling as well as expected has been identified as potentially impaired. Relevant information to assist management in accounting for the equipment properly is as follows:
Cost of equipment $200,000
Accumulated depreciation — equipment $40,000
Undiscounted future net cash flows associated with the equipment (estimated) $120,000
Fair value of equipment $100,000
What is the impairment loss to be reported by NBI with respect to this equipment?
a) $40,000
b) $60,000
c) $80,000
d) $100,000</p>
<p>B - the loss of $60,000 should be calculated as follows, per ASPE 3063.05-.06: “The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. This assessment is based on the carrying amount of the asset at the date it is tested for recoverability, whether it is in use or under development. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.”</p>
Charli Confectionary Co. (Charli) is a Canadian specialty bakery. It recently acquired PieGo, a manufacturing facility in Southeast Asia that will ship frozen treats to Charli’s customers worldwide. After the acquisition:
· The cost to manufacture products was reduced by 60%.
· There was no change to the ordering process; customers order from Charli’s website.
· The Canadian Food Inspection Agency required Charli to undergo a third-party certification to ensure goods complied with Canadian standards.
· Charli increased its prices to help cover increased shipping fees.
· Charli started to lease out equipment contributing to excess capacity.
Which of the following factors is the LEAST important when determining Charli’s functional currency?
a)
Funds required for manufacturing inputs
b)
Funds required to undergo third-party certification
c)
Funds received from the sale of Charli’s goods
d)
Funds received from leased assets
D - Funds received from leased assets are considered financing funds, a secondary factor when determining functional currency. All of the other options are primary factors, which makes funds received from leased assets the least important factor when determining functional currency.
Judy is preparing the cash flow statement for a client, AAA Moving and Storage. The company has several trucks as well as its own warehouse. The balance for property, plant, and equipment (PP&E) is as follows:
20X6 20X5
PP&E, net of accumulated amortization $825,000 $756,000
Other information available:
Amortization expense is $79,000.
A delivery van with a cost of $64,000 and accumulated amortization of $40,000 was sold. The sale took place halfway through the year.
What are the additions for PP&E for the year?
a)
$ 69,000
b)
$ 93,000
c)
$148,000
d)
$172,000
D - PP&E, beginning of the year ($756,000) – amortization expense for the year ($79,000) – cost of the delivery van sold ($64,000) + accumulated amortization of the van sold ($40,000) – PP&E, end of the year ($825,000) = $172,000.
Cardstock.com Inc.’s year end long term debt and shareholders’ equity at December 31, Year 5 consisted of:
- Common shares: 10,000,000 issued: $50,000,000
- Preferred shares: 5.75% cumulative; 500,000 issued; no dividends in arrears: $20,000,000
- Retained earnings: $5,500,000
- Convertible bonds: 6.5% coupon; issued at par January 1, Year 2; maturing January 1, Year 12 (each $1,000 bond is convertible into 200 common shares): $18,000,000
In Year 5, Cardstock.com Inc.:
• reported net income after taxes of $8,000,000.
• a common dividend of $0.12 per share was declared and paid.
What is Cardstock.com Inc.’s basic earnings per share for Year 5 (rounded to the nearest cent)? Assume a 40% tax rate. Cardstock.com Inc. is a publicly traded company.
a)
$0.73
b)
$0.69
c)
$0.80
d)
$0.59
B - Basic EPS is calculated as (net income after taxes – dividends on preferred stock) / weighted average number of common shares outstanding. [$8,000,000 – (5.75% x $20,000,000)] = $6,850,000 / 10,000,000 = $0.685 (rounded to $0.69).
<p>Which of the following is a required disclosure under IFRS but not ASPE?
a) Transactions
b) Amounts
c) Key management compensation
d) Obligations</p>
<p>C</p>
During the year, the holders of all of MEM’s convertible bonds opted to convert their bonds into shares. On the date of conversion, just prior to recording the conversion, the balances in the accounts related to the convertible bonds were as follows:
Convertible bonds payable $2,031,000
Contributed surplus — common share conversion rights 125,000
The bonds were converted into 30,000 common shares. On the date of conversion, the shares were trading at $80 per share.
In MEM’s statement of cash flows, how is this transaction reported?
a)
A financing activity cash inflow for issuance of common shares of $2,400,000 and a cash outflow for repayment of debt of $2,031,000
b)
A financing activity cash inflow for issuance of common shares of $2,156,000 and a cash outflow for repayment of loan of $2,156,000
c)
A financing activity cash inflow for issuance of common shares of $2,031,000 and a cash outflow for repayment of loan of $2,031,000
d)
The transaction is not reported on the statement of cash flows, but is disclosed in the notes
D - The current share price is irrelevant and, since there are no cash flows arising from this event, the transaction is not reported on the statement of cash flows. Answer d) is correct. All non-cash transactions must be disclosed in the notes.
Which of the following best describes the purpose of management discussion and analysis (MD&A)?
a)
To provide additional information about historical operations of an entity to enhance user understanding of the annual financial statements, including financial statement elements and notes to the financial statements
b)
To provide both historical information as well as a discussion of how management has been operating the entity and its plans to continue operations in the future
c)
To provide management’s opinion of projections for future performance of the entity to support management efforts to maximize the entity’s share price
d)
To provide management with an opportunity to provide non-financial information to the stock market to allow users of the financial statements to better predict future share prices for the entity
B
<p>Red Rocket Inc. had a beginning inventory on January 1 of 300 boxes of fuses at a cost of $9 per box. During the year, the following transactions occurred:
~~~
Transaction Boxes Cost
February 10 Purchase 700 $7
March 20 Sale 500
October 30 Purchase 100 $12
November 15 Sale 400
~~~
Determine ending inventory using the FIFO (first in, first out) cost formula.
a) $1,900
b) $1,800
c) $1,666
d) $1,600</p>
<p>A</p>
Snow Outfitters Ltd. (Snow) has incurred a series of costs over the past year. The CFO of Snow, Tim Parsons, would like to know which one of the following costs can be capitalized as an intangible asset.
a)
Construction of a research facility (a three-storey, 80,000-square-foot building) for use in current and future projects
b)
Marketing research related to the promotion of Zynex, a new waterproof, breathable fabric membrane used in all-weather clothing
c)
Purchase of materials to be used in current and future research
d)
Costs incurred in testing the prototype of and design modifications made to Zynex
D - The costs incurred to test the prototype of and design modifications made to Zynex should be capitalized as an intangible asset if the development criteria are met. If the development criteria aren’t met, these costs should be expensed.
<p>On January 1, 20X6, Beatty Inc. entered into a lease to acquire some machinery. Beatty reports under ASPE and is the lessee. The terms of the lease are as follows:
· Lease payments of $25,000 are made annually on the first day of the year for five years.
· Included in the annual lease payments are maintenance fees of $2,000 per year.
· The machinery reverts to the lessor at the end of the lease and the lease contains no renewal option.
· The machinery has a fair value of $100,000 on January 1, 20X6, and has an estimated economic life of five years with no residual value.
· Beatty’s incremental borrowing rate is 11% per year.
· The lease’s implicit interest rate is 10%.
What is the balance of the lease obligation at January 1, 20X7, assuming that the lease is a capital lease?
a) $62,175
b) $72,910
c) $56,143
d) $57,201</p>
<p>C</p>
XYZ Ltd. is a public company with the following results:
Segments Sales Profits Assets A $60 $20 $1,000 B 10 3 55 C 11 4 20 D 55 35 900 E 5 2 60 F 10 5 65 G 15 2 100 $166 $71 $2,200
Based on the quantitative thresholds, how many reportable segments are there?
a)
2
b)
3
c)
4
d)
5
B - Segments A, D and G are all reportable. Proof:
Note: A minimum of 75% of total sales must be disclosed separately. Segments A and D, which are greater than 10% of total sales only make up 69% of total sales, which is why the next largest segment, G, is also a reportable segment.
Segments Sales Profits Assets Reportable? A 36% 28% 45% Y B 6% 4% 3% N C 7% 6% 1% N D 33% 49% 41% Y E 3% 3% 3% N F 6% 7% 3% N G 9% 3% 5% Y 100% 100% 100%
Which of the following describes a change in an estimate?
a)
A company changes the presentation of operating expenses from “by function” to “by nature.”
b)
An enterprise switches from the gross method to the net method of presenting government grants.
c)
A temporary difference was treated as a permanent difference when calculating deferred taxes (IFRS)/future taxes (ASPE).
d)
The useful life of a building was originally estimated to be 20 years but, based on new information available, it was changed to 15 years as at the beginning of the year.
D - A change in the useful life of an asset as a result of new information is a change in an estimate.
At the beginning of the year, Ellis Construction (Ellis) built a storage facility on leased land. Note the following:
· The lease agreement requires Ellis to return the land to its original state at the end of the 10-year lease by dismantling the building.
· Engineering reports commissioned by Ellis show that the best estimate of costs to settle the obligation in 10 years will equal $40,000.
· Any amount greater than $5,000 is material to Ellis.
· The company’s discount rate is 8%.
How would Ellis record the decommissioning asset and liability upon entering into the lease at the beginning of Year 1, and the interest expense at the end of Year 1?
a) Beginning of Year 1: debit decommissioning asset (storage facility asset) and credit decommissioning liability for $40,000; end of Year 1: interest expense of $4,000
b) Beginning of Year 1: debit decommissioning asset (storage facility asset) and credit decommissioning liability for $18,520; end of Year 1: interest expense of $4,000
c) Beginning of Year 1: Debit decommissioning asset (storage facility asset) and credit decommissioning liability for $18,520; end of Year 1: interest expense of $1,482
d) Beginning of Year 1: debit decommissioning asset (storage facility asset) and credit decommissioning liability for $20,000; end of Year 1: interest expense of $1,600
C - The decommissioning asset and the decommissioning liability are correctly calculated using the 8% discount rate: 0.463 × $40,000 = $18,520 (per paragraph 45 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets). The interest expense has been correctly calculated based on the increase in the liability at the company’s discount rate: 8% × $18,520 = $1,482.
<p>Easten Co. leased a new forklift on January 1. This has been determined to be a finance lease with the following details:
· The lease agreement is for 10 years.
· The annual payment of $5,000 is due at the beginning of each year.
· Easten has the option to buy the forklift at the end of the lease for $1.
· At the end of the lease Easten may choose to return the forklift with no penalty.
· This forklift sells for $35,000.
· The interest rate on January 1 of Year 1 was 7%.
What is the interest expense to be recorded for Year 1?
a) 3,150
b) 2,630
c) 3,382
d) 3,430</p>
<p>A</p>
You, CPA, are employed as the chief accountant for Draw Pro Inc. (Draw), a computer software company. Over the past year, Draw has been developing a new software program called Graphics Tool. At the end of the year, Draw’s director of research estimated that $1 million was spent during the year on the Graphics Tool program. The director of research has asked you to reduce Draw’s expenses for the year by capitalizing the $1 million spent on the development of Graphics Tool as development costs.
Which of the following questions would NOT need to be considered when determining whether the development costs can be capitalized under IFRS?
a)
Has a future market for the Graphics Tool been clearly defined?
b)
Is the Graphics Tool program technologically feasible?
c)
Are the costs related to research activities or development activities?
d)
How soon will the Graphics Tool program be ready to begin marketing?
D - An analysis of the timeline to eventual marketing of the asset is not a criterion considered when determining whether costs can be capitalized as development costs per IAS 38.57.
Catherine, your audit manager, has asked you to explain to your client, Michael, the difference between a cash flow statement prepared using the indirect method and a cash flow statement prepared using the direct method. How would you explain this to him?
a)
The presentation and the amount of net cash flow from the operations section is different under both methods. The presentation and the amount of net cash flow from the investing and the financing sections is the same under both methods.
b)
The presentation and the amount of net cash flow from the operations and investing sections are different under each method. The presentation and the amount of net cash flow from the financing section is the same under both methods.
c)
The presentation of the operations, investing, and financing sections are different under both methods but the amount of net cash flow from the operations, investing, and financing sections under both methods are the same.
d)
The amount of net cash flow from the operations, investing, and financing sections is the same under both methods. The presentation of the operations section is different under both methods. The presentation of the investing and financing sections is the same under both methods.
D - The presentation of the operations section is different under both methods but the amount of net cash flow from the operations section is the same under both methods. The presentation and the amount of net cash flow from the investing and financing sections is the same under both methods.
<p>The following case facts pertain to Bok Choy Inc. (BCI) and a grant received from the Ontario government:
• On day 1 of the 20X7 fiscal year, BCI received a grant for $5,000,000 toward the construction of a new building.
• The total construction cost of the building, which was completed on day 1 of the 20X7 fiscal year, was $25,000,000.
• The building is to be depreciated on a straight-line basis over the useful life of the building, which is expected to be 25 years.
• The grant does not have to be repaid unless BCI fails to meet certain conditions imposed by the Ontario government.
• Management has assessed that it is likely that BCI will meet all conditions of the grant.
What is the impact on income in 20X7 as a result of the above transaction?
a) Income will increase by $200,000.
b) Income will decrease by $800,000.
c) Income will decrease by $1,000,000.
d) It is not possible to calculate the impact on income without knowing which method BCI will use to account for the grant.</p>
<p>B - (25,000,000 - 5,000,000) / 25 years</p>
At the beginning of the year (Year 1), Bambi’s Barbells (Bambi) built a CrossFit gym on leased property. Note the following:
· The lease agreement requires Bambi to return the leased property to its original state at the end of the five-year lease by dismantling the gym.
· Engineering reports commissioned by Bambi show that the best estimate of costs to settle the obligation in five years will equal $5,000.
· Any amount greater than $50 is material to Bambi.
· The company’s risk-adjusted market discount rate is 12%.
· The market risk-free rate is 3%.
What is the accretion expense for Year 3?
a)
$340
b)
$427
c)
$478
d)
$381
B - The PV of the $5,000 future remediation is $2,837 (I = 0.12, N = 5, PMT = 0, FV = 5,000). At the end of Year 3, the decommissioning obligation is $3,986 and accretion expense is $427.
Angela’s Artwork Inc. (Angela’s) recently entered into a contract to supply artwork to a U.S. company. The controller of Angela’s is not experienced with translation of foreign currency transactions and has made the following entries to record sales to the U.S. company without factoring in the impact of foreign currency on the transactions:
To record sales in USD:
DR Accounts receivable $156,000
CR Sales $156,000
To record the collection of a portion of the receivable:
DR Cash (USD) $90,000 CR Accounts receivable $90,000
To record the conversion of a portion of USD cash to CDN cash:
DR Cash (CDN) $78,000 CR Sales $18,000 CR Cash (USD) $60,000
Sales were made evenly over a period when the exchange rate was US$1.00 = C$1.33, and the exchange rate at the end of the fiscal year was US$1.00 = C$1.25.
What is the correct adjustment to accounts receivable?
a)
$39,000 debit to accounts receivable
b)
$16,500 debit to accounts receivable
c)
$16,500 credit to accounts receivable
d)
$39,000 credit to accounts receivable
B - [($156,000 – $90,000) × 1.25] – ($156,000 – $90,000) = $16,500 credit. This calculation is correct, but the adjustment is incorrect. The adjustment should increase the accounts receivables balance since a U.S. dollar is worth more than a Canadian dollar.
Dust Corp. purchased 100% of the shares of Bunny Inc. on January 1,Year 1, for $250,000 cash. Dust incurred total direct costs of acquisition of $6,000. On the date of acquisition, Bunny’s common shares and retained earnings were $50,000 and $150,000, respectively.
The following assets and liabilities had fair values different from book values:
Fair value Book value
Inventory 25,000 15,000
Land 50,000 25,000
Long-term debt 100,000 75,000
Both corporations have a 25% tax rate. What is the amount of goodwill on this purchase?
a)
$42,500
b)
$39,375
c)
$1,875
d)
$45,375
B - Goodwill was correctly calculated as:
Deferred income tax Purchase price 250,000 Net book value (200,000) Purchase premium 50,000 Inventory (10,000) 10,000 Land (25,000) 12,500 Long-term debt 25,000 (25,000) Temporary differences (2,500) Tax rate 25% Deferred income tax (625) (625) Goodwill 39,375
When deciding whether the functional currency of a foreign subsidiary is the Canadian dollar, which of the following is a primary factor that should be considered?
a)
Source of financing
b)
Location of inputs
c)
Use of the parent company’s management
d)
Percentage of ownership by the parent
B - The location of the inputs influences input costs, which is a primary factor when determining the functional currency.
Which of the following is an accounting error?
a)
A company changes from the gross method to the net method of recording cash discounts.
b)
A private corporation previously using ASPE chooses to adopt IFRS.
c)
Costs not related to the construction of a building were included in the building cost.
d)
A patent was expected to provide protection of intellectual property for the full legal life of 20 years, but technological advances made the patent obsolete after only 12 years.
C- If costs that are not related to the construction of a building are included in the cost of the building, it results in an accounting error.
Sports Clothing Inc. (SCI), a Canadian company reporting in Canadian dollars, is a wholesale sports clothing distributor selling to retail outlets across North America. It recently opened up an office and warehouse in the United States, and borrowed funds in U.S. dollars to fund the expansion. The loan has a fixed rate of 5% per annum.
The company will sell items in U.S. dollars and incur costs in Canadian and U.S. dollars. Based on projections, the company expects sales in U.S. dollars to be greater than its U.S. dollar costs.
Which of the following statements best describes the risks facing this company?
a)
The company is incurring interest rate risk by selecting the U.S. dollar loan rather than a Canadian dollar loan.
b)
The company is exposed to foreign exchange risk on the net amount of its sales and costs that are denominated in U.S. dollars. The U.S. dollar loan is a natural hedge of this risk.
c)
The company has interest rate risk on its sales and costs that are incurred in U.S. dollars.
d)
The company has interest rate risk on its loan.
B - The cost of servicing the U.S. dollar loan will change, in Canadian dollar terms, to offset the changes in the value of the U.S. dollar net cash flows if the exchange rate changes unexpectedly.
For a decommissioning provision, the present obligation condition is met when:
a) An obligating event can be measured
b) An obligating event occurs
c) An obligating event has been budgeted for
d) Both a) and b) above
B - for a decommissioning provision, the present obligation condition is met when an obligating event occurs.
<p>Which of the following statements is FALSE?
a) A financial statement audit requires an understanding of the internal controls of an organization, whereas a financial statement review does not.
b) Financial statement audits will often require confirmation of balances and attendance at inventory counts, while financial statement reviews primarily focus on inquiry, analytical procedures, and discussion.
c) A financial statement audit and a financial statement review both require the practitioner to be independent.
d) A financial statement audit and a financial statement review both offer a positive opinion.</p>
<p>D</p>
Jeff has just joined a company that provides a defined contribution pension plan as a benefit for its employees. Jeff has come to you, CPA, to understand this pension plan and the obligations of the employer and employee.
Which of the following statements represents a defined contribution pension plan?
a)
The employer has an obligation to ensure that the plan assets are sufficient to pay for the employee’s pension benefit.
b)
The pension expense includes the current service cost, interest costs, and any returns on the plan assets.
c)
Annually, the employer pays fixed amounts that have been defined by the plan.
d)
The employer guarantees a set amount to be paid on the employee’s retirement.
C - The plan defines the amount of current service cost and past service costs that must be paid annually by the employer.
<p>In 20X7, the federal government provided land to Bomb Inc. (BI) to use in its business operations into the foreseeable future. The land had a fair market value of $55,000 and BI paid $0 to the federal government for the land use. BI uses IFRS to prepare its financial statements.
Which of the following is the best description of how to account for this grant?
a) The land was received for free by BI so a transaction is not recorded. However, note disclosure is required.
b) BI has the option of recording the grant and related asset at fair value or assigning a nominal amount to the grant and related asset.
c) BI records a deferred grant at fair value and recognizes the grant over the expected period of usage of the land.
d) BI must obtain an appraisal for the land and record the grant and related asset at fair value.</p>
<p>B</p>
<p>Which of the following is true regarding an engagement letter?
a) It describes the responsibilities of management, but does not describe the responsibilities of the practitioner.
b) It identifies the applicable financial reporting framework for the preparation of the financial statements.
c) It outlines any new or emerging risks that could have an impact on the engagement.
d) It is prepared by the auditor prior to the start of the audit and is acknowledged by the client at the end of the audit.</p>
<p>B</p>
Which of the following factors would not be considered in making the determination between control and significant influence?
a)
The voting rights of the investor
b)
The investor’s right to elect directors to the investee’s Board of Directors
c)
The length of time that the investor has held the shares of the investee
d)
The existence of a large number of other non-controlling shareholders.
C - This factor would not be considered when making the determination between control and significant influence, as an investor may exert significant influence over a number of years but may never control the investee.
<p>Under IFRS, which of the following can be capitalized to the cost of land?
a) CEO’s salary
b) Construction materials
c) Utilities
d) Title search</p>
<p>D - Costs to perform a title search can be capitalized to the cost of the land.</p>
<p>Kima Inc. had credit sales of $600,000 and cash collections of $450,000 last year. The ending balance in accounts receivable was $175,000. The allowance for doubtful accounts has a balance of $2,600. Bad debt expense is estimated at 1% of credit sales.
What was the bad debt expense for the year?
a) $1,500
b) $1,750
c) $6,000
d) $8,600</p>
<p>C</p>
The disposal of Cinnamon Inc.’s (CI) packaging division qualifies as a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Pertinent information for the most recent fiscal year end is as follows:
· Income up to the date that CI’s Board of Directors voted on disposal of the division: $3,000,000
· Income between the date of the board’s decision and the fiscal year end: $500,000
· Carrying value of net assets of the division: $600,000
· Fair value of net assets of the division: $500,000
· Sales commission to be incurred related to the disposal: 5% of proceeds
· Estimated income from the division during the three months between the fiscal year end and when the disposition is expected to take place: $200,000
Assuming CI’s effective tax rate is 40%, what amount will be reported for discontinued operations in the statement of comprehensive income for the recent fiscal year end?
a) $2,025,000
b) $225,000
c) $2,100,000
d) $2,145,000
A - Proof of correct answer:
= $3,000,000 (income up to the date of the decision to discontinue) + $500,000 (income between the date of the decision to discontinue and the fiscal year end) – $125,000 (write-down to fair value less selling costs)
= $3,375,000 × (1 – 40%)
= $2,025,000
<p>Which of the following statements regarding inventory is true?
a) Under IFRS, companies must capitalize borrowing costs, whereas ASPE allows companies to choose whether to capitalize or expense them.
b) There are no differences between IFRS and ASPE.
c) Under IFRS, companies must capitalize shipping costs, whereas ASPE allows companies to choose whether to capitalize or expense them.
d) Under IFRS, companies must capitalize manufacturing overhead, whereas ASPE allows companies to choose whether to capitalize or expense them.</p>
<p>A</p>
<p>Which of the following is considered restricted cash?
Question 4 options:
a) Foreign currency where there is a limited market for exchange into the company’s operating currency
b) Minimum balance requirements in bank accounts
c) Donations provided for a specific purpose in a not-for-profit organization
d) Both b) and c)</p>
<p>D</p>
Under ASNPO, when a donated item is used in the normal course of operations and would have been purchased otherwise, the NPO:
a)
Will have an increase to its net assets
b)
Must record the donation if its fair value can be reliably measured
c)
Has a choice whether or not to record the donation
d)
Both a) and b) above
C - an NPO has a choice whether or not to recognize a donated good or service, even if its value is reasonably estimated, it is used in the normal course of operations, and it would have been purchased otherwise.
Recently, Claries Clothing Inc. (CCI), a Canadian company, received an order to sell to a new customer in the United States. The invoice is for US$300,000. The customer has agreed to pay on October 15, 20X6, two months from the date of sale and shipment.
It is now the date of sale and shipment, and the exchange rate is US$1 = C$1.20. The company has taken no action to offset its foreign exchange risk at this point.
Which of the following statements BEST describes possible outcomes related to this sale?
a)
If the customer pays the invoice immediately, at the date of sale, there is foreign exchange risk associated with the amount of the sale and an exchange gain of $60,000 is recorded [$300,000 × ($1.00 – $1.20)].
b)
If CCI enters into a forward contract on the date of sale and shipment, based on a two-month forward rate of US$1 = C$1.23, CCI will record an exchange loss of $9,000 on the date the customer pays.
c)
If the customer pays in two months, and if the exchange rate is US$1 = C$1.25 at that time, CCI will realize an exchange loss of $15,000.
d)
If the customer pays in two months, and if the exchange rate is US$1 = C$1.25 at that time, CCI will realize an exchange gain of $15,000.
D - The company will realize an exchange gain of $15,000 [$300,000 × ($1.25 – $1.20)].
Cheong Inc. (CI) reports under ASPE. In fiscal 20X7, it acquired shares of $45,000 in a large, public company. How should the measurement of CI’s investment in these shares be classified?
a)
Fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVTOCI)
b)
FVTPL or cost
c)
Cost
d)
FVTPL
D - ASPE requires FVTPL classification when shares are traded in an active market. There is no other valid option for these shares.
<p>Which one of the following would be separated into individual components for purposes of depreciation?
a) Canadian pipelines
b) Laptop computer
c) Airplane fuselage
d) Building roof</p>
<p>A - Canadian pipelines need to be separated into individual components as the useful life of each pipeline segment would differ depending on the geography and weather it has been subjected to.</p>
<p>On April 15, 20X6, SFC Inc. consigned 80 units of Product A to HGL Inc. Each unit cost SFC $450 to produce, and it cost $1,000 to ship all the consigned units to HGL. On December 31, 20X6, HGL reported that it had sold 40 units for $800 each, and remitted to SFC the proceeds of sales, less a 15% commission and $850 in delivery costs to customers.
What profit on the consigned sales will SFC report for 20X6?
a) $7,350
b) $7,850
c) $13,500
d) $26,350</p>
<p>B</p>
<p>Based on the following information, calculate the ending balance in inventory.
~~~
Opening inventory $415,875
Purchases — lumber $350,750
Purchases — nails $16,250
Purchases — tools and equipment $125,350
Total sales $750,825
Mark up on goods 30%
~~~
a) $330,667
b) $257,298
c) $205,317
d) $782,875</p>
<p>C - Markup on goods calculated as $750,825 / 1.3</p>
<p>Which of the following statements is true?
a) The execution stage consists of the practitioner performing either tests of controls and detailed substantive tests or detailed substantive tests alone.
b) The reporting stage consists of the practitioner evaluating the audit evidence. Analytical procedures are not performed at this stage.
c) The planning stage consists of the practitioner assessing the client’s integrity to determine whether there are any factors to prevent the practitioner from continuing with an existing client.
d) The client acceptance and continuance stage consists of the practitioner preparing the management letter based on the practitioner’s understanding of the client.</p>
<p>A</p>
<p>The units of production method of depreciation:
a) Assumes that the benefit derived from the asset is higher in its initial years
b) Is the cost of the asset, net of the residual value, divided by the estimated useful life
c) Is based on allocating the cost in proportion to the fraction of capacity used
d) Is the book value of the asset multiplied by the depreciation rate</p>
<p>C - The units of production method of depreciation is based on allocating the cost in proportion to the fraction of capacity used.</p>
<p>The following accounts were taken from Blue Monkey Inc.’s unadjusted trial balance at December 31, 20X6:
Accounts receivable $850,000
Opening allowance for doubtful accounts (AFDA) January 1, 20X6 ($11,000)
Net credit sales $2,950,000
Blue Monkey estimates that 1.5% of the gross accounts receivable will become uncollectable. At December 31, 20X6, AFDA should have a credit balance of what?
a) $1,750
b) $11,000
c) $12,750
d) $44,250</p>
<p>C</p>
You are the controller of Alka Co., a ten year old company that has just gone public. The president comments:
“I know that we now need to supply audited annual financial statements, but the regulators also want timely reports periodically during the year.”
Which of the following statements is true?
a)
We do not have to provide any note disclosures in the interim financial statements.
b)
We are required to provide the same note disclosure in the interim financial statements as is contained in the annual financial statements.
c)
The note disclosure in the itermin financial statements is typically much less detailed than those containted in the annual financial statements..
d)
Estimates will need to be made for annual revenues and expenses so that allocations to interim periods can be made with minimal fluctuations between periods.
C - Per IAS 34.8, a minimum component of the interim financial statements includes selected explanatory notes. Per IAS 34.15, interim financial statements should include explanations of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the last annual reporting period. Interim financial statements should include additional notes if their omission would make the condensed interim financial statements misleading (i.e. changes in significant judgements and assumptions made by management).
<p>Under IFRS, which of the following statements regarding losses caused by the revaluation method is true?
a) It is recorded to other comprehensive income (OCI), up to the amount of gains that were previously recorded.
b) It is recorded to the income statement, up to the amount of gains previously recorded.
c) It is recorded to the income statement, after all previous gains have been depleted from OCI.
d) Both a) and c) above.</p>
<p>D - Both a) and c) are correct because, when the asset is written down to fair market value under the revaluation method, it is first recognized by reducing any previously recognized gains in OCI, then the remaining loss is recognized in net income.</p>
Which of the following are included in consolidated common shares?
a)
100% of the parent’s common shares plus 100% of the subsidiary’s common shares.
b)
100% of the parent’s common shares only
c)
100% of the parent’s common shares plus the parent’s share of the subsidiary’s common shares
d)
100% of the parent’s common shares plus the non-controlling interest’s share of the subsidiary’s common shares
B - Only the parent’s common shares are included in consolidated common shares.
<p>Which of the following statements is true when evaluating whether a lease is a finance lease or an operating lease under IFRS?
a) A lease is classified as an operating lease if the lease term is for the major part of the economic life of the asset.
b) A leased asset is classified as an operating lease if the leased asset is specialized.
c) A leased asset could be classified as an operating lease if there is no bargain purchase option (BPO) in the lease.
d) A leased asset is classified as an operating lease if the present value of the minimum lease payments is substantially all of the fair value of the leased asset.</p>
<p>C</p>
<p>Which of the following is true regarding the client acceptance and continuance stage?
a) It is the second stage of the audit process.
b) It is the stage where the auditor plans the audit to reduce audit risk to an acceptably low level.
c) It is the stage where the auditor must review the threats to independence and ensure that safeguards are in place to reduce or remove those threats.
d) It is the stage where the auditor tests in detail the controls, transactions, and balances of the client.</p>
<p>C</p>
At the beginning of the year (Year 1), Bambi’s Barbells (Bambi) built a CrossFit gym on leased property. Note the following:
· The lease agreement requires Bambi to return the leased property to its original state at the end of the five-year lease by dismantling the gym.
· Engineering reports commissioned by Bambi show that the best estimate of costs to settle the obligation in five years will equal $5,000.
· Any amount greater than $50 is material to Bambi.
· The company’s risk-adjusted market discount rate is 12%.
· The market risk-free rate is 3%.
What is Bambi’s depreciation expense for the decommissioning obligation in Year 1?
a)
There is no depreciation expense, only accretion expense
b)
$1,000
c)
$567
d)
$340
C - The asset is capitalized at the present value of the $5,000 future remediation, or $2,837 (I = 0.12, N = 5, PMT = 0, FV = 5,000). $2,837 / 5 years = $567 depreciation per year.
Jayco Incorporated prepares its financial statements in accordance with IFRS. During its third quarter, it purchased shares in Crown Canada for a total cost of $40,000 and classified the shares as fair value through other comprehensive income. At year end, the shares had a fair value of $55,000.
Jayco is subject to a tax rate of 45%. Which of the following entries shows all required adjustments at year end?
a)
Dr. Investment in Crown shares
$15,000
Cr. Deferred taxes (liability)
$15,000
b)
Dr. Investment in Crown shares
$3,375
Cr. OCI — Unrealized gains
$3,375
c)
Dr. Investment in Crown shares
$15,000
Cr. OCI — Unrealized gains
$11,625
Cr. Deferred taxes (liability)
$3,375
d)
Dr. Investment in Crown shares
$15,000
Cr. Other income
$11,625
Cr. Deferred taxes (liability)
$3,375
C - The investment is revalued to fair value, and the unrealized gain, net of tax, is recorded into other comprehensive income (OCI). A debit of $15,000 is recorded to the investment account ($55,000 – $40,000). Deferred taxes are calculated at 45% of this increase in fair value, then multiplied by 50% to recognize the capital gains treatment ($15,000 × 45% × 50% = $3,375). OCI unrealized gains are the difference between the fair market value and cost, less the deferred taxes {($55,000 – $40,000) – [($55,000 – $40,000) × 0.45 × 0.50]} = $15,000 – $3,375 = $11,625, per paragraph 61A of IAS 12 Income Taxes.
On October 1, Alberta Camp Services Ltd. (ACSL) purchased 100% of the shares of Wholesale Foods Inc. (WFI) for $3,100,000. On October 1, WFI reported share capital of $150,000 and retained earnings of $2,600,000. All assets and liabilities had fair values equal to book values, except for inventory and buildings. Inventory had a fair value of $360,000 and a book value of $280,000. Buildings that originally cost $2,500,000 had a book value of $1,875,000 and a fair value of $1,775,000. ACSL’s tax rate is 30%.
What is the amount of goodwill on this purchase?
a)
$336,000
b)
$364,000
c)
$370,000
d)
$376,000
B - Goodwill is calculated as:
Deferred income tax Purchase price $ 3,100,000 Book value of net assets (2,750,000) Purchase premium 350,000 Fair value differentials: Inventory (80,000) 80,000 Buildings 100,000 (100,000) (20,000) Income tax rate 30% Deferred income tax (6,000) (6,000) Goodwill $ 364,000
Which of the following circumstances requires prospective treatment?
a)
Your client amortizes computer hardware over four years and computer software over two years. While preparing the current-year financial statements, it is discovered that all computer hardware and software were amortized over two years.
b)
Your client purchased some new equipment last year and determined that it should be amortized over five years. In the current year, a new model of the equipment was announced and your client plans on replacing the equipment next year. Your client has revised the amortization period of the existing equipment to the two remaining years.
c)
In the current period, your client decided to switch from a straight-line method to a declining-balance method of amortization for a building your client owns because it determined that a competitor uses the declining-balance method of amortization for its buildings.
d)
In reviewing the amortization schedule for last year, an adding error was found, which resulted in an overstatement of prior-year amortization expense of $10,000.
B - A change in the useful life of an asset as a result of new information is a change in an estimate, requiring prospective treatment.
<p>Reed Construction Ltd. (RCL) uses the percentage of completion method under ASPE on its long-term construction contracts. In 20X4, RCL agreed to build an apartment building for a total contract price of $250 million. The percentage of completion is most reliably measured through costs. The job was completed with the following information:
~~~
(in millions) 20X4 20X5 20X6
Costs incurred to date $ 80 $165 $240
Estimated costs to complete 150 70 —
Billings to date 90 180 250
Collections during the year 80 95 75
What amount should be recognized as revenue in 20X5?
~~~
a) $88.5 million
b) $90 million
c) $95 million
d) $175.5 million</p>
<p>A</p>
On February 22 of Year 1, an NPO with a March 31 year end is given $200,000 cash to buy land. At the end of Year 1, it had revenues of $1,000,000. The NPO uses the cash to purchase land on April 2 of Year 2. The NPO has a depreciation policy where long-lived assets greater than $50,000 in value are amortized evenly over 10 years.
The NPO uses the deferral method to account for contributions.
What is the journal entry required for February 22 of Year 1?
a)
Dr. Cash 200,000; Cr. Deferred contribution 200,000
b)
Dr. Cash 200,000; Cr. Net assets 200,000
c)
Dr. Net assets 200,000; Cr. Capital assets (land) 200,000
d)
No journal entry is required
A - When the NPO receives the cash restricted for buying land on February 22 of Year 1, the appropriate journal entry to record the transaction is: Dr. Cash 200,000; Cr. Deferred contribution 200,000
On January 1, Year 1, ABC Inc. bought and received equipment from a U.S. supplier for US$100,000, payable on March 1, Year 1. On January 1, immediately after receiving the supplier’s invoice, ABC entered into a contract to purchase US$100,000 for C$105,000 for delivery on March 1.
Spot exchange rates:
January 1 US$1.00 = C$1.04
March 1 US$1.00 = C$1.06
Average exchange rate
January 1 to January 31, Year 1 US$1.00 = C$1.05
January 1 to March 1, Year 1 US$1.00 = C$1.09
Assume that no depreciation had been taken on the equipment. The March 1 book value of the equipment would be:
a)
C$104,000
b)
C$105,000
c)
C$106,000
d)
C$109,000
A - The equipment is non-monetary; therefore, it should be valued at its historical cost of $104,000. US$1.00 = C$1.04 x $100,000 = $104,000.
<p>Amaris Corp. manufactures and installs air conditioning systems. It recently signed a contract with Barkley Inc. to provide 10 custom-built air conditioning units, including installation, for total consideration of $250,000. Of this amount, $50,000 is non-refundable and is due in advance; the balance is due after all 10 units have been installed. The units will be manufactured and shipped over a one-month period, and the full installation will occur the following month. Amaris also sells air conditioning units without installation because several of its customers hire independent installers that they have used for other projects.
Which of the following statements is true?
a) Amaris should recognize $250,000 as revenue only when all installations are complete.
b) The non-refundable deposit should be recognized in revenue at the beginning of the contract.
c) The revenue related to the sale of air conditioning units cannot be recognized separately because the Barkley contract specifies that the installation must be completed.
d) The revenue related to the installation of air conditioning units can be recognized separately because there is evidence of a fair market value for the air conditioners.</p>
<p>D</p>
When discussing an integrated operation, which of the following statements is true?
a)
Its functional currency is the same as in a self-sustaining operation.
b)
Its functional currency can vary depending on the presentation currency
c)
Its functional currency is the Canadian dollar.
d)
Its functional currency can vary depending on the company’s reporting framework.
C - because the functional currency of an integrated operation is the Canadian dollar.
On February 22 of Year 1, an NPO with a March 31 year end is given $200,000 cash to buy land. At the end of Year 1, it had revenues of $1,000,000. The NPO uses the cash to purchase land on April 2 of Year 2. The NPO has a depreciation policy where long-lived assets greater than $50,000 in value are amortized evenly over 10 years.
The NPO uses the deferral method to account for contributions.
What is the journal entry required for March 31 of Year 2?
a)
Dr. Amortization expense 20,000; Cr. Accumulated amortization 20,000
b)
Dr. Amortization expense 20,000 Cr. Contribution revenue 20,000
c)
Dr. Net assets 20,000; Cr. Contribution revenue 20,000
d)
No journal entry is required
D - Land is a non-depreciable asset, therefore, no entry is required as at March 31 of Year 2.
<p>Depreciation should be calculated on a leased asset when:
a) It is classified as an operating lease.
b) It is classified as a finance lease.
c) It is accounted for from a lessor’s point of view.
d) Both b) and c) above.</p>
<p>B</p>
You, CPA, are working on the deferred tax section for Underhill Ltd., a publicly listed company, and its June 30, 20X6, year end. You have gathered the following information:
· NBV of capital assets at year end: $40,000 at June 30, 20X6; $30,000 at June 30, 20X5
· UCC of assets at year end: $30,000 at June 30, 20X6; $38,000 at June 30, 20X5
· Accrued warranty liability (current): $0 at June 30, 20X6; $20,000 at June 30, 20X5
The effective tax rate used for the June 30, 20X5, fiscal year was 20%. Corporate tax rates decreased, and at June 30, 20X6, the effective tax rate was 18%. There is strong speculation that the tax rate will fall to 16% by June 30, 20X7.
Assume that Underhill has recorded its deferred tax entries correctly in the past. Which one of the following entries is needed to record deferred taxes for the fiscal year ended June 30, 20X6?
a)
Dr. Retained earnings, opening $560, Dr. Deferred tax provision $6,840; Cr. Deferred tax (liability) $7,400
b)
Dr. Deferred tax provision $7,200; Cr. Deferred tax (liability) $7,200
c)
Dr. Deferred tax provision $7,400; Cr. Deferred tax (liability) $7,400
d)
Dr. Deferred tax provision $7,400; Cr. Deferred taxes, short term (liability) $1,600, Cr. Deferred taxes, long term (liability) $5,800
C - calculation of the deferred tax liability is:
Opening deferred tax asset = $5,600 ($1,600 difference in capital assets [$8,000 × 20%] + $4,000 difference in warranty [$20,000 × 20%]).
Closing deferred tax liability = $1,800 ($1,800 difference in capital assets [$10,000 × 18%] + $0 difference in warranty [no timing difference]).
Paragraph 74 of IAS 12 Income Taxes permits deferred tax assets and liabilities to be netted.
Under ASNPO:
a)
The deferral method facilitates tracking externally restricted contributions.
b)
The NPO may have one bank account that includes the balances of several funds.
c)
The statement of operations helps users understand which funds are available for use.
d)
The fund method tracks all contributions separately in their own fund.
B - under ASNPO, the NPO may have one bank account that includes the balances of several funds.
Which of the following statements about functional currency is true?
a)
Primary factors include funds retained from operations.
b)
Primary factors contribute to the determination of presentation currency.
c)
Secondary factors should be considered concurrently with primary factors.
d)
Secondary factors should be considered if primary factors cannot be determined.
D - When determining functional currency, secondary factors should be considered if primary factors cannot be determined.
Academy Vending Machines Inc. (Academy), along with several other parties, is being sued for $500,000 by a man who was badly burned when he spilled a cup of hot chocolate on himself at a skating rink.
Academy sold the hot chocolate machine to the rink during the year. At year end, Academy’s lawyer and management team were unable to estimate the probability of a loss or the amount of the loss.
If Academy reports in accordance with ASPE, what is the appropriate treatment for the lawsuit in Academy’s financial statements?
a)
Accrue $500,000 and disclose that the outcome of the lawsuit is not determinable.
b)
Disclose $500,000 and that the occurrence of the future event is unlikely.
c)
Accrue only a portion of the $500,000, based on management’s best estimate.
d)
Disclose $500,000 and indicate that the result of the lawsuit is not determinable.
D - Because the outcome is not determinable and the amount of the loss is not estimable, disclosure is appropriate.
<p>During the year, MNR Ltd. entered into a contract to provide monthly consulting services to XYZ Inc. The contract is expected to last for 12 months. It commenced on March 1 and MNR’s year end is October 31. The total value of the contract is $120,000. XYZ paid the full amount on July 11.
Which of the following statements is correct with respect to MNR’s October 31 financial statements?
a) MNR should record $40,000 as deferred revenue because the contract is not complete.
b) MNR should record $80,000 as deferred revenue because that is the amount earned.
c) MNR should record $120,000 as deferred revenue because the contract is not complete.
d) MNR should record $120,000 as revenue because that is the amount of cash received.</p>
<p>A</p>
<p>Which of the following describes audit risk?
a) The risk that the practitioner accepts a client but later determines that, due to a lack of sufficient staffing resources, it is not possible to complete the engagement
b) The risk that audit evidence is not scrutinized using professional judgment by the practitioner’s undesignated staff
c) The risk that an unmodified audit opinion is issued on materially misstated financial statements
d) The risk that insufficient analytical procedures are performed during the planning stage of the audit</p>
<p>C</p>
<p>Determine whether an entity is a related party to the reporting entity using IAS 24
Flowers International Ltd. (Flowers), a wholesaler of plants, is a subsidiary of Blooms Inc. Flowers has a 25% ownership interest in Blooms Inc. Blooms Inc. sells floral bouquets nationwide and applies ASPE.
Which one of the following parties would be a related party to Blooms Inc.?
a) The sister to the spouse of Blooms’ CEO
b) National Delivery Service, a company owned 15% by Flowers
c) CostGo, the largest customer of Blooms Inc.
d) The minority shareholder of Bloom, who accounts for the investment using the equity method</p>
<p>D - As per IAS 24.9(a)(ii), a person who has significant influence over the reporting entity is a related party. Since the minority shareholder accounts for its investment in Blooms Inc. using the equity method, this implies that the minority shareholder has significant influence and qualifies as a related party to Blooms Inc.</p>
