Core 1 — Retired Exam Set
Multiple-choice questions
1.
Daffy Ltd. has cash of $200,000 that will be used to create an investment portfolio.
The portfolio will be invested equally in two assets: an equity investment that has
a beta of 1.50 and a risk-free, interest-bearing certificate. The current risk-free rate
in the market is 5%, and the market requires a 5% risk premium for equity
securities. What return should Daffy Ltd. expect to earn on its portfolio?
A.
B.
C.
D.
$17,500
$15,000
$12,500
$25,000
Option A) is correct. The expected return on the equity security is calculated with
the Capital Asset Pricing Model (CAPM) as the risk-free rate plus the market
premium multiplied by the beta. Therefore, the return is calculated as follows: 5% +
1.5(5%) = 12.5%. Given that $100,000 was invested in the equity, the dollar return
is $12,500.
The expected return on the risk-free interest-bearing certificate is the same as the
risk-free rate of 5%. Given that $100,000 was invested in the risk-free asset, the
dollar return is $5,000.
Therefore, the combined return of the portfolio is $17,500.
Option B) is incorrect. This represents the returns on the portfolio if the beta is not
used in CAPM to calculate the expected return of the equity security. Without the
beta, the expected return on the equity security is 10% (5% risk free + 5% market
premium). Therefore, the return on the equity is expected to be $10,000 plus the
$5,000 return from the risk-free asset.
Option C) is incorrect. This represents the return on the equity security alone. 5% +
1.5(5%) = 12.5%. Given that $100,000 was invested in the equity, the dollar return
is $12,500.
Option D) is incorrect. This is calculated by applying the expected return on equity
of 12.5% to the entire $200,000 portfolio.
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2023-04-05
Core 1 — Retired Exam Set —Multiple Choice Questions
2.
Multiple-Choice Questions
DDD Co. (DDD) is one of the pioneers in the 3D printing industry. During the peak
period of investors’ interest 10 years ago, it was not a problem to get venturebacked financing to spearhead its research and development activities. It used
these funds to purchase required printing machinery and technology, along with
more discretionary assets, such as original art and limited-edition furnishings, to
decorate its post-modern offices.
Several years have gone by, and DDD has yet to show any substantial sales.
Management has forecasted enough cash flow for the next eight months of
operations, and the most recent audited financial statements indicate there is a
going concern issue. DDD has not found any additional investors willing to finance
the company, but it has been actively searching. Trends show that the 3D printing
industry is set to skyrocket in two years’ time, and DDD should be able to
generate sales from that period onward.
A competitor in the industry with five times DDD’s market capitalization is looking
to purchase some of DDD’s printing machinery as soon as possible. From the
competitor’s financial perspective, which one of the following is the best valuation
method to consider when approaching DDD?
A.
B.
C.
D.
Discounted cash flow value
Liquidation value
Appraisal value
Replacement value
Option A) is incorrect. From the financial perspective of the competitor, the
preferred valuation method is the liquidation value as this is the minimum value the
company would receive for the quick sale or liquidation of its assets.
Option B) is correct. Liquidation value is the minimum value the company would
receive for the quick sale or liquidation of its assets. As time is of the essence in
DDD’s situation, given the lack of cash flow, investors, and substantial sales, the
competitor may be able to capitalize on this through a lower valuation of their
assets.
Option C) is incorrect. From the financial perspective of the competitor, the
preferred valuation method is the liquidation value as this is the minimum value the
company would receive for the quick sale or liquidation of its assets.
Option D) is incorrect. From the financial perspective of the competitor, the
preferred valuation method is the liquidation value as this is the minimum value the
company would receive for the quick sale or liquidation of its assets.
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Core 1 — Retired Exam Set —Multiple Choice Questions
3.
Multiple-Choice Questions
Which one of the following statements is correct?
A.
B.
C.
D.
The purpose of a valuation based on liquidation values is to value a
business based on its ability to turn its current assets into cash quickly.
The purpose of a valuation based on capitalized earnings is to value a
business with relatively stable earnings that approximate discretionary cash
flows.
The purpose of a valuation based on adjusted net book values is to value a
business that is not a going concern.
The purpose of a valuation based on discounted cash flows is to value a
business based on the estimated fair market value of all of its net assets
and to discount these amounts back to the present to reflect the estimated
time lag that would be required to dispose of these net assets.
Option A) is incorrect. The purpose of a valuation based on liquidation values
would be to value a business that is not a going concern. This would include all of
its assets including its current and fixed assets.
Option B) is correct. A business that has relatively stable earnings that
approximate discretionary cash flows would be valued based on capitalized
earnings.
Option C) is incorrect. The purpose of a valuation based on adjusted net book
values would be to value a business where the assets could be adjusted to market
values which, when accumulated, would represent the value of the business rather
than valuing the cash flow stream of the business from its operations.
Option D) is incorrect. A discounted cash flow approach should take the estimated
cash flows of the business’s operations and discount them back to the present
using an appropriate discount rate. This approach is not used when disposing of all
of the net assets of a business such as in a wind up.
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Core 1 — Retired Exam Set —Multiple Choice Questions
4.
Multiple-Choice Questions
When assessing the fair market value of an early stage, high-growth mining
company, the following factors should all be considered except for
A.
B.
C.
D.
the past financial performance of the company.
proven and unproven reserves.
the forecasts and future prospects of the company.
the past record of management with similar organizations.
Option A) is correct. The past financial performance for this company would not be
indicative of the future performance and therefore is not relevant when assessing
its value.
Option B) is incorrect. The proven and unproven reserves are likely to be the key
asset of this organization at this early stage and are therefore relevant.
Option C) is incorrect. The forecasts and future prospects would drive the inputs
for any discounted cash flow valuation.
Option D) is incorrect. Management’s track record would add credibility to the
future viability of the company.
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Core 1 — Retired Exam Set —Multiple Choice Questions
5.
Multiple-Choice Questions
BioTek Corp. (BTC) is a technology start-up firm based in San Francisco. It has
developed the latest app to monitor a user’s biometrics through the wireless
transmitter in the user’s phone and the user’s body movements. The app has
been downloaded over 500,000 times to date, but sales are generated through inapp purchases because the basic app is free to download. This revenue model is
similar to that of other competitors in the sector and has been fuelled by the
concept of low-price, high-volume transactions.
Although there are a multitude of more established competitive apps in the
marketplace, BTC believes it will be able to gain the majority of market share in
four years’ time, as reflected in its mission statement: “To be the leader in
biotechnology, today and in the future.”
Part of its competitive advantage is strong financial management. It outsources
customer troubleshooting to the vast number of skilled technicians in India who
receive an average hourly rate in rupees. The economy in India and other
emerging countries continues to grow exponentially compared to established
economies such as those of the United States, the United Kingdom, and
Germany.
Cash on hand is kept at a minimum because BTC invests any significant free cash
into five-year government bonds. Its financial risk management also includes
separate insurance coverage for personal liability, business property, business
interruption, legal action, bad debt receivables, and force majeure.
BTC’s management is aware that the economy is not as strong as it was when
they started the company five years ago. The unemployment rate has increased,
the interest rate is volatile, the dollar has weakened, and the biotechnology sector
is at risk of being oversaturated.
Which one of the following would be the LEAST imperative financial risk for BTC
to consider when updating its financial management policies?
A.
B.
C.
D.
Foreign exchange risk
Market risk
Interest rate risk
Bad debt risk
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
Option A) is incorrect. Foreign exchange risk would exist due to outsourcing
arrangements with India.
Option B) is incorrect. Market risk would exist as they invest in bonds and their
success is driven by market factors in their industry.
Option C) is incorrect. Interest rate risk would exist as they invest in bonds.
Option D) is correct. Bad debt risk is mitigated in the insurance coverage. In
addition, this industry is based on low-price, high-volume transactions. As such,
there is minimal risk of significant bad debts.
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Core 1 — Retired Exam Set —Multiple Choice Questions
6.
Multiple-Choice Questions
The following statement describes a significant advantage of one type of
derivative financial instrument that can be used to mitigate specific financial risks
for an entity:
“They can create certainty because specific rates are locked in. They also
are easily traded on an exchange in standard amounts and, thus, are very
liquid.”
This advantage is applicable to which one of the following derivative financial
instruments?
A.
B.
C.
D.
Option contract
Forward contract
Short sale
Future contract
Option A) is incorrect. An option contract provides the right, but not the obligation,
to buy/sell an asset or financial instrument within a specified timeframe.
Option B) is incorrect. A forward contract is a contract that must be completed and
could lead to substantial losses. Forward contacts are often used to mitigate
foreign exchange risks. They are typically tailor-made and not traded on
exchanges making them illiquid.
Option C) is incorrect. A short sale is not a financial instrument.
Option D) is correct. A future contract is a specific locked in contract. They are
traded on exchanges in standard amounts and are therefore very liquid.
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Core 1 — Retired Exam Set —Multiple Choice Questions
7.
Multiple-Choice Questions
Which one of the following statements about mergers and acquisitions is correct?
A.
B.
C.
D.
A horizontal acquisition involves firms at different stages of the production
process acquiring another firm (for example, a charter airline acquiring a
chain of travel agencies).
A leveraged buyout involves all of the equity of a public company being
purchased by a small group of investors.
In order to avoid a takeover acquisition, the target firm may seek a
competing bid from another buyer who promises more favourable terms.
This is referred to as a poison pill.
A conglomerate acquisition involves the buying firm acquiring a firm in a
different industry. One benefit may be diversification, which reduces risk and
in turn increases overall debt capacity.
Option A) is incorrect. This is the definition of a vertical acquisition.
Option B) is incorrect. This explanation is actually one for a going private
transaction.
Option C) is incorrect. This explanation is actually referring to a white knight.
Option D) is correct. The term “conglomerate acquisition” is used correctly. The
diversification it provides helps reduce unsystematic risk, and a reduction of risk
would translate to an increase in borrowing capacity.
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Core 1 — Retired Exam Set —Multiple Choice Questions
8.
Multiple-Choice Questions
On May 1 this year, Ling incorporated her business, which she started as a sole
proprietorship three years ago. She chose May 1 as the first day of the fiscal year
of the corporation. Her spouse, Ahmed, works for an international corporation on a
full-time basis and has no involvement in Ling’s business. Which one of the
following statements is incorrect with respect to income tax filing requirements?
A.
B.
C.
D.
The corporation must file its corporate tax return before November 1 of the
following year.
The corporation must file its corporate tax return before April 30 of the
following year.
Ahmed must file his personal tax return before June 15 of the current year.
Ling must file her personal tax return before June 15 of the current year.
Option A) is incorrect. This statement is correct as the corporation’s filing deadline
would be October 31 of the following year (six months after the end of each fiscal
period).
Option B) is correct. This statement is not correct as the corporation’s filing
deadline would be October 31 of the following year (six months after the end of
each fiscal period), not the end of the fiscal period.
Option C) is incorrect. This statement is correct as an individual’s filing deadline is
June 15 if their spouse has self-employment business income.
Option D) is incorrect. This statement is correct as an individual’s filing deadline is
June 15 if they have self-employment business income.
9 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
9.
Multiple-Choice Questions
The following businesses were incorporated in Canada:
• Alpha Ltd. – 50% of the voting shares are owned by a non-resident. The
remaining 50% are owned by a Canadian resident. Alpha Ltd.’s shares are not
listed on any stock exchange.
• Beta Ltd. – 40% of the voting shares are owned by a non-resident. The
remaining 60% are owned by a Canadian resident. Beta Ltd.’s shares are not
listed on any stock exchange.
• Capricorn Ltd. – 70% of the issued common shares are listed on the Toronto
Stock Exchange. The remaining 30% are owned by Canadian public
corporations.
• Delta Ltd. – 60% of the voting shares are owned by non-residents. The
remaining 40% are owned by a private Canadian corporation. Delta Ltd.’s
shares are not listed on any stock exchange.
Which one of the following lists contains only Canadian-controlled private
corporations?
A.
B.
C.
D.
Alpha Ltd., Capricorn Ltd
Beta Ltd., Capricorn Ltd
Beta Ltd., Delta Ltd.
Alpha Ltd., Beta Ltd.
Option A) is incorrect. Capricorn is not a CCPC as its shares are listed on a stock
exchange.
Option B) is incorrect. Capricorn is not a CCPC as its shares are listed on a stock
exchange.
Option C) is incorrect. Delta Ltd. is not a CCPC since it is controlled by nonresidents.
Option D) is correct. Alpha and Beta are both Canadian-controlled private
corporations. The definition in ITA 125(7) states that a Canadian-controlled private
corporation is a private corporation that is a Canadian corporation other than a
corporation controlled, directly or indirectly in any manner whatsoever, by one or
more non-resident persons, by one or more public corporations, or by a
corporation a class of the shares of the capital stock of which is listed on a
designated stock exchange. It also excludes a corporation a class of the shares of
the capital stock of which is listed on a designated stock exchange. As both
shareholders hold 50%, the non-resident does not control the corporation.
10 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
10. Which one of the following statements about the requirement to maintain books
and records under the Excise Tax Act (Canada) is correct?
A.
B.
C.
D.
Records must be kept by every person engaged in a commercial activity in
Canada except those who are not required to register for GST/HST.
Records may be kept outside of Canada unless the Minister of Finance has
specifically requested that they remain in Canada.
Records must be kept in English or French, must be complete, and must be
in a form that contains enough information to determine any liabilities or
refunds.
Records must be kept along with every account and voucher necessary to
verify the information contained therein, and retained until the expiration of
five years from the end of the calendar year for which they were kept.
Option A) is incorrect. As per the Excise Tax Act 240(1)(a), a small supplier is not
required to register for GST/HST purposes. However, they must maintain adequate
records to support their status as a small supplier under the Excise Tax Act.
Option B) is incorrect. As per the Excise Tax Act 98(1), records must be kept at
that person’s place of business in Canada.
Option C) is correct. As per the Excise Tax Act 98(1), records and books of
account must be kept in English or French at that person’s place of business in
Canada in such form and containing such information as will enable the amount of
taxes or other sums that should have been paid or collected, the amount of stamps
that should have been affixed or cancelled or the amount, if any, of any drawback,
payment or deduction that has been made or that may be made to or by that
person, to be determined.
Option D) is incorrect. As per the Excise Tax Act 98(1), records and books shall be
retained and every account and voucher necessary to verify the information
contained therein until the expiration of six years from the end of the calendar year
in respect of which those records and books of account are kept.
11 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
11. Mac-Pac Corp. (MPC) has a December 31 taxation year end. In 2016, MPC
purchased a $40,000 passenger vehicle for business use. On January 1, 2022,
the UCC balance for this vehicle was $18,000. The vehicle was sold on May 1,
2022, for $19,000. On June 1, 2022, MPC purchased a new passenger vehicle for
business use at a price of $50,000. MPC’s associated corporations have already
used their $1,500,000 immediate expensing room for the year. What is the total
maximum capital cost allowance deduction for both vehicles for 2022?
A.
B.
C.
D.
$14,300
$15,300
$18,000
$10,200
Option A) is incorrect. This incorrectly deducts recapture of $1,000 on the vehicle
sold from the $15,300 CCA [($34,000 × 1½ (AII adjustment) × 30%] on the new
vehicle purchased. As the vehicle that is sold is considered a luxury car and was
placed in Class 10.1, in the year of sale neither recapture nor terminal losses are
recognized.
Option B) is incorrect. Only the CCA on the vehicle purchased in 2022 was
included. One-half of the normal CCA on the vehicle sold would also be deductible.
Option C) is correct. Total CCA = $2,700 CCA on vehicle sold + $15,300 CCA on
new vehicle purchased = $18,000. In the year of sale, one-half of the normal CCA
on Class 10.1 assets may be deducted = $18,000 × 30% × ½ = $2,700. For the
new vehicle purchased, $34,000 would be added to a separate Class 10.1 and the
first year CCA under the accelerated investment incentive would be calculated as
= $34,000 × 1½ (AII adjustment) × 30% = $15,300.
Option D) is incorrect. The $10,200 is the CCA calculated on the new vehicle
purchased ($34,000 × 30%) but the accelerated investment incentive was not
applied. As well, the CCA of $2,700 on the vehicle sold was not added.
12 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
12. RHM Ltd. had income before taxes for accounting purposes of $175,000 this year.
In the calculation of this amount, expenses included $50,000 for amortization,
$2,000 in charitable donations, and $30,000 in entertainment expenses. The
capital cost allowance claimed for the year is $60,000. What is the company’s net
income for tax purposes for this year?
A.
B.
C.
D.
$167,000
$180,000
$182,000
$197,000
Option A) is incorrect. This doesn’t adjust for the non-deductible portion of
entertainment expense (50% × $30,000 = $15,000). Per ITA 67.1, 50% of
entertainment is deductible.
Option B) is incorrect. This doesn’t add back charitable donations. Charitable
donations are a deduction to compute taxable income, not net income for tax
purposes. [ITA 110.1]
Option C) is correct.
Accounting income
Add back:
Amortization expense
Charitable donations
Non-deductible portion of entertainment ($30,000 × .5)
Deduct: CCA
Net income for tax purposes
$175,000
50,000
2,000
15,000
(60,000)
$182,000
Option D) is incorrect. This adds back 100% of entertainment expense as a nondeductible adjustment. 50% of entertainment is deductible [ITA 67.1].
13 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
13. Which one of the following statements BEST describes the taxation of dividend
income received by a minor child from a private corporation, when the shares in
question were acquired for them by one of their parents?
A.
B.
C.
D.
Dividends received by the child will be taxed to the child at the top personal
tax rate.
Dividends received by the child will be included in the parent’s income for
tax purposes.
Dividends received by the child will be split equally between the income for
tax purposes of each of their parents.
Dividends received by the child will be taxed twice: once at the child’s
regular tax rate and once at the top personal tax rate.
Option A) is correct. Since the child is a specified individual (under age 18) and is
receiving split income (dividends from a private corporation), the minor child pays
tax on split income at the top rate that applies to high-income taxpayers
[ITA 120.4(1)].
Option B) is incorrect. The dividends were received from a private corporation and
therefore will not attribute back to the parents as they would if the dividends were
received from a public company, and the parent had provided the funds to
purchase the public company shares.
Option C) is incorrect. For purposes of determining whether corporations are
associated, shares owned by a child under age 18 are deemed to be owned by
each parent unless it can reasonably be considered that the child manages the
business and affairs of the corporation and does so without a significant degree of
influence by the parent [ITA 256(1.3)]. However, this rule has no impact on the
taxation of dividends received in this situation.
Option D) is incorrect. Split income is deducted from income for regular tax
purposes [ITA 20(1)(ww)]. Therefore, the dividend income is taxed only once.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
14. Jason transferred a parcel of land with an adjusted cost base (ACB) of $200,000
and fair market value (FMV) of $140,000 to his common-law partner for $150,000.
He also transferred a parcel of land with an ACB of $250,000 and FMV of
$225,000 to his brother for $225,000.
Assuming no elections are made, what is the total capital loss that Jason will
recognize on the two transfers?
A.
B.
C.
D.
$0
$25,000
$60,000
$85,000
Option A) is incorrect. This assumes a rollover has occurred on both the transfer of
land to Jason’s common-law partner and brother. The transfer of land to Jason’s
brother is not eligible for a tax-free rollover under ITA 73(1) and ITA 73(1.01).
Option B) is correct. ITA 73(1) and ITA 73(1.01) provide an automatic rollover of
capital assets to a spouse or common-law partner at the assets’ ACB. As no
election has been made to elect out of the automatic rollover, Jason would not
recognize a capital loss on the transfer to his common-law partner ($200,000
deemed proceeds – $200,000 ACB). Jason would recognize a capital loss of
$25,000 ($225,000 – $250,000) on the transfer to his brother as the proceeds are
equal to FMV.
Option C) is incorrect. This assumes a capital loss as a result of the land transfer
to Jason’s common-law partner and that a rollover has occurred on the land
transferred to his brother. The transfer of land to Jason’s brother is not eligible for a
tax-free rollover under ITA 73(1) and ITA 73(1.01) and Jason must elect out of the
automatic rollover to his common-law partner.
Option D) is incorrect. This records a capital loss on both properties. ITA 73(1) and
ITA 73(1.01) provide an automatic rollover of capital assets to a spouse or
common-law partner at the assets’ ACB. Jason would not recognize a capital loss
on the transfer to his common-law partner.
15 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
15. Barb Rockefeller, a Canadian resident, received the following amounts in
Canadian dollars during 2022:
•
$10,000 of eligible dividends from taxable Canadian corporations
•
$10,000 of other-than-eligible dividends from taxable Canadian corporations
•
$10,000 of foreign dividends from which the foreign payer withheld $1,500 in
foreign tax (net cash received: $8,500)
With respect to these amounts, how much income for tax purposes will be
included on Barb’s tax return?
A.
B.
C.
D.
$25,300
$33,800
$34,500
$35,300
Option A) is incorrect. The foreign dividend has been excluded ($35,300 – $10,000
= $25,300).
Option B) is incorrect. The foreign dividend has been reduced by the foreign tax
paid ($35,300 – $1,500 = $33,800). The foreign tax paid is not deducted to arrive
at income for tax purposes.
Option C) is incorrect. All three dividends have been grossed up by the other-thaneligible rate of 15% ($30,000 × 115% = $34,500).
Option D) is correct.
Eligible dividends ($10,000 × 138%)
$13,800
Other-than-eligible dividends ($10,000 × 115%)
11,500
Foreign dividend
10,000
Income for tax purposes
$35,300
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
16. Wilma and Serge separated in 2021, and Serge took custody of their child. At that
time, Wilma and Serge signed a written separation agreement requiring Wilma to
pay Serge $1,500 per month in spousal support and $1,200 per month in child
support. Wilma made all the required payments in 2021. However, in 2022, Wilma
made only eight months of payments, which totalled $21,600. How much of the
2022 payments can Wilma deduct on her 2022 personal income tax return?
A.
B.
C.
D.
$7,200
$12,000
$18,000
$21,600
Option A) is correct. Only payments in excess of the required non-deductible child
support will be deductible as spousal support as priority is given to child support
payments.
Total payments
$21,600
Less: child support 12 × $1,200
(14,400)
Spousal support deduction
$ 7,200
Option B) is incorrect. Wilma cannot deduct eight months of spousal support
payments (8 × $1,500 = $12,000). Only payments in excess of the required nondeductible child support will be deductible as spousal support.
Option C) is incorrect. Wilma cannot deduct 12 months of spousal support
payments (12 × $1,500 = $18,000). Only payments in excess of the required nondeductible child support will be deductible as spousal support.
Option D) is incorrect. The total payments are not deductible. Only payments in
excess of the required non-deductible child support will be deductible as spousal
support.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
17. The following information pertains to trusts A, B, C, and D:
Trust A – Brenda settled Trust A by transferring $100,000 to it for the benefit of
her five-year-old daughter, who lives with her.
Trust B – Clark’s will provides for $500,000 of specific assets to be held in Trust B,
established at his death, for his wife. Trust B is required to pay Clark’s wife, during
her lifetime, all of the annual income generated by the trust.
Trust C – Basil settled Trust C by transferring $1 million to it. Under the terms of
the trust, no one other than his wife is to benefit from the trust assets during her
lifetime. On the death of Basil’s wife, the trust assets are to be distributed equally
between his children.
Trust D – Martha’s will provides for her assets to be held in Trust D, established at
her death, for the benefit of her son and granddaughter.
Which two of the above trusts are testamentary trusts?
A.
B.
C.
D.
Trust A and Trust C
Trust C and Trust D
Trust B and Trust D
Trust B and Trust C
Option A) is incorrect. Trust A and C were established during the lifetime of the
settlor, and as a result are not testamentary trusts.
Option B) is incorrect. Trust C was established during the lifetime of the settlor, and
as a result is not a testamentary trust.
Option C) is correct. Under ITA 108(1), a “testamentary trust” is one that arose on
and as a consequence of the death of an individual.
Option D) is incorrect. Trust C was established during the lifetime of the settlor,
and as a result is not a testamentary trust.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
18. Regarding reserves in the year of death (for example, reserves for doubtful debts
of an unincorporated business), which one of the following statements is true?
A.
B.
C.
D.
The prior year reserve must be included in the deceased’s income, and a
reserve may be deducted in the year of death.
The prior year reserve must be included in the deceased’s income, and a
reserve cannot be deducted in the year of death.
The prior year reserve does not need to be included in the deceased’s
income, and a reserve cannot be deducted in the year of death.
The prior year reserve does not need to be included in the deceased’s
income, and a reserve may be deducted in the year of death.
Option A) is correct. In the year of death, reserves taken in a prior year must be
included as income. While limited in the types of reserves that can be claimed, the
deceased is not prohibited from deducting a reserve with respect to the bad debts
of the business. The only exception where a bad debt reserve cannot be deducted
is when a reserve is specifically listed in ITA 72(1). ITA 20(1)(n) reserves are
denied, but there is no indication in the question that the accounts receivable are to
be collected over more than two years.
Option B) is incorrect. The deceased is allowed to deduct reserves with respect to
the bad debts of the business under ITA 20(1)(p), or a reasonable allowance under
par. 20(1)(l).
Option C) is incorrect. Last year’s reserve must be included as income in the year
of death.
Option D) is incorrect. Last year’s reserve must be included as income in the year
of death.
19 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
19. When an individual wishes to dispute a Notice of Assessment received from the
Canada Revenue Agency, how much time does that individual have to file a
Notice of Objection?
A.
B.
C.
D.
90 days from the date on the Notice of Assessment or Reassessment
One year from the filing deadline of the tax return of the year in question
90 days from the date on the Notice of Assessment or one year from the
filing deadline of the tax return, whichever is later
90 days from the date on the Notice of Assessment or one year from the
filing deadline of the tax return, whichever is sooner
Option A) is incorrect. This is the deadline for taxpayers other than individuals.
Option B) is incorrect. The CRA can issue a notice of assessment anytime during
the normal reassessment period [ITA 152(3.1)] which extends out past one year
from the due date of the tax return.
Option C) is correct. Due to ITA 165(1), an individual must file a notice of objection
within one year of the required tax return filing date of the year in question or within
90 days of the day the notice of assessment is dated, whichever is later.
Option D) is incorrect. This specifies that whichever option is sooner should be
chosen which is inconsistent with ITA 165(1).
20 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
20. The management of Real-Time Marketing Corp., an advertising agency reporting
under IFRS, is working on the implementation of a real-time accounting and
reporting system to satisfy its investors’ and stakeholders’ need for more timely
financial information. The CEO explains that, to achieve this, the statement of profit
or loss and the statement of financial position numbers need to be updated every
day and published for the users. He is interested in understanding the key hurdles
to setting up such a system. Which one of the following challenges is the MOST
significant when implementing a real-time accounting and reporting system?
A.
B.
C.
D.
Providing the numerous users access to dashboards and summaries
Configuring the information system to accept real-time transactions when
booked
Training all of the company’s employees to close the books on a daily basis
Posting and publishing reliable un-audited real-time transactions
Option A) is incorrect. Many information systems in the current technological
environment are already capable of having a multitude of users with a variety of
privileges. This is the case with even the most basic accounting systems as well as
online customer portals.
Option B) is incorrect. Many information systems in the current technological
environment are already capable of handling real-time transactions. This is the
case with shipping and receiving, banking, investments, etc. The difficulty is not
configuring the systems to handle real-time data, but rather, the reliability of the
data once it is entered.
Option C) is incorrect. In the current financial reporting environment, accounting
employees already enter transactions and information on a daily basis. While there
are some end-of-month closing transactions that are left out from day-to-day
activities, they may not require an exhaustive amount of training or re-directing
resources to execute on a more-frequent basis.
Option D) is correct. The reliability of real-time data is the largest risk to a real-time
accounting system. Reliability is inversely proportional to timeliness. When data is
highly reliable, it usually takes a lot of time to prepare it and thereby may not be
timely. When data is timely, there is likely a lack of sufficient review or verification
and thereby may not be reliable. Having data available real-time is pushing this
relationship to its limits by having unprocessed and potentially erroneous data feed
right into the system.
21 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
21. In Year 1, the provincial government approved financial assistance with employee
wages for GUM Ltd. (GUM). Under the terms of the agreement, GUM is required
to maintain staffing levels at Year 1’s level for each of Year 2, Year 3, and Year 4.
In return, the government will provide a grant of $100,000 for each year that the
staffing level requirement is met. In Year 1, the company had 50 employees. In
Year 2, GUM still had 50 employees, but it may have to lay off a few employees in
Year 3.
Assuming no amount has yet been recorded for Year 2 and the income approach
is used, how much of the grant should be recognized in Year 2, when reporting
under ASPE?
A.
B.
C.
D.
$0
$100,000
$200,000
$300,000
Option A) is incorrect. Potential future layoffs are irrelevant as the criteria by the
government is assessed on an annual basis and future layoffs will not affect the
qualification for Year 2.
Option B) is correct. In Year 2 GUM has met the criteria for the government
funding by maintaining 50 employees. It is therefore appropriate to record this
amount.
Option C) is incorrect. Recognizing more than $100,000 of revenue is
inappropriate as GUM has yet to earn the government funding for Year 3 or Year
4. The remaining funding should be recognized when GUM has earned it by
maintaining employment levels in those years.
Option D) is incorrect. Recognizing more than $100,000 of revenue is
inappropriate as GUM has yet to earn the government funding for Year 3 or Year
4. The remaining funding should be recognized when GUM has earned it by
maintaining employment levels in those years.
22 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
22. On June 30, Year 12, Cruisers Ltd. purchased a new cruise ship. The cost of the
purchase was $25,690,000. Although ships generally have a life of 25 years, it is
common in the industry for the various components of a ship to be replaced at
different times throughout its life. The total cost of the ship is allocated to the
following components:
Component
Ship engines
Decking
Galley fixtures
Other
Replacement Rate Percentage of Total Cost
5 years
30%
10 years
35%
10 years
30%
25 years
5%
In the December 31, Year 12, annual financial statements prepared following
IFRS, what is the depreciation expense for the newly acquired ship if straight-line
depreciation is used?
A.
B.
C.
D.
$513,800
$1,631,315
$1,027,600
$3,262,630
Option A) is incorrect. This is the straight-line depreciation for the total cost of the
ship for 25 years, taking into account that the ship has only been owned for six
months, which would be a total depreciation of $513,800 ($25,690,000 / 25 years ×
6/12 months).
Option B) is correct. According to IAS 16.43, “each part of an item of property,
plant, and equipment with a cost that is significant in relation to the total cost of the
item shall be depreciated separately.” Based on the depreciation calculation below,
and acknowledging that only six months of depreciation should be taken at the end
of Year 12 (because the date of purchase was June 30), the total depreciation
would be $1,631,315 ($3,262,630 × 6/12 months).
Component
Ship Engines
Decking
Galley Fixtures
Other
Total
Percentage of
Total Cost
30%
35%
30%
5%
100%
Allocated
Expected
Cost
Life
$7,707,000
5
$8,991,500
10
$7,707,000
10
$1,284,500
25
$25,690,000
23 / 82
Annual
Amortization
$1,541,400
$899,150
$770,700
$51,380
$3,262,630
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
Option C) is incorrect. This is the straight-line depreciation for the total cost of the
ship of 25 years, which would be a total amortization of $1,027,600 ($25,690,000 /
25 years).
Option D) is incorrect. This calculation is adequately done by component, but does
not consider that the ship was only owned for 6 months; therefore the total
depreciation is calculated at the full year amount of $3,262,630.
24 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
23. R Ltd. (R) is an online merchandiser and reports under ASPE. It sells products on
its website and accepts payment either by credit or debit card. All of its products
are from one manufacturer, M Ltd. (M). R has set its selling prices at M’s suggested
retail price, which results in a net margin of 50% to R. The products are ordered
from M when payment is received from the customer and are sent directly from M
to the customer. The process is automated. Shipping is paid by the customer.
Details of a sale are as follows:
September 4
Sales order and payment received by R from customer for
$100,000
September 6 Product shipped by M
September 10 Product received by customer
On what date and at what amount will the revenue be recorded by R?
A.
B.
C.
D.
On September 6 for $50,000
On September 6 for $100,000
On September 4 for $100,000
On September 10 for $50,000
Option A) is correct. Facts support that R is an agent, not a principal, and therefore
the net of $50,000 should be recorded as revenue. The transaction should be
recorded when performance is achieved on September 6 when all criteria per
Section 3400 have been met as R is not responsible for the shipment.
Option B) is incorrect. Facts support R that is an agent, not a principal, and
therefore revenue should be recorded on a net basis.
Option C) is incorrect. Facts support that R is an agent, not a principal, and
therefore revenue should be recorded on a net basis. In addition, performance has
not taken place September 4, as goods have not been shipped yet.
Option D) is incorrect. The revenue recognition criteria are met as of September 6,
when the goods are shipped.
25 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
24. IOK Corp. (IOK), a public company that operates franchises, holds a 12-month
note receivable and receives payments based on the contractual terms of the
note. The note is recorded at fair value through other comprehensive income and
has a face value of $560,000. Loans such as this note have historical default rates
of 1%; however, IOK’s management predicts the probability of default is likely 2%.
Management uses a present value factor of 0.8 in their calculations.
What is the amount of the credit loss to be recognized under the general approach
model described in IFRS 9, on the day the note was issued?
A.
B.
C.
D.
$11,200
$8,960
$4,480
$5,600
Option A) is incorrect. This does not take into account the time value of money and
simply applies the projected default rate to the face value of the note: $560,000 ×
2% = $11,200. The present value (rather than face value) of the note receivable
should be adjusted by management’s expected rate of default to arrive at the
expected credit loss.
Option B) is correct. The present value of the note receivable is adjusted by
management’s expected rate of default (to incorporate a forecast of future
economic conditions) to arrive at the expected credit loss, as follows:
Face
value ($)
$560,000
Present
value factor
0.80
Present
value ($)
$448,000
Projected
default rate
2%
Expected
credit loss ($)
$(8,960)
Option C) is incorrect. This uses the historical default rate: $560,000 × 0.80 × 1% =
$4,480. The present value of the note receivable should be adjusted by
management’s expected rate of default (to incorporate a forecast of future
economic conditions) to arrive at the expected credit loss rather than using
historical default percentages.
Option D) is incorrect. This does not take into account the time value of money and
uses the historical default rate: $560,000 × 1% = $5,600. The present value (rather
than the face value) of the note receivable should be adjusted by management’s
expected rate of default (to incorporate a forecast of future economic conditions) to
arrive at the expected credit loss rather than using historical default percentages.
26 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
25. On the last day of Year 1, Ranger Inc. (Ranger) sold items to Sirius Corporation
(Sirius). Related to that transaction, $100,000 was included in revenue and
accounts receivable. At the time, Ranger had every expectation of collecting the
amount.
At the end of Year 2, Ranger’s management estimated that the most likely amount
it could recover was $50,000, based on its best estimate at the time and having
heard that Sirius might be undergoing creditor protection.
Two months into Year 3, Sirius was acquired by a new parent company and
received a cash infusion that allowed it to repay the account in full, including
accrued interest of $4,000.
Excluding the $100,000 of revenue from the sale already recorded on the last day
of Year 1, what is the impact of the transaction on Ranger’s income for Years 1, 2,
and 3, respectively, according to ASPE?
A.
B.
C.
D.
Year 1: $0; Year 2: $(50,000); Year 3: $54,000
Year 1: $0; Year 2: $0; Year 3: $4,000
Year 1: $(100,000); Year 2: $0; Year 3: $104,000
Year 1: $(50,000); Year 2: $0; Year 3: $54,000
Option A) is correct. In Year 1, since management expected to recover the full
amount, there is no impairment. At the reporting date for Year 2, management’s
best estimate is that the account was impaired in the amount of $50,000, so there
is an impairment of $50,000 to be recognized in the financial statements. When the
account was settled in Year 3, a full reversal of $50,000 plus the interest collected
in the amount of $4,000 need to be recognized. The event which allowed Sirius to
repay the account did not occur until after Year 2 and therefore is accounted for in
Year 3.
Option B) is incorrect. The information available at the end of Year 2 indicates that
the balance was impaired and should be allowed for in Year 2 despite subsequent
repayment.
Option C) is incorrect. The information available at the time the sale occurred
indicated that collection was reasonably assured; therefore recognition of the
revenue was appropriate and no adjustment for the sales amount is necessary.
Option D) is incorrect. The writedown should not have been adjusted to the time
that the account was established since in Year 1, management expected to
recover the full amount.
27 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
26. If inventory costs are expected to increase, which one of the following sets of
accounting policies would result in the HIGHEST annual income in the short
term for a new company using ASPE?
A.
B.
C.
D.
Inventory valuation method: FIFO; capital assets depreciation method:
straight-line
Inventory valuation method: weighted average; capital assets depreciation
method: straight-line
Inventory valuation method: weighted average; capital assets depreciation
method: declining
Inventory valuation method: FIFO; capital assets depreciation method:
declining
Option A) is correct. FIFO provides a higher income since old (lower) costs are
recognized in the income statement as prices increase. Straight-line generates
lower amortization in the first years.
Option B) is incorrect. Weighted average generates lower income compared to a
FIFO valuation method.
Option C) is incorrect. Weighted average generates lower income compared to a
FIFO valuation method. Accelerated amortization, such as declining balance, will
generate lower income than a straight-line depreciation method in the first years.
Option D) is incorrect. Accelerated amortization, such as declining balance, will
generate lower income in the first years than a straight-line depreciation method.
28 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
27. Simcoe Industrial Ltd. (SIL) purchased a specialized piece of equipment to be
used in its manufacturing process. It did not take SIL a substantial period of time
to get the asset ready for its intended use. SIL paid for this equipment as follows:
• $12,475 cash upfront.
• $12,475 per annum payable at year end of each year for five years. The current
market interest rate for a note with similar payment terms is 6%.
In accordance with IFRS, what amount should SIL record for the initial value of the
equipment (rounded to the nearest thousand dollars)?
A.
B.
C.
D.
$53,000
$61,000
$65,000
$75,000
Option A) is incorrect. This calculates the present value of five payments of
$12,475 and ignores the $12,475 paid upfront ($12,475 × PVIFA 5,6% [4.21] =
$52,520 or $53,000 rounded)
Option B) is incorrect. This calculates the present value of six years of payments of
$12,475, ignoring the fact that the first one is paid up front ($12,475 × PVIFA 6, 6%
[4.92] = $61,377 or $61,000 rounded)
Option C) is correct. This calculates the present value of five payments of $12,475
and includes the $12,475 paid upfront. $12,475 + ($12,475 × PVIFA 5,6% [4.21]) =
$12,475 + $52,520 = $64,995 = $65,000 (rounded)
Option D) is incorrect. This does not calculate the present value of the note and
therefore capitalizes the interest component to the equipment account. ($12,475 ×
6 = $74,850 or $75,000 rounded). The asset is not a qualifying asset as defined in
IAS 23 for the capitalization of interest as it does not take an extended period of
time to get ready for its intended use.
29 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
28. JRM Ltd. is a company, listed on the Toronto Stock Exchange, that operates only
in Canada. The differences between net income and taxable income for Year 1, its
first year of operations, were as follows:
• Depreciation expense was $280,000 and capital cost allowance was $350,000.
• Deferred rental revenue of $80,000 was taxable in Year 1 and would be
recorded as earned in Year 2.
Assuming a tax rate of 35% for Year 1 and Year 2, how will the deferred taxes be
presented on JRM Ltd.’s statement of financial position at the end of Year 1?
A.
B.
C.
D.
$24,500 non-current deferred tax liability; $28,000 current deferred tax asset
$3,500 non-current deferred tax asset
$24,500 non-current deferred tax asset; $28,000 current deferred tax
liability
$3,500 non-current deferred tax liability
Option A) is incorrect. The deferred rental revenue is taxable in Year 1, which
generates a current deferred tax asset at the end of Year 1 of $28,000 ($80,000 ×
35%). The CCA in excess of depreciation creates a long-term deferred tax liability
[($350,000 – $280,000) × 35% = $24,500]. However, where an entity presents
current and non-current assets and liabilities separately, deferred tax should not be
shown as part of current assets or liabilities.
Option B) is correct. This correctly offsets the non-current deferred tax liability and
the current deferred tax asset given that they are legally enforceable and settle in
the same year and are with the same taxation authority.
Option C) is incorrect. This incorrectly treats the deferred tax asset related to
deferred rental revenue as a deferred tax liability and the deferred tax liability
related to depreciation as a deferred tax asset. Further, where an entity presents
current and non-current assets and liabilities separately, deferred tax should not be
shown as part of current assets or liabilities.
Option D) is incorrect. This incorrectly treats the asset as a liability, and vice versa.
30 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
29. Steelie Rims Inc. is a publicly traded automotive parts manufacturer. The
company keeps a significant number of parts in its inventory, including rims.
In the first quarter of Year 4 (Q1), the market price of rims declined drastically from
$120 to $80 per rim due to a competitor entering the market. The loss was not
expected to be recovered in Year 4 because of the increased competition.
However, in the second quarter of Year 4 (Q2), the competitor was shut down by
the transportation regulatory authority, which resulted in a market price recovery in
the third quarter of Year 4 (Q3). The recovery was in excess of the first-quarter
decline, and the market price for a rim climbed to $130. The cost of rims remained
stable during Year 4, at $90 per rim.
Which one of the following statements accurately describes the effect of the
market price fluctuation on the value of inventory in Year 4?
A.
B.
C.
D.
No impact on the per unit value in Q1, but an increase of $10 in the per unit
value in Q3.
A decrease of $10 in the per unit value in Q1, and then an increase of $10 in
the per unit value in Q3.
No impact on the per unit value in either Q1 or Q3.
A decrease of $40 in the per unit value in Q1, and then an increase of $50 in
the per unit value in Q3.
Option A) is incorrect. A decline in inventory that is not expected to be recovered
(that is other than temporary) should be shown in the quarter of the decrease.
Accordingly, Q1 would have to be adjusted by the amount of the decrease.
Option B) is correct. A decline in inventory that is not expected to be recovered
(that is other than temporary) should be shown in the quarter of the decrease. A
subsequent recovery of the market value should be recognized as a cost recovery
in the period of increase up to the original cost. Both Q1 and Q3 would be affected
by the changes in market price.
Option C) is incorrect. A decline in inventory that is not expected to be recovered
(that is other than temporary) should be shown in the quarter of the decrease. A
subsequent recovery of the market value should be recognized as a cost recovery
in the period of increase up to the original cost. Both Q1 and Q3 would be affected
by the changes in market price.
Option D) is incorrect. This assumes that inventory is carried at market value. In
addition, a subsequent recovery of the market value should never be recorded
above original cost.
31 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
30. A Ltd. (AL) reports under ASPE and acquired 1,000 of its own shares on
December 31, Year 1, for $95 per share. It cancelled the shares on February 28,
Year 2. The shares were initially issued for $100 each.
Which one of the following statements is correct?
A.
B.
C.
D.
On the December 31, Year 1, balance sheet, the shares will be included in
non-monetary assets at $95,000.
On the December 31, Year 1, balance sheet, the shares will be deducted
from shareholders’ equity at $100,000.
In the December 31, Year 2, financial statements, a loss of $5,000 will be
included in retained earnings.
In the December 31, Year 2, financial statements, $95,000 will be deducted
from shareholders’ equity.
Option A) is incorrect. On the December 31, Year 1 balance sheet, the shares are
not assets to AL since it is not possible to own part of yourself. Rather, ASPE
3240.06 indicates that the cost of the shares are shown as a deduction from the
total shareholders’ equity until cancelled.
Option B) is incorrect. On the December 31, Year 1 balance sheet, the shares
should be deducted at cost ($95,000), and not par value ($100,000).
Option C) is incorrect. In the December 31, Year 2 financial statements there is no
gain/loss on purchase and cancellation of a company’s own shares, since it is
considered to be a capital transaction.
Option D) is correct. When the shares are acquired, they need to be recorded at
cost as a deduction of shareholders’ equity per ASPE 3240.06. In this case, they
would be shown at the end of Year 1 as a deduction from shareholders’ equity at
$95,000.
As for the subsequent transaction of cancelling the shares, an amount equal to the
par value is deducted from share capital, with the difference going to contributed
surplus. Therefore, in the December 31, Year 2 financial statements, a net $95,000
will be deducted from total shareholders’ equity as the $5,000 difference is credited
to contributed surplus per ASPE 3240.09.
32 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
31. Perfect Pets Ltd. reports under ASPE. The following information on some of its
balance sheet accounts as of December 31, Year 1 and 2, is available:
Chequing account (overdraft)
Savings account (required deposit for loan
security)
Preferred shares in public company X
90-day guaranteed investment certificate
Big Bank 90-day money market investments
(mature March 1, Year 2)
Total
December 31
Year 1
Year 2 Variance
$12,000 $(4,000) $(16,000)
2,500
6,000
1,000
2,000
5,000
0
(500)
(1,000)
(1,000)
1,500
0
(1,500)
$23,000
$ 3,000 $(20,000)
How much will the net decrease be on the company’s December 31, Year 2, cash
flow statement?
A.
B.
C.
D.
$19,500
$18,500
$20,000
$16,500
Option A) is incorrect. The $19,500 includes everything except the savings account
— excluding the savings account is correct as it is security for debt but the
preferred shares should also be excluded since they are not readily convertible
and equity investments are excluded from cash equivalents. $16,000 + $1,000 +
$1,000 + $1,500 = $19,500
Option B) is correct. The $18,500 includes everything except the savings account,
which is excluded since it is security for debt, and the preferred shares, which is
excluded since they are not readily convertible and equity investments are
excluded from cash equivalents. $16,000 + $1,000 + $1,500 = $18,500
Option C) is incorrect. The $20,000 includes everything, which is not correct. The
savings account should be excluded as it is security for debt and the preferred
shares should be excluded since they are not readily convertible and equity
investments are excluded from cash equivalents. $16,000 + $500 + $1,000 +
$1,000 + $1,500 = $20,000
Option D) is incorrect. The $16,500 includes the chequing and saving accounts
only which is not correct. The savings should be excluded as it is security for debt
and the GICs and money market funds should be included as they are readily
convertible. $16,000 + $500 = $16,500
33 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
32. For Year 6, a manufacturer’s research and development (R&D) department
incurred the following costs to design a new manufacturing process:
Testing materials
Research staff salaries
Staff training costs
$ 40,000
$120,000
$ 20,000
During training, it was found that the new process would not work effectively with
the existing equipment and staff. Consequently, the process cannot yet be
implemented and the R&D department will have to redesign the process. What
costs should be capitalized for Year 6, if reporting under IFRS?
A.
B.
C.
D.
$120,000
$160,000
$180,000
$0
Option A) is incorrect. This capitalizes the research and staff salaries which is not
correct as no capitalization is permitted since at least one of the development
criteria has not been met.
Option B) is incorrect. This capitalizes the research and staff salaries as well as the
testing materials which is not correct as no capitalization is permitted since at least
one of the development criteria has not been met.
Option C) is incorrect. This capitalizes all of the costs which is not correct as no
capitalization is permitted since at least one of the development criteria has not
been met.
Option D) is correct. This capitalizes none of the costs which is correct. Since the
process did not work, there is no future economic benefit yet. Therefore, all costs
should be expensed in Year 6. No capitalization is permitted as at least one of the
development criteria has not been met.
34 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
33. LISS Ltd. is a private company and reports under ASPE. Its new controller wants
to change from applying the future taxes method to the taxes payable method
because it is easier to calculate. The balance sheet shows a future income tax
liability. Which one of the following statements about this proposed change is
accurate?
A.
B.
C.
D.
It is not permitted because it will not result in more reliable information.
It is not permitted because the taxes payable method is not an acceptable
method.
It will affect the prior period’s comparative information.
It must be approved by the company’s auditors.
Option A) is incorrect. An entity may change its accounting policy to account for
income taxes using the taxes payable method or the future income taxes method
without having to meet the criterion of requiring the policy change to result in
information that is more reliable and relevant.
Option B) is incorrect. Both the taxes payable method and the future income taxes
method are acceptable under ASPE.
Option C) is correct. Accounting policy changes are applied retrospectively unless
the information is not available; therefore this change will affect the prior period’s
comparative information.
Option D) is incorrect. There is no requirement for accounting changes to be
approved by auditors.
35 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
34. Fox Incorporated, a public company reporting under IFRS, entered into a lease for
equipment with a fair value of $315,000. The interest rate implicit in the lease is
6%, with annual lease payments of $64,000 payable at the beginning of each
year. The lease has a term of five years and a guaranteed residual value of
$49,500.
What is the value of the lease liability at the inception of the lease, rounded to the
nearest thousand?
A.
B.
C.
D.
$323,000
$259,000
$307,000
$315,000
Option A) is incorrect. This is the value of the leased asset at the present value of
minimum lease payments at the inception of the lease.
Option B) is correct. This values the lease liability at the present value of minimum
lease payments less the initial payment. PV = 6%, 5, 64000,49500,1 = 322,756 –
the initial payment of $64,000 = $259,000 (rounded).
Option C) is incorrect. This values the lease liability at the present value of
minimum lease payments but assumes the payments are made at the end of the
period. However, the annual lease payments of $64,000 are payable at the
beginning of each year.
Option D) is incorrect. This values the lease liability at the market value of the
leased asset, not the present value of the lease payments that have not been paid.
36 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
35. CLT Manufacturing (CLT) is a public company that has occasional foreign sales.
On June 12, Year 3, it sold its products to a customer in the United States for
US$150,000. This was the only sale to a foreign customer in Year 3. CLT has a
December 31 year end.
Which one of the following exchange rates should be used to record this sale in
Canadian dollars for the Year 3 financial statements?
A.
B.
C.
D.
Average rate for Year 3; US$1 = C$1.031
Exchange rate on June 12, Year 3; US$1 = C$1.021
Exchange rate on December 31, Year 3; US$1 = C$1.042
Average rate of June 12 to December 31, Year 3; US$1 = C$1.035
Option A) is incorrect. It is appropriate to use the average rate when revenues
occur evenly over the course of the year. In this case, there was only one foreign
sales transaction on June 12, therefore the average rate is not the correct rate for
translation. Revenue should be recorded at the rate in effect on the date the
transaction occurred (that is at the June 12 rate).
Option B) is correct. The exchange rate in effect on the date the transaction
occurred should be used.
Option C) is incorrect. Revenues should not be recorded at the rate in effect at
year end unless the transaction occurred on that date.
Option D) is incorrect. The average rate between date of sales and date of year
end is not the rate that should be used. Revenue should be recorded at the rate in
effect on the date the transaction occurred (that is the June 12 rate).
37 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
36. Company X has long-term investments in the shares of two companies, Y and Z.
Company X has significant influence, but no controlling interest, over Company Y
and no significant influence or controlling interest over Company Z. In accordance
with IFRS, how should Company X record regular cash dividends it receives from
Company Y and Company Z, respectively?
A. Company Y: reduction of the investment; Company Z: dividend revenue
B. Company Y: dividend revenue; Company Z: dividend revenue
C. Company Y: dividend revenue; Company Z: reduction of the investment
D. Company Y: reduction of the investment; Company Z: reduction of the
investment
Option A) is correct. The equity method should be used to account for the
investment in Company Y since significant influence exists but there is no
controlling interest. Under the equity method, receipt of dividends from Company Y
would be recorded as a reduction of the investment in Company Y’s shares. The
fair value method should be used to account for the investment in Company Z
since no significant influence exists. Under the fair value method dividends are
recognized as dividend revenue when received or receivable.
Option B) is incorrect. This assumes the fair value method for both investments
which is not correct. Only the investment in Company Z should be accounted for
using the fair value method since no significant influence exists.
Option C) is incorrect. This assumes the fair value method for Company Y and the
equity method for Company Z which is not correct. The investment in Company Y
should be accounted for using the equity method since significant influence exists
but there is no controlling interest. The investment in Company Z should be
accounted for using the fair value method since no significant influence exists.
Option D) is incorrect. This assumes the equity method for both investments which
is not correct. Only the investment in Company Y should be accounted for using
the equity method since significant influence exists but there is no controlling
interest.
38 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
37. Travel Incorporated (TI), a travel agency, reports under ASPE. For which one of
the following events would TI be MOST likely to accrue an estimate in the financial
statements, rather than include a note disclosure alone?
A.
B.
C.
D.
TI provided a full refund to its customers for cancellations of hotel
reservations with a major hotel chain after a tsunami disaster. This chain
has historically provided a full refund to the travel agency for any
cancellations.
A lawsuit has been filed against TI by a number of its customers who
became ill on a cruise ship due to an influenza outbreak. They have filed
damages ranging from $50,000 to $250,000. TI’s lawyers indicate that,
based on past case law, a payment is probable.
TI booked tickets for March break on a major airline for a large number of its
customers. The airline filed for bankruptcy protection on the date many of
the passengers were to depart. TI was able to make reservations on other
airlines for these customers. TI may receive a refund from the government
for its costs.
When the major airline went bankrupt, TI had customers stranded in tourist
destinations. Many of these customers made their own arrangements and
paid for their tickets to get home. Some of these customers may apply to TI
for reimbursement, while others will receive reimbursement through their
credit card companies.
Option A) is incorrect. This is a contingent gain and should not be accrued for in
the financial statements.
Option B) is correct. A contingent loss should be accrued if likely and measurable.
Legal opinion indicates that the lawsuit is probable and there is an estimate of the
possible damages.
Option C) is incorrect. The costs to make alternative reservations for their
customers would have actually been recorded. There is no need to estimate an
accrual. Any possible reimbursement by the government would be a contingent
gain which cannot be accrued
Option D) is incorrect. This is a contingent loss, but in order to be recorded in the
financial statements it must be both likely and measurable. Even though the loss is
likely it is not possible to provide an estimate of the amount.
39 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
38. Etheridge Corporation (EC) is a heating and cooling company that prepares its
financial statements using ASPE. In Year 4, EC engaged in R&D for the first time
with a project to develop more efficient air conditioners. EC has tracked detailed
expenses for the project.
On July 17, Year 4, a breakthrough confirmed that the new method would work
and the sale of more efficient air conditioners would be profitable. At that time, EC
made a request to its board of directors to continue the project. On September 3,
Year 4, the board of directors approved funding for the rest of the project and
committed EC to completing the project and selling air conditioners using the new
technology.
Which one of the following statements regarding EC’s treatment of its costs
related to this project is correct?
A.
B.
C.
D.
EC is required to capitalize project costs as incurred.
EC is required to capitalize project costs starting on July 17, Year 4.
EC is required to capitalize project costs starting on September 3, Year 4.
EC is not required to capitalize project costs.
Option A) is incorrect. Expenditure on research (or on the research phase of an
internal project) should not be capitalized and shall be recognized as an expense
when it is incurred. Additionally, under ASPE it is an accounting policy choice
whether the company expenses or capitalizes internally generated intangible
assets in the development phase.
Option B) is incorrect. At this stage all six of the criteria to capitalize as
development costs have not been met. Additionally, under ASPE it is an
accounting policy choice whether the company expenses or capitalizes internally
generated intangible assets in the development phase.
Option C) is incorrect. At this stage all six criteria have been met; however, there is
no requirement to capitalize.
Option D) is correct. There is an accounting policy choice to either expense
expenditures on internally generated intangible assets during the development
phase or capitalize such expenditures as an intangible asset (provided all six of the
criteria are met).This accounting policy choice shall be applied consistently to
expenditures on all internal projects in the development phase. Since EC has not
previously engaged in such projects and therefore has not yet selected an
accounting policy, there is no requirement that costs ever be capitalized.
40 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
39. Takun Corp. (Takun), a wholesaler, sold 1,000 water filtration units for $300 each
on January 10, Year 2. They were carried on Takun’s books as inventory at $150
each. The sales contract allows the purchaser to return defective products for a
full refund over a period of up to one year from the time of purchase. Management
expects 5% of units sold to be returned, and Takun pays for transportation to get
the units back from the clients. It costs $30 on average to have each unit shipped
back to Takun.
In accordance with IFRS, how much net revenue should Takun recognize for the
January 10 sale, and what amount should Takun recognize as an asset related to
the right to recover returned products?
A.
B.
C.
D.
Net revenue of $300,000; asset related to expected returns of $7,500
Net revenue of $285,000; asset related to expected returns of $6,000
Net revenue of $300,000; asset related to expected returns of $6,000
Net revenue of $285,000; asset related to expected returns of $9,000
Option A) is incorrect. The amount recorded for net revenue represents the full
amount of sale (1,000 × $300 = $300,000). However, Takun can only recognize
revenue up to the amount it expects to be entitled (that is, excluding the products
expected to be returned). In addition, the amount recorded for the asset for
expected returns (50 × $150 = $7,500) does not take into account the expected
costs to recover each unit.
Option B) is correct. The right of return has been recognized and the sale revenue
reduced to the net amount of $285,000 (1,000 unit × $300 × 95%). Revenue has
not been recognized for the products expected to be returned. The amount
recorded for the asset related to the right of recovery has been measured at the
former carrying amount of the product less expected costs to recover those
products (including any potential decreases in the value to the entity of returned
products).The asset value per unit is the inventory cost of $150 less the $30 to
recover each unit [1,000 units × 5% × ($150 – $30) = $6,000].
Option C) is incorrect. The amount recorded for net revenue represents the full
amount of sale (1,000 × $300 = $300,000). However, Takun can only recognize
revenue up to the amount it expects to be entitled (that is, excluding the products
expected to be returned).
Option D) is incorrect. The amount recorded for the asset for expected returns
includes the shipping costs as an increase in the asset value. [(1,000 units × 5% ×
($150 + $30)] but this would reduce the asset amount since an asset recognized
for an entity’s right to recover products from a customer on settling a refund liability
shall be initially measured by reference to the former carrying amount of the
product less expected costs to recover those products (including any potential
decreases in the value to the entity of returned products).
41 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
40. Geraldton Amusement Park Ltd. (GAP) acquired 20,000 (20%) of the outstanding
shares in Foxwood Video Games Corp. (FVG) for $240,000 on January 1, Year 5,
when FVG’s shares were trading at $12 per share. GAP incurred $12,000 in
transaction costs to acquire the shares. GAP sold the shares on December 31,
Year 7, for $15 per share less $10,000 in transaction costs. The fair values per
share during that period were as follows:
December 31, Year 5
December 31, Year 6
December 31, Year 7
$14.00
$12.50
$15.00
During the period that GAP held the shares, significant influence did not exist and
the investment was appropriately designated as a financial asset measured at fair
value through profit and loss. In accordance with IFRS, which one of the following
represents the impact of holding the shares in each of the three-year period on
GAP’s profit and loss before taxes?
A.
B.
C.
D.
Year 5: $28,000 gain; Year 6: $30,000 loss; Year 7: $40,000 gain
Year 5: $0 gain/loss; Year 6: $0 gain/loss; Year 7: $38,000 gain
Year 5: $12,000 loss; Year 6: $0 gain/loss; Year 7: $50,000 gain
Year 5: $40,000 gain; Year 6: $30,000 loss; Year 7: $50,000 gain
Option A) is correct. This expenses the transaction cost at the time of purchase
and measures the investment at fair value at each subsequent reporting period.
The gain in Year 5 is calculated as $240,000 – $12,000 – $280,000 = $28,000;
The loss in Year 6 is calculated as $280,000 – $250,000 = ($30,000); The gain in
Year 7 is calculated as $300,000 – $10,000 – $250,000 = $40,000.
Option B) is incorrect. This records nothing on the investment until the sale, when
the full gain (net of transaction costs) is recorded (that is, $28,000 – $30,000 +
$40,000 = $38,000 gain for Year 7).
Option C) is incorrect. This only expenses the transaction cost at the time of
purchase, and defers all the gains (net of transaction costs for the sale) until the
actual sale of the investment (that is, $38,000 gain net of transaction costs +
$12,000 already expensed = $50,000 gain for Year 7).
Option D) is incorrect. This ignores the transaction costs on the purchase and sale
and only performs the fair value adjustments.
42 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
41. Fancy Fashions Inc. (FFI) sells clothes. The company began a loyalty program
through which customers who sign up for the program earn one point for every
dollar spent. Each point can be redeemed for $0.10 of clothing. FFI marks up its
products by 50%. Currently, the full amount of sales is recognized as revenue
immediately when the customer purchases the clothes. All customers have signed
up for the loyalty program.
During Year 1, 3.8 million points were issued to customers and 900,000 points
were redeemed. Industry statistics for similar clothing retailers indicate that 60% of
points issued will be redeemed.
According to IFRS, how should the loyalty program be recorded in the financial
statements for Year 1 (rounded to the nearest hundred)?
A.
B.
C.
D.
As a reduction of revenue and an increase in deferred revenue in the
amount of $164,200
As an increase in promotion expense and an increase in promotion liability
in the amount of $152,000
As an increase in promotion expense and an increase in promotion liability
in the amount of $146,200
As a reduction of revenue and an increase in deferred revenue in the
amount of $228,000
Option A) is correct. The points provide a material right to customers that they
would not have received without purchasing items from FFI. Therefore, IFRS
requires that the promise to provide points to the customer be recognized as a
performance obligation. FFI would allocate the transaction price to the products
and points on a relative stand-alone selling price basis as follows:
Clothes
Loyalty points
Total
Stand-alone selling price
(SSP)
$3,800,000
3,800,000 points ×
$1/point
$228,000
60% × points × $0.10
$4,028,000
Transaction price (TP)
$3,584,900
$3.8 million × ($3.8
million/$4.028 million)
$215,100
$228,000 × ($3.8
million/$4.028 million)
$3,800,000
The amount of points unredeemed at the end of the year = 3,800,000 – 900,000 =
2,900,000. The amount of revenue related to the unredeemed points = (2,900,000
/ 3,800,000) × $215,100 = $164,200 (rounded).
Option B) is incorrect. The $152,000 is calculated using the cost value of the points
($0.10/1.5 × 60% × $3,800,000 = $152,000).
43 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
Option C) is incorrect. This is an erroneous calculation of the liability by using the
markup information, which is not relevant to the calculation, and ignores the points
redeemed:
Clothes
Loyalty points
Total
Stand-alone selling price
(SSP)
$3,800,000
3,800,000 points ×
$1/point
$152,000
60% × points × $0.10/1.5
$3,952,000
Transaction price (TP)
$3,653,800
$3.8 million × ($3.8
million/$3.952 million)
$146,200
$152,000 × ($3.8
million/$3.952 million)
$3,800,000
Option D) is incorrect. This distractor does not allocate the transaction price on a
relative stand-alone selling price basis. Instead, it calculates the revenue to be
differed based on the stand-alone selling price of the loyalty points only.
44 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
42. In Year 10, a lawsuit was initiated against Benall Corp. (Benall) by a competitor.
The lawsuit had not been settled by the end of the year, but Benall’s lawyers
expect that Benall will have to compensate its competitor for an amount between
$750,000 and $1,500,000.
How should this ligation be reflected in the Year 10 financial statements, when
reporting under ASPE?
A.
B.
C.
D.
Accrue $750,000 and disclose the details of the possible loss in the notes.
Accrue $1,500,000 and disclose the details of the possible loss in the notes.
Accrue $1,125,000 and disclose the details of the possible loss in the notes.
Do not accrue any amount and disclose the range of the possible loss in the
notes.
Option A) is correct. The company is expecting to incur a loss. Therefore, an
estimate of the amount of the contingent loss must be accrued. According to ASPE
Section 3290.13, when there is a range of possible losses and no amount is a
better estimate than the other amounts, the minimum amount of $750,000 should
be accrued. Also, because the lawsuit is an unusual event, it should be disclosed
in the notes.
Option B) is incorrect. This is the maximum amount of the range and therefore is
not correct.
Option C) is incorrect. This is the average of the range and therefore is not correct.
Option D) is incorrect. The contingent loss can be estimated, making this choice
incorrect.
45 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
43. Olio Ltd.’s (Olio) year-end shareholders’ equity at December 31, Year 13,
consisted of the following:
Common shares, 500,000 issued and outstanding
Preferred shares, 8% cumulative, 90,000 issued and outstanding
Retained earnings
$5,000,000
$6,300,000
$2,700,000
On April 1, Year 14, Olio issued 300,000 common shares for $3 million cash. In
Year 14, the company reported net income after taxes of $1.5 million. No
dividends were declared or paid during Year 14.
In accordance with IFRS, what is Olio’s basic earnings per share for Year 14
(rounded to the nearest cent)?
A.
B.
C.
D.
$1.37
$1.25
$1.99
$2.07
Option A) is correct. Net income available for common shareholders = $1,500,000
– (8% × $6,300,000) = $1,500,000 – $504,000 = $996,000 (the preferred dividends
are cumulative and should be deducted even though they were not declared or
paid). The weighted average number of shares outstanding = 500,000 + (300,000
× 9/12) = 725,000. Therefore, basic EPS = Net income available for common
shareholder / Weighted average common shares outstanding = $996,000/725,000
= $1.37
Option B) is incorrect. This uses non-weighted number of shares:
$996,000/800,000 = $1.25.
Option C) is incorrect. This uses the beginning number of shares:
$996,000/500,000 = $1.99.
Option D) is incorrect. This does not deduct preferred dividends:
$1,500,000/725,000 = $2.07.
46 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
44. KAR Industries manufactures a specialized washing brush for oversized vehicles.
The following costs are incurred in producing and selling one batch of washing
brushes:
Direct labour
Direct materials
Allocated overhead directly associated with manufacturing the brushes
Storage costs after production but prior to selling
Selling costs
Delivery costs to the wholesaler
$240
$ 80
$ 40
$ 15
$ 8
$ 2
In accordance with ASPE, what is the cost of inventory for one batch of brushes?
A.
B.
C.
D.
$375
$320
$360
$385
Option A) is incorrect. This includes the storage cost which is not part of the cost of
inventory and is to be expensed in the period. $240 + $80 + $40 + $15 = $375
Option B) is incorrect. This does not include the allocated overhead. $240 + $80 =
$320
Option C) is correct. The cost associated with production including an allocation of
overhead is to be recorded as part of the cost of inventory. Therefore, inventory
should be recorded at $240 + $80 + $40 = $360.
Option D) is incorrect. This includes all costs as part of ending inventory. Storage
and selling costs are not added to inventory costs and are to be expensed in the
period. $240 + $80 + $40 + $15 + $8 + $2 = $385
47 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
45. FRG is a waste water treatment company that started its operations on
January 1, Year 3. FRG entered into a lease agreement on its first day of
operations to rent 10 turbines, for a total amount of $10,000 a year. The turbines
are specifically designed with a technology that only FRG is using in the industry.
On January 1 of Year 3, each turbine had a fair value of $6,000, and experts
agreed that the depreciation for this type of asset would be around 10% annually.
The lease term expires on December 31, Year 7.
The key features of the lease agreement are as follows:
• There is no provision to allow a transfer of ownership to FRG by the end of the
lease term.
• FRG has the option to purchase the 10 turbines for $36,000 at the end of the
lease term.
• The economic life of the turbines is estimated at 10 years.
• FRG may extend its lease for another year at a total price of $5,000.
According to IFRS, which one of the following facts would determine that FRG
should record a right-of-use (ROU) asset and a lease liability?
A.
B.
C.
D.
FRG has the option to purchase the turbines for $36,000 at the end of the
lease term.
The turbines are specifically designed with a technology that only FRG is
using in the industry.
FRG may extend the lease for another year at a total price of $5,000.
The lease term expires on December 31, Year 7.
Option A) is incorrect. If $36,000 was sufficiently lower than the fair value at that
date to be reasonably certain that the option will be exercised, the bargain
purchase option would be included in the lease liability calculation but it would not
determine whether FRG should record an ROU asset and a lease liability.
Option B) is incorrect. Whether or not the leased assets are of a specialized nature
such that only the lessee can use them without major modification is not a
determining factor in whether FRG should record an ROU asset and a lease
liability.
Option C) is incorrect. Whether or not the lessee has the ability to continue the
lease for a secondary period is not a determining factor in whether FRG should
record an ROU asset and a lease liability.
48 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
Option D) is correct. The lease term is five years; IFRS 16 Leases requires leases
be recognized as an asset with a related lease obligation. The asset represents an
ROU asset for a period of time and the obligation represents the payments
required under the lease agreement. Short-term leases of one year or less and
leases for low-value items are exempted from this treatment.
49 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
46. Gold-Firsch Corp. (GFC) is a multinational food processing facility. GFC entered
into a joint arrangement with Cheese-Straws Inc. (CSI) to secure access to
additional inventory, as well as warehouse space, and further expand its product
line. This arrangement is structured through a separate vehicle. The agreement
states GFC will purchase the output of the arrangement at market prices.
You, CPA, are looking to appropriately classify the agreement between GFC and
CSI under IFRS 11, Joint Arrangements. Which one of the following aspects of the
written agreement would be sufficient on its own to indicate that GFC and CSI are
parties to a joint operation rather than a joint venture?
A.
B.
C.
D.
The contractual arrangement clearly outlines the allocation of revenues and
expenses between GFC and CSI on the basis of the relative performance of
each party to the joint arrangement.
Each of GFC and CSI has rights to the assets of the arrangement, as well
as obligations for the liabilities relating to the arrangement.
The contractual arrangement between GFC and CSI has a provision that the
parties to the joint arrangement are liable for any claims that are raised by
third parties.
Each of GFC and CSI, as part of the arrangement, is required to provide
separate guarantees to third parties who may receive a service from, or
provide financing to, the joint arrangement.
Option A) is incorrect. This option does not specify that the parties have rights to
the assets and obligations for the liabilities. IFRS 11, paragraph B29 notes that
only when the terms of the contractual arrangement do not specify that the parties
have rights to the assets and obligations for the liabilities relating to the
arrangement, that other facts and circumstances should be considered to assess
whether the arrangement is a joint operation or a joint venture.
Option B) is correct. This option specifies that the parties have rights to the assets
and obligations for the liabilities relating to the arrangement and are therefore
parties of a joint operation. IFRS 11, paragraph B28 explains that “when a
contractual arrangement specifies that the individual parties have rights to the
assets, and obligations for the liabilities, relating to the arrangement, they are
parties to a joint operation and do not need to consider other facts and
circumstances for the purposes of classifying the joint arrangement.”
Option C) is incorrect. This option does not specify that the parties have rights to
the assets and obligations for the liabilities. IFRS 11, paragraph B29 notes that
only when the terms of the contractual arrangement do not specify that the parties
have rights to the assets and obligations for the liabilities relating to the
arrangement, that other facts and circumstances should be considered to assess
whether the arrangement is a joint operation or a joint venture.
50 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
Option D) is incorrect. This option does not specify that the parties have rights to
the assets and obligations for the liabilities. IFRS 11, paragraph B29 notes that
only when the terms of the contractual arrangement do not specify that the parties
have rights to the assets and obligations for the liabilities relating to the
arrangement, that other facts and circumstances should be considered to assess
whether the arrangement is a joint operation or a joint venture.
51 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
47. M Ltd., which applies ASPE, appropriately translates all of the assets of its
Mexican subsidiary, L Ltd., using the current foreign exchange rate in effect at the
balance sheet date. Which one of the following is the result of this policy?
A.
B.
C.
D.
Any gain or loss on translation is recorded as a separate component of
equity.
Any gain or loss on long-term items is amortized over the life of the item.
Any loss is reported as part of income, and any gain is deferred.
Any gain or loss on translation is recorded in income.
Option A) is correct. Since M is correctly translating all of the assets using the
year-end rate, the subsidiary must be self-sustaining. The exchange gain or loss
on translation has no direct effect on the activities of the reporting enterprise;
therefore it is inappropriate to incorporate this exchange gain or loss in net income
in the period in which it arises; rather, it is reported as a separate component of
shareholders’ equity.
Option B) is incorrect. ASPE does not have an option available to amortize the
gain or loss on translation of long-term items over the life of the item.
Option C) is incorrect. There is no option under ASPE 1651 to allow for immediate
recognition of losses and defer gains.
Option D) is incorrect. Since M is correctly translating all of the assets using the
year-end rate, the subsidiary must be self-sustaining and therefore it is
inappropriate to incorporate the exchange gain or loss in net income in the period
in which it arises; rather, it is reported as a separate component of shareholders’
equity.
52 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
48. Under IFRS, which one of the following must be shown on a net-of-tax basis either
on a company’s statement of profit or loss or in the notes to the financial
statements?
A.
B.
C.
D.
The effect of a change from FIFO to the weighted average method of
inventory valuation
Losses incurred to settle a lawsuit for patent infringement that has been in
the courts for five years
An adjustment to record amortization on a building bought three years ago
Results of discontinued operations of a large division of a company
Option A) is incorrect. This would be considered a change in accounting policy and
would be adjusted on a retrospective basis.
Option B) is incorrect. This would be considered a change in estimate, which is not
shown net on a net-of-tax basis.
Option C) is incorrect. Corrections of errors related to prior periods are done
retrospectively.
Option D) is correct. Discontinued operations of a large division of a company
require disclosures including a single amount in the statement of comprehensive
income comprising the total of the post-tax profit or loss of discontinued operations
and the post-tax gain or loss recognized on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s) constituting the
discontinued operation.
53 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
49. During Year 13, CanDo, a not-for-profit organization, received a $50,000 grant
from the City of Montréal for the specific purpose of covering the expenses of
providing computer training to its volunteers. A first wave of training is planned for
February of Year 14. CanDo uses the restricted fund method of accounting to
recognize the contributions it receives, but there is no training fund in its
accounting system. Which one of the following statements is true regarding the
impact of this transaction on the different items in CanDo’s financial statements at
December 31, Year 13?
A.
B.
C.
D.
Increase in cash and increase in revenue
Increase in cash and increase in liabilities
Increase in contributions receivable and increase in revenue
Increase in contributions receivable and increase in liabilities
Option A) is incorrect. The grant was received in Year 13 so it is correct to
recognize an increase in cash in Year 13. However, the grant is intended to
provide computer training to its volunteers which will not happen until Year 14.
Since there is no training fund in the accounting system, it could not be recognized
as revenue in Year 13. Restricted contributions for which no corresponding
restricted fund is presented should be recognized in the general fund in
accordance with the deferral method. Restricted contributions for expenses of one
or more future periods should be deferred and recognized as revenue in the same
period or periods as the related expenses are recognized.
Option B) is correct. The grant was received in Year 13 so it is correct to recognize
an increase in cash in Year 13. However, there is no fund set up for training and
the training will not happen until Year 14; therefore the grant will not be recognized
as revenue until Year 14 and will be recognized as deferred revenue (a liability) in
Year 13. Restricted contributions for which there is no corresponding restricted
fund should be recognized in the general fund in accordance with the deferral
method. Restricted contributions for expenses of one or more future periods should
be deferred and recognized as revenue in the same period or periods as the
related expenses are recognized.
Option C) is incorrect. The actual grant was received in Year 13 so there would not
be an increase in contribution receivable in Year 13. In addition, the grant is
intended to provide computer training to its volunteers which would not happen
until Year 14. Since there is no training fund in the accounting system, it could not
be recognized as revenue in Year 13.
Option D) is incorrect. The actual grant was received in Year 13 so there would not
be an increase in contribution receivable in Year 13. Since the training will not
happen until February Year 14 and there is no training fund in the accounting
system, the grant could not be recognized as revenue until Year 14. It should be
recognized as liabilities (that is, deferred revenue) in Year 13.
54 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
50. Relic Inc. (Relic), a company that provides architectural services, owns 85% of the
voting shares of Smithson Ltd. (Smithson), a company that builds buses it sells to
municipal governments. During the current year, Smithson acquired land from
Relic that Relic had acquired a number of years ago at a cost of $250,000.
Smithson acquired the land to use for storage of unsold buses. Smithson paid
Relic $400,000, which is the appraised value of the land.
In accordance with ASPE, how should this transaction be accounted for in the
unconsolidated financial statements of Relic?
A.
B.
C.
D.
A $150,000 gain should be shown as a pre-tax gain in Relic’s
unconsolidated income statement.
A $150,000 gain should be shown net of taxes as contributed surplus in
Relic’s unconsolidated balance sheet.
A $150,000 gain, net of taxes, should be deducted from retained earnings in
Relic’s unconsolidated balance sheet.
No amount should be recorded in Relic’s unconsolidated financial
statements.
Option A) is incorrect. This incorrectly measures the transaction at the exchange
amount.
Option B) is correct. Since the transaction is not in the normal course of operations
(as Relic’s normal activities are architectural services, and not selling land), and
the change in ownership interest is not substantive (that is, it is less than 20% and
there are no other facts to indicate it was substantive), the transaction should be
measured at the carrying amount.
The journal entries for the transaction would be as follows:
DR Cash $400,000
DR Income tax $XXX
CR Land $250,000
CR Contributed surplus (or Retained earnings) $XXX (gain, net of tax)
Option C) is incorrect. The transaction results in a gain and thus would not be a
deduction in retained earnings.
Option D) is incorrect. This assumes that the transaction would not have any
impact on the financial statements.
55 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
51. Barnard Co. (Barnard) paid $110 million to acquire 85% of Dasilva Co. (Dasilva).
On the date of acquisition, the fair value of the net identifiable assets was
$80 million and the book value was $60 million. Barnard reports under IFRS, and
it accounted for non-controlling interests at full fair value at the acquisition date.
Regarding Barnard’s recording of balances in the consolidated statement of
financial position, which one of the following statements is correct?
A.
B.
C.
D.
Barnard will record the difference between the fair value and the book value
of Dasilva’s net identifiable assets as goodwill.
Barnard will record non-controlling interest as 15% of the purchase price.
Barnard will record Dasilva’s assets and liabilities at 100% of fair value.
Barnard will record 85% of Dasilva’s dividends issued as dividend income.
Option A) is incorrect. Goodwill is the difference between the purchase price and
the fair value of the assets acquired, not between the fair value and book value.
Option B) is incorrect. Non-controlling interest measured using the fair value would
be 15% of the fair value of the assets (grossed up to 100%, that is, $110 million /
85%), not the purchase price.
Option C) is correct. The consolidated financial statements should include 100% of
Dasilva’s assets and liabilities with certain adjustments at fair value.
Option D) is incorrect. Dividends issued by the subsidiary are eliminated upon
consolidation.
56 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
52. Access for All (AFA) is a new not-for-profit organization that lobbies for additional
accessibility for people with disabilities. George Tarly set up this organization after
his grandfather passed away and left a large gift to George in his will, with a
stipulation that it be used in this type of venture. In addition to the previous
restriction, the organization is only allowed to spend any investment income
earned off the gift, and not the gift itself.
Because AFA is new, George must decide whether to follow the deferral method
or the restricted fund method for accounting for contributions. Which one of the
following statements correctly explains how the gift would be treated under these
options?
A.
B.
C.
D.
Under both methods, the gift would be recorded as a direct increase in net
assets.
Under both methods, the gift would be recorded as revenue in the current
period.
Under the deferral method, the gift would be recorded as revenue in the
current period; under the restricted fund method, the gift would be recorded
as a direct increase in net assets.
Under the deferral method, the gift would be recorded as a direct increase in
net assets; under the restricted fund method, the gift would be recorded as
revenue in the current period.
Option A) is incorrect. Only the deferral method would record it as a direct increase
in net assets.
Option B) is incorrect. Only the restricted fund method would record it immediately
as revenue.
Option C) is incorrect. This has the two methods backwards. The deferral method
would record it as a direct increase in net assets. The restricted fund method would
record it immediately as revenue.
Option D) is correct. The gift represents an endowment since the principal portion
cannot be spent; only the investment income can be spent. Under the deferral
method, endowment contributions should be recognized as direct increases in net
assets in the current period. Under the restricted fund method, endowment
contributions should be recognized as revenue of the endowment fund in the
current period.
57 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
53. The following selected amounts are taken from a company’s adjusted trial
balance:
Sales discounts
Accrued liabilities
Operating expenses
Unusual loss
Sales
Allowance for doubtful accounts
Contributed surplus
Unrealized gain on foreign currency liability
Cost of goods sold
$ 7,000
$ 12,000
$ 25,000
$ 100,000
$ 300,000
$ 6,000
$ 10,000
$ 3,000
$ 145,000
In accordance with IFRS, what would total comprehensive income be?
A.
B.
C.
D.
$23,000
$26,000
$33,000
$36,000
Option A) is incorrect. This solution fails to include the $3,000 unrealized
investment gain in the calculation.
Option B) is correct. Comprehensive income includes net income plus other
comprehensive income. The calculation includes: Sales – Sales discounts – Cost
of goods sold – Operating expenses – Unusual loss + Unrealized holding gain
(300,000 – 7,000 – 145,000 – 25,000 – 100,000 + 3,000 = 26,000)
Option C) is incorrect. It fails to deduct the $7,000 sales discount in the calculation.
Option D) is incorrect. It includes contributed surplus as an income item.
58 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
54. The March 31, Year 8, bank statement for Wink Inc. (Wink) showed a $37,850
ending balance. In the comparison to the company’s records, the following facts
were identified:
• A customer cheque for $4,900 was returned by the bank due to Not Sufficient
Funds (NSF).
• Several cheques issued by Wink, totalling $17,600, had not yet been deposited
by the recipients and, therefore, had not cleared the bank.
• The bank had made an error in processing a deposit. It had deposited $2,300
in Wink’s account instead of the actual deposit amount of $3,200.
What amount should Wink show as its ending cash balance on its March 31,
Year 8, financial statements?
A.
B.
C.
D.
$16,250
$19,350
$21,150
$32,950
Option A) is incorrect. It incorrectly deducts the NSF cheque of $4,900.
$37,850 – $4,900 – $17,600 + ($3,200 – $2,300) = $16,250
Option B) is incorrect. It subtracts the $900 bank error, instead of adding it.
$37,850 – $17,600 – ($3,200 – $2,300) = $19,350
Option C) is correct. The $4,900 NSF cheque does not need to be factored in,
since the bank statement balance of $37,850 has already taken this into account.
$37,850 – $17,600 + ($3,200 – $2,300) = $21,150
Option D) is incorrect. It takes the $37,850 as the company’s ending cash balance
before the reconciliation (as opposed to it being the bank’s ending cash balance).
$37,850 – $4,900 = $32,950
59 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
55. A small business reporting under ASPE shows revenues exceeding expenses by
$75,000 prior to recording the December 31, Year 5, year-end adjusting entries.
The following information was known at December 31, Year 5:
• Services amounting to $16,000, were performed by the company but have not
yet been billed or recorded.
• An advertising campaign is scheduled to run from January 1 to June 30,
Year 6. The $13,000 costs of the campaign were paid for and expensed on
November 30, Year 5.
• The $9,000 amortization of capital assets for Year 5 has not yet been recorded.
• The December Year 5 bank reconciliation shows that the bank deducted
interest expense of $4,000 on a note payable on December 31, Year 5. The
company did not record the amount until January 10, Year 6.
What is the company’s net income before taxes for Year 5?
A.
B.
C.
D.
$65,000
$100,000
$91,000
$78,000
Option A) is incorrect. This deducts the costs of the campaign instead of adding
them back. Net income = $75,000 + $16,000 accrued revenue less $0 cost of
goods sold – $13,000 prepaid advertising campaign – $4,000 interest expense –
$9,000 amortization expense = $65,000
Option B) is incorrect. This neglects to deduct the amortization.
$75,000 + $16,000 + $13,000 – $4,000 = $100,000
Option C) is correct. Net income = $75,000 + $16,000 accrued revenue less $0
costs of goods sold + $13,000 prepaid advertising campaign – $4,000 interest
expense – $9,000 amortization expense = $91,000
Option D) is incorrect. This neglects to add back the advertising expense.
$75,000 + $16,000 – $4,000 – $9,000 = $78,000
60 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
56. Under IFRS, when a company has a discontinued operation during the year, it
should disclose:
A.
B.
C.
D.
just a single amount on the statement of comprehensive income,
representing the total of the post-tax profit/loss of the discontinued operation
and the post-tax gain/loss on the assets sold or held for sale (if any)
just a single amount on the statement of comprehensive income,
representing the total of the pre-tax profit/loss of the discontinued operation
and the pre-tax gain/loss on the assets sold or held for sale (if any)
the single amount discussed in “A” above, plus a supporting schedule
showing the revenue, expenses, and related income tax expense leading to
the post-tax profit/loss of the discontinued operation, and the gain/loss and
related income tax expense leading to the post-tax gain/loss on assets sold
or held for sale (if any)
the single amount discussed in “B” above, plus a supporting schedule
showing the revenue and expenses leading to the pre-tax profit/loss of the
discontinued operation, and the pre-tax gain/loss on assets sold or held for
sale (if any)
Option A) is incorrect. A supporting schedule of the single sum is required.
Option B) is incorrect. A supporting schedule of the single sum is required and the
single amount on the statement of comprehensive income should be the post-tax
amount.
Option C) is correct. An entity shall disclose a single amount on the statement of
comprehensive income, representing the total of the post-tax profit/loss of the
discontinued operation and the post-tax gain/loss on the assets sold or held for
sale (if any) AND a supporting schedule showing the revenue, expenses, and
related income tax expense leading to the post-tax profit/loss of the discontinued
operation, and the gain/loss and related income tax expense leading to the posttax gain/loss on assets sold or held for sale (if any). The analysis may be
presented in the notes or in the statement of comprehensive income. If it is
presented in the statement of comprehensive income, it shall be presented in a
section identified as relating to discontinued operations, that is, separately from
continuing operations.
Option D) is incorrect. The single amount in the statement of comprehensive
income should be the post-tax amount.
61 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
57. In accordance with IFRS, which one of the following BEST describes an operating
segment?
A.
B.
C.
D.
A division that is under the supervision of a manager and for which discrete
financial information is available
A separate legal entity that engages in business activities, that exceeds
certain quantitative thresholds, and for which discrete financial information is
available
A component that engages in business activities, that is reviewed regularly
by the CEO, and for which discrete financial information is available
A subsidiary that meets certain quantitative thresholds
Option A) is incorrect. Division is not relevant. This option includes the supervision
by a manager rather than the review of the information by the chief operation
decision maker.
Option B) is incorrect. Legal entity is not relevant. This option does not include
information being reviewed by the chief operation decision maker. Note:
quantitative criteria are important only to decide which segment is reportable.
Option C) is correct. This option meets the three characteristics of an operating
segment. An operating segment is a component of an entity (1) that engages in
business activities from which it may earn revenues and incur expenses (2) whose
operating results are regularly reviewed by the entity’s chief operating decision
maker (3) for which discrete financial information is available.
Option D) is incorrect. Subsidiary is not relevant. This option is missing all three
characteristics of an operating segment. It is not a component of an entity that
engages in business activities from which it may earn revenues and incur
expenses. Operating results are not regularly reviewed by the entity’s chief
operating decision maker and discrete financial information is not available.
62 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
58. Collette Beauty Products Ltd. (Collette) reports under ASPE. The following is
selected financial information related to Collette:
Revenue
Cost of goods sold
Gross margin
Year 1
$650,000
445,000
205,000
Year 2
$675,000
460,000
215,000
Year 3
$750,000
560,000
190,000
Beginning inventory
Ending inventory
$70,000
$80,000
$80,000
$95,000
$95,000
$110,000
Which one of the following scenarios is the MOST plausible explanation for
Collette’s financial results?
A.
B.
C.
D.
Inventory turnover decreased from Year 1 to Year 2, since the company was
starting to stock up for a large order with a lower-than-usual gross margin
percentage, which occurred in Year 3.
The gross margin percentage has increased every year because the
production department is becoming more efficient.
The buildup of inventory every year indicates that there are more obsolete
goods in inventory.
The high inventory turnover in Year 1 indicates that some Year 1 sales may
have been mistakenly recorded in Year 2.
Option A) is correct. Inventory turnover is noticeably slower in Year 2 compared to
Year 1 (5.26 versus 5.93). Year 3 sales are higher than prior years but with a
lower-than-usual gross margin (25% versus 32%).
Revenue
Cost of good sold
Gross margin
Ending inventory
Beginning inventory
Inventory turnover (Cost of
goods sold / Average inventory)
Year 1
650,000
445,000
205,000
32%
Year 2
675,000
460,000
215,000
32%
Year 3
750,000
560,000
190,000
25%
80,000
70,000
95,000
80,000
110,000
95,000
5.93
5.26
5.46
Option B) is incorrect. The gross margin percentage is consistent in Years 1 and 2
but lower in Year 3, so this doesn’t support lower costs per unit.
63 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Revenue
Cost of good sold
Gross margin
Ending inventory
Beginning inventory
Inventory turnover (Cost of
goods sold / Average inventory)
Multiple-Choice Questions
Year 1
650,000
445,000
205,000
32%
Year 2
675,000
460,000
215,000
32%
Year 3
750,000
560,000
190,000
25%
80,000
70,000
95,000
80,000
110,000
95,000
5.93
5.26
5.46
Option C) is incorrect. While increasing inventory suggests there could be more
obsolete goods, the ongoing increase in sales in Year 3 suggests the company
needs to increase inventory to support increasing sales.
Revenue
Cost of good sold
Gross margin
Ending inventory
Beginning inventory
Inventory turnover (Cost of
goods sold / Average inventory)
Year 1
650,000
445,000
205,000
32%
Year 2
675,000
460,000
215,000
32%
Year 3
750,000
560,000
190,000
25%
80,000
70,000
95,000
80,000
110,000
95,000
5.93
5.26
5.46
64 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
Option D) is incorrect. The inventory turnover was higher in Year 1 than in Year 2
which would more likely suggest Year 2 sales may have been recorded in Year 1
(as inventory would have been relieved from the Year 1 balance). In fact, if Year 1
sales had been recorded by mistake in Year 2, then the Year 1 COGS should have
been higher and the year-end inventory would have been lower, which would have
increased the inventory turnover ratio, not decrease it.
Revenue
Cost of good sold
Gross margin
Ending inventory
Beginning inventory
Inventory turnover (Cost of
goods sold / Average inventory)
Year 1
650,000
445,000
205,000
32%
Year 2
675,000
460,000
215,000
32%
Year 3
750,000
560,000
190,000
25%
80,000
70,000
95,000
80,000
110,000
95,000
5.93
5.26
5.46
65 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
59. RWM Inc. reports under ASPE and its current ratio increased over the previous
year, while its debt-to-equity ratio decreased over the previous year. What change
did RWM MOST likely implement that affected these two ratios?
A.
B.
C.
D.
Introduced a just-in-time inventory system.
Issued common shares.
Entered into capital leases.
Tightened the accounts receivable policy.
Option A) is incorrect. Introducing a just-in-time inventory system has no impact on
either the current ratio or the debt-to-equity ratio. The increase in cash is offset by
the decrease in inventory. Both items are current assets and their impacts on the
current ratio are cancelled out with one another. Neither the debt nor equity have
been impacted.
Option B) is correct. Current ratio = current asset / current liability and debt-toequity ratio = debt / equity. With the issuance of common shares and all other
things being equal, both cash (current asset) and equity increased but current
liability did not change. Thus, the current ratio has increased. In addition, debt did
not change but equity has increased; thus, the debt-to-equity ratio would most
likely decrease.
Option C) is incorrect. Entering into capital leases would reduce the net income
and thus the equity of RMW but the liabilities would not be impacted. It would also
reduce cash, and therefore reduce the current ratio. Thus, the current ratio would
decrease and the debt-to-equity ratio would be increase.
Option D) is incorrect. Tightened accounts receivable policy has no impact on
either the current ratio or the debt-to-equity ratio. The increase in cash is offset by
the decrease in accounts receivable. Both items are current assets and their
impacts on the current ratio are cancelled out with one another. Neither the debt
nor equity have been impacted.
66 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
60. During an audit of S&P Inc., it was discovered that the accounts receivable clerk
had been misappropriating cash and covering it up by intentionally applying
payments received to the wrong customer accounts (lapping). Which one of the
following is an example of a detective control that the auditor might recommend in
the communications with management and those charged with governance?
A.
B.
C.
D.
Periodic reconciliation of the accounts receivable subledger to the general
ledger by an accounting clerk other than the accounts receivable clerk.
Segregation of duties between custody of cash and recording collection of
accounts receivable.
Distribution of regular monthly statements to customers and follow-up of any
customer complaints by an accounting clerk other than the accounts
receivable clerk.
Review of the bank reconciliation on a regular basis by an accounting clerk
other than the accounts receivable clerk.
Option A) is incorrect. This control will ensure that the general ledger reflects all
balances in the accounts receivable subledger, but will not detect the theft of cash
through an accounts receivable lapping scheme.
Option B) is incorrect. If the accounts receivable clerk did not have access to the
company’s cash, they would not have been able to carry out this fraud without
colluding with another person. Therefore, this control may have prevented the
theft, but it would not have detected it.
Option C) is correct. This may detect the fraud if a statement is sent to a customer
who has paid their bill but whose payment was applied to another customer’s
account. It is important that someone other than the accounts receivable clerk
follow up on any complaints received from customers.
Option D) is incorrect. The accounts receivable clerk’s theft of cash would still
result in the general ledger reflecting only cash deposited in the bank; therefore,
this control would not detect misappropriation.
67 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
61. You, CPA, are a senior auditor with the firm Kadom & Karat. You have been
engaged by GDC Consulting to assist the company with the design of controls for
its new computerized payroll system. One of the company’s key concerns is
ensuring that no unauthorized employees are issued cheques. Which one of the
following controls would BEST achieve this objective?
A.
B.
C.
D.
Require two signatures on all employee direct deposit approvals.
Ensure that only the payroll clerk’s computer can print payroll cheques.
Have the director of finance reconcile a report from the payroll system of
staff additions and deletions with a listing of the same information from
human resources for each pay period.
Have the internal audit department test the payroll cheques monthly.
Option A) is incorrect. This is not as effective as it is subject to human error. It
requires that the signors have knowledge of who all the employees are.
Option B) is incorrect. This is not as effective as the payroll clerk could still print
unauthorized cheques.
Option C) is correct. Ensuring that an automated report from the payroll system is
reconciled with HR records ensures that all employees in the system are active.
Option D) is incorrect. This is not as effective as it is only done monthly and would
be subject to possible sampling errors and is a detection control.
68 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
62. An auditor is assessing the internal controls of Gemini Resources. Which one of
the following is the MOST effective control?
A.
B.
C.
D.
The accounts payable clerk is the only person allowed to set up new
creditors in the system and input invoices received for payment.
The human resources manager authorizes the hiring of all new employees
and sets them up in the payroll system, which automatically assigns them
unique employee codes.
The inventory module automatically generates inventory count sheets for
the month-end inventory count. The inventory clerk completes the count and
enters the quantities in the system. The system compares the count quantity
to the perpetual record, generating an exception report for follow-up.
The employee responsible for recording cash receipts against accounts
receivable is only authorized to access the receivables module and has no
access to the cash module or the general ledger module.
Option A) is incorrect. The payables clerk can set up a fictitious supplier and enter
an invoice for payment. This could allow the clerk to input fictitious invoices and
divert payments.
Option B) is incorrect. This is an example of authorization control and poor
segregation of duties. Segregation of duties would be improved if a different
person was required to approve the setup of the new employee in the payroll
system. Otherwise, the HR manager could set up fictitious employees and pay
them.
Option C) is incorrect. The segregation of duties is inadequate. Better segregation
would be for staff that don’t have physical access to the inventory to input the
actual count quantities into the system.
Option D) is correct. The segregation of duties between recording cash receipts,
accessing the cash, and reconciling receivables to the general ledger helps
prevent the cash receipts from being misappropriated and concealed by fraudulent
recording.
69 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
63. Great Bodies, Great Minds Inc. (GBGM) is a fitness centre where clients pay a biweekly membership fee. Some clients pay by authorized, automatic debit to their
bank accounts, while other clients have their credit cards charged. Client bank
account or credit card information is stored in the customer relationship
management (CRM) system, and protection of this information is critical. The
CRM system is hosted on an internal network server, which is not accessible
externally.
Which one of the following would be the BEST control for protecting this
information?
A.
B.
C.
D.
GBGM should invest in good-quality virus protection and firewall software.
GBGM should password-protect the access to client payment information.
GBGM should design role-based access controls to ensure only relevant
employees can view or edit client payment information.
GBGM should not store the client payment information in its CRM system;
instead, it should keep hard copies of this information locked in a fire-proof
safe.
Option A) is incorrect. It does not prevent unnecessary employees on the system
from accessing the information. In addition, because the system is on an internal
network server, the risk of external parties accessing the system is minimal so a
firewall/virus protection would not be as critical as controls preventing internal
access.
Option B) is incorrect. All employees will likely have passwords and this option
does not specify that only certain staff should be able to access client payment
information. Accordingly, it is not as good as option C).
Option C) is correct. Ensuring only employees that need access to this information
(likely a select few/management) actually have access to this information would
limit the risk of the information being compromised. The system can be designed
so that employees that don’t require access cannot even see the area/file of the
system that contains it.
Option D) is incorrect. The CRM system is likely in need of that information to
properly charge customers bi-weekly. The safe lock can also be picked, cut, or the
key stolen.
70 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
64. Which one of the following is non-essential to an audit engagement letter?
A.
B.
C.
D.
The analysis of the entity’s going concern assumption
The objective and scope of the audit of the financial statements
The responsibility of the auditor to issue an opinion and the responsibility of
management to prepare the financial statements
The identification of an applicable financial reporting framework
Option A) is correct. The analysis of the entity’s going concern assumption is not
required. Rather, CAS 570.6 dictates it is “the auditor’s responsibility is to obtain
sufficient appropriate audit evidence about the appropriateness of management’s
use of the going concern assumption in the preparation of the financial statements
and to conclude whether there is a material uncertainty about the entity’s ability to
continue as a going concern.”
Option B) is incorrect. The agreed upon terms of the audit engagement are
required to be recorded in an audit engagement letter, including the objective and
scope of the audit of the financial statements.
Option C) is incorrect. The agreed upon terms of the audit engagement are
required to be recorded in an audit engagement letter, including the responsibilities
of the auditor and the responsibilities of management.
Option D) is incorrect. The agreed upon terms of the audit engagement are
required to be recorded in an audit engagement letter, including the identification of
the applicable financial reporting framework for the preparation of the financial
statements.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
65. Tasty Treats Inc. (TTI) is a chain of ice cream franchises with locations across
Canada. TTI is subject to health and safety standards at all its locations, and it
reports under ASPE for financial reporting purposes. TTI’s management has
recently realized that some of its franchisees are not operating certain aspects of
the franchise in a manner that meets TTI standards. This is concerning to the
company, and management has decided that every franchise must obtain an
assurance report to provide TTI with some comfort that its franchisees are
operating appropriately.
Which one of the following sets of criteria should TTI apply to determine whether
franchisees are operating appropriately?
A.
B.
C.
D.
The franchise agreement between the franchisee and TTI
Health and safety standards
ASPE
A quality measurement system, such as Six Sigma
Option A) is correct. There should be a franchise agreement that outlines the
expectations for the franchisee in terms of how the store is operated. An assurance
engagement under CSAE 3531 Direct Engagements to Report on Compliance
could be performed and an opinion provided on whether the franchisees are
complying with the terms of their franchise agreement.
Option B) is incorrect. This option is not the best choice for a set of criteria.
Although health and safety standards are important in the food service industry,
there is no indication that this is the problem that TTI has had with the franchisees.
Further, there could be additional issues that would not be covered under this set
of criteria, given it would only relate to health and safety (for example, branding
requirements, such as always using the proper coloured cups and bowls, would
not be covered in health and safety rules).
Option C) is incorrect. A financial reporting framework like ASPE would not
address the concerns cited by management as it doesn’t relate to how franchises
are operated. Similarly, a financial statement audit would not provide assurance on
the concerns of management. Therefore, ASPE would not be an appropriate set of
criteria for this assurance engagement.
Option D) is incorrect. This is not a practical choice. Management does not seem
to be looking for a quality management system — and this would be a major
undertaking at a high cost. Management’s objectives could be met more easily and
less costly using the franchise agreement for this assurance engagement.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
66. Lollipop Limited (LL) is a candy manufacturer that reports under IFRS. Its primary
users are its shareholders and the analysts who review LL’s quarterly results.
These users are most concerned with future stock prices. During Year 10, a
division of LL was sold due to declining financial results.
Which one of the following is the BEST basis for the determination of overall
materiality for LL’s Year 10 audit?
A.
B.
C.
D.
Total assets
Total expenses
Income before tax
Income before tax from continuing operations
Option A) is incorrect. Total assets is generally not as good a basis for materiality
for a profit-oriented entity as income before tax from continuing operations would
be.
Option B) is incorrect. Total expenses is generally not as good a basis for
materiality for a profit-oriented entity as income before tax from continuing
operations would be.
Option C) is incorrect. Since the users are focused on future results/future share
price, net income from continuing operations is a more meaningful measure than
net income before tax as the latter includes operating results from discontinued
operations that will not exist in future years.
Option D) is correct. Based on the support in CAS 320, and the fact that users will
want to evaluate the statements on the basis on the continuing operations (to
judge future share price), this is the best measure for materiality for LL.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
67. The Sesame Book Association (SBA) is a not-for-profit entity that arranges for the
distribution of books free of charge to low-income families in order to support
family literacy.
Key financial statement data is as follows:
Gross revenue (grant from provincial government)
Total expenses
Total assets
$400,000
$300,000
$600,000
Assuming no significant qualitative factors or onerous user needs exist, which one
of the following is the MOST appropriate base to use in calculating materiality?
A.
B.
C.
D.
The difference between gross revenue and total expenses
Total assets
Total expenses
Net assets
Option A) is incorrect. Not-for-profit entities generally operate on a break-even
basis and net income would not be reflective of the size of SBA’s operations.
Option B) is incorrect. Not-for-profit entities may select an accounting policy choice
to not capitalize all of its capital assets.
Option C) is correct. Total expenses is most reflective of the item users of SBA’s
financial statements would be most interested in.
Option D) is incorrect. Net assets should be close to zero, due to a not-for-profit’s
goal of breaking even.
74 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
68. Which one of the following procedures would an auditor MOST likely perform
during the planning stage of the audit to determine the risks of material
misstatement of the client’s financial statements?
A.
B.
C.
D.
Verify the formulas used in spreadsheets to determine accounting
estimates.
Ask management how they select and apply accounting policy choices,
including the reasons for any changes to accounting policies.
Communicate with the company’s legal counsel pursuant to the Joint Policy
Statement regarding any claim or possible claim.
Attend the physical inventory count and observe performance of
management’s count procedures.
Option A) is incorrect. This is a substantive procedure focusing on obtaining
evidence on estimates; it is not a risk assessment procedure.
Option B) is correct. The auditor shall evaluate whether the entity’s accounting
policies are appropriate for its business and consistent with the applicable financial
reporting framework and accounting policies used in the relevant industry. In order
to make this assessment, the auditor would ask management how it selects and
applies accounting policy choices, including the reasons for any changes to
accounting policies.
Option C) is incorrect. This is a substantive procedure focusing on obtaining
evidence on contingent liabilities and disclosure; it is not a risk assessment
procedure.
Option D) is incorrect. This is a substantive procedure focusing on obtaining
evidence on inventory; it is not a risk assessment procedure.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
69. The auditor of Smith Ltd. has determined that it is necessary to reduce the audit
risk assessment.
Which one of the following will be the result of this decision?
A.
B.
C.
D.
A reduction in the previously assessed level of materiality
A decrease in the assessment of inherent risk
An increase in the assessment of detection risk
An increase in the amount of evidence required from audit procedures
Option A) is incorrect. A reduction in audit risk would not affect the level of
materiality chosen.
Option B) is incorrect. Inherent risk is usually related to the nature of the business
or transaction — the more complex the business or transaction, the higher the risk.
Hence, it is outside the control of the auditor.
Option C) is incorrect. If control risk was assessed as high, this would result in a
need to decrease in detection risk (not increase it).
Option D) is correct. If control risk was assessed as high, to keep audit risk at an
acceptably low level, detection risk would need to be decreased, which would
increase the amount of evidence required from audit procedures.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
70. A junior auditor at a CPA firm is currently working on the December 31, Year 14
audit of a blue jeans company. The company’s lenders require it to follow
IFRS. Noting several boxes of old blue jeans in the back of the store, the senior
auditor asked the junior auditor to create a substantive procedure to test the
accuracy, valuation, and allocation assertion of the company’s inventory.
Which of the following sets of procedures provides the BEST evidence regarding
the accuracy, valuation, and allocation assertion for inventory?
A.
B.
C.
D.
Select a sample of inventory items from the inventory subledger. Examine
subsequent sales documents, assessing if inventory can be sold above the
items’ carrying value.
Select a sample of inventory items from the inventory subledger. Physically
examine the clothing for signs of tears or damage and write down inventory
as needed.
Perform a test inventory count. Trace a sample of inventory items from the
general ledger to the company’s warehouse, and then trace the sample from
the company’s warehouse to its general ledger.
Select a sample of inventory items from the inventory subledger. Trace the
sample to purchase documents in order to assess if inventory was recorded
at the correct value.
Option A) is correct. This procedure is a strong test for accuracy, valuation, and
allocation. By comparing the net realizable value from sales documents to the
carrying value of the inventory item, the junior auditor is assessing if any writedowns to inventory are required.
Option B) is incorrect. This is an inadequate test of accuracy, valuation, and
allocation. While physical examination could flag some items that would need to be
written down, this would likely only represent a small portion of the jeans inventory.
Items that are in perfect condition, but which don’t appeal to customers, would not
be caught with this test. Other items that have high costs of production that may
not be recoverable also are ignored. Examining subsequent sales documents for
net realizable value and comparing to carrying value is stronger test for accuracy,
valuation, and allocation.
Option C) is incorrect. This procedure does not address accuracy, valuation, and
allocation. Inventory counts with sheet-to-floor and floor-to-sheet testing support
the existence and completeness assertions, respectively.
Option D) is incorrect. This procedure would identify if inventory is being booked at
the correct purchase price, but does not assess if that purchase price is now in
excess of its net realizable value. Given that the audit senior has concerns over the
old stock in the client’s store, procedures focusing on net realizable value tests
would be more appropriate.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
71. During the audit of Kennex Incorporated the accuracy, valuation, and allocation of
accounts receivable, particularly whether the amounts are collectable, has been
identified as a risk of material misstatement.
Which procedure would be the MOST appropriate for the auditor to perform to
help mitigate this risk?
A.
B.
C.
D.
Subsequent receipts testing
Accounts receivable confirmations
Inquiry with management
Recalculation of the accounts receivable subledger
Option A) is correct. This procedure provides assurance over accuracy, valuation,
and allocation since it verifies which accounts were collected subsequent to year
end.
Option B) is incorrect. This procedure provides assurance primarily over existence,
not accuracy, valuation, and allocation.
Option C) is incorrect. This procedure provides assurance over
completeness/existence, not accuracy, valuation, and allocation.
Option D) is incorrect. This procedure provides assurance over the arithmetical
accuracy of the amounts, rather than the assertion of accuracy, valuation, and
allocation.
78 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
72. Which one of the following would be considered a test of controls?
A.
B.
C.
D.
Testing monthly bank reconciliations to ensure there are no stale-dated
cheques
Testing the controller’s monthly bank covenant calculation to ensure the
covenant calculation is accurate and not breached
Testing that the deposit book agrees to the bank statement
Testing authorized signatures on cancelled cheques as evidence that the
signatures are from authorized approvers
Option A) is incorrect. This is a test of details. Checking the bank reconciliation
itself is a substantive procedure. Checking that someone independent reviews the
bank reconciliations would be a control.
Option B) is incorrect. This is a test of details. It tests the actual calculation and not
whether someone reviewed the calculation.
Option C) is incorrect. This is a test of details. It compares information from one
document to another; it is a process, not a control.
Option D) is correct. This is a test of controls. It tests that an appropriate person
performed the control (that is, the control is that the cheque signer would have
reviewed supporting documentation before signing the cheque).
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
73. Which substantive test provides the MOST relevant evidence of the occurrence of
revenues for a manufacturing company?
A.
B.
C.
D.
Vouching sales invoices to shipping documents
Confirming customer accounts receivable balances
Recalculating sales based on the entity’s price lists and quantities sold
Tracing cash receipts to the sales listing
Option A) is correct. Vouching sales invoices to shipping documents is the best
way to ensure that all sales have occurred (that is, performance has been
achieved) as the shipping document provides evidence that the goods were
actually shipped to the customer.
Option B) is incorrect. Confirming accounts receivable provides evidence on the
existence of accounts receivable, not necessarily revenue (accounts receivable
could be from a different period’s revenue).
Option C) is incorrect. Recalculating sales based on prices and quantities sold
would cover accuracy, but not necessarily occurrence.
Option D) is incorrect. Tracing cash receipts to the sales listing would only provide
evidence over the occurrence of some sales; it would not help with any sales that
were still in AR.
80 / 82
Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
74. You, CPA, are performing a review engagement for a long-time client. In response
to your inquiry on the deteriorating aging of accounts receivable, you are told that
the employee responsible for collections has been on sick leave. Which one of the
following actions should you take?
A.
B.
C.
D.
Document this in the file and move on.
Make further inquiries on the collectability of accounts receivable.
Follow up to ensure that the employee is really on sick leave.
Perform additional work on the balances, such as confirmation.
Option A) is incorrect. The response indicates there may be an issue with
collectability and this must still be investigated as it is possible that a material
misstatement exists.
Option B) is correct. The response provides a reasonable explanation for the
increase but logically raises an issue on collectability which must still be
investigated as it is possible that a material misstatement exists.
Option C) is incorrect. Unless there is reason to disbelieve the response,
corroboration of enquiries is not required in a review.
Option D) is incorrect. Confirmations are an audit procedure and are not normally
performed in a review engagement. The issue here is related to collectability so
confirmation, which is primarily an existence procedure, would not be the most
appropriate for determining if a material misstatement exists regarding accuracy,
valuation, and allocation of accounts receivable.
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Core 1 — Retired Exam Set —Multiple Choice Questions
Multiple-Choice Questions
75. During the audit of Spritz Inc., the auditor received back 10 of 12 accounts
receivable confirmations. The two unconfirmed balances are individually, and in
aggregate, immaterial.
The auditor should:
A.
B.
C.
D.
perform alternative procedures on the two unconfirmed balances.
conclude that sufficient appropriate audit evidence has been obtained, as
the untested balance is below materiality.
select two other balances to confirm.
extrapolate the unconfirmed balances as an error.
Option A) is correct. Part of a sample can’t be left untested on the basis of
materiality alone. All items in the sample must be evaluated before a conclusion on
the population from which the sample was taken can be made. For each nonresponse, the auditor should perform alternative audit procedures to obtain reliable
and relevant audit evidence.
Option B) is incorrect. Additional testing is required on the two unconfirmed
balances. All items in the sample must be evaluated before a conclusion on the
population from which the sample was taken can be made.
Option C) is incorrect. It is not appropriate to reselect a sample just because there
were non-responses. All items in the sample must be evaluated before a
conclusion on the population from which the sample was taken can be made.
Option D) is incorrect. A non-response does not automatically indicate an error.
Further procedures must be performed to determine if any errors exist in the
balances that were not confirmed.
82 / 82