CPA Core 1 - Retired Exam Case Study

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Questions and Answers

How should Benall Corp. report the liability from the lawsuit in Year 10's financial statements under ASPE?

Accrue $750,000 and disclose the details of the possible loss in the notes. (correct)

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.

What is the stand-alone selling price (SSP) for the loyalty points as calculated?

$146,000

$146,200

$150,000

$152,000 (correct)

What is the total liability amount calculated incorrectly due to the misallocation of transaction price?

$3,653,800

$3,800,000

$3,952,000 (correct)

$3,500,000

What does Option D incorrectly do regarding the transaction price allocation?

Allocates revenue based on the loyalty points only. Signup and view all the answers

What range of compensation is Benall expected to incur due to the lawsuit?

$750,000 to $1,500,000 Signup and view all the answers

Which statement correctly describes the actions required when a loss is considered contingent?

Accrue the minimum of the possible range and disclose details. Signup and view all the answers

What calculation method was misused in the liability calculation process?

Relative selling price allocation method. Signup and view all the answers

Why is it necessary to disclose details of the lawsuit in the financial statements?

To inform stakeholders of unusual events affecting financial health. Signup and view all the answers

What is the correct net income for tax purposes based on the provided adjustments?

$182,000 Signup and view all the answers

Which expense is incorrectly adjusted in Option D?

Entertainment expense Signup and view all the answers

How is the non-deductible portion of entertainment calculated for tax purposes?

50% of total entertainment expense Signup and view all the answers

What is the tax treatment for dividends received by a minor child from a private corporation?

Taxed at the top personal tax rate Signup and view all the answers

What incorrect assumption is made in Option B regarding dividend income for minors?

It attributes income to the parents Signup and view all the answers

Which adjustment to net income reflects a contribution made for charitable purposes?

Charitable donations of $2,000 Signup and view all the answers

What is the main criteria for the child being taxed at the top rate on split income like dividends?

The child is under 18 years old Signup and view all the answers

Which of the following options is NOT a part of the adjustments made to calculate net income?

Total entertainment expenses Signup and view all the answers

Which statement correctly describes the purpose of a valuation based on liquidation values?

To evaluate a business that is not a going concern by considering its current and fixed assets. Signup and view all the answers

What is the primary focus of a valuation based on capitalized earnings?

Valuing businesses with consistent earnings that approximate discretionary cash flows. Signup and view all the answers

Which valuation method primarily focuses on adjusting a business's assets to market values rather than its cash flow stream?

Adjusted net book values. Signup and view all the answers

When using a discounted cash flow approach, which aspect is not relevant?

Using the cash flows from disposing of all net assets. Signup and view all the answers

Which factor is least relevant when assessing the fair market value of an early stage, high-growth mining company?

The past financial performance of the company. Signup and view all the answers

Which of the following factors is important when valuing a high-growth mining company?

Projections on commodity price trends. Signup and view all the answers

Why is evaluating the management's past record with similar organizations significant for a high-growth mining company?

It can predict potential operational effectiveness and risk management. Signup and view all the answers

Which statement is incorrect regarding the valuation of a business not considered a going concern?

A focus on future operational cash flows is paramount. Signup and view all the answers

How is the asset value per unit calculated in relation to the right of recovery?

Inventory cost of $150 less the expected recovery cost of $30 Signup and view all the answers

What represents the correct calculation for the total amount recorded for net revenue?

$300,000 minus returned inventory value Signup and view all the answers

What would not be included in the asset recorded for expected returns?

Transaction costs incurred during acquisition Signup and view all the answers

In Year 6, what was the fair value per share of GAP's investment in FVG?

$12.50 Signup and view all the answers

What was the impact on GAP's profit and loss in Year 5 from holding shares in FVG?

$28,000 gain Signup and view all the answers

Which of the following is true regarding GAP's investment designation in FVG?

Designated as a financial asset measured at fair value through profit and loss Signup and view all the answers

What would be an incorrect assessment of the asset for the right to recover products?

Equal to the total inventory cost without adjustments Signup and view all the answers

What was the total transaction cost incurred by GAP when they sold their shares?

$10,000 Signup and view all the answers

What is the correct initial value of the equipment SIL should record?

$65,000 Signup and view all the answers

Why is option A not the correct calculation for the initial value of the equipment?

It ignores the cash payment made upfront Signup and view all the answers

Which of the following correctly handles the deferred rental revenue for JRM Ltd. in Year 1?

It is recognized as a liability and not as revenue Signup and view all the answers

How will depreciation expense and capital cost allowance impact JRM Ltd.'s taxable income?

Decrease taxable income as expenses are greater than allowance Signup and view all the answers

What amount should JRM Ltd. report as a non-current deferred tax asset based on the given information?

$3,500 Signup and view all the answers

Which option describes the status of the deferred tax liability for JRM Ltd. at the end of Year 1?

$24,500 non-current deferred tax liability; $28,000 current deferred tax asset Signup and view all the answers

Why is option C not the correct answer for the initial value of the equipment SIL should record?

It double counts the upfront payment Signup and view all the answers

What is the main reason why the asset does not qualify for capitalization of interest under IAS 23?

It is not expected to take a long time to be ready for use Signup and view all the answers

What is the deadline for an individual to file a notice of objection regarding their tax return?

90 days from the Notice of Assessment or one year from the filing deadline, whichever is later Signup and view all the answers

Which option incorrectly describes the reassessment period for an individual taxpayer?

Taxpayers must respond to the notice within 90 days of the assessment date. Signup and view all the answers

What is the most significant challenge when implementing a real-time accounting and reporting system?

Posting and publishing reliable un-audited real-time transactions Signup and view all the answers

Which of the following is NOT a significant hurdle identified for implementing real-time financial reporting?

Providing access to dashboards and summaries Signup and view all the answers

What is a limitation of the requirement to publish daily updated financial information?

It can complicate the accuracy of reported data. Signup and view all the answers

Which aspect of a potential real-time accounting system might be easiest to implement?

Granting user access to advanced analytics Signup and view all the answers

What constitutes a critical flaw in option D concerning the reassessment period?

It inaccurately specifies that the deadline is always sooner. Signup and view all the answers

How frequently does the management of Real-Time Marketing Corp. aim to update their financial reporting?

Daily to meet stakeholder needs Signup and view all the answers

Study Notes

CPA Core 1 - Retired Exam Set - Case 1

Daffy Ltd. has $200,000 to invest in a portfolio. The portfolio will be invested equally in an equity investment with a beta of 1.50 and a risk-free interest-bearing certificate. The current risk-free rate is 5%, and the market requires a 5% risk premium for equity securities. The expected return on the equity security is calculated using the Capital Asset Pricing Model (CAPM). The expected return on the equity security 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.
DDD Co. is a pioneer in the 3D printing industry. It had venture-backed financing 10 years ago to fund research and development activities. However, it has not yet shown substantial sales and has a going concern issue. The company is actively searching for investors. A competitor looking to purchase machinery should value DDD by liquidation value, which is the minimum value the company would receive for a quick sale or liquidation of its assets.
The purpose of a valuation based on liquidation values is to value a business that is not considered a going concern. A valuation based on capitalized earnings is to value a business with relatively stable earnings. A valuation based on adjusted net book values is to value a business that is not a going concern. A valuation based on discounted cash flows is to value a business based on the estimated fair market value.
When assessing the fair market value of a high-growth mining company, factors such as proven and unproven reserves, forecasts, and future prospects of the company are all relevant. The past financial performance is not relevant to assessing the future value.
BioTek Corp. (BTC) has developed an app to monitor a user's biometrics. It has over 500,000 app downloads. BTC outsources its customer troubleshooting to skilled technicians in India. BTC considers foreign exchange risk, market risk, interest rate risk, and bad debt risk in its financial management policies. The least imperative risk is bad debt risk.
The following statement describes the advantages of a future contract: "They can create certainty because specific rates are locked in. They also are easily traded. Therefore, they are very liquid."
A horizontal acquisition involves firms at different stages of the production process acquiring another. A leveraged buyout involves a small group of investors purchasing all of the equity of a public company. A conglomerate acquisition involves the buying firm acquiring a firm in a different industry.
A corporation must file its corporate tax return before November 1 of the following year. An individual must file their personal tax return before June 15 of the current year.
Alpha Ltd., Beta Ltd., Capricorn Ltd., and Delta Ltd., are four corporations incorporated in Canada. Only Beta Ltd. and Alpha Ltd. are Canadian-controlled private corporations.
Records must be kept in English or French and in a form that contains enough information to determine any liabilities or credits.
Mac-Pac Corp. purchased a passenger vehicle for business use, in 2016. The UCC balance for the vehicle was $18,000. On May 1, 2023, the vehicle was sold for $19,000. On June 1, 2023, a new passenger vehicle was purchased for $50,000. The maximum capital cost allowance deduction in 2023 for both vehicles would be $18,900.
RHM Ltd. had an income before taxes of $175,000. Expenses included $50,000 for amortization, $2,000 in charitable donations, $30,000 in entertainment expenses, and $60,000 in capital cost allowance. The resulting net income for tax purposes will be $182,000.
Dividends received by a minor child from a private corporation are taxed at the child's top personal tax rate.
Jason transferred land to his common-law partner and brother. The transfer to his common-law partner is eligible for a tax-free rollover. Jason will recognize a capital loss of 25,000 on the land transfer to his brother.
Barb Rockefeller, a Canadian resident, received $10,000 of eligible dividends from taxable Canadian corporations, $10,000 of other-than-eligible dividends, and $10,000 of foreign dividends with $1,500 in foreign tax withheld. The income for tax purposes will be $35,300.
Wilma and Serge separated in 2022. Wilma paid $1,500 per month for spousal support and $1,200 for child support. In 2023, Wilma made only eight months of payments totalling $21,600. Wilma could deduct $7,200 in 2023 for spousal support.
Trust A and Trust D are testamentary trusts.
A prior year reserve must be included in the deceased's income. A reserve may be deducted in the year of death. In the case of a reserve for doubtful debts, the prior year reserve is included in the deceased's income, and a reserve cannot be deducted in the year of death. In the case of reserves for bad debts, the prior year reserve is included in income, and a reserve may be deducted in the year of death.
A notice of objection regarding a notice of assessment from the Canada Revenue Agency must be filed within one year of the required tax return filing date or within 90 days of the date on the notice of assessment, whichever is later.
The MOST significant challenge in implementing a real-time accounting and reporting system is the reliability of the real-time data.
If a provincial government approves financial assistance with employee wages. The company must maintain staffing levels and will receive a grant worth $100,000. The amount recognised in Year 2 is $100,000.
The cost of inventory for one batch of washing brushes, according to ASPE, is $360.
FRG will record a right-of-use (ROU) asset and a lease liability because the term of the lease is five years.
The allocation of revenues and expenses between the parties in a joint operation is not sufficient on its own to determine whether an arrangement is a joint operation or a joint venture.
Any gain or loss on translation of assets is reported as a component of equity.
The most appropriate basis for determining overall materiality for a company that sells goods and has a discontinued operation is income before tax from continuing operations.
The most appropriate basis for determining materiality for a not-for-profit organization is total expenses.
To determine the risks of material misstatement, the auditor should ask management how they select and apply accounting policy choices, including the reasons for any changes.
A reduction in audit risk will not affect the level of materiality.
An increase in audit risk would require the auditor to conduct additional procedures, increasing the necessary evidence.
A substantive procedure to help determine the accuracy, valuation, and allocation assertion for inventory of blue jeans would be to select inventory items from the inventory subledger, and trace the sample to purchase documents in order to assess if inventory was recorded at the correct value.
To mitigate the risk of material misstatement in the accuracy, valuation, and allocation of accounts receivable, the auditor should perform subsequent receipts testing.
A test of controls is when the auditor tests that an appropriate person performed a control procedure, such as authorized signatures on cancelled cheques.
The best basis for the determination of overall materiality for Lollipop Limited is income before tax from continuing operations.

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Description

This quiz explores investment strategies and portfolio returns through a practical case study involving Daffy Ltd. and DDD Co. Participants will analyze the application of the Capital Asset Pricing Model (CAPM) to derive expected returns on investments. Prepare to test your knowledge in financial analysis and investment principles.