CPA Core 1 - Retired Exam Case Study

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.