Cpa Capstone 2 questions and answers
Accounts receivable
Financial Reporting (ASPE)
Core - Level A - AnswerAccounts receivable (ASPE)
• Considered a financial instrument (financial asset) as it represents a contractual right to receive
cash or another financial asset from another party
• As such, accounts receivable must be tested for impairment at the end of the reporting period if
significant adverse changes during the period cast doubt on collectability
• If impaired, then should be written down to the amount expected to be collected, either directly,
or through the use of an allowance account
• The amount of the reduction shall be recognized as an impairment loss in net income.
Case: Bruin Car Parts
Reference: ASPE 3856.05(h), .16, .17
Inventory - Valuation
Financial Reporting (ASPE)
Core - Level A - AnswerInventory valuation (ASPE)
• Valued at lower of cost and net realizable value (NRV)
• NRV is the estimated selling price in the ordinary course of business less estimated selling costs
Case: Bruin Car Parts
Reference: ASPE 3031.07, .10
Inventory - Costs
Financial Reporting (ASPE)
,Core - Level A - AnswerInventory costs (ASPE)
• The cost of inventories shall comprise all purchase, conversion and other costs incurred in bringing
the inventories to their present location and condition
• Trade discounts, rebates and other similar items are deducted in determining the costs of
purchase
• Storage, administrative overhead, and selling costs are specifically excluded from the cost of
inventories
Case: Bruin Car Parts
Reference: ASPE 3031.11, .12, .17
Internally generated intangible assets - R&D
Financial Reporting (ASPE)
Core - Level A - AnswerInternally generated intangible assets - R&D (ASPE)
• Research costs are always expensed when incurred
• Accounting policy choice to either capitalize or expense development costs
• Development costs can be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Availability of adequate technical, financial and other resources to complete the development
o Ability to reliably measure the expenditures attributed
o Probable future economic benefits will be generated
Case: Bruin Car Parts, TankCo
Reference: ASPE 3064.37, .40, .41
Goodwill and intangible assets - Amortization
Financial Reporting (ASPE)
,Core - Level A - AnswerGoodwill and intangible assets - Amortization (ASPE)
• Intangibles are to be amortized over their estimated useful lives unless they are considered to
have an indefinite life
• Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite
(however it must still be tested for impairment)
• Amortization method and useful life should be reviewed annually
• The expected useful life must consider:
o expected use of the asset,
o expected useful life of related assets,
o contractual, legal and regulatory provisions and other economic factors
Case: Bruin Car Parts
Reference: ASPE 3064.56, .57, .61
Investments
Financial Reporting (ASPE)
Core - Level A - AnswerInvestments (ASPE)
• Investments subject to significant influence can be accounted for using the equity or cost method
• Investments without significant influence:
o Not quoted on an active market - accounted for using cost method (can be designated at fair value
upon first recognition)
o Quoted on active market - accounted for at fair value
Case: Bruin Car Parts
Reference: ASPE 3051 and 3856.11 - .15
Financial instruments - Impairment
Financial Reporting (ASPE)
, Core - Level A - AnswerReference: ASPE 3051 and 3856.11 - .15
Financial instruments - Impairment (ASPE)
• Financial instruments tested for impairment at the end of each reporting period. Where
impairment exists, reduce the carrying value to the highest of:
o PV of cash flows expected from holding the asset
o Net realizable value (if asset sold)
o Amount entity expects to realize from exercising its right to collateral
• Impairment can be reversed if asset subsequently recovers in value
Case: Bruin Car Parts, Kinfolk
Reference: ASPE 3856.16 - .19
Deductibility of expenses
Taxation
Core - Level B; Elective - Level A - AnswerDeductibility of expenses (Tax)
• General limitation- To be deductible, expense or outlay must be made or incurred by the taxpayer
for the purpose of gaining, producing or maintaining income, and be expected to generate income
related to the taxpayer's business or property
Case: Bruin Car Parts, Dogani
Reference: ITA 18(1)(a)
Common business expenses DISALLOWED
Taxation
Core - Level B; Elective - Level A - AnswerCommon business expenses DISALLOWED (Tax)
• Amortization / Impairment / Accounting Gains & Losses (deduct via CCA/CEC)
• Personal expenses and membership / club dues
Accounts receivable
Financial Reporting (ASPE)
Core - Level A - AnswerAccounts receivable (ASPE)
• Considered a financial instrument (financial asset) as it represents a contractual right to receive
cash or another financial asset from another party
• As such, accounts receivable must be tested for impairment at the end of the reporting period if
significant adverse changes during the period cast doubt on collectability
• If impaired, then should be written down to the amount expected to be collected, either directly,
or through the use of an allowance account
• The amount of the reduction shall be recognized as an impairment loss in net income.
Case: Bruin Car Parts
Reference: ASPE 3856.05(h), .16, .17
Inventory - Valuation
Financial Reporting (ASPE)
Core - Level A - AnswerInventory valuation (ASPE)
• Valued at lower of cost and net realizable value (NRV)
• NRV is the estimated selling price in the ordinary course of business less estimated selling costs
Case: Bruin Car Parts
Reference: ASPE 3031.07, .10
Inventory - Costs
Financial Reporting (ASPE)
,Core - Level A - AnswerInventory costs (ASPE)
• The cost of inventories shall comprise all purchase, conversion and other costs incurred in bringing
the inventories to their present location and condition
• Trade discounts, rebates and other similar items are deducted in determining the costs of
purchase
• Storage, administrative overhead, and selling costs are specifically excluded from the cost of
inventories
Case: Bruin Car Parts
Reference: ASPE 3031.11, .12, .17
Internally generated intangible assets - R&D
Financial Reporting (ASPE)
Core - Level A - AnswerInternally generated intangible assets - R&D (ASPE)
• Research costs are always expensed when incurred
• Accounting policy choice to either capitalize or expense development costs
• Development costs can be capitalized if all of the following exist:
o Technically feasible
o Intention to complete it
o Ability to use or sell it
o Availability of adequate technical, financial and other resources to complete the development
o Ability to reliably measure the expenditures attributed
o Probable future economic benefits will be generated
Case: Bruin Car Parts, TankCo
Reference: ASPE 3064.37, .40, .41
Goodwill and intangible assets - Amortization
Financial Reporting (ASPE)
,Core - Level A - AnswerGoodwill and intangible assets - Amortization (ASPE)
• Intangibles are to be amortized over their estimated useful lives unless they are considered to
have an indefinite life
• Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite
(however it must still be tested for impairment)
• Amortization method and useful life should be reviewed annually
• The expected useful life must consider:
o expected use of the asset,
o expected useful life of related assets,
o contractual, legal and regulatory provisions and other economic factors
Case: Bruin Car Parts
Reference: ASPE 3064.56, .57, .61
Investments
Financial Reporting (ASPE)
Core - Level A - AnswerInvestments (ASPE)
• Investments subject to significant influence can be accounted for using the equity or cost method
• Investments without significant influence:
o Not quoted on an active market - accounted for using cost method (can be designated at fair value
upon first recognition)
o Quoted on active market - accounted for at fair value
Case: Bruin Car Parts
Reference: ASPE 3051 and 3856.11 - .15
Financial instruments - Impairment
Financial Reporting (ASPE)
, Core - Level A - AnswerReference: ASPE 3051 and 3856.11 - .15
Financial instruments - Impairment (ASPE)
• Financial instruments tested for impairment at the end of each reporting period. Where
impairment exists, reduce the carrying value to the highest of:
o PV of cash flows expected from holding the asset
o Net realizable value (if asset sold)
o Amount entity expects to realize from exercising its right to collateral
• Impairment can be reversed if asset subsequently recovers in value
Case: Bruin Car Parts, Kinfolk
Reference: ASPE 3856.16 - .19
Deductibility of expenses
Taxation
Core - Level B; Elective - Level A - AnswerDeductibility of expenses (Tax)
• General limitation- To be deductible, expense or outlay must be made or incurred by the taxpayer
for the purpose of gaining, producing or maintaining income, and be expected to generate income
related to the taxpayer's business or property
Case: Bruin Car Parts, Dogani
Reference: ITA 18(1)(a)
Common business expenses DISALLOWED
Taxation
Core - Level B; Elective - Level A - AnswerCommon business expenses DISALLOWED (Tax)
• Amortization / Impairment / Accounting Gains & Losses (deduct via CCA/CEC)
• Personal expenses and membership / club dues
