CPA - Core 1 With Complete Solutions Latest Update
Equity Method vs. Cost Method - ANSWER Once policy choice made, it cannot be
changed.
Equity Method:
- more complicated
- inflates income
- reflects higher profitability
Cost Method:
- less complicated
Residual value vs BPO - ANSWER Residual value is the fair market value of the asset at
the end of the lease.
With a BPO, the lessee c ould purchase the asset for less than the residual / fair market
value.
Establish Lease - IFRS 16 - ANSWER Dr ROU asset
Cr Lease liability
Cr Cash - if made at start of year
ROU Lease Depreciation - IFRS 16 - ANSWER Dr Depreciation expense
Cr Accumulated Depreciation
Payment of lease liability - IFRS 16 - ANSWER Dr Lease liability
,Cr Cash
Interest on Lease payments - IFRS 16 - ANSWER Dr Interest Expense
Cr Lease liability
IFRS 16 - Finance Lease - SOLUTION Less or classifies a lease as a finance lease if lease
transfers substantially all the risks and rewards inherent in ownership to the lessee.
Criteria needed for a finance lease :
- Title transferred to the lessee
A bargain purchase option exists
Lease term where lessee has the asset for majority of its lifetime
PV of the lease payments amount to the FV of the asset
This is because an asset is only created for the lessee's needs
ASPE 3065 - Leases - ANSWER The leases are categorized as either capital or operating
based on a set of criteria. If capital, the leased asset and lease liability are recognized. If
operating, the lease payments are expensed as incurred.
IFRS 16 - Leases - ANSWER All leases are capitalized, recognizing a ROU asset and
lease liability. Limited exceptions are for short-term leases of one year or less and
lowvalue leases. For such leases, the lease payment is expensed as incurred.
ASPE 3065 Leases - Initial Measurement - ANSWER Dr. Asset under lease
Cr. Lease Liability (FV - lease payment)
Cr. Cash (lease payment)
ASPE 3065 Leases - Subsequent Measurement - ANSWER Depreciate at the lower of the
lease term and useful life.
,Depreciation - asset under lease
Accumulated depreciation - asset under lease
Interest expense
Lease liability
IFRS 16 - Lessee - ANSWER All leases are capitalized recognizing a ROU asset and
lease liability.
The only limited exceptions are for leases of a short period of one year or less and for
low value leases. For these types of lease the lease payment is simply expensed as
incurred.
IFRS 16 - Lessor - ANSWER Leases are classified as either finance or operating using
specific criteria.
ASPE 3065- Lessee - ANSWER Leases are classified as either capital or operating using
specific criteria.
If capital, the leased asset and lease liability are recognized.
If present, the lease payments are then currently expensed accordingly.
ASPE 3065 - Lessor - ANSWER Leases There are two types of leases - capital and
operating. Classification is based upon certain criteria.
ASPE 3065 - Lessee Criteria - ANSWER The criteria / consideration factors for the
lessee can be summarized as follows:
1. There is a transfer of title at the end of the lease or the existence of a bargain
purchase option.
2. The lease term is a major portion of the asset's useful life, commonly 75% or more
3. The PV of the minimum lease payments is equal to substantially all of the FV of the
asset commonly 90% or more
ASPE 3065 - Lessor Criteria - ANSWER Under APSE, a lease is considered a capital
lease if:
It meets any one of the criteria as described above from lessee's perspective; and
, The credit risk is normal when compared to the risk of collection of similar receivables;
and
The amounts of any unreimbursable costs that are likely to be incurred by the lessor
under the lease can be reasonably estimated.
Non-Monetary Transaction - SOLUTION An asset exchanged or transferred in an NMT is
measured at the fair value of the asset given up or the fair value of the asset received,
whichever is more reliable. When the fair value of both the asset received and the asset
given up can be reliably determined by an entity, the fair value of the asset given up is
used to measure the asset received.
Vouching - ANSWER Test for overstatement
Assertion: Existence or occurrence
Ledger > Journal > Source Document
Tracing - ANSWER Test for Understatement
Assertion: Completeness
Source Document > Journal > Ledger
Declining Balance Method - ANSWER A method of depreciation that assumes that the
benefit derived from the asset is higher in its initial years and less as the asset ages.
(100% / useful life) x 2 = rate %
Cost of Asset x Depreciation Rate
Equity Method vs. Cost Method - ANSWER Once policy choice made, it cannot be
changed.
Equity Method:
- more complicated
- inflates income
- reflects higher profitability
Cost Method:
- less complicated
Residual value vs BPO - ANSWER Residual value is the fair market value of the asset at
the end of the lease.
With a BPO, the lessee c ould purchase the asset for less than the residual / fair market
value.
Establish Lease - IFRS 16 - ANSWER Dr ROU asset
Cr Lease liability
Cr Cash - if made at start of year
ROU Lease Depreciation - IFRS 16 - ANSWER Dr Depreciation expense
Cr Accumulated Depreciation
Payment of lease liability - IFRS 16 - ANSWER Dr Lease liability
,Cr Cash
Interest on Lease payments - IFRS 16 - ANSWER Dr Interest Expense
Cr Lease liability
IFRS 16 - Finance Lease - SOLUTION Less or classifies a lease as a finance lease if lease
transfers substantially all the risks and rewards inherent in ownership to the lessee.
Criteria needed for a finance lease :
- Title transferred to the lessee
A bargain purchase option exists
Lease term where lessee has the asset for majority of its lifetime
PV of the lease payments amount to the FV of the asset
This is because an asset is only created for the lessee's needs
ASPE 3065 - Leases - ANSWER The leases are categorized as either capital or operating
based on a set of criteria. If capital, the leased asset and lease liability are recognized. If
operating, the lease payments are expensed as incurred.
IFRS 16 - Leases - ANSWER All leases are capitalized, recognizing a ROU asset and
lease liability. Limited exceptions are for short-term leases of one year or less and
lowvalue leases. For such leases, the lease payment is expensed as incurred.
ASPE 3065 Leases - Initial Measurement - ANSWER Dr. Asset under lease
Cr. Lease Liability (FV - lease payment)
Cr. Cash (lease payment)
ASPE 3065 Leases - Subsequent Measurement - ANSWER Depreciate at the lower of the
lease term and useful life.
,Depreciation - asset under lease
Accumulated depreciation - asset under lease
Interest expense
Lease liability
IFRS 16 - Lessee - ANSWER All leases are capitalized recognizing a ROU asset and
lease liability.
The only limited exceptions are for leases of a short period of one year or less and for
low value leases. For these types of lease the lease payment is simply expensed as
incurred.
IFRS 16 - Lessor - ANSWER Leases are classified as either finance or operating using
specific criteria.
ASPE 3065- Lessee - ANSWER Leases are classified as either capital or operating using
specific criteria.
If capital, the leased asset and lease liability are recognized.
If present, the lease payments are then currently expensed accordingly.
ASPE 3065 - Lessor - ANSWER Leases There are two types of leases - capital and
operating. Classification is based upon certain criteria.
ASPE 3065 - Lessee Criteria - ANSWER The criteria / consideration factors for the
lessee can be summarized as follows:
1. There is a transfer of title at the end of the lease or the existence of a bargain
purchase option.
2. The lease term is a major portion of the asset's useful life, commonly 75% or more
3. The PV of the minimum lease payments is equal to substantially all of the FV of the
asset commonly 90% or more
ASPE 3065 - Lessor Criteria - ANSWER Under APSE, a lease is considered a capital
lease if:
It meets any one of the criteria as described above from lessee's perspective; and
, The credit risk is normal when compared to the risk of collection of similar receivables;
and
The amounts of any unreimbursable costs that are likely to be incurred by the lessor
under the lease can be reasonably estimated.
Non-Monetary Transaction - SOLUTION An asset exchanged or transferred in an NMT is
measured at the fair value of the asset given up or the fair value of the asset received,
whichever is more reliable. When the fair value of both the asset received and the asset
given up can be reliably determined by an entity, the fair value of the asset given up is
used to measure the asset received.
Vouching - ANSWER Test for overstatement
Assertion: Existence or occurrence
Ledger > Journal > Source Document
Tracing - ANSWER Test for Understatement
Assertion: Completeness
Source Document > Journal > Ledger
Declining Balance Method - ANSWER A method of depreciation that assumes that the
benefit derived from the asset is higher in its initial years and less as the asset ages.
(100% / useful life) x 2 = rate %
Cost of Asset x Depreciation Rate
