CPA core 1 accounting notes PDF

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CPA core 1 accounting notes- pep program...

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Memo Role: CPA To: Partner, Brick and Wall Chartered Professional Accountant Re: Orion Ltd

Matchmaking Revenue- Revenue Recognition Accounting Issue The issue here is when should revenue be recognized? Analysis Per to ASPE 3400, revenue should be recognized if the following conditions are met  Performance is achieved-Met  Performance has been met because Orion has set up the client’s personal profile and set up the platform for matchmaking  Revenue can be measured reliably- Met  Fees payable upon consultation is $1200  Collection is reasonably assured- Met  $1,200 upfront fees are collected when a new client signs a contract Recommendation Orion should use the completed contract method to recognize revenue. At the end of every contract revenue should be recognized. Orion needs to reverse the amount in the revenue account (480,000/12) *9= 360,000 and create a provision for the 25% refund due to clients after 12months. The 360,000 should be recorded as deferred revenue This will affect Orion’s profitability negatively for 2019 as it will increase liability and reduce the overstated revenue. Journal Entry In January 2019 Cash (400*1,200)

480,000

Deferred Revenue (75%*480,000)

360,000

Refund Liability (25%*480,000)

120,000

After 12- months Dec 2019 Deferred Revenue

360,000

Refund Liability

120,000

Revenue Audit

480,000

Risk

 There is a likelihood for management to overstate revenue by aggressively recognizing revenue. The assertion here is Accuracy.  Because the bank is monitoring Orion’s profitability there is a likelihood for management to overstate revenue by recording revenue prior to the end of the contract. The assertion here is occurrence and cut-off Procedure:  Select a sample of invoices and trace them back to the general ledger to make sure the amounts recorded are correct.  Recalculate the revenue based on the contract end dates to make sure revenue is recognized in the appropriate period  Take a sample of the general ledger entries and trace back to the related contract documents to confirm contract duration.

Socialize in Charlottetown Sales- Revenue Recognition Gross or Net Accounting Issue The issue is if Orion is acting as an agent or principal and should they recognize all $125 as revenue or just the net? Analysis As per ASPE 3400.24 One feature indicating that an enterprise is acting as an agent is that the amount the enterprise earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.- Met; this condition is met as Orion has a standard 25% markup from the fees. Because this is an agent and not a principal the following indicators per ASPE 3400.A39 will confirm if revenue should be reported at net or at gross.   

The amount the enterprise earns is fixed – Met Orion has a standard 25% mark up. The supplier (and not the enterprise) has credit risk- Met- Orion is not responsible for addressing customer concerns related to venues selected The supplier (not the enterprise) is the primary obligor in the arrangementMet. The Venue provided the unhappy customers with a coupon for future visits as a gesture of goodwill. Meaning they are responsible for the fulfillment of the service.

Recommendation Orion should not recognize the gross amount as revenue. They should only recognize the net which will be from the 25% mark up $25 from each customer as revenue. Also, the $100 should not be booked as an expense but as a liability. 23,000 recorded as revenue needs to be reversed and (23000-18,400=4,600) booked as revenue and the remaining 18,400 recognized as a liability until paid to the venue. This will increase

Orion’s liability and reduce the revenue which will have a negative impact on Orion’s profitability Audit Risk  The main assertion which the auditor would be concern about is Accuracy and classification. Accuracy due to an incorrect amount being posted as revenue which may lead to revenue being overstated and classification due to recognizing the fees in the wrong accounts Procedure:  From the general ledger, select a sample of expense transactions and determine whether all the expenses recognized were actual expenses  From the general ledger, select a sample of invoices and confirm if the amounts recorded as revenue are accurate by comparing if the service was an agent related service or a principle related service.  Recalculate the totals collected from clients to ensure the revenue account is not overstated.

Capital Assets- Leases Accounting issues The issue here is should this lease be treated as an operating or a capital lease? Analysis Per the CPA handbook a lease can be classified as a capital lease if any of the following criteria are met.  There is reasonable assurance that ownership of the asset will transfer to the lessee by the end of the lease term – Not Met- Orion will consider purchasing the truck at the end of the lease.  The present value of the minimum lease payments amounts to substantially all (usually 90% or more) of the fair value of the asset- Met -The PV of the lease per exhibit 1 is $78,016 which is (78016/65000)120% greater than the fair value of $65,000.  The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its lifespan.-Not met- The lease term is less than 75% of the useful life of the truck (4/10)*100= 40% Recommendation Because 1 of the criteria is met, the lease is considered a capital lease hence the lease liability needs to be recognized. The lease payments expensed will need to be reversed. Which will increase the net income and increase liability as

well. The expense entry will need to be reversed which will have a positive impact on Orion’s profitability Journal Entry To record capital lease Lease asset Lease Liability

78,016 78,016

To record initial lease payment Lease Liability 792 Cash

792

Audit Risk  There is a risk that the lease payments have been recorded as an operating risk instead of a capital risk and expensed instead of capitalized hence understated liability. The assertion here is existence.  There is also a risk that the amounts being recognized as lease liabilities is incorrect due to wrong terms and interest rates. Procedure  Select a sample of the assets related to lease and recalculate and assess the reasonability for the type of lease to make sure they are not being expensed if they are capital leases.  Select a sample of the lease, gather supporting document and send customer confirmations to confirm that the terms and rates used by Orion to calculate the payments and interest are correct. Dinner for Eight Ltd – Investment Accounting Issues Orion has invested $1,500 in DFEL and holds 15% ownership interest of DFEL. Gagan the founder of DFEL invested $8,500 and owns 85% of the company. Rico had a contract drawn by a layer to make sure the terms of the business relationships were clearly defined. Rico recorded the $1,500 investment as “other asset”. In 2019 DFEL earned $ 25,000 in profits and did not pay any dividend. The issue here is should Rico have recorded this as other assets? And should the investment be recognized using the cost or equity method? Analysis ASPE 3051.07 When an investee's equity securities are quoted in an active market, the investment shall be accounted for using the equity method or at its quoted amount with

changes recorded in net income. Under these circumstances, the investment shall not be accounted for using the cost method Because the security is not quoted in an active market, the cost method will be used and Per ASPE 3051 all investments are recorded at fair value Recommendation The journal entry recording the investment as other assets needs to be reversed and an entry done to recognize the investment at fair value. Under the cost method, dividend income is recognized which will increase profitability. To record initial investment Dr. Investment in DFEL

1,500

Cash

1,500

To record Income earned in 2019 Dividend receivable (2500*15%) 3,750 Dividend income

3,750

AUDIT Risk  Rico is uncertain how to record the investment so there is a high risk of errors which leads to an increase in the OFSL risk. There is a risk of recording transactions where they do not belong. The main assertion here is classification Procedure  Check the investment balances and make sure the entries are correctly booked.  Get confirmation from DFEL to confirm the ownership interest owned by Orion...