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IIA CIA Exam
Certified Internal Auditor Exam (Page 51 )

Updated On: 12-Jan-2026
Page 51 of 342
PDF with 1702 Questions

Finance and operating leases differ in that the lessor

  1. Obtains use of the asset only under a finance lease.
  2. Is using the lease as a source of financing only under an operating lease.
  3. Makes rent payments that are actually installment payments constituting a payment of both principal and interest only under a finance lease.
  4. Finances the transaction through the leased asset only under a finance lease.

Answer(s): D

Explanation:

A lease is a rental or sub-purchase arrangement between a lessorthe owner or seller of the property) and a lesseethe renter or purchaser). The issue in all leases is whether the risks and rewards of ownership have been transferred from the lessor to the lessee. If so, the lease should be accounted for as a sale-purchase, i.e., a finance lease. If the risks and rewards of ownership have not transferred, the lease is a rental arrangement and is called an operating lease. In effect, the lessor provides financing for an installment purchase, and the lessee's payments include both principal and interest components.



If a lease agreement transfers substantially all of the risks and rewards of ownership to the lessee, the asset amount is recognized on the lessee's records as a(n) <List A} asset, and the lease is classified as a <List B} lease.

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

a lease agreement transfers the risks and rewards of ownership of the lessee it is treated as a finance because the transaction is in essence an installment purchase. Accordingly, the lessee records a depreciable asset and a liability. Moreover, IAS 38. Intangible Assets, specifically does not apply to bases that are within the scope of IRS 17, Leases. A finance lease is therefore presented as an item of property, plant, and equipment, that is, as a tangible asset.



On January 1, Year 1, International Entity entered into an equity-settled share-based payment transaction with its senior executives. This award of 1, 000 share options has a 4- year vesting period. The market prices of the options and the related shares on the grant date are US $20 and US $80. respectively. The exercise price is US $85. Assuming that the vesting conditions were not met for 100 of the options because of unexpected events in Year 4, the entry to debit option expense at

  1. December 31. Year 4. is for US $ 5, 000
  2. December 31. Year 3, is for US $ 4, 000
  3. December 31, Year 2. is for US $ 5, 000
  4. January 1, Year 1, is for US $ 20, 000

Answer(s): C

Explanation:

The fair value of each share option is determined at the measurement date, which is the grant date for transactions with employees and others providing 1 similar services. Thus, the fair value of each share option was set at its market price of US $20 on January 1 Year 1 The periodic expense varies only with the expected number of equity instruments expected to vest. Because the events causing 100 options not b. vest occurred unexpectedly in Year 4, the entity presumably at each balance sheet date for the first 3 years of the vesting period that all options would vest. Total expected expense was thereof US $20, 000, and the proportional expense recognize each of the first 3 years was US $5, 000 [(1, 000 options x $20) ÷ 4 years.



On January 2, Year 1, Kine Co. granted Morgan, its preside -I t. share options to buy 1.000 shares of Kine's US $10 per ordinary stock. The options call for a price of US$20 per share and are exercisable for 3 years following the grant date. Morgan exercised the options on December 31, Year 1. The market price of the shares was US $50 on January 2, Year 1, and US $70 on the following for December 31. The market price of the shares is followed because the fair value of the option is not reliable measurable, by what net amount should equity increased as a result of the grant and exercise of the options?

  1. US $ 20, 000
  2. US $30, 000
  3. US $50, 000
  4. US $70, 000

Answer(s): A

Explanation:

The measurements January 2, Year 'I_ At that date, the intrinsic value of the options is US $30.000 [1, 000 shares$50 market price -$20 option price)]. This US $30, 000 will be recorded as both compensation expense and options outstanding The net effect on equity is 0. When the options are exercised the US $20, 0001.000 shares $20 option price)].
This US $30, 000 will be recorded as both compensation expense and options outstanding will be allocated to share capital as US $30, 000 of options are exercised, the US $ 20, 0001, 000 shares x $20 exercise price) cash received and the US $30, 000 of options are exercised price) cash received and the US $30, 000 of options outstanding will be allocated to share capital as US $10, 000 ordinary stock and US $40, 000 additional paid- in capital. The net effect on equity will be a US $20, 000 increase.



The measurement date in accounting for shares issued to employees in share option plans accounted for in accordance with the fair value method prescribed by !FRS 2 is

  1. The date on which options are granted to specified employees.
  2. The earliest date on which both the number of shares to be issued and the option price are known.
  3. The date on which the options are exercised by the employees.
  4. The date the entity forgoes alternative use of the shares to be sold under option

Answer(s): A

Explanation:

Under the fair-value-based method prescribed by IFRS 2, compensation expense is measured at the grant date_ This expense is based on the fair value of the award at that date and recognized over the v....sting period, the period over which the vesting conditions are expected to be satisfied.



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