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IIA CIA Exam
Certified Internal Auditor Exam (Page 62 )

Updated On: 12-Jan-2026
Page 62 of 342
PDF with 1702 Questions

An entity issued a noninterest bearing note payable due in 1 year in exchange for land. The fair value of the land is not reliably determinable. Which of the following statements is true concerning the accounting for the transaction?

  1. The land should be recorded at the future value of the note, and interest should be imputed at the prevailing rate on similar notes.
  2. No interest should be recognized on the note, and the land should be recorded at the present value of the note
  3. Interest on the note should be imputed at the prime rate, and the land should be recorded at the discounted value of the note.
  4. Interest on the note should be imputed at the prevailing rate for similar notes, and the land should be recorded at the present value of the note.

Answer(s): D

Explanation:

When a financial liability is initially recognized, the entity should measure it at its cost a
is the fair value of the consideration received. The fair value ordinarily is determined by reference to the transaction price or other market prices. If these prices are not reliably determinable, the fair value is estimated by discounting the future cash payments at an imputed rate equal to the prevailing market rate for a similar instrumente.g., similar as to currency. term, and type of rate) of an issuer with a similar credit rating.



A plot of land is acquired in exchange for US $250, 000 cash and a noninterest-bearing note with a face amount of US $1, 000.000 on January 1 of the current year. The US $1, 000, 000 is payable in installments of US $250, 000 each, with the first installment due December 31 of the current year. With regard to imputing interest on this note.1) what market rate should be used to account for interest for the current year and2) what should be done in future years when there is a change in prevailing interest rates?

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

Answer(s): A

Explanation:

Determination of the imputed interest rate is made at the time the debt instrument is issued. Subsequent to initial recognition, most financial liabilities are measured at amortized cost using the effective interest method. Exceptions are those1) classified as at fair value through profit or loss or2) arising when a transfer of a financial asset does not qualify for derecognition or is accounted for on a continuing involvement basisIAS 39). Consequently, a change in the prevailing market rate does not affect the measurement of the noninterest-bearing note given for the land.



Subsequent measurement of trade receivables is at

  1. Fair value through profit or loss.
  2. Cost.
  3. Amortized cost
  4. Fair value through equity.

Answer(s): C

Explanation:

According to IAS 39, subsequent measurement of financial assetsincluding derivatives that are assets) is at fair value with certain exceptions. Loans and receivables and held-to- maturity investments are measured at amortized cost using the effective interest method. Unquoted equity instruments whose fair value is not reliably measurable are reported at cost.



An entity often factors its accounts receivable. The finance company requires an 8% reserve and charges a 1.5% commission on the amount of the receivable. The remaining amount to be advanced is further reduced by an annual interest charge of 16%. What proceedsrounded to the nearest dollar) will the entity receive from the finance company at the time a US $110, 000 account that is due in 60 days is turned over to the finance company?

  1. US $81, 950
  2. US $83, 630
  3. US $96, 895
  4. US $99, 550

Answer(s): C

Explanation:

The factor will hold out US $8, 800$110, 000 x 8%) as a reserve against returns and allowances and US $1, 650$110, 000 1.5%) as a commission. That leaves US 300, 50111 to be advanced to the seller. However, interest at the rate of 16% annually is also to be withheld. For 60 days that interest would amount to approximately US $2, 655assuming a 360-day year). The proceeds to be given to the seller equal US $96, 895$99, 550 - $2, 655).



In November of the current year, the vice-president of a local bank reviews the bank's mortgage portfolio prior to the December 31 year-end. The bank's largest client has mortgages on buildings in three cities. The client has incurred net losses for the past 3 years and is now experiencing serious cash flow problems. For the past 6 months, no payments have been made on any of the three mortgages. The vice-president reluctantly concludes that it is probable that the full amount of principal and interest will not be collected. What is the impact of this conclusion on the local bank's current year financial statements?

  1. No accounting or disclosure of a possible loss in value is necessary.
  2. Contingency note disclosure of a possible impairment is required.
  3. The carrying amount of the mortgages should be reduced, with a charge directly to retained earnings.
  4. The carrying amount of the mortgages should be reduced, with a charge to the income statement

Answer(s): D

Explanation:

A financial asset, such as a lender's mortgage receivable, is impaired if its carrying amount at the balance sheet date exceeds its estimated recoverable amount If it is probable that all amounts due on such a held-to-maturity investmenta financial asset carried at amortized cost) cannot be collected, the loss should be included in profit or loss_ The loss equals the difference between the carrying amount and the present value of
the expected future cash flows discounted at the original effective interest rate. The carrying amount of the asset should be reduced to its estimated recoverable amount directly or by crediting an allowance account



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