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IIA CIA Exam
Certified Internal Auditor Exam (Page 65 )

Updated On: 12-Jan-2026
Page 65 of 342
PDF with 1702 Questions

An entity sells inventory for US $80, 000 that had an inventory cost of U'; $40, 1: X11 i1: i The terms of the sale involve payments receivable of US $10, 000 in the first year, 11F; $45, 000 in the second year, and US $25, 000 in the third year. The buyer of the inventory is a new firm with no credit history. If the cost-recovery method of revenue recognition is used, the amount of gross profit to be recognition in the second year is

  1. US $0
  2. US $5, 000
  3. US $15, 000
  4. US $45, 000

Answer(s): C

Explanation:

The profit recognized in the second year equals the cumulative payments received minus the seller's cost, or US $15, 000 [($10, 000 + $45, 000) - $40, 000].



Which inventory pricing method generally approximates current cost for each of the following?

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

Answer(s): C

Explanation:

FIFO assigns the most recent purchase prices to ending inventory and the earliest purchase prices to cost of goods sold. LIFO uses the earliest acquisition costs to price the ending inventory. It is not permitted by the IFRSs. Thus. FIFO approximates current o. .$t for ending inventory, and LIFO approximates current cost of goods sold.



On August 1. Jones leased property to Smith for a 5-year period. The annual US $20, 000 lease payment is payable at the end of each year. The expected residual value at the end of the lease term is US $10, 000. Jones's implicit interest rate is 12%. The cost of the property to Jones was US $50, 000, which is the fair value at the lease date. The present value of an ordinary annuity of I for five periods is 3.605. The present value of I at the end of five periods is .567. At the inception of the lease, the recorded gross investment is

  1. US $110, 000
  2. US $100, 000
  3. US $72.100
  4. US $90.000

Answer(s): A

Explanation:

For a finance lease, the lessor should record the gross investment in the lease at the undiscounted sum of the minimum I, , , r ' paymentsthe total of the lessee's required payments, excluding contingent rent and costs for services and taxes to be paid by and reimbursed to the lessor. and any guaranteed residual value) and any Unguaranteed residual value. The gross investment is the same regardless of whether any residual value is guaranteed. The five periodic payments of US $20, 000 equal US $100, 000. The expected residual value including guaranteed and Unguaranteed portions equals US $10, 000. The gross investment should be US $110, 000$100, 000 + $10, 000).



ABC entities, a manufacturer lessor, leased a chine to XYZ on January 1. The lease meets the criteria for a finance lease. Title to the asset will automatically pass to the lessee at the end of the lease term. Other details are as follow:

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

Answer(s): D

Explanation:

For this finance lease, the manufacturer-lessor should record
1. As gross investment, the minimum lease payments because there
2. As net investment, the difference between the gross investment in the lease and unearned finance incomea credit to a liability)
3. As unearned finance income the difference between the gross investmentgross investment discounted at the interest rate implicit in the lease)
4. As sales revenue the fair value of the asset o if lower, the present value payments computed at the interest rate implicit in the lease
5. As cost of goods sold, the cost of the leased asset Because the first payment is made at the inception ofthe lease. the payment structure is that of annuity due. Sales revenue is therefore equal to the US $10.000 periodic payment times the present value of an annuity due of I discounted for 10 years at 10%US $10, 000 6.7590 = US $67, 590). Given that cash is paid at the beginning of the year, the initial 10.000 cash debit immediately decreases the gross investment in the leaselease payments receivable) from US $100, 000 to US $90, 000. The cost of the leased assetUS $55, 000) must also be charged to cost of sales and credited to inventory. Finally, at the inception of the lease, unearned finance income equals the difference between the gross investment and the sales priceUS $100, 000 ax$67, 590 = US 632, 410).



For a finance lease, the gross investment, lease payments receivable, recorded by the lessor is equal to the

  1. Present value of the minimum lease payments minus the unguaranteed residual value accruing to the lessor at the end of the lease term.
  2. Lower of 90% of the present value of the minimum lease payments or the fair value of
    the leased asset.
  3. Minimum lease payments plus the unguaranteed residual value accruing to the lessor at the end of the lease term
  4. Difference between the present value of the minimum lease payments and the unearned finance income.

Answer(s): C

Explanation:

For a finance lease, the lessor should record as the gross investment in the lease the amount of the minimum lease payments (payments plus either any bargain purchase option or any residual value guaranteed by the lessee, a party related to the lessee, or by a financially capable parry unrelated to the lessor or the lessee) plus any amounts of unguaranteed residual value. The net investment in the lease is equal to the gross investment minus unearned finance income.



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