CPA Core Modules Practice Cases: Mastering Financial and Management Accounting

25.2.1 Practice Cases for Core Modules

The CPA Professional Education Program (CPA PEP) is a rigorous journey that requires a deep understanding of core accounting principles. To help you prepare effectively, this section provides practice cases for the core modules: Financial Accounting and Reporting (Core 1) and Management Accounting (Core 2). These cases are designed to simulate real-world scenarios and challenge your ability to apply accounting standards and principles in practical situations.

Core 1: Financial Accounting and Reporting

Case Study 1: Revenue Recognition

Scenario:

ABC Corporation, a Canadian public company, has entered into a contract with a customer to deliver customized software solutions over a period of two years. The total contract value is $500,000, with payments structured as follows: $100,000 upfront, $200,000 upon delivery of the first phase, and $200,000 upon completion of the project. The company uses the percentage-of-completion method for revenue recognition.

Requirements:

1. Determine the revenue to be recognized at the end of the first year, assuming 60% of the project is completed.
2. Discuss the impact of IFRS 15 on revenue recognition for this contract.

Solution:

1. Revenue Recognition Calculation:

   • Total contract value: $500,000
   • Percentage completed: 60%
   • Revenue recognized = Total contract value × Percentage completed = $500,000 × 60% = $300,000

   At the end of the first year, ABC Corporation should recognize $300,000 in revenue.

2. Impact of IFRS 15:

   IFRS 15 requires entities to recognize revenue when control of the promised goods or services is transferred to the customer. The percentage-of-completion method aligns with IFRS 15 as it reflects the transfer of control over time. ABC Corporation must ensure that the measurement of progress is reliable and reflects the transfer of control to the customer.

Case Study 2: Lease Accounting

Scenario:

XYZ Ltd. has entered into a lease agreement for a piece of equipment with a lease term of five years. The annual lease payment is $50,000, and the interest rate implicit in the lease is 5%. The equipment has a useful life of 10 years, and XYZ Ltd. classifies the lease as a finance lease.

Requirements:

1. Calculate the initial recognition of the lease liability and right-of-use asset.
2. Prepare the journal entries for the first year of the lease.

Solution:

1. Initial Recognition:

   • Present value of lease payments = $50,000 × [1 - (1 + 0.05)^-5] / 0.05 = $216,472.58
   • Initial recognition of lease liability and right-of-use asset = $216,472.58

2. Journal Entries for the First Year:

   • Initial Recognition:

     • Debit Right-of-Use Asset: $216,472.58
     • Credit Lease Liability: $216,472.58

   • Lease Payment:

     • Debit Lease Liability: $50,000
     • Credit Cash: $50,000

   • Interest Expense:

     • Debit Interest Expense: $10,823.63 (5% of $216,472.58)
     • Credit Lease Liability: $10,823.63

Core 2: Management Accounting

Case Study 3: Budgeting and Variance Analysis

Scenario:

DEF Manufacturing has prepared its budget for the upcoming year. The budgeted production is 10,000 units with a standard cost of $20 per unit. Actual production was 9,500 units, and the actual cost incurred was $195,000.

Requirements:

1. Calculate the budget variance and analyze its components.
2. Discuss the implications of the variance for management decision-making.

Solution:

1. Variance Calculation:

   • Budgeted Cost: 10,000 units × $20 = $200,000
   • Actual Cost: $195,000
   • Variance: $200,000 - $195,000 = $5,000 Favorable

   Components:

   • Volume Variance: (10,000 - 9,500) × $20 = $10,000 Unfavorable
   • Price Variance: ($20 - $19.50) × 9,500 = $4,750 Favorable

2. Implications for Management:

   The favorable variance indicates cost savings, but the volume variance suggests lower production than planned. Management should investigate the reasons for lower production and assess whether cost savings were due to efficiency improvements or other factors.

Case Study 4: Cost-Volume-Profit Analysis

Scenario:

GHI Enterprises produces a single product with a selling price of $50 per unit, variable costs of $30 per unit, and fixed costs of $100,000 per year. The company wants to determine the break-even point and the impact of a 10% increase in sales volume.

Requirements:

1. Calculate the break-even point in units.
2. Analyze the impact of a 10% increase in sales volume on profit.

Solution:

1. Break-Even Point Calculation:

   • Contribution Margin per Unit = Selling Price - Variable Cost = $50 - $30 = $20
   • Break-Even Point (Units) = Fixed Costs / Contribution Margin per Unit = $100,000 / $20 = 5,000 units

2. Impact of 10% Increase in Sales Volume:

   • New Sales Volume = 5,000 units × 110% = 5,500 units
   • Additional Contribution Margin = 500 units × $20 = $10,000
   • New Profit = $10,000 (additional contribution margin)

   A 10% increase in sales volume results in an additional profit of $10,000, highlighting the sensitivity of profit to changes in sales volume.

Practical Application and Exam Strategies

To excel in the CPA exams, it is crucial to practice applying accounting principles to various scenarios. Here are some strategies to enhance your preparation:

• Understand the Standards: Familiarize yourself with IFRS and ASPE standards, focusing on their application in different contexts.
• Practice Regularly: Work through practice cases and problems to reinforce your understanding and improve your problem-solving skills.
• Analyze Case Studies: Break down case studies into manageable parts, identify key issues, and apply relevant accounting standards.
• Time Management: Practice solving cases within a set time limit to simulate exam conditions and improve your time management skills.
• Review and Reflect: After solving practice cases, review your solutions and reflect on areas for improvement.

Additional Resources

• CPA Canada Handbook: A comprehensive resource for accounting standards and guidelines.
• IFRS Foundation: Provides access to IFRS standards and interpretations.
• CPA Canada Learning Resources: Offers practice exams, study guides, and additional materials to support your exam preparation.

By engaging with these practice cases and applying the strategies outlined, you will be well-prepared to tackle the core modules of the CPA exams with confidence.

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