[jeff]

BEC Resources:

Free BEC Notes & Audio – https://www.another71.com/cpa-exam-study-plan

BEC 10 Point Combo: https://www.another71.com/products-page/ten-point-combo

BEC Score Release: https://www.another71.com/cpa-exam-scores-results-release

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[stokey45]

Good Luck @jennknee. It IS very nerve racking. You are not alone.

[Luvthebeach]

HI Everyone! My exam is on Monday @11:30 a.m., and going into a slight panic mode. I thought I prepared well this time, but now I am wondering if I ever will feel prepared…. 2nd attempt

Question if anyone is out there right now and not taking a holiday break…. can anyone give me a real life example of an interest rate swap? I am trying to grasp the concept and am totally confused.

[Luvthebeach]

HI Everyone! My exam is on Monday @11:30 a.m., and going into a slight panic mode. I thought I prepared well this time, but now I am wondering if I ever will feel prepared…. 2nd attempt

Question if anyone is out there right now and not taking a holiday break…. can anyone give me a real life example of an interest rate swap? I am trying to grasp the concept and am totally confused.

[Anonymous]

I'll see if I can help here.

Let's use todays low interest rates of ~2%.

Say I offer loans at a fixed rate of 2%. You offer loans at rates that fluctuate with the market (variable), so your future cash flow fluctuates with the market interest rate at that time.

I am concerned that rates may go up in the next couple years (after all 2% is mighty low), and if rates go up and I am only receiving 2% from the money I lent out. I don't want to be stuck with the low 2% interest for the next couple of years if the market interest rate increases to 4 or 5%.

On your end, you think rates are going to continue to drop (say fed keeps printing money, etc), and you expect rates to be lower than 2% in the coming years, maybe even 1%. You don't want the interest on your loans outstanding to adjust to the lower rates – decreasing your future cash flows.

So we work together to hedge ourselves against changes in rates that could hurt us. In this case, I would get some of your loans that fluctuate with the market, so if rates go up, I'll have loans whose rates will go up with the market. If rates go down, I still have some 2% fixed interest income, effectively making more than market rate.

As for you, you will now have some fixed rate 2% loans, so if the interest rate does drop (as you predict) you will get 2% interest in a market of 1% or less. If rates increase, you still hold many of your variable rate loans to take advantage of higher rates.

It's a way to diversify what types of loans you have outstanding and the future cash flows derived from these loans. You create a hedge against fluctuations in interest rates.

May not be the most eloquently put example, but hope this helps give you an idea of what it is and why banks engage in this activity.

[Anonymous]

I'll see if I can help here.

Let's use todays low interest rates of ~2%.

Say I offer loans at a fixed rate of 2%. You offer loans at rates that fluctuate with the market (variable), so your future cash flow fluctuates with the market interest rate at that time.

I am concerned that rates may go up in the next couple years (after all 2% is mighty low), and if rates go up and I am only receiving 2% from the money I lent out. I don't want to be stuck with the low 2% interest for the next couple of years if the market interest rate increases to 4 or 5%.

On your end, you think rates are going to continue to drop (say fed keeps printing money, etc), and you expect rates to be lower than 2% in the coming years, maybe even 1%. You don't want the interest on your loans outstanding to adjust to the lower rates – decreasing your future cash flows.

So we work together to hedge ourselves against changes in rates that could hurt us. In this case, I would get some of your loans that fluctuate with the market, so if rates go up, I'll have loans whose rates will go up with the market. If rates go down, I still have some 2% fixed interest income, effectively making more than market rate.

As for you, you will now have some fixed rate 2% loans, so if the interest rate does drop (as you predict) you will get 2% interest in a market of 1% or less. If rates increase, you still hold many of your variable rate loans to take advantage of higher rates.

It's a way to diversify what types of loans you have outstanding and the future cash flows derived from these loans. You create a hedge against fluctuations in interest rates.

May not be the most eloquently put example, but hope this helps give you an idea of what it is and why banks engage in this activity.

[Luvthebeach]

@ aduncansdg – thank you so much, your explanation does help. I think the key thing here is it is a way to diversify. Sounds kind of like you are teaming up with someone so to speak.

[Luvthebeach]

@ aduncansdg – thank you so much, your explanation does help. I think the key thing here is it is a way to diversify. Sounds kind of like you are teaming up with someone so to speak.

[Luvthebeach]

Holy cow, I must be losing it… countdown is less than 24 hours till the exam. Stumped on a cost acctg ?, any help appreciated for this sad, lost soul.

Lane Co. produces main products Kul and Wu. The process also yields by-product Zef. Net realizable value of by-product Zef is subtracted from joint production cost of Kul and Wu. The following info pertains to production in July 2012 at a joint cost of $54,000:

Product Units Produced Market Value Additional cost after split-off

Kul 1,000 $40,000 $0

Wu 1,500 $35,000 $0

Zef 500 $7,000 $3,000

If Lane uses the net realizable value method for allocating joint cost, how much of the joint cost should be allocated to product Kul?

The answer his answer is $26,667 because net realizable value (NRV) is the predicted selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. The joint cost of $54,000 is reduced by the NRV of the by-product ($4,000) to get the allocable joint cost ($50,000). The computation is

Sales value at split-off Weighting Joint costs allocated

Kul $40,000 $40,000/$75,000 × $50,000 $26,667

Wu 35,000 $35,000/$75,000 × $50,000 23,333

$75,000 $50,000

Therefore, $26,667 of the joint cost should be allocated to product Kul.

My hangup is right now in understanding the answer is where did they get “The joint cost of $54,000 is reduced by the NRV of the by-product ($4,000) to get the allocable joint cost ($50,000)” not understanding where the $4,000 came from.

[Luvthebeach]

Holy cow, I must be losing it… countdown is less than 24 hours till the exam. Stumped on a cost acctg ?, any help appreciated for this sad, lost soul.

Lane Co. produces main products Kul and Wu. The process also yields by-product Zef. Net realizable value of by-product Zef is subtracted from joint production cost of Kul and Wu. The following info pertains to production in July 2012 at a joint cost of $54,000:

Product Units Produced Market Value Additional cost after split-off

Kul 1,000 $40,000 $0

Wu 1,500 $35,000 $0

Zef 500 $7,000 $3,000

If Lane uses the net realizable value method for allocating joint cost, how much of the joint cost should be allocated to product Kul?

The answer his answer is $26,667 because net realizable value (NRV) is the predicted selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. The joint cost of $54,000 is reduced by the NRV of the by-product ($4,000) to get the allocable joint cost ($50,000). The computation is

Sales value at split-off Weighting Joint costs allocated

Kul $40,000 $40,000/$75,000 × $50,000 $26,667

Wu 35,000 $35,000/$75,000 × $50,000 23,333

$75,000 $50,000

Therefore, $26,667 of the joint cost should be allocated to product Kul.

My hangup is right now in understanding the answer is where did they get “The joint cost of $54,000 is reduced by the NRV of the by-product ($4,000) to get the allocable joint cost ($50,000)” not understanding where the $4,000 came from.

[Qlad]

@love the beach…in ur question ZEF is a by-product and thay say that it's cost is reduced from the joint costs…so before we split between 2 main products we first subtract that cost of by product…MKT value of by product is $7000 and additional cost is $3000 so 7000-3000=4000 …we subtract from 54000 and get 50000…hope that helps..

FAR 72,71,81 🙂
AUD 64,71, 72, 75 🙂 I'm done !!!
REG 73, 74, 74, 84 🙂
BEC 76 🙂

[Qlad]

@love the beach…in ur question ZEF is a by-product and thay say that it's cost is reduced from the joint costs…so before we split between 2 main products we first subtract that cost of by product…MKT value of by product is $7000 and additional cost is $3000 so 7000-3000=4000 …we subtract from 54000 and get 50000…hope that helps..

FAR 72,71,81 🙂
AUD 64,71, 72, 75 🙂 I'm done !!!
REG 73, 74, 74, 84 🙂
BEC 76 🙂

[Anonymous]

Looks like I'm in the same boat as most everyone else! LOL Test is tomorrow, panic mode is setting in. I have prepared and prepared and prepared but then run across questions and I think, did I prepare at all? Economics is not my strong suit at all. I am getting hung up on one area and a lot of questions seem to logic through this one area. I think if I can get this one glitch ironed out, it would really help me on a lot of economic questions.

If aggregate demand shifts to the left, that's good because employment goes up, prices go up, etc… But it is important to keep this balanced because it also means inflation. Because prices are up, less exports because other countries don't want to buy our products because they are too expense. This means exports would decrease during a time of inflation.

Here is where I get stumped. Because of inflation the US dollar would then lose buying power. Does this not mean the value of the $ goes down? If this is true, then that means the other countries currency is appreciating and the dollar is depreciating. If the $ is depreciating then other countries would want to buy our products? This would mean that exports would increase during a time of inflation.

So, does inflation cause a currency to appreciate or depreciate?

Thanks in advance for the help.

[Anonymous]

Looks like I'm in the same boat as most everyone else! LOL Test is tomorrow, panic mode is setting in. I have prepared and prepared and prepared but then run across questions and I think, did I prepare at all? Economics is not my strong suit at all. I am getting hung up on one area and a lot of questions seem to logic through this one area. I think if I can get this one glitch ironed out, it would really help me on a lot of economic questions.

If aggregate demand shifts to the left, that's good because employment goes up, prices go up, etc… But it is important to keep this balanced because it also means inflation. Because prices are up, less exports because other countries don't want to buy our products because they are too expense. This means exports would decrease during a time of inflation.

Here is where I get stumped. Because of inflation the US dollar would then lose buying power. Does this not mean the value of the $ goes down? If this is true, then that means the other countries currency is appreciating and the dollar is depreciating. If the $ is depreciating then other countries would want to buy our products? This would mean that exports would increase during a time of inflation.

So, does inflation cause a currency to appreciate or depreciate?

Thanks in advance for the help.

[Anonymous]

So, thought I had it figured out but I don't.

If AD shifts to the right, price goes up = inflation=exports go down=imports increase because we can buy more of the other countries products because our currency has more value than yours. However, this question clearly says that higher inflation means a depreciating currency value.

Assuming that the real rate of interest is the same in both countries, if country A has a higher nominal interest rate than country B, then the currency of country A will

likely be selling at a

a -Forward premium relative to the currency of country B.

b – Forward discount relative to the currency of country B.

c – Spot discount relative to the currency of country B.

d – Spot premium relative to the currency of country B.

b is correct because:

This answer is correct. If the real rates of interest are the same, the country

with the higher nominal interest rate is expected to experience a higher rate of

inflation. A higher rate of inflation is associated with a devaluing currency so the

currency of the country with the higher nominal interest rate will likely be selling

at a forward discount.

Good luck everyone! Wishing you the best Christmas present ever….a PASS!!

[Anonymous]

So, thought I had it figured out but I don't.

If AD shifts to the right, price goes up = inflation=exports go down=imports increase because we can buy more of the other countries products because our currency has more value than yours. However, this question clearly says that higher inflation means a depreciating currency value.

Assuming that the real rate of interest is the same in both countries, if country A has a higher nominal interest rate than country B, then the currency of country A will

likely be selling at a

a -Forward premium relative to the currency of country B.

b – Forward discount relative to the currency of country B.

c – Spot discount relative to the currency of country B.

d – Spot premium relative to the currency of country B.

b is correct because:

This answer is correct. If the real rates of interest are the same, the country

with the higher nominal interest rate is expected to experience a higher rate of

inflation. A higher rate of inflation is associated with a devaluing currency so the

currency of the country with the higher nominal interest rate will likely be selling

at a forward discount.

Good luck everyone! Wishing you the best Christmas present ever….a PASS!!

[Author]

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