FAR Study Group – Q2 2018 - Page 13

thanks @Josh. Good luck on your exam! I'm taking AUD in June I only have 1 month to prepare.

@AF do you have a list of SIMs that correlate with the Blueprints? I would greatly appreciate if you could share it or how did you fish them out?
Thanks

Can anyone please shed some light on when to include/close out net income items in ending retained earnings and thus, shareholdders’ equity?

Ninja Question #107 on Statement of Changes in Equity:

Zinc Co.'s adjusted trial balance on December 31, 20X1, includes the following account balances:

{C}
Common stock ($3 par) $600,000
Additional paid-in capital 800,000
Treasury stock (at cost) 50,000
Net unrealized loss on available-for-sale debt securities 20,000
Net unrealized loss on investment in equity securities 15,000
Retained earnings appropriated
for uninsured earthquake losses 150,000
Retained earnings (unappropriated) 200,000

What amount should Zinc report as total stockholders' equity in its December 31, 20X1, balance sheet?

Incorrect A.
$1,665,000

B.
$1,680,000

C.
$1,685,000

D.
$1,780,000

E.
Answer Statment

You answered A. The correct answer is B.

CONTRIBUTED CAPITAL:
Common stock $ 600,000
Additional paid-in capital 800,000
———-
Total contributed capital $1,400,000
Retained earnings ($150,000 appropriated) 350,000
———-
Subtotal $1,750,000
Less accumulated comprehensive income
(unrealized loss on available-for-sale
debt securities) $20,000
Less Treasury stock at cost 50,000 70,000
——- ———-
Total stockholders' equity $1,680,000
==========

Note

Only the unrealized loss from the debt securities classified as available-for-sale is included in shareholder's equity as a component of accumulated comprehensive income. The net unrealized loss on investment in equity securities is included in income

Per the definition of R/E:

Retained earnings are increased by net income, prior-period adjustments, and quasi-reorganization. Retained earnings are decreased by net loss, prior-period adjustments, cash, property, scrip, stock dividends, and treasury stock and stock retirement transactions.

Question: If Net Income is closed out to retained earnings and thus included in shareholders’ equity, why wouldn’t we include the unrealized loss on equity securities (FVTNI) in the ending retained earnings balance? It goes to equity in the end…

Thanks!

@faisalzamil

Look at the JE for the two transactions:

Sale Of Building (Carrying Value is 350,000)

Cash 350,000
Accumulated Dep 250,000 (Accumulated Depreciation associated with the building)
Building 600,000 (Historical Cost)

Depreciation for Year (All PP&E)

Depreciation Expense 250,000
Accumulated Depreciation 250,000

However, as you are looking at the indirect method for reconciling the statement of cash flows, the accumulated depreciation doesn't matter. Because depreciation expense is taken out of Net Income and it is a non-cash item (and the indirect method starts with net income/loss), you would need to add it back. Under the direct method, you would ignore the depreciation expense unless it states that it is part of SG&A or something along those lines.

I'm taking FAR in 16 days. I just finished F10 and will start to review all the material by doing progress test (All chapters together) and the simulations. I'm planning on taking a practice test on May 11 and the other one on May 19. Do you guys think this is a good strategy? Any recommendations? Anyone on the same boat lol?