[jeff]

Welcome to the Q2 2017 CPA Exam Study Group for FAR. 🙂

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

[aatoural]

@mtaylo24 – That is so true! The AICPA abuses us.

@TurboSandwich – I hope that is the case with me as well. I need to take up some therapy like yours LOL

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Pokey]

I HATE BONDS !!! HATE THEM!! and they shouldn't be this hard!!!! Probably the most simple thing to get in this ENTIRE BOOK OF FAR!! .. anyhow I'm done bi*ching. Thanks for listening. 😉

AUD - 74 (3x), TBD
BEC - Sept16
FAR - TBD
REG - TBD

[aatoural]

@Pokey – welcome to my life!!!! LOL

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[mtaylo24]

One of these is reduced by the whole lease pmt and the other is reduced by the principal. Is it because of the beginning date?

On December 31, Year 1, Neal, Inc., leased machinery with a fair value of $105,000 from Frey Rentals Co. The agreement is a 6-year, noncancelable lease requiring annual payments of $20,000 beginning December 31, Year 1. The lease is appropriately accounted for by Neal as a capital lease. Neal’s incremental borrowing rate is 11%. Neal knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, Year 1 balance sheet, Neal should report a lease liability of

A. $75,816
Answer (A) is correct.
Given that the lease qualifies as a capital lease and that the 10% known implicit interest rate is lower than the 11% incremental borrowing rate, the lease liability should be recorded at the present value of the minimum lease payments minus the initial payment [($20,000 periodic payment × 4.7908 present value factor for an annuity due at 10%) – $20,000 = $75,816].
B. $85,000
C. $93,918
D. $95,816

On January 1, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh’s December 31 balance sheet, the capital lease liability should be

A. $102,500
B. $111,500
Answer (B) is correct.
A lease payment has two components: interest expense and the portion applied to the reduction of the lease obligation. The effective-interest method requires that the carrying amount of the obligation at the beginning of each interest period be multiplied by the appropriate interest rate to determine the interest expense. The difference between the minimum lease payment and the interest expense is the amount of reduction in the carrying amount of the lease obligation. Consequently, interest expense is $9,000 ($112,500 BOY liability balance × 8% implicit rate), and the reduction in the lease obligation is $1,000 ($10,000 cash – $9,000 interest expense). The new balance of the lease obligation is thus $111,500 ($112,500 – $1,000).
C. $112,500
D. $290,000

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Anthony]

@mtaylo24 in question #1, one full annual payments would have been made on that day because it says it in the problem, notice the date signed the lease and the date of the first payment. So it would be a simple:

DR: Lease liability 20k
Cr: Cash 20k

In question 2, 1 full year of amortization of the lease would have been done. Blaugh Co signed the lease on the first day of the year and it's asking the balancing sheet at the end of the year of the lease.

Dr: Interest exp 9k
Dr: Lease liability 1k
Cr: Cash 10k

[mtaylo24]

Thanks, I'm starting to get frustrated with the straight-line section of this chapter. One questions will tell you to use the economic life, one will tell you to use the lease term. I keep mixing them up…

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[mtaylo24]

According to the second question, if the lease term is >75%, you amort over the lease term, not the useful life. On question 1, they tell you to use useful life. Last time I checked 4/5 = 80%. What am I missing here?

Fact Pattern: Neary Company has entered into a contract to lease computers from Baldwin Company starting on January 1, Year 1. Relevant information pertaining to the lease is provided below.

Lease term – 4 Years
Useful life of computers – 5 Years
Present value of future lease payments – $100,000
Fair value of leased asset on date of lease – 105,000
Baldwin’s implicit rate -10%

At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has properly classified this lease as a capital lease on its financial statements and uses straight-line depreciation on comparable assets.

Question: 8 What is the annual depreciation expense that Neary will record on the leased computers?

A. $20,000
Answer (A) is correct.
Under a capital lease, the lessee recognizes a leased asset at an amount equal to the present value of the minimum lease payments ($100,000). Since the lease provides for the transfer of ownership, Neary should depreciate the computers using the straight-line method over their estimated useful life (5 years). Annual depreciation expense on the computers is $20,000 ($100,000 ÷ 5 years).
B. $21,000
C. $25,000
D. $26,250

Douglas Co. leased machinery with an economic useful life of 6 years. For tax purposes, the depreciable life is 7 years. The lease is for 5 years, and Douglas can purchase the machinery at fair market value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting purposes?

A. 0.
B. 5 years.
Answer (B) is correct.
If a lessee capitalizes a lease because the lease term is at least 75% of the expected remaining life, or the present value of the minimum lease payments is at least 90% of the fair value at the inception of the lease, the asset should be amortized over the lease term. These capitalization criteria do not apply when the beginning of the lease term is within the last 25% of the total estimated economic life. Douglas Co.’s lease is for a period that exceeds 75% of the expected remaining life (5 years ÷ 6 years = 83 1/3%). Thus, the depreciable life is the lease term of 5 years.
C. 6 years.
D. 7 years.

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Anthony]

@mtaylo24

In question #1, we would use 5 years, the useful life of the asset and not the lease term why? Because title would transfer to the lessee at the end of the lease term.

In question #2, we would use the lease term instead of the useful life because there isn't a bargain purchase option. Douglas has the option at buying the asset at FV and that isn't a bargain.

If you have the 2017 edition of the Gleim book, see page 327. There a small chart that gives you everything you need to know. You should use the useful life of the asset only when title will transfer OR when a bargain purchase option is available.

[mtaylo24]

Thanks man! I guess reading is fundamental. This chapter is pickin me apart, too many things to consider for each question…

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Ne’O]

Tagging in for notifications on this thread. I won't be taking FAR until July or August, but want to gear up with this crowd since I know it will be one of the harder exams for me.

@mtaylo : been seeing and following your posts this last year. I'm in the bleachers watching for you to get an 80+ and be done.
Your score history makes me exhausted just thinking about the time spent.

Ne'O

Newbie CPA Candidate

[HoldMyBeerCPA]

Well this was a nice little refresher on leases. The present valuing of lease payments was getting confusing for me as I got that mixed up with determine the cash proceeds of a note payable with a discount.

Why must these tests be so tricky!?

[mtaylo24]

Yup, leases are brutual, but I'm done. On to contingencies, then to equity.

@neobliviscar Welcome and thanks for the support. Gotta keep the scores out there to motivate the strugglers…I remember reading all of the sigs whenever I first started, but they all got purged whenever the new site rolled out. I'm beyond exhausted btw!

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Yo831CA]

Need help with this one, please…

When marking up a specific line of household items for resale, a retailer computes its markup as 40% of cost. For purposes of estimating ending inventory using the gross margin method, what percentage is applied to sales when estimating cost of goods sold?

Answer is 71 ??!!

how was that calculated??

[HoldMyBeerCPA]

I don't even think the gross margin method was covered in the Roger lectures, but it kinda makes sense to me.

The gross margin method uses the cost price to sales price ratio to determine the cost of goods sold. It is given that markup is 40% of cost.

In cases like this, where there's very little information given, I like to use examples with the smallest possible numbers. In this case, I used the number 1 as my cost.

Normally, the sales price of an item is its Cost multiplied by (1 + the percentage of markup), or the Cost plus (Percentage of Markup times Cost).

In this case, the markup percentage is 40%. As such, the sales price will be calculated as follows:

Sales Price = $1.00 (Cost) times 1.4 [1 + 0.4 (the markup percentage)]
Sales Price = $1.40; or

Sales Price = $1.00 (Cost) Plus $0.40 [40 percent markup times $1.00 (Cost)]
Sales Price = $1.40

Now that the sales price is determined, we simply take the Cost of $1 divided by the Sales Price of $1.4 which yields 71%.

The important takeaway for me is that the gross margin method says that the estimated COGS ratio = Cost / Sales Price. If we can estimate COGS and Beginning Inventory, Purchases and Sales are given, we can back into Ending Inventory. Let's hope the questions of the CPA exam are that generous to just given us all that juicy info without having to calculate it 🙂

Thanks for asking this question, because it would've thrown me for a loop had I seen this on the exam. Don't think Roger covered this in his lectures.

EDIT: Roger covered this for about all but two minutes in his lectures, haha. Just a reminder for me to go back and review the 3 trees worth of notes I've been taking for this exam.

[Anonymous]

I'm taking FAR on April 25th and have been studying with Surgent. Has anyone else studied with Surgent? Input?
I feel like it has been good at helping me retain pertinent info so far, but I've also never taken any of the exams yet either so…

[Author]

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