[jeff]

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

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

[Mscfisher]

@niunian i would recommend paying the 200 to renew the material. The 2017 os much better.

[aatoural]

On January 1, 1992, Point, Inc. purchased 10% of Iona Co.'s common stock. Point purchased additional
shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1, 1992. During
October 1992, Iona declared and paid a cash dividend on all of its outstanding common stock. How
much income from the Iona investment should Point's 1992 income statement report?

a. 10% of Iona's income for January 1 to July 31, 1992, plus 40% of Iona's income for August 1 to
December 31, 1992.
b. 40% of Iona's income for August 1 to December 31, 1992 only. CORRECT
c. 40% of Iona's 1992 income.
d. Amount equal to dividends received from Iona.

How come they just add this as the answer when they only mention that Iona had paid and declared dividends? Is it just me or this is confusing?

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

[mtaylo24]

@aatoural This is the equity method question that changed last window. Whenever ownership changed to 50% in August it's treated prospectively. The answer used to be a.

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)

[aatoural]

No wonder!.

Thanks @mtaylo24

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

[aatoural]

Becker is confusing me.

It used to be Cost Method, Equity Method and Acquision Method. Now is FV Method instead of Cost Method. Now under this method when you get liquidating dividend you DR cash and Cr investment and Dividend Income. Which I am asuming the part in excess of investment account is what counts towards dividend income. Now look at this problem. Why do we assume the entire 6,000 dividend goes to credit the investment account and nothing as dividend income?

Information pertaining to dividends from Wray Corp.'s common stock investments for the year ended December 31, Year 1, follows:
On September 8, Year 1, Wray received a $50,000 cash dividend from Seco, Inc., in which Wray owns a 30% interest. A majority of Wray's directors are also directors of Seco.
On October 15, Year 1, Wray received a $6,000 liquidating dividend from King Co. Wray owns a 5% interest in King Co.
Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, Year 1, to stockholders of record on December 15, Year 1, payable on January 5, Year 2.
What amount should Wray report as dividend income in its income statement for the year ended December 31, Year 1?

a. $4,000 CORRECT
b. $10,000 MY ANSWER
c. $60,000
d. $56,000

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

[cmrn89]

@aatoural although Wray only owns 5% interest in King, liquidating dividends are always a reduction of investment, so the 2% on 200,000 cash dividend is the only dividend income.

[mtaylo24]

The biggest difference I see between the 6,000 dividend and the 4,000 dividend is that the 6,000 one is liquidating which just reduced the carrying amt of the investment on the balance sheet, while the 4,000 is income in the income statement.

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)

[cmrn89]

I see it as ‘liquidating', the business is closing down and they are returning their owners' equity back to their investors.

[aatoural]

Then how come the book has as a general JE for Liquidating Dividends

Dr…Cash
Cr…….Investment
Cr…….Dividend Income

Becker book page F4-26

I understand that it should be seen as were are going to liquidates, thus we decrease our investment. But then that other Cr to dividend income is confusing. Cuz even for tax laws it should be return of capital.

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

[mtaylo24]

I found some free flashcards. Surgent gives them out if you register. 677 cards and they aren't bad. Anybody try Roger's cards? Trying to break away slightly from the MCQs without reading an entire textbook or watching hours of videos.

@aatoural, I have no clue, Gleim user here lol.

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)

[HoldMyBeerCPA]

I do recall a Roger lecture stating that, depending on the size of the dividend, a cash dividend can be treated as income up to the accumulated amount of earnings recognized by the investee (their retained earnings). Any additional portion of dividends would reduce the investment.

For example, let's say that Wray's investee held retained earnings of 80,000 at the time his 5% dividend was declared. Let's also assume that the investee declared a dividend of 200,000. Since Wray has a 5% interest, he would receive 10,000. The maximum amount of dividend income that he could recognize is his portion of retained earnings recorded by the investee (80,000 * 5%). Any additional portion of the dividends payable to him would be a reduction of his investment.

So the JE for the 10,000 dividend would resemble what is in the Becker example

Cash 10,000
Dividend Income 4,000 (5% of total retained earnings of the investee)
Investment 6,000 (Amount of dividend that exceeds 5% of retained earnings of the investee)

[aatoural]

Thanks for the info @mtaylo24 – I am getting them for commute times 🙂

@TurboSandwich – Thanks! I get that JE now. Uff my mind was going all over the place.

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

[mtaylo24]

@turbo makes sense. Idk why but I was assuming that she was referring strictly to the liquidating dividend for the JE lol

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)

[aatoural]

@mtaylo24 – I think it was something more related to Becker since they made a summary page with that JE. Gleim probably does not have that and you did not get confused like I did. LOL

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

[Romney_p]

Hi Everyone,

Newbie here, I sit for FAR on May30. I had a question about AFS impairment. When an AFS investment gets impaired is the JE according to the Rogers textbook is:
DR Loss Acct (I/S)
CR Investment Asset (B/S)

If so, what do I do with the AOCI for that investment?? What if I've already recognized OCI loss on the investment, wouldnt I then be recording the loss twice? I feel like I'm missing something basic here I've forgotten since intermidiate I.

[Author]

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