[jeff]

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

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

[Wannafree]

@Beantown ,what I meant it seems they took out the cost method from exam.Equity method is still for investment between 20 and 50%.
Cost method is also known as AFS method and Fair value method as it reevaluate the investment (fair value ) at the Balance sheet date and any unrealized loss or gain is taken to OCI.
Under cost method you take the dividend in IS.
Under Equity method (20 to 50%) you take the income (increases the investment ) based on your equity into IS and Dividend received reduces your investment.
JE for Equity method:
JE to record @ cost (FV of consideration plus legal fees) :Note legal is capitalized in equity method but expensed in Acquisition method.
Investment in Investee XXX DR
Cash XXX CR
If the common stock is given instead of cash to the Investee for Stock, then the JE would be:
Investment in Investee XXX Dr
Common Stock (Always @ PAR) XXX CR
APIC XXX CR
For earnings ( % of equity say you own 40% then just 40% of earnings)
Investment in Investee (To Increase Investme n t ) XXX DR
Equity in Earning/Investee Income XXX Cr
JE to record Cash dividends Paid (reduce only total % of ownership owned from Investment
acct)
Cash (Received cash Dividends) XXX Dr
Investment in Investee (Reduce Investment) XXX Cr
Income Statement
Record the Investor's/Parent ownership % of earnings as income (dividends are Not income,
treat as bank Withdrawal) JE:
Investment in Investee XXX DR
Equity in Earnings/Investee Income XXX CR

I was referring to by saying Cost method gone because I couldn't find out in CSO.Why I was excited because there are differences between Cost and Equity method and sometimes I mixes the things in MCQ.
So if Cost Method is not there ( not sure ) than my probability of making mistakes in Combination chapter reduces to significantly low level.
This is one chapter I love after Govt accounting.I wish if there would be a SIM from Combination and Govt then most likely I would be able to solve it.

[mtaylo24]

Anybody have the cheat codes for Non-monetary exchanges? This topic kills me because every question has different criteria!

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]

@mtaylo – this is my simple chart I use for it. Although I find that doing the JE along the way is much more helpful.

Exchange that lack Commercial Substance:
No Boot Rec.= No Gain
Boot Paid (<25%) = No Gain
Boot Received = (1) < 25% prorate gain; (2) >= 25% recognize all gain
Losses = Always recognize immediately

I think the most tricky part here is when you have boot paid in excess of 25%. Here is an example:

On January 2, Elbert's Delivery Company and Wanda's Exporters exchanged similar delivery trucks in an exchange that lacks commercial substance. Data relative to the trucks follow:

Elbert's truck
Original cost – $10,000
Accumulated depreciation as of January 2 – $8,000
Fair market value – $3,000

Wanda's truck
Book value – $15,000

In the exchange, Elbert paid Wanda cash of $10,000. Elbert's Delivery Company should record the new truck at:
a.$10,000
b.$8,000
c.$12,000
d.$13,000 CORRECT

The new truck is recorded at $13,000 on Elbert's books. In this case, the transaction is considered to be a monetary exchange, because the boot ($10,000) exceeds 25% of the total consideration ($10,000 plus $3,000 fair value of the old truck transferred to Wanda). Therefore, both parties to the exchange recognize all gains and losses on the transaction. The journal entry prepared by Elbert follows:

DR Truck-New $ 13,000
DR Accum. Depre. 8,000
………….CR Cash $ 10,000
………….CR Truck-Old 10,000
………… CR Gain 1,000

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

[mtaylo24]

@aatoural Thanks~!!!!!! I'm copying this now!

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)

[Lexi]

@mtaylor24 this one helped me out a lot

Commercial Substance Y Y Y N N N
$$(Boot) None Paid Rcvd None Paid Rcvd
Gain Y Y Y N N Partial
Loss Y Y Y Y Y Y

[Lexi]

sorry I aligned them but it won't take 🙁

[mtaylo24]

@Lexi, Is the second line the header? Can you screenshot it?

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)

[Lexi]

View post on imgur.com

Can you see anything? I get a black screen but it shows if I go on edit mode… and I can't get screenshots to paste here…

[Wannafree]

Becker's typo/error noticed.
For recording sales on credit under Gross and Net method
The entries are
Debited Receivables (correct )
Credited Cash (wrong )( instead of sales )
Right
Receivables Dr
Credit Sales.

Surprised to see error in Becker's.

[mtaylo24]

Question 1 we do cash/new FMV for the test; Question 2 we do cash/(cash+new FMV)… Question 1 would only be 22% if we treated it like Q2. What's the difference?

On March 31, Winn Company traded in an old machine with a carrying amount of $16,800, and paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. On March 31, what amount of loss should Winn recognize on this exchange?
A. $0
B. $2,300
Answer (B) is correct.
The cash paid (boot) equals at least 25% of the fair value of the exchange. The $6,000 paid by Winn exceeds 25% of the $20,500 fair value of the exchange. Thus, both parties should treat the transaction as a monetary exchange, with gains and losses recognized in full. This gain or loss is calculated as the difference between the fair value of the asset given up and its carrying amount. Because Winn paid $6,000 for the difference between the fair values of the old and new machines, the fair value of the old machine is $14,500 ($20,500 – $6,000). Thus, a loss on exchange of $2,300 ($16,800 carrying amount of old machine – $14,500 fair value of old machine) should be recognized by Winn.
C. $3,700
D. $6,000

Amble, Inc., exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for another truck and $5,000 cash. The fair value of the truck received was $15,000. The exchange was not considered to have commercial substance. At what amount should Amble record the truck received in the exchange?
A. $7,000
B. $9,000
C. $12,000
D. $15,000
Answer (D) is correct.
A transaction involving nonmonetary assets and boot is monetary if the boot equals or exceeds 25% of the fair value of the exchange. In this exchange, the $5,000 of boot equals 25% of the $20,000 ($5,000 + $15,000) fair value of the exchange. Thus, the exchange is monetary. Accounting for monetary transactions should be based on the fair value of the assets involved, with gain or loss recognized immediately. The party receiving boot measures the asset received at the fair value of the asset given up minus boot. Accordingly, Amble should record the truck received at $15,000 ($20,000 fair value of truck given up – $5,000 boot received).

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)

[CPAIN2K17]

@aatutorial @mtaylo so even when you are PAYING boot, you can still recognize a gain? I thought for some reason you couldn't recognize a gain if you paid boot.

[aatoural]

@CPAIN2K17 – yes because it is accounted as a monetary exchange (just like when boot received).

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

[aatoural]

Q – 1
Dr New 20.5
Dr Loss 2.3
……Cr Old 16.8
……Cr Cash 6

Q – 2
Dr Cash 5
Dr New “plug” 15
……..Cr Old 12
……..Cr Gain 8

Im not sure I understand your last part of the question @mtaylo24.

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

[mtaylo24]

@aatoural, different denominators fmv vs. fmv + boot

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]

@cpain2k17 You have to do the 25% monetary test whenever it lacks commercial substance. You can recognize gain if > 25%

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)

[Author]

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