[jeff]

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

[ahugemistake]

AP is a liability, and thus a decrease in a liability means you recognize the revenue, and increase the income.

FAR - 78*
AUD - 66, 79
REG - 73, 76
BEC - 79

[Mrs. CPA-to-be]

@ahugemistake – Maybe I'm over-thinking this but I'm not sure that makes sense to me. If you reduce your AP the offset is a reduction in cash…how is that a revenue? The AP seems to relate to expenses not revenues…maybe that is part of my confusion though?

B - ✔️ 70, 72, 82 (07/2014)
A - ✔️ 71, 76 (05/2014)
R - ✔️ 76 (10/2014)
F - ✔️ 56, 68, 73, 67, 77 (08/2014)

[ahugemistake]

You're right, I don't think I completely thought it through. The decrease in liability is added though. Here is a similar question

Question: Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni’s cash-basis pretax income is

Answer:

Higher by $36,000

150,000-20,000-16,000= $114,000 (accrual basis)

$150,000-$114,000= $36,000

Why is the increase in AP subtracted for accrual basis?

ANSWER: the increase in liab (i.e. AP) is deducted from income for accrual basis accy b/c if A/P goes up, that means for accrual basis accounting, you made the following JE:

Dr. Expense (which lowers net income)

Cr. A/P

asked here: https://www.another71.com/cpa-exam-forum/topic/far-study-group-january-february-2014/page/2

FAR - 78*
AUD - 66, 79
REG - 73, 76
BEC - 79

[Mrs. CPA-to-be]

@ahugemistake – That's exactly what I don't get though…it seems like the AP portion incurs the same treatment under both methods. Yes under the cash method you don't have a payable because you just expense and pay it, but even under the accrual method where you jump through the hoop of having a payable, you still debit an expense and credit cash, and by the time you incur the payable and actually make the payment, your AP entries net out to zero – so why does the change in AP balance make a difference between the two methods? Either way, you are incurring an expense, making a cash payment, and your AP nets to zero. I'm so confused!

B - ✔️ 70, 72, 82 (07/2014)
A - ✔️ 71, 76 (05/2014)
R - ✔️ 76 (10/2014)
F - ✔️ 56, 68, 73, 67, 77 (08/2014)

[IWPGirl]

@Mrs. CPA-to-be: I start to think from the point I know. Increase in AP means expenses are incurred but not paid. If they are not paid, expenses under cash method are understated. We deduct the increase in AP.

Decrease in AP is cash outflow… we are repaying vendors for expenses that are already recorded. So we add back this amount so the expenses are not double counted.

For increase in AR, the JE under accrual method: AR/Revenue. Since no cash invloved, no revenue was recorded under cash method. So to go from cash to accrual net income we add the increase in AR.

AUD - 90
REG - 78
BEC - 84
FAR - 91 woo hoooo!!

Becker and Ninja MCQ

[Melans]

@Bobcat – thanks! Does this mean the gain would be ignored till annual financials or would it be ignored till said inventory is sold?

AUD 7/30/12 73; 12/2/13 85
BEC 7/19/13 81
REG 8/2/14 83
FAR - Jan 2015

[Mrs. CPA-to-be]

@IWPGirl – I get the AR/revenue portion, it's the decrease in AP that has me confused. I guess I don't understand why you would need to add back the amount in order to avoid double counting it. The $60K net income you are starting with under the cash method and adjusting to the accrual method includes the cash out/expense for the decrease in AP, so it seems like you wouldn't have an adjustment for the decrease in AP to the accrual method since the treatment (cash out/expense incurred) isn't any different than the cash method.

B - ✔️ 70, 72, 82 (07/2014)
A - ✔️ 71, 76 (05/2014)
R - ✔️ 76 (10/2014)
F - ✔️ 56, 68, 73, 67, 77 (08/2014)

[lannebrown]

Hello Can someone please help me understand this question from Becker? What I don't understand is where they are getting the July 1st from in the explanation. I am assuming the contract is for a full two years because it does not say they were sold starting July 1st. Clearly I am missing something. Thanks

Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne's past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?

a.

$360,000

b.

$480,000

c.

$300,000

d.

$540,000

Explanation

Choice “b” is correct. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly (July 1 is average date), only ½ of the 40% of repairs will be in the current year.

Current year deferral ($600 x 1,000) $ 600,000

Earned in the current year (600,000 x 40% x 1/2) (120,000)

Deferral 12-31 $ 480,000

Choice “d” is incorrect. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly, (July 1 is average date) only ½ of the 40% of repairs will be in the current year.

Choice “a” is incorrect. Since repairs are incurred evenly during the first year (July 1 is average date) only ½ of 40% will be earned in the current year.

Choice “c” is incorrect. Revenue is recognized, and deferral reduced, as the service is performed.

AUD - 72,85 expires 12/31/15 yikes
FAR - 72,68,76!!!!
REG - 72, NOV 2015
BEC - 67,66,10/24/2015

[Anonymous]

CPA- 05142

Bunson Township was incorporated on 1/1/yr1, and is preparing its gvnt-wide Financial Statement for the year ended 12/31/yr1. The gvntal funds displayed a combined change in fund balance of $500,000 for that year and also had the following balances, data, or transactions:

Capital outlay of $250,000 partially funded by long-term debt proceeds of $225,000;

Current year depreciation of $60,000 on a capital asset base of $1,200,000;

Principal payments (on debt) of $40,000;

Interest payments (on debt) trough October 1 of $30,000;

Principal payments of $10,000 incurred through December 31 but paid on January 2;

Interest payments of $7,500 incurred through December 31 but paid on January 2;

Sales tax revenues of $30,000 associated with December 31, year 1 sales remitted to the State in February and paid to the Township in March.

The Government-wide changes in net position would be displayed as:

$455,000

$527,000

$587,500

$597,500

Correct Answer is $527,000

My question:

Why principal payments of $10,000 incurred through December 31 but paid on January 2 were not considered or omitted in the reconciliation?

[riascheme]

Hey y'all quick question regarding accrued int. payables:

On September 1, Year 1,Co. borrowed on a $1,350,000 note payable from Bank. The note bears interest at 12% and is payable in three equal annual principal payments of $450,000. On this date, the bank's prime rate was 11%. The first annual payment for interest and principal was made on September 1, Year 2. At December 31, Year 2, what amount should Co. report as accrued interest payable?

This was the solution:

Carrying amount, 9/1/Year 1 $ 1,350,000

Less: Principal payment, 9/1/Year 2 450,000

Carrying amount, 9/1/Year 2 900,000

12/31/Year 2 Interest payable is: $900,000 x 12% x 4/12 = $ 36,000

Why don't you consider the 12% interest the note bore during the first year? (1350 x 12%), if an annual payment for interest was also made on 9/1? Does my question make sense?

[sep7uakron]

@riascheme

The question says the first interest payment was made on top of the $450k principal payment on 9/1 year 2. So no interest is left on the balance sheet at 9/1 year 2. So, it would just be the principal of $900k * the adjusted rate for 4 months.

AUD: April 2014 - 85
REG: May 2014 - 83
BEC: July 2014 - 82
FAR: August 2014 - 83

I'M DONE!!

[riascheme]

@sep7uakron, so the question is saying the principal of 450,000 is already net of the interest? Aha…thanks.

[Anonymous]

cpastudent22,

is there an explanation? I don't even understand what's the question

[IWPGirl]

@Mrs. CPA-to-be: I woud draw T-accounts with numbers. You have two entries: Expense/AP and AP/Cash. If cash paid=expense, then there is no change in AP. AP balance goes down if cash paid >expense. In other words, expenses under cash method are overstated. So we add this amount back.

AUD - 90
REG - 78
BEC - 84
FAR - 91 woo hoooo!!

Becker and Ninja MCQ

[Anonymous]

@anjaja,

this is the question: The Government-wide changes in net position would be displayed as:

$455,000

$527,000

$587,500

$597,500

it's a reconciliation of gov't funds to gov't wide f/s

[Author]

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