[jeff]

Welcome to the Q4 2017 CPA Exam Study Group for FAR. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your FAR exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

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

[EStone]

I am also very curious on what others think about where you should allocate most of your time. I am taking my exam on October 17th. I want to review the chapters that will show up the most on the exam and go through the sims based on what is most likely to show up on my exam.

Also, just venting here, I wish we could receive our scores back in a week! I hate that we have to wait months to get our scores! If I failed my test I'd want to take it again a few weeks later when everything is still fresh and before I start studying for a different section. If that were the case I wouldn't feel as much pressure going into my exam.

[gguzman]

I am kinda happy I failed REG. Now that I am working on FAR I know I should definitely get this one out of the way first.

The material makes me feel like an idiot, who doesn't know anything.

[Lentilcounter]

Howe Co. leased equipment to Kew Corp. on January 2, 20X1, for an 8-year period expiring December 31, 20X8. Equal payments under the lease are $600,000 and are due on January 2 of each year. The first payment was made on January 2, 20X1. The list selling price of the equipment is $3,520,000 and its carrying cost on Howe's books is $2,800,000. The lease is appropriately accounted for as a sales-type lease. The present value of the lease payments at an imputed interest rate of 12% (Howe's incremental borrowing rate) is $3,300,000. What amount of profit on the sale should Howe report for the year ended December 31, 20X1?

The answer is $500K and Ninja gives the answer below. I am looking at my notes from Becker which says that if the present value of the rent payments is equal to or greater than 90 percent of the fair of the asset, defer all gains and amortize over the leaseback period.

$3,300,000/$3,520,000 = 93.75% or if I use the sales price as defined by the problem, then I get
$3,300,000/$3,300,000 = 100%

I'm not denying the gain just not understanding why it isn't deferred and is instead reported on 12/31/20×1?

Sales-type leases give rise to manufacturer's profit to the lessor defined as the difference between the sales price and the carrying value of the asset.

Present value of lease payments (i.e. sales price) $3,300,000
Less carrying value of leased property 2,800,000
———-
Income to be reported for year ended December 31, 20X1 $ 500,000

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[kdcpa]

Someone who uses Gleim Testbank, will you please explain the simulation question 1 from Not for profit accounting and reporting?

[lam2848]

@Lentil,

That question is confusing. But isn't Howe the lessor (purchaser) and Kew the lessee (seller)? So Kew originally sold the equipment to Howe and is now leasing the equipment back. I think you're right for Kew's books that they wouldn't recognize a gain on the sale to Howe. But Howe would recognize a gain on the lease to Kew because it is a capital lease. But I'm not 100% sure if that is right.

[Anonymous]

@kdcpa
If you post the question here, I may help you. The question 1 in your review system may not be the same as mine. I believe they are randomly assigned.

[Anonymous]

@kdcpa

This guy has very good videos for pension accounting. https://www.youtube.com/watch?v=qas5m8pSlDo

Watch his videos (a few videos) and write your own notes (T accounts like in his video. but must use your own hand to write down) will be helpful.

[Katie]

@lentilcounter

Sorry for the delay…no time to do much but study these days

In the Becker text, dividends paid by sub in year one were 150K. The EJE removes the dividends through RE in the elimination of sub's equity and parent's investment. The sub was accounted for under equity method.

DR CS: 1,000,000
DR APIC: 400,000
DR RE: 500,000 (which includes 150K of dividends, 300K beginning RE, and 350K NI for the year)
CR Investment in Sub 2,700,000
DR BS Fair Value Adjustment: 200,000
DR Intagible Assets Fair Value Adjustment: 100,000
DR Goodwill: 500,000

In the SIM, dividends paid by sub in year one were 10K. In this example, the dividends were removed by a separate EJE which I pasted below. The sub was accounted for under acquisition method.

DR Dividend Income from Sub: 10,000
CR Dividends paid: 10,000

I am having trouble understanding the difference between the two.

[EStone]

Can someone please explain the difference between expenditures and encumbrances for Government accounting? I seem to be getting these two confused while going through multiple choice questions.

[Anonymous]

@EStone

The expenditure is government using the current financial resource. It is a true accounting account used in the government accounting system. For memorizing, you could think about it like expense, BUT don't get confused with expense. Expenditure and expense are two different terminology.

The encumbrance is for budgetary accounting (control of budget), not for financial reporting. Government uses it to set aside the planned use within budgets (artificially not really transfer resources to a separate place), so the staff (management and/or staff) can know how much resource is planed and how much left for them to use before reach the budget limit. The appropriation (budgeted expenditure) minus expenditure (real expenditure, resources had consumed) minus encumbrance (outstanding) is the leftover that the management can spend before reach approved budget limit or consider budget amendment.

Gov't has some kind of schedule like this,

Date Reference Encumbrances Expenditures Appropriations
Debits Credits Balance Debits Balance Credits Available Balance

[JJK94]

Hey,
Please check out this question:
On January 1, 20X6, Jones Construction, Inc. changed to the percentage-of-completion method of income recognition for financial statement reporting but not for income tax reporting. Jones can justify this change in accounting principle. As of December 31, 20X5, Jones compiled data showing that income under the completed-contract method aggregated $700,000. If the percentage-of-completion method had been used, the accumulated income through December 31, 20X5, would have been $880,000. Assuming an income tax rate of 40% for all years, ASC 250 requires that the cumulative effect of this accounting change to be reported by Jones as

A) An increase in construction-in-progress for $180,000 in the 20X5 balance sheet.

B) A decrease in the beginning balance of retained earnings for $108,000 in 20X6.

C) A cumulative effect adjustment of $108,000 on the 20X6 income statement.

D) An increase in ending retained earnings of $180,000 in 20X5.

the correct option is A) could someone please explain to me why???Thanks in advance

[kdcpa]

@ckcpa18 it is Community Service Inc. If you can find it otherwise I will try to post it here soon.

[EStone]

@ckcpa18 thank you for clarifying. It makes more sense now.

[Anonymous]

@kdcpa
Other selected transactions that occurred during Community's Year 2 calendar year:
Debt security endowment received in Year 2. Income to be used for community services
Face amount $90,000
Fair value at time of receipt 88,000
Fair value at 12/31/Year 2 87,000
Interest earned in Year 2 9,000

First, this is an endowment meaning it is permanently restricted unless it is a term endowment (temporarily restricted). In NFP, you will see a lot of endowment funds or annuity funds. Remember, if it tells you endowment, not term endowment, it means permanently restricted fund.

So here, when the NFP received the donation, it must be measured at FV of the donation date, the JE:
Dr Investment 88,000
Cr Perm donation/contribution (whatever name the .org may named it) 88,000

Even debt security is measured at FV (Fair value method) unless the FV can not be fairly estimated or readily known, then cost method could be used. Because most investments are less than 20%, NFP unlike for-profit could have big holding shares. NFP uses investment to produce some resources, actually like diversity of investment and may need to sell frequently (not called Trading but like that way).

interest earned, usually is cash, unless it's received in a profolio and already included in the YE fair value, that will be different story. Because the investment income is told to use for community service, this means temp restriction. Here, JE:
Dr cash 9,000
Cr interest income – temp restricted 9,000

@FYE, fair value, JE:
Dr unrealized loss on investment – temp restricted 1,000 (this is temp restricted as the investment income is temp restricted, unless you are told the investment income on this endow is unrestricted or also perm restricted, then the gain/loss just follow the rule applied to investment income.)
Cr investment 1,000 (now the carrying amount in the book is the fair value, 88000-1000=87000)

so the question 1 , contributions – permanently restricted, the answer is 88,000

[kdcpa]

@ckcpa18 thank you so much for clarifying. You explained it so well. Would you please explain questions 2, 4 and 5 from the same sim?

[Author]

Replies