[jeff]

Welcome to the Q1 2016 CPA Exam Study Group for FAR.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

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

[MaLoTu]

Is anyone else really curious to see if the exam takers will have the same experience with FAR as these last Q4 Exam takers? I am hoping the material they are testing will be less “brutal”!

[Anonymous]

@MaLoTu almost all I have heard here and were I work is frustration and dissapointment. I hope that is bc they did good on the testlets. Today I am 1 month away from doomsday and I am starting to feel the pressure. It will be good to hear good stories on Dec 9th!!

[Anonymous]

Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years. What amount of expense should Standard report on its income statement for the first full year?

A.
$0

B.
$2,000,000

C.
$3,333,333

D.
$10,000,000

The answer is C. The question says the amount was spent AFTER development stage. Is not the amount spent after development stage expensed?

[Larry]

Cortes, if I remember correctly, any amount spent before technological feasibility is expensed. Any amount spent after that is capitalized.

REG - 82
FAR - 78
BEC - 76
AUD - 8/27/16

[Anonymous]

Thanks Papogator24 maybe I am over thinking this but according to the Ninja glossary when it is for internal use there are three stages and different applications in them:

Three stages in the development of internal-use software:

Preliminary project stage
Application development stage
Postimplementation-operation stage

FASB ASC 350-40-30 provides that all costs incurred during the preliminary project stage should be expensed as incurred. DURING the application development stage, costs associated with developing or obtaining the software should be CAPITALIZED, while costs associated with preparing data for use within the new system should be expensed. Costs incurred during the postimplementation-operation stage, typically associated with training and application maintenance, should be expensed.

And this was the MCQ explanation:
Costs incurred to develop software for internal use are capitalized after the application development stage is reached (in accordance with FASB ASC 350-40-35-4). The costs are amortized over the benefited periods—three years in this case.

Maybe I am understanding this wrong?

[jonm857]

Hello all –

Here is a question from Becker F-2 that I need some help with. I don't get the explanation given for the answer.

—————————

“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. $300,000
B. $360,000
C. $480,000
D. $540,000

Answer: C. 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.

—————————–

In my mind, I'm thinking okay… 40% of costs are incurred in the first year, so just take $600,000 sales and multiply by 40% to get $240,000. The difference of $360,000 will be the deferred revenue at Dec. 31.

I don't understand why the answer reduces this by 1/2.

Please help. I'm dumb.

Thanks!

B - 81
A - 87
R - 73
F - July 5th

[Steve Brule]

What helped me with these types of questions is to just remember if it says “evenly throughout the year”, pretend it's only for six months, or multiply by .50 etc. I even made flash card to help me remember how to calculate this type of question, and it helped me a lot. I never understood the logic behind it, but started getting these questions right after I remembered that. Btw, you're not dumb. FAR just makes us feel dumb lol.

FAR - 86
AUD - 99
REG - 88
BEC - 08/29/2016

For your health!

[jonm857]

@Dr. Steve Brule

I'm with you, but there has got to be some simple way of explaining it FOR YOUR HEALTH!!!

B - 81
A - 87
R - 73
F - July 5th

[Anonymous]

jonm857 that mcq tripped me up. I got caught up trying to mathemathclly see the explanation but never could. I don't know if you haven't seen it yet but I found this link that somehow explains the calculation (and some other ways to calculate deferred revenue on contract services)

https://docs.oracle.com/cd/E39583_01/fscm92pbr0/eng/fscm/sbil/concept_UnderstandingtheDeferredRevenueAccountingProcess-c9f8dc.html

From what I understand it is just one way to calculate deferred revenue bc of the problem that comes with revenue recognition on contract services.

[Anonymous]

I found/find Govt. Acctg so challenging and non-sensical, but I finally devised a very simple mnemonic to get me started (each of the lines below on a separate line):

E . . . . .. …
then later . . .
……………E
………….. V.

to “reserve” funds for payment: Debit Encumberance then Credit “Reserve for Encumbrance”
..
later to actually make the payment, reverse: Debit “Reserve for Encumberance, then Credit Encumberance
and also Debit “Expenses” or “Supplies” or “Downpayment” and Credit “Vouchers Payable”

The E, , , E,V is my memory device.

[jonm857]

@Cortes

Thanks for the link!

B - 81
A - 87
R - 73
F - July 5th

[Anonymous]

During the year, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the year-end income statement?

A.
Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: all interest incurred

B.
Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: interest incurred after completion

C.
Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: interest incurred after completion

D.
Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: all interest incurred

The ans is D and in spite of this being a simple mcq I am a bit confused. Should not the interest incurred for the construction of the machinery held for use be capitilized for the construction period of the machinery?

[MaLoTu]

@cortes – I don't have an answer for your confusion, but this is just one of those things that you have to remember because they said … just like that stupid contract warranty question that only accounts for 6 months!

I will say it again … I hate FAR! LOL

[Anonymous]

MaLoTu its crazy… If I am not wrong this other mcq (which I got right after the prior one that I posted) contradicts the prior one:

On January 2 of the current year, Cruises, Inc. borrowed $3,000,000 at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1,300,000 are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year?

A.
$0

B.
$300,000

C.
$600,000

D.
$900,000

The ans is A and this is the explanation:

The cruise ship qualifies for interest capitalization. Qualifying assets, per FASB ASC 835-20-15-5, include “assets that are constructed or otherwise produced for an entity's own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).”

The down payment means that the weighted-average accumulated expenditures each year will be at least $3,000,000. Therefore, all of the interest on the note is capitalized during each year of construction. No interest expense related to the note should be reported in the income statement during the construction period.

[MaLoTu]

I think the difference is the internal use vs. used for sale … the cruise ship will be used completely to be “sold” in the sense of making money. They will not use the cruise ship to perform internal functions.

[Author]

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