[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for FAR. 🙂

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

[GiniC]

10 days out, stress management is my first priority!
– dark chocolate (Ghirardelli mini's) in the freezer
– meditation tapes to make me NOT think of FAR on the way to sleep
– do something with other humans at least once a day (mostly brisk walks with one of my neighbors)
– eat for brain function (for me, lots of protein and veggies, avoid sugars – to each brain its own blend!)

Beyond that, I'm working half time this week and doing the Becker Final Review now, and will be on full vacation next week alternating problems between the sections I hate (cash flows, government/NFP) and ones I don't really mind. I figure I'll be numb by 9 AM on the 9th.

[mckan514w]

LOL- okay Thanks @hr I really needed to laugh this morning and thoughts of my nasty vomit notes did just that!!!! THANK YOU!!!

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[Mscfisher]

@ginic your plan sounds good I also have a very light load next week and I have A 4 Day weekend so I'm trying to avoid thinking of the days and just keep at it just keep at it. I think you and Mckan are very well prepared!

[Mscfisher]

Can someone please do the J/E for this? For both income and dividends?
At the beginning of the fiscal year, End Corp. purchased 25% of Turf Co. for $550,000. At the end of the fiscal year, Turf reported net income of $65,000 and declared and paid cash dividends of $30,000. End uses the equity method of accounting. At year-end, what amount should End report in its balance sheet for the investment in Turf?

DR: Investment in turf 550,000
CR: Cash 550,000

25% share of net income
DR: Cash 16,250
CR: Investment income 16,250

DR:INvestment 7500
CR: Cash 7500

How are dividends recorded?

[mckan514w]

Ginic- I like your plan- I have a reduced load this week and am also taking next week completely off…

Question on Troubled Debt Restructure- so if you restructure the terms of the debt- the creditor recognizes / reduces the receivable down to the PV of future cash flows based on the original contracted interest rate. Then the interest revenue they recognize will be equal to the carry amount of the receivable X the original interest rate… so what “happens” to the difference between what the debtor pays and the interest revenue recognized?

*** making up numbers here*****

So for Example- ABC owes XYZ 1,000 plus accrued interest at 10% per year. They restructure the loan, forgiving the accrued interest, lowering the principal to 600 and dropping the interest per year to 5%. PV of 600 at 10% equals 500. So XYZ would recognize Interest revenue of 50 (500X10%)– but XYZ only pays them cash of 30 (600 X.05)– so how is the difference recorded? As a discount / reduction of the receivable??? Does this make sense?

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[GiniC]

@Mscfisher –

Purchase:
DR Investment in Turf_______550,000 This becomes an investment asset (note – special category in IFRS but not US GAAP)
…..CR cash______________________550,000

End of year:
DR Investment in Turf________16,250 You don't receive this in cash; it adds to the ,asset – Turf retained earnings & my share of it go up
…..CR Equity in Turf Income________16,250 this is a revenue account on the income statement

Dividends:
DR Cash____________________7500 (you are RECIEVING cash, it increases the asset on the debit side)
…..CR Investment in Turf_________7,500 (dividends paid from Turf's Retained Earnings reduces their total value, so my share is reduced the same amount)

[Mscfisher]

@giniC … Thank you! I need to remember the share of net income is not actual cash received.

[GiniC]

@Mckan514w – I'm a little confused, maybe lost something in the paraphrasing?

Which entries are you trying to figure out – debtor or creditor?

Debtor: will account for the changes prospectively, like a change in estimate. The debtor will only show a gain on restructuring if the future cash flows are less than the carrying value of the debt at the time of restructure. So if your debtor's carrying value at the time of the debt is 1,100 (I'm assuming one year of overdue accrued interest) and the restructuring leaves them owing only principal of $600 and interest of 30, then the debtor shows a gain on restructuring of 470.

Creditor: always suffers a loss, and accounts for the value of concessions as bad debt expense. Could be the difference between fair value of an asset/equity surrendered and the loan amount, or the difference between the loan amount and the PV of future cash flows expected after restructuring.

[mckan514w]

@ginic- creditor side is the one I am asking about- – is I understand creditor recognizes loss for difference in amount owed and the PV of future cash flow. So essentially what I am asking (or think I am asking 🙂 ) is what are the entries each period that the debtor pays on the new terms.

I.e. lets say the new terms are 10,000 due in 5 years at 5% interest due annually. So each year the debtor pays the creditor 500 in interest.

The creditor will debit this 500 to cash and recognize (Credit) Interest Revenue for the PV of the new receivable X Old interest rate – where will the difference be recorded?

I will see if I can find a question for you…

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[mckan514w]

On December 31, Year Three, the Eveland Corporation owes a local bank $900,000 on a 6 percent note along with one year of accrued interest. The note itself comes due in exactly five more years. Because Eveland is undergoing financial difficulties, the two parties restructure the note. The accrued interest is eliminated and the principal of the note is reduced to $600,000 which is now due in 10 years. The annual interest rate drops from 6 percent to 4 percent ($24,000 per year) although the current interest rate on such risky loans is now 12 percent. The present value of these new future cash flows at a 4 percent annual rate is assumed to be $600,000 while at a 6 percent annual rate is assumed to be $480,000 and at 12 percent it is $260,000. What amount of interest revenue should the bank recognize at the end of Year Four?

A. 0
B. 19,200
C. 24,000
D. 28,800

Correct Answer D

According to the authoritative literature, the creditor (the bank) reduces the reported receivable to the present value of the future cash flows based on the interest rate that was originally established (6 percent in this case). Thus, the receivable is now reported as $480,000. Subsequently, interest revenue is recognized using the original rate and multiplying it takes the book value of the receivable. In Year Four, that is $480,000 times 6 percent or $28,800.

I understand the answer I just want to know how they would record the difference between the recognition of 28.8 and the actual cash paid of 24.

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[GiniC]

@mckan514w –

I believe that at the time the debt is restructured by modifying terms, the creditor changes the receivable to the PV of the future cash flows expected under the restructured plan, and debits the difference between the old plan (which was PV of future cash flows and had a carrying amount on the restructure date) and the new plan as bad debt expense.

The debtor only makes entries if there is a gain (sum of undiscounted future cash flows is less than carrying value of the debt). That entry would be a simple debit (reduction) to the payable and credit to gain on restructuring of debt.

If the debtor has no actual gain (paying the same or more than the current carrying value by a combination of time and interest adjustments) they make no entry at the time of restructuring – they simply change the payment amounts and tracking going forward.

[mckan514w]

ah okay that makes sense- I understand the debtor portion of it- and how they no longer recognize interest expense- I just couldn't get my head around the difference on the creditor side- I figured it had to be something like BDE- but just can't remember seeing / reading it anywhere- which of course is not to say it wasn't there- my brain is a sieve these days…. THANKS!

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[GiniC]

@mckan514w – in the Everland example, it's kind of like the way the “interest expense” is adjusted for amortizing bond premium and discount. They get one amount in cash but book a different amount to gradually bring the original issue price to meet the final principle amount.

[mckan514w]

Thanks! makes perfect sense- now just to remember it

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[Anonymous]

Heading to Prometric in 30 mins. Feel like I need a Valium haha

[Author]

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