[jeff]

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

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

[GiniC]

I have three topics to cover before foreign currency, so I'll be checking back in a few hours…

[Holly]

The following information pertains to Smith's personal assets and liabilities on December 31, 20X1:

Historical Estimated Current Estimated Current
Cost Value Amounts
———- —————– —————–
Assets $500,000 $900,000
Liabilities 100,000 $80,000

Smith's 20X1 income tax rate was 30%. In Smith's personal statement of financial condition on December 31, 20X1, what amount should be reported as Smith's net worth?
A. $294,000
B. $420,000
Correct C. $694,000
D. $820,000

Anyone have a pretty simple explanation for this question? I don't understand why it's the difference between historical and current regardless of which is higher? I don't know if that makes sense. Why would it be 900-500 and 100-80, instead of 900-500 and 80-100?

BEC - 79
REG - 85
AUD - 5/27/16

[GiniC]

@HRSexton – ugh – Becker doesn't even give an example of one, I really glossed right over those! They aren't even covered in my Wiley Intermediate text.

The way I read it, you are supposed to use fair value of assets – fair value of liabilities, and include a DTL as though the net assets had been sold.

900,000-80,000=820,000*.3=246,000 assumed DTL

So net worth should be 820,000-246,00=574,000. Not one of the choices.

Ninja doesn't give an explanation of the correct answer???

[GiniC]

OK, can somebody stick a pin in my terror of foreign currency hedging? I understand how to convert from one currency to another, but that's about where my comprehension is stuck. Trying to understand whether currency going up will make me lose, or what the derivatives will do – it's (sorry) like a foreign language!!! I was hoping to be mostly done with this after BEC. 🙁

If I can stop fearing the questions, maybe the knowledge will stick?

[Holly]

Net worth is the excess of the estimated value of assets over the estimated amounts of liabilities, reduced by the tax associated with the difference between the estimated values and the tax basis of assets and liabilities. Smith's net worth is computed as follows:

Estimated value of assets $900,000
Estimated amount of liabilities (80,000)
Tax on difference between estimated
values and tax basis:
Assets ($900,000 – $500,000) $400,000
Liabilities ($100,000 – $80,000) 20,000
——–
$420,000
Tax rate 30%
——–
Tax (126,000)
———
Net worth $694,000
=========

BEC - 79
REG - 85
AUD - 5/27/16

[Holly]

That's the answer explanation of the net worth question

BEC - 79
REG - 85
AUD - 5/27/16

[GiniC]

OK, that actually makes sense. I was reading my Becker explanation completely wrong, and the online source I found wanted tax on the assets as if sold (which realistically IS the difference between FV and CV). Tax on the difference for liabilities isn't gelling though, unless they figure you could “sell” the debt for a gain somehow and owe tax?

[Holly]

I don't know. I'm going to go back when I get to that one in the Missed Last Time Seen category and really think about what they're doing. I doubt we'll see anything on the test, though (wishful thinking?)

I have officially seen every single question in NINJA! Whew!

BEC - 79
REG - 85
AUD - 5/27/16

[GiniC]

@HRSexton Wow!!! You are moving MUCH faster than I am. May we both succeed with our different methods!!

[Holly]

I sure hope so! I think having to take this test twice should be considered cruel and unusual punishment!

BEC - 79
REG - 85
AUD - 5/27/16

[mckan514w]

oh I hate hate hate economics and foreign currency— I memorized and powered through for BEC:

If you buy a contract for a foreign currency you want this currency to go UP in value because you are then able to buy it for lower and sell it for higher….

If you sell a contract for a foreign currency you want the currency to go DOWN in value because then you will be paid more money

If you BUY merchandise and record a payable you want prices to go DOWN because you will pay less

If you SELL merchandise and record a receivable you want prices to go UP because then you will make more

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]

@hrsexton that must be a great feeling I am 1200 questions away from that and I plan to do about 75% of them this weekend even if it is just to see the question. I've already seen every question in Becker but during my last week I really want to focus a lot on my simulations. The madness begins 7 days and counting.

[GiniC]

@mckan514w Thanks! I'm saving that to read the morning of the exam!

[mckan514w]

Try three times- now that is beyond cruel and unusual…. I am lagging way behind in Ninja but have spent the week going through the “highlights” of each chapter reducing my notes down to what I don't know- I plan on picking Ninja back up this weekend and then just hammering the MCQ's until I want to barf…. The happy news is I will be done and on my way to a BIG FAT DRUNK next week this time….

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]

Kool! The Becker Final Review lecture just gave what (for me) is an even easier way to follow what @mckan514w just posted about which direction means what in foreign currency!

If you have A/P (a liability) in a foreign currency, and the currency goes down, that means the value of your liability went down L down = good/gain, I pay less to settle it!

If you have A/R (an asset) in a foreign currency and it goes down, my asset value just went down – which is bad, a loss, I'll get less for it when I'm paid.

The converse of each is true, of course.

For the contracts, I can hear my Mom in the back of my head – “Buy low, sell high!” so when buying futures/forward contracts, I want the value to go up before settlement so I can “sell high”. Works for the selling of currency contracts too, you want to sell the contract high end then have it go down when you collect (buy the currency)

Maybe those will click in someone's head…

[Author]

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