[jeff]

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

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

[Holly]

Kent Co. filed a voluntary bankruptcy petition, and the statement of affairs reflected the following:

Book Value Estimated Current Value
Assets
Assets pledged with fully secured creditors $300,000 $370,000
Assets pledged with partially secured creditors 180,000 120,000
Free assets 420,000 320,000
$900,000 $810,000
======== =========
Liabilities (book value)
Liabilities with priority $70,000
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
$1,070,000
==========

Assume that the assets are converted to cash at the estimated current values and the business is liqui­dated. What amount of cash will be available to pay unsecured nonpriority claims?

Not sure why it didn't grab everything else. Why when you reduce cash for the partially secured creditors, the $80,000 remaining doesn't reduce the cash available for the unsecured creditors? I looked in my Becker book and didn't see anything so someone please tell me where to read about this.

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

[mckan514w]

deep breath @Kala! try to put kindergarten out of your head– it will still be there when you finish the exam resolved or not- there is nothing you can do about it right now so do not let it interfere with your thoughts!!!

Focus- breath – you. can. do. this.! GOOD LUCK! and let us know how it goes!

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]

Ugh I hate that question @HR- I think I have missed it at least 5 times- I can't seem to make the concept stick in my head.

I will re-read my notes and circle back to this but hopefully someone will have a good explanation. I know it has something to do with making the secured holders whole first and then moving down in order…

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

[Holly]

Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:

Yola Co. Zaro Co.
Cost $100,000 $126,000
Market values 120,000 150,000

How do y'all know if this has or does not have commercial substance?

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

[mckan514w]

Okay can anyone help me with this Deferred tax question? Why wouldn't they have a DTLiability in year 1 related to the profit they recognized on financial statement and then a DTL-asset in year 2 for the loss?

At the end of Year 1, Cody Co. reported a profit on a partially completed construction contract by applying the percentage of completion method. By the end of Year 2, the total estimated profit on the contract at completion in Year 3 had been drastically reduced from the amount estimated at the end of Year 1. Consequently, in Year 2, a loss equal to one-half of the previous year profit was recognized. Cody used the completed contract method for income tax purposes and had no other contracts. The Year 2 balance sheet should include a deferred tax:
A. asset and liability.
B. liability.
C. asset.
D. None of the answer choices are correct.

Correct Answer B.- For financial accounting income, the company uses the percentage-of-completion method, and since they are partway done with an overall profitable contract, they have recognized some income on the contract for financial accounting purposes. Thus, they have generated an income tax expense, but since the company uses the completed-contract method to recognize income for tax purposes, they have not recognized any income on the contract for tax purposes. Thus, the company has a deferred tax liability yet to be paid (when the income is recognized for tax purposes and taxed). All deferred tax liabilities are classified on the balance sheet as noncurrent.

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

[Holly]

@mckan514w this is how I thought of the question when I answered it.

Year 1 income tax completed contract – DTL (because financial statements use percentage of completion and it was a profit)
Year 2 income tax completed contract – DTL (because even though there is a loss, it's only one half of the recognized % of completion on the f/s – which means one half of the liability is still relevant for completed contract method.

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

[mckan514w]

LOL- I actually have written in big red ink- READ THE QUESTION next to that question @HR…

So the question essentially wants to know how much “freed up money” from the sale of assets is available to pay the unsecured creditors their $540.

First look at your secured holders- Your fully secured holders are owed 260 and you have assets that are secured against that amount in the amount of 370. So after you pay them off you have 110 left over.

Next look at your partially secured holders- they are owed 200- The assets secured against this amount are 120- so unfortunately for them this is the amount they will have to settle for…they can sue you for the rest and would probably loose but you are under no obligation in regards to liquidation procedures

So now at this point your secured holders have all been made whole or as whole as they get. So you now have 320 in free assets as well as your 110 in freed up assets from your fully secured holders for a total of 430 in which to pay your priority and unsecured people. After taking out the 70 and making your priority holder whole you are left with 360 to pay off your unsecured.

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]

Okay @HR- so what you are saying is that despite having a loss in year 2 the overall project is still profitable- thus a deferred liability still exist / will arise? So what would the liability amount be for?

Example- I recognize 100 in year 1 on financial sheet as profit- which at a 30% tax rate equates to a 30 DTL.

In year 2 I recognize a 50 loss- (1/2 of the profit I recognized last year). This may or may not be a “real loss” for tax purposes- the project still could be profitable– so what amount of DTL would I recognize??

Does that make sense or am I way over analyzing this??

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

[cdn]

This whole deferred tax asset/liability and differed tax expense just ruin my studying. Have to start again from beginning to understand it. Guys you are awesome with all your explanations. Hope we all pass it.

[mckan514w]

@HR- the exchange is to “facilitate trade”- thus it should be treated as not having commercial substance-

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

[Holly]

Ugh facilitate trade!! Crappy subject!

Your explanation – Next look at your partially secured holders- they are owed 200- The assets secured against this amount are 120- so unfortunately for them this is the amount they will have to settle for…they can sue you for the rest and would probably loose but you are under no obligation in regards to liquidation procedures.
This is the part I was having trouble with; I didn't know that once the asset value is used they were just out of luck.

As far as the accounting for the change in profit – never thought about it. I guess???? almost like a reversing entry to reduce the DTL and Income Tax – deferred. Someone chime in who knows so we don't get totally confused.

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

[mckan514w]

@HR its kind of like this- you agree to loan somebody a thousand dollars and they put up their car as collateral- you know the car is only worth five hundred bucks… you are only partially secured in your loan because you have agreed to a loan for more money than what they are in theory agreeing to pay back. They do not pay you your money- you go to court and take their car. The car is now yours and as far as everyone is concerned you have been paid off. You may feel gyped but it was essentially what you agreed to when you made the deal.

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

[Cruzer]

@NYaccountingstudent thanks, I will definitely check out that video of the foreign subs. Been listening to Bob's videos all week to and from work and some of the information is starting to stick good, just 27 hours is quite a bit to sit in front of a computer and watch them without actively doing something (i.e. MCQ's, writing NINJA notes, practicing SIMS)

[cdn]

Totally confused about this question:

Rein, Inc., reported deferred tax assets and deferred tax liabilities at the end of the previous year and at the end of the current year. For the current year ended, Rein should report deferred income tax expense or benefit equal to the:

A.decrease in the deferred tax assets.
B.increase in the deferred tax liabilities.
C.sum of the net changes in deferred tax assets and deferred tax liabilities.
D.amount of the current tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities.

The basic way that income tax expense is computed is to compute the correct measured values of the deferred tax assets and deferred tax liabilities at the end of the period. When the journal entry is prepared to pay the current income tax due, the necessary adjustments are made to the balances in the accounts of the deferred tax assets and deferred tax liabilities, and the income tax expense is the amount needed to balance that journal entry.

Thus, the income tax expense is basically the sum of the changes in those deferred tax asset and liabilities accounts. All deferred tax asset and deferred tax liability accounts are classified on the balance sheet as noncurrent.

[mckan514w]

@cdn if you go back a page or two in this thread there is a discussion on this- essentially the amount of deferred tax expense that you recognize at the end of the year is equal to the “plug” of Beginning Deferred Tax balance and End Deferred Tax balance.

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

[Author]

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