[jeff]

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

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

[GiniC]

@HRSexton – Becker F3-42 has a chart on this – still deciphering…

[GiniC]

That was about acquisition/equity. F3-20 is one of the NEW pages, and that is where you saw it being a prospective change when going UP from cost to equity. It doesn't mention going from equity to cost though

[mckan514w]

@mtaylo24 yeah understand that but in this question they are doing a current period adjustment for the warranty expense which would have / should have been a retrospective application….

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

[mtaylo24]

@mckan514w, My bad, I misunderstood what you were asking. But I found this question should help…

For Year 1, Pac Co. estimated its 2-year equipment warranty costs based on $100 per unit sold in Year 1. Experience during Year 2 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported

A. In Year 2 income from continuing operations.
Answer (A) is correct.
The effect of a change in accounting estimate is accounted for prospectively, in the period of change, if the change affects that period only, or in the period of change and in future periods, if the change affects both. A change in warranty costs is considered a change in estimate and not the correction of an error. Thus, it affects current and future income from continuing operations.
B. As a cumulative amount, net of tax, below Year 2 income from continuing operations.
C. As an accounting change retrospectively applied to the Year 1 financial statements.
D. As a correction of an error requiring Year 1 financial statements to be restated.

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[mckan514w]

ah thank you! @mtaylo– but now I am confused why this answer calls warranty a change in estimate and the one above calls it an error– very frustrating….

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 first problem, the warranty costs were not accrued in a prior period for which the statements were already issued – that is an error, it violates the matching principle.

In the second problem, there is a change in the CURRENT PERIOD to information that impacts the amount of the estimate – it's not something you did incorrectly in a prior year. In this case it is just a change in estimate. Estimates change all the time, it would be totally impractical to restate financials every time foreign currency exchange rates change, or a company finds out its products break more or less often than expected.

Make sense?

[mckan514w]

okay then that begs the original question- if it is a change in error then why is the correction being made in current period- when it should be made retrospectively- thus the prior period adjustment should be made to 2001 statements / earliest beginning retained earnings shown… thus how / where in this question are you told / suppose to infer that this statement is the earliest shown… refer to this question…

The Year 1 financial statements of Bice Company reported net income for the year ended December 31, Year 1, of $2 million. On July 1, Year 2, subsequent to the issuance of the Year 1 financial statements, Bice changed from an accounting principle that is not generally accepted to one that is generally accepted. If the generally accepted accounting principle had been used in Year 1, net income for the year ended December 31, Year 1, would have been decreased by $1 million. On August 1, Year 2, Bice discovered a mathematical error relating to its Year 1 financial statements. If this error had been discovered in Year 1, net income for the year ended December 31, Year 1, would have been increased by $500,000. What prior adjustment, if any, should be noted for the year ended December 31, Year 2, because of the items noted above?

C. $0.
Answer (C) is correct.
A change from an accounting principle that is not generally accepted to one that is generally accepted should be accounted for as the correction of an error. Corrections of errors in financial statements of prior periods must be accounted for as prior-period adjustments and thus excluded from the determination of net income for the current period. Accordingly, the mathematical error and the change in accounting method have no effect on Year 2 net income.

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

The error correction is made by adjusting BEGINNING RETAINED EARNINGS of the earliest year presented. Whether or not there are comparative statements presented, the error correction won't touch the income statement and net income. It will be made ONLY on the statement of retained earnings.

Beginning retained earnings, Year 2 –
– ending RE from Year 1 xxx
– correction 1
– correction 2
Corrected beginning retained earnings, Year 2
Add Net Income from Year 2
Subtract dividends declared/paid Year 2
——————————————–
Equals Retained earnings Year 2

[aatoural]

I feel like my schedule is going the opposite as everybody else's. Or is it that I just can't study during bed hours? @namstut – I envy how you can study at 3 am OMG.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[mckan514w]

okay thanks- still think it is a poorly worded question- its very frustrating to know the concepts and miss things because of wording…

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

[julian31]

If someone could point me in the right direction on this one that'd be great.
Richards Inc., a U.S. company following GAAP, pays a vendor cash of $16,050 at the beginning of the year for goods that Richards will ultimately include in its inventory. In addition, Richards associates the following costs with the purchase:
Freight in: 500
Freight out: 150
Normal spoilage: 300
Abnormal spoilage: 450
Marketing costs: 100
At the end of the year, Richards is valuing the inventory in current dollars in order to prepare its financial statements. As of year-end, the inventory would have a net selling price of $17,100 with costs to complete and sell of $600. The same inventory on that date would cost Richards $16,250. Richards assumes a normal profit margin of 10% on all sales.
1. Prepare the journal entry for the inventory acquisition.
2. Determine the lower of cost or market value for the inventory
3. Prepare the year-end journal entry for the inventory.
4. If Richards used IFRS, determine the lower of cost or net realizable value for the inventory.
5. Prepare the year-end journal entry for the inventory under IFRS.
I've honestly been torn on this question for an hour.. I know that once I can figure out how to value the inventory at cost I can pretty much solve for the rest I would think that the inventory at cost is 16,550 (includes freight in) replacement cost is 16,250. nrv is 16500 and nrv-pm is 14790, am I on the right track with this?
Also the initial journal entry would be debit inv, credit cash. #3 and 5 would either be debit inventory loss or inventory/ credit inventory gain or inventory.. right?

[GiniC]

@aatoural –

You're not alone on that schedule – I get up around 5 (but can't stop doing “household” things while I get breakfast) and start studying by 6 or 6:30. I'm on PTO now to final-prep, so I'm beating on it until 8 or 9 at night, but I HAVE to get my 8 hours or I can't think straight, get anxious, waste time yelling at the computer, etc. I'm far better off keeping my schedule regular.

I'm just not “feeling it” anymore. I keep reviewing notes and doing MCQs and sims, but the excitement/spark/anxiety is mostly not there. I'm hoping I'm doing enough, but I've been on high alert for these exams nearly constantly for so long, I think my brain has just declared “enough – you get no more adrenaline, you junkie!”

[aatoural]

Karr, Inc. reported net income of $300,000 during the current year. Changes occurred in several balance sheet accounts as follows:
Equipment
$25,000
increase
Accumulated depreciation
40,000
increase
Note payable
30,000
increase
Additional information:
During the year, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
Depreciation expense for the year was $52,000.
In Karr's statement of cash flows, net cash used in investing activities should be:
a.$35,000
b.$12,000
c.$22,000
d.$2,000 CORRECT Equipment sale of $18,000 – $20,000 equipment purchase

How did they get to the 18 and 20?

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[GiniC]

@julian31

You're close, but inventory cost will include the product cost, freight in (but not out, that's a selling cost), and normal spoilage. Abnormal spoilage is an expense separate from the inventory, and marketing costs are part of selling.

So I see your product cost as 16,850

Lower of cost or market, you compare
– replacement (16,250);
– Net Realizable Value – what you can GET for the product – is Selling price less cost to complete (17,700); and
– “floor” (15,990); middle = market is replacement
Compare Cost (16,850) to market (16,250), you will use Market (16,250).

[GiniC]

@aatoural –

I got the 18 and 20, but I don't understand why they ignored the 25,000 increase in equipment balance.

The equipment sold will have this journal entry:

DR Cash received(Plug) 18,000
DR Accum Depr._________12,000
……CR Equipment______________25,000
……CR Gain on Sale Equip_____ 5,000

The equipment purchased will have this entry:

DR Equipment_______50,000
……CR Note Payable __________ 30,000
……CR Cash Paid _____________ 20,000

I see the rest of the info as
Equipment ______________________ 25,000 increase ______ Investing Cash Outflow
Accumulated Depreciation________ 40,000 increase ______ Operating Inflow
Note Payable____________________ 30,000 increase ______ Financing inflow

So why is the investing cash used (2,000) instead of (27,000)???

[Author]

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