[jeff]

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

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

[Holly]

Today is day two of studying Financial. I took Auditing Monday and take this test 3/6. Anyone out there with the same test date?

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

[mckan514w]

Could someone help me out with the explanation and journal entries for this question? I am not sure I understand the accounting of this one and why you record deferred charges?? and would the deferred charges and discount on note receivable be at their PV?

Jole Co. lent $10,000 to a major supplier in exchange for a non interest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should
record:
1) Discount on note receivable 2) Deferred charge
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Explanation
Choice “a” is correct. Absent established exchange prices or evidence of the note’s market value, the present value of a note with no stated rate or an unreasonable rate should be determined by discounting future payments using an imputed rate. The prevailing rate for similar instruments of issuers with similar credit ratings normally helps determine the appropriate rate. The purpose is to approximate the rate in a similar transaction between independent parties. The stated interest rate may be less than the imputed rate because the lender has received other stated (or unstated) rights and privileges as part of the bargain. The difference between the respective present values of the note computed at the stated rate and at the imputed rate should be accounted for as the cost of the rights or privileges obtained. Jole Co. will record a discount on the note. In addition, because it has received the right to purchase merchandise at a discount from prevailing market prices, a deferred charge (prepaid purchases) also should be recorded at an amount equal to the discount.

So would it be????

DR Note Receivable PV of 10,000
DR Deferred Charges 10% of market price
CR Cash 10,000
CR Discount on Note Receivable (plug)

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

[mcohen1993]

I believe the reasoning is not all expense is recognized, so you will make it as a LT prepaid expense.

REG: 91!!
BEC: 80!!
AUD: TBA
FAR: TBA

In the order I plan to take the exams.

[Mscfisher]

@mkcan514 where did you find this question I don't understand it at all.

[mckan514w]

@mscfisher- its a gleim question. and thank you for saying that you don't understand it either… this / their test bank is making me feel like a raving idiot who not only will never pass FAR but quite honestly doesn't deserve to!!! 🙂

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]

@mcohen1993 so what you are saying is that in exchange for me giving you 1,000 today you agree to pay me back with interest and I agree to buy merchandise from you at a set rate. Thus a portion of the note receivable is really a pre-paid expense of future merchandise to be purchased?

I don't know if that makes sense- it sort of makes sense in my head.

DR Note Receivable
DR Pre-paid Expenses
CR Cash
CR Discount note receivable

Then when the note comes due and I purchase the merchandise
DR Cash
CR Note Receivable
DR Inventory
CR Pre-paid Expense

Im sorry like I said above this is really making me feel super dumb!

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

[A1lessio]

@mcohen1993 – I used Becker for Regulation and Audit and I felt like the actual exam questions were shorter and more to the point. There were some questions that were almost identical. I think becker does a good job of making sure you understand the big picture.

I also use these free cpa questions a co-worker suggested from cpareviewforfree, but the FAR questions are ridiculously hard. For instance bond questions on troubled debt restructuring which was never even mentioned in the Becker book. I hope doing these questions pays off.

AUD (08/02/2016)

[Mscfisher]

#mkcan514 Michael Jordan's failure commercial is what i live by. Rest assure, this year we will both be able to say: I've failed and failed so many times that's why i succeed.

So b i like to put numbers to everything.

As i understand it even for non interest note u need the use the prevailing rate. So say pv of 1 @10% for 3 yrs is .75

DR N/R 7500
DR discount 2000
DR prepaid expenses 500
CR cash 10000

I'm just throwing in numbers but in that way the longwind explainatiom now makes sense. The actual discount is less bc of the right to purchase the merchandise.

[mcohen1993]

@mckan514w

Gleim is known to have a ridiculously hard test bank, one of my coworkers showed me an Inventory question that threw me for a loop.

@A1lessio

Thanks for the encouragement, just my usually worried self here. As you can see I scored high on REG and AUD, but I thought AUD was much harder and my score does NOT prove that. I work in Tax so it is a running joke at the office.

REG: 91!!
BEC: 80!!
AUD: TBA
FAR: TBA

In the order I plan to take the exams.

[mckan514w]

Thanks guys for the kind words- clearly I am having a “bad study day”. I just might have to print out that Michael Jordon quote!

@mscfisher LIGHTBULB! 🙂 that makes perfect sense- 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

[Anonymous]

@mcohen1993 Yeah the ninja questions are extremely close to the real exam. The reason is that ninja utilizes the AICPA test bank. Whereas, becker uses their questions as an additional teaching tool, hence they're more involved and cover multiple topics in a single question.

[Spartans92]

Conn Corp. owns an office building and normally charges tenants $30 per square foot per year for office space. Because the occupancy rate is low, Conn agreed to lease 10,000 square feet to Hanson Co. at $12 per square foot for the first year of a three-year operating lease. Rent for remaining years will be at the $30 rate. Hanson moved into the building on January 1, Year 1, and paid the first year's rent in advance. What amount of rental revenue should Conn report from Hanson in its income statement for the year ended September 30, Year 1?

a.
$120,000
b.
$90,000
c.
$240,000
d.
$180,000

Question: How come I have to use the total revenue 720k? At first I only accounted for the prepaid 120k * 9/12 = 90k which is incorrect. Answer is 180k. 720/3 * 9/12= 180. I get the math but not understanding why I take 720. Thanks

BEC- PASS

[Anonymous]

When you are ‘straight-lining' operating leases (from both lessor and lessee sides) you need to calculate the rent for the entire lease and then divide it over the lease term. Here is the calculation:

Year 1 12 x 10,000 = 120,000
Year 2 30 x 10,000 = 300,000
Year 3 30 x 10,000 = 300,000
total rent 720,000
Divide over lease term 36 months = 20,000 per month x 9 months = 180,000

[Spartans92]

So that's similar to like renting out and receiving several months free of rent. You have to account for the total revenue over the lease term.. Thanks!

BEC- PASS

[Anonymous]

Yes, the lessor and lessee calculate the rent expense or income the same exact way.

[Author]

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