[jeff]

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

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

[AR]

Good luck stilgoin!

[mckan514w]

Can someone help me out with the journal entries for a sales-type lease? I am confused on the recording of payments…

So at inception you:
DR Lease Payment Receivable
DR COGS
CR Sales Revenue
CR Unearned Sales Revenue
CR Asset/Inventory

Then at payment dates what would be your entries to recognize interest revenue and decrease the lease receivable? I can't seem to get it to balance… for instance the annual payment is 100 10% interest

DR Cash 100
CR Lease Receivable 90
CR Interest Revenue 10

But you would still need to Debit Unearned Sales Revenue wouldn't you?

does this make sense? I am clearly very confused 🙂

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

You're over-complicating it! I find it less confusing if I separate the entries.

At inception, you have the “sale”. It'a a sale, you're giving up the asset – no unearned revenue!

DR Lease Payments Receivable Sum of lease payments
. CR Unearned Interest Income Interest rate x beginning CV
. CR Sales Revenue Selling Price

Then you take the item off inventory:

DR Cost of Goods Sold CV
. CR Inventory CV

At each payment, you are receiving the lease payment, you allocate the cash to the lease obligation and to interest:

Recognize the payment
DR Cash
. CR Interest Receivable
. CR Lease Receivable

Those entries are straight out of my Wiley textbook. I left out the Executory costs, but those shouldn't be too difficult – debit cash, credit payable

[GiniC]

There's a decent example here:

[mckan514w]

No link showed up Ginic could you repost if you get a chance??

I am not following the interest receivable account here??? because at some point you are going to have to debit the interest revenue out of un-earned to recognize it on the income statement…

For Example lets keep it real simple and say your total lease receivable is 300 and interest revenue is equal to 100

Beg Entry
DR Lease Receivable 300
CR Sales Revenue 200
CR Unearned Interest Revenue 100

There is only one payment for 400
DR Cash 400
CR Lease Receivable 300
CR Interest Receivable 100

You now have 2 credits to Interest accounts one for unearned revenue and one for interest receivable. There is no way to close both of them out…

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]

Thanks, Mckan. I appreciate your help!

[GiniC]

Sorry about that McKan – let me try that again: AccountingExplained

In case it didn't come through, here it is as text: https://accountingexplained.com/financial/leases/

[GiniC]

@McKan514w – now I'm looking at my Becker materials beside my Wiley text (a couple of years old) and they don't match up. Becker has that unearned interest credit, but Wiley doesn't.

I sent the question in to Becker.

[aatoural]

On January 2, Year 1, Blake Co. sold a used machine to Cooper, Inc. for $900,000, resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed a $750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, Year 2. Blake appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 2, Year 2, of $325,000, which included accrued interest of $75,000. What amount of deferred gross profit should Blake report at December 31, Year 2?
a.$180,000
b.$225,000
c.$150,000 CORRECT
d.$172,500

My question is the way to get the answer. i got it correctly but what I did was:

GP% = 270/900 = 30%
Annual installment in year 2 = 250 * 30% = 75

Deferred GP for year 2 = 75 deferred GP + 75 interest earned = 150 total

Now, Becker does this:
Receivable ($750,000 − $250,000) $ 500,000
Gross profit % ($270,000 ÷ $900,000) 30%
Deferred gross profit $ 150,000

Is my way wrong and I just got lucky or is it a valid way of calculating it?

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

[AR]

@ aatoural

Gain calculation is independent of interest.
Gain has to be realized in proportion to the collection, so whatever principal receivable is remaining will be used in computing deferred gain.
So yes, your answer just happens to match in this case 🙂

[GiniC]

AR beat me to it – but I was going to say you got lucky too. BUT – if you get the right answer on the exam, it really doesn't matter how you did it!

[aatoural]

@AR – thank you, I wanted to make sure.

@Ginic – LOL, but I would rather be sure on exam day cuz then I have even more nightmares bfore score release date.

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

[mckan514w]

@GiniC thanks so much for your post!!! and the links… the becker one is pretty similar to what my gleim and my rogers shows- Really appreciate you taking the time to look at this- let me know if you hear anything from Becker- through google I came across some random fin acct. professors lecture notes on the subject and it also didn't show how to reverse the credit- I might send a random email to him asking for clarification as well- I know its probably not a big deal about how to clean up the entry / I am way over thinking this but it just bothers me- if that makes sense 🙂 I just keep thinking I KNOW I will get a JE SIM on this and be screwed ha ha ha ha…

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 WTF???? someone please help!!! 1. Not only do I not understand the math here (why are you debiting RE and APIC for what you are debiting them for) BUT I also don't understand why are you recognizing a gain ?? I didn't think that you recognized a gain on transactions involving your own stock!!!???

The following accounts were among those reported on Luna Corp.’s year-end balance sheet:

Securities (market value $140,000) $  80,000
Preferred stock, $20 par value 20,000 shares issued and outstanding 400,000
Additional paid-in capital on preferred stock 30,000
Retained earnings 900,000

On January 20, Luna exchanged all of the securities for 5,000 shares of Luna’s preferred stock, which were not mandatorily redeemable. Market values at the date of the exchange were $150,000 for the securities and $30 per share for the preferred stock. The 5,000 shares were retired immediately. Which of the following journal entries should Luna record in connection with this transaction?

A.
DR Preferred stock 150,000
CR Securities 80,000 
CR Gain 70,000

B.
DR Preferred stock $100,000
DR Additional paid-in capital 7,500
DR Retained earnings 42,500
CR Securities $80,000
CR Gain 70,000

C.
DR Preferred stock 100,000
DR Additional paid-in capital 30,000
CR Securities 80,000
CR Additional paid-in capital 50,000

D.
DR Preferred stock 150,000
CR  Securities 80,000
CR Additional paid-in capital 70,000

Answer (B) is correct. The reacquisition and retirement of the preferred stock result in debits to preferred stock at par (5,000 shares × $20 = $100,000) and additional paid-in capital [(5,000 ÷ 20,000 shares) × $30,000 = $7,500]. The transfer of the non-monetary asset to a shareholder should be recorded at the fair value of the asset transferred, and a gain should be recognized (credit securities at their $80,000 carrying amount and credit a gain for the $70,000 excess of fair value over the carrying amount). The balancing debit is to retained earnings for $42,500.

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]

@mckan515w BREATHE! So they're definitely going to be some questions on the exam that will throw us for a loop I think what's important is trying to get a strategy together and eliminate the obvious wrong choices that's what I've done here I immediately and eliminated A&D bc there was no APIC. So first think of it as them selling the securities. This is when the gain will be recognized. The stock that they bought back was worth $150 and the Securities were at a cost of 80 so immediately there will be a $70,000 gain. Remember anything above the par value is going to be additional paid in capital but you can't just debit all the additional apic because they have only recouped one fourth of the 20,000 stocks issued. 1/4 of the 30k APIC is 7250. Then just block the number I really hope this helps. The gain is from the Securities not from the stock.

[Author]

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