[jeff]

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

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

[GiniC]

Thanks everyone! The T-Account and journal entry approaches are helping me see the logic and get to the right answer. I think I was getting everything twisted up between the fact that this is an expense combined with going from cash to accrual instead of accrual to cash. Kind of like a double negative, but not quite…

[CPA8675309]

I got this question in Wiley. Am I on crack? I'm counting the lease term as 4 years since it ends at the beginning of year 5. I understand the answer, just not how they're calculating the number of years during the term. C is the correct answer with the note that the lease term is 5 years.

I apologize in advance if this my copy/paste job doesn't look good.

Rapp Co. leased a new machine to Lake Co. on January 1, year 1. The lease expired on January 1, year 5. The annual rental was $90,000.
Additionally, on January 1, year 1, Lake paid $50,000 to Rapp as a lease bonus and $25,000 as a security deposit to be refunded upon expiration of the lease.

In Rapp's year 1 income statement, the amount of rental revenue should be
A. $140,000.
The $140,000 amount is the sum of the annual rental of $90,000 and the $50,000 bonus. But the bonus should not be recognized as revenue all in the first year.

Rent revenue is recognized on a straight-line basis for operating leases unless information suggests a more appropriate method.

The $50,000 bonus is allocated to each year of the lease term because the bonus was paid to secure the lease. The $25,000 deposit is never recognized as a revenue because it is an amount that must be paid back to the lessee. The lease term was 5 years. Thus, annual rent revenue was $90,000 + $50,000/5 = $100,000.
B. $125,000.
C. $100,000.
Rent revenue is recognized on a straight-line basis for operating leases unless information suggests a more appropriate method.

The $50,000 bonus is allocated to each year of the lease term because the bonus was paid to secure the lease. The $25,000 deposit is never recognized as a revenue because it is an amount that must be paid back to the lessee. The lease term was 5 years.
Thus, annual rent revenue was $90,000 + $50,000/5 = $100,000.

[GiniC]

@CPA8675309 I'm with you – I count the term as four years too. Have you sent it in to the Wiley support address?

[mtaylo24]

Must be a Wiley thing. Whenever I google the question all other sources say the lease expired jan 1, yr 6…

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)

[ng3926a]

It seems that the question suggests it's an annuity due, due on the first of the year. So you'll have 5 payments for every january 1st of the lease. (y1 to y5)

edit// but i guess it makes more sense if it expired on 12/31/5

[demarcon]

Maybe someone can help me with impairment of goodwill.

question:

Company A paid $500,000 for all of the outstanding common stock of Company B in a business combination initiated and completed on January 1, Year 3. On that date, the fair value of Company B's assets and liabilities were $720,000 and $260,000, respectively. Company B is treated as a reporting unit, and the entire amount of goodwill recognized in the business combination is assigned to it.
On December 31, Year 4, the company determined that it is necessary to perform the quantitative impairment test for goodwill. No impairment loss of goodwill was previously recognized. The fair value of Company B's assets and liabilities on December 31, Year 4, were $650,000 and $255,000, respectively. The fair value of Company B and its carrying amount on December 31, Year 4, were $420,000 and $430,000, respectively.

3. What is the implied fair value of goodwill on December 31, Year 4?

The answer they gave me is this:

$25,000. The implied fair value of reporting-unit goodwill is calculated as follows:
Fair value of Company B
$ 420,000
Fair value of Company B's assets
(650,000)
Fair value of Company B's liabilities
255,000
Implied fair value of Company B's goodwill
$ 25,000

Can someone explain to me how to calculate this? They just calculate it and I'm just here like “ok.. I guess so”

Edit: I figured it out. The FV of Company B is the “purchase price” that you'd pay today, and the implied FV is the new “purchase price” over the actual FV of net assets.

[ng3926a]

GAAP uses full good will.

First see if there is an impairment. If fair value is less than carrying value, there's one. If fair value is greater than there's none and therefore no impairment loss.

TO calculate the impairment –> impairment loss= Fair value of the reporting unit – Book value of the sub.
where the book value is = assets- liabilities.

I would read up on the full goodwill method for GAAP and partial good will method for IFRS.

[greenolive]

Hi everyone, I am going through Ninja MCQ's and found this question that asks for LCM but wants you to answer with the new rule based on NRV. I am so confused about what to do if a question like this comes on the test:

Based on a physical inventory taken on December 31, 20X1, Chewy Co. determined its chocolate inventory on a FIFO basis at $26,000 with a replacement cost of $20,000. Chewy estimated that, after further processing costs of $12,000, the chocolate could be sold as finished candy bars for $40,000. Chewy's normal profit margin is 10% of sales. Under the lower of cost or market rule, what amount should Chewy report as chocolate inventory on its December 31, 20X1, balance sheet?

A.
$28,000

B.
$26,000

C.
$24,000

D. $20,000

Answer=B
Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.

Chewy should report chocolate inventory on December 31, 20X1 at cost of $26,000, which is lower than the NRV of $28,000 (selling price of $40,000 less processing costs of $12,000).

I thought the answer would be D despite the new rules since aren't we supposed to just “roll with the question” on the exam?

[Sticky Nicky]

Can someone tell me why the year 2 stock split would be included here?

Based on the stock transactions below, what is the weighted-average number of shares outstanding as of December 31, year 1, that should be used in the calculation of basic earnings per share in financial statements issued on March 1, year 2?

Date Transactions
January 1, year 1 Beginning balance 100,000
April 1, year 1 Issued 30,000 shares for cash
June 1, year 1 50% stock dividend
February 15, year 2 2-for-1 stock split
March 15, year 2 Issued 40,000 shares for cash

A.
147,500

Incorrect B.
183,750

C.
295,000

D.
367,500

Earnings per share (EPS) is a comparison of the earnings applicable to common stock with the number of shares of common stock of that enterprise. Basic EPS is based on the weighted-average number of actual common shares (WACS) outstanding during the period. In computing WACS, retroactive application is given to stock splits and stock dividends. WACS is computed as follows:

1/1 100,000 × 1.5 × 12/12 = 150,000
4/1 30,000 × 1.5 × 9/12 = 33,750
183,750
Effect of retroactive split 2
367,500

[mtaylo24]

@stickyNicky, I always make that same mistake. I guess you always have to restate the y2 beginning balance as well as the current year transactions.

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)

[GiniC]

I don't understand the explanation for this Governmental question (CPA-00972 for those who have Becker – question 22 of 49 in the second set of MCQs)

Current liability 1/1 = 100,000
Claims pd during year = 800,000
Current liability 12/31=140,000

What amount should be reported for claims and judgments expenditures?

I understand expenditures indicates a governmental fund so modified accrual/current resources focus. What I don't understand is why the expenditure includes the change in current liability (the correct answer is $840,000). The Becker book didn't really tell me anything about this. Is this a place where you analyze the liability account like this:
Beg . . . $100,000 Bal 1/1
Add . . . 840,000 Plug – represents new liabilities over the year??? Why would this be the expenditure?
Subtract. (800,000) Claims paid
End . . . 140,000 Bal 12/31

[demarcon]

@GiniC You can accrue for the claims in the year that you incurred the liability to pay them, similar to an encumbrance. You've already incurred the expenditure, you just haven't paid it yet. Think about accruing for Salary payable and vouchers payable.

[Holly]

@Sticky Nicky If a stock dividend/split is after year end but before the financials are issued, then it would be included in the calculation.

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

[EfrainV24]

Hi All – sort of freaking out so figured I would ask in here. Using Becker, my lectures have switched to v1.3 instead of v1.2. My exam is 2/24 – does anyone know for sure which version I should be studying for this exam? Is it best to just reach out to Becker and get their advice???

[GiniC]

@Efrainv24 – I had the same issue and already sent the question in to Becker. The first answer was useless (it was “canned” and talked about the new 2016 review geared toward Q2 exams) but when I went back they confirmed. If you are testing in Q1 2017, you should follow the Version 1.3 text, not version 1.2. There are errata sheets/updates on the Becker website (I posted a link earlier in this forum, but I'm due on a conf call in four minute so I don't have time to dig it up again) to where you can find them. Changes aren't huge, and they simplify things in F3 (measurement period adjustments) and F6 (DTAs and DTLs are now all non-current, no more figuring it out by associated account).

Good luck!

[Author]

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