[jeff]

Welcome to the Q2 2016 CPA Exam Study Group for FAR.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

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

[KJ]

Good luck MaLoTu for your exam, nail it!!!

FAR - August 2016
AUD - September 2016
REG - October 2016
BEC - November 2016

Remember: "Everything should be made as simple as possible, but not simpler." - Albert Einstein

[MaLoTu]

Thanks, kanwal … sorry about the FAR outcome. You will get it next time, you know enough to pass … unfortunately luck also seems to play a role.

[MaLoTu]

Might not get the answer to this before I leave, but where the heck did they get 50,000 credit to OCI?

At the beginning of Year 1, a company amends its defined benefit pension plan for an additional $500,000 in prior service cost. The amendment covers employees with a 10-year average remaining service life. At the end of Year 1, what is the net entry to accumulated other comprehensive income, ignoring income tax effects?
a. A $500,000 debit.
b. A $450,000 debit.
c. A $450,000 credit.
d. A $550,000 credit.
Explanation

Choice “b” is correct. The initial journal entry for a prior service cost will include a debit to other comprehensive income of $500,000 and a corresponding credit to the pension plan asset/liability. The amortization of the prior service costs will be $50,000 for Year 1, which is the beginning balance of $500,000 divided by the average remaining service life of 10 years. The amortization entry will debit net periodic pension cost and credit other comprehensive income for $50,000. The net effect to other comprehensive income will be a debit of $450,000.

[Titleistg0lfer]

@MaLoTu report back and let us know how it went!! I'm sure you did great!

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[thebigguy1992]

Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years. What amount of expense should Standard report on its income statement for the first full year?

the answer is 3,333,333. I thought since it was a software expense after the development stage, it should be capitalized and thus the answer is 0 for nothing expensed. Is the answer 3,333,333 because it is for INTERNAL use and therefore is expensed?

[Titleistg0lfer]

It is capitalized, but you have to amortize once you capitalize the asset thus $10,000,000 / 3 = $3,333,333.

When they say don't expense, but capitalize they just mean don't expense the entire $10M that year but instead capitalize and amortize over the useful life.

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[thebigguy1992]

For capital leases and operating leases:

When there is a BPO or transfer of ownership at the end of the lease = depreciate over the useful life? And when there is no mention of BPO or transfer of ownership, but it meets the 75% or 90% test, depreciate over the lease life, not the useful life, correct?

And for operating leases what is it – since it meets neither of the tests, depreciate over the lesser of the useful or economic life?

[Titleistg0lfer]

So for Capital (Finance) Leases if it meets the requirements, and in the questions it acts as though they are going to utilize the BPO and acquire the asset then you depreciate over the economic useful life of the asset. If it's capital, but very unlikely they will utilize since no BPO then depreciate over life of lease.

Operating doesn't have depreciation because you don't capitalize. You only expense the lease payments.

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[thebigguy1992]

for temporary declines in inventory – if it is temporary decline and expected to be reversed, you don't recognize anything. if it is temporary decline in Q1, and reverses in Q3, and improves 10% over its original price, do you still not recognize the gain because of conservatism?

Also, if it is expected to be a temporary decline, but you realize it is a permanent decline by Q3, then you recognize the loss at the end of the year right?

Is any of this different for IFRS?

[Titleistg0lfer]

Well for GAAP purposes, inventory is either the “Lower” of Cost of Market so it can never have a revaluation gain. You are correct that if temporary you do not include a loss. If permament you will record the loss on the IS, but are not allowed to record this back up.

Under IFRS, you can record revaluation gains. Also, if you record an impairment loss on the IS, you can record this back up if the value increases.

I hope this helps!

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[thebigguy1992]

How would a municipality that uses modified accrual and encumbrance accounting record the transaction of the receipt of supplies from approved purchase orders and the approval of the related invoices?

A.
Debit encumbrances control.

B.
Debit expenditures control.

C.
Credit appropriations control.

D.
Credit other financing uses.

Why is the answer B? I thought when a purchase order is approved you:
DR encumbrances control
CR fund balance – reserve for encumbrances?

[thebigguy1992]

And what is the difference between this problem?

How would a municipality that uses modified accrual and encumbrance accounting record the transaction of approved purchase orders issued for supplies?

A.
Debit expenditures control

B.
Credit encumbrances control

C.
Debit encumbrances control

D.
Debit appropriations control

C is correct. The only difference in the wording is that the first question uses the transaction of receipt of supplies, so then they debit expenditures because its a receipt. But here we debit encumbrances control to just record the transaction? I'm so confused.

[Titleistg0lfer]

This is good for me…keep them coming it's a good refresher for me.

So when you approve the PO you:

DR Encumbrances
CR Budgetary Control

When you receive the actual purchase:

DR Expenditures
CR Vouchers Payable

In Modified Accrual you will not record a “Capital Asset” but instead record an expenditure. This is a reconciling item to the “Government-wide” financials though because they will be reported as a capital asset in those financials. Does this make sense?

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[Titleistg0lfer]

The differences in both of those are exactly how I mentioned above.

The first one you received the order, but the second one you simply just approved the purchase order.

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[Titleistg0lfer]

@MaLotu I know it's a little late on your question and you're probably already testing but here you go.

The reason why you debit AOCI for $450,000 is because OCI acts pretty much the same way as income.

If you have income it will be a Credit to OCI. At the end of the year you have to close OCI out to AOCI as such:

DR AOCI
CR OCI

So since you had $500,000 in OCI but amortization from the Prior service cost of 50,000 you only had 450,000 closed out to AOCI at the end of the year. Also the 500,000 was a cost so OCI was a debit balance at the time but closed out as a credit and AOCI was a debit.

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[Author]

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