[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

[Claudia408]

Hi guys… question about prepaid rent… when i think prepaid rent, i think of it as for example, rent paid for October in September. So in this question, I was thinking prepaid rent was 6 months, but the calculation has it as 9 months. Why am I thinking about this incorrectly?

Liaison Company leased an asset from Endor, Inc. to be accounted for as an operating lease. Liaison is a calendar-fiscal year firm. Data for the lease:

Inception, 7/1/x3
Lease term, 3 years
Monthly rental, $20,000. Except as noted below, rent is due at the beginning of each month.
Bonus to secure the lease due at inception, $7,200
Damage deposit due at inception, $5,000
First three months' rent (July, August, September, 20×3) and last three months' rent (April, May, June, 20×6) are due at inception

What is prepaid rent for 2013 and 2014?

ANSWER: Prepaid rent at 12/31/x3: nine monthly payments were made during 20×3: the first three months of 20×3 at inception, last three months of 20×3, and the last 3 months of the lease term due at inception. 9($20,000) + $7,200 – $121,200 rent expense for 20×3 = $66,000 = also 3($20,000) + (30/36)($7,200).

Prepaid rent at 12/31/x4 = 3($20,000) last 3 months of lease term + (18/36)$7,200 = $63,600

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Spartans92]

Claudia prepaid could be longer than a month in advance. So in the question the lease's inception date was july. From july to december you have 6 months plus 3 months in 2014 were paid too. Total of 9 were made in 2013. So to calculate the expenses for that year you could do 9 total payment * 20,000 + 7200 = 187200 but you actually paid out 6 months *20,000 + (6/36)*7200 = 121,200 the difference is prepaid.

Guess I have spread this exam out way too long, losing what I learned earlier.

BEC- PASS

[Claudia408]

To me it sounds like they prepaid July, August, September 2013 and the last 3 months of the lease in 2016 for a total of 6. When October, November, December 2013 came that's when they paid so that's when the expense occurred so they weren't prepaid. But obviously that's wrong…

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Spartans92]

I had to re-read multiple times they aren't saying 9 months in prepaid but 9 monthly payments were made in 2013 6 being prepaid like u said but 3 were suppose to be paid (sept-dec). I added more to my comment because originally i didnt get how they derived those numbers but now I do.

BEC- PASS

[Just3Letters]

Claudia,

Very confusing question. They definitely have prepaids of the first three months and last three months of the lease at inception. So that is 6. I don't see where the other three come in? Other than the 6 months I just mentioned, all other months are prepaid for each month. The question is asking how much is prepaid for both 2X13 and 2X14 but the answer only talks about the prepaids in 2X13.

What is going on?!

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[marqzho]

prepaid rent as of 12/31/13 is for 3months according to the explanation.

As of that day, only April, May, June, 20×6 are prepaid

REG 90
FAR 95
AUD 98
BEC 84

[Spartans92]

WOW that simplifies everything LOL Thanks Marqzho. Was trying too hard to make this thing understandable.

NVM I totally missed the dates. I was thinking 20×4 the whole time.. Makes more sense.

BEC- PASS

[marqzho]

Prepaid rent as of 2013 = 3*20000+30/36*7200= 66000
Prepaid rent as of 2014 = 3*20000+18/36*7200=63600

REG 90
FAR 95
AUD 98
BEC 84

[marqzho]

7200 is for the whole 36mos. lease and was paid at inception.

So at inception(ignore the monthly rent)
Dr. Prepaid Bonus 7200
Cr. Cash 7200

After the first month
Dr. Rent Expense (1/36*7200) 200
Cr. Prepaid Bonus 200

After six month, for this bonus, (30/36*7200) is still in prepaid rent:)

REG 90
FAR 95
AUD 98
BEC 84

[Spartans92]

That helps so much! Thank you.

BEC- PASS

[mckan514w]

@Just3 regarding your question about statement of cash flows investing- the gain is shown in investing as part of the transaction but then you have to remove it from operations so it isn't counted twice… SO you sell equipment for 20 that cost 10 your Cash flow investing is +10 (sale of equipment)– this includes your gain of 10… so then under Operating Cash Flow you would have Gain on sale of equipment (10) to take this amount out….

DR Cash 20
CR Equipment 10
Gain on Equipment 10

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]

Sorry Just3 typed that out wrong– your Investing section would be sale of equipment +20 (this includes the gain of 10) which then the 10 would be taken out in operating… sorry for the mistype hope I didn't confuse 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

[MaLoTu]

Does anyone have an easy way to remember how to get from cash to accrual or vice versa? I struggle to remember what is added in or backed out =(

[Just3Letters]

Thanks Mckan! I totally get that now 🙂

Sorry MaLoTu, F2 is the downfall of my life.

However, I always think of it this way…

If you have 100,000 cash income and:

10,000 increase in A/R: Add because not cash but accrual income
20,000 Decrease in A/P: Add back because the associated expense is in another period
10,000 increase in Prepaid Rent: Subtract because has not yet been expenses per accrual
5,000 increase in Unearned Whatever… : decrease because hasn't been earned

100,000 +10,000 – 20,000 – 10,000 – 5000= 75,000 accrual income

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[Claudia408]

thanks guys, i think i wasn't reading the answer carefully!

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Author]

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