FAR Study Group Q2 2016 - Page 93

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  • #765051
    Just3Letters
    Participant

    This is just an explanation for the answer to a problem. It says that “the modified cash basis” shows long-term assets, liabilities, and depreciation on the balance sheet. I was under the impression that the modified system didn't have any long-term anything… Can somebody un-confuse me? Thanks!

    The modified cash basis is a hybrid method that combines features of both the cash basis and the accrual basis. Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes. If these modifications are made, the resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes. The income statement would report depreciation expense and income tax expense. Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.

    The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

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

    #765052
    Spartans92
    Participant

    NVM my explanation didnt make any sense…

    BEC- PASS

    #765053
    Oneday
    Participant

    Why is “borrowing form line of credit” part of Financing Activities? Isn't it a short term liability?

    The question:

    A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:

    Dividends paid $300
    Proceeds from the issuance of common stock 250
    Borrowings under a line of credit 200
    Proceeds from the issuance of convertible bonds 100
    Proceeds from the sale of a building 150
    What is the company's increase in cash flows provided by financing activities for the year?

    Incorrect A.
    $50

    B.
    $150

    C.
    $250

    D.
    $350

    #765054
    agripper
    Participant

    Why is “borrowing form line of credit” part of Financing Activities? Isn't it a short term liability?

    The question:

    A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:

    Dividends paid $300
    Proceeds from the issuance of common stock 250
    Borrowings under a line of credit 200
    Proceeds from the issuance of convertible bonds 100
    Proceeds from the sale of a building 150
    What is the company's increase in cash flows provided by financing activities for the year?

    Incorrect A.
    $50

    B.
    $150

    C.
    $250

    D.
    $350

    – See more at: https://www.another71.com/cpa-exam-forum/topic/far-study-group-q2-2016/page/35#post-923465

    Borrowings under a line of credit 200 is not a operational it is financing company debt.

    D 250

    #765055
    KJ
    Participant

    @ just3 for your question of Govt.-wide entity revenues, Hope this helps!

    The journal entry for that will be:

    Dr. Property tax receivable 2M
    Cr. Allowance for uncollectible 100K
    Cr. Revenues 1.9M

    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

    #765056
    Broag
    Participant

    Why does the borrower credit Unearned Income here? Shouldn't the initial J/E be:
    Dr. Cash 135,000
    Dr. Discount 65,000
    Cr. Note Payable 200,000

    ??

    I was able to answer this correctly because the recording of interest expense was easy, but I made the above J/E to start out.

    On January 1, year 2, Dorr Company borrowed $200,000 from its major customer, Pine Corporation, evidenced by a note payable in 3 years. The promissory note did not bear interest. Dorr agreed to supply Pine’s inventory needs for the loan period at favorable prices. The going rate of interest for this type of loan is 14%. Assume that the present value (at the going rate of interest) of the $200,000 note is $135,000 at January 1, year 2. What amount of interest expense should be included in Dorr’s year 2 income statement?
    $0
    $18,900 – Correct
    $21,667
    $28,000
    This answer is correct. ASC Topic 835 requires that the liability should be recorded at its present value by establishing a discount account. The difference between cash proceeds and the present value of the note is credited to an unearned income account, which is recognized as revenue as the agreement is fulfilled.

    Cash 200,000
    Discount on N/P 65,000
    Note payable 200,000
    Unearned income 65,000

    Interest expense is then recognized using the effective interest method. For year 2, interest expense is equal to the present value of the note ($135,000) times the effective interest rate (14%), or $18,900. The unearned income will be recognized as sales as the inventory is sold to Pine Corporation at favorable prices.

    REG - 79
    FAR - ?
    AUD - ?
    BEC - ?

    #765057
    KJ
    Participant

    @ just3 sorry forgot to mention if I am not wrong, this line in the question – ” An enforceable legal claim for the September 1, 20X1, levy does not attach until January 15, 20X3″ is the key. I could be wrong but you will not take 90% into consideration because of that. Anyone else has any thought on that?

    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

    #765058
    KJ
    Participant

    @ just3 sorry forgot to mention if I am not wrong, this line in the question – ” An enforceable legal claim for the September 1, 20X1, levy does not attach until January 15, 20X3″ is the key. I could be wrong but you will not take 90% into consideration because of that. Anyone else has any thought on that?

    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

    #765059
    KJ
    Participant

    @ broag.. I think in that question it does not say exactly what was paid in cash and assumes what would have paid in cash for present value of the note.

    I would use the following J/E:

    Cash – 135,000
    DR. Discount 65,000
    CR. Note payable 200,000

    Dr. Cash – 65,000
    Cr. Unearned Revenue – 65,000

    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

    #765060
    Broag
    Participant

    And then when you pay the difference back you would just reverse it?

    Dr. Unearned Revenue 65,000
    Cr. Cash 65,000

    REG - 79
    FAR - ?
    AUD - ?
    BEC - ?

    #765061
    Just3Letters
    Participant

    I agree with Kanwal,

    I would treat the lending of inventory and the cash/note as two different transactions. Combining the two transactions makes the J/E confusing. However, if you did the two J/E separately and then were required to combine them for the initial entry, that would be easy.

    Broag, each year, according to effective interest, you would:

    Dr. Unearned Rev
    Cr. Revenue

    Just like any other deferred revenue transaction.

    Then, the questions states that “the note did not bear any interest” and “the note was payable in 3 years”. So you don't make any cash payments until three years were up when you:

    Dr. Note Payable 200k
    Cr. Cash 200k

    That was confusing!

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

    #765062
    Oneday
    Participant

    Thank you agripper.

    From a material I use(Roger), generally, current asset and current liability are operational activity; noncurrent assets are investing activity; and noncurrent liability and shareholder's equity items are financing activity with few exceptions.

    Does this mean that the borrowings from line of credit is one of these exception? I thought the borrowing could be both current/noncurrent liability, which is why I was confused :/…

    #765063
    MaLoTu
    Participant

    Why would they allow for a reasonable profit margin? Isn't that, in a way, violating conservatism?

    PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general guidelines for assigning amounts to the inventories acquired provide for:
    a. Finished goods to be valued at replacement cost.
    b. Raw materials to be valued at original cost.
    c. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable profit allowance. (correct)
    d. Work in process to be valued at the estimated selling prices of finished goods, less both costs to complete and costs of disposal.

    #765064
    patelhj1
    Participant

    Anyone can tell me how long I should save my final review for? I just finished F10 and have exactly 20 days to review.

    Is this enough time for a good review? I'm studying daily 5-6 hours.

    BEC 78 08/2015
    REG 71 11/2015, RETAKE 83 01/2016
    FAR 75! 5/2016
    AUD ? 8/2016

    Becker with Nonstop NINJA MCQ
    Google most difficult professional exam

    #765065
    marqzho
    Participant

    patelhj1

    How many MCQ have you tried? What was the avg score?

    REG 90
    FAR 95
    AUD 98
    BEC 84

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