[jeff]

Welcome to the Q3 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

[Jsn3004]

On January 2, the City of Walton issued $500,000, 10-year, 7% general obligation bonds. Interest is payable annually, beginning January 2 of the following year. What amount of bond interest is Walton required to report in the statement of revenue, expenditures, and changes in fund balance of its governmental funds at the close of this fiscal year, September 30?

A.
$0

B.
$17,500

C.
$26,250

D.
$35,000

Answer is A. I can't tell if this is a trick question or if I am just overthinking it. I figured the simple answer would be 500,0008 7% x 9/12 which would be C.
Or is it A because the question asked how much interest is to be reported in it's governmental funds, when funds only report the money that is in the fund, not actual interest. Like how capital projects funds don't actually report the capital assets in the fund, just the money.

[cpaMD86]

@jsn3004

Governmental funds are based on the modified accrual/current financial resources approach, so you do not accrue the interest for that period. The interest that is ultimately paid will become an EXPENDITURE when paid.

FAR: 9/3

[CPYay]

@cpaMD86

Sorry for not responding earlier. After the exam I took a weekend hiatus from all things CPA hah..

But yes… there were quite a few gov/NFP, but I didn't feel like it was significantly more than the rest. I was shocked because I was extremely confident going into the exam in regard to gov/NFP and was actually hoping for a lot. Never had a class in either, but during my studies I did well on those topics.

[Jsn3004]

@cpamd86
That makes sense. So since EXPENDITURES is the action of spending funds, you can't accrue an expenditure if you have not paid it. It only gets reported when the interest is actually paid for.

I think that's what I got out of it. Thanks.

[Jsn3004]

The functional currency of Nash, Inc.’s, subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?

A.
The translation loss less the exchange gain is reported in other comprehensive income.

B.
The translation loss less the exchange gain is reported in net income.

C.
The translation loss is reported in other comprehensive income and the exchange gain is reported in net income.

D.
The translation loss is reported in net income and the exchange gain is reported in other comprehensive income.

The answer is A. I'm aware that the translation loss is in OCI, but why is the exchange gain also in OCI? Are exchange gains always reported in OCI? Is it because they borrowed euros as a partial hedge instead of actually purchasing the euros?

[cpaMD86]

@CPYay

Not a problem, I can't blame you! I plan to do the same thing after my exam on Saturday…sitting on the opening weekend of College football. lol

My current state consists of a mad scramble…trying to cover whatever pops to mind…jumping from MCQs to Sims. Starting to get anxieties and nerves!

FAR: 9/3

[CPYay]

I know what you mean. I hate the ambiguity of some of the questions, more specifically the Sims.

My best advice based on what I experienced, although very generalized, is to understand the exceptions to a concept. One word in a question can change the entire dynamic of a question, so it's important to know the material and disclosures. Calculations are easy if you know what info needs to be used.

Good luck! At least you have some football to look forward to after the exam. I had to go to work after mine! haha

[Jsn3004]

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 (AOCI), ignoring income tax effects?

A $450,000 debit

B.
A $500,000 debit

C.
A $550,000 credit

D.
A $450,000 credit

The answer is A, but i'm not too sure why.
I thought it would be a 450,000 debit balance in plan assets not AOCI. I figured the only thing in AOCI would be a 50,000 debit balance for amortization of PSC. I'm very confused about this.

[CPYay]

@jsn3004

When the company adjusts its pension for an additional 500K in prior service costs, it doesn't record this in the plan yet. It must amortize this cost based on the service life of employees (whether that's an average or calculated specifically per year).

So… when they added the 500K, they had to make an entry:

Dr Prior Service Cost – OCI 500,000
Cr Wherever the funds came from 500,000

Then… when amortized, the entry would be:

Dr Pension Expense 50,000
Cr Prior Service Cost – OCI 50,000

The net effect is a $450,000 dr to OCI.

[jolien]

Hi, can someone help me understand why we need to count 20X1 (before plan to discontinued in Jan 1, 20X2)? I would think the component is displayed as discontinued only after Jan 1, 20X2. Thanks so much!

Q: Munn Corp.'s income statements for the years ended December 31, 20X2 and 20X1, included the following, before adjustments:

20X2 20X1

Operating income $ 800,000 $600,000
Gain on sale of division 450,000 —
———- ——–
1,250,000 600,000
Provision for income taxes 375,000 180,000
———- ——–
Net income $ 875,000 $420,000
========== ========

On January 1, 20X2, in a strategic shift, Munn agreed to sell the assets and product line of one its operating divisions for $1,600,000. The sale was consummated on December 31, 20X2, and resulted in a gain on disposition of $450,000. This division's pretax losses were $320,000 in 20X2 and $250,000 in 20X1. The income tax rate for both years was 30%. In preparing revised comparative income statements, assuming that the division qualified as a component, Munn should report which of the following amounts of gain (loss) from discontinued operations?

A. 20X2: $130,000; 20X1: $0

B. 20X2: $130,000; 20X1: $(250,000)

C. 20X2: $91,000; 20X1: $0

D. 20X2: $91,000; 20X1: $(175,000)

The correct answer is D.

The gain or loss from the disposal should be reported separately net of income tax effects, as a component of income.

Loss in 20X1: $250,000 – (.3 x $250,000) = $175,000
Gain in 20X2
Gain on disposal $450,000
Loss on operations 320,000
——–
Gain before taxes $130,000
Tax at 30% 39,000
——–
Gain from discontinued operations $91,000

[vodrldnr]

Bond issuance cost is capitalized and amortized over the term of bond.

[Bnots]

@jolien

It's a reporting requirement that the discontinued operations be reported separately in prior periods on comparative financial statements. I think that makes sense in an apples-to-apples, oranges-to-oranges kind of way.

ASC 205-20-45-3

The statement in which net income of a business entity is reported or the statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the discontinued operation, including any gain or loss recognized in accordance with paragraph 205-20-45-3C, in the period in which a discontinued operation either has been disposed of or is classified as held for sale.

[cpaMD86]

This is problem #7 from the AICPA released ‘Difficult' section:

7.
Janson traded stock in Flax Co. held as trading securities during year 1 as follows:
Number of shares
Price per
purchased (sold)
share
February 3, year 1 1,100
$11
April 15, year 1 2,500
9
May 28, year 1 (750)
13
July 5, year 1 1,400
12
September 30, year 1 (4,000)
15
No other transactions took place for Flax during the remainder of the year. At December 31, year 1, Flax
is trading at $10 per share.
Janson trades securities on a last in, first out basis. What amount is the net value of the investment in Flax at year end?

The answer is 2,500…but I keep coming to 2750. Does anyone have any insight on the process to resolve?

Thanks.

FAR: 9/3

[Bnots]

@cpaMD86

The remaining shares need to be adjusted to fair value, so use the 12/31 price of $10 per share rather than the $11 purchase price. The use of LIFO is just hand-waving for this particular question.

[cpaMD86]

Wow, talk about over thinking a question.

Thanks, @Bnots

FAR: 9/3

[Author]

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