[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

[CPYay]

@jolien

I did some research on this and will do my best to explain.

The conversion price is usually more than the market value at issuance. Why? Because if you purchased a bond and there was already value in converting it, why wouldn't you convert? The purpose of the convertible option is to convert the bond should the stock increase. This relationship provides an investor with reduced risk, in a sense, because if the company begins to do very well, they can capitalize by converting to stock. In accepting this, they also accept a bond with a lower interest rate.

[jolien]

@CPYay

Thank you for your response! I did think that conversion price should be more to encourage conversation. However, when I read online about Convertible bonds (Convertible Bonds, it said:

Current Stock Price: The current stock price is used to calculate the value of the equity portion of the convertible bond. For example, if the bond's conversion price is $20/share, then the buyer of the bond will choose to convert the bond into equity if the stock is now $25/share but will hold on to the bond if the stock is below the conversion price.

So I'm confused. Should conversion price be higher or lower than the stock price at the conversion time?

[CPYay]

At issuance: Conversion price > market price

This is to prevent immediate conversion.

But… Let's say the market price shoots up, so you're going to convert.

At conversion: Conversion price < market price

Think of it this way… Suppose the market price for Ninja is $50. You hold a bond with a value of $600 that converts into 20 shares. The conversion price is $600/20 = $30. Would you convert? Yes. By converting the bond, you're getting those 20 shares at $50 each.

[jolien]

@CPYay

I see. It makes more sense now. Thank you for explaining it to me! =)

[Claudia408]

Hi can someone help with the consolidation question? My understanding is that you must eliminate the equity section of the acquired entity. But wouldn't the parent's equity increase by the purchase price? What am I missing?

Beni Corp. purchased 100% of Carr Corp.'s outstanding capital stock for $430,000 cash. Immediately before the acquisition, the balance sheets of both corporations reported the following:

Beni Carr
Assets $2,000,000 $750,000
Liabilities $750,000 $400,000
Common stock $1,000,000 $310,000
Retained earnings $250,000 $40,000
Liabilities and stockholders' equity $2,000,000 $750,000

At the date of the acquisition, the fair value of Carr's assets was $50,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the purchase, the consolidated stockholders' equity should amount to:

Answer: 1250000. I thought the answer would be 1250000+43000=1680000.

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

[JustAnotherWannabe]

@Claudia, they are being consolidated as one entity so you cannot say that the total equity includes the cash you pay to yourself.

AUD- 98 2/24/16
FAR-
REG-
BEC-

Self Study CPAExcel

[Claudia408]

JustAnother – thanks, makes sense. However if the problem said the parent issued stock to acquire the sub, then I would add the common stock to the parents equity right?

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

[Claudia408]

Here's a govt question… I understand that Govt Funds are a modified accrual so they would not depreciate assets and would report them as expenditures. In this question however, that isn't the case. What am I missing about Govt Funds?

Tree City reported a $1,500 net increase in fund balance for governmental funds. During the year, Tree purchased general capital assets of $9,000 and recorded depreciation expense of $3,000. What amount should Tree report as the change in net assets for governmental activities?
Answer: The Statement of Activities, where a government would report the change in net assets, is prepared on the accrual basis. Therefore, depreciation expense will need to be accounted for when determining the net change. Netting the $1,500 increase and the $9,000 purchase with the $3,000 in depreciation expense results in an amount of $7,500.

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

[Operation_CPA]

On January 2 of the current year, Kine Co. granted Morgan, its president, compensatory stock options to buy 1,000 shares of Kine's $10 par common stock. The options call for a price of $20 per share and are exercisable for 3 years following the grant date. Morgan exercised the options on December 31 of the current year. The market price of the stock was $45 on January 2 and $70 on December 31. Using an acceptable options pricing model, Morgan determined that the fair value of the options granted was $30,000. By what net amount should stockholders' equity increase as a result of the grant and exercise of the options?

Answer: 20,000

This somewhat makes sense, but per the example in the Becker book (F7-20) don't you only recored the J/E for compensation exp (DR) and APIC – Stock options (CR) for 10,000 in the first year? I was stuck between the answer choice of 30,000 and 20,000 and of course it was 20,000. Please help!

Becker J/E:

J/E: Comp exp.30,000
………APIC – stock options 30,000

J/E Exercise:
Cash 20,000
APIC 30,000 (reverse)
………….C/S 10,000 (par)
………….APIC 40,000 (plug)

T account = 20,000

But at first I only recorded a J/E for compensation exp of 10,000 (30,000 / 3 years), so my APIC was apparently off.

Any input is appreciated!

EDIT Never mind, I need to read more carefully. It says he is able to exercise them for 3 years following the grant date (as opposed to the Becker problem they are exercisable after the second year)

[Teal]

Can anyone help me with this? My question is literally just how they got 8.5 as the present value factor?

On January 2, 20X1, Elsee Co. leased equipment from Grant, Inc. Lease payments are $100,000, payable annually every December 31 for twenty years. Title to the equipment passes to Elsee at the end of the lease term. The lease is noncancellable.

The equipment has a $750,000 carrying amount on Grant’s books. Its estimated economic life was twenty-five years on January 2, 20X1.
The rate implicit in the lease, which is known to Elsee, is 10%. Elsee’s incremental borrowing rate is 12%.
Elsee uses the straight-line method of depreciation.

The rounded present value factors of an ordinary annuity for twenty years are as follows:

12% 7.5
10% 8.5

EXPLANATION
At 1/2/X1, the inception of the lease, Elsee will record the lease as a capital lease since title transfers (TT), but they could also qualify since lease term of 20 years and the useful life of 25 years equals 20/25 = 80%, which is > 75% of useful life. Elsee then records both an asset and a liability equal to the present value of the minimum lease payments. The present value will be based on the 10% rate implicit in the lease since it is lower than Elsee’s incremental borrowing rate of 12% and the rate implicit in the lease is known to Elsee. The present value will be $100,000 x 8.5 or $850,000.

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[Teal]

I can't figure out how to edit my post, but no worries on that question. There was a software glitch that wasn't showing the 7.5 or 8.5 until I copied and posted it. I went back and read it on here and was like “oh”! So nevermind. haha

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[Teal]

Although I do have a question related to the above lease question I posted. Maybe I am missing something, but I thought that you also added PV (of annuity) the interest payments and added that to the PV of lease payments?

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[Claudia408]

Can someone please help with this govt encumbrance JE? I tried searching the old posts for it but can't find it bc I know I had seen it for my 1st Far attempt. I understand that some of the vehicles did not show up before year end… so can someone help with the sequence of the JEs??

Carlson City's fiscal year ends December 31. On August 1, the city issued a purchase order for new vehicles to be delivered at the rate of two per month beginning October 15. Twelve vehicles were delivered as scheduled and payments of $264,000 were made upon delivery. If these were the only transactions made by the city, which of the following balances would appear on the balance sheet as of December 31?

Answer:
Fund balances $132,000
Reserved for encumbrances $132,000

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

[pharaoh]

@Claudia408 – When you issue PO, the JE
Dr. Encumbrances 264,000
Cr. Reserved for Encumbrances 264,000

You received 6 vehicles, so you reverse the encumbrances for those
Dr. Reserved for Encumbrances 132,000
Cr. Encumbrances 132,000

and Recognize expenditure
Dr. Expenditure 132,000
Cr. Voucher Payable 132,000

At the end of the year, you close the encumbrances into the Fund Balance (Like close NI into RE)
Dr. Fund Balance 132,000
Cr. Encumbrances 132,000

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[Operation_CPA]

Kuchman Kookware issued 40,000 shares of its $8.00 par value common stock for $9 on January 1, Year 1. Kuchman repurchased 1,000 shares at $8 per share on April 1, Year 2, resold 500 shares at $9 per share on July 1, Year 2, and, on October 1, Year 2, resold the final 500 shares at $5 per share. Assuming Kuchman uses the par value method of accounting for its treasury stock, retained earnings at December 31. Year 2 would be reduced by:

Why is the answer not 1,000? (Becker says the answer is 500).

Here are my J/E's:

(1). DR: Cash 360,000
……….CR: C/S………..320,000
……….CR: APIC – C/S….40,000

(2). DR: T/S 8,000
……….CR: Cash……….8,000

(3). DR: Cash 4,500
………….CR: T/S……..4,000
………….CR: APIC -T/S..500

(4). DR: Cash 2,500
DR:..APIC 500
DR:..R/E 1,000
…………CR: T/S…….4,000

Thanks!

[Author]

Replies