[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for FAR.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

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

[mckan514w]

This may seem dumb but I am having a very hard time with parent / sub / inter-company eliminations when doing a consolidated financials…. what would the journal entry be to eliminate say a note payable between the two companies… where dose the debt go if it is eliminated in consolidation? Is it written off?

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

[mperez102204]

@mckan514w- the explanation makes total sense. Thank you sooo much for the help!!

[nib]

In below question , i thought correct answer as 25000 , bec initial cash payment is nonrefundable and no future services are required by Baker.
I dont understand why future payments added with present value 34000 of 10000* 4 yrs .

ninja explanation given is “””Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000). The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.”””

Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker's restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee, which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?

ANS= CORRECT ANSWE – 59000

A.0
B.25000
C.59000

[jonm857]

Why does this not result in a loss? My understanding is that if the bond reacquisition proceeds exceeds the carrying value, then you would have a loss, not a gain. Is this problem different from a reacquisition?

– – – – – – – – – – – – – – –

Jent Corp. purchased bonds at a discount of $10,000. Subsequently, Jent sold these bonds at a premium of $14,000. During the period that Jent held this investment, amortization of the discount amounted to $2,000. What amount should Jent report as gain on the sale of bonds?
a. $22,000
b. $26,000
c. $12,000
d. $24,000

Explanation
Choice “a” is correct. The bonds' book value equals the bond face value less the unamortized discount. The unamortized discount = $10,000 – $2,000 = $8,000, so the book value equals face value – $8,000. The selling price of the bonds is face value + $14,000. The gain on the sale equals the selling price (face value + $14,000) minus the book value (face value – $8,000) = $22,000.
Choice “c” is incorrect. The premium less the amortized discount is not the proper calculation of the gain.
Choice “d” is incorrect. This calculation ignores the $2,000 amortization of discount.
Choice “b” is incorrect. In this calculation, the $2,000 amortization of discount is included as a decrease in book value rather than an increase.

B - 81
A - 87
R - 73
F - July 5th

[mckan514w]

@jonm to me this explanation is convoluted…. Think of it more like this… you bought the Bonds at a discount of 10,000 this means that the face value of the bond was X + 10,000 since most bonds are denominated in 1,000's lets just say the face amount was then 100,000 so this means your bond carry value is 90,000 (100-10 discount). During the time you held the bond the amortization of the discount amounted to 2,000 which brings your carry value of the bonds up to 92,000 (90 +2amortization). And you sold the bonds for a PREMIUM of 14,000 so if face was 100,000 and you sold for a 14,000 premium then your cash was 114,000.
114,000 less your carry value of 92,000 = 22,000 gain on the sale of the bond.

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]

BTW this isn't a re-aquisition it simply says you sold them- which you can take to mean on the open market… so it isn't the company redeeming the bonds.

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

[jonm857]

@mckan

Yeah I think the formula for reacquisitions does not apply here because it appears to be a normal sale, in which case I guess it would be considered a gain, not a loss.

B - 81
A - 87
R - 73
F - July 5th

[mperez102204]

I am about 4 days out from my far retake (not counting today or the day of the exam, which is the 25th). I am in a bit of a panic because I am trending at 63% in Ninja and still have about 800 questions I have not seen yet. I have been doing about 200-300 MCQ a day for about 2 days. I also took off until the day after the exam. I am hoping to finally pass this and the pressure is on because I have already failed it once and if I fail FAR again I can not take it until January, which I am terrified of. PLEASE give me confidence that I have to ability to pass…………

Anyone else taking the exam soon?

[letsrun4it]

Taking the exam in a week.

I'm at 88% trending, 3000 questions done, seen them all, and have 120 I haven't gotten right yet, that stupid progress bar is like a half inch from the review phase. I also did the 1700 MCQ Roger had before switching to NINJA. I'd been doing “New Questions” on Ninja to get through all of them and that runs up the trending score. It's a case of correlation not causation. High trending scores don't matter.

To MPerez:
let me give you some confidence….Keep doing what you're doing, you're definitely in the position to PASS the exam, just do those questions non stop til the exam. People who cram for the exam have seen all the material recently. The more you can do the last few days before the exam the better.

BEC: 85
REG: 74, 78
AUD: 86
FAR: October?

[jeff]

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

[jonm857]

In the formula for periodic pension cost: do you add or subtract amortization of existing net obligation/net asset?? The formula in the book shows it should be added but I just did a problem where it subtracted to get periodic pension cost……

Edit: “It is important to note that the amortization of a net transition obligation increases net periodic pension cost, while the amortization of a net transition asset decreases net periodic pension cost.”

B - 81
A - 87
R - 73
F - July 5th

[letsrun4it]

JonM857 you add it. Maybe post that problem you did if you still have it handy.

BEC: 85
REG: 74, 78
AUD: 86
FAR: October?

[jonm857]

@letsrun4it

Here it is. It is different for a “transition asset”. Amortizing a transition asset will decrease pension expense, and a transition obligation will increase it.

————————————-

Big Books, Inc. has the following information related to its defined benefit pension plan:

December 31, Year 6:

Projected benefit obligation – $1,500,000
Fair value of plan assets – 1,400,000
Unrecognized prior service cost – 200,000
Unrecognized net transition asset – 60,000

December 31, Year 7:

Projected benefit obligation – $1,740,000
Fair value of plan assets – 1,670,000
Service cost – 220,000

Assumptions:

Discount rate – 6%
Expected return on plan assets – 8%

Big Books makes an annual pension plan contribution of $200,000. The company's employees had an average remaining service life of 20 years on 12/31/Year 6. The company paid benefits of $70,000 in Year 7 and expects to pay benefits totaling $170,000 to retired employees in Year 8. Big Books has an effective tax rate of 30%. The actual return on plan assets was 10%. What would Big Books report as U.S. GAAP net periodic pension cost on its December 31, Year 7, income statement?

a. $187,400

b. $193,400

c. $205,000

d. $211,000

Explanation
Choice “c” is correct. The Year 7 U.S. GAAP net periodic pension cost should be calculated as follows:

Service cost – $220,000

Interest cost – 90,000

= $1,500,000 x 6% = Beg PBO x discount rate

Expected return on plan assets – (112,000)

= $1,400,000 x 8% = Beg FV x expected rate

Amortization of prior service cost – 10,000

= $200,000 / 20 years

Amortization of (gains) / losses – 0

Amortization of transition asset – (3,000)

= $60,000 / 20 years

Net periodic pension cost – $205,000

Note: The difference between the expected and actual return on plan assets will be amortized starting in Year 8. Amortization is based on the beginning balance in the unrecognized gain/loss account.

B - 81
A - 87
R - 73
F - July 5th

[Claudia408]

hello, can someone explain the rationale behind the additional 26,000 in stockholders equity in this question? the explanation was very short and i don't understand it.

Mr. and Mrs. Gasson own 100% of the common stock of Able Corp. and 90% of the common stock of Baker Corp. Able previously paid $4,000 for the remaining 10% interest in Baker. The condensed December 31, year 2 balance sheets of Able and Baker are as follows:

Able Baker
Assets $600,000 $60,000
Liabilities $200,000 $30,000
Common stock 100,000 20,000
Retained earnings 300,000 10,000
$600,000 $60,000
In a combined balance sheet of the two corporations at December 31, year 2, what amount should be reported as total stockholders’ equity?

Answer: 426,000

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

[thekyang]

Hello! I have couple questions on Bonds and I still could not understand after reading the explanation.

1. On March 1, year 1, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method instead of
the effective interest method to amortize the discount. Clark does not elect the fair value option to report these securities.
How were the following amounts, as of December 31, year 1, affected by the error?
Bond carrying amount Retained earnings
a. Overstated Overstated
b. Understated Understated
c. Overstated Understated
d. Understated Overstated

Why is it C? I know discount under effective interest method starts with low interest expense, which makes amortization amount higher, result in higher CV for the next period and at the end of the term the CV will be equal under both methods. Just don't get why using SL will cause CV overstated…

2. On July 1, year 1, York Co. purchased as a held-to maturity investment $1,000,000 of Park, Inc.’s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, year 1 balance sheet, what amount should York report as investment in bonds?
a. $911,300
b. $916,600
c. $953,300
d. $960,600

Ans is a. How to approach this?

Thank you so much!

[Author]

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