[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).

[MMAFEM]

hi
plz help with this question.

Cobb company sells appliances service contracts agreeing to repair appliances for two-period. The past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% is incurred evenly during the second contract. Receipts from service contract sales are 500000 for 2015 and 600000 for 2016. Receipts from contracts are credited to unearned revenue. All sales are made evenly during the year. What amount should be reported as unearned service revenue on Dec. 2016?

a. $360,000
b. 470,000
c. 480,000
d. 630,000

cant really understand how to apply Evenly concept, plz help.
thanks

[Tikitwo411]

This question gets me too. In this case, they are taking the 600k and multipling it by 40%, to arrive at 240k. The 240k is incurred evenly throughout the year, so at the end of the year, half the contracts are left (think of July through Dec contracts being left at the end of the yr). So take 240k and divide by 2 for 120k. Then take 600k and multiply by the 60% for the second year. Is the answer 480?

[emichelle2321]

Ok, I just got this question too. I don't understand why we are dividing this in half?

Current year deferral $600,000
Earned in current year (600,000 x 40% x 1/2) = (120,000)

Deferral @ 12-31 = $480,000

[Bnots]

Divide in half because we are told the contracts are honored evenly throughout the year.

That will usually put you on the right path in these kind of problems.

Long-winded explanation (by contracts sold below I mean the dollar value of the contracts):

500,000 * 0.40 = 200,000 contracts sold in 2015 and honored in the first year of the contract.

200,000 * 0.50 = 100,000 of those 200,000 contracts honored in the first contract year that were also honored in 2015.

200,000 * 0.50 = 100,000 of those 200,000 contracts honored in the first contract year but were honored in 2016.

A contract year is not the same as a calendar year. For example, a contract sold on December 31, 2015, has a first contract year that basically falls entirely in the 2016 calendar year. We are told that contracts honored in a given contract year are honored evenly throughout that contract year. The first contract year is also spread evenly between 2015 and 2016 because the sales occurred evenly during 2015. So we can expect half of contracts honored in the first contract year to fall in 2015 and half in 2016. Of those contracts sold in 2015 and honored in the second contract year, half will fall in 2016 and half will fall in 2017.

500,000 * 0.60 = 300,000 contracts sold in 2015 and honored in the second year of the contract.

300,000 * 0.50 = 150,000 of those 300,000 contracts honored in the second contract year that were honored in 2016.

300,000 * 0.50 = 150,000 of those 300,000 contracts honored in the second contract year that won't be honored until 2017.

So through 2016, of the 500,000 service contracts sold in 2015, 100,000 were honored in 2015, 250,000 were honored in 2016, and 150,000 will be honored in 2017. Those 150,000 are still on the books as unearned revenue.

600,000 * 0.40 = 240,000 contracts sold in 2016 and honored in the first year of the contract.

240,000 * 0.50 = 120,000 of those 240,000 contracts honored in the first contract year that were also honored in 2016.

And that's as far as we really need to go for this problem. The other contracts sold in 2016 will be recognized as revenue in 2017 or 2018.

At the end of 2016:

150,000 sold in 2015 are still on the books.
480,000 sold in 2016 are still on the books.
——-
630,000 is still unearned as of the end of 2016.

Hope I didn't make things even more confusing… O_O

[greenbreen]

Hey guys. First exam, using Becker, studying in Long Beach, CA. @Operation: RE Boot and the 25% rule. Denominator should be “total consideration…” seems little but I think it makes it less confusing since there are multiple fair values floating around but only one total consideration because this is in theory the same for both parties. Hope that helps and keep up the hard studying guys!

[ramaa17]

Can someone please explain in what conditions would we have a negative amortization of transition asset ?
I thought that a. returns and b.gains would be negative while calculating the pension expense

Explanation for one ques in Pension in Becker
*Amortization of Transition cost = 60000 / 20 years = 3000.
They have used (3000) while calculating net periodic pension cost

[rsg149]

Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds?
a.
12%
b.
14%
c.
6%
d.
7%
Explanation
Choice “a” is correct. GAAP interest expense = Carrying value at the beginning of the period x effective periodic interest rate
The question is asking for the “stated interest,” not GAAP interest.
Stated interest = Amount stated on bond: $12,000/200,000 = 6% x 2 = 12%.

PLEASE EXPLAIN TO ME HOW 12% IS NOT THE STATED INTEREST RATE? 14 IS SUPPOSED TO BE THE CORRECT ANSWER BUT ISNT 14% THE EFFECTIVE RATE AND NOT THE STATED RATE?

[539Mayor]

HELP!
Only gave myself a month window to take REG and it took me about 2 weeks to find a groove. Should I still take the exam next week if I do not feel I'm fully prepared? On one hand, I've spent a lot of time studying on the other I don't want to fail/ego blow.
Should I hold off?

Any thoughts on my schedule
Mon-Friday; 2 hours before work, 1hr lunch break, attempt 2 hours after my daughter falls sleep
Sat/Sun: 8 hours broken into two/three our sessions.

[539Mayor]

Need your thoughts!

Whats are some best practices for studying? Becker + Ninja Audio
– Should I stay on one part till I “master” it. Or just keep on moving and setup a three week period to go back and cram.
– In some cases 50 questions could take me three hours and I”ll still get 60-70%

I need to fine tune my plan. I have the smarts and drive just lack organization that leads to anxiety and anger!!

[Claudia408]

How do you know that AR and AP increased in this question?
Baker Co. began its operations during the current year. The following is Baker's balance sheet at December 31:

Baker Co.
BALANCE SHEET
Assets
——
Cash $192,000
Accounts receivable 82,000
——–
Total assets $274,000
========

Liabilities and stockholders' equity
————————————
Accounts payable $ 24,000
Common stock 200,000
Retained earnings 50,000
——–
Total liabilities and stockholders' equity $274,000
========
Baker's net income for the current year was $78,000 and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its statement of cash flows for the current year?

Answer: Both AR and AP increased, therefore: 78,000-82000+24,000=20,000

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

[OdellBj]

Hello all, I'm on F5 and worked on a simulation where the answer was $13,089.495 and I entered the exact number and it was rounded down to $13,089. However, Becker's answer was $13,090 and my answer was marked wrong.I want to know if this is an error in Becker's software or if we are always meant to round up. Thank you.

[OdellBj]

Hello all, I'm on F5 and worked on a simulation where the answer was $13,089.495 and I entered the exact number and it was rounded down to $13,089. However, Becker's answer was $13,090 and my answer was marked wrong.I want to know if this is an error in Becker's software or if we are always meant to round up. Thank you.

[Anonymous]

In the following example, why do they assume that Plane #2 qualifies as a capital lease?

On December 31, Year 1, Smalltime Airlines sold Big Bucks Company two airplanes and simultaneously leased them back. Additional information pertaining to the sale-leasebacks follows:

……………………….Plane #1…..Plane #2
Sales Price……………..$500,000…..$900,000
Carrying amount, 1/1/Y1…..$200,000…..$300,000
Lease term……………….8 years……3 years
Annual lease payments……..$80,000…..$200,000

The implicit rate in both leases is 10%. The present value of an annuity due of $1 at 10% for 8 years is 5.868 and the present value of an annuity due of $1 at 10% for 3 years is 2.736.

[OdellBj]

@eleuthromania, because it passes the 90% rule. The Present Value of the annual payments is less than 90% of the Fair value of the asset.

[livealittle]

@OdellBj The $13,089.495 should be rounded up. If you are doing this in the real exam, don't use cents, if in your calculations you get 49.5 cents. you need to round up automatically to 50 cents. That will automatically round up to the 13,090.

Sometimes there are errors in Becker. I have found several, called them and reported them, and they have corrected them in the updates they periodically release.

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[Author]

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