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POSITIVE EVOLUTION IS WHAT YOU NEED

Lesson 32

From: Joe


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(1) - Thanks to everyone for helping us pass along good words about our site:

--In our most recent weekly statistics, we had 5.5 percent more hits to www.CPAreviewforFREE.com than in any previous week of our existence.

--In our most recent weekly statistics, we had 8.7 percent more page views to www.CPAreviewforFREE.com than in any previous week of our existence. We are now up to approximately 2.7 million page views. That is a LOT of added points.

--We have now had over 3,300 views to my lecture on dreams and heroes and deciding what you really want to do in life and then GOING FOR IT. That video can be viewed at:

www.youtube.com/user/UniversityofRichmond

or

www.youtube.com/watch?v=LjwHxVbZq1o

If you have already watched the video, you'll know why I have had an incredible number of people walk into my office (many that I did not know) to tell me: "I want to see the dagger that you got as a gift." Yeah, it is right there on the wall.


(2) - And, now for the legal requirement: if you want to unsubscribe to these occasional email lessons, please scroll to the end of this email and hit the Unsubscribe button.

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(3) - Here is a nice email that I received last week. I love getting emails that indicate that www.CPAreviewforFREE.com is making a real difference in people's lives.

"FAR exam went very well. It was simpler and easier than I had anticipated. I feel good. CPAReviewforfree had prepared me so well, I found the exam easy. Over the last 3 months (from the time I decided to take the CPA exam and started the registration process), I have been using CPAReviewforfree for all the 4 papers. It has been a great experience using the website as well as getting my issues clarified by you. I am hoping to have cleared all 4 parts and I will communicate to you the result when I get! I think I am going to miss using CPAReviewforfree but tomorrow onwards!"


(4) - I had a busy week-end and here are two quick episodes from my last couple of days.

Story One: I have just begun to read the book "Outliers" that has become such a phenomenally popular book. The book has the sub-title "The Story of Success" which gives you a good reason why I have been so interested in reading it. It investigates the real reason that people become successful.

It took me all the way to page 38 to find the one sentence that I had been expecting. Whenever I read about success, this sentence always seems to pop up early and often. In fact, I am not sure I have ever read anything at all on success that has not stressed this one sentence. If I were going to write a book on success, this would be my theme from page one:

"The closer psychologists look at the careers of the gifted, the smaller the role innate talent seems to play and the bigger the role preparation seems to play."

I could not agree more. If you are willing to prepare, you have already taken the single biggest step you will ever take toward passing the CPA Exam.

People worry about the wrong things. They set up walls that keep them from succeeding:
--I didn't get good grades in college.
--I am not a good test taker.
--I did not go to a big name university.
--I always seem to freeze up on tests.

Those are just excuses and probably have nothing to do with whether you will be successful on the CPA Exam. Instead, you should ask yourself one question and one question only: am I willing to do the work necessary to pass (probably a total of 250-400 hours for all four parts)?

That's all you need to know - any other issue is just a wall to slow you down. What you need is a willingness, a dedication that will allow you to prepare for the exam. If you do the work, you can eventually pass the CPA Exam-hopefully the very first time.

Many times people will come to me and say. "I really want to pass the CPA Exam. I am willing to do the work but . . ." And, I stop them right there!!!! I am not the least bit interested in what comes after the word "but." I don't want to hear anything after the word "but." If those candidates are willing to do the work, that is good enough for me. Anything after the word "but" is probably just noise that is going to distract them from the true goal.

"The closer psychologists look at the careers of the gifted, the smaller the role innate talent seems to play and the bigger the role preparation seems to play."

Story Two: I have been giving final exams and awarding grades. I had one student in one class who made low B's on her first two tests during the semester. However, she made a very high A grade on the third test of the semester and also on the final exam and made an A for the semester. She was thrilled. I was impressed by how much improvement she had made. I asked her about that in an email and she responded with "Oh, I finally figured out what you wanted us to learn and decided it really was worth the extra effort."

I sometimes refer to that type of change as "positive evolution" where a student genuinely gets better during the semester. Many students come in as C or B students and walk out three months later as C or B students. No real change. They did not get one bit better the entire semester. No evolution took place at all. There was no improvement. As a teacher, that is frustrating.

A few students, though, like the one above, walk in on the first day as a C or B students and walk out as A students. Now that makes my job feel great.

That never happens by accident. The student makes some significant change; they evolve. Usually, like this student, they come to see what I want them to learn and decide that the material is more interesting and useful than they had expected. Thus, their work just improves, often almost overnight.

As you use www.CPAreviewforFREE.com, that is what I want to see from you: positive evolution. I want you to get better and stronger as the course of your study progresses. I want you to come in as a person who cannot pass and walk out as a 75.

That usually happens because candidates work question after question and begin to see how to read and think about the questions and how to put the answers together to gain understanding. Then, there comes a point when they say to themselves "you know, I CAN pass this exam." At that point, putting in the hours of preparation gets much easier. They have two good reasons to prepare: first, they begin to see how to prepare in a way that is effective and efficient for them and, second, they begin to see the chance for positive results.

There is nothing like realizing that you have a chance to win to make you play harder.

As you prepare today for the CPA Exam, are you getting to that point of personal evolution?


(5) - As always, here is a little practice. In case you are interested, the first question comes directly from my final exam in Intermediate Accounting II that I gave last week. Of course, the students had a big advantage in that they had just studied this material in depth.


FAR

On April 26, Year Four, Harding Corporation owes the local bank $700,000 on an 8 percent note plus $120,000 in accrued interest. The note itself comes due in exactly six more years. Because Harding is undergoing severe financial difficulties, the two parties restructure the note on that date. The accrued interest is eliminated and the principal of the note is reduced to $400,000 which is now due in exactly 10 years. The annual interest rate drops from 8 percent to 5 percent although the current interest rate on such questionable loans is 15 percent. Assume that the present value of these future cash flows at 5 percent interest is $400,000 and at 8 percent is $270,000 and at 15 percent is $160,000. What gain should Harding recognize on this troubled debt restructuring?

A. -0-
B. $220,000
C. $420,000
D. $550,000

Answer is B.

The accounting rule for a debtor (Harding) in a troubled debt restructuring such as this are completely different from that which applies to the creditor (the bank). The debtor starts with the current amount of the debt ($820,000 or $700,000 plus $120,000) and compares that number to the total cash that will ever be received under the new agreement. Here, that amount is $400,000 plus $20,000 per year ($400,000 times 5 percent) for 10 years or $200,000. The total to be paid is $600,000. If that amount is greater than the current debt ($820,000), the debtor recognizes no gain. If that amount is less, the reduction is recognized immediately as a gain. That reduction is $220,000 ($820,000 current debt less $600,000 in total payments). The debtor does not use present value although the creditor (the bank) does in its own computation.


REGULATION

Jeremiah Wilson died on January 11, Year One. The value of several large pieces of estate property fell sharply shortly after his death. Consequently, the executor of his estate chose the alternative valuation date for estate and other tax purposes. The property was all conveyed to the proper recipients on February 9, Year Two. On what date was the property valued?

A. Six months after death
B. December 31, Year One
C. One year after death
D. February 9, Year Two

Answer is A

The executor has the right to choose the alternative valuation date to reduce taxes on the estate. That date is the date of conveyance or six months after death, whichever comes first.


BEC

The Jiminez Corporation buys 10,000 shares of Warrington Corporation at $23 per share because the CEO of Jiminez expects the price of Warrington to rise sharply over the next few months. However, the CEO is concerned that economic conditions might also cause the price of the shares to fall quickly and sharply. He is concerned about explaining a big loss if that might happen. How is Jiminez most likely to protect itself from any such severe market drops?

A. Jiminez could also buy stock warrants in Warrington.
B. Jiminez could also buy a call option for 10,000 shares of Warrington at a properly designated price.
C. Jiminez could also buy a put option for 10,000 shares of Warrington at a properly designated price.
D. Jiminez could also buy convertible bonds issued by Warrington.

Answer is C

A put option allows Jiminez to sell the stock at a specified price. For example, if the put option is for $22, then Jiminez can sell the stock at that price even if it drops much lower. Although there is a cost for the put option, the loss is limited to a specified amount. All of the other possibilities (warrants, call option, and convertible bonds) allow for the acquisition of more shares which does little (unless the conversion price is extremely low) to help protect against a severe fall in stock price. They are all considered strategies to be used when stock prices are expected to rise.


Auditing and Attestation

The Othello Corporation buys and sells widgets. In Year One, the average number of days that it took to sell a widget was 18. In Year Two, because of the downturn in the economy, the average number of days that it took to sell a widget rose to 27. Which of management's assertions about the balance being reported as inventory on the company's balance sheet would be of most concern to the independent auditor?

A. Presentation
B. Valuation
C. Existence
D. Completeness

Answer is B

As inventory gets older, the chance that its value will fall below cost goes up. As goods get older, they tend to get damaged or show other signs of age that may require them to be sold at a reduced amount. Inventory is reported at the lower of cost or market. The increase in age might be a cause for the market value to decline so that a reduction in the reported balance will be necessary.

HAVE A GREAT WEEK - WORK FOR EVERY POSSIBLE POINT. IT MIGHT WELL BE THE ONE THAT GETS YOU TO 75!!!

Joe Hoyle
Co-Founder
CPA Review for FREE