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February 13, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
84 Weeks of Operation and 8,983,803 Page Views (without a penny spent on marketing)
Lesson 63
From: Joe
(a) – Happy Valentine’s Day tomorrow!!! Make it a point of telling everyone you are fond of to have a Happy Valentine’s Day (and do it with gusto) – You’ll
be surprised at how many people you make smile. Life goes better when you make other people smile.
(b) – Unless something weird happens, we will go over 9 million page views this week. We have done this without one piece of paid advertising. We cannot
afford to provide a free site without your willingness to spread the word. We depend on you. That is the truth; we will go out of business without you and
your helping us to spread the word to others about www.CPAreviewforFREE.com.
That is not a threat nor a joke; it is the simple truth. We work hard and we do it all for free. None of our owners has made a penny for all their time and
effort. But, www.CPAreviewforFREE.com goes nowhere without you help in spreading the word. Thanks!!!
(c) – We have gotten a zillion or two requests for our 20 extra FAR questions over the last few days. Last call – if you would like these extra questions and
answers, just send me a note (no, we don’t have a secretary, I actually answer these emails all by myself) at jhoyle@cpareviewforfree.com.
(d) – I sent out our 43rd tip on our Facebook page yesterday. To read all 43, go to www.facebook.com and search for CPAreviewforFREE.
(e) – We have gotten several great emails recently. Here are just a few:
From CM: “Thank you for providing an excellent resource for CPA exam candidates through your website! I am preparing to take the FAR section in 3 weeks and
I've been using the questions provided on your site to reinforce concepts since a friend told me about it last week. Whether or not the actual exam questions
bear any resemblance to your questions, I feel I am making a lot of progress in my understanding of the concepts by working problems on your site. I have
another study system but I prefer your problems because they force me to draw upon more than one area of knowledge and they seem more realistic to actual
situations that may occur in real life. Furthermore, your answer explanations make more sense to me than those provided in my other system!”
From TR: “I just want to say how much I appreciate your website. It has been very helpful in my preparation for the CPA exam. In the fall I passed Regulation
on my first try and spent hours going through your practice multiple choice questions. On Monday I am taking FAR and really hope this is the only time I have
to take it.”
(1) – Probably, the question that I get asked the most is: what is the best way to use www.CPAreviewforFREE.com to pass the CPA Exam. If I were you, the
first thing I would do is go to www.cpareviewforfree.com/resources.cfm?name=article&article_id=4 and read my thoughts on how to use our 2,100 free
questions and answers to get the 75 points you need to pass.
(2) – I took a break the other night and watched a bit of a college basketball game. At the beginning of the game, the announcers said something that I found
very interesting: “We talked to the coach and asked him how his team could possibly win tonight. He told us that during every game there are a lot of 50-50
moments where two players are fighting for the ball or fighting to make a play. ‘If we are going to win,’ he said ‘we have to win those 50-50 situations.’”
In live review classes, I always tell people that there are three kinds of CPA Exam questions. About 20-30 percent are reasonably easy. You may have to
think for a bit but, if you are careful, you should get most of those questions correct. However, another 20-30 percent are just incredibly hard. Those are
for the people who feel an obsession to make 100. Based on the luck of the guess, you can expect to get 25 percent of those correct (and that 25 percent does
help).
But, in the middle, there are about 40-60 percent of the questions that really make a difference. The people who pass are able to get a reasonably high
percentage of those middle questions; the people who come close don’t get quite enough of those middle questions. You need to win the battle of those middle
40-60 percent of the questions. That is the difference in making a 65 and a 75.
People often ask me how I write the questions that I include in www.CPAreviewforFREE.com. Do I, they will ask, try to write really easy questions to make
people feel good or really hard questions to push people to learn everything possible? “Neither” is the answer. I’m trying to write questions that reflect
the middle 40-60 percent. Those are the questions that a person who makes 75 really needs to get right and the person who makes 65 probably won’t get right.
People occasionally ask me about some really difficult topic. They will pose a question that seems virtually impossible to get right and want to know how to
do it. They seem shocked when I don’t seem too concerned about that type of question. Well, of course, I’d like to see everyone get every question right.
But I really don’t think those far out questions are worth the time and energy. That is not the battlefield where you typically get your 75 points.
Yeah, you need to get virtually all of the easy ones right and at least 25 percent of the impossibly hard ones. But everyone does that. It doesn’t make a
huge difference. To pass, you have to get as many of the middle 40-60 percent as possible. The questions that basically take a straight-forward rule and
ask a question to see if you really do understand that rule.
As you work the questions on our site, we are trying to show you that middle section and the rules they are testing.
You need to win those 50-50 battles.
(2) – Unsubcribe? Surely not. But, if you must – go to the end of this email lesson and you’ll find a link. But, if you ask us, we’d prefer for you to
stay around.
(3) – Practice – Okay, I’m ready to see if we can add at least one point to your current CPA Review score. Yeah, let’s add one point—right now!!! Read
these four questions. Read them carefully. Think through the rule that is being tested and figure out your answer. Don’t guess. That is fine on the CPA
Exam but does you no good when you are studying. And, then read my answer. Is there anything in that answer that you didn’t know; anything that you can
add to your storehouse of knowledge that will help you get a similar question correct the next time?
Remember, in studying, it is not getting the questions right that counts—it is being able to get the questions right the NEXT TIME that makes all the
difference in the world.
FAR
Samattin Corporation borrows $800,000 on January 1, Year One from a bank on a five-year note that is supposed to pay cash interest of 10 percent per year.
Samattin fails to make the first interest payment on December 31, Year One. On the next day, the bank restructures the loan with Samattin so that the company
does not go bankrupt. The first year interest is forgiven and the face value of the note is reduced to $500,000. The interest rate is dropped from 10
percent to 6 percent. Instead of being due in four more years, the face value is now due in 9 years. The present value of these future cash flows at a 10
percent effective rate is $380,000. What gain does Samattin recognize on the restructuring of this loan?
A – Zero
B - $110,000 gain
C - $300,000 gain
D - $500,000 gain
Answer is B
In debt restructuring, the bank records its loss using the present value of the future cash payments. However, the debtor (Samattin) compares the amount of
the debt at this moment to the total of the future cash flows. That is the rule. After one year, the debtor owes $800,000 on the original note and $80,000
or one year of interest at 10 percent for a total of $880,000. The future cash flows are now $500,000 plus 6 percent interest ($30,000) for nine years.
That is $270,000 in interest plus $500,000 face value to arrive at total future cash flows of $770,000. The amount owed is dropped from $880,000 to the
total of the future cash flows of $770,000. As a result, the debtor records a gain of $110,000.
BEC
A company sells 20,000 widgets in Year One for $8 each. Variable costs are $4 each and the company made a net income of $50,000. In Year Two, the company
raises the sales price to $10 each because of a 50 percent increase in fixed costs. Variable cost is not impacted. How many units must the company sell
just to break-even?
A – 7,500 units
B – 10,000 units
C - 12,500 units
D – 15,000 units
Answer is A
The fixed cost for Year One must be determined first. Sales were $160,000 (20,000 x $8) and variable costs were $80,000 (20,000 x $4). Sales minus variable
cost minus fixed cost equals net income. Because net income was $50,000, fixed cost must have been $30,000: $160,000 - $80,000 – Fixed Cost = $50,000.
Fixed costs went up 50 percent or $15,000 ($30,000 x 50 percent) so it must be $45,000 in Year Two. The question here asks for the number of units to
breakeven (where there is no net income) so $10 x units sold minus $4 x units sold minus $45,000 is set equal to zero. Sales minus variable costs leaves a
contribution margin of $6 per unit. Six dollars is made on each unit and enough units must be sold to cover the fixed cost of $45,000. The number of units
sold to break even is 7,500 ($45,000 divided by $6).
Regulation
Josh Smith has a salaried job working for a local greenhouse. In addition, he runs a small business of his own where he mows and maintains lawns. Finally,
he invests his money in a number of stocks using an online brokerage service. During the current tax year, he paid $340 in cash for subscriptions to
investment publications to help him buy the right stocks. How should he handle the $340 when filing his federal income tax return?
A – It cannot be deducted.
B – He can reduce any taxable gains from the investments by the $340.
C – He can report the $340 as a deduction to arrive at his adjusted gross income.
D – He can include the $340 as a miscellaneous itemized deduction with only the aggregate amount over 2 percent of his adjusted gross income being deducted.
Answer is D
This cost is not related to a trade or business. It relates to the production of portfolio income and can only be deducted as a miscellaneous itemized
deduction. Only the total of such amounts that exceeds 2 percent of the taxpayer’s adjusted gross income is actually deducted.
Auditing
A company has 26 warehouses spread across the United States that are used to hold its inventory. The company has scheduled the physical inventory to take
place after the close of work on December 31. Which of the following is true?
A – The independent audit firm is responsible for the taking of the physical inventory to ensure that the resulting numbers are appropriate.
B – The independent audit firm need not be present at each location.
C – The independent audit firm must be present at a majority of the locations to provide the necessary oversight.
D – The independent audit firm should hire consultants who will take the physical count for the company so that the process will be done in a proper manner.
Answer is B.
The independent audit firm must observe the taking of the physical inventory which is carried out by the reporting company. However, depending on the
auditor’s assessment of the internal control and the manner by which the count is taken, the independent auditor only needs to observe a sample of this work.
The exact size of this sample is up to the judgment of the auditor and depends on the assessment of the control procedures being followed.
You can do it – you can add a point by just making sure you know the rules that are demonstrated in these four questions.
HAPPY VALENTINE’S DAY!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
3351 Lady Marian Court
Midlothian, VA 23113
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