May 27, 2015
Lesson 162
From: Joe
I Shall Astonish You All
My wife and I went to the movies on Saturday night to see Far From the Madding Crowd. The movie was set about 150 years ago. A young woman is poor but inherits a large but failing farm. It is obvious that no one expects her to save the place—failure seems inevitable. As one of her first actions, she calls all the workers together and tells them the following.
“Don't anyone suppose that because I'm a woman, I don't understand the difference between bad goings-on and good. I shall be up before you're awake, I shall be afield before you're up, and I shall have breakfasted before you're afield. In short, I shall astonish you all.”
I just loved that quote. As soon as I got home that evening, I looked it up on Google just to get the words correct. Why did I love her words so much? Gosh, there are many reasons.Reasons...
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Create a Challenging Competition
I get up each morning and stretch. At my age, I need to stretch once or twice every day just to keep my body from becoming brittle. In the morning, I stretch at about 5:50. On the local PBS radio station at that time, they have a short show by Garrison Keillor called “The Writer’s Almanac” where he discusses writers and reads a poem, all in just five minutes per day. This morning he informed his listeners (and me) that it was the birthday of Ralph Waldo Emerson who said “nothing great was ever achieved without enthusiasm.” Ah, another fabulous quote and I had written it down before 6 in the morning.
When I talk with people about passing the CPA Exam, I am always surprised by how unenthusiastic they often seem. “I don’t want to study.” “I don’t want to learn.” “I don’t want to take those tests.” I always think to myself—oh my gosh, this must be so difficult for you to do. No one with that attitude can possibly want to do the necessary work. Every day of study must seem like sheer drudgery.
But we all love to see competition—for many, it is one of the most interesting things in their lives. Two tennis players battle for hours and we watch spellbound. Two basketball teams play into overtime to determine the championship and we can hardly look away. Baseball players go at each other for 9 innings trying to show who is most deserving. Who wouldn’t love that level of great competition? More...
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Practice Makes Perfect (Or Good Enough to Pass the CPA Exam)
Okay, let’s practice a bit. Read the following four questions and see how well you do. After you have selected your answers, scroll down and read my answers. If you get a question correct, that’s great/wonderful/super but it does not do you much good. But, if you miss a question and then study how to arrive at the correct answer, you have a chance to hit an important goal: Moving your score that much closer to the passing score that you want on the CPA Exam.
FAR
The Farena Corporation has 100,000 shares of $5 par value common stock outstanding. In the past few years, these shareholders have been paid a $.30 per share dividend each year. The company also has 20,000 shares of $40 par value preferred stock outstanding. These shares are entitled to a $1 per share cumulative cash dividend each year. That dividend has been paid every year since the stock was issued. In the current year, because of operating problems, the company’s board of directors did not declare or pay a dividend on either the common stock or the preferred stock. Which of the following statements is true?
A. The company should report a liability of $20,000.
B. The company should report a liability of $30,000.
C. The company should report a liability of $50,000.
D. The company should not report any liability.
REG
Regina Everton is filling out her current federal income tax return. Which of the following is deductible as an itemized deduction as a gift to charity?
A. Value of her time in helping do the primary work of a qualified charity.
B. The monetary value of blood given to a qualified blood bank.
C. Cash gifts to civic leagues, labor unions, and chambers of commerce.
D. A gift to the federal government if the gift is solely for public purposes.
BEC
A company is considering the possibility of buying equipment. It will cost $500,000 and be depreciated over 5 years with no residual value for both tax and financial reporting purposes. The equipment is expected to generate cash operating revenue of $280,000 each year and cash operating expenses (without income taxes) of $130,000 each year. The effective tax rate is 40 percent. For convenience, assume straight-line depreciation. In deciding whether to make this investment, what is the best estimate of the payback period?
A. 3.33 Years
B. 3.85 Years
C. 4.20 Years
D. 5.00 Years
AUDITING
An independent auditor is working with a client company and is currently seeking answers to an internal control questionnaire. The next question is: Are paid notes canceled, stamped “Paid,” and the filed away? What is the most likely concern that prompts the auditor to ask this question?
A. The auditor wants to ensure that debts are paid as they come due.
B. The auditor wants to ensure that paid debts are removed from the accounting records.
C. The auditor wants to ensure that the same debt is not paid multiple times.
D. The auditor wants to ensure that interest is properly calculated on the note and then paid.
Answers
FAR
Answer is D.
Until a dividend is declared by the board of directors, it is not reported as a liability. If a dividend had been declared on either the common or the preferred stock but not paid, then a liability would have been reported. If a preferred stock dividend is cumulative and missed, then the company must pay that amount first in the future before any dividends can be paid on the common stock. That information must be disclosed. However, no liability is reported until the board actually declares the dividend.
REG
Answer is D
As might be imagined, these four examples are taken almost verbatim from the IRS book of instructions. To be deductible as a gift to charity, there must be the sacrifice of an asset that is conveyed to a qualified charity. Time and blood are not considered assets in the traditional sense because they do not have a direct cost to the taxpayer (like a car would have or shares of stock would have). A civic league, labor unions, and chambers of commerce are not viewed by the government as qualified charities. A gift to the federal government is an itemized deduction as long as it is for a public purpose. For example, a cash gift to reduce the federal budget deficit qualifies as does a gift to a national park.
BEC
The answer is B.
For an investment, the payback period is the length of time it takes the buyer to collect net cash inflows equal to the cost. A quick payback period is viewed as a better investment. If cash is generated evenly over time, the payback period is the cost of the asset divided by the annual cash inflow. Here, the company makes a cash profit of $150,000 each year ($280,000 less $130,000). Annual depreciation is $100,000 ($500,000/5 years) so taxable income is $50,000 (cash income of $150,000 less depreciation of $100,000). The annual tax payment is $20,000 ($50,000 times 40 percent). The actual cash collection is $130,000 after subtracting the $20,000 paid in taxes from the $150,000 net operating cash inflow. The payback period is the $500,000 cost divided by the net annual cash inflow of $130,000 or 3.85 years.
AUDITING
Answer is C
The key words in the question being asked by the auditor have to do with canceling the debt, marking it paid, and then filing it away. Those actions by themselves do not ensure that the debt is paid when it comes due (it might have been paid very late and had the same actions taken). Those actions by themselves do not ensure that the debt is removed from the accounting records (those actions can be taken and the debt still not be removed from the accounting records). Those actions by themselves have nothing to do with the computation and payment of interest. However, by canceling the debt and marking it paid and then safeguarding it in the files, a dishonest employee cannot try to use the document to get the amount paid a second time. In questions like this, always connect the key words to what the auditor is hoping to prevent.
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Go for it! You can do it!
Joe Hoyle
President, CPAreviewforFREE
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