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Lesson 124

 

VOTE!

 

 In about two weeks on Tuesday, November 6, here in the United States, there will be an election.   We here at CPA Review for FREE always urge everyone to get out and vote.  No matter which candidate or party you support, we believe that democracy and freedom can only survive if we make the effort necessary to cast our ballots.   We are lucky to live in a country where we can vote.   Everyone should make the most of that opportunity.   I certainly understand that there is no perfect candidate.   We always seem to want something different.  I sometimes think we want candidates who are not human.   But they are all human and they deserve our support.   Pick one that you believe in and go out there and make your vote count.   It will remind you of how lucky you are to be able to vote.  

 

And, no matter who wins, be thankful that there are people who are courageous enough to put themselves through this.   We spend too much time tearing down that “other candidate” when we should feel a deep sense of gratitude for everyone who seeks to serve our nation.   Promise yourself that you will support the winner whether it is your person or the other person.  

 

If you think preparing for the CPA Exam is hard, you should try running for president.  Every skeleton comes out of the closet.

 

Carve  Out Time to Study--Not Pumpkins

 

One of the hardest things about passing the CPA Exam is just finding the time to do the preparation that is necessary.   We all live full lives that keep us running around constantly.   Then, we suddenly try to add in a number of hours of study each day and there simply is not enough available time.   I cannot tell you how often people write to tell me that they get to the end of each day exhausted without having found the time to do any studying.  It is frustrating.  

 

How can you get organized enough to find sufficient time to study?   Well, I have two pieces of advice.  More...

 

 

Phone Apps FAQ's

 

Even finding time to use the Phone Apps is hard.  How can I do it?

 

Candidates often complain about not having time.   That is true.   The burden is on you to find the time.   Always be ready to study.   That is one of the primary reasons to look into buying our apps.   All of our questions are available to you on our new mobile apps.   That makes studying at odd moments ever so much easier.

 

Do I need wifi or my data plan to use the phone app?

 

Once you download the app onto your phone, you do not need wifi or your precious data plan minutes to work practice questions.  One of the true secrets to passing the CPA Exam is being ready to study when any opportunity presents itself.   It is rare, most days, to have 90 minutes of free time to study.   But there are numerous times during each day when you have an open 2-10 minutes.   If you are not ready, it is easy to miss those chances to stay.   And that time can accumulate.   Always be ready to do a bit of studying whenever a few spare minutes open up.   While you are waiting for your meal to arrive at lunch.   Or, you are waiting for a bus.   Or, you are sitting in a doctor’s office until it is time for your appointment.   Be ready to add points.

 

Which smartphones work with the new phone apps?

 

Only iPhone/iPad and Android smartphones support our apps.  For more info on the apps, read this article.

 

Do I have a ghost of a chance to pass using CPAreviewforFREE only?

 

Yes you do!  Our review course program is a stand alone self study regimen which will prepare you to pass IF you are willing to put in the time--about 60-100 hours per part.  We have all the resource articles, practice questions, online Essential Content material and smartphone apps to get you there.  Don't take our word for it.  We have manytestimonials on our site  to prove it.  

 

If you are studying for FAR, consider using Points to Pass.  Unlimited FAR test bank of questions by individual question or by topic.  Try it now!

 

Luck? No--Hard Work? Yes

 

My wife and I went to Philadelphia last week and had a great day wandering through several magnificent museums.   One day we went to the Franklin Institute.   There sits a huge statue of Benjamin Franklin in the foyer.   Around that statue, Franklin’s famous quotations are constantly flashing up on the walls.   While we were standing, my wife pointed to one particular quotation that came up and told me that Benjamin Franklin was talking to CPA Exam candidates when he said  “I am a strong believer in luck and I find the harder I work the more I have of it.”

 

People will often hear about a candidate who passes the CPA Exam and will mumble with a bit of envy “boy, that person certainly is lucky.”   Nonsense.   Absolute nonsense.   Luck has nothing really to do with it.   I realize that people would like to think that luck plays a role because that takes some of the burden off of them.   But, in truth, people who put in the work (we usually recommend 60 to 100 hours for each of the four parts) and who come to understand the material, usually do well.   There is no guarantee but their chances go way up.

 

On the other hand, people (for whatever reason) who are not able to put in a sufficient amount of time and effort are much more likely to struggle on the actual exam.

 

Don’t rely on luck – as Benjamin Franklin knew:   What counts is your willingness and ability to put in all those hours in an efficient way.   If you do that, there is no reason to even think about luck.

 

 

Time to stop being lucky and start adding some real points.  

 

Here are a few of practice questions.   Let’s see how you do.  Are any of them scary?

 

FAR – I’m currently reading “Essentials of Accounting for Governmental and Not-for-Profit Organizations” by Paul Copley up at James Madison University.   This question is based on the information that I have been reading today.  

 

Within the City of Copley, an enterprise fund provides a service to a governmental fund for cash.   On fund financial statements, how is this transaction recorded?

 

A.   As an expense by the governmental fund and as a transfer in by the enterprise fund

B.   As an expenditure by the governmental fund and as revenue by the enterprise fund

C.   As an other financing use by the governmental fund and as an other financing source by the enterprise fund

D.   As a transfer out by the governmental fund and as a transfer in by the enterprise fund

 

 

Answer is B

 

This interfund service is not a transfer because actual work is being performed.   Therefore, the reporting is done the same as if each of the parties had been dealing with an outside organization.   The governmental fund loses current financial resources because a service is acquired.   For fund financial statements, that is reported as an expenditure.   The enterprise fund provides those services and, therefore, earns the compensation received.   That is reported as revenue.

 

 

Auditing

 

The CPA firm of Abraham and Associates is auditing the financial statements of the West Nebraska Corporation (WNC).   The auditors have obtained a general understanding of WNC’s internal control system and are pleased with the results.   What might the auditors do next?

 

A.   Verify the assessment of internal control by performing analytical procedures

B.   Consider whether additional testing of specific control policies and procedures would be an efficient means of lowering overall audit time and cost.

C.   Consider whether the internal control is strong enough so that an unqualified opinion can be rendered without substantive testing.

D.   Make sure that the information received has been documented through the use of a flow chart.

 

 

Answer is B

 

After a general understanding of internal control has been obtained, the auditor should consider whether additional testing of more specific factors (such as policies and procedures) might reduce audit time enough to outweigh the cost and effort of doing that additional testing.   Often, the additional testing of specific controls is not viewed as an effective way to reduce overall audit effort so that the auditor moves directly to substantive testing procedures.   However, in some cases, this additional emphasis on internal control can be used to reduce the assessment of control risk enough to warrant that work.   Some amount of substantive testing is always necessary to render an unqualified opinion.   The internal control information must be documented but a flowchart is not required.   Analytical procedures are used to spot account balances that seem out of line with what the auditor might have anticipated and are not directly related to internal control.

 

 

Regulation

 

What is a registration statement?

 

A.   It is another term for a company’s audited financial statements.

B.   It is a document that must be filed with the SEC each year by a publicly-held company.

C.   It is a document that is filed with the SEC to list all inside parties and any insider trading that has taken place in the previous 12 calendar months.

D.   It is a statement that must be filed with the SEC before the initial sale of securities in interstate commerce.

 

 

Answer is D

 

When a company wants to issue its securities through interstate commerce (for example, capital stock shares that will subsequently be traded on a stock exchange), specific information must be provided to the SEC with portions of that information being made public.   The overall filing is known as a registration statement.

 

 

BEC

 

A company starts the year with $340,000 in accounts receivable.   During the year, credit sales of $2,993,000 are made while cash collections are $2,763,000.   No accounts are written off during the year.   How long did it take the company to collect its average accounts receivable during this year?

 

A.   46.3 days

B.   52.5 days

C.   55.5 days

D.   60.4 days

 

Answer is C

 

Ending accounts receivable is $340,000 plus $2,993,000 less $2,763,000 or $570,000.   Therefore average accounts receivable for the year is ($340,000 + $570,000)/2 or $455,000.   Sales per day is $8,200 ($2,993,000/365 days).   If the company sells $8,200 each day and average receivables total $455,000, then the average time to collect accounts receivable is $455,000/$8,200 or 55.5 days

 

 

Joe Hoyle
Co-Founder
CPA Review for FREE

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Lesson 122

From:  Joe

CPA Review for FREE--Over 2,400 FREE CPA Review Questions, Answers and Explanations Available to YOU (for FREE and always will be)

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FROM WM:

“I don't remember HOW I stumbled upon CPARFF, but I'm SO glad I did.  I was trying to decide which part of all of this has been most valuable, and it's pretty tough.  I will say that I really began to take a second look at the paid Essentials content because of your motivational emails.  I don't know if it's the same for everyone, but for me, they truly spoke to me--motivated me in such a positive way.

“As I also posted on the forums and elsewhere, I never doubted that I could pass the exam based on the content.  But I often doubted I would be able to overcome procrastination, laziness, fear, ambivalence, poor time management, and boredom (hope I didn't leave any out) to get all of that content in my head.  I knew I'd never quit, but I was afraid I might drag my feet on and on, finding other things to do during my study time (as happened to me so very many times).

“The Friday before my THIRD attempt at AUD (this last one), I even ended up rescuing an old, lost dog (with 4 inches of hair) with no collar from the 100 degree heat that I SWEAR would've expired in another hour.  All from a phantom ring of my doorbell--both my dogs and I thought we heard one, but no one was there but the little dog running down my front walk, desperate for shade and water (honest to Goodness, it's true).  All of my valuable study time two days prior to the exam was spent trying to capture, find the owner of, and return what turned out to be a little old lady's dog (thanks to FB, Cody made it safely home that afternoon).

“All I kept thinking was, ‘oh, no!  I wish I hadn't allowed myself to be so easily distracted all those OTHER times!’

“But the Universe saw fit to give me some extra AUD points for the deed, I guess.  Once again, I was just trying for a 75, but the trick of knowing where that 75 line is remains elusive--my highest score of all, an 87.  From 73 to 66 to 87.  I still think it's partly a crap shoot as to whether you get a hard one or an easy one, which is mitigated by great preparation.  A quality I never had!  AUD is really much easier than the rest, despite my marks to the contrary!  :o)

“Anyway, I really only meant to say a HUGE thanks.  Your site, your review course, and your motivational emails were truly responsible for completion of all four parts!  Keep up the great work!”

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(2) – In a very few days, my younger daughter Lara leaves the security of home to start college in Charlotte.   She is one of the hardest working people that I’ve ever met.   And, she really wants to do well in college.   She has long dreamed of a particular career and this is her big chance.   She is willing to make the sacrifices necessary to make it happen.   But she is also nervous.   It’s a big step.

There are no guarantees in life.   If she is going to make it, she has to be willing to take the gamble.

Lara has cerebral palsy which has presented her with very significant challenges over the years.   So far, she has always been able to work around those challenges wonderfully well.   She’s an inspiration to us all.   College, though, is a new challenge on top of the CP.  

I think she will be fine.   However, as we all know, there are no guarantees in life.  

What advice would you tell me to give Lara as she leaves home to start her college career?   More...

(3) – Practice

FAR – I wrote this question by opening my intermediate accounting textbook at random and picking the first topic I saw.

Hans Dieterbach is the accountant for the Ehrmantraut Company, a company that applies straight-line depreciation.   In Year Seven, he realizes that a material error was made in the Year Four financial statements.   A $200,000 expenditure on the first day of Year Four was added to the cost of a piece of equipment (with a 10-year remaining life and no residual value) when it should have been expensed immediately.   Which of the following is NOT true?

A.   If only Year Seven financial statements are prepared, depreciation expense should be increased by $20,000.

B.   If only financial statements for Years Six and Years Seven are prepared, beginning retained earnings should be decreased by $160,000.

C.   If only financial statements for Years Five, Six, and Seven are prepared, beginning retained earnings should be decreased by $180,000.

D.   If only financial statements for Year Four are prepared, net income will be reduced by $180,000.

Answer is A

A material error made in an early year is corrected retroactively by changing the impact of the previously reported numbers from incorrect to correct.   Because the $200,000 was capitalized to the cost of equipment with a 10-year remaining life, depreciation expense was then reported as higher each year by $20,000.   Instead, the entire $200,000 should have been expensed immediately.   Going from $20,000 depreciation in Year Four to an expense of $200,000 decreases reported net income by $180,000 and also reduces the beginning retained earnings for Year Five by that same amount.   Another $20,000 in depreciation is recorded in Year Five so that beginning retained earnings for Year Six needs to be reduced by $160,000 ($200,000 rather than $20,000 and $20,000).  However, in the current year, depreciation expense is not increased by $20,000 but rather decreased by $20,000.

Need help with FAR?  Check out Points to Pass.  Try our UNLIMITED test bank of FAR questions for only $29.99

Regulation

Mr. and Mrs. Allen Mosweisz have adjusted gross income for tax purposes of $80,000.   They own a garage where they park their two cars.   The garage has a cost basis of $100,000 but is actually worth $140,000.  Lightning strikes the garage and does extensive damage to the roof.   The value of the property drops to $110,000.   Because times are tight, they only spend $17,000 to repair the roof.   What amount of itemized deduction can they take as a result of this casualty loss?

A.    Zero

B.   $16,900

C.   $21,900

D.   $30,000

Answer is C

For a casualty, the loss is the smaller of the drop in value (from $140,000 to $110,000 or $30,000) or the cost basis of $100,000.   Thus, the casualty loss is $30,000.   To determine the itemized deduction, each separate casualty is reduced by $100.   All casualty losses are then reduced by 10 percent of the taxpayer’s adjusted gross income.   So, the itemized deduction is $30,000 less $100 less $8,000 or $21,900.

BEC

Economists have a demand curve for widgets that shows that 10,000 units will be demanded by the market at a price of $5.   What happens if something takes place that moves the demand curve to the left?

A.   There will be more demand so at $5, the market would be willing to buy more than 10,000 widgets.

B.   There will be less demand so at $5, the market would be willing to buy less than 10,000 widgets.

C.   Producers will be willing to supply more widgets.

D.   The market price of widgets will go up.

Answer is B

When the demand curve for a product moves to the left, that reflects a reduction in demand.   So, at the same price, buyers will buy fewer units.   Because demand is less, the demand curve and the supply curve will cross (where equilibrium is established) at a lower market price.   Because the market price is lower, producers will reduce the amount they are willing to supply.

Auditing

The CPA firms of Barr and Goodman audited the financial statements for the HeavyDuty Company for December 31, Year Four, and the year then ended.   The last day of audit fieldwork was February 9, Year Five.   However, on February 13, Year Five, a major event took place and HeavyDuty added a footnote to its Year Four financial statements to disclose the impact of this event on several reported balances.   On that same day, the auditors examined the contents of that footnote and were satisfied that it contained no material misstatements according to US GAAP.   What date should be used for the audit report supplied by Barr and Goodman?

A.   December 31, Year Four

B.   February 9, Year Five

C.   February 13, Year Five

D.   It should be dual dated

Answer is D

The normal date of the independent auditor’s report is the last day of audit fieldwork.   However, if a change is subsequently made to the financial statements (such as the added footnote), the auditor can return and only audit that change.   If sufficient evidence is obtained that the change contained no material misstatements according to US GAAP, the audit report is then dual dated as of February 9, Year Five except for the footnote which is dated as of February 13, Year Five.

Did you have trouble with these questions?  If so, we sell the Essential Content (study material, study guide and SIMS) for only $15/month per section.

The year of 2012 is beginning to wind down.   You want to make as much progress toward passing the CPA Exam in 2012 as you possibly can.   Start now.   Start making it happen.   You can do this!!!

Joe Hoyle

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August 2, 2012

Lesson 120

From:  Joe

 

Great Questions, Great Answers

 

We always love hearing from the folks who use our products.   Here’s an email that we got yesterday from PH:  “You guys are so great, thanks for what you do.  Your explanations of why the wrong answers were wrong and why the right answers were right are extremely thorough and helpful.
It's great to have a supplement like this, and a free one also!”

 

PH makes a great point.   One of the best ways to evaluate any review program is to look at the explanations they provide for the answers.   Most of the ones that I have seen do that very poorly.   The real learning is not in the question; the real learning is in the answers.  Anyone can write a question but only true teachers know how to write clear and helpful answers.  “The answer is C because it is not A, B, or D” is simply not a good answer.   It doesn’t help you get the question correct the next time you see it (which, of course, is the real goal).  

 

When anyone asks what makes CPAreviewforFREE special,  I always have the same response:   “Our answers are, by far, the best in the business and that’s how you learn to pass the CPA Exam.”

 

CPA Exam Passing Rates for the First Half of 2012

 

I posted this information on our Facebook page on Friday but it is worth repeating here.  The pass rates for the CPA Exam for the first half of 2012 were:   Auditing – 46.45 percent, BEC – 51.03 percent, FAR – 45.19 percent, and Regulation – 47.40 percent.  

 

I am sure we would all love to see pass rates of 99 percent.   It would take the uncertainty out of exam preparation.   However, I think a rate of close to 50 percent is pretty good.   For many decades, back under the old exam format, the pass rate hovered around 30 percent.   That was scary.   You had to get in the upper 30 percent to pass. 

 

With roughly a 50 percent pass rate, you obviously only need to get into the upper half of the candidates.   That’s a lower threshold.  

 

Furthermore, I would estimate that between 25 and 30 percent of the candidates have not seriously prepared when they enter the test site.   They meant to study or they planned to study or they thought about studying.   But they never got around to studying.   If only 70 percent of the candidates actually prepare in a reasonable manner and the pass rate is about 50 percent, you can see that there is certainly good reason not to despair.   Most people who prepare in an adequate fashion do well.   Not all, but most. 

 

If YOU prepare seriously for the CPA Exam, you’ve got quite a good chance (let’s guess 50/70) of being successful.   Those are not bad odds.

 

But, of course, preparation is the key.  Preparation is always the key.   Go start answering some questions.

 

Serious Preparation or Fun Now

 

This summer, I have spent some time at the gym working to get into better physical shape.   The other day, as I drove into the parking lot, I noticed that they had put up a sign:   “would you prefer to be sore or sorry tomorrow?”    I thought that was an excellent question.   In life, we make choices.   Often, those choices come down to:   What do you want to do right now versus what do you want to be like tomorrow?  

--I can be lazy now or I can feel stronger tomorrow.  

--I can eat cake now or I can be thinner tomorrow.  

 

As we all know, one of the main reasons we fail to accomplish our goals is that we choose to be easy on ourselves now which results inbeing weaker tomorrow.  

 

For CPA candidates, the choice is obvious:

--Do I study now so that I am able to get a higher score tomorrow?

or

--Do I have fun now and have a lower score tomorrow?

 

That’s a choice you must make.

 

Life is full of choices.   It is very easy to choose “fun now” or “cake now” because the poor results won’t appear until tomorrow.  

 

If you seriously want to pass the CPA Exam, you have to get away from that “fun now” attitude.   I teach in college.   I cannot even begin to tell you how many good students that I have seen do poorly over the years simply because they could not get beyond that basic “fun now” attitude.  

 

You don’t have to study every minute.   You don’t have to work yourself into exhaustion.  There’s no benefit from that.

 

But you do have to do the work and you need to start right NOW.   You can’t put it off and put it off and put it off.   That’s just a loser’s approach.  

 

Given the choice between “study now” or “study later,” absolutely everyone is inclined to study later because that allows for fun now.  

 

It is a tough world out there.   You are never going to live up to your potential and be competitive until you can choose “study now” over “fun now,” at least most of the time.

 

CPA Exam Candidates are Like Tea Bags

 

I was at church on Sunday and the pastor used a quote from Eleanor Roosevelt that I am going to steal (borrow) and change a little bit.   The quote was “Women are like tea bags. You never know how strong they are until you put them in hot water.”   And, of course, I am going to modify Mrs. Roosevelt’s words to:   CPA Exam candidates are like tea bags.   You never know how strong they are until you put them into hot water.

 

Preparation for the CPA Exam and the actual taking of the CPA Exam can sometimes just move along like clockwork.   Everything just goes according to schedule.  You never get sick while studying.   You never have any job problems while studying.   You never have any family issues while studying.   You never have any major distractions while studying.   And, then, you go to the exam itself and the questions are pretty much what you expected and what you studied.

 

When things go that well, you really don’t need much internal strength in order to do well.  

 

How often do things run that smoothly?  Oh, I would guess about one time in 100.   Life is just always full of unexpected challenges.   It is when those challenges begin to pop up along the way that you come to learn how much real strength you have.   You have to plunge into that hot water to know how strong you really are.

 

There are always tough days that you have to face.

--The boss wants you to work late.

--Your children need for you to take them to a soccer tournament.

--One of your parents gets sick.

--A friend asks you for a favor that is going to require a lot of time you don’t have.

 

At those moments, you can always just bring out the white flag and give up.  I’ve met many candidates over the years who just threw in the towel at the first sign of trouble.  They were great when things went smoothly but they couldn’t deal with the hot water.

 

Giving up is always easy.

 

Or, they got to the exam and unexpected challenges started jumping at them.

--The room was noisy.

--The room was hot.

--The room was cold.

--They faced questions on topics they had never heard of in their studies.

--They worked a problem they knew and their answer was not one of the choices.

 

At those moments, it is easy to get distracted and discouraged and frightened.   Negative emotions seem to be everywhere.    It’s at that point that Mrs. Roosevelt’s (modified) quote comes into play:   CPA Exam candidates are like tea bags.   You never know how strong they are until you put them into hot water.

 

There are a lot of things out there – both as you prepare each day and while you take the exam – that seem designed to throw you off your game.   I’d love to wave my magic wand and push those distractions away.   But there is no magic wand.   The only thing that works is your ability to soldier on through that hot water.  

 

“I am not going to let this get me rattled.   I am not going to let this keep me from my goal of passing the CPA Exam.”

 

When it comes to hot water, are you ready to be strong????

 

NEW COMMUNITY FORUM SITE 

 

If you haven't visited our new Community Forum, you are missing out.  Designed as a survival guide for candidates preparing to pass the  Certified Public Accountants, HELP!!! + HOPE is a discussion forum to provide tips and tricks to help others pass the CPA exam. Now you don't have to go to other websites to discuss common issues, questions, share stories, etc.  AND, you can use your current login info and seamlessly create your username that will appear on the forum.  We are a "one stop shop" for CPA exam preparation, discussion and encouragement for others.  Even if you've passed the exam, encourage others by setting a great example.

 

More importantly, we have partnered with Project Hope who is dedicated to providing lasting solutions to health problems with the mission of helping people to help themselves. Most visibly known by the SS HOPE, the world’s first peacetime hospital ship, Project HOPE offers medical training and health education along with humanitarian assistance programs in more than 35 countries. Give to others.  More..

 

Practice – Time to Add Some Points.   You Can Do It!

 

FAR

 

Company A and Company Z go together equally to create Middle Company as a joint venture with joint control.   Middle Company holds land that cost $2 million but has a fair value of $3 million.   Company A is currently considering how it should report its ownership interest in this joint venture.   Which of the following statements is not true?

 

A.   Under U.S. GAAP, Company A applies the equity method to its ownership of the joint venture.

B.   Under IFRS, Company A is allowed to apply the equity method to its ownership of the joint venture.

C.   Under U.S. GAAP, Company A is allowed to add $1.5 million to the reported value of its land account.

D.   Under IFRS, Company A is allowed to add $1.5 million to the reported value of its land account.

 

 

Answer is C

 

Under U.S. GAAP, a joint venture is reported using the equity method.  The ownership interest appears in an investment account.   The share of the income is reported by Company A as a single amount as it is earned by Middle.     According to IFRS, the equity method can be used.  However, a second method called proportionate consolidation is also allowed.   In that alternative, the assets of Middle Company are reported by each owner based on the proportionate share of fair value.  Thus, half of the land’s value can be reported by Company A under IFRS but not under U.S. GAAP.

 

 

Auditing

 

The CPA firm of Kobe and James has been hired by an investment firm to examine the financial statements of Winston Coal Company.   The firm has been hired to specifically perform three testing procedures.    The board of directors for Winston Coal has agreed to allow such testing.   Which of the following is true about this engagement?

 

A.   The CPA firm is not allowed to accept such an engagement.

B.    The report must be in the form of a general use report or Kobe and James should not accept the engagement.

C.    The engagement can only be accepted if the report will first be filed with the PCAOB.

D.   The final report from the CPA firm will be a restricted use report for the parties involved.

 

 

Answer is D

 

When agreed-upon procedures are being performed, the risk is that parties who do not fully understand what was done by the auditors will see the report and make incorrect conclusions based on the information.   Therefore, when parties have agreed-upon the procedures to be performed, the report should be restricted to those parties who understand the actions that were taken.  

 

 

Regulation

 

Mr. and Mrs. Smith have two children, both of whom are dependents.  Their son James was a full-time junior at State College this past year.  Mr. and Mrs. Smith paid $4,000 for his tuition, fees, and course materials.    Their daughter Delores was a full-time freshman at South University this past year.   Mr. and Mrs. Smith paid $2,000 for her tuition, fees, and course materials.   Mr. and Mrs. Smith report adjusted gross income of $92,000.   What amount will Mr. and Mrs. Smith take as their American Opportunity Tax Credit (also known as the Modified Hope Scholarship Tax Credit)?

 

A.   $2,000

B.   $4,000

C.   $4,500

D.   $6,000

 

 

Answer is C

 

Because the adjusted gross income is well below the threshold here, Mr. and Mrs. Smith are allowed to take the American Opportunity Tax Credit.   The amount is 100 percent of the first $2,000 spent on tuition, fees, and course materials and 25 percent of the next $2,000 spent on those same costs.   That is a credit of $2,000 for the daughter (100 percent of $2,000).   That is also a credit of $2,500 for the son (100 percent of the first $2,000 and 25 percent of the next $2,000) for a total of $4,500.

 

 

BEC

 

Determination must be made as to whether each member of a corporation’s board of directors is independent or not.   Under normal rules, which of the following directors for the Kreyst Corporation is independent?

 

A.   A director who is president of Washington Corporation, a company that receives significant amounts of revenue from Kreyst.

B.   A director whose spouse received $50,000 in payments from Kreyst while working as an independent contractor.

C.   A director who was a former partner until last year of Adams CPAs, the external audit firm that examines the financial statements of Kreyst.

D.   A director whose spouse was an officer of Kreyst until two years ago.

 

 

Answer is B

 

The New York Stock Exchange (and NASDAQ) have rules that establish whether a director is deemed to be independent or not.   Those rules identify relationships that are too recent and too significant to be ignored.   Thus, the president of the company that sells to Kreyst is too closely tied to the company and is not independent.   The same is true for the director whose spouse was recently an officer and the director who was recently a partner with the external auditor.   However, the director whose spouse received $50,000 is still considered independent.   The rules set $120,000 as the threshold for this amount and that line was not broken.

 

 

And, finally, to repeat:

 

You don’t have to study every minute.   You don’t have to work yourself into exhaustion.  There’s no benefit from that.

 

But you do have to do the work and you need to start right NOW.   You can’t put it off and put it off and put it off.   That’s just a loser’s approach.  

 

 

Joe Hoyle

CoFounder

CPA Review for FREE

 

www.CPAreviewforFREE.com

 

 

 

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July 20, 2012

Lesson 119

From:  Joe

 

THIRTY QUESTIONS A DAY CAN CHANGE YOUR LIFE

 

Greetings from Richmond, Virginia, where the temperature is supposed to hit about 100 today and tomorrow.   That’s a great time to curl up in a cool room with a computer and work questions onCPAreviewforFREE.   You do not have to work thousands of questions each day.   Believe it or not, if you take your time and work just 30 questions per day and really think about each answer, you can go through our entire 2,300 question database in 2 ½ months.

 

People often view the CPA Exam as this massive undertaking.  And, of course, there is a lot to be done.   However, it is amazing how much you can get done if you simply break things down and then put in a consistent effort virtually every day.   If I asked you how long it would take to work 2,300 questions, you’d probably say 6-9 months because the number of questions seems so large.

 

But, if you just work 30 questions per day (which should take 90 minutes or less), you can go through our entire group of questions in 2 ½ months.  Take that a step further and figure that you'll be studying for one part of the exam at a time and it should take only approximately 20 days (550 questions/30 a day).  

 

So, what are you waiting for – get to work, answer some questions.   It’s going to be hot today.  You might as well find a cool place and start answering questions.  

 

WELCOME TO OUR FIRST TIME READERS

 

It's always great to welcome new users to our site and newsletters.  There are lots of resources to help you prepare for the exam. Hopefully, you didn't buy another review course before trying CPAreviewforFREE.  We offer everything you need to pass the exam.  "Try us first before you spend your hard earned money."

 

 Visit our Forum of users to give back, share insights, frustrations, happenings, and dreams.  Be on the lookout for news of weekly "best" comments as voted on by others in the forum.  We'll be giving away our products and services to the best response.  We also have many Tips for Success in our Resources section of the site.  Most importantly, you can always reach us to ask for help, let us know you passed the exam or part of the exam, or suggestions to make us better. 

 

Check out our HELP!!! & HOPE alliance with Project Hope as part of our forum.  We all have so much to be thankful for and Project HOPE is there to help those in need in their most critical time.

 

WHY DO YOU WANT TO PASS THE EXAM

 

If you have read these email lessons for long, you probably know that I read a lot.   I rarely watch television (except for “Breaking Bad”) but I enjoy reading.   I was reading a book last week and the hero was talking with a young woman and he asked her who she would like to be if she could be anyone in the world.   It’s a common question and people usually talk about athletes or singers or actors or politicians.  

 

I really enjoyed the answer the woman gave in the book because I thought it was ever so true:   “If I could be anyone, I would just as soon be me on my good days.”   I think we all get tied up occasionally in wishing that we could be someone else.   What we want seems to be outside of ourselves, outside of our own abilities; we have to be someone else to get what we want.    However, on a really good day, would you truly want to be anyone else?   Those days when you feel strong, courageous, and confident are just great.   Those are the days when you know that you can conquer the world.   What you want is not outside of you some place; it is inside of you – it is that strength, courage, and confidence that hides inside of each of us that we really want to draw out.

 

That’s one of the reasons that people try to pass the CPA Exam.   They want that exhilaration that comes from passing an exam that people often fail.   They know that passing the CPA Exam will require all of their strength, courage, and confidence.   Every last ounce.   Passing will help them understand just how strong, courageous, and confident they really are.  

 

It is always important to know why you are trying to pass the CPA Exam.   I think that is a must.  Some of reasons don't count.  More...

 

HOW TO TURN A NEGATIVE INTO A POSITIVE 

 

I get a lot of emails, as you might imagine.   I’m always touched by how many people write because they have become tired and frustrated and upset.   Over the years, I have received thousands of emails that start out “I work these questions and I miss them and that is so discouraging.”  

 

I guess that is one way to look at it but I’m not sure that’s the best way.  

 

I have a saying that I find helps me to avoid becoming discouraged:   “every action in life can have two outcomes:  (1) it can help you learn something new or (2) it can reinforce what you already know.   And, both outcomes are positive.”   If you can look at life that way, it can be a wonderfully positive experience:   everything’s either a learning experience or a reinforcement of what you know.  Here's what works to increase that knowledge.  More...

 

PRACTICE, PRACTICE, PRACTICE

 

Let’s do a bit of practice.   I actually went to the site and picked four questions at random and then changed them up a bit.   And, here they are:

 

FAR

 

A company located in the United States sells a significant amount of inventory to a company in Chile on credit. The transaction was denominated in Chilean pesos.   The balance had not been paid prior to the end of the current fiscal year. Financial statements are now being prepared for the US company and its functional currency is the US dollar.   Officials want to know which exchange rate will be used to report these amounts (the receivable and the revenue) in terms of US dollars. What procedure should the company follow in determining the amounts to be reported?

 

A.   Internal conversion

B.   Remeasurement

C.   Translation

D.   Exchange arrangement

 

 

Answer is B

 

The US company has engaged in a transaction that is denominated in a currency outside of its functional currency.   The exchange rates to be applied are based on the remeasurement process.   In remeausrement, monetary assets and liabilities are reported at the current exchange rate (the exchange rate at the balance sheet date) and all other accounts are reported using the historical exchange rate at the time of the original recording.

 

 

Auditing

 

A CPA is in the process of evaluating the design of a specific internal control being applied by an audit client.   The CPA will determine whether the control can do all but which of the following?

 

A.   Detect material misstatements

B.   Correct material misstatements

C.   Prevent material misstatements

D.   None of the above is a correct answer

 

 

Answer is B

 

Internal control policies and procedures are intended to keep material misstatements from occurring and winding up in the financial statements reported by a company.   This process usually takes one of two forms.   Many elements of internal control are designed to prevent material misstatements from ever occurring in the first place.   Other elements are created to detect material misstatements that have managed to get into the financial reporting system.   Some types of misstatements are more easily prevented.  Others are more easily detected.   Internal control policies and procedures should recognize and address those traits.

 

 

Regulation

 

Company A traded a large delivery truck to Company Z for a small delivery truck and a medium size delivery truck. The fair value of the assets exchanged is equal: both sides are surrendering assets worth $37,000.   Company A’s tax basis in the large truck is $42,000 and Company Z’s tax basis in the small truck and medium truck are $8,000 and $24,000. What is the tax effect of this transaction?

 

A.   Company Z has a tax basis in the new large truck of $42,000

B.   Company A has a total tax basis in the two new trucks (small and medium-sized) of $32,000.

C.   Company A has a tax loss of $10,000

D.   Company A has a total tax basis in the two new trucks (small and medium-sized) of $42,000.

 

 

Answer is D

 

Like-kind business assets are being exchanged here and no cash or other boot is conveyed.   Thus, it is a tax-free exchange and both parties retain their tax basis.    Company A had a tax basis of $42,000 and it will still have a tax basis of $42,000.   Company Z had a tax basis of $32,000 and it will still have a tax basis of $32,000

 

 

BEC

 

In Year Two, the Walton Company reported a contribution margin of $800,000 and net income of $600,000.    If the contribution margin was 40 percent of sales, what is the break-even point for this company?

 

A.   $500,000

B.   $600,000

C.   $720,000

D.   $840,000

 

 

Answer is A

 

Contribution margin is sales minus a company’s variable costs.   If contribution margin is $800,000 and net income is $600,000, then the total amount of fixed costs is $200,000.   Break-even point can then be determined by taking Sales minus Variable Costs minus Fixed Costs and setting that formula equal to zero.   Sales minus Variable Costs will be 40 percent of sales while Fixed Costs total $200,000.  Therefore, 40 percent of Sales minus $200,000 equals zero.  Or, 40 percent of Sales equals $200,000.   Or, Sales at break-even is equal to $500,000 ($200,000/40 percent).

 

 

Have a great week.   Stay cool.   Stay inside and work questions at www.CPAreviewforFREE.com

 

Joe Hoyle

CoFounder

CPA Review for FREE

 

www.CPAreviewforFREE.com