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May 27, 2014

 

Lesson 152

 

From:   Joe

 

Keeping Things Fresh

 

I wanted to do something entirely different in today’s email lesson.   Obviously, we have over 2,500 free questions and answers to help you pass the CPA Exam as quickly as possible.   In addition, we sell a product that we call “The Essentials” to help you gain the information you need to get those 75 points.   We charge a small amount for The Essentials, money that goes to help support our CPAreviewforFREE website. 

 

We get a lot of questions about The Essentials so I wanted to use today’s email lesson to provide an example of how The Essentials can help you gain the knowledge you need.   Remember, the exam is a mile wide and an inch deep. 

 

I have been doing work over the last few days making updates in the coverage included in The Essentials for FAR.  We pride ourselves in keeping our website up to date. In that one part of the CPA Exam, we have 20 different topics including earnings per share, leases, bonds payable, and the like.  If you have already passed FAR, forward this newsletter to one of your friends or colleagues who are still working on passing FAR.

 

Below is one of those 20 topics:   stockholders’ equity.   I just copied it out of The Essentials and pasted the content below.  We try to provide all the information you need to pass.   We want to provide information in a clear and understandable fashion.  

 

Special Offer

 

Here is my special offer.  Read our Essential Content below and then you will find four questions like you might see on the CPA Exam about stockholders’ equity.   I’ll try not to make them too easy or too hard.   Just normal questions.

 

For the first two people who send me correct answers to all four of these questions atjhoyle@cpareviewforfree.com, I will mail you an autographed copy of my book Don’t Just Dream About Success:   Stack the Odds in Your Favor.   It is available on Amazon for $8.99.   Everyone else will get a consolation prize.   But the first two people with all four answers correct will receive an autographed copy of the book.

 

Okay, read the Essential Content below and send me your answers to the four questions at the end of this lesson to jhoyle@cpareviewforfree.com.

 

FROM “THE ESSENTIALS” SOLD BY CPAreviewforFREE (Only $15/month or $30/3 months; Printable $39*) FOR THE FAR PORTION OF THE CPA EXAM:

 

STOCKHOLDERS’  EQUITY

 

The stockholders’ equity section of a balance sheet is equal to the reported assets minus liabilities (i.e., net assets).   Basically, it shows the source of an entity’s net assets.  Stockholders’ equity consists of two major categories:  contributed capital (the amount of the net assets that were put into the business by owners) and retained earnings (the amount of the net assets generated by operations – all net income since operations began minus all dividends). 

 

Businesses also report accumulated other comprehensive income to record gains and losses that are not reported on the entity’s income statement (such as gains and losses in the value of investments in available-for-sale securities).   A fourth section within stockholders’ equity (treasury stock) is a negative to indicate that net assets have been used to repurchase shares of the business but those shares have not, as of yet, been retired. 

 

Most companies report a statement of changes in stockholders’ equity within their financial statements which reports the change in each element of stockholders’ equity.   

 

 

Common Stock

 

In the incorporation process, a business indicates the number of authorized ownership shares (the total number of shares that it wants to have the right to issue—this is often a huge number so that limitations are unlikely to be encountered in the future).   The "shares issued" are the shares that have been provided to outside parties.   The "shares outstanding" are the shares that are currently held by outside parties.   The difference in issued shares and outstanding shares occurs because of treasury stock—issued shares that have been bought back by the business but not retired.  

 

Ownership shares can be common stock or preferred stock.   All companies have common stock while a few also issue preferred stock.    The holders of common stock gain the rights specified by the state of incorporation. Those rights normally allow the owners to vote for the members of the board of directors that oversees the running of the company.   Those rights also provide that each owner gets to share proportionally in any dividends that are distributed.    

 

In most states, a corporation is required to indicate the par value of its common stock and preferred stock.   With common stock, the legal purpose of par value has faded over the years.  It basically means that anyone who buys the stock directly from the corporation for less than par value might eventually be held liable for this discount if the company ever goes bankrupt.  Today, most corporations set the par value of their common stock at such a low amount (often a penny or a nickel) that no one ever buys the stock from the company for less than that amount.  

Assume, for example, that a company issues one share of $1 par value common stock for $35 in cash.   The journal entry is as follows.   Note that the common stock is recorded at the par value (a traditional approach in accounting) with the excess shown in an account such as “additional paid-in capital” or “contributed capital in excess of par.” Together, these equity accounts indicate the total amount of contributed capital—the amount paid in by owners directly to the company.

 

Cash                             35

         Common stock                    1

         Additional paid-in capital

                  —common stock     34 

 

If stock is issued to pay for an asset or expense, the recording is based on the fair value of the stock.   Only if the value of the stock is not known is the value of the asset or expense used.   However, assets should never be recorded at a figure that is above its own fair value.  

Assume that $1 par value common stock is selling for $35 per share and 1,000 shares are issued for land that has a fair value of $36,000.   The recording entry is as follows based on the $35,000 value of the shares issued. 

 

Land                                35,000

         Common stock

           ($1 par value X 1,000 shares)  1,000

         Additional paid-in capital

            —common stock                     34,000 

 

In a few states, no-par stock is allowed.  All of the proceeds from the issuance of no-par stock is credited to “common stock.”

 

Costs of registering and issuing common stock are generally netted against the proceeds so that a smaller amount is reported in the Additional Paid-in Capital account. 

Preferred Stock

 

The holders of preferred stock have only the rights specified in the stock certificate.   In effect, the common shareholders are giving up a preference to these specified rights in exchange for the cash or other assets being put into the business.   Most commonly, the holders of preferred stock are given the right to receive a set amount of dividends.  The amount of the dividend payout is specified as a dollar amount or as a set percentage of the par value of the preferred stock.   

 

Additional possible features stated in a preferred stock certificate:

 

1. Participating—preferred stockholders share with common stockholders in any dividend distributions that occur after both preferred and common stockholders receive a specified level of the dividend payment.   Thus, preferred stockholders benefit by any exceptional large dividend payments.

 

2. Cumulative—preferred dividends not paid in a prior year (known as “dividends in arrears”) that must be paid before any distributions can be made to common stockholders.  Dividends in arrears are not reported as a liability until declared by the board of directors.  However, they should be disclosed.

 

3. Convertible—preferred stockholders have an option of exchanging their stock for common stock at a specified ratio

 

4. Callable—the corporation has the option to repurchase the preferred stock at a specified price.  In stock transactions, no gain or loss is ever recognized on the income statement.   Instead, gains are recorded as increases in additional paid-in capital (or an account with a similar title).   Losses are a bit more of a reporting problem.  If a comparable additional paid-in capital balance exists, it can be reduced to record any loss from a stock transaction.   As an alternative, or if no additional paid-in capital balance exists, retained earnings is reduced.   Thus, under certain circumstances, retained earnings can be reduced by a stock transaction but can never be increased. 

 

Mandatorily redeemable preferred stock is classified as a liability on the balance sheet (rather than as stockholders’ equity) because payment must be made in the future.    

 More on Treasury Stock Transactions, Retirement of Stock, Dividends, Stock Splits, Share Based Payments, Quasi Reorganization, and Ratios…

 

PRACTICE QUESTIONS

 

Okay, the first two people who send the correct answers (just include the question number and the letter of the correct answer in your email) to all four of the following questions will receive an autographed copy of my book Don’t Just Dream About Success:   Stack the Odds in Your Favorwhich can be bought on Amazon for $8.99 (kindle or paperback).

 

Send your answers with the subject line "Answers" directly to me at Jhoyle@cpareviewforfree.com.   Remember if you are not one of the first two people to answer all four questions correctly, there is a consolation prize.  Everybody wins with correct answers.

 

 

ONE – On January 1, Year One, the VanHuss Corporation issues 1,000 shares of its preferred stock for its par value of $100 per share.   The stock pays a 6 percent ($6) cumulative cash dividend every December 31.     Both the company and the investor stipulate in the stock contract that these shares will be reacquired by VanHuss in exactly 8 years for par value plus any dividends that are unpaid at that time.   On December 31, Year One, the first dividend payment is properly made.   When the company then produces a balance sheet, how is this stock reported?

 

A – As a part of stockholders’ equity

B – As a liability

C – As a footnote disclosure

D – Between the liability section and the stockholders’ equity section.  

 

 

TWO – The Hough Company issues 100,000 shares of $10 par value common stock for $12 per share.   Two years later, the company reacquires 10,000 of these shares for $13 per share.   The company is going to report this treasury stock by the cost method.   However, at the last minute, company officials decide to report these shares by use of the par value method.   How does that decision affect the total stockholders’ equity reported by Hough?

 

A.   Total stockholders’ equity will be $10,000 lower because of the decision to use the par value method.

B.   Total stockholders’ equity will be $20,000 lower because of the decision to use the par value method.

C.   Total stockholders’ equity will be $30,000 lower because of the decision to use the par value method.

D.   Total stockholders’ equity will not be impacted because of the decision to use the par value method.

 

 

THREE – The Lawson Company has 100,000 shares of common stock outstanding with a par value of $10 per share.   The stock was originally issued for $14 per share.    Currently, the stock has a fair value of $17 per share.   The company issues 22,000 new shares of this common stock to its stockholders as a stock dividend.   Retained earnings should be reduced because of this dividend by which of the following amounts?

 

A.   $220,000 (22,000 shares at $10 per share)

B.   $308,000 (22,000 shares at $14 per share)

C.   $374,000 (22,000 shares at $17 per share)

D.   The company can reduce retained earnings by either $220,000 or $374,000

 

 

FOUR – On January 1, Year One, the Smith Company issues 1,000 stock options to its president.   The president must work for four years and then has three additional years in which to buy the stock at a price of $30 per share.   The price of the stock on that day is $28 per share but it goes up in price by $3 per year thereafter.   The conveyance qualifies as a compensatory stock option plan.   According to a computer pricing model (Black-Scholes), one of these options is worth $5 on January 1, Year One but $8 on December 31, Year One, and $10 on December 31, Year Two.   How much expense should this company recognize in Year Two?

 

A.   No expense is recognized in Year Two.

B.   $1,250

C.   $2,000

D.   $3,000

 

 

Okay, all of these questions can be answered from the material in The Essentials provided above.   Send your four answers with the subject line "Answers" to jhoyle@cpareviewforfree.com.   First two correct responses get a free autographed book.   Everyone else gets a consolation prize AND the answers.

 

Go for it.

 

Joe Hoyle

 

*As of May 27, 2014.  Prices subject to change.

How to Turn Desire into Results

Try us FIRST before you spend your hard-earned money.   CPA Review for FREE   Over 2,500 FREE CPA Review Questions and Answers Available to YOU (for FREE)   May 21, 2014   Lesson 151   From:   Joe   How do you turn that intense desire into results?   We all want to be winners.   We all want to be the champion.   We all want to pass the CPA Exam (although that can be an especially difficult goal).   Wanting to succeed is human nature.     How do you turn that intense desire into results?   How do you become a winner?   How do you attain a championship?   I watched a pro basketball game on television recently.   The playoffs are now being played.  Only four teams remain and they are all vying to become the champions.     That particular game was very close and the coach for one of the teams called time out to rally his players for a final push toward victory.   During this game, the coach was wearing a microphone so the fans could listen in to what he had to say to his team.   He looked at each player and said “When this is all over, don’t let anyone be able to say that the other team played smarter or played harder than you did.”     What great advice!!!   My guess is that many of you are preparing to take the CPA Exam in the near future—possibly this summer.   The pass rate on each part of the exam is roughly 50 percent so it is not an easy exam.   Success is tough to attain.   Nevertheless, when you walk away from that testing site, never let anyone be able to say that the other candidates studied smarter or studied harder than you did.     If the rest of the candidates managed to study smarter or if they studied harder than you did, then they have more right to pass than you do.  That’s only fair.   So, how do you study smarter?   How do you study harder?   Let me give you four quick recommendations based on my 35 years in this business. More...   Daily Motivation on Facebook to Pass the CPA Exam   As many of you probably know, we have a Facebook page and send out notes on success virtually every day.   We like to provide a bit of encouragement each day.   It’s just a nice way to start a day.   Here’s one that I sent out a day or two ago:     “In the next 24 hours, how will you be different? Answering that question positively is the first step toward success.“Words from Joe Hoyle, author of Don’t Just Dream About Success: Stack the Odds in Your Favor of CPA Review for FREE. Available on Amazon —either Kindle version or paperback. Only $8.99.”   In my mind, one of the real keys to success is learning how to focus your attention on the current moment.   Many people dwell in the past or become obsessed by the future.   But if you are going to accomplish something meaningful in this life (like adding points toward passing the CPA Exam), it is only the current moment that really counts.   Make sure you have a set plan for each day and then have the self-discipline to make it happen.   Even if you simply start each morning with a list of three or four things you want to achieve, that does provide a plan.   That gives you direction.   If you are planning to take the CPA exam this summer, don’t worry so much about what you will get done in four weeks or how well you did last Tuesday.   Your first question should always be:  What do I need to get done today?   The follow up question is:   When am I going to make that work happen today?     That is why I wrote that particular Facebook post.   We have nearly 3,500 followers.   I wanted to challenge each of them to focus on the upcoming 24 hours.   What can you do in that period of time that will make you different, make you better?     So, before you read another paragraph, take my challenge.   What are you (yes, YOU) going to do in the next 24 hours (from right now) that will make you different?   Don’t just answer this question idly.   Find a piece of paper and write down 3-4 things that you pledge to do over the next day that will make a difference.  For the CPA Exam, what can you accomplish in those 24 hours?   You can worry about the following 24 hours when you get there.   For the moment, focus on the next 24 hours.     In Chapter Nine of my book on Success, I tell a very short little story that I think exemplifies how people make the move toward success:   “John Ruskin, an influential art critic in England during the 19th century, kept a stone on his desk with one word scratched into its surface:     “Today   “Although the sentiment appeals to me, I would have selected an even more immediate admonition:   “Now”   Fast Forward Academy Partnership   Fast Forward Academy is CPA review taken to the highest level.  Why?  Because their CPA review program has the most technologically advanced program on the market.  Text notifications, intelligent learning modules, and at a very competitive price. $265 per part!  If you mention CPAREVIEWFORFREE, you can receive a 10% discount!         Being Productive   A friend of mine on the faculty of the University of Richmond brought me a cartoon the other day that he thought I would enjoy.   It is titled “How My Week Went.”    It shows a pie chart divided into two pieces.     One piece makes up about 20 percent of the pie and is labelled “Amount of time I spent being productive.”   The other piece makes up the remaining 80 percent of the pie and is labelled “Amount of time I spent doing things I thought would make me more productive.”   Isn’t that the truth?   We spend so much time getting ready to work that we don’t have any time left to actually get real work accomplished.   In truth, work is hard.   Preparing to work is kind of fun.   It feels productive without requiring much work.   We clean off our desk and take out the trash and pay the bills and sharpen the pencils.   That provides a sense of accomplishment without really adding any points to our score.     When I used to teach live CPA Review courses, I was always amazed by how many people would say that they really planned to study as soon as they got a few necessary preliminary actions finished up.   “If I can just get the bills paid and mow the grass, then I can study without being distracted.”     But the number of things that get in the way can just be amazing.   For that reason, I constantly told the candidates:   “Always study first.   Get that done.   The bills will eventually get paid.   The grass will manage to get cut.   The trash will be taken out some time.   But if you wait until everything else is done before you start to study, then you might never get around to the important stuff.   The study time has to be your priority.   Do it first.”   I believed that statement then.   I believe it now.    The very biggest part of your daily pie chart has to show:  “Amount of time I spent being truly productive and adding points.”     Speaking of adding points   Let’s do some practice.   FAR   According to US GAAP, the liquidation basis of accounting must be used in reporting a company when liquidation becomes imminent.   Which of the following is most likely to meet the definition of the term “imminent” as established in US GAAP? A.   The company fails to pay debts as they come due. B.   The company files for bankruptcy under Chapter 7 rules. C.   The court grants an order for relief following the petition for bankruptcy. D.   The court approves a plan for liquidating the company.     Auditing   A client has asked a CPA firm to help with its XBRL implementation.   To what does XBRL implementation refer?   A.    The creation of adequate financial accounting controls to meet standards established by the AICPA. B.   The tagging of data reported to the SEC so that it can be more easily analyzed and compared. C.   The transition of specified financial data from reporting according to US GAAP to reporting according to IFRS. D.   The reporting of information in the management’s discussion and analysis so that it more closely conforms to standards of the PCAOB.     Regulation   Susan Aritand is filing her latest federal income tax return.    During the tax year, she received $12,300 in ordinary income from a trust fund established by her mother before the mother’s death.   The income is taxable.   On what schedule of the form 1040 is this income most likely to be reported? A.   Schedule B B.   Schedule C C.   Schedule D D.   Schedule E     BEC   The United States measures its gross national product.   It also measures its gross domestic product.   What is the difference? A.   There is no difference.   The terms are interchangeable.  B.   Gross national product only measures manufacturing.   Gross domestic product also measures the value of some specified services. C.   Gross national product measures the value of products and services produced by the citizens of the country.   Gross domestic product measures the value of products and services produced within the country. D   Gross national product measures the value of products and services produced within the boundaries of the US.   Gross domestic product is the gross national product adjusted for inflationary factors.     Answers   FAR   Answer is D   According to US GAAP, liquidation is said to be imminent when a plan of liquidation has been approved by the court, or by the people who have such authority (likely the board of directors if the company is not in bankruptcy), and the chance that this plan will be blocked or that the entity will return from liquidation is remote.   In other words, the liquidation basis is used for reporting once liquidation of the company becomes virtually assured.   Auditing   Answer is B   XBRL is an information format for reporting used by the SEC.   The data formatted by a reporting entity using XBRL can be downloaded so that the users can compare information between companies and in many other ways.   Tagging the data in this way simplifies the analysis of reported information.     Regulation   Answer is D   Schedule B is for the reporting of interest and ordinary dividends.   Schedule C is for the reporting of profit and loss from a sole proprietorship.   Schedule D is for the reporting of capital gains and losses.   Schedule E is for the reporting of supplemental income and loss.   Part III of the Schedule E is specifically for the reporting of income and loss from estates and trusts.       BEC   Answer is C   Gross national product (GNP) is a measurement of the total market value of all final goods produced by the citizens of a country.   GNP is tied to people.   Gross domestic product (GDP) is a measurement of the total market value of all final goods produced within a country.   GDP is tied to geography.   Practice, practice, practice!   Joe Hoyle

Is Being Good, Good Enough to Pass the CPA Exam?

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April 22, 2014

 

Lesson 150

 

From:   Joe

 

Being Good is Good Enough

 

If you truly want to pass the CPA Exam, you don’t ever have to be great on any day.   That is simply not necessary.   Great is not required.   But you do need to be good and you do need to be strong almost every day.   Great is not needed but good is necessary as is being consistently strong.   And, everyone has the ability to do that.   There is absolutely nothing preventing you from passing the CPA Exam, sooner rather than later.   Be good and be consistently strong most days and you will make it.

 

To be successful on the CPA Exam, no one needs to be a super person.   You don’t have to be a genius.   You don’t have to be brilliant.   You don’t have to leap tall buildings with a single bound.  

 

But you do have to be good and you do have to be strong almost every day.  

 

It is that consistent effort that is so important to get the 75 points you need in order to pass the CPA Exam.    Too many people start out on their studies like they are going to conquer the world.   They study night and day for a few days.   But then they burn out.   That is not the way to pass the CPA Exam.   “Methodical” is a good word to keep in mind.

 

--Set a goal.   How many hours do you want to study this week?   Make it reasonable.   That is your target.

--Set a goal.   How many days do you want to study this week?   Not necessarily 6 or 7 but maybe four or five.

--Now that you know how many days you want to study this week – determine which ones it will be.   If you don’t specify the days, you’ll find excuses each day to avoid studying.   Look in a mirror and ask yourself which days you are going to study and then hold yourself to that.

--Take your target hours for the week and divide it by the number of days you are going to study during that week.   That’s your immediate goal.   That number is what you need to accomplish over the next 24 hours.  

--Always know the number of hours you need to study each day and when you are going to make time to do those hours.

 

If you are going to join the choir of people who have passed the CPA Exam, you have to make the challenge a real priority and do so at this very moment.  Anything that puts the process off into the distant future will work against you.   You need an urgency to be successful.  Remember you don’t have to be great but you do need to be good and you need to be strong.   And you need them now.

 

Go to CPAreviewforFREE and start working problems.   Do a problem and read the answer.   Do a problem and read the answer.   Get into the habit.  

 

Be good – don’t worry about trying to be great.  

 

Need a How To Video to Get Started on CPAreviewforFREE?

 

As I have mentioned before in these lessons, we have a short video available to help you make good use of the 2,500 free questions that we have on our site.

https://www.youtube.com/watch?v=qxs814aZP0k

 

Also, don't forget to check out our discussion forum to talk to others facing the CPA exam just like yourself.  You are not alone.  You have us at CPAreviewforFREE to keep you motivated through these newsletters, the forum, and our CPA exam tips articles.

 

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If you are looking for a CPA review program with all the technology whistles that integrate mobile, book, online with your busy life AND is very reasonably priced, look no further than our CPA review partner Fast Forward Academy.  

 

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How I Passed The CPA Exam     

 

Two weeks ago, I included a couple of excerpts from my book Don’t Just Dream About Success:   Stack the Odds in Your Favor (available for $8.99 on Amazon—paperback or Kindle).   The response was absolutely amazing.   Even I was shocked by how many people were intrigued by the guidance that was included.   

 

So, I am going to include a bit more from the book in today’s lesson.   More specifically, I want to share information from Chapter Seven on how I went about studying for and passing the CPA Exam.   It wasn’t easy for me but I made up my mind that I was going to pass and then set out to make it happen.  You can do it too!

 

Excerpt One (from Don’t Just Dream About Success:   Stack the Odds in Your Favor)

 

(My) encounter (with the CPA Exam) took place during the spring of 1970, and culminated on May 6-8 of that year.  Long decades have now passed, but the experience still influences how I face each of life’s new challenges.  Hitting the wall and successfully pushing through the challenge has been one of the most positive experiences of my life.  I discovered the power of personal evolution.  I learned to manage my time effectively and gained confidence in myself.  If you (yes, YOU) plan to stack the odds for success in your favor, such lessons are essential.  

 

Having majored in accounting during college, I took the CPA examination in a hotel ballroom in Charlotte, North Carolina, on May 6, 7, and 8 of 1970.  At that time, this comprehensive set of tests was 19 ½ hours long and was only given each May and November.  Then, and now, a candidate had to pass all four of the individual sections as one of the requirements for admission into the accounting profession.  At that time, the pass rate on each separate test was roughly 33 percent.  That percentage is eye-catching because it reflects the true intensity of the challenge.  The percentage of candidates who pass is now somewhat higher but, in those years, two of every three candidates walked out of each of the four tests with a failing grade.  Not surprisingly, the pressure was mind numbing.  Failure meant an additional six months of study before the next set of exams was given with their own 33 percent pass rate.  Given the odds, many bright, hard-working accountants took the CPA exam for years without ever achieving success.  Most faced the challenge with a genuine sense of dread.

 

I returned to college after my Christmas vacation in January 1970, a senior accounting major with decent grades earned at a good school.  A job waited for me following graduation.  I had a fiancée and wedding plans.  I was ready (at least I believed) for adult life.   But, the CPA examination stood in my path – very much like a giant wall. 

 

Excerpt Two:

 

Passing was important to me.  I wanted to get on with life.  I was ready to be an adult and stop having to sit in little desks, listen to lectures, and take tests.  Moreover, I had a burning desire to pass all four parts on my first attempt.  In college, my grades were fairly good, but far from stellar.  For many reasons, the elevated level of ambition that I felt so intensely in high school had disappeared.  I missed the feeling.  An essential part of me had gotten misplaced during those four years.  The CPA exam offered the chance to recapture the internal drive that had pushed me to succeed.  I was not aware at the time, but completion of this examination became a genuine Level-3 goal for me.

 

Excerpt Three:

 

Success on the CPA exam offered a chance for redemption.  I wanted to pass all four sections immediately to reignite the element of my personality that I had allowed college to dampen down:  my passion for success.  (Not coincidentally, I later became a teacher, in part, because I wanted future college students to have a better educational experience than my own.)  To ready myself for the battle,  more on Joe's success story.

 

Okay, let’s do some practice.  

 

Remember, you don’t have to be great but you do need to be good and you do need to be consistently strong.

 

FAR

 

Good Company filed a $900,000 law suit against Bad Company during Year One.   At the end of Year One, both companies think that Good will probably win $200,000 but that a win of $370,000 is reasonably possible.   In Year Two, the suit is settled with Bad paying $170,000 in cash to Good.   What does each company recognize on its income statement for Year Two?

a.    Good recognizes a gain or $170,000 and Bad recognizes a recovery (gain) of $30,000.

b.    Good recognizes a loss of $30,000 and Bad recognizes a recovery (gain) of $30,000.

c.    Good recognizes a gain of $170,000 and Bad recognizes a loss of $170,000.

d.   Good recognizes a loss of $30,000 and Bad recognizes a loss of $170,000.

 

 

Regulation

 

Ajax is eager to sell its former headquarters, a commercial building valued at $1,650,000.  Ajax has received an offer from Johns in the amount of $1,800,000.  The offer stated, among other things, “all fixtures and furnishings now in the building shall remain and be conveyed with the sale.”  The furniture was of inconsequential value, but, for sentimental reasons the president of Ajax did not want to convey an old “Ajax Corporation” sign which still hung in the lobby.  Which of the following is correct?

 

a.   The board of directors of Ajax must authorize the sale for any contract to be valid.

b.   An acceptance by Ajax which does not convey the “Ajax Corporation” sign will cancel the offer from Johns.

c.   The offer from Johns must be notarized since the contract involves real estate.

d.   Ajax’s advertisement to sell its building, since it specified the price, is a valid offer.

 

 

Auditing

 

An investor is looking at audit reports for two different companies and finds the same sentence in both:   “Our responsibility is to express an opinion on these financial statements based on our audit.”   In the first case, that sentence is at the end of the first paragraph.   In the second case, that sentence is at the beginning of the third paragraph.   Which of the following is most likely?

a.   The first report is for a public entity and the second report is for a nonpublic entity.  

b.   The first report is for a nonpublic entity and the second report is for a public entity.

c.   The first case is correct but the second case is not.

d.   The second case is correct but the first case is not.

 

 

BEC

 

An investor recently bought a large amount of gold as an investment after selling a portfolio of corporate bonds.   Which of the following is the most likely reason for those actions?

 

a.   Inflation rates are expected to remain the same over the near future.

b.   Interest rates are expected to fall in the near future.

c.   Corporate dividend levels are expected to rise in the near future.

d.   Inflation rates are expected to rise in the near future.

 

 

 

Answers

 

FAR

 

Answer is A

 

For a contingent loss, balances are recognized when they are probable.    Bad would recognize a probable loss of $200,000 in Year One but would then reduce that to $170,000 because of the settlement.   The reduction creates a $30,000 recovery (gain).  Contingent gains are not recognized until finalized because accounting is conservative.   The entire $170,000 is recognized by Good in Year Two.

 

 

Regulation

 

Answer is B

 

Any “acceptance” which varies from the terms of an offer constitutes a counter-offer which cancels the original offer.

 

Auditing

 

Answer is A

 

The Public Company Accounting Oversight Board sets the standards for public companies and has maintained the traditional audit report where the auditor’s responsibility is stated at the end of the first paragraph.   The Auditing Standards Board sets standards for nonpublic companies and has created a new standard report where the auditor’s responsibilities are spelled out at the beginning of the third paragraph.

 

BEC

 

Answer is D

 

Since the investor is switching from bonds to gold, corporate dividend levels are not relevant.   A rise in dividend rates would be a reason for switching to equity investments but not into gold.   Because the portfolio of bond investments has already been bought, their interest rates will not be impacted by a drop in interest rates but their values will climb because high interest rates have been locked in.    If inflation rates do not change, they have no real impact on the future value of either the bonds or the gold.   However, if inflation rates are expected to rise, the set bond interest rate will not be able to rise with inflation and the value of the bonds will drop.   But the value of gold will rise in recognition of the reduced value of the dollar (caused by the increase in the rate of inflation).

 

Go for it!

 

Joe Hoyle

President

CPA Review for FREE

 

www.CPAreviewforFREE.com