Complete Bisk CPA Review FAR Course (Part 3)

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The popular Bisk CPA Review FAR course is back – and free.

Backstory: NINJA CPA Review acquired the Bisk CPA Review intellectual property from Thomson Reuters in 2016.

Many of these videos feature Bob Monette, who passed away in 2015, and is regarded by many as one of the best CPA Review instructors ever.

I personally passed AUD in 2.5 weeks using Bisk CPA Review videos.

I have put these videos on YouTube so that Mr. Monette's teaching legacy can live on.

Note: Some content is obviously outdated, so be sure to only use it with an updated FAR CPA Review course.

See Also: Bisk CPA Review Complete Course (129+ Hours)

FAR CPA Exam Review Course 

Welcome back in this FAR CPA Review class, of course, we're going to continue the solution of dice corporation, our statement of cash flows problem. And you remember when we left off, we had begun our analysis by proving out the change in retained earnings because. I feel that's the most logical place to start. So we'd proven out the change in retained earnings.

So we had X that out. Now we move on to the next step. Once you prove out the change in retained earnings. Now you go to the additional information. If you look at the third bullet down, we've already dealt with the first two bullets, the third bullet says equipment costing 400,000, having a carrying amount of one 50.

Was sold in year two for 150,000. Let's start with an entry. I think it's always good to start with an entry. It, get your organized. We know that they would have debited cash for what they collected 150,000. We know they would credit equipment for the original cost 400,000. And because they said that the carrying amount of the equipment was 150,000.

There must've been 250,000 of accumulated depreciation on that equipment. So we'll debit accumulated depreciation 250,000. In other words, there was no gain or loss on sale. All right. So you put that entry down. What's the first thing you notice about that? This cash, anytime you see cash in an entry, it's got to go somewhere.

What kind of cash is that? Is it operating? No. It's happy. Isn't it's PPE. It's happy. So you're going to go to your second big T account, which is investing and you're gonna post that $150,000 debit right there. That's cash provided by an investing activity because investing always makes me happy by yourself.

Held to maturity by yourself. The over sale buyers LPP and a buy or sell equity investments. That's when I go there, let's post the rest of it. We go to plant equipment. We post that $400,000 credit. Notice we have not explained the $700,000 change in that account. Leave it open. And now you go to your T account on accumulated depreciation.

You post that debit of 250,000 notice. Now we have proven there is some activity in that account. The net change was zero, but once we post that 250,000 to accumulated depreciation, now we know there is some. Activity in that account, there's going to have to be more activity because the net change was zero.

Let's do the next one, I held to maturity security was sold for 135,000. There were no other transactions affecting, held to maturity securities. Well, let's do an entry. We know they would have debit and cash for the 135,000. What would they credit to held to maturity? We'll look at your T account. If you look at your T account and held to maturity, that account during the year, went down by a hundred thousand.

This must have been the transaction because they said there were no other transactions that affected, held to maturity. So they would credit held to maturity. We assume for the a hundred thousand. And the point is there's a $35,000 gain on sale. What's the first thing you notice about that entry. Bob this cash, the minute you see cash, it's got to go somewhere.

Is it operating cash? No. Is it happy? Is it happy? It is right. The H in happy is buyer sell, held to maturity. This happy. The agent happy is buy or sell, held to maturity. So you're going to go to your second big T account, which is investing activity. And you're going to post that $135,000 debit right there.

That's cash provided by an investing activity. Cause investing always makes me happy buy or sell, held to maturity by herself. They will for sale by herself, PP and E buy or sell equity investments. That's when I go there. Let's post the rest of it. I go to held to maturity securities. I post that a hundred thousand dollar credit to that account.

We've explained the net change in that account. Exit out. How about the game? How about the gangs operating? That's an operating item. You go to your operating T account and post that $35,000 gain as a credit to operating. Remember when you put an entry down? Everything gets posted somewhere. You can see what flows is like.

You have to be meticulous. So you put an entry down and everything gets posted somewhere. So that game is an operating item. Now that might bother you, but let me just explain what's going on here. Just think for a second, why we're doing this, you can't show this thirty-five thousand as both a gain on your income statement.

And cash provided by an investing activity. You'd be double counting it doesn't that make sense? You've got you. Can't show that $35,000 gain on sale of HTM as both $135,000 cash provided by an investing activity and also a $35,000 gain on your income statement. You'd be double counting it, but you don't have to think all that through just post it.

You posted it as a credit to operating. But as I say, when you put an entry down, everything has to be posted somewhere. The final bullet says 10,000 shares of common stock were issued for $22 a share. So we have to assume they would've made their normal entry. They would have dividend cash for 10,000 shares at 20 to 220,000.

They would credit common stock for par value, 10,000 shares at par 10, a hundred thousand and credit API for the rest, 120,000. What's the first thing you noticed about that entry? Well, this cash it's got to go somewhere. Is it operating? No. Is it happy? No. It's Prince divots. Isn't it? The I, and it is issue stock.

So you're going to go to your third, big T account, which is. Financing activity. And you've got to post that $220,000 debit where it belongs cash provided by a financing activity because I'm always financing for Prince divots. Prince is dead. Principal did pay dividends. I is his shoe stock. Ts is treasury stock transactions.

I suppose the rest of it, we go to common stock. We post that a hundred thousand dollars credit. We've explained the change in that account. We can exit out. We post the credit to additional paid-in capital of 120,000. We've explained the change in that account exit out. So now we have dealt with all the additional information.

Now, once you have dealt with all the additional information, there's only one step left. Now, before we do this together, let me explain that there are good solid accounting reasons. For everything that we're about to do, and we're not going to spend time going through all the ins and outs of each thing we're about to do, because I'm not sure it would be that valuable in the long run.

In other words, when we're done with this FAR CPA Review class, if you end up thinking at the end, if there's a debit here, I credit this. If there's a credit here, I debit that. That's fine. That's deliberate on my part. I want you to know that I have. Deliberately chosen a method that is somewhat mechanical. Why do you think I did that timing?

One of my constant worries is that my students could be in the test. They get a simulation on cash flows. They're behind their time and they have to do this as quickly as possible. So I've deliberately chosen a method that is somewhat mechanical, so you can do it more quickly. So we're not going to get bogged down in all the ins and outs of why we're doing each thing.

Let's just do the mechanical approach at the end. I want you to get mechanical. Let's let's go to the accounts we have not explained. Remember, once we, once we put an X to every account we're really basically done, let's go to the accounts. We've not explained the first one available for sale securities that went, that increased by a net debit of 300,000.

First of all, let me ask you, is that that account is that operating, investing? Or financing it's investing, right? It's the a and happy by yourself available for sale. So we're talking about an investing item and here's, here's the mechanical approach. You say if during the year that increased by a debit of 300,000, then I'll go to investing, do the opposite.

I'll credit investing 300,000. I'm assuming that was 300,000 cash use in an investing activity. See, at the end, just do the opposite. In hell available for sale securities increased by a debit of 300,000. Then I go to investing. I do the opposite. I credit investing 300,000. I have to assume that was 300,000 cashews in an investing activity.

Let's do another one. There was no net change to accounts receivable. Here's one inventory. First of all, operating investing or financing. It's an operating item. It has to do with cost of goods sold. So my thinking is what inventory increased by a net debit of 80,000. I go to operating do the opposite credit operating 80,000 held to maturity securities.

We took care of that. We've explained the change. Now here's an interesting one. Here's a little tricky one property plant equipment. We know that during the year plant assets increased. By a net debit of 700,000, right? That was the net change. But all we saw in our journal entries was a credit of 400,000.

Now think this through with me, the only way that plan assets could have increased by a net debit of 700,000, we have to infer there must've been another debit net account of 1,000,001. Again, if plan assets increased by a net debit of 700,000 and all we saw in our journal entries. Was a credit of 400,000.

We have to infer that there must have been the, had to be another debit, that account of 1,000,001. So we debit plant assets, 1,000,001, and we credit investing PPD. It's happy. We credit investing 1,000,001. I have to assume that was 1 million, one of cash used in an investing activity. Now, if you look at your Tia account, we actually have, we finally have one.

Here's what you have an investment, 150,000 cash provided by selling equipment. 135,000 cash provided by selling HTM 300,000 cash used to buy available for sale and 1,000,001 cash used to buy property, plant equipment. If you, if you work it out, net cash used, I don't know what to use. So on the credit side, none of the debit side is provided.

The credit side is used net cash used in investing activity 1,115,000. So we can answer number two, number two, what was the net cash? Used in investing activity. The answer is a 1 million, one 15, but you see why we're using this technique because the FAR CPA Exam plays games with you. We didn't know about that million one.

We had to find it there's missing information. And of course, you're not going to get in your ears. You're in your exam. You're not going to get multiple choice. This involved. This is more like a simulation. Well, we have to work out operating, investing, and financing. You won't get multiple choice. This involved.

This is more like a simulation, but as I say, the reason why this technique helps you is that the FAR CPA Exam plays games with you. This missing information, we had to find that million one. All right, let's move on. Here's another interesting one. Accumulated depreciation. First of all, operating investing or financing.

It's an operating item. We're trying to find the depreciation expense for the year. Now we know the net change to accumulated depreciation was zero, but in our entries, we had a post, a debit of 250,000. What is the only way the net change to that account could be zero. We have to infer there must've been another credit in that account.

There had to be another credit to accumulated depreciation of 250,000 for the net change to be zero. That must've been the depreciation expense for the year. So that was a credit to accumulated depreciation. Two 50, go to operating, do the opposite debit operating 250,000. You had to find the depreciation expense.

As I say, this technique helps you because the FAR CPA Exam plays games. Are you this missing information? How about Goodwill? Goodwill went from a hundred thousand down to 90 didn't Goodwill decreased by a net credit of 10,000. Why did that, why did Goodwill decrease by 10,000 amortization was their amortization.

I hope you're thinking. No, Bob Goodwill is not amortized. It's tested for impairment at least annually. So if Goodwill went down there, must've been an impairment loss. Again, if Goodwill went down the, it must've been an impairment loss on the income statement. So it's an operating item. So that went down by a credit of 10, go to operating, do the opposite debit operating 10 next accounts payable.

What kind of, is it operating, investing, or financing operating again? It has to do with cost of goods sold. Now we know accounts payable increased by a net. Credit of 105,000 go to operating, do the opposite debit operating one Oh five. We've got another one we can now do operate. Here's what you have in operating.

We have the net income, six 90 on the debit side. On the credit side, we have the $35,000 gain on equipment. The 80,000 increase in inventory. Then on the debit side, we have. Adding back the depreciation expense of two 50, the impairment loss of 10, and the increase in accounts payable, one Oh five, do all the math net cash provided by operating activity 940,000.

So that gives us number one. Number one, the answer is C. So we've got that one. Now there's only one account remaining that we have not explained, and that is short-term debt. And you know, it must be financing. Because we've explained operating, we've explained investing we're done with those. So Bob, it must be a financing item and I know you're right, but would you please tell me this?

What part of Prince divots would that be? That's right. It's that principle? And really seen that yet. If short term debt went up, they must have borrowed debt principles. It's the Prince and Prince divots. All right. So short term debt increased by net credit of three 25. Go to financing, do the opposite debit financing three 25.

Now you have the other one net cash provided by financing.

305,000. So the answer to number three is a, and we've answered all three questions. Now, also in your viewers guide, we gave you the actual statement. I'd like you to look at it and your viewers guide you'll see the actual statement of cash flows for dice corporation for the year ended December 31 year two.

And. I want you to look at it. Notice if you actually had to do the statement, you just pull the information right out of the T accounts. Look at the first, look at the first section cash flows from operating activities. We just pulled this right out of the team. We've got the net income, six 90. We took out the gain on HTM.

We took out the increase in inventory. We add back the depreciation. We added back to Goodwill impairment and we added back the increase in accounts payable. Net cash provided by operating activity. 940,000. Look at cash flows from investing activities. We have proceeds from the sale of equipment. One 50 proceeds from the sale of HTM, one 35 payments to buy avail for sale securities, 300,000 payments to purchase property, plant equipment, 1 million, one net cash used in investing activity 1,000,001 15, and then finally cash flow from financing activities.

You have the 240,000 cash used to pay a dividend proceeds from the sale of stock two 20 proceeds from the issue of debt three 25 net cash provided by financing activities 305,000. So notice if you have to actually do the statement, you just pull the information right out of the T accounts. And of course in a case-based simulation, they might have, you actually do a statement.

No, they could give you the outline of a statement. Have you fill it in something like that? It's possible. So you have to know how to do the statement. And if you're in a situation where you actually have to do the statement, you just pull the information right out of the T accounts. Now you notice, did you notice this?

And I bet you did. If I take a $940,000 debit. A 1 million, one 15 credit and a $305,000 debit. It all comes out to $130,000 debit. What was that? That was the increase in cash for the year. We knew when we started the cash increased by $130,000 debit. And notice it does reconcile. If you take a $940,000 debit and a 1 million, one 15 credit and a $305,000 debit, it does come out.

To the change in cash, $130,000 increase in cash. And then the way you finish the statement, you show cash and cash equivalence, January one, the a hundred thousand cash and cash equivalents, December 31, 230,000. And that finishes the statement. Now what you need to do is get some practice. On this technique because it does take practice, but you'll find once you get the technique down, it's, it's not as time consuming as you might think it is either you'll get better and better and you get faster at it, as well.

As I say, I wanted, I wanted you to have this technique because of timing. Cause that's my main concern. You could be. You could have a simulation on cash flows it's possible and you could be behind your time. It's possible. So you want to work quickly. So I want you to get your, I want you to get some practice on this technique.

If you look in your viewers guide, you'll see questions four and five car company. Okay. Now what I want you to do is get this set done before the next FAR CPA Review class. Okay. Don't don't just go right to the next FAR CPA Review class. We'll do it together that that's not as good for you. What you need to do is use this technique, you know, set up the T accounts, do the journal entries.

It's not, it's not as detailed as the set that we just did, but. I want you to set up the T accounts, do the journal entries, do the technique, answer four and five before you go to the next FAR CPA Review class. And then in the next FAR CPA Review class, we'll go through it together and I'll see you, then keep studying.

Welcome back in this FAR CPA Review class, we're going to continue our discussion of cash flows. And you remember that in our last class, I asked you to do the set of questions on. Car Inc, before coming to this FAR CPA Review class. And I hope you really did that because you need to practice this technique that we went through together.

So if you looked at this set, they want two things. They want the cash used in investing activity. They want the cash provided by operating activity. So right away you sat down to T accounts. One for investing. Remember investing makes you happy. By herself held to maturity by herself available for sale by herself, PP and E buy or sell equity investments.

You know, that's when you use that section and then you set up a T account for operating activity and remember, that's your income statement section, and it starts on the debit side with net income. You have to put that in the net income for the year 300,000 and we know net income provides cash from operations.

It doesn't use it. So we put the net income on the debit side. That's what starts off that section. What starts off that T account? What's the next step? That's what I wanted you to get practice on. So now what do I do now? You put down a small T account for every account. They give you in the balance sheet except for cash and put the net change in each one of those accounts.

So let's do that. They have equipment in the last year equipment increased by a net debit of 25,000. Put that $25,000 debit change in that account and double underline it accumulated depreciation increased by a net credit of 40,000 with that $40,000 net credit increase in that account. Double underline that and notes payable increased by a net credit of 30,000.

Put that net credit increase in that account and double underline that. All right. So what's now, what do you do? So you get used, you have to get used to the flow, the steps. Now, what do you do? You put down a journal entry for every transaction. They describe there's two of them let's do the first one.

They say during the year cars sold equipment costing 25,000. So we'll start our entry. We know they would have credited and equipment 25,000 with accumulated depreciation of 12. So we know they would have debited accumulated depreciation, 12,000. With a gain of five, we know they would have credited gain 5,000.

The point is it's now a plug you had to plug the cash. The cash wants to have been a debit of 18,000. That's why it's hard to beat entries because this is an exam. They play games with you. There are things that are missing. That's why this approach hopefully will get you to the point where you're being meticulous.

And you're finding the things you need to find, because it is like a little treasure hunt. There are things missing. They're playing, you know, little mind games with you. They didn't give you the cash. So by putting the entry down, you plug the cash. Now you look at that entry. You say, well, this cash it's gotta be, it's gotta go somewhere.

What kind of cash is that? It's PP and E it's happy. So, you know, you're going to go to your second big T account investing activity, and you're going to post that $18,000 debit right there. That's cash provided by an investing activity. Now let's post the rest of it. We go to equipment. We post that $25,000 credit to equipment.

Have we explained the change to equipment? No equipment increased by a $25,000 debit. All we've seen is a $25,000 credit. Be careful. We go to accumulated depreciation. We post that $12,000 debit. We have not explained the change in that account. We leave it open. How about the game? That's an operating item.

You post the gain as a credit to operating. Remember, once you put an entry down, everything gets posted to 80 account somewhere. Now there's another transaction they say at year end car purchased equipment costing 50,000, but $30,000 cash and a for excuse me, $20,000 cash and a $30,000 note. So you put the entry down, they would have debited equipment.

For the 50,000 credit cash, 20,000 credit credit notes payable, 30,000. That's the entry you put the Andrew down. You say all this cash. And of course it's P P and E it's happy. So you go to your investing activity, post that $20,000 credit. The fact is that's cash used in an investing activity. So now we have one net cash used in investing.

You have an $18,000 debit and a $20,000 credit. In that T account. So the net cash used in investing is 2000. So the answer to the first question is a, alright, right now we have done the entries. We have to post everything though. Let's post the debit to equipment. We're going to post that $50,000 debit to equipment.

Notice we've now explained the change in that account. You can exit out. We post the $30,000 credit to notes payable. We've explained the change in that account. We X that out. So we've done the entries. We posted everything. What's the last step. Well, you circle all the accounts you have not explained. The only account you have not explained is accumulated depreciation.

Now help me analyze this don't we know that during the year, accumulated depreciation increased by a net credit of 40,000. But all we saw in our journal entries was a debit of 12,000 to that account. That's what we posted a debit of 12. The only way that accumulated depreciation could have increased by a net credit of 40,000, we have to infer that had to be another credit in that account of 52,000.

That must have been the depreciation expense for the year. So often in the FAR CPA Exam, they make you find it. So I'll go over it again. There was a $40,000. Net credit change in accumulated depreciation. But all we saw in our journal entries was a debit to accumulated depreciation of 12,000. The only way that account could have increased by a net credit of 50 of 40,000 is by having another credit in that account, we have to infer that had to be another credit in that account of 52,000.

That must've been the depreciation expense for the year. Now I know they gave it to you. I'm well aware of that. Here. They said depreciation expense for the year was 52,000. They actually mentioned it, but the FAR CPA Exam may not so often they'll say nothing and you're, you have to find the depreciation expense.

So that was a credit to accumulated depreciation. 52,000. We go to operating, do the opposite number at the end, you do the opposite. We're going to debit operating 52,000. That gives us the other one net cash provided by operating activity 347,000. So the answer to the second question. Is B.

Now let's do some more questions on cash flows in the viewers guide

for this FAR CPA Review class. Let's go to question number one, tab company. You go to the bottom. They want to know in tabs year seven statement of cash flows. What was net cash used in financing activities? So we can put down a T account. You don't have to put down a T account for financing activity. And what do we know?

We know you're always financing for Prince divots, Prince Prince's debt. Principal div has paid dividends. I is issued stock TSS, treasury stock transactions. So let's go through it payment for the early retirement of long-term bonds. You go out and retire bond. Is that Prince divots? Sure. You're paying down debt principal.

If you retire bonds, bonds are debt security. So if you retire bonds, you're paying down debt principle. So that's the Prince in Prince divots. Now, what number would we use here? The 740,000 or the 750,000, right? Seven 50. We don't care about the carrying value of the bonds. We're analyzing cash here, the cash they paid out to retire the bonds.

750,000. So we'll put that in as a credit to our T account that's cash used in a financing activity because it's Prince it's debt, principal, the Prince and Prince divots. Now the second one, the dividend, we know that's the div in divots. Notice that they declared this dividend in year six. We don't care when they declared it.

If the cash went out in year seven, that 62,000 of cash used in year seven. For a financing activity. So th so put that on the credit side, 62,000. What about the carrying amount of convertible preferred stock converted to common stock will prefer it. If the preferred stock is converted to common stock, that doesn't affect cash.

That's a non-cash item. And we'll say more about that in a minute. So that's, non-cash, don't worry about that. Now, the last one, the treasury stock, we know that's the Ts on divots. So it is a financing item. Do we, do we use the 95,000 or the 86,000? That's right. The 95,000. We don't care about, we don't know.

We don't care about the carrying value of the Treasury's years when analyzing cash. So that's 95,000 cash provided by selling treasury stock. It's a financing activity. So you put that on the debit side. Now we have the answer net cash used in financing activities, 717,000 answer a. Now I want to go back to the convertible preferred, converted to common.

We agree that doesn't affect cash. There's a name for this. These types of transactions are called non-cash investing and financing activities. You're gonna have to know these non-cash investing and financing activities. There's four big ones. Make sure you know them. the FAR CPA Exam hits these a lot. Number one, this one.

Preferred stock converted to common stock preferred stock, converted to common stock. That is a non-cash investing and financing activity. Number two, bonds converted to stock. So if you see convertible bonds converted to stock, that is a non-cash investing and financing activities. Number three. If you see a straight exchange of debt for property.

In other words, you see a company issue, a note in exchange for an asset. If there's a straight exchange of debt for property, a note exchange for an asset that is a non-cash investing and financing activity. And then finally, a straight exchange of stock for property. You see a company issue at stock for an asset, just a straight exchange of stock for property that is a non-cash investing and financing activity.

Now, let me make a point. Now that you have the list, got to know those for these non-cash investing and financing activities, make sure you know, the, for these non-cash investing and financing activities are not in the statement of cash flows. They're not in the body of the statement, but they get footnoted at the bottom of the statement as a supplemental disclosure.

That's what these are. These are a supplemental disclosure on the statement of cash flows. Now there's more. Make sure you remember these stock dividends, stock splits, retained earnings appropriations. Again, stock dividends, stocks splits, retained earnings appropriations, and sometimes they'll mention cash flow per share things like stock dividends, stock splits, retained earnings appropriations.

If they mentioned cash flow per share. These are not in the statement of cash flows and then not a supplemental disclosure in the statement of cash flows either. So stock dividends, stock splits, retained earnings, appropriations cashflow per share. They're not in the body of the statement of cash flows.

And then on a supplemental disclosure, in a statement of cash flows, let's do another question. Number two, men. Number two says men purchased a three month us treasury bill. Men's policy is to treat as cash equivalents, all highly liquid investments with an original maturity of three months or less when purchased was nice of them to remind you of that three month rule member, highly liquid securities certificates of deposit, treasury bills, any commercial paper with an original maturity of three months or less, you treat it the same as cash.

Just treat it as if it work at those are cash equivalent. They want to know how would this purchase be reported in the statement of cash flows? I wanted to do this question with you because some students, they get tricked by a question like this, and they'll go for a as cash flows from operating activities, because they may remember from class that well, Bob said, if you buy or sell trading securities, that's cash flows from operating activities and they jump for a.

Remember, this is not a trading security. It's a cash equivalent. So don't make that don't make that jump. They never said it was a trading security. It is true that you buy or sell trading securities that's cash flows from operating activities, but they never said this was a trading security. It's a cash equivalent.

You know what helps with this one? Think of an entry. What journal entry would you make? If you go out and you buy a cash equivalent, what's the entry, debit cash credit cash. It doesn't have to be reported at all. And the answer is D you're just moving around cash, cashed a different place. It's like, it's no different in effect than moving cash from one bank account to another bank account.

If you go out, you purchase a cash equivalent. It's the same concept as moving cash from bank to bank B on the statement of cash flows, it's not reported at all. So watch out for that. Let's do three and four Reeve company. And number three, they want the cash used in investing activity. And in number four, they want the cash provided by financing activities.

Now we have a whole list of items to deal with here together. Let's just go through the list. Let's label each one over operating I for investing F for financing. How about the gain on equipment? Of course, that's an operating item. Put it over there. How about the proceeds from the sale of equipment? Well, that's P P E P P E.

That's happy we know that's investing. How about the purchase of a S inks bonds? And they're going to be an available for sale security. If you buy on investment in bonds that will be available for sale security, that's the AE and happy that's investing. How about the yeah. Amortization of a discount.

That's an operating item now with the dividend. Now we, now we know that's the div and divots, it's a financing item. Do we care what they declared or what they paid? You don't care about declared. We're analyzing, just put a aligns with declared. So there's a financing item. And then of course the treasury stock, that's the Ts on divots.

We know that's financing. So now you can really, now you can answer both questions. We have two investing items. We have 10,000 cash provided. By selling equipment, 180,000 cash used to buy available for sale securities, net cash used in investing 170,000. So number three is a, and then number four, we have two financing items.

We have 38,000 cash used to pay a dividend. We have 75,000 cash provided by selling treasury stock net cash provided by financing activity. 37,000. I'm hoping that as long as you remember investing makes you happy, I'm financing for Prince divots, you just eat up questions like that. That's what I want.

And I know that that's what you want. We'll continue cash flows in our next FAR CPA Review class. Keep studying don't fall behind. I'll see you in the next FAR CPA Review class.

Welcome back. In this FAR CPA Review class, we're going to finish our discussion of doing a statement of cash flows. And I'm sure you've noticed that up until this point. All we've talked about is how to do a statement of cash flows under the indirect method. And as we've already said in these classes, that's what they test the most.

If the FAR CPA Exam is silent, you would assume. They that you're going to use the indirect method to break it down because there's really only one way to break down statement of cash flows problems. And that is the indirect method. As I said, in our other class, you only worry about the direct method when they specify and sometimes they do.

So let's get into the direct method, a couple of points. First, if you see the correct method in the FAR CPA Exam, please remember investing activity is exactly the same. You're still investing to be happy by herself, held to maturity by herself, available for sale by hers LPP and a buy or sell equity investments.

I want you to know that memory tool will still work for you. Investing activity is exactly the same financing activity is exactly the same. You're still financing for Prince divots. Prince is debt. Principal div is pay dividends. I is issued stock. Ts is treasury stock transaction. So all that will still work for you.

It's exactly the same. The only difference in the direct method is that under the direct method we present the operating section differently. It's really just a presentation difference. So that's what I want to go over next. Let's go over how you present the operating section under the direct method.

When you do cash flows from operating activities under the direct method. It is still your income statement approach. It is still your income statement section. So when you do the cash flows from operating activities, now you're going to start with cash sales. You're going to start with cash sales or what they could call cash collected from customers, but that's how you start the section cash sales or cash collected from customers.

And then you've put in four categories of cash expenses. First there's cash cost of goods sold. Or they could call it cash paid to suppliers, but think of it as cash cost of goods, sold cash paid to suppliers, then number two cash selling it, administrative expenses, cash selling an admin. What this really amounts to for the most part is salaries and wages.

It could be some other things, but for the most part, it's salaries and wages, but it's cash for selling and administrative expenses. Then number three, Cash paid for interest and number four cash paid for taxes and it'll come out the same. You'll get the same answer. That's how you do the operating section.

Under the direct method. You show cash sales and those four categories of cash expenses. Remember earlier, we did that set of questions on dice corporation. If you go to your viewers guide, Where we have the statement of cash flows under four dice corporation. I'd like you to go back to it. So just go back and your viewers guide to where we had the actual statement of cash flows, but dice corporation, take a look at it.

Here's my point. You look at that statement. If we had done dice corporation under the direct method, just look at the statement. If we had done dice corporation under the direct method. First of all investing activity would be exactly the same. It would still come out to net cash used in investing activity.

1,000,001 15 financing activity would still be exactly the same. So net cash provided by financing activity would still be three Oh five. Of course the net cash, the net change in cash, $130,000 increase would still be the same. So obviously net the net cash provided by operating activity would have to be the same nine 40.

But listen carefully. If I had done dice under the direct method, we would have to present the operating section this new way. We'd have to show cash collected from customers or cash sales, those four categories of cash expenses. And it would come out the same net cash provided by operating activity 940,000.

But listen carefully, listen carefully again. Don't misunderstand me. The section would have to be done differently. We'd have to show cash collected from customers or cash sales. Those four categories of cash expenses. We would have to present the first section that way that's the direct method. And it would come out the same net cash provided by operating activity, 940,000.

But listen carefully. You see where we have in this statement, net income, six 90, we take out the gain on HTM. We take out the increase in inventory. We add back the depreciation. We add back the Goodwill impairment. We add back the increase in payables. You see that calculation. Even in the direct method, that calculation shows up at the bottom of the statement as a supplemental disclosure.

Anyway, you understand what I'm saying? Even though in the direct method you present the operating section differently. That information we have currently has to show up at the bottom of the statement as a supplemental disclosure. Anyway, when you use the direct method, they want a supplemental disclosure where you reconcile from a cruel income to cash income.

Anyway, that's why I say there's really only one method. Of solving statement of cash flows problems. And that is the indirect method. If they mentioned the direct method, all it means is the operating section gets presented differently. The way that we have said, now you say, well, Bob does the CPA exam ever test the direct method.

They do. Let me show you what they could do with it. You look in your viewers guide, we're going to do flax corporation. If you take a look at it, it says. Flax corporation uses the direct method. Now let me, let me stop right there. When is the only time in the CPA exam that you're going to worry about the direct method when they specify and here they're specifying wax corporation uses the direct method to prepare a statement of cash flows, December 31 year two and year one, we have comparative trial balances.

That's a December 31 year two and year one. We have comparative trial balances. Now, before we start breaking this down, let's back up a step. Remember I said, really the only difference in the direct method because investing activities exactly the same financing activities. Exactly the same, all that's different in the direct method is we present the operating section differently.

When we do operating activities, we show cash collected from customers, cash sales, and four categories of cash expenses. Right. We'll look at the, look at the questions here. What's question number one, question. Number one is what cash collected from customers. What's question number two, cash cost of goods sold what's question number three, cash paid for interest.

What's question number four, cash paid for taxes. What's question number five, cash for selling, you know, really what else can they do with it? That's what's different about the direct method we show cash sales and those four categories, the cash expenses. So this is pretty much how they really could test.

The direct methods. Let's do question number one. How would you figure out cash sales? How do you do that? Well, if you go to the comparative trial balances, go to the debit side,

the last debit listed notice the sales four year to 538,800. So let's start an entry. You know, me, I love journal entries. So of sales for year two. Well, 538,800. We know they would have credited sales, 538,800. True. Now, let me ask you if I'm trying to convert sales from a cruel to cash, what account comes to mind right away?

That's right. Accounts receivable. So now go to the debit side, third debit down, find accounts receivable in the last year. Accounts receivable went from. 30,000 to 33,000. So in this entry, we know they debit accounts receivable 3000 because accounts receivable increased during the year from 30,000 to 33,000.

We know in this entry, they would have debited accounts receivable for 3000. It is the rest must've been cash. So debit cash, 535,800. So the answer to number one is D cash sales. Must've been 535,800 that's cash sales. Or cash collected from customers. All right, now let's do number two. They want cash cost of goods sold.

Now there's a number of ways to do this one. I like to emphasize my way is not the only way, but I have to show you what I think is the easiest way to do this. You know what I think works well here, anytime I want to convert cost of goods sold from accrual to cash. Let's find a pool. First of all, if you go to the comparative trial balances, Go to the debit side about halfway down notice cost of goods sold on the accrual basis for year to 250,000.

So cost of what's old on the accrual basis year to right off the trial balance, 250,000 for year two. Now, as I started to say, anytime, I want to convert cost of goods sold from accrual to cash. I always start by figuring out purchases to me. That's the key figure out purchases now stopping things. How do I go from what I sold to what I purchased.

I look at what change in inventory. Go to the debit side, find inventory. The fourth asset down in the last year inventory went from 47,000 down to 31,000 inventory, went down 16,000. So think about it. Did I purchase all the goods I sold? No. I took 16,000 out of my inventory. Inventory went down. So I didn't purchase all the goods I sold.

I must've taken 16,000 out of my inventory. So I subtract that. Then I must've purchased the rest purchases. Must've been 230, 4,000. I hope that makes sense to you. I didn't purchase all the goods I sold. I took 16,000 out of my inventory, so I must have purchased the rest 234,000. Now, why do I like to go from what I sold to what I purchased?

Because once I have purchases, I can just do an entry. You know, me, I love entry. Because there, because it really simply breaks it down. If I know they debit purchases 134,000, now that I know that was all of it cash. No. What do I have to look out for? Go to the credit side and find trade accounts payable in the last year trade accounts payable went from 17,500 up to 25,000.

So in this entry, they must have credited accounts payable, 7,500. If accounts payable during the year went from 17,500. Up to 25,000 trade accounts payable increased by 7,500 in this entry I must've credited accounts payable, 7,500. The point is the rest must be cash credit cash, 226,500. That's the cash paid to suppliers, cash cost of goods sold.

And the answer number two is D question number three. What was the cash paid for interest? Well, again, you go to the debit side about halfway down now it's just towards the bottom, just above income tax expense. Notice, notice interest expense for a year to 4,300. So I know they would have debit interest expense, 4,300.

Right. We know that they would have debited for year two interest expense 4,300. Now the question is, is all of that cash? What do you. What do you think of right away? Is there any, what interest payable, if you thought it interest payable, give yourself a gold star because that's what you normally think about is that all cash what's the balance and interest payable.

If you looked at the trial balances, there's no interest payable. So if there's no interest payable, is it all cash? No. Got to look at everything they give you on the debit side about halfway down. Notice they had an unamortized bond discount. That went from 5,000 a year ago, down to 4,500. Well, if I'm amortized bond discount has gone from 5,000 down to 4,500.

In this entry, they must have credited discount, 500 and the rest must've been cash. It must've been cash credit cash. 3,800. The answer is C 3,800 because there's no interest payable. So the rest must've just been cash. 3,800 answer. See how about question four cash paid for taxes. Well, again, if you go to the debit side at the bottom, the last debit listed on the debit side income tax expense for year two, 20,400.

So we know what they would have debit income tax expense, 20,400. Now the question is, is it all cash? No. Look at the credit side, you see, they had a deferred tax liability that went from 4,600 a year ago, up to 5,300. So in this entry, they must have credited deferred tax liability, 700. I hope you see my point.

They had a deferred tax liability a year ago with a balance of 4,600. It's gone up to 5,300. So in this entry they must've credited deferred tax liability, 700. Anything else? Sure. How about income tax payable? Notice income tax payable went from 27,100 a year ago, down to 21,000. So when this entered, they must have debited income tax payable, 6,100.

And now you need a credit to balance the whole entry out of 25,800, that must've been cashed. The rest must've been cashed. And the answer is a notice how entries help you entries clarify.

You have scrap paper in the FAR CPA Exam, they might be a little stingy about it, but you can get scrap paper in the FAR CPA Exam, use it. You know, you're supposed to do an analysis with a question like this and, and you start with an entry entries are, are really powerful. That's why I like you to start thinking in terms of entries like this.

Now, one more question cash for selling. Well, if you go to the debit side, three quarters of the way down the selling expense for year two, one 41 five. So we know they would have debited selling expense, 141,500 debit selling expense, 141,500. Now, the question is, is it all cash? Well, as I said earlier, the cash paid for selling and administrative expenses is primarily salaries and wages.

So give yourself a gold star. If you thought of wages payable, there isn't any, but that's what you'd normally look for. Any wages payable related to selling there isn't any, so is it all cash? No, because you've got to read everything. Notice this a little additional information here. Second bullet says flax allocates one third of their depreciation to selling well, if they allocate one third of that appreciation to selling.

Depreciation is a non-cash expense. It's an expense that does not require the outlay of cash. You know, that, you know, when you debit depreciation expense, you don't credit cash. You credit accumulated depreciation, right? Depreciation is an expense that does not require the outlay of cash. And they're allocating one third of their depreciation to selling that's a non-cash expense.

So the question is, do we know the depreciation expense for the year? No, but we can figure it out. Go to the credit side. Find accumulated depreciation in the last year, accumulated depreciation went from 15,000 to 16 five. We have to infer the depreciation expense for the year. Must have been 1500 since one-third went to selling in our entry, we would credit accumulated depreciation for 500.

Again, one, one third of the depreciation related to selling one third of 1500. So when our entry, they would have credited accumulated depreciation, 500 and the rest must've been cash credit cash, 141,000. The answer to number five is C because there's no wages payable. So the rest must've been cash. So just to reiterate the FAR CPA Exam hits the indirect method far more, often, much more heavily, but.

You're going to be concerned about the direct method, if they specify. And again, that's pretty much what they do with it. They can ask you cash sales, cash, cost of goods, sold cash for selling cash, for interest, cash for taxes. That's why that's a good set of questions to study on the direct method gives that's pretty much what they could ask.

Keep up with your studying. Don't fall behind, keep working on problems. And I look to see you in the next FAR CPA Review class.

Welcome back in this FAR CPA Review class, we're going to begin our discussion of a very important topic, a very heavily tested topic. And that is the accounting issues that are raised when one company called the parent company acquires the outstanding voting common stock. I have another company called the subsidiary company.

And if a parent company acquires more than 50% now that's key criteria, more than 50% of a subs, outstanding voting shares that represents control. And here's the point when a parent company has control. Over subsidiary company, that parent and that subsidiary company are required to consolidate their financial statements.

So that's the basic criteria that you work with when a parent company owns more than 50%, and I should warn you that I always have some students that talk as if it's 50% or more. I hear that a lot from my students. It's not 50% or more. I try to choose my words very carefully. It's more than 50% of a subs voting shares.

Well, that represents a controlling interest. And when a parent company has a controlling interest in the subsidiary company, now, the parent controls the assets of the sub, the operations of the sub, the financial policies of the sub. When a parent has control over a subsidiary company, that parent and that subsidiary company are required.

To consolidate their financial statements. Now, why is consolidated? Why is consolidation required? Why are consolidated statements required? Because we always work under a presumption that consolidated statements are more meaningful, more meaningful than what more meaningful than if the parent and subsidiary companies were to continue to issue separate statements.

That's our basic premise that consolidated statements are more meaningful to creditors. Shareholders are the interested parties. Then if the parent and sub were to continue to issue separate statements. Now, eventually in these classes, we are going to get into how you actually prepare consolidated financial statements.

So we are going to get into that, but not quite yet, before we get into that. There's something else we have to cover first in this FAR CPA Review class, we're going to look at the type of problems that come up in the FAR CPA Exam, where the parent company owns 50% or less of the subsidiaries, outstanding voting common stock, 50% or less.

Now, you know, if our parent company owns 50% or less of a subs voting shares, there's no consolidation. Right? Forget consolidated statements. Because the parent does not have control over the sub. And you know, how control is defined as the parent owning more than 50% of the subs, outstanding voting shares.

So let me make my point. If our parent company owns 50% or less of a subs voting shares, and we agree there's no consolidation because there's no control. Now, the sob is just another investment. On the parents balance sheet. I hope you see that, that connection when there's no consolidation, because there's no control.

Now, the sub would just be another investment on the parent's balance sheet. That's going to be our focus. What we're going to zero in on is what is the proper way for the parent to account for the investment in the subsidiary. That is the question in this FAR CPA Review class. Now, as you may know, there are two.

Acceptable methods of accounting for investments in common stock, there is the cost method and there is the equity method. So let's get to the bottom line. Here is the criteria that you have to know. If our parent company has significant influence over subsidiary company, the equity method is required.

Let's go over that again. If a parent company. Has significant influence. That's a key phrase here and notice not just any influence. No. The parent has to have a significant amount of influence over subsidiary company. The equity method is required and let's cover all possibilities. If a parent company does not have significant influence over subsidiary company cost method is required.

So that is the basic criteria that you work with. If a parent company has significant influence over the sub equity is required. If the parent company does not have significant influence over this up cost method is required. Now, obviously what this criteria all comes down to is what we mean by significant influence.

In other words, how are we out in practice supposed to know? How much influence is a lot of influence, how much influence is a significant amount? Well, here's what we have to go through. First. We look for evidence now, listen carefully. Now, first we look for evidence. Is there any clear evidence that the parent has a lot of influence over the sub examples?

If the parents on the subs board of directors, that would be evidence. Have significant influence another one. If the parent makes policy-making decisions for the sub. Well, that would be evidence of significant influence. If the parent is the largest single shareholder in the sub, that would be evidence of significant influence.

So you see the way we have to proceed here. First, we look for evidence. Is there any clear evidence that the parent has a lot of influence over this up? If the parents on the subs board of directors? Well, that's evidence. Of significant influence parent makes all the policy making decisions for the SOP.

Well, that's evidence of significant influence. Parent is the largest single shareholder in the sub. Well, that's evidence of significant influence. You see this would make a great written communication. Wouldn't it. So first we look to see if there's any clear evidence that the parent has a lot of influence over the sob.

What if there is no evidence? What if there is no clear evidence that the parent has a lot of influence over the sub? Well, there's a guideline and you have to know it. If the parent company owns 20% or more notice, I didn't say more than 20%. I said 20% or more of a subs, outstanding voting shares. Well, then you just assume significant influence equity must be used.

You have to know that criteria. So you see the way it works. First, we look for evidence. But if there is no clear evidence, we have that guideline. If the parent owns 20% or more of the subs, outstanding voting shares, well, then we just assume significant influence equity must be used. Let me ask you a question.

Could a parent own 3% of a sub stock and have significant influence? Sure. Cause there could be evidence. Remember the 20% is just a guideline. If there is no evidence, but evidence comes first. In other words, if you're in the FAR CPA Exam and they say Monette, Oh, they don't use my name a lot, but you never know.

Monette owns 3% of Joan stock, but Moneta is on Jones. Board of directors. Monette makes all the policy-making decisions for Jones. When there's evidence of significant influence equities required, it doesn't matter what percent of the stock you own. That's an equity question. Let me ask you this. Go to parent owned 42% of a subs shares and not have.

Significant influence. Sure. It's possible. Theoretically, because another company could hold the 58% and control everything it's possible. And I'm not just trying to drive you crazy. the FAR CPA Exam can play games with this. The people that write this FAR CPA Exam, know what I know. They know that a lot of people take the FAR CPA Exam.

I'm not talking about you not talking about my students, but a lot of people. Take the FAR CPA Exam and all they know about equities. That's 20%. Hey, 20% of more equity on a 20% cost. So the FAR CPA Exam can try to play games with it. They'll say, you know, Jones owns 4% of Smith's stock Jones is on Smith's board of directors.

Jones may call it makes all the policy for Smith. That's an equity question, or they could go the other way. Jones owns, you know, 48% of Smith's stock, but does not have significant influence. Oh, that's a cost question. So be careful. Remember the criteria is significant influence. And as I say, the 20%, it's just a guideline that there's no evidence to go by and I'm not minimizing how important the guideline is.

You have to know it. So I hope you're with me on how we're going to know in the FAR CPA Exam. We have an equity question. Now what I want to get into next is how we approach each method and. Uh, you know, me, I like journal entries and I think that's the way to study this. I think if you know the journal entries for each approach, you can answer whatever they come up with.

Let's start with the cost method. Let's go over the journal entries on the cost method in your viewers guide, you'll see an illustrator problem on the cost method. Parent purchased a thousand shares of a subsidiary's outstanding voting common stock for $10 a share on January one year one. The thousand shares represent 2% of the voting shares of the sub.

So you below 20%. So you're thinking there's no significant influence, but is there any evidence that it says the parent does not have significant influence over the sob? So we know it is the cost method, so let's apply the cost method here. First of all, on January one on the date of acquisition, the parent is going to debit investment in sub.

For the cost of the shares, a thousand shares at $10 a share. So the parents going to debit investment in sub $10,000 and credit cash, 10,000. So notice on the day of acquisition on the day, the parent acquires an investment. The parent establishes the initial carrying value of the investment at the cost of the shares.

That's why they call it the cost method. On the day of acquisition on the day you acquire an investment, you establish the carrying value of the investment at the cost of the shares. Now they say that a year goes by and the sub reports, 20,000 of income. The question is what entry would the parent make on its books?

Remember, we're looking at this from the parent's point of view, what entry would the parent make on its books under the cost method? To reflect the fact that salvage reported income. And I think, you know, no entry, the parent makes no entry on its books under the cost method to reflect the fact the sub has reported income.

Let's go ahead another year. Now it's December 31 year two and the sub has reported a $10,000 loss. Same question. What entry would the parent make on its books? Under the cost method to reflect the fact the sub has reported a loss again, no entry. So notice this under the cost method, the parent makes no entry on their books to reflect the fact that sub has reported income or losses.

Parent makes no entry on its books under the cost method to reflect the fact that the suffrage reported income or loss. One more thing. What if the sub sends the parent a dividend? Notice the sub pays a dividend of $500 to the parent. What's the parent going to do? Well, you know, the parent's going to debit cash for what they collected 500, and this is very important.

The parent credits dividend income notice under the cost method. The parent treats dividends from the sob as dividend income. One more point when a parent has an investment in a subsidiary company. Being accounted for under the cost method, that investment will just be carried on the parent's balance sheet as one of their available for sale securities.

And if they need cash, they'll sell it. That's how to look at this, that when a parent has an investment in a subsidiary company being accounted for under the cost method, that investment will just be on the parents' balance sheet as one of their available for sale securities. And if they need cash, they'll sell it now, as you can already see.

The cost method is a very simple method. You establish the carrying value of the investment at the cost of the shares. If the sob reports income, no entry in the parent's books, if the sob reports a loss, no entry in the parent's books and a facade pays the parent, a dividend, the parent treats that dividend as income.

It's a very simple method. There is though one little complication that could come up in a cost problem. And I want to show you this because. You know, if you're in the FAR CPA Exam and you get a problem that on the surface, it looks like a simple little cost problem. I'd be suspicious. I don't think it's likely the FAR CPA Exam would have just a simple question on the cost method, although they could.

But if you see a problem on the cost method, I would always check to see if there's a liquidating dividend. I mentioned a liquidating dividend because it's the one little complication that can put into a problem that on the surface looks like a simple little cost problem. Let me show you what I mean.

And your viewers guide the next cost problem on January one year, one parent purchases, 5% of a sub stock, and they are using the cost method. They have below 20%. We have no evidence to go by. We assume there's no significant influence there on the cost method. A year later, December 31, the sub reports, a hundred thousand of income.

And notice now at December 31 year one, the sub sends the parent a $7,000 dividend. Well, let's think what's going to happen here. If the sob sends the parent a $7,000 dividend, we know that the sob is going to debit. Excuse me. We know the parent is going to debit cash 7,000. If the sob sends the parent a $7,000 dividend, parent's going to debit cash for what they collected 7,000.

Now what's the tempting thing here. The tempting thing is. To just credit dividend income, 7,000. In other words, people sit in the FAR CPA Exam and say, well, it's the cost method. Parent treats dividends from the up as dividend income. So the tempting thing is to credit dividend income, 7,000, but you can't. Do you see why in this problem?

What percent of the sub stock does the parent own 5%? If the parent owns 5% of the sub Skok, what is the most. The parent could possibly participate in the current income of the sub up to 5%, up to 5,000, that's the dividend income. So we're going to credit dividend income, 5,000 in this problem, the parent owns 5% of the subs voting shares.

So the most the parent could possibly participate in the current income of this up is up to 5% up to 5,000. That's the dividend income. Now, if the parent is sent a check for 7,000, what is that other 2000, it must be a return of capital. So for the other 2000, we credit investment in sub that's a return of capital.

And that 2000 that we credit to investment in sob. That's what the FAR CPA Exam would mean by a liquidating dividend. And again, I show you this because it's the one way they can complicate a problem that on the surface looks like a simple little cost problem. Let's do a question. Look at the question. Number one, it says an investor.

Uses the cost method to account for an investment in common stock classified as available for sale. That makes sense. Then look at the wording here. Dividends received this year, exceeded the investor's share of investees undistributed earnings. Since the date of the investment at the bottom, it says the amount of dividend revenue, the very precise here, what is dividend revenue that would be reported in the invest door?

That in other words, the parent's income statement. Would be what I look at that wording again, dividends received this year, exceeded the investor, share the parents' share of sub income, and they want to know what would you report as dividend revenue? Is it a, would dividend revenue BA the portion of dividends received this year that were in excess of the parents' share?

No. Anything you receive in excess of your share, anything you receive in excess of your 5% is a return of capital that goes to the investment account. How about B. Would dividend revenue be the portion of dividends received this year, that we're not an excess of the parents' share that's right. Anything you receive this year, that's not an excess of your 5% would be dividend revenue.

It's the one way that can complicate the cost method in the next FAR CPA Review class. We'll get into the equity method and I'll see you then.

Yeah, welcome back in this FAR CPA Review class. We're going to continue our discussion on how a parent company should account for the investment in the common stock of a subsidiary company. And in our last class, we went through the cost method in this FAR CPA Review class. Let's go through the equity method and remember the parent.

Is required to use the equity method when the parent company has significant influence over the subsidiary company. And once again, I think the best way to study this and master it is to know the journal entries that you would make under the equity method. So let's go to a problem. You'll see an illustrator problem in your viewers guide that says on January one, a parent company purchased 20% of a subs, outstanding voting common stock for $280,000.

Now I want to make this clear you're in the FAR CPA Exam. What's your thought process? While the parent owns 20%, 20% or more, I've got no evidence to go to go buy. So I assume significant influence equity is going to have to be used here. Then they say the fair market value of the subs net assets on January one, total the million during the year, the sub paid 12,000 in dividends.

And at December 31, the sub reports. 60,000 of income, let's apply the equity method to these facts on January one, when the parent acquires the investment, the parent's going to debit investment in sub for the cost of the shares $280,000 and credit cash, 280,000. So notice once again, on the day of acquisition, we establish the initial carrying value of the investment at the cost of the shares.

And I know that you've noticed right off the bat. That on the day of acquisition on the day of acquisition, the cost and equity method are identical. No difference there. Now they say during the year, the sub pays 12,000 in dividends. Well, you have to assume that if the parent owns 20% of the subs voting shares, the parent would have received 20% of that dividend or $2,400.

So what's the entry. While they're going to debit cash, of course, for what they collected 2,400. And this is extremely important. Notice the parent credits investment in sub 2,400. Why? Because under the equity method, parent treats dividends from the Saab as a return of capital. I'll say it again. Under the equity method, parents tweets any dividends from this up as a return of capital notice, it's a credit.

To investment in sub 2,400 under the cost method. Parent treats dividends from the South as income, but under the equity method, parent treats dividends from the sub as a return of capital. It's a huge difference. Now at December 31, the sob reports, 60,000 of income. And this is another major difference in the equity method, because under the equity method, when the sub reports income like this.

The parent automatically picks up their share of that income. And I know you've seen this thinking before, because the parent owns 20% of the subs, outstanding voting shares. The parent will automatically pick up 20% of that income or 12,000. What's the entry parents going to debit investment in sub 12,000.

Notice the carrying value of the investment rises by 12,000. And what's the credit. It's an account name. You have to get used to. Equity in the earnings of a subsidiary, 12,000, you know what that really represents investment income, that's investment income for the parent. It's going to be on the parent's income statement for the year, but don't call it investment income.

The account name, the FAR CPA Exam likes his equity in the earnings of the subsidiary company. So you have to remember this under the equity method, the parent company automatically automatically picks up their share of the reported net income or loss. Or a loss of a subsidiary company under the equity method, the parent automatically picks up their share of the reported net income or loss of a subsidiary company.

Now we have the three entries that would be made under the equity method. We have those now, and what I want to do next is set up a T account because I want to show you something let's set up a T account for investment and sub and let's post. The entries that we just went through to the T account while we know on January one, the parent debited investment in sub 280,000 and credited cash 280,000.

So we'll put that debit in that account. When the dividend came in, they debited cash 2,400 and they credited the investment account 2,400. So we'll put that on the credit side. It was, it was return of capital. And then on December 31, the parent picked up their share of sub income. So we debited investment in South for another 12,000 credit equity and cyber earnings, 12,000.

But here's my point. If you add it all up right now, the balance in that T account right now, the balance in investment in sub is 289,600. In other words, if you were to look on the parent's balance sheet, you would see investment in sub F 289,600. That is generally accepted accounting principles. Two 89 six.

Now we have that balance and now let's do a Goodwill calculation because you're going to have to know how to do this. Let's do a Goodwill calculation. The key to a Goodwill calculation is when they said that the fair market value, the fair market value of the subs, net assets. On January one, the date of acquisition, total a million.

So we'll put that down. We know the fair market value of the subs, net assets on the date of acquisition, total a million. Now you stop and think what percent of those net assets did the parent purchase 20%. If you take 20% of a million, that's worth 200,000, what did they pay for the stock? 280,000. There is 80,000 of Goodwill in that investment.

Now don't misunderstand. There's no Goodwill account. The parent's not going to have a good will account on the parent's balance sheet. That 80,000 Goodwill is in the two 89 six. the FAR CPA Exam could ask you that they could ask you when the FAR CPA Exam, you know, how much of the investment represents Goodwill. They could ask you that.

And 80,000 of that, two 89 six, we have investment in sub on the parents' balance sheet. Now at two 89, six and 80,000 of that is Goodwill. Now, do you amortize that Goodwill? Of course not. We know Goodwill is not amortized. It's tested for impairment at least annually. So I want to ask you this. How do you test this Goodwill for impairment?

Well, these are actually a fairly simple test. If you want to test this Goodwill, this $80,000 Goodwill, that's in the two 89 six. If you want to test it for impairment, it is simply this. If there's ever a permanent decline in market, if there's ever a permanent decline in market for that investment. Not temporary.

Now look, every day the stock market goes up. It goes down. It's not what I'm talking about, but if there's ever a permanent decline in market for this investment in sub you would debit a loss, take a loss to the income statement and credit investment in sub you'd. Write it down to market. That's the impairment test.

If there's ever a permanent decline in market, you debit a loss, take it to the income statement and credit investment and sub you write it down to market. Now, another point. We agree that investment in sub is on the parents balance sheet right now at 289,600. What, what kind of investment is this? Is it a trading security?

No, it's not. Is that a, is that an available for sale security? No, it's not. Is it a held to maturity security? Well, you know, it's not because it's not a debt security held. The maturity is just debt. Please remember that. Equity investments are carried separately on the parents balance sheet equity investments are not trading.

They're not available for sale. They're certainly not held to maturity. No equity investments would be carried separately on the parents balance sheet. Let's do a couple of problems. Number one, it says on January 2nd of the current year, well purchased 10% of Ray's outstanding shares before a hundred thousand.

Well as the largest single shareholder in REA. And Wells officers are a majority on Ray's board of directors. The sub Ray reported net income of 500,000 for the year pay dividends of 150,000 in the December 31 current year balance sheet. At what amount would well report this investment in REA. Now I know you wouldn't fall for this.

We just talked about this, but a lot of people in the FAR CPA Exam would go for C. Do you see why? Because a lot of people sit in the FAR CPA Exam and they say, well, Well owns less than 20% of Ray stock. Well only owns 10% of Ray stock. They have below 20%. There's no significant, significant influence. We would just keep the investment.

It costs, we use the cost method and that's why I answer C is there, but we know it's more complicated than that when there's evidence of significant influence. It doesn't matter what percent of the stock you own equities required. And there's evidence here. Well is the largest single shareholder in Ray Wells.

Officer's are a majority on Ray's board of directors. When there's evidence of significant influence equity is required. It doesn't matter what percent of the stock you own. So let's apply the equity method during the year, the sub paid 150,000 in dividends. Well, you've got to assume. That if well, owns 10% of reishi heirs, well would have gotten 10% of those dividends are 15,000.

So what entry would they make? They would debit cash, 15,000 credit, the investment 15,000. It's a return of capital also. Well, would automatically pick up their share of raise income, raise income for the year 500,000 well would pick up their share 10%. So debit investment and re 50,000 credit equity and sub burnings or investment income, 50,000.

So when they ask us at the bottom. At what amount would well report this investment in re well, it start at 400,000, it went up 50,000 because of the income down 15,000, because of the dividend that was return of capital. The answer is B and don't misunderstand me. I'm not saying you had to do entries. We showed you entries just to make the thinking as clear as possible, but you can get comfortable enough with this.

We just would look at it and go, well, it's the, it's the 400 plus the 50 minus the 15. That's fine. Just showing you my entries, hoping to make it as clear as possible. But the main point is when there's evidence of significant influence, it doesn't matter what percent of the stock you own. Equity is required.

Let's do number two, Burke purchased 30% of. Sleds outstanding stock December 30, one of the current year for 200,000. Now again, you have to assume it's the equity method, right? It's 20% or more. I've got no evidence to go by. I assume there is significant influence equity would be required on that date.

The sub stockholders' equity totals, 500,000, the fair value of the net assets, 600,000 at the bottom, they say December 31. What amount of Goodwill would you attribute to this investment? What amount of Goodwill would you attribute to this acquisition? This is why you have to know how to do a Goodwill calculation because the FAR CPA Exam can ask for Goodwill.

Now, let me ask you this. What's my starting point. If I'm going to figure out Goodwill, what I start with the value stockholders' equity, the book value of net assets, 500,000 or the fair value of net assets. 600,000 fair value. Remember Goodwill by definition. Is what someone's willing to pay over fair value for net assets.

So we're going to, we're going to say that, Hey, the fair value of the subs net assets on the day of acquisition, total 600,000, what percent of those net assets to the parent acquire 30%? If you take 30% of 600,000, it's worth 180,000, what they pay for that stock 200,000, there is 20,000 of Goodwill here, and the answer is B, make sure you know how to do a Goodwill calculation.

Question number three on July. One of the current year, Denver purchased 3000 shares of Eagles, 10,000 outstanding stock for $20. A share on December 15th, the sob Eagle paid 40,000 in dividends to the common stockholders Eagle's net income for the year ended. December 31 was 120,000. Or an evenly through the year, in the year end income statement.

What amount of income from this investment would Denver report? I want to ask you a question you're in the FAR CPA Exam, you have this question. How do you know what's an equity question I'm asking because they never said the word equity in this, in this question, the word equity is nowhere mentioned. It's a hobby.

You know, it's an equity question because of the guideline. All you know is that Denver owns 3000. Of Eagles, 10,000 outstanding shares. It's 30%. I've got no evidence to go by 20% or more. I assume significant influence equities required. I'm not minimizing how important that guideline is. You use it a lot, but notice, I ha I have to use it here.

They don't say the word equity, but I know it is an equity question because of the guideline. All right, now we know that during the year, the sub paid 40,000 in dividends on the common stock hall on the common stock. Well, if Denver owns 30% of Eagle's shares, Denver would have got 30% of that dividend or 12,000.

So we know Denver would have debited cash 12,000. Now at the bottom, they said in the year end income statement. What amount of income from this investment would Denver report? What I'm asking? Is it C is an answer say no, because that's a return of capital. We're going to credit, not income. We're going to credit the investment account.

So you're not going to fall for that, right? It's not answer C that's not income. Parents treats dividends from the sub under the equity method as a return of capital, not income, but we do know that under the equity method, Denver will automatically pick up their share of Eagles income, Eagles income. For the years, 120,000 Denver picks up their share 30% that's 36,000 hell lo a a is wrong, but a is tempting.

Isn't it. They really want you to go for a why isn't a day. Well, There's a real lesson in this question, and I know you're going to remember it, you know, once you see it, if you haven't yet, once you see it, I think you never forget it. What day did Denver acquire Eagle shares? July one. Oh, July one. Remember under the equity method, the parent company picks up their sheriffs of income since the acquisition.

In other words, the parent is entitled to pick up their share of Eagle's income since July one. Not for all time. Did you notice? They said that Eagle's net income for the year 120,000 was earned evenly. Well, if it was earned evenly, that must've been 60,000 in the first half of the year, 60,000 in the last half of the year.

So for the 60,000 of income, the suburban in the last half of the year, Denver can pick up 30% or 18,000. And the answer is B. So Denver is going to debit investment in sub 18,000. Carrying value. The investment rises by 18,000 credit equity and sub earnings or investment income, 18,000. The answer is B. So you have to remember that lesson that under the equity method, the parent is entitled to pick up their sheriffs of income since the acquisition, not for all time.

So dates matter in an equity question, you have to be right on top of that. Let me ask you this. What if they didn't say it was earned? Right. You know, here, they said it was earned evenly. That was nice. What if they didn't say it, you'd have to assume it. You have to assume it. I can't solve this question if I don't know the subs income for the last six months.

So if they hadn't said that, I'd have to assume it out. I've always believed just a personal opinion. Now I've always believed that in a well-written exam, a student should never have to make an assumption. That's just a personal opinion. I think in a well crafted well-written test, a student should never have to make an assumption.

That's my opinion. And I will say that the CPA exam is very good about that, but this is one of those rare cases where sometimes in the FAR CPA Exam, you have to make an assumption because if they said nothing, I'd have to assume they earn it evenly 60,000, the first half of the year, 60,000, the last half of the year, because I can't solve this question if I don't know Eagle's income for the last six months.

So you might have to assume it let's look at number four. Green owns 30% of the outstanding stock and a hundred percent of the outstanding non cumulative non-voting preferred stock of Axel in the current year, the sub axle declared dividends of a hundred thousand on the common and 60,000 on the preferred.

Green does exercise significant influence over axle. We know it's an equity question. And here again, the word equity is never mentioned, but I know it's an equity question because green owns 30% of actual shares it's in the guidelines 20% or more, and they say it green does have significant influence over axle.

I know it's equity. What amount of dividend revenue? They're very precise here. What amount of dividend revenue would green report on its income statement? For the current year ended December 31. Well, in this problem, the sub axle paid a hundred thousand of dividends on the common. You have to assume if green owns 30% of actual common shares, green would have got 30% of that.

A hundred thousand. So green would have dividend cash, 30,000. Right. And when they asked you at the bottom, what is dividend revenue? Is it B, is it answer B? Of course. It's not B. Because that would be, that would not be a credit to dividend revenue that would be credit to investment in sub it's a return of capital.

You're not going to fall for that. It's not B. Now there's also a $60,000 dividend on the preferred. What percent of that would green collect all of it? Green owns a hundred percent of the preferred. So green is going to debit cash 60,000. Now let's agree that if it's not B it can't be D. Because D is the 60 plus the 30, and we already know that 30,000 doesn't work.

So it's not B can't be D so we're down to eight versus C. Is it a or C? It is C you would credit dividend revenue here for 60,000. Why? Because investments in preferred. Are always accounted for under the cost method. Remember equity method is for investments in common. I want you to remember that equity method is for investments in common, not for investments in preferred.

And I know, you know, this, you can't really exercise significant influence over another company by holding their preferred stock. Why? Because there's no voting rights. You can't really exercise significant influence over another company by holding their preferred stock because there's, there's no voting rights.

So remember equity method is for investments in common investments in preferred are always accounted for under the cost method. So yes, for the dividend on preferred green would debit cash 60,000 and credit dividend revenue, 60,000. And the answer is C we'll do more on the equity method in the next FAR CPA Review class.

I'll see you then.

Welcome back in this FAR CPA Review class, we're going to do more problems on the equity method because there's so much the FAR CPA Exam can do with the equity method. The first three questions in your viewers guide are Aset about grant and South. It says grant acquired 30% of South's voting stock for 200,000, January 2nd.

Year three grants, 30% interest in South gave grant the ability to exercise, significant influence over South's operating and financial policies. So we know it's equity. They never said the word equity, but they're in the guideline 20% or more. They've got significant influence equities required. It says during year three, the sob earned 80,000 of income and paid 50,000 in dividends.

And then we get into year four. Now, before we get into year four, the first two questions are about year three now, because they're asking about the carrying value of the investment. Let's set up a T account. If we set up a T account for investment in South, we know on January 2nd, when grant bought the shares, they would have debited investment in South for the cost of the shares 200,000 and credit cash, 200,000.

So we'll put that in the T account. And we know equity's required here because they're in the guideline. They own 30% of the shares. They even said they had significant influence equities required. So under the equity method, how are we going to handle that dividend? Well, if during year three, the sub paid 50,000 in dividends.

We have to assume if grant owns 30% of South shares grant received, 30% of those dividends are 15,000 and you know, the entry. Grant would debit cash 15,000 and credit the investment account, 15,000. It's a return of capital. So let's put that in the T account as a credit of 15,000. Also we know grant would automatically pick up this year.

If South's income Saltz income for the year 80,000 grant would pick up 30%, their share automatically 24,000. And you know, the entry you would debit investment in South 24,000, put that in the T account, the credit is to equity and cyber innings or investment income goes to the parents' income statement.

So let's look at the first question before taxes. What amount would grant include in their year three income statement as a result of this investment? What's on the income statement, a or B, is it a or B it's B of course the 15 thousands of return of capital. The 24,000 is on grants, income statement as equity and burnings investment income, answer B the second question in grants, December 31 year three balance sheet.

What would be the carrying amount of the investment? Well, we have the T account. It's going to be the 200 minus the 15 plus the 24 answer be again, 209,000. Now, the real reason I wanted us to do this set is the third question they say in the third question in the year for income statement, what amount would grant report as the gain from the sale of half the investment.

They tell us that. South reported earnings of a hundred thousand for the six months ended June 30 year for 200,000 for the year ended December 31 year four. And on July one year four grants sold half their shares in sell for 150,000 cash. The sub also paid dividends of 83 of 60,000 on October one of year four.

So what's happening is on July one year four. Grand sells half the shares for 150,000 and we work. We have to work out the gain on sale. The reason I wanted us to do this set together is to mention a very important concept. If you sell off an investment that's been accounted for under the equity method, you must apply the equity method up to the date of sale.

I'll say it again. If you sell off on investment, that's been accounted for under the equity method. You must apply the equity method. Up to the date of sale. If you don't, you don't have the proper carrying value, you won't get the proper gain or loss on sale. So our job here is to apply the equity method up to the date of sale, which was July one.

Now that we know the income for the whole year of year four was 200,000, but they did break it out. They said the income was a hundred thousand for the six months ended June 30th. So for the six months ended June 30th, the sub reports income of a hundred thousand. Grant would pick up this year, 30,000, 30%.

So let's put that in. There would be a debit to investment in South for the 30,000 credit equity and our earnings or investment income, 30,000. Right. That's what happened in year four. So let's go back to our T account. Let's go back to our T account. When we left off at December 31. At the end of year three, the balance and investment in South was 209,000.

Wouldn't that be the balance in investment in sub when I begin year four and then July, then July one year four grant would pick up this year. So I've been coming up to that point 30,000. So we'll put that in debit investment in sub 30,000. And again, the credit would be equity and sub. Earnings 30,000.

The point is the balancing investment in sub on the date of sale is 239,000. You have to apply the equity method up to the date of sale. If you don't, you don't, you will not have the proper carrying value. You won't get the proper gain or loss on sale. So now we know that the proper carrying value of investment in sub on the date of sale, July one was 239,000.

Why don't have to worry about the dividend cause that didn't occur until after the sale. In October, but now let's handle the sale. If your grant, you go out, you sell half the shares for 150,000. So you've got to debit cash for 150,000 credit investment in South for what half of 239,001 19 five. Remember you sold half the shares.

So you're going to credit investment in South for half of the carrying value, half of 239,000 or 119,500. And you would credit gain on sale 30,500. And the answer is B again. Let's do another problem. Number four, they say Sage bought 40% of Adam's outstanding stock January 2nd, for 400,000. Now you read that first sentence.

You're already thinking equity because it is 40% so far. I've got no evidence to go by. But right now, I'm assuming significant influence. It's got to be an equity question. Let's read on. It says the carrying amount of Adam's the subs net assets on the purchase date. Total 900,000 fair values and carrying amounts were the same for all items except for the plant and inventory.

For which fair values exceeded carrying amounts by 90,000 and 10,000 respectively, the plant has an 18 year life. All inventory was sold during the year, during the year, the sub Adams reported net income of 120,000 and paid 20,000 in dividends. What amount would Sage the parent report on its income statement from this investment in Adams for the current year and in December 31?

Well, when you look at this problem, the first thing we're going to do is. An excess calculation. Let's do an excess calculation. We know that the, they said that the carrying amount of Adam's net assets on the purchase date, total 900,000. So we'll start with that. We know that the book value the carrying value of the subs, net assets on the purchase date, total of 900,000.

Now you think what percent of those net assets did stage purchase 40%. If you take 40% of 900,000, it comes out to 360,000. What did Sage pay for the stock? 400,000. So there is a $40,000 excess here. I want you to notice that is that Goodwill now be careful. Goodwill by definition is what a company is willing to pay over.

Fair value for net assets, this 40,000. Is what the parent was willing to pay over book value for net assets. Do you see the difference? Goodwill is an excess of cost over fair value for net assets. This is an excess of cost over book value. Now you have to think here. Why, why was Sage? Why was the parent willing to pay a premium over book value to acquire these net assets?

Because two assets, the plant and the inventory have fair values, much higher than book values. So you, what you have here are some undervalued assets, the plant and the inventory have fair values, much higher than book values. So what you have here are some undervalued assets. Now let's break this down.

They said that the plant. Has a fair value, 90,000 higher than book value. Isn't that true? The plant has a fair bet. The plant is undervalued on the books. The plant has a fair value, 90,000 higher than carrying them out and think about it. If I buy 40% of your net assets, I just bought 40%. I just bought a 40% interest in that plan.

So take 40% of 90,000. Let's agree that 36,000 of the 40,000 excess is traceable to the plant. Let's talk about the inventory. The inventory's undervalued. The inventory has a fair value, 10,000 higher than carrying them out on the books. And if I buy 40% of Adam's net assets, I just bought a 40% interest in that inventory.

So 4,000 of the 40,000 excess is traceable to the inventory. I want you to see how you can trace the excess. To undervalued assets. 36,000 of the excess is traceable to the plant. 4,000 of the excess is traceable to the inventory. I want you to remember this basic split. Listen carefully. Remember this basic difference.

If there's an excess of cost over fair value of net assets, we call that Goodwill, right? Anytime there's an excess of cost over fair value of net assets, we call that Goodwill. It's not amortized. It's tested for impairment at least annually, but if there's an excess of cost over book value of net assets, you've got to trace that excess to undervalued assets.

Remember that basic difference. If there's an excess of cost over fair value, call that Goodwill. We don't amortize it. We test it for impairment at least annually. But if there's an excess of cost over book value, you've got to trace that excess to undervalued assets. By the way, this is a very difficult problem.

In my opinion, this is about as difficult as a problem on the equity method would ever be in the FAR CPA Exam. But they like this. Don't think they'd never ask. They do like this. This tracing the excess, the undervalued assets. Now here's the point. Now listen carefully. When you can trace your excess to undervalued assets, this excess is amortized over the remaining useful life of these assets.

Do you see the difference when you can trace your excess to undervalued assets? This excess is amortized over the remaining useful life of these assets. So let's do it. Let's, let's figure it, this whole thing out. We know that Adam's net income, the sub's net income for the year was 120,000. Right. We know under the equity method, Sage would automatically pick up this year, that income, right.

Sage would automatically pick up 40% of that income of 48,000. And we know the entry Sage would debit investment in sub 48,000. The carrying value of the investment would rise by 48,000 Sage would credit equity and sub. So earnings or investment income, 48,000. And by the way, notice that to answer that it's not that simple, but Sage would pick up their share of Adam's income, 48,000.

But now we're going to have to make some adjustments because when you can trace your excess to undervalued assets, this excess is amortized over the remaining useful life of these assets. So let's do it. I'm going to take the 36,000 of excess that I traced to the plant. And I'm going to amortize it over 18 straight line years, the remaining useful life of the plant.

So I take the 36,000 of excess that I trace to the plant over 18 straight line years. I'm going to take 2000 of amortization, but notice the entry don't debit, amortization expense. That's just going to get you messed up in the CPA exam. They would always take this amortization as a direct reduction of equity and sub income.

So I'm going to debit equity and sub earnings or equity and sub income. For 2000 and credit the investment account, 2001 more time. Don't debit, amortization expense. It's going to get you messed up in the CPA exam. They'd always take this amortization as a direct reduction of equity and salve income equity and suburb innings, investment income.

So I took the 36,000 of excess that I traced to the plant divide by 18 straight line years, the remaining life of the plant. And I'm going to debit. Equity in suburb innings, 2000 and credit the investment account 2000. How about the 4,000 of excess that I traced to inventory? How much of that? Should I amortize all of it because they sold it all.

If they sold half I'd amortize half, if they sold a quarter at amortize a quarter, but here they sold it all. So I'm going to amortize it all. And again, I'm going to debit equity and cyber earnings, 4,000 and credit. The investment account 4,000. I take this amortization as a direct reduction of equity and subheadings.

So now let's answer the question. They want to know what would be on the income statement as a result of this investment for the current year. Well, I started at 48,000 equity and sub earnings of 48,000, but my make my adjustments, I lowered it by two because of the plant. I lowered it by four because of the inventory.

And the answer is B. The answer is B why don't I worry about the dividend? How about that 20,000 dividend? Why didn't I worry about that? Because that's a return of capital. It's the equity method here. That's the return of capital that wouldn't affect what's on the income statement. So we didn't have to worry about that.

Let's do another one like that is, as I say, the FAR CPA Exam likes these. So let's do another one. Like that. Number five sets on January 2nd, Keene purchased. A 30% interest in pod for 250,000 on that date pod stockholder's equity was 500,000. The carrying amount of pods identify the whole net assets, approximately the fair values except for the plant and the equipment whose fair value is exceeded.

Carrying them out by 200,000, the plant and equipment has remaining useful life of 10 years. Pod reported net income of a hundred thousand for the year. And paid no dividends. So the sub reported income of a hundred thousand for the year, there's no dividends keen accounts for this investment under the equity method.

So here they say, it's the equity method. We were thinking it anyway, because it was 30%. There's no evidence. We'd have to assume significant influence. It is an equity question in the December 31 balance sheet. At what amount would keen report this investment in sob? Well, because they're asking for the carrying value of the investment, you know, I like a T account, so let's set up a T account for investment in pod.

We know how it started on January 2nd, when Keane acquired the investment team would have debited investment in bod for 250,000 credit cash, 250,000. So they will put that 250,000 as a debit in that T account. We know that keen would automatically pick up their share of pods. Income pods income for the year was a hundred thousand Keene would pick up this year 30%.

So you would debit investment in pod. 30,000 credit equity and sub earnings, investment income, 30,000. So put another $30,000 debit in that account. Now I can't stop there. Can I, because I've got some undervalued assets, let's do it. Let's do an excess calculation. We know that the book value the carrying amount of stockholders' equity on the day of acquisition totaled 500,000.

What percent of those net assets did keen purchase 30%. If you take a 30% interest in 500,000. It comes out to 150,000, but they paid 250,000 for the stock. There is a a hundred thousand excess here, but that's not Goodwill. Goodwill is an excess of cost over fair value. This hundred thousand represents an excess of cost over book value.

Why were they willing to pay a premium of a book value? Because we have some undervalued assets, the plant and equipment let's work on it. The plant equipment. Have fair values, 200,000 higher than book value. And if I buy 30% of Adam's net assets, excuse me, if I buy 30% of pods, net assets, I just bought a 30% interest in that plant equipment.

So take 30% of 200,000, 60,000 of the a hundred thousand excess is traceable to that plant equipment. If I buy 30% of pods, net assets, I just bought a 30% interest in that plant and equipment. So 60,000, 30% of 200,000, 60,000 of my a hundred thousand excess is traceable to that plant equipment. What's the other 40,000 of excess must be Goodwill because there are no other undervalued assets.

So the other 40,000 of excess must be what I paid over. Fair value for net assets. So the other 40,000 is good. Well, now we know we don't amortize the Goodwill, the 40,000. That's tested for impairment, but the 60,000 of excess that I trace the plant and equipment, we amortize that over the remaining useful life of the plant and equipment and that's 10 years.

So I'm going to take the 60,000 of excess that I traced to the plant equipment over 10 straight line years. I'm going to take 6,000 of amortization on that and you know, the entry. I'm going to debit equity and suburb innings 6,000. I take the amortization as a direct reduction of equity and suburb innings, 6,000 and credit the investment accounts, 6,000.

And when I put that in the T account, when I put a credit to investment in pod of 6,000, now my carrying value for the investment is what, it's the two 50 plus the 30 minus the six, 274,000 answer D watch out. For undervalued assets, as I say, they like that. We'll do more on the equity method in the next FAR CPA Review class.

And I'll see you then

welcome back in this last class on the equity method, we have to cover one more issue and that is a step-by-step acquisition. Let me define that. What you're looking for in the FAR CPA Exam. Is a problem where it takes more than one purchase of stock to acquire significant influence over the subsidiary company.

That is a step-by-step acquisition. It's a problem where it takes more than one purchase of stock to acquire significant influence over the subsidiary company. Let's go over an example. You look on your viewers guide. We have a problem where on January 1st. 2011 parent purchased 8% of a subsidiary stock.

What would be your assumption? Well, they own 8%. They're below 20%. I've got no evidence to go by. So I have to assume below 20%, there is no significant influence cost method would have to be used. So I'm assuming that in year 11, they're using the cost method. Then notice some time goes by and on July 1st, 2012 parent purchases, an additional 6% of, of the sub stock.

So as of July 1st, 2012, now the parent owns eight plus six, 14% of the sub stock. They're still below 20%. So as far as I know, they would still be under the cost method. As far as I know, there's no significant influence. So they'd still be using the cost method and then some time goes by. And then finally on July 1st, 2013, the parent purchases, an additional 11% of the subs voting shares.

So as of July 1st, 2013, now the parent owns eight plus six plus 11, 25%. Of the subs voting shares, I would have to assume now they do have significant influence over the sob and they would switch over to the equity method. This is a step-by-step acquisition. It is a problem where it takes more than one purchase of stock to acquire significant influence over the subsidiary company.

Well, as you can imagine, the FAR CPA Exam likes this because it's a complication and here's the point. In a step-by-step acquisition. Once you determine that the parent does have significant influence over the self, I'll say it again in a step-by-step acquisition. Once you determine that the parent does have significant influence over the subsidiary company, you must retro, actively apply the equity method all the way back.

To the first purchase of shares. That's what you're up against in a problem like this, because in a step-by-step acquisition, once you determine that the parent does have significant influence, you must retroactively apply the equity method all the way back to the first purchase of stock. So that's what we're going to have to do here.

We're going to have to go back in time and retroactively apply equity all the way, all the way back to January 1st. 2011. Now, I don't know if you already see the complication, but there's something that bothers students here. Just think about this for a minute. If we're going to retroactively apply equity all the way back to January 1st, 2011, you know that the parent now has to pick up their share of income, but here's the question.

What percent of the subs income should the parent pick up? 8%, 6%, 11%. 17%, 19%, 25%, 14%. I just want you to recognize that there's all these percentages floating around in this problem. And a lot of students freeze right here. So what I want to give you is my rule, and I always tell my students, if you can just remember this rule, it'll just take you through any step by step.

Here's the rule. The rule is this. When you retroactively apply equity. You always make your adjustments based on the ownership percentage that existed at the time the income was earned. That's the rule. Let me say it again. When you retroactively apply equity, anytime you are retroactively applying equity, you will always make your adjustments always make your adjustments based on the ownership percentage that existed.

At the time the income was earned, you make your adjustments based on the ownership percentage that existed at the time the income was earned. So let's apply the rule. Let's go back to 2011. I asked you what percent of the sub stock did the parent own all through 2011, 8%. So the parent would be entitled to pick up their share 8% of the subs income for year 11.

That's how the rule works. Since the parent owned 8% of the subs shares while the Saab was earning the year 11 income parent is entitled to pick up their share 8% of the year 11 income. Let me ask you what percent of the sub stock did the parent owned for the first six months of year 12? It was still 8%.

Remember the ownership interest didn't change. Until July 1st. And of course, this is what the FAR CPA Exam will likely do to you. It'll be a little, it'll be a little test on, on being careful with dates. They'll have the ownership percentage change during the year. Notice in this case, the parents still own 8% of the sub stock for the first six months.

Of year 12. So the parent would be entitled to pick up their share 8% of the subs. First six months, year 12 income. What percent of the sub stock did the parent owned for the last six months of year? 12, 14%. So the parents are entitled to pick up 14%. Of the subs last six months income, you make your adjustments based on the ownership percentage that existed at the time the income was earned.

Let's go to 2013. What percent of the sub stock did the parent owned for the first six months of year 13? It was still 14%. So the parent would be entitled to pick up their share 14% of the sobs. First six months, year 13 income. See that's the thought process. Since the parent owned 14% of the sub stock while the Saab was earning their first six months, year 13 income parents entitled to pick up their share.

14% of the subs. First six months, year 13 income. What percent of the sub stock did the parent owned for the last six months of year? 13, 25%. So the parent is entitled to pick up their share 25% of the sobs last. Six months of year 13 income, you make your adjustments based on the ownership percentage that existed at the time the income was earned.

I want you to remember that rule. Let's look at a multiple choice on this on January one point purchased 10% of I own a company's common stock stop right there. You're in the FAR CPA Exam. What are you thinking? Well, you don't have any evidence or anything yet, but you're below 20%. So if there's no evidence to go by, I've got, I gotta use my guideline.

I have to assume that they below 20% as of January one, they do not have significant influence. I would have to assume that right now, the parents using the cost method, and then they say the parent purchased additional shares, bringing its ownership percentage up to 40% of is common stock on, on August 1st.

So now let's just stop there when they purchase more shares. And their ownership level goes up to 40% on August 1st. Well, now there are 20% of more. I've got no evidence to go by. I have to assume they have significant influence. So what am I required to do? I must retroactively apply equity all the way back to January one.

The first purchase of shares in October, the sub declared and paid a cash dividend on all its shares. How much income from this? I own an investment. Would be in the parents year-end income statement. Well, you know, the answer is a, because you make your adjustments based on the ownership percentage that existed at the time the income was earned.

So since the parent owned 10% of own shares from January one to July 31, the parents are entitled to pick up 10% of the subs income in that period. Since the parent owned 10% of the sub stock while the sub was earning their income from January 1st to July 31, parents entitled to pick up their share 10% of the income for that period.

And since the parent owned 40% of the sub stock from August 1st on, parents entitled to pick up 40% of the subs income from August. First on, you make your adjustments based on the ownership percentage that exists at the time the income was earned, as we've already said in these classes, there's just so much.

the FAR CPA Exam can do with the equity method.

Welcome back in this FAR CPA Review class. We're going to begin our discussion on how you prepare consolidated financial statements. And I want to begin by going over some concepts that we've talked about in other classes. Now, assuming that we have no other evidence to go by no other evidence to go by. These are our basic guidelines.

We know that if a parent owns less than 20%, less than 20% of a subs voting shares, we assume that the parent does not have significant influence over the subsidiary company. And the cost method would have to be used. The parent would have to use the cost method to account for that investment. And if a parent owns between 20 and 50%.

Between 20 and 50% of the subs voting shares. What do we assume? We assume that the parent does have significant influence over the sob. So the equity method would be required, but I want to remind you that once you cross that 50% threshold, now we're no longer talking about significant influence. We're talking about control when a parent owns more than 50%, more than 50%.

All of a sudden voting shares. Now the parent has control over the subsidiary company and when a parent company has control over a subsidiary company, that parent and that sub are required to prepare consolidated statements. Now there is only one. Okay. Acceptable method of preparing consolidated financial statements.

It's called the acquisition method. That's what we're going to be going over in these classes, the acquisition method. And I want you to know that when we prepare consolidated statements under the acquisition method, our goal, and it's important never to lose sight of this. Our goal is to present the parent and the subsidiary companies as if they will one company try to never forget that that is your goal in the acquisition method to present the parent and the subsidiary companies.

As if they are one company. Why? Because the argument is that theoretically, they are one company. Once a parent has control over a subsidiary company, once a parent controls the assets of the sub, the actions of the sub, the financial policies of the sub, the operations of the sub. Once the parent controls everything that the subsidiary company is doing, who are we kidding?

In legal form. There are still two companies. Of course, legally, there are still two companies, but in substance, in substance, there is now only one economic entity in substance. There is only one company. And I want you to know that the FAR CPA Exam refers to the concept that we just went through as the single entity concept.

That's what this is known as the single entity concept. That in legal form, there are still two companies, parent and sub, but in substance, there is only one company. And I think, you know where all of this is leading. If in substance, there's only one economic entity. If in substance, there's only one company, how do intercompany transactions make any sense at all?

How could the parent sell something to the sub and make a profit in substance? This entity just made a profit with itself. How can there be intercompany payables, Andrew company receivable. Intercompany dividends, intercompany sales, intercompany profits, intercompany losses, intercompany bonds. It's all ridiculous.

If you buy the original premise that once a parent has control over a sub in substance, there's only one company in substance. There's only one economic entity. So the bottom line is this your job in a consolidation, whether it's a multiple choice. Whether it's a simulation. Really what they're testing you on is your objective.

Your job is to eliminate all this intercompany activity. So that's what we're going to be going over in these classes. We're going to be going over the different elimination entries that you make in a consolidation. And we're going to start with the most important elimination and three of them all. Let me give you an example.

Let's say on January 2nd. Our parent company purchased 80% of the subs voting shares for $880,000. So on January 2nd apparel company has purchased 80% of the subs voting common stock for 880,000. So we know the entry the parent would have made the parent would have debited investment in sub 880,000 and credit cash, 880,000.

And as you know, the parents sub relationship begins with that entry. Now I want you to imagine that when you sit down and do a consolidation, what you're going to be given is the trial balance of the parent and the trial balance of the subsidiary company. Just kind of picture this, you're sitting down to do a consolidation.

And what you have is the trial balance of the parent and the trial balance of the subsidiary company. And when you look on the trial balance of the parent company, you're going to see investment in Saab at $880,000. And I bring this up because. The main elimination entry that you make in any consolidation is to eliminate that investment account.

This is really the center of the problem because it is the main elimination that we, that we make. We have to eliminate that investment account. Now also, when you look on your spreadsheet, again, just picture that you've got the trial balance of the parent and the trial balance of the sub. If you look at the trial balance with the sub and you go down to the subs capital structure, here's what the sub is showing.

The sub is showing common stock 300,000 additional paid-in capital 100,000 and retained earnings, 400,000. So on January 2nd, the day of purchase the net assets of the sob, add up to what 300,000 plus 100,000 plus 400,800,000. Now we're also told this, we're told that the carrying value of the subs net assets, 800,003 plus one plus four.

Is the same as the fair value, except for land. The subs land has a fair value, a hundred thousand greater than carrying them out. So in other words, the land on the subs books is undervalued because the land has a fair value, a hundred thousand greater than carrying them out. These are the facts we're told now, as I said, the main elimination of three that we make in any consolidation problem is to eliminate this investment account.

And that's the. That's going to be our objective and that's what we're going to be going through. Now, before we start our elimination entries, I want to do some preliminary calculations. Don't we know that the panel bought 80% of the subs stock, the $880,000. So we're going to set up an equation, 80% of X, the total value of a hundred percent of the sub stock equals 880,000.

So now of course, Whatever I do to one side of an equation I do to the other. I'm going to divide both sides by 80%. And what we end up with is this, that X the total value of a hundred percent of the sub stock equals that 880,000 divided by 80%. So X the total value of a hundred percent of the sub stock equals 1 million, 100,000.

That's what we know going in that we have inferred that the total value of 100% of the sub stock. Is worth 1 million, 100,000. So if somebody purchased a hundred percent of the subs shares, they'd have to pay 1 million, $100,000. What are they getting for net assets? Well, we know the book value, the carrying value of the net assets 300,000 plus 100,000 plus 400,000 is 800,000.

Is that the fair value? No, because the fair value of the sub land is a hundred thousand greater than carrying them out. So isn't the fair value of the subs net assets, 900,000. So let me summarize. If somebody purchased a hundred percent of the stock, they'd have to pay 1 million, 100,000 for net assets that have a fair value of 900,000.

So what that means is total Goodwill related to this acquisition is $200,000. So we know going in that there's 200,000 of Goodwill. We also know that if the parent owns 80% of the subs shares. Then the other 20% of the capital stock of the sob, the other 20% of the net assets of the sob is owned by the minority interest shareholders or what is called the non-controlling interest.

So the non-controlling interest owns the other 20%. So if the total fair value of all of the sub stock is 1 million, 100,000 times 20%, we know as of January 2nd, the day of purchase, the non-controlling interest has. A total fair value of 220,000. One of the objectives of the acquisition method is to value the non-controlling interest at its full fair value.

And as of January 2nd, that would be 220,000. So with those preliminary calculations in mind, now let's get to the main elimination fee that we have to make. As I say, we have to eliminate that investment account. We look at the trial balance of the parent. And there it is big as life investment in Saab 880,000.

There's no way we can carry that investment over to the consolidated balance sheet. Why? Because there is no sub, remember the sub has been consumed by the parent. The sub has gone. How many entities are there? One who's the entity, the parent, the parent is the surviving entity. The sub has gone. So we know we have to eliminate the investment account.

Now I have a checklist for you. It's going to take three steps, three entries to eliminate this investment account. Let me give you the checklist to eliminate the investment account. You're going to have to do three things. Number one, you're going to have to record the Goodwill. Number two, you're going to have to write the subs, net assets, the fair value, and then step three, you're going to have to eliminate the capital structure of this up.

If you do those three things, you will eliminate the investment account. If you record the Goodwill. If you write the subs net assets to fair value and you eliminate the capital structure of the sub, you will have eliminated the investment account. So let's do these three things. Don't we know that total Goodwill, as of January 2nd, comes out to 200,000.

So my first entry I'm going to debit Goodwill 220,000. We're going to record the Goodwill in the purchase of 200,000 and that's Goodwill. That that is going to be carried over. To the consolidated balance sheet shown as Goodwill in the consolidated balance sheet. So I debit Goodwill 200,000. I'm going to credit the investment account for 80% of that Goodwill or 160,000.

And I'm going to credit the non-controlling interest for 20% of that Goodwill or 40,000. That's my first entry. So I've already credited the investment account for 160,000. That's what the parent paid for. They share of Goodwill. So we credit the investment account 160,000, and we're starting to build our non-controlling interest account.

We're going to credit non-controlling interest for 20% of the Goodwill for 40,000. Let's get to step two. Now I have to write the subs net assets to fair value. This is an adjustment you have to make in the acquisition method. The subs net assets are written to fair value. It's a big part of a consolidation now for the most part.

The fair value. The subs net assets equals the, carry them out, except for that land. The land has a fair value, a hundred thousand greater than carrying them out. So we're going to debit land for a hundred thousand notice in consolidation under the acquisition method, we actually write the subs land to fair value.

So we're going to debit land a hundred thousand. We're going to, we're going to credit the investment account for 80% for the parents share or 80,000. And we're going to credit the non-controlling interest. What 20% or 20,000 now our third and final entry, our third and final step to getting rid of the investment account.

We have to eliminate the capital structure, the subsidiary. So when we look at the sub trial balance in the subs trial balance, they're showing capital stock 300,000 additional paid-in capital 100,000 retained earnings, 400,000. So let's do our third entry. I'm going to debit the subs. Common stock.

300,000. I'm going to debit the subs, API C 100,000. I'm going to debit the subs, retained earnings 400,000. I always eliminate 100% of the capital structure of the Saab. Why there is no stock, it doesn't exist. The Saab has been consumed by the parent. I'll put it another way. There's only one capital structure that you'd have a carry over to the consolidated balance sheet.

And that's the capital structure of the parents. The parent is the surviving entity. Joe suffice it to say that the capital structure of the subsidiary has to be eliminated. So I debit the subs, common stock, 300,000. I debit the subs, API C 100,000. I debit sub retained earnings 400,000. Now I'm going to credit the investment account, but 80% of those net assets, 640,000.

And I'm going to credit the non-controlling interest, but 20% of those net assets or 160,000. Those are the three entries that it takes to eliminate the investment account. Now let's reconcile. Look at the three credits that, that we in our three entries, the three credits, we just put the investment in sub when I recorded the co the Goodwill didn't I credit investment in sub for 160,000.

When I wrote the land, the fair value didn't I credit investment in sob for 80,000. And when I eliminated the capital structure, the subsidiary didn't I credit the investment account. 640,000. If you add up 160,000 plus 80,000, well, 640,000 haven't I credited investment and sub or 880,000. That account has been brought to zero.

Why does it get brought to zero? Because there is no sub how many entities are there one? So if you publish this account, you'd be saying you invested in yourself. There's only one entity. There is no sub that investment account has to be brought to zero and we've done that. All right. Look at the non-controlling interest.

Look at my three credits to non-controlling interest denied credit non-controlling interest for 40,000. When I recorded the Goodwill didn't I credit non-controlling interest for 20,000. When I wrote the land to fair value and denied credit non-controlling interest for 160,000, when I eliminated the capital structure, the sob.

And if you add up 40,000 plus 20,000 Wells, 160,000 haven't I established my non-controlling interest account. At 220,000. And doesn't that make sense? Because the non-controlling interest owns 20% of the capital stock of the sub a hundred percent of the stock to the sub is worth fair value. 1 million, one times 20%.

It should come out to 220,000. So we have established our non-controlling interest account at 220,000. Is that carried over to the consolidated balance sheet? It is that non-controlling interest. Will be carried over to the consolidated balance sheet. It will be reported in stockholders' equity, in the consolidated balance sheet.

In other words, down in the, when S when you look at the consolidated balance sheet, you're going to see down in stockholders' equity, common stock, additional paid-in capital retained earnings, and non-controlling interest valued at 220,000. As of January 2nd, the day of purchase, as I said, eliminating the investment account.

Is the most important elimination entry of them all. There is not another elimination fee that you make in consolidation. That's even a close second. And you know me well enough to know that we're not going to just do this sequence of entries one time. We'll certainly be going through it again, but make sure you study the sequence of entries.

And in our next FAR CPA Review class, we'll continue talking about other elimination entries that you have to make in consolidation because. Once you've eliminated the investment account. Then what you have to do is eliminate any intercompany transactions between the parent and sob. And we'll get to that in our next FAR CPA Review class.

I look to see you then

welcome back in this FAR CPA Review class. We're going to continue our discussion on the elimination entries that you make in a consolidation. And you know that the main elimination entry that you make in any consolidation. Is to eliminate the investment account and we've seen the different things the FAR CPA Exam can do with that.

And as you know, the main elimination entry can be tested in multiple choice as you've seen. And of course, if you get a simulation on consolidation with a spreadsheet, you know, with a worksheet, that's going to be the center of the simulation, getting that main elimination entry down. And my point is, once you get that main elimination entry down really what's left in terms of testing.

Is eliminating intercompany activity and in multiple choice and in simulations, there are three situations of intercompany activity. the FAR CPA Exam loves intercompany sales with profits, intercompany sales of fixed assets and intercompany bonds. You gotta be ready for those three intercompany situations.

Intercompany sales with profits. Intercompany sales of fixed assets and intercompany bonds. Let's start with intercompany sales with profits. Look at illustrator problem. Number one, during the year, the parents sold a hundred thousand of merchandise to the subsidiary. And of course the basic problem is parent and sub one economic entity.

Really you're selling merchandise to yourself. That's the basic problem. Parents sold a hundred thousand in merchandise to the subsidiary. Parent the sub, excuse me, has not paid the parent for the merchandise as of December 31. So the sub has not paid for the merchandise as of December 31, the parents gross profit on the sale 20,000 and notice half the merchandise is still in the subs inventory.

All right. I have a little checklist for you now. Listen carefully. I don't care whether the parent sells merchandise to the sub. Or the sub sells merchandise to the parent cause students get all hung up on that. It does not matter whether the parents sells merchandise to the sub or the sub sells merchandise to the parent.

When you see this, you gotta do three things. Let's, let's go down to three things. You have to do. Number one, you have to eliminate the intercompany sales themselves. That's number one, you have to eliminate the intercompany sales themselves. Number two, you have to eliminate any intercompany accounts payable.

Accounts receivable. That's number two, you have to eliminate any intercompany accounts, payable, accounts receivable, and step three, eliminate any intercompany profit. If it's still an inventory, remember only eliminate intercompany profit. If it's still in inventory. And of course I would memorize a check loss checklist like that.

Because it gets, you're organized. You see intercompany sales with profits, scarred. There's three potential things I have to do here. Eliminate the intercompany sales, eliminate intercompany accounts, payable, accounts receivable, eliminate the intercompany profit. If it's still an inventory. So let's apply the checklist to this problem.

The first thing we have to eliminate is the intercompany sales. So if I were consulting parents up here, if I had a spreadsheet where I were consolidating parent and sub. The first adjustment I'd make, I would debit sales a hundred thousand and I would credit cost of goods sold a hundred thousand. Why?

Because you can't have sales with yourself. See sales are overstated on the parent's books. Purchases. Therefore cost of goods sold is overstated on the subs books, but none of this can happen because it's all one company. So the first adjustment I would make, I would debit sales a hundred thousand and I would credit cost of goods, sold a hundred thousand, making the point that this entity.

Cannot have sales with itself. There's no other company to have sales with. The sub has been consumed by the parent. What it comes down to is you're not allowed to have sales with yourself. So debit sales, a hundred thousand credit cost of goods sold a hundred thousand and that'll take care of the first thing.

Now, the next thing you take care of, you have to eliminate any intercompany accounts, payable, accounts receivable. They said the sub is not paid the parent for this merchandise as of December 31. Well, if that's true, Isn't there a $100,000 accounts payable on the subs books. Isn't there a hundred thousand dollars accounts receivable on the parents.

So my second entry debit accounts payable, a hundred thousand, wipe that out, wipe out the payable on the subs books, credit accounts receivable, a hundred thousand wipe out the receivable on the parents' books. Why? Because you cannot have payables and receivables with yourself. It's all one company now.

All right. So the first thing we eliminate is the intercompany sales debit sales, a hundred thousand credit cost of good sold a hundred thousand. Next thing we eliminate intercompany accounts, payable, accounts receivable, debit accounts payable, a hundred thousand credit accounts receivable, a hundred thousand.

Now the third thing you eliminate is any intercompany profit. If it's still an inventory. Now, remember that don't eliminate all the profit. You only eliminate profit. If it's still an inventory. Now, the parent made $20,000 of gross profit on the sale. With the sub, they say half the merchandise is still in the subs inventory.

If half the merchandise is still in the subs inventory, we're going to have to eliminate half the profit or 10,000 only eliminate the profit if it's still in inventory. So if half the merchandise is on hand, we have to eliminate half the profit or 10,000, but what's the entry we'll look at the credit.

The credit will make sense. We have to credit inventory 10,000. I hope that makes sense. Our job is to get that intercompany profit out of inventory. So credit inventory, 10,000 now, what do you debit? Well, if ending inventory is overstated by that profit cost of goods sold is understated by that profit.

Again. If ending inventory is overstated by that profit cost of goods sold is understated by the profit. So debit cost of goods sold 10,000. Those are the three things you have to do. If you see intercompany sales with profits. And as I say, I'd memorize that checklist because you get your organized, Hey, this intercompany sale, the FAR CPA Example loves it.

You'll see when you do your homework, a lot of the multiple choice are about intercompany sales with profits. If you get a simulation on consolidation, I guarantee you they'll have intercompany sales with profits in there. So you want to be ready for them. And those are the three things you do. Eliminate the intercompany sales, eliminate intercompany accounts, payable, accounts receivable, and eliminate the undergrads.

Any profit. If it's still in inventory. All right, now let's talk about intercompany sales of fixed assets. If you go to illustrate a problem, number two on July one, the parent sold equipment with a $16,000 book value to the sub. For 12,000. So on July one, the parents sold equipment with a $16,000 book value.

And the sub only paid 12,000. Isn't there a $4,000 loss in that sale. If the parent takes a piece of equipment on their books, that cost 16,000 and they sell it to sub for 12,000, there's a $4,000 loss on sale. The depreciation method is straight line and. The remaining life is five years. Now, once again, let me say, let me give you a checklist.

I don't care whether the parents sells fixed assets to the sob or the sub sells fixed assets to the parent. It doesn't cause again, some students get hung up on that. It doesn't matter. I don't care whether the parent sells fixed assets to the sub, the sub sells fixed assets to the parent. When you see this item, you got to do three things.

I'm in love with threes here, you got three things you have to do. Number one. You have to eliminate any intercompany gain or loss. Number one, you're going to have to eliminate any intercompany gain or loss. Number two, you have to adjust the asset. It's either over or understated. It's either over or understated.

And then number three, sorry, you have to adjust depreciation now, here again, I'd memorize that checklist. Cause you get you're organized. You see intercompany sales of fixed assets. You know, there's three things you got to look for. You have to eliminate any intercompany gain or loss. You have to adjust the asset.

It's either over or understated and you have to adjust appreciation. All right, let's go to this problem. Is there an intercompany gain a loss? There's a loss, right? Didn't the parent take a piece of equipment on its books that costs 16,000 sell to the sub for 12,000. There's a $4,000 loss in that transaction.

So there is an intercompany loss. Now the question is next point is the asset over or understated? Let me ask you a question. Who owns this equipment, the parent or the sub, the parent does, there is no sub. Remember the sub has been consumed by the parent sub is gone, so it doesn't exist. And if the parents still owns the equipment, theoretically, what's the proper carrying value to the parent.

There costs 16,000, but the sub has possession. The sub has it on the books of 12. So it's understated. You see the problem who owns the equipment. The parent does. There is no sub. And if the parent owns the equipment, They should, they should be on the parents' books at their original. It should be on the parents books at its true original costs, 16,000, but the sub has possession the Saba asset on the books at 12 it's understated.

Here's what we're going to do. We're going to make one very quick entry. That'll solve those first two problems. See if it makes sense. Our first adjustment it'll take care of the first two problems. I'm going to debit plant and equipment 4,000. Why am I debiting? You know, this is, this is an adjustment we make, it's a consolidating adjustment.

We're going to debit plant equipment, 4,000. Why to bring the equipment from 12,000 on the subs books back up to 16,000, the true carrying value for the entity. What do I credit? Well, if you have a truck, if you have a trial balance on your spreadsheet, you'll see on that trial balance loss on sale equipment, 4,000 and you'll credit loss on sale equipment, 4,000.

Why? Because you can't incur a loss with yourself. It's all one company. They can't be intercompany gains and losses. There's no other company to incur a loss with. The sub has been consumed by the parent. So look at that entry. Doesn't that solve the first two problems. If I did it plant equipment 4,000, that brings the carrying value from 12,000 on the subs books back up to 16,000, the true carrying value for the entity.

And if I credit loss on sale of equipment, that intercompany loss is eliminated. Now, the last thing you do is adjust the depreciation and I think that'll make sense to you too. It gets back to the question. Who owns the equipment parent us up parent does. There is no sub. And if the parent owns the equipment, the parent should have taken depreciation for the last six months from July on, based on their cost, 16,000, but the sub had possession, the sub-base depreciation for the last six months on 12,000.

They didn't know any better. We are consolidating the entity. We have to make corrections here. Like I say the subhead possession, the would have based depreciation from July 1st on, based on 12,000, nobody has depreciated that $4,000 segment from July on if we do that, we've got it. So let's do it. I'm going to take that $4,000 loss divide by five straight line years.

That's what $800 depreciation for a full year, but I don't want a full year. I want a half year, July 1st on it's a $400 adjustment. So what is my adjustment debit depreciation expense 400. They didn't take enough. The Saab has the sub is ignorant. The sub based depreciation on 12,000. They don't know. We consolidate in the entity and say, no depreciation should be based on 16,000.

They didn't take enough. So we're going to debit depreciation expense 4,000, and we're going to excuse me, 400. And we're going to credit accumulated depreciation 400. That takes care of everything you have to take care of in that problem. Now I'm not gonna make you do this, but what if it was a gain? What if instead, you had an intercompany gain just reverse everything.

Now you would debit gain 4,000 credit plant equipment, 4,000 debit accumulated depreciation, 400 credit depreciation expense, 100. I hope that makes sense to you. If it was an intercompany game, just reverse everything. If you saw an intercompany gain here, you would debit game 4,000 credit plant equipment, 4,000 debit accumulated depreciation, 400 credit depreciation expense, 400.

So every, everything just gets reversed. Here's what I'd like you to do before you come to the next FAR CPA Review class. Make sure you do the next set Pern and scroll. It's a good set to set up two questions. Your assignment is to have those done before you come to the next FAR CPA Review class. I'll see you then

welcome back in this FAR CPA Review class. We're going to continue our discussion on the elimination entries that you make in a consolidation, specifically eliminating intercompany activity. And in our last class, I asked you to do Pern and scroll before coming to this FAR CPA Review class. So let's look at Pern and scroll and you see what it is.

It's a little test on eliminating intercompany. Profits and eliminating intercompany sale of fixed assets. So we'll go to the first question it says in Perkins, December 31, consolidating worksheet, how much Andrew company profit will be eliminated from inventory. Well, as I said in our last class, when you see intercompany sales with profits right away, you think of the checklist three things I have to do eliminate the intercompany sales.

Eliminate any intercompany accounts, payable, accounts receivable, and eliminate any intercompany profit, if it's still an inventory. So that checklist is in your head. Now how about the intercompany sales themselves? We'll notice the sales to scroll from Pern run a hundred thousand. So the first elimination entry that you'd make you would debit sales a hundred thousand and you'd credit cost of goods sold a hundred thousand.

Now that's not going to affect your answer to this question, but I'd like you to be disciplined. You know, what, what is it, you know, in total I have to do, because depending on the question, it can matter. And as I say, as a student, you want to be disciplined and to get in the habit of what is, what is the, what is the grand total of what I have to do when I see intercompany sales with profits.

So that's the first thing I'd have to do. Eliminate the sales themselves. I would have to debit sales, a hundred thousand credit cost of goods sold a hundred thousand. If I were doing a consultanting worksheet proponents role, that's the first adjustment I'd make. The second thing I would do. Is, I would eliminate any intercompany accounts, payable, accounts receivable.

Apparently there isn't anyone not told of any, we don't have balance sheet accounts, but you think of it. I want you to think of it because it's something that could be there. Now, the third thing is to eliminate the intercompany profit. Did you notice? They said in the additional information that the sales by person to scroll are made on the same terms as they make the third parties.

So the parent is selling to the sub here on the same terms. They'd sell to anybody else. So if you look at the income statement for parent, the parents, parent is showing total sales 500,000

cost of goods sold three 50 gross profit, one 50. So didn't the parent make $150,000 gross profit on 500,000 of sales. If you take 150,000 over 500,000, the gross profit percentage for Perrin is 30%. One 50 over 500. And if person is selling to scroll on the same terms, they'd sell to anybody else per and must've sold to scroll at a 30% gross profit margin.

So if we know a hundred thousand in merchandise, went from print to scroll times 30% that's answer a and a lot of students would pick that you take all the gross profit percentage is 30% take 30% of the sales, a hundred thousand, how low a so many students go for a, what did that student forget? You don't eliminate all the profits.

You only eliminate profit if it's still an inventory. So what you had to figure out is how much of this intercompany merchandise is still in the subs inventory. A hundred thousand, the merchandise went from the parent to the sub from parental to scroll, but how much is still on hand? Look at scrolls cost of goods sold notice.

80,000 of scrolls cost of goods sold is from the merchandise that came from the parent. Do you see that 80,000? 80,000 of the goods they sold, came from the merchandise that came from the parent. So a hundred thousand merchandise went from the parent to the sub, but then the sub turned around and sold 80,000 outsiders in their cost of goods sold.

So how much Andrew company merchandise is still on hand 20,000 times 30% gross profit margin. The answer is D you'd have to eliminate 6,000 profits from inventory. You credit, you consolidating this enterprise, you credit inventory 6,000 and you would debit cost of goods. Sold 6,000 cause of ending inventory is overstated by this profit cost of goods.

Sold is understated by this profit. The answer is date. Remember you only eliminate profit. If it's still an inventory. Now the next question says, what amount would be depreciation expense. In the consolidated income statement. Well, if you look at the income statements about halfway down, notice the toll depreciation for the parent is 40,000 for the sub 10 added up 40 plus 10 hell lo a no, it's not that simple because there's an intercompany sale of fixed assets.

The second bullet of additional information says that equipment purchased by the sub from the parent. The 36,000 on January one is depreciated using straight line over four years. Well, we have an intercompany sale of fixed assets. So what, what is your checklist eliminate? Any intercompany gain a loss?

Was there any intercompany gain a loss? Sure. Look at the income statement towards the bottom. You'll see gain on sale of equipment to the, to scroll 12,000 might want to circle that there was a $12,000 intercompany gain. So that's point number one, you have to eliminate any Andrew company gain a loss.

You have to adjust the asset. It's either over or stated. You see the overall understated and you have to adjust appreciation. Like I say, that checklist, if you get it down, helps you get organized, eliminate any intercompany gain or loss. You have to adjust the asset. It's either over or understated and you have to adjust depreciation.

All right. So we know from looking at the income statement, there was a $12,000 gain on the sale of the equipment to the sub. So what's the first adjustment I would make. I would debit gain 12,000. That can't be an intercompany gain. You can't earn a gain with yourself. It's all one company. So I would debit gain 12,000 and I would credit equipment 12,000 because it's overstated on the parent's books.

Parent has another book that 36,000 should be at the parents. Excuse me, parent has, has it on the books at 36,000 should be on the books at what it costs the sub, which must've been 24,000 it's overstated. So notice that entry takes care of the first two problems. If I debit gain 12,000 because you can't earn a gain with yourself, it's all one company and I credit equipment 12,000, then I've eliminated the intercompany gain and the asset is no longer overstated.

Now what's left. I have to adjust appreciation. I have to take that $12,000 gain divide by four straight line years. And I have to debit accumulated depreciation, 3000 and credit depreciation expense, 3000. They took too much. The parent would have based appreciation on 36,000 they're ignorant. They don't know any better.

We consolidate the enterprise. We say no depreciation should have been based on the subs cost, which would be 24,000 depreciation is overstated. So I would have to credit depreciation expense 3000, again, that's 12,000 gain or before straight line years credit depreciation expense, 3000 debit accumulated depreciation 3000.

So when they ask us. What is depreciation expense in the consolidated income statement? It's the 40 on the parent's books. Plus the 10 on the subs books, 50 minus Arkansas, consolidating adjustment three 47,000. Answer B. Now there's one more intercompany activity item that the FAR CPA Exam really likes and that's intercompany bonds.

If you look at illustrator problem, number one, it says. The Saab had 6% bonds outstanding. They pay interest semi-annually July one and January one. And on July one, the parent bought a hundred thousand of the subs bonds, and we have to make our consulting adjustments. Well, I have another checklist for you, you know, I would, and I love threes.

Let's go over the checklist. I don't care whether the parent buys the subs bonds. Or the sub buys, the parents bonds don't get hung up on that. It doesn't matter whether the parent buys the subs, bonds sub buys, the parents bonds. You got three things you have to do. First. You have to eliminate the investment and the debt that's number one, eliminate the investment and the debt.

Number two, eliminate any intercompany interest payable, interest receivable. So again, step one, eliminate the investment and the debt. Step two, eliminate any intercompany interest payable. Interest receivable and step three, eliminate any intercompany interest, revenue, interest expense. You memorize that checklist.

All right, so let's go through it. How would I eliminate the investment in the debt? Well, if the parent buys a hundred thousand of the subs, bonds, remember bonds are debt security. These are bonds payable on the subs books. So we'd have to eliminate. The bonds payable to ourselves. See the problem with intercompany bond holdings is this entity.

It's all one entity has a debt to itself now. So I'm going to debit bonds payable 100,000. This entity can not have a debt to itself. That's the problem with intercompany bond holdings. So I'm going to debit bonds payable a hundred thousand and trust me on the parent's books, you'd see investment in bonds, a hundred thousand.

You can't invest in your own securities either. So credit investment in bonds, a hundred thousand. That's your first adjustment. That's eliminating the investment and the debt. If I debit bonds payable a hundred thousand that eliminates the debt. You can't have a death of yourself. And if I credit investment in bonds, a hundred thousand, that eliminates the investment problem because you can't invest in your own securities.

Now notice this came out nice. And even I have to show you this. Notice the bonds payable was a hundred thousand. The investment bonds was a hundred thousand, but let me show you what could happen. Let's say you're in the FAR CPA Exam and you say, all right, Bob said, eliminate the investment in the debt. So I debit bonds payable for the a hundred thousand.

I eliminate the debt. But when I look on the spreadsheet, investment in bonds is at 105,000. So I credit investment in bonds, 105,000. It doesn't balance. Well, I want you to know if it doesn't balance it's because there's discounts and premiums in there somewhere, the parent must have had to pay a $5,000 premium to get the bonds back while the way we do this, it almost really doesn't matter.

You would just plug. A loss on retirement of bonds, you would just simply plug a loss in retirement of bonds of 5,000. And that loss would go to the consolidated income statement. Let me show you another possibility you're in the FAR CPA Exam and you say, well, Bob said, eliminate the investment in the debt. So you debit bonds payable a hundred thousand.

You get rid of the debt. But when you look on the spreadsheet, investment in bonds is at 96,000. See, the parent must have got the bonds back at a discount. So you would debit bonds payable, a hundred thousand, get rid of the debt credit investment in bonds, 96,000. If it doesn't balance, it means there's discounts or premiums there somewhere.

You would just plug a gain on retirement of bonds, 4,000. Let me summarize my point. What I always tell my students is this, when you're doing a consolidation, get rid of the debt, whatever the balance is because you can't have a debt to yourself, get rid of the investment, whatever the balance is on the spreadsheet.

Because you can't have an investment in yourself. And if it doesn't balance at that point, there's gotta be some discounts and premiums in there. And it's no big deal. If you need a debit to balance the entry out, it's a loss on retirement. If you need a credit, it's a gain on retirement really is that simple.

I'm trying to show you a simple way out of a tricky little problem. So if you need a debit to balance the entry out, it's a loss of retirement of bonds. If you need a credit, the balance, the entry out, it's a gain on retirement, a bond. Now in this pro in this problem, it was night. And this illustrate a problem.

We just debit bonds payable 100,000 credit investment bonds, a hundred thousand and it all evened out. No problem. There were no discounts and premiums, but you know what the bottom line is. And I know you already see it for consolidation purposes. Intercompany bond holdings are retired. That's what you're seeing in this entry for consolidation purposes, intercompany bond holdings are retired.

All right. Now the second thing we have to take care of. We have to eliminate any intercompany interest payable, interest receivable, eliminate number two. And he intercompany interest payable, interest receivable. Ask yourself this question. When was the last time interest was paid? July one. When's it gonna be paid again tomorrow morning, January one.

We're on December 31 doing consolidated statements. And I want you to know that's always how this calculation for crude interest is going to go. It's going to go from the last time interest was paid in this case, July one, up to the day of your consolidation. December 31, what we're dealing with here is six months of accrued interest.

It always goes from the last time interest was paid July one up to the day, you're consolidating this case December 31. So what we're dealing with here is six months of accrued interest, and that's not bad. We're going to take 6% of a hundred thousand. That's 6,000 of interest for a full year, but I don't want a full year.

I want a half a year, six months. It's $3,000. So what's my entry, debit accrued interest payable, 3000 credit accrued interest receivable, 3000. Why? Because this entity cannot have any kind of payables and receivables with itself. You're going to debit interest payable 3000. Why? Because there's an interest payable on the subs book.

You're going to credit interest receivable 3000 is an interest receivable on the parent's books, but it's an intercompany payable receivable. And this entity is all one entity. Now you cannot have payables and receivable of any kind payables and receivables of any kind with yourself. So debit accrued, interest payable, credit accrued interest receivable, 3000.

Now the third thing you take care of would be any intercompany interest, revenue, interest expense. So now I make another entry or I debit interest revenue, 3000. You can't earn revenue with yourself and credit interest expense, 3000. You can't incur expenses with yourself. So now you deal with the income statement problems.

So I'm going to debit interest revenue 3000 because the parent made revenue here and you can't make revenue with yourself. I'm going to credit interest expense 3000. That's an expense on the subs books. You can't incur an expense with yourself. So debit interest, revenue, credit, interest expense, 3000, and that'll take care of it.

Let's go to a problem. If you go to the next problem, Wagner Wagner, a holder of a million dollars of Palmer's bonds collected the interest on March 31 and then sold the bonds to seal for 975,000. On that date, Palmer owned 75% of sale Palmer owned 75% of seal. So you see what happened when Wagner sells.

A million dollars of Palm was called a parent when instead of Palmer and seal would say parent and sot, maybe that'll make it clearer. When Wagner sells a million dollars of the parent Palmer's bonds to the sub seal. Well, now the sob is holding the parents bonds. There's an intercompany bond holding they say on that date Palmer, a 75% owner seal had 1,000,070 $5,000 carrying value for the bond.

What was the effect? Of the subs purchase of the parents, bonds on retained earnings and minority interests. When we do the March 31 consolidated statements, well, we go through our checklist. The first thing we have to deal with is eliminate the investment in the debt. And by the way, that's all we have to deal with here.

We don't have to worry about the second step, eliminate any intercompany interest payable, interest receivable, or the third step eliminate any intercompany interest, revenue, and interest expense. There's been no intercompany interest because Wagner sold the bonds to. The sob seal on March 31. And we're doing the consolidated statements on March 31 the same day.

So the Saab has not earned any interest from the parent. So I hope you see that we don't have to worry about intercompany, interest payable, interest receivable, intercompany, interest, revenue, interest expense. We don't have to worry about that. All we have to worry about here is the first step, eliminate the investment in the debt.

So let's do it. If we were consolidating Palmer and seal. We're going to debit bonds, payable a million, and we're going to debit on amortized premium 75,000 didn't they say that Palmer had 1,000,070 $5,000 carrying value for the bonds on the parents' books on Palmer's books. So to eliminate the debt, we're going to debit bonds payable, a million debit on amortized premium 75,000 because the bonds have a carrying value on the parent's books of 1,000,070 5,000.

There must be a $75,000 premium. On those bonds. So debit bonds payable, a million debit on amortized premium, 75,000. The point is you can't have an outstanding debt to yourself. Now, what do we do? Get rid of the investment credit investment in bonds for 975,000 didn't seal buy the bonds, but nine 75. So seal has an investment in bonds at 975,000.

So credit investment in bonds, 975,000, because you can't have an investment in yourself. So we get rid of the debt. We get rid of the investment. Now, what did I say before? Get rid of the debt, whatever the balance is, get rid of the investment, whatever the balance is and when it doesn't balance as it does not here.

It's because you got discounts and premiums in there. No big deal to balance the entry out. I need a credit of a hundred thousand. That's a gain on retirement of bonds. That is a game on retirement of bonds. All right, now we've got the entry. Now let's look at the answers. It's a little tricky. Remember I said for consolidation purposes, intercompany bond holdings are basically retired, whose bonds are being retired here.

Notice it's the parent's bonds. It's Palmer's bonds being retired. So that game would go really belong to the parent because it's the parent's bonds being retired that gain on retirement really belongs to the parents. Minority interest would have nothing to do with it. And the answer is a again, because it's the parents bonds because it's Palmer's bonds that are being retired that gain really belongs to the parent minority interest would have nothing to do with that gain.

And the answer is a now you have to be careful. What if Palmer? Same facts. What if Palmer had bought seal's bonds for nine 75, same facts. If Palmer bought seals bonds, but 97. Nine 75. I do the same entry member. It doesn't matter whether the parent owns the subs, bonds sub owns the parents, bonds. You go the same steps.

But if the, if the parent have bought the subs bonds here, if PA, if we bought seals bonds for 975,000, the entry would be identical. But now that a hundred thousand dollar gain would belong to the sub and minority interest, 25% would pick up their share. And the answer would be B the answer would be B if it was.

Parents buying the subs bonds. So minority interests can come into it, but because this is Palmer's bonds being retired, minority interest has nothing to do with it. And the answer is a make sure, you know, those checklists, make sure you know, the checklist on how to deal with intercompany sales, with profits intercompany sale of fixed assets, intercompany bonds, be ready for those three intercompany types of transactions.

And of course, Be able to do the main elimination entry in your sleep. And I know you will keep studying. Don't fall behind. I'll see you in the next FAR CPA Review class.

Welcome back in this FAR CPA Review class. We're going to continue our discussion on consolidated financial statements. And you remember that in our previous classes, we've said that if you get. A simulation on consolidation with a spreadsheet. There are really two major steps to breaking that simulation down. You have to number one, eliminate the investment account and number two, eliminate all the intercompany financial activity, eliminate the investment account and eliminate all the intercompany financial activity.

What we're going to do in this FAR CPA Review class is. Apply what we've learned to a simulation. And if you look at your viewers guide, you'll see Jarad Munson. So just imagine that you're in the FAR CPA Exam, you've done Tesla. Number one, you've finished Tesla. Number two, you've finished Tesla, number three, you've done all of the multiple choice.

And then you open up your first simulation. And what you're faced with is Jared and Munson and typical of many simulations. There's a lot of information. It says on April one of the current year jar, I purchased 80% of the common stock of months and manufacturing for $6 million at the date of purchase the book and fair values of Munson's in the assets and liabilities were as follows.

So they give us a list of Munson's book values, fair values on the day of purchase for all the assets and liabilities. And then. It says by year end, December 31, the following transactions had occurred during the year. The first bullet says the balance of Munson's net accounts receivable at April one had been collected the inventory on hand April one had been charged to cost of sales months and does use a perpetual inventory system when accounting for inventory prior to this year.

Jared had purchased at face value. 1,500,000 of Munson's 7% subordinated to ventures or bonds. These dimensions mature in seven years on October 31 with interest payable annually on October 31 as of April one, the day of purchase. The machinery and equipment had an estimated remaining life of six years.

Martin uses straight line Munson's depreciation expense calculation for the nine months ended December 31 was based on the old. Depreciation rates, the other assets, consistent tireless of long-term investments made by Munson do not include any investment in Jarhead. And then they say during the last nine months of the year, the following intercompany transactions occurred between Jared and Munson.

And you can see that we have one of the situations, the FAR CPA Exam likes the most intercompany sales with profits. Jarrod's been selling merchandise to Munson. Munson's been selling merchandise to Jara. Some of that intercompany merchandise is still included in the purchases inventory. December 31 is also a balance.

Unpaid Jarad sells merchandise two months and the cost. So there's no profit in the jar of the Munson column, but Munson sells merchandise to Jarad at a regular selling price. And that includes a normal gross profit margin of 35%. There were no intercompany sales between the companies prior to April one.

So we've got intercompany sales, intercompany profits. There's a balance on paid. Then they have an odd point across interest on intercompany. Debt is recorded by both companies in their respective accounts, receivable and accounts payable accounts. Just something odd. We have to keep in mind that if there's any interest payable, it's in accounts payable.

If there's any interest receivable. They have it in, they have it in accounts receivable, who knows why this business combination is being accounted for under the acquisition method. And that's a very good thing because it's the only acceptable method. So it's good that they did that. Now on the next page, you can see that we were given the spreadsheet on December 31.

Remember our job in the simulation is, is to consolidate Jarryd and Munson. On December 31 and they gave us, you know, you click on the spreadsheet, it comes up and people have things I'd like you to notice about halfway down. You can see biggest life investment in months in manufacturing. It's on jars trial balance.

At $6 million. And that makes sense because Jared purchased 80% of the shares for 6 million just below their investment in Munson bonds for 1,000,005. That makes sense because Jara did purchase months in bonds for 1,000,005. All right. So we've clicked on to this simulation we're faced with this massive problem we have to deal with, but I don't care how massive it is.

The minute you see a consolidation simulation that has a spreadsheet, you know, right away, two huge steps must be done to break it down, eliminate the investment account, eliminate the intercompany activity, eliminate the investment account, eliminate the intercompany activity. So we'll start together by eliminating that investment account.

And, you know, the way I like to do this, let's start with a couple of preliminary calculations. Don't I know that Jared purchased 80% of months in shares for 6 million. So we're going to set up an equation. 80% of X X stands for what the value of a hundred percent of month's in shares. That's what X stands for 80% of X.

What would be valuable? The value of a hundred percent of months in shares. Equals $6 million. So we divide both sides by 80%. So what it comes down to is that X the total value of 100% of months in shares equals that 6 million divided by 80%. And if you take 6 million and divide by 80%, it comes out to 7 million, 500,000.

So we then furred haven't. We we've inferred that the total value, the total fair value of 100% of months in shares. Must be 7 million, 500,000. Now, once we have that number, we can, we can figure out a couple of important points. If someone had purchased a hundred percent of months in shares, theoretically, they would have had to pay 7 million, 500,000.

What are the net assets worth? Well, if you look at the problem, look at the fair value column, the fair value of the assets. Add up to 10,000,007 15, the liabilities are 5 million, five 50. So the fair value. Of the subs net assets on the day of purchase comes out to 5 million to 10,000,007, 15 minus 5 million, five, 15, 5 million to so you see my point.

If somebody had purchased a hundred percent of months in shares, they would have had to pay 7 million, 500,000 for net assets that are worth 5 million too. So the total Goodwill in this acquisition comes out to 2 million, 300,002 million, 300,000. We can also we'll figure something else out. We know that if Jared owns 80% of months in shares, then the minority interest or the non-controlling interest owns the other 20% of Munson's outstanding shares the other 20% of Munson's net assets.

So since under the acquisition method, our job. Is to value that non-controlling interest at its full fair value. We can figure that out. Now can't wait, because if the total value of a hundred percent of months in shares equals 7 million, 500,000 and the non-controlling interest shareholders own 20% of that stock, you take 20% of 7,000,005.

It comes out to 1,500,000. So don't, we know that as of the day of purchase as of April one, the total value, the total fair value of the non-controlling interest shares. Comes out to 1,500,000. I think it's just good to know these numbers before you begin to figure out the total Goodwill, figure out the value of the non-controlling interest, because you can use that as a way to check your work.

All right. So now with that preliminary analysis out of the way, let's get to our main job. Step one, eliminate the investment account, and I gave you a checklist on this, and eventually you've promised me that you are going to memorize this checklist. Remember, there are three steps to getting rid of the investment account.

What is, what are they? You know, them record the Goodwill, right? The subs net assets to fair value, eliminate the capital structure, the sub record, the Goodwill, right? The subs net assets to fair value and eliminate the capital structure of the subsidiary. So let's do our first entry. Let's record the Goodwill.

We know the Goodwill adds up to 2 million, 300,000 as of the day of purchase as of April one. So we're going to debit Goodwill 2 million, 300,000, and that Goodwill, where we're actually establishing the Goodwill account. If you look on your spreadsheet, Goodwill is on there for you to fill in Goodwill will be carried over to the consolidated balance sheet.

If you do a formal consolidated balance sheet, you show the Goodwill as an intangible asset. It's the Goodwill in the purchase. It has to be recorded. So we're going to debit Goodwill 2 million, 300,000. We're going to credit the investment account. Now we're starting. To eliminate the investment account.

We're going to credit investment in Munson for 80% of that Goodwill or 1,840,000. And we're going to start to build our non-controlling interest account credit non-controlling interest to put 20% of the Goodwill, 20% of 2 million, three or 460,000. So we recorded the Goodwill. We started to lower the investment account and we're starting to build our non-controlling interest account.

Now, step two. We have to write the subs net assets to fair value. This is an important adjustment that must be made in the acquisition method. The subs net assets must be written to fair value. So if you go back to the simulation and you go to the book value and the fair value column, obviously there's no difference between.

Book value and fair value for cash accounts receivable. But look at the inventory. The inventory has a book value of 828,000, but on the day of purchase, the fair value of the inventory was only 700,000. So we have to adjust that. And remember, in the additional information, it said that the inventory on hand April one had been charged to cost to sales.

That's the second bullet in the additional information, furthermore months and uses the perpetual inventory system in accounting of inventory. So the point is that if we want to adjust that beginning inventory, we're going to have to do it through cost of sales. If you look on your spreadsheet, cost of sales is there.

And if the beginning inventory was overstated, which it was, they charged beginning of trade of cost to sales at 828,000, the entity should have charged. Beginning inventory to cost of sales at its fair value, 700,000. So beginning inventory was overstated. Therefore cost of sales is overstated. I'm going to credit cost of sales, cost of goods sold 128,000.

Then we know land has a book value of 1 million, five 60, and a fair value of 2,000,001. I'm going to debit the land 540,000. I have to write the subs net assets to fair value. Machinery and equipment. We have, we have to write that from a book value of 7 million, eight 52, a fair value of 10,000,006. I'm going to debit machinery and equipment 2,000,007 50.

Also, we're going to write accumulated depreciation from book value, 3 million, two 50 to fair value, 4 million. I'm going to credit accumulated depreciation, 750,000. Now it's odd how they did this. Coming up with the fair value of accumulated depreciation, but the objective, however, they, however they decided to approach this, the objective was to write the machinery and equipment to its fair value, which must be what, 10 million, six minus 4 million, 6,000,006.

So there's a number of ways you could do that. They chose to come up with an estimated fair value of accumulated depreciation. But however you do this, your job here was to write the machinery and equipment up to its fair value, which must be. 6,000,006. The other assets will be written from a book value of 140,000 to a fair value, 50,000.

So I'm going to credit other assets, 90,000 on the day of purchase, you have to write the subs net assets to fair value. It's a major adjustment that you make in the acquisition method. All right. Now I think what we've done here. Look at the totals. Didn't we just in this entry, right? The subs net assets from a book value of.

8,000,003 93 to a fair value of 10 million, seven 15. Didn't we just write the subs net assets up 2 million, 322,000. Again, that's 10,000,007, 15 minus 8,000,003 93. We just wrote the subs net assets up 2,000,003 22. So I'm going to credit investment in sub for 80% of 2 million, three 22 or 1,857,600 credit investment and sub.

For 1,857,600. And I'm going to credit the non-controlling interest for 20% of 2 million, three 22 or 464,400. So we've written the subs net assets to fair value. And now our third step, we have to eliminate the capital structure of the subsidiary. Notice on April one, the sub months in is showing. Common stock of a million additional paid-in capital of 872,000 and retained earnings of 1,000,006 thousand.

And if you look on your spreadsheet, which is dated December 31, look at common stock, API C and retained earnings for the sub Munson, same numbers. We notice we have the beginning balances because we have trial balances here. These numbers haven't been adjusted yet for the current net income that will happen after we.

Make our adjustments to the trial balance, but we know that in consolidation, we always eliminate 100% of the capital structure of this up. So I'm going to debit the subs, common stock for a million. I'm going to debit the subs API for 872,000. I'm going to debit the subs, retain earnings for 1,000,006 thousand.

We always eliminate 100% of the capital structure this up because there is no sub you know, that. Months and has been consumed by Jarett months and no longer exists. So we debit the subs, common stock, a million. We debit the subs, API C 872,000. And we debit the sub retained earnings, 1,000,006 thousand. As you know, there's only one capital structure that we'd ever carry over to the consolidated balance sheet.

And that's the capital structure of the parent. Parent is the surviving entity. Now what do I do? Well, the net assets of the sub, if you add up. A million plus 872,000 plus a million, 6,000, the net assets of the sub add up to what 2,878,000. I'm going to credit the investment account investment in Munson by 80% of 2,878,000 or 2 million, 302,400 credit investment in Munson for 80% of 2,878,000, the net assets of this up.

So credit investment Munson, 2 million. 302,400 and I'll credit the non-controlling interest for 20% of the net assets. 20 minutes, 20% of 2,878,000 or 575,600. Now look at the three entries that we just made. Does everything reconcile? Well, look at the three credits to non-controlling interest. Didn't we credit non-controlling interest for 460,000.

When we recorded the Goodwill. Didn't we credit non-controlling interest for 464,400. When we wrote, when we wrote the subs net assets to fair value, and we didn't, we credit the non-controlling interest for 575,600. When we eliminated the capital structure, the sub at the added up, if you add a 460,000 plus 464,400 plus 575,600, it adds up to 1,000,005.

And doesn't that make sense? Cause didn't, we know when we started. That the non-controlling interest account on April one, the day of acquisition should add up to 20% of 7,000,005. The total value of all the sub stock is 7,000,005 non-controlling interest has a 20% interest in those shares. 20% of 7,000,005 is 1,000,005.

How about the credits to investment in sub? Well, there's three of them. We credited investment in Munson for 1,840,000. When we recorded the Goodwill, we credited investment in months and for 1,857,600, when we wrote the subs net assets to fair value, and we credited investment in Munson for 2 million, 302,400, when we eliminated the capital structure, the sob, if you add that up, If you add up 1,000,008, 40 plus 1,857,600 plus 2,302,400.

What's it add up to 6 million, the balance and the investment account. That's been written down to zero because you can't invest in yourself. How many companies are there? One there's only one economic entity. How does this account make any sense? Investment in myself? It's nonsense. And the investment account has to be eliminated.

And that's the first major thing you do in any simulation on consolidation. And it takes those three entries. It takes those three steps. So you memorize that checklist and I think you'll be ready for any simulation. They give you on consolidation because you have to be ready for the acquisition method and you have to be ready to eliminate that investment account.

All right, now that we've eliminated the investment account. All that's left is what you go through the additional information. And eliminate any intercompany financial activity that must be eliminated. And if you do that, you've done the problem. That's our second major step in any simulation on consolidation, go through the additional information, go through the remaining tabs.

One tab at a time. Look for any intercompany financial activity that must be eliminated. And if you eliminate all that intercompany financial activity, there's nothing else to do. What I'd like you to do is this. I'd like you to shut the class down. And before you come to the next FAR CPA Review class, promise me now, before you come to the next FAR CPA Review class, see if you know how to eliminate test yourself here.

So you know how to eliminate all that intercompany financial activity. You'll give yourself 20 minutes, but do it before you come to the next FAR CPA Review class. And in the next FAR CPA Review class, we'll go through the elimination entries together. I look to see that

welcome back. I hope you tried going through the additional information, looking for the intercompany activity, making the elimination entries, because I think you need practice like this. Let's now do it together. It says by year end, December 31, the following transactions that occurred first, the balance of Munson's net accounts receivable on April one had been collected nothing there.

The inventory on hand April one had been charged to cost of sale. We needed that information to write the beginning inventory to fair value. We dealt with that. First thing you had to think about is the third bullet down prior to this year, prior to this year, when they were not apparent and sub jarred had purchased at face value, 1,500,000 of months and 7% subordinated to ventures or bonds.

The debentures mature in seven years on October 31. With interest payable annually on October 31. So here's what you had to think about since these bonds were purchased before they were parent and sub do they have to be retired? Remember we said in our previous class that for consolidation purposes, intercompany bond holdings have to be retiring, but how about at the bonds?

Were purchased way before they were apparent and sub do I worry about them? Of course we do. Doesn't matter when they bought the bonds. Now, when they bought the bonds could affect our interest calculations, but it doesn't matter when they bought the bonds. You cannot publish, you cannot publish consolidated statements and show that you have a debt to yourself.

Show that you have an investment in your own securities whenever they were purchased. So don't let that bog you down. They still have to be eliminated. So our first entry. You know what to do because you go back to the checklist. Eventually you have to memorize these checklists. You might not be there yet, but when you take the FAR CPA Exam, you've got these checklists down.

When I see intercompany bonds, what are the three things I have to do? There's always three things on my checklist. Eliminate the investment and the debt. Eliminate any intercompany, interest payable, interest receivable, and step three. Eliminate any intercompany interest, revenue, interest expense.

Eliminate the investment in the debt eliminate any intercompany, interest payable, interest receivable, and step three, eliminate any intercompany interest, revenue, interest expense. That's, what's reverberating in your head when you're in the FAR CPA Exam, because you memorize that checklist. And as I've said to you before, the reason I give you a checklist is a way to be sure you're doing everything you have to do with these bonds.

All right. So let's eliminate the investment in the debt. If he went to the spreadsheet you saw that months in is showing. Subordinated the ventures, basically bonds payable of 5 million. Do I eliminate all 5 million? No, just the intercompany portion. So we're going to debit subordinated ventures. Same thing as bonds payable.

These are the, these are the benchers though. They're unsecured. Notice this subordinated to other claims. In other words, they're junk bonds. That's what these are the ventures junk bonds. They're not secured debt. So if the corporation were to liquidate. This debt would be subordinated to claims by other debt holders.

So they're junk bonds, not very good bonds, but anyway, we're going to debit subordinated ventures, same thing as bonds payable, 1,500,000, and we're going to credit in and why we debiting subordinated ventures, 1 million Vive, because this entity is not allowed to have an outstanding debt to itself. That's the problem with intercompany bond holdings, showered and Munson on now one economic entity.

Don't forget that single entity concept and the bottom line is this entity is not allowed to have an outstanding debt to itself. So we're going to debit subordinate adventures, basically bonds payable, 1,000,005, and we're going to credit investment in months, credit investment in months. And Vaughn's 1,000,005.

And why am I crediting investment in months in bonds, 1,000,005, because this entity can not invest in its own secure and notice the entry balances. There are no discounts and premiums to worry about. And that's always something to be grateful for. Just debit, subordinated ventures and credit investment months and bonds, 1,000,005 we've eliminated the investment and the debt.

Let's go to step two. We're now going to eliminate any intercompany interest payable, interest receivable. What's the first question on this. When was the last time interest was paid? When was the last time interest was paid October 31. Remember the interest is paid annually on October 31. So the last time it was paid is October 31.

What's the date of by spreadsheet, December 31. So as the date of our spreadsheet is accrued interest for what November, December is about. We're talking about two months of accrued interest. It always goes, this calculation for crude interest always goes from the last time interest was paid in this case, October 31.

Up to the day of your consolidation, December 31. So as of the day of our consolidation, December 31, there were two months of accrued interest for November and December. So let's work it out. I'm going to take the interest rate 7% times 1,000,005. What is that? That's 105,000 of interest for a full year, but I don't want a full year.

I just want November, December to twelves one sixth of. 105,000 or 17,500, we're going to debit what we're going to. Debit accounts payable, 17 five. We're going to credit our accounts receivable 17 five. Remember that odd point towards the bottom. It said accrued interest on intercompany debt is recorded by both companies and their respective accounts receivable and accounts payable accounts.

Who knows why? So with that in mind, we have to debit accounts payable. I think, you know, we're really debit interest payable, 17 five, and we're going to have to credit our accounts receivable. I think, you know, we're really crediting interest receivable, 17 five, but you have to eliminate any intercompany interest payable, interest receivable.

Okay. You know why it has to be done because Jara and Munson are one economic entity and this entity cannot have any, any type of payables and receivables with itself. And then finally, step three, we have to eliminate any intercompany interest, revenue, interest expense. Now you have to think about this.

When did Jarryd acquire Munson's bonds prior to this year? So didn't Jarad on Munson's bonds for all 12 months of the current year. We all agree on that, right? The Jarno and Munson's bonds for all 12 months of the current year. But let's agree on this too. Any interest revenue earned by Jaren from Munson for January, February, and March is not a problem because that was before they were a parent and sub that was before they were one economic entity.

That was an arms length transaction, but all the intercompany interest, revenue and expense for April, may, June, July, August, September, October, November, December for the last nine months is a problem because. You're earning interest revenue. You're incurring interest expenses with yourself. So it's the last nine months.

That's a problem. So we're going to take the interest rate 7% times 1,000,005. That's 105,000 of interest for a full year, but I don't want a full year. I just want April 1st to December 31, nine twelfths of that nine twelfths of 105,000 or 78,750. We're going to debit interest revenue. 78,007 50. Why?

Because you can't earn revenue with yourself. We're going to credit interest expense 78,007 50. Why? Because you can't incur expenses with yourself and that'll take care of it. If you do that checklist, you've taken care of the bonds. That's why you've promised me you're going to memorize these checklists.

I really think they help. All right. So we've taken care of the bonds let's read on as of April one. The machinery and equipment had an estimated remaining life of six years, months and use straight line. And Munson's depreciation expense calculation for the nine months ended December 31 was based on the old rates.

So if you'll go on the spreadsheet and you find depreciation, expense, machinery and equipment, it's 588,007 50. That's what the sub took question is. What should the entity tape? And I think you see the problem. The problem is that. We wrote the machinery and equipment to its fair value. What's the fair value of the machinery equipment?

Well, it's 10 million, six minus accumulated depreciation of 4 million. There's that odd thing where they worked out the fair value of accumulated depreciation, but the fair value of the machinery equipment would be 10 million, six minus 4 million, 6,000,006. The point is that as of April one who owns that machinery equipment, the entity does months and no longer exists.

Months and has been consumed by Jarad. So as of April one, the entity owns these fixed assets. So the entity should take nine months depreciation, April one to December 31, nine months depreciation based on their costs, which is fair value, 6,000,006. So let's work it out. We're going to take that fair value of 6 million, six divided by six straight line years.

This machinery equipment still has remaining life from six years. So divide by six straight line years. What is that? That's 1 million, 100,000 of depreciation for a full year. Do we want a full year? No, just April 1st to December 31. That's how long the entity is owned the fixed assets. So multiply by nine twelves.

What the entity should take for depreciation is 825,000. Now look at what the sub took on the spreadsheet. Five 88, seven 50. Your job. Is to adjust that depreciation from five 88, seven 50 up to the depreciation, the entity should take that 700, excuse me, that's 825,000. That's your job in this adjustment to adjust what the sub tour based on the old rates.

However, they figured that out, which was five 88, seven 50, adjust that up to 825,000. The true depreciation expense for the entity based on fair value. That's the entities cost for these assets. So we're going to debit depreciation expense. 236,002 50. And we're going to credit accumulated depreciation 236,002 50.

We're going to adjust that to appreciation up to 825,000 based on fair value. This adjustment has to be made. Anytime in a consolidation, you have written depreciable assets from book value to fair value. That's going to require a depreciation adjustment. Let's go back. To the additional information. It says the other assets consists entirely of long-term investments made by Munson and do not include any investment in Jara.

So there's nothing there. And then they say during the last nine months of the year, the following intercompany transactions occurred, we've got intercompany sales with profits, and you've got another checklist, which I hope you thought about. Member. It doesn't matter whether the parent is selling merchandise to the sub, the sub selling merchandise to the parent.

You see this, you got to do three things. Eliminate the intercompany sales, eliminate any intercompany accounts, payable, accounts receivable, and step three, eliminate any intercompany profit. If it's still an inventory, always remember you only eliminate the profit if it's still an inventory. So you got your checklist.

So let's look at this thing. Let's go to the sales. Jar sold 158,000 in merchandise to months and months and sold 230,000 of merchandise to Jarad. Just add it up, add up one 58 plus two 30. We're going to debit sales 388,000. We're going to credit cost of goods sold 388,000. And you know why you can not have sales with yourself.

That's the problem on the sales side, you can't purchase your own merchandise. That's the problem on the purchaser side purchases are overstated. They full cost of goods. Sold is overstated. So that's why we debit sales 388,000 and credit cost of goods sold 388,000 because you can't have sales with yourself and you can't purchase your own merchandise.

So sales were overstated purchases they have for cost of goods. Sold is overstated. Hopefully you got that entry done right away. Now the second thing on your checklist, you have to eliminate any intercompany accounts, payable, accounts receivable, and notice there's a balance on paid at December 31. So you look at the jar, the Munson column.

If there's a balance, unpaid, there must be what? 16,800 of an accounts receivable on Jarrod's book. Right. There must be a six 16,800 accounts receivable on Jared's books and a $16,800 account payable on Munson's books. Same thing in the, in the jar would call them there's a balance unpaid. So they must be a $22,000 receivable and accounts receivable on Munson's books, a $22,000 accounts payable on Jarrod's books.

So you just add it up, add up 16, eight plus 22,000. There's 38,000. 800 of intercompany accounts, payable, accounts receivable, you know what to do debit accounts payable, 38,800 credit accounts receivable 38,800, because you cannot have any type of payables and receivables with yourself. And now the third and final step we have to eliminate any intercompany profit.

If it's still an inventory, always remember you only eliminate profits. If it's still an inventory and notice the second line down in this section, what's included in the purchaser's inventory at December 31. Well, there's still 36,000 of this intercompany merchandise in Munson's ending inventory monsters.

The purchaser. Do I worry about that? No, because Jared sells merchandise to months and it costs, so there's no profit in the 36,000, but look at the monster jar column. Jarrod's the purchaser and there's 12,000 of this intercompany merchandise in the purchaser's inventory. Jar is inventory and months and sells to jar, right at a regular selling price.

That includes a normal gross profit margin of 35%. So we're going to have to take 35% of 12,000 is 4,200 of intercompany profit in the ending inventory of Jarad, which has going to become the ending inventory for the consolidated entity. So take 35% of 12,000 and we're going to credit what inventory?

4,200. I always hope the credit makes a lot of sense because our job in this adjustment is to get that intercompany profit out of inventory. And what do we debit? Well, if ending inventory is overstated by that profit cost of goods sold is understated by that profit and cost of goods sold or cost of sales is on your spreadsheet and it's understated.

So you're going to debit cost of sales, 4,200 only eliminate profit. If it's still an inventory. And again, you might not be there yet, but eventually you memorize that checklist, all the checklists I've given you. And I think you'll really find they make it so that you're meticulous. You're doing everything you have to do.

If you get a big simulation on consolidation or you get multiple choice on consolidation, you're probably going to get one of the other or both. So you've got to be ready now. There's nothing else to worry about here. There's no other intercompany activity. So the problem is done. Just remember, in any simulation on consolidations, those are the two big steps you always have to do to break it down.

Eliminate the investment of gout. You have a checklist on that and then eliminate any intercompany transactions. Eliminate the investment account. Eliminate any intercompany transactions. You'll break it down now. Before I see you in the next FAR CPA Review class. You'll see. When you get to the next module that in your viewers guide, there are six multiple choice at the beginning of the next module.

Six multiple choice. Promise me, you'll get those done. Get those six, multiple choice done. Get your six answers before you opened the class, because I'm going to start by going over those questions. And it's very important that you get your answers first. So get those answers and I'll see you in the next FAR CPA Review class.

Welcome back. As you know, in our last class, I asked you to do the six questions at the beginning of this module, before coming to the class, I wanted you to get your six answers before we went through the questions together. And I know you've done that. So let's look at the six questions. Number one says that Penn paid $300,000 for the outstanding stock of star.

So apparently Penn purchased a hundred percent of stars shares. And as you know, that means there's no non-controlling interests. And if there's no non-controlling interest that does simplify the problem at that time, the sub star had the fallen condensed balance sheet. The sub is showing current assets, 40,000 plant and equipment net 380,000 liabilities, 200,000.

And notice the sub stockholders' equity adds up to 220,000 might want to circle that there's the book value of the subs, net assets, assets minus liabilities gives us total stockholders' equity or the net assets in the corporation. 220,000. Let's go right to the bottom. What amount of Goodwill related to stars acquisition would Penn report in the consolidated balance sheet?

Well, they paid 300,000 for a hundred percent of the stock, the net assets of a book value of 220,300,000 minus two, 20 there's, 80,000 of Goodwill. Hello, answer D and you know, D is wrong because Goodwill is not defined as what someone's willing to pay over book value for net assets. It's defined as what someone's willing to pay over.

Fair value for net assets. And they went on to say that the fair value of the subs plant and equipment was 60,000 more than it's recorded, carrying them out. The fair value and caring amounts were equal for all other assets and liabilities. So if the book value of the subs net assets on the day of acquisition totaled 220,000 total stockholders' equity.

The fair value. Must've been 280,000. When you write that plant and equipment up 60,000 up to fair value, the fair value of the subs net assets, 280,000. Now you can solve it. If the parent paid 300,000 for a hundred percent of the stock and acquired net assets only worth fair value, 280,000, the rest must be Goodwill.

There's 20,000 of Goodwill in that acquisition. And the answer is a same thing with number two. On November 30th parlor purchased for cash at $15 a share all there's no non-controlling interest here. None. They bought all 250,000 shares of the outstanding stock of Shaw. So if you take the 250,000 times 15 parlor paid 3 million, seven 50 for the stock, they say at November 30th, Shaw, the sub.

Has a balance sheet showing a carrying amount of net assets of 3 million. Now here again, if you stop there and say, well, they paid 3 million, seven 50 for the stock net assets of a book value 3 million. Hello. A Goodwill is seven 50, but Goodwill is not defined. As what someone's willing to pay over book value for net assets, it's defined as what someone's willing to pay over fair value for net assets.

And they went on to say at the time of acquisition, the fair value of Shaw's property, plant and equipment exceeded, it's carrying them out by 400,000. So if the book value of the subs, net assets on the day of acquisition, total 3 million, when we write the equipment up 400,000, the fair value. Of the subs net assets on the day of acquisition must have been 3 million, four, and then you can solve it.

What happened in this problem is that power paid 3 million, 750,000 for net assets that have a fair value, 3 million for this 350,000 of Goodwill in that acquisition. Then the answer is C as I say, when there's no non-controlling interest that just makes the problem a lot easier to deal with. Let's do three and four.

It's a set. On December 30, one of the current year, penny purchased 80%. So now there is a non-controlling interest. They purchased 80% of the outstanding stock of Sutton for 1 million, one on the purchase date, the book value of Sutton's net assets equal the million. We don't care about the book value and the fair value equaled.

1 million to the business combination is accounted for under the acquisition method and they want two things. Number one, in the current year consolidated balance sheet, what amount would be reported as Goodwill and number two. Excuse me, number four in the current year consolidated balance sheet, what amount would be reported as non-controlling interest?

Well, let's do some calculations. We know that penny purchased 80% of the sub stock for 1,000,001. So can't we set up our equation. Can't we say 80% of X equals 1 million, one 80% of X, X would stand for the value of 100% of the sub stock equals 1,000,001. We divide both sides by 80%. So you end up with X, the total value of a hundred percent of the sub stock equals that 1,000,001 divided by 80%.

If you take 1 million, one divided by 80%, we infer that the value of a hundred percent of the sub stock X equals 1,375,000. So the bottom line is if someone had purchased a hundred percent of Sutton stock, they would have had to pay 1 million, 375,000. For net assets that have a fair value of 1 million to the rest must be good.

Well, there must be 175,000 of Goodwill. And the answer to number three is be 175,000 of Goodwill. And as you know, that Goodwill will be carried over to the consolidated balance sheet and would be in to be tested for impairment annually, at least annually. Then the number four in the current year consolidated balance sheet, what would be reported as non-controlling interest?

Well, the acquisition was on December 31 and we know on December 31, the fair value of a hundred percent of the sub stock would be 1 million, 375,000. We just calculated that the non-controlling interest owns 20% of that stock take 20% of 1,375,000. The answer is D the full fair value of the non-controlling interest.

We infer must be worth 275,000. 20% of 1 million, 375,000. Hopefully you do well on a set like that because you're getting more and more comfortable with the acquisition method. I just know you are number five in the December, in December 30, one of the current year, Paxton purchased 80% of the outstanding stock of small on the purchase date.

The book value. Of smalls, net assets,

1,800,000. As you know, we don't care about the book value of the net assets. They also tell us the fair value, the net assets equal to million. That's what we care about in the current year consolidated balance sheet non-controlling interest we'll report to that 425,000 under the acquisition method.

What amount. Will be reported as Goodwill in the current year consolidated balance sheet. Now, again, the acquisition took place on December 31, we're doing a consolidated balance sheet immediately. What is the Goodwill on that consolidated balance sheet? Well, the tricky thing in this problem is we don't know what Paxton paid for 80% of the stock.

We don't know that, but we do know that in the current year consolidated balance sheet non-controlling interest were reported in 425,000. Don't the non-controlling interest on 20% of the capital stock of small. So we can set up the equation. 20% of X equals 425,000 X would again, stand for the value of a hundred percent of the stock.

So what you end up with is that X the value of a hundred percent of the sub stock equals that 425,000 divided. By 20% you divide it out. X equals 2 million, 125,000. The value of 100% of the sub stock must be worth for 2 million, 125,000. If somebody purchased a hundred percent of the stock, they'd have to pay 2 million, 125,000 and the net assets have a fair value of only 2 million.

So there is. 125,000 of Goodwill on the consolidated balance sheet on December 31. And the answer is, see, let's go to number six on December 30, one of the current year, Pauli purchased 80% of the outstanding stock of Sachs for 480,000 on the purchase date. The fair value of SACS has net assets equals 500,000.

And the fair value of the non-controlling interest was determined to be 115,000 under the acquisition method. What amount will be reported as Goodwill in the current year consolidated balance sheet? Well, if the parent paid 480,000 for 80% of the stock, wouldn't we assume that a hundred percent of the stock is worth the 480,000 divided by 80% or 600,000.

And somebody bought a hundred percent of the stock. They'd have to pay 600,000 for net assets worth 500,000. So Goodwill is a hundred thousand, right. But that's not an answer choice. I want you to see the difference in this question up until this point, we've had to infer what the value of a hundred percent of the stock turns out to be.

We've had to infer the fair value of the non-controlling interest, but here we're told that the fair value, the non-controlling interest was determined to be 115,000. We're given that value. So we have to look at it this way. The parent bought 80% of the stock. For 480,000. And we're told that the fair value of the non-controlling interest chairs was determined to be 115,000.

So add up 115,000 plus four and 80,000. We're told that the value of a hundred percent of the stock is 595,000. So if somebody bought a hundred percent of the stock, they'd have to pay 595,000 and receive net assets that have a fair value of 500,000. The rest must be Goodwill. They must be 95,000 of Goodwill in that acquisition.

I've got to warn you. That you may not have to infer the full fair value of the non-controlling interest. the FAR CPA Exam may give it to you. If the FAR CPA Exam gives it to you, you have to work with it. Maybe the, maybe what was known as what the non-controlling interest shares were trading for on the, on the acquisition date, or maybe other, other valuation techniques were used, but somehow they were able to determine.

The full fair value of the non-controlling interest on the acquisition date was 115,000. If the FAR CPA Exam gives you that number, then you don't infer it. You have to work with that number. And it's very possible. the FAR CPA Exam could go that way. So be careful, you don't always have to infer it, not if the FAR CPA Exam gives you the full fair value of the non-controlling interest, you work with that number.

Plus what the parent paid for the 80% of the share. Then, you know, the value of a hundred percent of the stock and you can work out good will. Now, as we've said, time and again, in these classes and in these problems, if the fair value of 100% of the stock is more than the fair value of the subs net assets, the rest must be good.

Well, what if the fair value of a hundred percent of the stock is less than the fair value of the asset? This is what they would call a bargain purchase. If the fair value of a hundred percent of the stock is less than the fair value of the assets, that means the acquisition. Was that a bargain? So what do you do then?

Let me give you an example. It's in your viewers guide, let's assume that the parent purchased 90% of the sub shares for $630,000. And on the acquisition date, we're given the sub stockholders' equity section. The salvage showing common stock 300,000 additional paid-in capital 100,000 retained earnings, 400,000.

So add it up. What is the book value of the subs? Net assets 300,000 plus 100,000 plus 400,000. Let's agree that the book value of the subsidiaries net assets on the acquisition date, total 800,000. And then they go on to say that there's no difference between the book value and the fair value of the subs net assets.

So the fair value of the subs net assets is 800,000. So let's figure out what a hundred percent of the stock is worth. We're going to set up our equation. 90% of X equals 630,000 X. Again stands for the value of a hundred percent of the subs shares. So would an X equal the 630,000 divided by 90% X. The value of a hundred percent of the subs stock equals 700,000.

So you see the problem here. If somebody purchased a hundred percent of the sub stock, they would have paid 700,000, but they're acquiring net assets with a bookend fair value of 800,000. They got a bargain. So when you think about how you do a problem, we know we have to eliminate the investment account, the investment account.

In this case, the 630,000, I gave you a checklist, three steps. First we'd have to record the Goodwill, but there's no Goodwill here. Second, we'd have to write the subs net assets to fair value. There's no difference between book and fair value. So let's go right away, right. To step three, where we eliminate the capital structure, the sub.

So we're going to debit the subs. Common stock, 300,000. We're going to debit the subs additional paid-in capital 100,000. We're going to debit and subs retained earnings 400,000. As you know, in consolidation, we always eliminate 100% of the capital structure. The sub, because there is no sub. It doesn't exist.

The sub has been consumed by the parent. Now we're going to credit investment in sub 630,000. We get that account down to zero because you can't invest in yourself. We're going to credit the non-controlling interest for 10% of the full, fair value of the stock or 70,000. We worked out that X the full value of a hundred percent of the sub stock equals 700,000.

The non-controlling interest shareholders own 10% of that stock take 10%, 10% of 700,000. What are we going to credit non-controlling interest for 70,000? And as you can see the entry doesn't balance, I need a hundred thousand dollars credit to balance the entry out. Why do I need a credit? Because it's a bargain, a hundred percent of the stock is only worth 700,000.

And yet by buying a hundred percent of the stock, you would acquire 800,000 of net assets. I need a hundred thousand dollar credit to bounce the entry out. That's just an ordinary game, not an extraordinary game, just an ordinary game. You got a pretty good deal. Now we would credit gain for the a hundred thousand.

That's how you finished that entry. Now, if we were told, for example, that land is overstated on the sub's balance sheet by 10,000. You would debit that gain 10,000 and credit land, 10,000, you would write the land down to fair value. You would. So sometimes in bargain situations, there are overvalued assets.

So if that's thrown in, you have to deal with that too. So if they added that the land has a fair value, 10,000 less than book value, the land is overvalued on the subs balance sheet. Well, then I would add another entry where I would debit that gain. I'd lower it by 10,000. And credit land, 10,000. I'd write the land down to fair value.

I wouldn't knowingly overstate the land on the consolidated balance sheet. And as I say, a lot of times in a bargain situation, there would be overvalued assets. If you're told is overvalued assets, you would make another entry and write those assets down to fair value. If you look at multiple choice, number seven, it says in a business combination accounted for under the acquisition method.

The appraise values of the identifiable assets acquired exceed the acquisition price. It's a bargain. If the appraise values of the identifiable assets acquired exceed acquisition price, you have a bargain. How would this excess of appraised value be reported as a Goodwill? No, no. Goodwill Goodwill is what, what you have.

If the fair value of the stock exceeds the fair value of the net assets here, it's less than. Is the additional paid-in capital answer be? No. Is it see a reduction of the values assigned to non-current assets and then an extraordinary gain for any unallocated portion? No, it's answer D it's an ordinary game.

When you have a bargain purchase, you're going to end up reporting an ordinary gain. Now, before you come to the next FAR CPA Review class, I have another assignment for you when you go to the next module. You'll see that we're going to do one more simulation on consolidation, and I'd really like you to give this a try.

It's the best thing for you. It's Poe and Shaw. It's a good problem. It'll put you through your paces and I think it's a good summary of everything we've learned in these classes. And let's be honest. You've got to be ready for simulation on consolidation and the way to be sure that you're ready is by doing one.

So before you come to the next FAR CPA Review class, Yep. Give yourself about 30, 40 minutes. You'll give yourself a time limit, answer all the questions. Don't leave anything blank and then open the class and we'll go through it together. I'll see you then

welcome back as you know, what we're going to do in this FAR CPA Review class is a simulation on consolidation and. I asked you to try the simulation before coming to this FAR CPA Review class. I hope you did that. It's the best way to learn. Take the simulation, get all your answers down and see where it leads. Let's take a look at this simulation together.

It says present below are selected amounts from the separate unconsolidated financial statements of Paul and it's 90% subsidiary Shaw at December 31. So notice all these numbers. Selected amounts from the separate statements are dated December 31. We have selected income statement amounts. We have selected balance sheet amounts.

We have selected statement of retained earnings amounts, and then some additional information January 2nd, a year ago, Pope purchase 90% of Shaws, a hundred thousand outstanding shares for cash of 270,000 on that date. The sub stockholders' equity equal to 150,000 and the fair value of Shaw's assets liabilities equal their carrying amounts except for land, for which fair value exceeded carrying them out by a hundred thousand on September 4th, the sub pay to cash dividend of 30,000 on December 31, the parent recorded its equity and Shaw's earnings.

The business combinations being accounted for under the acquisition method. The first two questions they say for items one and two, using the table of selected information from the consolidated. And I end on consolidated financial statements, determine the dollar amount to be reported in the December 31 consolidated balance sheet for the following listed accounts.

Ignore tax consideration. We have to figure out the non-controlling interest. We have to figure out the Goodwill. Well, you know, me, I like some preliminary calculations just to get myself organized. Don't we know that back on January 2nd, 90% of X equals 270,000, right? X again, standing for the value of a hundred percent of the sub stock.

So X the value of a hundred percent of the sub stock must be that 270,000 divided by 90% X, the value of a hundred percent of the sub stock must be worth. 300,000. So if somebody had purchased a hundred percent of the sub stock, they'd have to pay 300,000 to get net assets with a fair value of what?

Well, the stockholders' equity of the sub adds up to 150,000 on January 2nd, but that's the book value of the net assets. They say fair value of assets and liabilities equal to carry amounts except for land, for which fair value exceeds carrying them out by a hundred thousand. Land is undervalued on the PA on the subs balance sheet.

So as you know, in the acquisition method, that land would have to be written up to fair value. That land would have to be written up a hundred thousand. So if the book value of the subs net assets on January 2nd was 150,000, the fair value must have been 250,000. Once we write that land up to fair value.

So what do we know now? We know that if someone bought a hundred percent of the shares, they'd have to pay. 300,000 for the stock and acquire net assets with a fair value of only 250,000. There is 50,000 of Goodwill. There is 50,000 of Goodwill. Now that's back on January 2nd. They're asking for Goodwill a year later, December 31, would it still be 50,000?

It would. That's not going to change unless there's an, there's been an impairment because it is tested for impairment, but they said nothing about an impairment loss, nothing about an impairment of Goodwill. So as far as we know you later, December 31, it would still be 50,000. Now we also know that if a hundred percent of the sub stock is worth 300,000, non-controlling interest owns 10% of those shares.

So take 10% of 300,000. So the non-controlling interest is where 30,000, right? No, that's back on January 2nd. A year has gone by, I don't know if you did this. I hope you did. But one way to get this answer is if you just follow my checklist, if you're consolidating Poe and Shaw on December 31, which is the premise of these questions, you've got your checklist record the Goodwill, write the sub's net assets to fair value.

Eliminate the capital structure, this up record the Goodwill, write the sub's net assets to fair value, eliminate the capital structure of the sub. So let's do that. Why don't we, why don't we make our three entries? Don't we know the Goodwill we've worked it out is 50,000. So we know that the first entry, the first adjustment is to debit Goodwill, 50,000 credit investment in sub for 90% of that or 45,000 and credit the non-controlling interest for 10% or 5,000.

So we recorded the Goodwill. And then the second adjustment, I write the subs net assets to fair value. So I would debit the land a hundred thousand. I'd actually write the subs land up to fair value. I would debit the land a hundred thousand I'd credit investment in sub for 90% of that increase or 90,000.

And I credit the non-controlling interest for 10% or 10,000. And then finally, my third adjustment, I would eliminate the capital structure, the subsidiary company. If you go to the selected balance sheet accounts, remember these are dated December 31. The sub is showing common stock, 10,000 additional paid-in capital 40,000 retained earnings, 140,000.

So let's eliminate it. I'm going to debit the subs common stock for 10,000. I'm going to debit the subs API for 40,000. I'm going to debit the subs, retained earnings for 140,000. Because as you know, in consolidation, we always eliminate. 100% of the capital structure of the subsidiary company. Always. Now I'm going to credit investment in sub for 90% of the capital structure of the sub.

Add it up capital structure. The Saab was common stock, 10 additional paid-in capital 40 retained earnings, one 40, the net assets of the sell bond, December 31, add up to 190,000. I'm going to credit investment in sub for 90%. Of 190,000 or 171,000 I'm crediting investment in sub for 90% of 190,000 or 171,000.

And I'll credit the non-controlling interest, but 10% of 190,000 or 19,000. So let's think what we've done here. Let's reconcile. Have I eliminated the investment account? Well, if you go back to the selected balance sheet amounts about halfway down, I want you to find investment in Shaw is an investment in Shaw at December 31 being reported on the parent's balance sheet at 306,003 Oh six.

You might want to circle that just to draw your eye to it. Well, let's look at my adjustments. I credited investment in self for 45,000. When I recorded the Goodwill, I credited investment in sub four at 90,000. When I wrote the land to fair value, I credit investment in self for 171,000. When I eliminate the capital structure, the sub.

So add it up at a 45,000 plus 90 plus one 71. Yes. I have credited investment in sub for 306,000. It's written to zero. What have I credited to non-controlling interest? Well, I credited non-controlling interest for 5,000. When I recorded the Goodwill. I credited non-controlling interest for 10,000. When I wrote the land to fair value and I credit non-controlling interest for 19,000.

When I eliminate the capital structure, the sub. So add up 5,000 plus 10,000 plus 19,000 non-controlling interest on December 31 would be reported at 34,000. So the answer to number one, question number one is 34,000 question number two. Goodwill is still 50,000. I hope you got that. Can I reconcile that?

Can I prove that must be true? Sure. Cause don't I know that non-controlling interest a year ago, January 2nd was 30,000. Right. A year ago, non-controlling interest was 10% of 300,000 or three or 30,000. What's happened in the last year. In the last year, go to selected statement, retained earnings amounts.

The subs income for the year was 70,000 non-controlling interest would get 10% of that or 7,000. So the non-controlling interest would go from 30,000 up 7,000, but there was also 30,000 of dividends. Non-controlling interest. Shareholders would get 10% of that dividend. So non-controlling interest just would drop 3000.

So let's take 30 plus seven minus three. It makes perfect sense that non-controlling interest is now 34,000. Now we have another set of questions, items three, four, and five represent transactions between Poe and Shaw during the year using the table of selected information from the consolidated and unconsolidated financial statements, determine the dollar effect, the dollar amount effect of your consolidating adjustments.

On consolidated net income. So they want the dollar effect of your consolidating adjustments on consolidated net income before considering non-controlling interest. They don't want us to consider non-controlling interest at all with any of these ignore taxes and you have to state whether the change is an increase, decrease or not considered.

So as you know, in our classes, we've been saying that in terms of intercompany transaction, the FAR CPA Exam really loves three in particular, intercompany sales with profits, Andrew company sale of fixed assets and intercompany bonds. Those are the three they asked the most. What do you have in number three on intercompany sale of fixed assets?

What do you have a number for intercompany sales with profits? What do you have? A number five intercompany bonds. No big surprise. Number three says. On January 3rd, the subs sold equipment with an original cost of 30,000 and a carrying amount of 15,000 to the parent for 36,000, the equipment had a remaining life of three years.

They use straight line. Both companies use straight line. All right. Now you might not be ready for it yet, but there's a checklist on this. Remember it doesn't matter whether the parents sells fixed assets to the sub or the sub sells fixed assets to the parent. You got to do three things. You have to eliminate any intercompany, gain a loss.

You have to adjust the asset. It's either over or understated. And number three, you have to adjust the depreciation, eliminate any intercompany, gain a loss, adjust the asset. It's either over or understated adjust depreciation. Now, in this case, what happened? Didn't the sub Shaw take a piece of equipment with a carrying value of 15,000.

Sell it to the parent for 36,000. Wasn't there a $21,000 gain in that transaction. So what are we going to do? We're going to debit gain 21,000. We can't allow that game because you can't earn a game with yourself. Paul and Shaw are now one economic entity. So we're going to debit that game 21,000. We're going to eliminate it.

And also the asset is overstated. We're going to credit the equipment 21,000 it's overstated because the parent now has the equipment on the books of 36,000. It should still be on the books for the entity at the true cost of the entity, which is the carrying value of 15,000 it's overstated. Again, the parent has that equipment on the books at 36,000.

That equipment really should be on the financial statements at its true carrying value for the entity, which is still 15,000. So we're going to credit equipment 21,000. Now we also have to adjust appreciation. Why? Because the parent is ignorant. They don't know the parent based appreciation for this full year on their costs, 36,000, but the depreciation still should have been on the original carrying value 15,000.

So the problem is that $21,000 gain. If you take that $21,000 gain divided by three straight line years, you've got a debit. Accumulated depreciation 7,000 and you're going to credit depreciation expense 7,000. They took too much depreciation, parent doesn't know pant basis appreciation on 36,000.

They're ignorant. They don't know. We come in to consolidate the entity and we say, no, that equipment should still be depreciated on the original carrying value. This transaction can't take place. This entity cannot sell itself its own fixed assets and change its carrying value and change. The depreciation makes no sense.

So debit accumulated depreciation, 7,000 and credit depreciation expense 7,000. All right. Now we haven't answered the question yet. What's the question. They said, determine the dollar effect of your adjustments on consolidated net income. Well, if I eliminate that game, consolidated net income goes down 21,000, but if I credit depreciation expense, 7,000, look at that second adjustment.

I debit accumulated depreciation and I credit depreciation expense 7,000. If I lower an expense that increases consolidated net income seven. So the net effect of my adjustments is a $14,000 decrease. If I eliminate the gain, consolidated net income goes down 21,000, but if I lowered depreciation expense, 7,000 consolidated net income goes up 7,000.

The net effect of my adjustments is a $14,000 decrease to consolidated net income. Number four. During the year, the sub sold merchandise to the parent for 60,000 and that included profit of 20,000 at December 31 half. The merchandise remained in the parents' inventory. Well, once again, we have a checklist.

It doesn't matter whether the parents sells merchandise to the SOP or the sub sells merchandise to the parents. Doesn't matter. You've got to do three things. You eliminate the intercompany sales, you eliminate any intercompany accounts, payable, accounts receivable, and number three, you eliminate any intercompany profit.

If it's still an inventory, you've got your checklist. Those are the three things that you have to do. So let's eliminate the intercompany sales step one. I'm going to debit sales 60,000. Why? Because this entity can not have sales with itself. So I'm going to debit sales 60,000 and I'm going to credit cost of goods sold 60,000.

Why cost of goods sold? Because purchases on the other company's books is overstated. Therefore cost of goods sold is overstated because you can't purchase your own merchandise. So debit sales, 60,000 credit cost to consult 60,000, you've eliminated the sales themselves. Step two, we eliminate any intercompany accounts, payable, accounts receivable.

As far as we know, there isn't any, we weren't told there was any balance on paid. If you look at the selected balance sheet amounts, there's no accounts payable, accounts receivable. So we don't have to worry about that. But what I'm hoping is the checklist makes you disciplined so that you're looking for everything you may have to deal with.

Finally. We eliminate any intercompany profit. If it's still an inventory. Now, the sub made a $20,000 profit on these sales and they said at December 31 half, the merchandise is still on hand. Well, if half the merchandise is still on hand. We have to eliminate half the profit or 10,000. So we're going to credit inventory, 10,000, get that intra-company profit out of inventory.

And then we say, if ending inventory is overstated by this profit cost of goods sold is understated by this profit. So we're going to debit cost of goods sold 10,000. Those are my adjustments. Now let's answer the question. What is the net effect on consolidated net income? Well, first entry. My first entry, if I lower sales and I lower cost of goods sold 60,000.

There's no effect on the bottom line, but in my second adjustment, if I increase cost of goods sold 10, I lower consolidated net income, 10,000. So the answer is a $10,000 decrease the effect of my consolidating adjustments to consolidate in that income because I increased costs of consult 10,000. I decrease consolidated net income, 10,000 is a $10,000 decrease.

Finally, in number five, we have some intercompany bonds. You knew they were coming on December 31, Pope paid 91,000 to purchase 50% of the outstanding bonds of Shaw. There's some intercompany bond holdings, and we know the bottom line for consolidation purposes. Intercompany bond holdings have to be retired.

The bonds mature in six years on December 31. And were originally issued at par. So there's no discount or premium there. The bonds pay interest annually on December 30, one of each year. And the interest was paid to the prior investor immediately before post-purchase of the bonds. And you have another checklist.

It doesn't matter. It does not matter. Whether the parent buys the subs, bonds sot buys the parents bonds. You got to do three things. You have to eliminate the investment and the debt. You have to eliminate any intercompany, interest payable, interest receivable, and step three. Eliminate any intercompany interest, revenue, interest expense.

Hopefully you get that checklist. Now eliminate the investment in the debt. Eliminate any intercompany interest payable, interest receivable in step three, you eliminate any intercompany interest revenue, interest at expense. Let's do this. Let's do the second step. Is there any intercompany interest payable, interest receivable?

You know what? My next question is going to be. When was the last time interest was paid today? It's paid annually on December 31. So there is no accrued interest, nothing to worry about. There let's go to step three, eliminate any intercompany interest, revenue, interest expense. Let me ask you, when did the parent acquire the subs bonds?

Today, December 31. So the parent hasn't earned any interest from the sub. There is no intercompany interest, revenue, and expense. So we have nothing to worry about with steps two and three, nothing to worry about there. Let's all we had to do to solve this particular simulation on the bonds is the first step on the checklist, eliminate the investment and the debt.

So you had to go back through the selected balance sheet amounts. And I want you to find bonds payable. I'm sure you did. Sean is showing bonds payable 200,000. There's the debt. Should I debit bonds payable 200,000? No, the parent only bought 50%. You're only eliminating the intercompany portion. So I'm going to debit bonds payable a hundred thousand.

Why? Because you can't have a debt to yourself. Now, if you find, if you go to that same section of the problem selected balance sheet amounts, notice that Paul is showing investment in bonds. Of a hundred thousand with a discount of nine, maybe they paid 91,000. So we're going to credit investment in bonds, a hundred thousand and debit discount, 9,000.

Now you could have just credited investment bonds, 91,000. That's fine, but I'm doing it more formally, a credit investment in bonds, a hundred thousand and debit the discount 9,000. But the point is you can not invest in your own securities. Paul and Shaw are one economic entity. You cannot invest in your own securities.

It has to be eliminated. Now the entry doesn't balance, what did we say in an earlier class, get rid of the debt, whatever the balance is, get rid of the investment, whatever the balance is, and if the entry doesn't balance at that point, it's because there's discounts and premiums in there. What do you do to finish this entry off you?

Credit what I've gained on retirement of bonds of 9,000, just to balance the entry out. You plug that in there, credit gain on retirement bonds, 9,000 and that game would go to the consolidated income statement. So what is the net effect on consolidated net income from my adjustments, a $9,000 increase, because that gain would go to the consolidated income statement.

So the net effect on consolidate net income from all my adjustments for the bonds, a $9,000 increase. And then finally, there's one last section. Items six through 17 refer to accounts that may or may not be included in Poland. Shaw's consolidated financial statements. And here are your list of possible responses.

Is it a, just sum the amounts on poet Shaw's separate books? Is it being less than the sum of the amounts on the separate books, but. Not the same as the amount on either. Is it C same as the amount for the parent only D same as the meal. Same as the amount for the sub only E eliminated entirely in consolidation F shown him the consolidated statements.

Only, not in anybody's separate statements or G neither in the consolidated or the separate statements. These are your choices. How about number six cash? Is it a, just sum the amounts on the separate books? It is. Cash, you would just merge the amounts on the separate books, answer a seven. How about equipment?

Is it a, just sum the amounts on the separate books? No, you had to be careful because you had to look back on the consulting adjustments that you made. In one of our consulting adjustments, we did credit equipment. We did credit equipment for 21,000. We lowered it because of one of our consolidating adjustments.

So it's B. Less than the sum of the amounts on the separate books, but not the same as the amount on either. If you didn't get number eight, I could get very upset. Investment in Sabino is eliminated entirely. You know, that I hopefully, hopefully you didn't even hesitate on that investment and sob always eliminated entirely.

How about nine bonds payable? Is it a, just some of the mountain, the separate books? No, because he looked back at our consulting adjustments. We did lower. Bonds payable a hundred thousand. So it's another big, less than the sum of the amounts on the separate books. Not the same as the amount on either 10 non-controlling interest.

We do have a non-controlling interest at December 31 it's at $34,000. It'll be on the consolidated balance sheet. So what's the right letter. I hope you got it. It's F that's an example of something that's in the consolidated statements only that can non-controlling interest will be down in stockholders' equity.

In the consolidated balance sheet, but that's not in anybody's separate books that non-controlling interest is the result of all our consolidating adjustments. So that's an example of an F something that's in the consolidated statements only. It's not in anybody's separate books,

11 common stock, you know, We always in consolidation eliminate the capital structure of the sub. So the only capital structure that's carried over to the consolidated balance sheet is the capital structure of the parent. So common stock parent only common stock would be parent only letter C, same as the amount for the parent.

Only now 12 and 13 may have bothered you. But when you hear this, it'll make perfect sense in 12 and 13. They're making you think about what you do when you prepare a consolidated statement of retained earnings. When I say it'll make perfect sense to you, the big thing to remember when you do a consolidated statement of retained earnings is the sub has gone.

The sub has been consumed by the parent. It doesn't exist. There's only one economic entity. The parent is the surviving entity. So when I do a consolidated statement, retained earnings, I start with the beginning retained earnings. Of the parent only 12 is see, there is no sub, it doesn't exist. I start with the beginning retainer needs of the parent only 12, a C.

Then I add consolidated net income. And then I subtract any dividends paid by the parent only. There is no sub. So 13 is also sick dividends paid by the parent. Only parent is the entity. How about gain on retirement bonds? Number 14. Well, we did, when we did our consultanting adjustments, it turns out there's a $9,000 gain on retirement bonds.

What letter? Very good. It's F it's another F we got that. That's an example of something that's in the consolidated statements only. That's not in anybody's separate books. That's the result of Arkansas ending adjustments. How about cost of goods sold number 15? Well, if you go, go back to our elimination entries, go back to our adjustments.

When I eliminated the sales, I debited sales 60,000 credit cost of sold 60,000. When I eliminated the profit, I credited inventory 10,000 and I debit cost of goods sold 10,000, but it wasn't that decrease. Wasn't it, it wasn't a decrease. The cost of it sold at 50,000. So it's another letter B less than the sum of the amounts on the separate books, not the same as the amount on either interest expense.

While you may have noticed, if you looked at the statements, only Shaw has interest, so it'd be let her date. Same as the amount for the, some only. Now if you picked a, that will be acceptable too, because if you just say some of the mounts on the separate books, if I add zero on the parent's books to what's on the subs books, I get the same answer a or D would be acceptable there.

And then finally, depreciation expense, you know, from our earlier adjustments, we had a lower depreciation expense, 7,000 didn't we? So it's another B. Less than the sum of the amounts on the separate box, but not the same as the amount on either. I hope he did real well on that simulation. And if he got some questions wrong, hopefully it tells you where to target your studying and your review in this area, especially when you get down to crunch time and you're say two or three days from the FAR CPA Exam, and you're cramming your brains out, you know, knowing where your weak spots are really helps a lot.

And that's what you're going to focus on in that final cram period, but I hope you did well on that simulation and don't fall behind, keep studying and I'll look to see you in the next FAR CPA Review class.

Welcome back in this FAR CPA Review class, we're going to begin our discussion of international financial reporting standards or . And the best approach with  is to first get a solid foundation in U S generally accepted accounting principles. And then you can study the differences between us gap and efforts, and hopefully that's where you are in your preparation.

You have a solid foundation in us gap. So now we can talk about the differences with lifers in general. It has to be said that U S gap is a rules-based approach. Us gap sets, precise rules, bright line rules in regard to recognition measurement. Financial statement presentation. I firs is considered to be a principles-based approach principles based.

I firs sets general principles for recognition measurement, financial statement presentation, and allows more judgment in applying the principles, but it needs it's to be said also that the focus of us gap and I for is of course. Is the fair representation of financial information. That's always the focus.

Let's talk about the  reporting model under eye firs, an entity has to report a statement of financial position, basically a balance sheet, a statement of financial position. An entity has to provide a statement of comprehensive income, a statement of changes. In equity, a statement of cash flows and of course, notes to the financial statements.

That's the international frame framework. That's the  reporting model right there. That's what an NTS and entity has to provide a statement of financial position, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows, inappropriate disclosures. Let's go to the second question in your viewers guide.

Second question says on August 1st year two Lex company decided to adopt heifers. The company's first  reporting period will be for the year ended December 31 year to li Lex will. Present year one statements for comparative purposes. What is Lexus date of transition to ? Now this is a technical point.

What would be the date of transition? The answer is a January 1st year one, because the date of transition is the beginning of the earliest period for which you will present comparative information under . And that in this case would be January one, year one. And. What you're required to do in the year of transition is to present three statements of financial position.

They're going to have to show a statement of financial position. January one, year one, the date of transition January one, year one, December 31 and December 31 year two, three statements of financial position they have to present to. Statements of comprehensive income, one for year one and one for year two, two statement of changes in equity.

One for year one, one for year two and two statements of cash flows. One for year one and one for year two. Those are the requirements. If they elect to use the revaluation model for something like say property, plant and equipment under the revaluation model. The property plant equipment would be adjusted to fair value and that, and the increase or decrease would be reflected in retained earnings.

The gain loss would be included in retained earnings, but if they elect to use the revaluation model, something like property, plant and equipment would be adjusted to its fair value. And that fair value would be the assets deemed costs going forward. Another point I wanted to make us gap has no requirement regarding comparative information, no requirement at all, but under efforts you are required to present comparative information for the prior year.

That is a requirement under Ivers. Let's go back to the IFAs reporting model. And I want to talk about the statement of cash flows. Now under  a statement of cash flows can be done under the direct method or the indirect method. That's true. Now, if you go back in your mind to the class we had on statement of cash flows, we know that in the gap model, there were three sections operating, investing, and financing activities, operating activities.

That's our income statement section. As I know you remember. Investing activities. Investing always makes us happy, right? Buy or sell, held to maturity, buy or sell available for sale, buy or sell PP and E buy or sell equity investments. That's investing activity. How about financing activity in the U S gap model where financing for Prince divots?

Prince debt, principal div is pay dividends. I is issued stock and Ts is. Treasury stock transaction. We know that well, those memory tools will still work for you. When you do a statement of cash flows under the eye for his model, it's going to be operating, investing, and financing. The operating section is still, you know, your income statement, section investing will still make you happy.

You're financing for Prince divots. All that will still work for you. A couple little differences though.

When you talk about interest paid or interest received, where would I find interest paid interest received in the U S gap model? That's on the income statement. It's an operating well under I firs interest paid or interest received can either be an operating or financing. You have to apply consistently, but you make a choice, whether you want to include interest, paid interest, received an operating activity or financing activity.

And of course be consistent about it. Same thing with dividend income, dividend income would be in operating activity in the U S gap model. And I first you make a choice whether it's going to be in operating. Or financing activities and of course apply it consistently. Also in our class on cash flows, we talked about non-cash investing and financing activities.

Remember preferred stock converted to common stock bonds converted to stock a straight exchange of S of debt for property, a straight exchange of stock for property. These are non-cash investing and financing activities. Now in the U S gap model. The non-cash investing and financing activities are a supplemental disclosure in the statement of cash flows in the  model, the non-cash investing and financing activities are not a supplemental disclosure on the statement of cash flows there in the notes to the financial space, they would be in the notes to the financial statements.

Let's talk about the statement of comprehensive income.  requires a statement of conference of income. Remember, there's the one statement approach where you do a combined statement of income and comprehensive income. There's the two statement approach where you have an income statement and a separate statement of comprehensive income.

Well notice in efforts. You are required to present a statement of comprehensive income. So in , it's either going to be the one statement approach or the two statement approach. And I first you're either going to have a combined statement of income and comprehensive income, or the two statement approach where you have a separate income statement and a separate statement of comprehensive income that's required in efforts, either the one statement approach or the two statement approach that's required.

Either a combined statement of income and comprehensive income or an income statement with a separate statement of comprehensive income. Now we also do also what's required as a statement of changes in equity and in the statement of changes in equity, there'll be a reconciliation of total comprehensive income as well.

Now on the income statement itself. Under IFR is of course we're going to use a cruel accounting, but there is a difference. Remember in us gap, if we're accounting for a long-term construction contract, we can either use the percentage of completion method or completed contract. Please remember that under  completed contract is not allowed under  completed.

Contract is not allowed under IFR is if you have a long-term construction contract. On the right phrase, you're going to either account for it under the percentage of completion method, or if you can't reasonably estimate the degree of completion each year, you'll only be allowed to recognize revenue to the extent of the cost incurred.

Now, another point I know you remember that under us gap, we report on an income statement, income from continuing operations. Discontinued operations, extraordinary items. You're never going to forget that. Basic C D E presentation alphabetical. Well under  you still present income from continuing operations, you still present discontinued operations net of tax, but there are no extraordinary items.

Remember that under efforts, extraordinary items are not reporting. All gains and losses are up in continuing operations. There are no extraordinary items under efforts. We'll continue this in our next FAR CPA Review class. Don't fall behind. Keep studying. I'll see you then

welcome back in this FAR CPA Review class. We're going to continue our discussion of  and what we have to get into is the statement of financial position. We have a lot to say about the statement of financial position. I want to start with investments. We know that under us gap, there are trading securities trading securities are accounted for at their fair market value and the unrealized holding gains and losses go to the income statement.

There are held to maturity securities accounted for under amortized cost, and there are available for sale securities accounted for at fair value, but unrealized holding gains and losses do not go to the income statement. They go to OCI. That's us gap now in  trading securities defined the same way are accounted for under what they call fair value through profit and loss.

Fair value through profit and loss. Same basic idea that we adjust trading securities to their fair value and any gains and losses would go to the income statement. Fair value through profit and loss. Now with held to maturity and available for sale, a company can elect to account for those securities under fair value through profit loss.

If there's, uh, an active market for the securities, there has to be an active market, but underwriters with held to maturity and an old for sale, you can elect to account for those securities under. Fair value through profit and loss. So the gains and losses would go to the income statement. Now, if they do not elect fair value through profit and loss, or if it's not an active market, then held to maturity would be accounted for under amortized costs and available for sale securities would be adjusted to fair value, but the gains and losses would go to OCI.

If you have significant influence over another company, we know in U S gap. You have to use the equity method under IFR is if you have significant influence over another company, you can either use the equity method or fair value through profit and loss. Another difference under us gap, if a company issues convertible bonds, if a company issue is convertible bonds, they just debit cash and credit bonds payable.

In other words, under us gap. When we issue convertible bonds, we don't try to separate the debt component from the equity component. Well, an I firs you are required when you issue convertible bonds to separate the debt component from the equity component. So you're going to debit cash, credit bonds payable for the debt component and credit stockholder's equity for the equity component.

You have to divide it up. Let's talk about deferred taxes. We know in us gap, we'll use the liability method to account for deferred taxes under U S gap. We have to be able to calculate a deferred tax asset and a deferred tax liability. And that's true in  as well in  defer taxes are accounted for under the liability method.

So under IFR is we're going to have to calculate. A deferred tax asset or deferred tax liability, but there are some differences. Remember under us gap. We said that if a temporary difference is caused by a current asset or current liability, then the deferred tax account is current. If a temporary difference is caused by a non-current asset or a noncurrent a noncurrent deferred to a non-current liability, then the deferred tax account is non-current.

That's how us gap works. If the temporary difference is caused by current asset or current liability, then the deferred tax account is current. If a temporary difference is caused by a non-current asset or non-current liability, then the different tax account is non-current well in I efforts deferred tax assets and deferred tax liabilities are always, non-current always non-current there's no current all doesn't matter what causes them.

In  deferred tax assets and deferred tax liabilities are always non current. Now let's go back to us gap. Remember in the U us gap, what we report on the balance sheet is net current amount net noncurrent amount. So let's go to  since it's always non-current. If I have a noncurrent deferred tax asset and a noncurrent deferred tax liability.

In, I first, can I net them and just report net noncurrent amount? Yes. If it relates to the same taxing authority. In other words, under eye fruits, if I have a noncurrent deferred tax asset that relates to France and a noncurrent deferred tax noncurrent deferred tax liability that relates to France the same taxing authority, I'll net them and report on the statement of financial position net noncurrent.

Liability net noncurrent deferred tax liability or net noncurrent deferred tax asset. I will net them, but if I have under lifers a noncurrent deferred tax asset that relates to Britain and a noncurrent deferred tax liability that relates to France, I can't net them. I can only net if it relates to the same taxing authority, one other small difference under us gap.

Remember we have to use. Future tax rates. When we calculate, calculate our different tax asset or deferred tax liability, we have to use future tax rates. If those future tax rates have been enacted into law under , we also use future tax rates. If they've been enacted into law or substantially enacted again, you get to use more judgment.

So under I, for as if I were preparing my financial statements and there was an imminent change in tax rates. And, you know, both houses of Congress had passed the legislation by overwhelming majorities, but there hadn't been a final vote taken yet. Well, it's substantially enacted. It's another example of how an IFR is.

You use more judgment, so you would be able to use, uh, a future tax rate. If it's been substantially enacted. Let's talk about leases. You remember that in U S gap. If we're just renting, we have an operating lease. That's true in  as well. If you're just renting, it's an operating lease, but in U S gap, if I'm using the lease in substance to purchase the asset, if I'm the lessee or if I'm a less and I'm using the lease to sell my property, then it's a capital lease.

Well, it's the same idea in , but in  a capital lease is called a finance lease should be aware of that. So again, in  the term is to call it a finance lease. If you're the lessee and the lease is in substance way to purchase the asset, it's a finance lease. If you're a lessor and the lease is in substance way to sell your property, it's a finance lease now in us gap.

How do we know. If you're a lessee in substance, the lease is a way to purchase the asset. Remember the criteria to bop 75 90, right? We know that any of those criteria are met to bot 75 90. There's a transfer of ownership. There's a bargain purchase option. If the term of the lease is equal to, or greater than 75% of the remaining life of the asset, or if the present value of the lease payments are equal to, or greater than 90% of the fair value of the asset, it's a capital lease.

Well, it's the same idea and , but there's more criteria in efforts. Here's the criteria. You have a finance lease. It is a finance lease. If there's a transfer of ownership or if there's a bargain purchase option, or if the term of the lease is a major part. Of the economic life of the asset notice not equal to a greater than 75%.

No. The term of the lease has to just be a major part of the economic life of the asset. Again, it's another example where us gap sets bright line rules. I firs is more principles-based and you're allowed to use more judgment, but in, I first, if the term of the lease is a major part of the life of the asset, it's a finance lease.

Also when I first, if the president died at lease payments

are substantially all of the fair value of the asset. Not equal to a greater than 90%, if the fair value of the lease payments, if the present value, at least payments are equal to substantially all of the fair value of the asset, it's a finance lease. So again, more judgment is involved, but there's more criteria.

If the asset is of such a specialized nature that only the lessee could use the asset without modifications, that would indicate it's a finance lease. If the lessee cancels the lease, any losses that the less or would suffer would be born by the lessee that would indicate it's a finance lease. Again, if the lessee were to cancel the lease.

And any losses sustained by the lesser would be born by the lessee that would indicate it's a finance lease, any gains and losses from fluctuations of the value of the asset would accrue to the lessee that would indicate it's a finance lease. And if the lessee can continue the lease under lower than market rate terms, if the lessee has the option to continue the lease at lower than market rate terms indicates.

It's a finance lease. So there's more criteria and more judgment involved under . Let's talk about inventory. We know when U S gap, the primary basis of accounting inventory is historical costs. And we know in, in us gap, we capitalize to inventory all the costs. We incur to bring the merchandise into a condition and location for sale.

We know that. We also know that we have different methods of valuation for inventory under U S gap there, specific identification. There's the gross profit method we can make an assumption about the way inventory costs are flowing. First in, first out last in first out, weighted average, that's us gap underwriters here again, the primary basis of accounting for inventory.

Is historical costs. And in, I first we are going to capitalize to inventory all the costs we incurred to bring the merchandise into a condition and location for sale. How do we value inventory under ? Well, under lifers, you have to use specific identification when the goods are not interchangeable under , you are required to use specific identification.

If the goods are not interchangeable, if the goods are interchangeable, If they're fungible, then you are allowed to use five Fu or weighted average, but not life. Life O is prohibited under heifers. Remember that lifeboat is prohibited under , but you would be allowed if the goods are fungible interchangeable to use five for a weighted average, but never life.

Oh, you can use the retail method in  in certain industries, you can use the gross profit method. If a physical count is not possible under . Now we agree that under both us gap and  the primary basis of accounting for inventory is historical costs, but ultimately under both  and us gap inventory would be carried on the balance sheet on the statement of financial position at its original cost.

Or it's market value. Whatever's lower. My point is both us gap and  apply lower of cost of market to inventory, but it's done differently. Let's go to a problem. If you go to your viewers guide and look at questions, one and two were given some information about Ames company aims company determined the following values for its inventory.

As of December 31, we know the historical costs 200,000. Replacement costs is 160,000. The sales value is 190,000 cost to complete and sell 10,000. A normal profit margin is 8,000 and the fair value is 194,000 question number one says under us gap. What amount should aims report for its inventory at December 31?

Well, let's have a little review. How do we apply lower of cost of market to inventory under. U S gap or remember first you have to calculate the ceiling called net realizable value. The ceiling is defined as the selling price, 190,000 minus disposal costs the normal cost to complete and sell 10,000. So the ceiling net realizable value would be 180,000.

The floor remember market can never be higher than the ceiling. And then the floor is defined as that net realizable value. 180,000 minus a normal gross profit on sale. 8,000 the floor would be 172,000. That's all the floor is defined as. The net realizable value, the ceiling 180,000 minus a normal gross profit on sale of 8,000.

The floor would be 172,000 market can never be below that. All right. So we figured out the ceiling, we figured out the floor. Now we look at three numbers. We look at the replacement costs 160,000, the ceiling net realizable value, 180,000 and the floor 172,000. And remember, what's your market? The middle number, middle number is always market.

Now the number that's in the middle is the floor 172,000. There's your market. So now your final step is to say, it's the lower of cost, 200,000 that's historical cost or market, which I now know is 172,000 because market's lower. I use market. And the answer is C so I'm no, you remember that applying lower of cost to market to inventory under U S gap is complicated.

Now number two says under efforts, what amount would aims report for inventory at December 31? Well, here's, here's a place you're going to love efforts because lower of cost of market under  is much easier under  you carry inventory at the lower of its cost, 200,000 or net realizable value. You don't have to worry about the floor and replacement costs.

No, it's the lower of its cost in this case, 200,000 or its net realizable value defined exactly the same way. The selling price, 190,000 minus the cost of dispose 10,000 net realizable without he's 180,000 since net realizable value was lower. I'll use answer B 180,000 that's heifers inventories carried at the lower of.

Cost or net realizable value. Another difference. What if it recovers in value gap would not allow a recovery in value for as would, if it recovers in value you would debit inventory and credit income. It would be permissible to record a recovery and value for inventory underwriters, but not us gap.

We'll continue our discussion on  and our next FAR CPA Review class. And I'll see you then.

Well, welcome back in this FAR CPA Review class. We're going to continue our discussion on international financial reporting standards, or  when we left off in our last class, we were talking about the differences in IFR is when you're dealing with the statement of financial position. Let's continue our discussion on the statement of financial position.

And let's talk about fixed assets. We know in us gap, fixed assets are fairly simple. We capitalize to fixed asset accounts, all the costs we incur to bring a fixed asset into a condition and location for use. And after we've done that, we carry the fixed asset on the balance sheet at it's capitalized cost minus accumulated depreciation, minus any impairment loss.

And of course, if the asset recovers in value under us gap, we do not record any reversal of impairment loss. We do not well in a statement of financial position. There are different classes of long lived assets, there's property, plant, and equipment there's investment property, and there's biological assets.

So that's a difference right off the bat. Where in, I first in the statement of financial position, you're going to have different classifications of long lived assets, property, plant equipment. Investment property and biological assets. Let's start with property, plant and equipment. Now, very similar to us.

Gap, property, plant, and equipment under  would be initially recorded at all the costs that are incurred to bring the property, plant and equipment into a condition and location for use. Now subsequently. The property plant and equipment can either be accounted for under the cost model, which is very similar to U S gap or the entity can elect to use the revaluation model.

So you have a choice, either the cost model or the revaluation model onto the cost model, the property plant equipment would be carried at its costs. Minus accumulated depreciation minus any impairment loss. But of course, if there's a reversal of impairment loss, it would be recorded under . It would be recorded.

Uh, you'd you'd increase the, the carrying value, the asset and the game would go to the income statement, but reversal of impairment loss would be recorded under lifers. Now in the revaluation model. In the revaluation model, the property plant equipment would be adjusted to its fair value or the date of revaluation.

This is the revaluation model where we adjust the property plant equipment to fair value on the date of revaluation and basically any gain or loss would go to stockholders equity in a revaluation surplus. Account it's part of, of a comprehensive income, but when you adjust properly plant equipment to its fair value, you would basically debit property, plant equipment and credit V revaluation surplus.

And again, that's an element of stockholders' equity. It's part of a comprehensive income. Then you would subtract any subsequent accumulated depreciation you would subtract. Any subsequent impairment loss. And here again, if the impairment loss were to reverse, a reversal would be recorded, you would write the asset up.

If the impairment loss were to reverse, that is allowed under . Now, what if you sell a piece of property, plant or equipment? That's been accounted for under the revaluation model. Well, if you sell a piece of property, plant or equipment that's been accounted for under the revaluation model, you're going to debit revaluation, surplus and credit retained earnings.

Notice the revaluation surplus that's in stockholders' equity. Part of OCI, the revaluation surplus that relates to that asset. You're going to transfer it to retained earnings. So you would debit revaluation, surplus, and credit retained earnings, and then just handle the sale as a normal sale. Debit cash credit the asset for its carrying value and recognize any gain or loss.

The gain of loss would go to the income statement. So it takes two entries. When you sell an asset that's been accounted for under the revaluation model, debit, the revaluation surplus credit retained earnings. You're going to transfer any revaluation surplus related to that asset to retain earnings and then handle the sale in a normal way.

Debit cash credit, the asset for its carrying value. Credit gain or debit loss and that gain or loss would go to the income state. Let's talk about investment property. Investment property would be property that's held to earn rentals or property held for capital appreciation or both. That's called investment property.

Remember under us gap, all we have is held for use held for sale. Those are the categories in us gap. Held for use held for sale, but in  is we have a category investment property, property held to earn rentals or for capital appreciation or both. Now this can be property in this category. Investment property can be property that's owned by the entity owned by the corporation or leased under a finance lease.

And it could even be property. That's leased under an operating lease. If you can determine the fair value of that operating lease. Let me say that again, the property in this category would be property. That's either owned by the corporation or leased under a finance lease or even leased under an operating lease.

And you can determine the fair value of that operating lease. And here again, you have a choice. How do you account for investment property? Well, you can use the cost model cost model would simply mean that the property would be. On the statement of financial position at its cost minus accumulated depreciation minus any impairment losses, the fair value model you would adjust the asset to fair value.

No depreciation is taken. You would simply adjust the asset to its fair value and any gain a loss would go to the income state. That's the fair value approach. Where you adjust the investment property to its fair value. And again, a loss would go to the income statement and no depreciation is taken. And then finally there's a category in lifers for long lived assets that we do not have in us gap.

And that's biological assets. Biological assets are basically agricultural agricultural assets. You know, living animals, plants. These are disclosed separately on the balance sheet. These will be disclosed separately on the statement of financial position. Assuming they have future economic benefits, future economic benefits must be probable and the corporation can elect here again to use the cost model.

So this, this biological asset would be on the statement of financial business net it's cost less accumulated depreciation, less impairment losses, or the fair value Mt. Model. Where the biological asset would be on the statement of financial position at its fair value minus any costs that will be required to sell it at the point of sale.

That would be the fair value approach where the biological asset would be on the statement of financial position at its fair value minus any cost to sell at the point of sale, let's talk about intangible assets. Well, you know that in us gap in tangible assets are divided into different categories.

There are intangibles with a finite useful life, a copyright, a patent, a leasehold improvement, but there are intangibles with an indefinite life Goodwill. You have those categories now under us gap, the intangible. Initially gets recorded at the cost of acquisition. Plus you'd also add any cost to register the copyright, the patent, the trademark, whatever it is.

Plus you also add any legal costs that were incurred in successful defense of the copyright, the patent, the trademark, whatever it is. Well, this is basically true in I for as, as well in . Intangibles are initially recorded at their acquisition costs, plus the cost of register plus legal fees and successful defense that would all apply.

But of course, in terms of how you account for intangibles, this is where there's a difference. As I said, under us gap, we start with, what do we do with intangibles with a finite useful life. Well, if it, if it's us gap and the intangible has a finite use for life like a copyright, it'll be on the, on the balance sheet at its cost minus accumulated amortization minus any impairment loss, and under us gap.

If that impairment loss would reverse, we don't record it now under . If we have an intangible with a finite useful life. It'll be on the statement of financial position at its cost minus accumulated amortization. We will amortize the intangible over our best estimate of its useful life minus any impairment loss.

But of course, if it recovers in value under , the recovery would be recorded. Recovery would be recorded. That's a difference in efforts. Now, how about an intangible with an indefinite useful life like Goodwill while remembering us gap. If you have an intangible with an indefinite useful life like Goodwill, it's not amortized.

It's tested for impairment at least annually. Well in . If a corporation has an intangible with an indefinite useful life like Goodwill. They use the cost model. If they use the cost model, it will not be amortized. It will be tested for impairment. What if it reverses it's not recorded? Not Goodwill. If it's Goodwill, a reversal of impairment, loss is not recorded, not Goodwill, even in efforts.

Now there is another choice in IFAs for intangibles. Whether it's an intangible with a finite useful life or an indefinite life under ISIS, you could also choose the revaluation model. So again, whether it's an intangible with a finite useful life or an indefinite life underwriters, you could choose the revaluation model where you basically adjust the intangible, whether it's finite life or indefinite life, adjust the intangible to its fair value and any gain or loss from the adjustment.

Goes to stockholders equity in a revaluation surplus account. Part of OCI. Let's do a couple of questions. Number one, it says Murray company maintains its records under  international financial reporting standards. During the current year Murray sold a machine. That had been accounted for using the revaluation methods.

So they are using, they elected to use the revaluation model. Here are the details. The sales price is 150,000. The machines book value or carrying value is 80,000. And notice as a revaluation surplus down in stockholders' equity, part of OCI 9,000, which of the following is correct regarding the sale.

Let's put the entries down. There are two entries that are made when you sell a long lived asset. That's been accounted for under the revaluation model. You're going to start by debiting that revaluation surplus take that revaluation surplus that relates to this asset out of stockholders' equity out of OCI and you'll credit retained earnings.

That'll be transferred to retained earnings and then just handle the sale as a normal sale. You'll debit cash, 150,000 credit. The asset for its carrying value, 80,000 and credit a gain of 70,000 in that game would go to the income statement. So it's not answer a, a says the gain of 70,000 would go to OCI.

It would not be says a gain of 79,000 would be recorded in profits and losses on the income statement. That's not true. Answer C is true. The gain of 70,000 would be recorded in profits and losses. It's a gain on the income statement and the 9,000 revaluation surplus would be transferred to retained earnings.

The answer is C watch out for that. It's tricky. Number two. Number two says on January 1st PAX company acquired for 18,000 a new piece of equipment with an estimated life of 10 years. The equipment required. The addition of a custom made component costing $3,000. That must be replaced in four years. PACS uses straight line.

And by the way, under  you can use any systematic basis of depreciation  would allow straight line, double declining balance some of the years, some of the year's digits, any systematic approach. Is allowed. So straight line is okay. Pat's uses straight line under efforts. What is the depreciation expense for the year ended December 31?

Well, the point that's being raised in this question is that if a component of a fixed asset has different periods of benefit under , you are required to depreciate that component. As a separate asset, you are required to, you're not required in gap to do this gap, permits it, but  requires it again, get gap would permit this, but I, for his requires it.

So we're going to take the 18,000 machine over 10 straight line years. That's 1800 of depreciation, but we have a component here that has different periods of benefit  would make us. Depreciate that separately, we'll take the 3000 divided by four straight line years. That's another seven 50 in depreciation.

So the answer is D 1800 plus seven 50, 25 50. As I say, us gap permits this, but it doesn't require heifers requires it. Another point if you change depreciation methods, just like us gap. I first treats that. As a change in estimate it's accounted for as a change in estimate prospective only, you don't do anything retroactive if there's a change in depreciation methods.

So I, for as in U us gap are the same in that regard. I want to talk for a minute about the securities and exchange commission. The sec, I think, you know that if a corporation is an issuer, Of publicly traded securities. If a corporation has securities that are traded on a national stock exchange or an over-the-counter market, if a corporation has had an initial public offering of securities, they have to file reports with the sec.

Also, if you're a corporation that has assets greater than 10 million, 500 or more employees, even if you're not trading securities in the open market. But your corporation with more than 10 million in assets, 500 or more employees, you have to file reports with the sec. And I think going into the FAR CPA Exam, you have to know the re the type of reports that are filed with the sec.

Make sure you're aware of these. And of course the most important ones. First of all, we'll start with the 10 K the 10 K is filed annually, and it's a very comprehensive snapshot. Of of a company's performance it's filed annually and the 10 K includes financial statements audited by an independent public accountant.

So the 10 K does include financial statements that have been audited by an independent public accountant. And as I say, it's very comprehensive. The 10 K includes a business description, risk factors. Legal proceedings management, discussion and analysis. Very comprehensive. The 10 Q is filed quarterly. The 10 Q is very similar to the 10 K but less detail.

And the 10 Q includes quarterly statements that have been reviewed, not audited reviewed by public accountant. And if you are

submitting a 10 Q to the sec, it's going to include, you're going to have to submit three, 10 QS per year. So if you're filing reports to the sec, You're going to have to submit three, 10 cubes per year, and then your 10 K your annual report to the sec will include your fourth quarter information. That's how it works.

You should also be aware of the eight K the eight K. These are information statements that report on significant events, material events. These are . These are information statements. These report on significant events, material events, mergers, acquisitions, you change directors, you change the CEO, you change auditors.

You have to file an AK with the sec within four days of the event within four days. And then finally, I think it should be aware of regulation. S ex regulation S X. Describes in detail, the content of financial statements that are filed with the sec that's regulation, SX describes in detail the content of financial statements that will be filed with the sec.

So make sure you know, these reports and regulation, SX, and I'll be looked as I'll be looking to see you in the next FAR CPA Review class. Keep studying don't fall behind. Welcome back in this FAR CPA Review class, we're going to begin our discussion of other nonprofit organizations, O N P O. Now, when we talk about other nonprofit organizations, we're talking about private not-for-profit colleges or universities, we're talking about private.

Not for profit hospitals or healthcare entities. We're talking about voluntary health and welfare organizations. And let me add one more category. Any other nonprofit you can think of would fall in this category, a church, a labor union, any other nonprofit? the FAR CPA Exam mentioned, you know, other than state and local governmental units, which we've discussed fall into this area.

O N P O. Other nonprofit organizations. Now I want to begin our discussion by talking about some things that all of these nonprofits have in common. First of all, all of these nonprofits carry their own fixed assets and they depreciate their own fixed assets. So you would see depreciation expense in all of these non-profits they carry their own fixed assets.

All of them, they depreciate their own fixed assets. All of them do. Also all these non-profits carry their own long-term debt. So you would see accounts like bonds payable, long-term notes, payable in all these nonprofits. Also all these nonprofits service, their own long-term debt. So you would see interest expense in all these nonprofits.

The bottom line is all of these nonprofits use normal accrual accounting, generally accepted accounting principles. All these non-profits follow the passerby. They don't follow the Gasby. Remember the Gasby is for governmental. So all of these nonprofits follow the . They use normal cruel accounting, generally accepted accounting principles.

Also another thing that all these nonprofits have in common, they all have the same measurement focus. You know, the FAR CPA Exam likes that they like to get into that. What is the measurement focus of all these nonprofits? Is providing information for the entity as a whole. That's their focus to provide information for the entity as a whole.

Now, another thing that all these nonprofits have in common is that all these nonprofits have to deal with restricted money. And this is very important. Remember in nonprofit accounting, the word restricted has a very particular meaning. Remember. In non-profit accounting, the only way money can be restricted is by an outsider.

In other words, it has to be somebody outside the hospital. It has to be somebody outside the college. It has to be somebody outside the health and welfare organization that says law. You can only spend my money on this item in nonprofit accounting. That is the only way money can be restricted. It has to be by a third party.

Has to be somebody outside the hospital, outside the college that says you can only spend my money on this item, on this project in nonprofit accounting. That's the only way money can be restricted. And you want to keep that in mind as we go through this. Now, another thing that all these nonprofits have in common is that all these nonprofits have to deal with with gifts, bequests, pledges donations, let's get into how these nonprofits.

Handle donations. Let's say, for example, that one of these, one of these nonprofits could be a hospital, could be a university. Let's say one of these nonprofits receives a hundred thousand dollars gift and the money is restricted. The donor says they can only use this a hundred thousand dollars to purchase equipment.

So one of these nonprofits, again, hospital, a university, whatever it is, gets a hundred thousand dollars gift. And the money is restricted to the purchase of equipment. Now, you know that when the nonprofit gets this gift, you know, they're going to debit cash or a hundred thousand. We know that now I want to talk about this before we get into what they credit.

Let's go back to governmental for a minute. Remember we said in modified a cruel, if a governmental unit receives any kind of restricted money, like a grant in modified a cruel, the governmental unit. Is not allowed to recognize that restricted money as revenue until when that's right, until they spend it until they spend it for the intended purpose until they meet the terms of the grant.

I know you remember that, but I want to remind you that that's a rule in modified cruel these nonprofits on following modified approval. These non-profits don't follow the Gasby. So this is a major difference when one of these nonprofits. Receives restricted money. It's revenue immediately. It's revenue immediately when they collect it, or even when it's promised, when it's pledged.

So we're going to debit cash a hundred thousand and the nonprofit is going to credit temporarily restricted revenue, a hundred thousand, but notice the revenue is recognized immediately when these nonprofits receives or receive restricted money, any kind of restricted money, it is recognized as revenue immediately.

When it's collected, or even when it's promised, when it's pledged it's revenue immediately. So notice the credit is to temporarily restricted revenue, a hundred thousand. Now let's say that at year by year end, the nonprofit is still not purchased the equipment. So what they basically do at year end, if they haven't purchased the equipment, they would debit temporarily restricted revenue, a hundred thousand, close that out and credit net assets.

Temporarily restricted. And that account net assets temporarily restricted. That's a balance sheet account. And we'll look at the balance sheet a little bit, but that's basically what they do. If they haven't spent the money for the intended purpose, then they'll debit temporarily restricted revenue, a hundred thousand, close it out and credit net assets temporarily restricted, a balance sheet account a hundred thousand.

Now let's say the following year, they go out and they purchase the equipment. Well, we know that all these non-profits. Carry their own fixed assets. So if they purchase the equipment, they'll debit equipment, a hundred thousand credit cash, a hundred thousand, and now that they have used the money for the intended purpose, they will debit basically that net assets temporarily restricted, that balance sheet account debit net assets temporarily restricted, a hundred thousand and credit net assets released from restriction a hundred thousand.

And that account net assets released from restriction. That is an income statement account. That's a revenue type item on the income statement. And we'll look at that income statement in a moment, but they credit net assets released from restriction. And as I say, that account is an income statement, account, a statement of activities account, which we will look at.

I just think that that is a very important sequence of entries because all the nonprofits deal with gifts, bequests, pledges. Money that's promised to them and it's revenue immediately when it's collected, or even when it's promised, when it's pledged, let's get into pledges because all these nonprofits member, we're still talking about what all these nonprofits have in common.

And another thing that all these nonprofits have in common, they deal with pledges. So let me give you an example. Let's say that a private not-for-profit hospital could be a college, could be health and welfare, any nonprofit, but let's say. That a private not-for-profit hospital has a pledge drive. And on December 31, the hospital receives $500,000 worth of pledges.

200,000 of the pledges have some sort of restriction. The person says you can only use my money to buy kidney dialysis machine, or the person says you can't use my money till 2034. All they'll love you for that, but it could be a time restriction. Can't use my money to 2057. It would be time restriction, but 200,000 of those pledges have some sort of restriction.

300,000 of the pledges have no restriction whatsoever. Okay. Now, based on past experience, they've had pledge drives before and based on past experience, they expect to collect a hundred percent of the restricted pledges, but they expect 50,000 of the unrestricted pledges to be uncollectible. Well, so again, they've had pledge drives that had pledge drives in the past, based on past experience.

They do expect to collect a hundred percent of the restricted pledges, but 50,000 of the unrestricted pledges they expect to be uncollectable well, here's the point bottom line is this pledges must be recorded at their fair market value and recorded as revenue in the year. The pledge is made again, pledges must be recorded at their fair market value.

And. Recorded as revenue in the year of the pledge is made in the year, the pledge is made. So on December 31, when the hospital receives those pledges, they'll debit pledges receivable 500,000. If you think some of the pledges, if you think some of the pledges are not collectible, no big deal, you would credit allowance for uncollectable pledges for the 50,000.

So if you think some of the pledges are not going to be collected, set up an allowance for uncollectable pledges. So we'll credit. Allowance for uncollectable pledges, 50,000 credit unrestricted revenue for the 250,000 and credit temporarily restricted revenue for the 200,000. That would be the entry that would be made because pledges must be recorded at their fair market value and recorded as revenue in the year.

The pledge is made. And as I say, all these non-profits have to deal with pledges. Another thing that all these nonprofits have in common. Is that all these nonprofits sometimes have to deal with donated services. You know, for example, let's say a group of nuns donated, donated nursing services to a private not-for-profit hospital.

This can happen in nonprofit. What the FAR CPA Exam's going to ask you is with the nonprofit, with the hospital record, that donation, the answer is yes. If it meets the following criteria, make sure you know, the criteria. So again, the answer is yes, donated services would, should be recorded by a non-profit as a donation.

If it meets the following criteria, number one, the fair market value of the service can be determined. So that's number one, the fair market value of the service has to be determined and either, and either the skills that are being donated. Our skills, the nonprofit would have had to pay for otherwise, or non-financial assets have either been created or enhanced.

I'll go over that again. They ask you would donated services be recorded by a non-profit as a donation. Yes. If it meets this criteria, first, the fair market value of the service can be determined. So the fair value to service has to be determinable and either, either the skills that are being donated are skills the nonprofit would have had to pay for otherwise.

Or non-financial assets have either been created or enhanced, make sure you know, the criteria or donated services. Another thing that all these nonprofits have in common is they all follow the basic same reporting model. Let's go over the reporting model that all of these nonprofits have to follow. All these, non-profits have to do a statement of financial position, basically a balance sheet.

And what I want to look at with you is just a very simplified version of this. We don't have to look at a really elaborate detailed example of this. Let's just break it down. When you do a statement of financial position for any of these nonprofits, as I say, it's basically a balance sheet and what you'll do is take all the assets.

And let me say, including fixed assets with accumulated depreciation, remember all of these non-profits carry their own fixed assets and they depreciate their own fixed assets. So the assets would include fixed assets with accumulated depreciation. Also, the assets would include the non-profits investments, all recorded at fair value.

And by the way, nonprofits. Is not drawing a distinction between held to maturity and available for sale and trading. All the investments are recorded that they have fair market value carried at fair market value. So you take all their assets minus all their liabilities and the liabilities would include bonds payable.

Long-term notes payable. We know they carry their own long-term debt. So you take all their assets minus all their liabilities, but I want you to remember. That the basic thrust of this statement, the focus of this statement is to show at year end. What is the balance in three net asset positions? What is the balance in net assets?

Unrestricted? What is the balance in net assets temporarily restricted? And what is the balance in net assets permanently restricted? That's really the focus of this statement now to show a year end, you know, December 31. What is the balance in those three net asset position? What is the balance in net assets?

Unrestricted? What is the balance in net assets temporarily restricted? And what is the balance in that assets permanently restricted? What you're already seeing is that really all of nonprofit accounting is organized around one principle. Is the money restricted or is it unrestricted? That's really, that's really the case.

All of nonprofit accounting. It's organized around that, that one guiding principle is the money restricted or it's an unrestricted. And you can see it in the statement of financial position. Now, all these nonprofits have to do a statement of activities, basically an income statement. Let's look at a very simplified version of it.

When you do a statement of activities for any of these nonprofits, you start with all their revenues. That's unrestricted revenue and restricted revenue. So take all their revenue. Unrestricted and restricted revenue. Then you would add any net assets released from restriction. Remember, that's a revenue dyed item, and we look at the entries in terms of how that account comes into being, but you would take all their revenues restricted and unrestricted.

You would add any net assets released from restriction. So you would add up all the revenue items you would deduct all the expenses and the expenses would include depreciation, expense, interest, expense. Right. They depreciate their own fixed assets. They service their own long-term debt. So expenses would include depreciation, expense, interest expense.

You basically deducting any expense that a profit making company would deduct. But here's the point of this statement? The focus of a statement of activities is to show for this accounting period. What was the net change in those three net asset position? What was the net change in net assets?

Unrestricted. What was the net change in net assets with a temporary, with a temporary restriction. And what was the net change in net assets with a permanent restriction? That's the thrust of this statement. Yeah, you take all the revenues minus all their expenses, but the real focus of this statement is to save for this accounting period.

What was the net change in those three net asset position? What was the net change in that assets? Unrestricted? What was the net change in net assets temporarily restricted. And what was the net change in net assets permanently restricted. Then finally, all these non-profits have to do a statement of cash flows and of course they don't follow the Gasby format.

Forget that they don't follow the Gaspe. They follow the FASBI format, you know, so well, Operating investing and financing. Just a couple little wrinkles. When all these nonprofits do their statement of cash flows, it is the direct method and your operating activity. Just one little wrinkle operating activity would include agency transactions.

When the hospital, when the nonprofit is acting as an agent for somebody. So operating activity would include agency activity, agency, transaction, investing activity, which would include. The purchase or sale of works of art, just a couple little wrinkles you don't normally see, but again, it's the format.

It's the FASBI format, you know, so well operating, investing, and financing. But as I say, investing activity would include the purchase or sale of works of art and financing activity. The one thing is a little different. Their financing activity would include any contributions that were restricted to the purchase of assets.

So financing activity would include. Any contributions that were restricted to the purchase of assets, but all these nonprofits follow this reporting model, they have to do a statement of financial position, a statement of activities and a statement of cash flows. And as I say, the statement of cash flows is really the past before Matt, that you know, very, very well we'll continue our discussion on all these non-profits in our next FAR CPA Review class.

See you then.

welcome back in this FAR CPA Review class. We're going to continue our discussion of O N P O's. Other nonprofit organizations. Let's start with a couple of questions. Number one, they say a storm damage. The roof of a new building owned by canine shelters, a not-for-profit organization, a supporter of canine, a professional roofer repaired the roof at no charge in K9 statement of activities.

The income statement. The damage and the repair of the roof would be reported. How well, of course, what you're dealing with in this question is something that the FAR CPA Exam loves and that is donated services. Remember we talked about this, you have to remember the criteria first, the fair market value can be determined and either.

The service that's being donated or services the nonprofit would have had, had to pay for otherwise, or non-financial assets have either been created or enhanced. You have to know the criteria. You know, we talked about the nuns, donating nursing services to a private not-for-profit hospital. Your analysis would be well, is the fair value of that service?

Determinable of course it is, you know, the fair value of nursing services are the services that the hospital would have had to pay for otherwise. Well, of course, if the nuns don't. Donate the nursing services to the hospital, the hospital's going to have to hire more nurses. So you would record that donation.

How is it recorded? Well, basically it's a debit to salaries and wages expense for the fair value of the services and credit revenue. It gets booked as both a revenue and an expense. In other words, in the statement of activities, it's all going to wash out. It's going to show up as both a revenue and an expense.

It all washes out, but they make non-profits do this. Why. Because of full disclosure, it's all about full disclosure. And the same thing applies to this problem with the fair market value of the roofing services be determinable of course you could figure out the fair value of what you normally pay a roofer are these skills that the nonprofit would have had to pay for.

Otherwise, of course they are. If the member doesn't donate the roofing services, the non-profits are going to have to hire a roofer. So how would this get booked? It would be booked as both revenue. And an expense. So once again, on the statement of activities, it's just all going to wash out, but they make non-profits do this for full disclosure.

The answer here is B this has got to be both an increase to expense and a contributions. It's an expense and revenue all about full disclosure. Number two, December 30th Lee museum, a not-for-profit organization received a $7 million donation from DEI. And it says the donor stipulated, the following requirements shares valued at 5 million are to be sold with the proceeds used to erect a public viewing building shares value to 2 million are to be retained with the dividends, used to support current operations as a consequence of the receipt of day shares.

How much would Lee report as temporarily restricted net assets on the statement of financial position? As we've said already in these classes, non-profit accounting is really structured around this one. Basic concept. Is the money restricted or is it unrestricted? And if there is a restriction, is it a temporary restriction or is it a permanent restriction?

The first. Shares valued at 5 million are to be sold with the proceeds used to erect a public viewing. Building. This item brings up a concept that you have to be aware of. I want you to listen carefully. If this is in the FAR CPA Exam a lot, if a nonprofit gets any kind of donation, that's restricted to the purchase of an asset or the construction of an asset in almost all cases, almost all cases.

With very rare exceptions. Once the non-profit, you know, buys the asset. Once the nonprofit buys the building, uh, wrecks the building in almost all cases at that point, the restrictions off, because at that point, the nonprofit can use the asset, sell it, give it away in almost all cases, you know, once you actually acquire the asset or construct the asset, the restriction will be off.

Because as I say at that point, the nonprofit can use the asset, give it away, sell it. So that would represent temporarily restricted net assets, but of course the shares value to 2 million notice. You can only use the interest in dividends to support operations. You can never touch the principle. That's a permanent restriction.

So the answer is C we're talking about net assets with a temporary restriction would be 5 million, the 2 million. Would be in the statement of financial position of as net assets with a permanent restriction net assets permanently restricted. And while we're on a museum, there's a special rule dealing with gifts of art or antiques.

You have to be aware of this too. If a nonprofit, like a museum receives a gift of art or antiques, it doesn't have to be recorded at all. If it meets the following criteria again, if a nonprofit, like a museum. Gets a gift of art or antiques. It doesn't have to be recorded if it meets the following criteria.

If first the art or antiques are part of a collection. Number two, the collection is held for the public's benefit and very important. Number three, the intent of the nonprofit is that if any items from the collection are sold, they will use the proceeds to purchase additional items for the collection.

That's the criteria you have to meet. So again, the art or antiques must be part of a collection. Number two, the collection must be held for the public's benefit. And then number three, the nonprofits, the intent is that if any items from the collection are sold, they will use the proceeds to purchase additional items for the collection.

You meet that criteria, a gift of art or antiques doesn't have to be recorded at all.

Number three. A not for profit organization received $150 from a donor. The donor received two tickets to a theater show and an acknowledgement in the theater program. Tickets have a fair market value of a hundred dollars. What amount would be recorded as contribution revenue? This one will make more sense.

If you see an entry in this case, what entry does the nonprofit make? Well, when the nonprofit gets the donation, you know, they'll debit cash, $150. But remember the nonprofit went out and purchased, you know, huge group of tickets to this program, this theater show, whatever it is. So they're going to have an inventory of theater tickets.

So when they get this donation, they debit cash one 50, but they'll credit their ticket inventory, you know, for the fair market value, the tickets a hundred and credit. Contribution revenue for just $50. The answer is B that's the entry that the nonprofit has to make their debit cash out and 50 credit their ticket inventory for the tickets worth a hundred dollars and credit the contribution revenue, just $50.

In other words, the answer is not D they don't let the nonprofit gross up their contribution revenue up to 150. No, the real revenue is just $50 now to this point of our discussion. What we've been talking about are things that are true in any non-profit. We've talked about things that apply to all the other nonprofit organizations.

And now I want to get more specific. Let's talk about private, not for profit hospitals or healthcare entities. Now we know that for external reporting, private not-for-profit hospitals, healthcare entities. Have to follow the reporting model. We went through in our other class, they have to do a statement of financial position.

They have to do a statement of activities. They have to do a statement of cash flows. We know that, but for internal reporting, a private not-for-profit hospital can still use funds. And that's what I want to get into next. What I want to get into next are the funds. That a private not-for-profit hospital can use for internal reporting.

Now, before we go through the funds, let me just say what is probably obvious. All these funds are organized around one principle. Is the money restricted or is it unrestricted? Let's start with the unrestricted funds in a private not-for-profit hospital. There's only one unrestricted fund it's called the general fund.

So again, in a private not-for-profit hospital, there's only one unrestricted fund. It's called the general fund, the general fund of a hospital accounts for money. That's not restricted in any way. And what this fund does is account for the day-to-day operations of the hospital. So that's the general fund.

It accounts for money. That's not restricted in any way. And it accounts for the day-to-day operations of the hospital. Just a quick point. How would a hospital get unrestricted money? How does that happen? Well, of course, they get tons of it, all that money coming in for lab tests, x-rays cat scans, private rooms, ward surgery, you know, all that money coming in for healthcare is unrestricted.

You know, that you can't pay your hospital bill and say, now you can only use my money to buy bandages of what you can't do. That, you know, a lots, all that money coming in for healthcare is unrestricted. So you need this general fund. Now, something I always worry about in your mind. Don't confuse the general fund of a hospital with the general fund and governmental cause the names are the same, but they're very different.

Let me give you some things to remember about the general fund of a hospital. First of all, in the general fund of the hospital, this is where the hospital would carry its fixed assets with accumulated depreciation. So again, in the general fund of a hospital, this is where the hospital would carry its fixed assets with accumulated depreciation.

Also in the general fund of a hospital, this is where the hospital would carry its longterm debt. So you'd find accounts like bonds payable in the general fund of a hospital. Now, another point in the FAR CPA Exam loves this in the general fund of a hospital. This is where you would find board designated assets.

Be careful. Of board designated assets. the FAR CPA Exam really likes this. Let's get into this for a minute. Here's what's going on with this. The governing board of a hospital can set aside assets for some project. They might want to start pregnancy counseling in the neighborhood. They might want to start nutrition counseling for new mothers, anything they want.

So what the governing board of the hospital will do is set aside these assets. They'll make investments, but all the interest in dividends they make on those investments will only be used for this project, whatever it is, nutrition counseling for new mothers in the neighborhood, whatever it is. So they set aside money, they make investments, but all the interest in dividends that they make from those investments can only be used for this project, whatever it is they have in mind.

So let me ask you a question. If the interest in dividends can only be used for this project, is the money restricted or is it unrestricted? Listen very carefully. This money is restricted, but it's internally restricted by the board. They can change their mind. Remember internally restricted money is technically unrestricted.

the FAR CPA Exam loves this game. Internally. Restricted money is technically unrestricted because remember in nonprofit accounting, the only way money can be restricted is by an outsider. Don't forget that principle. In non-profit accounting. The only way money can be restricted is by a third party. Somebody outside the hospital, this money is restricted by the board.

And as I say, they can change their mind. So let me make my point. If the hospital has any board designated assets, they had just carried in the general fund. Notice the unrestricted fund. Also in the general fund of a hospital, you'd find agency activity. You know what that is the hospitals acting as an agent for somebody.

And if the hospital is acting as an agent, you're going to find the cash and the liability, you know, due to cardiologists just carried in the general fund. So if the hospital is acting as an agent for somebody, if there's agency activity, you're going to find the cash and the liability, you know, do two minute clinic, whatever it is just carried in the general fund.

Now, another thing to keep in mind, All these funds have net asset positions. They don't have fund balances. They have net asset positions, and I'm sure you're with me. There's three possible net asset positions. There's net assets, unrestricted net assets, temporarily restricted net assets permanently restricted.

What would the net asset position for the general fund be? You know, it's the unrestricted fund. So it would be net assets unrestricted. All right now, that's the only unrestricted fund that a hospital would use. Now let's get into the restricted funds and more specific basically they're called donor restricted funds.

And that makes perfect sense. Doesn't it? Because the only way money can be restricted is by a donor by third party. So these are called donor restricted funds. The first donor restricted fund is called a specific purpose fund. The specific purpose accounts for gifts. Bequests grants donations that are restricted for operational purposes.

That's what I, that's how I would think of this. You know, gifts donations that are restricted for operations. That's the specific purpose bond. It accounts for gifts, donations that are restricted for operations. And remember, all these funds have net asset positions. This bond would be net assets temporarily restricted.

The second donor restricted fund is the plant replacement and expansion fund, the plant replacement and expansion fund accounts for gifts, grants, donations that are restricted for capital additions. So just think of it as grants, gifts, donations that are restricted for capital additions. And again, it would have a net asset position, net assets temporarily restricted, and then finally you have the endowment funds and of course, The endowment funds account for money donated to the hospital.

And what you have to remember here is that there are two types of endowments. The first type of endowment is called a permanent endowment or a pure endowment. Just remember what a permanent endowment or pure endowment you can never touch the original principle. It's permanent. Let the name help. With a permanent endowment, you can never touch the original principle.

You can only spend the interest and the dividends on some specified purpose. So you're talking about what net assets permanently restricted. That's a permanent restriction because you can never touch the original principle. And then finally you have a term down with a term endowment after a term. After a period of time, you can spend the principle.

That's a term down. After a term after period of time, you can spend the principle. So these are the funds used by a not-for-profit hospital for internal reporting. We'll continue our discussion of not-for-profit hospitals in our next FAR CPA Review class. I'll see you then

welcome back in this glass. We're going to continue. Our discussion on accounting for private not-for-profit hospitals or healthcare entities. And as we said in our last class for internal reporting, internal reporting, private not-for-profit hospitals or healthcare entities can still use funds. And in our last class, we went over the, the funds that a private not-for-profit hospital or health care entity can use for internal reporting.

But I remind you. For external reporting, private, not for profit hospitals, still have to follow the FASBI nonprofit model. So that means that they're going to have to do a statement of financial position, basically a balance sheet. And by the way, a private not-for-profit hospital does call it a balance sheet.

It's called a balance sheet. And the whole point of the balance sheet is to show at year end. What was the balance in those three net asset positions? What was the balance in net assets? Unrestricted? What is the balance in net assets temporarily restricted. And what is the balance in net assets permanently restricted now private not-for-profit hospitals have to do a statement of cash flows.

And we know that they follow the FASBI non-profit model for external reporting. So when a private nonprofit hospital does their statement of cash flows, they're going to follow the FASBI nonprofit model, which is the model we know, and we love operating activities, investing activities, financing activities, right?

It's the format we know so well, and we're really comfortable with. And we, we are really used to, but I should warn you just in case. If this were a city hospital, I'm not trying to drive you crazy. But if this were a city hospital, now wait a minute. A city hospital is connected to a governmental unit. So a city hospital, because it's connected to governmental unit, wouldn't follow the FASBI model.

It would follow the Gasby model. So when a city hospital does their statement of cash flows, they have to use the Gasby model, the Gasby format for cash flows. So, you know, it's still. Operating activities, investing activities, but remember financing activities, it gets divided into two there's non-capital and related financing activities and capital and related financing activities.

I know I'm driving you crazy, but that complication is, is there. If the city hospital it's connected to a governmental unit, so city hospitals don't follow the FASBI model if all the Gasby model. So when a city hospital does the statement of cash flows, it would be the gas before I'm at drawing that distinction between.

Non-capital related financing activities and capital and related financing activities. Now, do I think the FAR CPA Example, try to get you on that? I actually don't. I think from the kind of feedback I've gotten from my students, I think that the CPA exam tends to draw a pretty bright line, that they have all of governmental accounting to test you on the Gasby.

Their only chance to test you on the FASBI nonprofit model is with. Hospitals and universities and voluntary health and welfare. So I think generally speaking in the FAR CPA Exam, they'll draw that bright line difference. So don't worry about it too much, but it's, it is there. And I think it's something that should be mentioned now, private not-for-profit hospitals have to do a statement of activities, basically an income statement, but what's a little different is that hospitals actually turn the statement of activities into two statements.

It's actually two. They do a statement of operations and then a separate statement showing the changes for the year in the net asset positions, they actually turned it into two statements, a statement of operations, and then a statement showing the changes in net assets, unrestricted net assets, temporarily restricted net assets, permanently restricted.

So they actually divided into two statements. Now, a little tricky thing here in the FAR CPA Exam tends to hit this when a private not-for-profit hospital. Does that statement of operations? Don't forget. They divide their revenue in a statement of operations. They divide their revenue into three categories.

First there's patient service revenue right now what's patient service revenue. Well, patient service revenue is what you think it is. It's all the revenue coming in for patient care. It's all the revenue coming in for lab tests. X-rays cat scans, surgery, outpatient. Wards. Anything you can think of. It's all the revenue coming in for patient care.

It's patient service revenue, but this still gets tricky. You know why? Because a lot of hospitals, when they provide charity care, now what's charity care. It's providing healthcare without charge, say to a street person, an indigent, some hospitals provide healthcare without charge. They never get paid for a street person comes in and they're ill street person in indigent.

It's called charity care. And some hospitals just as a policy, we'll just bill charity care at their normal billing rate, even though there's no anticipation of getting any money for that care. So you gotta be careful if you're in the FAR CPA Exam. And they say that in the patient service revenue there, that does include charity care.

You have to back it out because that's just a hospital policy. They just built charity care at the normal billing rate, but there's never any anticipation of receiving money for that care. So it doesn't belong in there. That's what I'm saying. So if you notice charity care is inpatient service revenue, you have to back it out.

Then you would also back out bad debt expense for the year. You're going to back out bad debt expense for the year. You also back out third-party contractual adjustments. Now, what do we mean by third-party contractual adjustments? Let's say blue cross will pay $800 per cat scan the hospital, normally charges a thousand.

So the hospital normally charges a thousand dollars for cat-scan blue cross only pay 800 and the hospital accepts that and full payment. That $200 difference would be a third-party contractual adjustment. So you would also back out third-party contractual adjustments. So let me let's, let me just give you an example, but show you what I mean, let's say a hospital's patient service revenue is $800,000.

So you're in the FAR CPA Exam. They say patient service revenue is 800,000, but that includes 75,000 of charity care. Well, you see that charity care back it out. There's no anticipation of ever receiving any money for that care. So you back out the charity. So that would give you patient service revenue of 725,000.

Now, if they have bad debt expense for the year of 50,000 back out to 50,000, third-party contractual adjustments of 150,000 back that out when you back out the bad debt expense of 50,000 and the third-party contractual adjustments of 150,000. That brings you down to 525,000. That would be called net patient service revenue.

Be careful in that exam, whether they just want patient service revenue. In my example, patient service revenue would be 725,000 because the charity doesn't belong in there. So they asked me an exam for patient service revenue at 725,000. But if they ask you for a net patient service revenue, they are picky.

Well, net patient service revenue would be 525,000. Cause I have to back out the bad debt expense for the year and I have to back out the third-party contractual adjustments. All right. Now, second category of revenue. We know the first category is patient service revenue, and you see how they can be tricky in those questions.

The second category is other operating revenue for a private not-for-profit hospital. What's considered other operating revenue. Well, if they have educational programs, Let's say they're a teaching hospital. They hold nursing classes. Let's say they hold CPR classes, not CPA glasses. Now, CPR classes, cardiopulmonary resuscitation classes.

You know, if they're a teaching hospital, they have educational programs that becomes part of the normal operations of the hospital. That's other operating revenue. If they have a cafeteria, a gift shop in the lobby, a paid parking, lots, other. Operating revenue. These become part of the day-to-day operations of the hospital.

Don't forget specific purpose grants. Remember what those are for my last class. What a specific perfect purpose grants, grants for operations grants for operational purposes. That's other operating revenue. Here's where donated services would come in. Right? We know the criteria is the fair value. The service determinable or these services the hospital would have had to pay for otherwise, or are non-financial assets either created or enhanced.

You apply the criteria. So, you know, you go back to those, you know, nuns that donate nursing services to a private non-profit hospital is the fair value of that service determinable yes. Are these services that the hospital would have had to pay for otherwise? Yes, because if the nurse, if the nuns do not donate these services, the hospitals are going to have to hire more nurses.

So that would be recorded as a donation. But remember how it's recorded, it's going to be a debit to salaries, wage expense, and a credit to revenue. As we said in our other class on the statement of activities, it's all going to wash out. It's not going to have any effect on the bottom line, but we have to do this, but full disclosure.

But my point is, yes, we debit salary and wage expense and credit revenue. What kind of revenue is it? They can ask you that it's other operating revenue. So other operating revenue, also in this category, the fair market value of donated medicine, linen supplies, you know, let's say a pharmaceutical house donate a hundred thousand dollars worth of medicine to a hospital.

This happens in nonprofit. Well, the hospital would basically debit an expense and credit revenue. It's booked as both a revenue and expense it'll wash out in terms of the bottom line, but it must be done for full disclosure. What kind of revenue is it other operating revenue also in this category, any gifts you receive for charity?

You know, somebody actually, if somebody actually gave you money as a gift for charity care, now you're getting money. If you get a gift for charity care, that would be other operating revenue. And then finally the third category non-operating items. What's uh, what's what are non-operating gains and losses?

Well, any unrestricted gifts, bequests contributions, pledges, any unrestricted gifts, bequests contributions, pledges. That's not operating any gains or losses from the sale of assets. Non-operating no hospital sells off an old x-ray machine at a game. So non-operating items, any unrestricted endowment income.

That's unreal. That's non-operating any term indictments that have expired number after a term, you can use the principle. You have a term endowment has expired. That's a non-operating item, any unrestricted interest, dividend income, investment income. Non-operating so just remember those different categories because the FAR CPA Exam seem to talk seems to touch on that a lot.

Let's do a couple of questions. Question number one, an organization of high school seniors. Performs services for patients at Lear hospital, the patients, excuse me, the students are volunteers and perform services that the hospital would not otherwise provide such as wheeling patients in the park and reading to patients Lira spend 1500 on a recognition, banquet and awards for the volunteers.

Lira has no employer, employee relationship with these volunteers. They donated 4,000 hours of service. At minimum wage that comes out to 20,600, we don't care about minimum wage. What's the fair value of that service? 25,000 in Lear's statement of activities, you know, statement of operations, what amount would be reported for this donation?

Well, you just go through the criteria is the fair value of the service. Determinable it is 25,000. Are the services the hospital would have had to pay for otherwise. No. It's a very nice thing to do wheeling patients in the bark and reading to patients. So wonderful thing to do, but if the volunteers didn't do this, the hospital just wouldn't have time.

Just couldn't possibly do it so that this is not recorded at all. It's not a donation it's not recorded as a donation. The answer is D and of course the $1,500 recognition banquet as an expense, but there's no, there's no donated services here in number two, Terry. An audit or performed test work for a not-for-profit hospital.

Here are the components of their operations. And at the bottom they say what amount would be reported as total revenues gains and other support in the statement of operations, remember private, nonprofit, hospitals divide the statement of activities into two statements. It's the statement of operations.

And there's a statement of changes in net assets. So you're doing the statement of operations section. You're doing that part. What would be total revenues gains and other support? Well, you start with your net patient service revenue of 500,000, but notice that in that includes charity care, there's a hundred thousand dollars charity care there cause that they just build it at the normal rate.

It's a policy they're never going to receive money for that charity care back it out the 70,000 of bad debt expense. Back it out. It doesn't belong in there. So really your net patient service revenue, when you really work it out is 330,000, but they want to know total revenue gains and other support. So we're going to pick up the 80,000 of other revenue and we're going to pick up the 50,000 of net assets released from restriction.

Remember, we went over how that account comes into being. We have net assets released from restriction. That's a revenue type item. So total revenue gains and other support would be 460,000. Answer a number three hospital, Inc. A not-for-profit hospital with no governmental affiliation. So no governmental affiliation tells you clearly they follow the FASBI nonprofit model and they give us a list of their situation and what I'm out with a hospital report as net.

Patient service revenue. They want net. So to get net patient service revenue, start with the gross patient service revenue, 775,000. But wait a minute, that included 25,000 to charity back it out. Really a gross patient service revenue here is 750,000. Then you back out the bad debt expense of 15,000 back out the third-party contractual adjustments of 70,000 and net patient service revenue is 660.

Answer a and then finally, number four. Typical question they'd ask in the FAR CPA Exam, which of the following normally would be included as other revenues. What are other operating revenues for hospital? And if you study the list, we went over, you don't have to memorize it, but as long as you look at it, a couple of times before you take the FAR CPA Exam, you'll recognize it.

When you see it, that revenue from grants specified by the donor for research well that's grants for operational purposes. That is a specific purpose grant. That's other operating revenue, pick it up. Yes. A gift shop in the lobby. That's other operating revenue. They both are. And the answer is D double.

Yes. Keep studying. And I look to see you in the next FAR CPA Review class.

Welcome back in this FAR CPA Review class. We're going to finish our discussion of other nonprofit organizations and what I want to talk about next. Is private, not for profit colleges or universities. Now we know that for external reporting, private, not for profit colleges, universities have to follow the model that we've talked about.

They're going to have to do a statement of financial position, basically a balance sheet, and the whole point of that balance sheet, that statement of financial position. Is to show an ERN. What is the balance in that assets? Unrestricted? What is the balance in net assets temporarily restricted? What is the balance in net assets permanently restricted, private not-for-profit colleges.

Universities have to do a statement of cash flows, and of course they don't follow the Gaspe. They follow the FASBI. So when they do their statement of cash flows, it'll, it will of course be the FASBI format that we know, and we love operating, investing, and financing. But be careful. What if it's a state college on a, see if it's a state college, then again, it's connected to a governmental unit.

No doubt. It would be operated as an enterprise fund, but because it's a state college and it's connected to a governmental unit, when a state college does their statement of cash flows, they're going to follow the Gasby and use the Gasby format. But as I pointed out in another class, I just don't think the FAR CPA Exam will go that way.

That complication is there. That's why I feel I should mention it. But as I said in our previous class, they've got all of governmental accounting to hit you on the Gatsby. So I think that they pretty much split it that way. They hit your heart on the Gasby and governmental accounting. And when they hit other nonprofit organizations they're into the FASBI.

So when private not-for-profit colleges, universities do their statement of cash flows, We assume in the FAR CPA Exam, it would be the FASBI format that we know so well. And of course, a private not-for-profit college or a university has to do with their statement of activities, their income statement, and a lot of the questions in the FAR CPA Exam on private not-for-profit colleges have been on the statement of activities.

Couple of things to watch out for when you're doing a statement of activities for a private nonprofit college, how do you handle tuition waivers? What a tuition waivers. Well, there are cases where the university is waiving the tuition. So we're talking about scholarships, fellowships, tuition, remissions.

These are tools, waivers. They're all cases where you're waiving the tuition. Now I know, you know, what a scholarship is. I know, you know what a fellowship is. You might not know what a tuition remission is. You may know what it is, but you might not know the term. It works like this. If you're on the faculty of a university, Very often your children can go to that university without charge.

That is a tuition remission. It's one of the great benefits that's out there. In fact, very often you don't have to be on the faculty. If you're any employee of a university, your children could go to that university at a reduced rate or for free. That is a tuition remission, but again, scholarships, fellowships, tuition, remissions, they're all cases where the university is waiving the tuition they called.

Tuition waivers. And when you're dealing with tuition waivers, there's a rule. And the rule is this scholarships, fellowships, tuition, remissions, any kind of tuition waivers are not revenue reductions. They're not revenue reductions. I'll give you an example. Let's say a private not-for-profit college gives out $200,000 worth of scholarships.

Well, if a private not-for-profit college gives out $200,000 worth of scholarships because they have this rule, they'll book, this entry. They'll debit scholarship expenditures, 200,000 and they'll credit revenue, 200,000. You see how weird this is? Notice that the college has to record the revenue as if the people are going to pay their tuition and then not the tuition is waived, but they have to record the tuition.

They have to record the revenue as if the people are going to pay their tuition. Of course, they also have a corresponding expenditure, so on the statement of activities that all washes out, but they make universities do this. And you know why full disclosure. Now on the other hand, Refunds are a direct reduction of revenue.

I'm sure you remember when you were in college, if you signed up for a course and you withdrew within 10 days, whatever the rule was, you got to refund. The way refunds are handled would be debit revenue, say 10,000 refunds, debit revenue, 10,000 credit cash, 10,000 refunds are a direct reduction of revenue.

So make sure you know that rule about tuition, waivers and refunds now also, and. The statement of activities, a private not-for-profit college divides their expenses into three broad categories. I think you should know. These first there's education in general education in general would be expenses for instruction.

In other words, faculty salaries, research, student services, that's education in general. It's expenses for instruction. Faculty salaries. In other words, research student services. And then the second category would be auxiliary enterprise auxiliary enterprise would be expenses for the cafeteria, the dorms bookstores, athletic programs.

Again, those are known under the heading auxiliary enterprise expenses, auxiliary enterprise expenses with the cafeteria, the dorms bookstores athletic programs. And then finally, there's the third category support. Support expenses would be management general administrative and the big one fundraising.

Those are support expenses, management, general administrative and fundraising.

Let's do a couple of questions. Number one says for the summer session, unity university assessed its students $3 million for tuition and fee. However, the net amount realized was only 2,000,009. Cause the following notice they had tuition remissions of 30,000, well, tuition, remissions, you know what? Those are, that's a tuition waiver.

We're going to record that revenue as if the people are going to pay that tuition. Even though they're not that's tuition waiver, we don't touch that. But the cancel the class cancellation refunds, the 70,000, that's a direct reduction of revenue. You basically debit revenue, credit cash. So when they ask at the bottom, how much.

Unrestricted current funds revenue from tuition and fees would unity, unity university report. It would be the 3 million,

the assessed tuition, 3 million minus the refunds, which are a direct reduction of revenue, seventy thousand two million nine 30. The answer is B as I say, the 30,000 tuition remissions. That's a tuition waiver. We got, we're going to record that revenue is that the people are going to pay that tuition.

That's just the rule we have now, just like with private not-for-profit hospitals, a private non-for-profit college or a university for internal reporting can use funds. So just like a hospital can use funds for internal reporting, private not-for-profit private not-for-profit colleges. Universities can use funds for internal reporting.

Now I don't want to go over all the funds. That a private not-for-profit college can use for internal reporting, but they're in your viewers guide. If you look in your viewers guide, you'll see. And I'm sure that they're getting very familiar with the kind of funds that a private profit college can use for internal reporting.

But I do want to cover a couple with you. I want to talk about the plant funds because these are mentioned a lot in a private not-for-profit college. There are four plant funds. You have to be aware what they are for plant funds. Let's go to this. Let's just go over them. The first plant fund. Is called again.

Remember, this is for internal reporting, a private, not for profit college or university can use funds for internal report. And as I say, funds that are mentioned a lot in the FAR CPA Exam are the plant funds and there are four of them. The first one is called the unexpended plan fund, the unexpended plant fund accumulates the money to acquire fixed assets.

In other words, the unexpended plan fund. Accounts for gifts, bequests, pledges, donations that are restricted for capital additions. That's what it's for the unexpended plant fund. It accounts for gifts, bequests grants, donations that are restricted for capital additions and all of these funds have net asset positions.

So we'd be talking about net assets temporarily restricted, and as always let the name of the fund help you notice the money hasn't been spent yet. It's called the unexpended plant fund. In other words, All the unexpended plant fund does is accumulate the money for the acquisition of fixed assets, but they haven't spent the money yet.

It's called the unexpended plant fund. Always let the name mean something to you. So all this fund is doing is accumulate, accumulating the money for the acquisition of fixed assets. The second plant bond is called the investment in plant fund. Now the investment in plant fund does two things. First. It carries the fixed assets.

Again, the investment implant fund, those two things. First it carries the fixed assets. So this is where the university would carry its fixed assets. And it also carries any long-term debt secured by the fixed assets. So it does Bo it carries the fixed assets and also any long-term debt secured by the fixed assets.

Let's have a little pop quiz. What do you think the net asset position would be for this one? How about the investment in plan fund? The carries the fixed assets and also any longterm debt. That is secured by the fixed assets. What do you think that the net asset position would be for the investment in planned fund?

Very good unrestricted net assets. Remember, once you acquire a fixed asset in almost all cases, the restrictions off number, once you acquire a fixed asset or construct a fixed asset in almost all cases. At that point, there is no restriction. The nonprofit can use the asset, give it away, sell it. So it would be talking about net assets unrestricted.

Third plant fund is called the retirement of indebtedness plant fund. It's just like the debt service fund in governmental here. It's called the retirement of indebtedness plant fund. All it does is serve as debt and its net assets temporarily restricted, but that's all it does. It services debt, just like the debt service fund in governmental, but here it's a plant fund and it's called the retirement of indebtedness plan fund net assets temporarily restricted.

And then finally the fourth and final plant fund. Is the renewal and replacements plant fund, the renewal and replacement plan fund accounts for major repairs and maintenance and refurbishing that's the renewal and replacement plant fund. It accounts for major repairs, maintenance refurbishing, and the net asset position would be net assets temporarily restricted.

So you've got to got to know those four plant funds. And as I say, and your viewers guide, you can see all the funds that are used by a university for internal reporting. And they'll seem very familiar to you. Look at question number two. Uh, college is plant funds group includes which of the following subgroups?

Well, you know that the renewal and replacements, that's a plan fund. The retirement of indebtedness. That's a plant fund, but not the restricted current fund. No. So just the answer is eight. Just the first two would be planned funds answer a. Now you can look at that third one restricted current funds. Now we didn't cover.

All the funds used by a university for internal reporting. As I say, they're in your viewers guide, but even though we didn't cover it, what do you think that fund is used for? The name tells you everything. If it's called the restricted current fund, it tells you that the money's restricted and it accounts for current operations.

You know, the names mean something. So even though you say, Oh, I never, I've never heard of that fund. I don't know what it does. Look at the name it's called the restricted current fund. Why? Because the money's restricted and you have to use the money for current operations. So the names are very telling.

Number three, the board of trustees of Rose foundation designated 200,000 for college scholarships. Now notice what we're dealing with here is board designated assets. Remember we talked about board designated assets in hospitals, but I want you to know that any non-profit can have board designated assets.

That's not unique to hospitals. Any non-profit can have board designated assets. In other words, the governing board of a university can set aside assets for some project. They might want to start tutoring on campus. They might want to start counseling on campus for troubled students, anything they want, but just be aware that any nonprofit can have board designated assets.

So the board of trustees of the Rose foundation designated 200,000 for college scholarships, the foundation received a bequest. Uh, 400,000 from the estate of a benefactor who specified that the bequest was to be used for hiring teachers to tutor handicap students. What amount would be accounted for as restricted resources?

Well, the answer is C just the 400,000 is restricted because that's by an outside of, by a third party, that's by a benefactor who said you have to use the money to hire teachers that's restricted, but of course the board designated assets board can change their mind. That's internal restricted money and internally restricted money is technically unrestricted.

So for us, it's answer C number four. What describes a private nonprofit universities internally designated assets. Once again, we're talking about board designated assets. I want to emphasize that to you that any nonprofit can have board designated assets. Now, what they're asking here is the income from which will be used to for some specified purpose.

And they want to know where we'd find the board designated assets. And I just wanted to do this question to say to you that when a university has board designated assets, they're carried down in the endowment funds and there's a special endowment for board designated assets. It's called the quasar endowment answers seat.

So if a university has board designated assets that it's carried in the endowment funds, and there's a special endowment just for board designated assets. And that is the cuase I endowment. Answers C let's talk about voluntary health and welfare organizations. Now, first of all, what is a voluntary health and welfare organization?

Well, rather than give you a big definition, just remember red cross, you know, the red cross is a voluntary health and welfare organization. That's one, we all know the United way is a voluntary. Health and welfare organization. These are the ones we all know. Now, one thing you'll like is that voluntary health and welfare organizations have to follow the FASBI.

There's no Gasby possibility here. It's gotta be the FASBI. So we know that for internal reporting for internal reporting, a voluntary health and welfare organization can still use funds. And they're in your viewers guide. If you look in the viewer's guide, you'll see a list of the funds. That a voluntary health and welfare organization can use for internal reporting.

But for external reporting, a voluntary health and welfare organization still has to follow the FASBI model. And we know what that is. They're going to have to do a statement of financial position, basically a balance sheet, showing it year end. What is the balance in those three net asset position?

They're going to have to do their statement of cash flows. And when a voluntary health and welfare organization does their statement of cash flows, it has to be the FASBI format. A Gasby format is not even possible, gotta be the FASBI format, operating, investing, and financing. Now we know that a voluntary health and welfare organization has to do a statement of activities, their income statement.

And that's a lot of questions in the FAR CPA Exam on voluntary health and welfare are on the statement of activities, the income statement. But I also want you to remember that a voluntary health and welfare organization has to do a fourth statement called the statement of functional expenses. So a voluntary health and welfare organization has to do a fourth statement called the statement of functional expenses.

So what we're going to zero in on is the statement of activities and the statement of functional expenses. Let's talk about the statement of activities. When a voluntary health and welfare organization does their statement of activities, they draw a distinction between revenue and support. Make sure you know this cause the FAR CPA Exam likes this again, a voluntary health and welfare organization in their statement of activities, they draw a distinction between revenue and support.

Let's go over it to a voluntary health and welfare organization. What is revenue? Revenue would be, you know, Program revenue revenue from the program, membership dues fees for services, dividend interest, investment income, that's revenue to a voluntary health and welfare organization. That's what revenue is.

Program revenue revenue from the program, membership dues fees for services, interest, dividend, any kind of investment income that's revenue. Now support is public support, contributions, gifts, but quests. Pledges, and don't forget special events like a casino night that support just think of it as public support, contribution, get contributions, gifts, requests, pledges.

And as I say, don't forget special events like at casino night, it's public support. And then finally a voluntary health and welfare organization has to do a fourth statement called a statement of functional expenses. And in the statement of functional expenses, They divide their expenses into two broad categories.

First, there are program expenses. What a program expenses, expenses to run the program. That's what program expenses are. And what are the expenses to run the program? What's the program? Is it research? Is it education? Is it health? What will your expenses to do what you're there to do? What have you expenses to achieve your mission expenses to run the program?

Those are program expenses. What is your, what is your program? What is your, what is your mission? Is it research? Is it education? Is it health? And then finally there are support expenses. What is support expenses, general administrative, and the big one fundraising. That's the big one. Now I know that, you know, you're probably just trying to get used to all this, but that's a very important statement.

The statement of functional expenses, for example, let's say you were thinking of making. A contribution to a voluntary health and welfare organization. So you call up and you say, would you please send me your statement of functional expenses? It's public information. They'll send it. Oh yeah, please send me your statement of functional expenses.

So they do. And here's what you find. You find that 99% of their expenses are support 1% of program. Okay. When you look on their statement of functional expenses, 99% of their expenses are support. 1% is programmed. You're going to make a contribution. Let me see if I understand this 99 cents out of every dollar I give you, you're going to use to raise more money.

Just a penny gets to the people I'm trying to help. No, no, you probably would not make a contribution. That's a very important statement. I want to make another point. If you're in the FAR CPA Exam and they bring up any nonprofit that I haven't mentioned. In other words, you know, a church, you know, you never know what they're going to bring up.

They make up some nonprofits. Our church, a labor union, any non-profit that's not governmental. If it's not state and local governmental units, which we talked about, then you assume it falls in this category. It's an, it's an Oh NPO, it's other nonprofit organization. And just assume it follows the voluntary health and welfare model.

We just went through. So any other nonprofit, I didn't mention that. And those, if it's not governmental, if it's not a hospital, if it's not a college, not a university, you just assume it's in this category. Voluntary health and welfare, and it just, you just follow this model. Let's do a couple of questions.

Number five says a labor union, voluntary health and welfare, a labor union had the following expenses. They have expenses for labor negotiations, fundraising, membership development, and admin. In the statement of activity, what amount would be reported under the classification of program services? What a program services.

Expenses to run the program. If you're a labor union, what's your program. What's your mission? Is that labor negotiations? Yes. And the answer is D everything else is support. I hope you see that. That's what program expenses are. What is your program? What is your mission? Well, if you're a labor union, your program, your mission is labor negotiations.

So that that would be program services. Everything else would be support. Number six, during the current year, a voluntary health and welfare organization. Receives 300,000 in pledges of this amount, a hundred thousand has been designated by donors to be used next year. That's a restriction. It's a time restriction.

You know, if I say, you can't use my money until 2057, all they love me for that, but that it's a time restriction. That is a restriction. They say that if 15% of the unrestricted pledgers are, they say 15% of the unexpected pleasures. 15% of the unrestricted pledges are expected to be uncollectable. What amount of unrestricted support with the organized organization recognized?

We'll think about the entry. What do we know about pledges? We know that pledges must be recorded at the fair market value and recorded as revenue in the year. The pledge is made, but that's the rule pledges are recorded at the fair market value and recorded as revenue in the year. The pledge is made. So when the voluntary health and welfare organization.

Received these pledges. Think about the entry. They're going to debit pledges receivable for 300,000. Now, if you, and you're going to credit, you're going to credit temporarily restricted revenue, a hundred thousand. Remember that a hundred thousand has a restriction. It's a time restriction. Can't use the money until next year.

So you're going to credit temporarily restricted revenue, a hundred thousand. That's a restriction now of the unrestricted pledges. They expect 15%. Will be uncollectable well, you have to set up an allowance for uncollectable pledges. So take 15% of 200,000 credit allowance to uncollectable pledges, 30,000 and credit unrestricted support for 170,000.

So that's the entry, debit pledges receivable 300,000 credit that temporarily restricted revenue or support a hundred thousand because there's a restriction there. If 15% of the unrestricted pledges are not going to be collected. Take 15% of 200,000 credit allowance for uncollectable pledges, 30,000 and credit unrestricted revenue or support 170,000.

So when they asked me here at the bottom, what is unrestricted revenue or unrestricted support? The answer is date number support is public support gifts, bequests pledges specialists. So the answer is D watch out for restrictions and remember, pledges are recorded at their fair market value and recorded as revenue in the year.

The pledge is made. Number seven, a voluntary health and welfare organization received a cash donation in year one from a donor specifying that they can't use the money until year three. It's a time restriction. The cash donation would be accounted for is what answer its revenue in year one member restricted revenue.

When money's restricted, it's recorded as revenue immediately when you collect it, or even when it's promised, when it's pledged. So that would be revenue right away in year one. That concludes our discussion of nonprofit organizations. Don't fall behind, keep up with your studying and I'll see you in the next FAR CPA Review class.

Welcome back in this, our last class. I want to share a few final thoughts with you. And the first thing I'd like to get into is how you time the FAR CPA Exam. And I get into this because. How you tie the FAR CPA Exam is a critical party of get performance. And let's be honest in any big exam like this. One of the things that's being tested is what kind of exam taker you are.

It's unavoidable. And my point is good exam takers, which is what I want you to be. Of course, go to exam takers, have a game plan, good exam takers. Think about how they're going to time the FAR CPA Exam long before they take the test. As I say, they have a game plan. Bad exam takers, get into the test and react to it.

That's what we want to avoid. Now. Timing is particularly critical with financial accounting and reporting because I really believe of the four parts of the FAR CPA Exam, financial accounting and reporting timing is the tightest, this sort of feedback you get from students. And let me get right to it. The big danger in financial accounting and reporting is that a student will not want to not monitor the time carefully, fall behind in the multiple choice so that when they get to the last test lit with the simulations, they're behind their time.

And that makes the simulations infinitely more difficult. If you're pressed for time, that last teslot where they have the simulations becomes a much bigger nightmare. So since it's so critical to have a game plan, let's think about a game plan. I suggest this. We know when you start the FAR CPA Exam, you're going to have to deal with three multiple choice Teslas.

I say this plan on spending no more than 50 minutes on each Tesla, that's going to be your game plan. 50 minutes on each multiple, multiple choice Tesla. So if you work it out, Tesla, number one, he's got 30 multiple choice in it. 50 minutes. It's about 1.6 minutes, a little bit more than one and a half minutes per question.

10 questions. Every 16 minutes, basically. That's the pace you're working. And I don't know how that pays sounds, but it's a fairly rapid pace, but. You're not trying to tie in each question. You don't have to time each 10. No. The real game plan is at the end of 50 minutes. I'm done with the first Tesla at the end of another 50 minutes.

I'm done with a second Tesla. So another 30 mobile, multiple choice are done at the end of the third Testament. I'm done at the end of 50 minutes. Let me ask you this. What I guess on some questions if I had to, so that I'm done after 50 minutes. Yes, I would. Yes, I would. You've you have to stick to this guideline.

That's going to be your game plan and you're going to stick to it. Remember, there are experimental questions in the test. There are questions that they're trying out for future exams. They're not worth anything. You don't know which ones they are, you know, your Guinea pig that day. You know that they're testing questions out on you.

So the ultimate insult would be to get all caught up in a mobile choice, spend 10 or 15 minutes on it. And even if you get the answer, it's just not worth anything. If it's an experimental question, doesn't even count towards your score. That's the ultimate insult. So if you were in that test and you see some question that, gee, I don't remember Bob talking about this.

I don't remember this coming up in the homework. I've never seen anything like this before. No, what you do with that question, you guess, and you move on now. Obviously I don't want guessing to get out of control, but Pieta guests on a few questions because I had to so that I don't go past 15 minutes, but the first Tesla and I don't go past 50 minutes with a second desolate and I don't go past 50 minutes, but the third Tesla, that's my game plan.

And I stick to my game plan. So if you add it up, you see what we are. Financial is a four hour exam. We have 240 minutes to play with. If we spend 15 minutes on each of the first three, testlets with used 150 of those minutes. That means when I opened the final Tesla with a simulation, I have 90 minutes remaining.

And that's really the game plan. When you open that last test live, I want you to have at least 90 minutes remaining a little bit more would be great, but no less than 90. Now let's get into the last Tesla. You open up the last Tesla. There are seven simulations. One of those simulations will be a research question.

The other six will be larger accounting type problems. Perhaps schedules you have to fill in text. You have to read anything is possible. So you've opened up that last Tesla. You have 90 minutes at least 90 minutes and no less than 90 minutes remaining. So think how that works out. You start with a research question.

That's what I would do. Start with a research question. You spend no more than say five or six minutes on the research question. So that leaves you 84 minutes for the remaining six testlets, which are again, larger accounting problems. That means you have 14 minutes for each of those simulations. You stick to that guideline as well.

Don't get up. You have your timing. Doesn't stop. Cause you were in the last Tesla. You don't want to spend more than 14 minutes on each of the remaining six simulations. Now another point, does it matter what simulation you do first again? I'd like you to do the research question first, but beyond that, does it matter which one you do next?

It does matter. It matters a lot. There's something else I want you to do in the last Tesla before you work on the last. Six testlets excuse me. The last six simulations before you work on those, I want you to scan them over. I want you to just quickly look at each one, get a sense of what each one is about.

Maybe the first is on consolidations, maybe the next one's on inventory, whatever, but you scan over the remaining six problems

and I want you to do an evaluation. I want you to divide them into three categories. The two that you feel the best on. This is a very personal thing. Maybe you feel really good on leases. Maybe you feel really good on consolidations it's individual, but you look at those remaining six simulations and you isolate them into three categories.

The two that you feel the best on the two that, you know, from the Mrs material you're very comfortable with, they don't look that bad. It looks like I'll be able to handle those two really well. That's the best category. Then the two of you feel middle of the road on, they're not your best, but they're not your worst.

You're in the middle somewhere. And then the two that scare you, the two that you're sort of dreading that you have to do. All right. So once you've decided how they break out, once you break them into those three categories, which ones do you do? First, the ones you feel best on start with the ones you feel best on.

Part of this thinking is that you get the grading points, you know, you can get got to get those in your pocket before you deal with more difficult things. So you get those first two done that you feel best on. Now, what would you go to the ones in the middle, get those next two done. And then finally, you're going to finish the FAR CPA Exam with the two that scare you the most.

And you do a final breakdown there as well. Look at those final two. When you get into the worst category, the final category decide the one you feel absolutely the worst on do the other one. You got the other one done. In other words, the thinking is if time runs out on the, on the test, you should be working on the thing you feel the least comfortable with.

When time runs out all the grading points that you were comfortable with, all the points you knew you could get. You got those long ago, they're in your pocket, time runs out in that exam. You're working on what scares you, what you feel the least comfortable with now. You know what I hope, I hope you get the whole exam done.

And time does not run out on you. You get the whole thing done time. Didn't turn out to be much of an issue. You got the whole thing done. You had a few minutes left over. That would be ideal, but it doesn't necessarily work like that. And if time does run out for you, I want you to be working on what scares you the most, this really matters.

And I want to make sure that you build it into your game plan because good exam takers have a game plan. This is all thought through before you get there and you stick with it. I really want you to do that. There's another thing I worry about with my students, and that is that. There's a trap with the CPA exam that a lot of students fall into and that trap is they don't take the test until they feel they're ready.

I've got to warn you against that. Don't do that. Don't wait until you feel ready. Cause you're never going to feel ready with an exam like this with this much material is you always feel a little unsure. This, this amount of material keeps you off balance. You never feel like, yes, I'm ready to tackle this thing.

That feeling never comes. So don't wait for it. What you need to do with an exam like this is schedule it, set a deadline and stick to it. Give yourself at least a week to cram. I don't think you need more than a week to cramp. That's another, that's another thing I hear from my students. I hear some students talk like, Oh, I'll need weeks.

No, that's too much. No, you don't need weeks of cramming. You know, try this once. Try going to a library, you know, get out of your house. If you try to do this in your house, the phone will ring. The TV will be on. It's not the same. Try to, you know, go to a library, put one good solid day in, you know, good six, seven hours.

You'll be amazed. What you can, you can accomplish in a day like that. You don't need more than a good one. Solid week of cramming. Now, you know, if you can't get out of work, you know, people have different situations. Maybe you might need a little bit more than a week if you're working long hours, something like that.

But assuming that you're not swamped with work, that you can hopefully, maybe even take a couple of days out of work, you don't need more than a week to cram this material. So give yourself about a week or so Graham set the deadline and then just go in and give it your best shot. That's all good things happen.

So don't, don't talk yourself out of it. And as I say, don't wait till you feel ready. That just, that's something that will cause you to just keep postponing it. And that's not good for you. The best thing for you is to schedule it and stick to the schedule. And that's what I certainly want you to do. I know you want to get this FAR CPA Exam out of the way and from all of us at the bisque review.

We want to wish you the best of luck on the FAR CPA Exam. Do a good job.


jeff-elliott-cpa-ninja-cpa-review-another-71
Jeff Elliott, CPA (KS)
NINJA CPA Review

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