"If a taxpayer dies before total cost of the annuity is recovered, unrecovered cost is allowed to be deducted as a miscellaneous expense on the taxpayor's final tax return."Lol.
Sunday, February 13, 2011
Started studying for REG...
Skipped ahead to federal taxation of individuals (since it's the most heavily tested), and here's a quick tip on reporting annuities:
Sunday, February 6, 2011
A quick basic EPS calculation
Remember with basic EPS calculations to subtract dividends from preferred stock when they are cumulative, whether they're declared or not. Here is a problem out a practice book to illustrate:
The EPS equation goes like this:
The problem has a bunch of extra information, but basically we need Net Income ($200,000) and Preferred Dividends ($16,000 = 8,000 * $20 * 10%) for the numerator (top) and # of shares outstanding (25,000) for the denominator (bottom). When you plug those numbers into the equation above, you get $7.36, answer b. If you didn't subtract preferred dividends from net income, then you would have arrived at the sucker answer of d., with an EPS of $8.00.
The math here is simple, the tricky part comes in knowing to subtract cumulative preferred dividends, even though none were declared. The stuff about convertible bonds would have been relevant if the problem asked for diluted EPS, instead of basic.
SFAS No. 128 provides all the guidance you'll want on EPS. For further guidance SFAS 128 was amended by SFAS 150 and 160.
During the current year, Dan's Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into thirty shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Dan's basic earnings per share for the current year?
a. $3.38
b. $7.36
c. $7.55
d. $8.00
The EPS equation goes like this:
| EPS = | Net Income – Preferred Dividends Weighted Avg. Common Shares |
The problem has a bunch of extra information, but basically we need Net Income ($200,000) and Preferred Dividends ($16,000 = 8,000 * $20 * 10%) for the numerator (top) and # of shares outstanding (25,000) for the denominator (bottom). When you plug those numbers into the equation above, you get $7.36, answer b. If you didn't subtract preferred dividends from net income, then you would have arrived at the sucker answer of d., with an EPS of $8.00.
The math here is simple, the tricky part comes in knowing to subtract cumulative preferred dividends, even though none were declared. The stuff about convertible bonds would have been relevant if the problem asked for diluted EPS, instead of basic.
SFAS No. 128 provides all the guidance you'll want on EPS. For further guidance SFAS 128 was amended by SFAS 150 and 160.
Tuesday, January 18, 2011
Percentage of completion method, a practice problem from a CPA book
This is an old problem about the percentage-of-completion (p-o-c) method that I have seen in two different books I'm studying out of for the FAR, and it goes like this:
The question is asking us to calculate 2011 Profit. Normally profit for a construction contract calculated under the p-o-c method would be calculated using this formula:
It may seem scary, but this is the easy way to calculate profit under the p-o-c method. Unfortunately there isn't enough information to use this equation, so we have to calculate 2011 profit indirectly.
Under the p-o-c method, three things affect the Construction in Progress (CIP) account: 1) to record accumulated costs, 2) to record recognition of interim revenue and expenses, and 3) to close the CIP and Billings account at the completion of the project. In this problem we only have to worry about 2): recording recognition of interim revenues and expenses. Expenses and revenues both get debited to CIP. Here's a t-account:
We don't really care about x0 in this problem, but for the record, it's $17,000. It's x1 we're after, and that's $50,000 (364,000 – 192,000 – 122,000). Your answer is a.
1. Some Co. recognizes construction revenue and expenses using the percentage-of-completion method. During 2010, a single long-term project commenced, which concluded at the end of 2011. Information on the project follows:
2010 2011 Accounts receivable from contract $100,000 $300,000 Construction expenses 105,000 192,000 Construction in progress 122,000 364,000 Partial billings on contract 100,000 420,000
Profit recognized from the long-term construction contract in 2011 should be:
a. $50,000
b. $108,000
c. $128,000
d. $228,000
The question is asking us to calculate 2011 Profit. Normally profit for a construction contract calculated under the p-o-c method would be calculated using this formula:
| Profit = | Σ CTD Σ CTC | (Contract price – Σ CTC) – PY Profit |
Where:
Σ CTD is Total Costs To Date;
Σ CTC is Total Expected Costs To Completion;
Contract Price is the total price of the contract;
and PY Profit is the profit recognized in Prior Years.
It may seem scary, but this is the easy way to calculate profit under the p-o-c method. Unfortunately there isn't enough information to use this equation, so we have to calculate 2011 profit indirectly.
Under the p-o-c method, three things affect the Construction in Progress (CIP) account: 1) to record accumulated costs, 2) to record recognition of interim revenue and expenses, and 3) to close the CIP and Billings account at the completion of the project. In this problem we only have to worry about 2): recording recognition of interim revenues and expenses. Expenses and revenues both get debited to CIP. Here's a t-account:
2010 Expenses | 105,000 | |||||
2010 Profit | x0 | |||||
12/31/2010 Balance | 122,000 | |||||
2011 Expenses | 192,000 | |||||
2011 Profit | x1 | |||||
12/31/2011 Balance | 364,000 | |||||
We don't really care about x0 in this problem, but for the record, it's $17,000. It's x1 we're after, and that's $50,000 (364,000 – 192,000 – 122,000). Your answer is a.
Thursday, October 7, 2010
The FAR section: oh the agony
So tomorrow will be the one week anniversary of when I took the FAR exam. There is a lot to learn between passing the BEC section in the summer and taking the FAR section a week ago. The contrast between the two sections is so great, you may as well obtain two different certifications.
First off, time played a major role. To say I managed my time poorly is a little bit of an understatement. The BEC section is only 2.5 hours long - the shortest of the four exams. Going into it, I was very time-conscious and it paid off. I probably had a good half hour at the end to check over the last testlet. The FAR section, on the other hand, is 4 hours long - only the Auditing exam is longer at 4.5 hours. With three testlets (of 30 multi-choice each) and two simulations, you're asked to do a lot in that amount of time. Whereas I should have been spending maybe 60 to 90 seconds on a multiple choice problem, I was spending up to 5 minutes on a single problem. By the time I was finished with the 3rd testlet, I only had 45 minutes to complete the two simulation problems.
Upon this realization, I was not only fighting the clock, I was fighting myself. I was flustered and panicked. I tried taking a deep breathe and relaxing, so as to fight the anxiety that had set in, but it was a futile effort. I tried guessing the accounts in the debits and credits that should have been the journal entries and skipped on calculating the amounts. For the Communication tab, I fired off two quick sentences summarizing something that vaguely related to what the mock-client wanted to know and left it at that (something I would never do to a real client).
What I learned from the whole thing was not just how important knowing the material is, but how valuable time is during the exam. The CPA exam isn't just testing if you know the material, but how well you know the material.
The only redeeming factor in all this is knowing that the three testlets got progressively more difficult as I took them. This is a good sign since the CPA exams are adaptive. How well you do in the earlier testlets determines how difficult the later testlets are, and the more difficult testlets weigh more for correct answers. Even assuming all of this, I have to expect to take it again 2011. Given my non-calculations of journal entries in the simulations and poor communication in the written section, I am prepared to see a grade of less than 75 when the grades are released in December.
Moving on, I have scheduled the Audit and Attestation (AUD) section for mid-November. This time will be different. For the AUD section, which is 4.5 hours, I will not take time for granted.
Happy studying.
First off, time played a major role. To say I managed my time poorly is a little bit of an understatement. The BEC section is only 2.5 hours long - the shortest of the four exams. Going into it, I was very time-conscious and it paid off. I probably had a good half hour at the end to check over the last testlet. The FAR section, on the other hand, is 4 hours long - only the Auditing exam is longer at 4.5 hours. With three testlets (of 30 multi-choice each) and two simulations, you're asked to do a lot in that amount of time. Whereas I should have been spending maybe 60 to 90 seconds on a multiple choice problem, I was spending up to 5 minutes on a single problem. By the time I was finished with the 3rd testlet, I only had 45 minutes to complete the two simulation problems.
Upon this realization, I was not only fighting the clock, I was fighting myself. I was flustered and panicked. I tried taking a deep breathe and relaxing, so as to fight the anxiety that had set in, but it was a futile effort. I tried guessing the accounts in the debits and credits that should have been the journal entries and skipped on calculating the amounts. For the Communication tab, I fired off two quick sentences summarizing something that vaguely related to what the mock-client wanted to know and left it at that (something I would never do to a real client).
What I learned from the whole thing was not just how important knowing the material is, but how valuable time is during the exam. The CPA exam isn't just testing if you know the material, but how well you know the material.
The only redeeming factor in all this is knowing that the three testlets got progressively more difficult as I took them. This is a good sign since the CPA exams are adaptive. How well you do in the earlier testlets determines how difficult the later testlets are, and the more difficult testlets weigh more for correct answers. Even assuming all of this, I have to expect to take it again 2011. Given my non-calculations of journal entries in the simulations and poor communication in the written section, I am prepared to see a grade of less than 75 when the grades are released in December.
Moving on, I have scheduled the Audit and Attestation (AUD) section for mid-November. This time will be different. For the AUD section, which is 4.5 hours, I will not take time for granted.
Happy studying.
Thursday, September 30, 2010
Capitalizing software costs
On the date of the balance sheet, software should be valued at the lower of: unamortized cost OR net realizable value. 'Unamortized cost' of software is similar to 'carrying amount' of depreciable assets. Take the total software cost and divide it by the economic life (useful life), and that is your amortization expense. Unamortized cost is simply original cost minus accumulated amortization. SFAS 142 tells all about intangible assets, while SFAS 86 talks about software development for sale or lease.
Impairment losses
For long-lived assets, you test impairment by comparing undiscounted cash flows of the asset to the carrying amount of the asset. If undiscounted cash flows is less than carrying amount, recognize impairment. The asset must now be reported at fair value. So the impairment is the carrying amount minus the fair value of the asset. You would think it would be carrying amount minus undiscounted cash flows, since that's what you originally compared to determine whether to recognize an impairment in the first place, but it's not. It's seems inconsistent; it's like saying since undiscounted CF < carrying amount, you get to subtract FV from carrying amount. But that's the way SFAS 144 goes. Just remember you have to report the asset at fair value on the balance sheet.
Capitalizing interest
Let's think philosophically for a moment: what is capitalized interest? Well capitalizing is when something is reported as an asset instead of as an expense. And interest is of course the charge for borrowing money. So capitalizing interest is when a company gets to report the charge they pay on debt (interest) as an asset on the balance sheet instead of an expense on the income statement (capitalize). Only certain situations allow this sort of accounting treatment, and they are addressed in SFAS 34 (paragraphs 9 and 10).
Actual or avoidable interest, that is the question...
As SFAS 34 says, the amount of interest to capitalize is the lower of: actual interest OR avoidable interest. Actual interest is easy: it's the actual interest rate a business pays for capitalizable debt. Avoidable interest is a little tricker because it's calculated. It's the average accumulated expenditures times the incremental borrowing rate. Remember that in accounting, averages are calculated as the beginning balance plus the ending balance divided by two. Also remember to pick the lower of the two.
Remember that whichever rate you use, you can only capitalize up until the moment that asset is ready for use. Once it goes into use, starting expensing that interest just like all other interest.
Actual or avoidable interest, that is the question...
As SFAS 34 says, the amount of interest to capitalize is the lower of: actual interest OR avoidable interest. Actual interest is easy: it's the actual interest rate a business pays for capitalizable debt. Avoidable interest is a little tricker because it's calculated. It's the average accumulated expenditures times the incremental borrowing rate. Remember that in accounting, averages are calculated as the beginning balance plus the ending balance divided by two. Also remember to pick the lower of the two.
Remember that whichever rate you use, you can only capitalize up until the moment that asset is ready for use. Once it goes into use, starting expensing that interest just like all other interest.