CPA Exam – FAR with Accurate
Solutions
Cash - ANSWER-Money that is FREE and CLEAR and available to be spend in current
operations.
Not Cash: - ANSWER-Security deposits & bond sinking funds
Three-Month Rule - ANSWER-Highly liquid securities with ORIGINAL maturity dates of
three months or less are treated as cash.
Bad Debts - Direct Write-Off Method - ANSWER-- No entry for bad debts until customer
actually defaults.
- At default, the cutomer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - ANSWER-Income Statement Approach
Balance Sheet Approach
Income Statement Approach - ANSWER-- Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: - ANSWER-Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach - ANSWER-- Estimate of bad debt expense is based on the
balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected - ANSWER-Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - ANSWER-- Assignment of A/R normally is done with
recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - ANSWER-- With or without recourse.
Pledging A/R - ANSWER-- Use receivables as security for a loan
, - Requires footnote disclosure
Noninterest-Bearing Notes - ANSWER-APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year,
there is no requirement to impute interest to that note.
Investments - ANSWER-- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - ANSWER-- Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Trading Securities - ANSWER-- Equity or Debt securities held primarily for sale in the
near term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement
Available-for-sale Securities - ANSWER-- Debt or Equity securities not classified as
either HTM or Trading
- Debt is classified on BS by maturity date
- Equity securities are classified by mgt's intent
- Carried on BS at aggregate FMV
- Unreal G/L go directly to SH equity (other comprehensive income)
Derivatives - ANSWER-Investment that derives its value from something else (asset or
liability)
Hedging - ANSWER-Strategy of investing in a derivative to counteralance the potential
loss from another security or transaction
Non-Hedge Derivatives - ANSWER-- Record on BS as asset or liability at FMV
- Report unrealized G/L on IS
Fair Value Hedge - ANSWER-Protects against potential loss from the change in an
asset's or liabilities's FMV
- Record on BS as asset or liability at fair market value
- Report unrealized holding G/L on IS
Cash-Flow Hedge - ANSWER-Protects against potential loss from an asset's or
liability's future cash flow
- Record on BS as asset or liability
- Unreal G/L depend on whether hedge is effective
Solutions
Cash - ANSWER-Money that is FREE and CLEAR and available to be spend in current
operations.
Not Cash: - ANSWER-Security deposits & bond sinking funds
Three-Month Rule - ANSWER-Highly liquid securities with ORIGINAL maturity dates of
three months or less are treated as cash.
Bad Debts - Direct Write-Off Method - ANSWER-- No entry for bad debts until customer
actually defaults.
- At default, the cutomer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - ANSWER-Income Statement Approach
Balance Sheet Approach
Income Statement Approach - ANSWER-- Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: - ANSWER-Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach - ANSWER-- Estimate of bad debt expense is based on the
balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected - ANSWER-Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - ANSWER-- Assignment of A/R normally is done with
recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - ANSWER-- With or without recourse.
Pledging A/R - ANSWER-- Use receivables as security for a loan
, - Requires footnote disclosure
Noninterest-Bearing Notes - ANSWER-APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year,
there is no requirement to impute interest to that note.
Investments - ANSWER-- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - ANSWER-- Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Trading Securities - ANSWER-- Equity or Debt securities held primarily for sale in the
near term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement
Available-for-sale Securities - ANSWER-- Debt or Equity securities not classified as
either HTM or Trading
- Debt is classified on BS by maturity date
- Equity securities are classified by mgt's intent
- Carried on BS at aggregate FMV
- Unreal G/L go directly to SH equity (other comprehensive income)
Derivatives - ANSWER-Investment that derives its value from something else (asset or
liability)
Hedging - ANSWER-Strategy of investing in a derivative to counteralance the potential
loss from another security or transaction
Non-Hedge Derivatives - ANSWER-- Record on BS as asset or liability at FMV
- Report unrealized G/L on IS
Fair Value Hedge - ANSWER-Protects against potential loss from the change in an
asset's or liabilities's FMV
- Record on BS as asset or liability at fair market value
- Report unrealized holding G/L on IS
Cash-Flow Hedge - ANSWER-Protects against potential loss from an asset's or
liability's future cash flow
- Record on BS as asset or liability
- Unreal G/L depend on whether hedge is effective
