 Hello and welcome to the session. This is Professor Farhad in which you would look at CPA questions that deal with the FAR section of the CPA exam. And those questions could be also covered in an intermediate accounting course. And the topics are revenue recognition and expense recognition principle. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lessons, please like them, share them, put them in playlist. Subscribe to the channel, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your accounting courses or to pass your CPA exam. If you want to earn 10 to 15 extra points on your CPA exam and go over 75%, check out my website. I explain the topics in detail in contrast to a review course and a review course, they review the material. I explain the material in depth. I prepare you to take your CPA review course if need be. So check out my website if you are serious about passing your CPA exam. So to illustrate what we want to talk about today is we're gonna be working sample CPA questions to show you how you will be tested about your understanding and knowledge on the CPA exam. The first question reads, according to the concept of accrual accounting, which of the following describe deferral? Now, if you don't know what deferrals are, then you should not sit for the exam yet. And if you don't know what accrual accounting is, you should not sit for the exam is. Remember, we have two types of deferrals and two type of accrual. We have deferral, deferrals, let me just put them right here, revenues, we could defer revenues and we can defer expenses. Those are the two deferrals, revenue and expenses. So let's take a look at the answers and see what we are giving here. The deferral of revenue will occur when cash is received, but not yet recognizable for financial statement purposes. And that answer is correct. Yes, when we defer revenue, when we defer revenue, it will occur when we receive the cash. So simply put, this is what happened. We received cash of $10,000. But the deferral of revenue, when the cash is received, but not yet recognizable for financial statement purposes, simply put, we credit unearned or we can call it deferral revenue, which is a liability. So this is correct. This is a deferral, deferral of revenue. This is exactly a deferral of revenue. Therefore, one is correct. We could take out the B because V is only one is correct. And we can take out D because neither one nor two, we know one is correct. Therefore, we can take out two. Although we have to know now, is two is a correct statement. Is two is correct? C is the correct answer. The deferral typically result in the recognition of a liability or a prepaid expense. The recognition of a liability we already saw in this example here. Yes, the deferral would recognize in the recognition of a liability. Debit cash, credit unearned revenue, which is the deferral of revenue. Does it, is the deferral would lead to a prepaid? And the answer is yes. Same concept. Remember, we have two types of deferral. We have expenses and revenues. Same concept. When we prepay, it's a form of deferral. Let's assume we prepaid $10,000 for some expense. We debit prepaid credit cash. Well, we can also call it prepaid a deferral of expense. All we're doing is prepaid is a form of deferral. Therefore, the deferral will typically result in the recognition of a liability or a prepaid. That's exactly the deferral. Therefore, the answer is C. We have two type of deferral and we have two type of accrual. This is what accrual accounting. Just like we have the deferral, we also have accrual and under accrual we have accrued revenue and accrued expenses. All these topics are covered in my intermediate accounting in detail. Check out my website if you're interested in learning more. ABLE, enter into a royalty agreement with the B company under which ABLE will pay royalty with the assignments of patent for seven years. When should ABLE expense the royalty payment? So when should B expense the royalty payment? That's simply put. You enter into an agreement to pay for royalty. Okay. Do you pay for the royalty? At the commencement date of the royalty agreement. Do you pay? Do you recognize expenses at the beginning? It's seven year and the answer we should know that's not the case. Not when we enter. D, the royalty expense should be the third until the royalty agreement expire. Should we wait until year seven? No, so it's not A and not B. C, in the period the royalty is paid. Is this one we recognize expenses? Do we recognize expenses when we pay them? And the answer is no. We are using a cruel. In the period the royalty expense is incurred and the answer is yes. This is when we recognize expenses. We recognize expenses when incurred. Also recognize expenses when there's a direct matching. For example, when we sell a product and we have the cost of goods sold for that product associated with it, we match the cost with the revenue. And sometime we recognize expenses based on a systematic manner, like depreciation or amortization. And often time we recognize expense as they are incurred. So when do we recognize the expenses? We recognize the expenses as they are incurred. With regard to cash receive in advance, for gift certificate, cash received in advance, basically we are dealing with unearned revenue. That's what we're dealing with. Or the furl of revenue. Now, well, the deferred revenue right there, account would decrease by which of the following. So when would the deferred or unearned revenue decrease? So lapse or expiration of the certificate? Well, yes, if the expiration of the certificate lapse or it expired, then we no longer have a liability, we no longer have a deferral. So one is definitely correct, okay? This is we decrease unearned revenue. So let's assume we have, we sold 10,000, we debited cash, 10,000, and we have deferred revenue of 10,000. And they were all gift certificates. So we sold 10,000 of gift certificate. And let's assume we were so lucky that none of the people that purchased the gift certificate came back and redeemed them. We gave them three months. Well, after three months, what we do is we debit the deferred revenue, 10,000, and we turn it into revenue. Why? Because they lapse or expire because three months later. Therefore, what happened, one is correct. If one is correct, we can take out B, we can take out D. So all we have to know is number two, redemption of certificate. Well, if they redeemed the certificate, we'll do the same thing. If they redeemed the certificate, we debit the deferred revenue and we credit revenue. So one and two are correct. We hope that they lapse and they never show up. So this way we have the money. We don't have to deliver anything, right? That's how it works. With regard to profit recognition from long-term construction contract accounted for on a percentage of completion method. So here we are dealing with long-term construction contract reported on the percentage of completion method. This topic is covered in details in my revenue recognition chapter in the intermediate accounting. Which statement of these is correct? Progress billing impact profit, but cash collection do not, okay? So do progress billing impact profit? When you build the client, as you are doing to work, would it impact your profit? And the answer is no, it doesn't impact your profit. When you build a client, sometimes you build a client even for work before you complete the work. Why? Because you need to buy material. So sometimes you build a client, but you don't do the work. Therefore you didn't recognize any revenue. Therefore progress billing does not impact the profit. So A is out. So percentage of completion method, they have specific rules. Cash collection impact the profit, but progress billing do not. True, progress billing do not. And cash collection do not impact the profit because you're not using cash method. If you're using the cash method, then yes. Cash collection will impact the profit. It's not the case. Both cash collection and progress billing impact the profit recognition. No, cash collection does not, and progress billing does not. So by process of elimination D, neither cash collection nor progress billing impact the profit. And the answer is correct. No, neither cash collection nor progress billing. What impact the profit is how much did you completed? The degree of completion. And how do you measure the degree of completion? Usually most companies use costing, costing, cost to cost. How much did you complete of the work? Thus far, relative to the total cost of the project. And based on that, you could recognize the revenue and recognize the expense, which in turn gives you the profit. Not how much cash you received, not progress billing. Again, this topic is also covered in much, much more in detail. Am I on my intermediate accounting? Check out my website with additional exercises. Only contracting is hired by State of Arizona on January 1st, year 13, to build a section of a new highway. Very typical. The contract will take several years to complete. The sales price is 50 million and the company estimate that the work will cost 44 million. So, so far 50 minus 44, we expect 6 million in profit over the life of the contract. During year 13, 11 million is spent. So notice of the 44, they already spent 11 million. During year 14, another 20 million. They spent another 20 million. And engineers expect that the project would require an additional cost of 15. Then they would now, they expect 15. So notice, one, two, four. Now what happened is by the time they are done, their cost will be 46. It doesn't matter. I'm just showing you that their cost change. Only corporation must use the percentage of completion method to account for the contract. If the buyer has the ability to fulfill its obligation and only has the ability to do what. So yes, so we account for this as a percentage of completion as long as we can complete the project. And in other words, complete the work. We have the ability to complete the work. And we can estimate the degree of completion with reasonable accuracy. And here it seems we are able to, because notice our cost initially was 44 million. That's what we thought. Then after year two, we find out it's 46. It's a still reasonable degree of an estimate. We can estimate within reasonable degree of accuracy how much it's gonna cost us. So we need both. So we use the percentage of completion when we can complete the work. Obviously, if we can't complete the work, there's no reason to use the degree of completion. We're gonna be in trouble. And we can estimate the cost. This is important. Being able to estimate the cost, it's important, the degree of completion with the reasonable accuracy. It doesn't have to be 100%, but reasonable accuracy. And here we are giving that reasonable accuracy. So basically they're giving you all these numbers to ask you, do you know when do we use the percentage of completion? Yes, if I can complete the work and I can estimate with certain accuracy, how much am I going to need to complete the work? Again, to learn more about this topic, the degree of completion, you have to go to my intermediate accounting three. You have to go to my intermediate accounting and under revenue recognition, I have a lot. I'm sorry, I believe it's either two or three, I don't remember which course. And I have lectures, exercises that's gonna help you understand this concept. As always, I would like to invite you to like the lecture, share them. Visit my website if you are looking to study for your CPA exam. You want to pass, you want to invest in your career, get those 10 to 15 extra points. I'm here to help you. Study hard, good luck, and stay safe, especially during those coronavirus days.