 Hello and welcome to the session. This is Professor Farhad and this session we would look at an actual CPA simulation Why do I say actual because this CPA simulation is released by the AI CPA? The AI CPA is the organization that administer the CPA exam specifically this simulation will be a far simulation 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 one thousand six hundred plus accounting auditing finance and tax lectures that cover all topics on the CPA exam I do also cover hundreds of questions of CPA Questions on my website. You will have access to additional materials such as PowerPoint slides notes true false multiple choice and 2000 plus CPA questions So I'm gonna go ahead and pull the The CPA simulation and we'll work on it together. Okay, let's take a look at this CPA simulation This CPA simulation initially it looks very intimidating But you're gonna see that once we boil it down to it boils down to one simple concept that you need to learn Before you set for the exam. So this is another opportunity to remind you to just by answering multiple choice questions That's not gonna be enough for you to pass the exam. You have to understand the concept Although you might answer a Multiple choice question by mistake correctly when it comes to the simulation if you don't have understanding and what I mean by understanding It doesn't mean how it does it has to be difficult You just have to understand the concept and once you understand the concept you can easily easily answer these Questions actually they are sometimes easier than the multiple choice. So basically in this problem Let's go ahead and see what we are giving you are giving exhibits Letter from outside legal console, let's take a look at it This is we're gonna revisit them first. Just I want to show you you have you have a letter of credit as well. We just This is a letter of credit will look at it You have an email regarding a loan guarantee basically an email between two individuals email regarding letter of credit letter from the state health and The safety agency that's fine. That's fine. We have all of those. Let's see what we are at what we are being asked to do We're a company is reviewing the accounting and disclosure requirement for its significant guarantees Commitment and contingency including litigation as of December 31st year three So the dates are very important The financial statements are expected to be to be to be available to be issued February 10th year for So the balance sheet date is December 31st year three The report will be issued February 10th year four. So dates are very important here Use the following information and the exhibit above to determine the amount if any to be recognized and whether disclosure is required and financial statements as of and for the year ended December 31st year three unless otherwise specified assume that no amount related to these guarantees commitment and contingency including litigation Have been recognized in the financial statements as of December 31st year three So simply put they're giving you a bunch of information about Contingencies commitments loan guarantees and they want you to know they didn't do anything about them They want you to tell us whether you should disclose disclose them and whether you should recognize Any amount simply put this is based on a contingent losses. When do you recognize contingent losses? Remember we have three probabilities You know what I think I should I should go over the rules real quick because if I go over the rules It's it's gonna trigger You know, it's gonna help you feel a little bit more comfortable when you get a problem like this So all you have to do is this When it comes to loss contingencies here what you have to do the company will have to determine They have to estimate the probability of losing. So there is basically to have three probabilities remote possible and Probable Okay, now you don't want to be doing this on the exam day I'm just telling you what you need to do if the if the contingency is remote No disclosure. We don't do anything. We don't even disclose. So if you're on disclose, we don't recognize So basically if the if we said there's no there's the case without a merit or there's no chance of losing We don't even disclose. So the possibility is remote The if the possibility is remote if it's possible we are going to lose if it's past possible Possible we will disclose now. How do you know it's possible from the language? They'll tell you it's possible if you see the word probable then you have to be very careful when it's probable okay You have to determine whether we know the dollar amount or we don't know the dollar amount if we it's a probable And we don't know the dollar amount. We don't know the we cannot estimate the loss. We simply disclose So when do we accrue? Well, if it's probable and we know the dollar amount we disclose Obviously we have to disclose and The crew so this is what you need to know for this for this simulation once you know these rules Which I think very simple rules it takes five ten minutes to learn those rules then you have to apply them So that's why understanding is extremely important I cannot emphasize this enough and that's my philosophy when it comes to the CPA exam You have to understand you really have to know you have to take your time You cannot just wing it because the way they ask the questions they test your understanding not your memory anymore, okay so For each graph guarantees commitment and contingencies including litigation in the table below so they have you know We have we're gonna have to deal with one two three four five Six different things okay in column B indicate whether disclosure is required by clicking in the associated cell and selecting Yes, or no is appropriate. So for this question We're either we're either have to answer yes or no So it's either yes or no for the first question whether we disclose or Or we don't have to disclose and in C If we have an asset or a liability if we have a liability put the liability in parentheses be careful basically the amount and if there's none you put zero enter zero That's what they're asking you So the first thing is being familiar with those with those simulation on the exam day It will not intimidate you so when you look at something like this for the first time It's a little bit intimidating but as you look at them and as you as your confidence level go up before the exam They're not as intimidating as they are So let's go ahead and dive into the information The first thing is they're talking about a copy of copyright infringement now What you have to do you have to go up to these exhibits and look for information for the copyright for the copyright infringement to determine based on our rules do we have to disclose yes or no and If we don't have to disclose obviously We don't have to do anything if we have to disclose we have to determine whether we have to a crew Liability a crew ally ability. Okay. It's a copyright infringement. Let's start with the letter from the outside legal counsel Let's see if there's anything about this copyright infringement The following is an update on four matters for which we retain we retain to represent rev So this letter from from a and B LLP, which are the our lead console. Okay, so Rev is a defendant and a six million copyright infringement. So we at least now we we zoomed in on what we need to do Rev is a defendant and a six million copyright infringement lawsuit brought by Beach Company in October year three Okay, so it started in October year three. So it might be relevant to us Rev we offered Rev has has offered 1.5 million to settle the lawsuit But Beach made a counteroffer of five million The case is not expected to go to the trial and we believe that the loss is probable Hold on. This is a key word. Did you tell you at least here? You have a disclosure. So immediately now disclosure is yes Now we need to know if we can estimate the loss as of the date of this letter negotiation are ongoing Although we cannot determine the exact amount of the loss We believe that the reasonable amount of the loss is between two million and five million No amount within this range is more likely outcome than any other outcome Okay, this is basically enough for me to answer the first question Very simple straightforward. That's it. I mean you can scan the other information make sure there is no updated information But if this letter January 31st, look this letter January 31st 10 days before we're gonna issue the report That's practically the latest information. The first thing we already determined the answer is yes So let's go ahead and the answer the answer is yes So for as far as this we're gonna have to disclose. That's it. You you you you gain some points the question is do you have to Book a liability and the answer is yes, you have to book a liability Here they're giving you an estimate two million and five million and they're saying There is no No amount within the relevant range is more likely than not now here. You are not told you are following IFRS You are told you are following gap if you're following gap and there is no amount That's more likely outcome than any other amount. You'd go with the lower amount Therefore you would book a liability of two million now if it was IFRS you would you would find the average Therefore remember also to put the liability in parentheses. You don't want to do all this work then show them the Answer incorrectly. That's it That's it. It should take you like two minutes once you look at this. It's probable. Definitely. I'm gonna disclose and There's an estimate and we're gonna go with the lower estimate because it's it's no amount within this range It's more likely than not if there's any amount more likely you would use that amount, but there's not so we're done with this The second the second question is about loan guarantee So let's see if there's anything in the in the legal letter about the loan guarantee on September 15 product liability I'll skip this on October 15 ref facility sustained significant damage. That doesn't look like a loan guaranteed and Something from the health and safety. I closed this exhibit. I don't need it. So I'm looking for the exhibit that deals with loan guarantee Email regarding loan guaranteed. Let's see what we have here. Okay now We have an email and we have to interpret the email basically to determine what happened. We have two email We have two individual replying. So you want to make sure you start with the first email They're both on January 16th January 16th year for January 16th year for which is after year end and This email was at 945 and this email was at 1150 a.m. So we're gonna start with this email obviously just I want you to understand how you approach this That's why because some people don't pay attention to these things. You have to pay attention. So controller Raff company has fully guaranteed. So this is to to ref company and this is from Birko the CFO at Birko. Okay, chief financial officer of the other company Raff company has fully guaranteed our Outstanding half a million loan from Sunnytown Bank due to our deteriorating Deuteriorating financial condition. We were unable to repay the loan which was due on December 31st year 3 Okay, on January 15th year 4th Sunnytown Bank deliver us a notice of default in accordance with the terms of our loan as a result of our default on the loan and our Enability to pay it's probable that Sunnytown will require ref to perform as guarantor now here You have to know if you guarantee the loan of others Okay, the minimum you have to do is to disclose so the minimum so immediately once you guaranteed the loan I'm gonna close this and say yes to the disclosure I'll tell you why so if you guaranteed the loan you always have to disclose that You always have to disclose that now the question is Whether you had to book a liability. Well, guess what? Do you think you have to book a liability? Of course, you're gonna have to book a liability. Okay, but the question we're gonna determine how much okay? So simply put you'll always disclose when you have a loan now. Do you have to book a liability in for how much? Let's see what the response was accounting manager We just receive a notice from the cup from their company and unrelated third party with respect to our long guarantee We provided for the company at the inception of the guaranteed. We recognize a $150,000 liability for this guaranteed. Thank you now Okay, they said we upfront we recognize 150 as a liability But now the whole amount is responsible for the whole amount and this is before we are issuing the financial statement So notice we know about this January 16th. Okay, so what does that mean? We have to book a liability for the whole amount now. Why because we are responsible For the half a million. Therefore, it's a liability. We're aware of it before the issuance of the report We have a liability. We have to recognize it. We are required to perform now We are required to perform. We are responsible for half a million In my opinion pretty straightforward Let's look at property insurance claim. I believe I saw something in the Exhibit from the outside console about this issue. Let's come come up here So it was about property insurance claim So this is about product liability It looks like this that look it looks here. Okay property insurance claim on October 15th year three so with the year That's relevant for us One of ref facility sustained significant water damage. Okay at your request We can we contacted the property insurance at your request means the lawyer is speaking on your behalf We contacted the property insurance carrier to check on the status of the 2.5 million claim that ref filed on November the 15th year Three so we filed a claim a month later to get 2.5 million on December 27th year three The property insurance carrier acknowledges that the laws appear to be covered by the insurance policy However, the property insurance Stated that its adjuster is still reviewing the claim and does not expect to settle it until March 4 The property insurance Further indicate that any payment is subject to one hundred and twenty five thousand dollar deductible including in the property insurance policy Okay, that's fine. Okay now Do you have to disclose something like this? You're not losing you're basically you're expecting to receive money. Yes, you can disclose if you want to disclose You can disclose so yes, you can disclose now Why do I say yes, you can because if you don't disclose it's not a big deal, but If they're saying you yes or no, you have to say yes, okay, but you I mean in the real world Let's assume you did not disclose it. That's good news. It doesn't matter. You didn't really you're not It's okay to hide hide to hide good news in a sense that you're not really cheating anyone But it's better to disclose it now. We are waiting to receive money Do you do you accrue anything if you're waiting to receive money and the answer is never? Okay, you're gonna disclose it but do not accrue again Do not accrue some sort of a receivable that you're gonna be getting this money So the accrual is zero. You don't do anything. So simply put accrued gain. There's no such thing as accrued gain You don't accrue game. Okay, if you're waiting to receive the money wait until March you receive the money And you'll book it you debit cash credit whatever insurance proceeds whatever you want to credit Okay, but you do not book it before year-end. So there's no such thing as Contingency gain. Okay or accrued gain. Okay Good now we need to deal with the penalty from the state from the state Health and safety agency. So we have to find out, you know information about this topic. So let's go up here and I do believe this is the long guarantee letter from the state health and and safety agency Let's take a look at this letter and It's dated February 5th. So this is five days before we issue the financial statement This is as good as it's gonna get. Okay, this is letter from this state agency The letter serve as a notice that you are being assessed the fine of 150,000 related to the violation of the state health codes that were identified on November 28th year 3 So it's relevant for us at your manufacturing facilities located blah blah blah our follow-up inspection on December 15th Indicate that the violation were appropriately remediated and were no outstanding code violation at that time. That's fine Guess what? Are we responsible for this 150? Yes, they told us they assessed the fine and They find the problem and they now we fixed it. So we still have to pay 150 Do we have to accrue this and do we have to disclose? Sure, we have to disclose the loss is definitely 100% Guaranteed that we're gonna lose therefore. We're gonna have to say yes For the disclosure do we have to accrue it? Of course, we have to accrue a loss because it happens But it happens during year 3. So that's 150 Now we move to product lawsuit liability. We have to find out where do we have information about this topic? So let's go up here Looks like the letter from the outs outside console. There was something about this. So let's go back here Okay on September 15th and September 15th year 3 6.5 million product liability lawsuit was brought against our company by a customer who sustained injuries while using one of our product On the date of this letter. We have completed our initial discovery and believe that the lawsuit is without merit What does it mean without merit? No chance. We are going to lose it Just basically they're trying to get money out of us given that the lawsuit lack a merit We believe the possibility that rev will be required to pay any amount We'll be required to pay any amount and the lawsuit is remote. They even give you the keyword remote Companies get sued all the time. So if they say if the lawyer tells you there's no chance a remote possibility You don't even have to even disclose So let alone if once you have the answer is no here the answer is zero here If you don't disclose, obviously, you don't recruit the minimum you have to do is disclose So here because we're not we're not gonna be responsible for anything. So forget about it. There is no liability. Okay Letter of credit. Let's talk about let's look what we have for letter of credit We have letter of credit and email recording letter of credit. So we have to look at both A letter of credit here Issue date 1231. This is from mega bank or this is from the bank Exploration date a year later practically. We have this letter of credit for one year. The beneficiary is the supply company Amount available 1.5 million. So basically letter of credit is when we guarantee the trade of others, okay? What the beneficiary is supply company the beneficiary may present this letter of credit upon providing the following document Documentation within 21 days of the purchase transaction the bill of lading that indicate that the inventory has been properly boarded for Transportation to the applicants address packaging solic packaging slip signed influence Now if you don't know what a letter of credit is then right there, you need to know what that is what this is basically we're guaranteeing That the bank will finance the transaction for supply because we're guaranteeing this okay Please examine this instrument carefully if you are unable to comply with the terms and the condition Please communicate with the applicant to arrange for an amendment. So this is basically what the letter is they could they could We're backing them up for 1.5 million. All right, that's fine. Now. We know what the issue is email regarding the letter of credit Let's see what we have here This is from the Treasury Manager at Traffco to the purchasing agent at Traffco, which is Traffco is the company. So let's let's look at this January 3rd year for so this is basically Post year end in the afternoon. That's fine per your request mega bank issued 1.5 million letter of credit They did December 31st for the purchase from supply company of raw material that are expected to be received in February of year 4 Please let me know if you need any additional information. All right. So basically what happened is we have a letter of credit But as of December 31st there was no activity against that letter of credit if there's no activity We don't really have to do anything in terms of accruing because there's no transaction The question becomes do we have to disclose a letter of credit is very similar to to to loan guarantee So it's very similar to this idea right here Loan guaranteed and what did you say about loan guarantees? If you're guaranteeing someone else you have to disclose minimum You have to disclose. Okay, and since there's no nothing happened. There was no delivery. We're not really responsible for anything Therefore, we don't have to accrue anything. The answer is zero. Okay, so this is basically a simulation now It took me longer than to to to resolve this simulation But on the exam day if you know the rules, you know remote probable possible, you know When do you have to accrue when do you have to disclose then it should not take you that much that much to to complete To complete something like this always. I'm gonna go back to my always. I'm gonna go back to my Website to remind you look all these topics are covered in detail in my intermediate accounting course So if you go to my website, it's not only you have access to the lectures and make specifically intermediate accounting, too You'll have access to PowerPoint slides Notes true false multiple choice. You'll be able to understand this topic very well So when you see that simulation on the exam, you're like bring it on I can do this I strongly suggest you subscribe you study for your CPA one time It's a lifetime investment subscribe invest this money in your career. Good luck, and I'm here to help