 Hello and welcome to this session. This is Professor Farhat and this session we would look at previously used CPA questions that were released recently by the AI CPA. Those questions are the real deal. Those questions appeared on the CPA exam and this is the source, the holy grave of CPA questions. And specifically, these are far questions. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where I park my 1500 plus accounting, auditing, finance and tax lectures. This is a list of courses that I cover, including CPA questions. On my website, you will have access to additional material such as notes, PowerPoint slides, true, false, multiple choice, 2000 plus CPA questions and I have the file for the AI CPA recently released questions which you can download as well. Let's take a look at the first question and as I promise every time I list a question, I will tell you, for example, if you want to go to my learn about this topic, if you're not sure, go to my intermediate accounting playlist chapter three. So this is what this blue thing is all about. The following information pertain to Dash's company utility bills. Period covered. April 15 to May 15, the amount is 5,000, paid on June 1st. May 15 to June 15, $6,000. The bill was paid July 1st. June 15 to July 15, the bill was $8,000, paid on August 1st. The question reads, what is the amount that Dash should report as a liability in its June 30 balance sheet, June 30 balance sheet. Let's take a look at April 16, May 15, the amount was 5,000, it was paid. Therefore, we can cross this out. It was paid. It's not a liability anymore. May 15 to June 15, May 16 to June 15 bill, which was 6,000, it was not paid till July 1st. What does that mean? It means on June 30, this was a liability. So this is 6,000. Then June 16 to July 15, the bill was $8,000, and it was not paid till August. Now we have to be careful here. The bill was $8,000 from June 16 till July 15. So half of the month was in June. Therefore, half of it should be counted on the June 30th balance sheet. Therefore, the liability, the utility liability should be $10,000. $6,000, May 16 to June 15, and half of June 16 till July 15. And this is basically a form of adjusting entry. This is basically, this is why I refer you to chapter three. This is where I covered the adjusting entries. Let's take a look at this question. Under state law, Boka Company may reimburse the state directly for actual employment claims, or it may pay 3% of eligible gross wages. So Boka believes that actual unemployment claim will be 2% of the eligible gross wages and has chosen to reimburse the state. So they chose to estimate to be 2% of gross wages. Eligible gross wages are defined as the first $15,000 of wages paid to each employee. So simply put, the amount that's subject to this tax is only the first $15,000 of wages. Boka had four employees, each of whom earned $20,000 during the year. What amount should Boka report as a crude liability for unemployment claim in its year, in its first, in its year and balance sheet? Well, they paid each individual $20,000, but the only thing that's eligible for the tax is $15,000. So $15,000 times four, we have gross wages of $60,000. We estimate to pay 2%, and this should be $1,200. This is the liability. The answer is A as in alpha. This is an application problem, but it should not take you very long if you know the steps. So here you have to remember they chose 2%, and you have to be careful. Although they paid them $20,000, the state law, it says you only pay taxes on the first $15,000. So although they might pay them $2 million, it doesn't matter. You only pay $15,000 per employee. $15,000, you only pay $15,000, you only pay taxes on the first $15,000 of the employee wages. Let's take a look at this question. This is Chapter 14, Intermediate Accounting. On July 1st, year 7, Dean Company issued at a premium, bound with the due date of July 1st, year 12, five years. Dean incorrectly used the straight line method instead of the effective interest rate method to amortize the premium. Okay? How were the following amount affected by the error at June 30th, year 12? June 30th, year 12 is the bond mature. They're asking us, well, if they use the straight line versus the effective rate, what happened after five years, once the bond mature, it doesn't really matter. The bond carrying value will not be affected because the premium will equal to zero, whether it's straight line or effective rate, and retained earnings will not be affected because if we overstated an income in some years, it's going to be understated another years. The net effect is zero. So the net effect is zero. After five years, whether you use the straight line or the effective rate, the net effect over five years is the same. Therefore, there is no effect. Therefore, the answer is D. Okay? Notice it's by year 12, it doesn't matter. Okay? Let's assume the premium was 3,000. By year 12, the premium is down to zero. Let's assume the premium is 3,000. By year 12, the premium is down to zero. So it doesn't really matter by the end of the life of the asset. Now, in year one, we'll have a difference. In year two, we'll have a difference. In year three, we'll have a difference. In year four, we'll have a difference. In year five, basically, they cancel each other. So the difference offset each others. Okay? Let's take a look at this question. This is basically intermediate accounting chapter 16. On July 1st, Alto Company split its common stock 541 when the fair value was $100 per share. Prior to the split, Alto has 10,000 shares, $10 par value common stock and outstanding. After the split, the par value of the stock equal to what? Well, guess what? If you have 541 split, it means the market value of the stock was 100. If the market value was 100, the market value, it's going to go down to 20. It's going to be divided by 5. The 5,000 shares, the 10,000 shares becomes 50,000 shares. And the par value goes from 10 divided by 5 goes down to 2. Okay? So the par value becomes 2. Okay? Let me tell you why it doesn't make a difference. So you had 10,000 shares at $10 par value. So your common stock was 100,000. After the split, you had 50,000 shares, par value of 2. Same thing. The common stock balanced from 100,000. So before and after the split, notice the total is the same. So you can double check yourself, but you really don't want to waste your time on the exam. This should be like 20 second question. Well, if they split 541, well, the par value will have to be adjusted. Well, it means it has to be divided by 5, which is 2. Let's take a look at this question, which is basically from chapter 13. Allen Company has two employees. Each employee received two weeks of paid vacation each year. Vacation rights accumulate. One employee whose weekly salary is 600 took a two-week vacation during the year, but the other employee who earns 800 per week took no vacation during the year. And it's year and financial statement, what amount should the company report as vacation liability and vacation expense? Well, let's start with the liability. Do they have any liability? And the answer is yes, because the other employee, the $800 employee, okay, did not take the vacation and the vacation accumulate. So we have 600 worth of liability. This eliminated C and D. So A has a 600, B has a 600. So now we're down to 50-50. Now, expense, how do we record the expense? Well, let me tell you what happened. I'm going to do the journal entry and show you what happens. For the employee with 600, when they took the vacation, we debited vacation expense $1,200. We credit cash because we paid them the money. For the $800 employee, we debited vacation expense $1,600 for two weeks, and we credited vacation payable $1,600. And this is where this $1,600 is coming from, from this $1,600. Therefore, the expense, we expense $1,200. We expense $1,600. Therefore, the expense is $2,800. Although the employee did not take the vacation, it doesn't matter. We have to expense it in that particular year to match the expense with that particular year. Therefore, the expense is $2,800. So don't fall the expense is $1,200 alone. The expense is $2,800. In the next session, again, we will work more additional questions about the real deal, actual CPA questions. I strongly suggest you visit my website. 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