 the session. This is Professor Farhad and this session we would look at CPA questions that were previously released by the AI CPA. Those questions are the real deal. Those questions appear on a CPA exam. 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 1,600 plus accounting, auditing, tax, and finance lectures. This is a list of all the courses that I covered including CPA questions. On my website you have access to additional resources such as PowerPoint slides, true, false, multiple choice, notes, and refuel practicing for your CPA exam. 2000 plus CPA question. So let's take a look at this first question. A non-governmental, non-for-profit organization held the following investment. 100 shares of stock A, 200 shares of stock B, we're giving the cost, we're giving the fair value at the beginning of the year, we're giving the fair value at the end of the year. What amount of stock investment should be reported at the end of the financial statement? Simply put, how should we report investment, the 100 shares in stock A and the 200 shares in stock B? Simply put, you're going to report those at fair value. What does that mean? It means you have to compute the fair value, you have to compute the fair value for both investments. So you have 200 shares times 49 dollars, that's equal to 9800 and you have 100 shares at 51 plus 5100, that's 14900, therefore the answer will be 14900. Simply put, you need to remember that you have to report them at fair value, whether it's a profit or not for profit, it does not matter. Let's take a look at this question. A bond issued on June 1st, year one, has interest payment dates of April 1st and October 1st, this is when we make the payment. Bond interest expense for year end of December 31st, year one is for the period of how long? This question is one of the, not simple, you just have to be very careful, you have to be very careful, here's what they're asking us. Let me put it on a timeline, so hopefully you would remember this when you take the exam. Be careful about the date, so let me just show you what's going on here. So the bond was issued June 1st, it pays interest October 1st and this is December 31st, then in year two, this is year one, in year two it's going to pay interest again April 1st. This is what it, it was issued right here. The question is how much interest expense do we record for year one? Well, count all of June, July, August, September, October, November and December, seven months. Be careful, be careful to count all of June, because it was issued June 1st. So here all what they're trying to do is to pay attention, it was issued June 1st, to you're recording bond interest expense. You're only going to make one payment for this much, which is partial period, but the interest expense is for the whole period from June 1st till December 31st. Therefore the answer is seven, the answer is seven month, the answer is seven month. Okay, just have to be very careful, just count properly. Let's take a look at this question. Let me get this, so I can't, I can't work the math with this because it has numbers. So here's what we are told. On January 1st, year one, a company purchased equipment for 100 million. The equipment consists of four major components of which two components comprise 80% of the total cost and each in each has a 20 year use for life. So they bought 100 million worth of equipment, 80% of this is 80 million of the equipment has a useful life of 20 years. The remaining two component has a cost of 10 million each, which they should because that equal to 100 million, so 10 million and 10 million. One of them has a useful life of five, five years, and the other one has a useful life of four. The company applies the cost model to the equipment and uses the straight line method of depreciation under ifers. What's the depreciation expense? Well, the depreciation expense, you're going to do it separately. You're going to take 80 million, which is 80% of the asset and you're going to divide them by 20 and that's going to give you 20 years. That's going to give you 4 million, 4 million per year and that's one of the answers, but that's not the answer because you still have to depreciate the other two assets. One is for 10 million and it has a life of five, which will give you depreciation of depreciation of 2 million and you have another asset which has cost of 10 a life of four, which will give you a depreciation of 2.5 million. So all in all, depreciation expense is 8.5 million, 8.5 million. Therefore, the answer is 8.5 million. Let's look at this question. A governmental entity is required to include a statement of cash flow in which of the following financial statement, this should take you literally two seconds, two seconds. You have to memorize this that the proprietary fund financial statement will have to have a cash flow. If you go to my website, I have all about the proprietary fund and all about how to prepare one. I also have lectures about bonds and everything that we covered, but the point is this is two seconds, literally five seconds max question. You get this question, you should be very happy. Well, this question requires computation. Let's go ahead and transfer this to my notepad then we can work it. Simcompany has determined it's December 31st, inventory on life basis of 400,000. Information pertaining to the inventory as follows. So the cost equal to 400,000. Estimated selling price is 408, estimated cost of disposal is 20, normal profit margin is 60,000, current replacement cost is 390. What amount, what should be the amount that SIM inventory should be reported at? Interesting. This is basically the concept of, which is I covered it heavily in my intermediate accounting, lower of cost or what we call lower of cost or market or market. That's fine. We have the cost. The cost is 400,000. That's easy. So we're going to choose between the lower of either a cost, b market. Now, how do we define the market? We have to be very careful. We are giving the replacement cost. The replacement cost is 390. So we have replacement cost. We have replacement cost, which is right here given as 390. Current replacement cost. Do we choose the replacement cost? Do we choose the replacement cost as 390? And the answer is no. Why? Because although the replacement cost seems like a reasonable figure to choose, but we have to check it to make sure it's not too high and it's not too low. What do you mean it's not too high? It's not too low. We have to compute a floor and a ceiling. So we have to compute a ceiling and a floor. So what is a ceiling? The ceiling is what's called NRV net realizable value. The ceiling is 408, which is the estimated selling price minus estimated cost to dispose, which is 20,000. So the ceiling is, and I'll explain this in a moment, 388. This is the ceiling. The floor is NRV minus, minus normal profit. The normal profit margin is 60 minus profit. We call this the floor. And what's 388 minus 60 is the floor is 368. The floor is 328. So this is the floor and this is the ceiling. Now, as long as the replacement value is between the floor and the ceiling, as long as the replacement value is here, so we would use the replacement value. Let's see where the replacement value is. The replacement value is above the ceiling. Therefore, we don't use the replacement value. What we do is we use the ceiling figure, which is 388. If the replacement cost happens to be below the floor here, below the floor right here, then we would use the floor, 328. If the replacement cost was in between, we would use the replacement cost as the market cost. Simply put, market here is 388. So between 400,000 and 388, which one is the lower of the two, you got it, 388. Okay? So we use the replacement cost only if it's between the ceiling and the floor. The ceiling is NRV. NRV is the selling price minus cost to dispose. The floor is NRV, whatever you compute it up there, minus a normal profit. Now, in this situation, they gave you the normal profit as 60,000. Sometimes they give you the profit as a percentage of sales or some other way. So you just have to compute what the normal profit is. Therefore, the answer is 388. These questions are, these topics are covered heavily on my website, which is farhatlectures.com. And on my YouTube channel, I strongly suggest you subscribe to my website. Study hard. You're going to only study once for your exam, once in your lifetime. It's a lifetime investment. Do it the right way. I'm here to help you. Good luck and study hard.