 and welcome to this session. This is Professor Farhat and this session we would look at an actual CPA that was released by the AI CPA. This is the real deal. This is what an actual simulation would look like on the exam day. Specifically, we're going to be looking at a FAR CPA 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 1,600 plus accounting, auditing, tax, and finance lectures. This is a list of all the courses that I cover, including CPA questions. Please, like my YouTube, share them, put them in the playlist. If they benefit you, they might benefit other people. On my website, I do have access to additional materials such as notes, PowerPoint slides, true, false, multiple choice, quasi CPA simulations. If you're studying for your CPA exam, 2,000 plus CPA questions, I strongly suggest you visit the website. Let's take a look at this simulation and see how should we approach simulations similar to this one. The first thing you want to make sure you are comfortable with is the format. You need to know what your calculator is, the Excel sheet, the authoritative literature, so on and so forth. We're going to look at this simulation, which is, I believe, it's pretty straightforward. What I can compare the simulation to is to an exercise I give in my classes. Basically, a simulation is no more than a college or university exercise that you see in your accounting education as an undergraduate. I will show you this in a moment. This is, if you get the simulation or something similar to this, you should be very happy. Scroll down to complete all parts of this task. Make sure you scroll down over everything. The GRM company granted its employee 1 million shares of stock on January 1st. On the grand date, the fair value of each share is $36. The share cliff vest at the end of the three year and no furniture are expected. Management expects that all shares will vest because the staff performance indicates a successful three year period. The fair value of the stock dates were at the end of the first year, December 31st, $39. At the end of the second year, $45. At the end of the third year is $48 and this is obviously estimated. For each of the situation below, prepare the journal entry for the appropriate journal entry for year two, including the tax effect. So in column B and column C, click on the cell to select the appropriate account from the option listed provided. An option may be used once or not at all and column D entered the amount as positive whole value. So simply put, what they're asking us is what do you need to debit? What do you need to credit? The amount, that's basically what it is. It's two journal entries based on this exercise. If you know your stuff, if you're ready for the exam, this should be a pretty straightforward simulation. And matter of fact, an easy simulation. So the first journal entry, prepare the journal entry to record the expense for the share-based payment for year two. Now you need to know how share-based compensation work. How does it work? Simply put, on the grand date, you gave your employees a million shares and each share on the grand date has a value of 36. What does that mean? It means the company will have a compensation expense, a total of how much? Let's see, a million share. Let's see, the calculator is not working. We have a million times 36. On the grand date, the fair value of this share-based plan is 36 million and they told us they're going to vest over a period of three years. We're going to divide this by three. Simply put, we are going to expense per year $12 million. That's what it is. So simply put, what we need to do, we need to spread this cost over a period of three years. So for year two, it doesn't matter whether it's year one, year two, or year three, they ask you for year two and they gave you the number here to confuse you. They want you to use one million times 45. That's not how you do share-based compensation. It's the number of shares multiplied by the fair value on the grand date. So simply put, you are going to debit some sort of a compensation expense, which is a compensation cost, and you're going to debit some sort of an equity and the equity will be additional paid in capital. I mean, sometimes they might have different type of equity, but this is the equity that you would use, additional paid in capital. So simply put, if you really think about it, compensation expense, equity went down, additional paid in capital, equity went up. So simply put, from an equity perspective, there's no really no effect and the amount is 12 million as computed above. Now, prepare the journal entry to record the tax effect in year two, assuming a tax rate of 20%. So we need to know a little bit more about the third tax asset and the third tax liability. What happened here is this. We recorded an expense of 12 million on our financial statement. This expense is not deductible for tax purposes now. What does that mean? If it's not deductible, it means it can be deducted in the future when the actual expense takes place and it's deducted on the tax return. What does that mean? It means we have 12 million, which is, I already have the 12 million here. I'm going to multiply it by 0.2 and that's going to give me a deferred tax asset of 2.4 million. What does that mean? It means I need to debit the third tax asset. How much? 2.4 million. Why 2.4 million? Because I am recording an expense of 12 million now on the financial statement and this expense is not deductible for tax purposes until later. So later when I deduct it, I'll have a deferred tax asset. Therefore, I can debit the third tax asset and what do I credit when I debit the third tax asset? I credit the third tax lia, I'm sorry, should be benefit. I should be able to credit the third tax benefit, the third tax benefit. Therefore, the credit is the third tax benefit. Why? Because I cannot take the tax deduction now. I took the deduction of 12 million for financial accounting. I can take the deduction for tax purposes in the future. As a result, if that's the case, I'm going to have a deferred tax asset for the future of 2.4 million. Why 2.4 million? Because the tax rate is 20%. Simply put, this simulation tests your knowledge on two simple concepts, literally two simple concepts. How do you treat share-based compensation and how do you treat simply and what's the effect on the deferred tax asset or the deferred tax liability for this transaction? This transaction is going to give you a future tax deduction. A future tax deduction will give you a deferred tax asset. Now, if you have any doubts about the third tax asset or the third tax liabilities, I strongly suggest you go to my intermediate accounting course, which I have plenty of explanation in exercises and example that explain in details an important concept, which is the third tax asset and the third tax liability. And if you want to learn about compensation expense, you can go to my intermediate accounting. I believe that's chapter 16. Once again, I'm going to invite you to visit my website. On my website, you'll have additional resources such as PowerPoint slides, true, false, multiple choice. You're going to study for your CPA exam once. Make sure you do it right. I'm here to help you. 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