 Hello and welcome to this session. This is Professor Farhad in which we would look at this CPA Question that looks pretty intimidating and this question was sent to me by one of my followers on YouTube they would like me to go over this question So I'm gonna go over this questions and specifically I'm gonna show you immediately how you could eliminate two choices and go down the 50 50 so basically Practically on most CPA questions. You should be able to eliminate two choices if you on if you have a basic understanding And when they ask about the journal entries, so when the exam ask about journal entries Here's what I need to tell you most CPA prep companies They don't teach you the basic of debits and credits and there isn't a simple they they feel that's not their job and That's true. Why because by the time you sign up for a CPA prep course You already went through your accounting education. Therefore, they're not gonna be they're not gonna be wasting in quote any time on Basic debits and credits and that's the difference between what a CPA prep course do and Farhad accounting lectures on Farhad accounting lectures I teach you the basics and believe me once, you know the basics once you understand the concept you could eliminate two answer choices immediately on most CPA questions I'm not gonna say all but on most CPA questions in 10 to 15 seconds You should be able to eliminate two choices and you're down to 50 50 then take your chances. How about that? Okay, so let's take a look at this question and I'm gonna show you how you can take out two choices immediately The following accounts were among those reported on Adam's core balance sheet They have investments in trading securities. The cost is 80,000. The value is 140 Preferred stock they have a par value of $20 2000 shares issued an outstanding 400,000 additional paid-in capital on the preferred stock is 30,000 and they have retained earnings of $90,000. There's a lot of questions. They can ask you here Let's see what they are. Let's see what they are asking on January 20th year to Adam exchange all the marketable securities So these they will need to be gone all the marketable securities for 5,000 shares of Adam preferred stocks So the extension for the preferred shares Market value at the date of the exchange was 150. So this was on the date of the exchange was 150 For the marketable securities and $30 per share for the preferred stock. That's fine The 5,000 shares of preferred stock were retired immediately after the exchange. So we exchange them We exchange the preferred for the we exchange the preferred for the investments and we immediately retired the preferred Which of the following journal entries should Adam record in connection with with this transaction now How can I eliminate to answer choices immediately? If you know how to issue? Basic journal entries for the preferred stock. You'll be able to eliminate two entries So I'm gonna give you an example to show you how we issued Stock preferred stock. So let's assume we did issue preferred stock. Let's assume we issued 1000 shares of $20 preferred stock for $40,000 so if I ask you to journalize this entry, do you know how to journalize this entry? Well, we debit cash We received $40,000 then we have to credit preferred stock How much do we credit preferred stock? The key is to know this is the key in this question Do you know how do you credit preferred stock? Well, it's the number of shares and you have to memorize this number of shares number of shares times The power value and this this formula applies also to common stock So when you issue common stock the common stock is credited for the number of shares times the power value And when you remove preferred stock and when you removed Common stock, you will do the same thing, but you debit the preferred stock and you debit the common stock So here I issued 1000 shares times $20. That's gonna give me $20,000 Yes, four zeros $20,000 and this is the preferred stock. So I did the preferred stock. So what's left? What's left is the additional paid in capital preferred stock So anything left it's additional paid in capital preferred stock and this is how you issue preferred stock That's fine. So at this point when you get to this questions You need to understand how to issue preferred stock if you know how to issue preferred stock then, you know How to retire preferred stock because how do you retire preferred stock you debit preferred stock and you debit Additional paid in capital preferred stock. How much do you debit preferred stock? The number of shares that you are retiring times the power value. So how many shares am I retiring? I'm I am I am exchanging it for 5,000 shares of preferred that I'm retiring those shares So 5,000 times 20. I need to debit preferred stock 100,000 Immediately once I know I need to debit preferred stock 100,000 Here's my 50 50 C and B are gone because they have preferred stock at 150 preferred stock at 150 now I'm down to 50 50. Okay now Even even a step further every time you retired preferred stock You have to retire the related additional paid in capital because look these two account comes hand-in-hand So those two accounts preferred stock and additional paid in capital. They come hand-in-hand just like Fixed asset and accumulated depreciation when you retire a fixed asset you have to get rid of its accumulated depreciation When you retired Come in stock you have to look if there's any additional paid in capital related to it when you retire preferred stock You also have to get rid of any Paid in capital. So how much additional paid in capital? Well simply put I retired I had 20,000 shares. I had so I retired 5,000 out of the 20,000 shares, which is I retired one fourth or 25% of my Preferred stock if I retire the 25% of my preferred stock I have to retired 25% of this account. So simply put 25% of additional paid in capital cannot be B because B it says additional paid in capital 30,500 we don't even have 30,500 for all of additional paid in capital. I eliminate B I'm down to a is the answer but I'm gonna take you through the whole thing. So you could answer this these questions and Really a short amount of time if you have basic understanding and all what I did I did not even go went into, you know, how am I gonna exchange it to invest? How am I gonna get rid of the investment and all the other stuff? So once you know That you need to debit preferred stock 100,000 and how did you come up with 100,000 5,000 shares times 20? Then I have to retired 25% of 30,000. So I'm gonna take 30,000 Times 0.25 and that's gonna give me 7,500. Therefore. I debit additional paid in capital 7,500 at this point if you don't have time move on at this point if you don't have time choose a and move on Okay Now but we have time because I'm gonna explain the remainder for you Well, you have to credit investment and trading securities because you are Exchanging those you are getting rid of them investment in trading securities 140,000 and this is this entry here. So we did this entry this entry Now those investments went when you to when you retired them, they had a gain They had a gain of 10,000 therefore you can recognize the gain you can recognize the gain of 10,000 now notice what happened? We retired worth of securities 150,000 and In and against those we We got rid of 100,000 7100 7,500 so we have a loss now we don't debit the loss what we do is we debit Retained earnings for the difference and retained earnings is 42,500 Again, you don't have to go this far Okay, let me let me recap one more time once. I know I'm retiring 5,000 shares of of preferred stock 5,000 shares times 20 because when I retire them I have to to debit preferred stock exactly the same way I credited preferred stock, which is the number of shares times the par value. I eliminated C I mean it be I'm down to I need to have a preferred stock 100,000 preferred stock 100,000 Then I need to retire the related additional paid-in capital and here they make it very easy for us Simply put if you understand that you don't have how can you debit additional paid-in capital? 30,500 if you don't have 30,500 you only have 30,000 so I could take out B. A is the answer and that's the whole story for you so Understanding the basics. So what do I mean by the basics? You have to be 100% comfortable with your financial accounting one-on-one. It means That's like your your first course you took in in college You'd learn about preferred stock all what they did in this question is try to make it look intimidating But if you understand that they cannot look here's my philosophy if you understand the topics I Mean let me rephrase I want you to sit in the person in the seat of the person that's writing the question The person that writes this question the person the people that write the questions for the CPA exam It's very difficult. I'm telling you from experience. I don't write any questions for the CPA exam But I do write I did write questions for the CFA exam at some point The most difficult thing for the exam writer is to select the wrong answers in other words The exam writer here's what they struggled with they struggle with B C and D. It's easy to give the answer a but The exam writer will find hard problems writing the wrong answers, which is BC and D. What does that mean to you? It means if you have a basic understanding of the concept you could eliminate the wrong answers immediately. This is what I meant by Learning the basics now. How can you learn the basics the CPA review course? Don't teach you the basic I know I keep repeating myself. What should you do go to four hat lectures calm Whatever you are studying for rag for BEC or audit I have plenty of resources to help you succeed at 10 to 15 points to your CPA exam I hope this illustration was beneficial to you Don't short change yourself on your CPA exam. Your CPA exam is a 20 The 30 year investment and who knows if medication keeps getting better You may live until we are 90. So it's maybe 40 to 50 year investment in your career Don't short change yourself. Subscribe to my website. It's it's a nominal fee It's really meaningless. It's less than a dollar per day It's you can even buy a cup of coffee and learn the basics So you can succeed on the CPA exam and in any way they throw any questions at you Good luck study hard And if you have any questions about the CPA exam, you could always reach out to me go to my website Make a Calendly appointment and we can talk best of luck