 Hello and welcome to the session. This is Professor Farhad and the session we would look at previously used CPA questions that were recently released by the AICPA. Those questions are the real deal. The AICPA is the Holy Grail for CPA questions. Those are the questions that actually appeared on an actual CPA exam so it doesn't get any more real than that and we're going to be covering far section. As always I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1,500 plus accounting, auditing, finance and tax lecture. This is a list of all the courses that I cover including the number of lectures. I also cover CPA questions. On my website you will find additional resources such as notes, PowerPoint slides, true, false, multiple choice, exercises which I considered quasi CPA simulation, 2,000 plus CPA questions and the questions that you will see here I post the same file that's on the AICPA site. So let's go ahead and take a look at the first question. As always I would like to remind you the topic that I'm covering I will tell you in this blue box what course and what chapter in that course. So for example this topic is covered in my Chapter 22 Intermediate Accounting. Now if you click on the card you can look up my intermediate accounting, go to Chapter 22 and you would learn about this topic. So let's go ahead and start to take a look at the first question. Holt Company discovered in the prior year it failed to report 40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 20%. How should Holt report the correction of error in the current year? So simply put they failed to report 40,000 of depreciation expense. So let me show you what happened. So from the prior year what they did is they should have debited depreciation expense 40,000. They should have credited accumulated depreciation 40,000. So what should they do now to correct this error? In your opinion what should they do? Well let's look at the first. Simply put what should they do? Well what they should do is they should credit accumulated depreciation and debit an account. Well it cannot be depreciation expense because depreciation expense is gone. What they would have debit? Really the entry will be just so you know what the entry is. They will debit retained earnings. They will reduce their earnings by 40,000 and they will credit accumulated depreciation. This is the entry to basically fix what happened. Well let's see what our options are. Hey an increase in accumulated depreciation of 32 not at all because for tax purposes it was computed correctly. So we don't have to worry about the tax effect. An increase in accumulated depreciation of 40 that looks good. An increase of accumulated depreciation of 40. Let's take a look at the other questions. An increase in depreciation expense. Depreciation expense is closed. You can no longer go back and fix that. An increase of depreciation expense that's closed too. So therefore the entry is to debit retained earnings and credit accumulated depreciation for 40,000. Therefore the answer is V as in Poi. Let's take a look at this question. This question is covered in chapter 23 and basically actually this is chapter 22. This is also chapter 22. I made a mistake here. Chapter 22. Mill reported pre-tax income of 152,500 for the year and that December 31st. During the year audit the external auditor discovered the following errors. So they reported 152,500 but the auditor found that ending inventory was overstated. Well and depreciation expense was understated. What amount should mill reported as the correct pre-tax income for the year and the December 31st? So let's take each error separately, determine if it has an effect on income and make the appropriate adjustment. Well here's what happened. If your ending inventory is overstated this means your cost of goods sold is understated. This means your if cost of goods sold understated it means your income was overstated. Your profit was overstated. So simply put your profit was overstated by 30,000. Well I have to deduct from this 30,000 because I made the error and once they fix the error once they fix the error what's going to happen once they fix the error everything will reverse. This was overstated this will be understated. Cost of goods sold will go up and my profit will go down. Now if you don't know this relationship it's it's a very important relationship that's tested heavily on the exam. The relationship between ending inventory and cost of goods sold and this topic is covered in my chapter five I'm sorry chapter seven and eight which is inventory sorry eight and nine. Eight and nine this is the intermediate accounting. So simply put when ending inventory goes up cost of goods sold goes down there's a negative relationship between the two. This is ending inventory and cost of goods sold. So we fix the first problem. Now on the exam immediately you have to know ending inventory overstated cost of goods sold was understated. So I found the I found the error I have to reverse it okay. Now depreciation expense was understated. They underreported depreciation expense. When I fix this problem my depreciation expense is going to go up by 64. As my depreciation goes up by 64 I have to reduce my profit by an additional 64 000. So if I take 150 to 500 minus 30 minus 64 the answer should be 58 500 and the answer is A as in alpha A is an alpha. Very important concepts here and this is an application problem but if you understand the relationship between the accounts how do they work it should be fine. Let's take a look at this question are no company that not record a credit purchase of merchandise made the prior prior to year end. However the merchandise was correctly included in year end physical inventory. What a fact that the emission of reporting the purchase of merchandise have on our nose balance sheet at year end. So simply put they made a purchase they did not record the purchase but so the purchase was on credit too but when they counted the inventory the inventory was counted. So simply put they did not do the following they did not debit purchases and credited AP or they debited they did not debit let's make it easier they did not debit inventory and credit AP they did not do I'm sorry AP not AR this looks like AR AP so they did not make this entry. However the inventory was counted although they did not debit inventory they counted inventory. So what's the effect on asset there is no effect because they counted the inventory. Therefore C and D are out because there is no effect on the asset. Liabilities guess what we did not report this liability therefore our liability is understated so no effects on assets liabilities are understated because we did not credit accounts payable as we should have had done. Let's take a look at this question this question is from chapter this question is from chapter 13 I don't know why I just mix mix I kept chapter 23 this is from chapter 13. Prior to the issuance of its December 31 financial statement Stark company was named as a defendant in a lawsuit arising from an event that occurred in October. Stark's legal console believed it is reasonably possible that that will be unfavorable outcome and that the damages would range from 100,000 to 150 which amount should Stark accrue and or disclose in its December 31 financial statement. So the question is how much we should accrue how much we should disclose well we need to know the rules you have to know the you have to know those rules by hard they're very easy to remember very very easy to remember if it's reasonably possible no accrual reasonably possible no accrual. Therefore A and B are out because we don't accrue anything if it's reasonably possible we don't accrue now we're down to one to C and D well if the what can we do we have a range from 100 to 150 guess what we'll disclose the range that's okay we can disclose the range of 100 to 150 so the answer is C we don't accrue anything but we'll disclose the range let's take a look at this question this is properly from chapter 13 dairy ink or dairy ink guaranteed the debt for a related party basically similar to the prior question in December dairy learned that it's probable probable notice now it's not reasonably possible it's probable that it will require to pay between 150 and 200 000 so it's probable and they have a range within the next six months in satisfaction of the of its guaranteed but no amount within that range is more likely what is the amount of contingent liability should this company accrue and it's December 31 balance sheet now do we have to accrue the answer is yes why do we have to accrue because it says it is a probable probable not reasonably possible it's probable therefore we have to do an accrual D automatically is out now the question becomes and they are required to pay 150 to 200 but no amount within that range is more than likely so what does gap says well if that's the situation gap says you go with the minimum with the minimum range what's the minimum range the minimum range is 150 now if if the question asks what would happen under the IFRS rules under the IFRS rules we have to choose the midpoint and the answer would have been 175 so be careful although here they did not tell us its gap on the CPA exam if they don't specify its gap if it's IFRS they will specify you are looking under IFRS under the IFRS what would be what would the accrue will be it will be 175 they use a midrange if you have a range okay just be careful about this in case it was gap versus IFRS in the next session we would look at additional questions specifically for FAR I strongly suggest you visit my website for additional lectures notes powerpoint slides and I strongly suggest you subscribe you study once in your lifetime for your CPA exam make sure you get it right get all the resources that you can so you can pass good luck study hard and I'm here to help you