Gleim CMA Review Updates to Part Edition, 1st Printing July 2018

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1 Page 1 of 5 Gleim CMA Review Updates to Part Edition, 1st Printing July 2018 NOTE: Text that should be deleted is displayed with a line through it. New text is shown with a blue background. Study Unit 3 Measurement, Valuation, and Disclosure: Long-Term Items Page 96, Subunit 3.4, Item 4.c.1): This update corrects information regarding minimum lease payments. 1) The minimum lease payments must be discounted (measured at present value) using the lessor s implicit rate or the lessee s incremental borrowing rate, whichever is lower. If it is known by the lessee, the lessor s implicit rate is used and if not, the lessee s incremental borrowing rate is used. Page 103, Subunit 3.5, new Item 8.c.: This update expands the coverage related to deferred taxes. c. Deferred tax liabilities and assets and any related valuation allowance are netted and presented as a single noncurrent amount. Pages , Subunit 3.5, Questions 23-25: These questions have been revised to reflect the applicable standards. 23. On a statement of financial position, all of the following should be classified as current liabilities except A. Advances from customers for services to be performed. B. Salaries payable for work performed during the previous month. C. Deferred income taxes for differences based on depreciation methods. D. Accounts payable for inventory items to be shipped on consignment. REQUIRED: The item not a current liability. DISCUSSION: Deferred tax amounts are classified as current or noncurrent based on the classification of the related asset or liability (assuming such an asset or liability exists). Because depreciable assets are noncurrent, a deferred tax liability for differences based on depreciation methods is noncurrent. Answer (A) is incorrect. Advances from customers for services to be performed are classified as unearned revenue (current liabilities). Answer (B) is incorrect. Salaries payable for work performed during the previous month are accrued as current liabilities. Answer (D) is incorrect. Trade accounts payable for inventory, whether or not to be shipped on consignment, are current liabilities.

2 Page 2 of 5 Questions 24 and 25 are based on the following information. Lucas Company computed the following deferred tax balances for the 2 most recent years. Deferred tax assets are considered fully realizable. Year 1 Year 2 Current deferred tax assets $3,000 $10,000 Noncurrent deferred tax assets 6,000 7,000 Current deferred tax liabilities 8,000 9,000 Noncurrent deferred tax liabilities 5,000 14,000 Deferred tax assets $ 9,000 $17,000 Deferred tax liabilities 13,000 23, If Lucas calculates taxable income of $1,000,000 for Year 2 and is taxed at an effective income tax rate of 40%, how much income tax expense will be reported on Lucas s income statement for Year 2? A. $400,000 B. $402,000 C. $404,000 D. $406, What deferred tax amounts will appear on Lucas s statement of financial position at the end of Year 2? Assets Liabilities Current Noncurrent Current Noncurrent A. $0 $1,000 $5,000 $0 B. $7,000 $1,000 $1,000 $9,000 C. $1,000 $0 $0 $7,000 D. $10,000 $7,000 $9,000 $14,000 A. $6,000 deferred tax asset. B. $2,000 deferred tax liability. C. $6,000 deferred tax liability. D. $17,000 deferred tax asset, and $23,000 deferred tax liability. Answer (B) is correct. REQUIRED: The amount of income tax expense reported. DISCUSSION: Deferred tax expense or benefit is the net change during the year in the entity s deferred tax liabilities and assets. It is aggregated with the current tax expense or benefit to determine total income tax expense for the year. The amount of income taxes payable (current tax expense) is $400,000 ($1,000,000 40%). The deferred tax assets increased by $8,000 ($10,000 $3,000 + $7,000 $6,000 $17,000 $9,000) and the deferred tax liabilities increased by $10,000 ($9,000 $8,000 + $14,000 $5,000 $23,000 $13,000). Thus, Lucas s income tax expense for Year 2 is $402,000 ($400,000 current tax expense $8,000 increase in the deferred tax assets + $10,000 increase in the deferred tax liabilities). Answer (A) is incorrect. The current tax expense is $400,000. Answer (C) is incorrect. Improperly netting deferred tax assets and liabilities results in $404,000. Answer (D) is incorrect. Excluding the effects of noncurrent deferred tax items results in $406,000. REQUIRED: The deferred tax amounts at the end of Year 2. DISCUSSION: Current deferred tax amounts are netted for financial reporting purposes. Likewise, noncurrent amounts are also netted. At the end of Year 2, Lucas nets its $10,000 of current deferred tax assets and $9,000 of current deferred tax liabilities for a reported current deferred tax asset of $1,000. Similarly, the $7,000 of noncurrent deferred tax assets and $14,000 of noncurrent deferred tax liabilities are netted to produce a reported noncurrent deferred tax liability of $7,000. Deferred tax liabilities and assets and any related valuation allowance are netted and presented as a single noncurrent amount. Accordingly, the deferred tax amount appearing on the statement of financial position at the end of Year 2 is a $6,000 deferred tax liability ($23,000 deferred tax liability $17,000 deferred tax asset). Answer (A) is incorrect. Lucas should report a current deferred tax asset and a noncurrent deferred tax liability. The deferred amount is a liability. Answer (B) is incorrect. Deferred tax assets and liabilities are netted for financial reporting purposes. This amount represents the net increase of the Year 2 balances ($10,000 increase in DTL $8,000 increase in DTA). However, the deferred tax amount that appears on the statement of financial position is the net of the Year 2 balances. Answer (D) is incorrect. Deferred tax assets and liabilities are netted for financial reporting purposes. The Year 2 balances must be netted.

3 Page 116, Subunit 3.6, Question 27: This edit corrects a mathematical error in the answer explanation. Page 3 of 5 Questions 27 through 30 are based on the following information. On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest is payable annually on December What is the amount of interest expense that should be reported on Evangel s income statement for the second year? A. $8,779 B. $9,000 C. $9,559 D. $9,683 Answer (D) is correct. REQUIRED: The amount of interest expense reported on Evangel s income statement for the second year. DISCUSSION: An amortization schedule for the first 2 years of Evangel s bonds can be prepared as follows: Beginning Carrying Amount Times: Effective Rate Equals: Interest Expense Minus: Cash Paid Equals: Discount Amortized Ending Carrying Amount Year 1 $96,207 10% $9,621 $9,000 $621 $96, ,828 10% 9,683 9, ,510 97,511 Answer (A) is incorrect. The amount of $8,779 results from subtracting the cash portion of interest from the beginning carrying amount and multiplying the effective rate by the result. Answer (B) is incorrect. The amount of $9,000 is the amount of cash interest paid. Answer (C) is incorrect. The amount of $9,559 results from increasing the unamortized discount rather than reducing it. Study Unit 6 Cost Allocation Techniques Page 214, Subunit 6.6, Question 22: This update improves the answer explanations. 6.6 Allocating Service Department Costs -- Theory 22. In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base? A. Units of product sold. B. Salary of service department employees. C. Units of electric power consumed. D. Direct materials usage. REQUIRED: The item most likely used as an activity base when allocating factory service department costs DISCUSSION: Service department costs are considered part of factory overhead and should be allocated to the production departments that use the services. A basis reflecting cause and effect should be used to allocate service department costs. For example, the number of kilowatt hours used by each producing department is probably the best allocation base for electricity costs. Each producing department most likely consumes electrical power to produce their respective products. Thus, units of electrical power consumed is a likely indicator of each producing department s level of activity. The greater the level of activity, the more likely a cause of factory service department costs. Therefore, units of electrical power consumed is the most likely activity base to allocate factory service department costs to producing departments. Answer (A) is incorrect. Making allocations on the basis of units sold may likely does not meet satisfy the cause-and-effect criterion because factory service department costs are more likely caused by the level of production activities. Answer (B) is incorrect. The salary of service department employees is the cost allocated, not a basis of allocation. Answer (D) is incorrect. Making allocations on the basis of materials usage may not meet the cause-and-effect criterion. Although direct materials usage may be an appropriate activity base for allocating certain factory service department costs (e.g., materials handling costs), it is not a better activity base than electrical power consumption for allocating all factory service department costs.

4 Page 4 of 5 Study Unit 10 Cost and Variance Measures Pages , Subunit 10.6, Items 2.a. and 2.b.2): These edits correct wording in the outline and a typographical error in the formulas presented. Actual variable overhead a. The total variable overhead variance is the flexible-budget variance. It is the difference between actual variable overhead and the amount applied based on the budgeted [ rate and the standard ( input allowed for the actual output. Standard Budgeted cost driven driver rate per unit Actual units )] [... ] Budgeted rate 2) The efficiency variance is the budgeted rate times the difference between (a) the actual allocation base and (b) the standard cost driven per unit [ input allowed for the actual ( quantity. Standard Actual cost driven allocation driver base per unit Actual units )]

5 Page 5 of 5 Study Unit 12 Internal Controls -- Corporate Governance Page 418, Subunit 12.1, Item 15.f.: This update improves the discussion of the types of audit opinions. f. There are four types of audit options (audit reports) opinions that an external auditor may give on a set of financial statements. 1) Unmodified opinion: Often called a clean opinion, an unmodified opinion is an audit report issued when an auditor determines that the financial records are free of any misrepresentations. An unmodified opinion indicates that the statements have been maintained in accordance with generally accepted accounting principles (GAAP). This is the best type of report a business can receive and is the most commonly issued report. The auditor signs and dates the document, including his or her address. An unmodified opinion is the conclusion that the financial statements are presented fairly, in all material respects, in accordance with the framework. 2) Qualified opinion: In situations when a company s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion. The writing of a qualified opinion is similar to that of an unmodified opinion. A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unmodified. A qualified opinion is the conclusion that, except for the matter(s) described in the basis for qualified opinion paragraph, the financial statements are presented fairly, in all material respects, in accordance with the framework. a) If the auditor has obtained sufficient appropriate audit evidence, misstatements are material but not pervasive. b) If the auditor has not obtained sufficient appropriate audit evidence, the possible effects of undetected misstatements are material but not pervasive. 3) Adverse opinion: The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm s financial records do not conform to GAAP. An adverse opinion is the conclusion that, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the financial statements are not presented fairly. a) The auditor has obtained sufficient appropriate audit evidence, but the misstatements are material and pervasive. 4) Disclaimer of opinion: On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm s financial status could not be determined. It is issued when the scope of the audit is not sufficient to permit formation of an opinion or when the auditor is not independent. A disclaimer of opinion is the conclusion that, because of the significance of the matter(s) described in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence. Accordingly, the auditor does not express an opinion on the financial statements. a) The possible effects of undetected misstatements are material and pervasive.