Becker Professional Education

Financial Course Updates—December 2022

The purpose of this document is to provide you with a list of items that have been updated in the
December 2022 Financial textbook version (V4.3). Additions, changes, and clarifications in the text have
been indicated with yellow highlight. All other text is unchanged from V4.2

Table of Contents

CPA Exam Review Replacement Textbook Pages ..................................................................... 2

V4.3 F1 Module 2 page 16 .......................................................................................................... 3

V4.3 F1 Module 3 page 24 .......................................................................................................... 4

V4.3 F4 Module 5 page 50 .......................................................................................................... 5

V4.3 F5 Module 6 pages 59, 62, 63 ...................................................................................... 6—8

 Becker Professional Education
Financial Course Updates—December 2022

CPA Exam Review Replacement Textbook Pages

Details on the replacement textbook pages are provided below.

V4.3 Location V4.2 Location Description of Update

F1 Module 1 Same Example 2 was updated for the presentation of infrequent

Page 16 and unusual items.

F1 Module 3 Same Example 5 was updated, moving information needed to

Page 24 solve the example from the solution to the facts.

F4 Module 5 Same Changes were made for ASU 2021-08 Fair Market Value of
Page 50 Equity Securities Subject to Contractual Sale Restrictions

F5 Module 6 Same Changes were made for ASU 2022-02 Troubled Debt
Pages 59, 62,63 Restructuring and Vintage Disclosure
2 Income Statement and Balance Sheet FAR 1

2.2 Single-Step Income Statement

In the single-step income statement presentation of income from continuing operations, total
expenses (including income tax expense) are subtracted from total revenues; thus, the income
statement has a single step. The benefits of a single-step income statement are its simple design
and the fact that the presentation of types of revenues or expenses do not appear to the user to
be classified as more important than others.

Example 2 Single-Step Income Statement

Facts: Same as Example 1.

Required: Using the trial balance from Example 1, prepare a single-step income statement.
Solution:

Radon Industries Inc.

Income Statement
For the Year Ended December 31, Year 1
(in thousands)

Revenues and other items:

Sales revenue $ 350
Service revenue 200
Interest revenue 170
Rental revenue 100
Gain on sale of available-for-sale securities 50
Other revenue 130
Total revenues and other items $1,000
Expenses and other items:
Cost of goods sold $ 200
Cost of services sold 150
Cost of rental income 60
Selling expenses 100
General and administrative expenses 70
Interest expense 50
Depreciation expense 80
Loss on sale of fixed assets 40
Restructuring expense 100
Income tax expense 100
Total expenses and other items $ 950
Income from continuing operations $ 50
Discontinued operations (net of tax) 25
Net income $ 25

F1–16 Module 2 Income

© Becker Professional Education Statement
Corporation. and Balance
All rights reserved.Sheet
3 Revenue Recognition: Part 1 FAR 1

2.4.2 Stand-alone Selling Price

The price an entity would sell the promised good or service to a customer on a stand-alone
basis. Once this price is determined for each obligation within the contract, the total transaction
price should be allocated in proportion to the stand-alone selling prices.

2.4.3 Discounts
A discount exists when the sum of the stand-alone prices for each obligation within a contract
exceeds the total consideration for the contract. A discount should be allocated proportionally to
all obligations within the contact.

2.4.4 Variable Consideration

If applicable, variable consideration may be attributable to the entire contract, individual
performance obligations within a contract, or distinct goods or services within a single
performance obligation.

2.4.5 Transaction Price Changes

If the transaction price changes after contract inception, the change should be allocated to the
performance obligations in the contract on the same basis that was used at inception. Changes
in stand-alone selling prices after inception should not be reallocated.

Example 5 Allocating the Transaction Price

Facts: A software company enters into a $250,000 contract with a customer to transfer a
software license, perform installation service, and provide technical support for a three-year
period. The entity sells the license, installation service, and technical support separately. The
license is usually sold for $160,000, the installation service is $20,000, and technical support runs
$30,000 per year. The installation service and technical support could be performed by other
entities and the software remains functional in the absence of these services. The contract price
must be paid on installation of the software, which is planned for March 1, Year 1.
Required: How should the software company recognize revenue for these transactions?
Solution: The entity identifies three performance obligations in the contract for the
following goods and services:
1. Software license
2. Installation service
3. Technical support
The stand-alone selling price can be determined for each performance obligation. The fair
value of the contract is determined to be $270,000 ($160,000 for the license, $20,000 for
the installation service, and $90,000 for three years of technical support). Based on the
relative fair values, the allocation of revenue is as follows:

Software license [($160,000/$270,000) × $250,000] = $148,148

Installation service [($20,000/$270,000) × $250,000] = $18,519
Technical support [($90,000/$270,000) × $250,000] = $83,333

(continued)

F1–24 Module 3 Revenue

© Becker Professional Education Corporation. Recognition:
All rights reserved.Part 1
5 Acquisition Method: Part 2 FAR 4

2 Balance Sheet Adjustment to Fair Value,

Identifiable Intangible Asset Adjustment
to Fair Value, and Goodwill (Gain) CAR IN BIG

2.1 Fair Value of Subsidiary

Under the acquisition method, the fair value of the subsidiary is equal to the acquisition cost
plus any noncontrolling interest at fair value.

FV subsidiary = Acquisition cost + NCI at FV

On the acquisition date, the fair value of the subsidiary must be compared with the respective
assets and liabilities of the subsidiary. Any difference between the fair value of the subsidiary
and the book value acquired will require an adjustment to the following three areas:
1. Balance Sheet: Adjustment of the subsidiary's assets and liabilities from book value to
fair value.
2. Identifiable Intangible Assets: Related to the acquisition of the subsidiary are recorded at
fair value.
3. Goodwill: Is recognized for any excess of the fair value of the subsidiary over the fair value
of the subsidiary's net assets. If the fair value of the subsidiary is less than the fair value of
the subsidiary's net assets, a gain is recognized.
Note: Any contract assets or liabilities on the books of the subsidiary entity that are acquired
through a business combination should be recorded on the books of the acquirer using
standard revenue recognition principles.

2.2 Acquisition With Goodwill

Rule: When acquiring a subsidiary with a fair value (acquisition price + fair value of NCI) that is
greater than the fair value of 100 percent of the underlying assets acquired, the following steps
are required:
  Step 1: Balance Sheet Adjusted to Fair Value
Adjust the subsidiary's assets and liabilities to fair value.
  Step 2: Identifiable Intangible Assets to Fair Value
Allocate the remaining acquisition cost to the fair value of any identifiable intangible
assets acquired.

Illustrative List of Identifiable Intangible Assets

— Agreements and contracts — Computer software and licenses

— Rights — Technical drawings and manuals
— Permits — Customer lists
— Patents and copyrights — Unpatented technology
— Trademarks and trade names — In-process research and development
— Franchises — Noncompetes

F4–50 Module 5 Acquisition

© Becker Professional Education Corporation. All rightsMethod:
reserved.Part 2
FAR 5 6 Troubled Debt Restructuring and Extinguishment

1.1.4 Combination of Type

When a restructuring involves a combination of asset or equity transfers and modification of
terms, the fair value of any asset or equity is used first to reduce the carrying amount
of the payable. The difference between the fair value and the carrying amount of any assets
transferred is recognized as gain or loss. No gain on restructuring can be recognized unless the
carrying amount of the payable exceeds the total future cash payments.
All gains on debt restructuring are aggregated and included in net income for the period.
They are treated and classified along with other gains of the company, typically in the continuing
operations section of the income statement.

1.2 Accounting and Reporting by Creditors

1.2.1 Recognition of Impairment
A loan is considered impaired if it is probable (likely to occur) that the creditor will be unable to
collect all amounts due under the original contract when due. Normal loan procedures should
be used to judge whether a loan is impaired. A loan restructured in a troubled debt restructuring
is an impaired loan.

1.2.2 Measurement of Impairment

  Receipt of Assets or Equity: When the creditor receives either assets or equity as full
settlement of a receivable, these are accounted for at their fair value at the time of the
restructuring. The fair value of the receivable satisfied can be used if it is more clearly
determinable than the fair value of the asset or equity acquired. In a partial payment, the
creditor must use the fair value of the asset or equity received.
The excess of the recorded receivable over the fair value of the asset received is recognized
as a loss. The creditor accounts for these assets as if they were acquired for cash.
  Modification of Terms: Impairment should be captured as part of an entity's overall
assessment of credit losses. Any losses with troubled debt restructuring should be
incorporated into a creditor's estimate of its allowance for credit losses. Entities may employ
a variety of methods to estimate credit losses. If a discounted cash flow approach is used,
the post-restructuring effective interest rate must be used as the discount rate.
The impairment is recorded by creating a valuation allowance with a corresponding charge
to bad debt expense:

DR Bad debt expense $XXX

CR Allowance for credit losses $XXX

© Becker Professional Education Corporation. All rights reserved. Module 6 F5–59

6 Troubled Debt Restructuring and Extinguishment FAR 5

Example 3 Modification of Terms

Facts: The same facts as in the previous example, except that on December 31, Year 3, Apex
agreed to modify the terms of the debt. The accrued interest was forgiven, the interest rate
was lowered to 3 percent, and the maturity date was extended to December 31, Year 5.
Required:
1. Indicate how Hull should report the troubled debt restructuring on its Year 3 income
statement.
2. Prepare the journal entry to record the transaction on Hull's books.
3. Prepare the journal entry to record the transaction on Apex's books, assuming the
company utilizes a discounted cash flow approach and the post-restructuring effective
interest rate of 3.50 percent.
Solution:
1. Hull's total debt is the $500,000 face value of the note plus $60,000 of accrued interest,
or $560,000.
Total future cash payments under modified terms:
Face amount of note $500,000
Year 4 interest 15,000 = $500,000 × 3%
Year 5 interest 15,000 = $500,000 × 3%
Total $530,000
Gain on restructuring:
Carrying amount of payable $560,000
Total future cash payments (530,000)
Gain on restructuring of debt $ 30,000

2. Journal entry to record the troubled debt restructuring on the books of Hull:
DR Notes payable $500,000
DR Interest payable 60,000
CR Note payable $530,000*
CR Gain on restructuring 30,000
*All future payments (principal and interest) will reduce the note payable.
3. Journal entry to record the impairment on the books of Apex:
DR Bad debt expense $64,745
CR Allowance for credit losses $64,745*

*This amount is calculated as the difference between the pre-restructured note balance
and the present value of future cash flows ($500,000 and two interest payments of
$15,000) discounted at the loan's effective interest rate of 3.50 percent.

Pre-restructure carrying amount $ 560,000

Present value of restructured cash flows $(495,255)
Creditor's loss on restructuring $ 64,745

(continued)

F5–62 Module 6 Troubled

© Becker Professional Debt Restructuring
Education Corporation. Alland Extinguishment
rights reserved.
FAR 5 6 Troubled Debt Restructuring and Extinguishment

(continued)
The present value of restructured cash flows is calculated as follows:
Present value of $500,000 due in two years at 3.50 percent = 0.9335 × $500,000 = $466,755
Present value of $15,000 interest payable annually for two years at 3.5 percent =
1.900 × $15,000 = $28,500
Present value of restructured cash flows = $466,755 + $28,500 = $495,255

2 Extinguishment of Debt

Corporations issuing bonds may call or retire them prior to maturity. Callable bonds can be
retired after a certain date at a stated price. Refundable bonds allow an existing issue to be
retired and replaced with a new issue at a lower interest rate.

2.1 Definition of Extinguishment

A liability cannot be derecognized in the financial statements until it has been extinguished. A
liability is considered extinguished if the debtor pays or the debtor is legally released.

2.1.1 Debtor Pays

A liability is considered extinguished if the debtor pays the creditor and is relieved of its
obligation for the liability.
  Bond Extinguishment at Maturity
If a bond is paid at maturity, the carrying value of the bond is equal to the face amount of
the bond and no gain or loss is recorded:
Journal entry retirement at maturity of a bond issued for $1,081,109 with a face value of
$1,000,000. The premium has been fully amortized by maturity.

DR Bonds payable $1,000,000

CR Cash $1,000,000

  Bond Extinguished Before Maturity

If a bond is extinguished before maturity, a gain or loss is generally recorded. The gain or
loss is the difference between the carrying value of the bond (Face value less Unamortized
discount or plus Unamortized premium) and the cash paid to extinguish the bond.

2.1.2 Debtor Legally Released

A liability is considered extinguished if the debtor is legally released from being the primary obligor
under the liability, either judicially or by the creditor. A troubled debt restructuring would result in
the extinguishment of debt only if the debt were forgiven by the creditor as the result of a transfer
of assets or the transfer of equity interest. A modification of terms is not extinguishment.

2.2 In-Substance Defeasance Not Extinguishment

An in-substance defeasance is an arrangement in which a company places purchased securities
into an irrevocable trust and pledges them for the future principal and interest payments on its
long-term debt. Because the company remains the primary obligor while there is outstanding
debt, the liability is not considered extinguished by an in-substance defeasance.

© Becker Professional Education Corporation. All rights reserved. Module 6 F5–63