Must Know

Question 1

Equity Investment

Answer 1

0-20% –> Fair Value –> Net Income
20-50% –> Equity
+50% –> Consolidation

Question 2

Accounting Treatment Debt Investment

Answer 2

Held For Collection –> Amortized Cost –> Not Recognized

Held For Collection and Selling –> Fair Value –> Recognize as other comprehensive income

Trading Securities –> Fair Value –> Recognized in Net income

Question 3

Assume Stated Rate of 8%

Answer 3

6% –> Premium
8% –> Par Value
10% –> Discount

Question 4

If bond is issued at Discount

Answer 4

The amount paid at maturity is more that the issue price

Question 5

If bond is issued at Premium

Answer 5

The amount paid at maturity is less than the issue price

Question 6

Amortization of a Discount

Answer 6

Increases bond interest expense

Question 7

Amortization of a Premium

Answer 7

Decreases bond interest expense

Question 8

Contingent Liability

Answer 8

Virtually Certain –> At least 90% –> Report as a Liability

Probable –> 51-89% –> Report as a Liability

Possible but not probable –> 5-50% –> Disclosure

Remote –> Less that 5% –> No disclosure required

Question 9

Contingent Asset

Answer 9

Virtually Certain –> At least 90% –> Report as an Asset

Probable (More likely than not) –> 51-90% –> Disclosure

Possible but not probable–> 5-50% –> No disclosure required

Remote –> Less than 5% –> No disclosure required