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CPA FAR Exam > CPA FAR I-75 Comp income > Flashcards

CPA FAR I-75 Comp income Flashcards

1
Q

total comprehensive income

A

net income + other comprehensive income

net income closed to retained earnings
OCI closed to AOCI
both go to Equity

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2
Q

other comprehensive income

A

GAAP states certain transaction cannot hit the income statement, but they go directly to equity. these items will likely later hit I/S

one statement = bottom of I/S, net of tax
two statements= separate I/S and statement of comp income, net of tax

AOCI = PUFI
pension adjustments
unrealized gains/loss AFS securities and hedges
foreign currency translation gain/loss
investment specific risk

OCI= closed to AOCI at end of year (equity acct B/S)

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3
Q

total comprehensive income includes

A

all changes in owners’ equity during a period except those resulting from owner investments and distributions

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4
Q

total comprehensive income does not include

A

does not include: retrospective effects of changes in accounting principle (beg RE adjustment), prior period adjustment (error correction, also beg RE adj)

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5
Q

total comprehensive income = NI + OCI

A

the purpose of reporting total comprehensive income is to summarize all changes in equity from non-owner sources

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6
Q

which is an element of total comprehensive income?
1. investments by owners
2. sales revenue
3. distributions to owners
4. deferred revenue

A
  1. sales revenue = I/S
    REGL=> net income=> retained earnings=> equity
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7
Q

according to FASB conceptual framework, total comprehensive income includes which if the following?
I. loss on disc ops
II. Investments by owners

A

I. loss on disc ops

loss on disc ops=> impacts net income=> RE=> equity

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8
Q

purpose of reporting total comprehensive income?
1. to provide retroactive info regarding chg acctg principle
2. reconcile the difference between net income and cash flows provided from operating activities
3. to summarize all changes in equity from nonowner sources
4. to reduce AR to NRV

A
  1. to summarize all changes in equity from nonowner sources

total comprehensive income represents all changes in SE that come from nonowner sources

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9
Q

REGL and income statement

A

I/S is where items are reported that are ready to impact corporate earnings in the current year

unrealized gains and losses from ALL equity securities= I/S

items ready to impact I/S

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10
Q

OCI other comprehensive income

A

OCI is where items are reported but not ready to impact earnings in the current year

items NOT ready to impact I/S= PUFI

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11
Q

unrealized gains and losses on which of the following debt securities are includes in OCI?
1. AFS securities
2. Trading securities
3. HTM securities

A

correct:
1. unrealized gains or losses AFS DEBT securities = OCI

incorrect:
2. goes to I/S
3. HTM not reported

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12
Q

ignoring tax effects, how much should be reported as OCI?
revenue = $400,000
operating expense = $270,000
loss on sale of fixed assets $30,000
unrealized gain AFS debt securities $20,000

A

gain $20,000 = from AFS debt securities’ unrealized gain

OCI= usually reported net of tax

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13
Q

ignoring tax effects, how much should be reported as total comprehensive income?
revenue = $400,000
operating expense = $270,000
loss on sale of fixed assets $30,000
unrealized gain AFS debt securities $20,000

A

total comprehensive income = NI + OCI

400,000 + (270,000) + (30,000) + 20,000 = 120,000

TCI = $120,000

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14
Q

ignoring tax effects, how much should be reported as OCI?
revenue = $400,000
operating expense = $270,000
loss on sale of fixed assets $30,000
unrealized gain AFS debt securities $20,000
loss on sale of securities $5,000

A

gain $20,000 = from AFS debt securities’ unrealized gain (usually reported net of tax)

realized loss = part of net income I/S (subtracted)

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15
Q

ignoring tax effects, how much should be reported as total comprehensive income?
revenue = $400,000
operating expense = $270,000
loss on sale of fixed assets $30,000
unrealized gain AFS debt securities $20,000
loss on sale of securities $5,000

A

total comprehensive income = NI + OCI

400,000 + (270,000) + (30,000) + 20,000 + (5,000) = 115,000

TCI = $115,000

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16
Q

closing entries= net income gets closed to RE

A

close net income:
DR Net income
CR retained earnings

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17
Q

closing entries= OCI to AOCI

A

move OCI=> AOCI
DR OCI gain
CR AOCI gain (SE)

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18
Q

Which gets closed to retained earnings at the end of the year?
1. net loss
2. OCI

A

net loss (or gain) gets closed to RE

OCI gets closed to AOCI

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19
Q

which are NOT stockholders’ equity accounts?
1. AOCI
2. Retained earnings

A

Both ARE stockholders’ equity accounts

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20
Q

which of the following is to summarize all changes in equity from nonowner sources?
1. OCI
2. total comprehensive income
3. net income
4. cash flow statement

A
  1. total comprehensive income

goal is to summarize all changes in equity from nonowner sources

net income + OCI = TCI

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21
Q

Company info:
Net income $20,000
positive $2,000 cumulative effect change in accounting principle
$5,000 unrealized gain AFS securities

What is TCI?

A

20,000 + 5,000 = $25,000 TCI

2,000 = change beg balance RE for prior period adjustments

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22
Q

Company info:
Net income $80,000
prior period adjustment $10,000 related to failure to accrue warranty exp on prior yr I/S
$6,000 unrealized loss AFS securities

What is TCI?

A

80,000 + (6,000) = 74,000 TCI

10,000 = adjustment to beg balance RE

23
Q

OCI: pension adjustments

A

OCI= certain pension adjustments (gain or loss) go direct to equity without hitting I/S

these include changes in the funding status of a pension plan due to actuarial gains or losses, prior service costs from plan amendments, and transition assets or obligations. These are amortized to income over several years

I/S= service cost, interest on PBO and expected return

24
Q

pension plan: prior service cost

A

incurred when pension plan is initiated giving employees credit for working prior to pension plan inception

plan actuary estimates the prior service cost which is the amount the employer owes to the plan based on services performed by employees in the years prior to the pension plan

if debited pension expense this year (Yr 11) for the ten years prior for a new pension plan to cover the prior ten years of service, the expense would not be spread across the ten year period prior to inception of the pension plan. Net income would take a big hit and it does not adhere to the matching principle. the amount in OCI will be expensed over time to hit the I/S incrementally via amortization

prior service cost= transition obligation or existing net obligation

Orig entry:
DR OCI
CR pension liab

**then amortize over future periods:
DR pension expense
CR OCI

25
Q

Begins pension plan Jan 1, Yr 5
recorded min pension liab adjustment $20,000 to cover prior years
Gain on sale of equipment $50,000
Net income $400,000
how much is OCI for year 5?

A

$20,000 other comprehensive loss

DR OCI loss
CR Pension liab

the OCI loss will be amortized incrementally:
DR pension expense
CR OCI

26
Q

Prior service cost: plan amendment

A

pension plan may be amended to increase employee benefits

Ex orig plan = 50% of employee salary but now change to 60% of employee salary. actuary will calc the difference needed to add the benefit going back to each employee’s first day = $300,000 amendment

DR OCI $300,000
CR pension liability 300,000

at the end of the year, the OCI loss will incrementally be amortized
DR pension exp 30,000
CR OCI 30,000

27
Q

pension plan: existing net obligation

A

amount that employer must put in the plan to catch up calculated by the actuary (gives employees credit for working prior to plan inception)

28
Q

amended pension plan for additional benefit Dec 31, yr. 5
recorded min pension liab adjustment $20,000
gain on sale equipment $70,000
Net income $300,000
OCI Year 5

A

$20,000 OCI loss not on income statement in the year of estimation, it will be amortized incrementally
DR OCI 20,000
CR pension liability 20,000

29
Q

5 items that bypass I/S and go directly to equity

A

PUFI:
Pensions- prior service cost and actuarial gains and losses
unrealized gain/loss AFS debt securities and hedges
foreign currency translation adjustments
investment specific risk
IFRS revaluation surplus of fixed assets

30
Q

pension plans: actuarial gains and losses

A

accounted for the same way as prior service cost = put in OCI and amortize over future periods

Assume actuarial loss $100,000
DR OCI 100,000
CR pension liability 100,000
amortize:
DR pension expense
CR OCI

31
Q

company recorded actuarial loss
increased minimum pension liability $40,000 Dec 31, Yr 5
actuary reported more employees were expected to participate in the pension plan than orig anticipated
Net income $400,000
unrealized gain AFS sec $100,000
Total comprehensive income =

A

TCI = NI + OCI
400,000 + 100,0000 + (40,000) = 460,000

TCI $460,000

32
Q

pension plan: actuarial gain journal entries

A

actuarial gain $100,000:
DR pension liability 100,000
CR OCI 100,000
amortize:
DR OCI 10,000
CR pension expense 10,000

33
Q

reported actuarial gain 20,000 pension liab Dec 31, Yr 5
actuary estimated fewer employees were expected to participate in the pension program vs original estimate
Net income $400,000
unrealized gain AFS sec $100,000
what is TCI?

A

TCI = net income + OCI
400,000 + 100,000 + 20,000 = 520,000
TCI = $520,000

34
Q

reported actuarial gain 20,000 pension liab Dec 31, Yr 5
actuary estimated fewer employees were expected to participate in the pension program vs original estimate
Net income $400,000
unrealized gain AFS sec $100,000
loss on sales debt sec $30,000
what is TCI?

A

loss on sale debt sec = already included net income

TCI = net income + OCI
400,000 + 100,000 + 20,000 = 520,000
TCI = $520,000

35
Q

OCI: foreign currency translation adjustment

A

when a US company translated the financial statements of a foreign subsidiary from foreign currency to USD, those translation adjustments go to OCI

I/S= Conversely, if a US company engages in foreign transactions (importing and exporting) the gains and losses go to earnings!

36
Q

reported positive foreign currency translation adjustment 20,000 Dec 31, Yr 5
Net income $400,000
unrealized loss AFS sec $60,000
what is TCI?

A

TCI = NI + OCI
400,000 + (60,000) + 20,000 = 360,000

TCI = $360,000

37
Q

Reported as OCI/loss?
Sales revenue $90,000
gain on early extinguishment of bonds $24,000
foreign currency transaction loss ($5,000)
actuarial loss pension plan ($2,000)
foreign currency translation gain $9,000

A

(2,000) + 9,000 = 7,000 OCI

($5,000) foreign currency transaction not translation!!

38
Q

what happens to foreign currency translation adjustments in OCI?

A

foreign currency translation adjustments (gains or losses) remain in OCI until sale or liquidation of the investments in the foreign entity

39
Q

effective portion of fair value hedge (gains and losses) are reported

A

in earnings!

goes to I/S

40
Q

effective portion of cash flow hedges (gains and losses) are reported

A

OCI!

ineffective portion = I/S

effective portion of cash flow hedges (good news) remains part of OCI until the cash flows associated with the hedged item are REALIZED

“effective” = it worked the way we planned; does not go to I/S yet=> direct to equity

41
Q

Calculate OCI:
pension net gain $40,000
unrealized gain equity securities $32,000
foreign currency translation loss ($44,000)
gain effective portion cash flow hedge $21,000

A

40,000 + (44,000) + 21,000 = 17,000

OCI = $17,000

unrealized gains/losses equity securities go to I/S

42
Q

which are part of OCI?
1. foreign currency transaction gains
2. unrealized losses equity securities
3. loss due to obsolete inventory
4. effective portion cash flow hedges

A
  1. effective portion cash flow hedges = these items remain in OCI until cash flows assoc with hedged items are realized
43
Q

IFRS only= revaluation surplus

A

revaluation surplus= a gain recognized when intangible of fixed assets are revalued upward
gain not booked on I/S, rather booked to OCI=> never reclassed to I/S

obstacle to convergence: certain fixed assets instead of having them on the books at cost, IFRS revalues, marks them to market value
*this is only IFRS not GAAP

44
Q

impairment losses on asset write downs

A

reported I/S

45
Q

IFRS revaluation surplus on fixed or intangible assets

A

booked to OCI

46
Q

IFRS for Dec 31 reporting:
loss on effective portion of a cash flow hedge $60,000
revaluation surplus from revaluation of fixed assets $25,000
unrealized gain AFS debt securities $32,000
what should be reported as OCI?

A

loss on effective portion of a cash flow hedge ($60,000)
revaluation surplus from revaluation of fixed assets +$25,000
unrealized gain AFS debt securities +$32,000

what should be reported as OCI/loss? ($3,000)

47
Q

Regarding comprehensive income, net income is included:
1. total comprehensive income
2. OCI

A

TCI = NI + OCI
1. total comprehensive income

48
Q

gains or losses from which of the following are reported in OCI?
1. effective portion fair value hedge
2. effective portion cash flow hedge
3. both
4. neither

A

OCI= 2. effective portion cash flow hedge

49
Q

which of the following is a component of OCI?
1. gain on foreign currency transaction
2. unrealized gain or loss on trading securities
3. loss on foreign currency translation adj
4. changes FMV inventory

A
  1. loss on foreign currency translation adj
50
Q

recording of comprehensive income would include:
1. dividends
2. comprehensive income/share
3. net income
4. proceeds from sale of stock

A
  1. net income
51
Q

calculate OCI:
unrealized gain on equity securities $32,000
foreign currency translation loss $44,000
gain from effective portion of cash flow hedge $21,000
loss from effective portion of fair value hedge $10,000

A

calculate OCI:
unrealized gain on equity securities
foreign currency translation loss ($44,000)
gain from effective portion of cash flow hedge $21,000
loss from effective portion of fair value hedge

OCI= ($23,000)

52
Q

which of the following is correct regarding comprehensive income?
1. must present comprehensive income/share on either the face of financial statements or in footnotes
2. CI can be presented together with I/S or as a separate statement of comprehensive income

A
  1. CI can be presented together with I/S or as a separate statement of comprehensive income
  2. is incorrect= not displayed
53
Q

Securities classification

A

Trading debt: I/S both realized and unrealized G/L; mark to market

AFS debt: unrealized G/L= OCI; realized G/L= I/S; mark to market

HTM Debt: unrealized G/L=none; realized G/L= I/S, NOT marked to market

Equity securities: unrealized or realized G/L= I/S, mark to market

CPA FAR Exam (25 decks)

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