Flashcards in 2015-05-05 - NINJA CPA FAR MCQs (Focus Notes) Deck (21):
What is the number of days in company's operating cycle when having the following info:
# days' sales in inventory = 39
# days' in trade account receivables = 41
Answer: 39 days + 41 days = 80 days
Explanation: Operating cycle is the time period between cash spent on goods and services and their conversion back to cash (from cash to inventories, to accounts receivables (upon sale of inventory to customer), and back to cash (cash collections on accounts receivables from customers).
How to calculate the times interest earned ratio?
Income before interest expense and taxes
= times interest earned ratio
Operating income $900,000
Interest expense (100,000)
Income before income tax = 800,000
Income tax expense (320,000)
Net income = 480,000
Preferred stock dividends (200,000)
Net income available to c/sholders = $280,000
$900,000 operating income / $100,000 interest expense = 9.0 to 1 ratio (answer)
How to calculate the Common stock, preferred stock, and additional APIC when have the following information:
On April 1, 20X1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
Common stock, no par, $1 stated value, 10,000 shares originally issued for $20 per share
Preferred stock, $10 par value, 5,000 shares originally issued for $60 per share
Common stock = $1 stated value x 10,000 shares
C/S = $10,000
Preferred stock = $10 par x 5,000 share
P/S = $50,000
APIC = ($20 - $1) x 10,000 on the CS
($60 - $10) x 5,000 on the P/S
So: ($19 x 10,000) + ($50 x 5,000)
= 190,000 APIC-CS + 250,000 APIC-PS
= 440,000 (total APIC)
Dr. Cash ($20 x 10,000) $200,000
Cr. C/S ($1 x 10,000) $10,000
Cr. APIC-CS ($20-$1 x 10000) $190,000
Dr. Cash ($60 x 5,000) 300,000
Cr. P/S ($10 x 5,000) 50,000
Cr. APIC-PS ($50 x 5,000) 250,000
The effective interest rate for a loan restructured in a troubled debt restructuring is based on _____.
The original contractual rate.
Explanation: Effective interest rate is on the Original Contractual rate. It does not deal with Current Interest Rate or rate specified in the restructuring agreement.
(1) What does Troubled debt restructuring deal with in terms of loan terms and receiving the amount on the debt to be paid off?
(2) When does the debt restructuring occur?
(3) What is the date of consummation of restructuring?
(4) How is the gain /loss calculated from debt restructuring?
(1) It's between a debtor and creditor where the debtor is having a hard time to pay off the loan to the creditor (lender).
This deals with
(1) Modify terms to reduce or defer cash payments
(2) Accepting cash, other assets, or an Equity Interest in the debtor to satisfy the debt (help pay it off) although the value received to the creditor is less than the debt amount.
 Restructuring may occur Before Maturiy or after maturity.
 Date of consummation of restructuring is the date of restructuring the debt where the Debtor recognize the gain / loss via
 Debt Book value (before restructure)
MINUS Total FUTURE CASH PAYMENTS of principal and interest (not discounted) after the debt restructured
= Gain or loss
(or extraordinary gain or loss depending circumstances meeting the criteria on extraordinary gain/loss)
What date to decide what the fair value is of a stock option plan given to company employees or officers?
How to calculate compensation expense in dealing with stock options?
Decide what fair value is on stock options given to company officers or employees on GRANT DATE.
Calculate compensation expense: Total stock option fair value / vesting period.
Example: $300,000 FV / 3 years (of vesting period).
Cost Recovery - How to calculate the gross profit from sales to customers in year 1 and year 2?
Here's the data:
3/31, Year 1 3/31, Year 2
Sales $10,000 $15,000
Cost of sales 8,000 9,000
on Year 1 sales 7,000 3,000
on Year 2 sales -- 12,000
Note: Cost recover is to recognize realized profit / gross profit when collected all the cash to cover the cost of sales.
Cost of sales is $8,000
Cash collected in year 1 = $7,000
Therefore, do not recognize any profit because the cash collections did not cover the entire cost of $8000.
Cost of sales is $9,000
Cash collected: $3,000 for year 1 sales; $12,000 for year 2 sales.
For year 1 sales cost recovery: $7,000 (yr 1) + $3,000 (yr 2)
For year 2 sales cost recovery: $12,000
Yr 1 collections: $7,000 + $3,000 = $10,000
$10,000 - $8000 (year 1 cost of sales) = $2,000 Gross profit
Yr 2 collections: $12,000 (this covers the $9,000 cost of sales in year 2), therefore:
$12,000 - $9,000 = $3,000 gross profit.
Thus: in year 2 - recognize the Gross profit for collections for Year 1 sales and year 2 sales
$10,000 collected - $8,000 costs = $2,000 GP
$12,000 collected - $9,000 costs = $3,000 GP
= $5,000 GP (reported in Year 2 only income statement)
How to calculate the construction interest capitalization?
Here's the data:
Construction loan = $300,000 loan with 10% interest on 1/1/YR 1
On 1/1/YR 1, constrution began with these payments:
1/1 Purchase land for $120,000
9/1 Progress payment to contractor for $150,000
Note: only calculate the portion of the interest during the time of construction. No interest capitalization before construction began or after construction ended.
$120,000 land purchase x 12 months / 12 months = $120,000
$150,000 contractor payment x 4 / 12 months (September to Dec) = $50,000
[$120,000 + 50,000] x 10%
= $170,000 x 10%
= $17,000 interest capitalized (answer)
Bond proceeds - how to calulate when have the following:
issued 500, 10%, $1,000 bonds at .98 accrued interest
Interest is paid semi-annually on April 1 and Sept 1.
Sale price = 500 x 1,000 x 0.98 = 495,000
Accr. int. = 500 x $1,000 x 0.10 x (4/12) = 16,667
Total bond proceeds received = 511,667
*Note: 4/12 is from Sept 1 to Dec 31 (Sept, Oct, Nov, Dec = 4 months)
How to calculate dollar LIFO?
Note: need to have price index and base year cost.
Index = Inventory at current year cost / Inventory at base year cost
Then: Year Index x year layer at base year cost
Then: Dollar Value LIFO inventory
= Prior year valuation + Current year layer
20X2 index = $80,000 current cost inventory / $60,000 inventory base cost
20X2 index = 1.333
20X2 layer = 20X2 index x 20X2 base year cost layer
= 1.333 x $15,000
Dollar LIFO inventory on Dec 31 20X2
= 12/31/X1 valuation (12/31/X1 Dollar LIFO) + 20X2 layer
= $46,000 + $20,000
What is the preferred stock dividend ratio?
Net income / preferred stock dividends paid out
Or: [Operating income minus all expenses] / Preferred stock dividends paid out.
480,000 net income / $200,000 preferred stock dividends = 2.4 to 1 ratio
Granting of equity interest
In granting equity interest to satisfy Troubled debt restructuring, proper accounting by debtor and credit are
- Recognize Stock Distribution at Fair Value
- Recognize Gain on restructuring of debt (equal to Equity FV - Debt Carry value: Example: $25,000 equity fair value - $28,000 debt carry value = $3,000 gain)
For trouble debt restructuring, when equity FV
What is a Rabbi trust?
Companies arrange various types of deferred compensation.
The most common is referred to as a rabbi trust. A grantor trust is set up to fund compensation for a group of managers or executives. The goal is to provide a benefit that is not taxable to the recipients until some later date when they actually receive compensation. To qualify for no current taxation, the trust agreement must explicitly state that the assets of the trust are available to satisfy the claims of general creditors in the event of bankruptcy of the employer.
Deferred revenue - subscriptions
How to calculate the Deferred revenue on subscriptions based on the following info:
April 15 and October 13 = date of publishing and shipping subscription magazine to customers (after company receive the cash)
March 31 and September 31 = cutoff dates where subscription payment by customers and the customers get their magazine in the next publication date.
Deferred Subscription revenue (Jan 1, 20X1) = $750,000
Cash receipts from subscribers = 3,600,000
$3,600,000 cash received 3/12 months = $900,000
*3/12 months (after Sept 31 cutoff, so, it's oct, nov, dec. i.e. 3 months after Sept 31 cutoff.)
Note: if cutoff date (last one was) Sept 1, then it's 4/12 months (Sept, Oct, Nov, Dec)
How to calculate bond interest expense with the following data:
June 1 issued bonds
Principal amount = 200,000
Interest rate = 7%
Interest payment dates are on April 1 and Oct 1.
200,000 (principal) x 7% (interest rate) x 7/12 months (time)
*Note: the 7/12 months is from June 1 to Dec. 31
(Jun, Jul, Aug, Sep, Oct, Nov, Dec)
If it's June 30 to Dec 31, then it's 6 months because Jun 30 is like July 1st. (Jul, Aug, Sept, Oct, Nov, Dec.)
How to calculate additional pension liability when have the following data:
Projected benefit obligation $103,000
Plan assets at fair value 78,000
Net periodic pension cost 90,000
Employer’s contribution 70,000
(1) Projected benefit obligation (PBO) - Plan assets fair value = underfunded pension
(2) Net pension costs > contributions
Net pension costs - contributions = result
(3) Result - underfunded pension = additional liability
(1) $103,000 - 78,000 = 25,000 underfunded
(2) 90,000 net pension cost - 70,000 contribution = $20,000
(3) $25,000 underfunded - $20,000 = $5,000 additional liability
Convertible debt securities should receive a ____ ____ rate than a non-convertible debt security
Convertible debt securities should receive a LOWER INTEREST rate than a non-convertible debt security.
To maintain asset in good working order consistent with original desires and expectations. Example: ordinary repair and maintenance.
Accounting treatment is ______.
Charge to expense in period incurred.
Debit Repairs expense and maintenance
To restore asset to predamage condition. Examples: repairs resulting from fire, flood, accident, and other similar events.
Accounting treatment is ______ .
Charge portion NOT reimbursable from insurance to loss account in period in which event occurred.
Debit Loss ($$ restoration cost - reimbursed $$)
To enhance the service potential of the asset by increasing its efficiency or capability. Examples: additions, improvements, and appropriate portion of other asset modifications, overhauls, and rearrangements.
Accounting treatment is ______ .
Capitalize by Debit the asset account.
Carry amount of asset or parts of assets replaced should be removed from accounts and recognize gain or loss.
Debit Asset (enhance costs)
Debit Loss (if any)
Cr. Asset (old asset carry amount)
Cr. Gain (if any)