FAR 5.1

Question 1

Dividend Declaration JE

Answer 1

Dr. RE

Cr. Dividend Payable

Question 2

How much to include in ST liability at the end of the year if the company issues stock in the subsequent year to payoff a portion of the liability?

Answer 2

The amount of stock issued should be used to offset the ST liability bc it will be used to pay it off, as long as it occurred prior to financial statements being issued.

Question 3

Warranty expenses vs. warranty liability, when should each be recognized?

Answer 3

Warranty expense should be recognized at the date of sale.

Warranty liability is reduced as warranty services are performed.

Question 4

Liability disclosures

What is required for a “reasonable possible” (not probable) loss?

Answer 4

Footnote only

Question 5

How should a contingent liability of a related party (CEO) be treated if remote?

Answer 5

Disclosed only

Contingent liabilities which are remote neither disclosed or accrued. However, related party transactions must be disclosed.

Question 6

How are gain contingencies reported?

Answer 6

Note disclosure only

Not accrued until the transaction generating the gain is completed.

Should be disclosed unless remote. If a range is given, go with the lower number, unless a “most likely amount” is also given, then go with that number.

Question 7

Loss contingency when insurance policy is in effect, how to report probable damages? Insurance policy has 500k deductible, and probable losses are 3.5m?

Answer 7

Need to report an accrued liability for 3.5mm.

The insurance proceeds will be treated as a gain contingency and not recorded until received.

Question 8

LT Liabilities

Imputed interest on notes, when to include?

Answer 8

Normally when no, or unreasonably low rate is stated.

Or, on transactions that do not exceed one year.

In other words, record at Face Value.

Question 9

Answering bond carrying value questions when your purchasing bonds that include accrued interest?

Answer 9

Need to make sure and subtract out the accrued interest receivable from the purchase price to get to the initial carrying value. The difference from face value then becomes the discount or premium

Note: if ISSUING bonds then accrued interest needs to be ADDED to the bond proceeds received.

Question 10

Bond discount amortization JE

Answer 10

Dr. Interest exp
Cr. Amortization of bond disc
Cr. Cash or Interest payable

Question 11

How is the interest payable of a bond calculated

Answer 11

face value times contractual interest rate, not the market/effective rate

Question 12

Bond accrued interest starts accruing when?

Answer 12

from date of last interest payment