Deck 1

Question 1

A change from the cost approach to the market approach of measuring FV is considered to be what type of accounting change?

Principle
Estimate
Valuation Technique

Answer 1

A change in the valuation technique used to measure fair value is a change in accounting estimate.

Question 2

When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid

Plus discount?
minus discount?

Answer 2

Plus discount

JE for amortization of the discount:
Interest Expense XXX
Amortization of bond discount XXX
Cash (or interest payable) XXX

Question 3

If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which is tested first?

Answer 3

A company will perform impairment analysis and record necessary entries on all assets of the company prior to performing impairment analysis related to goodwill. Reporting units (segments) will be separately tested for impairment analysis.

If the fair value of a reporting unit is less than the carrying value, the impairment is assumed to be due to the goodwill as all other assets of the reporting unit would already have been properly adjusted.

Question 4

When a firm issues compensatory stock options to an employee and the options expire, the correct accounting treatment is to do what?

Answer 4

When employee stock options expire, the firm reclassifies the remaining balance from additional paid-in capital—stock options (debit) to additional paid-in capital—expired stock options (credit).

Question 5

How are dividends and interest treated for cash flows?

Answer 5

Dividends Paid = Financing
Dividends received = operating

Interest received and paid = Operating

IFRS
Dividends and interest paid = operating or financing
Dividends and Interest received = operating or investing

Question 6

How would you calculate the interest income on a non-interest baring note that covers multiple years?

For example, a $600 note that was 10% and has a PV of 1 at 10% of .75?

Answer 6

A non-interest bearing note should be recorded at its present value calculated using the prevailing market interest rate. The market interest rate is then used to calculate interest on the note.

$600 * .75 = $450 * .10 = 45 is the interest income for the year.

Question 7

Are Stock dividends and stock splits recorded under fair value?

Answer 7

Stock dividends and stock splits are not considered income to the recipient.

Therefore, investors do not record stock dividends at fair market value. They simply reallocate the investment account balance (under either method – cost or equity) over more shares so that value per share decreases.

Question 8

What is considered a liquidating dividend?

Answer 8

Any part of the dividend a company paid over their REs account.

Question 9

Are trading securities recorded as realized or unrealized gains/ losses when they are there is a change in market value?

Answer 9

Trading securities are recorded at a realized gain or loss on the income statement. it doesnt matter if it is sold or not, it its just a change in market value it is a realized gain/loss.

Question 10

All credit losses, even on available for sale securities are recognized in earnings.

Answer 10

All credit losses, even on available for sale securities are recognized in earnings.

Question 11

To classify an investment as held-to-maturity, the company must have BOTH the intent and the ability to hold the security until maturity.

If a debt security is purchased at par value, it will be valued and reported at the purchase price until it matures.

A held-to-maturity security can be reported as either a current or a non-current liability.

Answer 11

To classify an investment as held-to-maturity, the company must have BOTH the intent and the ability to hold the security until maturity.

If a debt security is purchased at par value, it will be valued and reported at the purchase price until it matures.

A held-to-maturity security can be reported as either a current or a non-current liability.

Question 12

How do you calculate Impairment for GAAP and IFRS?

Answer 12

GAAP:

1. Is Future cash flows < carrying value?
2. If yes there is impairment. Impairment is calculated by taking FV - CV.

IFRS:
Impairment loss is recorded for the excess of the CV - its recoverable amount

Recoverable amount = Greater of:

1. FV - Costs to sell
2. Assets value in use (PV of future cash flows).

Question 13

Are sick days included in the liability for compensated absences at the end of the year for any company?

Answer 13

Even if the sick days can be carried forward, they do not vest and are not included in a calculation for the liability for compensated absences.

Question 14

What are the characteristics of a defined contribution plan?

Answer 14

With a defined contribution plan, the employees will typically make contributions every pay period. The employer may also match the employee contributions. As this is not a defined benefit plan, there will not be a fixed amount provided at retirement. The amount available at retirement will depend on the amount of the contributions over time and the returns earned on those contributions.

Question 15

Are the purchase of stock of another company and the purchase of treasury stock a cash flow item from investing or financing?

Answer 15

The purchase of stock of another company and the purchase of U.S. Treasury notes are both cash outflows related to investing activities as they result in assets on the balance sheet.

Question 16

Use stated value like par value. IF theres no par value, but there is a stated value, use stated value like par value

Answer 16

Use stated value like par value. IF theres no par value, but there is a stated value, use stated value like par value

Question 17

How is the underfunded or overfunded status of a defined benefit pension plan recorded?

Answer 17

US GAAP requires that the funded status (FV of plan assets - PBO) of a company’ defined benefit pension plan(s) be reported on the balance sheet as a non-current asset (if overfunded) or a current/ non-current liability (if underfunded).

Question 18

Compensatory stock options should be valued at the FV of the option on the grant date

Answer 18

Compensatory stock options should be valued at the FV of the option on the grant date

Question 19

How is pension loss treated under IFRS?

Answer 19

The pension loss is recorded in OCI and its not reclassified (amortized) to the income statement in subsequent periods.

Question 20

How do you calculate current portion of income tax and income tax expense?

Answer 20

Current Portion of income tax = Taxable income for the year after temporary and permanent differences are removed * tax rate.

Income tax expense = Taxable income for the year with the change in deferred tax assets and liabilities applied to that amount and then multiplying that amount by the tax rate.

Question 21

How do you calculate noncontrolling interest under the IFRS partial goodwill method and under GAAP?

Answer 21

IFRS
NCI = FV of subsidiary net assets * NCI%

GAAP
NCI = FV of subsidiary X NCI %

You would calculate FV of subsidiary by taking the purchase price/ % ownership being acquired. So if it was 80% then you would divide this by 80% and then in the calculation above you would take this calculation * 20%.

Question 22

When calculating goodwill in a situation where the acquisition is being acquired through the issuance of the purchasers stock instead of by paying cash, do you use the par value or the market value to calculate the purchase price?

Answer 22

You would use the market value * # of shares issued

Question 23

What are some facts for a VIE?

Answer 23

1. The entity is not self-supporting
2. A significant amount of power, along with being a primary beneficiary of the VIE, will lead to the requirement for the investor company to consolidate the VIE in its financial statements.
3. The majority of voting rights does not necessarily tie to which parties exercise actual power and control over the VIE.

Question 24

What are some acquisition facts?

Answer 24

1. In an acquisition method business combination, the subsidiary can be acquired using any agreed upon form of consideration
2. Financial statements consolidated using the acquisition method do not show the equity of the subsidiary company
3. In the year of acquisition, the acquisition method consolidation is done starting on the date of acquisition.

Question 25

For financial instruments (derivatives), should the carrying value and the FV being disclosed on the FSs?

Answer 25

Yes, both must be disclosed for most financial instruments (when it is practicable to estimate FV).

Question 26

What are some facts about derivatives?

Answer 26

1. AA derivative must have one or more underlyings AND one or more notional amounts, require little or no net investments, and permit or require a net settlement.
2. Derivatives can be recorded as assets or liabilities.
3. If a derivative is speculative (no hedge designation), changes in FV are reported on the income statement
4. Changes in the FV of a FV hedge are reported on the income statement.

Question 27

Is the concentration of credit risk and market risk required disclosures (derivatives)?

Answer 27

Concentration of credit risk, the risk that the other party to the instrument will not perform, must be disclosed. Disclosure of market risk, the risk of loss from changes in market prices, is encouraged, but not required under GAAP.

Note that disclosure of market risk is required under IFRS.

Question 28

Is a leased item depreciated if it is an operating lease by the lessee?

Answer 28

No, leased items will not be depreciated on the books of the lessee. A ROU asset will be booked, which will be amortized by the lessee.

Question 29

When a company uses the completed contract method to account for long-term construction contract, revenue is recognized when the job is completed, NOT when progress billings are collected or when they exceed recorded costs.

Answer 29

B

Question 30

Are software costs on internally developed software expensed initially or depreciated over their economic lives?

Answer 30

Software developed internally, costs incurred in the preliminary project stage are expensed under GAAP. The costs after the preliminary project stage are capitalized and depreciated over the economic life of the product.