F4 Flashcards
(45 cards)
Non-Interest-Bearing Note Payable
Step 1: Compute Present Value of Note (Using Imputed Rate)
PV = X/(1+i)^n
Step 2: Initial Journal Entry (eg)
Account
Equipment Debit $75,131.48
Discount on Notes Payable Debit $24,868.52
Notes Payable Credit $100,000.00
Step 3: Amortization Schedule (Effective Interest Method)
Carry Value * Market rate = interest expense/amortization
Step 4: Journal Entry for Interest (Year-End)
Account
Interest Expense Debit $7,513.15
Discount on Notes Payable Credit $7,513.15
Below-Market Interest Rate Note Payable
Step 1: Compute Present Value of Note
eg.
PV of Interest(stated) = $5,000 × (PV Annuity Factor @10%, 3 yrs) = $5,000 × 2.48685 = $12,434.25
PV of Principal = $100,000 / (1.10)^3 = $75,131.48
TotalPV =12,434.25 + 75,131.48 = 87,565.73
Step 2: Initial Journal Entry
Account
Cash Debit $87,565.73
Discount on Notes Payable Debit $12,434.27
Notes Payable Credit $100,000.00
Step 3: Amortization Schedule
Beg. Balance * Market rate = Interest expense then less cash paid = amortization
Step 4: Journal Entry for Interest (Year-End)
Account
Interest Expense Debit 8,756.57
Discount on Notes Payable Credit 3,756.57
Cash Credit 5,000.00
Name 4 types of restructuring involving debt
- Transfer of Assets
- Transfer of Equity Interest
- Modification of Terms
- Combination of the three
Interest expense on a bond is
for premium lower due to amortized amount being subtracted from the coupon interest
for discount higher due to amortized amount being added to the coupon interest
Under U.S. GAAP, bond issuance costs are not capitalized as separate assets.
Instead, they are deducted from the carrying amount of the liability (i.e., the bond payable) and amortized over the life of the bond.
Initial liability lower than face value; increases over time.
Higher interest expense vs. cash paid; affects net income.
Only the coupon affects operating cash flow. Issuance cost affects financing cash flow.
The Investor records bonds as
Initial:
Debit Investment in bonds
Credit Cash
Amortization:
Debit Cash
Credit/Debit investment in bond(amort. discount/premium)
Credit Bond interest revenue
so for a discount the investor records more higher revenue with amortization and the issuer records higher interest expense
for a premium the investor records lower revenue with amortization and the issuer records lower interest expense
When would you recognize a liability associated with an exit or disposal activity
only when a transaction or event occurs that creates a present obligation of an entity to transfer an economic benefits
For operating Lease there is no interest expense?
There is a lease expense with includes Interest expense and amortization expense to lease payment made.
The lease liability and accumulated amortization ROA is amortized based on payment less effective interest.
A financing lease includes line for interest expense not lease expense?
The interest expense line is the effective interest amount and lease liability is reduced by the amortization amount with payment on the lease
The ROA is amortized based on the straight line method separately
Acquisition Date: October 1, Year 1
Face Value: $200,000
Purchase Price (excluding accrued interest): $215,000
Premium: $15,000
Bond Maturity: January 1, Year 8
Total Life from Purchase to Maturity: 6 years + 3 months = 75 months
Amortization Method: Straight-line under U.S. GAAP
Monthlyamortization= 15,000/ 75 = 200
As of December 31, Year 2, total premium amortized is:
15 months × 200 = 3,000
CarryingValue=215,000 − 3,000= 212,000
What is the sum of years digit method of depreciation formula?
N = useful life @ n(n+1)/2
Calculate carry value of treasury notes as investment:
Step1: Deduct accrued interest if any
to get to purchase price which includes
discount/premium
Step 2: Determine discount/premium by comparing step 1 to face value
Step 3: Use either straight line or effective interest method to determine monthly amortization of discount/premium.
Step 4: Calculate amortization to date based on month required
Step 4: Add calculated amortization to purchase price = carrying amount (at month required)
Gain/Loss on extinguishment of debt (bonds) =
Face value of bonds retired +/- prorata unamortized bond issuance cost/premium/discount = net carrying amount vs reacquisition price = G/L
The carry amount for a one year noninterest bearing note would be:
Face amount of note * discount rate = discount amount - face amount = proceeds at discount - monthly amortization of discount amount (SL) = carry amount at date
Stock dividends and stock splits are not considered income to the recipient.
(FVPL)/(FVOCI):
No journal entry is required at the time of the stock dividend.
Instead, you adjust the number of shares held and recalculate the per-share carrying amount.
The total carrying amount of the investment remains the same.
Equity method:
A stock dividend is a memo entry only.
It is treated as a non-monetary, non-income event, meaning:
No change in investment carrying value.
The number of shares increases, but the ownership percentage remains constant.
A lessee had a 10-year finance lease requiring equal annual payments. The reduction of the lease liability in Year 2 should equal:
The reduction of the lease liability in Year 2 should equal the current liability shown for the lease at the end of Year 1.
When would dollar-value LIFO be greater than the comparable base-year value?
When the price index is greater than 1.0
when calculating the sales before sales tax
you would divide the after tax bill by (1+i) to get sales before tax.
The difference is your tax amount.
a net decrease in A/R results
in higher income on a cash basis.
Cash basis revenue is higher because cash collections exceeded accrual basis revenue
Cash paid for accrued expenses (debit Accrued Expenses and credit Cash) results in
higher expenses under the cash basis than under the accrual basis.
Therefore, income would be lower because cash expenses are higher than accrual expenses.
Bonds with issuance cost
cash received reduced by issuance cost and added to discount to be amortized
Accretion expense is the increase in the
ARO liability due to the passage of time.
The credit adjusted interest rate is used to calculate the ARO
All costs associated with the issuance of bonds should be
amortized over the “outstanding” term of the bonds
eg. Promotion costs, Engraving and printing, Underwriters’ commissions
Deposits into a bond sinking fund are
an asset held by a trustee to repay the entire liability at maturity
sinking-fund requirement would be disclosed in a footnote but is not included as a current maturity of long-term debt
