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F4 Flashcards

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1
Q

what are current liabilities valued at?

A

settlement values or NRV

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2
Q

what are trade notes payable?

A

formal, written promises to pay on a certain date for the purchase of goods, supplies, or services

they may include a stated interest rate

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3
Q

should unemployment taxes and employer’s share of payroll taxes (social security, medicare) be accrued by the employer as an expense?

A

yes

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4
Q

what are self insurance liabilities?

A

occur when an entity is liable for the risk they choose to bear themselves rather than obtaining third party insurance

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5
Q

what is an asset retirement obligation?

A

a legal obligation associated with the retirement of a tangible, long-lived asset that results from the acquisition, construction, or development and/or normal operation of a long-lived asset

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6
Q

how are asset retirement obligations recorded?

A

an asset (asset retirement cost - ARC) and a liability (ARO) on the B/S equal to the FV of the asset retirement obligation or the PV of future obligations if the FV cannot be determined

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7
Q

what is expensed on the ARO and ARC, respectively, in subsequent periods after initial measurement?

A

ARC: depreciation expense
ARO: accretion expense

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8
Q

what is JE if discount is not taken and net method was used upon purchase?

signify difference between periodic and perpetual inventory method

A

DR: AP
DR: purchase discount (periodic) or inventory (perpetual)
CR: cash

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9
Q

what 2 things must be present for current obligations expected to be refinanced to be excluded from CL and kept in NCL?

A
  1. intent to do it (existence of noncancelable financing agreement)
  2. ability to do it (actual refinancing prior to issuance of FS)
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10
Q

are all taxes an expense to the corporation?

A

no, but the company will have a payable for all taxes

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11
Q

what are the 2 ways to book a property tax?

A

1) accrue it -> record property tax expense in period incurred rather than when bill is paid
2) recorded as a payable upon receipt of the tax invoice and expensed in the year of receipt

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12
Q

is sales tax an expense to the company?

A

no, classified as a payable upon acceptance of cash during the sale and paid out later

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13
Q

what are the 4 conditions that have to be met for employer to accrue vacation expense (what is the mnemonic)?

A

S - services have already been rendered by employees (they earned the vacation)
O - the obligation relates to rights that vest or accumulate (employee does not lose vacation time if they do not use it)
C - payment of the compensation is probable (employee will take vacation within next year)
R - the amount can be reasonably estimated (accrue for salary expense at current year salary)

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14
Q

what if only SOC are met for vacation accrual?

A

a disclosure in the FS is adequate and no JE is required

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15
Q

what is the JE when the employee takes their vacation time that has been accrued and their salary went up from the time the accrual occurred?

A

DR: salaries and wages payable (for vacation accrual)
DR: salaries and wages expense (for new salary)
CR: cash

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16
Q

what is the liability recorded at for the costs associated with an exit or disposal activity?

A

fair value

if not given then use present value of the future costs

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17
Q

what are 5 costs associated with exit and disposal activities?

A

involuntary employee termination benefits (severance pay)
costs to terminate a contract that is not a lease
consolidating facilities (moving them)
relocating employees
moving PPE

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18
Q

when should a liability associated with an exit or disposal activity be recognized?

A

only when a transaction or event occurs that creates a present obligation of an entity to transfer an economic benefit

ex. transfer assets, pay cash, provide services, pay severance pay, move PPE, etc.

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19
Q

exit or disposal liabilities may be adjusted in future periods because of:

A

revisions to the timing of, or estimated cash flows from, the exit or disposal activity

accounted for prospectively

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20
Q

how are estimated future operating losses accrued for in regards to exit and disposal activities?

A

not recorded until they actually occur

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21
Q

what are the disclosure requirements regarding timing for exit and disposal activities?

A

disclose in the period the activity was initiated and all subsequent periods until the activity is completed

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22
Q

what are 5 things that should be included in the disclosures for exit and disposal activities?

A

1) description of the exit or disposal
2) total amount expected to be incurred for each major cost (severance pay, moving PPE, etc.)
3) reconcile beginning and ending liability for each major cost
4) total amount incurred in current year and the cumulative amount to date
5) if the liability for a major cost is not booked a reason for why the cost cannot be reasonably estimated

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23
Q

what are 3 examples of AROs?

A

nuclear decommissioning
oil and gas industry
mining industry

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24
Q

what is accretion expense?

A

the increase in the ARO liability due to the passage of time calculated using the appropriate accretion rate

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25
what is formula for accretion expense?
ARO beginning carrying value x risk-adjusted discount rate = accretion expense
26
what rate is used if there is an upward revision on an ARO? a downward revision?
upward: current/new discount rate downward: historical rate
27
when should the costs of benefits be recognized if the terms of a deferred compensation arrangement attribute all or a portion of expected future benefits to a period of service greater than one year?
over that required period of service
28
Any change in the value of the liability after the property has been fully depreciated will be recognized in...
the nonoperating section of I/S
29
when would a contract obligation liability be accrued for during a termination of a contract that has no termination clause?
on the date the services are no longer used in the business (cease-use date) ex. if company is notified on Dec. 15, Y1 they will no longer need services on Feb. 28th, Y2, then Feb. 28, Y2 would be the date of the obligation was recorded not Dec. 31, Y1
30
what are contingencies?
existing conditions whose outcomes depend on some future event or occurrence
31
what are the 3 categories of contingencies?
probable reasonably possible remote
32
what is a loss contingency?
involves possible future loss whose existence is proved by subsequent events
33
what is a gain contingency?
a claim or right to receive assets whose existence is uncertain but may become valid upon the occurrence of future events
34
how are gain contingencies that are not remote recorded?
not accrued but are disclosed
35
how are loss contingencies that are probable and reasonably estimated recorded?
must be accrued based on the best estimate of the loss if no best estimate can be made, the minimum amount in the range is accrued and the possibility of the range is disclosed in a footnote
36
how are loss contingencies that are reasonably possible recorded?
not accrued but are disclosed with nature of the contingency and estimate of the possible loss
37
how are remote contingencies recorded?
generally ignored but if they are DOG guarantees they must be disclosed
38
what are premiums and warranties?
loss contingencies that are generally accrued by the entity and expensed as the expected amounts are probable and can be reasonably estimated
39
what are DOG guarantees?
types of loss contingencies Debt of others guaranteed Obligations of commercial banks under standby letters of credit Guarantees of repurchase receivables that have been sold or assigned
40
how are potential insurance proceeds treated (ex. in a lawsuit)?
would be treated as a gain contingency and not recorded until received but disclose it in the notes
41
how are potential loss contingencies treated?
the same as actual loss contingencies in terms of probable and reasonably estimated requiring a JE
42
how are general unspecified business risks (fire, flood, strikes, war) treated?
no loss accrual should be made nor is disclosure required
43
what are appropriated retained earnings?
set aside for a specific use like acquisition, expansion, lawsuit and are not available to pay dividends
44
can an appropriation of retained earnings be a substitute for booking a loss accrual?
no costs of losses should not be charged to appropriation of RE
45
what are premiums and what are they charged to?
offers to customers for the purpose of stimulating sales cost of premiums are charged to sales in periods that benefit from the offer
46
what is done with the number of outstanding premium offers?
they must be estimated accurately to reflect the current liability at the end of each period
47
what is a warranty and when should it be accrued?
seller's promise to "correct" any product defects liability must be created if the cost of the warranty can be reasonably estimated accrual should occur in the year of sale to "match" the cost with the corresponding revenue
48
do you accrue and disclose premiums and warranties?
yes
49
how is the value of the note determined if the note is noninterest bearing or the interest rate is unreasonable?
determined by imputing the market rate of the note and using the effective interest method
50
why do creditors use debt covenants in lending agreements?
to protect their interest by limiting or prohibiting the actions of debtors to maintain credit ratings and FMV of investments
51
what is it called when debt covenants are violated by the debtor?
technical default and the creditor can demand repayment by forcing bankruptcy
52
to adjust from the PV factor for an ordinary annuity to the PV factor for an annuity due...
add 1.00 to the PV of an ordinary annuity for 1 period less than what is asked ex. need annuity due PV factor for a 3 year lease with pmts at beginning of period *PV of annuity due for 3 years = PV of ordinary annuity for 2 periods + 1*
53
what are the 2 big differences between liabilities and equity?
liability has a maturity date and an obligation to repay the capital while equity does not
54
financial instruments in the form of shares that are mandatorily redeemable should be classified as a liability or equity, and why?
a liability because it represents an unconditional obligation
55
what is formula for gross notes payable?
payment x number of payments
56
how do you determine the discount on notes payable and what type of account is the discount on NP?
gross note payable - PV discount is a contract account because it is deferred interest expense
57
what are the 2 types of notes?
no principal is paid (no payment until maturity) periodic payments are made (reduces principal/interest)
58
a note issued solely for cash equal to its face amount is presumed to earn what interest rate?
the interest rate stated
59
what are 5 reasons imputed interest would not be required?
short-term payables are not paid in cash payables represent security deposits payables bear an interest rate determined by gov. agency payables arise from transactions between a parent company and its subsidiaries
60
what are the 3 things needed in a disclosure for a note payable?
full description of the payable effective interest rate face amount of the note
61
what are 3 ways creditors protect their interests in advance?
affirmative covenants negative covenants limiting or prohibiting the actions of the debtors
62
what are affirmative covenants?
activities the debtor has to do ex. pay taxes, safeguard assets
63
what are negative covenants?
activities the debtor should not do ex. borrow excessive amounts, pay excessive dividends
64
why do creditors usually not force the debtor into bankruptcy when they are in technical default?
the creditor tries to prevent to value of the debt to plummet
65
what are 3 common concessions the creditor can do?
waive debt to equity restriction change interest rate to compensate for additional risk change other terms of the debt (change from one payment to periodic payments)
66
do zero coupon bonds still have interest expense?
yes just like a non-interest bearing note
67
what is a bond indenture?
the document that describes the contract between the issuer and bondholders
68
what are 10 types of bonds?
debenture mortgage bonds collateral trust bonds convertible bonds participating bonds term bonds serial bonds income bonds Zero coupon/deep discount bonds commodity backed bonds
69
what is a debenture?
unsecured bond with high risk and high yield
70
what is a mortgage bond?
secured by real property
71
what is a collateral trust bond?
secured bond with less risk and low yield
72
what is a non-detachable warrant?
the convertible bond itself must be converted into capital stock
73
what is a detachable warrant?
the bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants the warrants can be bought and sold separately from the bonds
74
what is a participating bond?
has a stated rate of interest but participate in income if certain earnings levels are obtained
75
what is a term bond?
has a single fixed maturity date where the entire principal is paid at the end of the term
76
what is a serial bond?
prenumbered bonds that the issuer may call and redeem a portion by serial number mature in installments
77
what is an income bond?
only pay interest if certain income objectives are met
78
what is a zero coupon bond?
bonds sold with no stated interest but rather at a discount and redeemed at the face value without periodic interest payments aka deep discount bond
79
what is a commodity backed bond?
bonds that is redeemable either in cash or a stated volume of a commodity, whichever is greater aka an asset linked bond
80
how do discounts and premiums relate to gains and losses and interest expense?
a discount represents a deferred unrecorded loss causing interest exp. to be greater than the coupon paid a premium represents a deferred unrecorded gain causing interest exp. to be less than the coupon paid
81
what does the stated interest rate dictate?
the periodic coupon payment (operating outflow on SCF)
82
what does the effective interest rate dictate?
the selling price (and proceeds on sale) which determines the PV factors also determines the interest expense
83
how does interest expense change over the life of a bond with a discount and premium?
discount: increases premium: decreases
84
how is interest expense related (in terms of $ amount) to the coupon paid?
discount: more than the coupon paid premium: less than the coupon paid
85
what are 2 things you do with bond issuance costs?
subtract from the face value to arrive at reduced initial CV amortize as interest expense over the life of the bond
86
what are 4 examples of bond issuance costs?
legal fees accounting fees underwriting commissions printing
87
what rate do you use to calculate interest expense when there are bond issuance costs?
effective interest rate
88
what is the JE for deferred bond issuance costs?
DR: deferred bond issuance costs (asset) CR: cash
89
what are the 2 methods to amortize a bond premium or discount?
straight line method (constant dollar amount for coupon paid and interest exp.) effective interest method (constant interest rate)
90
is straight line method allowed under GAAP?
no, but it can be used if there is an immaterial difference from effective interest method
91
do investor JEs match the bond issuer JEs when there are bond issuance costs? if not, why?
no because the investor is not effected by the bond issuance costs therefore they do not deal with the effective interest rate but rather the market rate interest rev. does not equal interest exp.
92
what is interest accrued at the time of the bond sale called?
accrued coupon payment
93
what is troubled debt restructuring?
creditor allows the debtor certain concessions to improve the likelihood of collection
94
what is the goal of the creditor in troubled debt restructuring?
maximize recovery of the investment something is better than nothing
95
what must be true for the debtor's transfer of assets to the creditor?
there is a gain for the debtor CV of liability > FV of asset transferred
96
what must be true for the debtor's transfer of equity to the creditor?
there is a gain for the debtor CV of liability > FMV stock issued
97
what is the difference between a modification of terms and a transfer of assets/equity?
under modification of terms the debt has not been extinguished modification is accounted for prospectively
98
when does a debtor adjust the CV of the liability in a modification of terms? if the CV is written down what does the debtor recognize?
when the total undiscounted future cash flows are less than the CV of the liability if this is the case, the debtor recognizes the difference as a gain from restructuring of debt
99
how is amortization of the loan dealt with after writing down the carrying amount of the liability?
all cash payments reduce the carrying amount directly no longer record interest expense
100
what is the formula for impairment on the receivable for the creditor when modification of terms occurs?
CV receivable - sum of discounted cash flows = impairment
101
what is the new liability recorded at for the debtor under a modification of terms?
the undiscounted future cash flows no discounting required
102
what are the 3 instances of debt extinguishment?
debtor pays at maturity debtor pays before maturity debtor legally released (transfer of asset or equity)
103
what is in-substance defeasance?
arrangement in which a company places purchased securities into an irrevocable trust company pledges them for future principal and interest payments on its LTD liability is NOT considered extinguished
104
when is gain recorded for bond extinguishment before maturity? loss?
reacquisition price < CV of liability = gain reacquisition price > CV of liability = loss
105
what is a lease?
a contractual agreement between a lessor (the one who leases the asset) and a lessee (the one who pays to use the asset) over a specified period of time
106
what are the 5 criteria for determining a lease as operating or finance? ## Footnote what is the mnemonic?
1) ownership transfers at end of lease (transfer of title) 2) an exercise of written purchase option is reasonably certain (BPO - buyer purchase option) 3) the PV of the minimum lease payments is at least 90% of the FV of the leased property 4) the lease term is at least 75% of the asset's economic life 5) asset is specialized/customized ## Footnote OWNES
107
if at least one of the 5 criteria is met in determining an operating or finance lease, what is it classified as?
finance
108
if the lease is an operating lease how will it be recorded on BS and IS?
BS: right of use asset and lease liability with both amortized over the lease of the life using effective interest method IS: lease expense recognized each year equal to the payment amount
109
if the lease is a financing lease how will it be recorded on BS and IS?
BS: ROU asset and corresponding liability with it being amortized similarly to how the entity amortizes other assets IS: amortization expense of ROU asset and lease expense (interest expense + decrease of lease liability)
110
what are the 2 criteria that need to be met for a contract to be a lease?
1) contract must depend on an identifiable asset in which the lessor does not have a substantive substitution right 2) contract must convey the right to control the use of the asset over the lease term to the lessee
111
when do you decide if a contract is a lease or contains a lease?
when the contract is made can only be reassessed if the contract is amended
112
what are the 4 criteria that all must be met for a contract to be combined?
1) one or more contracts contains or is a lease 2) contracts are entered into at approximately the same time 3) parties to the contract are the same, or related 4) one of the following: - performance or price of one contract affects the consideration paid in the other contracts - contracts have the same commercial objectives and were negotiated as part of a package - the rights to use the underlying assets do not meet the accounting criteria for separate lease components
113
what are the 2 conditions that have to be met for lease components to be separated?
1) can lessee benefit when combining asset with its other resources 2) can lessee benefit from asset by itself
114
what are the 2 options to deal with lease and nonlease components?
1) lease components are separate accounts from nonlease ones 2) combine related lease and nonlease components
115
what is the commencement date for a lease?
the date for which the lessor makes the underlying asset available to the lessee for use
116
what are the 2 things required for a lease to qualify as short term?
lease is for 12 months or less there is no option to extend the lease beyond 12 months
117
if a lease is short term how is it recorded?
an operating lease and the lessee will recognize payments over the lease term on a straight line basis
118
what are the 6 things the lessee includes in the calculation of lease payments? ## Footnote what is the mnemonic for it?
1) required contractual fixed payments 2) exercise option reasonably assured 3) purchase price at the end of the lease 4) only indexed or rate variable payments 5) residual guarantees likely to be owed 6) termination penalties reasonably assured ## Footnote REPORT
119
what are the two things specifically excluded from lease payments?
guarantees of lessor debt by lessee other variable lease payments
120
what is the discount rate used by the lessee?
the rate implicit in the lease (if known) if it is not known then the incremental borrowing rate of the lessee
121
how are initial direct costs recorded for a lease?
included in the valuation of the ROU asset ex. commissions, legal fees, consulting fees
122
what is the 2 instances for determining amortization in a finance lease?
if it meets "O" or "W" then you amortize over the asset's useful life if it meets "N", "E", or "S" then you amortize over the shorter of the lease term or useful life of the asset
123
At the inception of a finance lease, the residual value expected to be owed by the lessee to the lessor at the end of the lease term should be:
discounted to its PV and included in the initial lease liability

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