F5-F7 Topics

Question 1

Accrued Vacation

Answer 1

1. Services already rendered
2. Obligation relates to rights that vest/accumulate
3. Payment is probable
4. Reasonably estimated

Question 2

Current Liability related to borrowed money

Answer 2

Current Liability = Principal paid within year + Accrued Interest @B/S date

Question 3

Asset Retirement Obligation

Answer 3

Legal obligation associated with retirement of a tangible long-lived asset

Debit ARC = Asset (Capitalized)
Credit ARO = Liability @PV (Inc. with Accretion)

ARC - Dep. Exp.
ARO - Accretion/Int. Exp. -> ARO x Credit Adjusted Risk Free Rate

Question 4

Premiums

Answer 4

Total Estimated Coupon Redemptions = # issued/sold x Estimated rate
- Coupons Redeemed
= Coupons to be Redeemed

Outstanding Premium Claims = Coupons to be Redeemed / # of coupons
Outstanding Claims x $/each = Estimated Liability

Debit Premium Expense
Credit Premium Liability

Question 5

Warranties

Answer 5

• Creates liability if easily estimated
• Entire liability accrued in year of sale

Debit Warranty Expense (Sales x ALL %)
Credit Warranty Liability

Debit Warranty Liability (Actual Costs)
Credit Inventory

Question 6

Notes that mature in less than one year

Answer 6

Record at FACE, no Discount

Question 7

Effective Interest Method

Answer 7

Payment is allocated to interest and principal

CV of Loan x Market Effective Rate = Interest Expense
Rest of Payment is Principal
CV - Principal = New CV

Question 8

Imputing Interest

Answer 8

Interest accrued and recorded whether cash payment is paid or not
@Market Rate and determine PV

Question 9

Debt Covenants

Answer 9

Creditors protect their interest by maintaining debtor’s credit rating
Concessions negotiated and real default is avoided

Question 10

Stated Rate vs. Market Rate

Answer 10

Stated Rate - Interest to be PAID = Cash Outflow

Market Rate - Interest actually EARNED = Interest Expense

Question 11

Discount

Answer 11

Market Rate > Stated Rate
Collected Less than Face
Deferred Loss - Increase expense = Slowly records LOSS
Causes future interest expense on I/S > Cash paid

Question 12

Premium

Answer 12

Market Rate < Stated Rated
Collect more than Face (Gain)
Deferred Gain - Reduce expense = Slowly record GAIN
Causes future interest expense on I/S < Cash Paid

Question 13

Nondetachable Warrants vs. Detachable Warrants

Answer 13

Nondetachable = Convertible bond itself must be converted into capital stock
Detachable = Bond not surrendered

Question 14

Bond Issuance Costs

USE EFFECTIVE RATE for Interest Expense

Answer 14

Costs incurred when issued
Direct reduction to CV of bond (like discounts)
Bond proceeds recorded net of issuance costs

Debit Cash (Proceeds - BIC)
Debit Discount and BIC
Credit Bonds Payable

Deferred BIC = Pre-paid Asset!

Question 15

Amortization Methods - Allocated G/L over life of bond

Answer 15

Straight Line Method = Constant dollar amount - NOT GAAP
- Amortization = Premium or Discount + BIC / #Periods Outstanding

Effective Interest Method = Constant Interest Rate - GAAP
- Interest Expense = CV @Beginning of Period x Effective (Market) Rate
Effective if BIC, Market if no BIC
- Coupon Payment = Face x Stated Rate
- Amortization Discount = Interest Expense - Interest Payment
-Amortization Premium = Interest Payment - Interest Expense

Question 16

Troubled Debt Restructuring

Answer 16

Transfer of Assets:
FMV Asset Exchanged
- CV Asset Exchanged
= Gain on Disposal

Cancellation of Debt
-FMV Asset Exchanged
= Gain on Restructuring

*Total Gain Broken into Gain on Disposal and Gain on Restructuring

Transfer of Equity:
CV of Payable
- Settlement Amount
= Gain on Restructuring

Modification of Terms = PROSPECTIVELY

Question 17

Extinguishment of Debt

Answer 17

• Debtor Pays
• Debtor Legally Released

NOT In-Substance Defeasance = Collateral as Security

Reacquisition Price (Face x %Paid)
- Carrying Value (Face - Unamort. Discount/BIC or + Unamort. Premium)
= (Gain) or Loss

Question 18

Lease Types

Answer 18

OWNES Met: 
O = Ownership transfers
W = Written option to purchase
N = NPV at least 90% of FV
E = Lease Life is at least 75% of economic life
S = Specialized 
Lessee = Finance
Lessor = Sales-Type 

None are met/Short Term:
Lessee = Operating

PC Met:
P = PV of lease payments and 3rd party guaranteed RV > Asset FV
C = Collection to satisfy is probable 
Lessor = Both met = Direct Financing 
Lessor = One/None = Operating 

• Record when asset is available to lessee
• Initial Direct costs = Capitalized

Question 19

Sale-Leaseback

Answer 19

Sale = Contract Exists & Control Transfers (OWNES)
Criteria Met = 2 Transactions
- Sale along with profit/loss recognition
- Lease recorded

Debit Cash
Debit A/C
Credit Equipment @HC
Credit Financing Liability (Sale - FV) 
Credit Gain (FV - CV)

Criteria NOT Met = Failed Sale
Debit Cash
Credit Financing Liability
*Pays Interest and depreciates equipment @YE

Question 20

Lessee Accounting

Answer 20

Operating Leases: 1 EXPENSE
Debit ROU Asset (PV of Payments)
Credit Lease Liability

Debit Lease Expense (Depr. + Int.) (Straight Line Payments)
Debit Lease Liability (Depr.)
Credit Cash
Credit Accum. Amort. (Depr.) 

Finance Leases: 2 EXPENSES
Debit ROU Asset (PV of Payments)
Credit Lease Liability

Debit Interest Exp. 
Debit Lease Liability (Reduced by PRINCIPAL)
Credit Cash

Debit Amort. Exp.
Credit Accum. Amort.  *Asset includes initial Direct Costs

Question 21

Lessor Accounting

Answer 21

Sales-Type: Lessee OWNES

• Derecognizes Asset
• Direct Costs Incurred = Expensed

Debit Lease Expense (Direct Costs)
Debit Residual Asset (PV of what is expected to be worth)
Debit Lease Rec. (PV of payments)
Credit Cash (Direct Costs)
Credit Gain (FV - CV)
Credit Truck (Remove FV of Asset)
*Lease on B/S = RA + Lease Rec. 

Direct Financing: No OWNES, Both PC

• Derecognizes Asset
• Recognizes Net Investment
• Gain/DC = Deferred and Amort.

Inception:
    Debit Net Investment in Lease (PV of Payments + Residual Asset)
    Credit Truck (Remove FV of Asset)
    Credit Cash (Direct Costs)
First Payment:
    Debit Cash (Payment)
    Credit Net Investment in Lease 
    Credit Interest Income 

Operating: No OWNES, 1/0 PC

• Keeps asset on B/S
• Depreciates and recognizes impairment
• Income recognized @SL

Debit Cash
Credit Rental Income

Debit Depreciation
Credit Accum. Dep.

Question 22

Depreciation of Leases

Answer 22

O/W = Over Useful Life
N/E/S = Shorter of Lease term or Useful Life

*Improvements similar to N/E/S

Question 23

Lease Cashflows

Answer 23

Operating Lease:
Payments = Operating
Preparing for Use = Investing

Finance Lease:
Interest/Variable Payments = Operating
Principal Payments = Financing

Question 24

Derivatives

Answer 24

• One or more underlyings
• Requires no initial investment
• Settlement that gives substantially same results

Question 25

Hedging

Answer 25

- Reduces risk of holding and trading certain A/L | - Offset anticipated losses or reduce earnings volatility

Question 26

Common Derivatives

Answer 26

Option Contract: Contract between 2 parties - gives right to buy/sell @specified price -Call Option = Holder right to buy -Put Option = Holder right to sell Futures Contract: Agreement to exchange currency/asset @specified price on future date -Long Position = Agrees to buy -Short Position = Agrees to sell -Both parties have obligations to perform Forward Contract: Similar to Futures but PRIVATE -Not standardized -1 Opportunity Swap Contract: Private agreement between 2 parties to exchange future cash payments -Series of Forward Contracts -Multiple opportunites

Question 27

Reporting G/L

Answer 27

- No Hedging Designation = I/S - Fair Value Hedge = I/S * Asset, Liability, Unrecognized Firm Commitments * Earnings in same period * Expected to be highly effective - Cash Flow Hedge = OCI * Future cash flows * Asset, Liability, Forecasted Transaction Foreign Currency Hedges * Same rules* - Net Investment Hedge = OCI *Perfect Hedge = No possibility of future G/L

Question 27

Functional Currency

Answer 27

Currency of primary. economic environment (usually local) - Use that country's currency - Self contained - Not hyperinflationary

Question 28

Translation vs. Remeasurement

Answer 28

Translation: - Sub has functional currency - Foreign to Reporting Remeasurement: - Dysfunctional currency used by sub - Monetary Items = A/L that are fixed regardless of market change (A/R) - Nonmonetary Items = A/L that fluctuate regardless of market change (Building)

Question 29

Remeasurement Method

Answer 29

1. Balance Sheet - Monetary = Current Rate - Nonmonetary = Historical Rate 2. Income Statement - Non B/S items = WA Rate - B/S items = Historical 3. G/L = NI

Question 30

Translation Method

Answer 30

1. Income Statement - I/S = WA Rate - Transfer NI to RE 2. Balance Sheet - A/L = Current Rate - Equity = Historical Rate - RE = Roll forward 3. G/L = OCI

Question 31

Individual Foreign Transactions

Answer 31

- No ownership (no Sub/Parent) | - G/L on I/S at SPOT rate

Question 32

Tax Allocations

Answer 32

1. Current Liability 2. Deferred Liability 3. Total Tax Expense * Do not apply tax rate to perm. differences * Deferred Liabilities include cumulative * DTA and DTL are noncurrent and NETTED * Perm. differences neither current or noncurrent * Enacted Rate

Question 33

Temporary Differences

Answer 33

1. Revs on F/S before Tax = DTL - Installment Sales, Inc. in receivables 2. Revs on Tax before F/S = DTA - Prepaid 'unearned' 3. Exps on F/S before Tax = DTA - Established liabilities, BDE 4. Exps on Tax before F/S = DTL - Depreciation, Prepaid Expenses ``` DTL = Pay taxes later, Income Tax Exp > Taxes Paid DTA = Pay taxes early, Income Tax Exp. < Taxes Paid ```

Question 34

Operating Losses = Creates DTA

Answer 34

NOL 2018, 2019, 2020 -Carried back 5 Years, NO 80% Limit NOL 2021 and later -NO Carryback, Forward Forever, 80% Limit NOL Carrybacks = Refund (Current) Debit Tax Refund Rec. (@35%) Credit Tax Benefit ``` NOL Carryforwards -Recognized to extent benefit is more likely than not -DTA = Future tax savings Debit DTA Credit Tax Benefit ```

Question 35

Investee's Undistributed Earnings

Answer 35

Ownership 0-19% = 50% exclusion Ownership 20-80% = 65% exclusion Ownership Over 80% = 100% exclusion *Perm Differences

Question 36

Effective Tax Rate Calculation

Answer 36

Income Tax Expense = Taxable Income x Tax Rate | Effective Tax Rate = Income Tax Expense / Pretax Income

Question 37

Examples of Permanent Differences

Answer 37

- Tax Exempt Interest from Muni Bonds (nontaxable) - Life Insurance Proceeds on Officer's Policy (nontaxable) - Life Insurance Proceeds when Corp is beneficiary (nondeductible) - Penalties, fines, bribes (nondeductible) - Nondeductible portion of meals/entertainment (0-50% deductible)

Question 38

Costs associated with exit/disposal activites

Answer 38

- Involuntary employee termination benefits - Cost to terminate contract NOT a lease - Cost to consolidate facilities/relocate employees

Question 39

Book Value of Common Stock

Answer 39

Total Shareholder's Equity - Preferred Outstanding - Cumulative Preferred Div in Arrears = Common Shareholder's Equity Book Value = Common Shareholder's Equity / Common Shares Outstanding

Question 40

Cumulative. Participating, Mandatorily Preferred Stock

Answer 40

Cumulative = Not paid div. must be paid in future *Disclosure! Participating = Share with common shareholders in excess of specific amount Mandatorily = Bought back by company, Maturity date

Question 41

Retained Earnings

Answer 41

- Earnings not paid as dividends - Reduced by dividends and transfers to APIC for stock dividend - Does not include Treasury Stock or AOCI ``` Net Income -Dividends Declared +/- Prior Period Adj. +/- Accounting Changes = RE ``` *Appropriated = Restricted

Question 42

Treasury Stock

Answer 42

-Reduces Equity = Debit Balance Cost Method: G/L calculated upon reissue Legal Method: G/L calculated immediately upon repurchase *Timing Difference, NOT included in I/S

Question 43

Cost Method

Answer 43

Gain = Inc. APIC Loss = Dec. APIC, or RE if needed Never increase NI or RE Example: 10,000 shares, $10 Par, $15 per share Original Issue: Debit Cash $150,000 Credit CC $100,000 Credit APIC-CS $50,000 Buy Back above issue price: 200 shares repurchased for $20 Debit Treasury Stock $4,000 Credit Cash $4,000 Reissue above Cost: 100 shares repurchased for $20 resold for $22 Debit Cash $2,200 Credit Treasury Stock $2000 (AT COST) Credit APIC-TS $200 (GAIN) *Does not impact RE Reissue below Cost: 100 shares repurchased for $20 resold for $13 Debit Cash $1,300 Debit APIC-TS $200 (To extend of APIC-TS) Debit RE $500 Credit Treasury Stock $2,000

Question 44

Legal Method

Answer 44

AKA Par Value Method Reduce amount of par value and APIC received @time of original sale Example: 10,000 shares, $10 Par, $15 per share Original Issue: Debit Cash $150,000 Credit CC $100,000 Credit APIC-CS $50,000 (10,000 x $5) ``` Buy Back above issue price: 200 shares repurchased for $20 Debit Treasury Stock $2,000 (AT PAR) Debit APIC-CS $1,000 (Reverse using $5) Debit RE $1,000 (Loss/No APIC-TS yet) Credit Cash $4,000 ``` ``` Buy Back below issue price: 200 shares repurchased for $12 Debit Treasury Stock $2,000 (AT PAR) Debit APIC-CS $1,000 (Reverse using $5) Credit Cash $2,400 Credit APIC-TS $600 (Gain) ``` Reissue above Cost: 100 shares repurchased for $20 resold for $22 Debit Cash $2,200 Credit Treasury Stock $1,000 (AT PAR) Credit APIC-CS $1,200 (PLUG) Reissue below Cost: 100 shares repurchased for $20 resold for $13 Debit Cash $1,300 Credit Treasury Stock $1,000 (AT PAR) Credit APIC-CS $300 (PLUG)

Question 45

Donated Stock

Answer 45

No change in Equity Debit Donated Treasury Stock Credit APIC @FMV

Question 46

Stock Subscription

Answer 46

* Agreement to sell specified # at agreed upon price * Stock certificate issued when paid in full Sell: No cash received, No change in Equity Debit Subscription Rec. (contra equity) Credit CS Subscribed Credit APIC Collection: Debit Cash Credit Subscriptions Rec. Issuance: Debit CS Subscribed Credit CS

Question 47

Stock Rights

Answer 47

No JE unit exercised | Memorandum Entry Only

Question 48

Distributions to Shareholders

Answer 48

Date of Declaration: BOD Approves (Inc. Payable, Dec. RE) Date of Record: Specifies date/names Date of Payment: Disbursed (Dec. Cash, Dec. Payable) Cash Dividends: -Paid from RE Property Dividends: - Noncash assets (nonrepiprocal) - G/L in Continued Ops. Script Dividends: - Commits to pay at later date - Debit RE, Credit Notes Payable Liquidating Dividends: - Dividends exceed RE - First debit APIC and then Stock as appropriate Stock Dividends: - Distribute additional shares - No Cash Outflow, No income to owners * Small = Less than 20% = Reduce RE by FMV * Large = More than 20% = Reduce RE by PAR Stock Splits: - NO JE, No change in Equity - Reduces per share proportionately - Memo entry only

Question 49

Noncompensatory Employee Stock Options

Answer 49

- NO JE until employee buys stock - NO compensation expense Conditions: - All employees may participate - Stock offered equally - Time to exercise is reasonable - Discount is reasonable

Question 50

Compensatory Employee Stock Options

Answer 50

- Valued at FV on Grant Date (NO JE) - Compensation expense allocated over vesting period (Regardless if exercised) - Vesting Period = Period employee performs services

Question 51

Expiration of Options and Stock Appreciation Rights

Answer 51

Debit APIC-Stock Options Credit APIC-Expired Stock Options *No change in equity Stock Appropriation Rights: - Compensation Expense for SAR adjust annually for changes in market price - Prospectively

Question 52

Earnings Per Share - Basic

Answer 52

*Required by Public entities Basic = (NI - Preferred Div.) / WACSO WACSO = Shares @Beg. + Shares Sold - Shares Reacquired + Stock Div/Splits + Conversions? Stock Div./Splits = RETROSPECTIVE * Occurred at beginning of period * Multiply all changes in share by 1.0X for stock div.

Question 53

Earnings Per Share - Diluted

Answer 53

* Includes securities that can be converted to CS - Convertible Securities (Pref. stock, bonds) - Warrants/Options - Contacts that may be settled in cash/stock - Contingent Shares Diluted = Income + Int. on Diluted Securities + Discount Amort. / WASCO *If-converted Method Convertible Bonds: - Add Int. Expense to numerator (NET OF TAX) - Add # associated with conversion to denominator Convertible Pref. Stock: - Do not include div. in numerator - Add # associated with conversion to denominator Options/Warrants: - Dilute if mkt. price > strike price - No change in numerator

Question 54

Statement of Cash Flows - Operating Activities

Answer 54

* Producing goods/services * Anything NOT investing/financing * Subtract changes in operating assets, add changes in operating liabilities ``` Direct Method (Ignore NI, Depr., G/L) 1. Cash Received = Revenues - Inc. in Rec. + Dec. in Rec. + Inc. in Unearned Rev - Dec. in Unearned Rev 2. Interest Received 3, Dividends Received 4. Other Operating Cash receipts 5. Cash Received from trade securities if current 6. Cash Paid to suppliers/employees = + Inc. in Inventory - Dec. in Inventory - Inc. in Accounts Payable + Dec. in Accounts Payable 7. Interest Paid 8. Income Taxes 9. Cash Paid to acquire trading securities if current 10. Other operating cash payments = - Dec. in Prepaid Expenses + Inc. in Prepaid Expenses + Dec. in Accrued Liabilities - Inc. in Accrued Liabilities ``` ``` Indirect Method (Ignore cash received/paid) Net Income + Dep. - Losses/Provisions/BDE + Gains/Amort. of Dis/Prem -Equity Earnings > Div. Received +/- Changes in Operating Assets +/- Changes in Operating Liabilities ``` *Interest paid and Income Taxes Paid DISCLOSED *Accrual to Cash basis: Direct Relationship with Liabilities/Equity Indirect Relationship with Assets

Question 55

Statement of Cash Flows - Investing Activities

Answer 55

* Noncurrent Assets * Creditor = LENDING * Asset Inc = Cash Dec, Asset Dec = Cash Inc - Loans (Outflows) to other entities - Purchasing/Disposing Trading Securities if noncurrent, AFS and HTM - Acquiring/Disposing PPE *Purchase Shares/Bonds = Investment!

Question 56

Statement of Cash Flows - Financing Activities

Answer 56

* Change in Interest bearing debt and Equity * Debt/Equity Inc = Cash Inc, Debt/Equity Dec = Cash Dec Equity - Obtaining resources from owners - Providing owners with return on investment Liability - Obtaining resources from creditors - Payments/Principal on amount borrowed *Issue Stock, Proceeds/Repurchase of Treasury, Paid Div., Repay Principal

Question 57

Noncash Activities

Answer 57

* Disclosed in Supplemental Disclosure - Purchase of FA with stock - Conversion of bonds to Equity

Question 58

Required F/S for Defined Benefit Plan | @FV

Answer 58

1. Statement of Net Assets Available for Benefit = BS (Assets) 2. Statement of Changes in Net Assets Available for Benefit = IS 3. Statement of Accumulated Plan Benefits = BS (Liabilities) 4. Statement of Changes in Accumulated Plan Benefits = Liability Changes * Change in actuarial assumptions *Accumulated Plan Benefits = Future benefit payments attributable to employee services

Question 59

Required F/S for Defined Contribution Plan | @FV

Answer 59

1. Statement of Net Assets Available for Benefit = BS (Assets) 2. Statement of Changes in Net Assets Available for Benefit = IS