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FAR > F5-F7 Topics > Flashcards

F5-F7 Topics Flashcards

1
Q

Accrued Vacation

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

Current Liability related to borrowed money

A

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

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3
Q

Asset Retirement Obligation

A

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

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4
Q

Premiums

A

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

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5
Q

Warranties

A
  • 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

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6
Q

Notes that mature in less than one year

A

Record at FACE, no Discount

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7
Q

Effective Interest Method

A

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

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8
Q

Imputing Interest

A

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

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9
Q

Debt Covenants

A

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

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10
Q

Stated Rate vs. Market Rate

A

Stated Rate - Interest to be PAID = Cash Outflow

Market Rate - Interest actually EARNED = Interest Expense

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11
Q

Discount

A

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

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12
Q

Premium

A

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

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13
Q

Nondetachable Warrants vs. Detachable Warrants

A 
Nondetachable = Convertible bond itself must be converted into capital stock
Detachable = Bond not surrendered
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14
Q

Bond Issuance Costs

USE EFFECTIVE RATE for Interest Expense

A

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!

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15
Q

Amortization Methods - Allocated G/L over life of bond

A

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

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16
Q

Troubled Debt Restructuring

A

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

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17
Q

Extinguishment of Debt

A
  • 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

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18
Q

Lease Types

A 
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
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19
Q

Sale-Leaseback

A

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

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20
Q

Lessee Accounting

A

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
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21
Q

Lessor Accounting

A

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.

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22
Q

Depreciation of Leases

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

*Improvements similar to N/E/S

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23
Q

Lease Cashflows

A

Operating Lease:
Payments = Operating
Preparing for Use = Investing

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

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24
Q

Derivatives

A
  • One or more underlyings
  • Requires no initial investment
  • Settlement that gives substantially same results
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25
Q

Hedging

A
  • Reduces risk of holding and trading certain A/L

- Offset anticipated losses or reduce earnings volatility

26
Q

Common Derivatives

A

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

27
Q

Reporting G/L

A
  • 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

27
Q

Functional Currency

A

Currency of primary. economic environment (usually local)

  • Use that country’s currency
  • Self contained
  • Not hyperinflationary
28
Q

Translation vs. Remeasurement

A

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)
29
Q

Remeasurement Method

A
  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
30
Q

Translation Method

A
  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
31
Q

Individual Foreign Transactions

A
  • No ownership (no Sub/Parent)

- G/L on I/S at SPOT rate

32
Q

Tax Allocations

A
  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
33
Q

Temporary Differences

A
  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
34
Q

Operating Losses = Creates DTA

A

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
35
Q

Investee’s Undistributed Earnings

A

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

*Perm Differences

36
Q

Effective Tax Rate Calculation

A

Income Tax Expense = Taxable Income x Tax Rate

Effective Tax Rate = Income Tax Expense / Pretax Income

37
Q

Examples of Permanent Differences

A
  • 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)
38
Q

Costs associated with exit/disposal activites

A
  • Involuntary employee termination benefits
  • Cost to terminate contract NOT a lease
  • Cost to consolidate facilities/relocate employees
39
Q

Book Value of Common Stock

A

Total Shareholder’s Equity
- Preferred Outstanding
- Cumulative Preferred Div in Arrears
= Common Shareholder’s Equity

Book Value = Common Shareholder’s Equity / Common Shares Outstanding

40
Q

Cumulative. Participating, Mandatorily Preferred Stock

A

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

41
Q

Retained Earnings

A
  • 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

42
Q

Treasury Stock

A

-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

43
Q

Cost Method

A

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

44
Q

Legal Method

A

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)

45
Q

Donated Stock

A

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

46
Q

Stock Subscription

A
  • 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

47
Q

Stock Rights

A

No JE unit exercised

Memorandum Entry Only

48
Q

Distributions to Shareholders

A

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
49
Q

Noncompensatory Employee Stock Options

A
  • 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
50
Q

Compensatory Employee Stock Options

A
  • Valued at FV on Grant Date (NO JE)
  • Compensation expense allocated over vesting period (Regardless if exercised)
  • Vesting Period = Period employee performs services
51
Q

Expiration of Options and Stock Appreciation Rights

A

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
52
Q

Earnings Per Share - Basic

A

*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.
53
Q

Earnings Per Share - Diluted

A
  • 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
54
Q

Statement of Cash Flows - Operating Activities

A
  • 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

55
Q

Statement of Cash Flows - Investing Activities

A
  • 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!

56
Q

Statement of Cash Flows - Financing Activities

A
  • 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

57
Q

Noncash Activities

A
  • Disclosed in Supplemental Disclosure
  • Purchase of FA with stock
  • Conversion of bonds to Equity
58
Q

Required F/S for Defined Benefit Plan

@FV

A
  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

59
Q

Required F/S for Defined Contribution Plan

@FV

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

FAR (3 decks)

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