FAR - 2 Flashcards
Concepts and Main Ideas (132 cards)
1
Q
What’s account literature is included in the FASB Accounting Standards Codification?
A
- Financial Accounting Standards Board
- Emerging Issues Task Force Abstracts
- Accounting Principles Board Opinion
- Accounting Research Bulletins
- Accounting Interpretations
- AICPA Statements of Position
- AICPA Audit and Accounting Guides
- Practice Bulletin
Does NOT include AICPA Statements of Auditing Standards.
2
Q
If company elects to use cash-basis accounting for tax purposes and accrual for its financial statements. What do they report as sales in its IS under the accrual method?
A
When converting cash sales to accrual sales, sales must be adjusted for net change in AR.
So if AR decrease from Y1 to Y2 by (20,000) then subtract it from sales in current year (Y2).
If AP decreases then increase accrual income.
3
Q
What is the effect of NI and OE if a company cannot determine beginning balance for supplies?
A
NI - Overstated
OE - No Effect
NI is overstated because (Supplies expense = Beg + Purchase - End) so Beg is 0 then expense is understated meaning NI over.
OE no effect.
4
Q
What is the different between the Direct and Indirect Method of the Cash Flow Statement? Give an example.
2) In indirect, how should an increase in inventories be presented?
3) In Indirect, a loss on sale of machinery should be presented as?
A
Only difference is in the operating section other than that the same.
Direct - each line is a “direct” statement showing cash paid of received like “cash paid to suppliers”
Cash R from customers 800 Cash P to suppliers (200) Cash P to employees (150) Cash R for interest 20 Net Cash provided by operating activities
Indirect - starts with net income and works backwards to “cash provided by operating activities”. With items being Increases/Decreases in accounts like AR, Inventory, AP IN ADDITION to noncash items like depreciation expense/gain/loss on sale of equipment
Net income 50 Depr. expense 10 Decr. AR 5 Incr. Inv (20) Gain on sale of equipment (3) Net cash provided by operating activities
2) Deduction to NI (reason b/c NI is at top in indirect so when inventory increases, inventory sold is less than purchased)
3) Addition to NI (the loss decrease NI but does not reduce cash. therefore the loss must be added back to NI to determine cash flow from investing.
5
Q
ABC exchanges equipment with DEF. ABC’s asset had BV of 80,000 (cost 120,000; Dep 40,000) and FV 100,000. ABC also gave 30,000 as part of exchange. DEF property had FV 120,000 (Cost 150,000 and Dep 40,000). Commerical transaction.
What will ABC and DEF record on its books? And journal entry?
A
ABC will record 130,000 (total FV given up) on its books. DEF will record 90,000 (120 - 30).
ABC:
Equipment (rec) 130
Acc Dep 40
Equipment (exch.) 120
Cash 30
Gain 20
DEF
Equipment (rec.) 90
Acc Dep 40
Cash 30
Equipment (exch) 150
Gain 10
** equipment (exchanged) is always what the original COST was***
6
Q
Assets held for sale? How to record?
If CV 200, FV 180 and costs to sell 10?
A
Assets are “held for sale” when management has active plan to sell the asset, highly probably within 1 year. Kept on books at lower of CV or NRV.
1) NOT depreciated
2) Listed under “Other Assets” and not included in PPE (Don’t trust)
3) Valued at NRV
So, write down equipment to 170,000 and recognize a loss of 30,000.
7
Q
How are equity securities recorded?
JE at 1) 1,000 purchase 2) FV increase to 1,250 3) Receive dividends of 50 4) Investment worth 950 5) Security sold for $900
A
Equity recorded at FV. Dividends received in net income.
1) Investment 1,000
Cash 1,000
2) Investment 250
Unrealized Gain 250
3) Cash 50
Dividend Income 50
4) Unrealized loss 300
Investment 300
5) Cash 900
Realized loss 50
Investment 950
8
Q
What are the steps to a multi-step income statement? And multi-step vs single step income statement?
A
Sales (COGS) = Gross Income (SG&A expenses) (Depreciation) = Operating Income (+/-Misc rev, exp, gains, losses, int income) =Income before tax (Income tax expense) = IFCO (+/- IFDO) = Net Income
Single is very simplified. Just lumps rev/gains together and exp/losses together.
9
Q
General Rule to convert from Cash Net Income to Accrual Net Income?
A
Add: decreases in liabilities/increases in assets
Subtract: increases in liabilities/decreases in assets
10
Q
T-account (equation) to analyze Accounts Payable?
A
Beginning AP + Accrual purchases - cash payments = Ending AP
11
Q
Accounts Receivable T-account equation
A
Beg. Balance + Credit Sales - Collections (usually what question needs) - write-offs = Ending Balance
12
Q
What are gains
A
Gains are increases in equity (net assets) from incidental or peripheral transactions affecting an entity.
13
Q
what is realization?
A
when revenues and gains are realized when products (goods and services), are exchanged for cash or claims to cash.
14
Q
What is the Statement of Comprehensive Income? And what does a piece of it include? And how is it disclosed?
A
- All changes in net assets of an entity during a period EXCEPT those resulting from investments by owners and distribution from owners.
- NI + OCI = Comprehensive Income
“Other Comprehensive Income” items:
- Unrealized gains/losses on AFS securities
- Unrecognized gains/losses pension costs
- Foreign currency translation adjustments
- Unrealized gains/losses effective CF derivative transactions
- Error corrections/loss from discontinued operations
Represented:
1) At the bottom of the IS, continue from NI and add other comprehensive income; OR
2) In a separate statement, start with NI and add other comprehensive income
15
Q
AcidTest (quick) ratio?
A
(Cash + Net Receivables + Marketable Securities) / Current Liabilities
16
Q
Inventory Turnover
A
COGS / Avg. Inventory
- Ratio of COGS to average inventory.
**COGS = Beg Inv + Purchases - End Inv. **
17
Q
Inventory equation
A
Beg inv + puchaese = Ending Inv + COGS
18
Q
Accounts Receivable Turnover?
A
Credit Sales / Avg. AR
19
Q
Operating cycle in days?
A
(365/AR Turnover) + (365/inventory turnover)
20
Q
Return on equity?
A
NI / Avg Owners Equity
21
Q
Profit Margin on sales?
A
NI / Sales
22
Q
Dividend payout ratio?
A
Common dividends / NI
23
Q
Earnings per share? Where is it represented?
A
(Net Income - Preferred Dividends) / Weighted Shares Outstanding
- EPS is calculated on income before discontinued operations, or net income
24
Q
Capital Balance?
A
Beg Capital + Investments + Income - Drawings = End Capital
25
Company was awarded damages of $75mn for patent infringement suit brought on by competitor. Accrual & disclosure, disclosure, or neither?
Both Accrual and disclosure
26
Former employee has brought on a wrongful-dismissal suit against previous employer. Company's lawyers believe the suit to be without merit. Accrual & disclosure, disclosure, or neither?
Neither Accrual nor disclosure
27
Company has outstanding purchase orders in ordinary course of business for purchase of raw materials for manufacturing process. Market price is currently higher than the purchase price and is not anticipated to change within a year. Accrual & disclosure, disclosure, or neither?
Neither Accrual nor disclosure
28
Government contract completed during year 2 is subject to renegotiation. Although the company estimates that it is reasonably possible that a refund of 200-300mn may be required by the gov, but it does not wish to publicize the possibility. Accrual & disclosure, disclosure, or neither?
Disclosure only
29
Company has been notified by a governmental agency that is will be held responsible for cleanup of toxic materials at a site company formerly conducted operations. Company estimates that its probable that its share of remedial action will be $500mn. Accrual & disclosure, disclosure, or neither?
Both Accrual and disclosure
30
Company redeemed its outstanding bonds and issued new bonds with lower rate of interest. The reacquisition price was in excess of the carrying value amount of the bonds. Accrual & disclosure, disclosure, or neither?
Disclosure only
31
Allowance for Doubtful Accounts equation? And how does it work?
Ending Balance for Allowance Doubtful Accounts = Beg Balance + Recoveries of bad debt written off in prior years + Current year's bad debt expense
(uncollectible) - write-offs of uncollectible.
Bad Debts Expense is the loss from extending credit to customers and is usually an estimated amount based on a company's credit sales.
32
What happens when parent company uses the cost method vs equity method on its books to carry its investment of its subsidiary? How are dividends on those investments recognized? Is Goodwill amortized?
1) Under the cost method:
- Investment - the parent recognizes only its share of the subsidiary's dividends declared.
- Dividends - recorded as dividend revenue
2) Under equity method:
- Investment - investor recognizes its share of investee earnings (used when company has 30% or above ownership) ie ownership x earnings
- Dividends - common stock dividends treated as return on capital. Only preferred dividends recognized as dividend revenue.
- Only income increases the investment account
3) Goodwill is never amortized but only assessed at least annually for impairment at the REPORTING level
***Dividends never increases investment account under either method***
33
1) Under with of the following will the methods of carrying a subsidiary on its books, will the carrying value of the investment normally change following a combination? (cost/equity - yes/no)
2) Will the method used by a parent to carry an its books its investment in the subsidiary affect the consolidated process or the final consolidated financial statements?
3) What is the acquisition date called in a combination?
1) Cost method does not change after a combination
1) Equity changes as the equity in the subsidiary changes
2) whatever method used (cost, equity, other) that a parent uses to carry its subsidiary on its books will affect the consolidating process BUT NOT the final consolidated financial statements
3) Closing date
34
Cost-Benefit
is what it is called when the cost of information exceeds its benefit, it should not be reported, even if it might be useful.
35
The SEC is comprised of five commissioners, appointed by the President of the United States, and five divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
- Division of Corporate Finance.
- Division of Enforcement.
- Division of Trading and Markets.
- Division of Investment Management.
- Division of Corporate Finance.
36
What are the 3 criteria for an operating segment to be reportable?
- segment revenue is 10% or more of total revenue for all reported operating segments,
- segment profit or loss is 10% or more of total profit
- segment assets are 10% or more of total assets of all operating segments.
37
Which of the following methods (cost or equity) would an investor use to account for an investment in an entity in which they have significant influence, under IFRS and GAAP?
Under US GAAP, only the equity method may be used.
Under IFRS, either method can be used.
38
Under the allowance method, not the direct write off method, what happens when an account is written-off. What does it NOT have effect on?
- account written off, the journal entry is:
allow. for uncollectible acc xxxx
AR xxxx
- If collected, an entry is made to reinstate the account receivable by:
AR xxxx
allow. for uncollectible acc xxxx
THEN
Cash xxxx
AR xxxx
**Because it has been collected so we get cash**
AR - no change (since it was written off to Allowance
NI - No change
Assets - No change
No impact on Balance sheet or IS when AR is written off under allowance method
39
LIFO under Perpetual and periodic inventory system? What does it mean and how to solve the below?
January
1/1 Purchased 2000 @ 1
1/17 Sold 1200
1/28 Purchased 800 @ 5
What would be the difference if using average-cost method?
For example, if 1/1 had a beg balance of 200 @ 4.
Perpetual LIFO because it is assigned after EACH sale. Last item purchased is the first one sold.
Periodic is calculating LIFO at the end of the month or quarter.
Perpetual:
800 x 5 = 4,000
800 x 1 = 800
Periodic:
1600 x 1 = 1600
**you calculate what is left over not what is sold.**
Average
- requires a new unit cost to be calculated every time inventory is purchased. So for this problem it would be total cost of 2,800 ((200x4) + 2000)) divided by 1200 = 2.3 per unit so use that.
Perpetual
800 x 2.3 = 1,840
200 x 2.3 = 460
800 x 5 = 4000
40
When should loss/gain contingencies be accrued?
How do you record contingency liabilities that are probable under IFRS?
A loss contingency can be accrued IF:
1) Probable
2) Amount of loss is reasonable estimated
Contingent gains are not recognized in the accounts, but only footnoted
IFRS
They consider it a PROVISION instead of a liability
Also, if they give you a range say loss is 2mn to 3mn you accrue the middle 2.5mn instead of the lower value.
41
What costs should be capitalized in PPE?
What are required footnote disclosures on PPE?
What costs are capitalized in intangible assets?
What costs are capitalized for software development?
Property, Plant and Equipment
1) Cost getting the land ready for use (development)
- Cost of the land
- RE taxes in arrears
- Attorney fees for title search / insurance
- Shipping / Installation / Testing
2) Cost to Increase useful life
3) Cost to increase efficiency
Required Disclosures:
- Range of useful lives
- Depreciation Methods
- Accumulated depreciation
Intangible
- Successful defense in lawsuit
- Registration costs
Software
- i.e. Write the code (nothing else)
- Capitalize costs for creating software ONCE it has reached technological feasibility.
- Anything before is R and D
42
What are the accelerated depreciation methods?
Asset Cost: 10,000
4 year life
Salvage value: 2,000
Double Declining Balance:
SL - 25%
25% x2 = 50%
10,000 x 50%
*no salvage value)
Sum-of-the-years:
(4/10) x (10,000 - 2,000)
43
1) How to record impairment loss for equipment under both IFRS and US GAAP? Is restoration of loss allowed?
2) Under IFRS how are changes in FV recorded?
IFRS
- If the CV is greater than recoverable cost - Impairment is the difference (one step process)
* *BUT recoverable cost is the greater of FV less cost to sell (MV) or value in use (discounted cash flows). **
- Reversal of loss is allowed even for entire class of assets held for use or disposal.
- Any increase in FV above original cost is recorded in OCI (revaluation surplus).
GAAP
- If undiscounted cash flows is below CV THEN subtract fair value from CV to get impairment loss.
- Reversal of loss is NOT allowed.
44
How to report on the balance sheet a long-term bond investment? Held-to-maturity.
What are HTM debt securities carreid on balance sheet? How are gains/loss in FV reflected and where?
- Have to remember how to calculate bond interest revenue and amortization
Discount amortization = Interest revenue - state interest at par
And what you do is add that discount amortization amount to the price that the bond was purchased at (the discount). This increases the cost of the discounted bond until it finally reaches parity at maturity.
- HTM carried at amortized cost
- Unrealized gains/losses are note reported
45
When are AFS gains and losses NOT recorded in OCI in the equity section of the Balance sheet?
And what are AFS and Trading securities carried at?
- When firm elects to use the FV option. Any unrealized gains/loss are recorded in earnings for the period.
- Gains/loss appear on OCI (net tax) BUT on the balance sheet they are recorded at FV
**AFS and trading are carried at FV on the BALANCE SHEET **
46
Accrued Interest Payable T-Account
Beg Balance + Interest Expense - Interest Payable = End Balance
47
How is warranty expense recorded in JE?
For example, if company estimates that warranty costs are 4% of sales how do you record and how does it work?
If estimates that warranty costs are 4% of sales then:
Warranty Expense xxxx
Warranty Liability xxxx
**Above is the recorded entry for the estimate**
Once they actually incur warranty costs (people bring in defected devices) then:
Warranty Liability xxxx
Cash, parts etc xxxx
48
You borrowed $1,000,000 on a 9% note payable. You paid the first of four quarterly payments of $264,200 when due on December 30. In December 31, balance sheet, what amount should World report as note payable?
You're looking to solve for what note payable is worth on 12/31. But you have to remember you need to figure out what the quarterly payments are WITHOUT interest (as interest is given to you).
The value of the note payable is the entire amount of 264,200 (which includes interest) MINUS interest. Then subtract that amount for the initial amount borrowed and that is what its worth.
Interest = 22,500 (.09 x 1/4 x 1mn)
Payment of principal = 241,700 (264,200 - 22,500)
Note Payable value = 758,300 (1,000,000 - 241,700)
49
How to record a discount on a bond sold to an investor that wants a higher yield because i'm riskier? they want 12% when stated interest is 10%. Value of bond is 96.54 and Par is 100. Effective interest is at 12% is 5.79 while stated is 5.
Value of Bond = PV of Principal + PV of interest
Entry at issue date:
Cash 96.54
Discount 3.46
Bond Payable 100
Amortization:
Interest Exp 5.79
Discount .79
Cash 5.00
At maturity:
Bond Payable 100
Cash 100
**discount/premium on bond is a contra account. So slowly over the life of the bond you eliminate that discount/premium so that at maturity bonds value is 100**
TIP: Interest exp = Yield x bond discount (Not PAR)
50
How to calculate the PV of bond and PV of ordinary annuity? If issue price is 5% and market rate is 8%
TIP: When they give you a table ONLY look at numbers on the MARKET/EFFECTIVE yield rate because you're discounting it at current market prices.
1) Take issue price x PV at 8%.
2) Take bond cash payment (price x 5%) x PV of ordinary annuity at 8%
51
JE for early retirement of debt? And what can you calculate in the problem initially?
```
Bonds Payable xxx (FV Bonds)
Premium xxx (unamortized)
Loss
Bond issue costs
Discount
Cash MV
Gain
```
* Only thing you're changing is whether it is at a Discount/premium and solving for gain or loss. Cant have both a discount and premium in same entry. **
- if they give you an effective rate method, you calculate the unamortized discount/premium is subtract the PV of the bond (BV) from the FV.
52
Troubled Debt Restructuring. What happens to debtor during the settlement (not modification)?
How do you know if restructuring was a troubled debt restructure?
Is it appropriate for a debtor to recognize a gain?
Because they cant pay, they are giving the credit an asset or equipment. SO...
1) Compare the CV to the MV of that asset you're giving the creditor to see if there's a gain/loss on disposal
2) Compare that gain or loss to the carrying value of the debt.
If PV of restructured flows using original interest is less than BV of debt at date of restructure
Yes, when carrying amount EXCEEDS the total future cash payments specified by the new terms
53
What makes up owners equity? How do you calculate it?
2) How is stockholders' equity calculated? How is APIC, Treasury Stock (cost) and Unrealized loss on AFS treated?
Contributed Capital
- Preferred stock
- Common Stock
- APIC
Earned capital
- Retained earnings
- AOCI
- Treasury Stock
Beg RE
+ NI
- Dividends
= End RE
```
+ APIC
+ CS
- (Treasury stock, at cost)
- (Unrealized loss AFS)
+ RE
```
54
What makes up owners equity? How do you calculate it?
2) How is stockholders' equity calculated? How is APIC, Treasury Stock (cost) and Unrealized loss on AFS treated?
3) Two items that can change prior year balances of retained earnings
Contributed Capital
- Preferred stock
- Common Stock
- APIC
Earned capital
- Retained earnings
- AOCI
- Treasury Stock
Beg RE
+ NI
- Dividends
= End RE
```
2)
+ APIC
+ CS
- (Treasury stock, at cost)
- (Unrealized loss AFS)
+ RE
= Stockholders Equity
```
3)
- Cumulative effect of accounting principle change
- Correction of an error
55
JE for Property dividend at declaration and payment. And what is it?
Property dividend is when a firm wants to pay shareholders but they dont have enough cash so they sell a share of a security they own, mark them at FV, recognize gain/loss, and use that as dividend.
```
At declaration:
Stock investment xxx
Gain investment xxx
Dividends declared xxx
Prop. div. payable xxx
```
At payment:
Prop. div. payable xxx
Stock Investment xxx
56
What is the effect on total OE, RE and shares outstanding for both a 100% stock dividend and 2-1 stock split?
OE - (100%) none, (2-1) None
RE - decrease, none
Outstanding - Double both
57
JE when small and large stock dividend are declared.
Declaration: (Small = <25%):
RE xx (div % x MV)
CS xxx
APIC - CS xxx
Declaration (large=>25%):
RE xxx (div % x Par)
CS xxx
**>25% = No decrease to stockholders equity because of the dividend. **
- The reason is that if its more than 25% you can't assume stock price will stay the same so use PAR.
58
What are the 5 steps of revenue recognition?
1) Identify the contract with a customer
2) identify the performance obligations in the contract
3) determine the transaction price
4) Allocate the transaction price to the performance obligations
5) recognize revenue when the entity satisfies the performance obligation
59
Step 3 in revenue recognition (transaction price) - what are the 2 ways to record variable consideration (bonus) in a contract?
1) Expected Value Method - weigh each bonus criteria by the outcome (easy)
2) Mostly Likely Method - used when there are only 2 outcomes. You just recognize the full amount of the one most likely (even easier)
60
Under special issues of revenue recognition, how do you record a firm's sales of $3mn (cash) that includes $150k for a 2 year warranty covering COGS. And if firm expects to incur 120k of warranty claims. During Y1, 20k of warranty expense incurred. What is the JE at sale and end of Y1?
At sale:
Cash 3,000
Sales revenue 2,850
Unearned warranty 150
```
During Y1:
Warranty exp 20
Cash 20
Unearned warr. Rev 25
Warranty rev 25
```
*25,000 = (20/120)*150k because of this they get to recognize 1/6th of the total revenues associated with it.
61
Accounting changes. How are accounting estimate changes and accounting principle changes accounted for? And what is an example of each? And where are they stated?
How are errors recorded? and what is included as an error?
Also, what happens if a change in accounting principle is inseparable from a change in accounting estimate?
Estimate changes:
- Change the estimated useful life of PPE or change depreciation methods.
- PROSPECTIVE application
- reported in a component of IFCO in the period the change and future periods if the change affects both
Principle changes:
- Corrections of errors and/or principle (FIFO to LIFO)
- Requires RETROSPECTIVE application
Erros:
- Financial statements are only restated due to errors
- Any "mistake" "misuse" or change from "cash basis to accrual basis"
If they are inseparable - the treat as change in ESTIMATE
62
Which of the following statements are required by nonprofit organizations?
How must the expenses be reported? and how are they represented?
What is the only statement required for Voluntary Health and Welfare Organization?
- Statement of activity
- Statement of financial position
- Statement of cash flow
Expenses need to be reported by nature and function. Either on in statement of activities, as a schedule in notes, or as a separate statement entirely.
**Statement of Functional expenses ONLY required by Voluntary Health and Welfare Organizations**
63
How is the gain on the retirement on bonds calculated?
Also, how are direct, indirect, and nonrefundable loan costs treated in the CV of a bond for a LENDER and for a BORROWER.
BV
- MV to retire
= Gain/loss on investment
If MV to retire is lower than BV then it is a gain since you don't have to amortization the entire amount.
```
The lender's CV of bond
FV
+ Direct loan costs
- Loan origination fee nonrefundable (borrower)
= CV of Bond
```
Borrower CV
FV
- Nonrefundable loan origination fee
= CV of bond
64
How does a company account for a cost it has incurred to fulfill a contract in 1 year?
Costs to fulfill a contract that benefit a period of less than 1 year are EXPENSED in period they occurred.
65
If a company A owns 100% of company B and company B (under the equity method) reports NI over dividends paid/declared. What is the entry that is eliminated?
The amount of an investment eliminating entry is the balance in the investment account as of the beginning of the period being consolidated.
SO the amount that needs to be eliminated is NOT the investment account PLUS the earnings added to the investment account. It eliminates the entry at the BEGINNING of the period being consolidated.
66
What is an example of a special-purpose government and how do they report state appropriations?
And when are RE appropriated?
A state university.
If it is engaged in a business like activity it should report the financial statements required for Enterprise Funds. So state appropriations are Nonoperating Revenues
- typically appropriated due to legal requirements, contractual requirements and discretion of BOD. NEVER for dividend in arrears
67
What is the difference
What is a provision account?
What is a recourse liability?
What is due from factor?
1) Provisions are accounts that are uncertain as to the amount or timing.
They are estimated accounts, such as warranty liabilities, bad debts and taxes
2) Recourse liability account is recorded to indicate probable uncollectible accounts.
DOES NOT MEAN sales discounts, sales returns, and sales allowances
3) Seller uses Due from Factor/Factor's Holdback for probable sales discounts, sales returns, and sales allowances
68
How are costs of raising capital, acquiring/constructing long-lived assets, and Research and Developement expenses treated?
- R and D is always expensed as incurred.
| - other are not.
69
How to recognize and measure uncertain tax positions?
Reduce the tax liability by the amount that is MOST likely to happen.
Ex: if tax liability is $40,000 and there is only a 20% chance full 40,000 will be upheld and a 40% the benefit will be 25,000 THEN reduce income tax expense by 25,000/.
70
Primary objective of accounting for income taxes?
What is deferred income tax expense? What creates both deferred tax liabilities and assets?
What should be disclosed about them? and how to calculate?
What happens if a loss from discontinued operations is carried forward and reduces current taxes payable - where is this recorded?
- To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.
- Net change in deferred tax accounts for the year.
- Temporary differences cause both deferred liabilities and assets. AND Operating loss/tax credit carry forwards generate only deferred tax assets.
- Deferred income tax accounts are affected by temporary differences AND nature/amount of each type of operating loss
Ending deferred tax liability (change in depreciation)
- End deferred tax asset (change in warranty cost)
= Net change in deferred tax accounts
- Tax benefits from a loss are recorded in Income from Continuing Operations
71
What are changes in estimates vs changes in accounting principles and how are they accounted for?
What would be an example of a correction of an error? And what is classified as?
What happens if it is impossible to determine whether it is a change in accounting estimate or principle?
Change in Principles = Retrospective
- Ex: changing from FIFO to LIFO/Error Corrections
- If change from LIFO to FIFO then beginning inventory at the earliest year is adjusted for beginning balance of retained earnings.
- The cumulative effect of the change in accounting principle (amount) is just the difference in the previous year's numbers
Change in Estimates
- Change in estimated useful life
- Change in depreciation method
- You must account for the change as a component of Income from continuing operations, in the period of change and future periods
- A correction of an error would be a change from cash basis to accrual basis accounting because cash basis accounting is NOT accepted under GAAP.
- Prior Period Adjustment
- if you can't determine, then consider it a change in estimate
72
What are notes payable/receivables recorded if they mature in less than 1 year and more than 1 year?
Ex: A issued 10,000 FV note payable in exchange for services rendered. It bears interest of 3%, market is 8%, and compounded interest of $1 for an 8% loan is .944. What should A report the note payable on balance sheet if it matured in less than 1 year and more than 1 year?
All receivables/payable are measured at PV with interest imputation with 1 exception.
If a receivable/payable is maturing in less than 1 year - it is reported at FV.
So less than 1 year reported at 10,000.
More than 1 year reported at present value
9,652 = (FV + interest) x .944
73
What are notes payable/receivables recorded if they mature in less than 1 year and more than 1 year?
Ex: A issued 10,000 FV note payable in exchange for services rendered. It bears interest of 3%, market is 8%, and compounded interest of $1 for an 8% loan is .944. What should A report the note payable on balance sheet if it matured in less than 1 year and more than 1 year?
All receivables/payable are measured at PV with interest imputation with 1 exception.
If a receivable/payable is maturing in less than 1 year - it is reported at FV.
So less than 1 year reported at 10,000.
If more than 1 year reported at present value
9,652 = (FV + interest) x .944
74
What are the 3 enterprise-wide disclosures?
- Products and services
- Geographic areas
- Major customers
75
When reporting income tax expense on an interim income statement. Which tax rate do you use?
- Effect income tax rate
- Effective annual income tax rate for previous year
- Effective annual income tax rate
- Statutory tax rate for current year
- Effective annual income tax rate
76
Does the methods that a parent uses to account for its investment in a subsidiary affect the consolidating process and/or the consolidated financial statements? Explain.
- Final Consolidated financial statements will be the same regardless of the method. No.
- The details behind the process of developing those statements will be different (consolidating process) due to the investment eliminating entry on the worksheet. Yes.
77
List the 3 JE's starting in Y1 when an AFS security was bought for $5, unrealized holding loss of $1, and Y2 sale at the loss equal to the unrealized loss in Y1.
Also, in the SCF in the operating activities section under indirect - a gain on the sale of an AFS security is represented how? How are all items security sales recorded?
And how would operating section under indirect be represent a realized gain on investment in equity securities be presented?
Purchase:
AFS $5
Cash $5
Y1 Loss:
OCI (loss) $1
AFS $1
```
Y2 Sale:
Cash $4
AFS $4
Loss AFS $1
OCI loss $1
```
A deduction from Net Income. Any gain from the sale of an investment (other than trading) should be included in total proceed in INVESTING activities. Under the INDIRECT method, NI is adjusted for items that affect income but not cash SO it has to be deducted to avoid double counting.
Addition to net income in the amount of securities' FV at the beginning of the period. Unrealized gains/losses are recorded in current income. Since the realized gain on sale is already included as a component of NI, only the FV (CV) at the beginning of the period must be added to NI.
78
Held-to-Maturity - JE to record interest expense and amortization on a bond purchased at a discount on Y1 if company uses the interest method of amortization? 500,000 8% bond purchased at $456,200 yielding 10%.
How is the interest method different from the straight-line method?
*if you know this you're an expert on accounting for HTM bonds*
Discount Bond
Interest Receivable 40,000
Discount 5,620
Interest Revenue 45,620
Interest receivable is what the bond is ACTUALLLY paying so you debit that. pretty straight forward.
If they used the straight-line method then the 456,200 discount would be amortized EVENLY throughout the life.
**REMEMBER to remove any interest in what you paid. it has to be the carrying value.**
79
Difference between commercial substance and noncommercial substance (lacks)?
How to account for FV of new assets in commercial substance? And how to calculate gains/losses?
How are account for new asset recorded in Noncommercial Substance? And how to calculate gains/losses?
HIGHLY TESTED ~10%
- Noncommercial substance - Entity is not significantly affected by exchange and assets are not really different
~Commercial Substance~
If cash paid :
FV of new asset = FV old + cash paid
If cash received:
FV of new asset = FV old - cash received
Gain/loss = difference between BV and FV of asset given up
~Noncommercial Substance~
Incoming (new) asset is recorded at the sum of the BV of the OUTGOING (old) asset plus cash paid
Rules:
1) If loss is evident:
- Record the loss and the new asset at FV (same as commercial substance)
2) If gain is evident + cash is paid:
- No gain is recognized and the new asset is the sum of BV of asset exchanged + cash paid
3) If gain is evident + cash received <25%:
- Recognize the gain in proportion to the cash received and the new asset is at FV less the unrecognized portion of the gain
4) If gain is evident + cash received >25%:
- Recognize full gain and record the new asset at FV
80
I have a pizza shop and I want to exchange 1 oven for a truck. Oven costs $60,000, accumulated depreciation is $25,000. FV of oven is $32,000 plus we will pay $10,000 on top of the oven for the truck.
What is the gain/loss on the exchange? What value should we record the truck at? And their JEs.
1) Loss of $3,000 (BV 35,000 - FV 32,000)
2) Truck value = 42,000 = 32,000 + 10,000
```
Pizza Truck 42,000
Depreciation 25,000
Loss 3,000
Pizza Oven 60,000
Cash 10,000
```
81
What happens if a contingent consideration liability post-combination is properly revalued to a FV that is lower than the original cost, is this a gain or a loss?
Would this be consideration paid to the acquiree from the change in fair value be an increase or decrease in contingent liability?
This is a gain.
No increase or decrease
82
In a consolidation, how does a newly issued entity issue capital to consolidate 2 business into 1?
Immediately after a consolidation, what is retained earnings and goodwill?
In a consolidation, merger, or acquisition - how are legal, consulting, registration and issuance costs accounted for?
- As it has no prior market value, the FV of new stock is the FV of the net assets being acquired. Thats why there is no goodwill.
BUT there can be APIC if Par value is given .
- The combined companies will NOT have retained earnings until after an operating period.
- No goodwill
- Registration and issuance costs are NOT capitalized. They're deducted from APIC. They reduce APIC.
- Consulting/legal fees are expenses in period incurred
83
What is the difference between FV and Cash flow hedge? and how are they recorded?
And what are the required disclosures for each?
FV - gain/loss arising is recognized in current income as earnings
Cash Flow - gain/loss CAN be DEFERRED in OCI.
1) FV Hedges - gain/loss recognized in earnings during the period
2) Cash flow Hedges - gain/loss deferred in OCI
84
What is the difference between GAAP and IFRS about hedged instruments in relation to forecasted business combinations to FX risk? and recording a hedge for the life of an instrument?
1) IFRS permits hedging forecasted business combination that is subject to foreign exchange risk; GAAP doesnt.
2) IFRS permits hedging part of the life of a hedge; GAAP have to hedge for entire life/
85
FX transactions. In AR (denominated in foreign currency) what happens if USD weakens and strengthens.
In AP, what happens if USD weakens and strengthens?
Also, what is the direct quotation of FX?
Where are FX transactions recorded? and how often recorded?
What would be a JE for gain or loss in AR and how is it settled (both in the foreign currency and in USD)?
AR:
USD Weakens - Gain
USD Strengthens - Loss
AP:
USD Weakens - Loss
USD Strengthens - Gain
**remember this is represented in foreign currency**
Direct - 1.00 EUR = 1.13 USD
- Component of Income from continuing operations.
- Every period, so if i enter into agreement in Nov and pay amount in Feb. I have to account for gain/loss in Dec 31.
Initial:
AR xxx
Sales xxx
Gain: (loss opposite)
AR xxx
FX transaction xxx
Settled (in Foreign currency)
Investment in FX xxx
AR in FX xxx
Covert to USD
Cash xxx
Investment in FX xxx
86
If a company uses the Installment income method for tax purposes, what is it? and how do you calculate it?
Installment method results in future taxable amounts beyond the year you're calculating it for. If in Y3, you're figuring it out for everything AFTER Y3.
You simply multiply the expected income x rate rate and add those all up. That's it.
87
When could a company reclassify a note payable from current to noncurrent under IFRS?
When it has executed an agreement to refinance before the statement of financial position date
88
How are gains/losses on hedged items and hedged instruments recorded under a FV and Cash flow hedge?
Give an example of difference between both FV risk and Cash flow risk in a frim commitment (forward contract) to buy cotton from india?
How to value a derivative entered into for speculative purposes?
What are the 3 things should disclose?
Fair Value hedge:
Both types of G/L are included in net income
Cash Flow Hedge:
Both types of ineffective portion of net income and effective portion in OCI
- Changes in price of cotton (FV risk)
- Changes in exchange rate of USD and INR (CF risk)
- Speculative valued using future rates NOT Spot
Disclosures
- Reasons for using derivatives
- Purpose
- BOTH net gain/loss in earnings and deferred in OCI
89
Conversion of foreign financial statements. If subsidiary can function independent of its US parent what conversion method is used and how are gains/losses recognized?
If the foreign subsidiary couldn't exist without the US parent (sales, purchases in USD and key employees in US), what conversion method and how are gains/losses recognized?
What is true about subsidiaries with currencies that are hyperinflationary?
What are the conversion rates using translation? and remeasurement? (Important)
If the foreign subsidiary's functional currency (primary economic environment) is its local currency (CAD) then it would be recorded using:
- Translation
- Gains and losses to OCI
UNDER IFRS - its a gain/loss on the statement on income
The foreign subsidiary's functional currency is USD.
- Remeasurement
- Gains and losses to IS
Subsidiary's who's functional currency is 100% or more over 3 year period are required to use USD as functional currency.
Translation
- Asset/liabilities = current rate (spot) at BS date
- IS = weighted average
- RE = NOT TRANSLATED its calculated
Remeasurement
- Monetary (cash, AR, BP, AP) current (spot)
- Nonmoneary (inventory, prepaid, PPE) - Historical
- Paid in capital = historic
- IS Rev/exp that occurred evenly Weighted average
- IS Rev/exp that occurred not evenly historical
**Monetary - Fixed and terminal cash value IE cash, AR, BP, AP. Nonmonetary is inventory, prepaids, PPE.
90
What is an operating lease? How do you calculate revenues/expenses? and what is included in it? There's a 20mn bonus, annual rent 30mn and first 6 months free?
What is Leasehold improvement? What is formula for total expense from ultilization?
Operating:
- rental agreement, no transfer of effective ownership
Total rental payments/lease term = Rent Rev/exp
Included: bonus payments, subtract free rent, provisions
```
20
+ 135 (30 x 4.5 yrs)
= 155 (total cash)
/ 5 years
= 31,000 (rent rev/exp)
```
Improvement is when lease makes an improvement but they don't own it SO its considered intangible asset and capitalized in asset account.
- Amortized at shorter of remaining lease-term or useful life of improvement
Total Exp Utilization = Rent Expense + Amortization (improvements)
91
When collectibility is reasonably assured, when should the APIC be recorded?
When it is RECORDED
92
Diluted securities. What does it mean If convertible securities are deemed to be diluted?
Then the interest expense should be added back to net income
93
In a business combination, what costs should be capitalized? And what costs are expensed?
How are issuance costs and legal/consulting fees treated?
Direct costs to carrying out the combination (accounting, legal, consulting, finders) are expensed in period incurred.
Costs of registering/issuing securities REDUCE the amount of paid-in capital. The costs to issue securities to buy a company just DECREASE the amount you received from the issue.
**anything related to selling or administrative activities (ie like software for MGMT to use) are not be reported as research and development**
94
What's the effect of on APIC if treasury stock is acquired for cash at more than PV then sold for more than its acquisition price using cost method? And what is the JE?
When retiring stock normally, how is common stock and APIC treated (concept)? Show a JE to account for acquiring previously issued shares at more than they were initially issued for?
When declaring a stock dividend, how are RE and total stockholders equity affected?
```
1) Treasury Stock
Purchase treasury stock:
- No effect
Treasury stock xxx
Cash xxx
```
```
Sale of treasury:
- Increase
Cash xxx
Treasury stock xxx
APIC - treasury xxx
```
2) Retiring of stock
- When retiring stock, CS and APIC are REMOVED from the books based on the original issue
```
CS xxx (par)
APIC xxx (original APIC)
RE xxx
Cash xxx (price they were bought at)
```
**NOTE that RE is the difference between what the stock was acquired at minus par (CS) and APIC is RE**
3) RE - decreases
Total SE - No effect
95
Up to when can the reclassification for short-term liabilities be altered if proceeds are issued from a stock issue? And where are they classified to?
Noncurrent (assuming they are not AP or Accrued liabilities) can be done after the end of the year BUT BEFORE financial statements are issued.
96
Difference between principal market and most advantageous market?
Principal - greatest volume and level of activity
Most advantageous - maximizes the price received for the asset
97
What are some disclosures for cash flow hedges?
- net gain/loss recognized in earnings during the period must be disclosed
- amount of gain/loss deferred in OCI must be disclosed
98
What is the date at which to record senior manager compensation? i.e what date is the FV used to measure compensation expense as the employer has given a resource of value to the employee?
AND how is total compensation recognized for the stock option plan?
What is the measurement date for a share-based payment to employees that is classified as a liability?
What are rights given to shareholders to purchase more stock?
- Grant Date
- Total compensation recognized is the difference between market price and option price at the grant date
- Settlement date
- Warrants
99
At the date of issue, what is the bond liability?
Carrying value of the bond
100
What are the 4 types of NPO (Non-Profit Organizations)?
In NPO, how to record the difference between a contribution with a restriction and a condition? And example? And what is considered normal gift and where are they recorded?
When do NPOs not need to recognize contributions?
1) 4 Types:
- Voluntary Health and Welfare Organization (Redcross - offer free or low costs services to the public from grants)
- Other NPO (museums, fraternities, athletic clubs)
- Healthcare (includes private for-profit hospitals
- Colleges and universities
2) Restriction affects WHERE assets are reported
- Time or
- Purpose
* time restriction is recognized in contribution revenue of net assets w/ donor restriction received
ex: pledge to receive 20k every year for 4 years is recorded as net asset w/ donor restriction
Condition affects WHEN revenue is recognized
ie: If condition then revenue is NOT recorded until satisfied
Normal Gift = office supplies or donation of depreciation property are part of net asset without donor restriction
3) Museums and other NPOs (dont recognize contribution if):
- Held for public exhibition or research (not gain)
- Are protected or preserved
- Subject to policy that requires proceeds of to acquire other items for the collection
101
What is a tax benefit? and where and how is it recorded?
If tax rate for a company is 30% and they have a loss carryforward of $180,000 available to offset future taxable income. What is the tax benefit for that year?
Tax benefit is a loss carryforward to be recorded in the Income statement. Loss carryforward x tax rate.
Tax benefit to be recorded in the IS is $54,000 (180,000 x 30%). That's it.
102
GASB
What are the objectives of financial reporting?
What are the characteristics of financial reporting?
What is the hierarchy of the financial reports?
FInally, what are the elements that every fund contains in its balance sheet or Statement of net position?
Objectives
- Accountability
- Inter-period equity
Characteristics (TRUCCR)
- Timeliness
- Relevance
- Understandability
- Comparability
- Consistency
- Reliability
Hierarchy
- Recognition of basic financial statements
- Note disclosure
- Required Supplemental Info
Elements of BS/Net Position
- Assets
- Liabilities
- Deferred Outflow of resources
- Deferred Inflow of resources
- Net position
103
GAAP for Colleges and Universities
What authoritative body do NFP and public universities follow?
How to calculate tuition revenue?
How are grants treated differently between pubic and private?
What are the financial statements for public and private universities?
Finally, what is the difference in equity sections between public and private?
NFP University - FASB
Public University - GASB
Tuition revenue at gross LESS any tuition refunds (scholarship, allowances, expenses, tuition waivers)
Public - Nonoperating Revenue
Private - Operating Revenue
Not-for-Profit (FS)
- Balance Sheet
- Statement of activities
- Statement of cash flows
Public (FS)
- Statement of Net Position
- Statement of Rev, Exp and Changes in Net position
- Statement of Cash Flows
Not-for-profit (Equity)
- Net asset with donar restriction
- Net asset without donar restriction
Public (Equity)
- Net Investment in Capital assets
- Restricted net position
- Unrestricted net positions
104
Healthcare Organizations
What is the revenue recognition for these?
How to calculate net patient service revenue?
Revenue recognition
- Identify contracts with customers
- Identify separate performance obligations
- Determine transaction price
- Allocate transaction price to performance
- Recognize rev when entity satisfies performance obligation
```
Gross patient Revenue
- (Charity Service)
- (Contractual adjustments)
- (Uncollectible account)
= Net patient Service revenue
```
*This is first line in statement of activities*
105
Under FV method for stock options plans, total compensation recognized is...
Is based on the value of the option at the GRANT date, adjusted for forfeitures
106
How are noninterest bearing notes recorded (carried at)? How is it amortized? and what is the interest revenue and carrying value in Y1 and Y2 if its a 200k note due in 4 years at interest rate of 10% and PV is 0.75?
They are carreid at PV in the balance sheet. The note should be amortized by what the interest expense is (this case 10%).
```
Y1
200,000
x 0.75
= 150,000
x 10%
= 15,000
*amortized up by 15,000
```
Y2
165,000 (carrying value)
x 10%
= 16,500
107
What is recognize synonyms with?
Recorded
108
What is a minor leaseback?
When PV of rentals is less than 10% of the FV of property. SO no gain is deferred.
109
What is the maximum length for measurement of a business combination?
One year from the acquisition date of the combination
110
How do the lessor and lessee treat interest and deprecation on a capital lease?
How do capital lease payments show up on financial statements?
Under IFRS, how should a company classify a capital lease?
Lessor - has no physical asset to depreciate. So a financial asset replaces it where interest revenue is recognized.
Lessee - if it is a capital lease depreciates the asset. They record an asset and a liability?
In 2 places, in Cash Flow Statement,
- Financing are the principle payments
- Operating are for the interest payments
IFRS
Capital lease = Finance Lease
111
How to calculate projected Benefit Obligation?
How to calculate the ending pension liablity balance?
```
Beg PBO (1/1)
+ Interest Cost (growth in PBO)
+ Service Cost
- Benefits paid
End PBO (12/31)
```
*Growth in PBO is discount rate x Beginning PBO. So if discount rate is 10% and Beg PBO is 72,000 - Interest Growth is 7,200
```
Beg PBO
- Beg Assets
+ Pension Expense
- Funding Contribution
= Ending pension liability balance
```
112
What must be disclosed in notes of FS for defined benefit pension plans?
- The funded status of its pension plans in the BS showing separately the noncurrent assets, current liabilities, and noncurrent liabilities reported.
113
How are cash receipts and cash payments reported in a Debt Service Fund?
Cash Receipts - Operating Transfers
| Cash Payments - Expenditures
114
What is an item recognized for governmental activities in the government-wide statement of activities and NOT in statement of revenues, expenditures, and changes in fund balance for governmental funds?
- Property tax revenues for an amount deferred because it was not available
115
If a company is going into bankruptcy and owes creditors $1,200,000 (which it cannot pay full) so it will pay $400,000 cash and issue 80,000 shares at 1.25 (total value $100,000).
1) How much is the stockholder's equity increased by?
2) What is the FV of the consideration paid to settle the debt?
3) What is the gain on the settlement of debt?
1) Equity increased by $100,000
2) Total consideration is $500,000 ($100,000 + $400,000)
3) Gain is $700,000 ($1,200,000 - $500,000)
116
- 10 year lease agreement (useful life 10)
- Lessor expects 10% return from lease
- Lessee has 12% incremental borrowing rate
- Annual lease payments = 30,000
- 3rd party guarantees residual/expected value/bargain purchase option of 50,000 at the end of lease
- PV of ordinary annuity at 12% is 5.6502; 10% is 6.71008
- PV of $1 at 12% is .3220; 10% is .46319
1) Lessee: How do you calculate the lease liability/principal amount of the lease obligation for the Lessee's account when Lessee guarantees residual/bargain purchase option?
2) Lessor: If lessee continues to guarantee residual value or there's a bargain purchase option. What is the Lease Receivable, COGS, Unearned Interest, Equipment value, and Sales for the lessor?
3) What would changed for both questions if residual value is not guaranteed by lessee but by a 3rd party? But for Q2, lessor equipment has BV of 150,000?
1) Lessee: In a capital lease, the lessee uses the LOWER of implicit return and incremental borrowing = 10%.
When a 3rd party guarantees the value then it is NOT included in the calculation for lease liability/principal. If problem does NOT say bargain purchase option you exclude it as below:
Leased Asset/Lease Liability/Principle
224,462 = 30,000(6.71008) + 50,000(.46319)
2) Lessor:
Lease Receivable
350,000 = (10)30,000 + 50,000
Equipment
224,462 = value of lease asset above
Unearned Interest
125,538 = Receivable - Equipment (FV)
* No entries for COGS or Sales*
3) If lessee guarantee's residual/expected value/bargain purchase option then:
Lessee:
Leased Asset/Liability/Principle
201,302 = 30,000(6.71008)
Lessor:
Lease Receivable
Same
COGS
150,000 = BV
Unearned Interest
Same because its subtracting FV of equipment not BV
Equipment
150,000 = BV
Sales
224,462 = Equipment FV
117
Asset Retirement Obligation (ARO) - equation
```
Beg ARO
+ Discounted Cash Flow Estimates
- Payment of previously recorded ARO
+ Accretion Expense
= End ARO
```
118
How to record Bond Payable and unamortized premium/discount on Balance Sheet?
Also, how do you record interest expense on Income Statement?
Say Bond was sold to public with FV 500,000 for a premium of 540,552 and at the end of that year bond's carrying value is now 533,661. How do you record that on the balance sheet in BP and unamortized interest?
Its whatever the carrying value is at the time obviously. BP is whatever you going to be giving back for that bond.
Bonds Payable - 500,000
Amortized premium is 33,661
CV = 533,661
For interest expense, its the ACTUAL interest expense column on the amortization table NOT the cash payment of bond.
119
What are the 4 items that should be disclosed on significant accounting policies?
- Company's revenue recognition policies
- How a company determines what investments are cash equivalents
- How they price inventory
- Methods for amortizing intangibles
120
ABC had the following transactions in Y1:
Disbursements of inventory purchases: 300k
Increase in AP: 20K
Decrease in Inventory: 30k
What is COGS?
AP increasing = purchases exceed cash payments (add that to purchases)
Inventory decreasing = more inventory was sold than purchased (add to COGS)
Total = 350,000
121
Assume a firm adopts ASU 2015-01—Extraordinary and Unusual Items. Extraordinary item presentation (net-of-tax) has...
Been eliminated. ASU has eliminated that item classification.
THATS why those answer choices are always wrong.
122
Public Company Reporting Topics:
1) In how many days do the following companies need to file their 10K or 10Q reports? And what are the MVs?
Large Accelerated filer
Accelerated filer
Nonaccelerated filer
2) What is Regulation S-X?
2) Also, are 10K and 10Q audited?
3) What are the following forms:
- Form 3,4,5
- 6K
- 20F
- 40F
Large Accelerated filer
>$700mn
10k - 60 days of fiscal year
10Q - 40 days of quarter end
Accelerated filer
$700mn - 75mn
10k - 75 days
10Q - 40 days
Nonaccelerated filer
<75mn
10k - 90 days
10Q - 45 days
2) S-X sets forth the form and content of and requirements for interim and annual FS filed with SEC
- 10k is AUDITED and includes disclosures such as summary of financial data, MDandA
- 10Q is UNAUDITED and interim period MDandA, and certain disclosures.
Forms 3,4,5 - filed by directors, officers and owners of more than 10%
6K - foreign private issuers semi-annually
20F - Non-US (10K) annual report
40F - Canadian (10K) annual report
123
What are the 4 types of Endowments?
How are gains and losses reported for Endowments?
What are underwater endowments? and how are they now recorded? (100% question)
Regular
- Net assets WITH donor restriction
Quasi
- Set up by governing body and categorized as net assets WITHOUT donor restriction
Term
- To be invested and spent after a passage of time (time restriction)
- Set up by external party (donated)
- Net assets WITH donor restriction
Board Designated
2) Unrestricted Net Assets
- Gains/losses are reported as changes to unrestricted net assets
- Nonprofits DO NOT USE AFS, Trading categories
3) Underwater = current value is LESS than amount originally donated and must be DISCLOSED in financial position (BS) with the following:
- FV of underwater endowments
- Original endowment amount
- Amount deficiency (1 minus 2)
124
Stock Rights and Retained Earnings
What are the JEs when stock right are ISSUED and EXERCISED?
Huskie (a start up) pays supplier $10,000 cash plus 200 stock rights 1/1. 2 rights for 1 share of Huskie's $1 CS for $40. The MV of the stock on the day the rights were issued is $55. What is the supply expense?
NO ENTRY WHEN STOCK RIGHTS ARE ISSUED
```
Exercised:
Cash xxx
CS xxx
APIC xxx
*cash = # shares x exercise price (not MV)
```
At issuance:
Supply Exp 11,500
Stock Rights Outst. 1,500
Cash 10,000
**1,500 = ((55-40) x 100) ... giving holder ability to buy stock at $15 below market price which is the value of the right recorded **
At exercise:
Cash 4,000
Stock Rights Outst. 1,500
CS 100
APIC 5,400
125
Government Funds
What is the method to recording rev and exp?
Revenue Recognition?
Financial Statements for Government Funds?
Modified Accrual Basis
Revenue Recognition
- Measurable
- Available
1) Balance Sheet
2) Statement of Rev, Exp, and changes in fund balance
3) Revenue, Expenditures and charges in fund balance
126
Fund Accounting
What are the 11 types of funds and their 3 categories? and a description of each.
Use the acronyms?
Acronyms
DRIP CEG PIPPA
E and I = Proprietary
PIPPA = Fiduciary
Governmental Fund
General - Big fund that accounts for most of transactions in gov and services
I.e.
Special Rev - accounts for resources that are restricted for specific purpose other than debt or capital
Capital Projects - Resources for construction
Debt Service - Provide debt service principal and interest expense
Permanent - Endowments earnings that are restricted for gov programs (public purpose)
Proprietary Funds
Enterprise - business like but public is primary user (water utility
Internal Service - Business type where government is primary user (internal users)
Fiduciary Funds
Anything with "Trust" in name
Pension trust - employee retirement obligation
Private purpose trust - created to benefit individuals
Investment Trust - trust of other participants
Agency - Assets held for custodian fashion
*taxes collected and held for a school district*
127
Capital Lease Depreciation
- PV of annual lease payments 160,000
- Lease Term, 8 years
- Useful life of asset, 10 years
- Estimated residual value of the asset at the end of lease term, 20,000
- Estimated residual value of the asset at the end of its useful life, 10,000
Calculate depreciation with the following:
1) Lessee has option to buy asset for $5,000 at the end of the lease term (PV of that is 2,000)
2) Asset reverts to the lessor at the end of the lease term
3) Asset reverts to the lessor at the end of the lease term and lessee guarantees the residual
4) Asset reverts to the lessor at the end of the lease term and 3rd party guarantees the residual
1) 15,200 = (160,000 +2,000 - 10,000) / 10
* add bargain purchase to asset cost when depreciating and depreciate it by useful life since you'll own it*
2) 20,000 = 160,000 / 8
3) 18,500 = (160,000 + 8,000 - 20,000) / 8
4) 20,000 = 160,00 / 8
KEY: if asset reverts back at the end of the lease term and 3P guarantees residual value its just PV of asset divided by lease term
And just basic, if asset is given back divide by lease term not useful life
128
Book value per share
(Common stockholders equity) / (# of common shares outstanding)
OR
(Total OE - Preferred stock claims) / (# of common shares outstanding)
129
What government funds do measurement focus occur to and what kind of flows are they?
Government-wide financial statements? Which funds are included? AND what is their measurement focus?
Measurement Focus
- Government Funds = Flow of current financial resources
- Proprietary = Flow of economic resources
Government-wide (Government and Proprietary)
1) Statement of Net Position/Balance Sheet
- includes balance sheet on accrual basis
With 2 columns:
- Governmental activities
- Business activities
2) Statement of Activities
- Statement of operations on accrual basis
Sections include:
- Program expenses
- Program Revenues
- Net program (expenses) or revenues
- General revenues
Measurement focus
- Economic resources focus
**DOES NOT include Fiduciary Funds - held in custodial capacity**
130
What are the financial statements of Governmental, Proprietary, and Fiduciary funds?
What are in the notes of the Financial Statements?
And what 3 supplementary information/other things do they required?
Governmental Funds
- Balance Sheet
- Statement of Revenues, Expenditures, and Changes in Fund Balance
Proprietary Funds
- Statement of Net Position
- Statement of Revenues, Expenses, and changes in net position
- Statement of Cash Flows
Fiduciary Funds
- Statement of Fiduciary Net Positions
- Statement of changes in Fiduciary net position
Notes to Financial Statements
- Summary of Significant Accounting Policies
- It'll include the government's policies for Capital Assets, Pension plans, debt service schedule, long-term liabilities
- Similar to For-Profit
1) Management's discussion and analysis
- Discusses current year's results compared to prior
- Explanation of financial statements and how different statements relate to each other
2) Budgetary Comparison Reporting
- Budget to actual comparison statement
3) Required Supplementary Information
- Budget comparison = initial and how/if it changed
- Disclosures of infrastructure assets
- Other statistical data/schedules to provide additional info on significant elements
131
Related to Capital Leases:What is the difference between a Direct Financing Lease and Sales-type lease?
What are their initial JEs to be recorded for Lessors? and How do you calculate unearned Interest, Sales, and Asset?
*If you know this you know Capital Leases*
BV = FV is Direct Financing Lease (no profit)
Lease Receivable xx
Unearned Interest xx
Asset xx
BV different from FV = Sales-Type (profit)
Lease Receivable xx
COGS xx
Unearned Interest xx
Asset xx
Sales xx
Asset = BV or Cost
Unearned Interest = Lease Receivable - FV Asset
Sales = Lease liability for Lessee
132
For proprietary and Fiduciary fund types, what are the 3 categories within net position?
For Governmental fund types, what are the 2 categories within Fund Balance?
- Net position is the "equity" section for P and F funds
- Fund Balance is the "equity" section for governmental funds
Net Position:
1) Unrestricted = funds that are NOT "restricted" OR "net investment in capital assets"
2) Restricted = due to EXTERNAL reasons such as creditors or legislation NOT city council (unrestricted)
3) Net Investment in capital assets = balance is equal to (capital assets) - (acc depreciation) - (any debt related to capital assets)
Fund Balance:
1) Non-spendable = not in spendable form or legally required to be unspent such as permanent endowment
2) Spendable
- Restricted = reserved for specific purpose by external parties such as creditors, regulations, law (external)
- Committed = constrained by governments highest level of authority (Internal)
- Assigned = intended to be used for specific purpose but not restricted or committed
- Unassigned = resources available for any purpose
