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CPA > FAR - Becker F10 > Flashcards

FAR - Becker F10 Flashcards

1
Q

Fair value

Transaction costs are used to calculate:

A

The most advantageous market, but is NOT INCLUDED in final fair value

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2
Q

FV valuation techniques :

A
  1. Market approach
  2. Income approach (PV discounted cash flows
  3. Cost approach
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3
Q

FV hierarchy:

A

Level 1 inputs - identical

Level 2 input- similar

Level 3 input - unobservable (discounted cash flows)

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4
Q

Partnership

Exact method:

When the purchase price is equal to the book value of the capital account purchase, no Goodwill or bonuses are recorded

RULES: will always ask “HOW MUCH xxx has to contribute “

A

Finger math:

Get 1|4 = 4-1 = 3

So divide current BV by 3 to get the amount that needs to be invested

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5
Q

Partnership

Bonus method

  • to existing partners ( new partner pays more)
  • to new parter ( new partner pays less)

When the purchase price is more or less then the book value of the capital Account purchase, bonuses are adjusted between the old and new partners capital accounts and do not affect partnership assets

A
  • it interest less than amount contributed, bonus to old partner

(when new partner pays more than NBV)

  • if interest greater than amount contributed, bonus to new partner

(When new partner pays less than NBV)

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6
Q

Partnership

Goodwill method (recognized intangible asset)

Goodwill is recognize based upon the total value of the partnership implied by the new partners contribution

A

Rules:

  1. Compute new “net assets before Goodwill” after admitting new (or paying old) partner
  2. Memo “compute new “capitalize” net assets (= total net worth) and compare “capitalize net assets” with “net assets before Goodwill” and
  3. The difference is goodwill to be allocated to the old partners according to their old partnership profit ratios ( NOTHING TO NEW PARTER)
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7
Q

Fair value is:

Exit price
Market based measure

A

The price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date under current market conditions

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8
Q

Partnership

Withdrawal of a partner: 2 methods

  1. Bonus
  2. Goodwill
A

BONUS METHOD:
1. Revalue assets

DR - asset adjustments
CR - capital A
CR- capital b
CR- capital c

  1. Pay off withdrawal partner

DR - capital a (make up deficit
DR - capital b (make up deficit
DR - capital c (buy him out 100%
CR - cash

GOODWILL METHOD:
1. Revalue assets

DR - asset adjustments
CR - capital A
CR- capital b
CR- capital c

2. Record goodwill
DR - goodwill 
    CR - capital A
    CR- capital b
    CR- capital c
  1. Pay off partner
    DR - capital c (100%)
    CR- cash
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9
Q

Variable interest entities is:

A

A corporation, partnership, trust, LLC, or other legal structure used for business purposes that either does not have equity investors with the voting rights or lacks the sufficient financial resources to support its activities

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10
Q

Variable interest entities

  • consolidation required (even if company owns no stock) if 3 conditions are met:
A
  1. Variable interest - having a financial stake in another company
  2. Variable interest entity (VIE) - that company’s equity/characteristics are strange
  3. Primary beneficiary: The entity that is required to consolidate the VI E. The primary beneficiary is the entity that has the power to direct the activities of a bearable interest entity that most significantly impact the entities economic performance and:
    1) absorbs the expected VIE losses
    OR
    2) receives the expected VIE residual returns
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11
Q

Identifying a VIE in a business entity:

A

All are met:

  1. The company or a related party significantly participated in the business entity’s design
  2. Substantially all of the business entity’s activities, by its design, involve or are conducted on behalf of the company
  3. More than half of the total of the equity, subordinated debt and other forms of financial support, is provided by the company
  4. Securitizations or other forms of asset-backed financing agreements or single lessee leasing arrangements are the primary activities of the entity
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12
Q

An entity has sufficient equity investment at risk, and is not a VIE, when:

A
  1. The entity can finance it’s own activities
  2. The entity’s equity investment address is at least as much as the equity investment of other non-VI E entities that hold similar assets of similar quality
  3. Other facts and circumstances indicate that the equity investment at risk is sufficient
  4. The fair value of the equity investment at risk is greater than expected losses
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13
Q

Asset retirement obligations is:

PRESENT VALUE

A

A legal obligation associated with the retirement of a tangible long lived asset that results from the acquisition, construction, or development and/or normal operation of a long lived asset, except for certain lease obligations (minimum lease payment and contingent rentals)

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14
Q

Asset retirement obligations

An ARO qualifies for recognition when it meets the definition of a liability:

A
  1. Duty or responsibility
  2. Little or no discretion to avoid
  3. Obligating event
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15
Q

ARO accounting and leases:

A
  1. Lessees
    1) if ARO is included in minimum lease payments, no separate ARO accounting is required
    2) if ARO is imposed otherwise, then ARO accounting applies
  2. Lessors
    1) ARO accounting applies
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16
Q

Asset retirement obligation

J/Es

A
  1. To record the asset retirement obligation at present value

DR - asset retirement cost
CR – asset retirement obligation

  1. To record accretion and depreciation expense

DR - accretion expense
CR - asset retirement obligation

DR - depreciation expense
CR- accumulated depreciation

17
Q

Asset retirement obligation

  • accretion expense calculation
  • depreciation expense calculation
A
  1. Beginning ARO x accretion rate

2. Asset retirement cost ÷ Useful life

18
Q

Asset retirement obligation

  • accretion amount is added to ARO?

T/F?

A

True

19
Q

Creditors

Large write down and large write offs are not extraordinary

T/f?

A

True

20
Q

Troubled debt restructuring accounting by creditors does not apply to:

A
  1. Group of loans collectively evaluated for impairment
  2. Loans measured at market value (or lower of cost or market
  3. Leases
  4. Heals to maturity debt securities
21
Q

Debt covenants are:

A

Creditors use that covenants in lending agreement to protect their interest by limiting or prohibiting the actions of debtors that might negatively affect the positions of the creditors

22
Q

Common debt covenants are:

A
  1. Limitations on issuing additional debt
  2. Restrictions on the payment of dividends
  3. Limitations on the disposal of certain assets
  4. Minimum working capital requirements
  5. Collateral requirements
  6. Limitations on how the borrowed money can be used
  7. Maintenance of specific financial ratios, including:
    1) debt to equity ratio
    2) debt to total capital ratio (debt ratio)
    3) interest coverage ratio (time interest earned)
23
Q

Premium on coupon redemption formula:

A estimated liability that results from a prior act

A

Total number of coupons issued x estimated redemption rate = total estimated coupon redemptions

24
Q

Warrant liabilities must be created if the cost of the warranty can be REASONABLY ESTIMATED

T/f?

FORMUALA

A

True

The accrual should take place even if part of the warranty expenditure will be incurred in a later year

FORMULA:

Step 1. Sales x total estimated expense (%) = total liability

Step 2. Total liability- actual expenditures = warranty liability balance

25
Q

Employee bonus calculation:

A

% of bonus [income - tax %(income - bonus)]

You’ll end up dividing the number by a percentage

26
Q

Contingencies are classified as what for

  • US GAAP
  • IFRS
A

US GAAP

  1. Probable - likely to occur
  2. Reasonably possible - more than remote, but less than likely
  3. Remote - slight chance of occurring

IFRS

  1. Probable - more likely than not to occur(greater than 50%)
  2. Possible - may, but probably will not occur
  3. Remote - slight chance of occurring
27
Q

If loss contingency is probable and can be reasonably estimated, then record j/e

A

DR- expense

CR - liability

28
Q

Loss contingency uses what range of estimates? If probable

US GAAP

IFRS

A

US GAAP
- the minimum range and disclose the difference of the range in the notes

IFRS
- uses the MIDPOINT of the range

29
Q

Loss contingency, reasonably possible

Has no:

A

Do not record J/E

Only need to:

  1. Disclose the nature
  2. Disclose the possible loss or range of loss or that an estimate cannot be made
30
Q

Loss is remote for loss contingency

  • ignore
  • no J/E

Exceptions:

A

Disclosures need for:

D - Debts of others guaranteed (officers/related parties)

O - Obligations of commercial banks under standby letters of credit

G - Guarantees to repurchase receivables (or related property) that have been sold or assigned

31
Q

No j/e for gain contingencies

T/f?

A

True

32
Q

Subsequent events are:

A

An event or transaction that occurs after the ballot sheet date but before the financial statements are issued or are available to be issued

2 categories

  1. Recognized subsequent events - subsequent events that provide additional information about conditions that existed at the balance sheet date. Entities must recognize the effects of all recognize subsequent events in the financial statements.
    1) settlement of litigation
    2) loss on an uncollectible receivables
  2. Nonrecognized subsequent events (DISCLOSE) - subsequent events to provide information about conditions that occurred after the balance sheet date and did not exist at the balance sheet date. Entity should not recognize nonrecognized subsequent events in the financial statements
    1) sale of bond or capital stock
    2) business combination
    3) settlement of litigation, if rose after
    4) loss of plant or inventory due to disaster
    5) Changes in FV of assets or liabilities or foreign exchange rates
    6) entering into significant commitments or contingent liabilities
    6)
33
Q

Liquidation basis of accounting

Definition:

A

Where liquidation is imminent, an entity must prepare it’s financial statements using the liquidation basis of accounting. The requirement applies to public and private companies and not for profit organizations. Liquidation basis is a pipe prospectively at the time liquidation is deemed imminent

The following entities or within the scope of this requirement:

  1. Entities which are in bankruptcy and are expected to liquidate
  2. Benefit plans which are terminated by their sponsors
  3. Limited life entities that are not following the preestablished liquidation plan from the entity’s inception, which results in the entity not receiving fair value for its assets. If a limited life entity is following it’s preestablished plan, liquidation basis does not apply
34
Q

Criteria for imminent liquidation

A company is a liquidation when it is converting its assets to cash or other assets and is settling his obligations with creditors with the intent of ceasing it’s activities. Financial statements must be prepared using a basis of accounting that helps financial statement users understand how much the organization will have available to distribute to investors after disposing of its assets and settling its obligations

In order for liquidation to qualify as imminent, The following criteria must be met:

A
  1. Likelihood of the entity returning from liquidation is remote and:

Either

  1. A liquidation plan is approved by the individuals who had the authority to make the plan effective and the likelihood is remote that the plans execution will be blocked by other parties

Or

  1. A liquidation plan is imposed by other forces, such as an involuntary bankruptcy
35
Q

Liquidation required

Cumulative effect adjustments and assets, liabilities, and accruals to be remeasured

A
  1. Assets - must be measured and presented at the amount of cash proceeds expected from liquidation
  2. Liabilities - liability should be measured and recognize according to the US GAAP that otherwise applies to them
  3. Accruals - costs are expected to be incurred during and at the end of the liquidation process must be accrued, as well as income expected to be earned during the period of the time the entity is a liquidation. All amounts must be present to separately and add non-discounted values
36
Q

Liquidation f/s and disclosures

  • statement of net assets in liquidation
  • statement of changes in net assets in liquidation

Following items are disclosed :

A
  1. A statement that the financial statements are prepared using the liquidation basis of accounting
  2. The plan for liquidation
  3. Significant assumptions and methods used to measure assets and liabilities
  4. The expected timeframe for completing the liquidation process
  5. The type and amount of cost and income accrued, as well as the. Over which these costs and revenues are expected to occur
37
Q

IFRS liquidation:

A

I FRS requires an entity to prepare financial statements on the going concern basis unless management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so.

However, unlike GAAP, IFRS does not provide the explicit guidance regarding when or how to apply the liquidation basis of accounting

CPA (15 decks)

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