FINAL REVIEW Flashcards by Hieu Nguyen

A lease is classified as a finance lease because it contains a purchase option that is reasonably certain to be exercised. Over what period of time should the lessee amortize the leased property?

Since a purchase option is reasonably certain to be exercised, the short of the lease term or useful life is irrelevant. Therefore the amortization is based on economic life of the asset.

Think: There is no need to amortize since we are going to buy and fully use up the asset.

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Cash Balance Sheet Items - What to Include?

Starting Point: Checkbook Balance

ADD:
Checks written but not mailed (still have control) Any cash/items under company’s control

SUBTRACT:
NSF checks (bounced checks)
Non-cash items (like stamps)
Post-dated checks (not current assets)

Key Rule: “If you still have control of it, count it!”

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Generally how do you find current liability?

AP
+ Unsecured Notes due within next year
+ Senior bonds due within next year
+ Contingent Liab.
+ Accrued Expenses

= Current Liability.

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How do you determine the accretion expense?

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?

In this scenario, the FV of the ARO is $100,000 and the credit-adjusted risk-free interest rate is 10%. Therefore, the accretion expense is $10,000 ($100,000 × 10%).

Accretion Expense = FV of Liability x Adj. Risk Free Interest Rate

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How do you find Total Current Assets?

Cash
+ AR (Net)
+ Inventory
+ Investment in Trading Securities
+ Prepaid Expenses
+ ST Investments
+ CIP in Excess of Billings (Entitled to future pmts)

= Total Current Assets

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How should warranty expense be accounted for based on what?

It should be expense based on the = estimated cost of the warranty repairs x % of sales.

So if est. cost was 2% of sales then that is considered the cost that should be reported for that year.

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How to calculate year-end Asset Retirement Obligation (ARO) balance?

257,000 Beg Bal
-87,000 Payment
68,000 Discount CF Est.
26,000 Accretion Expense

264,000 Ending ARO

Understand that ARO is a liab, so when you have more expenses or discount you have to increase the liability on the asset when it comes time to retire it you pay that amount. Keep in mind that installment payments can be made in order to reduce the ARO liability.

ARO is recorded as a liability because it’s a future payment the company is legally required to make. The corresponding debit when setting up an ARO usually goes to increase the cost of the asset itself (which is then depreciated over time).

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The effect when a company declares cash dividend is the result of what?

When a company declares cash dividend then at the date of declaration is the day that it would decrease working capital.

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What are the 5 lease criteria that makes it a finance lease?

Mnenomic: “SPOT-75-90”

Specialized: Only you can use it anyway
Purchase: You’re going to buy it
Ownership: You’ll get the title
Term (75%): You’re using most of its life
90% Value: You’re paying for most of its value

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What is the comprehensive formula for Net Income?

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What is the formula for COGM?

Beg FG
+ COGM
.- COGS
End FG

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What is the formula for Comprehensive Income?

Be careful and pay attention if they ask for “OTHER comprehensive Income” OR “Comprehensive Income”

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What is the formula for Dilutive EPS?

Note! The shares need to be converted! To increase CS outstanding

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What is the formula for Stockholders’ Equity?

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Year-End Compensation Expense Adjustments
Given:
* Starting balance: $490,000
* Unrecorded salary (Dec 25-31): $18,000
* Unpaid bonuses for current year: $175,000

Calculation:
$490,000 (initial balance)
$18,000 (accrued salary)
$175,000 (bonuses)
= $683,000 (adjusted balance)

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What would be the JE for the Issuance of Common Stock?

What would bethe JE for the Repurchase of Common Stock in the above problem?

What is the Ending APIC Balance?

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To find deferred tax expense = enacted tax x applicable tax deduction(diff. Book vs Tax return)

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“When is a contract modification treated as a SEPARATE contract?”

Must have BOTH:
Additional DISTINCT goods/services
Price reflects standalone selling price (Think: New & Different = New Contract)

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A company that uses the accrual method of accounting started the fiscal year with assets of $600,000 and liabilities of $400,000. During the fiscal year, the company recorded credit sales of $250,000, of which $8,000 remained to be collected at year end, and incurred expenses of $90,000, of which $72,000 was paid in cash. A stock dividend valued at $10,000 was declared and issued to stockholders during the year. What is the year-end balance of total equity?

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Dunn and Grey are partners with capital account balances of $60,000 and $90,000, respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of $100,000, after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be

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Giaconda Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. What example is this?

Study These Flashcards

The Income Approach

A common application of this approach is to determine the present value of expected future cash flows that a market participant expects to receive from holding an asset (ie, discounted cash flows analysis).

How do you calculate for Book Value per Common Share?

How do you find Current Income Tax Expense/Benefit?

Taxable Income x Current Income Tax Rate

How do you find TOTAL income Tax expense/benefit?

Current Income Tax Exp/Benefit + Deferred Inc. Tax Exp/Benefit

## Footnote Equity

When a treasury stock is sold, what should be the adjustment to Income Statement?

**TRICK QUESTION!** * There is NO effect on Income Statement, only SE * All transactions involving treasury stock generally affect only stockholders' equity accounts, never income statement accounts. No gain or loss is recognized in the income statement from the purchase, reissue, or retirement of treasury stock.

On July 1, Year 1, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Cove's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock? ## Footnote Equity

## Footnote Equity

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

Current liabilities of $30,000 Long-term liabilities of $100,000 ## Footnote *If an entity can demonstrate the intent and ability to refinance a short-term obligation to a longer period, the obligation is reclassified from current to long-term.*

Swift Corp. prepares its financial statements for its fiscal year ending December 31, year 1. Swift estimates that its product warranty liability is $28,000 at December 31, year 1. On February 12, year 2, before the financial statements were issued, Swift received information about a product defect that will require a recall of all units sold in year 1. It is expected the product recall will cost an additional $40,000 in warranty repairs. What should Swift present in its December 31, year 1 financial statements? ## Footnote Subsequent Event

* NO issue existed at year-end (Dec 31) * Fire happened AFTER year-end (Feb 1) * Completely NEW event * Therefore: UNRECOGNIZED subsequent event = FOOTNOTE only

How to you determine Serial Bond? ## Footnote Debt

Add **all bonds with schedule maturity** *Remember: A bond can't be both debenture and serial - they're mutually exclusive categories!*

## Footnote Accounting Changes and Errors

It's like this: * 20X7: -$60,000 (income too low due to understated ending inventory) * 20X8: +$60,000 (income too high due to understated beginning inventory) Net effect: $0 **The Effect on RE would be a $75k overstatement.** ## Footnote *Then we just have to deal with the 20X8 ending inventory error of +$75,000 overstatement, which is what carries forward to 20X9.*

How do you find the net cash balance if you were given the bank statement balance number? ## Footnote Cash & Cash Equivalents

How do you find the net cash balance if you were given the cash balance per books? ## Footnote Cash & Cash Equivalents

If you think about it logically, the bank would know about bank service charges, interest, if there is errors in the books that would not be known until later. Also, NSF check (bank would know first).

What items are considered cash and cash equivalent and what is the usualy time range? ## Footnote Cash & Cash Equivalents

1. Checking Accounts 1. Cash 1. Money Market Account 1. Petty Cash 1. Treasury Bill (Due within < 90 Days)

How do you calculate for Dividend Payout Ratio?

Cash Dividends / Net Income

How do you determine the acid test ratio? ## Footnote F/S Ratio

(Cash + Marketable Securities + Net Receivables) / Current Liabilities

How do you determine the amortization on a copyright for accounting purpose? What rule should be follow?

You should you the estimated useful life of the Intangible up to the time it is expected to generate cash flows.

# Goodwill Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount, if any, should be recorded as goodwill to the original partners?

On January 1, Year 1, Grout Co. entered into a 5-year finance lease for a new truck with annual payments of $20,000 beginning January 1, Year 1. Based on an implicit interest rate of 6%, the five lease payments have a present value of $89,300 at lease inception. What amount should Grout report as interest expense for the year ended December 31, Year 1? ## Footnote Lessee

Understand that when first payment is made on the same date when the lease is signed, interest isnt accrue until time has passed. So you have to take the PV of the lease 89,300 Less: Payment of $20,000 = $69,300 $69,300 x 6% = **$4,158 Interest Expense for Year 1**

# *Good Branch Question* On January 1, Year 1, Frost Co. entered into a two-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, Year 1 and ends on December 31, Year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a finance lease? A. The economic life of the computers is three years. B. The fair value of the computers on January 1, year 1 is $14,000. C. Frost does not have the option of purchasing the computers at the end of the lease term. D. Ownership of the computers remains with Ananz throughout the lease term and after the lease ends. ## Footnote Lessee

A, its not A because 2 Year Lease/ 3 year is not > 75% of the economic life **B. Correct Answer! Bc the PV of the lease term is > 90%** (Take the PV of Least Pmt/ FV of the computers.) C. If there was a purchase option at the end of the lease term it would be considered a finance lease. D. If ownership remains with the Original owner then it aint finance lease *Similar to Answer C.*

On December 31, Year 1, Roe Co. leased a machine from Colt for a 5-year period. Equal annual payments under the lease are $100,000 (including $5,000 annually allocated to taxes and insurance) and are due on December 31 of each year. The first payment was made on December 31, Year 1, and the second payment was made on December 31, Year 2. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $417,000. The lease is appropriately accounted for as a finance lease by Roe. In its December 31, Year 2, balance sheet, Roe should report a lease liability of ## Footnote Lessee

Understand that the discounted 10% is considered an interest expense with it comes to finance lease. Key Consideration/Observation: The PV of Lease Annual Pmt" 417,000 Less: 100,000 = 317,000 Year 2 Beg Liability 100,000 Annual Pmt Less: Interest of $31,700 = (317,000 x 10%) = 68,300 317,000 - 68,300 = **$248,700 Lease Liability**

When you lease and there has been new improvements to the lease what should you do? ## Footnote Lessee

You should account for amortization based on the economic life of the asset.

In the long-term liabilities section of its balance sheet at December 31, Year 1, Mene Co. reported a finance lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, Year 2, and January 2, Year 3. Mene's incremental borrowing rate on the date of the lease was 11% and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31, Year 2 balance sheet, what amount should Mene report as finance lease obligation, net of current portion? ## Footnote Lessee Obligation

For a finance lease, each payment has two parts: * Interest expense (Liability × Interest rate) * Principal/Liability reduction (Payment - Interest expense) Your calculation: * Starting liability = $75,000 * Interest expense = $75,000 × 10% = $7,500 * Payment = $9,000 * Principal reduction = $9,000 - $7,500 = $1,500 * New liability = $75,000 - $1,500 = **$73,500**

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for a total of 56 months. The lease term spans five years. The company has a calendar year end. What amount is the company's lease expense for the current calendar year?

So even though its 56 months x $28,900 = 1,618,400 / 60 =26,973.3 per month 26,973.3 x 7 months* = **$188,813** for the 1st year. *Jun to Dec = 7 months! *Note: even though they only paid 56 months, you still have to evenly spread the lease total payment across 5 years or 60 months.*

Sorel Co. enters a lease for machinery from Sherman Co. Sorel appropriately accounts for the lease as a finance lease. The lease contains a bargain purchase option of $3,000 exercisable at the end of the three-year lease term. Sorel agrees to an annual lease payment of $11,000 due at the beginning of each period. Sorel knows the implicit interest rate is 4%. The present value factor of a single sum for three periods at 4% is .88900, the present value factor of an ordinary annuity for three periods at 4% is 2.77509, and the present value factor of an annuity due for three periods at 4% is 2.88609. What amount will Sorel record as the lease liability at the inception of the lease?

Also, when a Bargain purchase option is exercisable at end of lease term you account for the PV amt of the single sum + the PV of the annual pmts (subject to payment end or beg) Bargain Purchase Option = 3000 x .88900 = $2,667 Annuity Due (Implicit Rate) = 11,000 x 2.88609 = $31,746.99 **Total = 34,413.99** *When payments are made beg of each period its considered an Ordinary Annuity Due (use that PV factor!)* *payment called for by the bargain purchase option would be added at its PV*

## Footnote Inventory

The $1,050,000 cost is allocated based on the relative sales value of the lots, as computed below. **Answer: 4,200**

When **stock dividend** is declared does it affect Assets, Liabities or Equity? ## Footnote Equity

No, SE, Assets, Liabilities, and Equity is usually not affected from the declaration of stock dividend being declared. *ONLY cash dividends creates liabilities!!!*

How do you determine deferred income tax expense?

= Temporary Differences x Future (Enacted) Income Tax Rate

At what point should you account for contingent events on disclosing and accrue? ## Footnote Contingency

Anything remote should not be disclosed or accrue. Only accrue for Probably + Estimatable LOSS Everything else is disclosed but not Accrue.

When it comes to recording cash dividends, what are the three most important dates and what is the JE on them? ## Footnote Equity

**Date of Declaration** * Dr: RE * Cr: Div Payable **Date of Record** * No Entry **Date of Payment** * Dr:Div Payable * Cr: Cash

Birk Co. purchased 30% of Sled Co.’s outstanding common stock on December 31, Year 1, for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. Assume Birk Co. uses the equity method to account for this investment. On December 31, Year 1, what amount of goodwill should Birk attribute to this acquisition? ## Footnote Investments

Goodwill = Purchase Price - (Fair Value of Net Assets × Ownership %) Using this question's numbers: Purchase Price = $200,000 Fair Value of Net Assets = $600,000 Ownership % = 30% Step 1: Calculate fair value of your portion $600,000 × 30% = $180,000 Step 2: Calculate goodwill $200,000 - $180,000 = **$20,000**

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year? ## Footnote Subsequent Event

The real-world application is: If you have a short-term liability ($500,000 in this case) AND you issue stock to pay it off ($400,000 in this case) AND this happens after year-end but before issuing financial statements THEN you can reduce the short-term liability by that amount So the practical impact is: Original short-term liability: $500,000 Amount refinanced with stock: $400,000 = **Remaining short-term liability: $100,000**

Return on Assets ## Footnote F/S Ratio

Net Income / Avg Assets

What are some rules on Cash and Cash Equivalent? ## Footnote Cash Equivalent

* If an asset retires or sold within 3 months * Cash in Hand and Banks * Petty Cash

FINAL REVIEW Flashcards

(59 cards)