Financial Statement Accounts 1 Flashcards
(495 cards)
1
Q
List the items that are not included in cash.
A
COD, legally restricted compensating balances, restricted cash funds, post-dated checks received, checks written but not sent, advances to employees, and postage stamps.
2
Q
What does separation of duties accomplish?
A
Makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
3
Q
Describe bank overdraft rules.
A
Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, it is reported as a current liability.
4
Q
Define “cash equivalents”.
A
Treasury obligations (bills, notes, and bonds), commercial paper (very short-term corporate notes), and money market funds.
5
Q
Define “monetary assets”.
A
An asset with fixed nominal value.
6
Q
What effect do overdrafts have in International Financial Reporting Standards (IFRS)?
A
They can be subtracted from cash, rather than classified as a liability.
7
Q
Define “compensating balance”.
A
A minimum balance that must be maintained by the firm in relation to a borrowing. Classified as current or non-current based on related loan classification.
8
Q
List the items included in cash.
A
Coin and currency, petty cash, cash in bank, and negotiable instruments such as ordinary checks, cashier’s checks, certified checks, and money orders.
9
Q
List the adjustments made to book balance to arrive at the bank balance.
A
Interest Earned; Note Collected; Service Charges; NSF Checks; Errors in company’s records.
10
Q
List the three types of bank reconciliations.
A
Bank to Book; Book to Bank; Bank and Book to True.
11
Q
What does cash on hand reflect?
A
Petty cash on hand and undeposited cash receipts.
12
Q
List the adjustments made to a bank balance to arrive at book income.
A
Deposits in Transit; Cash on Hand (deposited cash receipts, not petty cash); Outstanding Checks. Bank Errors.
13
Q
What does an NSF check represent?
A
“Non-sufficient funds” checks received from customers.
14
Q
What is a deposit in transit?
A
Deposits made by a company that have not cleared the bank as of the bank statement date.
15
Q
What are outstanding checks?
A
Checks written and mailed by the company which have not cleared the bank by the bank statement date.
16
Q
What other name is used for customer accounts receivable?
A
Trade Receivable.
17
Q
List the characteristics of accounts receivables.
A
Typically related to customer contracts; Short time frame; Typically no interest element.
18
Q
Does International Financial Reporting Standards (IFRS) permit recognition of accounts receivable when there is a firm sales commitment?
A
In some instances when the recognition criteria have been met.
19
Q
What is the measurement attribute of accounts receivable?
A
Net realizable value.
20
Q
How are receivables accounted for using the gross method?
A
Records receivables at gross invoice price (before cash discount).
21
Q
Define “contra to sales”.
A
Sales discounts.
22
Q
What factors affect receivable valuation?
A
Trade discounts; Sales discounts; Sales returns and allowances; Uncollectible accounts.
23
Q
List the two methods of accounting for accounts receivables.
A
Gross Net.
24
Q
List the characteristics of notes receivables.
A
Typically non-customer transactions; Longer time frame; Have an interest element.
25
Are notes receivable typically related to customer transactions?
No, they are not typically related.
26
Describe the Direct Write-Off Method for Bad Debts.
Direct write off records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Direct write-off method is rarely used.
27
Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?
The Allowance method.
28
What is the preferred method of accounting for uncollectible accounts receivable?
Allowance method.
29
Describe the Allowance Method of Accounting for Bad Debts.
Determine the amount uncollectible and provide an Allowance to measure Accounts Receivable at net realizable value.
30
Describe the income statement approach for bad debts.
Estimates bad debt expense as a percentage of credit sales.
31
What purpose does analyzing ending accounts receivable serve?
The determination of the needed or desired balance in the allowance account.
32
Describe the balance sheet approach for calculating an allowance balance.
Applies a percentage to ending accounts receivable.
33
At what value should a note receivable be recorded?
The present value of all future cash flows.
34
What do we call the (1) maker and (2) holder of a note?
(1) Maker is the buyer or borrower. (2) The holder is the seller or lender.
35
How is the present value in a noncash transaction determined?
The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.
36
Define "market rate".
Interest rate used to determine the present value of a note receivable.
37
Describe the difference between an interest-bearing and a noninterest-bearing note receivable.
Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest; Noninterest-bearing: the face amount of the note includes principal and interest that will be collected at maturity date.
38
How is the present value in a cash transaction determined?
The amount of cash that exchanged hands.
39
What are the three conditions of a sale?
(1) The transferred assets have been isolated from the transferor, even in bankruptcy; (2) the transferee is free to pledge or exchange the assets; (3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.
40
If three conditions for a sale are not met, what happens?
The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.
41
Define "maker".
A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.
42
Describe a transaction without recourse.
Transferor is not responsible for nonpayment on the part of the maker of the receivable.
43
Describe a transaction with recourse.
The transferor is responsible for nonpayment on the part of the original maker of the receivable.
44
What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?
Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.
45
Who bears the costs of bad debts when factoring with recourse?
The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
46
Define "factoring".
The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.
47
What is the accounting treatment when factoring with recourse, as accounted for as a loan?
The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.
48
What is the accounting treatment when factoring with recourse, as accounted for as a sale?
The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.
49
Who bears the cost of bad debts when factoring without recourse?
The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.
50
When a receivable is impaired, what should it be written down to?
The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.
51
List the methods through which interest revenue is recognized after a write-down has occurred.
Interest and cost recovery methods.
52
When does loan impairment occur?
When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.
53
What is the accounting treatment for loan impairments?
The receivable should be written down to: 1. Present value of future cash flows using original effective interest rate, or 2. Market value, if this value can be determined.
54
How is the loss on impairment accomplished?
With a debit to bad debt expense and a credit to a contra-receivable account.
55
What inventory costs are required to be capitalized?
All costs necessary to bring the item of inventory to salable condition.
56
Who is the owner of consigned goods?
The consignor (firm that shipped the inventory to consignee).
57
What elements affect fixed overhead rates?
Subject to estimation errors and affected by the choice of denominator measure and the budgeting horizon reflected in the denominator.
58
What merchandise is included in ending inventory?
All owned inventory, regardless of location.
59
How is the ownership of goods shipped Free On Board (FOB) destination determined?
The seller owns the goods until they reach destination.
60
Is fixed overhead one of the four manufacturing input costs?
Yes, this is one of the input costs.
61
What does inventory for a typical business entity include?
Includes property held for resale, property in the process of production, and property consumed in the process of production.
62
List the differences between moving and weighted average cost flow assumptions.
Moving average computes a new weighted average cost per unit after each purchase of inventory; Moving average results in lower Cost of Goods Sold during period of rising prices.
63
List the cost flow assumptions of a perpetual inventory system.
Specific Identification; Moving Average; First In First Out (FIFO); Last In First Out (LIFO).
64
List the differences between periodic and perpetual applications of Last In First Out (LIFO).
In perpetual, each sale is costed with most recent purchase; Perpetual results in a lower Cost of Goods Sold in a period of rising prices.
65
List the Last In First Out (LIFO) cost flow assumptions.
Ending inventory composed of oldest inventory; Cost of Goods Sold (COGS) composed of newest inventory; Produces lower net income and ending inventory valuation in periods of rising prices.
66
List the characteristics for the specific identification cost flow assumption.
Specifically identifies cost of each item; Appropriate for large, costly, distinguishable products.
67
List the weighted average (WA) cost flow assumptions.
Weighted average cost per unit is the average cost of all units held during period; Each item is treated as if costed at WA cost.
68
What is the calculation for determining Cost of Goods Sold (COGS)?
Beginning inventory + net purchases - ending inventory = COGS (Net Purchases = gross purchases + transportation in 'Çô purchases returns and allowances 'Çô purchase discounts).
69
List the weighted average cost per unit formula.
Cost of goods available for sale/number of units available for sale.
70
List the weighted average cost per unit formula.
Cost of Goods Available for Sale/Number of Units Available for Sale.
71
List the First In First Out (FIFO) cost flow assumptions.
Ending inventory composed of units most recently acquired; Cost of Goods Sold (COGS) comprised of oldest units; Most closely matches most firms' actual physical flows; Produces higher net income and higher valuation of inventory in periods of rising prices.
72
List the formula for calculating cost of goods sold.
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold.
73
What does the acronym FIFO mean?
First In First Out.
74
What account holds inventory acquisition cost during the period under a periodic system?
Purchases.
75
For which method should an ending inventory count be made?
Both periodic and perpetual.
76
What inventory system is implied when the moving average cost flow assumption is utilized?
Implies the perpetual inventory system.
77
What cost flow assumption is the same for both the periodic and perpetual systems?
First In First Out (FIFO).
78
List the main differences between perpetual and periodic entries.
The use of the inventory account rather than purchases and recording cost of goods sold at sale.
79
What cost flow assumption utilizes the latest purchases at time of sale?
Last In First Out (LIFO).
80
List some reasons to avoid Last In First Out (LIFO) liquidation.
Increases taxes; Does not match current period expenses and revenues.
81
What does Ending Inventory reflect in First In First Out (FIFO)?
Reflects the latest costs.
82
List the attributes of Last In First Out (LIFO).
Matching of revenues and expenses is significantly improved over FIFO; Income tax advantages associated with LIFO; Balance sheet presentation is less than ideal.
83
What is the main reason for using Last In First Out (LIFO) in periods of rising costs?
Tax minimization.
84
What effect does using Last In First Out (LIFO) have on the income statement?
Matching of revenues and expenses on the income statement become significantly improved.
85
List the attributes of First In First Out (FIFO).
Most closely approximates actual physical flow of goods for most companies; Balance sheet valuation of inventory is at more desired current cost; Matching of revenues and expenses on income statement is not ideal.
86
List the reasons for a Last In First Out (LIFO) liquidation.
Poor planning; Lack of supply.
87
Define "base-year dollars".
Price level for the pool at the beginning of the year Dollar Valued (DV) Last In First Out (LIFO) adopted.
88
List the advantages of Dollar Valued (DV) Last In First Out (LIFO).
Reduces the effect of the liquidation; Allows companies to use FIFO internally; Reduces clerical costs.
89
How does the double-extension method affect ending inventory?
The ending inventory is extended at both base year cost and ending current year cost.
90
List the steps in applying Dollar Valued (DV) Last In First Out (LIFO retail method.
DV LIFO is applied to inventory at retail; FIFO retail method cost/retail ratio is applied to retail layer; Cost layer is added to beginning inventory at DV LIFO cost.
91
Why would an entity utilize Dollar Valued (DV) Last In First Out (LIFO)?
Reduces the effect of the LIFO liquidation.
92
List the Dollar Valued (DV) Last In First Out (LIFO) conversion index formula.
Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars.
93
List the steps in Lower of Cost or Market (LCM) analysis.
Compute market value; Value inventory at lower of cost or market.
94
How is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory.
95
Define "market cost".
Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.
96
Generally, what is replacement cost?
Market cost.
97
List the formula to arrive at net realizable value.
Sales price - estimated cost to complete and sell the inventory.
98
List the methods of recording Lower of Cost or Market.
Direct method or Allowance method.
99
How is holding loss reported under the allowance method?
Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.
100
How is the cost of ending inventory determined?
Determined by applying one of the four cost flow assumptions .
101
How is holding loss reported under the direct method?
Any holding loss related to inventory is simply included in cost of goods sold.
102
What is the basis on which Lower of Cost or Market (LCM) can be applied?
Individual Item, Category, Total Inventory; But must be consistent from year to year.
103
List the methods used for estimating ending inventory.
Gross Margin method; Retail Inventory method; Dollar Value LIFO Retail method.
104
List the Gross Margin Percentage formula.
(Sales-Cost of Goods Sold) / sales.
105
List the formula for ending inventory for the gross margin method.
Beginning inventory + net purchases 'Çô sales (cost/sales).
106
What ratio is multiplied to Sales to estimate Cost of Goods Sold (COGS)?
The cost/sales ratio.
107
Describe the relative sales value method for recording costs.
Cost to be recorded for each item is based on its relative sales value to the total sales value of the group.
108
List the Margin on Cost formula.
(Sales-Cost of Goods Sold) / Cost of Goods Sold.
109
Which is always larger, margin on sales or margin on cost?
Margin on cost.
110
How is Normal Spoilage handled?
Subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail.
111
What is excluded in the cost ratio of the First In First Out (FIFO) Lower of Cost or Market (LCM) Retail Method?
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Net markdowns are also excluded from the cost ratio.
112
What is included in the cost ratio of the Average Retail Method?
The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.
113
The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.
Ending inventory at retail is determined; Cost to retail ratio is calculated; #1 x #2 = ending inventory at cost.
114
What are Net Additional Markups?
A net increase in the original selling price.
115
What are Net Markdowns?
A net decrease in the original selling price.
116
What is included in the Average Lower of Cost or Market (LCM) or Conventional Retail Inventory Method cost ratio?
The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator but excludes net markdowns from the cost ratio calculation.
117
What is Original Selling Price?
Cost plus initial markup.
118
What is included in the cost ratio of the First In First Out (FIFO) Retail Method?
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator.
119
What is in the cost/retail denominator?
Net purchases at retail plus additional markups minus additional markdowns.
120
List the two steps of Dollar Valued (DV) Last In First Out (LIFO) Retail.
Apply DV LIFO; Multiply by the cost ratio.
121
What is in the cost/retail numerator?
Net purchases at cost.
122
If an inventory error is discovered in year two, where is the difference recorded?
Beginning balance of Retained Earnings.
123
If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on Cost of Goods Sold (COGS)?
The impact on COGS is understated.
124
In year one of an error, if purchases are understated, what is the impact on Retained Earnings?
The impact on Retained Earnings is overstated.
125
List the basic inventory equation.
Beginning inventory + net purchases = ending inventory + cost of goods sold.
126
If an inventory error is discovered in year three, what is the impact on Retained Earnings?
There is no impact on Retained Earnings, the error has self-corrected.
127
What is the required accounting for a potential loss on a Purchase Commitment when the commitment can be modified?
The loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the loss is not probable given that the contract can be revised.
128
What is the required accounting for a potential loss on a Purchase Commitment when the commitment cannot be modified?
The loss must be accrued because the loss is probable and estimable; Inventory is recorded at market, and a loss is recorded for the difference between contract and market; If contract is not executed as of the balance sheet date, loss is recognized and liability established.
129
Define "Purchase Commitment".
Type of commitment made when a firm commits to the purchase of materials at a set unit price.
130
How do we account for the recovery of a Purchase Commitment loss?
A gain to the extent of the previously recognized loss.
131
If a firm has a Purchase Commitment that cannot be modified and the price declines, what journal entry should be booked?
DR: Loss on Purchase Commitment. CR: Liability on Purchase Commitment.
132
Can a company following International Financial Reporting Standards (IFRS) standards use Last In First Out (LIFO) cash flow assumptions?
No, the company cannot use Last In First Out (LIFO) cash flow assumptions.
133
List the three methods of assigning value to inventory under International Financial Reporting Standards (IFRS).
First In First Out (FIFO), specific identification, and weighted average.
134
How are adjustments for net realizable value applied?
Item-by-item basis.
135
Under International Financial Reporting Standards (IFRS), is reversal of a write down of inventory permitted?
Yes, it is permitted.
136
When is inventory reassessed under International Financial Reporting Standards (IFRS)?
At the end of each financial reporting period.
137
Under International Financial Reporting Standards (IFRS), is inventory reported at lower of cost or market OR at lower of cost or net realizable value?
Lower of cost or net realizable value.
138
What is the net realizable value as defined by International Financial Reporting Standards (IFRS)?
The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimate costs necessary to make the sale.
139
List the requirements for inclusion in plant assets.
Currently used in operations; Have a useful life extending beyond one year; Have physical substance.
140
How do land improvements differ from land?
This asset differs from land in that it has a finite useful life and is depreciated.
141
List some examples of natural resources.
Items such as gravel pits, coal mines, tracts of timber land, and oil wells.
142
List the limitation of recorded value of self-constructed assets.
Market value at completion.
143
List the components of capitalized costs of self-constructed assets.
Labor; Material; Overhead; Interest Cost.
144
List the general rules on costs to capitalize.
Cash equivalent price; Get ready costs.
145
What is the general rule for capitalizing expenditures?
Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.
146
Define "get ready costs".
All costs incurred to get the asset on the company's premises and ready for use.
147
List the considerations that must be given when electing to expense or capitalize an item.
Estimated time benefit; Materiality.
148
How is the price for group purchases recorded?
Total price is allocated to individual assets.
149
How is the cash equivalent price in the issuance of securities determined?
In fair value of asset acquired or of securities issued, whichever can be most clearly determined.
150
Define "cash equivalent price".
The amount of cash paid for the asset on acquisition date.
151
How are donated items recorded?
Recorded at fair market value.
152
What interest rates should be used to determine capitalized interest?
Average interest rate during period or specific interest rate applicable to construction debt.
153
When are unpaid construction input costs included in Average Accumulated Expenditures (AAE)?
Not until cash is paid.
154
Define "avoidable interest".
The amount of interest that would have been avoided had the construction not taken place.
155
Define "qualifying assets" for interest capitalization.
Assets constructed for an enterprise's own use or assets intended for sale or lease that are constructed as discrete projects.
156
What are the two allowed methods to compute total interest to be capitalized?
Weighted Average method and Specific method.
157
List the interest capitalization formula.
Interest Rate x Average Accumulated Expenditures.
158
List the two-step process involved in computing capitalized interest.
(1) Compute average accumulated expenditure; and (2) Apply the appropriate interest rate(s).
159
List the conditions that must exist to capitalize interest.
Qualifying expenditures have been made; Construction is proceeding; Interest cost is being incurred.
160
If Average Accumulated Expenditures (AAE)
The difference between total interest cost and the amount of interest capitalized.
161
If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?
The interest revenue is reported separately with no effect on interest capitalized.
162
If Average Accumulated Expenditures (AAE) \> total interest bearing debt, what is interest expense for the period?
All interest cost is capitalized and there is no reported interest expense for the period.
163
Where should the amount of interest paid be disclosed?
In the statement of cash flows, as either part of the statement, as a supplemental schedule or in a footnote.
164
What is not included in Average Accumulated Expenditures (AAE) until paid in cash?
Any unpaid construction input costs.
165
If Average Accumulated Expenditures (AAE) \> total interest-bearing debt, why is there no interest expense?
All debt could have been avoided if construction had not taken place.
166
When would you increase the asset's account basis by the post-acquisition cost?
When the productivity of the asset is enhanced rather than the useful life extended.
167
What is the useful life for depreciating an addition?
If integral part of old asset, over shorter of addition's or old asset's useful life. If not, over addition's useful life.
168
List the accounting approaches for post-acquisition expenditures.
Substitution; Increase larger asset account by post-acquisition cost; Debit accumulated depreciation.
169
What is the general rule on when to capitalize post-acquisition expenditures?
If the asset becomes more productive or if it extends the asset's life.
170
How do we calculate the annual straight-line depreciation amount of an asset?
(Cost - Salvage Value) / Useful Life.
171
Depreciation is included in overhead and allocated to production based on machine hours or direct labor for what type of asset?
Manufacturing assets.
172
Define "book value".
Original cost less accumulated depreciation to date.
173
What type of allocation is depreciation considered?
Systematic and rational allocation of capitalized asset cost to time periods.
174
List the non-accelerated methods of depreciation.
1. Straight-line Method; 2. Service Hours Method; 3. Units of Output Method.
175
How do we calculate depreciation based on service hours?
Depreciation rate x service hours used; Depreciation rate = (Cost-salvage value) / estimated hours.
176
What depreciation method is used for group/composite assets?
Straight-line method to groups rather than individual assets.
177
What depreciation method does not use salvage value?
Double declining balance.
178
How do we calculate the rate used in double declining balance?
1) Straight-line rate (number of years divided into 1) i.e., if 5 years 1/5 = 20%. 2) Twice the straight-line rate 20% x 2 = 40%.
179
When is the inventory method of depreciation used?
When the inventory items are smaller homogeneous groups of assets and individual records for the assets are not maintained.
180
List the depletion rate formula.
(Natural Resources account balance 'Çô residual value) / (Total estimated units).
181
What is the classification of natural resources on the balance sheet?
Non-current asset.
182
What costs are included in the successful efforts method for exploration costs?
Only the cost of successful exploration efforts are capitalized to the natural resources account.
183
List the type of costs capitalized for natural resources.
Acquisition; Exploration; Development.
184
List the methods of accounting for exploration costs.
Successful Efforts; Full costing.
185
Define "depletion".
Refers to the allocation of the cost of the natural resource to inventory.
186
What costs are included in the full costing method for exploration costs?
All costs of exploring for the resource are capitalized to the natural resources account.
187
Under International Financial Reporting Standards (IFRS), is revaluation of Property, Plant, and Equipment (PPE) allowed?
Yes, revaluation is allowed.
188
Under International Financial Reporting Standards (IFRS) how is interest during construction accounted for?
Expensed or capitalized.
189
How frequently do companies have to review depreciation policies under International Financial Reporting Standards (IFRS)?
They have to be reviewed annually.
190
Where is revaluation surplus reported under International Financial Reporting Standards (IFRS) until the Property, Plant, and Equipment (PPE) is sold?
It is reported in Equity.
191
What happens during the reset method?
Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation.
192
Under International Financial Reporting Standards (IFRS), what two methods can be used to adjust accumulated depreciation?
The proportional and reset methods.
193
Define "equity securities."
Securities representing ownership or right to acquire ownership interest.
194
List the guidelines for determining no significant influence in an investment.
Investment is: 1. in Debt securities; 2. in Non-voting stock; 3. Temporary in nature; 4. Less than 20% ownership of voting stock.
195
What is the required accounting treatment when an investor has control of an investee?
Treat as a subsidiary and consolidate investee with investor (consolidated statements).
196
List the investor's considerations in selecting the correct accounting for an investment.
1. The nature of the investment; 2. The extent of the investment; 3. Management's intent.
197
What is the basis for general guidelines for determining the level of influence over an investee?
The nature and extent of ownership.
198
Define "debt securities."
Securities representing the right of the Creditor to receive from the Debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds.
199
Identify the three possible levels of influence over an investee for accounting purposes.
1. Not significant; 2. Significant influence, but not control; and 3. Control.
200
How is interest earned on held-to-maturity investments reported in the income statement?
As an Other Income item in the income statement.
201
What amounts are included in a gain or loss recognized on the sale of an available-for-sale investment?
The gain or loss recognized on the sale of an available-for-sale investment includes: 1. The difference between the carrying value of the investment and its selling price; and 2. Any unrealized gain or loss in Accumulated Other Comprehensive Income related to the securities sold.
202
Under what conditions can a debt security sold before maturity be considered held to maturity?
1. Sale is near enough to maturity date so that interest rate risk is substantially eliminated; 2. Sale occurs after investor has collected a substantial portion (at least 85%) of the principal outstanding at acquisition date.
203
List the criteria for held-for-trading securities.
1. Applies to investments in Debt and Equity; 2. Investor buys for the purpose of selling in the near term.
204
What amounts should be included in the initial recording of a held-for-trading investment?
Purchase price of security; Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.
205
Where are unrealized holding gains and losses on investments held-for-trading reported?
In income (Income Statement) as part of Income from Continuing Operations.
206
What method is used to amortize a premium or discount on a security?
Effective interest method or straight-line method if not materially different.
207
At what cost are held-to-maturity securities carried and reported?
At amortized cost.
208
What investments are classified as available-for-sale?
Any debt or equity investments not classified as either Held-to-Maturity or Held-for-Trading. The Available-for-Sale category is the default category if an investment in debt or equity does not meet the requirements of either Held-to-Maturity or Held-for-Trading.
209
How are held-for-trading investments carried and reported?
At fair value, with changes in fair value reported in current income.
210
Where are held-to-maturity investments reported on the statement of cash flows?
Investing Activity.
211
What amounts should be included in the initial recording of a held-to-maturity investment?
1. Purchase price of security; 2. Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.; 3. Accrued interest, if any, is not included in the cost of the investment.
212
How are available-for-sale investments reported in the balance sheet?
At fair value (i.e., original cost +/- allowance to adjust to fair value) as either current or non-current asset (based on entity's policy).
213
List the criteria for a held-to-maturity classification.
1. Debt security; 2. Investor has intent to hold to maturity; 3. Investor has ability to hold to maturity.
214
How are available-for-sale investments accounted for and reported in financial statements?
1. Recognize interest income (one debt securities)/dividends (on equity securities); 2. Amortize discount or premium, if any, on debt securities; 3. Adjust investment to fair value at balance sheet date with any gain/loss reported as an item of other comprehensive income.
215
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?
Under normal circumstances, the carrying amount of the investment does not change under the cost method.
216
What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?
The carrying amount of the investment would change when: 1. The subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made); 2. The investor buys additional shares of the subsidiary or sells some of the share it already owns.
217
How do we account for the transfer of an investment from held-to-maturity to held-for-trading?
1. Credit held-to-maturity at unamortized cost; 2. Debit Trading at fair value; 3. Recognize unrealized holding gain/ loss in net income.
218
How do we account for the transfer of an investment from held-to-maturity to available-for-sale?
1. Credit held-to-maturity at unamortized cost; 2. Debit available-for-sale at fair value; 3. Unrealized (holding) gain or loss to Other Comprehensive Income.
219
How do we account for the transfer of an investment from held-for-trading to held-to-maturity or available-for-sale?
1. Credit Trading at recorded fair value; 2. Debit held-to-maturity or available-for-sale at current fair value; 3. Recognize unrealized holding gain/ loss in net income.
220
What causes transfers between classifications for investments which do not give the investor significant influence?
Changes in investor intent or Changes in investor ability to hold-to-maturity.
221
How do we account for the transfer of an investment from available-for-sale to held-to-maturity?
1. Credit available-for-sale at recorded fair value; 2. Debit held-to-maturity at current fair value; 3. Unrealized holding gain/loss stays in Accumulate Other Comprehensive Income in Shareholders' Equity 4. Unrealized holding gain/loss at date of transfer amortized over remaining life of debt.
222
Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to measure a debt investment at fair value that would otherwise be measured at amortized cost?
An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of fair value would eliminate or significantly reduce a measurement or recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases
223
What are the categories of investments under International Financial Reporting Standards (IFRS) No. 9?
Under IFRS No. 9 two categories of investments (and other financial assets) include: 1. Debt investments measured at amortized cost; 2. All other investments, including debt instruments not at amortized cost and all equity investments.
224
What conditions must be met under International Financial Reporting Standards (IFRS) No. 9 for an investment in debt to be classified as debt instruments measured at amortized cost?
Two conditions must be met: 1. Business model test - where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value; 2. Cash flow characteristic test - where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest.
225
Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income, rather than through profit and loss (net income)?
If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.
226
At the time an investor makes an investment that gives it significant control over an investee, what information must the investor determine in order to use the equity method of accounting?
At the time of investment, the investor must determine: 1. Book value of assets and liabilities of investee; 2. Fair value of assets and liabilities of investee; 3. Allocation of any difference between cost of investment and fair value of investee's assets and liabilities.
227
When an investor has significant influence over the operating and financial policies of an investee, what method must be used to account for the investment in the investee?
The investment must be carried on the investor's books and reported in the investor's financial statements using the full equity method of accounting.
228
Under what conditions will an investment give the investor significant influence, but not control, over the investee?
When an investor owns 20% to 50% of the voting equity securities of an investee and there are no impediments to the investor exercising its voting rights to influence the investee's operating and financial policies. Investments in non-voting equity securities (e.g., preferred stock) or in debt securities does not convey influence.
229
At the time an investment gives the investor significant influence, but not control, over an investee, how will any difference between the cost of the investment and the book value of the investee's assets and liabilities be allocated?
To adjust an investee's assets and liabilities to fair value, then 1. If cost of investment \> fair value of investee's net assets, to Goodwill; OR 2. If cost of investment
230
What is the required accounting if a change in an investor's level of ownership results in a loss of significant influence, but the entire investment is not disposed of?
The investor must cease using the equity method of accounting and begin accounting for the investment at fair value (either as available-for-sale or held-for-trading). The investment will be adjusted to fair value at the date significant influence is lost and any difference between fair value and the prior equity-based carrying amount will be recognized as a gain or loss in current income.
231
What are the elements that enter into the determination of revenue recognized from an equity method investment?
Investor's share of investee's reported net income/loss - "depreciation/amortization" on excess of cost of investment over book value (OR + "depreciation/amortization" on excess of book value over cost of investment) = net revenue recognized for equity method investment. Dividends received do not enter into the determination of the investor's revenue recognized; they reduce the investment account.
232
Identify the three major equity method items recognized each period by an investor.
1. Recognize investor's share of investee's net income/loss; 2. Recognize investor's share of investee's dividends declared; 3. Recognize adjustment to share of investee's net income/loss for "depreciation/amortization" of amount allocated to excess of fair value over book value.
233
List the journal entry for an Investor to recognize proportionate share of investee income using the Equity Method.
DR: Investment in X CR: Investment (equity) revenue
234
List the journal entry for an Investor to recognize proportionate share of investee dividends using Equity Method.
DR: Dividends Receivable/Cash CR: Investment in X
235
In what forms may a joint venture be established?
1. By agreement or contract alone; 2. As a corporation; 3. As a partnership; 4. As an undivided interest entity.
236
Under U.S. Generally Accepted Accounting Principles (GAAP), what are the methods of accounting that may be used to report an investment in a joint venture?
Equity method or consolidation basis for a corporate joint venture. Partnership basis, with certain equity method-like adjustments, for a partnership.
237
What are the major differences between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) in accounting for joint ventures?
1. Contributions of nonmonetary assets: \* U.S. GAAPat carrying value; \* IFRSat FV for share not owned by contributing entity, with gain/loss recognized. 2. Methods of Reporting: \* U.S. GAAP - primarily using equity method; partnership or full consolidation basis when appropriate; \* IFRS - equity method or proportionate consolidation.
238
What entry is made by an investor who receives stock rights?
An entry is made to transfer some of the cost of the investment in the stock that "earned " the rights to an account for the rights. The entry is: DR: Security Stock Rights CR: Investment
239
What is the accounting treatment by an investor when a stock split occurs?
Investor adjusts per share cost; not total cost. Original cost is divided by new total number of share (after split) to get new per share cost.
240
If stock rights are not exercised and lapse, what entry should the investor make?
The investor writes-off the stock rights and recognizes a loss. The entry is: DR: Loss on Expiration of Stock Rights CR: Security Stock Rights
241
What is the accounting treatment by an investor when a stock dividend is received?
Investor adjusts per share cost; not total cost. Original cost is divided by new total number of shares (after stock dividend) to get new per share cost.
242
How is the value of a stock right determined when the per share market value of rights is given?
The carrying value of the investment at the time the rights are received is allocated between the shares of stock and the newly acquired rights based on the relative market value of each set (total share and total rights). The amount allocated to the total rights is then divided by the number of rights received to get the value of each right.
243
What are the characteristics of investment property under International Financial Reporting Standards (IFRS)?
1. Investment property consists of building and/or land; 2. Held by the owner or a lessee under a capital lease; 3. For the purpose of earning rental income, recognizing capital appreciation, or both.
244
If an owner uses part of property, under what conditions may the other part be accounted for as investment property?
If the part of the property used by the owner and the part not used by the owner can be sold or leased separately and if the part not used otherwise meets the definition of investment property, it can be treated as investment property.
245
Under what conditions can property already held be transferred into or out of the investment property category?
Transfers of property into or out of the investment property category can be made only when it is clearly evident that there has been a change in the use of the property.
246
What are the acceptable methods (models) for measuring and reporting investment property?
The cost method (model) and the fair value method (model). An entity may use only one of these methods to measure and report all of its investment property.
247
List the types of intangibles
Marketing Related, Customer Related, Artistic Related, Contract Related, Technology Related, Goodwill.
248
What costs can be capitalized to an intangible asset?
Price paid to other parties.
249
What method is used to amortize intangible assets?
Straight line, unless another systematic method can be shown as more appropriate.
250
When can impairment of an intangible be recovered?
Impairment of an indefinite or definite life intangible CANNOT be recovered.
251
List the classifications of intangible assets.
Definite life intangibles, indefinite life intangibles.
252
How is amortization of definite life intangibles recorded?
Debit amortization expense and credit the intangible asset (there is no accumulated amortization contra account as with tangible assets).
253
What are intangible assets?
Long-term operational assets that lack physical substance or presence but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date.
254
Under what conditions is the residual value of a definite life intangible not assumed to be zero?
When 1) the entity has a commitment from a third party to purchase the intangible asset at the end of its useful life; or 2) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset's useful life.
255
What is the impairment test for definite life intangibles?
Two steps: 1. The book value (BV) of the definite life intangible is compared to the recoverable cost (RC) of the intangible asset. If the BV \> than the RC then 2. BV compared to fair value (FV). If BV \> FV then impairment loss = BV - FV.
256
What is the impairment test for indefinite life intangibles?
One step: BV compared to FV. If BV \> FV then impairment loss = BV - FV.
257
How much of the impairment loss can be recovered under IFRS?
The recovery of an impairment loss is limited to the carrying value had the impairment not occurred.
258
Provide examples of the class of assets can you carry at fair market value under IFRS?
Property, plant, and equipment; identifiable intangible assets; financial assets including investments and financial instruments.
259
At what level is goodwill impairment testing performed under U.S. GAAP and IFRS?
Under U.S. GAAP, goodwill impairment is tested at the reporting unit level. Under IFRS, goodwill impairment is tested at the cash generating unit.
260
Under IFRS, at what value can you report intangible assets?
Amortized cost or fair market value.
261
Which liability requires more future cash payments: a current liability reported at $2 million or a noncurrent liability reported at $2 million?
Noncurrent liability requires more future cash payments.
262
List the three key elements of liabilities.
1. Probable future sacrifice of economic benefits; 2. Obligations to transfer assets or provide services in the future; 3. Result of past transactions or events.
263
What do liabilities represent?
Represent outsider claims to a firm's assets or are enforceable claims for services to be rendered by the firm.
264
How are current liabilities valued and recorded?
Due to materiality, normally recorded at face value.
265
How should a short-term note payable refinanced every six months on a continuous basis be classified?
The classification of this note is Current.
266
What payroll taxes are paid in equal amounts by the employer and the employee?
Federal Insurance Contributions Act (FICA) tax, Medicare.
267
Define "sales taxes payable".
Account recognized for sales tax collected from customers.
268
How is the total employer expense for payroll computed?
Gross pay + employer payroll taxes + employer portion of employee fringe benefits.
269
How are nonmonetary liabilities paid?
Payable in services or nonmonetary assets.
270
What payroll taxes are paid only by the employer?
State and federal unemployment taxes paid only by employer.
271
How is the change in the deferred revenue account calculated for a period?
Cash received during the period less revenue earned for the period.
272
How are deferred revenues expected to be earned more than one year from the balance sheet date classified?
Noncurrent liability.
273
What accounts are used to record cash received from a customer before the revenue is earned?
Unearned revenue, revenue collected in advance.
274
What is the classification of an account credited when cash is received from customers for an extended warranty?
Current liability, noncurrent liability, depending on expected period of warranty claim work.
275
Are gift cards liabilities, definite liabilities, or contingent liabilities?
They are definite liabilities.
276
What account should be credited when gift cards are considered forfeited and the seller has no obligation to the state?
Miscellaneous revenue or sales.
277
What amount of revenue is recognized for a period for an extended warranty when total warranty costs are estimable?
The total amount received for the extended warranty multiplied by the fraction: warranty costs incurred for the period divided by the total estimated warranty costs to be incurred.
278
What increases in pretax earnings when a gift card is used by a customer to purchase an item?
Gross margin for the item sold.
279
What is the classification of an account that is credited when cash is received from gift cards sold to customers?
Current liability, noncurrent liability, depending on expected period of sale.
280
What amount of revenue is recognized for a period for an extended warranty when total warranty costs are not estimable?
The total amount received for the extended warranty multiplied by the fraction: 1/(term of extended warranty contract in years).
281
List the two different methods of amortizing a discount or premium on a note.
1. Effective interest method; 2. Straight-line method.
282
What is the amount of interest recognized for a period on a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Product of effective rate at date of issuing the note and the principal balance at the beginning of the period.
283
Define "interest-bearing note payable".
A note in which the interest element is explicitly stated.
284
What causes a discount on a note?
This occurs when a note is issued with a yield rate greater than the stated rate.
285
List the two different methods of recording a note for which a discount or premium is recorded?
1. Gross method; 2. Net method.
286
What is the amount of interest recognized for a period on an installment note (one requiring equal periodic payments that include both principal and interest)?
Product of effective rate at date of issuing the note and the principal balance at the beginning of the period.
287
What is the reported amount of a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Present value of remaining cash flows discounted at the effective rate.
288
What is the net note balance for a note issued at a discount?
Face value less unamortized discount.
289
What causes a premium on a note?
This occurs when a note is issued with a yield rate less than the stated rate.
290
What is the distinction between notes payable and accounts payable?
1. Time period is usually extended; 2. Notes have an interest element.
291
When is the straight-line method not allowed for notes payable accounting?
Installment notes, and when the yield and stated rates are materially different.
292
What is the principal amount of a noninterest-bearing note?
Present value of the face amount discounted at the yield rate on the note.
293
What is the amount of the periodic payment for an installment note issued at discount?
Face value divided by the annuity factor for the term of the note and the stated rate on the note.
294
How is the total interest expense recognized on a noninterest-bearing note?
Total payments less amount borrowed.
295
Is a noninterest-bearing note issued at a premium or discount?
It is issued at a discount.
296
What is the amount borrowed on an installment note issued at discount?
Product of the periodic payment and the annuity factor for the term of the note and the yield rate on the note.
297
Define "discount on note".
The amount of revenue recognized over the term of a note exchanged for cash and other privileges.
298
Define "serial bonds".
Mature serially, that is at regular or staggered intervals.
299
Describe the valuation of long-term liabilities.
1. Initially recorded at the present value of future cash flows; 2. Interest and amortization are recognized at the market interest rate the date the liability was established; 3. Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.
300
What method is used for premium/discount amortization?
Effective interest method.
301
When are bonds sold at a discount?
When stated rate
302
When are bonds sold at a premium?
When stated rate \> market rate.
303
Define "maturity date".
The date the maturity value is paid, the end of the bond term.
304
Define "bond date".
The first possible issuance date.
305
Define "issuance date".
The date the bonds are actually sold.
306
Define "secured bonds".
Secured bonds have a claim to specific assets.
307
Define "bond".
A financial debt instrument that typically calls for the payment of periodic interest (although a zero-coupon bond pays no interest), with the principal being due at some time in the future.
308
What is the length of a bond term when bonds are issued between interest dates?
Period of time from issuance date to maturity date.
309
Define "stated rate".
Rate used to calculate accrued interest.
310
How are bond issue costs accounted for?
Capitalized as a noncurrent deferred charge (asset account) and amortized to expense over the term of the bonds using the straight-line method.
311
Define "bond issue costs".
The costs of printing, registering, and marketing the bonds.
312
How many months of interest are collected when bonds are issued between interest dates?
Number of months between the most recent interest payment date and the date of issuance.
313
Define "bond proceeds".
The sum of the bond price and any accrued interest.
314
What is the income statement effect of the fair value option applied to financial liabilities?
Recognize gain or loss for the change in the fair value adjustment of the liability during the period.
315
What is the general rule to calculate the change in fair value adjustment for an international treatment of debt issue costs?
Net sum of the change in the fair value of the liability plus or minus the amortization of premium or discount.
316
How is interest expenses on the current line of an effective interest bond amortization schedule computed?
Multiply one-half the yield rate at date of issuance by the book value of the bond issue on the line above the current line.
317
What is the international treatment of debt issue costs?
Reduction in the proceeds from the debt.
318
Is the fair value option for financial liabilities required and to what securities is it applied?
It is an option (not required) and can be applied to any and all financial liabilities.
319
How is total interest for a bond issue using an effective interest bond amortization schedule (assume a premium) computed?
Sum of the cash interest column less sum of amortization of premium column.
320
What is the international applicability of the fair value option?
Limited to liabilities that are part of a group with financial assets managed together.
321
List the required liability disclosures regarding noncurrent liabilities.
1. Nature and terms of purchase obligations; 2. The fixed or determinable price of redeemable stock and the fixed or determinable date for the stock redemptions; 3. The total maturity value of each long-term obligation; 4. The sinking fund requirements related to each long-term obligation; 5. The aggregate amount of the maturities and sinking fund requirements for each of the five years following the balance sheet.
322
What is the balance sheet effect of the fair value option applied to financial liabilities?
Report liability at fair value.
323
What is the accounting treatment for convertible bonds with a beneficial conversion feature?
The excess of fair value of the stock to be issued upon conversion (measured at the date of issuance) over the face value of the bonds, is allocated to owners' equity.
324
What is the market value method of recorded converted debt?
The more reliable of market value of the stock or bonds is allocated to the capital stock account and contributed capital in excess of par account. A gain or loss is recorded equal to the difference between the total market value recorded and the remaining book value of the bonds.
325
Bonds are unaffected by conversion feature until what point in time?
Until conversion takes place.
326
When a convertible bond is issued, how are the proceeds treated?
The same as a nonconvertible bond. Nothing allocated to the conversion feature.
327
What method of recording converted debt does not recognize a gain or loss?
Book value method.
328
What is the book value method of recording converted debt?
Remaining book value of the bonds is transferred to the capital stock account and contributed capital in excess of par account. No gain or loss is recorded.
329
What amount is allocated to owners' equity on issuance of convertible bonds that can be settled in cash?
Issuance price less the present value of the bonds using the prevailing rate on similar bonds.
330
What is the accounting treatment by the issuer for additional consideration paid to induce conversion of convertible bonds?
Recognize expense for the fair value of the additional consideration.
331
How should the issuance of bonds with detachable warrants be recorded when only one market value is known?
Proceeds equal to the fair market value are allocated to that security, and the incremental proceeds are allocated to the remaining security.
332
How should the issuance of bonds with detachable warrants be recorded when the market value of both are known?
Proceeds are allocated based on the respective fair market values of the securities.
333
How should detachable warrants be accounted for after issuance?
Debit cash for exercise price, debit detachable warrants, credit common stock and additional paid in capital (APIC).
334
How should bonds with detachable warrants be accounted for after issuance?
Unaffected by warrants; amortize premium or discount.
335
What is the purpose of detachable stock warrants?
To increase marketability of bond issue.
336
How does an entity prove intent to refinance short-term obligations?
Must be proven, possibly in the form of board of directors' meeting minutes.
337
List the three ways to meet ability requirement.
1. Actually refinance before issuance of the financial statements; 2. Enter into a noncancelable refinancing agreement supported by a viable lender; 3. Issue equity securities replacing the debt.
338
List the criteria for reclassifying current liabilities to long term.
1. The intent to refinance the short-term obligation must be proven; and 2. The firm must demonstrate the ability to refinance the obligation.
339
How are gains/losses from extinguishment of debt reported on the income statement?
Recognized as components of income from continuing operations.
340
List the steps to retire debt on the books.
1. Record interest, amortization of discount/premium, issue costs; 2. Remove debt and related accounts; 3. Record gain or loss.
341
When is retirement of debt considered extraordinary?
When the "unusual and infrequent" criteria of Accounting Principles Board (APB) Opinion 30 apply.
342
List the gain on debt extinguishment formula.
Book value of debt - unamortized bond issue costs - cash paid.
343
List the conditions that must exist for debt to be extinguished.
1. Debtor pays creditor and is relieved of obligation; 2. Debtor is legally released from being primary obligor.
344
How is the loss on the early retirement of bonds computed?
Cash paid less book value of bonds retired plus unamortized bond issue costs.
345
Describe the journal entry recorded before the entry to remove relevant bond accounts in an early retirement?
Record interest expense, amortization of discount or premium, and amortization of bond issue costs for the period between the previous interest payment date (or fiscal-year end, if later), and the date of retirement.
346
What amount of bond issue costs are removed from the accounts upon early retirement of 30% of a bond issue?
Thirty percent of the unamortized bond issue cost account at the date of retirement.
347
What is the interest rate used to determine the price of a bond issue to be retired early in an open-market purchase?
The yield rate on the date of retirement.
348
What is the interest rate used to recognize interest expense before early retirement of a bond issued?
The yield rate on the date of issuance.
349
How is the gain on early retirement of bonds computed?
Book value of bonds retired less cash paid to retire bonds less unamortized bond issue costs.
350
What is the amount of interest to be recognized after a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?
Amount to be recognized is zero.
351
Describe the creditor's accounting treatment for the modification of a troubled debt restructuring.
Treat as a loan impairment.
352
What requirement must exist for a debt restructuring to be troubled?
Creditor makes a concession.
353
Describe the debtor's recording of a settlement restructure.
1. Gain = book value of debt + unpaid accrued interest - market value of consideration transferred; 2. Gain/loss on disposal of assets transferred; 3. Remove debt from books; 4. Record any stock issued at market value.
354
Describe the creditor's reporting of a debt settlement restructure.
1. Records loss equal to book value of receivables less market value of consideration received; 2. Remove receivables from books; 3. Record assets received at market value.
355
Describe the debtor's recording when the nominal sum of restructured flows is less than or equal to book value (BV) of debt + accrued interest.
1. Reduces carrying value of debt to nominal sum of flows; 2. Records gain for difference between book value and nominal sum; 3. No future interest recorded; 4. All restructured flows are principal payments.
356
What is the nature of restructured cash flows for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?
Principal payments.
357
List the computational methods of determining the post-restructure interest rate for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt; the restructured cash flows are not uniform in amount or timing.
Trial and error spreadsheet function for nonuniform cash flows.
358
List the two categories of modification of terms debt restructures for international accounting standards.
Significant modification and not significant modification.
359
What is the international accounting standard treatment of settlement troubled debt restructures?
Same as U.S. accounting but is considered an extinguishment.
360
Describe the post-restructure interest rate for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt.
Rate that equates the book value of the original debt with the present value of restructured cash flows.
361
What is the amount of interest to be recognized after a troubled debt restructure modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt?
Difference between the sum of restructured cash flows and the book value of the original debt.
362
What is the classification of liabilities that are due on demand?
Current Liability.
363
What is the classification of liability subject to a subjective acceleration clause?
Current if it is possible the debt will be called; noncurrent if a remote chance exists of calling the debts.
364
Define debt covenant.
Restriction on debtor and possible responses by creditor.
365
Give an example of a response by a creditor if the debt covenant is violated by the debtor.
Require the debtor to pay the debt or refinance the debt.
366
Define debt covenant compliance.
Steps taken by debtor to meet the restriction and reporting such compliance.
367
Define covenant-lite loan.
Loan with less stringent restrictions.
368
List some examples of specific attributes in a covenant.
Minimum Current Ratio, Maximum Debt to Equity Ratio.
369
What is the classification of a liability callable on demand if debt covenant is violated and it is probable that the debtor will cure violation?
Noncurrent Liability.
370
What does Owner's Equity represent.
Represents the residual interest in the net assets of an entity that remains after deducting its liabilities.
371
List the items represented in Owner's Equity.
1. A record of past investment by owners; 2. A record of the amount of net income that has not been distributed as dividends.
372
List the types of ownerships.
1. Sole proprietorship; 2. Partnership; 3. Corporation.
373
What purpose does legal capital serve?
1. Establishes minimum investment; 2. Provides protection for creditors (dividends may not be paid from legal capital).
374
Define "legal capital".
The par value of the stock or the stated value of the stock issued.
375
What is the primary measurement basis for contributed capital?
The historical value of direct investments made in the firm by investors.
376
List the two main Owners' Equity categories.
1. Earned; 2. Contributed.
377
List the major Owners' Equity accounts for a corporation.
1. Preferred stock; 2. Common stock; 3. Additional paid-in capital, preferred; 4. Additional paid-in capital, common; 5. Retained earnings; 6. Treasury stock.
378
Define "authorized shares".
The total number of shares that may be issued.
379
Define "dividends in arrears".
Unpaid dividends for a particular year on cumulative preferred stock.
380
List the types of common stock rights.
1. Voting; 2. Dividend; 3. Preemptive.
381
How is the number of shares outstanding determined?
The number of shares currently held by stockholders.
382
List the types of preferred stock rights.
1. Nonvoting; 2. Dividend preferences; 3. Liquidation preferences.
383
What is the number of shares issued?
The number of shares ever issued by the firm but not retired = # of outstanding shares + # treasury shares.
384
How is the number of shares in the Treasury determined?
The number of shares purchased by the issuing firm and not yet reissued.
385
List the alternatives to par value when a stock does not have such value.
Stated Value; No Par Value.
386
How is stock issued in exchange for nonmonetary consideration recorded?
Based on the fair market value of the stock sold or the fair market value of the asset received, whichever can be most clearly determined.
387
What is the basis of allocation for stock basket sale proceeds?
Fair value of individual stocks in the basket.
388
Describe the journal entry to record initial payment of stocks sold on subscriptions.
DR: Cash DR: Subscription Receivable CR: Common Stock Subscriptions CR: Additional Paid in Capital (contract price-par).
389
Describe the journal entry for subsequent payments on stock sold on subscriptions.
DR: Cash CR: Subscriptions Receivable
390
What value is added to the contributed capital account when a no par stock has a stated value?
Contributed capital in excess of stated value (common).
391
List the requirements for stock sold on a subscription basis.
Contract stating: 1. Specifying share price; 2. Number of shares; 3. Payment dates.
392
What is the classification of the stock subscriptions receivable account?
Contra owners' equity (contra common stock subscribed).
393
Define "par value".
The minimum legal issue price for capital stock in most states and appears on the stock certificate.
394
How is stock issued for nonmonetary consideration valued?
Fair value of stock or consideration, whichever is more reliable.
395
Describe the entry to record issuance of stock for cash.
DR: Cash CR: Common Stock (at par value) CR: Additional Paid in Capital (plug number)
396
Under what condition is retained earnings debited on conversion?
Total recorded value of preferred is less than par value of common on conversion.
397
What is the accounting treatment for the retirement of preferred stock?
1. All related Owner's Equity accounts are removed; 2. Debit differences go to retained earnings; 3. Credit differences go to contributed capital.
398
What is the accounting treatment for the conversion of preferred stock?
1. Preferred stock accounts are transferred to common stock accounts; 2. If total preferred stock value is less than common stock par value, debit retained earnings.
399
For what amount is Preferred Stock Additional Paid in Capital debited when called or redeemed?
Amount recorded from original issuance.
400
When called or redeemed, which Owners' Equity accounts are removed?
All related Owners' Equity accounts, including retained earnings from dividends in arrears and retained earnings debited for any difference.
401
What is the effect of treasury stock transactions on earnings?
There is no effect.
402
How can retained earnings be affected by treasury stock transactions?
Decreased (as a last resort) but never increased.
403
Describe the cost method for accounting for treasury stock.
1. Purchases are debited at cost; 2. Reissuances debit cash, credit treasury stock at cost, and contributed capital is plugged.
404
When is paid in capital from treasury stock decreased under the cost method?
When treasury stock is reissued for less than cost.
405
List the methods for accounting for treasury stock.
1. Cost Method; 2. Par Value Method.
406
What is the effect on owners' equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?
Increase owners' equity by the difference in purchase cost and reissuance price.
407
Under the cost method of accounting for treasury stock, how is treasury stock presented on the balance sheet?
Treasury stock is subtracted from very bottom of Owners' Equity section of the balance sheet.
408
What is the relationship of total owners' equity for cost and par methods for the same firm?
They are equal, although components of owners' equity would show different balances.
409
How is treasury stock presented on the balance sheet under the par value method?
Reported as a subtraction from the common stock account in the balance sheet.
410
What accounts may reflect different balances under the cost and par method for the same firm?
Treasury stock, paid in capital in excess of par-common, paid in capital from treasury stock, retained earnings.
411
Describe the accounting treatment of purchases of stock under the par value method.
1. Treasury stock is debited at par; 2. Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued; 3. Cash is credited.
412
Describe the accounting treatment of reissuance of stock under the par value method.
1. Treasury stock is credited at par; 2. Remainder of entry is treated like stock issuance.
413
When is paid in capital from treasury stock increased under the par method?
When treasury stock is purchased for less than original issue price.
414
What is the effect on the treasury stock account under the cost method when donated stock is received?
Effect on the treasury stock account is increase for the fair value of the stock received.
415
What is the effect on the treasury stock account under the par method when donated stock is received?
Effect on the treasury stock account is increase for the par value of the stock received.
416
On what date are dividend liabilities established?
Declaration date.
417
List the journal entry to record declaration of property dividends (assuming asset fair value exceeds book value).
DR: Retained Earnings (at FMV at declaration date) DR: Asset (FMV - book value) CR: Dividends Payable (FMV) CR: Gain on Disposal (FMV - book value)
418
List the journal entries to record cash dividend declaration and payment.
DR: Retained Earnings CR: Dividends Payable DR: Dividends Payable CR: Cash
419
Define "scrip dividend".
A special form of note payable whereby a corporation commits to paying a dividend at some later date because the firm does not have the cash at the date of declaration to pay the dividend but wants to assure the shareholders that the dividend is forthcoming.
420
List the journal entry to record payment of property dividend.
DR: Dividends Payable CR: Cash or Asset
421
Define "liquidating dividends".
1. A return of capital, rather than a return on capital; 2. Reduces contributed capital account instead of retained earnings
422
List the journal entry to record a scrip dividend declaration.
DR: Retained earnings CR: Scrip dividend payable
423
List the entry to record a scrip dividend payment.
DR: Scrip dividend payable DR: Interest expense CR: Cash
424
What types of dividends payable require establishing a liability?
Those dividends involving a distribution of assets.
425
What is a large stock dividend?
Percent of dividend is greater than 20-25%.
426
List the accounting treatments for a stock split.
1. Not a dividend; 2. An adjustment to par value and number of issued shares; 3. No net change to Owner's Equity.
427
What is a small stock dividend?
Percent of dividend is less than 20-25%.
428
Define "stock dividend".
A distribution by a firm of its stock to its shareholders in proportion to their existing holdings. No net change to Owner's Equity.
429
What is the date used to establish market price for small stock dividends?
Declaration date.
430
How is a small stock dividend accounted for?
Capitalize retained earnings at market price.
431
How is a stock split accounted for?
No accounting entry needed.
432
How is a large stock dividend accounted for?
Capitalize retained earnings at par value.
433
List the order of dividend payment if nonparticipating preferred stock is outstanding.
1. Preferred: dividends in arrears (if cumulative); 2. Preferred: current period dividend; 3. Common: remainder.
434
Is there any additional participation to preferred stock if total dividends are not sufficient to provide the partially participating preferred percentage to both common stock and preferred stock?
The remainder of dividends after the basic preferred percentage is provided to common, multiplied by the ratio: total preferred par value to total par value of both classes of stock.
435
List the order of dividend payment when partially participating preferred stock is outstanding.
1. Preferred: Any dividends in arrears; 2. Preferred: Current period dividends; 3. Common: Preferred percentage x total par outstanding; 4. Preferred: Additional percentage; 5. Common: Remainder.
436
List the order of payment for partially participating stocks.
1. Dividends in arrears; 2. Current p/s dividend; 3. Preferred stock receives up to an additional percentage.
437
What dividends can owners of preferred stock receive?
Preferred stock may receive dividends in addition to the annual current dividend.
438
Is there any additional participation to preferred stock if total dividends are not sufficient to provide common stock with dividends based on the fully participating preferred percentage?
There is no additional participation.
439
What dividends are paid before any other dividends are paid?
Preferred stock dividends in arrears.
440
What is the effect of retained earnings appropriations on assets?
No effect on assets.
441
Define "restrictions on retained earnings".
An external constraint placed on a certain portion of retained earnings by an external party.
442
List the reasons for appropriating retained earnings.
1. Financial planning; 2. Legal requirement; 3. Contractual obligation.
443
How should restrictions and appropriations on retained earnings be reported?
Disclosed in footnotes.
444
Describe the accounting entry to record stock rights issued to outside parties for services at exercise of rights.
Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.
445
What is often used to convey preemptive rights regarding stocks?
Stock rights.
446
Describe the accounting entry to record stock rights issued to outside parties for service at issuance.
Record an expense and owners' equity account equal to the difference between the market price and exercise price, times the number of shares under option.
447
Define "retained earnings appropriation".
Management's formal communication that a portion of retained earnings has been declared off-limits for dividends.
448
List the accounting steps in a quasi-reorganization.
1. Write assets to market value, further reducing retained earnings; 2. Reduce contributed capital to absorb earnings deficit; 3. If needed, change par value or number of shares of common stock to absorb remaining deficit.
449
Define "common stockholders' equity".
Total Owner's Equity after preferred dividend claims are removed.
450
What is the effect of a quasi-reorganization on total owners' equity?
Decrease in total owners' equity.
451
Define "book value per share".
Common stockholders' equity per share of outstanding common stock at the end of the period.
452
What is the effect on book value per share of a transaction that increases earning?
Increase in book value per share.
453
What is the effect of dividends in arrears on book value per share?
Decrease on book value per share.
454
List the requirements for a quasi-reorganization.
1. Shareholder and creditor approval; 2. Retained earnings balance must be zero immediately afterwards; 3. No contributed capital account can have a negative balance afterwards; 4. Assets must be written down to market value; 5. Retained earnings must be dated for 3-10 years afterwards.
455
What is the effect of a quasi-reorganization on retained earnings?
Increase in retained earnings.
456
What amount of sales is recognized for the first period of operations for a firm when there is a right of return and all relevant criteria for recognition of revenue under a right of return are met?
Total sales for the period less actual returns less estimated returns.
457
True or False: The installment sales basis is a version of the cash basis of accounting.
This is a true statement.
458
Describe the revenue recognition principle.
Revenue is not recognized unless it is (1) earned, and (2) realizable.
459
List the components of cash received under the installment method of revenue recognition.
1. Recovery of cost; 2. Gross margin.
460
List the formula to determine the gross profit recognized in the installment method.
(cash received in period) x (gross profit percentage).
461
List the three criteria for revenue recognition.
1. Goods and services have been provided to the client; 2. The company is reasonably assured of collecting; 3. The company can determine the related expenses incurred.
462
What amount of sales is recognized for the first period of operations for a firm where there is a right of return and future returns cannot be estimated?
Sales for the period that cannot be returned, or total sales less actual returns less sales that can be returned.
463
List the situations in which the installment method of revenue recognition may be applied?
1. Collectability is questionable; 2. Receivables will be collected over an extended period of time.
464
List the formula to determine the gross profit percentage.
(sales-cost of goods sold)/sales.
465
When is the initial franchise fee recognized as revenue?
When the franchiser has substantially performed all material services or conditions. Generally, when franchisee commences operations.
466
List the difference between cost recovery and installment method.
No gross profit is recognized for cost recovery method until all costs have been recovered.
467
List the criteria that must be met when recognizing revenue at the point of sale if a right of return exists.
1. Price is fixed or determinable at time of sale; 2. Buyer paying the seller is not contingent on resale; 3. Buyer would still pay seller if stolen or destroyed; 4. Buyer acquiring for resale has economic substance apart from seller; 5. The seller does not have obligations for future performance; 6. The amount of future returns can be reasonably estimated.
468
How are payments to consignee treated for accounting purposes?
Selling expenses.
469
List the situations in which cost recovery method of revenue recognition is used.
1. Collectability is questionable; 2. Collectable over a long time period (Same as for installment method).
470
When is revenue recognized in the consignment goods?
When sold by the consignee.
471
List the three conditions for revenue recognition at completion of production.
1. Relatively stable market for goods; 2. Any related marketing costs are nominal; 3. The units produced are homogeneous.
472
Describe the revenue recognized under the percentage of completion for the second year of a contract.
Total revenue through year two based on the percentage of completion through year two, less revenue recognized for year one.
473
What is the contra account to construction in progress?
The contra account is Billings.
474
Why are billings on construction treated as a contra to construction in progress?
To avoid double counting of assets.
475
Describe the accounting behind the revenue recognition method for percentage of completion.
Recognize profit in proportion to degree of completion. Required if estimates of degree of completion at interim points can be made and reasonable estimates of total project cost can be made.
476
List the methods of revenue recognition for long-term contracts.
1. Percentage of Completion; 2. Completed contract.
477
Describe the accounting behind the revenue recognition method for completed contracts.
No profit recognized until contract completed.
478
Describe the nature of the construction in progress account.
Inventory account - a current asset.
479
What is the effect of billing a customer on net assets?
There is no effect.
480
What is the amount of loss recognized in a period under the percentage of completion method when estimated total project cost exceeds contract price and gross profit was recognized in previous years?
Total project cost less contract price, plus gross profit recognized in previous years.
481
What method is used under international standards if the percentage of completion method is not appropriate?
Cost recovery (zero profit) method.
482
What is the amount of loss recognized in a period under the completed contract method when estimated total project cost exceeds contract price?
Overall loss; total project cost less contract price.
483
When is the balance in construction in progress the same for the percentage of completion method and completed contract method?
When an overall loss is expected on the contract.
484
What is the accounting effect when a single period loss occurs on a contract expected to be profitable?
Total gross profit through the period is less than the gross profit recognized in earlier periods.
485
What is the percentage of completion of a project when an overall loss on the contract is expected?
Same as usual; total cost to date divided by total estimated project cost.
486
Define "property taxes".
Taxes levied by the local government to support schools and other activities.
487
What is the accounting treatment for most advertising costs?
Immediate expensing or expense when first advertising occurs.
488
What is the main difference between expenses and losses?
Only expenses provide a benefit. Expenses arise from primary business activities-losses are incidental to business activities.
489
What account is credited in monthly property tax accrual entries before the tax bill is paid?
Property Taxes Payable.
490
What account is credited in subsequent monthly property tax accrual entries after the tax bill is paid?
Prepaid Property Taxes.
491
Does accounting for research and development reflect the concept of matching or asset definition?
It reflects asset definition.
492
Define "cost".
Value of cash or other resources exchanged for another resource.
493
Does the capitalization of interest reflect the concept of matching or asset definition?
It reflects the concept of matching.
494
What is the accounting treatment for direct response advertising programs?
Capitalize then amortize as advertising expense.
495
Over what period are property taxes accrued?
Over the fiscal year of the taxing authority.
