For the purpose of estimating income taxes to be reported in personal financial statements, assets and liabilities measured at their tax bases should be compared to assets and liabilities measured at their
- Assets - Estimated current value
Liabilities - Estimated current amount
To estimate the tax liability to be reported in personal financial statements (i.e., personal statement of financial condition) the tax basis of assets and liabilities should be compared with the fair value (estimated current value) of assets and the fair value (estimated current amount) of liabilities. Any excess of the fair value of the net assets (assets minus liabilities) over the tax basis of the net assets generally is a taxable gain subject to an income tax liability.
Which of the following statements normally would be included in a set of personal financial statements?
- Income Statement
- Statement of Cash Flows
Neither an Income Statement nor a Statement of Cash Flows is normally included in a set of personal financial statements. A Statement of Financial Condition (Balance Sheet) is always included in a set of personal financial statements, and a Statement of Changes in Net Worth may be included, but is not required.
The personal statement of financial condition for Allen Harvey reported a net worth of $825,000 on December 31, 20X0. During the calendar year 20X1, Harvey had earned income of $68,000. For 20X1, his broker's reports showed that his investments had increased by $23,000. In addition, for the year, his credit card debt increased $6,000 and his home mortgage principal balance decreased by $24,000. There were no other changes in Harvey's financial condition during 20X1. Which one of the following is Harvey's net worth as of December 31, 20X1?
The correct answer ($866,000) is computed as beginning balance $825,000 + increase in investments $23,000 - increase in credit card debt $6,000 + increase resulting from decrease in mortgage $24,000 = $866,000, the correct answer.
In personal financial statements, how should estimated income taxes on the excess of the estimated current values of assets over their tax bases be reported in the statement of financial condition?
- As liabilities.
- As deductions from the related assets.
- Between liabilities and net worth.
- In a footnote disclosure only.
Between liabilities and net worth.
Estimated income taxes (i.e., provision for income taxes) on the excess of the estimated current values of assets over their tax bases should be reported as a separate line item between liabilities and net worth sections of the personal financial statement.
The following information pertains to an insurance policy that Barton owns on his life:
- Face amount $100,000
- Accumulated premiums paid up to December 31, 2011 $8,000
- Cash value at December 31, 2011 $12,000
- Policy loan $3,000
In Barton's personal statement of financial condition at December 31, 2011, what amount should be reported for the investment in life insurance?
Assets should be reported at estimated current value (fair value), which for a life insurance policy is the current cash value, less the settlement amount of any loans against the life insurance policy. Thus, the correct answer is cash value of $12,000 less the loan against the policy of $3,000, which results in a reportable fair value of $9,000.
Quinn is preparing a personal statement of financial condition as of April 30, 20X5. Included in Quinn's assets are the following:
- 50% of the voting stock of Ink Corp. A stockholders' agreement restricts the sale of the stock and, under certain circumstances, requires Ink to repurchase the stock. Quinn's tax basis for the stock is $430,000, and on April 30, 20X5, the buyout value is $675,000.
- Jewelry with a fair value aggregating $70,000 based on an independent appraisal on April 30, 20X5, for insurance purposes. This jewelry was acquired by purchase and gift over a 10-year period and has a total tax basis of $40,000.
What is the total amount at which the Ink stock and jewelry should be reported in Quinn's April 30, 20X5 personal statement of financial condition?
Both the Ink stock and the jewelry should be measured at fair value. Thus, the correct answer is $745,000, which is the sum of the buyout value (fair value) of the stock ($675,000) and the fair value of the jewelry ($70,000).
On May 31, 20X7, Quay owned a $10,000 whole-life insurance policy with a cash-surrender value of $4,500, net of loans of $2,500. In Quay's May 31, 20X7, personal statement of financial condition, what amount should be reported as investment in life insurance?
In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any loan(s) outstanding against the policy. The facts in this question state that the policy has "a cash-surrender value of $4,500, net of loans of $2,500." So, although the policy has a $2,500 loan outstanding against it, that amount already has been deducted (net of loans) in determining the $4,500 value.
Which of the following accounting concepts, if any, is/are used in the preparation of personal financial statements?
- Accrual Accounting
- Fair Value Measurement
Personal financial statements (primarily statements of financial condition) are based on the use of both accrual accounting and fair value measurement (for assets and liabilities).
John Smith owns 50% of the common stock of Bally Corp. Smith paid $30,000 for this stock in year 1. At December 31, year 5, it was ascertained that Smith’s 50% stock ownership in Bally had a current value of $180,000. Bally’s cumulative net income and cash dividends declared for the five years ended December 31, year 5, were $275,000 and $40,000 respectively. In Smith’s personal statement of financial condition at December 31, year 5, what amount should be reported as his net investment in Bally?
- $ 30,000
Smith should report marketable securities at market price.
A business interest that constitutes a large part of an individual’s total assets should be presented in a personal statement of financial condition as
- A single amount equal to the proprietorship equity.
- A single amount equal to the estimated current value of the business interest.
- A separate listing of the individual assets and liabilities, at cost.
- Separate line items of both total assets and total liabilities, at cost.
A single amount equal to the estimated current value of the business interest.
Per ASC Topic 274, business interests that constitute a large part of a person’s total assets should be shown separately from other investments. The estimated current value of an investment in a separate entity, such as a closely held corporation, a partnership, or a sole proprietorship, should be shown in one amount as an investment if the entity is marketable as a going concern.
Mrs. Taft owns a $150,000 insurance policy on her husband’s life. The cash value of the policy is $125,000, and there is a $50,000 loan against the policy. In the Tafts’ personal statement of financial condition at December 31, year 1, what amount should be shown as an investment in life insurance?
ASC Topic 274 states that assets are generally presented at their estimated current values in personal financial statements. Specifically, investments in life insurance are to be valued at their cash surrender value less outstanding loans on the policy. Therefore, the investment should be reported at $75,000 ($125,000 cash value – $50,000 outstanding loan).
Personal financial statements should include which of the following statements?
- Financial condition
- Changes in net worth
- Cash flows
- Financial condition - YES
- Changes in net worth - YES
- Cash flows - NO
Per ASC Topic 274, personal financial statements consist of (1) a statement of financial condition, and (2) a statement of changes in net worth. A statement of cash flows is not required (or income statement).
The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?
The fair value of a fixed option plan at grant date is the fair value of the option. Typically the fair value of one option is given and that is multiplied by the number of options, but this problem provides the entire fair value. That total fair value is the total compensation expense to be recognized over the service period - the number of years from grant date to vesting. Once the options vest, no more compensation expense is recognized because the manager has provided the necessary service. Compensation expense per year is the total $300,000 compensation expense divided by 3 years, or $100,000 per year.
A stock option plan with a positive fair value at grant date caused compensation expense of $50,000 per year to be recorded over the five-year service period. During the exercise period (two years), the stock price never exceeded the option price. Therefore, none of the options was exercised.
Choose the correct statement about the accounting for these options.
- the contributed capital increase from recording compensation expense is reversed, causing compensation expense to be reduced in the eighth year after grant.
- The contributed capital increase from recording compensation expense is left intact.
- The financial statements during the service period are retroactively restated by removing the compensation expense.
- The compensation expense for later option grants is reduced by the amount recognized on the options that expired.
The contributed capital increase from recording compensation expense is left intact.
Expiration of stock options does not cause reversal of compensation expense because, at the grant date, the firm did provide value to the employee, given that the option had a fair value at that time.
The expense recognized for stock option plans is not based on the expected value of the employee services; rather, it is based on the value of what was given by the employer to the employee.
Under the fair-value method of accounting for stock option plans, total compensation recognized
- Is based on the value of the option at the grant date, adjusted for forfeitures.
- Equals the net increase in OE after all relevant journal entries are recorded.
- Is the difference between market price and option price at the grant date.
- Is unaffected by the option price.
Is based on the value of the option at the grant date, adjusted for forfeitures.
The fair value of the option sets the compensation expense to be recognized for each option expected to be vested. Applying the forfeiture rate ensures that only options expected to be vested will be entered into the calculation.
On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
- Date of grant.
- Date of restriction lapse.
- Date of vesting.
- Date of exercise.
Date of grant.
The fair value on the grant date is used for measuring compensation expense, because, on that date, the employer has given a resource of value to the employee.
A restricted stock award was granted at the beginning of 2005 calling for 3,000 shares of stock to be awarded to executives at the beginning of 2009. The fair value of one option was $20 at grant date. During 2007, 100 shares were forfeited because an executive left the firm.
What amount of compensation expense is recognized for 2007?
Total compensation expense at grant date is $60,000 (3,000 x $20). The service period is four years ($20x5 - $20x8). Annual expense recognized is $15,000 ($60,000/4).
Through $20x6, a total of $30,000 of compensation expense is recognized. After the forfeit, only 2,900 shares remain to be awarded.
Annual compensation expense for the remaining two years before considering forfeited shares is therefore $14,500 [(2,900 x $20)/4].
The expense for the two years associated with the 100 shares forfeited is $1,000 [(100 x $20)/2].
For $20x7, subtracting the reversal of the $1,000 yields $13,500 as the final amount of expense to be recognized.
Another way to calculate the $14,500 is: ($60,000 original total compensation expense - $30,000 expense for x5 and x6 - $1,000 expense for x7 and x8 on forfeited shares)/2.
On January 1, year 1, a company issued its employees 10,000 shares of restricted stock. On January 1, year 2, the company issued to its employees an additional 20,000 shares of restricted stock. Additional information about the company's stock is as follows:
- January 1, year 1 - $20
- December 31, year 1 - $22
- January 1, year 2 - $25
- December 31, year 2 - $30
The shares vest at the end of a four-year period. There are no forfeitures. What amount should be recorded as compensation expense for the 12-month period ended December 31, year 2?
Total compensation expense is computed as the fair value of the stock awarded, and is allocated evenly over the vesting period. The fair value at award date is the fair value used for this computation. The two awards are treated as separate awards, each with four year amortization periods. The total expense for year 2 is the sum of the compensation expense to be recognized for each plan for year 2 and is computed as 10,000($20)/4 + 20,000($25)/4 = $175,000. Total fair value is not updated after the award date.
Select the correct statement about executive compensation plans involving stock.
- The total amount of compensation expense for a restricted stock award plan is recognized when the stock is issued.
- The total amount of compensation expense for a restricted stock award plan is determined at the grant date.
- For stock-appreciation rights plans payable in cash, compensation expense is recognized only during the service period.
- For stock-appreciation rights plans payable in cash, compensation expense recognized in any given reporting period cannot be negative.
The total amount of compensation expense for a restricted stock award plan is determined at the grant date.
Total compensation expense is the product of the number of shares in the award and the market price of stock at the grant date. This amount is recognized over the service period required for the employee to receive or keep the shares.