10. Payables/ Accrued Liab, LT Debts, Equity Flashcards
What are the 3 criteria to be classified as liabilities?
Represent probable future sacrifices of economic benefits
Obligations to transfer assets or provide services in the future
Results of last transaction or event
What’s the payroll liabilities both employer and employees must pay?
FICA (federal ins contribution act) and MC tax
What’s the payroll liab only employer must pay?
FUTA (federal unemployment tax act) and SUTA (state unemployment tax act)
Bonus compensation liab:
Based on operating income after income tax but before deducting bonus?
After income tax and bonus?
B=bonus%(income - T)
T=tax%(income - B)
Compute B
B=bonus%(income - B-T)
T=tax%(income -B)
Compute B
Difference between expenses and losses?
Exp provides benefits .
Loss - incidental
Advertising expense: treatment of tangible assets (catalogues/bill boards)?
Recognize as prepaids
Advertising expense: treatment of direct response advertising (coupons, took free #, internet links)?
Capitalized if the main purpose is to produce sales from customers who respond (direct costs).
Amortized as advertising expense
Indirect costs (facility costs, depr) not capitalized.
What are the criteria to accrual compensated absences?
The obligation is attributable to services rendered as of the BS date
The rights vested (available even if leave company) or accumulated
Pmt of obligation probable
The amount of obligation estimable
Is sick pay benefits accrued?
No, but if unused sick pay leaves are routinely paid, it will be accrued
What’s the two criteria for contingent liab to be recognized?
Probable (very high) and amount estimable
Not Reasonably probable or remote
When the estimate amount for contingent liab is much larger than the actual cost, adjustment will be made at the yr end. Will it be applied retroactively as well?
No
Is gain contingency recognized when probable?
No
Under IFRS, what’s the name of contingent liability on BS?
Provision
Under IFRS, what’s the name for contingent liability when foot note disclosure only?
Contingent liability
IFRS: accruals for liability is much less uncertain than provisions?
Yes
What’s the criteria of recognizing provision under IFRS?
Has a present obligation
More likely than not outflow will occur
Amount estimable
When a range provided for likelihood of occurrence for contingent liability/provision, what should be selected to report?
U:Lowest range
I: mid point
IFRS: gain contingency recognized?
Yes when virtually certain
What are the two interest recognition methods?
Effective method: based on the unpaid balance of the debt
Suited for ones with long terms, non-interest bearing note
How to value the note payable or item purchased?
- FV of the note or item
- FV of the note
- Impute using prevailing rate for similar instruments
How to calculate effective interest paid?
Interest paid / cash rcvd
Explain discount on bond.
Premium.
Bond is sold for less than face value. Effective rate > Stated rate
For more than face value. Effective rate < Stated rate
What is unsecured bond called?
Debentures
What’s zero coupon bond?
Pay not interest
What’s the accounting for bond issue costs (accounting, legal, printing, underwriting)? JE?
Reduce face amount and amortized over the bond term.
Does not affect bond price, discount or premium.
Issue date: Dr: Bond issue cost. Cr: Cash. Interest pmt date: Dr: Interest expense. Cr: Bond issue cost.
Bond FV option: can it be applied to just one bond?
Yes, one, several or all
How is the change in FV for bond FV option treated?
Unrealized G/L in earnings
Criteria for refinancing CL to LT?
When do they need to occur?
Between BS date and issuance or available to be issued.
Actually refinance on LT basis
Enter into noncancellable agreement supported by a viable lender
Issue equity securities replacing the bond
IFRS: what’s the time frame for refinancing CL to NCL?
Before BS date
G/L recognized on debt retirement: where will they be recognized?
Income from continuing operation
How are G/L on debt retirement computed?
Difference between the current bond price and net bond liab (the face value of bond +- unamortized premium or discount less unamortized bond issue cost).
If current bond price > then loss
Troubled debt restructuring (TDR 1) settlement. How does debtor record gain? Which kind of gains?
Creditor?
Carrying value of assets being transferred
MV of assets being transferred
Difference=G/L on disposal
MV of assets being transferred
Carrying value of debt being liquidated
Difference=gain on restructuring
Creditor: record loss MV < BV.
TDR 2: modification of term: Explain
Sum of new CF < BV of debt.
Debtor: gain. No interest. All pmts treated as principal pmts.
Creditor: loan impairment
TDR 3: modification of term (sum of new CF > BV of debt): explain.
Debtor: recognize interest at lower rate. No gain. Must calculate the new interest rate: BV/new pmt each. Compare the result and the years of the new term on a table. Get the new interest rate. Compute the new interest pmt: BV x new interest rate. The difference between that and settled pmt each will be the reduction in note payable.
Creditor: loan impairment
IFRS: modification. How to determine significant modification?
Treatment?
The difference between the PV of 2 debts is 10% or more of the PV of the remaining CF on the old debt.
Treated as extinguishment of old debt and recognition of new debt
IFRS, if modification not significant, treatment?
New debt at original BV +- G/L
Costs, fees amortized
The difference in PV amortized
What’s bond indenture?
Rights and duties of issuer (debtor) and bond holder (creditor)
What’s bond covenant?
A section of contract describing the responses available to the creditor if certain events or conditions occur (called restriction also)
If bond is callable on demand without qualification, what’s the classification?
If there is a covenant violation?
If creditor waives the violation?
If the violation will be most likely fixed?
CL
CL
NCL
NCL
What is objective and subjective acceleration clause?
Objective - specific measurements
Subjective - enable creditors to call the debt for reasons not specified in objective. If likely - Classified as CL. If not - NCL
Mandatorily redeemable shares will be classified as liability under which criteria?
They are obligations to repurchase the firm’s equity shares or are indexed to such an obligation.
They require or may require the issuers to settle the obligation by transferring assets
Convertible bond: treatment?
Treated as debt like non convertible bond.
At conversion, equity component surfaces except when it can be settled with cash, then liability only
IFRS: bond classification for liability?
Regardless of form, liability if a financial instrument is an obligation to transfer cash or other assets
What are two main OE category?
Earned capital
Contributed capital
List 7 major OE account types?
Pref. Stock APIC pref. APIC APIC com. RE AOCI Treasury stock
IFRS:what's the mane of following GAAP names? Com. Stocks Pref. Stocks Paid in capital in excess of par Similar to RE
Ordinary shares
Pref. Shares
Share premium
Reserves
How does stock issue cost affect?
Reduce cash proceeds and APIC
Not an expense
How does the annual cost of maintaining stockholder records treated?
Expense as inccur
When is a liability recorded regarding dividend?
When declared
Property dividend: initial measurement? When asset distributed? JE?
At FV. G/L recognized and then distribute.
@ declaration: (1) Dr: Investment in stock. Cr: Gains on investment (affects RE). (2) Dr: Dividends declared (or Re). Cr: Property divi payable.
@Pmt: Dr: Property divi payable. Cr: Investment in stock.
IFRS: the amount of divi proposed or declared before the authorization of financial stmt must be disclosed?
Yes
100% stock dividend and 2-for-1 split impacts on: Total OE RE Par value Shares outstanding Contributed capital CS acct
None, decrease, none, double, increase, increase
None, none, cut in half, double, none, none
What’s small stock dividend? How is it treated?
Large stock dividend? JE?
S: < 20-25% of outstanding shares. Capitalize at FV
L: > 20-25%. At par value
Dr: RE (portion of divi). CR: CS. CR: APIC (No for large stock divi)
What’s the 5 order of dividend allocation?
- Pref.: divi in arrears
- Pref. Current period divi
- Com. Pref % x total com. Outstanding
- Pref. Additional
- Com. Additional
Stock rights convey which rights?
Preemptive rights : give an option to maintain % of ownership by purchasing new issues stocks
Stock right entry at issuance and exercised?
Issuance: no entry Exercised: Dr: cash (#of shares OS X exercise price per share) Cr: CS ( x par) Cr: APIC
Stock rights sold to outside parties in exchange of service.
Recording at issuance?
At exercise?
Record expense and OE acct (stock rights outstanding: market price minus exercise price x # of shares).
Record stock issuance at exercise price and remove stock rights outstanding
Is RE adjustment after or pre tax?
After tax
How does RE stmt can be displayed?
As a separate sheet or a column in the stmt of change in OE
What is RE appropriation? JE?
Possible dividend reduction for a particular purpose.
Dr: RE. CR: RE, appropriation for…
Does RE restriction by third party require recognition?
No. Foot note only
Formula for BV per share?
OE - pref. stock claims / ending # com. stock outstanding
What’s quasi reorganization?
GAAP allows a firm with a negative RE to start fresh and pay dividends
How to compute compound interest?
- Original: face x interest rate
2. Second yr: (face + #1) x interest rate
If employees historically let the benefits lapse, does the benefits need to be accrued?
No
Bond FV option: can it be revoked and change?
No. Once chosen, irrevocable.
Bond FV option: Treatment of discount/premium?
What does increase and decrease in FV mean? for Bond liability?
Same:
Increase: Unrealized loss - Increased liability.
Decrease: Unrealized gain - decreased liability.
What is the difference between FV and BV of bond?
FVO adjustment.
IFRS and FV bond option: When is it allowed?
Limited to financial assets/liabilities that are managed and evaluated as a group on a FV basis as part of risk management or investment strategy.
Deferred tax liability associated with depreciation: CL or NCL?
NCL
How do you calculate the adjustment of discount when bond is retired early? Total discount: 100, Original term: 10 yrs, remaining years 5, retiring 1/4.
100/10x1/4x5
What is another way to tell whether the restructuring is a TDR?
If the OV of the restructured flows using the original interest rate is less than the BV of the debt at the time.
Obligation to issue shares. When is it a liability or OE account?
When there is a fixed dollar amount (Issues bears the risk) - liability.
When there is a fixed number of issues (Receiver bears the risk) - OE account.
What’s included in contributed capital (paid in capital)?
Common/preferred stock at par or stated amount.
APIC (capital in excess of par).
When there is no par value for com stock issuance for cash: JE
Dr: Cash
Cr: Com. stock (use issuance price).
No APIC. If there is a stated value, use it as par.
How to value stock issuance for non monetary consideration?
Use most reliable fair value
Stock issued on subscription (cheaper because of no brokerage fee): When does the stock get issued? JE?
When subscription is fully paid. DR: Stock subscription Receivable (OE contra account). Cr: Com. stock subscribed account. Cr: APIC Net impact on OE is 0.
Stock issued on subscription: JE when fully paid.
DR: Cash
Cr: Receivable.
Dr: Com. stock subscribed.
Cr: Com. stock.
Stock issued on subscription: JE when payer defaults with a partial pmt.
Dr: Cash (partial pmt).
Cr: Com. stock subscribed.
Dr: Com. stock subscribed.
Cr: Com. stock.
Dr: Com. stock subscribed (part unpaid).
Dr: APIC (part unpaid).
Cr: com. stock subscription receivable.
JE when pref. stock is called ore redeemed.
1: Pay any dividends in arrears:
Dr: Div
Cr: Cash
Dr: Pref. stock Dr: APIC - Pref. stock Dr: Retained earnings (Plug) Cr: APIC - Com. stock (Plug) Cr: Cash
JE when pref. stock is converted:
Same except: instead of Cr: cash, it’s Cr: Com. stock
Mandatorily redeemable pref. stock: Treatment.
Treat as debt. Record at FV. Div recorded as interest expense.
Treasury stock: Two methods?
Cost method (at cost). Reissue: at cost (FIFO). Par method (at par). Reissue: treat as new issue.
When treasury stock transaction occurs, how does it impacts the size of the shareholder’s equity?
Buy - decrease by the amount of cash paid.
Sell - increase by the amount of cash received.
Treasury stock: average cost: how to compute average cost?
Treasury stock $ / shares in the treasury
Treasury stock: Under which method does CR: APIC-com stock is used?
Par method.
Under cost: APIC-treasury.
Scrip dividend JE?
@ declaration. Dr: Dividends declared (or RE). Cr: Scrip divi payable. @pmt: Dr: Scrip divi payable. Dr: Interest expense (WATCH FOR PARTIAL YEAR). Cr: Cash.
Where normal dividends taken from? Liquidating dividend? JE?
RE or temp OE account (Divi declared).
From contributed capital - APIC.
Dr: Dividend declared. Dr: APIC. Cr: Dividend payable.
Stock splits: Is it dividends? What’s JE? Impacts on market price?
No. No entry. Reduce the market price.
Stock splits effected in the form of a stock dividend: JE?
DR: APIC. CR: Com. stock (use par or FV depending on small or large).
Does treasury stock transaction impact shared issued number?
No because it’s already counted as issued.
Dividend allocation: Fully participating - Explain. Partially participating - explain.
F: Compute allocation - (Pref par x shares)/Total of both. (Com par x shares)/Total of both. Allocate arrears, pref., com based on pref.%, use % of allocation to divid the remainder.
P: Allocate arrears, pref., com. Compute: participation% x the total par price for both - if the remainder is enough, allocate participation% to pref (Par x shares x participation%) and remainder to com.
If not enough, use the acclamation% to divide.
Quasi reorganization: How should com. stock issuance be valued in OE?
At FV.
