2300: Specific Transactions, Events & Disclosures

Question 1

A lease is a capital lease if it meets one of these 4 criteria.

Answer 1

1. Transfer of Ownership to lessee upon completion
2. Bargain Purchase Option
3. Term > or = 75% of estimated economic life
4. Present Value > or = 90% of the excess fair value

Question 2

Define Spot Rate and Forward Rate (foreign currency)

Answer 2

Spot Rate - Exchange rate existing at the current date

Forward Rate - Specified exchange rate at specified future date

Question 3

How should a receivable be recorded on the date of sale when payment will be in a foreign currency at a later date?

Answer 3

Receivable should be calculated to domestic dollars using the spot rate on the date of sale and recorded in that amount. Exchange Gain or Loss is recorded as each payment is received.

Question 4

Bargain Purchase:
After December 15, 2008 how is the excess of appraised net value of identified acquired assets over acquisition price reported?

Answer 4

As an extraordinary gain

Question 5

Which types of enterprises are required to report on business segments?

Answer 5

publicly traded enterprises

NOT non-public, joint venture, and not-for-profit

Question 6

What are servicing assets/liabilities and how should they be reported and valued?

Answer 6

Loans sold to another entity while obligation/right to service the loans is retained.

Assess for impairment/increased obligation based on fair value.

Report separately on balance sheet at fair value.

Question 7

What factors warrant an assessment for impairment for an asset?

Answer 7

Significant decrease in market value of asset
Significant adverse change in its use or condition
Significant adverse change in business climate, legal factors, regulation
Accumulation of costs significantly in excess of expectation in acquiring or constructing asset
Associated operating or cash flow loss in combination with historical or projected continuing losses
Expectation asset will be disposed of significantly prior to end of useful life
Damage to long-term customer relationship (intangible) assets

Completion of depreciation equating carrying value to expected salvage value does NOT warrant assessment

Question 8

How does IFRS differ from GAAP in accounting for business combinations?

Answer 8

Unlike GAAP, IFRS

1. does not require goodwill to be recognized but it is an option
2. recognition of extraordinary gain as a “bargain purchase” is prohibited

Question 9

What is the basic accounting equation in determining changes in accounts period to period?

Answer 9

Beginning Balance + Additions - Deletions = Ending Balance

Question 10

How do you determine and value impairment of goodwill under GAAP?

Answer 10

Step 1: For reporting unit, compare year end overall fair value to the combined book value of assets, liabilities and goodwill.

Step 2: If combined book value exceeds overall fair value, compare the implied value of goodwill (difference between fair value and book value of assets and liabilities only) to book value of goodwill.

Difference is the impairment value, but limited to book value of goodwill.

Question 11

At what level is goodwill tested for impairment?

Answer 11

GAAP: Reporting Unit (Operating Segment (OS) or one level below)

IFRS: Cash-Generating Unit (CGU, smallest group of assets that generates cash-flows, can’t be larger that OS

Question 12

How is value determined in a nonmonetary exchange?

Answer 12

Company uses the fair value of the item GIVEN (of the item it is exchanging) unless the fair value of the item to be received is “more clearly evident*”.

*With appraisal is stronger indicator of value than without

Question 13

What criteria is used in determining sufficiency of reportable segments in consolidated financial statements?

Answer 13

Total external revenues of all reportable statements must make up at least 75% of consolidated income, otherwise additional segments must be identified.

Question 14

What is the primary difference in accounting for an intangible asset with a finite useful life and one with an indefinite life?

Answer 14

An intangible asset with a finite life is amortized over its useful life.
An intangible asset with an indefinite life is not amortized but is evaluated for impairment.

Question 15

Is a subsequent reversal of a previously recognized impairment loss allowable?

Answer 15

No, it is prohibited. IFRS permits.

Question 16

What are transaction costs and how do they effect price as a determination of fair value?

Answer 16

Transaction costs are incremental direct costs to sell an asset or transfer a liability. Adjustments to fair value are not made for these costs.
Price is the fair value including (adjusted for) any costs incurred to transport assets/liabilities to/from principal to most advantageous markets. These are not transaction costs.

Question 17

In a sale of financial assets how is the carrying value of assets sold allocated between assets sold and any retained interest?

Answer 17

Allocate the previous carrying amount of assets sold between the participating interest sold and the participating interest held based upon the fair value of the assets.

Question 18

What is the formula for calculating ending liability for an escrow account?

Answer 18

Beginning Escrow Liability + Escrow Receipts - Escrow Payments + Interest Earned - Fees Charged to Customers = Ending Escrow Liability

Question 19

What amount of ownership interest in an investment requires its inclusion in consolidated financial statements?

Answer 19

A parent will consolidate investments in which it has a controlling interest (> 50% of voting stock) in its consolidated financial statements.

Question 20

Which accounts are eliminated through consolidation of financial statements?

Answer 20

Intercompany payables and receivables must be eliminated against each other.

Investment account by parent must be eliminated against the parent’s share of the subsdiary’s shareholders’ equity.

Goodwill may be recognized in the investment eliminating entry but will not be then eliminated by another eliminating entry.

Question 21

What are the 3 circumstances when changes to prior financial statements are considered and when is each applied?

Answer 21

Change in accounting principle/entity - Retrospective (revise all years displayed) UNLESS SPECIFICALLY MANDATED BY FASB PRONOUNCEMENT TO INCLUDE CUMULATIVE EFFECT IN NI AT YEAR OF CHANGE

Change in accounting estimate - Prospective (going forward)
Correction of errors - Restatement (revise all affected years displayed)

Question 22

How do you determine and value impairment of goodwill under IFRS?

Answer 22

One Step:
If carrying amount exceeds “recoverable amount” of CGU, recognize impairment loss. Recoverable amount is the greater of fair value or value in use (present value of future cash flows). Apply impairment loss first to goodwill then pro rata to carrying value of other assets in CGU.

*Cash Generating Unit

Question 23

Is reversal of impairment loss allowable under GAAP or IFRS when attributable to:
1, Goodwill?
2. Indefinite Life Intangibles
3. Long Life Assets (Held & Used)

Answer 23

GAAP always prohibits reversal of impairment losses.

IFRS:

1. Prohibits reversals of impairment losses attributable to goodwill.
2. IFRS mandates annual review for indicators of reversal for impairment loss attributable to Indefinite Life Intangibles and Long Life Assets Held/Used. If indicated, estimate “recoverable amount” and reverse up to the lesser of that amount or initial carrying amount.
3. Same as 2 except Initial carrying amount is adjusted for inflation

IFRS reports biological assets at fair value less costs to sell while US GAAP reports a standard asset at cost less depreciation.

Question 24

What is carrying value compared to when testing for impairment of goodwill, other indefinite life intangible assets and long lived assets held and use for GAAP? IFRS?

Answer 24

GAAP compares Carrying Value to Fair Value in all tests for impairment.

Calculation of impairment for goodwill and indefinite life intangibles is the difference.

For long lived assets, the loss is identified instead by

1. comparing Carrying Value to Undiscounted Estimated Future Cash Flows, but the actual impairment amount is
2. calculated compared to Fair Value.

IFRS compares Carrying Value to “recoverable amount” to whichever is the GREATER of Fair Falue or Present (Discounted) Value of future cash flows generated for all of the asset(s) including goodwill, indefinite life intangibles and long lived assets.

Question 25

In testing for impairment of indefinite life intangibles what is the unit of account for GAAP? IFRS?

Answer 25

GAAP - individual asset and rarely grouped inseparable intangible long-lived assets

IFRS - individual asset (if not possible than CGU)

Question 26

In testing for impairment of long life assets held and used what is the unit of account for GAAP? IFRS?

Answer 26

GAAP - lowest level asset group for which cash flows are identifiable, rarely a single asset

IFRS - individual asset (if not possible than CGU)

Question 27

What are the 3 entries necessary for foreign currency transactions (other than forward contracts)?

Answer 27

Purchase:
Inventory (example) DR
A/P CR
Recorded in functional currency multiplied by effective exchange rate on purchase date

Year end:
A/P DR (CR)
Exchange Gain (Loss) CR (DR)
Adjust by effective exchange rate on year end date

Payment:
A/P  DR  (CR)
Exchange Gain (Loss)  CR  (DR)
Cash  CR
Credit A/P for existing balance.  Credit Cash for original foreign currency amount established at purchase date multiplied by the effective exchange rate on payment date.  Credit (Debit) Exchange G(L) by the difference.

Question 28

What is the relationship between Gain/Loss and exchange rate for the debtor? creditor?

Answer 28

Debtor - payable (inverse):
Gain - decrease in exchange rate (less functional dollars required)
Loss - increase in exchange rate (more functional dollars required)

Creditor - receivable (direct):
Gain - increase in exchange rate (more functional dollars received)
Loss - decrease in exchange rate (less functional dollars received)

Question 29

What is a hedge that does not qualify for hedge accounting and how is it accounted for?

Answer 29

1. Speculative Forward Contract
2. Options Contract

Related Gains/Loss are included in Net Income* for the periods in which changes in fair value occur

Account for the Transaction and the Forward contract
Include change in Rate + Time Value of Money

Alternatively, Qualified Hedges are reported as a separate component of Equity (OCI)

Question 30

Define the two steps used in foreign currency translation of financial statements and the their significance in reporting.

Answer 30

1. Remeasurement Adjustment - remeasure subsidiary FS from recording to functional currency and REPORT IN NI (not necessary if they are already the same i.e. Zags)
2. Translation Adjustment - translate subsidiary FS from functional to parent’s recording currency and report cumulative translation adjustment as a component of stockholers’ equity. Report adjustments separately IN OTHER COMPREHENSIVE INCOME and accumulate in comprehensive income ( not necessary if they are already the same i.e. USD)

Only 1 step will be required if only 2 currencies are involved.

Question 31

What rates are used in foreign currency translation?

Answer 31

BS - Spot Date
IS and other “Period Ending” FS - Weighted Average for the period
PIC (CS/APIC) - historical (issue) date no earlier than investment date of parent
Changes to RE - date of transaction
Together result in Translation Gain/Loss Adjustment to Cumulative Translation Adjustment to balance Trial Balance is reported as a separate component of stockholders’ equity. (Note this adjustment occurs only in translation of FS not in transactions)

Question 32

When is a subsidiary required to use reporting currency of parent (USD) as its functional currency?

Answer 32

Country with highly inflationary currency i.e. approx. 100% over 3-year period

Question 33

Define operating segments

Answer 33

Require all of the following:

1. business activities that earn revenue and incur expenses
2. results regularly reviewed by chief operating decision maker regarding performance and resource allocations (usually has a segment manager)
3. discrete financial information available

Question 34

What are the criteria for reportable segments?

Answer 34

One of the following:

1. Revenue (provides 10% or more of combined revenue including sales to external customers and intersegment sales)
2. Profit or Loss (absolute P/L is 10% or more of the greater of (1) combined profits for segments with profits or (2) combined losses for segments with losses)
3. Assets (10% or more of combined assets for all operating segments)

measured as for chief decision maker not as for consolidated financial statments

reportable segments must be identified to account for at least 75% of total revenue (sales to external, unaffiliated customers)

prior and current period reporting for all reportable segments (if prior then include current, if current then include prior)

10 is the practical limit for number of reportable segments, remainder in “all other” category

Question 35

Required disclosures for reportable segments

Answer 35

General Info (ID factors, products/services)

Reconciliations* - Reportable Segment to Consolidated:

1. Revenues
2. Profit & Loss (internal/external Sales, Interest, Depr/amort, Unusual G/L, Equity, income Tax, Extraordinary, Sig Noncash) to Income from Continuing Ops
3. Assets
4. Other significant items

*Same areas of 10% or more that qualify it as a reportable segment

Question 36

What is the proper accounting for Research & Development costs?

Answer 36

R&D costs are expensed as incurred.
D is after technological feasibility.
Capitalization only occurs once economic viability is reached.
R&D assets do not appear on balance sheet.

IFRS expenses R but may capitalize D

US GAAP software:
internal use may capitalize R&D
external use may capitalize only D (like IFRS)

Question 37

What is the basic principle for accounting for nonmonetary exchanges?

Answer 37

The asset received is recorded at the fair value of the asset given up. Only record it at the fair value of the asset received if its fair value is more clearly evident.

Question 38

What is the modification of accounting for nonmonetary exchanges and when is it applied?

Answer 38

The asset received is recorded at the book value (recorded amount, carrying value) of the asset given up instead of fair value only if one of the following is true:
1. Fair value is not determinable
2. The exchange transaction is to facilitate sales to customers (trade items for each to sell to its customer)
3. The exchange transaction lacks commercial substance
(cs = significant difference in asset’s cash flows or entity-specific value)

Question 39

If cash is included in an otherwise nonmonetary exchange without commercial substance, how is gain calculated?

Answer 39

Without commercial substance, asset received is recorded at book value of asset given up. With the addition of cash, partial gain is recognized:
Ratio of cash received to Fair Value of total consideration received (cash received/asset received + cash received) times
implied gain (Fair Value of asset surrendered less carrying value)

Question 40

What is a transaction gain/loss and how is it recorded?

Answer 40

Results from a change in exchange rates between functional currency and foreign currency denominating the transaction.

Transaction gains/losses are recorded in net income for the period in which the exchange occurs, not as an extraordinary gain or contra amount

Question 41

What are the 4 fundamentals of derivatives?

Answer 41

1. Derivatives are Rights/Obligations that are assets/liabilities to be reported in FS
2. Fair Value is the only relevant measure
3. Only assets/liabilities are reported as such on FS
4. Special accounting is provided only for qualifying hedge items

Question 42

What are the 3 characteristics of derivatives?

Answer 42

1. (a) 1 or more Underlyings (rate/price/pmt), (b) 1 or more Notional Amounts (specific units) or Payment Provisions or (c) Both
2. requires No Initial net Investment
3. Net Settlement - Required or Permitted by terms, readily accomplished outside terms, or asset provided not substantially different than NS

Examples:
Swaps (exchange cash flows: interest rate/currency)
Options (buy/call or sell/put specific item and price)
Futures (deliver commodity/currency, specific date/price thru clearinghouse)
Forward Contracts (same as future, no clearinghouse)

Question 43

What are the 3 categories of hedges that qualify for special hedge accounting?

Answer 43

Fair Value
Cash Flow
Foreign Currency Exposure (fair value, cash flow, net investment)

Disqualified = recognize g/l currently in net income

Question 44

How is basic earnings per share (EPS) calculated?

Answer 44

Net income - Preferred Dividends/Weighted Average Common Shares Outstanding

WACSO = # shares outstanding times months/12 per each change in quantity, summed

Question 45

How is diluted earnings per share (EPS) calculated?

Answer 45

SEE Fast Book 2335

Question 46

2375 Interim Financial Reporting

Answer 46

do a card to include:
Costs not directly associated with with interim revenues are allocated equally
Extraordinary items are recognized in the period that they occur
Cum Effect of change in accounting principle or corrections of an error should be reflected retroactively to all periods presented with appropriate adj to RE or accum other comprehensive income opening balance for earliest year presented

Question 47

What is the depreciation term for capital leases?

Answer 47

The term is for the life of the lease unless there is a transfer of ownership or bargain purchase option at the end of the lease in which case it is the estimated life of the asset.

Question 48

How is a freight-out cost by parent in sale to sub accounted for in consolidated statements?

Answer 48

Selling Expenses (Parent)
Less Intercompany Selling Expenses (i.e. freight-out)
Plus Selling Expenses (Sub)
Equals Consolidated Selling Expenses

(I believe If freight-in cost were paid by the sub, it would attach to proportionately to the inventory only the portion sold would be eliminated from selling expenses for cost of goods sold.)

Question 49

How is impairment of goodwill reported?

Answer 49

In income from continuing operations where it would have been recognized if amortized.

Question 50

If difficult to distinguish change in accounting principle from change in estimate, how is change accounted for?

Answer 50

As a change in estimate, so handled prospectively (current and future years), not retroactively.

Note disclosure to explain/justify change and impact on income and EPS.

Question 51

Define “principal” and “most advantageous” market and when each is applied in determining fair value.

Answer 51

Principal market is that with the greatest volume/level of activity for an asset or liability. Assumed in fair value measurement.

Most advantageous market is that which maximizes amount received for an asset or minimizes amount paid to transfer a liability. Used only when no principal market exists.

Both considered from reporting entity’s perspective.

Transaction costs are excluded but costs to transfer to applicable market are NOT transaction costs.

Question 52

What is the effect on WACS of stock dividends and stock splits?

2335

Answer 52

shares X restatement for div/split (1.20 = 20%) X fraction of year (x/12) = WA (for each segment)

Stock splits/dividends are treated retroactively for the entirety of current and prior periods presented (beginning of earliest year presented). Apply even if occurs after year end, prior to FS issue.

The # of shares outstanding for each period is individually increased by the % stock dividend so that it is as if the split/dividend were in effect.

Sum WA of segments for WACS

Question 53

What is the effect of preferred stock on the numerator for EPS?

2335

Answer 53

Subtract PS dividends from NI.
If cumulative, subtract regardless of declaration.
If noncumulative, subtract only if declared.
Ignore dividends in arrears (already accounted for).

If entity has a Net Loss, PS dividends are added instead to calculate loss per share.

Question 54

Name and explain the method used in calculating the denominator in dilutive EPS calculations effected by outstanding stock options/warrants?

2335

Answer 54

Treasury Stock Method:
Assume exercise at the beginning of period or issuance (if later) and only if avg mkt price > exercise price.

Assume reaquistion of common stock (purchase of Treasury stock) by the entity with the proceeds from exercise at avg mkt price.

The net increase in outstanding shares is added to the denominator (WACS + WPotentialCS)

Question 55

Name and explain the method used in dilutive EPS calculations as effected by convertible securities (convertible bonds, convertible preferred stock).

2335

Answer 55

If Converted Method:
Assume conversion to common stock at the beginning of period or issuance (if later).

Interest Expense (net of tax) or Dividend Savings to the entity must be added back to NI (numerator) upon the conversion.

Int Expense:
Cash ($Bond Value X %Int Rate) + Disc (- Prem) Amort
X (1 - tax rate)
X x/12time

Dividend Savings:
% (cumulative or noncumlative-declared) x Value (par for per share, otherwise total)

Incremental Common Shares (WPCS) due to the conversion are added to the denominator
(WACS + WPCS)
WACS + #shares converted X x/12 time

Question 56

If multiple convertible securities exist, how is diluted EPS calculated?

2335

Answer 56

The conversion is assumed only if it is dilutive.

First calculate per share effect of each instance of PCS (potential common shares):

Convertible PS = Dividends/Incremental Shares
Convertible Bonds = Interest net of Tax/Incremental Shares

Apply the lowest per share effect first to calculate diluted EPS.
Only continue to apply subsequent per share effects in ascending order if that effect is less than the previously caculated diluted EPS.

Question 57

What are contingencies and how are they accounted for?

Answer 57

uncertainty as to possible gain or loss resolved by occurrence (or lack thereof) of future event(s)

Examples included collection of receivables, warranty obligations, risk of casualty loss, threat of asset expropriation, litigation, guarantees for others

Loss contingencies - recorded according to probability Probable - likely accrue/disclose (accrue only with reasonable estimate (range = low unless other = better)
Reasonably Probable - > remote, < likely (disclose)
Remote - unlikely, slight (only disclose guarantees)

Don’t accrue/disclose for general risks or lack of insurance, disclose if anticpated to occur after BS date. Accrual may appropriate RE.

Gain contingencies - do not accrue, only disclose

IFRS:
best number in range must be selected
discount accruals to present value (GAAP may)
some recognition for gain cont allowable
contingent liabilities not recognized (guarantees?)
lower threshold than “probable” is “more likely than not”(>=51%)

Question 58

Define retirement as related to ARO (Asset Retirement Obligations).

Answer 58

other-than-temporary removal from service of long-lived asset

sale, abandonment, recycling, disposal, permanent idling (not temp)

Question 59

How is a condemnation award accounted for?

Answer 59

Condemnation award is an involuntary conversion of a nonmonetary asset in exchange for a monetary asset.

Gain is recognized in spite of reinvestment.

New asset recorded at acquistion cost.

Net effect: New asset carrying value is increased by excess of new asset cost over prior asset carrying value.

Change in CV = FV2 - CV1

Question 60

What is the primary subject of FASB ASC 275 Risks and Uncertainties

Answer 60

Disclosure or risks and uncertainties is critical to a user’s process of evaluating future cash flows and results of operations.

Question 61

When does US GAAP allow an exception for impracticality? IFRS?

Answer 61

US GAAP - calculating impact of changes in accounting principle

IFRS - changes in accounting principles and correction of errors

Question 62

What are criteria by which operating segments may be combined?

Answer 62

Nature of products/services
Nature of production processes
Type/class of customer
Distribution methods for products/services
Nature of regulatory environment

Question 63

What is a statutory consolidation?

Answer 63

A + B = C
A third entity, C is a new entity created to acquire assets of A & B
A & B cease to exist

In acquisition of assets, stock or statutory merger, two entities are merged into an existing one. There is no third entity.

All 4 are referred to as business combinations as are true mergers or mergers of equals.

Question 64

Name and describe types of leases.

Answer 64

Operating - right to use property in exchange for future rental payments (initial material indirect costs inucurred by the lessor are capitalized and amortized by the lessor)

Capital (per one of four criteria):
–Direct Financing (PV of lease pmts = cv of lessor)
Interest Rev only (no profit) to Lessor
–Sales-type (includes manufacturer’s profit, PV > cv, profit/sale recognized with each payment)

Sales-leaseback (sale of property with lease back to seller)
Capitalized = Purchase + Direct Financing Lease
Not cap = Purchase + Operating Lease

Question 65

In addition to minimum lease payments, what is and is not included in lease payments for direct financing leases by the lessee? The lessor?

Answer 65

Lessee/Lessor also includes:
residual guaranteed value
penalty for failure to renew/extend
bargain purchase option

Lessee/Lessor Excludes:
executory costs
contingent rentals
any agreement by lessor to pay lessee debt on property
residual value guaranteed by 3P*
(*Lessor includes, cannot be related)

Question 66

How is residual value accounted for (guaranteed and not guaranteed)?

Answer 66

Guaranteed – included and capitalized for both

Not Guaranteed – Lessor excludes, Lessee has a separate asset for residual value (Lessee Sales/COGS are reduced by PV of residual value

Question 67

How are executory costs (taxes, maintenance, insurance) accounted for in leases?

Answer 67

Not capitalized or included in Lessor min lease pmt receivable/Lessee lease obligation

Treated as expenses as paid by the lessee or amortized by lessor

Question 68

Disclosure required for fair value hedges?

Answer 68

Net Gain/Loss recognized in earnings (including when it no longer qualifies as a fair value hedge)

Question 69

Presentation of discontinued operations.

Answer 69

results of operations net of tax for a component that is disposed of or classified as held for sale are reported separately on the income statement discontinued operations for current and prior periods reported

Question 70

1933 Securities Act

Answer 70

accounting and disclosure requirements for initial offerings of stocks or bonds

Question 71

1934 Securities Exchange Act

Answer 71

created SEC

Question 72

How do nonlevel payments or bonus paid at singing affect accounting for a lease?

Answer 72

Nonlevel pmts and bonuses result in revenue deviation from a straight-line pattern. Revenues are still recognized on a straight-line basis (consistent amount) over the life of the lease.

Question 73

How does amortization of capitalized assets affect total expenses?

Answer 73

Amortized portion for the period is expensed
Expense Dr
Amortization CR

Question 74

How are software costs accounted for?

Answer 74

Expense up to technological feasibility.

After tf, capitalized (amortize) and report at the lower of useful life or NRV

Recognize impairment loss if NRV is less than amortized cost

Question 75

Define Accretion Expense

Answer 75

Increase in ARO (asset retirement obligation) that accrues as an operating expense

Original undiscounted cash flow estimate of ARO is adjusted to discounted ARO and period changes are recognized to include the passage of time (accretion expense/amortization of discount) and revisions of timing or amount of original estimate.

Question 76

How are acquistion (acquisition-related) costs accounted for?

Answer 76

Expensed as incurred.

Acquistion method is required to account for AQ of another company. AQ method requires AQ (related) costs to be expnesed as incurred.

AQ costs and Restructuring costs are recognized separately from the business combination and usually expensed.

Question 77

How are leasehold improvements accounted for?

Answer 77

Capitalized and amortized over the LESSER of:

1. useful life of improvements
2. remaining term of lease

Question 78

How is the transfer of an entire financial asset accounted for?

Answer 78

If transferor “surrenders control*” it constitutes a sale not a borrowing.

Assets including beneficial interests are recognized at fair value.

Derecognize transferred assets, recognize at fair value assets, liabilities and beneficial interest received in exchange and recognize the difference as a gain or loss.

If any beneficial interest is retained in a sale, the previous carrying value is allocated based on the fair value of those interests.

*beyond the reach of creditors, even bankruptcy, transferor can no longer pledge/exchange and transforee can, transferor, consolidated affiliates and agents do not maintain effective control

Question 79

How is fair value for an asset or liability measured?

Answer 79

Assumes an orderly transaction between market participants at measurement date by the PRICE:

Asset = RECEIVED to SELL it (not paid to acquire)
Liability = PAID to TRANSFER it (not received to assume)

Question 80

How is TDR accounted for when asset is transferred to satisfy the debt in full?

Answer 80

Ordinary Gain/Loss to debtor for difference between CV and FV of asset

Gain to debtor on TDR for excess of liability over FV of asset

TDR portion could be extraordinary (if not typical for economic/legal reasons i.e. bankruptcy is extraordinary)

Question 81

Explain FASB ASC 825-10-25 regarding Fair Value Measurement

Answer 81

Permits FV election but does not require it, if supported by concurrent or preexisting documentation

Unrealized G/L due to FV measurement are reported in Earnings (not direct to retained earnings)

Applied contract-by-contract, instrument by instrument, to the entire item

Specified dates allowed for election:
At initial adoption of FASB ASC 825-10-25 standard
Subsequently at initial recognition or event changing its basis

Purpose is to mitigate volatility without having to apply complex hedge accounting provisions

Question 82

What is noncontrolling interest and where is it reported?

Answer 82

Noncontrolling interest (minority interest) is the portion of equity (net assets) in a subsidiary not directly or indirectly attributable to a parent.

It is reported in the Owner’s Equity section of the Balance Sheet

Question 83

When are consolidated statements required and how are earnings reported?

Answer 83

If Parent/Sub relationship exists (i.e. a company owns >50% of voting interest in another), consolidated statements are required.

100% of the earnings are reported in the consolidated statement. If the parent owns less than 100%, the remaining, noncontrolling (minority) interest is listed in the Owner’s Equity section of the Balance Sheet

Question 84

How are retained earnings calculated?

Answer 84

Prior Year RE
+ NI
Less Dividends
= Current Year RE (net assets)

Question 85

Calculate Gain (Loss) on a trade + cash given 
(has commercial substance)

Answer 85

FV Asset Given
- CV Asset Given (Cost - Accum D)
= Gain (Loss)
CV Asset Received = CV of Asset Given + Boot Given

If FV Asset Received is more clearly evident:
FV Asset Received 
- Boot Given
- CV Asset Given (Cost - Accum D)
= Gain (Loss)

Question 86

Enterprise-wide disclosure of major customers

Answer 86

If revenues from transactions with a single external customer exceed 10% of enterprise-wide revenues,
disclose revenue attributable and from which segment(s)

(not customer identity or revenue specific to each segment)

Major customer = a group under common control or any singular government (federal, state, local, foreign)

Question 87

Material Related-Party Transactions

Answer 87

Disclosure required (other than compensation arrangements, expense allowance and similar items)

Disclose:
Nature of relationship
Description of transaction
Dollar amount for periods presented and affects of any changes
Amount due as of BS date and terms

Examples:
sale, purchase, trxfr of real or personal property
services received, furnished
use or lease of property/equipment
borrowings/lendings
guarantees
compensating balances to benefit

Question 88

Rules for Nonmonetary Exchanges

Answer 88

1. Losses are always recognized
2. Gains are recognized if the exchange is measured at fair value
3. If any of three conditions for exception to fair value*, use book value.

No Boot, no Gain.
Boot Given, New Asset recorded at CV old asset + Boot (no Gain) but first recognize any impairment loss
Boot Received, Partial Gain (pro rata Boot/Boot + FV x Gain)

*1) FV not determinable, 2) Trans to facilitate sales to customers, 3) lacks commercial substance (risk, timing, amount of future cash flows (not tax effects) is significantly different)

Question 89

Items NOT eligible for FV election per FASB ASC 825-10-15-4

Answer 89

Investment in Sub for which consolidation is required
Variable interest for which consolidation is required
Obligations for pensions and other post retirement benefits
Lease A/L
Deposit liabilities for banks/depository institutions
Financial instruments classified by issuer as component of shareholders equity

Question 90

Who can expense R&D costs done under contract for another company?

Answer 90

The company purchasing the R&D can expense it.

The company providing the services cannot (operating activity of that company).

Question 91

How are intercompany receivables reported on the balance sheet?

Answer 91

They are eliminated and therefore NOT reported.

Question 92

Accounting for ARO

Answer 92

Discount the estimated FutV cost of disposal (first adjusted up for inflation) back to present value (by the company’s cost of borrowing i.e. credit-adjusted risk free rate)
DR Asset PV
CR ARO (Liability) PV

Depreciate asset (PV s/l over 40 years, a minimal amount)
Accrete liability (PV effective interest method, grows back up to estimated FutV of disposal adjusted for inflation, significant amount)

IFRS requires regular recalculation of ARO to current market conditions (fair value).

Question 93

Reporting of a mandatorily redeemable instrument

Answer 93

Classify as a liability with proper disclosure unless required only upon liquidation or termination of the reporting entity (in light of going concern assumption)

Question 94

Lessee accounting for capital lease

Answer 94

At inception:
Record Asset and Liability
at the lower of 
present value of minimum lease payments or 
fair value of asset

Payments:
Interest Expense and
Reduction in Liability

Period:
Amortize/depreciate asset

Question 95

Definition and Recognition of subsequent events

Answer 95

events that occur after balance sheet date but before FS issued or available to be issued

recognize only if condition existed at balance sheet date 
otherwise nonrecognized (disclose?)

Question 96

How is depreciation for an asset exchanged in an intercompany sale affected on the consolidated financial statements?

Answer 96

The eliminating entry upon consolidation is to change depreciation to what it would have been had the asset not been sold.

Question 97

Ordinary Gain/Loss

Answer 97

Reported as a separate component of income from continuing operations before discontinued or extraordinary items.

Question 98

Three types of Financial Instruments that must be presented as liabilities on the balance sheet.*

*not between liabilities and equity

Answer 98

Mandatorily redeemable

Obligations to 1. repurchase issuer’s shares by 2. transferring Assets (both required)

Certain obligations to issue a Variable number of shares

NOT cumulative or convertible P/S or discounted C/S

Question 99

Significant Estimates

Answer 99

Reasonably possible, material
Disclose
Examples:
Inventory/Equipment subject to rapid obsolescence
Obligations for environmental remediation
Contingent liabilities for obligations of other entities
L/T obligations (pensions/postemployment)
Disposition of assets (net proceeds/losses)

Question 100

Valuation approaches

Answer 100

Income (future cash flows/earnings discounted to PV)
Cost (current replacement)
Market (identical, comparable assets/liabilities)

Question 101

Nonmonetary exchange and impairment

Answer 101

Recognize Impairment Loss on exchange of similar productive assets if CV > FV at exchange date BEFORE recording nonmonetary exchange unless exchange lacks commercial substance

Question 102

Accounting for Speculative Foward Contract

Answer 102

Does not qualify as a hedge
compare (30) day future rate to (90) day future rate, for example, to calculate gain/loss to net income not spot rates like purchase transactions

Question 103

Inventory losses from market declines

Answer 103

Recognize in the interim period in which decline occurs only if the decline is expected to be other-than-temporary

If recovered in a later period, recognize gain only to the extent of previously recognized loss

Question 104

When are restorations of carrying value for long lived assets permitted?

Answer 104

Held for disposal - fair value increases subsequent to recording impairment (reversal allowed only up to prior write down)

Question 105

Report Total Stockholder’s Equity on Consolidated Balance Sheet

Answer 105

Report COMBINED parent and sub accounts for assets and liabilities

TSE = Parent SE + noncontrolling interest portion (%) of sub SE

Question 106

Accounting for Profit in a Sale with Leaseback

Answer 106

Determine if capital or operating per standard criteria.

If capital, then profit or loss is deferred and amortized over the life (of asset or lease?) as a reduction in depreciation expense.*

• If seller retains only minor use of asset, p/l recognized unless lease payments are unreasonable (then a portion is still deferred)
• If seller retains significant use but less than substantially all, then excess of sale over PV min lease pmts (operating) or amount of leased asset (capital) is recognized immediately

Question 107

Revenue recognition and software sales.

Answer 107

If significant production, modification, customization not required, then recognize when ALL are met:

1. persuasive evidence of arrangement
2. fee fixed or determinable
3. collectibility probable
4. delivery occurred

Question 108

November 1, Y1 forward exchange contract for
1,000,000 yen on February 1, Y2, for $10,000 based on:

November 1, three-month forward exchange rate
$1 for 100 yen (1,000,000 x 1/100 or $10,000)
December 31, forward exchange rate tone month $1 for 103

November 1, acquired inventory for 1,000,000 yen to be paid in exactly three months. The forward exchange receivable is designated as a hedge for this payable.

November 1, the spot (current) exchange rate is $1 for 94 December 31, the spot (current) exchange rate is $1 for 96

Answer 108

The value of the forward exchange contract is based on the forward exchange rate.

November 1 - three month contract becomes
December 31 - one month contract

one-month contract could be acquired for $9,708 (1,000,000 x 1/103) so $292 loss recognized on the forward exchange contract

The company also has a payable on the inventory purchase that is remeasured at the spot (or current) rate.

day of purchase, debt value $10,638 (1,000,000 x 1/94)
end of the year, value debt $10,417 (1,000,000 x 1/96)
$221 gain.

recognize a net loss of $71 ($292 loss less $221 gain)

Question 109

Consolidated cost of goods sold

Answer 109

COGS parent + COGS subsidy less intercompany transfer plus unrealized gain remaining in inventory

Unrealized Gain:

(a) transfer price less related COGS = total gross profit
(b) calculate unrealized portion of (a) remaining in inventory*

*ending inventory is a negative in arriving at COGS, removing unrealized gain increases COGS

Question 110

Sales-Type Lease

Answer 110

Calculate sales price based upon usual mark up. Total lease payments less sales price is deferred interest reveune. Implicit interest rate X sales price less any up front payment year one and principal in subsequent years = interest expense

The entire Normal Gross Profit on the sale is recognized immediately. Any amount received above the normal sales price is recognized as interest revenue throughout the life of the lease (as the initial reported value of the receivable). For Year One, the lessor recognizes gross profit and interest revenue at the effective rate.

Question 111

IFRS revaluation of assets to fair value

Answer 111

Required for entire class of assets

G/L each period

Loss is NI on IS (not OCI on BS)
Gain is OCI on BS, w/in SE (not NI on IS)

Conservatism

Question 112

Long lived asset qualifies as Held for Sale

Answer 112

Reclassified on balance sheet

Reported at the lower of book value or net realizable value:
If net realizable value is lower, a loss must be recorded to reflect the drop in reported value. (If remains at BV, no G/L.)

Depreciation of the asset is stopped when it qualifies as being held for sale.

Question 113

Fair Value Hedge vs. Cash Flow Hedge

Answer 113

FV Hedge = NI
Fair value hedge is bought to
offset a possible loss
from an asset or liability that is recorded at fair value. Since the account being hedged is recorded at fair value, its gain or loss will go into net income. Thus, the offsetting gain or loss on the hedge is also put into net income.

CF Hedge = OCI until due
A cash flow hedge is bought to
ensure that an appropriate amount of cash is received or paid.
There is not a reported gain or loss to be eliminated. Therefore, any gain or loss on a cash flow hedge is temporarily put into accumulated other comprehensive income (in stockholders’ equity) until it is terminated. The gain/loss will go from accumulated other comprehensive income to net income when the derivative comes due.

Question 114

Lessor/Lessee Interest Rate on Capital Lease

Answer 114

US GAAP:
Lessor: Implicit
Lessee: Implicit if known, otherwise incremental borrowing

IFRS:
Lessor/Lesse: Implicit

Question 115

Compounded interest in a capital lease

Answer 115

When interest is not explicitly paid, it is added to the leas obligation, then the next payment is subtracted. This gives you the carrying amount to apply the applicable interest rate to the following year.