Audio Book 2

Question 1

Calculation for Future value.

Answer 1

fv = payment (1 + r)^n 
r= interest rate 
n= number of periods

Question 2

difference between return on investment and return if investment

Answer 2

return on investment is only the interest return of investment is the interest plus the money invested

Question 3

What should you adjust when calculating interest rates that compound semi annually

Answer 3

the periods and the interest rate pay very close attention to the details of the problem.

Question 4

Present value formula

Answer 4

Present value factor x future value = present value

Question 5

Ordinary annuity

Answer 5

constant payment paid at the end of the period. would always use the tables to determine the annuity factor

Question 6

Annuity Due ( annuity in advance)

Answer 6

constant payment paid in the beginning of the period always use the tables to determine the annuity factor

Question 7

How to use the ordinary annuity factor when solving for the annuity due factor.

Answer 7

use the factor that is for one year less then just add the first payment since it is all ready in present value because it is paid up front.

Question 8

Notes ?

Answer 8

could be either interest bearing or non-interest bearing . the contract could specify if the interest is paid either each period or if its paid at the end once the note matures.

Question 9

Calculation of interest for notes payable,

Answer 9

Principal x rate x the time outstanding

Question 10

Journal Entry when interest is paid?

Answer 10

Interest payable xxx

Cash xxx

Question 11

Journal Entry when the note matures

Answer 11

Notes payable xxx

Cash xxx

Question 12

Must watch out for !!!!

Answer 12

Partial year interest

Question 13

When Interest and the note is payable at the maturity date.

Answer 13

Under this method the accrual accounting method requires for the interest to be recognized as it incur.

end of year adjusting entry
Interest expense xxx
Interest payable xxx

Maturity date
Accrued interest payable xxx
Cash xxx

Note payable xxx
Cash xxx

Question 14

None interest bearing note is ?

Answer 14

When a contract is signed to pay the amount which represents both principal and interest.

the bank will calculate the present value of the total amount paid back. you will then receive this money as the amount you borrowed. the difference between the total amount you paid back would be considered the interest. This interest would be considered discount on note.
Journal entry at date not is received
this is when the fv option is not elected. You will always use the face amount of the note.
Cash xxx
Discount on note xxx
Note payable xxx

entry at the end of each year: interest expense in the carrying amount of the note x Interest rate.

Interest Expense xxx
Discount on note xxx

in the balance sheet the note would be posted at the face value amount which is note payable - discount on note.

Question 15

Short Term notes payable

Answer 15

notes that are one year or less they are recorded at there maturity value

Question 16

Long term notes

Answer 16

are recorded at the present value of the note

Question 17

if the note is exchanged for cash the present value of the note is.

Answer 17

The amount of the cash exchanged.

Question 18

if the note is exchanged for rights of cash the present value of the note is.

Answer 18

recorded at the present value of the note and the rights of cash are valued separately recorded in a separate account

Question 19

When a note is exchanged for the an item that is not cash value. like property goods or services. at what value would you record it.

Answer 19

this causes a problem in accounting because it does not present with the dollar amount to record the note at present value. this could be fixed by assuming that the stated or contractual rate represents a fair value of the note. If the interest rate is presumed to be fair. then the value is calculated by multiply the interest rate of the note by the face amount of the note. there would be no discount or premium since the face amount would be the present value.

Question 20

Related to the previous question

What happens if the interest rate of he note is not given or it does not represent the present value of the note.?

Answer 20

it would be determined based on the amounts listed below organized by the priority
1 if there is a fair value of goods and services you would use that amount to value the note.
2 if the market value of the note exist than this would be the present value
3 finally if there is not market value then you would use the imputed interest rate at the deters borrowing rate to calculate the value of the note.

Question 21

When should the lender recognize the cost generated by originating the loan?

Answer 21

The borrower should deffer and recognize the cost over life of the loan only when related directly to the loans
They include
1 Attorney fees
2 title insurance
3 wages of he loan officers

lender should capitalize these cost and amortize over the life of the loan

Question 22

To calculate the carrying amount of the loan.

Answer 22

The lender must add the direct cost listed above to the loan. in-direct cost should be expense immediately.

Question 23

In the times that the lender charges the borrower non refundable origination fees. how should it be recognized

Answer 23

Should be deferred and recognized throughout the life of the loan for both parties. This is most likely to be used when the loan uses a point system to lower the interest rate. most times it happens during mortgages. The borrower decides to pay 2 points or 2% on the loan amount to lock into a lower borrowing rate. remember that this amount is considered interest this amount would ultimately be subtracted to get the carrying amount of the loan.

Question 24

When the fair value option is not elected how do you determine the fair value

Answer 24

you would use a discount or a premium to come adjust it to fair value

Discount- is a contra account to note payable and would reduce the value of the carrying amount of the note.
Premium- is an adjunct account that increases the value of the note and t the carrying amount of note payable.

When this is done the effective method of interest amortization is required.

This method requires that interest be recognized as a constant interest rate over the life of the loan. as a result the interest method classified would be the interest rate times the amount at the beginning of the loan. the discount or premium account would be amortized as interest expense over the life of the loan

other method of amortization ( like the straight lined method) could be used as long as they are not materially different. CPA REQUIRES THAT YOU SHOULD USE THE EFFECTIVE RATE METHOD FOR CALCULATING INTEREST AND AMORTIZING DISCOUNTS AND PREMIUM. ONLY USE THE STRAIGHT LINE METHOD IF SPECIFIED.

Question 25

what is the interest rate printed on the bond referred to as???

Answer 25

stated rate,face rate, or coupon rate,

Question 26

What is the interest rate that investors demand??

Answer 26

effective rate, market rate,or yield.

Effective rate- the degree of risk associated with the companies bonds

Question 27

What is the present value of the bond liability?

Answer 27

any cash received minus any accrued interest.

Question 28

If the stated or face rate = the effective rate then?

Answer 28

The present value of the bond = the face amount of the bond

Question 29

If the stated or face rate < the effective rate then?

Answer 29

The present value of the bond < the face amount of the bond

The difference represents the discount

Question 30

If the stated or face rate the > effective rate then?

Answer 30

The present value of the bond > the face amount of the bond

The difference represents the bond premium.

Question 31

Journal entry on the date of issuing bonds?

Answer 31

Cash(plus any interest uncured) xxx

Bonds payable xxx

Question 32

How should you account for bonds with a discount on the balance sheet ?

Answer 32

you should either add the premium to the face amount or subtract the discount from the face amount. the face value would = the book value or carrying amount of the debt.

Question 33

How should bond issue cost be accounted for as ?

Answer 33

It includes
1 printing bonds
2 accounting or legal fees of bonds
3 promotion or commission cost.

Theses cost should be debited to an asset account titled BOND COST. they should then be amortized in a straight line method against the bond until the date that they mature. they should be disclosed as long term asset or a deferred charge on the balance sheet.

Question 34

when using the effective rate how would you calculate interest paid?

Answer 34

I made note about this before. You would multiply the effective x carrying value of the bond on the beginning of the period.

Question 35

The cash paid for the interest is calculated by?

Answer 35

the coupon rate x the face amount of the bond. this amount will never change on the period. but the amount of interest expense will.

Question 36

How do you calculate the carrying value of the bond?

Answer 36

When the bond has a discount you add the discount to the carrying value of the bond over the amortization period and subtract the discount from the discount account. when you have a premium you would deduct it. discount or premium would always approach 0 as you approach the maturity and the carrying amount would always approach face.

Question 37

Fair value option for reporting financial liabilities

Answer 37

• must be elect on initial recognition of liability and could be elected on an instrument and instrument basis
• the liability will be reported at fair value on the balance sheet date
• any gains or losses will be recognized in the income statement
• there are no specification when calculating interest expense. therefore there are multiple methods that can be used but one must make sure to reported in the notes in the financial statement.

you could report items reported on fair value in the balance sheet along with other items that are not reported at that level. the only thing thing is that you would have to reported in parentheses. another option is to reported in two separate line items one for fair value items and the other for none fair value option.

Question 38

Conversion bonds !!!

Answer 38

• the bonds could be converted into stocks. in the discretion of the holder.
• anytime a bond has a conversion feature it would be accounted for as debt.

Methods of converting bonds

Book Value Method: ( mostly tested)
this method the conversion is accounted for as if the bond holder always had the intention to be the common stock holder.
the carrying value/ book value of the bonds is converted to common stock.
Accounting entry : removing bonds and discounts and premiums at book value. Crediting the common stock amount at par value of shares issued and additional paid in capital for the remaining amount.

Market value method:
this method uses the market value of the stock on the conversion date. any gain or loss is calculated by the difference of the market value of the stocks and the carrying value of the bonds.
Journal entries: debit bonds payable fir the face amount of the bonds, and credit discount, debit premium on bonds payable to remove any of the bond accounts. credit common stock for the shares issued, credit additional paid in capital for the difference in the fair value and the par of the stock. and finally the gain or loss in the conversion of the bonds.

Question 39

Bonds issued with warrants or rights to purchase shares of the the stock.

Answer 39

Bonds with none detachable warrants: since the warrants are not detachable they do not have any value so the issue price of the bonds is allocated entirely to the bonds.

If the warrants are detachable they can be separated and sold. so the issue price of the bonds are allocated to the bonds and the warrants.

then there is debt you would use the proportional method to allocated between the bonds and the warrants. this is done by taking the fair value of the bond and warrants. then getting the percentage of each method than finally you would multiply by the issuing price of the bond

Question 40

When is the incremental method used?

Answer 40

when the fair value of the bonds and warrants is not known. this method uses the fair value of the security that is known. Than it uses the fair value of that security minus the issued price to allocated the remainder into the security that does not have a fair value.

Question 41

Early estinguishmant of debt.

Answer 41

requisition of any security debt or instrument before the maturity date of the debt.

• 1st the net carrying value of debt must be determined
• (when using bonds you must subtract any un-amortized discount and add any un-amortized premium, 2nd would be to deduct any un- amortized issuing cost if the cost where accounted for as assets.)
• 2nd would be to compare the net carrying value with the cash paid to retire the debt. and this would give you a gain or loss. this gain or loss would be reported regularly on the income statement and it would and it would be reported under continuing operations.

one journal entry to issue the new debt
and another to retire the old debt.

Retiring old debt
Bonds payable xxx
Debit or credit to remove discount or premium account .Bond issue cost xxx
Cash xxx
debit or loss to credit or gain

Question 42

Bond sinking fund is ?

Answer 42

a general ledger control account. 2 could be used either for sinking fund cash or for sinking fund investments.
When it is established cash is placed to the sinking fund. this account could buy and sell assets as well earn interest and dividend income.
Establishing a sinking fund.
Sinking fund Cash xxx
Cash xxx

Bonds are retired
Bonds payable xxx
Sinking fund cash xxx

Question 43

Accounting for debt restructuring (troubled debt restructuring)

Answer 43

debtor: entity which borrows the money
creditor; loaner of the mula
May include
1 transfer of assets the completely or partially satisfies the debt.
2 granting an equity interest to the creditor that could satisfy part or all of the debt.
3 modification if the terms of the debt which may include reduction of interest rate, reduction of owed interest, extension of maturity date. or reduction of the maturity or principal of the debt.

Question 44

When stock is issued to settle debt it should be recorded at?

Answer 44

Fair market value

Question 45

When the debt is settled on transferred assets what are the two potential gains or losses?

Answer 45

Gain or loss is assigned when the asset is revalued to fair value
than the asset is removed from the balance sheet at fair value and the debt is removed at carrying value than a gain or loss is recognized
losses and gains are recorded as other income or loss
and earning from continuing operations.

Question 46

How to calculate gain or loss under modification of debt for the debtor.

Answer 46

compare the total amount of future cash flows with the new changes to the carrying amount of the debt.
the debtor will never recognize a loss if the cash flows are higher than the carrying amount, it would adjust the interest rate to balance out. if the cash flows are lower then the carrying amount, then the debtor will recognize the debt the will not recognize interest rate

Question 47

How to calculate gain or loss under modification of debt for the creditor.

Answer 47

uses the present value of expected future cash flows to measure impairments. the cash flows are discounted at the loans original contact rate. then a bad debt expense is recognized for the amount of loan loss. should adjust the loan receivable by adjusting the valuation account. if interest is forgiven then the creditor should adjust the interest receivable account. should revise the value from one period to the other due to adjustments and also to change in estimates due to time change.

Question 48

How to determine pension cost (for the employer).

Answer 48

pensions are benefits that are given to employee by the employer. a fund is created where the employer and sometimes the employee contributes to it. This amount is out of the control of the employer once it is done.

when employer puts money into pension funds
Pension expense xxx
Cash xxx

when the employer pays more than its suppose to
pension expense xxx
prepaid pension cost xxx
cash xxx

When the employer pays less than its suppose to
Pension expense xxx
cash xxx
Pension Liability xxx

Question 49

What are the required disclosures for pensions?

Answer 49

1 Descriptions of the plan
2 the employees group covered
3 the basis for determining contribution
4 the natures and effects of the events effecting comparability

Question 50

Defined benefit plan (pension plan)

Answer 50

employer promises to pay retirement benefits based on a formula which is based on benefits or compensation received upon retirement.

example: contract could state that the employer would pay the average of the employers last 3 years salary.

this method requires for the employer to be liable for the amount stated in the contract even if the pension fund performs poorly.

Question 51

Concepts of defined benefit plans

Answer 51

the goal is to estimate how much pension the employer has to pay or pension cost for the period. actuaries usually predict the rate of return along with how much you should put into the pension based on the individuals age, life ans service expectancy. then this information is passed on to the accountant.

Question 52

What should the accountant calculate for the period?

Answer 52

Pension cost for the period
Prepaid pension cost.
pension liability
determining if the pension plan is over or under funded at the balance sheet date.

Question 53

Pension vocabulary used in defined pension plan

Answer 53

Vested benefit: benefit which the employer could retrieve even if it does not complete any additional services
Accumulated benefit obligation ABO: pension obligation both vested and non vested. this method would use current salary level for all employees . is estimate of what is owed to the employees it does not include any increases in salary.
Projected Benefit Obligation PBO: estimate that combines the future benefits for vested and non vested benefits. it is based on future salaries and level of services.
most calculations use ABO or PBO but these estimates and calculations could be in accurate and it becomes really complex. this is noted by the fasb the difficulties with this calculations.
Pension cost : pension expense for the period

Question 54

5 cost components of pension Cost AKA Expense

Answer 54

1 Service Cost 
2 interest cost
3 Actual return on pension plan assets
4 Amortization of prior service cost or credit
5 Affect of gains and losses

Question 55

1 Service Cost

Answer 55

Actuarial present value of benefits earned by employees during the current period.
This item is calculated by the actuary
Service cost would increase pension cost.

Question 56

2 interest cost

Answer 56

the increase of PBO over the passage of time. the PBO is calculated at present value at the beginning of the year. This amount will accrue interest by the end of the period based on the discount rate(settlement rate) selected. this amount is the added to the PBO. in increases pension expense. Beginning year PBO X settlement rate = Interest cost

Question 57

3 Actual return on pension plan assets

Answer 57

the difference in fv of the plan assets at the beginning and at the end of the period adjusted for contributions and benefit payments.

Question 58

4 Amortization of prior service cost or credit

Answer 58

This cost is caused by either an amendment to the current plan or an initiation to a new plan. prior service cost occurs when these changes happens and the employer then has to pay additional benefits. Prior service credit occurs when the changes make the employer pay fewer benefits. these changes are determined by the changes in PBO caused by the changes. they are then amortized over the present period and over the periods that it will affect. increases pension cost for the period while the credit decreases it .

Question 59

5 Affect of gains and losses

Answer 59

1 difference between actual and expected return on plan assets. adjust for fluctuation of plan assets. this includes by Actual return - Expected return.
Actual return < Expected return = added to pension cost.
Actual return > expected return = added to pension cost.

Steps to calculating gain or loss.
1 compare PBO with market relate value ( fair value or adjusted fair value calculated by actuary)
2 take the highest of PBO and market related value x 19% = corridor amount
3 compare gain or loss with corridor amount
4 Corridor> Gain or loss= do nothing
corridor

Question 60

Funded status is?

Answer 60

must be reported in the balance sheet this amount is the difference between the PBO and fair market value

Question 61

If the employer was to sponsor multiple plans

Answer 61

the funding status may NOT be netted.

Question 62

Accounting for Other post retirement benefits

Answer 62

these rules apply to all other post retirement benefits besides healthcare. the largest one would be health care.
Similar to accounting for defined benefit plans
these funds uses accrual accounting meaning that they should be recognized when the benefits are worked for by the employer not when they are paid.

Question 63

Que es Attribution period ?

Answer 63

the period when benefits are accrued and earned, it begins when the employee is hired ends when employee qualifies to receive benefits

Question 64

Expected post retirement benefit obligation (EPBO)

Answer 64

actuarial present value of all benefits expected to be paid post retirement. includes benefits for all employees.

Question 65

Accumulated post retirement benefit obligation (APBO)

Answer 65

actuarial present value of present benefits attributed to employee services. That are accumulated as a specific date. APBO = EPBO only if all retirees and employees could attain full retirement benefits.
Same cost are used as for pension cost benefits and for other post retirement benefits.
1 Service Cost
2 interest cost
3 Actual return on pension plan assets
4 Amortization of prior service cost or credit
5 Affect of gains and losses

The other similarity is that they use a gradual method to recognize gains and losses this method is not abrupt and instant.

Another similarity is that when are over funded and under funded you would recognize an asset or liability as for pension fund. this is all stated above. also you must describe in details in the notes what what was disclosed.

Question 66

What are 2 things that must be disclosed in Other post retirement benefits?

Answer 66

1 assumed health care cost trend rate along with a description of the pastern of change.
2 the effect that a 1 point decrease and increase would have on the aggregated service and interest rate components. and the accumulated post retirement obligation for health care plans.

Question 67

ACCOUNTING FOR LEASES

Answer 67

an agreement to use property plant and equipment for a agreed and stated period of time.
Lessor: person who owns the property
Lessee: person who borrows the property

Question 68

What are the two types of lease ?

Answer 68

1 Operating lease

2 Capital lease

Question 69

When should a lease be classified as a capital lease?

Answer 69

When it is none cancel-able and it meets one or more of the following requirements.
1. transfers ownership of the property at the end of the lease term to the lessee
2 the lease term consist of a fixed non-cancel-able terms plus all periods if any covered by bargain renewal option
3 The lease contains a bargain purchase option. this is an option for the lessee to purchase the item at a lower price than its fv on the date the option is exercisable
4 the lease is equal to 75% or more of the estimate economic life of the lease.
4 at the beginning of the lease the present value of the lease payment equals 90% or more of the fair market value of the asset being leased.

For the lessor 2 other conditions must be met to capitalize a lease.
1 collect-ability is assured or predictable
2 no important uncertainties exist concerning cost incurred by the lessor.

Question 70

Accounting for leases for the leasee

Answer 70

when the lease classifies as an operating lease the lease is charged as rent payment as they are incurred and expended.. if the lessee makes any improvements to the property it must charge any improvements to lease hold improvements. these improvements are then amortized over the life of the lease or the life of the improvement. of course the shorter one. lease hold account is classified in the balance sheet under the caption plant property and equipment. if the lessee pays a bonus to negotiate better payments the bonus should be debited to prepaid rent and amortized in a straight line method over the life of the lease.
if the lessor allows the lessee to occupy the property for free for a period of time. you must adjust the payments and recognize evenly during the life of the lease. of course you would this is better seen through examples. appropriate accruals and deferrals should be recorded each period.

Question 71

Accounting for lessee for the capital lease?

Answer 71

the lessee must record an asset and liability based on the present value of the minimum lease payment.

Minimum lease payments =
1 rent payments
2 Bargain options
3 Guaranteed residual value residual value 
4 Penalties for failure to renew

to determine the present value you should draw a timeline for of each payment

the lease asset should not be recorded at an amount greater then the fair market value of the leased asset.

Question 72

2 Entries made with capital lease each accounting period?

Answer 72

Depreciation expense xxx
accumulated depreciation leased assets xxx
if title is transferred over at the end of the period or there is a bargain option asset useful life is used. if not than the lease term.

Carrying value at the beginning of the period x interest rate = interest for the lease.

Interest expense xxx
Cash xxx

the difference of of the amounts represents the amount paid to the principal lease payment. and it is debited to obligation under capital lease account.

Question 73

Operating lease for a lessor

Answer 73

Cash xxx
Rent Revenue xxx

when payments are not required to be received for certain periods. you would adjust the revenue to be received over the life of the lease.

Question 74

lessor and capital lease

Answer 74

DIRECT FINANCING LEASE
applies to companies that act as a lender to the lessee
the lessor would only have one type of revenue which is interest revenue

SALES TYPE LEASE
applies to manufacturers of equipment
Has two types of revenue
1 Gross profit from selling the assets for more than its
2 recorded costs.
Interest revenue because the lessee is financing the lease asset.

Question 75

Entries for direct financing lease

Answer 75

Gross method:
used for accounting for the lessor
purchase of asset
Asset to be leased xxx
Cash xxx
it is recorded at the total amount of minimum lease payments made to the lessor over the life of the lease. this gross amount bargain purchase option, and guaranteed and not guaranteed residual value

Removal of asset
Total amount of minimum lease payment xxx
unearned interest revenue xxx
Asset to be leased: (fair value of leased asset) xxx

Payments
Cash xxx
lease receivable xxx

Recognize interest revenue ( effective interest method is used)
Unearned interest revenue xxx
Interest Revenue xxx

At the end of the lease term when the asset is reclaimed an asset is debited for the residual value of he equipment and the lease receivable is removed from the books. at the end of the period company must reclassify lease receivable as current and non current assets and place it in the balance sheet.

Net method:
records the lease at its present value or carrying value used by the lessee and was discussed previously

Question 76

entries for sales type lease

Answer 76

Results in gross profit in the period of sales and interest revenue to be earned over the lease term using the effective interest method.

lease recievable (gross amount of lease payment)   xxx
Sales (present value of the minimum lease payment)     xxx
The difference would be a credit to unearned interest 

an additional entry is recorded to to debit COGS for the cost of the lease asset. less the present value of any un guaranteed residual. note that any guaranteed residual value is recognized as part of sales revenue. un-guaranteed residual value is excluded from sales and COGS. the inventory account is credited

the recognition of a lease payment is equal to the recognition in a direct financing lease
Interest income is recognized each period

Initial direct cost: are cost incurred by the lessor for to when negotiating and finalizing the lease. include commissions, legal fees, cost for credit investigations, cost of preparing documents and so on. accounting for these cost could change depending on the lease.

they should be debited to a prepaid account and amortized over the life of lease in proportion to the rental revenue earned. if it was in a SALES TYPE LEASE they are expended as soon as they are incurred. if its in a DIRECT FINANCING LEASE they should be added to the investment in lease account and amortized over the life of the lease. this procedure results in a yield adjustment over the life of the lease.

Question 77

Sales and lease back

Answer 77

2 transactions
sale of property:
lease agreement:

When it is greater than or equal to 90% of the fairvalue of the asset leased then the gain should be deffered. then it would be recognized through a reduction of depreciation expense over the term of the lease. the deferred gain iS A CONTRA ACCOUNT TO THE LEASE ASSET on the balance sheet.

if the portion of the lease reps a minor portion of the asset. this is 10% or less of the fv. then the earnings process is complete on the asset and a gain or loss could be recognized.

of the present value of the lease is 10%90%, then it is considered a partial sale and the gain is fragmented into a recognized gain and a deferred gain.
Deferred gain is the present value of the rental payment. the recognize gain is the difference between the cash selling price of the asset less the carrying amount of the asset and the deferred gain.

Question 78

When lease contracts are modified or terminated ?

Answer 78

• modification would be changing the lease from a capital lease to a operating lease must be treated as a sales lease back transaction. this prevents the firms from changing the terms of the contract so that the long term liabilities could be removed from the balance sheet.

Question 79

When an operating lease is terminated?

Answer 79

a liability must be recognized for the remaining contract. the lease liability must be recognized at the fv of the liability on the date of termination