Blue Book Flashcards
1
Q
What is inventory cost and what costs are included?
A
Cost defined: all of the costs necessary to acquire the inventory and prepare it for use or for sale.
Cost should include:
- Invoice price less any discounts available,
- Insurance cost while in transit,
- freight in costs,
- warehousing costs.
2
Q
How should inventory be recorded on the Balance sheet?
A
Lower of cost or market
3
Q
Is freight out part of inventory costs?
A
No, only freight in. Freight out is a selling cost.
4
Q
What are the 2 methods for Purchase discounts? Which one is more superior and why?
A
Gross Method and Net Method. Net method is superior because it assumes that business would take advantage of cash discounts. If a business does not take the cash discount, it should be treated as an administrative costs, not as a cost of inventory.
5
Q
What is FOB shipping point?
A
Buyer assumes title at time of shipment
6
Q
What is FOB destination?
A
Buyer assumes title when goods REACH destination
7
Q
Consigned inventory: who holds title? physical possession? what is the accounting for it?
A
Cosignor has legal title to the inventory
Cosignee has physical possession of the inventory
Accounting:
- inventory remains on the consignor’s BS
- Should be recorded at cost
- Cost Includes shipping and warehousing costs
8
Q
Lower of Cost or Market for Inventory: explain how this works?
A
Market means current replacement costs except that market should not exceed the NRV of the inventory or should not be less than the NRV reduced by the normal profit.
Ceiling=NRV=est. selling price of the inv. - the costs of dispose
Floor=NRV -normal profit margin
Rule 1: If replacement cost falls bw the floor and ceiling values, use recplacement cost. Compare RC to istorical cost.
Rule 2: If replacement cost is less than Floor value, use NRV less profit margin. Compare the floor value to historical cost.
Rule 3: If replacement cost is higher than the ceiling value, use NRV (the ceiling). Compare the ceiling value to historical cost.
9
Q
What is the formula for COGS?
A
Beg inv.
-Purchase returns (if exist)
+Fright in (if exist)
+Purchases
-end inv.
COGS
10
Q
When average cost method is used in the periodic system, it is referred to as:
A
Weighted Average
11
Q
When average cost method is used in perpertual system, it is referred to as:
A
Moving average
12
Q
What is the comparison of period and perpetual between FIFO, AVG, and LIFO?
A
Periodic Perpetual
FIFO = FIFO
AVG ≠ AVG
LIFO ≠ LIFO
13
Q
What are the JEs for Periodic when you buy goods and sell goods?
A
Buy goods:
Purch xx
AP xx
Sell goods:
AR xx
Sales xx
14
Q
What are the JEs for Perpetual when you buy goods and sell goods?
A
Buy goods:
Inv xx
AP xx
Sell goods:
AR xx
Sales xx
COGS xx
inv xx
15
Q
Comparison of LIFO and FIFO when the prices are rising and the # of units is stable or increasing, is LIFO or FIFO higher for EI, COGS, NI?
A
FIFO EI > LIFO EI
FIFO COGS < LIFO COGS
FIFO NI > LIFO NI
16
Q
What are the steps in Dollar Value LIFO:
A
- Compare EI to BI in the same index. Normally this is done by converting EI to the same index used for BI.
So if index for X1 is 1.2. BI is $300,000 and EI is $390,000. Take $390,000/1.2=$325,000
- If inventory has increased– add a layer of inventory. New layer must be converted to currecnt year’s index.
So $300,000 x 1.0=$300,000
$25,000 x 1.2=$30,000
Total EI is $330,000
- If inventory has decreased– remove a layer or layers of inventory. To determine which layer to remove, apply LIFO.
17
Q
What is inventory gross profit method?
A
It is an estimation technique for inventory sold. Only time you use that is if tere is no other method to calculate the estimation.
If beginning inventory is $20
Purchases is $140
Sales are $194 and the markup percentage on cost is 25%. COGS is calculated
BI 20+ Purchases 140- COGS(194/1.25)=Ending inventory of $4.8
18
Q
Long term construction contracts:
A
- Completed contract method: Recognize revenue/income at the completion of the project.
- Percentage of Completion Method: Recognize revenue/income during the construction process.
19
Q
What is Royalty Agreements?
A
One party receives income based on the performance of another company. Example: Company A allows Company B to use its patent. In return company B will pay to A a percentage of its sales.
20
Q
For Royalty Agreements what is the income method and when is income recorded?
A
Income method- accrual accounting
Record income when earned. NOT when cash is received.
21
Q
When is income recorded in installment sales? and in what circumstances are installment sales used?
A
Income is recognized in proportion to the cash collection received. When uncollectible accounts cannot be estimated–use the installment or cost recovery methods.
22
Q
How is realized gross profit calcualted?
A
Cash collected x GP rate=realized GP
23
Q
How is deferred Gross Profit calculated?
A
AR balance x GP rate= Deferred GP balance
24
Q
What is the inventory method that is not allowed under IFRS?
A
LIFO
25
How is comprehensive income calculated?
**Other comprehensive income (net of tax)**
Foreign currency Translation adjustments
Unrealized holding gains/losses on avail. for sale securities
Delayed Recognition Pension Items
Prior Service Costs
Unrecognized Gains/Losses
Unrealized gains/losses on cash flow hedges
**=Comprehensive income**
26
What are the two statement approaches for Comprehensive Income?
One statement approach (on the IS) or two statement approach (IS and a separate CI statement)
27
Change in Reporting entity is presented how?
retroactively
28
How is change in estimate presented?
Always prospectively
29
Under IFRS: how should inventories be measured?
at the lower of cost and net realizable value.
30
how is the **Gross method of purchase discounts** recorded? JEs?
Purchases 10,000
AP 10,000
AP 10,000
Purchase Discount 200
Cash 9,800
**OR (if we don't take the discount)**
AP 10,000
Cash 10,000
31
+How is the **Net Method of Purchase Discounts** recorded? JEs?
DR: Purchases 9,800 (net of discount so if 10,000x.98)
CR:AP 9,800
DR: AP 9,800
CR: Cash 9,800
**OR (if we don't take the discount)**
DR: AP 9,800
DR: Discounts Lost 200
CR: Cash 10,000
32
If discount is **not** taken on purchased inventory, how is it treated?
It is treated as an **administrative cost**, not as a cost of inventory.
33
What is a **JE for purchases?**
Dr: Purchases
CR: Account Payable
If purchases are off, then AP is off.
34
what is the **JE for Sales**?
DR: Account Receivable
CR: Sales (revenue account)
If sales are off, AR is off.
35
What is the formula for **COGS**?
Beg inv
**+**Purchases
**-**Ending inventory
**=**
COGS
36
What are **purchase commitments?**
**Forward contract:** contract to buy somehting at a certain price and lock in the price. _Loss_ on purchase commitments _should be recorded at the time the price declines,_ not when you purchase the goods.
37
**Shipping costs** incurred by a cosignor on transfer of goods to a **consignee** should be:
**Inventory cost to the consignor.**
38
how to solve **lower cost or market questions?**
Write from **highest to lowest and choose the middle # as market value.**
39
What is **accrual** accounting? When should **revenue** be recognized? When should **expenses** be recognized?
**Revenue** should be recognized in the period **earned**.
**Expenses** should be recognized in the period **incurred**.
40
What are the rules when converting from **cash income number to accrual income**?
**Increase** in **Asset** Account-**ADD**
**Increase** in **Liability** Account- **DEDUCT**
41
What are the rules when converting from a **cash expense to accrual expense?**
**Increase** in **Asset** Account-**DEDUCT**
**Increase** in **Liability** Account-**ADD**
42
What are the rules when converting from **accrual income to cash income?**
**Increase** in an **Asset** Account-**DEDUCT**
**Increase** in a **Liability** Account-**ADD**
43
how are **discontinued operations** treated? and **where** are they on the income statement?
**Net of Tax**
**After** Income from Continuing Operations, but **before** Net Income.
44
How is a **change in estimate** treated? What are some **examples** of a change in estimate?
Change in estimate is always treated **prospectively** (current and future periods)
**Examples:** Useful life of depreciable or amortizable assets is changed; %age used to compute bad debt expense is changed.
45
How is a **Change in Principle** treated?
They are treated **retrospectively**. Applied to FSs from previous periods unless such application is impracticable.
## Footnote
**All past statements must be restated for the change, and an amount is recorded to retained earnings.**
46
How is **error correction** treated?
A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error, NOT a change in accounting principle.
**must be treated retroactively.**
1. Change is not shown on the IS, it is an adj. to REs
2. Must restate previous statements.
47
What is the accounting for **Franchise Fee Revenue?**
Franchise fee revenue from individual sales shall be recognized **when all material services or conditions relating to the sale _have been substantially performed_ or _satisfied by the franchisor._**
48
What does substantial performance mean in franchise accounting?
**Substantial performance means:**
1. Franchisor has **no remaining obligation** or intent to refund money or forgive unpaid debt
2. **Substantially all initial services have been performed**
3. **No other material conditions or obligations exist**
49
What is **Cost Recovery Method?**
Cost Recovery Method- **No income is recorded until all of the cost has been recovered.** After all the cost has been recovered, then every dollar received is 100% income.
50
What are the 2 rules that always **apply for adjusting entries?**
1. Adjusting entries always involve **one BS account and one IS account**
2. Adjusting entries **never involve cash**
51
What is **Held to Maturity?** Debt or equity? What kind of value is used? Is there adjustments for temporary market value changes?
**DEBT** securities that the enterprise has the positive intent and ability to hold to maturity. Use **amortized cost**; **no adjustment** for temporary market value changes.
52
What are **Trading Securities?** How are they recorded? Where do unrealized/realized G/Ls go?
**Trading securities: debt and equity securities** held principally for **purpose of selling them in the near term.**
**Use FMV**
**Unrealized G/Ls** recorded to the **IS**
**Realized G/Ls** also recorded to the **IS**
53
What are **Available for Sale**? How are they **recorded**? Where do **unrealized/realized G/Ls** go?
Available for Sale securities: **debt and equity** securities not in other two categories.
**Use FMV**
**Unrealized G/Ls** report in a separate component of Stockholder's Equity **(OCI)**
**Realized** G/Ls recorded to the **IS**
54
What are the JEs for Held to Maturity **debt** security (not availalbe for equity)?
*Acquire $10,000 par value of 10 year bonds at 90,000 plus accrued interest of $2,500*
## Footnote
**Purchase of the bonds:**
Investments-HTM 90,000
Accrued Interest Receivable 2,500
Cash 92,500
**Interest Received of $5,000**
Cash 5,000
Accrued interest receivable 2,500
Interest Income 2,500
**Amortize discount of $10,000 (assume SL) ($100,000-$90,000)**
Investments- HTM 1,000
Interest Income 1,000
55
What are the JEs for Available for Sale **Debt** Securities?
*Acquire $10,000 par value of 10 year bonds at $90,000 plus accrued interest of $2,500*
## Footnote
**Purchase of the bonds:**
Investments-AFS 90,000
Accrued Interest Receivable 2,500
Cash 92,500
**Interest Received of $5,000**
Cash 5,000
Accrued interest receivable 2,500
Interest Income 2,500
**Amortize discount of $10,000 (assume SL)($100,000-90,000)**
Investments- AFS 1,000
Interest Income 1,000
**Assume at YE Market Value $92,500, Cost $91,000 (90,000+1,000)**
Valuation Allowance-AFS 1,500
Unrealized Gain-OCI 1,500
56
What are the JEs for Trading Category **Debt** Securities?
*Acquire $10,000 par value of 10 year bonds at $90,000 plus accrued interest of $2,500*
## Footnote
**Purchase of the bonds:**
Investments-Trading 90,000
Accrued Interest Receivable 2,500
Cash 92,500
**Interest Received of $5,000**
Cash 5,000
Accrued interest receivable 2,500
Interest Income 2,500
**Amortize discount -Do not amortize if it is the trading category.**
**Assume at YE Market Value $92,500, Cost $90,000**
Valuation Allowance-Trading 2,500
Unrealized Gain-IS 2,500
57
What are the JEs for **Investment in Equity**- Less than **20**% for **Available for Sale**?
**Purhase of the stock: assume stock was purchased for $50,000 in year 200x**
Available for Sale Securities 50,000
Cash 50,000
**Dividends Received: assume dividends of $1,000 are received during the Year**
Cash 1,000
Dividend Income 1,000
**Assume Cost $50,000, Market $52,000**
Valuation Allowance- AFS 2,000
Unrealized Gain on securites-AFS OCI 2,000
58
What are the JEs for Trading **Equity** Securities- less than 20%?
**Purhase of the stock: assume stock was purchased for $50,000 in year 200x**
Trading Securities 50,000
Cash 50,000
**Dividends Received: assume dividends of $1,000 are received during the Year**
Cash 1,000
Dividend Income 1,000
**Assume Cost $50,000, Market $52,000**
Valuation Allowance-Trading 2,000
Unrealized Gain on trading securites-IS 2,000
59
Where should **realized** gains occur for **trading and available for sale category?**
## Footnote
**What about unrealized?**
**Realized gains** should appear on the **IS** for both
60
What is the **Fair Value Option?**
Gives firms the option of reporting certain financial assets and liabilities at **FV**. If the Fair Value option is chosen, then changes in the Fair Value (unrealized G/Ls) are reported on the IS and affect the net income amount.
* HTM: use FV instead of cost or amortized cost. Show unrealized G/Ls on IS
* AFS: use FV with unrealized G/Ls on IS rather than to OCI
* Equity method: use FV instead of equity method with unrealized G/Ls on IS.
61
What is the equity method and when should it be used?
Equity Method should be used when there is **significant influence- usually that is 20%.**
* Investee reports its share of investee income as income
* **Dividends** are not income under the equity method.
* They are a **reduction of investment account.**
Investment account is **debited** by original cost and the % of income. **Credited** by % of dividends and disposals of stock through sales.
62
When does a **change to equity method must occur?**
When x company owns 10% of Y corp, and then acquires and **additional 20%** of Y corp. X Company MUST change from the cost to the equity method of accounting for Y corp. A change to equity method is a change in reporting entity.
**Must retroactively restate prior periods as if equity method had been used in all those periods.** Typically, the investment account will increase, and the credit will be to REs.
63
Are **stock dividens** income?
Stock dividends are **not income** to the recipient. They change the per share basis of the stock investment. "Just an extra piece of paper to carry around and take care off"
64
What happens when **property dividends** are distributed?
Dividends paid in assets other than cash.
## Footnote
**To distributing corportaion: revalue to FV, recording the G or L**
**To receiving entity: record at FV**
65
What are **executory** costs?
Annual costs such as **insurance**, **taxes**. When calculating PV we do not include executory costs.
66
What are two **types** of leases can a **lesssee** have?
**Operating** Lease
**Capital** Lease
67
What is the **criteria** for a **capital lease**?
Lease must be **non cancelable** and at least one of the following is satisfied:
1. **Lease transfers ownership**
2. **Bargain purchase option**
3. **Lease term is \>= 75% of economic life**
4. **P.V. of minimum lease pmts\>= 90% of FMV of leased property.**
_\* If none of the criteria is met the lease defaults to an operating lease\*_
68
What type of lease can a **Lessor** have?
**Operating, Direct financing** and **sales type** lease. Criteria for both Direct Financing and Sales Type lease:
Lease must be noncancellable and _at least one_ of the following is satisfied:
1. Lease transfers ownership
2. Bargain purchase option
3. Lease term is \>= 75% of economic life
4. P.V. of min lease pmts of \>= 90% FMV of leased property
and **BOTH** of the following are met:
1. Collection of the **lease receivable is not in doubt**
2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease
69
What is the difference between **direct financing** _versus_ **sales type** lease?
**Direct financing:**
* income is interest income
**Sales Type:**
* Interest income recorded over lease term
* Gross Profit on sale recorded in year of sale
70
What is the JE for **Operating lease**- lessee?
DR: Rent Expense
CR: Cash
71
how should a **lease bonus** be treated?
Bonus should be **spread over life of lease.**
72
How should **leasehold improvements** be accounted for?
Leasehold improvements are **depreciable**. Report as PP&E. Depreciate over **shorter** of **lease term** or **useful life.**
73
What is the JE for **Operating Lease** of the **Lessor**?
DR: Cash
CR: Rent Revenue
\*Asset remains on book of the lessor\*
74
How are **initial direct costs** handled for the different type of leases for the lessor?
**If Operating Lease**: Amortize over life of lease
**If Sales Type Lease:** Expense in the first year of lease
**If Direct Financing:** Amortize and offset to interest income
Initial direct costs are those costs incurred by the lessor that are costs to originate a lease incurred in transactions with independent third parties and certain costs directly related to sepcified activities performed by the lessor for that lease. Those activities are: evaluating the prospective lessee's financial condition; evaluating and recording guarantees, collaterla, and other security arrangements.
75
What are the JEs for a Capital Lease -Lessee?
**To record the lease:**
DR: Leased Asset (BS)
CR: Lease Obligation(BS)
**To record depreciation:**
DR: Depreciation Expense (IS)
CR: Accumulated Depreciation (BS)
**To record payment:**
DR: Interest expense (IS)
DR: Lease Obligation (BS)
CR: Cash (BS)
76
What does **minimum lease payment** equal to?
**Annual rental payment**
**Bargain Purchase Option**-Discount it to PV and add it to the lease obligation
**Guaranteed residual value**
77
What **rate** does the the **Lessee** use for the PV calculation?
Use **lessees incremental borrowing rate** _UNLESS_ **implicit rate is lower** than borrowing rate and is **known** by lessee.
78
Under a **capital lease**, leased asset **should be depreciated over** what?
Over the **useful** life of an asset if:
**Lease transfers ownership _or_**
**Lease contains a BPO**
\*if neither of those two provisions are present-- depreciate the asset _over the term of the lease\*_
79
What is **Lease Obligation Interest expense?**
A **portion** of payment is **principal** (reduction of lease obligation) and a **portion** is **interest**.
Watch for annuity in advance _versus_ ordinary annuity.
80
What is a **sale-leaseback transaction**?
A sales/leaseback is a **transaction where a party "sells" an asset to another party and immdediately leases the asset back.** The reasoning underlying the transaction may include the following:
1. **Financing**-the seller/lessee may be able to obtain a larger amount of financing and/or may be able to get a better rate than if a conventional loan were considered.
2. **Tax**- One party may be able to utilize the tax advantages of the asset more than ther other.
81
In a **sale-leaseback transaction,** when the sale is made, the seller will usually have a gain on the sale. This **gain on sale** must be treated how?
This gain on sale must be treated as **unearned income. It is not considered income immediately but is amortized to income over the life of the lease (or life of the asset if title transfers)**
82
What happens **if the sale of the asset results in a profit and the lessee leases the asset back for only a "minor portion"** of the value of the asset?
Then the **profit on sale must be recognized at the time of the sale** and is not amortized over the life of the lease.
83
What happends if the **sale of the asset results in a loss** instead of a profit in a **sales leaseback transaction?**
Then the **loss must be recognized at the time of the sale** and is not amortized over time.
84
What is the difference between **Defined Contribution Plan** and **Defined Benefit Plan?**
**Defined Contribution Plan (contirbution is defined)**- contribution is a **certain sum each period based on a formula.** The formula may be based on age, length of service, etc.
**Defined Benefit Plan**- benefits are based on a formula. Formula may be based on age, years of service, etc.Contributions are determined as the amount necessary to achieve the benefit level.
85
What does **funded** or **funding** mean in pension accounting?
The **cash payment** from the **employer** to the **pension fund.**
86
What does **"vested benefits"** mean?
the a**mount that can be withdrawn if the employee leaves before retirement,** for example employee leaves for another job.
87
What is "**past or prior service costs"?**
The **credit** given to employees at the time a plan is initiated or when a plan is amended.
88
What is "**service costs or normal cost"**?
Credit for the **current year of service- Annual cost of pension plan**
89
What is "**Projected benefit obligation"?**
Meausre of liability. The **present value of benefits attributed by the pension benefit formula to service before the balance sheet date.** It is measured using assumptions as to future compensation levels.
90
How is **pension expense** calculated?
**Service cost**
**+ Interest**- interest rate x beg balance of PBO
**- Return on plan assets**
* Use expected rate of return on plan assets
* Assets may be measured by:
* Fair market value
* Market related value- an averaging
**+ Past Service Cost Amortized-**Amortization method may be
* Remaining serivce life of emplyees (a declining amount per year)
* SL over the average remaining service life of employees.
**+ or - Gain of Loss- using the corridor approach**
* Recognize G or L that is greater than 10% of the larger of:
* PBO
* Market related value of plan assets
* If recognized- amortize the amount over the remaining service life of employees.
91
how is **Projected Benefit Obligation** calculated?
**PBO at the beginning of the year**
**Plus:** _interest_ and _service cost_ and _PSC_
**Less:** _Benefits paid_ and _Prior Service CREDIT_
**+ or -** _Liability gain or loss_
**PBO at the end of the year**
**PBO at the beginning of year** x **Interest rate**= amount which **increases net pension cost.**
92
How is **Fair Value of Plan Assets** calculated?
Beginning FV of Plan Assets
+Contributions
-Benefits Paid
+ or - Actual return on plan assets
= endinbg FV of Plan assets
93
Where must a company recognize the **funding status of the pension plan?**
A company **must recognize the funding status of the pension plan on the BS** as an asset or liability, rather than in the notes. (Statement of financial position)
94
If a company has 2 pension plans: **one is overfunded and the other one is underfunded,** should they be **netted**?
**No, they should be shown separately, cannot be netter.**
95
What term does **IFRS** use for **capital lease?**
**Finance Lease**
96
what are the **IFRS** _criteria_ for a **finance lease?**
* The least **transfers ownership** of the asset to the lessee by the end of the lease term
* The lessee has the **option to purchase the asset at a price that is expected to be sufficiently lower** than the FV of the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;
* The **lease term is for the major part of the economic life of the asset** even if title is not transferred
* At the the **inception of the lease the PV of the minimum lease pmts amouts to at least substantially all of the FV** of the leased asset; and
* The leased assets are of such a specialized nature that only the lessee can use them without major modifications.
97
for **IFRS**: what **rate** is used?
IFRS always uses the **implicit** rate
98
What is the **general rule for interim reporting?**
General Rule- **revenues- same basis as annual reports**
99
In interim reporting, d**o temporary declines in inventory market value need to be recognized?**
**NO.**
If the decline is **expected to be restored** by the end of the year, the **decline is judged to be temporary and is not recognized as a loss in the interim period.** Do not use LCM rules for inventory in this situtation.
**IF** the **decline is NOT EXPECTED to be restored** by year end, the **LCM rules are applied and the loss is recognized in the interim period.**
100
For interim reporting, how are all of the costs and expenses recorded?
**Same basis as annual reports.**
Expenditures which clearly benefit more than one interim period may be allocated among periods benefited. Annual repairs, property taxes, and rent- use the accrual process, same as in annual report.
101
For **interim reporting**, when should **extraordinary items** be reported?
Report an **extraordinary item in the quarter in which it was incurred.** No other periods are affected by this loss. Do not spread across quarters.
102
For interim financial reporting, a **company's income tax provision for the second quarter of 20x1 should be determined using the:**
**Effective tax rate expected** to be applicable for the **_full year of 20x1_ as estimated at the end of te second quarter of 20x1**
103
What is the difference between **pensions** and **postretirement accounting?**
* Postretirement costs **often are not funded**
* **Not tax deductible**
104
What is the calculation of **postretirement expense?**
Service cost
+Interest Cost
-Return on Assets (might be 0, we only have a return if we are putting money aside)
Amortization of PSC
Amortization of gains and losses- use corridor approach
Amortization of transition obligation
105
All items shown **below income from continuing operations** must be shown?
**Net of tax**
106
what items must be shown **net of tax on the income statement?**
Discontinued operations
Extraordinary items
107
**Prior period adjustments** (corrections of errors) are shown on what **statement**? and **how**?
Are shown on the statement of **Retained Earnings** _net of tax._
108
What **must and must not be disclosed** in the accounting policies?
**Accounting Policies** is the **first footnote** in the annual report
**Must Disclose:**
* Selection from accounting alternatives
* Application of GAAP Peculiar to an Industry
* Unusual applications of GAAP
**Do not disclose:**
* Details
* Issues not discussed elsewhere in the annual report
109
Does **income tax payable** _equal_ **income tax expense?**
**No.**
**Tax payable**- amount computed per **IRS** rules
**Tax expense-** amount computed per **book**. This is the amount on the IS.
Most of the time there are difference between tax and book.
110
What are the reasons for the **difference in tax payable** and **tax expense?**
**Permanent** differences
**Temporary** differences
111
What are the **permanent differences?**
Items that enter tax computations but never enter book computations or vice versa.
* Premiums paid for life insurance on officers
* Proceeds from life insurance
* Interest received on state and municipal bonds
* Fines and penalties
* Dividend received deduction
112
What are **temporary differences?**
Items that **enter both book and tax computationa but in different years.** Over the life of the item the total amount included/deducted for book and tax are equal. "Timing difference"
**Example:** accelerated depreciation for tax and SL for book.
113
What are the JEs for **Deferred tax?**
DR: Tax expense
CR: Deferred tax
CR: Tax Payable
OR
DR: Tax expense
DR: Deferred tax
CR: Tax payable
114
How do you calculate **Tax payable, Deferred tax, Tax expense?**
**Tax payable:** Tax income x Current years tax rate
**Deferred tax:** Temporary differences x future tax rate
**Tax expense:** PLUG
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How can you tell if an item causes a debit or credit to the deferred tax account?
_Tax_ _Book_
Depr. exp. per tax \> Depr. exp. per book
Taxable income \< Pretax book income
Tax payable \< Tax expense
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Summary of Debit/Credit rules for **Temporary Differences:**
1. More expense on tax form than on book
* Example: Accel. dept. for tax, SL for book
* Result CR deferred tax when it originates, DR when reverses.
* Balance: DTL
2. More expense on book than on tax form
* Example: Warranty costs, losses recorded on book before tax, etc.
* Result: DR deferred tax when it originates, CR when it reverses
* Balance: DTA
3. More revenue on tax form than on book
* Example: Rent received in advance is recorded on tax before book
* Result: DR deferred tax when it originates, CR when it reverses
* Balance: DTA
4. More revenue on book than on tax form
* Example: %tage of completion method for book, completed contract for tax.
* Result: CR deferred tax when it originates, DR when it reverses
* Balance: DTL
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**To calculate tax payable**- what tax rate to use?
**To calculate the entry to deferred tax-** what tax rate to use?
Always use the **current tax rate**
Use the tax rate for **the year the item reverses, if the rate has been enacted.**
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How should **income tax expense** be **shown** on the **income statement**?
**Current portion**: this means the amount payble to IRS, in other words, it is the amount of income tax payable
**Deferred portion:** the amount of the entry to deferred tax account for the current eyar
Effective tax rate= tax expense/book income before tax.
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How do we **show deferred taxes on the BS?**
Deferred tax should be classified as **current** and **long term**
Current or long term is normally based on the **related account**, that is, the account that caused the deferred tax. If LT caused it, then it's LT.
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A **valuation allowance** account may be necessary if you have a **deferred tax asset**. When should it be **established** and what kind of **asset** is it?
Valuation allowance is a **contra asset.**
It should be **established** if it is **"more likely than not that a firm will not have income"** in the future to allow the deferred tax asset to be realized.
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Losses on LT contracts: When should losses be recorded?
Record losses immediately
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If there is more than one LT construction project: how are the losses recorded under completed contract vs. percentage of completion?
Completed contract: just record the loss for the job that is having the loss, do not net with a job that has a profit.
Percetage of completion: Net the project with the loss with the project that has no loss.
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Whenever it is imossible to determine whether a change in accounting estimate or a change in accounting principle has occured, the change should be considered a what?
A change in estimate.
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What is an accrual? Accruing a revenue and accruing an expense?
An item has accrued during the period, and adjustment is needed, _Cash is received or paid in SUBSEQUENT PERIOD._
**Example Accruing expense creates a liability:** a litigation fee: don't know the cost yet.
Loss on litigation expense 500
Accrued litigation loss payable 500
when you pay the litigation:
Accrued litigation loss payable 500
Cash 500
**Example Accruing a revenue creates an asset:** Sell a product
AR 500
Sales Revenue 500
When we receive payment
Cash 500
AR 500
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What is a deferral? Deferring an asset/expense- deferring liability/revenue?
A cash transaction has _OCCURED_ during the period, and an adjustment is needed in subsequent period. The adjusting entry always depends upon the original transaction that was recorded.
**Example deferring an expense creates an asset:** Prepay 3 months of rent for an office
Prepaid rent 600
Cash 600
When the time comes: 1st month
Rent expense 200
Prepaid rent 200
**Deferring revenue creates a liability: receiving money for undone lanscaping services**
Cash 600
Unearned revenue 600
When you do 1st month landscaping service
Unearned revenue 200
Revenue earned 200
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What is the **general rule** when transfering between categories of investment such as:
* **Trading to other**
* **Other to trading**
* **Available for sale debt to held to maturity**
* **Trading to other-** holding gain or loss would already be recognized in income
* **Other to trading-**recognize holding gain or loss at date of transfer as part of earnings for period
* **Available for sale debt to held to maturity**- continue to report holding gain or loss as component of stockholder's equity, but amortize over remaining term of debt equivalent to premium or discount on the debt
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If we don't have investments of more than 20% or is we do have investment over 20%, but no not have significant influence- what method is used?
Use cost method, equiy method cannot be used.
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What are liquidating dividends?
Dividends in excess of the investor's share of investee's earnings and they are always a **reduction of investment account,** they are not income.
129
When a company owns 10% of Y company, and then acquires an additional 20% of Y corporation, what must happen in regards to the methods used?
X company must change from the cost to the equity method of accounting for Y corporation.
A change in equity method is a change in reporting entity. Must retroactively restate prior periods as if equity method had been used in all those periods. Typically, the investment account will increase, and the credit will be retained earnings.
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what is a forward contract?
These are agreements to deliver cash, foreign currency, or some other item at a specified date in the future. The key distinction between futures versus forward contracts is that forward contracts are customized and not traded in organized markets. Since they are not traded in organized markets, their value may be more difficult to establish.
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What are Futures Contracts?
An agreement between a buyer, seller and a clearinghouse or futures exchange. The contract is to buy or sell a standard quantity and quality of a commodity or financial instrument at a specified future date and price. Examples include interest rate futures, foreign currenty futures, grain futures, etc.
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What are Options?
A contract that gives the purchaser the right to buy or sell an asset (such as a unit of foreign currency) at a specified price within a specified time period. A call option gives the holder the right to buy the underlying asset; a put option gives the holder the right to sell it. It differs from forward or futures contracts in that it represents the right to buy or sell, if conditions are favorable, but does not represent an obligation to buy or sell.
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What is a Swap?
An agreement in which two parties exchange payments over a period of time. For example, in an interest- rate swap one party has a fixed rate debt (and wishes to have a floating rate) and the other party has a floating rate debt (and wishes to have a fixed rate). The two parties generally exchange the stream of interest payments without exchange of principal.
134
Under sales type lease for the lessor- what interest rate should be used?
Always use the implicit rate for the lessor.
135
Under what period of time should we spread the expense of postretirement?
Spread until employee is fully eligable for benefits.
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