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Completed Outline Flashcards

1
Q

How is cash collected presented in the statement of cash flows under the direct and indirect method?

A

Direct Method: Cash collected is presented as a gross amount.

Indirect Method: Cash collected is determined based on adjusting net income to arrive at the total cash collected.

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2
Q

What is the difference between comparability and consistency?

A
  • Comparability shows items that are the same or different
  • Consistency shows that the same methods were used for each period across entities.
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3
Q

How are material events that are unusual and infrequent in nature reported on the income statement?

A

Material events that are unusual and infrequent in nature are reported on the income statement, separate from income from continuing operations and before results from discontinued operations. They are also reported net of tax

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4
Q

What is the role of the SEC?

A

The SEC makes rules and regulations for public companies in regard to disclosure of financial information.

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5
Q

What information must be included in the Statement of Changes in Net Assets Available for Benefits of a Defined Contribution Plan?

A

Net appreciation or depreciation of the FV of the investments

Contributions from employers

Contributions from the Participants

Benefits Paid to the Participants

Administrative Expenses

Payments to Insurance Entities to Purchase Contracts

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6
Q

What are the component of changes in net assets available for benefits of a defined benefit pension plan trust?

A

Employer Contributions

Participant Contributions

Benefits Paid to Participants

Net Change in the Actuarial PV of Accumulated Plan Benefits

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7
Q

What is the Uniform Prudent Management of Institutional Funds Act (UPMIFA)?

A

UPMIFA is a statute for NFP organizations. This statute extends the donor restrictions that are used for assets, including the return, until the board decides on how to use the donation.

Once the donation is used, the board can decide to either increase net assets without donor restrictions, followed by a decrease in net assets without donor restrictions. If this option is chosen, the board must apply the same policy to contributions, report consistently and disclose the policy chosen.

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8
Q

In a statement of cash flows for NFP, how are noncash investing and financing activities reported?

A

For the NFP, non-cash investing and financing activities are reported in the statement of cash flows in the related disclosures but in the statement.

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9
Q

What is reported as cash inflows from financing activities for a NFP Statement of Cash Flows?

A

Cash inflows from financing activities include

  • Receipts of restricted resources that by donor stipulation must be used for long-term purposes.
  • A cash contribution for the construction of a new building is a resource that must be used for long-term purposes.
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10
Q

What is reported as cash inflows from investing activities for a NFP Statement of Cash Flows?

A

Investing activities include

  • Making and collecting loans
  • Acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets.
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11
Q

What activities are classified as supporting activities for not for profit organizations?

A

Supporting activities include

  1. management and general
  2. fundraising
  3. membership-development activities.

Fundraising expenses include maintaining donor lists. Soliciting members and dues and printing membership benefits brochures are membership-development activities.

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12
Q

What activities are classified as program activities for not for profit organizations?

A

Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity.

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13
Q

What is a derivative?

A
  • A derivative is a bet on whether the value of something (underlying notional amount) will go up or down.
  • A derivative has at least one underlying (interest rate, currency exchange rate, price of a specific financial instrument, etc.) and at least one notional amount (number of units specified in the contract) or payment provision, or both
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14
Q

How is a gain or loss of a derivative calculated?

A

The change in the market price times the number of shares purchased
The change in the time value, or fair value, of the option
Derivative Gain/(Loss)

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15
Q

What is the basis of the FV of a derivative?

A

The fair value basis of a derivative is the forward exchange rate.

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16
Q

How is the intrinsic value of a call option calculated?

A

Market Value of underlying
Exercise Price of the Option
Intrinsic Value

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17
Q

What is the main purpose of the perfect hedge?

A

The perfect hedge would have no possibility of a future gain or loss.

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18
Q

What is a firm commitment?

A

A firm commitment is an agreement for unrelated party that is binding to both parties.

A firm commitment specifies all of the terms

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19
Q

What constitutes a derivative?

A

A derivative is a financial instrument that has

  1. At least one underlying
  2. At least one notional amount
  3. No or small initial net investment
  4. The ability of net settlement
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20
Q

Cash to Accrual

A
  • Prepaid Expenses: Beginning balance is added, ending balance is subtracted
  • Unearned Revenue: Beginning Balance is added, ending balance is subtracted
  • Assets: If the difference between the beginning balance is more than the ending balance is a positive number, then the difference should be deducted for accrual
  • Liabilities: If the difference between the beginning balance is more than the ending balance, then the difference should be added for accrual
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21
Q

Chapter 15: Derivatives

What is a Hedge?

A

A hedge is a strategy to protect an entity from adverse price movements

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22
Q

Chapter 15: Derivatives

What is a forward contract?

A

A forward contract is an agreement customized to the specific needs of the contracting parties

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23
Q

Chapter 15: Derivatives

What is a futures contract?

A

A futures contract is an agreement that is standardized and traded on an exchange

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24
Q

Chapter 15: Derivatives

What is a swap?

A

A swap is an agreement to exchange designated cash flows

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25
Q

Chapter 15: Derivatives

What is an American Option?

A

An American Option is an option contract that may be exercised at any time before the expiration date

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26
Q

Chapter 15: Derivatives

What is an European Option?

A

An European option is an option contract that may be exercised only on the expiration date

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27
Q

Chapter 15: Derivatives

What is a strike price?

A

A strike price is an amount at which an option may be exercised

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28
Q

Chapter 15: Derivatives

What is a call option?

A

“I’m Calling my Broker to purchase the option.”

A call option is a right to purchase an asset at a fixed price on or before a given date

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29
Q

Chapter 15: Derivatives

What is a put option?

A

“I’m Putting my fist down to sell the option, no matter what my broker says.”

A put option is a right to sell an asset at a fixed price on or before a given date

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30
Q

How are the translated rates calculated when the local currency of a foreign operations is the functional currency?

A

The currency is remeasured.

  • Nonmonetary items are remeasured at the historical rate.
  • Monetary items are remeasured at the current rate.
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31
Q

How is the currency remeasured when the functional currency of a foreign operation is the U.S. dollar?

A

Any gains or losses are recorded in the income statement as current earnings.

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32
Q

What is the difference between the reporting currency, functional currency, and foreign currency?

A
  • Reporting currency: Currency in which an entity prepares its financial statements
  • Functional currency: Currency of the primary economic environment in which the entity operates (generates or expends cash)
  • Foreign currency: Currency other than the functional currency
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33
Q

What is Foreign Currency Translation?

A

Foreign currency translation is the process of expressing in the reporting currency amounts that are

  • Denominated in (fixed units of) a different currency or
  • Measured in a different currency.
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34
Q

At what exchange rates are financial statement items translated?

A
  • Assets and liabilities: Exchange rate at fiscal year end
  • Equity: Exchange rate in effect when they were recognized (Historical)
  • Revenues, expenses, gains, and losses: Exchange rate in effect when they were recognized (or weighted-average rate)
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35
Q

At what exchange rates are nonmonetary and monetary items remeasured?

A
  • Nonmonetary items are remeasured at the historical rate.
  • Monetary items are remeasured at the current rate.
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36
Q

When is a Horizontal common-size analysis used?

A

“Horizontal = Hoard of Financial Statements”

The horizontal form uses the current year as a base line in order to analyze trends for all of the financial statements.

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37
Q

When is the vertical common-size analysis used?

A

The vertical analysis is used for a single year on the balance sheet and the income statement.

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38
Q

What is the Price to Earnings Ratio?

A

Market Price
Basic Earnings Per Share (BEPS)

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39
Q

How is the liquidation value of the preferred stock calculated in order to determine the book value per common share if the preferred stock is cumulative?

A 
Par value of the preferred stock
Premium
Dividends in arrears
_(Discounts)_
Liquidation Value of the Preferred Stock
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40
Q

How is the liquidation value of the preferred stock calculated in order to determine the book value per common share if the preferred stock is non-cumulative?

A

Par value of the preferred stock
Premium
(Discounts)
Liquidation Value of the Preferred Stock

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41
Q

What is the calculation to determine the book value per share

A

(Total Equity - Liquidating Value)

(Total number of shares Outstanding - Treasury Shares)

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42
Q

What is the calculation for Times Interest Earned?

A

Earnings before Interest and Taxes (EBIT)
Interest Expense

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43
Q

What is the Debt-to-Equity Ratio

A

Total Liabilities
Total Equity

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44
Q

What is the calculation for the Rate of Return on Assets?

A

Net income
Average Total Assets

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45
Q

What causes a current ratio to increase/decrease?

A

Increase the Current Ratio

  • If a ratio is less than 1.0: A transaction that equally increases in the numerator and denominator.
  • Ratio is greater than 1.0: A transaction equally decreases in the numerator and denominator.
  • If the ratio is not given, either an increase in current assets (the numerator) or decrease in current liabilities (the denominator)

Decrease the Current Ratio

  • If a ratio is less than 1.0: A transaction that equally decreases in the numerator and denominator.
  • Ratio is greater than 1.0: A transaction equally increases in the numerator and denominator.
  • If the ratio is not given, either a decrease in current assets (the numerator) or an increase in current liabilities (the denominator)
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46
Q

How are ending retained earnings declared when one of the main components (i.e. net income, beginning R/E) is not provided?

A

Shareholders Equity
(Additional Paid in Capital)
Ending Retained Earnings

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47
Q

What causes a quick ratio to increase/decrease?

A

Increase the Quick Ratio

  • If a ratio is less than 1.0: A transaction that equally increases in the numerator and denominator.
  • Ratio is greater than 1.0: A transaction equally decreases in the numerator and denominator.

Decrease the Quick Ratio

  • If a ratio is less than 1.0: A transaction that equally decreases in the numerator and denominator.
  • Ratio is greater than 1.0: A transaction equally increases in the numerator and denominator.
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48
Q

What are examples of changes in accounting entity?

A

An entity that was previously accounted for appropriately using the equity method.

Inventory costing method changed from LIFO to FIFO

Presenting consolidated statements for the first time.

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49
Q

What are examples of a change in accounting principle?

A

Held-to-maturity securities are transferred to the available-for-sale category.

Change in long-term construction contract from the completed-contract method to the percentage-of-completion method

A change from one generally accepted principle of accounting to another. (i.e. change from FIFO to average cost.)

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50
Q

What is an example of a Change in estimate effected by a change in principle?

A

A change in depreciation method

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51
Q

What is an example of a change in estimate that is inseparable from a change in principle?

A

A change in the method of depreciation, amortization, or depletion is a change in estimate inseparable from a change in principle

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52
Q

How are cash payments from a prepaid expense and payable accounts calculated under cash accounting?

A

Ending P/P Expense
Expense Reported
(Beginning Payable)
Cash Payments

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53
Q

How are cash payments from a prepaid expense and expense accounts calculated under cash accounting

A

Ending P/P Expense
Expense Reported
(Beginning Prepaid Expense)
Cash Payments

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54
Q

What is included in the calculating the total cash provided (used) by all three sections of the Statement of Cash Flows?

A

The cash balance from the current year
(The cash balance from the previous year)
The total cash provided (used) is calculated

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55
Q

xWhat is the revenue recognition standard?

A

The revenue recognition standard provides a single principles-based model that can be applied to all contracts with customers…no matter what the industry or transaction is.

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56
Q

Chapter 15: Derivatives

What is the five step approach of revenue recognition?

A

“CPO TAR”

  • Identify the contract with the customer
  • Identify the _p_erformance _o_bligations with the customer
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations in the contract
  • Recognize revenue when (or as) the entity satisfies the performance obligation.
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57
Q

What can be used if the standalone price is not directly observable?

A
  • The adjusted market assessment
  • The expected cost plus an appropriate margin
  • The estimation of the price in the seller’s market
  • Residual Approach
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58
Q

What is the criteria in order for costs to be capitalized when fulfilling a contract?

A
  • The costs relate directly to a current or anticipated specifically identifiable contract.
  • The costs generate or enhance resources of the entity that will be used in satisfying the performance obligations in the future
  • The costs are expected to be recovered.
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59
Q

Under ASC606, what determines the transaction price of a contract with a significant financing component?

A
  • Under ASC 606, the revenue recognized must reflect the price a customer would have paid for either the goods or the service if the goods or services were given at that time. Since the goods or services will not be available at that time, the transaction price should be adjusted based on the time value of money using the discounted cash flows and the variable consideration that must be determined at the time of the contract.
  • Variable consideration determines the price because the price should be adjusted for the effective of the time value of money.
  • There are two methods: Expected value or most likely amount.
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60
Q

What is the expected value method in revenue recognition according to ASC606?

A

The expected value method provides an appropriate estimate if an entity has a large number of contracts with similar characteristics (i.e construction).

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61
Q

What is the most likely amount method in revenue recognition according to ASC606?

A

The most likely amount method provides an appropriate estimate if the contract has only two possible outcomes.

This method uses the single most likely amount in a range of possible consideration amounts.

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62
Q

What is the impact on US accounting standards outside of the ASC?

A

The ASC is the single-source of guidance. All previous authorities (i.e. Research Bulletins, Opinions and Statements of Financial Accounting Standards, etc.) are no longer authoritative.

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63
Q

What is an example for the principle of systematic and rational allocation?

A

An example will be the amortization of intangible assets.

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64
Q

Describe systematic and rational allocation

A

Systematic and rational allocation occurs when the cost benefit occurs for two or more periods, and the costs generate revenue within those periods.

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65
Q

What is zero profit margin?

A

Zero profit margin occurs when the outcome of a contract cannot be reasonably measured, but the costs are expected to be recovered.

66
Q

What is included in the Summary of Significant Accounting Policies?

A
  • Chosen method of deprecation
  • Chosen method of valuing inventory
  • The securities chosen as cash and cash equivalents
  • The basis for consolidation
  • Revenue Recognition Policies
67
Q

What is not included in the Summary of Significant Accounting Policies?

A
  • Dates of maturity and amounts of long-term debt
  • Carrying value and gross unrealized gains and losses on a company’s marketable securities
  • Information about the company pension plan
  • Specific fair value estimates, contingency losses, restrictions on assets, segment reporting and subsequent events
  • Detail relating to changes in accounting principles
68
Q

What are the minimum disclosures of operating cash flows under the direct method?

A
  • Cash collected from customers
  • Interest and dividends received (unless donor-restricted to long-term purposes)
  • Other operating cash receipts
  • Cash paid to employees and other suppliers of goods or services
  • Interest Paid
  • Income taxes paid and the amount that would have been paid if excess tax benefits from share-based payment arrangements had not be available
  • Other operating cash payments.
69
Q

How are amortized costs treated when calculating the diluted earnings per share (DEPS)?

A

The amortized cost is add to the bond calculation before determining the taxable amount.

Example: Bond = 5,000,000 @ 9% stated interest. Amortization = 20,000; Tax Rate = 25%; N/I = 600000. The numerator is 60000+((5,000,000 x 9%) + 20,000) x (1-25%))

70
Q

What is an element describing transactions, events and circumstances during intervals of time?

A
  • Investments by owners
  • Distribution to Owners
  • Comprehensive Income
  • Revenues
  • Expenses
  • Gains
  • Losses
71
Q

What is variance power in relation to Not For Profit Organizations?

A
  • Variance power is assigned when a donation is made on behalf of a beneficiary to an NFP that agrees to use the donation on behalf of a third party. Any donations received by the NFP will be on behalf of the third party.
  • Variance power is a unilateral power to redirect the use of the assets to another beneficiary. Because of this, the NFP would record a liability for the FV of the assets when the asset is received.
  • The company will record the donation as an asset for the FV of the asset received.
72
Q

How are revenues and gains usually measured?

A
  • Revenues and gains are usually measured by the exchange prices of assets (goods or services) or liabilities involved.
  • They are recognized when they are either realized or realizable and earned.
73
Q

When does a gain occur?

A

A gain occurs when their is an increase in equity from an exchange of transactions that is not a result from an investment by the owners.

74
Q

What is revenue?

A

Revenue is an enhancements of assets or settlements of liabilities from, for example, delivering or producing goods

75
Q

How is Goodwill calculated under the Equity Method?

A

Cost of the investment

Equity in FV of net assets x the percentage of ownership

Goodwill

76
Q

How is income recognized under the equity method?

A
  • Under the equity method, income is recognized by the investors share of the investee’s earnings or losses.
  • This is calculated by multiplying the reported income times the percentage owned.
77
Q

How are dividends recognized under the equity method?

A
  • Any dividends received are treated as a return of an investment.
  • They do not have an effect on the investor’s income, but it does decrease the investment balance.
  • Dividends are not recorded in the income statement as revenue.
  • They are reported on the balance sheet as a decrease in the investment’s carrying amount.
78
Q

How are dividends recorded under the Fair Value Method of Accounting

A

Under the fair value method, dividends are recorded as dividend income. UNLESS a liquidated dividend is received.

79
Q

When can an entity elect the Fair Value Option (FVO)

A

An entity can select the fair value option for most recognized financial assets and liabilities.

However, the following are not eligible for the FVO

  • Variable Interest Entity (VIE)
  • An investment in a subsidiary that is part of a consolidated business
  • Employers’ and Plan obligations from Employee pension benefits, other post-retirement benefits
80
Q

What is the journal entry to record a purchase of an available for sale security?

A

DR: Available for Sale Securities

CR: Cash

81
Q

What is the journal entry to record a gain or loss on an available for sale security?

A

Gain on AFS

DR: Securities on Fair Value Adjustment
CR: Unrealized Holding Gain – AFS (Reported in OCI)

Loss on AFS

DR: Unrealized Holding Loss AFS (Reported in OCI)
CR: Securities on Fair Value Adjustment

82
Q

What is the journal entry to record an available for sale security that is sold?

A

DR: Cash
DR: Unrealized Holding Gain AFS (Reported in OCI
CR: Available for Sale Securities (at the original sale price)
CR: Unrealized Holding Loss AFS (Reported in OCI)
CR: Securities on Fair Value Adjustment

83
Q

How are gains and losses treated when the investment securities are reclassified from Trading to AFS?

A

The gains or losses are already recognized and do not need to be reversed.

84
Q

How are gains and losses treated when the investment securities are reclassified from Trading to Held to Maturity?

A

The gains or losses are already recognized and do not need to be reversed.

85
Q

How are gains and losses treated when the investment securities are reclassified from AFS to Trading?

A

The gains and losses that have not been recognized are recognized in earnings.

86
Q

How are gains and losses treated when the investment securities are reclassified from AFS to Held to Maturity?

A

The gains and losses recognized in OCI are not reversed but are amortized in the same way as premium or discount.

87
Q

How are gains and losses treated when the investment securities are reclassified from Held to Maturity to Trading?

A

The gains and losses that have not been recognized are recognized in earnings.

88
Q

How are gains and losses treated when the investment securities are reclassified from Held to Maturity to AFS?

A

The unrealized gains and losses not yet recognized are recognized in OCI.

89
Q

How is the present value of an asset determined when an exchange price is not provided for a non-interest bearing note?

A

For a non-interest bearing note, the present value of the note is the present value of the note times the present value of $1 for the number of periods.

90
Q

Why aren’t dividend policies a significant accounting policy?

A

Dividend policies are created by the board of directors. They are not an accounting policy.

91
Q

How are inventory losses reported on interim financial statements?

A

If the loss is not temporary, then it is recognized at the interim date. If the loss is recovered in another quarter, then it is recognized as a gain and treated as a change in estimate.

92
Q

What is the interest expense on a bond?

A

The interest expense is the carrying amount times the effective tax rate.

93
Q

How is interest revenue calculated?

A

Interest of the Bond (Look at the date)

Discount Amortization

(Premium Amortization)

Interest Income

94
Q

What is the link-chain method in Dollar Value LIFO?

A

In the link-chain method, the current year index is multiplied by the previous year’s index.

Example: Year 2 current year index is 1.15 and Year 3 current year index is 1.10. The link chain index is 1.15 x 1.10 = 1.265.

95
Q

How are the base-year inventory amounts calculated when using the link-chain index?

A

The Dollar-Value LIFO inventory base-year amount is calculated by dividing the Current-Year Inventory amount by the curren link-chain index.

For Example, the current year inventory amount is $215,000 and the current year link-chain amount is 1.265. The inventory at base year cost is $169,960 (215,000/1.265)

96
Q

How are brokerage fees reported in Securities?

A

Unless determined by the company, the brokerage fee is included in the amount for trading and AFS securities.

97
Q

How is the market price determined in the lower of cost or market

A

The market price is the greater amount between the replacement cost and the market floor (NRV - Normal Profit Margin)

98
Q

How is Accumulated Depreciation reported on the Statement of Cash Flows?

A

Accumulated depreciation is reported in the investment section of the Statement of Cash Flows.

99
Q

What is Composite Depreciation

A
  • Composite Depreciation is used for dissimilar assets.
  • It uses the straight-line method,
100
Q

What is Group Depreciation

A
  • Group Depreciation is used for groups of similar assets.
  • It uses the straight-line method,
101
Q

What are the steps to calculate capitalization of interest?

A

Step 1: Calculate the Weighted Average of Accumulated Expenditures (AAE)

Step 2: Determine Total Interest Expense Incurred

Construction Debt x Construction Interest Rate
Other Debt x Respective Interest Rate
Total Interest Expense Incurred

Step 3: Determine the Weighted-Average of the non-construction borrowings

Total Shares on Non-Construction/Total Non-Interest Expenses

Step 4: Determine Avoidable Interest.

Construction Loan x Construction Interest Rate
(Weighted AAE - Construction Interest) x the Weighted Average of Borrowings
Avoidable Interest

Step 5: Calculate Capitalized Interest (The lesser of the Interest Expense Incurred or the Avoidable Interest)

Step 6: Calculate the Interest Expenses.

Construction Interest Expense Incurred
Avoidable Interest
Interest Expense

102
Q

What is the definition of conservatism?

A
  • Conservatism is used to reduce the possibility of overstating net income or assets in the financial statements.
  • Conservatism supports the immediate recognition of a contingent loss
  • Conservatism urges the accountant from overstating net income or net assets.
103
Q

What is Realization?

A

Realization is the process of converting a non-cash resource or right into cash.

104
Q

What are examples of matching?

A
  • Estimate uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales.
  • Expense is recognized when economic benefits are consumed or assets lose their future value.
105
Q

When a deferred tax liability or asset occurs, how is the current year’s income tax calculated?

A

Taxable income for the current year

Increase/(Decrease) in deferred tax liability

Decrease/(Increase) in change in deferred tax asset

Current Year’s Income Tax

106
Q

How is the current provision for income tax calculated?

A

The current provision for income tax is the taxable income times the current effective income tax rate.

107
Q

What is included when the current income tax liability?

A

Current Tax Expense

(Estimated Tax Payments)

Income Tax Liability

108
Q

How are deferred tax assets and liabilities reported in the financial statements?

A

Deferred tax liabilities and assets are reported as noncurrent in the financial statements as a netted amount.

109
Q

What are the primary objectives of accounting for income taxes?

A
  • The amount of taxes payable or refundable
  • The deferred tax liabilities and assets for the future tax consequences of event that have been recognized in the financial statements or tax returns.
110
Q

What is the net effect on the carrying amount of an asset that has been replaced after being condemned?

A

Excess of the asset’s replacement cost
(Carrying value of the condemned asset)
The carrying value of New Asset

111
Q

What is an income tax expense or benefit?

A

The current tax expense or benefit
Deferred tax expense or benefit
Income Tax Expense or Benefit

112
Q

How is the current tax liability calculated?

A

The current tax liability equals the taxable income times the applicable tax rate

113
Q

What is a future deductible amount?

A

A future deductible amount is when the liability that is related to an expense or loss is deductible for tax purposes before being recognized in the books.

114
Q

What is the future taxable amount?

A

The future taxable amount is when an asset that is related to a revenue or gain is included in taxable income before it is reported in financial income.

115
Q

What is a deferred tax liability?

A

A deferred tax liability records the deferred tax consequences that create taxable temporary differences.

116
Q

What is a deferred tax asset?

A

A deferred tax asset is recorded when the there is a tax consequence that is attributable to temporary differences and carryforwards.

117
Q

What is a current tax expense or benefit?

A
  • A current tax expense or benefit is the amount of taxes that are in relation to the current year.
  • It is determined by applying the enacted tax law to the taxable income or excess of deductions over revenues for that taxable year.
118
Q

What is an example of a deferred tax liability?

A
  • More Accumulated Depreciation is reported in taxable income than in financial income
  • Unrealized Gains and Losses
  • Accrued Sales Reported
119
Q

Why is convertible debt more appealing as straight debt?

A

Convertible debt is issued at an interest rate that is lower than the interest rate for staight debt.

120
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the debtor when the undiscounted cash flow is greater than the carrying amount of the debt retired?

A

For the debtor: No gain or loss is recognized

121
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the debtor when the undiscounted cash flow is less than the carrying amount of the debt retired?

A

The debtor records a gain

122
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the creditor when the discounted cash flow is greater than the carrying amount of the receivable?

A

The creditor records a loss

123
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the creditor when the discounted cash flow is less than the carrying amount of the receivable?

A

The creditor records a loss

124
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the creditor when the fair value of the asset transferred and the carrying amount of the receivable is settled inf full?

A

The creditor records a loss

125
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the debtor when the fair value of the asset transferred and the carrying amount of the debt is settled inf full?

A

The debtor records a gain

126
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the debtor when the fair value of the asset transferred and the carrying amount of the assets is transferred?

A

The debtor records a gain or loss

127
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the creditor when the fair value of stock is transferred and the carrying amount of the receivable is settled in full?

A

The creditor records a loss

128
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the debtor when the fair value of stock is transferred and the carrying amount of the debt is settled inf full?

A

The debtor records a gain

129
Q

Under Trouble Debt Restructuring, how is the gain or loss recorded for the debtor when the fair value of stock is transferred and the carrying amount of the the stock is transferred?

A

Not applicable. No gain or loss is recognized.

130
Q

How are capitalized software costs calculated?

A
  • Software expense is calculated at the lower of the unamortized cost or the NRV of the software.
  • The unamortized cost is calculated as the book value of the software less than NRV
131
Q

How is an entity to account for asset retirement obligation (ARO)?

A
  • The fair value of the ARO liability is recognized when incurred.
  • If the estimate of the fair value cannot be determined, then the ARO can be recognized by determining the expected present value technique.
132
Q

What is the calculation to year-end Asset Retirement Obligation (ARO)?

A

Beginning Balance

New ARO (FV)

(Partial Settlement)

Accretion Expense

Ending Balance

133
Q

When is an ARO accounted for?

A
  • The fair value of the ARO is recognized when it is incurred.
  • If a reasonable estimate of the fair value cannot be determined, then the expected present value technique would be used to estimate the fair value.
134
Q

When should a contingent liability be recorded?

A

A loss of a contingent liability should be recorded when two conditions are met:

  1. It is probable that the liability has incurred.
  2. The amount of the loss can be reasonably estimated.

If only one of these conditions are met, then the liability should only be disclosed.

135
Q

For trouble debt restructuring, how is a gain/(loss) recognized for the adjustment?

A

The gain/(loss) for an adjustment on a restructured payable is the difference between the carrying amount and the fair value of the asset that is transferred.

136
Q

How is a finance-leased asset amortized?

A
  • Purchase option exercised: Amortized over the economic life of the asset.
  • Purchase option not exercised: Amortized over the life of the lease.
137
Q

What does the seller-lessee do in a Sales-Leaseback transaction?

A

The seller-lessee should

  • Recognize the transaction price as the sale of the asset
  • De-recognize the carrying amount of the asset
  • Recognize any gain or loss on the sale of the asset, adjusted for off-market terms, if necessary.
138
Q

In a sales-leaseback, what is an off-market adjustment?

A
  • An off-market adjustment occurs when the transaction is not at fair value and not based on market terms.
  • The off-market adjustment equals the difference between the
  1. Fair value of an asset and its selling price or
  2. PV of the lease payments and the PV of the market rental payment.
139
Q

How is the indirect cost reported on a sales-leaseback?

A

The indirect cost is added to the calculated PV of the lease payments as part of the ROU asset. They are not added to the lease liability.

If there is a adjusted market value, the indirect cost is recorded as an expense.

140
Q

Is the Sales price more than the FV of the Asset in a sales leaseback?

A
  1. No: Record Gain and include indirect cost to the ROU Asset Calculation
  2. Yes: Record additional gain and and an additional liability is recorded separate from the lease liability.
141
Q

What is the journal entry to record the stock options once they are exercised?

A

DR: Cash
DR: APIC (Stock Options)
CR: Common Stock
CR: APIC (Common Stock)

142
Q

When is a gain contingency reported on the financial statements?

A
  • A gain contingency is accrued on the financial statements when the payment was received in the year of the financial statements, or the payment was received subsequent to the financial statements being issued.
  • If the gain was due to a legal issue and the payment was received in the year of the financial statement, and no appeal is being made.
  • If an appeal was going to be made on a gain contingency, then the gain would not be accrued, but it would be disclosed in the financial statement.
143
Q

How is the right-of-use asset amortization calculated when the present value of the lease payments is 90% or more than the fair value of the lease?

A

When the present value is equal or greater than 90% of the fair value of the lease, then the amortization for the right-of-use asset is calculated using the shorter of the right-of-use asset’s useful life or lease term.

144
Q

How is the right-of-use asset amortization calculated when the purchase price option is reasonably certain to be exercised?

A

The amortization of the right-of-use asset is calculated based on the useful life of the asset.

145
Q

What is the effect on the APIC and RE for treasury stock between the cost method and the par value method?

A

Cost method: The purchase of treasury stock does not impact APIC or RE. It does decrease Total Equity.

Par-value method: The purchase of treasury stock using the par-value method will have a lesser amount on APIC or RE because the acquisition cost is more than par and less than the original issued price.

146
Q

How is treasury stock recorded when there are state laws relating to acquisition of treasury stock restrict the availability of retained earnings for declaration of dividends?

A

The cost of the treasury stock when purchased
(The cost of the treasury stock reissued)
Restricted Retained Earnings

147
Q

How is a stock dividend recorded?

A

When the stock dividend consists of fewer the 20% to 25% of the common stock outstanding:

DR: Retained Earnings at the FV of the Stock
CR: APIC at the Fair Value of the stock

When the stock dividend consists of more than 25% of the common stock outstanding:

DR: Retained Earnings at least equal to the legal requirement in the state of incorporation (usually the par value of the shares).
CR: Common stock dividend distributable

148
Q

How is a property dividend measured?

A

A property dividend is measured at its fair value on the declaration date.

DR: Retained Earnings at Fair Value
DR: Loss
CR: Gain
CR: Dividend Payable at book value

149
Q

What is the effect on total equity when a stock dividend has occurred?

A

Since the retained earnings is debited and the contributed capital is credited by the same amount, there is no effect on the total equity.

150
Q

What is the journal entry to record an employee stock option at the date of offering (or grant date)?

A

DR: Compensation Expense XXX
CR: APIC (Share Options) XXX

151
Q

How is a employee stock option recorded when the options are measured at an intrinsic value?

A
  • The intrinsic value is used when the fair value of the option cannot be measured.
  • The intrinsic value is market price of an underlying share at the measurement date (usually 1st of the year) and on the final settlement date minus the exercise price of the option.
152
Q

What is the journal entry to record a price difference for a purchase commitment that results in a loss?

A

DR: Loss on Purchase Commitments

CR: Accrued loss on Purchase Commitments

153
Q

How are general improvements recorded for a lease?

A

Under a financing and operating lease, general improvements to leased property should be recognized for both leasehold improvements and the lease contract.

154
Q

What is the exact method calculation of a partnership?

A
  • The exact method is when a new partner’s capital contribution is equal to the book value of the interest being acquired.
  • Step One: Calculate the number of partners for the denominator

1/Percentage of New Partnership Interest

  • Step Two: Calculate the Partnership’s Capital

Total Amount of Assets
Total Number of Partners Before the New Partner

155
Q

What is the bonus method calculation of a partnership?

A
  • Step One: Calculate the total capital of the resulting partnership

Capital of Partner A
Capital of Partner B
Capital of New Partner
Total Capital of the Resulting Partnership

  • Step Two: Divide the total capital of the resulting partnership by the number of partners

Total Capital of the Resulting Partnership
Total Number of Partners

  • Step Three: Calculate the Bonus

Capital paid by new partner
(Balance of Capital Account to New Partner)
Bonus to Old Partners

  • Step Four: Calculating the Old Partners Capital

Old Partner’s Capital before new partnership
(Bonus to old partner based on Partner’s Percentage)
Old Partner’s New Capital

156
Q

What is the journal entry to record a partnership under the bonus method?

A

DR: Capital Account, Partner A
DR: Capital Accounts, Partner B
CR: New Partner Capital Account

157
Q

What is the goodwill method calculation of a partnership?

A
  • Step One: Calculate the Implied Value

If the partnership is split equally (i.e. new partner will be 1/3 of partnership)

Amount Contributed by New Partner
X Number of New Partners
Implied Value

If the partnership is based on a percentage (i.e. The new partner will have 25% interest)

Amount contributed by new partner
The percentage of interest the new partner will have

  • Step Two: Calculate the book value

The book value is equal to all of the partners accounts

  • Step Three: Calculate Goodwill

Implied Value
(Total Capital Accounts)
Goodwill

  • Allocate goodwill based on the profit sharing percentages
158
Q

What is the payment hierarchy in a partnership liquidation?

A
  • All losses and potential losses must be first be considered before distributing to partners
  • A partnership has a claim against any partner with a negative capital
  • A final distribution of assets will be distributed to the partners based upon their final capital balances
159
Q

When is a transaction considered a sales-type lease?

A

A sales-type lease occurs when the life of the lease is the majority of the economic life of the asset.

160
Q

Chapter 15: Derivatives

How is Common Stock recorded when it is received as a contribution?

A
  • The receipt of a contribution of a company’s own stock is recorded at fair value as increases in both contributed capital and treasury stock
  • Adjustments, charges or credits from a transaction of an entity’s stock are excluded from net income or the results of operations.
161
Q

What is securitization?

A

Securitization is the transfer of a portfolio of financial assets to a trust or other entity and the sale of beneficial interests in that entity to investors.

162
Q

What is a servicing asset and a servicing liability?

A
  • Servicing Asset: A servicing asset is a contract under which the future revenues from servicing fees, late charges, etc., are expected to more than adequately compensate the servicer.
  • Servicing Liability: A servicing liability arises when such compensation is inadequate.

FAR (4 decks)

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