Concepts you Need to Understand for FAR Flashcards
What do you debit to Real Estate Taxes Payable?
Full Val
(Less)
RE paid in months of the year
How to do Deferred Gross Profit
1) Calc. installment sales (LESS) cost of sales ,then do a % of (cost/sales)
2) Do: Installment sales (LESS) collections x PROF %
to arrive at Deferred Gross Profit for the year
When do you do an impairment loss?
Fair Val - Carry Val
How to calc. intercompany sales?
Revenue A + Revenue B
(LESS)
Consolidated Rev (what’s reported)
for Interco Sales
What is Net Realizable Value equal to (for IFRS calculations of LCM?)
It is selling price (LESS) Cost to dispose, also known as market ceiling.
Is a “Deferred income tax payable” reported as a current liability?
No. Sep line item.
Depletion Calculation
Purch Price (PLUS) Development Costs (PLUS) restoration costs (Less) Sal val /// Total Tons
How to account for a bond sinking fund?
Investments (Plus) revenues (Less) expenses
What is the rule about deferred gain in leaseback transactions?
In GAAP, when a seller-lessee retains only a minor portion (PV of leaseback is 10% or less of asset sold,) then any gain should be recognized IMMED. and none deferred.
Net Bond Liability?
$1000 bonds x .99
(less)
Bond Issuance Costs
= what you should report as bond liability for the year
How do you allocate expenses in a quarter?
Everything that benefits for the year, pro-rated, per period.
EG:
60,000/4= 15,000
240,000/3=80000
Reporting on Seg. Rev
Segment revenue must be at least 10% of:
1) combined revenues (whether interseg. or affiliated customers)
2) Operating profit (of all segments not having an operating loss)
3) Identifiable assets
How to arrive at gross profit for final year?
$500K expected gross profit –
25% first year
45% second year…
So do 30% 3rd year
What should a company put on its balance sheet for an exchange WITH!
Commercial substance?
Fair Val of truck surrendered.
Does bad debts written off during the year subtract from Allowance for Uncollectible accounts?
yes
Journal entry for converting bonds into shares of STOCK
BP $775,000
Unamortized Discount $23000
C/S par $450,000
APIC $302,000
Accumulated Other Comprehensive Income: What’s in it?
PUFER
Pension Adjustments Unrealized G/Ls on A4S securities Foreign currency translation adjustments Effective portion of cash flow hedges - deferred G/L // Revaluation surpluses (IFRS only)
What is the IFRS impairment loss?
Recoverable Amount - CV
What is Acquisition accounting?
for acquisition transactions
The net assets acquired are based on fair market value.
What makes “Allowance for bad debt” account decrease?
When a specific uncollectible account is written off.
What do you do with bond issuance costs under GAAP?
Amortize them all.
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:
4/1 Issued 30,000 shares of common stock
6/1 Issued 36,000 shares of common stock
7/1 Declared a 5% stock dividend
9/1 Purchased as treasury stock 35,000 shares of its common stock.
Balm used the cost method to account for the treasury stock.
What is Balm’s weighted average of common stock outstanding at December 31?
In computing earnings per share, the weighted average of common stock outstanding is number of shares outstanding at the beginning of the year weighted by time for any change in shares outstanding. In this problem, the weighted average is:
Original shares outstanding 100,000
4/1 issue - 30,000 x 9/12 22,500
6/1 issue - 36,000 x 7/12 21,000
--------
143,500
Effect of stock dividend x 1.05
--------
150,675
Treasury stock acquired:
35,000 x 4/12 (11,667)
--------
Weighted average outstanding 139,008
Define Subsequent Events.
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.
Installment Sales
1) GP: Sales - Cost of Sales (y3 and y4)
2) GP Rate - GP / sales
3) A/R * GP rate = def gp.
SAMPLE: Sales (def GP/GP Rate) 560,000/.4 = 1400000 (less) AR - (800000) Cash Collected 600000 x GP x,4
= 240,000 realized gross profit
Transactions with commercial substance?
Gains and losses recognized immediately.
Neron Co. has two derivatives related to two different financial instruments, Instrument A and Instrument B, both of which are debt instruments. The derivative related to Instrument A is a fair value hedge, and the derivative related to Instrument B is a cash flow hedge. Neron experienced gains in the value of Instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?
B.
Gain in value of debt Instrument A only
FASB ASC 815-25-35-1 requires that gains or losses associated with changes in the fair value of the hedging instrument be recognized in net income in the period in which the change in fair value takes place.
The gain or loss resulting from changes in the fair value of a cash flow hedge is included in other comprehensive income.
Consequently, only the gain in the value of Instrument A would be included in net income.
On January 2, Year 1, Ross Co. purchased a machine for $70,000. This machine has a 5-year useful life, a residual value of $10,000, and is depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation expense was $25,000 for Year 1 and $20,000 for Year 2. Ross’s Year 2 income, before income taxes and depreciation expense, was $100,000 and its tax rate was 30%. If Ross had made no estimated tax payments during Year 2, what amount of current income tax liability would Ross report in its December 31, Year 2, balance sheet?
The income tax due and yet to be paid for the year (payable) is $24,000.
The income before income taxes and depreciation is $100,000 and the tax depreciation is taken from that to compute taxable income. Taxable income is $80,000 ($100,000 – $20,000) and the tax rate is 30%, so the current income tax due is $24,000 ($80,000 × 0.30). No part of the tax has been paid (no estimates for the year, yet), so it is all still payable.
What is true about total interest revenue earned over life of the note?
The total amount of interest revenue one earns on a note is related to the total payments but also to the present value of the note, with the discount recognized here initially.
The total amount to be received on this note is 5 years multiplied by $5,009, as specified, for a total of $25,045.
Interest is generally the amount returned over and above the amount originally recognized, which was $19,485 originally. Thus, the total interest revenue is $25,045 − $19,485 (Current Present Val., given), or $5,560.
On January 2, 20X1, East Corp. adopted a defined benefit pension plan. The plan’s service cost of $150,000 was fully funded at the end of 20X1. Prior service cost was funded by a contribution of $60,000 in 20X1. Amortization of prior service cost was $24,000 for 20X1.
Assuming that no amortization of unrecognized gain or loss is required in 20X1, what amount should East recognize as pension expense in 20X1?
East Corp.’s pension expense for 20X1 is $174,000, as shown below:
Service cost $150,000
Interest cost 0
Amortization of past service cost 24,000
Expected return on plan assets 0
Amortization of unrecognized gain/loss 0
——–
$174,000
========
The interest cost is computed by applying the appropriate rate times the projected benefit obligation (PBO) at January 1, 20X1. Since this is the first year of the plan, the PBO at January 1, 20X1, is $0, which means that the interest cost for 20X1 is $0. The expected return on the plan assets is computed by applying the appropriate rate times the fair value of the plan assets (PA) at January 1, 20X1. Since this is the first year of the plan, the PA at January 1, 20X1, is $0, which means that the expected return on plan assets for 20X1 is $0. Since no amortization of unrecognized gain/loss is necessary (which is stated in the facts), the pension expense consists of the service cost and the amortization of past service costs.
Gain on troubled debt restructuring for May Corp. in 20X6 is computed as follows:
Gain = Total due on debt - Required restructured payment
= Principal + Accrued interest - (Restructured principal + Required
interest)
= ($1,000,000 + $40,000) - ($950,000 + $30,000)
= $1,040,000 - $980,000
= $60,000
How to Calc COGS
Cost of goods sold (COGS) = Beginning inventory (BI) + Purchases (P) – Ending inventory (EI)
Income is constructively received and included in gross income if:
it is readily available to the taxpayer and actual receipt is not subject to substantial limitations or restrictions.
– Income that is constructively received is included in gross income. An example is interest income credited to an account by a financial institution. Income is constructively received if:
it is readily available to the taxpayer and
actual receipt is not subject to substantial limitations or restrictions.
How do you account for cash flows from operating activities?
You must map the fluctuations of A/P and A/R.
Baker should report $20,000 as net cash provided by operating activities:
Net income $78,000
Adjustments
Increase in accounts receivable ($82,000)
Increase in accounts payable 24,000 (58,000)
——–
Net cash provided by operating activities $20,000
When purchasing a bond, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
A: Price.
A bond has a face amount of principal, which is the amount repaid to the owner of the bond at the end of its term. A bond has a coupon rate, which, when multiplied by the face (principal) amount, states the amount of (actual cash) interest paid to the bond owner annually.
The value of owning the bond is the (present) value of these two rights, to be repaid the principal at the end of the bond’s term, and to be paid the coupon rate of interest every year until then.
The present value of these rights is the value of the bonds, hence the rational price.
The present value is based on the market rate of interest, since this is the (rational) rate to charge, and discount based on what the market would require of the debtor.
“Yield” is a synonym for market rate, and “par” is another term for face amount.
On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?
The balance on December 31 should be $1,000,000 less the payment of principal made on December 30.
9/30 Balance $1,000,000
Payment 264,200
Interest* (22,500) 241,700
12/31 Balance 758,300
* $1,000,000 × 9% × 1/4
In computing gain or loss, assets conveyed in a troubled debt restructuring should be valued at their fair value. Therefore:
Carrying amount of note $150,000
Less fair value of land 100,000
——-
Gain $ 50,000
=======
Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year’s balance sheet?
The amount is $264,000, computed as follows:
Total obligation $257,000
Add: undiscounted cash flow 68,000*
Accretion expense 26,000
Deduct: payment (87,000)
---------
$264,000
- The original undiscounted cash flow of $110,000 should be adjusted to the discounted estimate.
On December 30, 20X1, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 20X1, at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this capital lease in its December 31, 20X1, balance sheet?
A: $8,500
Initial lease obligation on December 31, 20X1 $135,000
Less payment made on December 31, 20X1 - 20,000
——–
Lease obligation during 20X2 $115,000
========
Portion of December 31, 20X2, payment that is interest =
rate x obligation x time = 10% x $115,000 x 1 = $11,500
Portion of December 31, 20X2, payment that is related
to lease obligation = payment - interest portion =
$20,000 - $11,500 = $8,500
This amount is a current liability since it is payable within the current period. The remaining lease obligation is noncurrent.
On October 1, Year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold paid the first installment of $300,000 plus interest on September 30, Year 2. What amount should Gold report as a current liability on December 31, Year 2?
A: $307,500
Current liabilities will include any installments of principal due within the next 12 months, plus the interest expense accrued (but not paid) until the end of the year. The second installment of $300,000 is due on September 30, Year 3, so it is a current liability as of December 31, Year 2. The first installment was paid on September 30, Year 2, so only 2/3rds of the $900,000 is still outstanding as principal on December 31, Year 2; only $600,000 is left.
The last payment on September 30, Year 2, included all interest to date; thus, we only need to accrue interest from September 30, Year 2, until December 31, Year 2, which is a total of $7,500 based on principal of $600,000 × 0.05 × 3/12 (last 3 months of the year). So, the total current liability as of December 31, Year 2, is $300,000 + $7,500, for a total of $307,500.
Which of the following statements regarding foreign exchange gains and losses is correct?
Why?
An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt.
Receivables denominated in a foreign currency entitle a company to a fixed number of units of the foreign currency. The U.S. dollar balance of the receivable is measured initially using the exchange rate in effect when the receivable is established. If the exchange rate is higher when the fixed number of units of the foreign currency is received (i.e., cash is received), the dollars received will exceed the balance of the receivable in dollars, and a gain will have occurred.
On January 1, 20X1, Bay Co. acquired a land lease for a 21-year period with no option to renew. The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, 20X2, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building’s estimated market value will be $420,000. What is the building’s carrying amount in Bay’s December 31, 20X2, balance sheet?
This building is treated as a leasehold improvement. Although the land lease is for 21 years, the building will be in use for 20 years; thus, the depreciation period for the building is 20 years:
Cost / Life = $840,000 / 20 years = $42,000/year
Building cost - Depreciation = Carrying Value of Building
$840,000 - $42,000 = $798,000
The following information was obtained from Smith Co.:
Sales $275,000
Beginning inventory 30,000
Ending inventory 18,000
Smith’s gross margin is 20%. What amount represents Smith purchases?
A: $208,000
Cost of goods sold = Sales × (1 - Gross margin ratio)
$220,000 = $275,000 × 0.80
Cost of goods sold = Beginning inventory + Purchases - Ending inventory
$220,000 = $30,000 + Purchases - $18,000 Purchases = $208,000
On December 12, 20X1, Imp Co. entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows:
Forward Rate
Spot Rate (for March 12, 20X2)
--------- -------------------- December 12, 20X1 $.88 $.90 December 31, 20X1 .98 .93 Imp entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Imp's specifications. At December 31, 20X1, what amount of net foreign currency transaction gain should Imp include in income from this forward contract?
A: $0
The “second” forward contract was entered into to hedge a purchase commitment, therefore (assuming that all other conditions are met) it qualifies as a hedge of a purchase commitment. In that case, the forward contract qualifies as a fair value hedge (rather than a cash flow hedge).
Therefore, the change in fair value of the derivative (the forward contract) should be included in net income, as should the change in fair value of the hedged commitment.
Accordingly, the $3,000 gain (100,000 francs × ($.90-$.93)) would be included in income from continuing operations. If the hedge associated with the derivative qualified as a cash flow hedge, the unrealized gain would be included in other comprehensive income rather than in net income. However, the increase in the fair value of the hedged item, the purchase commitment, should be a $3,000 loss. The unrealized gain of $3,000 associated with the derivative (the hedging instrument) and the $3,000 unrealized loss associated with the hedged instrument (the purchase commitment) should result in a net unrealized gain/loss of $0. Thus, the net unrealized gain/loss included in income from continuing operations is $0.
FASB ASC 815-25-35-1–35-8
Which of the following statements is correct concerning the appearance of non-controlling interest on the income statement?
Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the non-controlling interest.
What is the guidance for disclosing poss. $ value of legal liabilities on the financial statements?
When no amount within the range is a better estimate than any other amount, it is required that the MINIMUM amount in the range shall be accrued.
In 20X1, Chain, Inc., purchased a $1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ending December 31, 20X6, follows:
Cash surrender value (01/01/X6) $ 87,000
Cash surrender value (12/31/X6) 108,000
Annual advance premium paid (01/01/X6) 40,000
During 20X6, dividends of $6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for 20X6?
Since the cash surrender value of a life insurance policy is an asset, then the insurance expense is only the premium less the increase in the asset (surrender value).
Annual advance premium payment $40,000
Less increase in cash surrender value
($108,000 - $87,000) 21,000
——-
Life insurance expense for 20X6 $19,000
Since there is no reasonable basis for estimating the degree of collectibility, Astor Co. uses the installment method of revenue recognition for the following sales:
20X2 20X1
-------- -------- Sales $900,000 $600,000 Collections from: 20X1 sales 100,000 200,000 20X2 sales 300,000 --- Accounts written off: 20X1 sales 150,000 50,000 20X2 sales 50,000 --- Gross profit percentage 40% 30%
What amount should Astor report as deferred gross profit in its December 31, 20X2, balance sheet for the 20X1 and 20X2 sales?
A: $250,000
On installment sales, separate records must be kept as to each year’s sales, cost of goods sold, and gross profits (gross profit percentage). The gross profits are recognized to the extent of cash collections on the year’s receivables, and deferred to the extent of remaining receivables for that year (at the gross profit percentage).
20X2 20X1
--------- --------- Sales $900,000 $600,000 Less: Write-offs (50,000) (200,000)
Collections (300,000) (300,000)
--------- --------- Uncollected sales on December 31, 20X2 $550,000 $100,000 Times gross profit % x 0.40 x 0.30
--------- --------- Deferred gross profit $220,000 $ 30,000
========= =========
Total deferred gross profit on
December 31, 20X2 = $220,000 + $30,000 = $250,000
On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for 56 months. The lease term spans five years. The company has a calendar year-end. What amount is the company’s lease expense for the current calendar year?
A: $188,813
The inception of a lease is the date of the lease agreement. Rental expense should be as of that date. When the lease payments begin later than the inception date, the lease payments must be spread evenly over the longer period of time, which includes the months between the inception date and the beginning of the lease payments.
$28,900 × 56 months = $1,618,400
$1,618,400 ÷ 60 months = $26,973.33
$26,973.33 × 7 months (June through December) = $188,813
An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8):
- embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation and
requires or may require the issuer to settle the obligation by transferring assets.
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:
4/1 Issued 30,000 shares of common stock
6/1 Issued 36,000 shares of common stock
7/1 Declared a 5% stock dividend
9/1 Purchased as treasury stock 35,000 shares of its common stock.
Balm used the cost method to account for the treasury stock.
What is Balm’s weighted average of common stock outstanding at December 31?
Original shares outstanding 100,000
4/1 issue - 30,000 x 9/12 22,500
6/1 issue - 36,000 x 7/12 21,000
--------
143,500
Effect of stock dividend x 1.05
--------
150,675
Treasury stock acquired:
35,000 x 4/12 (11,667)
--------
Weighted average outstanding 139,008How should insurance premium adjustments be reported within retained earnings?
A: Net of applicable TAXES.
Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes:
A: a gain determined by the proportion of cash received to the total consideration.
Sable will recognize a gain determined by the proportion of cash received to the total consideration. Similar trucks were exchanged in the transaction; therefore, there would be no gain. Very similar trucks would not significantly change cash flows—so the transaction would lack commercial substance.
Now, add in the fact that Bensol paid Sable money. Since Sable received money, Sable now has to record a gain.
On November 1, 20X1, Davis Co. discounted with recourse at 10% a 1-year, noninterest bearing, $20,500 note receivable maturing on January 31, 20X2. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ending December 31, 20X1?
A: $20,500
“With recourse” means that the financial entity where the note was discounted can collect fully from Davis Co. in the event the maker does not honor the note.
Davis Co. should disclose the full amount ($20,500) of the note as a contingent liability in its December 31, 20X1, financial statements, because it is reasonably possible that Davis will have to make good on the note (FASB ASC 450-20-50-2).
On March 1, 20X1, Evan Corp. issued $500,000 of 10% nonconvertible bonds at 103, due on February 28, 20X9. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase for $50 one share of Evan’s $25 par common stock. On March 1, 20X1, the market price of each warrant was $4. By what amount should the bond issue proceeds increase stockholders’ equity?
A: $60,000
Since the warrants are detachable, the proceeds from the bond issue must be allocated between the bonds (debt) and the warrants (under stockholder’s equity) on the basis of fair market values.
Summary journal entry for March 1 issuance of bonds:
Dr. Cr. Cash ($500,000 x 1.03) $515,000 Discount on bonds payable ($560,000- $515,000) 45,000 Stock warrants outstanding (1) (500 bonds x 30 warrants x $4) 60,000 Bonds payable 500,000 (1) $500,000 / $1,000 bond = 500 bonds The balance ($60,000) in stock warrants outstanding would be classified under stockholder's equity in the balance sheet. Upon exercise, this balance would be transferred into the appropriate capital stock and additional paid-in capital accounts.
Howe Co. leased equipment to Kew Corp. on January 2, 20X1, for an 8-year period expiring December 31, 20X8. Equal payments under the lease are $600,000 and are due on January 2 of each year. The first payment was made on January 2, 20X1. The list selling price of the equipment is $3,520,000 and its carrying cost on Howe’s books is $2,800,000. The lease is appropriately accounted for as a sales-type lease. The present value of the lease payments at an imputed interest rate of 12% (Howe’s incremental borrowing rate) is $3,300,000. What amount of profit on the sale should Howe report for the year ended December 31, 20X1?
Sales-type leases give rise to manufacturer’s profit to the lessor defined as the difference between the sales price and the carrying value of the asset.
Present value of lease payments (i.e. sales price) $3,300,000
Less carrying value of leased property 2,800,000
———-
Income to be reported for year ended December 31, 20X1 $ 500,000
==========
Which of the following should be reported as a stockholders’ equity contra account?
A.
Discount on convertible bonds that are common stock equivalents
B.
Premium on convertible bonds that are common stock equivalents
C.
Cumulative foreign exchange translation loss
D.
Organization costs
C!
An entity purchased new machinery from a supplier before the entity’s year-end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?
The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.
Percentage of completion must generally be used if:
the company can make reasonably dependable estimates of the extent of progress toward the completion, contract revenues, and contract costs, and
both the buyer and seller can be expected to satisfy their obligations under the contract.
A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?
At the face amount minus a discount calculated at the imputed interest rate
When a note payable is exchanged for property, goods, or services, and the interest rate is not stated or is unreasonable, record the note at the fair value of the property, goods, or services exchanged OR at the amount that approximates the market value of the note, whichever is more clearly determinable. In the absence of said information, the note is recorded at its present value by discounting all future payments on the note using an imputed interest rate. The imputed interest rate is determined by considering the debtor’s credit standing, prevailing rates for similar debt, and rates at which the debtor can obtain funds.
The note payable should be presented in the statement of financial position at its face amount minus the discount calculated at the imputed interest rate.
Dallas Style
12/31/X1 12/31/X1 01/01/X1
——– ——– ——–
Investment in Style (equity method) $132,000
Other assets $138,000 $115,000 $100,000
Common stock 50,000 20,000 20,000
Additional paid-in capital 80,250 44,000 44,000
Retained earnings 139,750 51,000 36,000
What amount of total stockholders’ equity should be reported in Dallas’ December 31, Year 1, consolidated balance sheet?
A: $293,000
Under the principle of consolidation, the parent and subsidiary are considered a single economic entity. Thus, the consolidated balance sheet reports the combined (parent plus subsidiary) asset and liability accounts.
The single parent-sub entity owns all the net assets of both entities. Total stockholders’ equity accounts on the consolidated balance sheet equals the total stockholders’ equity of the parent plus the noncontrolling interest. Therefore, Dallas, Inc., reports total stockholders’ equity account on December 31, 20X1, of $270,000 ($50,000 + $80,250 + $139,750) plus 20% of the total stockholders’ equity of Style of $23,000 ($20,000 + $44,000 + $51,000), which is $293,000.
Potter Co. has the following contingencies, all resulting from lawsuits in progress during the current year:
Probable loss contingency $1,500,000
Reasonably possible loss contingency 500,000
Probable gain contingency 700,000
Reasonably possible gain contingency 300,000
Disclosed: $2,000,000 loss and $1,000,000 gain; Accrued: $1,500,000 loss
Contingent losses are accrued when probable and reasonably estimable. Contingent losses are disclosed when probable or reasonably probable. Contingent gains are not accrued but should be disclosed when probable or reasonably probable.
Only the reasonably probably loss should be accrued ($1,500,000). All of the gains and losses should be disclosed (Losses: $1,500,000 + $500,000 = $2,000,000, Gains: $700,000 + $300,000 = $1,000,000).
