CPA FAR - F4

Question 1

How is the balance sheet affected when short-term debt is refinanced into long-term debt?

Answer 1

It should be reclassified as long-term debt. HOWEVER, if the refinancing happened after year end but before the financial statements published, the amount paid end of year is still short-term debt but the remainder moves to long-term debt.

Question 2

How do you value Asset Retirement Obligation (ARO)?

Answer 2

When an asset is put into service, the ARO is recorded (if needed) as a liability using it’s PV of the full cost of retirement. This occurs on day 1.

Question 3

How do you calculate Accretion Expense?

Answer 3

Beginning ARO * Credit Risk-Adjusted Rate %

Question 4

What are the rules for Gain Contingencies?

Answer 4

Gain contingencies should be disclosed in the notes unless the likelihood of the gain being realized is remote. Additionally, the full range of possible settlements should be disclosed.

1. Anything other than remote –> disclose in the notes (do NOT accrue a gain contingency ever)

Question 5

What are the rules for Loss Contingencies / Contingent Liability?

Answer 5

Loss contingencies that is probable and estimable must be recognized. If all amounts within a range are equally likely, the lowest amount in the range must be recognized.

When a loss is reasonably possible, only a footnote disclosure is required.

1. Reasonably Possible –> Footnote only
2. Probable and estimable –> Accrue at lowest amount in range (if all are equally likely).
3. Probable but not estimable –> Footnote only

Question 6

What is an annuity?

Answer 6

An annuity is the same payment over and over.

Question 7

Do you calculate the PV of a note when the maturity is less than a year?

Answer 7

No, when a note’s maturity is less than a year, you just use the value in the question (the full future amount).

Question 8

How do you calculate interest expense on a noninterest-bearing note?

Answer 8

PV of Carrying Value * Imputed Rate

Question 9

How do you calculate a bond’s interest payment?

Answer 9

Full value of the bond * Stated Interest Rate * Time

Question 10

How do you calculate the effective interest expense of a bond?

Answer 10

Bond issuance amount * market yield interest rate

Question 11

How do you calculate the amortization amount for a bond discount/premium?

Answer 11

Bond annual interest payment - Effective interest expense

Question 12

What is a stock warrant?

Answer 12

A stock warrant is the right to purchase a company’s stock at a specific price and at a specific date.

Question 13

What is the bond when the Stated Rate > Market Rate?

Answer 13

The bond is a premium.

Question 14

What is the bond when the Stated Rate < Market Rate?

Answer 14

The bond is a discount.

Question 15

When do you use an ordinary annuity?

Answer 15

You use the ordinary annuity section when the payments are made at the END of the period.

Question 16

When do you use an annuity due?

Answer 16

You use the annuity due section when the payments are made at the BEGINNING of the period.

Question 17

How is an asset valued when the asset is being transferred to get rid of troubled debt?

Answer 17

The asset is valued at fair value before the gain or loss is recorded.

Question 18

What is a callable bond?

Answer 18

A callable bond provides the option for the ISSUER to call bonds back from the bondholder.

Question 19

When does the issuer typically call back a callable bond?

Answer 19

The issuer typically does this when interest rates are lowering. This is because the issuer can call back the bonds and issue them again for a lower interest rate (thus saving themselves interest expense).

Question 20

What is a puttable bond?

Answer 20

A puttable bond provides the option for the BONDHOLDER to sell back the bonds to the issuer.

Question 21

When does the bondholder typically put back a puttable bond?

Answer 21

The bondholder typically does this when interest rates are rising. This is because the bondholder can put back the bonds and buy other bonds that have a higher interest rate (thus securing more interest revenue).

Question 22

What is the effect of a bond that is issued at a premium but redeemed at a discount?

Answer 22

This is a gain in income from continuing operations.

Question 23

What is the effect of a bond that is issued at a discount but redeemed at a premium?

Answer 23

This is a loss in income from continuing operations.