CPA FAR - In My Words - Set2

Question 1

Factoring receivables: Treating as a sale of receivables (without recourse)

Answer 1

When a company factors receivables without recourse in exchange for cash, title to the receivables is transferred to the factor and the transaction is treated as a sale of receivables. Factoring without recourse means the sale is final and the factor assumes the risk of any losses.

Without recourse refers to the fact that if customers do not pay, the factor has no recourse against the entity that sold the receivables. For this reason, the factor often charges fees up front to allow for returns and uncollectible accounts.

Journal Entry:
Cash 90 (DR)
Loss on sale of receivables 10 (DR)
AR 100 (CR)

Question 2

Research and development software costs (R&D)

Answer 2

Research and development software costs (R&D) before technological feasibility are the expenses related to experimenting with new products, services, or processes. They can include facility costs (e.g., laboratory space), personnel costs (salaries and benefits for employees who work on R&D projects), and indirect costs such as supplies and equipment depreciation for the purpose of R&D.

Under conservatism, R&D costs are usually expensed and not capitalized since it is not sure the costs will develop into a viable asset.

Question 3

Internally developed computer software costs three stages

Answer 3

Before technological feasibility: software costs are R&D expense
Post technological feasibility: software costs are capitalized and amortized via the larger of straight-line and revenue to revenue methods
Production and forward: software costs are part of the inventory and the cost of goods sold.

Question 4

FIFO

Answer 4

Reporting ending inventory using FIFO and assuming it uses the periodic inventory sysem!

Under FIFO, ending inventory will consist of the most recent purchases, since the oldest is sold first. (first in, first out)

Question 5

Determining a pension asset or liability

Answer 5

Formula: Projected benefit obligation - the fair value of the plan assets

Example question: What amount should be recognized in the balance sheet related to the defined benefit plan?

FYI: obligation just means future liability . So, in other words, what is the total projected pension obligation/liability, and what is the fair value of the plan assets that are going to pay for that liability

Question 6

Calculating average cost per unit

Answer 6

Average cost per unit = beginning inventory (10,000 units at $1 = 10,000) + purchases = cost of goods avail for sale THEN take the cost of goods avail for sale and divide that by the total units from the purchases

Question 7

Using periodic system, how would you report COGS using the weighted average method?

Answer 7

When determining cost of goods sold using the weighted average method, the average cost per unit is multiplied by the number of units sold.

Question 8

Using periodic system, how would you report ending inventory using the weighted average method?

Answer 8

When determining ending inventory under weighted average, the first step is to determine the average cost per unit. Once the average cost per unit is determined, the next step is to multiply the ending inventory units by the average cost per unit.

Question 9

What should be reported as a deferred income tax liability?

Answer 9

Deferred taxes will be impacted only when the difference between financial statement income and taxable income are the result of temporary differences

(Keep in mind that life insurance [when the company is the beneficiary] and interest income on municipal bonds are considered permanent differences NOT temporary)

Question 10

Example question: Under US GAAP, the deferred tax liability is based on which of the following tax rates?

Answer 10

Deferred tax liability shown as a noncurrent deferred liability is based on the enacted tax rate expected to apply to the yrs when the liability is expected to reverse

Question 11

Bond short cuts

Answer 11

Definitions:
*Stated interest rate: rate of the cash payments
*Effective interest rate: rate of the earnings
*PV of the bond: PV bond face amount as a lump sum.

Use the effective rate to PV the single lump sum

PV interest payments as an annuity
Use the stated rate to get to the interest payments

Use the effective rate to PV the interest payments

Add the two PVs together

Annuities:
*Ordinary annuity payments are due at the end of a period
*Annuity due payments are due at the beginning of a period
Payments

If payments are due semi-annually double the periods

Question 12

Sample question:

With regard to a 5-year $1,000 bond issued at 102 on January 1, Year 10, that pays interest semiannually on June 30 and December 31, the stated interest rate of 8% is used to calculate the…

Answer 12

• Amount of interest payment -

With regard to a $1,000 bond issued at a premium of 102 on January 1, Year 10, that pays interest semiannually on June 30 and December 31, the stated interest rate is used to calculate the amount of interest payment.

If the stated interest rate was 8%, the amount of interest payment would be $1,000 times 8%, or $80 per year. Since the bond pays interest twice per year, the investor would receive $40 on June 30 and $40 on December 31 for a total of $80 per year.

Question 13

Sample question:

The Holden Corp. issued 10-year bonds at 102 with a maturity value of $1,000,000. The bonds pay interest semiannually. The stated interest rate of the bonds was 6%.

The entry the Holden Corp. uses to record the original issue should be what? (what’s the journal entry)

Answer 13

The entry to record the bond premium would be a debit to cash of $1,020,000, a credit to bonds payable for $1,000,000, and a credit to bond premium for $20,000

Question 14

Solving for bonds additional info

Answer 14

Figure out:
PV of the face of the bond
PV of the interest on bond
PV of interest payments
PV of total bond value

Question 15

With a 5 yr life, What amount should be recorded as depreciation for research and development projects? (Using the straight line method)

Answer 15

Only the equipment for Current AND Future projects would be capitalized and depreciated. All other R&D costs are expensed in the period incurred

Example: 100,000/5yrs = 20,000 depreciation

Question 16

What happens when expenses aren’t recorded? (The accountant forgot to record this)

Answer 16

Any expenses that aren’t recorded will overstate the net income and retained earnings

Question 17

What’s the difference between basic EPS and diluted EPS?

Answer 17

Diluted EPS is an “as if” calculation based on potential common stock!

Diluted EPS (DEPS) is calculating the lowest possible per share based on all outstanding securities at the balance sheet date. Potential shares as a result of convertible bonds or stock options and warrants are also included in the calculation–hence: all potential common stock!!

Question 18

Legal expenses

Answer 18

Journal entry:
Legal expense (DR)
Cash (CR)

All expenditures associated with securing and defending trademarks and trade names are amortizable.

BUT if you get an unfavorable judgment in defense of a trademark you cannot amortize the legal expenses and must deduct them as a current operating expense

Question 19

Equity method

Answer 19

Under the equity method, income from the investment company increases the investment account, and dividends decrease the investment account.

If you just think it through, it’s just an extension of the parent company itself: income adds to the company’s balance sheet and dividends decrease it

Question 20

Question:
On the effective date of the lease, how much liability should be shown for the lease obligation?

Answer 20

For an operating lease, the lessee will measure both assets and liabilities at the present value of the prospective lease payments using either the lessor’s implicit interest rate or if not readily determinable, at lessee’s incremental borrowing rate

implicit interest rate - equates the present value of the payments received to the fair value of the leased asset

lessee’s incremental borrowing rate - the rate at which lessee could borrow for a similar amount from their lending institution

Example: The present value of minimum lease payments of $23,000 can be calculated as $23,000 multiplied by the present value factor for Ordinary Annuity for 10 years at 10% i.e 6.81. The lease liability should be recorded at $156,630. (23,000 x 6.81 = $156,630)

Question 21

Sample question:

You acquired 100% of a company by issuing 20,000 shares of your common stock. The finalized price per share was $40 per share, the average selling price per share was $36 and there was a par value of $10 per share

How would you record the investment ?

Answer 21

Investment 800,000 (DR) 20,000 x 40per share
Common stock 200,000 (CR) 20,000 x 10par value
APIC (additional paid in capital) (CR) 600,000 PLUG

Question 22

Intangible assets are

Answer 22

*Identifiable
*Non-monetary
*Without substance

Examples:
computer software, licenses, trademarks, patents, films, copyrights, and import quotas.

Question 23

Cash-basis accounting

Answer 23

The cash basis of accounting is a bookkeeping method special purpose framework that records revenue and expenses when cash payments are made or received.

Cash Basis:

*Revenues and expenses: cash paid and received
*No non-cash items: AR or accrued revenues, AP or accrual expenses
*No capitalizing assets

Question 24

When there is a change in the reporting entity , how should the change be reported in the financial statements?

Answer 24

• Retrospectively, including note disclosures and application to all prior period financial statements presented

Additional info:
A change in reporting entity is treated similar to a change in accounting principle, meaning its reported retrospectively

Question 25

An overfunded single employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a…..

Answer 25

Noncurrent asset

*It’s a noncurrent asset because, in general, plan assets wouldn’t be liquidated within one year

Question 26

Fair value

Answer 26

Fair value is a market-based measurement, not an entity-specific measurement, and considers risk and restrictions.

Fair Value:

*Market-based measurement
*Most advantageous market
*Instrument-by-instrument basis
*Not entity-specific

Considers:
*Market risk
*Market restrictions

Question 27

SEC Reporting and Deadlines

Answer 27

A 10-K annual report is similar to an audit. Filing deadlines:

• $700mm or more in assets is considered a large accelerated filer: 60 days from the close of the fiscal year
• $75mm or more in assets is considered an accelerated filer: 75 days from the close of the fiscal year
• Less than $75mm in assets and less than $100mm in revenue is considered a small filer: 90 days from the close of the fiscal year

A 10-Q quarterly report is not an audit. It just requires inquiry and analytical procedures. Limited or negative assurance, no opinion. Filing deadlines:

• Large accelerated filer: 40 days of the close of the entity’s fiscal quarter
• Accelerated filer: 40 days of the close of the entity’s fiscal quarter
• Small filer: 45 days of the close of the entity’s fiscal quarter
• An 8-K reports on a major event (i.e., change in CEO, significant merger). Filing deadline: 4 days
• S-1 form is used to register a new public company.

Additional info

When a company solicits shareholder votes, it must file a 14A proxy statement with the SEC before the annual meeting. (14-A proxy is required when soliciting votes)

Question 28

Debt securities overview

Answer 28

Question 29

Debt securities overview continued

Answer 29