CRAM W2

Question 1

What is the central characteristic of a joint venture?

Answer 1

Shared control; not likely for one party to have unilateral control.

Question 2

What method is least likely to be used to account for a joint venture?

Answer 2

FV method generally n/a because it is unlikely that a readily determinable value is available.

Question 3

How are the initial investments into a joint venture accounted for?

Answer 3

Investments of assets (equipment and other property) should be accounted for at BV, NOT FV.

Question 4

Under IFRS, how is the G/L on an investment in a joint venture determined?

Answer 4

G/L should be determined for the share of ownership held by the investor (likely 50%) attributable to the excess of FV over CV.

Question 5

Under the equity method of accounting, are investments adjusted to FV at YE?

Answer 5

No. Equity method investments are never adjusted to FV, and no unrealized G/L’s are recognized.

Question 6

How does an investor report stock rights in the YE Balance Sheet?

Answer 6

FV of rights/[current market value of orig. purch+FV of rights]*BB of investment

Question 7

Under IFRS is it possible for a portion of a building to be considered/reported as investment property, while the other portion of the property is not?

Answer 7

Yes.

Question 8

Under IFRS, what methods are allowed for reporting investments?

Answer 8

Cost and FV - Equity method is disallowed.

Question 9

Under IFRS, when the cost method is used to account for an investment property, what disclosure is also required?

Answer 9

FV info is required.

Question 10

If a rental lease is signed requiring first and last month’s rent and a deposit that is rarely returned in full (and the amount deducted from deposit can be estimated), what amount is recorded as deferred rental revenue at YE?

Answer 10

The last month’s rent and the full security deposit is recorded as deferred revenue @ YE. Even though the amount generally deducted from the deposit can be estimated, the damages associated cannot be anticipated.

Question 11

What is the cash surrender value of a life insurance policy, and how does this figure affect the accounting for the revenue, asset, and expenses associated?

Answer 11

CSV is an asset built up/recorded over time that reduces insurance expense. To properly calculate insurance expense for a period, the change in CSV must be considered. Revenue to be recognized from payment of a life insurance policy is the proceeds less the CSV.

Question 12

If an intangible asset can be renewed indefinitely, how is amortization recorded?

Answer 12

When an intangible can be renewed indefinitely and the co. has the positive intent and ability to renew continuously, the asset is instead tested for impairment annually.

Question 13

What is another way to define an indefinite life intangible?

Answer 13

If cash flows are expected to be generated indefinitely, the asset qualifies as an indefinite life intangible and is not subject to amortization.

Question 14

Is a customer list considered/recorded as an asset? If yes, how is amortization handled?

Answer 14

Yes; it is a definite life intangible that is amortized and tested for impairment based on the recoverable cost test.

Question 15

What is the 2 step process required for GW impairment analysis?

Answer 15

1. Is CV greater than the FV of the reporting unit?
2. Determine the implied value of GW and calculate the loss.
   * Implied Value is diff between FV of the unit and FV of its assets and liabilities.

Question 16

What is the main criteria required for an asset to be considered an intangible under IFRS?

Answer 16

The item is identifiable and lacks physical substance.

Question 17

Under IFRS, when can an entity use the revaluation model for subsequent measurement of an intangible?

Answer 17

When an active market exists for the asset.

Question 18

When is recovery of of a previously recognized impairment loss allowed, under IFRS?

Answer 18

Whenever events and circumstances change, a previously recognized loss may be recovered.

Question 19

The IFRS test for asset impairment involves comparing the CV of the intangible to the recoverable amount. What is the recoverable amount?

Answer 19

The greater of FV less cost to sell or value in use.

Question 20

What is a balloon note and how is it classified in the Balance Sheet?

Answer 20

A note that does not fully amortize over the life of the loan. Thus, the entire balance of such a note is considered a long-term debt.

Question 21

How does interest earned affect an escrow liability?

Answer 21

As the holder of funds for a mortgage company, the interest that is accrued on the escrow account increases the liability. It is money earned on the deposited funds that are still owed to the owner of the account.

Question 22

What is included in a firm’s account for payroll tax liability?

Answer 22

The sum of income tax withheld, applicable FICA, and any other provided tax rates. The key is not to forget to include the amount withheld - that is a liability to the firm.

Question 23

In the event of a short term NP that incurs a loan origination fee in addition to stated interest, is the effective rate equal to the % of the origination fee + the stated interest %?

Answer 23

No; the origination fee reduces the amount received by the borrower AND increases the interest to be paid by the same amount. The effective rate will be greater than the sum of these 2 rates.

Question 24

When recording a NP, is interest expense/payable recorded at the market rate or the stated rate?

Answer 24

Interest expense should reflect the market rate at the date of issuance. If there is a difference from stated rate, a discount or premium should be recorded.
Interest payable is always recorded at the stated rate.

Question 25

When looking at a Bond Payable, what are the different interest rates referenced and needed to determine expense and amortization?

Answer 25

Coupon/Stated Rate - Determines cash interest paid

Effective/Market Rate - for interest expense and bond price

Question 26

How is the issue price of a Bond Payable calculated?

Answer 26

Issue Price = PV of all future pmts discounted at the yield rate given. (This would be the PV of FV, discounted at yield rate + PV of interest payments at the stated rate, discounted at yield rate)

Question 27

What are the headings in the amortization schedule for Bond Payable?

Answer 27

Interest Pmt (Stated RateFace), Interest Expense (Mkt/Effective RateBB of BP), Amtz of Discount/Premium (Interest Pmt-Interest Exp), Carrying Value of BP

Question 28

What are the 2 common types of bonds?

Answer 28

Term Bonds (registered debenture bonds and collateral trust bonds) and Serial Bonds (subordinated debentures).
Term Bonds mature on a single date, and Serial Bonds mature at regular intervals.

Question 29

If a bond is issued at a discount and the issuer incorrectly amortizes by SLN vs. Eff. Interest, how are Retained Earnings and the Bond Carrying Value affected?

Answer 29

Since SLN amortization results in higher interest expense during the early periods, expense is overstated and RE is understated during that time. The CV of the bond and amtz. of bond discount are smallest during the early periods under Eff. Interest method, and thus the CV is overstated during that time if SLN is used.

Question 30

What are the JE’s for periodic interest payments on a Bond Payable?

Answer 30

Discount:
  Interest Expense xx
      Discount on BP    xx
      Cash or Int Pay     xx
Premium: 
  Interest Expense xx
  Premium on BP   xx
      Cash or Int Pay    xx

Question 31

What are some of the exam tricks with a Bond that is paid semi-annually?

Answer 31

In order to calculate PV, important to note half of rates given and double periods for factors provided.

Question 32

How is the amount received from bond issuance calculated when issued between interest dates?

Answer 32

The accrued interest is ADDED to the bond issue price because the full interest amount is paid on the contracted date-that total never changes.

Question 33

The FASB Statement No. 109, Accounting for Income Taxes, justifies determining periodic deferred tax expense based on what concept?

Answer 33

Recognition of assets/liabilities: the deferred tax expense is the net change in the deferred accounts for the year.

Question 34

What is a deferred tax liability? What are some examples of a DTL?

Answer 34

DTL: Future tax effect of future taxable temporary differences. Increase in pre-paids, increase in rent rec’bl, installment sales, contractor’s accounting (% vs. completed) and depreciation are some examples.

Question 35

Is Goodwill treated differently in FS vs. tax return for an entity?

Answer 35

GW is amortized for tax purposes and tested for impairment under GAAP - a temporary DTL.

Question 36

What is the book/tax difference for bad debt expenses?

Answer 36

IRC requires direct write-off, and bad debts are not deducted from taxable income until the debt is written off. Generally results in a DTA.

Question 37

What are the indicators and examples of a DTA?

Answer 37

When income is recognized in tax return before FS (cash basis vs. accrual), a DTA (prepaid tax benefit) exists. Some examples include unearned revenues, bad debt expense, estimated warranty, start-up expenses.

Question 38

What is the relationship between DTA/DTL accounts and NOL’s?

Answer 38

The amount recorded in a DTA/DTL is net of taxes. An NOL is recorded as a DTA, but when it is applied to reduce taxable income, the entire amount is applied.
IE, an NOL of $20k recorded when tax rates were 30% would be a DTA of $6k. When applied as a carry-forward in the following year, income of up to $20k can be eliminated per the NOL benefit.

Question 39

What disclosures are required in the FS’ for deferred taxes?

Answer 39

Disclosures regarding 1. types and amounts of existing temporary differences and 2. the nature and amount of each type of operating loss and tax credit carry-forward.