Deck 5

Question 1

What is the JE to record a situation when a tax asset is expected to never be realized in the future?

Answer 1

Income Tax expense XXX
Deferred Tax Valuation XXX

Writing down a deferred tax asset increases (debits) income tax expense and increases (credits) the Deferred Tax Valuation Allowance in the amount that is expected to go unrealized.

Question 2

When calculating underfunded or overfunded amount of a pension plan you take the FV - PBO. How do you determine if its a non-current asset, current liability, or non-current liability?

Answer 2

Underfunded = Liability Overfunded = asset

If it is underfunded, the way you can determine if it is current or non current is to look at the FV and the payments expected to be made in the following year. if the company has payments expected to be paid OVER FV then that portion is current. If no amount of the amount to be paid is over FV the whole thing is noncurrent.

So say you have a plan that is underfunded by 50,000; FV of 200,000, and payments in the next year of 15,000 expected. Because the 15,000 is below the 200,000 of FV, it is all a non current liability. If the amount expected to be paid was 210,000 then 10,000 would be a current liability and 200,000 would be noncurrent.

Question 3

Generally the difference between the fair value of dues or other purchases and the amount transferred is classified as a contribution. When, however, the contributions relate to a major ongoing portion of the operation of the organization, the contribution revenues are displayed gross and the cost of the premium is displayed as fund-raising expense.

Answer 3

b

Question 4

If a finance lease problem asks what the current maturity is at December 31, year 2, its actually asking what the amount would be at December 31, year 3.

Answer 4

b

Question 5

A company prepares its second quarter interim report under GAAP. In preparing the reports, the company will likely do what?

Answer 5

Prepare the interim report with less due diligence than it would use for the annual report in order to issue it faster.

For interim reports, timeliness is emphasized over reliability. Therefore, the company will make more of an effort to get the reports out faster even if it sacrifices some of the reliability of the data presented.

Question 6

Which items have a separate EPS calculation:

1. Extraordinary items of the period
2. Discontinued Operations
3. Unrealized gains/ losses on AFS securities

Answer 6

Discontinued operations only

Extraordinary items are no longer recognized under U.S. GAAP. Only discontinued operations have separate earnings per share calculations and disclosures. Unrealized gains and losses on available-for-sale securities are part of other comprehensive income. Other comprehensive income items are direct charges to stockholders’ equity and do not affect net income. They have no earnings per share calculations and disclosures.

Question 7

Are not for profits required to produce a statement of functional expenses?

Answer 7

No
All not-for-profit organizations are required to produce a Statement of Financial Position, a Statement of Activities and a Statement of Cash Flows. Not-for-profit organizations do not produce a Statement of Functional Expenses.

Question 8

How do you calculate pension expense?

Answer 8

+Service Cost
+Interest Cost
-Return on Plan assets
=Pension expense

Question 9

What are examples of exit and disposal activities?

Answer 9

• Cost to relocate employees
• Benefits related to involuntary employee termination
• Costs to terminate contract that is NOT a direct finance lease

(Costs associated with the retirement of a fixed asset is not considered an exit or disposal cost)

Question 10

If London and NY have quoted stock prices of 100 and 105, respectively, and London is the principle market, what is the FV?

Answer 10

100

If one is the principle market, that is the FV amount you use. IF there is no principle market, you use the one that is higher, so NY’s 105 would be the FV

Question 11

What is a key phrase that indicates a company is not for profit?

Answer 11

Voluntary community organization = not for profit

Question 12

Whether the firm uses the direct method or indirect method to determine operating cash flow, the purchase of long-term treasury bonds would be classified as an investing cash outflow activity.

Answer 12

b

Question 13

Governmental units that use modified accrual accounting do not have a profit motive or income statements.

Answer 13

b

Question 14

Government-wide financial statements focus on operational accountability.
Operational accountability takes an economic view that reports on the long-term efficient and effective use of resources.

Answer 14

The focus of government-wide financial statements is the government’s responsibility to report the extent to it has met its operating objectives efficiently and effectively, using all resources available for that purpose, and the extent to which it can continue to meet its objectives for the future.

Question 15

What is reported as supplemental disclosures for cash flow?

Answer 15

When the indirect method is used, a supplemental disclosure of cash paid for interest and income taxes is required.

Question 16

According to the FASB conceptual framework, the process of reporting an item in the FS of an entity is what?

Answer 16

RECOGNITION

Question 17

What are some required disclosures for FV hedge derivatives?

Answer 17

Any portion of gain or loss excluded from the assessment of effectiveness
The effective portion of the hedge
Net gain or loss recognized in the current period

Question 18

When calculating Dilutive EPS, how do you calculate the numerator?

How would you determine if the item is dilutive or anti dilutive?

Answer 18

Net Income + Interest Expense (make sure to subtract tax if the tax rate is given)

You would calculate the Interest expense (less tax) portion and the shares that are convertible and if the earnings per share of that portion is less than the Basic EPS then it is dilutive.

Question 19

Typically you use the PV of the amount you record the lease for to depreciate the equipment and then depreciate it over the shorter of the lease life or the useful life. when would you use the useful life whether its longer or shorter than the lease life?

Answer 19

When there is a bargain purchase option included in the lease. You include the PV of the bargain purchase option to the total price of the equipment and then depreciate it over the useful life of the equipment.

If there is a purchase option, but there is no indication that the leasee will exercise the FV purchase option you use the shorter of the lease term or the item.

Question 20

All of the following distributions to stockholders are considered asset or capital distributions except what:

Stock splits
cash dividends
property distributions
liquidating dividends

Answer 20

Stock splits

A “stock split” increases the number of shares. Only the number of shares changes. The capital stock and retained earnings do not change. It is not considered a capital or asset distribution.

Question 21

When would internal transfers be an expenditure?

Answer 21

General fund owing money to another fund for the following reason:

Transfers between funds do not generally give rise to operating expenditures and revenues. However, an exception is made for quasi-external transactions (one in which the governmental fund acquires a good or service that could have been purchased from an unrelated business enterprise). Routine service charges for utilities is one example of a quasi-external transaction.

Question 22

How are property taxes classifies in a cash flow for an enterprise fund?

Answer 22

As noncapital financing

Noncapital financing activities include borrowing for non capital purposes as well as cash receipts from grants or subsidies, property taxes, etc.

Capital and related financing activities include acquiring and disposing of capital assets, borrowing money for capital acquisitions and repaying amounts borrowed (including interest) as well as capital grants, special assessments levied for capital acquisitions, etc. Property taxes are classified as noncapital financing activity.

Question 23

In a situation where a company guarantees to purchase 600,000 units @ .10 in 3 years under a non-cancellable contract, but they have only purchased 80,000 so far, and then decided to cancel sales of the product, what would be the loss in the current year related to the purchase commitment?

Answer 23

You would record the total known purchase commitment loss:

600,000 - 80,000 (already purchase) = 520,000 left to purchase over the remaining years

520,000 * .10 = 52,000 loss to record in year 1 because the company knows they will have a loss since they cancelled sales of this product

Question 24

How would you determine if there is an impairment loss for an asset group?

Answer 24

If the carrying value of an asset group is greater than its fair value, an impairment loss may need to be recognized. The impairment loss is recognized, however, only if the undiscounted cash flows for the asset group are less than the carrying value. In that case, the amount of the impairment loss is the difference between the carrying value and fair value.

Note that this is a little different than how to determine goodwill impairment:
GAAP = CV - FV, if CV > FV
IFRS = Greater of “CGU’s FV - Cost to sell” OR Value in use (PV of future cash flows) Then you subtract FV from whichever is greater

Question 25

For governmental accounting, capital outlay is classified in capital and related financing section of the cash flows, not the investing section.

Answer 25

b

Question 26

Which of the following is an R&D cost?

Development or improvement of techniques and processes

Market research related to a major product of the company

R&D performed under contracts for others

Answer 26

Development or improvement of techniques and processes

Market research, even though the term contains the word research, is not an R&D cost. And Research and development performed under contract for others is not an R&D cost. The purchaser buying the research and development will be able to expense its expenditures as R&D costs.

Question 27

If a company has a policy where they sell items to a customer and they give the customer an unlimited right of return with the customers obligation to pay the company being contingent on the customer being able to sell the goods. When would you recognize revenue? Even if you know typically the customer only returns 50% of the goods?

Answer 27

You wouldnt recognize revenue of 50% and a refund liability of 50%, you wouldnt recognize any revenue until the customer makes a sale. you can recognize revenue on anything that the customer was able to sell.

Question 28

IF the company has inventory that incurred a loss in the second quarter due to a decline in the market price, but is expected to recover by year end, but then doesnt recover, which quarter would you record the loss?

Answer 28

Fourth Quarter

When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time.

Question 29

In a situation where a company gives cash, stock, and contingent consideration in future periods (years 2 and 3) at an amount noted (but we also know the FV of the contingent consideration) how do you calculate the total consideration transferred?

Answer 29

Cash + Stock + FV of the contingent consideration

Question 30

Multiyear pledges are recorded at their net present value at the date the pledge is made. If any portion of the pledge is paid in the CY it reduces the total net assets with donor restrictions (if the donation is without further restrictions.

Answer 30

b