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FA3 Liabilities Intermediate > Exam review notes > Flashcards

Exam review notes Flashcards

1
Q

what are income bonds

A

hybrid, bonds that pay interest but only when the company has reported a certain level of earnings or operating cash flow in the year.

  • principal amount is paid at maturity
  • interest depends upon above statement
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2
Q

what are redeemable

A

preferred shares that have to be retired for cash at a certain time
- another hybrid, company can force the shareholder’s to receive the cash

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3
Q

hybrid securities or compound financial instruments

A

are securities that have characteristics of both debt and equity

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4
Q

debt shows up in earnings,

equity shows up in

A

retained earnings not deductible in net income

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5
Q

if a dividends is reported as an expense in earnings, how is it treated for tax purposes

A

the dividend WILL NOT be a tax deductible expense

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6
Q

payments on instruments that legally are debt but in substance are equity will be taxed as

A

tax deductible as interest even if the interest is reported as a deduction from earnings

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7
Q

what is perpetual debt

A

is a loan that never has to be repaid or is highly unlikely ever to be repaid.
there is a stated interest rate for the perpetual debt, and the corporation is obligated to pay the interest regularly, as required by the agreements with the lender

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8
Q

what is forced conversion

A

management can force conversion before maturity if the market price is higher than the conversion price of the shares. the company call the bond for cash redemption

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9
Q

what is convertible debt with a floating conversion price per share

A

convertible debt may be issued where the number of shares to be issued on conversion is not fixed by contract, but rather is based on the market value of the shares on the conversion date. the conversion option has no intrinsic value to the investor. the type of bonds has no equity component and is all debt

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10
Q

what is the accounting treatment for convertible debt

A

a convertible bond with a fixed conversion price per share has elements of both debt and equity. the liability and the equity components are treated separately.

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11
Q

what are stock options

A

give the holder the right, but not the obligation to buy shares at a fixed price at a specific point in time called the exercise date.
- most common form of derivative

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12
Q

why are stock options derivatives

A

because their value is derived solely form the value of the primary equity shares that they can be used to buy

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13
Q

what are warrants

A

another name for stock option

  • stock rights that are issued a sa detachable contract with another security (usually bonds)
  • detachable and trade separately
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14
Q

exercise price is also called the

A

strike price

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15
Q

share base payments to employees what are they

A

common compensation arrangements, which may be equity settled or cash settled
- including stock option plans, stock appreciation rights, phantom stock plans and restricted share units

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16
Q

what is vesting

A

no turning back

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17
Q

when is vesting achieved

A

when the employee is entitled to the compensation, regardless of other conditions

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18
Q

provisions: large lawsuit what do you do

A

use expected value
- 50 legal claims each $10,000 potential claim
30% likely to be no cost= 0
70% likely 10,000 payout
50% certainty
record: (50 x 30% x ) + (50 x 70% x 10,000)
= 350,000

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19
Q

provisions: small population what do you do

A 
use most likely outcome 
 3 legal claims each $100,000
30% chance payout on 1 lawsuit
50% chance payout on 2 lawsuits
20% chance payout on 3 lawsuits
*some payout is certain

most likely is 50%
(2 x100,000) = 200,000
and also consider cumulative probabilities

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20
Q

what is defeasance

A

may be used to engineer derecognition of a bond liability without formally repaying ti
- recognize a gain or loss

bond payable 100,000
premium on bond pay 6000 (remaining balance)
cash (cR) 92,600
gain on defea (cr) 13,4000

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21
Q

issuance of share capital what does this mean

A

of shares authorized
CBCA or articles of incorporation
- record as a memo

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22
Q

no par shares are issued for cash: what are the journal entries

A

cash 102,000

common shares 102,000

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23
Q

shares assigned a $1 par value: what is the journal entry

10,000 shares, cash 102,000

A

cash 102,000
common shares 10,000
contributed capital c.sh 92000

24
Q

what are share issued on a subscriptoion basis

A
  • shareholders sign a contract to purchase so many shares on account
  • called stock subscritpons
  • shares are not issued until fully paid
25
Q

what are the entries for share issued on a stock subscription

A
  1. initial 120 no par c.s subscribed for $40
    stock subscript. receivable c.s 4,800
    stock sub rec-com.shares 4,800
  2. record collection
    cash 1,600
    stock sub rec. c.sh 1,600

c. s subscription 4,800
c. s 4,800

26
Q

issue shares for land whatis the entry

A

land 420,000

share capital - c.s 420,000

27
Q

how do you record a basket sale? what are the methods

A
  1. weighted average or proportional method
  2. incremental method (know all but 1)

cash (dr)
contributed capital c.s (CR)
contributed capital ps (CR)

28
Q

how do you record share issue costs (2 methods)

A
  1. off set method - (More common)
  2. retained earnings method
    • share issue costs are directly to retained earnings
    • reduces common equity but
      - records gross proceeds to share capital account
29
Q

share issue costs offset method

A

entry

30
Q

what is retractable

A

option of shareholder

31
Q

what is callable redeemable

A

option for corp

32
Q

why would a company retire shares

A
  1. to increase EPS
  2. provide cash flow to shareholders in lieu of dividend
  3. acquaire shares that appear to be undervalued
  4. buy out one or more particular sharehodlers and thwart takeover bids
  5. reduce future dividend payouts by reducing the shares outstanding
33
Q

what are debits to retained earnings (decreases)

A
  1. cas and other dividends
  2. stock dividends
  3. share retirement
  4. share issue costs
  5. distributing shares form another co. (spin off)
  6. adjustmetns from hybrids
  7. error correction
  8. effectof change for accounting policy
34
Q

what are credits (increases) to retained earnings

A
  1. earnings (if net loss, debit)

2. removal of deficit in a financial reorganization

35
Q

what is appropriation and restrictions on retained earnings

A

to reduce the amount of retirmed earnings
- reserve

  • appropriation - management decision
    restriction - legal contract or corporate law
36
Q

what are the different dates for dividneds

A
  1. declaration date
  2. record date
  3. ex-dividned date
37
Q

how do you account for declaration date

A
  • announces dividend declaration
  • record as a liability
    dividends payable
38
Q

how do you account for record date

A
  • date the list of sharehodlers of records, who will receive the dividneds is prepared
39
Q

how do you account for ex-dividned date

A
  • invetor (buyer) of shares on or after the ex-didivned date does NOT receive the dividned
  • the day following the record date (some times several days prior to date of record) this is in effect
40
Q

how do you account for cash dividneds (entries)

A
  1. at declrataion date:
    common dividneds declared 5,000
    dividends payable 5,000
  2. at payment date:
    dividneds payable 5,000
    cash 5,000

or

pref dividend payable xx
com. dividend payable xx
cash dividned pay pre xx
cash divid pay c.s xx

41
Q

stock dividends what are they

A
  • proportional distribution to shareholders of additional shares
  • does not change the assets, liabilities or total shareholders’ eqyity of issuing company
    0 simply increases the number of shares outstanding
42
Q

what is a stock split

A

change in the number of shares outstanding

- no change in recorded capital accounts

43
Q

what is a reverse split

A
  • decreases the number of shares
  • proportional reduction in shares
  • increases the avg. book value per share
  • may be used to increase market price of shares
44
Q

what is substance over form

A

substance - how it behaves
form - title
- depends on characteristics

45
Q

tax status of hybrids

A
  • accounting classification does NOT affect the classification of an investment
  • if legally it is debt (title) but in substance it is equity (interest will be tax deductible)
  • if a dividned is reported as an expnse in earnings the dibvidned will NOT be a tax deductible expense
46
Q

when preferred shares are classified as debt, their dividends are

A

reported as financing expense

  • reported on i.s (dexuciton from earnings)
  • NOT reported on SCE as a reduction in retained earnings
47
Q

stock options what are they

A

sharehodlers has the right but not obligated to buy shares at a fixed price at a specified point in time (exercise date)
- most common form of derivatives

48
Q

what are the journal entries for stock options

A

cash 18,000
contributed capital : stock rights 18,000

exercise date:
cash 400,000
contrib. capital 18,000
c. shares 418,000

expiry date:
contr. capital: stock rights 18,000
contributed capital : lapse stock rights 18,000

49
Q

what are warrants

A
  • stock rights issued at a detachable contract with another security (usually a bond)
  • trade separately form the bond
  • may be exercised to acquire additional shares form the corp. or allowed ot lapse on expiration date
  • can be exercised without having to trade in or redeem the debt
  • results in cash paid for shares
50
Q

what are share based payments

A
  • result from transactions in which an entity acquires or receives goods or services
51
Q

what are share based payments to non-employees

A

recognized when service is rendered or goods received

rent expense 1,000
c. shares 1,000

52
Q

what are share bsed payemtns to employes

A

issue date:
admin expense 800
contributed capital: stock rights 800

exercise date:
c ash 7,500
cont. capit stockright 800
c.shares 8,300

expiry

contr. cap stock rights 800
contr. cap: lapse of stockrights 800

53
Q

what are SARS

A

Stock appreicaiton rights

54
Q

what are the 3 main forms of derivatives

A
  1. options
  2. forwards
  3. futures
55
Q

what are options

A

right, but not obligated to buy or sell something in future

56
Q

what are forward contracts

A
  • obligation to buy something in future
  • ie currency
  • fixed amount sell to bank, bank taking on the risk
57
Q

what are future contracts

A
  • obligation to buy in future

- commodities, corn wheat etc

FA3 Liabilities Intermediate (7 decks)

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