F-10 2013

Question 1

Define fair value.

Answer 1

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

Question 2

Describe the valuation technique that can be used to measure the fair value of an asset or liability.

Answer 2

1. Market Approach–Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value. 2. Income Approach–Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities. 3. Cost Approach–Uses current replacement cost to measure the fair value of assets.

Question 3

Describe the hierarchy of fair value inputs. Which inputs have the highest priority?

Answer 3

1. Level 1 Inputs–Quoted prices in active markets for identical assets or liabilities. 2. Level 2 Inputs– Inputs other than quoted market prices that are directly or indirectly observeable for an asset or liability. 3. Level 3 Inputs– Unobservable inputs for the asset or liability that reflect the entities assumptions and are based on the best available information. Note: Level 1 inputes have the highest priority.

Question 4

In creating a new partnership interest with an investment of additional capital, what three methods can be used?

Answer 4

Exact method, Bonus method, Goodwill method.

Question 5

Describe the exact method of creating a new partnership interest with an investment of additional capital.

Answer 5

The purcahse price equals the book value of the capital account purchased. No adjustment to the existing partners’ capital accounts. No goodwill or bonus.

Question 6

Describe the bonus methodof creating a new partnership interest with an investment of additional capital.

Answer 6

Bonus Method: New partner’s capital account = (A + B + C) x C’s percentage ownership. Excess of new partner’s contribution over capital interest received is a bonus to the old partners. Excess of capital interest received over new partner’s contribution is a bonus to the new partner.

Question 7

Describe the goodwill method of creating a new partnership interst with an investment of additional capital.

Answer 7

Goodwill is recognized based on the total value of the partnership implied by the new partner’s contribution. Goodwill is shared by the existing partners using the agreed profit/loss ratio.

Question 8

Describe the bonus method of withdrawal of a partner.

Answer 8

The difference between the balance of the withdrawing partner’s capital account and the amount that person is paid is the amount of the bonus. The bonus is allocated among the remaining partners’ capital accounts in accordance with their remaining profit and loss ratios.

Question 9

Describe the goodwill method of withdrawal of a partner.

Answer 9

The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios. After allocating goodwill, the balance in the withdrawing partner’s capital account should equal the final distribution to the withdrawing partner.

Question 10

In liquiditating a partnership, what is the order of preference?

Answer 10

Creditors, Loans and advances to partners, Capital accounts of partners. Remember that all losses must be provided for before disposal; that is, maximum potential losses before distribution of cash.

Question 11

What is the variable interest entity (VIE)?

Answer 11

A corporation, partnership, trust, LLC, or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks sufficient financial resources to support its activities.

Question 12

Who is the primary beneficiary of a VIE and how does the primary beneficiary account for its VIE investment?

Answer 12

The entity with the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and: 1. Absorbs the expected VIE losses; or 2. Receives the expected VIE residual returns. The primary beneficiary must consolidate the VIE.

Question 13

Who consolidates when one entity receives the expected returns from a VIE and another entity absorbs the expected losses?

Answer 13

The entity that absorbs the expected losses consolidates.

Question 14

Define an asset retirement obligation (ARO)?

Answer 14

A legal oblication associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of a long-lived asset.

Question 15

How is an ARO initially measured?

Answer 15

At fair value (present value of the future obligation) as an asset (asset retirement cost) and a liability (asset retirement obligation).

Question 16

How is an ARO accounted for in periods after initial measurement?

Answer 16

The ARO liability is adjusted for accretion expense and thee ARO asset is depreciated.

Question 17

Name four types of restructuringsinvolving debt.

Answer 17

1. Transfer of assets 2. Transfer of equity interest 3. Modification of terms 4. A combination of above three

Question 18

How is the gain (loss) measured in a troubled debt restructuring involving the modification of terms?

Answer 18

It is the difference between the carrying amount of the obligation prior to restructuring and undiscounted total future cash flows required after restructuring. If undiscounted future cash flows are less than the carrying amount.

Question 19

How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?

Answer 19

Restate the assets transferred to fair value and recognize a gain or loss in ordinary income. Recognize a gain for the difference between the fair value of the assets transferred and the carrying amount of the debt forgiven. The gain is possibly reported as extraordinary under US GAAP if it meets the US GAAP requirements (material, infrequent, and unusual).

Question 20

When is a gain (loss) not recognized on troubled debt restructuring?

Answer 20

For debtor, when there is a modification of terms and payment of the entire debt is not affected. For creditor, when the total cash to be received is greater than the amount receivable. The difference is amortized as interest.

Question 21

When is a loan considered impaired?

Answer 21

Probable that all amounts due (principal and interest) will not be received.

Question 22

How is an impaired loan reported by the creditor?

Answer 22

Present value of the loan’s expected future cash flows discounted at the loan’s effective interest rate. DR Bad debt expense, CR Alloance for credit losses.

Question 23

What are the general disclosures for the debtor in a troubled debt restructuring?

Answer 23

1. A description of the main changes in terms and/or features of settlements. 2. Gain on restructuring of payables (in the aggregate). 3. Net gain or loss on transfers of assets recognized in the period (in the aggregate). 4. Per share amount of the aggregate gain on the restructuring of payables. 5. The amount of contingently payable amounts included in the carrying amount of restructured payables (and any conditions that would cause those amounts to become payable or to be forgiven).

Question 24

What are the general disclosures for the creditors in a troubled debt restructuring?

Answer 24

1. The creditor’s policy for recognizing interest income. 2. Any commitment the creditor has to lend additional funds to the debtor. 3. The activity in the allowance account for the reporting period. 4. The average recorded investment in impaired loans for the period (including the amount of related interest income and the interest income recognized on a cash basis).

Question 25

Identify the three ranges of likelihood that a future event will confirm a contingent liability.

Answer 25

Probably, Reasonably possible, Remote.

Question 26

When are contingent liabilities accrued?

Answer 26

When the loss is both probable and can be reasonably estimated, then record the disclose. Financial statement disclosure only for reasonably possible contingent losses. Remote contingent losses are not disclosed, unless they are “guarantee-type”contingent losses, which must be disclosed.

Question 27

What is the accounting treatment of gain contingencies?

Answer 27

Gain contingencies are not reflected on the balance sheet but are disclosed as to their nature and amount if likelihood is probable and to do so would not be misleading.

Question 28

What is a subsequent even and what are the two categories of subsequent events?

Answer 28

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued. 1. Recognized subsequent events–Provide additional information about conditions that existed at the balance sheet date. 2. Nonrecognized subsequent events–Provide information about conditions that occurred after the balance sheet date and did not exist on the balance on the balance sheet date.

Question 29

What disclosures are required for subsequent events?

Answer 29

1. If an entity is not an SEC filer, the entity must disclose the date through which subsequent events have been evaluated. 2. Nonrecognized subsequent events should be disclosed if disclosure is necessary to keep the financial statements from being misleading.

Question 30

List the disclosure requirement for financial instruments under US GAAP.

Answer 30

Fair value and related carrying amounts, Concentrations of credit risk, Market risk (optional)

Question 31

Describe the financial instrument fair value option under US GAAP.

Answer 31

On specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings. The fair value option is irrevocable.

Question 32

Define derivative instrument.

Answer 32

A “derivative instrument” is a financail instrument (or other contract) that “derives” its value from the value of some other instrument and has all three of the following characteristics: 1. One or more underlyings and one or more notional amounts or payment provisions (or both); 2. Requires no initial net investment; and, 3. Its terms require or permit a net settlement.

Question 33

Define underlying and notional amount as they relate to a derivative financial instrument.

Answer 33

Underlying: A specified price, rate, or other variable (interest rate, security price, foreign exchange rate, index of prices or rates, etc.) Notional amount: A specified unit of measure (e.g., currency units, shares, bushels, pounds, etc.)

Question 34

Name four common derivative instruments.

Answer 34

Option contracts, Futures contracts, Forward contracts, Swap contracts.

Question 35

Identify the three types of hedge designations.

Answer 35

Fair value hedge, Cash flow hedge, Foreign currency hedge.

Question 36

Describe the accounting for changes in fair value associated with each type of hedge designation.

Answer 36

Fair value hedge: Included in current earnings with gain or loss from change in value of offsetting asset/liability. Cash flow hedge: Effective portion–included in other comprehensive income until cash flows from hedged item are realized. Ineffective portion–included in current earnings. Foreign currency hedge: Fair value hedge–included in current earnings with gain or loss from change in value of offsetting asset/liability. Cash flow hedge–included in other comprehensive income (effective portion). Net investment hedge–included in other comprehensive income, as cumulative translation adjustment.