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FAR > F4 > Flashcards

F4 Flashcards

1
Q

If short-term debt is expected to be refinanced, what is is classified as?

A

Long-term debt to the extent of post-balance sheet refinancing

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2
Q

If the terms of a deferred compensation agreement attribute all or a portion of expected future benefits to a period of service greater than one year, how are the cost benefits recognized?

A

The cost of benefit should be recognized over the required service period

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3
Q

How is sales tax collected?

A

Sales tax is collected from the customer by the company and recorded as a liability until it is remitted to the government. Not revenue of the collecting company

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4
Q

When does an asset retirement obligation (ARO) exist?

A

When an asset is constructed and there are legal requirements to incur removal-type costs related to the construction

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5
Q

When is a liability recorded for an ARO?

A

When the asset is put into service

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6
Q

What is the liability of an ARO valued at?

A

The present value of the future obligation

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7
Q

What effect does an ARO have on the asset?

A

It increases the value of the asset and depreciation expense will be recorded over the life of the asset

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8
Q

What conditions need to be met for the accrual of vacations?

A
  1. The employer’s obligations to compensate employees for accrued vacations is attributable to services already rendered
  2. The obligation relates to rights that vest or accumulate
  3. Payment of the compensation is probable
  4. The amount can be reasonably estimated
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9
Q

Exit and disposal costs

A
  • Involuntary termination benefits
  • Cost to terminate a contract is not a lease
  • Cost to consolidate facilities
  • Cost to relocate employees
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10
Q

What is the criteria for exit and disposal activity to be recognized as a liability?

A
  1. An obligating event occurred
  2. The event results in a present obligation to transfer assets or to provide services in the future
  3. The entity has little or no discretion to avoid the future transfer of assets or providing of services
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11
Q

How are costs associated with exit or disposal activity reported?

A
  • If related to discontinued operations, reported in discontinued operations
  • If not related to discontinued operations, reported in income from continuing operations
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12
Q

What is accretion expense?

A

The increase in the ARO liability due to the passage of time calculated using the appropriate accretion rate

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13
Q

How is accretion expense recorded?

A

It is added to the liability of the ARO each period

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14
Q

What is represented by the sum of cumulative accretion expense and cumulative depreciation expense?

A

The value of the asset retirement obligation

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15
Q

What is a contingency?

A

A existing situation, condition, or set of circumstances involving uncertainty about a possible gain or loss that will ultimately be resolved when future events occur or fail to occur

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16
Q

What conditions need to be met for a loss contingency to be accrued ?

A
  1. It is probable that as of the date of the financial statements an asset has been impaired or a liability incurred based on info prior to financial statement issuance
  2. The amount of loss can be reasonably estimated
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17
Q

How are gain contingencies recognized?

A

Gain contingencies should be disclosed in the notes unless the likelihood of the gain being realized is remote. The full range of possible settlements should be disclosed.

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18
Q

If there is an estimated range of contingency loss, what amount is accured?

A

The best estimate of the loss should be accrued. If no amount is a better estimate than any other, the minimum amount of the range should be accrued and an note disclosing the possibility of the upper range should be disclosed

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19
Q

What should the disclosure of a reasonably possible contingency loss include?

A
  1. The nature of the contingency
  2. An estimate of the possible loss or range of loss or a statement that an estimate cannot be made
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20
Q

If a loss contingency is remote, when should a dislosure be made?

A

For guarantee type remote loss contingencies

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21
Q

What is appropriation of retained earnings?

A

Setting aside a portion of retained earnings for a specific purpose. Does not reduce total retained earnings but instead marks part of the funds as unavailable for dividends and other uses

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22
Q

Why are premiums and warranties generally accrued as a loss contingency?

A

Because they are probable and reasonably estimated

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23
Q

How are premiums recorded?

A

Charged to sales in the periods that benefit from the premium offer

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24
Q

What amount of a warranty should be accrued in the year of sale?

A

The entire amount to match the cost with the corresponding revenue

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25
Q

If the market price of goods drops after a contract is signed to purchase materials in the following year, what amount should be recognized as a liability?

A

The amount committed to the purchase less the new market value

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26
Q

What is an annuity?

A

Transactions that result in identical periodic payment or receipts at regular intervals

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27
Q

When are ordinary annuity payments made?

A

End of the period

28
Q

When are annuity due payments made?

A

Beginning of the period

29
Q

What is the present value of $1

A

The amount that must be invested now at a specific interest rate so that $1 can be paid or received in the future

30
Q

Present value formula

A

Future value/(1+r)^n

31
Q

What is the future value of $1

A

The amount that would accumulate at a future point if $1 was invested now

32
Q

Future value formula

A

Present value*(1+r)^n

33
Q

What is the present value of an ordinary annuity?

A

Current worth of a series of identical periodic payments to be made in the future

34
Q

Present value of ordinary annuity

A

Annuity payment*PV ordinary annuity of $1

35
Q

What is the present value of an annuity due?

A

Current worth of a series of identical periodic payments to be made in the future, the same as present value of ordinary annuity. The only difference is that for an annuity due, the payment occurs at the beginning of the period

36
Q

Present value of annuity due formula

A

Present value of ordinary annuity*(1+r)

37
Q

Future value of an ordinary annuity

A

Value at a future date of a series of periodic payments

38
Q

Future value of an ordinary annuity formula

A

Periodic payment*Future value of an ordinary annuity

39
Q

What value are notes payable recorded as?

A

Present value at the date of issuance

40
Q

When is a note payable recorded at face value without any present value consideration?

A

When no rights or privileges are attached and the interest on the note reflects prevailing interest rates

41
Q

What is the effective interest method

A

Method in which each payment on the notes is allocated to interest and principal as though the note had a constant stated rate of interest

42
Q

How is the carrying value of a note payable reported on the balance sheet?

A

As the value of the note payable plus the discount because it is inseparable from the related note

43
Q

Why do creditors use debt covenants in lending agreements?

A

To protect their interest by limiting or prohibiting the actions of debtors that might negatively affect the positions of the creditors

44
Q

When happens when a debt covenant is violated?

A

The debtor is in technical default and the creditor can demand repayment

45
Q

When are bonds issued at face (par) value?

A

When the stated rate of interest and market rate of interest are equal

46
Q

What is the stated (nominal or coupon) interest rate of a bond?

A

The interest to be paid to the investors in cash

47
Q

What is the market (effective) interest rate of a bond?

A

Rate of interest actually earned by bondholders and is the rate of return for comparable contracts on the date the bond is issued?

48
Q

When is there a discount on a bond?

A

Market rate>stated rate

Bonds sell less than the face amount to make up for the lower return being provided

49
Q

When is there a premium on a bond?

A

Market rate<stated rate

Investors will pay more than face value due to higher return offered

50
Q

What is a bond?

A

A contractual promise by the issuing corporation to pay investors (bondholders) a specific sum of money at a designated maturity date plus periodic, fixed interest payments

51
Q

How should bonds payable be recorded?

A

At face value and adjusted to the present value of their future cash outflows by either subtracting unamortized discounts or adding unamortized premiums

52
Q

How is bond interest calculated?

A

Coupon rate*face value

53
Q

Journal entry to record bond issuance for the borrower when the bond is issued at a discount

A

Dr. Cash
Dr. Discount on bond payable
Cr. Bond payable

54
Q

Journal entry to record bond issuance for the investor when the bond is issued at a discount

A

Dr. Investment in bonds
Cr. Cash

55
Q

Journal entry to record bond issuance for the borrower when the bond is issued at a premium

A

Dr. Cash
Cr. Premium on bond payable
Cr. Bond payable

56
Q

Journal entry to record bond issuance for the investor when the bond is issued at a premium

A

Dr. Investment in bonds
Cr. Cash

57
Q

What is an unamortized bond discount?

A

Contra-account to bond payable that is a direct reduction from the face (par) value of the bond to arrive at the carrying amount of the bond

58
Q

What does bond discount represent?

A

Additional interest to be paid to investors at the bond maturity

59
Q

What is amortization of bond discount?

A

The amount added to the amount of cash paid at the stated rate to obtain interest expense

60
Q

What is an unamortized bond premium?

A

Direct additional to the face (par) value of the bond to arrive at the bonds carrying value

61
Q

What is amortization of bond premium?

A

The amount subtracted from the amount of cash paid at the stated rate to obtain interest expense

62
Q

How to get amortization of bond?

A

Take the difference between the effective interest expense and the annual interest payment

63
Q

How to find annual interest payment on bond?

A

Coupon rate*face amount

64
Q

How to find effective interest expense on a bond?

A

PV of bond*market rate

65
Q

If bonds are sold with detachable common warrants, how should each component be valued?

A

The issue price of the bonds and warrants together should be allocated based on each components fair value on the issuance date

66
Q

How are bond issuance costs treated?

A

Bond issuance costs are deducted from the carrying value of the liability and included in the entry to bond discount upon issuance

67
Q
A

FAR (6 decks)

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