F4 - Deck 1

Question 1

What are considered costs associated with exit and disposal activities? Related to employees and Leases.

Answer 1

Exit and disposal costs include employee relocation and involuntary termination benefits, as well as non-capital lease termination costs. Costs for retiring fixed assets and capital lease terminations are not included.

Question 2

When does an asset retirement obligation (ARO) exist and how is it recorded?

Answer 2

An ARO exists when there are legal obligations for removal costs of a constructed asset. It’s recorded as a liability at the asset’s service commencement, valued at the present value of the future obligation. The ARO increases the asset’s value and is expensed through depreciation over the asset’s life.

Question 3

How is a change in the value of a liability recognized after the related asset is fully depreciated?

Answer 3

Changes in the value of a liability after full depreciation are recognized in profit or loss when reviewed and adjusted, not only at settlement. These changes are recorded on the income statement, not in other comprehensive income, and apply whether the liability increases or decreases.

Question 4

What is accretion expense in relation to an asset retirement obligation (ARO)?

Answer 4

Accretion expense is the increase in the ARO liability due to the passage of time, calculated as the beginning ARO times the credit-adjusted accretion rate. It is not equal to the ARO itself or the ending carrying value of the asset.

Question 5

When should gain contingencies be disclosed in financial statement notes?

Answer 5

Gain contingencies are disclosed unless realization is remote, with the full range of possible settlements noted. Actual settlements known post-issuance do not affect this requirement.

Question 6

What is required for a ‘reasonably possible’ loss in terms of financial statement disclosure?

Answer 6

For a ‘reasonably possible’ loss, only footnote disclosure is required. No amount is accrued unless the loss is ‘probable.’

Question 7

How should gain contingencies be disclosed and accrued in financial statements?

Answer 7

Gain contingencies should be disclosed with caution to avoid misleading users about the likelihood of realization. They are disclosed unless realization is remote and are not accrued until the transaction generating the gain is completed.

Question 8

How are the likelihood of loss and gain contingencies treated in financial statements?

Answer 8

A ‘reasonably possible’ loss is disclosed in financial statement notes but not accrued. Gain contingencies are not recorded to prevent premature revenue recognition.

Question 9

When are gain contingencies recognized in financial statements?

Answer 9

Gain contingencies are not recognized until the gain is realized. Probable and estimable gain contingencies may be disclosed in the notes, but not recorded. This contrasts with loss contingencies, which are recorded when probable and estimable.

Question 10

What is a loss contingency and what are some examples?

Answer 10

A loss contingency is a possible future loss dependent on uncertain events. Examples include pending litigation, which may require payment if settled.
Receivables sold without recourse, pledged assets, and consigned goods are not loss contingencies.

Question 11

When are contingent liabilities recorded and how is the amount determined?

Answer 11

Contingent liabilities are recorded when they are probable and estimable. If only a range is known, GAAP requires accruing the minimum amount.
The plaintiff’s assertion or the maximum amount of the range is not typically accrued.

Question 12

How is the amount to recognize as a liability for a purchase commitment determined?

Answer 12

The liability for a purchase commitment is the committed purchase amount for the following year minus the new market value at year-end. A liability is recognized if the market value has declined from the committed price.

Question 13

Which of the following methods should a company use to account for a contingent liability when the loss is probable but not reasonably estimated?

Answer 13

The liability should only be disclosed in the notes to the financial statements.

Question 14

How is unearned revenue from coupon sales recognized?

Answer 14

Unearned revenue is recorded at the coupon sales price, which is the cash received. Revenue is earned when coupons are redeemed and matched with the cost of merchandise. The sales price is used because it’s more objective than the retail price of the merchandise.

Question 15

How does the timing of contract signings affect the deferred revenue balance?

Answer 15

Contracts signed earlier in the year increase opportunities for warranty work to be performed by year-end, reducing the deferred revenue balance.
Conversely, contracts signed later result in less warranty work done and a higher deferred revenue balance.

Question 16

How is the installment note receivable balance determined six months after the sale?

Answer 16

The installment note receivable balance is the present value of the remaining monthly payments, discounted at PERCENTAGE.
Early payments are mostly interest, resulting in little principal reduction, so the balance remains over PERCENTAGE of the original price.

Question 17

How are noninterest bearing notes payable reported?

Answer 17

Noninterest bearing notes payable are reported at the present value of future cash flows.

EXAMPLE: The present value of noncurrent future cash flows totaling $950,000 is $418,250, creating a discount on notes payable of $531,750. The present value of the current portion is $50,000.

Question 18

Which of the following is reported as interest expense?

Answer 18

Imputed interest on non-interest bearing notes is reported as interest expense.

Other interest components, such as pension cost interest, interest incurred during construction, and post-retirement healthcare benefits interest, are part of their respective expenses and not reported as interest expense.

Question 19

How should the discount on a note payable be reported on the balance sheet?

Answer 19

The discount on a note payable is reported as a direct reduction from the face amount of the note, showing the note at its present value. It is not a deferred credit or a separate deferred charge.

Question 20

When is interest normally imputed and what is the exception?

Answer 20

Interest is normally imputed for no or low interest rates, except for receivables and payables from normal business transactions with trade terms not exceeding one year, which are recorded at face value.

Question 21

How is a note payable correctly presented on the balance sheet?

Answer 21

A note payable is presented as the face amount less a discount, which is a deduction to the liability calculated at the imputed interest rate.

Question 22

How are financial instruments with characteristics of both liabilities and equity presented according to U.S. GAAP?

Answer 22

Financial instruments that are mandatorily redeemable for assets at a specified date are presented as liabilities, not equity. This obligation is reported on the financial statements as a liability until satisfied, regardless of any equity-like characteristics.