F5 Flashcards
How are amounts collected as sales tax by an entity treated?
As a payable by whoever is collecting, no an expense. Only collecting and remitting, which causes a liability.
Explain what an accrued liability/expense is..
An expense that has been incurred but not paid yet.
How should a deferred tax liability that is expected to reverse in the next year be classified?
Deferred Tax Liabilities are always classified as non-current.
If an entity has a loan coming due in the previous year, and refinances after YE but before the FS are issued, what is the treatment?
Report as a long term liability because the company refinanced the liability on a long term basis before issuing the FS.
What is the JE to record an ARO?
DR: Asset Retirement Cost (ARC) - Asset
CR: Asset Retirement Obligation (ARO) - Liab.
What exactly is an ARO? (Asset retirement obligation)
Legal obligation to remove certain components of an asset or entire asset when done with intended use. Must be accrued for during asset life.
What is the proper name of an ARO under IFRS?
Decommissioning liability.
What is the proper treatment of asset retirement costs?
Capitalize and add to carrying value of the asset. Gets depreciated along with asset.
ARO’s are initially recorded at PV, what is the difference between the PV discounted amount today and the value when it fully matures?
Accretion expense. Accretion (int. exp) will bring the liability up toward the maturing value during the life of the ARO.
ARO increases with accretion.
ARC decreases with depreciation.
What is the JE to record accretion?
DR: Accretion Expense (int.)
CR: ARO (increasing to maturity)
What is the JE to record depreciation on the ARC?
DR: Depreciation Exp.
CR: Accumulated Deprecation (ARC) - decreases
An entity sells machines that it includes warranties on, when should the warranty liability be recorded?
At the time of sale.
If an entity has a gain contingency for $5,000,000 - $10,000,000 and is highly probable, what is the treatment?
No JE recorded for gain contingencies (rule of conservatism).
An entity may disclose the range of the gain contingency in the notes.
If an entity has a loss contingency that is reasonably possible, what is the treatment?
Disclose, but do not record a JE.
Under U.S GAAP, if an entity discovers a loss contingency that is likely to occur within a certain range, what is the treatment?
Record the minimum of the range under U.S GAAP. (if no amount in the range is a better estimate)
Under IFRS, if an entity discovers a loss contingency tht is likely to occur within a certain range, what is the treatment?
Record the midpoint of the range.
What is an appropriation of retained earnings?
Reserved for something, not passed on to the shareholders. “off limits”
What is the difference between an ordinary annuity and an annuity due?
An ordinary annuity receives payment at the end of a period, an annuity due receives payment immediately in the beginning of the period.
If an entity needs to accumulated $1,000,000 in 10 years, what PV factor should they be using to figure out how much they should deposit at the beginning of each period?
PV of an annuity due for 10 periods @ stated int. rate.
When would you use the present/future value of any annuity?
When there are multiple equal cash flows.
When would you use the present/future value of $1?
When there is a single lump sum.
If an entity receives a non-interest-bearing note for $10,000 @ 8% for nine months, what should be reported on the balance sheet for the note if the present value of $1 due in nine months at 8% is .944?
Since the note is less than a year in term, it should be reported at the face amount for $10,000.
If it were a note longer than a year in term it must be reported at the present value of the obligation using the market rate interest.
If the market rate of interest is lower than the stated (coupon) rate, is the bond selling at a premium or discount?
Premium (Gain)
Collected more than the Face Value.
If the market rate of interest is higher than the stated (coupon) rate, is the bond selling at a premium or discount?
Discount (Loss)
Collected less than the Face Value.
In bond transactions, who is the “bondholder”?
The investor, lender.
Who is the issuer of the bond?
The borrower.
How are zero coupon bonds treated?
Since there is no stated interest rate, still must accrue for interest quarterly. (Think non-interest bearing notes)
What are payments made prior to maturity on a bond called?
Interest.
What are payments made @ maturity on a bond called?
Principal pmts.
Different than a bond, when periodic payments are made on Notes Payable, what is the treatment for those payments?
Must be allocated between interest & principal.
What is the normal face amount of bonds?
$1,000
If a bond is trading at 97%, what price is it trading @?
102%?
$970 (1,000 * .97)
$1,020 (1,000 * 1.02)
When a premium or discount exists, conceptually, what does that mean?
That the stated rate of the bond does not equal the market rate.
How do you determine the selling price of a bond?
Dictated by the market rate
PV of principal + PV of interest
If a bond is issued at Par value, what does that mean?
The coupon rate = the market rate.
Cash received = Interest Expense
What rate is used when finding the PV factors to use?
MARKET RATE.
DO NOT USE COUPON RATE TO FIND PV FACTORS.
Why do you need the coupon rate for bond questions?
To calculate the coupon payment, and then get the PV of those payments to determine the selling price of the bond:
PV principal + PV interset (coupon pmts) = Selling Price
Coupon rate will equal int. paid on S of CF.
Why do you need the market rate for bond questions?
To determine which PV factors to use to calculate the selling price of the bond.
Market rate will equal the int. exp on the income stmt.
If a bond is issued at a discount, who is the loss towards, and why?
Loss to the issuer, they are selling the bond at a stated (coupon) rate that is lower than the market rate.
If a bond is issued at a premium, who is the gain towards, and why?
Gain to the issuer, they are selling the bond at a stated (coupon) rate that is higher than the market rate.
In terms of the interest paid & int. exp, what is the relationship () is the bond is issued at a discount?
Int. exp > Int. paid
In terms of the interest paid & int. exp, what is the relationship () is the bond is issued at a premium?
Int. exp < Int. paid
Briefly explain why you need the following to determine the selling price of a bond:
a. ) coupon rate
b. ) market rate
a.) Coupon Rate - To determine the coupon pmt.
Once you have the coupon pmt, multiply that by the correct PV factor to get PV of interest pmts.
b.) Market Rate - To determine the PV factors used
Once you know the amount of periods and market rate used, determine which PV factors to use to determine the selling price of the bond (PV princ + PV int.)
How do you find the discount / premium of a bond once you determine the selling price?
Face value
(Less) Selling Price
Equals = Premium / Discount
If SP higher than face = premium
If SP lower than face = discount
When trying to find the PV factors to use, what interest rate do we use?
Market rate of interest.
To solve a bond problem, why would you need a PV factor to find the PV of $1?
To find PV of the principal.
To solve a bond problem, why would you need a PV factor of an annuity of $1?
To find PV of coupon pmts (interest).
What is the presentation on the balance sheet for a bond issuer who sells a bond at a premium?
Bond Face
+ Unamortized Premium
Equals= Initial Carrying Value
Initial CV must equal cash proceeds
Which interest rate regarding bonds is synonomous to the “effective interest rate”
Market rate - determines SP of bond.
What is the presentation on the balance sheet for a bond issuer who sells a bond at a discount?
Bond Face
(Unamortized Discount)
Equals= Initial Carrying Value
Initial CV must equal cash proceeds
As a discount is amortized on a bond over time, what happens to the carrying value of the bond?
Pulled up towards par.
As a premium is amortized on a bond over time, what happens to the carrying value of the bond?
Pulled down towards par.
When a bond is selling at a discount, what amount will it eventually mature to?
Bonds always mature at Par (FACE) value.
As a discount is amortized, does it increase or decrease interest expense?
Increases interest expense as it is amortized (built in loss).
As a premium is amortized, does it increase or decrease interest expense?
Reduces interest expense as it is amortized (built in gain).
How should bond issuance costs (legal fees, accounting fees, underwriting, etc) be treated at the time of issuance?
As a reduction to the CV of the bond.
```
Bond Face
Bond issuance costs
+Premium
(Discount)
Equal = CV
~~~
What is the JE for a bondholder at the bond issuance date?
DR: Investment in Bonds $ (bond SP)
CR: Cash $ (bond SP)
What is the JE for a bond issuer at the bond issuance date to record a bond with a discount?
DR: Cash $ (received)
DR: Bond Discount $ (diff of SP to Face)
CR: Bond Payable (@ FACE)
What is the JE for a bond issuer at the bond issuance date to record a bond with a premium?
DR: Cash $ recieved
CR: Premium on Bond $ (diff of Face and SP)
CR: B/P $ (FACE)
What is the JE for a bondholder at the bond issuance date to record a bond at a discount?
DR: Investment in Bonds $
CR: Cash $
*Same JE for bondholder no matter if it’s a premium or a discount.
What is the treatment for deferred bond issuance costs and what are they?
Expenses paid for in advance (like a prepaid), treat as an asset:
DR: Deferred Bond Issuance Costs
CR: Cash
Reversed out when the bond is actually issued.
DR: Cash
DR: Discount on bond
CR: Bond Payable
CR: Deferred Bond Issuance Costs
Are debenture bonds secured or unsecured?
Unsecured (no collateral)
What is a serial bond?
Bond maturing at multiple different dates.
No matter what the circumstances, what does the issuer of a bond credit as bond payable for? (what amount)
Face value of the bond.
The carrying value will be affected by either adding a premium or subtracting a discount.
What kind of bond matures in installments?
Serial bonds.
Which costs should be amortized over the term of the bond as “bond issuance costs”?
All costs associated with the issuance:
Accounting Fees Legal Fees Promotion Costs Underwriters Commission Engraving & Printing Etc.
What is the amortization period for a premium/discount of a bond?
The term that the bond is outstanding.
from date the bonds are SOLD, not from when they are DATED
Is straight line amortization GAAP for bond premium/discounts?
Not GAAP, but allowed under GAAP if not materially different from effective interest method.
Is the straight line method of amortizing a discount/premium of a bond allowed under IFRS?
Not allowed under IFRS.
Must use effective interest method.
How do you calculate Interest expense on a bond? And what components might affect it’s increase or decrease?
Face Value X Stated (coupon) Rate = Interest Exp.
*Coupon Pmt
Increases or decreases from the amortization of a premium or a discount.
A premium lowers interest expense.
A discount increases interest expense.
Bond issuance costs increase interest expense.
On the investor’s side, how does an amortization of a premium or discount affect the interest income?
A premium will decrease the interest income and the investment in the bonds.
DR: Cash $ (coupon pmt)
CR: Investment in Bonds $ (pulled down to par)
CR: Interest Income $ (decreased)
A discount will increase the interest income and the investment in the bonds.
DR: Cash $ (coupon pmt)
DR: Investment in Bonds $ (pulling up to par)
CR: Interest Income $ (increased)
What should total amortization equal once the bond matures?
Full amount of either the premium or discount to make CV = Face w/o a premium or discount.
How do you determine how much to amortize off of a premium or discount of a bond using the effective interest method?
CV of the bond * Market Rate @ issuance
What is the difference between the Straight line amortization method of bonds and the effective interest method?
The straight line method is a constant $ amount that is amortized @ each payment.
The efffective interest method is a constant RATE that is amortized @ each payment (CV * mkt rate)
Under the effective interest method, the CV of the bond changes during each period. Therefore, the $ amount of amortization changes, but the rate stays the same.
When factoring in bond issuance costs to the amortization of a premium or discount, what (if any) is the difference between interest expense booked by the borrower and interest revenue booked by the investor when using the effective interest method?
The borrower will have a different effective market rate when factoring the bond issuance costs in.
The investor will have the same market rate as stated in the question, since they have no obligation to account for the bond issuance costs (they didn’t issue the bonds..duh)
This is the only situation when interest expense and interest revenue won’t agree.
What is unique about a bond selling in between interest dates?
Must accrue for interest (actual cash = Coupon pmt) @ the time of sale.
DR: Cash $
DR: Discount on B/P $
CR: B/P $
CR: Bond int payable (accrued) $
When extinguishment of a bond happens before maturity, is the G/L considered extraordinary?
NOTHING is “extraordinary” anymore.
When a bond still has unamortized discount within the CV, and it is extinguished early, what is the treatment?
Loss in continuing operations.
You were supposed to amortize the discount slowly through int. exp on the income statement, since you didn’t get a chance to do that you have to take a loss all in one shot now.
When there is a trouble debt restructuring happening, and a transfer of assets occurs to satisfy, do you calculate G/L for the debtor based on their carrying value of the asset, or the fair value?
Step 1: Recognize G/L on asset by comparing BV to FV
Step 2: Recognize G/L on trouble debt restructuring by comparing debt relieved to FV of assets transferred.
