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FAR Review > F5 > Flashcards

F5 Flashcards

1
Q

How to find sales tax amount when it is lumped together with the total sales revenue? (Formula)

A

Total Sales Revenue Credits/(1+Sales Tax Rate) = JUST Sales Revenue
Then take just the sales revenue and multiply by sales tax rate to get actual sales tax

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2
Q

Are Dividends in Arrears a Current Liability?

A

NO

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3
Q

What rate do we use to calculate accretion (aka. Interest) expense?

A

The credit-adjusted rate

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4
Q

How does maintenance expense and interest earned affect the escrow account?

A

Maintenance expense = decrease

Interest = increase

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5
Q

How do leftover vacation days and sick days work?

A

Vacation days are paid if accumulated or vested

Sick days are only paid if VESTED

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6
Q

How to recognize expense from deferred compensation?

A

If terms of deferred compensation > 1 year then evenly allocate the expense over the TERM PERIOD.

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7
Q

How to recognize a purchase discount journal entry?

A

CREDIT to add, DEBIT to remove

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8
Q

Difference between gross trade payable method and net method?

A

Gross method = only recognize purchase discount as it happens
Net Method = recognize from beginning, then remove if necessary

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9
Q

Which payroll taxes apply to both employees/employers and which applies only to employer?

A

FICA/MEDICARE = both have to pay

Unemployment tax = only employer pays

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10
Q

Journal entries for ARO problems

Also called, decommissioning liability under IFRS

A

1) Recognize ARO at FV (discounted CF)
ARC (Asset) XX
ARO (Liability) XX
2) Record accretion (interest) expense
Initial PV of ARO * Credit Adjusted Rate
Accretion Expense XX
ARO XX
3) Record Depreciation Expense
Initial PV of ARC/Depreciation rate
Depreciation Expense XX
Accumulated Depreciation XX

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11
Q

Total ARO expense is equal to ____ + ____?

A

Total Accumulated Depreciation + Total Accretion Expense

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12
Q

How does depreciation and accretion expense affect the ARO/ARC?

A

Depreciation = Decreases ARC

Accretion (Interest) = Increases the ARO (Liability!)

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13
Q

JE for ARO when you pay for disposal/dismantle

A

Remove the total cost of the ARO (total accretion +dep), remove cash/AP for cost of dismantle, recognize rest as expense.
ARO XX
Expense XX
Cash/AP XX

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14
Q

Basic rule for recording a contingent liability

A

Must be PROBABLE and be able to be REASONABLY ESTIMATED
If it is reasonably possible or remote, never record a JE, but need to disclose information for reasonably possible and in some instances for remote cases.

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15
Q

Rule for contingent gains

A

Contingent gains are not recorded until they are absolutely going to be actually earned

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16
Q

How to record warranty expenses?

A

1) Record the estimated TOTAL warranty liability for each year (total % of warranty exp *sales)
Warranty Expense XX
Warranty Liability XX
2) Record the ACTUAL warranty expenses for each year
Actual Warranty Exp XX
Inventory XX
Balance in liability account = Total estimated warranty exp - total actual warranty expenses

**PAY ATTENTION: IF PROBLEM ASKING FOR WARRANTY EXP or WARRANTY LIABILITY BALANCE!!

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17
Q

How to solve for coupon liability?

A

Estimated amount of coupons to be collected
- Amount actually collected
= Leftover liability amount * coupon value

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18
Q

How does change in the estimate of the warranty expense percentage affect future years?

A

Adjust for changes PROSPECTIVELY.

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19
Q

How to solve for PV of $1 and FV of $1? (AKA, 1 single lump sum payment)

A 
FV = PV*(1+r)^n
PV = FV/(1+r)^n
OR
If the problem gives you the PV and FV factors, simply multiply each one by the factor. 
FV = PV * FV factor
PV = FV * PV factor
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20
Q

How to convert PV factor and FV factor interchangably?

A

Take 1/PV to get FV and vice versa

21
Q

How to solve for PV of Ordinary Annuity and PV of Annuity Due?

A

PV of Ordinary Annuity = PV of PMT * PVOA Factor
PV of Annuity Due = PVOA Factor * (1+r)
0r PV of PMT * PVAD Factor
**IMPORTANT: PVOA of current period 2 + 1 = PV annuity due factor for 3 periods

PV AD for 3 periods = PVOA for 2 periods + 1

22
Q

Imputed interest for notes payable problems

A

Even if the notes payable says zero interest, still need to amortize the interest evenly over the life of the note.

Regardless what type of problem, the total discount or premium is always the difference between the original FACE VALUE and the PV of the asset/note whatever. from there, figure out how much is amortized throughout the year.
Int exp XX
Discount XX
amortizing discount = increase CV

23
Q

JE to record first-year payment of interest under effective interest rate method

A

Interest Expense XX
Notes Payable XX (principal paid)
Cash XX (Amt of set pmt)

24
Q

How to solve for imputed interest

A

Problems where a note has no interest or unreasonable amount of interest, so we still have to record interest payments every year even though nothing paid. It is amortization problem, so interest added onto balance every year.
1) Record purchase of note at PV
Asset XX
Discount XX
Notes Payable XX (Full payment amount)
2) Record interest payment
Interest expense XX
Discount on Notes Payable XX

At year end, take Notes payable - total discount =carrying value

25
Q

JE to record an issuance of debt in debt covenant?

A

Cash XX
Restricted Cash XX
Notes Payable XX`

26
Q

How is a short term note recorded?

A

DO NOT have to record at PV, so no discount recognized because it is short-term. Only must have interest/discount for long-term notes.

27
Q

To remember for problems with loan origination fee

A

1) First see if the problem is asking for how much income is receivable or how much income is earned.
2) If asking for how much income is received, use the current PV and rate to find the interest.
3) If asking for how much income is RECEIVABLE, use the total Face Value of the note (including the origination fee), and interest rate to find the amount.

28
Q

Interest relation to principal, liability, expense, etc.

A

Important to remember that interest is an EXPENSE. it is what the lender charges you for taking the loan. It does not pay down the loan liability balance, only the payment of the principal does that. need to think of interest and principal separately.

29
Q

How to report required sinking fund payment?

A

It is disclosed in footnotes but not recognized as a current liability.

30
Q

When can bonds/notes be shown as non-current?

A

If the issuer can show the intent and ability to refinance (payoff) the bond with other long-term debt. Must be demonstrated after the balance sheet date but before issuance date of F/S. Also need to have FOOTNOTE DISCLOSURE of the issuance

31
Q

What is a discount on a note?

A

The FV of the notes payable minus the discount = the reported amount of the notes payable

32
Q

Shortcut equation to find total interest revenue earned?

A

KNOW THIS

Total Cash Payments - PV of Note = Total interest earned/owed over the life of note

33
Q

Non-interest bearing note

A

1) The PV of the bond is less than the face value, so there will be an unamortized discount amount (Face value - stated PV of bond)
2) The unamortized discount amount is the total interest expense that must be paid back by the end of the note life. This amount is added onto the carrying value every period until the bond reaches face value again.
3) Each year there will be interest expense and discount on N/P recognized and amortized.

34
Q

General interest bearing notes

A

1) Important to remember that even if bond issued at discount (aka. less than the market rate of interest), YOU ARE STILL EVENTUALLY PAYING BACK THE FULL FACE AMOUNT!!!
2) The stated interest rate that comes with the bond = standard payment due every period
The market rate = used to find the amount of interest owed each period.
3) but then the actual amount amortized is only the cash payment minus the interest expense for each period.

35
Q

When problem asks for how much the note receivable is worth today?

A

to solve

1) Important to remember to find the WHOLE VALUE OF THE NOTE. Aka. Face value of the note plus all the interest you will be getting
2) then multiply this by the PV factor to get the current day amount

36
Q

How to find the selling price of the bond? (Issued at par, prem, disc)

A

Issued at Par Value: The stated selling price of the bond = the face value of the bond
Issued at premium/discount: Take PV of the bond principal + PV of the coupon payment = Total selling price

**When calculating PV of selling price, ALWAYS USE THE MARKET RATE!!!

37
Q

What does it mean for a bond to be issued at a premium/discount?

A

Discount: Means that we (seller/issuer) are selling the bond for lower than the market rate. The market rate > coupon rate
Premium: We are selling at higher than the market rate so the face value will be higher. Market rate < Coupon rate

38
Q

What is the difference between the market rate and the coupon rate?

A

The market rate is the rate on bonds for other similar in the market, this is used to find the interest expense on the bond. The coupon or stated rate is the rate that comes with the bond and is the periodic CASH PAYMENT that must be made.

39
Q

How is bond liability shown on the balance sheet as?

A

Net of unamortized discount, so at the CARRYING VALUE

40
Q

To remember bond issuance costs (APPLE CO)

A 
A - Accounting Fees
P - Printing Fees
P - Promotion Fees
L - Legal Fees
E - Engraving Fees
C - Commissions
O - Other similar charges
41
Q

How to find the price of the bond on the issuance date?

A

EQUAL to the price at issuance date, whatever the Present Value is

42
Q

Impact of bond premium or discount on interest expense?

A

Issue bond at discount = amortization increases the interest expense, so aka. the total interest expense equals the cash paid + the discount
Issue bond at premium = amortization decreases the interest expense

43
Q

What period do you accrue interest for on a bond?

A

Between the BOND ISSUANCE DATE and the first INTEREST PAYMENT DATE

44
Q

How to solve for bond extinguishment before maturity?

A

1) Find new PV of bond
2) Depending on premium/discount, either add or subtract the old FV and unamortized disc/premium to find the gain/loss
old FV + unamort amount = premium
old FV - unamort amount = discount
Positive = loss
Negative = Gain
3) Make journal entry, removing the discount by credit and premium by debit entry, then recognize gain or loss too

45
Q

On early extinguishment of debt, how to find unamortized discount/bond issuance costs?

A

ALWAYS USE ORIGINAL VALUES TO FIND THESE AMOUNTS!!!! then subtract out the amount already amortized to find the portion unamortized

46
Q

What defines EXTINGUISHMENT of Debt?

A

Can only officially recognize a gain or loss when the creditor officially 1) accepts another form of payment or 2) agrees to some terms to extinguish the debt. If these don’t happen then the debt still exists.

47
Q

How to find BDE for modification of terms problems?

A

1) Record CV of original debt (FV+accrued interest)
2) Solve for PV of New debt CF’s [(original Face value of debt*PV factor at original rate) + (New interest payment at new agreed rate * PV factor at original rate)]
3) 1 - 2 = BDE for lender

48
Q

To remember for debt extinguishment transfer of equity problems with what affects equity account

A

Both the total gain and issuance of common stock will increase the equity account for the debtor

FAR Review (2 decks)

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