F5 Flashcards
AP gross method account (DR or CR balance) and when recorded
Record discount when taken
Purchase discounts - CR balance
AP net method acct (DR or CR balance) and when recorded
Purchase discounts NOT taken, DR balance
Recorded when NOT taken
How can current debt be reclassified as non-current?
Company must have INTENT and ABILITY to refinance evidenced by:
Subsequent event (actually refinancing after BS date -or- Non-cancelable financing Arrangement
Sales Tax are NOT a what?
They are NOT an expense
What two methods are allowed for property taxes?
Expense when bill received or accrue
Doesn’t matter as long as consistent
How to calculate bonus?
Bonus = R (NI - taxes) Taxes = Tax_Rate * (NI - bonus)
Combine formulas and algebra
If vacation time carries over and is paid at X2 salary, when does the difference is salary expenses hit?
When paid:
Vacation Payable X1 rate
Salaries Expense (Plug)
Cash
Accrual of sick pay benefits IFRS vs GAAP
IFRS: as services rendered
GAAP: vested amounts
What is asset Retirement obligation under IFRS?
Decommissioning Liability
Required to be estimated at best estimate of expenditure, US GAAP requires initial measurement @ FV
Exit and disposal activities
Cost of involuntary EE termination (closing a branch / region / facility)
Is commitment to an exit plan enough to recognize a liability for exit and disposal costs?
No - not by itself
Unmarked checks at year end - effect on AP
AP should be increased if the checks aren’t mailed until AFTER the bs date
Should a Liability that requires the periodic payment of interest or secured by collateral be classified as a AP?
No, the former is an accrued Liability or debt and the latter is classified as a loan payable
If stock was issued to retire debt as a subsequent event, should it be recorded?
Move the current debt to non-current since it is being retired with equity INSTEAD of current assets
A deferred tax liability expected to reverse within 90 days is current - true of false
Non-current always
After the property is fully depreciated any change in the asset Retirement obligation will be recognized where?
Profit and loss
Same for IFRS and GAAP
Is there any difference between GAAP and IFRS for asset Retirement obligations?
Nothing material, just different verbage
Should the subsequent event of dividends declared be accrued for?
No - dividends payable are recorded when declared and are NOT accrued
What kind of cost is a cost to relocate EEs after closing down a location?
Exit and disposal cost
10% maintenance fee based on interest earned =
10% * interest earned
When to accrue vacation?
- Services already rendered
- The obligation relates to vested OR accumulated rights
- The amount can be reasonably estimated
- And payment probable
Should sick pay accrue?
Only if vested (rare)
If the terms of the deferred compensation arrangement attribute or a portion of expected future benefits to a period greater than one year, when should the related cost hit?
Over the period of REQUIRED service - expense to contingent years
CPA-08506
Contingencies - w/ range of equally likely amounts what to record?
GAAP
Minimum amount so you don’t have a cookie jar for later
Contingencies - w/ range of equally likely amounts what to record?
IFRS
Midpoint
GAAP vs IFRS probable
IFRS - more likely than not (>50%)
GAAP - likely (>75%)
When to record gain contingency?
Don’t.
Disclose in notes if highly probable
When to record loss contingency?
Probable and reasonably estimatable
Should a loss contingency be recorded if reasonably possible?
NO - disclose in the notes
General rule if the loss chance is remote
Ignore
Disclosures required for recorded loss contingency
Nature and range
What about a probable potential loss contingency?
If reasonably estimatable, record
Should general or unspecified biz risk be recorded such as risk of fire, flood, strikes, or war?
No
DOG
DOG - guarantee type remote loss contingencies that ARE disclosed
Debts of others guaranteed
Obligations of commercial banks under standby letters of credit
Guarantees to repurchase that have been sold or assigned (like AR / assets)
Is appropriation of retained earnings a substitute for an accrual?
NO!
Appropriation of RE
RE set aside in stockholders equity section for loss contingency
Premium (sales)
Offers to customers to stimulate sales offered in return for coupons / box tops / labels
When are warranty and premium cost charged?
In the period of the sale (matching)
In service contracts, how to calculate deferred revenue?
Defer 100% of revenue first and then subtract as work is completed
Disclose
Notes
Evenly throughout the year
Total for the year / 2
Stamp redemption
Ignore revenue.
Revenue is recognized whether redeemed or unredeemed.
Redemption cost must be accrued at sale time (business counts on stamps being unredeemed / unused)
Reasonably possible
Disclose in notes
Do NOT accrue
For contingent Liability, is record insurance deductible or full exposure?
Full exposure. Any proceeds from insurance company is treated as a gain.
Rule of conservatism
Ordinary Annuity
End of each period
Annuity due
Beg. Each period
What is the difference between future value and present value?
Amount of interest earned over period
Given a future value factor, how to find present value?
1 / FV
Given a present value factor, how to find future value
1 / PV
Multiple identical payments due at end of period
Ordinary annuity
Leases are typically what kind of problems
Annuity Due
Convert ordinary annuity factor to annuity due factor
( PV of ordinary due for n - 1 periods ) + 1
Convert Annuity due to ordinary annuity
( Annuity due factor for n + 1 periods ) - 1
Dividends vs interest
Dividends aren’t legally required, they are declared at discretion of the board
Imputed interest NOT required when
- short term loan
- Paid in property or services
- Represent security deposits
- Interest rate determined by the gov.
- Related loan
Must interest be recorded if there is only one lump sum payment to settle a loan?
Yes! B/c this is accrual accounting
Discount on loan liability
Deferred interest
Amortizing discount
Recording deferred interest over life of the loan
Effective interest method
Each payment is allocated to interest and principle at constant effective stated rate
Effective rate in effective interest method aka
Market rate
Required disclosures for note payable
- Description of note
- Effective interest rate
- Face amount
Multiple payments for loan
Annuity
If nothing is stated about when the payments are due for an annuity assume
Ordinary annuity
Interest expense of note Receivable is calculated by (effective interest method)
= Carrying value * effective interest rate
What is the carrying value of a note Receivable?
Face less discount
How to calculate principle reduced on payment?
Payment less interest expense
How to find future value from PV factor
1/PV or amount / PV
Difference between interest Receivable and interest income
Amortization of unearned interest (discount)
Term note
A note that matures in a term of x years
A discount resulting from the determination of a note s PV should be reported on the BS as a
Direct reduction from the face amount of the note
How to calculate the total interest revenue earned by Leaf over the life of a note?
Total payments received over life of note less PV of note when first recorded
How are loan origination fees accounted for?
Deferred and recognized over the life of the loan as interest in earned (amortization of discount)
Annuity due is recorded on recording date by
PV netted against first payment
Proceeds from discounting a note to a bank
( Face amount + Interest over life of the loan ) * months remaining / 12 * bank’s interest rate
Is pension cost interest interest expense?
No
When a note is issued after the note date, what account will increase? (investor side)
Interest Receivable
How to solve for present value of note
Amount due at maturity (face + interest) x present value factor
A note payable with a stated rated and a loan origination fee yields an effective interest rate of
More than the sum of both the rate and origination fee % of loan
Should cash consideration issued with a note for equipment be combined to determine recorded value?
Yes
The difference between the undiscounted cash flows and the PV is what?
Discount. This will be amortized
Difference between carrying value of note in X1 and X2 when no principal is paid is (if there is a difference, there is a discount)
The discount (unearned interest) amortized (carrying value increased by the earned interest)
Yield is calculated by
Coupon rate over principle
If coupon rate = market rate is there a discount or premium?
No
What is the present value of a note for cash at the market rate?
Do not consider present value for notes for cash at the market rate. Record at face value
With a note payable - when is there a discount?
Only with imputed interest
Bond indenture
Contract
Stated rate
Interest to be paid to investors in cash
Coupon rate
Interest to be paid to investors in cash
Nominal rate
Interest to be paid to investors in cash
Market Rate
Interest expense
Yield
Yield
Market rate
Market rate higher than stated rate
Discount
Market rate lower than stated rate
Premium
Issuing corporation for bonds is the
Borrower
The bondholder is an
Investor
Debentures
Unsecured bonds (no collateral)
Convertible bonds - No detachable warrants
Convertible bond itself must turned in to convert to capital stock
Convertible bonds - detachable warrants
Bond is NOT surrendered upon conversion, only the warrants plus cash representing the strike price of the warrants
Zero coupon bonds - is there interest expense?
Yes. Interest paid in balloon payment with principal on maturity date
Zero coupon bond
No periodic payments until maturity
Bonds are issued in denominations of
$1000
When coupon = market rate, Issuance price is equal to
Principal
PV of principal + PV of interest pmts = issuance price
When interest expense > coupon interest paid
Bonds issued at a discount
Does the bondholder record a premium or discount in their JE on purchase?
No, only issuer of bond
How do we recognize loss on bonds sold at a discount?
Amortized as increased interest exp over coupon cash payments over life of the bond
Amortization of discount / premium is the difference between
coupon paid and the interest expense
Initial carrying value or bond must always equal
The cash proceeds
Bond issuance costs are accounted for how?
Direct reduction to the carrying value of the bond, similar to discounts
Amortized over life of the bond
Maturity value
face amount + all the interest to be paid
JE for bond issuance costs
Decrease cash received and increase discount for bond issuance costs
More cash is paid than CV for a bond
Cash paid to the seller b/c accrued interest is included in the cash
When does the effective interest rate (which determines interest expense) differ from market rate?
When there are on issuance costs
Bond issuance costs incurred before the bond issuance date are recorded as
Deferred cost and reversed when issued
Issued at Discount
Loss
Issued at Premium
Gain
How does the bond carrying value go up (or down) over time
Amortization of discount or premium
Amortization of discount or premium on bonds is calculated by
(Interest expense - interest payable)
Do unamortized bond issuance costs affect the carrying value of the bond?
Yes - unamortized bond issuance costs are subtracted from the bond’s face amount along with discounts (and premium is added)
Are serial bonds and debentures mutually exclusive?
No, they can be both
Does amortization of discount / premium begin before bonds are sold?
No
How long is the amortization period?
From SALE date until maturity date, not from origin date
Is strait line interest method for amortization allowed under GAAP?
Not GAAP, but allowed if the results are NOT materially different from effective interest method
How can you remember how many FS are required under IFRS vs GAAP?
IFRS has more BS
Is strait line method allowed under IFRS?
No
If there is a premium or discount, how much revenue does the investor recognize for interest?
Cash received less the amortized discount / plus the premium
Does bondholder interest revenue equal borrower interest expense?
Yes - unless there are bond issuance costs (in which case the difference will be the amortization of the bond issuance costs)
Interest expense will not equal interest payable when
There is amortization of discount or premium
Objective of troubled debt restructuring
Maximize recovery of investment
First step when settling debt with asset
Recognize gain / loss on disposal before recognizing gain on restructuring of debt
Is there ever a loss on restructuring debt? (Borrower side)
No
For the lender, loss on restructuring debt account name when debt is settled with an asset or equity
Allowance for credit losses
Modification of term impairment JE
Bad debt expense
Allowance for credit losses
How is impairment of a debt investment measured when there is a modification of terms?
Impairment measured based on the loan’s present value of expected future cash flows discounted at the loan’s HISTORICAL rate
When there is a modification of terms for the debtor, when is there no gain?
Future payments exceed the carrying amount. Do NOT adjust carrying value of the note
Refundable bonds
Allow an existing bond to be retired and replaced with one of a lower interest rate
In substance defeasance is NOT
Extinguishment
Does placing cash in an irrevocable trust count as extinguishment of a bond?
No
Does market value matter when determine gain / loss on extinguishment of debt?
No - irrelevant
Gain on troubled debt restructuring modification of terms is calculated by
Carrying value - ( Total undiscounted future cash payments )
If foreclosure of loan is not probable, how can investor measure impairment with the practical expedient alternative
Observable market price -or-
Fair value of the collateral if loan is collateral dependent
Does restructuring debt result in a net gain of stockholders equity?
If there is a gain on troubled debt restructuring - yes!
Interest earned on escrow liability, does it increase liability or decrease?
All money received by escrow is a liability and expected to be paid.
So interest earned INCREASES liability. It’s an inflow of money to be remitted for the purpose of the escrow.
If there is an unadjusted balance for accrued vacation of $10K and there are 50 days outstanding at $100 a day at year end, what should ending accd vacation be?
50 x 100 = 5000
Unadjusted total is distractor info
PV of 3% note with annual interest payable at maturity for 5 years and a market rate of 10% is recorded at
PV of face at 10% plus PV of (3% interest * face * 10 years) @ 10%
Effective interest method interest expense is calculated by
CV * effective interest rate
Why is a note issued for cash recorded at proceeds value instead of present value?
Items for CASH are treated special on the financials
Bond with a discount, does the difference between interest paid and interest expense get bigger or smaller each period?
Bigger because the CV increases which increases interest expense while interest paid remains constant
Lower market rates relative to the coupon rate result in what for the carrying value and the amortization?
Would result in either something closer to the coupon rate or at a premium, which raises the carrying value. This would lower the interest expense relative to the coupon as the yield rate gets lower and lower. Eventually a premium results in interest expense lower than interest payable
Change in market rate impact on book value of the bonds or interest expense
No impact: it the market place value of the bonds will decrease as interest rates rise because fixed coupon bonds will be less attractive than stocks
