F5 Flashcards
When recording Accounts Payable, what’s the difference between the net method and gross method?
Net Method: purchases and AP are recorded at NET of discount. If payment is made within the discount window, there is no adjustment, but if you pay after the discount period is up, your discount is gone and you debit purchase discount loss
Under the Gross method your record purchases without regarding dicounts and so when you pay within the dicount period, credit purchase discount
What types of costs are associated with exit and disposal activities
cost to terminate contracts that arent capital leases
costs to consolidate facilities
costs to relocate employees
Can you tell me what is meant by an asset retirement obligation (ARO)
a legal obligation associated with the retirement of a tangible long lived asset that results from acqusition, construction, or normal operations
How is an ARO valued intitially
at Fair value (present value of future obligations)
How is an ARO accoutned for in periods of initial measurement
ARO liability is adjusted for accretion expense and the ACOasset is then depreciated
What are the three ranges of likelihood that a future event will confirm a contingent liability
Probable
Reasonably Likely
Remote
When do you actually record a contingent liability? how do you record/disclose if it is probable, reasonably likely, and remote
when the loss is both probable AND reasonably estimated (minimum in-range amount) you record and disclose it
you just disclose it when it is only reasonably possible
and when its remote you dont disclose it (unless its a guarantee)
Can you tell me the difference between an ordinary annuity and an annuity due
Ordinary annuities are due at the end of each period
While Annuity Due are DUE NOW at the beginning of the period
At what value are notes payables recorded on the financial statements
at present value at the date of issuance
When would you not use the present value valuation of a note payable and instead use the effective interest method
if the note is non interest bearing or the interest rate is unreasonable
what is the effective interest method
method where each payment on a note is divided between an interest component and a principal component as though the note had a constant effective stated rate of interest
When is a bond issued at a discount, what about a premium
issued at a discount when the coupon/stated rate is less than the the market/effective rate
its a premium when the bond interest rate is greater than the market rate
What is the prefferred method of accounting for bond issuance costs under GAAP and IFRS
you deduct the carrying amount of the liability and amortized using the effective interest method
What is the straight line method of amoritizing Bond premiums and discounts (GAAP only)
Premium (discount) / # of periods outstanding
What is the interest (effective rate) method of amoritizing Bond premiums and discounts Method (US GAAP / IFRS)
Premium(discount) amortized = (carrying value x effecive rate) - ( Face value x stated rate)
Interest expense = (face value x stated rate) + discount amortized - premium amortized = carrying value x effective rate
What are the four types of restructuring involving debts
transfer of assets
transfer of equity interest
modification of terms
combination of the above three
how is a gain (loss) measured in a troubled debt restructuring involving a transfer of assets
restate the assets transferred to fair value and recognize a gain/loss in ordinay income
recognize a gain for the difference between the fair value of the assets transferred and the carrying amount of debt forgiven
how does the creditor record the loss incurred on a modification of terms
Dr: Bad Debt Expense
Cr: Allowance for credit loss
When is a liability considered extinguished
if either:
debtor pays the creditor and is relieved of obligations
or
debtor is legally released from being the primary obligor
where is the gain or loss on early extinguishment reported on the income statement
gain or loss in the continuing operaitons section
What is the common entry for Asset REtirement obligation (ARO) ? ehat do you value it at
Dr: Asset retirement cost (ARC asset)
Cr: Asset retirement oblgation (ARO Liability)
Value at Fair Value (present value)
What would make you have to recognize an ARO, when is it recorded
duty or responsibility
little or no discretion to avoid
or obligating event
Think like “ this building has asbestos, you have to get a new roof”
its recorded when met
what does accretion expense do to ARO? how do you record it
it increases the ARO liability as it is essentially interest
you debit accretion expense and credit ARO
If you have an ARC (asset retirement cost asset) what do you do to it over time
you depreciate it and decrease it by debitting depreciation expense and credit accumulated depriciation (ARC)
if you have a gain contingency do you record a JE??
NOOO
when finding present values, what do you use for the present value of a bond, what about the interest?
Find the present value of $1 for the face value, and then the present value of an annuity for the interest
If the bond is issued at face,or par value, what rates are the same
the market rate and the coupon rate.
How do you find the yield to maturity
Coupon / price –> C/P
if you are borrowing and you get a bond with a discount, how do you record? what about a premium
you debit discount or credit premium
Does the person selling the bond recognize a discount
no
when finding the price of a bond, how do you do it? considering the face amount, stated rate, periods, amount of payments a year, and market rate?
First you will decide what PV factor to use by taking the market rate and adjusting for number of periods. After you find the PV factor for the principal and the payment. multiply the principal amount times the factor of 1 dollar. and then find the amount of one payment using the stated rate, and discount it at the PV factor of an annuity. Add these two answers together to get price of bond
What account are bond issue costs included in
the discount account
Is Straight line amortization of bond discounts and premiums allowed under gmap? what about IFRS
It is not GAAP, but is allowed by GAAP. However, it is NOT allowed by IFRS
Under the straight line method how do you get the interest expense for a period
(Face Value x Stated Interest rate) + Premium amortization or - discount amortization
What is the equation for the effective interest method to find the interest expense? What is the equation to find interest paid? how do you use those two answers to get the amount of amortization
Interest Expense: Carrying value at beginning of period x Effective (market) rate
Interest Paid: face value x interest rate
Amortization: Bond interest expense - bond interest paid
IF you have bond issuance costs what rate do you use to find amortization
effective interest rate
How do you handle bond issue costs under IFRS?
they decrease the carrying amount of the bond,
what is the proper name for an unsecured bond
debenture
What makes a term bond, a term bond
the fact that the entire thing is due at maturity
What is a charactersitc of a serial bond
the bond usually is called in order of serial number and has a constant annual payment, but dont have the same date per-say
If the coupon (stated) and the market rate are the same do you find the PV and all that shit
NOOO
HOW DO YOU FIND THE BOND PRICE
1: take the face amount and multiply it by the coupon (stated) rate and divide by number of periods (if applicable) this gives us one of our interest payments
2: take the face amount of the bond and mulitply it by the PV factor of $1 for the MARKET interest rate (notice the periods and rate are changed if paid more than annual)
3: take the interest payment and multiply it by te PV market rate of an annuity (notice periods and such)
ADD THE ANSWERS TOGETHER AND YOU GET BOND PRICE
How do you find the amount of amortization for a premium under the effective interest method?
Difference between the cash interest paid and the interest expense
cash interest paid = Face amount of bond x stated rate
Interest expense = carrying value x market rate
If you have a trouble debt restructuring, how do you find the recognized G/L for an asset being transferred?
You mark the asset you are holding up to fair value and recognize a gain on disposal, and then take the differene between the amount owed and the FV of the asset, this is the gain on restructuring. These two figures are then added together
If you have a trouble debt restructuring, how do you find the recognized G/L for an equity thing (like a note) being transferred?
take the amount you owe minus the FV of your equity = gain or loss
What is the defintiion of carrying value
Its the Face amount - unamortized discounts + unamortized premiums - unamortized selling costs
How do you find the G/L on a bond extinguishment before maturity?
Reacqusition cost - Net Carrying value
where reacquisition cost is the face price x % paid (such as 101)
What are the two conditions that mean you are relieved on an obligation
paying the creditor or being told you dont have to pay them by court order/the person you owe money to
If you have a modification of terms, what do you do to see if you have a gain?
Carrying amount - total future cash payments
