F5-F7 Topics Flashcards
Accrued Vacation
- Services already rendered
- Obligation relates to rights that vest/accumulate
- Payment is probable
- Reasonably estimated
Current Liability related to borrowed money
Current Liability = Principal paid within year + Accrued Interest @B/S date
Asset Retirement Obligation
Legal obligation associated with retirement of a tangible long-lived asset
Debit ARC = Asset (Capitalized)
Credit ARO = Liability @PV (Inc. with Accretion)
ARC - Dep. Exp.
ARO - Accretion/Int. Exp. -> ARO x Credit Adjusted Risk Free Rate
Premiums
Total Estimated Coupon Redemptions = # issued/sold x Estimated rate
- Coupons Redeemed
= Coupons to be Redeemed
Outstanding Premium Claims = Coupons to be Redeemed / # of coupons
Outstanding Claims x $/each = Estimated Liability
Debit Premium Expense
Credit Premium Liability
Warranties
- Creates liability if easily estimated
- Entire liability accrued in year of sale
Debit Warranty Expense (Sales x ALL %)
Credit Warranty Liability
Debit Warranty Liability (Actual Costs)
Credit Inventory
Notes that mature in less than one year
Record at FACE, no Discount
Effective Interest Method
Payment is allocated to interest and principal
CV of Loan x Market Effective Rate = Interest Expense
Rest of Payment is Principal
CV - Principal = New CV
Imputing Interest
Interest accrued and recorded whether cash payment is paid or not
@Market Rate and determine PV
Debt Covenants
Creditors protect their interest by maintaining debtor’s credit rating
Concessions negotiated and real default is avoided
Stated Rate vs. Market Rate
Stated Rate - Interest to be PAID = Cash Outflow
Market Rate - Interest actually EARNED = Interest Expense
Discount
Market Rate > Stated Rate
Collected Less than Face
Deferred Loss - Increase expense = Slowly records LOSS
Causes future interest expense on I/S > Cash paid
Premium
Market Rate < Stated Rated
Collect more than Face (Gain)
Deferred Gain - Reduce expense = Slowly record GAIN
Causes future interest expense on I/S < Cash Paid
Nondetachable Warrants vs. Detachable Warrants
Nondetachable = Convertible bond itself must be converted into capital stock Detachable = Bond not surrendered
Bond Issuance Costs
USE EFFECTIVE RATE for Interest Expense
Costs incurred when issued
Direct reduction to CV of bond (like discounts)
Bond proceeds recorded net of issuance costs
Debit Cash (Proceeds - BIC)
Debit Discount and BIC
Credit Bonds Payable
Deferred BIC = Pre-paid Asset!
Amortization Methods - Allocated G/L over life of bond
Straight Line Method = Constant dollar amount - NOT GAAP
- Amortization = Premium or Discount + BIC / #Periods Outstanding
Effective Interest Method = Constant Interest Rate - GAAP
- Interest Expense = CV @Beginning of Period x Effective (Market) Rate
Effective if BIC, Market if no BIC
- Coupon Payment = Face x Stated Rate
- Amortization Discount = Interest Expense - Interest Payment
-Amortization Premium = Interest Payment - Interest Expense
Troubled Debt Restructuring
Transfer of Assets:
FMV Asset Exchanged
- CV Asset Exchanged
= Gain on Disposal
Cancellation of Debt
-FMV Asset Exchanged
= Gain on Restructuring
*Total Gain Broken into Gain on Disposal and Gain on Restructuring
Transfer of Equity:
CV of Payable
- Settlement Amount
= Gain on Restructuring
Modification of Terms = PROSPECTIVELY
Extinguishment of Debt
- Debtor Pays
- Debtor Legally Released
NOT In-Substance Defeasance = Collateral as Security
Reacquisition Price (Face x %Paid)
- Carrying Value (Face - Unamort. Discount/BIC or + Unamort. Premium)
= (Gain) or Loss
Lease Types
OWNES Met: O = Ownership transfers W = Written option to purchase N = NPV at least 90% of FV E = Lease Life is at least 75% of economic life S = Specialized Lessee = Finance Lessor = Sales-Type
None are met/Short Term:
Lessee = Operating
PC Met: P = PV of lease payments and 3rd party guaranteed RV > Asset FV C = Collection to satisfy is probable Lessor = Both met = Direct Financing Lessor = One/None = Operating
- Record when asset is available to lessee
- Initial Direct costs = Capitalized
Sale-Leaseback
Sale = Contract Exists & Control Transfers (OWNES)
Criteria Met = 2 Transactions
- Sale along with profit/loss recognition
- Lease recorded
Debit Cash Debit A/C Credit Equipment @HC Credit Financing Liability (Sale - FV) Credit Gain (FV - CV)
Criteria NOT Met = Failed Sale
Debit Cash
Credit Financing Liability
*Pays Interest and depreciates equipment @YE
Lessee Accounting
Operating Leases: 1 EXPENSE
Debit ROU Asset (PV of Payments)
Credit Lease Liability
Debit Lease Expense (Depr. + Int.) (Straight Line Payments) Debit Lease Liability (Depr.) Credit Cash Credit Accum. Amort. (Depr.)
Finance Leases: 2 EXPENSES
Debit ROU Asset (PV of Payments)
Credit Lease Liability
Debit Interest Exp. Debit Lease Liability (Reduced by PRINCIPAL) Credit Cash Debit Amort. Exp. Credit Accum. Amort. *Asset includes initial Direct Costs
Lessor Accounting
Sales-Type: Lessee OWNES
- Derecognizes Asset
- Direct Costs Incurred = Expensed
Debit Lease Expense (Direct Costs) Debit Residual Asset (PV of what is expected to be worth) Debit Lease Rec. (PV of payments) Credit Cash (Direct Costs) Credit Gain (FV - CV) Credit Truck (Remove FV of Asset) *Lease on B/S = RA + Lease Rec.
Direct Financing: No OWNES, Both PC
- Derecognizes Asset
- Recognizes Net Investment
- Gain/DC = Deferred and Amort.
Inception:
Debit Net Investment in Lease (PV of Payments + Residual Asset)
Credit Truck (Remove FV of Asset)
Credit Cash (Direct Costs)
First Payment:
Debit Cash (Payment)
Credit Net Investment in Lease
Credit Interest Income
Operating: No OWNES, 1/0 PC
- Keeps asset on B/S
- Depreciates and recognizes impairment
- Income recognized @SL
Debit Cash
Credit Rental Income
Debit Depreciation
Credit Accum. Dep.
Depreciation of Leases
O/W = Over Useful Life N/E/S = Shorter of Lease term or Useful Life
*Improvements similar to N/E/S
Lease Cashflows
Operating Lease:
Payments = Operating
Preparing for Use = Investing
Finance Lease:
Interest/Variable Payments = Operating
Principal Payments = Financing
Derivatives
- One or more underlyings
- Requires no initial investment
- Settlement that gives substantially same results
Hedging
- Reduces risk of holding and trading certain A/L
- Offset anticipated losses or reduce earnings volatility
Common Derivatives
Option Contract: Contract between 2 parties - gives right to buy/sell @specified price
-Call Option = Holder right to buy
-Put Option = Holder right to sell
Futures Contract: Agreement to exchange currency/asset @specified price on future date
-Long Position = Agrees to buy
-Short Position = Agrees to sell
-Both parties have obligations to perform
Forward Contract: Similar to Futures but PRIVATE
-Not standardized
-1 Opportunity
Swap Contract: Private agreement between 2 parties to exchange future cash payments
-Series of Forward Contracts
-Multiple opportunites
Reporting G/L
- No Hedging Designation = I/S
- Fair Value Hedge = I/S
- Asset, Liability, Unrecognized Firm Commitments
- Earnings in same period
- Expected to be highly effective
- Cash Flow Hedge = OCI
- Future cash flows
- Asset, Liability, Forecasted Transaction
Foreign Currency Hedges
- Same rules*
- Net Investment Hedge = OCI
*Perfect Hedge = No possibility of future G/L
Functional Currency
Currency of primary. economic environment (usually local)
- Use that country’s currency
- Self contained
- Not hyperinflationary
Translation vs. Remeasurement
Translation:
- Sub has functional currency
- Foreign to Reporting
Remeasurement:
- Dysfunctional currency used by sub
- Monetary Items = A/L that are fixed regardless of market change (A/R)
- Nonmonetary Items = A/L that fluctuate regardless of market change (Building)
Remeasurement Method
- Balance Sheet
- Monetary = Current Rate
- Nonmonetary = Historical Rate - Income Statement
- Non B/S items = WA Rate
- B/S items = Historical - G/L = NI
Translation Method
- Income Statement
- I/S = WA Rate
- Transfer NI to RE - Balance Sheet
- A/L = Current Rate
- Equity = Historical Rate
- RE = Roll forward - G/L = OCI
Individual Foreign Transactions
- No ownership (no Sub/Parent)
- G/L on I/S at SPOT rate
Tax Allocations
- Current Liability
- Deferred Liability
- Total Tax Expense
- Do not apply tax rate to perm. differences
- Deferred Liabilities include cumulative
- DTA and DTL are noncurrent and NETTED
- Perm. differences neither current or noncurrent
- Enacted Rate
Temporary Differences
- Revs on F/S before Tax = DTL
- Installment Sales, Inc. in receivables
- Revs on Tax before F/S = DTA
- Prepaid ‘unearned’
- Exps on F/S before Tax = DTA
- Established liabilities, BDE
- Exps on Tax before F/S = DTL
- Depreciation, Prepaid Expenses
DTL = Pay taxes later, Income Tax Exp > Taxes Paid DTA = Pay taxes early, Income Tax Exp. < Taxes Paid
Operating Losses = Creates DTA
NOL 2018, 2019, 2020
-Carried back 5 Years, NO 80% Limit
NOL 2021 and later
-NO Carryback, Forward Forever, 80% Limit
NOL Carrybacks = Refund (Current)
Debit Tax Refund Rec. (@35%)
Credit Tax Benefit
NOL Carryforwards
-Recognized to extent benefit is more likely than not
-DTA = Future tax savings
Debit DTA
Credit Tax Benefit
Investee’s Undistributed Earnings
Ownership 0-19% = 50% exclusion
Ownership 20-80% = 65% exclusion
Ownership Over 80% = 100% exclusion
*Perm Differences
Effective Tax Rate Calculation
Income Tax Expense = Taxable Income x Tax Rate
Effective Tax Rate = Income Tax Expense / Pretax Income
Examples of Permanent Differences
- Tax Exempt Interest from Muni Bonds (nontaxable)
- Life Insurance Proceeds on Officer’s Policy (nontaxable)
- Life Insurance Proceeds when Corp is beneficiary (nondeductible)
- Penalties, fines, bribes (nondeductible)
- Nondeductible portion of meals/entertainment (0-50% deductible)
Costs associated with exit/disposal activites
- Involuntary employee termination benefits
- Cost to terminate contract NOT a lease
- Cost to consolidate facilities/relocate employees
Book Value of Common Stock
Total Shareholder’s Equity
- Preferred Outstanding
- Cumulative Preferred Div in Arrears
= Common Shareholder’s Equity
Book Value = Common Shareholder’s Equity / Common Shares Outstanding
Cumulative. Participating, Mandatorily Preferred Stock
Cumulative = Not paid div. must be paid in future
*Disclosure!
Participating = Share with common shareholders in excess of specific amount
Mandatorily = Bought back by company, Maturity date
Retained Earnings
- Earnings not paid as dividends
- Reduced by dividends and transfers to APIC for stock dividend
- Does not include Treasury Stock or AOCI
Net Income -Dividends Declared \+/- Prior Period Adj. \+/- Accounting Changes = RE
*Appropriated = Restricted
Treasury Stock
-Reduces Equity = Debit Balance
Cost Method: G/L calculated upon reissue
Legal Method: G/L calculated immediately upon repurchase
*Timing Difference, NOT included in I/S
Cost Method
Gain = Inc. APIC
Loss = Dec. APIC, or RE if needed
Never increase NI or RE
Example: 10,000 shares, $10 Par, $15 per share
Original Issue:
Debit Cash $150,000
Credit CC $100,000
Credit APIC-CS $50,000
Buy Back above issue price: 200 shares repurchased for $20
Debit Treasury Stock $4,000
Credit Cash $4,000
Reissue above Cost: 100 shares repurchased for $20 resold for $22
Debit Cash $2,200
Credit Treasury Stock $2000 (AT COST)
Credit APIC-TS $200 (GAIN)
*Does not impact RE
Reissue below Cost: 100 shares repurchased for $20 resold for $13
Debit Cash $1,300
Debit APIC-TS $200 (To extend of APIC-TS)
Debit RE $500
Credit Treasury Stock $2,000
Legal Method
AKA Par Value Method
Reduce amount of par value and APIC received @time of original sale
Example: 10,000 shares, $10 Par, $15 per share
Original Issue:
Debit Cash $150,000
Credit CC $100,000
Credit APIC-CS $50,000 (10,000 x $5)
Buy Back above issue price: 200 shares repurchased for $20
Debit Treasury Stock $2,000 (AT PAR)
Debit APIC-CS $1,000 (Reverse using $5)
Debit RE $1,000 (Loss/No APIC-TS yet)
Credit Cash $4,000
Buy Back below issue price: 200 shares repurchased for $12
Debit Treasury Stock $2,000 (AT PAR)
Debit APIC-CS $1,000 (Reverse using $5)
Credit Cash $2,400
Credit APIC-TS $600 (Gain)
Reissue above Cost: 100 shares repurchased for $20 resold for $22
Debit Cash $2,200
Credit Treasury Stock $1,000 (AT PAR)
Credit APIC-CS $1,200 (PLUG)
Reissue below Cost: 100 shares repurchased for $20 resold for $13
Debit Cash $1,300
Credit Treasury Stock $1,000 (AT PAR)
Credit APIC-CS $300 (PLUG)
Donated Stock
No change in Equity
Debit Donated Treasury Stock
Credit APIC @FMV
Stock Subscription
- Agreement to sell specified # at agreed upon price
- Stock certificate issued when paid in full
Sell: No cash received, No change in Equity
Debit Subscription Rec. (contra equity)
Credit CS Subscribed
Credit APIC
Collection:
Debit Cash
Credit Subscriptions Rec.
Issuance:
Debit CS Subscribed
Credit CS
Stock Rights
No JE unit exercised
Memorandum Entry Only
Distributions to Shareholders
Date of Declaration: BOD Approves (Inc. Payable, Dec. RE)
Date of Record: Specifies date/names
Date of Payment: Disbursed (Dec. Cash, Dec. Payable)
Cash Dividends:
-Paid from RE
Property Dividends:
- Noncash assets (nonrepiprocal)
- G/L in Continued Ops.
Script Dividends:
- Commits to pay at later date
- Debit RE, Credit Notes Payable
Liquidating Dividends:
- Dividends exceed RE
- First debit APIC and then Stock as appropriate
Stock Dividends:
- Distribute additional shares
- No Cash Outflow, No income to owners
- Small = Less than 20% = Reduce RE by FMV
- Large = More than 20% = Reduce RE by PAR
Stock Splits:
- NO JE, No change in Equity
- Reduces per share proportionately
- Memo entry only
Noncompensatory Employee Stock Options
- NO JE until employee buys stock
- NO compensation expense
Conditions:
- All employees may participate
- Stock offered equally
- Time to exercise is reasonable
- Discount is reasonable
Compensatory Employee Stock Options
- Valued at FV on Grant Date (NO JE)
- Compensation expense allocated over vesting period (Regardless if exercised)
- Vesting Period = Period employee performs services
Expiration of Options and Stock Appreciation Rights
Debit APIC-Stock Options
Credit APIC-Expired Stock Options
*No change in equity
Stock Appropriation Rights:
- Compensation Expense for SAR adjust annually for changes in market price
- Prospectively
Earnings Per Share - Basic
*Required by Public entities
Basic = (NI - Preferred Div.) / WACSO
WACSO = Shares @Beg. + Shares Sold - Shares Reacquired + Stock Div/Splits + Conversions?
Stock Div./Splits = RETROSPECTIVE
- Occurred at beginning of period
- Multiply all changes in share by 1.0X for stock div.
Earnings Per Share - Diluted
- Includes securities that can be converted to CS
- Convertible Securities (Pref. stock, bonds)
- Warrants/Options
- Contacts that may be settled in cash/stock
- Contingent Shares
Diluted = Income + Int. on Diluted Securities + Discount Amort. / WASCO
*If-converted Method
Convertible Bonds:
- Add Int. Expense to numerator (NET OF TAX)
- Add # associated with conversion to denominator
Convertible Pref. Stock:
- Do not include div. in numerator
- Add # associated with conversion to denominator
Options/Warrants:
- Dilute if mkt. price > strike price
- No change in numerator
Statement of Cash Flows - Operating Activities
- Producing goods/services
- Anything NOT investing/financing
- Subtract changes in operating assets, add changes in operating liabilities
Direct Method (Ignore NI, Depr., G/L)
1. Cash Received =
Revenues
- Inc. in Rec.
\+ Dec. in Rec.
\+ Inc. in Unearned Rev
- Dec. in Unearned Rev
2. Interest Received
3, Dividends Received
4. Other Operating Cash receipts
5. Cash Received from trade securities if current
6. Cash Paid to suppliers/employees =
\+ Inc. in Inventory
- Dec. in Inventory
- Inc. in Accounts Payable
\+ Dec. in Accounts Payable
7. Interest Paid
8. Income Taxes
9. Cash Paid to acquire trading securities if current
10. Other operating cash payments =
- Dec. in Prepaid Expenses
\+ Inc. in Prepaid Expenses
\+ Dec. in Accrued Liabilities
- Inc. in Accrued Liabilities
Indirect Method (Ignore cash received/paid) Net Income \+ Dep. - Losses/Provisions/BDE \+ Gains/Amort. of Dis/Prem -Equity Earnings > Div. Received \+/- Changes in Operating Assets \+/- Changes in Operating Liabilities
*Interest paid and Income Taxes Paid DISCLOSED
*Accrual to Cash basis:
Direct Relationship with Liabilities/Equity
Indirect Relationship with Assets
Statement of Cash Flows - Investing Activities
- Noncurrent Assets
- Creditor = LENDING
- Asset Inc = Cash Dec, Asset Dec = Cash Inc
- Loans (Outflows) to other entities
- Purchasing/Disposing Trading Securities if noncurrent, AFS and HTM
- Acquiring/Disposing PPE
*Purchase Shares/Bonds = Investment!
Statement of Cash Flows - Financing Activities
- Change in Interest bearing debt and Equity
- Debt/Equity Inc = Cash Inc, Debt/Equity Dec = Cash Dec
Equity
- Obtaining resources from owners - Providing owners with return on investment
Liability
- Obtaining resources from creditors - Payments/Principal on amount borrowed
*Issue Stock, Proceeds/Repurchase of Treasury, Paid Div., Repay Principal
Noncash Activities
- Disclosed in Supplemental Disclosure
- Purchase of FA with stock
- Conversion of bonds to Equity
Required F/S for Defined Benefit Plan
@FV
- Statement of Net Assets Available for Benefit = BS (Assets)
- Statement of Changes in Net Assets Available for Benefit = IS
- Statement of Accumulated Plan Benefits = BS (Liabilities)
- Statement of Changes in Accumulated Plan Benefits = Liability Changes
- Change in actuarial assumptions
*Accumulated Plan Benefits = Future benefit payments attributable to employee services
Required F/S for Defined Contribution Plan
@FV
- Statement of Net Assets Available for Benefit = BS (Assets)
- Statement of Changes in Net Assets Available for Benefit = IS
