F5 OLD

Question 1

Explain the difference betwen the net method an dgross method of recoridng accounts payable.

Answer 1

Gross Method
The gross method records a purchase without regard to the discount. When invoices are paid within the discount period, a purchase discount is credited.

Net Method
Under the net method, purchases and accounts payable are recorded net of the discount. If payment is made within the discount period, no adjustment is necessary. If payment is made after the discount period, a purchase discount lost account is debited.

Question 2

What types of costs are associated with exit and disposal activities?

Answer 2

• Involuntary employee termination benefits
• Costs to terminate a contract that is not a capital lease
• Costs to consolidate facilities
• Costs to relocate employeess

Question 3

Define an asset retirement obligation (ARO).

Answer 3

A legal obligation asssociated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of a long-lived asset.

Question 4

How is an ARO initially measured?

Answer 4

At fair value (present value of the future obligation) as an asset (asset retirement cost) and a liability (asset retirement obligation).

Question 5

How is an ARO accounted for in periods after initial measurement?

Answer 5

The ARO liability is adjusted for accretion expense and the ARO asset is depreciated.

Question 6

What is the accounting treatment of gain contingencies?

Answer 6

Gain contingencies are not reflected on the balance sheet but are disclosed as to their nature and amount if likelihood is probable and to do so would not be misleading.

Question 7

Identify the three ranges of likelihood that a future event will confirm a contingent liability.

Answer 7

• Probable
• Reasonably possible
• Remote

Question 8

When are contingent liabilities accrued?

Answer 8

• When the loss is both probable and can be reasonably estimated, then record and disclose.
• Financial statement disclosure only for reasonably possibly contingent losses.
• Remote contingent losses are not disclosed, unless they are “guarantee-type” contingent losses, which must be disclosed.

Question 9

Premiums, warranties, and service contracts are examples of estimated liabilities. When are the liabilities for these types of expenses recorded and why?

Answer 9

Estimated liabilities for premiums, warranties, and service contracts are recorded in the same period as the revenue associated with the various transactions in order to accomplish matching of costs and revenues.

Question 10

What is the difference between an ordinary annuity and an annuity due?

Answer 10

Timing of Payments

*Ordinary annuity – payments are at end of each period

*Annuity due – payments are at the begininning of each period

Question 11

How are notes payable recorded in the financial statements?

Answer 11

Notes payable must be recorded at present value at the date of issuance.

If a note is non-interest bearing or the interest rate is unreasonable (usually below market), the value of the note must be determined by imputing the market rate of the note and by using the effective interest method.

Question 12

What is the effective interest rate method?

Answer 12

The effective interest method is a method under which each payment on a note (or other loan) would be divided between an interest component and a principal component as though the note had a constant effective stated rate (or adequate rate) of interest.

Question 13

How are premiums or disocunts resulting from recording notes payable and receivable at present value presented in the financial statements?

Answer 13

The premium or disount that arises from th euse of present values on cash and noncash transactions is inseparable from the related asset or liability. Therefore, such premium or disount valuation accounts are added to (or dedcuted from) their related asset or liability on the balance sheet.

Question 14

When is a bond issued at a discount? A premium?

Answer 14

A bond is issued at a discount when the coupon/stated interest rate is less than the market/effective interest rate of interest.

A bond is issued at a premium when the bond interest rate is greater than the market rate of interest.

Question 15

How is the bond selling price computed?

Answer 15

The price is the sum of the present value of the future principal payments plus the present value of the periodic interest payments disocunted using the market/effective rate on the date the bonds are issued.

Question 16

What is the preferred method of accounting for bond issuance costs under U.S. GAAP?

Answer 16

Deducted from the carrying amount of the liability and amortized using the effective interest method.

Question 17

Name two methods of amortizing bond premium (or discount).

Answer 17

Straight-Line-Method
Premium (Discount) / Number of periods outstanding

Interest (Effective Rate) Method (U.S. GAAP)
Premium (Discount) amortized = (carrying value x effective rate) - (face value x stated rate)

Interest expense = (face value x stated rate) + discount amortized - premium amortized = carrying value x effective rate

note: the straight-line-method is permitted under U.S. GAAP if not materially different from the effective interest rate method.

Question 18

What are the major disclosures for long-term debt?

Answer 18

1) Maturity dates
2) Interest rates
3) Call and conversion privileges
4) Assets prledged as security
5) Borrower-imposed restrictions

Question 19

Name four types of restucturings involving debt.

Answer 19

1) Transfer of assets
2) Transfer of equity interest
3) Modification of terms
4) A combination of the above 3 types

Question 20

How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?

Answer 20

Restate the assets transferred to fair value and recognize a gain or loss in ordinary income.

Recognize a gain for the difference between the fair value of the assets transferred and the carrying amount of the debt forgiven.

Question 21

How is the gain (loss) measured in a troubled debt restructuring involving the modification of terms?

Answer 21

It is the difference between the carrying amount of the obligation prior to restructuring and undiscounted total future cash flows required after restructuring, if undiscounted future cash flows are less than the carrying amount.

Question 22

When is a loan considered impaired?

Answer 22

When it is probable that all amounts due under the original contract will not be received when due.

Question 23

How is the loss incurred as a result of a modification of terms of an impaired loan reported by the creditor?

Answer 23

The amount of the loss is the present value of the loan’s expected future cash flows discounted at the loan’s effective interest rate minus the carrying value of the loan before the modification of terms.

dr Bad debt expense
cr Allowance for credit losses

Question 24

When is a liability considered extinguished?

Answer 24

If either one of the following conditions is met:

• If the debtor pays the creditor and is relieved of its obligations for the liability.
• If the debtor is legally released from being the primary obligor under the liability, either judicailly or by the creditor.

Question 25

Define in-substance defeasance.

Answer 25

An arrangement in which a company places purchased securities into an irrevocable trust and pledges them for the future principal and interest payments on its long-term debt.

The company remains the primary obligor; therefore, the liability is not considered extinguished.

Question 26

How is the gain or loss on early extinguishment of debt treated?

Answer 26

Gain or loss on the income statement, shown as a separate line item, if material, in income from continuing operations.

The gain or loss is the difference between net carrying value (including unamortized bond issuance costs and premium or discount) and the reacquisition price of the debt.