FAR 1 - Conceptual Framework & Financial Reporting

Question 1

What is a discount on bonds payable and why should I account for it as a current liability and negative?

Answer 1

Discount on bonds payable happens when the interest rate set by the company is lower than the market interest rate is for similar bonds. So I sell bonds for with a 6% but the market has a rate of 6.1%
It needs to be subtracted because the discount is considered a contra liability account so it is recorded as a debit.

Question 2

For revenue recognition purposes when can a seller book a financing arrangement?

Answer 2

The seller can book a finance agreement when 1) he is required to re-purchase and 2) when the repurchase price is higher or equal than the original price and expected market value.

Question 3

How do you calculate contract asset/liability for a percentage of completion project?

Answer 3

Take into account:
1) Cumulative costs incurred
2) Cumulative gross profit recognized
3) MINUS Cumulative billings
If the sum of 1 & 2 is higher than 3 then it is an asset.
If the sum of 1 & 2 is less than 3 then it is a liability.

Question 4

What is a refund liability? What is the journal entry and how do you book it when merchandise sold is greater than COGs?

Answer 4

Refund liability is the amount expects returned and therefore cash needs to be issued (if paid in cash)
Entry:
Merchandise Sold
Cash xx.xx
COGS xx.xx 
    Inventory xx.xx
    Refund liability xx.xx
    Revenue xx.xx
 Merchandise Returned
Refund liability xx.xx
Inventory xx.xx
     Cash xx.xx
     COGS xx.xx

Question 5

What are considered incremental costs of obtaining a contract?

Answer 5

Incremental costs are costs that had not been incurred because the contract was secured, note that the costs in the pursuit of the contract are not considered incremental costs. i.e., commissions, lawyer fees to draw up the contract. Incremental costs that qualify are recognized as an asset.

Question 6

How can progress be measured in contracts?

Answer 6

Input (lawyers, CPA firms) vs Output (newspapers)

Question 7

SFAC 8

Answer 7

1) Who the primary users are
2) Purpose of financial reports
3) Fundamental & enhancing qualitative characteristics

Question 8

SFAC 4

Answer 8

Objectives of financial reporting by nonbusiness organizations

Question 9

SFAC 5

Answer 9

1) Full set of financial statements

2) Recognition criteria

Question 10

SFAC 6

Answer 10

Elements of financials statements (10)