FAR 10

Question 1

With no principal market, what is the most advantageous market in FV measurement?

Answer 1

Use most favorable market (net of cost) however use the value not including cost when actually utilizing the market value.

Question 2

Calculating how much partner should contribute to have x% ownership

Answer 2

Add total existing capital accounts of partners and divide by % difference of 100% - new partner’s % interest

ex: New partner 20%, add capital/.80 = total new capital

= New total equity and then use difference to determine contribution needed

Question 3

Bonus method (new partners and contributed capital)

Answer 3

No goodwill involved, simply adjust capital accounts accordingly:

1. Add all partner’s capital after contributions
2. multiply new partner % by total capital to determine capital balance
   * If (capital account) after calculation < than amount contributed, bonus to old partners
   * If (capital account) after calculation > than amount contributed, bonus to new partner

Question 4

Partnership distributions

Answer 4

Unless agreement states otherwise, payments for interest on capital, salaries, bonuses are deducted from total profit PRIOR to any distribution in the profit and loss ratio (that will give new base to distribute based on profit/loss ratio).

Question 5

Partnership- Goodwill Method Calculation

Answer 5

1. Compute implied value with new partner %
   * Capital contributed / % interest
2. Add total partner’s accounts after contribution
3. Difference b/t implied value & combined partner’s accounts = Goodwill
   * multiply goodwill amount by pre-new partner’s % to calculate their capital account

Question 6

Variable Interest Entity - Consolidation Required

Answer 6

All 3:

1. Financial interest
2. Company’s equity characteristics strange- no equity investors, voting rights, sufficient capital to support itself
3. Have power over VIE and interest in P&L

Question 7

IFRS name for Variable Interest Entity

Answer 7

Special purpose entity

Question 8

Asset Retirement Obligation

Answer 8

Measured at PV of future obligation

Dr. asset
Cr. liability

Expense - accretion - similar to depreciation

At end of life, liability should = expected cost because accretion is amortized and liability increases until end of life.

ARO should equal total depreciation expense and accretion expense at end of period

Question 9

TDR Gain calculated for debtor- transfer of assets

Answer 9

Excess of

Carrying amount of payable (face amount + accrued interest, premiums, etc) over FV of the assets given up.

Account separately, first gain/loss regarding asset - adjust from carrying to FV

and then gain/loss regarding restructuring. Aggregate both for total gain on restructuring and then asset transfer

Question 10

TDR - gain calculated for transfer of equity interst

Answer 10

Difference b/t:

Carrying amount of payable and FV of the equity interest

(may be extraordinary gain in GAAP)

Question 11

TDR- gain on modification

Answer 11

• account prospectively

* if total future cash payments < carrying amount, debtor to reduce carrying amount, recognize difference as gain

Question 12

TDR- impairment by creditor

Answer 12

Excess of recorded receivable over FV of asset received= ordinary gaine

Modification- based on loan’s PV of expected future cash flows discounted at loan’s historical effective interest rate.

Dr. bad debt expense
Cr. allowance for credit losses

Question 13

Measurement of current liabilities

Answer 13

settlement values aka net realizable value

Question 14

Property Taxes Payable - Methods of accrual

Answer 14

1. Accrue prior to receipt of tax invoice and matched in year for which invoice pertains
2. Recorded as payable upon receipt of tax invoice and expensed in year of receipt (which often differs from year invoice pertains)

Question 15

Unemployment taxes & employer’s share of payroll taxes

Answer 15

• Accrue as expense

unemployment tax expense
payroll tax expense

Question 16

Notes Payable & Receivable - Recorded value

Answer 16

• PV at date of issuance
• use imputed market rate and by using effective interest method
• Ordinary course of business (less than one year) use FV

Question 17

Amortization of Discount or Premium - Notes payable & receivables

Answer 17

• amortization reported as interest
• premium or discount inseparable from related asset or liability
• must not be classified as deferred charges or credits resulting from imputed interest

Question 18

Premiums and estimated liability

Answer 18

Cost of premium charged to sales in period that benefit from the premium offer.

of coupons issued x est. redemption rate = est coupon redemptions

Question 19

Warranties - Accruing liability

Answer 19

Entire liability for the warranty should be accrued in the year of the sale to “match” cost with corresponding revenue.

Question 20

Service Contracts

Answer 20

• cash received prior to period expense occurs
• unearned revenue and estimated and accrued in F/S
• when service performed:

Dr. unearned revenue
Cr. revenue

Question 21

Accrued liability/expense

Answer 21

Represents expense recognized or incurred (through passage of time or other criteria) but not yet paid

Ex: accrued interest, accrued wages, accrued unemployment taxes, accrued employer’s portion of FICA taxes

Question 22

Classification of contingencies

Answer 22

Probable - likely to occur

Reasonably possible - more than remote, but less than likely

Remote - Slight chance of occurring

Question 23

Provision for loss contingency - loss probable and reasonably estimated

Answer 23

• Accrued by a charge to income as long as:
  1. Probable that as of date of F/S an asset has been impaired or liability incurred, based on info available prior to issuance of F/S.

2. Amount of loss can be reasonably estimated.
   
   • if range - best estimate
   • no best estimate- minimum amount
   • disclose possibility of rest

Question 24

Contingency - loss is reasonably possible

Answer 24

Disclosure made of nature of contingency and possible loss or range of loss or that estimate cannot be made

Question 25

Financial instruments not eligible for FV option

Answer 25

1. Investments in subsidiaries or VIEs an entity is required to consolidated.
2. Pension benefit assets or liabilities
3. Financial assets or liabilities recognized under leases
4. Deposit liabilities of financial institutions
5. Financial instruments classified as equity

Question 26

Derivatives- Notional Amount & Underlying

Answer 26

A notional amount is a specified unit of measure (e.g. currency units, shares, bushels, pounds)

Underlying - specific price, rate, other other variable (interest rate, security, commodity price, foreign exchange rate)

Question 27

Cash flow hedge- recognizing gains/losses

Answer 27

Ineffective portion - I/S

Effective portion - deferred, OCI until hedged transaction impacts earnings, then reclassify from AOCI to earnings

Question 28

Risk that requires disclosure

Answer 28

Concentration of credit risk

Question 29

Liquidation basis of accounting

Answer 29

• applied prospectively at time liquidation is deemed imminent
• likelihood of entity returning from liquidation remote
• liquidation plan approved or imposed
• assets- measured/presented at amount of cash proceeds expected from liquidation
• liabilities- GAAP
• accruals - expected to be incurred
• Stmt of net assets in liquidation
• Stmt of changes in net assets in liquidation

Disclosure:

• stmt of liquidation
• plan for liquidation
• assumptions to measure assets/liabilities
• expected time frame for completing liquidation process