FAR

Question 1

When should use of estimates be disclosed in financial statement footnotes?

Answer 1

When it is REASONABLY POSSIBLE that the estimate will change and the effect will be material.

Question 2

Under Regulation S-X, what should a public company include in its SEC filing?

Answer 2

1. Income statement for 3 years
2. Changes in Owners’ Equity for 3 years
3. Cash Flow statement for 3 years
4. Balance sheet for 2 years (comparative)

Question 3

Fundamental qualitative characteristics of useful financial information

Answer 3

1. Relevance
2. Faithful Representation

Question 4

When can revenue be recognized from a bill-and-hold arrangement?

Answer 4

Revenue can be recognized when there is a substantive reason for the bill-and-hold arrangement:

1. Products built to customer specifications
2. Separately identified + cannot be directed to another customer
3. Completed and ready to transfer to customer

Question 5

When would you reduce accumulated depreciation for equipment?

Answer 5

1. Improvement or replacement increase asset life.
2. Extraordinary equipment repair increase asset life.

Question 6

How should the nondeductible portion of expenses (M&E) be reported for financial statements prepared on income tax-basis?

Answer 6

Included in the expense category in the determination of income.

Question 7

When does an exchange LACK commercial substance?

Answer 7

Projected cash flows after exchange not expected to change significantly.

1. No Boot received = No Gain
2. Boot Received = Recognize Partial Gain [if less than 25%]
3. Boot Paid = No Gain [if less than 25%]
4. Realized Gain = Boot Received/ Total Consideration Received

Note: Exchanges WITHOUT commercial substance:
* If loss, record it + new asset at FV
* If gain, but no cash received, no gain recognized. Record new asset at BV of asset exchanged + cash paid
* If gain + cash received, recognize gain in proportion to cash received. Record new asset at FV - unrecognized portion of gain
* If proportion of cash received to total consideration received > 25%, record gain in full + asset acquired at FV

Question 8

Net Profit Margin

Answer 8

= Net Income / Net Sales

Question 9

Days in Inventory ratio

Answer 9

= Ending Inventory/ [COGS /365]

Question 10

Days Sales in A/R ratio

Answer 10

Net Ending A/R / Net Sales
/ 365

Question 11

Which ratios use average balances?

Answer 11

Turnover ratios use average balances for balance sheet components.

Question 12

How to determine impairment loss

Answer 12

1. Compare Net carrying value to Undiscounted future cash flows
2. If undiscounted future cash flows is lower, an impairment loss must be recorded
3. Assets held for use: Impairment loss = Net carrying value less Fair value
4. Assets held for disposal: Total Impairment loss = Net carrying value less Fair value + cost of disposal

Question 13

When do you capitalize interest?

Answer 13

1. Only on money actually spent (not on total amount borrowed)
2. Capitalized interest = Lower of actual interest incurred and Avoidable interest calculated

Question 14

Dollar-value index calculation

Answer 14

• Estimate of changes in price level is required.
• Need to calculate price index if it’s not given: Price index = EI @ CY cost / EI @ Base year cost.
• To compute LIFO layer added in the CY at dollar-value LIFO, the LIFO layer at base year cost is multiplied by the price index

1. Base = CY cost / Index
2. Layer = CY cost x Index
3. Index = EI @ CY cost / EI @ Base year cost

The change in base = Layer

Question 15

How do you account for In-Process R&D?

Answer 15

1. Recognize as an intangible asset (separate from Goodwill)
2. Don’t immediately write off
3. Meets the definition of an asset = future probable economic benefit

Question 16

Exchanges lacking Commercial Substance approach

Answer 16

1. Calculate gain or loss = FV old less BV old
2. No cash [boot] received = No Gain
3. Small cash paid [< 25%] = No Gain
4. Boot paid [< 25% of total consideration] = No Gain
5. Boot received = Recognize gain [Proportionally]

= Realized gain x [Boot received / FV received]

6. Large boot [received or paid] Greater than 25% = Recognize entire gain/loss for both parties

Note: Exchanges WITHOUT commercial substance:
* If loss, record it + new asset at FV
* If gain, but no cash received, no gain recognized. Record new asset at BV of asset exchanged + cash paid
* If gain + cash received, recognize gain in proportion to cash received. Record new asset at FV less unrecognized portion of gain
* If proportion of cash received to total consideration received > 25%, record gain in full + asset acquired at FV

Question 17

When should concentrations be disclosed?

Answer 17

1. Concentration exist at B/S date
2. Makes entity vulnerable to near term severe impact
3. Reasonably possible severe impacts will occur in near term

Question 18

What is the rule for LCM?

Answer 18

Compare the following: Floor, Ceiling and Replacement Cost

1. Use middle amount
2. Compare middle amount to Cost
3. Use lower of the two

Question 19

When should a company NOT recognize subsequent events?

Answer 19

Company should NOT provide information about conditions that did NOT exist at B/S date.

Subsequent events that occur AFTER B/S date but BEFORE financial statements are issued or available to be issued should NOT be recognized.

However, non recognized subsequent events should be disclosed.

Question 20

What is the rule for restoring the CV of assets that have been impaired?

Answer 20

Impairment loss results when: Net CV > Undiscounted future NCFs

1. Assets held for use = No Restoration
2. Assets held for disposal = Restoration

Note: Write-ups are limited to previous write-downs

Question 21

How do you calculate Total Depletion?

Answer 21

Total Depletion =

Unit depletion rate
x # of units extracted

Question 22

How do you calculate Unit Depletion Rate (Depletion per unit)?

Answer 22

Unit depletion is the amount of depletion recognized per unit (e.g., ton, barrel, etc.) extracted:

Unit Depletion Rate = Depletion base / Estimated recoverable units

Question 23

How do you calculate the following:

• Depletion Base
• Unit Depletion Rate
• Depletion Expense

Answer 23

1. Depletion Base =

Cost to purchase property
+ Development costs
+ Estimated restoration cost
- Residual value/ Salvage value

= Depletion base

2. Unit depletion rate = Depletion base / Estimated recoverable units
3. Depletion expense = Unit depletion rate x number of units extracted

Question 24

What is gross profit/ loss using Completed Contract method?

Answer 24

Total contract sales price

Less: Total cost of contract

= Gross profit/ loss *

• Recognized when contract is completed

Question 25

What are key things about Fair value?

Answer 25

1. Market based measure (NOT entity-based)
2. Measured in principal market or most advantageous (if no principal market)
3. Exit price (NOT entrance price)
4. Does NOT include transaction costs
5. Includes transportation costs

Question 26

What considerations does a lessee need to make regarding a written purchase option for recording depreciation?

Answer 26

If lessee is reasonably assured to exercise bargain purchase option, the useful life of the asset is used to calculate depreciation (rather than the lease period).

Doesn’t matter whether the lease period is less or more than the useful life.

Question 27

Deferred Tax Liability

Answer 27

Revenue/ gains included in taxable income AFTER inclusion in F/S income

Tax income later = Future tax liability

1. Installment sales
2. Contractors accounting [% vs. completed]
3. Equity method [undistributed dividends]

Question 28

Deferred Tax Liability

Answer 28

Expenses/ losses deducted for taxable income BEFORE deduction from F/S

Tax deduct first = Future tax liability

1. Depreciation expense [Tax depreciation > financial (book) depreciation]
2. Amortization of franchise
3. Prepaid expenses [cash basis for tax]

Question 29

Deferred Tax Asset

Answer 29

Revenue/ gains included in taxable income BEFORE inclusion in F/S income

Tax income first = Prepaid tax benefit (asset)

1. Prepaid rent *
2. Prepaid interest *
3. Prepaid royalties *

• IRC uses term “prepaid” and GAAP uses term “unearned”

Question 30

Deferred Tax Asset

Answer 30

Expenses/ losses deducted from taxable income AFTER deduction from F/S income

Tax deduct later = Future tax benefit (asset)

1. Bad debt expense (allowance vs. direct w/o)
2. Est. Liability/ warranty expense
3. Start-up expenses

Question 31

Deferred Tax Liability

Answer 31

Future tax accounting income > Future financial income =

Pay taxes later

Question 32

Deferred tax assets

Answer 32

Future tax accounting income LESS THAN Future financial accounting income =

Pay taxes early

Question 33

How are DTAs and DTLs reported on balance sheet?

Answer 33

All DTAs and DTLs are reported on the balance sheet NET and classified as NON-CURRENT

Question 34

What changes would cause DTL to increase?

Answer 34

1. Increase in prepaid insurance

Prepaid insurance is deducted for tax purposes in the year in which it was paid, but for book purposes in the subsequent year for the period covered by the policy.

2. Increase in rent receivable

Rent receivable represents income earned but not yet received in cash. Taxes will be paid in the following year when the receivable is collected.

Question 35

How should a note payable or bond be classified on the financial statements if a company issues a bond to use proceeds to pay an existing note payable?

Answer 35

Rule:

Bonds and notes due within 1 year are shown as “Non-current” if the issuer has the intent and ability to refinance with a new issuance of LT debt.

Intent and ability must usually be demonstrated through refinancing of the debt after the B/S date, but before the issuance of F/S.

Separate disclosure of refinancing is required.

Question 36

Are inventory loss or gains recognized in interim F/S due to market declines?

Answer 36

No.

Temporary market declines in inventory need not be recognized at interim when a turn-around can reasonably be expected to occur before EOY.

Question 37

What are attributes of donated treasury stock?

Answer 37

1. Donated stock received from a shareholder is recorded at FV.
2. Donation of C/S reduces the number of C/S shares outstanding.
3. When C/S is donated, BV per C/S increases, while number of shares decreases.

Question 38

What costs should be capitalized to building?

Answer 38

1. Architect fees
2. New bldg. construction cost
3. Building excavation costs

Question 39

What does Estimated Total Costs mean?

Answer 39

Estimated total costs =

Total costs for a long-term construction contract from inception to completion.

Question 40

What does Estimated costs to complete mean?

Answer 40

Estimated costs to complete =

Added to costs incurred to date to arrive at estimated total costs.

Question 41

What is the J/E to record a large stock dividend
(> 20 - 25%)?

Answer 41

1. J/E to record stock divided declaration at Par:

DR: R/E
CR: C/S distributable

2. J/E to record stock dividend distribution at Par:

DR: C/S distributable
CR: Capital stock (par common)

Note: If dividend is MORE than or equal to 25% of outstanding shares, the stock is capitalized at par value.

Question 42

Reclassifying HTM Bond to Trading security

Answer 42

Reported at FV and current asset on B/S

Impact on F/S - unrealized gain/loss in income

Question 43

Reclassifying HTM Debenture to AFS security

Answer 43

Reported on B/S - FV non-current asset

Income statement impact - unrealized gain/loss in OCI

Question 44

Reclassifying AFS security to HTM

Answer 44

• Reported on B/S at FV
• Non-current asset
• I/S impact - Amortized gain/loss moved from OCI to I/S

Question 45

Marketable equity security to hold indefinitely

Answer 45

Reported on B/S at FV non-current asset

I/S impact - unrealized gain/loss to NI

Question 46

Marketable equity security intend to sell within year

Answer 46

B/S reported at FV, current asset

I/S impact- unrealized gain/loss goes to I/S

Question 47

Reclassify Stock to HTM security

Answer 47

Ineligible transaction

Not allowed to reclass stock or equity security to a HTM b/c stocks do NOT have a maturity date.

Question 48

What is the cumulative effect of a change in Accounting Principle?

(GAAP to GAAP)

Answer 48

Retrospective application

Rule: Cumulative effect of a change in accounting principle = difference between R/E at beginning of period of change and what R/E would have been if change was applied to all affected prior periods.

If comparative F/S presented, adjustment made to beginning R/E of earliest year presented.

Question 49

What kind of adjustments are made to the operating activities section of CFS using the indirect method?

CLAD

Answer 49

1. Current assets and liabilities
2. Losses [added back to NI] and gains [subtract from NI]
3. Amortization and depreciation [added back]
4. Deferred items

Question 50

How do you calculate cash received from customers?

Direct Method

Answer 50

Revenues
- Increase in A/R
+ Decrease in A/R
+ Increase in unearned revenue
- Decrease in unearned revenue

= Cash received from customers

• Changes in DEBIT balance accounts = Opposite effect on cash flows
• Changes in CREDIT balance accounts = Same effect on cash flows

Note 1: The following is another way to look at calculating cash received from customers:

1. Start with Revenues [cash inflow “+”]
2. Analyze change in A/R
3. Analyze change in Unearned revenue
4. Total = Cash received from customers

Note 2: Use the same method to determine reconciling items for CFO using the indirect method.

Question 51

How do you calculate cash paid to suppliers?

Direct Method

Answer 51

COGS
+ Increase in inventory
- Decrease in inventory
- Increase in A/P
+ Decrease in A/P

= Cash paid to suppliers

• Change in DEBIT balance accounts = Same effect on cash flows
• Change in CREDIT balance accounts = Opposite effect on cash flows

Note 1: The following is another way to look at calculating cash paid to suppliers:

1. Start with COGS [cash outflow “-“]
2. Analyze change in Inventory
3. Analyze change in Accounts payable
4. Total = Cash paid to suppliers

Note 2: Use the same method to determine reconciling items for CFO using the indirect method.

Question 52

How do you calculate cash paid to employees?

Direct Method

Answer 52

Salaries and wages expense
- Increase in wages payable
+ Decrease in wages payable

= Cash paid to employees

Note 1: The following is another way to look at calculating cash paid to employees:

1. Start with Salaries and wages expense [cash outflow “-“]
2. Analyze change in Wages payable
3. Total = Cash paid to employees

Note 2: Use the same method to determine reconciling items for CFO using the indirect method.

Question 53

How do you calculate other operating cash payments?

Direct method

Answer 53

Other operating expenses
- Decrease in prepaid expenses
+ Increase in prepaid expenses
+ Decrease in accrued liabilities
- Increase in accrued liabilities

= Cash paid for other expenses

Note 1: The following is another way to look at calculating cash paid to suppliers:

1. Start with Other operating expenses [cash outflow “-“]
2. Analyze change in Prepaid expense
3. Analyze change in Accrued liabilities
4. Total = Cash paid for other operating expenses

Note 2: Use the same method to determine reconciling items for CFO using the indirect method.

Question 54

What type of account is Construction in progress?

Percentage of completion method

Answer 54

Construction in progress is an Inventory account.

Question 55

What type of account is Progress billings?

Percentage of completion method

Answer 55

Progress billings is a contra-inventory account.

Question 56

What are the steps to calculating gross profit or loss?

Percentage of completion method

Answer 56

Step 1: Compute Gross Profit (GP)

Contact price
- Estimated total cost
= GP

Step 2: Compute % of completion:

= Total cost to date / Total Est. cost of contract

Step 3: Compute GP earned (profit to date)

= GP x % of completion

Step 4: Compute GP earned for CY

Profit to date at FYE
- Profit to date at BOY
= CY to date GP

Question 57

What happens when you compute an estimated loss?

Percentage of completion method

Answer 57

Estimated loss on total contract is recognized immediately.

Reverse previous profit.

Question 58

How should you view percentage of completion?

Percentage of completion method

Answer 58

% of completion = Total costs to date / Total estimated cost of contract

Also equals the following:

1. Cost incurred / Total expected cost
2. Work done / Total expected work

= % of job “earned”

Question 59

What are “cost of uncompleted contracts in excess of progress billings”?

Percentage of completion method

Answer 59

CIP > Progress billings
Current asset

This is like inventory (an asset) and is also called construction in progress.

Question 60

What are “progress billings on uncompleted contracts in excess of costs”?

Percentage of completion method

Answer 60

Progress Billings > CIP
Current liability account.

Think of this as:
1. Excess billings
2. Retainer
3. Deposits

Question 61

What’s the journal entry to record cost incurred?

Percentage of completion method

Answer 61

DR: Construction in progress
CR: Cash/ Accounts payable

Question 62

What’s the journal entry to record Billings on contract?

Percentage of completion method

Answer 62

DR: A/R
CR: Progress Billings on construction
contract/ Progress billings

Question 63

What’s the journal entry to record payments received?

Percentage of completion method

Answer 63

DR: Cash
CR: A/R

Question 64

What’s the journal entry to record estimated gross profit during construction?

Percentage of completion method

Answer 64

DR: Cost of LT construction contracts
DR: Construction in progress
CR: Revenue from LT construction
contracts **

** Determined based on costs to date relative to total costs. Losses recognized in full in the period incurred.

Question 65

What’s the journal entry to record when construction is completed?

Percentage of completion method

Answer 65

DR: Progress Billings

CR: Construction in progress

Question 66

Are COGS and Ending inventory the same for FIFO using the Perpetual and Periodic inventory system method?

Answer 66

Yes. Under the FIFO inventory method, COGS and EI will be the same for the perpetual and periodic inventory system methods.

Question 67

Are COGS and Ending inventory the same for LIFO using the Perpetual and Periodic inventory system method?

Answer 67

No.

Perpetual inventory system - we DO care when items were sold. We start with the last item that was sold and calculate the batch using the cost for that item. We keep going until all items purchased are accounted for.

Periodic inventory system - we DON’T care when they were sold. We know we have to account for everything that was sold in total, so we start with the last inventory batch that was purchased and keep going back until we’ve accounted for all units.

Question 68

What is the first thing you should do when tackling inventory computation problems?

Answer 68

Calculate total cost of all purchases made during the year. This is important because total represents cost of goods available for sale (COGAS).

Rule: COGS + Ending Inventory = COGAS

COGAS can only go to one of two places:

1. If available for sale, we sold it and it becomes COGS; or
2. We retain it in EI

Question 69

For exchanges having commercial substance, what will the new asset carrying value amount equal?

Answer 69

New asset carrying value =

FV of asset given up
+ cash paid
- cash received

Note: If cash is involved:
* Giver of cash ADDS amount to their FV given up
* Receiver of cash SUBTRACTS amount from their FV given up

Question 70

For computer software development costs, when is period that costs are expensed?

Answer 70

1. Expense costs from concept to technological feasibility (amortization)
2. Resume expensing further development costs after selling activity started (COGS).

Question 71

For computer software development costs, when is period that costs are capitalized?

Answer 71

Costs are capitalized between technological feasibility through start of selling activity.

These costs are amortized using the greater of:

1. % of revenue
2. Straight-line

Internally generated software = amortize on straight-line basis.

Question 72

What bond issuance costs should be amortized over the term?

Answer 72

All cost associated with the issuance of bonds should be amortized over “outstanding” term of bonds.

Question 73

When are contributed services recognized?

Answer 73

They are recognized SOME of the time:

1. Specialized skills required and possessed by donor
2. Otherwise needed by NFP
3. Measurable
4. Easily (at fair value)

Question 74

How does NFPs report expenses?

Answer 74

NFPs report ALL expenses as without donor restrictions.

Expenses that satisfy restrictions would NOT be classified as with donor restrictions (they would be classified as “without”)

Question 75

How are conditional pledges recorded?

Answer 75

Conditional pledges or promises are NEVER recognized as revenue.

They would be recognized as a receivable and revenue ONLY when they become unconditional, when pledge conditions (contingencies) are met (resolved).

Question 76

How should NFPs report investments in financial statements?

Answer 76

NFPs report all investments (debt and equity securities that have readily determinable fair values) at FV.

Question 77

What is the purpose of a government presenting separate fund F/S for governmental and proprietary funds?

(GASB 34)

Answer 77

Report additional and detailed info about primary government.

Rule: Separate fund F/S should be presented for governmental and proprietary funds to report additional + detailed information about primary government.

Question 78

How do you use the weighted average method?

(Inventory cost flow assumption)

Answer 78

Under this method, average cost of each item in inventory will be the weighted average of cost of all items in inventory.

1. Calculate the extended inventory values (units x cost/unit) for beginning inventory and all purchases PRIOR to the sale.
2. Add items from step #1 = Total cost of goods in inventory.
3. Divide total from step #2 by total units purchased + beginning inventory = Per unit inventory value.
4. Multiply per unit inventory value by total units sold = COGS.
5. Multiply per unit inventory value by total units in ending inventory = Ending inventory value.
6. Weighted avg. cost per unit = Cost of goods available for sale / # of units available for sale

Question 79

What are steps to using the Translation method to translate F/S to the reporting currency?

(Current Rate Method)

Answer 79

Step 1: Income statement

Use weighted average. Translated NI is transferred to RE [used in roll forward]

Step 2: Balance sheet

Use YE rate for all assets + liabilities
Common Stock & APIC - use historical rate
Roll forward RE

Plug:

Equity - AOCI
Gain/ Loss - OCI

• Foreign currency translation is restatement of F/S denominated in functional currency to reporting currency.
• Translation gains + losses are part of OCI.

Question 80

What are steps to using the Remeasurement method to remeasure
F/S to the functional currency?

(Temporal Method)

Answer 80

Step 1: Balance sheet

Use YE rate = Monetary items [cash, Bonds/non-convertible, A/R, N/R, LT receivables, A/P, N/P, Accrued expenses, Bonds]

Use historical rate = Nonmonetary items [marketable C/S, Inventory, Invest in sub (equity), PP&E, Fixed assets, Intangible assets (patents + trademarks), deferred charges + credits, P/S, C/S]

Step 2: Income statement

Use weighted average = Non B/S related
Use historical rate = B/S related accounts - [COGS, depreciation + amortization]

Plug:

Gain/ Loss so NI is at amount necessary for R/E plug

Gain/loss = NI

Note: Foreign currency remeasurement is restatement of foreign F/S from foreign currency to functional currency when 1) reporting currency = functional currency and 2) entity’s books must be restated in functional currency prior to translating F/S from functional currency to reporting currency.

Question 81

What are things to note for Exchanges that HAVE commercial substance?

Answer 81

Gains + losses are ALWAYS recognized in exchanges having commercial substance.

Gain/Loss calculated as follows:

FV of asset given up
Less: BV of asset given up

= Gain/ Loss

Question 82

What is the effect of a 2-for-1 stock split?

Answer 82

Stock-split doubles the number of C/S outstanding and cuts in half the stock par value.

No change in total book value of shares outstanding.

Memo entry is used to acknowledge stock splits.

Question 83

What are examples of derived (Non-exchange) tax revenues?

Answer 83

1. Personal income tax
2. Sales tax

These are imposed on or derived from exchange transactions.

Question 84

What are examples of imposed non-exchange revenues?

Answer 84

1. Property taxes (or wealth)
2. Fines

These are imposed on Non-exchange transactions.

Question 85

How do you record budgetary AJE’s?

Answer 85

J/E that records budgeted amounts for estimated revenues and approved expenditures (appropriations) is posted on OPPOSITE of T-account compared with actual amounts:

DR: Estimated revenue control
CR: Appropriations control

The Budgetary control can be a debit (negative/deficit) or credit (positive/surplus)

At EOY, just reverse first J/E for the SAME amount:

DR: Appropriations
CR: Estimated revenue control

The Budgetary control can be a debit (positive) or credit (negative)

Question 86

How is issuance of bonds b/t interest dates handled?

Answer 86

Amount of interest that has accrued since the last interest payment is ADDED to bond price and is reimbursed at the next interest payment date to purchaser.

Note: Purchaser gets full interest payment regardless of how long they held the bond

Journal Entry:

DR: Cash
DR: Discount on B/P
CR: Bonds payable
CR: Interest expense [or payable]

Question 87

Effective Interest Method

Answer 87

Balance sheet:
Bond Face
x Coupon Rate
= Interest Paid

Income Statement:
Net Carrying value
x Effective Interest Rate
= Interest Expense

Amortization = Interest Paid - Interest Expense

Question 88

Bond payable discount J/E

Answer 88

DR: Interest Expense
CR: Discount on B/P
CR: Cash

Question 89

Bond payable premium J/E

Answer 89

DR: Interest Expense
DR: Premium on B/P
CR: Cash

To record interest expense and premium amortization.

Question 90

Retirement of bond issued at a premium J/E

Answer 90

DR: Bonds payable
DR: Premium on B/P
CR: Cash

The difference would be credited for a gain or debited for a loss

Question 91

Retirement of bond issued at a discount

Answer 91

DR: Bonds payable
CR: Discount on B/P
CR: Cash

The difference would be credited for a gain or debited for a loss

Question 92

What are revenue type sources of governmental funds?

Answer 92

1. Taxes - income + sales
2. Taxes - property + real estate
3. Fines + penalties

Question 93

What are other financing sources of governmental funds?

Answer 93

1. Debt proceeds (bonds + notes)
2. Interfund transfers

Question 94

What is the Nonspendable governmental fund balance category?

(NU CAR nemonic)

Answer 94

Practical: Monies have been spent, assets are either maturing (e.g., longer-term investments and are not available) or expiring (e.g, prepaids)

These are current assets that can’t be spent.

Question 95

What is the Restricted governmental fund balance category?

(NU CAR nemonic)

Answer 95

External authorities: Legislation, grantor, or creditor requirements must be satisfied (e.g, bond covenants)

Question 96

What is the Committed governmental fund balance category?

(NU CAR nemonic)

Answer 96

Internal: Highest governing authority establishes limits (e.g, government set aside)

These are encumbered appropriations.

Question 97

What is the Assigned governmental fund balance category?

(NU CAR nemonic)

Answer 97

Internal: Intention w/o formal commitment (designation)

Question 98

What is the Unassigned governmental fund balance category?

(NU CAR nemonic)

Answer 98

No constraint as to use. General fund (only) = Positive

Question 99

What is the major exception to general rule of expenditure accrual for governmental funds under modified accrual basis?

Answer 99

Exception relates to the treatment of interest and principal payments for LT debt.

Interest and principal on LT debt are recorded when they become due and payable NOT when they accrue.

No interest accrual at interim dates.

Question 100

What are examples of items that would be included in the Special Revenue Fund?

Answer 100

1. Sales tax fund - operate park + tourist facility
2. Gasoline tax fund - operate + maintain streets
3. Funds to account for specific fees:
   - Special fees (operate school programs)
   - Admission fees (operate museums)
   - Parking fees (operate traffic court)
4. Monitoring (administrative involvement) for grants

Question 101

What are the bond premium
J/E’s for borrower?

Answer 101

Bond issuance: Jan. 1, Year 1

DR: Cash
CR: Premium on B/P
CR: B/P

1st interest payment: June 30, Year 1

DR: Interest Exp.
DR: Premium on B/P
CR: Cash

2nd interest payment: Dec. 31, Year 1

DR: Interest Exp.
DR: Premium on B/P
CR: Cash

Question 102

What are the bond premium
J/E’s for investor?

Answer 102

Bond investment purchase: Jan. 1/ Year 1

DR: Investment in bonds
CR: Cash

First Interest pymt: June 30, Year 1

DR: Cash
CR: Investment in bonds
CR: Interest revenue

2nd Interest pymt: Dec. 31, Year 1

DR: Cash
CR: Investment in bonds
CR: Interest revenue **

** same amount that borrower books as interest expense

Question 103

What are the bond discount
J/E’s for borrower?

Answer 103

Bond issuance: Jan. 1, Year 1

DR: Cash
DR: Discount and bond issuance costs
CR: B/P

1st interest pymt: June, 30, Year 1

DR: Interest expense
CR: Discount and bond issuance costs
CR: Cash

2nd interest pymt: Dec. 31, Year 1

DR: Interest expense
CR: Discount and bond issuance costs
CR: Cash

Question 104

What are the bond discount
J/E’s for investor?

Answer 104

Bond investment purchase: Jan. 1, Year 1

DR: Investment in bonds
CR: Cash **

** cash won’t equal what bond issuer paid out b/c of bond issuance costs. These are NOT paid by investor

1st interest pymt: June 30, Year 1

DR: Cash
DR: Investment in bonds
CR: Interest Revenue

2nd interest pymt: Dec. 30, Year 1

DR: Cash
DR: Investment in bonds
CR: Interest Revenue **

** Does not equal interest expense on borrower side b/c of bond issuance costs

Question 105

What is Retained Earnings?

Answer 105

Retained earning (or deficits) are cumulative earnings (or losses) that have not been paid as dividends. Portion of R/E may be appropriated (restricted) for legal reasons or mgmt. discretion. Appropriated R/E distinguished from unappropriated on B/S:

Beg R/E
+ Net income (or minus loss)
- Divds (cash, property, & stock) declared
+/- Prior period adjustments
+/- Accounting changes (cumulative effect)
- Treasury stock (when necessary)
+ Adjustment from quasi-reorg

= Ending Retained earnings

Question 106

What are the J/E’s for the completed contract method?

Answer 106

DR: CIP
CR: Cash/ Accounts payable

DR: A/R
CR: Progress billings

Note: Losses (100%) for completed contract method are recognized in full as they are discovered

Question 107

What are the J/E’s for the percentage-of-completion method?

Answer 107

DR: CIP
CR: Cash/ Accounts payable

DR: A/R
CR: Progress billings

DR: CIP
CR: Current gross profit

Losses for % of completion method recognized in full as discovered

Question 108

What is the J/E to record the current portion of income tax expense?

Answer 108

DR: Current tax expense
CR: Current liability

Note: Current income tax expense/benefit = taxable income for CY x current tax rate.

Tax return income
x Current tax rate
= Current income tax expense

Question 109

What is the J/E to record the deferred portion of income tax expense?

(Temporary Difference)

Answer 109

DTL

DR: Deferred tax expense
CR: Deferred liability [owe now + owe later]

• Owe now = Current income tax expense
• Owe later = Deferred income tax expense

DTA

DR: Deferred asset
CR: Deferred tax benefit

Note: Deferred income tax expense/benefit = temporary differences x future tax rate or change in DTL or asset account on balance sheet from beginning of CY to end of CY [balance sheet approach].

Temporary differences
x Future [Enacted] Tax rate
+ Deferred liability
- Deferred asset

= Deferred Tax Benefit

Question 110

What are examples of special items?

(Governmental Accounting)

Answer 110

These are unusual or infrequent:

1. Sales of certain governmental capital assets
2. Termination benefits resulting from workforce reductions
3. Early retirement program offered to all EE’s
4. Significant forgiveness of debt

Question 111

What are examples of extraordinary items?

(Governmental Accounting)

Answer 111

• Environmental disaster
• Terrorist attack

Question 112

What are deferred inflows and outflows of resources?

(Governmental Accounting)

Answer 112

These result from the acquisition or consumption of net assets in one period that are applicable to future periods.

Deferred outflows = positive effect on net position + reported following assets but BEFORE liabilities.

Deferred inflows = negative effect on net position + reported following liabilities but BEFORE equity.

Question 113

What are the potential (likely) classifications of fund balance for the general fund?

(NU CAR nemonic)

Answer 113

General fund constraints:

Nonspendable: Yes
Unassigned: Positive

Committed: Yes
Assigned: Yes
Restricted: Yes

Question 114

What are the potential (likely) classifications of fund balance for the special revenue fund?

(NU CAR nemonic)

Answer 114

Special revenue fund constraints:

Nonspendable: Yes
Restricted: Yes
Committed: Yes
Unassigned: Negative

Question 115

What are the potential (likely) classifications of fund balance for the debt service fund?

(NU CAR nemonic)

Answer 115

Debt service fund constraints:

Restricted: Yes
Committed: Yes
Assigned: Yes
Unassigned: Negative

Question 116

What are the potential (likely) classifications of fund balance for the capital projects fund?

(NU CAR nemonic)

Answer 116

Capital projects fund constraints:

Restricted: Yes
Committed: Yes
Assigned: Yes
Unassigned: Negative

Note: Same as debt service fund

Question 117

What are the potential (likely) classifications of fund balance for the permanent fund?

(NU CAR nemonic)

Answer 117

Permanent fund constraints:

Restricted: Yes
Unassigned: Negative

Question 118

What is Net position?

(SE + Government-wide)

Answer 118

Reported in the government-wide + proprietary fund balance sheets.

Net equity = Assets - Deferred outflows and laibilities + Deferred inflows

Question 119

What is net investment in capital assets?

Answer 119

Capital assets
- Accum. Depr.
- Debt (incurred to acquire, construct + improve assets)

Includes:
1. Tangible capital assets (land + bldgs)
2. Intangible capital assets (patents + rights)

Excludes:
1. Unspent resources accumulated for capital purchases
2. Equity interest in capital assets of JV

Question 120

What are key things about the general fund?

(GRaSPP nemonic)

Answer 120

1. Modified accrual
2. Book and close: budget, activity and encumbrances
3. B/S = Current items only
4. No fixed assets (expenditures instead)
5. No LTD (other financing sources instead)
6. NU CAR (fund balance classifications)
7. No depreciation expense
8. Transfers and bond proceeds (included in other financing sources + uses)

Question 121

What are key things about the special revenue fund?

(GRaSPP nemonic)

Answer 121

1. Modified accrual
2. Book and close: budget, activity and encumbrances
3. Legally restricted, committed for specific purpose and resources are expendable (grant funds)
4. I/S = revenues, expenditures, other financing sources (uses) and net change in fund balance
5. Accounting for restricted funds: Public use ONLY and interest and principle expendable

Question 122

What are key things about the debt service fund?

(GRaSPP nemonic)

Answer 122

1. Modified accrual
2. Book and close: budget and activity ONLY. Encumbrances = N/A
3. Pays off debt for GRaSPP funds only. SE-CIPPOE funds pay their own debt.
4. Revenues = interfund transfers + investment income
5. Expenditures = principal + interest (no accrual). Booked when legally due
6. Debt service fund ONLY pays current principal + interest
7. B/S = Current items only

Question 123

What are key things about the capital projects fund?

(GRaSPP nemonic)

Answer 123

1. Modified accrual
2. Book and close: budget, activity and encumbrances
3. Similar to a purchasing dept. Used ONLY for GRaSPP funds. NOT used by SE-CIPPOE funds.
4. Life of fund = short + limited of 1 to 3 yrs.
5. Capital grants are financing source. Unrestricted grant = unrestricted revenue = recognize immediately. Restricted grant = Revenue collected in advance = deferred
6. Interfund transfer = report on I/S
7. Bond issue proceeds = other financing sources = report on I/S
8. No amortization of premiums or discounts
9. Payment of principal + interest is considered expenditures for fund
10. B/S = No fixed assets or LTD - both reported in govt.-wide F/S
11. No deprecation expense
12. Net change in fund balance

Question 124

What are key things about the permanent fund?

(GRaSPP nemonic)

Answer 124

1. Modified accrual
2. Book and close: budget and activity only. Encumbrances = N/A
3. Recorded revenues received are legally restricted, ONLY earnings can be used to benefit the public.
4. Available for public spending = Interest ONLY **
5. Accounting for restricted funds: Public use ONLY and interest expendable. Must NOT spend principal

** The special revenue fund allows for Principal AND interest to be available for public spending.

Question 125

What are key things about the internal service fund?

(SE nemonic)

Answer 125

1. Full accrual
2. Economic resource measurement focus
3. B/S, I/S, CFS, Footnotes
4. Other departments fund operations by paying fees - they are customers
5. Restricted grants recognized when earned as operating revenue
6. BAE-BAE NOT used
7. Fund FA’s and LTD
8. Net position NOT fund balances
9. “RUN” to “SE” your net position:

R = Restricted for debt services
U = Unrestricted
N = Net investment

10. Government-wide F/S = GRaSP + SE
    Does NOT include CIP POE

Question 126

What are key things about the enterprise fund?

(SE nemonic)

Answer 126

1. Full accrual
2. Economic resource measurement focus
3. B/S, I/S, CFS, Footnotes
4. Examples include Public utilities, hospitals, and universities
5. BAE-BAE NOT used
6. Revenues reported net or gross
7. Contributed capital displayed AFTER nonoperating revenues and expenses
8. Special + extraordinary items reported AFTER nonoperating revenues and expenses
9. Capital contributions NOT classified as transfers
10. Depreciation expense
11. Carry FA’s and LTD
12. Net position NOT fund balances
13. “RUN” to “SE” your net position:

R = Restricted for debt services
U = Unrestricted
N = Net investment

14. Direct method required
15. CFS order = operating activities, noncapital financing activities, capital & related financing activities, investing activities and reconciliation to operating income NOT net income
16. Income statement order = INCASET

I = Income (operating)
N = Nonoperating income + expense
C = Capital contributions and
A = Additions to endowments
S = Special items (unusual or infrequent)
E = Extraordinary items
T = Transfers

17. Government-wide F/S = GRaSP + SE
    Does NOT include CIP POE

Question 127

What are key things about the fiduciary funds?

(CIP POE nemonic)

Answer 127

1. Assets controlled by government
2. Government hold assets or has ability to direct use
3. Assets must have one or more characteristics: administered through a trust (government NOT beneficiary), dedicated to providing benefits to recipients, legally protected from creditors
4. Assets for benefit of individuals, not derived government provision of services/goods, NOT have administrative or financial involvement
5. Fiduciary activities classified in one of four types:

C = Custodial
I = Investment trust
P = Private purpose

POE = Pension and other employee benefit

Question 128

What key things about the custodial fund?

(CIP POE nemonic)

Answer 128

1. No CFS (all fiduciary funds do not have these)
2. Full accrual
3. B/S, I/S and FN
4. Normally expected to hold revenues + expenses for 3 months or less
5. Can collect sales tax, payroll withholding and RE taxes from other funds
6. Cash conduit with NO monitoring or administrative involvement

Note: If governmental unit HAS monitoring or administrative involvement, then special revenue fund is used.

7. Special assessments - IF LIABLE, use capital projects + debt service fund
8. B/S = Stmt. of fiduciary net position
9. I/S = Changes in fiduciary net position

Question 129

What are key things about the investment fund?

(CIP POE nemonic)

Answer 129

1. No CFS (all fiduciary funds do not have these)
2. Full accrual
3. B/S, I/S and FN
4. Revenues include contributions, net appreciation/ depreciation on FV plan assets, realized + unrealized gains/losses, premiums/discounts on debt
5. Expenses include payments to beneficiaries + administrative exp.
6. B/S = Stmt. of fiduciary net position
7. I/S = Changes in fiduciary net position

Question 130

What are key things about the private purpose trust fund?

(CIP POE nemonic)

Answer 130

1. No CFS (all fiduciary funds do not have these)
2. Full accrual
3. B/S, I/S and FN
4. NOT for public use: Public employee retirement systems, investment pools held on behalf of other governments
5. Held for principal + income for benefit of SPECIFIC individuals, private organizations, or other governments
6. Accounting for restricted funds: Private use only and Interest and/or principal expendable

Question 131

What are key things about the pension and other employee benefit trust fund?

(CIP POE nemonic)

Answer 131

1. No CFS (all fiduciary funds do not have these)
2. Full accrual
3. B/S, I/S and FN
4. $ in pension for ER and EE contributions - recorded as “Additions” NOT revenue or other financing sources
5. J/E for GRaSPP funds contributing money: DR: Expenditures, CR: Cash
6. J/E for CIP POE funds contributing money: DR: Expenses, CR: Cash
7. Income from investments recorded as an “Addition”
8. Expense relate to benefit payments, refunds and administrative expenses
9. B/S = Stmt. of Fiduciary Net Position
10. Net position restricted for pension = Assets minus Liabilities
11. Net pension liability + change in net pension lability NOT included on B/S of pension fund F/S
12. I/S = Stmt. of changes in Fiduciary Net Position
13. Additions = contributions received, net appreciation, realized + unrealized gains/losses, premiums/discounts on debt
14. Deductions = benefit payments + administrative expenses

Question 132

How are stock dividends handled for the equity method?

Answer 132

Stock dividends (more shares of stock) is NOT reported as revenue, ONLY a memo entry is made.

Question 133

How do you calculate bond interest accrual?

Answer 133

Accrued interest is added to cash proceeds paid to issuer.

To calculate: Face x coupon rate x period

Question 134

What do you need to know about the process of converting from cash basis income statement to accrual basis F/S?

Answer 134

Process of converting from cash basis to accrual basis is the OPPOSITE in preparing operating section of CFS.

Question 135

Convert cash basis revenue to accrual basis

Answer 135

Cash basis revenue - [cash receipts from customers]

+ Ending A/R - [revenue earned, not collected]
- Beg. A/R - [cash collected, earned in prior periods]
- Ending unearned rev. - [cash collected, not earned until future]
+ Beg. unearned rev. - [cash collected in prior period, earned in current period]

= Accrual basis revenue

Note: Process of converting from cash basis to accrual basis is the OPPOSITE in preparing operating section of CFS.

Question 136

Convert cash paid for purchases to COGS

Answer 136

Cash paid for purchases

+ Ending AP - [exp. incurred, not paid]
- Beg. AP - [exp. incurred prior, paid in current period]
- Ending inv. - [purchases made currently, not sold]
+ Beg. Inv. - [purchases made prior, sold in current period]

= COGS

Question 137

Convert cash paid for OPEX to accrual basis

Answer 137

Cash paid for OPEX
+ Ending Accrued Exp. - [expenses incurred, not paid]
- Beg. Accrued Exp. - [expenses incurred prior, paid in current period]
- Ending Prepaid Exp. - [payments made currently, benefit future periods]
+ Beg. Prepaid Exp. - [payments made prior, benefit current period]

= Accrual basis operating expenses

Question 138

For governmental accounting, is interest capitalizable on construction or improvements?

Answer 138

NO.

Construction interest is NOT capitalized. Reported as interest expense

Question 139

How are ongoing infrastructure expenditures treated for governmental accounting?

Answer 139

Under the modified accrual approach, ongoing expenditures are typically reported as expenses, UNLESS the outlays result in additions or improvements, in which case they would be capitalized (but NOT depreciated).

Question 140

What are the four (4) enhancing qualitative characteristics that enhance usefulness of financial information?

(Numeric: CUT V)

Answer 140

C - Comparability
U- Understandability
T- Timeliness

V - Verifiability

Question 141

How are other comprehensive income items reported?

Answer 141

They are reported NET of tax. This is similar to how Net income is reported.

Question 142

When a company issues a property dividend, how is this recorded?

Answer 142

DR: Retained Earnings [at FMV of the asset]
CR: Asset [Inventory]

• The additional debit or credit will be loss or gain, respectively. It will be the difference b/t the CV and FMV of the asset.

Question 143

When a company issues a Small stock dividend, how is it recorded?

[Small 15% to 20%]

Answer 143

For small stock dividends:

DR: Retained earnings [at FV]
CR: Common stock [at Par value]
CR: APIC

• Reduce RE by FV
• No change in total SE
• One (1) J/E to record dividend

Note: If dividend is LESS than 25% of outstanding shares, the dividend is capitalized at market value [fair value]

Question 144

What is the J/E to record an acquisition?

Investment in subsidiary

Answer 144

DR: Investment in subsidiary
DR: Legal expense
CR: Common stock (at par)
CR: APIC **
CR: Cash

** Stock registration fees and issuance costs are recorded as a direct reduction to value of stock by reducing APIC.

Question 145

What are items paid before arriving at P&L distribution?

Answer 145

Interest, salaries + bonuses are DEDUCTED from total profit to arrive at amt of profit and loss distributed in P&L ratio.

Question 146

What is the difference between the subsequent event evaluation period for issuers/ filers (public companies) and non-issuers (private companies)?

Answer 146

Issuer/ filer: Evaluate subsequent events through the date that F/S are ISSUED.

All other entities: Evaluate subsequent events through the date that F/S are AVAILABLE to be issued.

Question 147

What are the J/E’s for operating lease?

(Lessee)

Answer 147

1. Lease inception

DR: ROU Asset
CR: Lease laibility

Reflects ROU asset & liability
Amortize over life of lease
Record at PV of lease payment

2. First lease payment:

DR: Lease expense
CR: Cash

DR: Lease liability
CR: Amortization ROU Asset

Lease expense is SL, it’s the cash pymt
Subsequent lease payments are the same J/E’s, just the amortization changes

Total interest = Total Pymts - PV Lease Pymts

Question 148

What are the J/E’s for operating lease?

(Lessor)

Answer 148

1. Lease inception

DR: Lease receivable
CR: Unearned income

• Lessor keeps asset on B/S
• Recognize revenue SL
• Lessor depreciates asset

2. Lessor receives first payment

DR: Cash
CR: Rental Income

DR: Unearned income
CR: Lease receivable

DR: Depr. exp
CR: Accumulated Depr.

Total interest income - lessor has NO interest income on an operating lease, just rental income.

Question 149

How do you record compensation expense J/E?

Answer 149

1. J/E to allocate compensation expense over service period [between grant and vesting date]:

DR: Compensation expense
CR: APIC - stock options

2. J/E to record exercise of stock options

DR: Cash [at strike price NOT FMV]
DR: APIC - stock options **
CR: C/S [at par]
CR: APIC - capital in excess of Par ***

3. J/E to record expiration of options not exercised

DR: APIC - stock options
DR: APIC - expired stock options

** This reverses the previous compensation expense entires to account for exercise of stock options

*** Plug figure

Note: No J/E made on the date options are issued or the grant date.

Question 150

What is the relationship between CV and interest expense for a bond issued at a Premium?

Answer 150

1. As CV is pulled down towards par, interest expense is LOWER.
2. Amortization [difference b/t interest expense and payment] INCREASES over bond period to bring bond maturity to face value.
3. Interest payment is GREATER than interest expense throughout bond period.

Question 151

What is the relationship between CV and interest expense for a bond issued at a Discount?

Answer 151

1. As CV increases, interest expense is INCREASED.
2. Amortization (difference b/t interest expense and payment) INCREASES over bond period to bring bond maturity to face value.
3. Interest expense is GREATER than interest payment throughout bond period.

Question 152

How do you calculate gain/ loss when an investor equity interest goes from non-controlling [I.e., 30% interest] to controlling [> 50%] through a step acquisition?

Answer 152

1. Adjust investor previously held investment to FV. Multiply non-controlling interest percentage by FV amount on date they acquired additional interest [to controlling].
2. Calculate CV of investment when they held non-controlling interest.
3. The difference between both is the adjustment, which is the gain or loss.

Question 153

What are key differences in Proprietary funds compared to commercial SCF?

Answer 153

1. Direct method required
2. Reconciliation to operating income (NOT net income). Does not include adjustments for gain/losses
3. Four categories (instead of three): Operating activities, Capital and related financing activities, Noncapital financing activities, Investing activities
4. Order of financing and investing activities categories are Reversed
5. Interest income reported as Investing activities (as opposed to operating)
6. Interest expense = NOT operating. It’s either Capital and related financing or Noncapital
7. Capital asset purchases = Financing activities (as opposed to investing)

Question 154

What are Operating activities for proprietary funds?

Answer 154

Cash inflows from the following:
* Sale of goods/ services
* Interfund reimbursements + exchanges including pymt in lieu of taxes

Cash outflows for suppliers/ employees

Cash transactions not meeting definition of other categories

Question 155

What are Investing activities for proprietary funds?

Answer 155

Cash inflows/ outflows associated with:

• Loans to others (including interest income)
• Equity transactions

Question 156

What are Capital and Related Financing activities for proprietary funds?

Answer 156

Cash inflows from the following:
* Capital gains
* Contribution activity associated w/capital assets

Cash flows from issuing debt associated w/capital assets (including interest expense)

Cash activity related to special assessments associated w/capital assets

Question 157

What are Noncapital Financing activities for proprietary funds?

Answer 157

Cash flows from issuing debt for noncapital purposes (including interest exp.)

Cash receipts from grants/ subsidies

Cash received from property taxes (not restricted for capital use)

Operating transfers

Question 158

What are the sections of the Annual Comprehensive Financial Report (ACFR)?

Answer 158

1. Introductory section (unaudited)

• Letter of transmittal
• Org chart
• List of principal officers

2. Basic F/S + RSI (Audited)

• MD&A
• Govt-wide F/S
• Fund F/S
• FN
• RSI

3. Statistical section (Unaudited)

• NOT part of basic F/S
• 10 yrs selected financial data
• 10 yrs economic data (I.e., mileage rates, appraised values)
• Other data

Question 159

What items are included in Accumulated Other Comprehensive Income [AOCI]?

Answer 159

• Unrecognized Prior Service Cost
• Unrecognized Pension Gain/ Loss
• Foreign currency translation Gain/ Loss
• Amortization of actuarial pension Gain/ Loss

Note 1: These items are reported after tax
Note 2: Unrecognized Prior Service Cost is a negative figure

Question 160

When using the indirect method for SCF, how do you convert accrual items to cash for operating activities?

Answer 160

• Change in assets = cash moved in OPPOSITE direction
• Change in liabilities = cash moved in SAME direction

Question 161

Working capital ratio turnover

Answer 161

= Sales / Average working capital ratio

• Calculate the change in working capital for periods #1 and #2
• Woking Capital = Current assets - Current liabilities
• Compute average for both periods and use amount as denominator

Question 162

What items should a consignor include in inventory?

Answer 162

• Consigned goods held at consignee (at cost)
• Shipping cost paid by the Consignor to get goods to consignee

Question 163

What costs are chargeable to inventory vs. to expense?

Answer 163

• Import duty cost - Chargeable to inventory
• Warehousing cost incurred for storing inventory offsite due to a fire - NOT chargeable to inventory if it is NOT a “usual” cost. To be included in inventory, cost must be usual, necessary and make the item ready for sale.
• Freight-out charge - NOT chargeable to inventory as it is a selling expense

Question 164

How do you calculate depreciation expense for declining balance depreciation?

Answer 164

Declining Balance Depreciation = 2 x [1 / N] x [Cost - Accumulated depreciation]

• The ONLY methods that ignore salvage value in the annual calculation of depreciation are the declining balance methods. Salvage value is only used as the limitation on total depreciation.

Question 165

What conditions must be present for an entity to begin capitalizing interest?

Answer 165

• Expenditures for a qualifying asset have been made
• All necessary permits (licenses) have been filed to prepare the asset for its intended use
• Interest cost is being incurred

Note: Obtaining borrowed funds from a financial institution is NOT a condition necessary to begin recognizing capitalized interest. Borrowed funds obtained, but not used, before, during or after the construction period MUST be EXPENSED by the entity.

Question 166

When would the units-of-production method of depreciation be most appropriate?

Answer 166

• Asset’s service potential declines with use. Units-of-production depreciation method reflects that an asset’s service potential declines with use.

Note: Straight-line depreciation method reflects that an asset’s service potential declines with the passage of time.

Question 167

What are inventoriable computer software costs?

Answer 167

• Duplication of software + training materials
• Packaging product

Question 168

What are capitalized computer software costs?

Answer 168

• Coding costs AFTER technological feasibility
• Testing cost AFTER technological feasibility
• Costs of producing masters for training materials

Question 169

What are computer product R&D costs?

Answer 169

• Completion of detail program design
• Coding and testing to establish technological feasibility

Note: Program design, planning, coding, and testing costs are expensed PRIOR to technological feasibility.

Question 170

What are R&D costs?

Answer 170

• R&D performed by another company
• Testing for evaluation of new products
• Laboratory research aimed at discovery of new knowledge
• Testing in search of product or process alternatives
• Design, construction, and testing of preproduction prototypes and models

Note: Facility, personnel, and indirect costs may be included in R&D. Administrative costs are NEVER included in R&D.

Question 171

What costs are NOT research and development?

Answer 171

The following costs are NOT R&D:

• Routine efforts to improve an existing product
• Troubleshooting costs
• Routine quality control testing

Question 172

How do you calculate the discount on a bond?

Answer 172

Discount = Bond face value - Carrying value

Question 173

What is the three step process to answer bond retirement questions?

Answer 173

• Record cash for bond retirement
• Remove bond from books - bond payable, premium or discount
• Record the Gain or Loss

Question 174

How do you calculate the effective interest rate?

Answer 174

Effective interest rate = Market rate / # of Payments per year

Question 175

How do you calculate the coupon rate?

Answer 175

Coupon rate = Stated interest rate / # of Payments per year

Question 176

What are the types of leases that a LESSEE can have?

Answer 176

• Operating Lease
• Finance Lease
• Short-term Lease - [less than 12 months]

Note 1: Lessee will classify lease as a Finance lease if ANY of the OWNES criteria are met.

Note 2: Lessee will classify lease as an Operating lease if NONE of the OWNS criteria are met.

Question 177

What are the types of leases that a LESSOR can have?

Answer 177

• Short-term lease
• Operating Lease
• Finance Lease - Sales-Type Lease + Direct Financing Lease

Note 1: Lessor will classify lease as a Sales-Type lease if ANY of the OWNES criteria are met.

Note 2: Lessor will classify lease as an Operating lease or Direct finance lease if NONE of the OWNS criteria are met.

Note 3: If BOTH PV of sum of lease pymt + guaranteed residual value is equal to or substantially exceeds assets FV AND collection of lease pymts + residual value guarantees is probable = Direct Financing lease.

Note 4: If NEITHER or only ONE of the criteria in Note 3 is met = Operating lease.

Question 178

What’s the journal entry for a LESSEE to record an operating lease?

Answer 178

Lease inception: Jan. 1, Year 1

DR: ROU asset
CR: Lease liability

• B/S reflects ROU asset and lease liability
• Both amortized over life of lease
• Both calculated using PV of lease payments

1st lease payment: June 30, Year 1

DR: Lease expense
CR: Cash/Lease liability

DR: Lease liability
CR: Accumulated amortization - ROU asset

2nd lease payment: December 31, Year 1

DR: Lease expense
CR: Cash/Lease liability

DR: Lease liability
CR: Accumulated amortization - ROU asset

Note: The lease payment journal entries are the same. Lease expense and cash are the same amounts. Lease liability and Amortization - ROU Asset change due to the effective interest method. Effective interest method includes the following columns: Date, Lease expense, Interest, Amortization of ROU asset and CV of ROU Asset.

Question 179

How do you calculate total interest paid by LESSEE over life of operating lease?

Answer 179

Total Interest = Total payments - PV of Lease Payments

Alternatively, you can sum up total interest expense from the effective interest method column.

Question 180

What’s the journal entry for a LESSOR to record an operating lease?

Answer 180

Lease inception: Jan. 1, Year 1

DR: Lease Receivable
CR: Unearned Income

• Lessor keeps asset on its B/S
• Lessor recognizes income on SL basis
• Lessor depreciates asset
• Total Receivable = Annuity Pymt x # of Pymts [no PV factors used]

1st lease payment received: June 30, Year 1

DR: Cash
CR: Rental Income

DR: Unearned Income
CR: Lease Receivable

DR: Depreciation expense
CR: Accumulated Depreciation

2nd lease payment received: December 31, Year 1

DR: Cash
CR: Rental Income

DR: Unearned Income
CR: Lease Receivable

DR: Depreciation expense
CR: Accumulated Depreciation

Question 181

How do you calculate total interest received by LESSOR over life of operating lease?

Answer 181

• LESSOR has NO interest income on an operating lease, ONLY rental income.

Question 182

How would a company benefit purchasing a call option?

Answer 182

• Buyer of a call option has the right to buy stock at a fixed amount
• Buyer will benefit if stock price goes UP b/c they can buy it for cheaper than the market
• Buyer’s profit = Market price of stock - Option strike price - Option premium

Question 183

How would a company benefit selling a call option?

Answer 183

• Seller of a call option gives purchaser the right to buy stock at a fixed amount
• Seller will benefit if stock price goes DOWN b/c buyer won’t exercise option if it’s “out of the money”
• If stock price goes UP, buyer will exercise option and purchase it at the lower strike price, which will result in loss to seller
• Seller Loss [if stock price goes UP] = Market price of stock - Option strike price. Loss is offset by premium buyer pays to seller to exercise option
• Seller Gain [if stock price goes DOWN] = Premium per share x # of underlying shares

Question 184

How would a company benefit purchasing a PUT option?

Answer 184

• Buyer of a put option has the right to sell stock at a fixed amount
• Buyer will benefit if stock price goes DOWN
• If stock price goes DOWN, buyer gets to sell at the higher fixed market share price
• Buyer’s profit = Option strike price - Market price of stock. Gain is offset by premium buyer pays seller to exercise option

Question 185

How do you calculate sum of years digits?

Answer 185

[# of years remaining x (cost - salvage value)] / Sum of the years

• Numerator is the remaining life of asset at the beg. of the current year
• Denominator is the sum of the digits for the number of years of asset life [3-year life = 1+ 2 + 3 = 6]

Question 186

How do you calculate SL rent expense when free rent is given?

Answer 186

1. Calculate: Lease term x # of monthly lease payments
2. Subtract free rent: # of free months rent x monthly lease payment
3. Calculate: Total from #1 - #2/ [# of monthly lease payments]

Question 187

What period of time should a lessee amortize leased property for a FINANCE lease with a written purchase option that lessee is reasonably certain to exercise?

Answer 187

• Economic life of asset
• Lessee should amortize leased property over ECONOMIC LIFE of asset when 1) Written purchase option and 2) Lessee takes ownership of asset at end of lease term

Question 188

What is the criteria for lease to be a FINANCE lease for lessee?

Answer 188

Lessee must meet at least ONE of the following requirements:

• Ownerships transfer at end of lease
• Written purchase option lessee reasonably certain to exercise
• PV of minimum lease payments = FV of asset [approx. 90%]
• Lease Term = Major part [75%] of asset UL
• Asset specialized, no alternative use

Question 189

What is the criteria for lease to be a SALES-TYPE lease for lessor?

Answer 189

Lessor must meet at least ONE of the following requirements:

• Ownerships transfer at end of lease
• Written purchase option lessee reasonably certain to exercise
• PV of minimum lease payments = FV of asset [approx. 90%]
• Lease Term = Major part [75%] of asset UL
• Asset specialized, no alternative use

If NONE of the criteria is met, lessor has an OPERATING or DIRECT-FINANCING lease.

For a DIRECT-FINANCING lease, BOTH additional criteria need to be met:

• PV of lease payment + guaranteed residual value > FMV of asset
• Probable lessor will receive all lease payments + guaranteed residual value

Question 190

What are various types of temporary differences?

Answer 190

• Allowance for doubtful accounts
• Bad debt expense
• Depreciation
• Accumulated depreciation, excess of tax over GAAP
• Unrealized gain (loss) on trading securities
• Rental income [prepaid rent]
• Royalties received
• Net operating loss
• Installment sales

Question 191

What are the steps when using the Par value method to account for treasury stock transactions?

Answer 191

[1] - J/E to record issuance of stock using the Par value method:

DR: Cash
CR: Common Stock
CR: APIC - Common Stock

[2] - Process to create J/E using Par value method to purchase [buy back] Treasury Stock:

1. When an entity buys back their stock, always CREDIT Cash
2. DEBIT Treasury stock [at par]; then DEBIT APIC- Common Stock [at original sold APIC]
3. Determine whether you need more debits or credits:
4. If need more credits: CREDIT APIC- Treasury Stock
5. If need more debits: DEBIT APIC - T/S [IF there is a credit balance in APIC - T/S] *
6. DEBIT Retained Earnings if you need additional debits [to balance out entry]

• Note: Can ONLY DEBIT APIC - T/S if it has a credit balance; if it does not, then you can’t. In other words, cannot have a negative APIC - T/S account balance.

[3] - Process to create J/E using Par value method to re-sell Treasury Stock:

1. DEBIT Cash
2. CREDIT Treasury stock [at Par]
3. CREDIT APIC - Common Stock [to balance out entry]

Question 192

What are the steps when using the Cost method to account for treasury stock transactions?

Answer 192

[1] - J/E to record issuance of treasury stock using the Cost method:

DR: Cash
CR: Common Stock
CR: APIC - Common Stock

[2] - Process to create J/E using Cost method to purchase Treasury Stock:

1. When an entity buys back their stock, always CREDIT cash
2. DEBIT Treasury stock [at cost]

[3] - Process to create J/E using Cost method to re-sell Treasury Stock:

1. DEBIT Cash
2. CREDIT Treasury stock [at Cost]
3. Determine whether you need more debits or credits:
4. If need more credits: CREDIT APIC- Treasury Stock
5. If need more debits: DEBIT APIC - T/S [IF there is a credit balance in APIC - T/S] *
6. DEBIT Retained Earnings if you need additional debits [to balance out entry]

• Note: Can ONLY DEBIT APIC - T/S if it has a credit balance; if it does not, then you can’t. In other words, cannot have a negative APIC - T/S account balance.

Question 193

When a company issues a Large stock dividend, how is it recorded?

[Large > 20% to 25%]

Answer 193

For large stock dividends:

1. J/E to record declaration of stock dividend at PAR:

DR: Retained earnings [at Par]
CR: Common stock distributable

2. J/E to record distribution of stock dividend at PAR:

DR: Common stock distributable
CR: Capital stock [at Par]

• Reduce RE by Par value
• Both J/E’s: No change in common stock distributable, DECREASE in Retained earnings, INCREASE in Common stock [at Par]

Question 194

What is the J/E to retire treasury stock using the cost method?

Answer 194

DR: Common stock [at Par]
DR: APIC - Common stock
DR: Retained Earnings
CR: Treasury stock

Question 195

What is the J/E to retire treasury stock using the par value method?

Answer 195

DR: Common stock [at Par]
CR: Treasury stock [at Par]

Question 196

When are instruments [options or warrants] dilutive with respect to EPS?

Answer 196

Dilutive ONLY if: Average SP [market] > Strike [exercise] price
* “In the money”
* Assume treasury method is applied

Anti-dilutive = Strike [exercise] price > Market price
* “Out of the money”

Question 197

What is formula to compute the dilutive effect of options?

Answer 197

Additional shares outstanding =

Number of shares - [# of shares x Exercise price / Average market price]

Question 198

What items are classified in the operating cash flow section?

Answer 198

• Selling products/ collecting receivables
• Purchasing inventory / paying vendors
• Purchasing supplies + services / paying vendors
• Paying taxes
• Purchasing / selling trading securities [general rule]
• Collecting interest on an investment
• Collecting dividends on an investment [dividends received from AFS security]
• Paying interest on debt
• Loss or gain on sale of fixed assets

Question 199

What items are classified in the investing cash flow section?

Answer 199

• Purchasing long-term assets or investments for cash
• Selling long-term assets or investments [non-cash equivalents + non-trading securities]: cash proceeds
• Ex: Increase in available-for-sale securities
• Proceeds from sale of equipment
• Payment for purchase of PP&E

Question 200

What items are classified in the financing cash flow section?

Answer 200

• Borrowing funds [bank loans + issuing debt]
• Paying principal on debt
• Issuing common + preferred stock
• Paying dividends on common + preferred stock
• Repurchasing stock [treasury stock]
• Prepaying debt
• Paying debt extinguishment costs
• Redemption of bonds payable [buying debt back]
• Working capital loan received from bank

Question 201

What are key things to remember preparing operating activities section of SCF using indirect method?

Answer 201

• Record net income
• Adjust net income for non-cash items [depreciation, amortization, impairment of goodwill]
• Reverse I/S gain + loss shown on sale of any asset
• Adjust for changes in current assets + liabilities, except for cash and current interest bearing debt [recorded on financing activities]

Question 202

What are key things to remember preparing financing activities section of SCF using both methods?

Answer 202

• All sums borrowed and/or repaid [principal amount ONLY]
• Issuance and/or repurchase of own company stock
• Dividends paid [NOT received]

Question 203

What are key things to remember preparing investing activities section of SCF using both methods?

Answer 203

• All sums lent and/or repaid [principal ONLY]
• Purchase and/or sale of non-current assets [including fixed assets, intangible assets + marketable securities]

Question 204

What is the consolidated work paper eliminating J/E?

Nemonic: “The car I’m in is Big”

Answer 204

DR: Common stock - subsidiary
DR: APIC - subsidiary
DR: Retained earnings - subsidiary

CR: Investment in subsidiary
CR: Non-controlling interest

DR: Balance sheet adjustments to FV
DR: Identifiable Intangible assets to FV
DR: Goodwill

Common stock - sub
APIC - Sub
R/E - Sub
- Investment in Sub
- Non-controlling Interest
Balance sheet FV adj. [Difference]
Identifiable intangible assets
= Difference:
Debits = Goodwill
Credits = Gain

Question 205

What are the reporting rules of a primary government?

“SELF” nonmonic

Answer 205

Reporting status of a government unit is determined by whether it can stand alone by “its SELF” based on the following:

• Separately
• Elected governing body
• Legally separate entity
• Financially [fiscally] independent status

If government meets all four criteria = Primary government
If government fails ANY one of the above = Component unit

• Default for component unit is discrete, unless it meets certain requirements.
• Component unit is blended if governing board is the same as primary government and serves the primary government exclusively.

Question 206

What is the journal entry when reconciling fund financial statements to government-wide financial statements for recognizing Non-current capital assets purchased by a governmental fund?

Answer 206

1. To capitalize asset acquired for governmental activities in accordance with economic resources measurement focus:

DR: Capital asset
CR: Capital outlay expenditure

2. To record depreciation expense on capital asset in accordance with accrual basis of accounting:

DR: Depreciation expense
CR: Accumulated depreciation

Question 207

How do you record the recognition of a Troubled debt restructure gain?

Answer 207

There are three (3) formulas:

Carrying amount of payable
- FV asset transferred
= Gain

Carrying amount of payable
- FV equity transferred
= Gain

Cancellation of debt
- FMV asset exchanged
= Gain on restructuring

Question 208

How do you record gain/loss on disposal/exchange for a Troubled debt restructure transaction?

Answer 208

There are two (2) formulas:

FV asset transferred
- NBV asset transferred
= Gain/Loss

FMV asset exchanged
- NBV asset exchanged
= Gain/Loss on disposal exchange

Question 209

What are items that should be ADDED when converting revenue from Cash basis to Accrual basis?

Answer 209

The following items should be added to cash basis revenue when converting to accrual basis revenue:

• Ending A/R - [revenue earned, not collected]
• Beg. unearned revenue - [cash collected in prior period, earned in current period]

Question 210

What are items that should be SUBTRACTED when converting revenue from Cash basis to Accrual basis?

Answer 210

The following items should be subtracted from cash basis revenue when converting to accrual basis revenue:

• Beg. A/R - [cash collected, earned in prior periods]
• Ending unearned revenue - [cash collected, not earned until future]

Question 211

What are items that should be ADDED when converting cash paid for purchases to COGS?

Answer 211

The following items should be added to cash paid for purchases when converting to COGS:

• Ending Accounts Payable - [expense incurred, not paid]
• Beg. Inventory - [purchases made prior, sold in current period]

Question 212

What are items that should be SUBTRACTED when converting cash paid for purchases to COGS?

Answer 212

The following items should be subtracted from cash paid for purchases when converting to COGS:

• Beg. Accounts Payable - [expense incurred prior, paid in current period]
• Ending Inventory - [purchases made currently, not sold]

Question 213

What are items that should be ADDED when converting cash paid for operating expenses to accrual basis?

Answer 213

The following items should be added to cash paid for operating expenses when converting to accrual basis expenses:

• Ending Accrued Expense - [expense incurred, not paid]
• Beg. Prepaid Expense - [payments made prior, benefit current period]

Question 214

What are items that should be SUBTRACTED when converting cash paid for operating expenses to accrual basis?

Answer 214

The following items should be subtracted from cash paid for operating expenses when converting to accrual basis expenses:

• Beg. Accrued Expense - [expense incurred prior, paid in current period]
• Ending Prepaid Expense - [payments made currently, benefit future periods]

Question 215

How do you calculate gain/loss on bond extinguishment?

Answer 215

The following must be accounted for and adjusted in a bond reacquisition:

• Unamortized bond issuance costs
• Unamortized discount or premium
• Difference b/t bond face value and reacquisition proceeds

Reacquisition price
- Net carrying amount
= (Gain) or Loss

Reacquisition price = Bond face amount x % paid

Net carrying value = Bond Face - Unamortized discount - Unamortized issuance cost

Net carrying value = Bond Face + Unamortized premium - Unamortized issuance cost

Question 216

What costs should be capitalized to land?

Answer 216

1. Cost of razing old bldg.
2. Title insurance/legal fees
3. Land purchase
4. Title search fees
5. County assessment
6. Demolition
7. Real estate taxes in arrears
8. Surveying fees
9. Salvaged or scrap materials sold [subtracted]

Question 217

What are attributes of definite life intangibles?

Answer 217

• Finite life legally or other factors limit life
• Patents + copyrights
• Useful life means how long asset will provide benefit, not legal life
• Capitalize external costs: legal fees
• Amortized over UL using SL method
• Impairment if BV > Recoverable cost
• Impairment loss = BV - FV

Question 218

What are attributes of indefinite life intangibles?

Answer 218

• No foreseeable limit on asset life
• Trademarks
• Capitalize external costs
• NOT amortized; although goodwill can be amortized for non-public companies on SL basis over 10 years.
• Impairment loss = BV - FV

Question 219

How are bond issue costs accounted for?

Answer 219

• Reported on B/S as a DEDUCTION to bond carrying amount
• Issuance cost amortized over bond life to interest expense
• Accounting fees, legal fees, printing fees and underwriting fees

Question 220

What are program services?

Answer 220

• Expenses that relate to purpose and mission of NFP organization
• Universities - education + research
• Hospitals - patient care + education
• Union - labor negotiations + training
• Day care - child care
• Included as expense classification on Statement of Activities

Question 221

What are support services?

Answer 221

• Expenses that relate to management and general [administrative expenses], fundraising and membership development activities
• Includes everything NOT classified as a program service
• Included as expense classification on Statement of Activities

Question 222

What is asset turnover ratio?

Answer 222

Net Sales / Average total assets

Question 223

What are examples of items that would be reflected in Required supplementary information [RSI] section of Annual Comprehensive Financial Report?

Answer 223

• Road and bridge assets reported using the modified approach
• Comparison of general fund budgets to actual general fund activity

Question 224

What are examples of items that would be consolidated with governmental activities in the government-wide financial statements?

Answer 224

• Non-major debt service fund
• Internal service fund financial statements

Question 225

What are examples of items that would be reflected in Optional supplementary information section of Annual Comprehensive Financial Report?

Answer 225

• Budget variances
• Details of non-major fund financial statements

Question 226

What are examples of items that would be reflected in Management’s Discussion and Analysis [MDA] section of Annual Comprehensive Financial Report?

Answer 226

• Analysis of significant budget variances

Question 227

What are key things about government-wide financial statements?

Answer 227

• Shown as two (2) categories: Governmental activities + Business Activities
• Governmental activities = GRaSPP funds - [General, Special revenue, Debt service, Capital projects & Permanent] + Internal service fund - [proprietary fund]
• Business activities = Enterprise fund - [proprietary fund]
• No CIPPOE - Fiduciary funds are NOT included on government-wide financial statements b/c government does not have control over these funds
• Economic resource measurement focus used - involves adjusting capital assets and LT debt, rather than current financial resources

Question 228

What type of transactions should be reported in Governmental Activities section of the government-wide financial statements?

Answer 228

• Historical cost of land that relates to the general fund
• Maintenance costs [expensed]
• Road + improvement costs [capitalized + NOT depreciated]

Note: Under modified approach, ONGOING infrastructure expenditures are typically reported as EXPENSES, unless the outlays result in additions or improvements, in which case they would be CAPITALIZED. Also, the outlays that are capitalized related to the infrastructure using the modified approach are NOT depreciated.

Question 229

What type of transactions should be reported in Business-Type Activities section of the government-wide financial statements?

Answer 229

• Water and sewer enterprise fund plant improvements

Question 230

What are the key sections for a fund financial statement of cash flows?

Key sections:
* Cash flows from operating activities
* Cash flows from noncapital financing activities
* Cash flows from capital and related financing activities
* Cash flows from investing activities
* Reconciliation of operating income (loss)

Answer 230

The following list the key headers on fund financial SCF:

1. Cash flows from operating activities - [starting point]
2. Net cash provided (used) by operating activities - [total for operating activities section]
3. Cash flows from noncapital financing activities - [after operating activities section. For commercial SCF, investing section goes after operating]
4. Net cash provided (used) by noncapital financing activities - [total for noncapital financing activities section]
5. Cash flows from capital and related financing activities - [after noncapital financing activities section]
6. Net cash provided (used) by capital and related financing activities - [total for capital and related financing activities section]
7. Cash flows from investing activities - [after capital and related financing activities section]
8. Net cash provided (used) by investing activities - [total for investing activities section]
9. Net increase (decrease) in cash and cash equivalents - [subtotal for all three sections]
10. Balance - Beginning of the year and Ending of the year - [reconciliation for starting and ending cash balance]
11. Reconciliation of operating income (loss) to net cash provided (used) by operating activities - [similar to the indirect method of SCF]
12. Operating income (loss)

Question 231

What are key items that go in Cash flows from operating activities on a fund financial SCF?

Answer 231

• Receipts from customers
• Payments to suppliers
• Payments to employees

Question 232

What are key items that go in Cash flows from noncapital financing activities on a fund financial SCF?

Answer 232

• Operating subsidies and transfers to other funds

Question 233

What are key items that go in Cash flows from capital and related financing activities on a fund financial SCF?

Answer 233

• Proceeds from capital debt
• Purchases of capital assets
• Principal paid on capital debt
• Interest paid on capital debt
• Proceeds from sale of assets

Question 234

What are key items that go in Cash flows from investing activities on a fund financial statement SCF?

Answer 234

• Proceeds from sales and maturities of investments
• Interest and dividends

Question 235

What are adjustments to Reconciliation of operating income (loss) on a fund financial SCF?

Answer 235

• Depreciation - [add back]
• Changes in assets and liabilities - [excluding cash]

Note: Includes ONLY current assets and liabilities

Question 236

What is diluted EPS?

Answer 236

Diluted EPS = Income available to common shared holders + Interest on conversion of bonds [net of tax] /

Weighted avg. # of C/S [assuming all dilutive securities are converted to C/S]

• options + warrants - accounted for using treasury stock method. Incremental shares [difference b/t the shares “sold” and shares “reacquired”] are added to the denominator.

Question 237

What are the effects of Overstated inventory?

Answer 237

Ending inventory = Overstated
COGS = Understated
Net income = Overstated

Errors in ending inventory have the same effect on net income + R/E [move in the same direction].

Errors in beginning inventory move in the opposite direction.

Question 238

What are the effects of Understated inventory?

Answer 238

Ending inventory = Understated
COGS = Overstated
Net income = Understated

Errors in ending inventory have the same effect on net income + R/E [move in the same direction].

Errors in beginning inventory move in the opposite direction.

Question 239

What is the J/E for exchange of an asset that HAS commercial substance?

Answer 239

DR: New asset [FV of old asset + cash given]
DR: Accumulated depreciation [old asset]
DR: Cash received
DR: Loss

CR: Old asset [at historical cost]
CR: Cash given
CR: Gain

• Gains + losses ALWAYS recognized on exchanges having commercial substance
• Gain + loss equal difference between FV and BV of old asset
• FV given up = FV of asset received including cash given up or received in the transaction

Question 240

How is the carrying amount of a bond reflected on the F/S?

Answer 240

Bond face value
+ Unamortized premium
- Unamortized discount
- Bond issuance costs

= Bond net carrying value

• Note: At maturity, carrying amount of bond = Face

Question 241

How do you account for transfers of assets to a NFP by an UNAFFILIATED entity that raises or holds contributions for others?

[Unaffiliated entity]

Answer 241

• Recipient has variance power = Recipient recognizes contribution [revenue]
• Beneficiary recognizes = Nothing
• Recipient has NO variance power = Recipient recognizes refundable advance liability
• Beneficiary recognizes = Contribution [revenue]

Note: Variance power means recipient can distribute contribution to whatever beneficiary they want. No variance power means the recipient must give contribution to a SPECIFIC beneficiary. It can also be stated that contribution is INTENDED to be provided to or on BEHALF of a beneficiary, which means no variance power.

No variance power J/E’s:

1. Recipient J/E:
   DR: Asset
   CR: Refundable advance liability
2. Beneficiary J/E:
   DR: Receivable
   CR: Contribution

Question 242

How do you account for transfers of assets to a NFP by a FINANCIALLY INTERRELATED entity that raises or holds contributions for others?

[Financially Interrelated entity]

Answer 242

• Recipient has variance power = Recipient recognizes contribution [revenue]
• Beneficiary recognizes = Nothing
• Recipient has NO variance power = Recipient recognizes contribution [revenue]
• Beneficiary recognizes = Change in net assets

Note: Variance power means recipient can distribute contribution to whatever beneficiary they want. No variance power means the recipient must give contribution to a SPECIFIC beneficiary. It can also be stated that contribution is INTENDED to be provided to or on BEHALF of a beneficiary, which means no variance power.

No variance power J/E’s:

1. Recipient J/E:
   DR: Asset
   CR: Contribution
2. Beneficiary J/E:
   DR: Interest in recipient net assets
   CR: Change in interest in recipient net assets

Question 243

How do you record a lease transaction for a governmental fund?

Answer 243

• Government funds use current financial resources [modified accrual] measurement focus to recognize fixed asset acquisitions as capital outlay expenditures and new non-current debt as other financing resources

J/E: To record execution of lease
DR: Capital outlay [lease pymt x PVF]
CR: Other financing sources [lease pymt x PVF]

Note 1: Do NOT record ROU and Lease liability like for an operating lease

J/E: To record first lease payment
DR: Debt service expenditure - principal
DR: Debt service expenditure - interest
CR: Cash

Note 2: Payments on non-current debt are recognized as expenditures when they are paid. Debt service expenditures are only accrued when they are past due. The expenditure identifies the principal + interest portion of the debt. Interest is computed using the effective interest method.

Question 244

Is amortization recorded on a lease for a governmental fund?

Answer 244

• Amortization is NOT recorded in the governmental fund financial statements.
• Governmental funds use current resources measurement focus [modified accrual] and do not include recognition of non-current assets and, consequently, does not include any recognition of related amortization of a right-of-use asset.
• Governmental funds do NOT record fixed assets or depreciation.

Question 245

What is the purchase method that governmental funds use?

Answer 245

• Record an expenditure when purchased
• Record inventory and non-spendable fund balance at year-end for any items not used [still on hand]

J/E: To record supplies inventory
DR: Inventory
CR: Fund balance - non-spendable

Question 246

What are the proper financial statement classifications for selected transactions?

Answer 246

1. Capital outlay expenditures are reported by the general fund - Financial statement classification is “Character” b/c it’s based on timing. It is a function of fiscal year.
2. Debt service expenditures are reported by the debt service fund - Financial statement classification is “Character” b/c it’s based on timing.
3. Public safety expenditures are reported by the general fund - Financial statement classification is “Function” b/c it’s more concerned with purpose.
4. The special revenue fund transferred funds to the debt service fund - Financial statement classification is “Other Financing Sources [Uses]” b/c it’s not an expenditure nor an expense.
5. Salaries and wage expenses are reported in the enterprise fund - Financial statement classification is “Object” b/c we care about the general ledger classification. The object tells us where the expense should be recorded.
6. Occupational licenses applicable to Year 2 are billed and collected in Year 1 - Financial statement classification is “The transaction is not appropriate for classification in any operating statement of governmental entity” b/c this is related to the B/S.

Question 247

How do you reconcile Government funds to Government-wide Statement of Activities?

[CPAS RIDES mnemonic]

Answer 247

Net change in fund balances presented in governmental funds statement of revenues, expenditures, and changes in fund balances must be reconciled to the change in net position of governmental activities presented in the government-wide statement of activities.

Net change in fund balances - [total governmental funds]
+ Capital outlay
+ Principal payments on non-current debt
- Asset disposals [NBV]
- Sources [other financing sources - debt proceeds]
+ Revenue [measurable but unavailable]
- Interest expense [accrued]
- Depreciation expense
+ Internal service fund net revenue
= Change in net position of governmental activities

Question 248

What are key things to remember to determine whether a fund qualifies as a major fund?

Answer 248

• Aggregate fund balance/equity is NOT used in either test
• General fund will always be major fund
• Internal service funds will NOT be considered in the evaluation of major and nonmajor funds

Question 249

What are permanent differences?

Answer 249

• Do NOT affect deferred tax computation
• Only affect current tax computation - period in which they occur
• No affect on future financial or taxable income
• Interest income on state or municipal obligations
• Life insurance proceeds and expense
• DRD

Question 250

What are temporary differences?

Answer 250

• Differences b/t tax basis of asset/liability and reported amount on F/S that will result in taxable or deductible amounts in future years
• Revenues/gains included in taxable income AFTER inclusion in F/S which results in a DTL [sales on account]
• Expenses/losses deducted for taxable income BEFORE deduction from F/S which results in a DTL [accelerated depreciation]
• Revenues/gains included in taxable income BEFORE inclusion in F/S which results in a DTA [rents collected in advance]
• Expenses/losses deducted from taxable income AFTER deduction for F/S which results in a DTA [warranty expense]

Question 251

What are exceptions to accounting changes and error correction general rule?

[Impractical to estimate + Change in depreciation method]

Answer 251

• If impractical to calculate cumulative effect adjustment, change is handled PROSPECTIVELY, like a change in estimate [i.e., change in inventory cost flow assumption to LIFO]
• Change in method of depreciation, amortization, or depletion considered to be BOTH change in accounting principle + change in estimate and are handled prospectively.

Question 252

How are changes in accounting entity handled?

Answer 252

• Changes in accounting entity are handled RETROSPECTIVELY

Question 253

How is non-controlling interest in a business combination handled?

Answer 253

• Non-controlling interest is recognized in consolidated F/S when parent company owns LESS THAN 100%
• Non-controlling interest [BS] = FV of subsidiary x NCI %
• Non-controlling interest in NI of subsidiary = Subsidiary NI x NCI %

Question 254

What is the eliminating J/E for payable/receivable intercompany transactions?

Answer 254

DR: Accounts payable
CR: Accounts receivable

Question 255

What is the eliminating J/E for inventory intercompany transactions?

Answer 255

DR: Intercompany Sales [selling affiliate] [1]
CR: Intercompany COGS [selling affiliate] [3]
CR: COGS [purchasing affiliate]
CR: Inventory [purchasing affiliate] [2]

[1] - Represents the marked up selling price that parent sold to subsidiary. The entire sale needs to be reversed; thus debit.

[2] - Assuming that subsidiary sold 60% of inventory to third party, that means 40% of inventory purchases from parent is still on-hand. Inventory account must be adjusted for the difference b/t cost basis of the subsidiary [at the higher cost basis] and the parent cost basis [what inventory should be valued at]. The inflated inventory cost is revered, which is why account is credited.

[3] - COGS is adjusted for the 60% of marked up cost that is in COGS from sale to third party. Ultimately, the market up between parent original cost and subsidiary cost must be reversed. 40% of the marked up cost is in inventory and the other 60% is in sales.

Question 256

What is the eliminating J/E for fixed asset intercompany transactions?

Answer 256

DR: Gain [1]
CR: Equipment [2]
CR: Accumulated depreciation [3]

DR: Accumulated depreciation
CR: Depreciation [RE] [4]

[1] - Results from the parent selling the subsidiary equipment for a price that is greater than the NBV. Given that the parent owns the subsidiary, the gain must be eliminated; therefore it’s debited.

[2] - Results from the equipment that was sold to the subsidiary being recorded at the higher cost basis, which is the selling price that the parent sold to the subsidiary. The difference b/t the original cost basis [the Parent company] and the new cost basis must be eliminated; therefore it’s credited.

[3] - Accumulated depreciation on Parent books gets written off due to the sale of equipment to the subsidiary. After adjusting for depreciation [4], we need to add back depreciation to get the accumulated depreciation back to what is was before the sale to the subsidiary.

[4] - Compare the depreciation that should be on the equipment [assuming parent never sold to subsidiary] to the depreciation that subsidiary took when they acquired the equipment, that difference will need to be eliminated. If the subsidiary depreciation expense > parent, then it’s overstated and therefore is credited.

Question 257

What is the eliminating J/E for bond intercompany transactions?

Answer 257

DR: Bond interest payable
CR: Bond interest receivable
DR: Bonds payable
DR: Premium on bonds payable
DR: Loss
CR: Investment in bonds
CR: Discount on bonds payable
CR: Gain

Question 258

What items have NO cash effect using the direct method?

Answer 258

• Gains
• Losses
• Depreciation
• Amortization

Question 259

What items should be included in the calculation of lease payments?

Answer 259

• Required contractual fixed payments - includes variable payments that are in-substance fixed payments less lease incentives paid or payable to lessee
• Exercise option - if lessee is reasonably certain to exercise
• Purchase price - of leased asset at the end
• Only indexed or rate variable payments
• Residual guarantees - which are likely to be owed
• Termination penalty - due from lessee upon lease termination
• Non-lease components - amounts allocated to non-lease components of contract

Question 260

How to convert from cash-basis to accrual-basis?

Answer 260

• Add INCREASES in current assets
• Subtract DECREASES in current assets
• Subtract INCREASES in current liabilities
• Add DECREASES in current liabilities