FAR 21 Flashcards
The effective interest rate for a loan restructured in a troubled debt restructuring is based on:
the original contractual rate.
How do you record donated fixed assets?
When an asset is received from a governmental entity, no income is recognized, and the offsetting credit is to an owners’ equity account, “Additional Paid-In Capital: Donated Assets.”
Assets donated by entities other than governmental units are included in revenue in the period of receipt.
If several dissimilar assets are purchased for a lump sum, the total amount paid should be allocated to each individual asset on the basis of its relative fair value.
Which of the following ratios useful in assessing the liquidity position of a company?
Defensive-interval ratio-The defensive-interval ratio is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable). Thus, it is computed by dividing total quick assets by average daily cash expenditures. This is a liquidity measure, as it assesses how long a company can continue to keep up with its debts.
What is the par value method?
The par value method is a method for accounting for the purchase and resale of treasury stock that uses the two-transaction view: as (1) the purchase and retirement and (2) the subsequent reissuance of the shares. The par value method uses a contra-capital stock account: for purchases, it reduces capital stock, contributed capital, and/or retained earnings; for resale, it increases capital stock and contributed capital. The par value method has the same effect on total stockholders’ equity as the cost method but apportions the amount to the component equity accounts.
How to calculate the PV of a notes receivable?
Maturity amount x Present value factor If the note matures within the current 1-year accounting period, record at original note value.
Which of the following should be disclosed by a company providing health care benefits to its retirees?
The assumed health care cost trend rate used to measure the expected cost of benefits to its retirees
The accumulated postretirement benefit obligation
what is not a comprehensive basis of accounting other than generally accepted accounting principles?
Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution
Under the LIFO method
the last goods in are treated as the first ones included in cost of goods sold.
The perpetual method of LIFO treats units sold as
coming from the last units acquired prior to that sale.
When using the periodic method, the inventory is not valued until
the end of the period
The term “tax position” as used in FASB ASC 740-10-20 refers to ?
A.
A decision not to file a tax return
B.
An allocation or a shift of income between jurisdictions
C.
The characterization of income or a decision to exclude reporting taxable income in a tax return
Final year income for the percentage of completion method would be calculated as:
Total contract revenue XXX
Less actual total costs - XX
—-
Total income from contract XX
Less income previously recognized - X
—-
Income recognized in final year
A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should:
capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
What is a liquidating dividend?
The liquidating dividend is that portion of the cash dividend that exceeds the balance in retained earnings because other equity accounts must be debited.
What does common stock outstanding mean?
Outstanding refers to the number of shares of capital stock that have been issued and are currently owned by stockholders. Treasury stock is not considered to be “outstanding” since it is owned by the issuing corporation, not by outside shareholders. Outstanding is an important aspect of earnings per share calculations.
The number of bonds that have been issued and are currently owned by bondholders and accounts receivable that have not been collected are both examples of outstanding numbers.
What is the JE to record issuance of stock?
Cash
C/S Par
APIC
What is the JE to record buy back (for more than par) and retirement of stock
Common stock Par
APIC
Cash
APIC retired stock
When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest exceeded Mill’s capital balance. Under the bonus method, the excess:
Decreases the capital balances of the other partners.
FASB ASC 505-50-15-2 establishes a fair value approach for stock-based employee compensation plans. The fair value methodology is also extended to cover issuance of:
Equity instruments for good and services.
Which of the following is an objective of a rabbi trust?
Companies arrange various types of deferred compensation. The most common is referred to as a rabbi trust. A grantor trust is set up to fund compensation for a group of managers or executives. The goal is to provide a benefit that is not taxable to the recipients until some later date when they actually receive compensation. To qualify for no current taxation, the trust agreement must explicitly state that the assets of the trust are available to satisfy the claims of general creditors in the event of bankruptcy of the employer.
Cash collection is a critical event for income recognition in:
both the cost recovery method and the installment method.
A disadvantage of the periodic inventory system is that
cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
How do you calculate periodic inventory COGS?
Cost of goods sold as the difference between cost of goods available for sale and ending inventory. This system does not maintain records indicating what the amount of ending inventory should be. It simply requires a company to determine what the amount of ending inventory is at period end.
what is a direct financining lease?
As its name implies, a direct-financing lease is basically the coupling of a sale and financing transaction. In this case, the lessor removes the leased asset from its books and replaces it with a receivable from the lessee. The only income recognized by the lessor is the interest received. The implied rate is taken by calculating IRR of the asset; cash inflow is equal to lease payments and cash outflow is equal to the book value of the lease asset.
What is a sales type lease?
A sales-type lease is accounted for like a direct-financing lease, except that profit on a sale is recognized upon inception of the lease, in addition to the interest income recognized during the lease term. The gross profit recognized at the inception of the lease is the PV of all lease payments minus the cost of the leased asset.
A lease is recorded as a sales-type lease by the lessor. The difference between the gross investment in the lease and the sum of the present values of the two components of the gross investment (the net receivable) should be:
e
Rig Co. sold its factory at a gain, and simultaneously leased it back for 10 years. The factory’s remaining economic life is 20 years. The lease was reported as an operating lease. At the time of sale, Rig should report the gain as:
When a sale of property is made and a gain is realized on the sale, if the seller immediately leases the property back from the new owner, that is generally justification for deferring recognition of the gain on the sale. The deferred gain on the sale is generally accounted for as a deferred revenue, a deferred credit, recognized in later periods.
Accounting for a capital lease (Lessor)
Record a receivable and remove the asset from its balance sheet.
Record dealers’ profit at lease inception for a sales-type lease.
Record rental payment received, allocated between interest revenue and a reduction to the receivable, at each payment date.
e
When an asset may have sustained a loss in value, due to circumstances occurring by the end of the year, it must be tested for impairment. Under IFRS, the test for and measure of an impairment loss is the excess of carrying value above recoverable amount. The recoverable amount is the higher of the value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). The recoverable amount here is the value in use of $440,000, which is larger than the net realizable value of $450,000 - $16,000, or $434,000. Thus, a $60,000 impairment loss is recognized.
e
When a sale of property is made and a gain is realized on the sale, if the seller immediately leases the property back from the new owner, that is sometimes a justification for deferring recognition of the gain on the sale. If the lease is for a term that is a small fraction of the asset’s remaining useful life, then the gain is usually not deferred at all.
Regarding stock-based compensation, FASB ASC 718-10-30-10 requires that the total amount of compensation cost recognized in a stock-based employee compensation award be based on the total number of instruments that:
eventually vest.
Davis Tire Co. has a deferred compensation plan for several key employees. Each employee’s plan contains an agreement not to compete and has a different set of benefits. How should Davis Co. account for this plan?
The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.
FASB ASC 505-50-15-2 establishes a fair value approach for stock-based employee compensation plans. The fair value methodology is also extended to cover issuance of:
equity instruments of goods and services.
Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?
FIFO
In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases). FIFO will give opposite results, with a lowest cost of goods sold (from earliest purchases) and highest ending inventory (from recent purchases). Average costing will be in the middle of the other two on both measures.
inventory turnover
cogs/avg inventory
What is perpetual inventory system?
It measures the physical quantities in inventory under which the units received (manufactured) and issued (sold) are recorded continuously during the accounting period.
What is the periodic inventory system?
The periodic inventory system is a method of measuring the physical quantities in inventory under which the units (and costs) are determined at the end of the accounting period based on a physical count.
How do you calculate a deferred tax asset?
Deferred tax assets are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind.
The transfer of a security between categories of investments shall be accounted for at fair value. At the date of the transfer, the security’s unrealized holding gain or loss shall be accounted for as follows:
For a security transferred FROM the trading category, the unrealized holding gain or loss at the date of the transfer will have already been recognized in earnings and shall not be reversed.
For a security transferred INTO the trading category, the unrealized holding gain or loss at the date of the transfer shall be recognized in earnings immediately.
e
When a debt that is due within the next 12 months is refinanced (repaid with the proceeds of a long-term debt) after the balance sheet date, but prior to balance sheet issuance, the debt that was due within 12 months can be classified as a noncurrent liability, as long as the refinance was intended by management as of the balance sheet date. A disclosure of the details is required in the footnotes to the balance sheet.
Composite life system is a depreciation method that applies a composite rate of depreciation to a heterogeneous group of assets, such as all the assets in a plant. The composite depreciation rate is based on a weighted-average of the various lives of the assets in the group. It is based on the total carrying amount of the group regardless of the age of each individual asset in the group. No gain or loss is recognized on the disposal or retirement of an individual asset in the group.
The computation is composite depreciation expense = the composite depreciation rate × the group total carrying amount.
When applying group or composite depreciation methods, when one sells an asset, the cost of the asset is removed, and the accumulated depreciation is assumed to be equal to the difference between cash received and cost. When the asset cost and this accumulated depreciation amount are both removed, the carrying amount of the asset accounts is decreased by the cash proceeds exactly.
How do you record a N/R that matures less than one year?
Record note rec at face amount if matures less than one year.
What is the preferred dividend earned ratio?
This particular ratio is the relationship to earnings available to pay preferred stock dividends, net income, divided by the preferred stock dividends total.
What is the capitalized interest criteria?
For qualifying assets being constructed for an entity’s own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred.
Under the installment sales method, the gross profit on sales is?
deferred and recognized as cash is actually collected. The gross profit percentage is the realized gain divided by the contract price. This gross profit percentage is multiplied by any cash received to determine the gain to be included in net income.
Warranty of title is a warranty provided by the seller that the:
title is good,
transfer is rightful, and
goods are delivered free of any security interest or lien.
Cash and cash equivalent
3 months
e
When a right to return is allowed, sales revenue is often deferred until the right of return lapses unless all six required conditions are met sooner than that. In this case, the second requirement to recognize the revenue is not yet met—the buyer has to have paid the seller, or the buyer is required to pay the seller, and that obligation is not contingent on the buyer’s resale of the item.
An entity that exerts significant influence over another company in which it owns stock must use
the equity method to account for its investment. Under this method, dividends received from an investee reduce the carrying amount of the investment but are not included in the income of the investor.
In assessing the more-likely-than-not criterion as required by FASB ASC 740-10-25-7, which of the following is required?
The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.
Which of the following situations is the most likely cause of the decline in the bonds’ market value?
Increased interest rates.
When convertible debt is issued under IFRS rules, the value of the bonds alone is
treated as a liability on the corporation’s books, measured just as normal debt is, the present value with a reasonable discount rate, of the amounts to be paid.
When software costs are capitalized, yearly amortization of these costs is based on the
the greater of the ratio of current sales to expected total sales or the straight-line method over the useful life of the asset (four years).
Governmental financial reporting should provide information to assist users in which situation?
Making social and political decisions
Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens
Neutrality is part of
faithful representation.
An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a:
non current asset.
how do you calculate an additional pension liability?
the amount by which the net periodic pension cost exceeds the contribution.
Davis Tire Co. has a deferred compensation plan for several key employees. Each employee’s plan contains an agreement not to compete and has a different set of benefits. How should Davis Co. account for this plan?
The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life
A deferred compensation plan which is not the equivalent of a pension plan should be reported in accordance with FASB ASC 710-10-25-11. Davis Co. would accrue a liability of not less than the present value of the estimated future payments.
How do you record sales of GOOD on credit?
Dr. A/R
Cr. Revenue
Dr. Cogs
Cr. Inventory
should depreciation expense be included in nfp statement of activities?
Yes, as an element of expense.
Estimates of price-level changes for specific inventories are required for which of the following inventory methods?
Dollar-value LIFO starts with a base-year layer valued at base-year prices. As subsequent year layers are added, these inventory layers are valued using the specific inventory prices in effect for the year in which the layer is added. Thus, estimates of price-level changes (price indexes) for specific inventories are required in applying dollar-value LIFO.
what is the quick ratio?
CA+AR+Marketable Sec. / current liabilities
