FAR 28 Flashcards
If a bond premium is not amortized - what are the effects on Interest Expense and Total Stock Holder’s equity
JE:
dr Interest expense 50
dr premium 10
cr Cash (face * stated rate) 60
If you do not amortize interest expense - then the interest expense would be over stated:
dr. interest expense 60
cr cash 60
The result is that the over statement of interest expense will UNDERSTATE net income ( by $10)
Understated Net Income will close out to Retained Earnings ( lower by $10) resulting in an UNDERSTATEMENT of stockholder’s equity
When purchasing a bond, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
The Price
The market value of a bond consists of two parts, the present value of cash flows from interest, calculated at the effective rate, and the present value of the lump sum principal, calculated at the effective rate. These two amounts are added together to get the market price or selling price of the bond.
Loan 2 is an 8%, $1,000,000 loan with interest due annually on December 31. Drake did not record or pay the required year 2 interest payment until January 1, year 3. Prepare the journal entry Drake should record at December 31, year 2.
dr Interest Expense 80,000
cr. Interest payable 80,000
Loan 1 is a 4%, five-year balloon loan for $3,000,000 with interest due and paid annually on December 31. Drake records interest annually on December 31. Drake incorrectly recorded the journal entry for the year 1 interest expense and payment as a debit to accrued interest payable and a credit to cash. Prepare the net journal entry to correct year 1 and properly record the interest attributable to the loan as of and for the year ended December 31, year 2.
dr RE 120,000
cr accrued interest payable 120000
dr interest expense 120,000
cr cash 120,000
How are R&D assets acquired in a business combination measured and reported
They are measured and reported at their fair values at the date of acquisition
How do you calculate the initial carrying amount of a bond
Present Value of face amount + PV of all future interest payments at date of issuance
This for both a discounted bonds and bond at a premium
How do you calculate how much cash is paid each interest payment date
If semi-annual:
Face Amount * Stated rate * 1/2
If Annual:
Face Amount * Stated rate
If you don’t have the Effective Interest Rate given:
Interest Expense / carrying amount at beginning * 2 ( if semiannual payments
What do you do if you do not have the Effective Annual Interest rate given?
Interest Expense = CV * EIR *1/2 so
EIR = Interest Expense/CV * 2
CV at the beginning of period
and X2 if semiannual payments
How do you calculate the new Carrying Value (premium and discount)
Discount:
CV old period (+) amortization for the current period 800 + 50 = 850 NEW CV or FV - unamortized discount = CV 1000 - 150 = 850 NEW CV
Premium:
CV old period (-) amortization for the current period
1100 - 25 = 1075
or
FV + unamortized premium for current period
1000 + 75 = 1075
How do you calculate the new Carrying Value (premium and discount)
Discounts
CV old period (+) amortization for the current period
800 + 50 = 850 NEW CV
Premium
CV old period (-) amortization for the current period
800
Formula: Cash Paid
(Face Value * Stated IR ) *1/2 semi
Initial CV at start of Bond
= Proceeds from this issuance of the bonds
Proceeds = PV of lump sum + PV of all future payments
PV is calculated using the EIR
Formula: unamortized premium
Carrying amount - Face Amount
Formula: Interest Expense
CV at beginning * EIR *1/2 (semi)
Formula: CV at end of period Premium
Cv previous period - amortization for current period
JE for Stock Dividend
dr. RE (Fair value)
cr. Common Stock (par)
cr. APIC (difference)
JE for detachable warrants:
example: 1000, $1,000 FV bonds with detachable warrants good for 1 share of C/S at $25 per share. Proceeds = $1,000,000
Market Value of bonds without warrants = 1,080,000
Market value of warrants is $120,000
The proceeds of bands with detachable warrants are allocated between bonds and warrants based on their relative FMV at time of issuances:
FMV of Bonds: 1,080,000
FMV of warrants: 120,000
Total FV of $1,200,000
warrants: 120,000/1,200,000 = 10%
10% * 1,000,000 = $100,000
Bonds: 1,080,000/ 1,200,000 = 90%
90% * 1,000,000 = $900,000
JE:
dr CASH 1,000,000
dr. Bond Discount 100,000
cr. Bonds Payable 1,000,000
cr. APIC warrants 100,000
On Balance sheet the amount of Bonds payable will equal B/P - Discounts or 1,000,000 - 100,000 = $900,000
What are a public company’s requirements for reporting per share amounts
- required to report per share amounts for income from continuing operations and net income
- Also will report per share (or disclosed) for discontinuing operations and
NOT required for preferred stock dividends, US Treasury Stock, or compensation effect of fair value on stock options
What are the two situations in which disclosures are required for going concern
1) If you find evidence of substantial doubt but they are then alleviated by management - must disclose
2) If there is substantial doubt and Not alleviated - Then must disclose
What should the Going Concern disclosure describe:
1) Principle conditions or events that led you to believe they had a going concern issue ( before you got a plan from management)
2) Management’s evaluation of the significance of those conditions
3) A description of management’s plans to mitigate the concerns or a description of their plans that you do not agree will actually alleviate their concern
A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized under IFRS?
The change in the liability is recognized in profit or loss.
A decommissioning liability, similar to an asset retirement obligation, represents the estimated amount it will cost the entity to put property into a usable or sellable condition when it is no longer going to be used by the entity for its original purpose.
The liability is periodically adjusted to reflect changes in the estimated cost with increases or decreases recognized as adjustments to the carrying value of the property and subsequently affecting depreciation or amortization expense.
When the property is fully depreciated, any adjustment to the decommissioning liability is recognized in profit or loss since it is too late to recognize it as an adjustment to depreciation or amortization.
