FAR 28

Question 1

If a bond premium is not amortized - what are the effects on Interest Expense and Total Stock Holder’s equity

Answer 1

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

Question 2

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?

Answer 2

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.

Question 3

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.

Answer 3

dr Interest Expense 80,000

cr. Interest payable 80,000

Question 4

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.

Answer 4

dr RE 120,000
cr accrued interest payable 120000

dr interest expense 120,000
cr cash 120,000

Question 5

How are R&D assets acquired in a business combination measured and reported

Answer 5

They are measured and reported at their fair values at the date of acquisition

Question 6

How do you calculate the initial carrying amount of a bond

Answer 6

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

Question 7

How do you calculate how much cash is paid each interest payment date

Answer 7

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

Question 8

What do you do if you do not have the Effective Annual Interest rate given?

Answer 8

Interest Expense = CV * EIR *1/2 so
EIR = Interest Expense/CV * 2

CV at the beginning of period
and X2 if semiannual payments

Question 9

How do you calculate the new Carrying Value (premium and discount)

Answer 9

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

Question 10

How do you calculate the new Carrying Value (premium and discount)

Answer 10

Discounts

CV old period (+) amortization for the current period

800 + 50 = 850 NEW CV

Premium
CV old period (-) amortization for the current period
800

Question 11

Formula: Cash Paid

Answer 11

(Face Value * Stated IR ) *1/2 semi

Question 12

Initial CV at start of Bond

Answer 12

= Proceeds from this issuance of the bonds

Proceeds = PV of lump sum + PV of all future payments

PV is calculated using the EIR

Question 13

Formula: unamortized premium

Answer 13

Carrying amount - Face Amount

Question 14

Formula: Interest Expense

Answer 14

CV at beginning * EIR *1/2 (semi)

Question 15

Formula: CV at end of period Premium

Answer 15

Cv previous period - amortization for current period

Question 16

JE for Stock Dividend

Answer 16

dr. RE (Fair value)
cr. Common Stock (par)
cr. APIC (difference)

Question 17

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

Answer 17

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

Question 18

What are a public company’s requirements for reporting per share amounts

Answer 18

• 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

Question 19

What are the two situations in which disclosures are required for going concern

Answer 19

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

Question 20

What should the Going Concern disclosure describe:

Answer 20

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

Question 21

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?

Answer 21

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.