FAR 3

Question 1

What is the treatment for gain and loss contingencies on the balance sheet?

Answer 1

Gain contingency:
1) Probable/reasonably possible - do not accrue; disclose amount & nature in notes
2) Remote - ignore

Loss contingency:
1) Probable to occur & can be reasonably estimated - accrue; disclose range of amounts & nature in notes
2) Reasonably possible to occur but cannot be reasonably estimated - do not accrue; disclose range & nature in notes
3) Remote - ignore

Question 2

If neither the O nor the W in the OWNES mnemonic exist, how long should the present value of the lease liability be amortized/depreciated?

Answer 2

By the length of the lease term, NOT by the useful life of the asset

Question 3

How is the bond issue price calculated using present value factors?

Answer 3

Bond face value x present value factor
+ Bond interest payment x present value of ordinary annuity/annuity due (depending on when the payment is made)

*Always use the market interest rate for the present value factor

Question 4

What is an easy way of determining whether a deferred tax liability or a deferred tax asset exists?

Answer 4

• Deferred tax liability: Financial income > taxable income (e.g., double-declining balance method for tax purposes vs. straight-line method for financial reporting purposes)
• Deferred tax asset: Financial income < taxable income (e.g., prepayment of rent - recognize the full amount of revenue on tax return; only recognize portion of revenue that is earned on the books)