Far 3 Flashcards by Riley Wagner

Payables and Accrued Liabilities…

CURRENT LIABILITIES

Liabilities are either Current Liabilities or Non-Current Liabilities

Current Liabilities: expected to be paid within 1 year OR one operating cycle
-current liabilities are non interest bearing.
-current liabilities are primarily accounts payable and accrued liabilities/expenses
-accounts payable are short term liabilities due to purchasing goods or services on credit
ex.
office supplies X
inventory X
Accounts payable X

Accrued Expenses:
are expenses that are recognized in the books before they are paid for, with the main example being payroll, interest, and taxes

Payroll Liabilities:
Are the wages that are accrued as employee’s work, and then are paid out as a wage or salary expense on payday
ex.
wages expense X
wages payable X

then when wages are paid…
wages payable X
cash X

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LONG-TERM Debt

Modification of terms (substantially the same loan) vs. Extinguishment of Debt (a substantially different new loan)

To be considered an Extinguishment….

there needs to be a 10% or greater difference in the PV of the new loans cash flows and the PV of the old loans remaining cash flows.
ALSO, if any embedded conversion options were changed, it could be considered “substantially different” and would be considered an extinguishment.

*** if neither of these apply, then the new loan is not substantially different and it would just be considered a modification.

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Asset Retirement Obligation (ARO)

Assets that have environmental impact or are affected by other regulations, there will be significant cots to dispose of the asset.

ex. costs could be to close a mine, decommissioning nuclear processes, or site reclamation
-the future asset retirement costs are capitalized as an asset, and as a liability
-the amount capitalized is the weighted PRESENT VALUE of the future costs to retire the asset.
-the assets base is depreciated over its useful life
The ARO is INCREASED each year as time goes on and this is “accretion expense”, increasing the PV of the ARO up to its full amount the closer it gets to being retired
*The accretion expense= ARO Balance x discount rate at initial measurement

ex.
the initial entry:
Mine 107,500
                   Cash 100,000
                   Liability for ARO 7500 (the PV)

the entry to recognize accretion expense for each year:
Accretion expense 500
Liability for ARO 500

by the end of all the years, when the money is paid and the mine is sealed, the final entry is:

Asset Retirement Obligation 10,000
Cash 10,000

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Troubled Debt Restructuring

When the creditor grants the debtor a concession that they normally wouldn’t consider…

the creditor would obviously rather get paid back a portion of what they are owed then nothing if the debtor is forced to default
when this happens, the creditor must record a LOSS, and the debtor records a GAIN!

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Debt Vs. Equity Instruments

Some instruments have features of both debt and equity.

Convertible Debt: Debt that can be later be exchanged for common stock. It will be classified as Debt until the conversion takes place.

Bonds with Detachable Warrants:
The proceeds from the issuance are allocated to:
- the FV of the warrants without the debt (Paid in capital account under equity) and the
-FV of the debt instrument

Issuing shares worth a fixed dollar amount:
-A firm that is basically just agreeing to pay a certain price in the future this is considered DEBT.
-If a firm issues a certain number of shares BUT NOT at a fixed price, this would be considered EQUITY!
5456

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BONDS

Bonds and long term notes use essentially the same principles!

Types of Bonds:

Secured and Unsecured Bonds:

A secured bond has a claim to specific assets, meaning there is collateral involved
Unsecured bonds have no such claims and the bondholders are unsecured creditors

Serial Bonds: bonds that mature at staggered intervals

Single Maturity Bond: Most CPA problems are this type of bond and it just means a bond with a single maturity date

Callable and redeemable bonds: Bonds that can be matured before the maturity date a specified price

Convertible and Non Convertible:

a convertible bond can be converted into stock
most bond problems will be “regular” bonds that are not convertible, and just have a single maturity date

MATURITY DATE OF BOND:

if the market rate is GREATER than the stated rate, there is a discount
if the market rate is LESS than the stated rate, there is a premium
if the market rate is the SAME as the stated rate, there is no premium or discount

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Convertible Debt (CD)

Debt that can be later reclassified or exchanged for common stock. Will be classified as Debt until the conversion takes place. If the conversion is satisfied with cash instead of common stock, then it remains classified as Debt

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Bonds with Detachable Warrants

The proceeds from the issuance are allocated to:

the Fair Value of the warrants with out the debt (paid in capital)
The fair Value of the debt instrument (classify as debt)

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Issuing Shares with a Fixed Dollar amount

If a firm agrees to a transaction where they will issue shares worth a fixed dollar amount in the future, this is considered DEBT. They are essentially just agreeing to pay pay a certain price in the future for the transaction… which fits the description of DEBT

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Issuing a fixed number of shares

IF a firm agrees to a fixed transaction where they will issue a certain number of shares.. but NOT a FIXED PRICE…. this would be classified as EQUITY

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Maturity Date of Bond

MATURITY DATE OF BOND:

if the market rate is GREATER than the stated rate, there is a discount
if the market rate is LESS than the stated rate, there is a premium
if the market rate is the SAME as the stated rate, there is no premium or discount

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Bond Price

Bond price is the Present Value of future cash payments discounted at the yield (Market) rate

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Premium on Bonds

cash proceeds-face amount

Meaning more cash was received than the face amount

Premium example:
ABC issues $100,000 of 10% bonds at 102. ABC received $102,000 in cash, so there is a premium of $2,000.

Cash $102,000
Bonds Payable 100,000
Bond Premium 2,000

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Discount on Bonds

face amount-cash proceeds

You received less Cash than the face amount

Discount example:
ABC issues $100,000 of 10% bonds at 97. ABC received $97,000 in cash and there is a discount of $3,000.
Journal entry is…

Cash 97,000
Discount 3,000
Bonds Payable 100,000

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Premium or Discount Bond Amoritization

As each bond payment is made, the premium or discount is amortized.

** The ACTUAL cash payment is equal to the bonds stated rate x the face amount.
This doesn’t change from payment to payment
What DOES CHANGE.. is the carrying value of the bond and the premium or discount.

With a bond discount…
the portion of the discount amortized with each payment is bringing the carrying value of the bond back up to its face amount by the bonds maturity date

With a bond premium.. the portion of the premium being amortized with each payment is bringing the carrying amount back down to the face amount by the bonds maturity date.

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Bond Issue Costs

The bond issue costs are reported on the B/S as a deduction to the bond carrying amount

the issuance costs are amortized over the life of the bond to interest expense

These costs include:
accounting fees, legal fees, printing fees, and underwriting fees

Fair Value option for BONDS

a company can elect to record a bond at fair value-the fair value option. The election can never be changed and it can apply to one or several books

the bond is recorded at FB
the amortization of a premium or discount still applies
any change in FV is recognized in earnings as unrealized gains or losses
INCREASE IN FV means a loss.. the company owes more
DECREASE in FV is a gain…. the company owes less

Conversion of convertible bonds

2 methods:

Book Value Method: at conversion you just transfer the bond balances to stock accounts and no gain or loss is recorded
Market Value Method: at conversion the stock accounts are credited for the market value of the stocks or bonds, the bond accounts are closed, and a gain or loss is recorded for the difference
* you are comparing the market value of the bonds to the market value of the stock, and the difference will either be a gain or loss

Bonds with Warrants (stock rights)

a company can issue bonds that also give the bond purchaser stock warrants (Stock RIGHTS)

Both the bonds and the warrants need to be allocated to a value

if the FV of both the bonds and the warrants is know, then you allocate the total bond price in proportion to the Fair Values
if only one FV is known, you assign the FV to that security and allocate the remaining bond price to the other security
when allocating a value to the warrants, this is recorded in equity, not debt

Notes Payable

Notes payable and discounts/premiums on bonds works exactly like bonds

With notes payable problems.. you might be given two interest rates:
1. The STATED RATE: This is the rate stated in the note and determines the actual cash payment of interest each period

2.The EFFECTIVE RATE: (or yield or market rate of interest) If the note is to be reported at Present value, then you use the effective rate.

when the effective rate is bigger than the stated rate, the note is issued at a discount
when the effective rate is lower than the stated rate, the note is issued at a premium

EQUITY- common vs preferred stock

Common stock usually has voting rights
Preferred stock doesn’t have voting rights, but preferred stock usually has dividends and dividend priority when common stock might not receive dividends

Preferred Stock can be:

callable
redeemable (if redeemable preferred stock has a specified date at a specified price, it is usually classified as DEBT and associated cash dividends are reported as interest expense)
convertible

*When callable or redeemable stock is called or redeemed, an dividends in arrears are PAID FIRST!

EQUITY-

Stock Issuance

When a company issues stock, there are usually 3 accounts hit:

“Cash” for the amount of the stock issued (cash received)
“Common Stock” (# of shares x par value)
“Paid in Capital excess of Par”-whatever is above the par value

ex. if you recieved 10 shares of $1 par value stock for $100, you would receive $100 in cash, and then credit common stock for $10 and credit “additional paid in capital” for $90

Cash $100
Common Stock $10
APIC $90

*If the stock is “NO PAR” stock, then there would be no APIC it would just be

Cash $100
Common Stock $100

Treasury Stock

Treasury stock is when a company purchases its OWN STOCK!

It lowers cash and owners equity.
It is a contra owners equity account
It is not an asset or an investment and income is never affected, EPS is increased

there are 2 methods for accounting for treasury stock… COST METHOD AND PAR METHOD

Cost method example:
ABC purchases 100 of its own shares for $20 per share. The entry would be:

Treasury Stock $2,000
Cash $2000
if ABC later reissued 20 of these shares at $30 per share…

Cash $600
Treasury Stock $400
Contributed capital from treasury stock $200

Cost Method for Treasury Stock

there are 2 methods for accounting for treasury stock…

Cost method example:
ABC purchases 100 of its own shares for $20 per share. The entry would be:

Treasury Stock $2,000
Cash $2000
if ABC later reissued 20 of these shares at $30 per share…

Cash $600
Treasury Stock $400
Contributed capital from treasury stock $200

Par Method for Treasury Stock

Par Method example:
ABC purchases 100 shares at $30/share of its own $10 par stock that was originally issued at $20
the entry would be:
Treasury Stock $1,000
Contributed Capital Excess of Par $1,000
Contributed Capital from Treasury Stock $1,000
Cash $3,000

If the treasury stock was purchased for $15/share it would be:
Treasury Stock $1,000
Contributed Capital in excess of par $1,000
Contributed Capital from Treasury Stock $500
Cash $1500

Dividends

Dividends are the distribution of cash or other property from a firm to its owners. They are a distribution of earnings, so they are NOT AN EXPENSE!

the liability or dividends payable is recognized at the declaration date of the dividends
the “date of record” is the cutoff date for owners to receive dividends
payment date is the date the dividends are actually paid out
dividends reduce the owners equity account when paid

Retained Earnings

Retained Earnings= Income to date-dividends declared to date +/- any other adjustments

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Far 3 Flashcards

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