FAR 38 Flashcards
In a capital lease the amount recorded by the lessee and lessor equal what
lessee records an amount equal to the PL of the MLP at the beginning of the lease
they record the value at the lower of FMV or MLP
To get the MLP you include: - annual payment -BPO as a lump sum - guaranteed residual value ( as a lump sum) - penalty for failure to renew NO executory costs
Lessor includes all of the above but would also include the pv of the unguaranteed residual value
- you would not include this amount if you are doing a TT or have a BPO
What information does the balance sheet provide information for
- the companies liquidity
this is because there is information about cash and equivalents that can easily be converted into cash - same with assets
- also about flexibility
this is because it has information about if the company has resources to acquire additional assets and if these assets can easily be disposed of
what is the difference between
- historical costs/nominal dollar
- current cost/nominal dollar
- historical cost/constant dollar
- current cost constant dollar
- Historical cost/nominal dollar - items are recorded at their ORIGINAL amounts and NOT adjusted for price changes
Current cost/nominal dollar - - items are adjusted to their CURRENT amounts, but NOT for changes in the general price level
Historical Cost/Constant dollar - items are recorded at their ORIGINAL costs, but are ADJUSTED for changes in the general price level
Current Cost/Constant dollar - items are BOTH ADJUSTED to current amounts and ADJUSTED for changes in the general price level.
What is a company required to disclose for each reporting segment
- profit and lose AND Total assets for each reporting segment
What is the difference between accrual method and installment method for recognizing a sale
Accrual - you recognize revenue on the date of the sale
In Installment method - you use the gross percentage to recognize revenue in proportion to collections
Installment receivables * Gross profit = deferred gross profit
realized gross profit = collections * gross profit percentage
What are warranty expense accounts based on
They are based on estimated warranty expenses
If the estimated costs are 1% in first year and 3% in second year - the total estimated costs are reported 4% of sales Sales 1000 At time of sale: dr cash 1000 cr sales 1000
dr warranty expense 40
cr estimated warranty liability 40
the amount spent in a year is applied to the warranty
dr. estimated warranty liability 6
cr cash 6
At end of year - warranty expense for year = 40
Warranty liability = +40 - 6 = 32
LOC - what are the rules
When you have a line of credit, but have not borrowed against it - there is NO liability recored on the books
Instead it is DISCLOSED in the notes
What if you have a LOC and it comes with a compensating balance requirement - how do you treat?
- The required compensating balance is treated as restricted cash on the balance sheet
Restricted cash can be current or non current depending on when you plan to use it
Other asset
It is Not part of cash or cash equivalents
What do you do if you enter into a noncancellable purchase commitment that will have a loss
You will accrue a liability for the amount that exceeds the value
So you must buy 10,00- units
So have bought 2500 units
The price if 6.50 the current value is 5.00
6-5.5 = 1.5 per unti
1.5 * the number of unit you must purchase = 7500 = 11,250
This is recorded as a loss and liability
dr loss 11,250
cr. estimated liabiity 11,250
Disclose/Accrue?
At December 31, 20X1, Town had outstanding purchase orders in the ordinary course of business for purchase of a raw material to be used in its manufacturing process. The market price is currently higher than the purchase price and is not anticipated to change within the next year.
No Accrue No Disclose
(Neither accrual nor disclosure) Fluctuations in the market prices of resources used or required by an entity represent the normal risks of being in business. It would be neither possible nor useful to recognize all such risks in the financial statements and neither disclosure nor accrual would be required.
Disclose/Accrue?
A government contract completed during 20X1 is subject to renegotiation. Although Town estimates that it is reasonably possible that a refund of approximately $200,000 $300,000 may be required by the government, it does not wish to publicize this possibility.
Disclose
(Disclosure only) The prospect of being required to pay a refund as a result of an anticipated renegotiation of a government contract represents a contingent loss. Since it is only reasonably possible that it will occur, it will be disclosed and not accrued. If it were probable, it would be disclosed and accrued. The amount to be accrued would be the minimum amount of the range, $200,000, since there is no indication that an amount within the range of $200,000 to $300,000 is the best estimate of the loss.
Disclose Accrue?
Town has been notified by a governmental agency that it will be held responsible for the cleanup of toxic materials at a site where Town formerly conducted operations. Town estimates that it is probable that its share of remedial action will be approximately $500,000.
Accrue and Disclose:
(Both accrual and disclosure) A governmental requirement to clean up toxic waste is an asset retirement obligation that is treated similarly to a contingent liability. Since a liability of $500,000 is both probable and reasonably estimable, that amount will be accrued and disclosed.
Disclose Accrue?
On January 5, 20X2, Town redeemed its outstanding bonds and issued new bonds with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds.
Disclose Only
The redemption of bonds after the balance sheet date is a subsequent event. Since it is not indicative of a condition that existed as of the balance sheet date, as the bonds were not redeemed until the following period, it is a Type 2 subsequent event that will be disclosed but will not involve an adjustment to the financial statements.
Disclose Accrue?
Edge owns a small warehouse located on the banks of a river in which it stores inventory worth approximately $500,000. Edge is not insured against flood losses. The river last overflowed its banks twenty years ago.
No Accrue No Disclose
The fact that a company does not maintain an insurance policy for certain types of losses does not constitute a contingency that would be subject to accrual unless the condition that is not covered by insurance exists at the balance sheet date, it is probable that a loss will occur, and the amount of the loss can be reasonably estimated. Although the company may disclose the lack of insurance, it is not required to do so
Disclose Accrue?
During 20X3, Edge began offering certain health care benefits to its eligible retired employees. Edge’s actuaries have determined that the discounted expected cost of these benefits for current employees is $150,000.
Accrue and disclose
When a company has an obligation for postretirement benefits, such as providing health care benefits to retired employees, an amount equal to the present value of an estimate of the expected benefits must be accrued and reported as a liability. The amount, in this case, is given as $150,000. An obligation for postretirement benefits must also be disclosed.
