FAR 39

Question 1

How do you calculate the minimum amount of unrecognized gain and when

Answer 1

unrecognized gain is amortized when the amount at the beginning exceeds 10% of the greater of the beginning PBO or Plan Asset

SO PBO 600
Plan asset 720
unamortized prior pension gain: 96

96 is greater than than both - so take the larger of the two - plan assets at 720,000

10% of 720,000 = 72,000
96,000 - 72,000 = 24,000

24,000 is then amortized over the expected average service life of employees = 12 years

24,000/12 = 2000 = amortization of unrecognized pension gain

Question 2

What is required to be disclosed regarding related parties

Answer 2

• Must disclose anything that is not in the ordinary course of business

Do not have to disclose normal transactions such as salary transactions and expense reimbursements - or per diem. ordinary course of business

• Need to disclose the nature of ownership or management control even if there are no transactions between the entities (even if when you due business it was a normal market rates and terms - still disclose)

_ Need to also disclose amounts due from or due to related parties as of the B/S date

• Need to disclose amounts of purchases from and sales to related parties

Question 3

what must you disclose in the Significant Accounting policies section

Answer 3

• you must disclose what acct policies and principle you use when GAAP gives you some alternatives that are all ok to use.

Example - profit recognition for long-term contracts

Question 4

What is the difference between IFRS and GAAP with acc changes and errors

Answer 4

• Changes in estimates - Like GAAP - prospectively
• Change in Acct principle - Like GAAP (call it policy) - retrospectively
• Correction of errors - Same as GAAp retrospectively
• Change in reporting entity - No recognized

Question 5

What is the purpose of notes to the financial statements

Answer 5

The purpose of notes is to provide those disclosures required by GAAP

Question 6

What is the effect when ending inventory is overstated on Current assets and Gross profit

Answer 6

Over statement of Current asset and over statement of gross profit

Explanation: When you over state inventory you think you have more assets than you actually do - (Overstate current Assets)

You also under state COGS ( an expense)

missed doing this entry:
dr. COGS
cr Inventory

so you expenses are understated and therefore your gross profit is over stated

Question 7

What are the IFRS disclose requirements that go along with a correction of an error

Answer 7

• as description of the error
• a description of the impact on the F/S
• Thi is will include the correction that was made and the impact on EPD and diluted EPS for earliest period presented

Question 8

When would you include a summary of significant assumptions

Answer 8

These are included when you prepare prospective financial statements

• ALWAYS include a summary of significant accounting policies

Question 9

What are example of Changes in estimate which require respective ( today and tomorrow) changes

Answer 9

• change in depreciation

- change in warranty obligation - nor effect on prior periods

Question 10

What do you do if you can’t determine if a change in accounting estimate or change in accounting principle has occurred -

Answer 10

the change should be considered a change in ESTIMATE

Question 11

What do you do if an investment you have now qualities as an equity method investment

Answer 11

NOT an acct change or correction of an error

ASC 323 - that when an investment qualifies for the equity method - it is applied prospectively - and NO retroactive adjustment is required. PROSPECTIVE

Question 12

When does IFRS allow a change in accounting policy

Answer 12

when 1 of 2 circumstances

1 - it required by IFRS

2- if the change will result in more relevant and reliable financial statements

Question 13

what is a change in a method of accounting considered

Answer 13

a change in accounting principle and is given retrospective treatment

Example: switch from completed contacts methods to percentage of completion method

Question 14

What do you do if you change from FIFO to LIFO but you can’t determine the cumulative effects of the change

Answer 14

The change is accounted for through prospective application to the earliest period possible

This is OK because it is sometimes not practical to determine the cumulative effect of a change

Question 15

What type of Transaction and Treatment?

Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is preferable, accounting for these long-term contracts was switched from the completed-contract method to the percentage-of-completion method.

Answer 15

Change in accounting principle.

Retrospective

A change in the method of accounting for a long-term construction contract is a change in accounting principle.

Question 16

What type of Transaction and Treatment?

As a result of a production breakthrough, Quo determined that manufacturing equipment previously depreciated over fifteen years should be depreciated over twenty years.

Answer 16

Change in accounting estimate.

Prospective

A change in the useful life of a depreciable asset is a change in accounting estimate.

Question 17

What type of Transaction and Treatment?

The equipment that Quo manufactures is sold with a five-year warranty. Because of a production breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.

Answer 17

Change in accounting estimate.

Prospective

A change in the estimated cost of fulfilling a warranty obligation is a change in accounting estimated.

Question 18

What type of Transaction and Treatment?

Quo changed from LIFO to FIFO to account for its finished goods inventory.

Answer 18

Change in accounting principle.

Retrospective

A change from LIFO to FIFO is a change in accounting principle.

Question 19

What type of Transaction and Treatment?

Quo changed from FIFO to average cost to account for its raw materials and work in process inventories.

Answer 19

Change in accounting principle.

Retrospective

A change from FIFO to average cost is a change in accounting principle.

Question 20

What type of Transaction and Treatment?

Quo sells extended service contracts on its products. Because related services are performed over several years, in 20X2, Quo changed from the cash method to the accrual method of recog­nizing income from these service contracts.

Answer 20

Correction of an error in previously presented financial statements.

Retroactive

A change from the cash method to the accrual method for recognizing income is a change from an unacceptable accounting principle to an acceptable one. It is considered a correction of an error.

Question 21

What type of Transaction and Treatment?

During 20X2, Quo determined that an insurance premium paid and entirely expensed in 20X1 was for the period January 1, 20X1, through January 1, 20X3.

Answer 21

Correction of an error in previously presented financial statements.

Retroactive

Recognizing the entire 2 year premium as an expense in the first year is an error.

Question 22

What type of Transaction and Treatment?

Quo changed its method of depreciating office equipment from an accelerated method to the straight-line method to more closely reflect costs in later years.

Answer 22

Change in accounting estimate.

Prospective

A change in the method of calculating deprecation is a change in accounting principle that cannot be distinguished from a change in accounting estimate.

Question 23

What type of Transaction and Treatment?

Quo instituted a pension plan for all employees in 20X2 and adopted the accounting standards related to pensions. Quo had not previously had a pension plan.

Answer 23

Neither an accounting change nor an accounting error.

Prospective

When a company adopts a new accounting principle for a transaction that is new or unlike previous transactions, it is not considered an accounting change but rather the establishment of an accounting policy. It is neither an accounting change nor an error.

Question 24

What type of Transaction and Treatment?

During 20X2, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 20X1, to 30%, and acquired a seat on Worth’s board of directors. As a result of its increased in­vestment, Quo changed its method of accounting for invest­ment in subsidiary from the cost adjusted for fair value method to the equity method. Quo did not elect to use the fair value method to report its 30% investment in Worth.

Answer 24

Neither an accounting change nor an accounting error.

Prospective

An increase in ownership from 10% to 30%, coupled with acquiring a seat on the board of directors gives the company the ability to exercise significant influence over the investee and would require a change from the cost method to the equity method. This would not be considered an accounting change or a correction of an error.

Question 25

Bulldog provides credit to its customers. The customer agreement requires the customer to pay a $40 penalty for late payments. A year 2 court decision indicated that the penalty was excessive and gave customers reimbursement recourse for this charge. The company recorded a year 2 provision of $1,000,00 for the reimbursements, which constituted the company’s estimated total liability. In the first quarter of year 3, the expected claims increased by 25% over the initial estimate.

Record any required year 3 journal entry related to the reimbursement provision.

Answer 25

Dr Provision Expense 250,000
cr. Penalty charge liability 250,000

Type of change - change in acc estimate

The $1,000,000 loss accrued in year 2 was an estimated liability. Estimated amounts are expected to change over time as more precise information becomes available. When this occurs, the change is recognized in the period in which the estimated amount changes. As a result, in year 3, when the company determined that claims were increasing by 25%, the liability of $1,000,000 would be increased by 255 or $250,000. It will be recognized as an additional expense and liability in year 3.

Question 26

What 3 types are considered accounting changes

Answer 26

• change in accounting principle
• Change in account estimate
• change in reporting entity

No - Correction of an error os NOT considered an accounting change