FAR (3rd Deck) Flashcards
What does it mean when a bond is considered premium, give an example?
Example:
Your bond: 8% fixed rate (from when rates were high)
New bonds today: Maybe 4% (current lower rate)
Result: Investors will pay PREMIUM for your 8% bond
Debt
Think of it like this:
Would you rather have:
Old bond paying 8% interest?
New bond paying 4% interest?
I would want the 8% interest!
How do you calculate for Debenture Bond?
Debt
All all unsecured bonds:
* Registered bond
* Convertible Bond
How to you determine Serial Bond?
Debt
Add all bonds with schedule maturity
Remember: A bond can’t be both debenture and serial - they’re mutually exclusive categories!
Accounting Changes and Errors
It’s like this:
* 20X7: -$60,000 (income too low due to understated ending inventory)
* 20X8: +$60,000 (income too high due to understated beginning inventory)
Net effect: $0
The Effect on RE would be a $75k overstatement.
Then we just have to deal with the 20X8 ending inventory error of +$75,000 overstatement, which is what carries forward to 20X9.
How do you find the net cash balance if you were given the bank statement balance number?
Cash & Cash Equivalents
How do you find the net cash balance if you were given the cash balance per books?
Cash & Cash Equivalents
If you think about it logically, the bank would know about bank service charges, interest, if there is errors in the books that would not be known until later. Also, NSF check (bank would know first).
What items are considered cash and cash equivalent and what is the usualy time range?
Cash & Cash Equivalents
- Checking Accounts
- Cash
- Money Market Account
- Petty Cash
- Treasury Bill (Due within < 90 Days)
How do you calculate for Dividend Payout Ratio?
Cash Dividends / Net Income
How do you determine the acid test ratio?
F/S Ratio
(Cash + Marketable Securities + Net Receivables) / Current Liabilities
How do you determine the amortization on a copyright for accounting purpose? What rule should be follow?
You should you the estimated useful life of the Intangible up to the time it is expected to generate cash flows.
If a noncash asset is subject to a liability that the partnership assumes, the asset’s fair value is reduced
Equity
by the present value of the liability.
Goodwill
Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount, if any, should be recorded as goodwill to the original partners?
A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?
Equity
*Remember: Large Stock Dividend = Greater than 20% - 25% is recorded at Par Value
*
When Div Declared, (1000 x $1 x 30%) = 300
Dr: RE $300
________Cr: CS (Par) $300
Equity
What are dividends in arrears?
They are undeclared dividends that are not represented as a liability and therefore not accrued.
Disclosed in F/S notes.
When you are trying to determine a Lease Liability for a specific year, what is the usual formula and consideration taken to find Year 2 or 3 liability?
Lessee
Lease Obligation
Less: Any payment made before the Lease begins
= Amount of Liability Remaining for Year 2 Beg
Determine the Year 2 Principal Pmt:
Take the Annual Payment for Year 2
Less: Interest Expense
= Principal Pmt amount
Beg Year 2 Liability
Less: Year 2 Principal Amount
= Liability for Dec 31, Year 2
When it comes to determining the amortization of ROU asset, what are the steps or formula?
Lessee
You take the PV of the Lease Pmts / Either Shorter of Lease term or useful life = Amortization of ROU
On January 1, Year 1, Grout Co. entered into a 5-year finance lease for a new truck with annual payments of $20,000 beginning January 1, Year 1. Based on an implicit interest rate of 6%, the five lease payments have a present value of $89,300 at lease inception. What amount should Grout report as interest expense for the year ended December 31, Year 1?
Lessee
Understand that when first payment is made on the same date when the lease is signed, interest isnt accrue until time has passed.
So you have to take the PV of the lease 89,300
Less: Payment of $20,000
= $69,300
$69,300 x 6% = $4,158 Interest Expense for Year 1
Good Branch Question
On January 1, Year 1, Frost Co. entered into a two-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, Year 1 and ends on December 31, Year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a finance lease?
A. The economic life of the computers is three years.
B. The fair value of the computers on January 1, year 1 is $14,000.
C. Frost does not have the option of purchasing the computers at the end of the lease term.
D. Ownership of the computers remains with Ananz throughout the lease term and after the lease ends.
Lessee
A, its not A because 2 Year Lease/ 3 year is not > 75% of the economic life
B. Correct Answer! Bc the PV of the lease term is > 90% (Take the PV of Least Pmt/ FV of the computers.)
C. If there was a purchase option at the end of the lease term it would be considered a finance lease.
D. If ownership remains with the Original owner then it aint finance lease Similar to Answer C.
On December 31, Year 1, Roe Co. leased a machine from Colt for a 5-year period. Equal annual payments under the lease are $100,000 (including $5,000 annually allocated to taxes and insurance) and are due on December 31 of each year. The first payment was made on December 31, Year 1, and the second payment was made on December 31, Year 2. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $417,000. The lease is appropriately accounted for as a finance lease by Roe. In its December 31, Year 2, balance sheet, Roe should report a lease liability of
Lessee
Understand that the discounted 10% is considered an interest expense with it comes to finance lease.
Key Consideration/Observation:
The PV of Lease Annual Pmt” 417,000
Less: 100,000
= 317,000 Year 2 Beg Liability
100,000 Annual Pmt
Less: Interest of $31,700 = (317,000 x 10%)
= 68,300
317,000 - 68,300 = $248,700 Lease Liability
When you lease and there has been new improvements to the lease what should you do?
Lessee
You should account for amortization based on the economic life of the asset.
On January 2, Year 1, Marx Co. as lessee signed a 5-year noncancelable equipment lease with annual payments of $200,000 beginning December 31, Year 1. Marx treated this transaction as a finance lease. The five lease payments had a present value of $758,000 on January 2, Year 1, based on Marx’s incremental borrowing rate of 10%. In its year-end income statement dated June 30, Year 1, what amount of interest expense should Marx report?
Lessee Interest Expense
Take:
PV of the Lease Obligation: 758,000
x 10%
x 1/2 for (Jan to Jun)
= $37,900 Interest Expense
Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years. The lease is for five years, and Douglas can purchase the machinery at fair market value at the end of the lease. What is the amortizable life of the leased machinery for financial reporting purposes?
Lessee Amortization
In the long-term liabilities section of its balance sheet at December 31, Year 1, Mene Co. reported a finance lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, Year 2, and January 2, Year 3. Mene’s incremental borrowing rate on the date of the lease was 11% and the lessor’s implicit rate, which was known to Mene, was 10%. In its December 31, Year 2 balance sheet, what amount should Mene report as finance lease obligation, net of current portion?
Lessee Obligation
For a finance lease, each payment has two parts:
- Interest expense (Liability × Interest rate)
- Principal/Liability reduction (Payment - Interest expense)
Your calculation:
- Starting liability = $75,000
- Interest expense = $75,000 × 10% = $7,500
- Payment = $9,000
- Principal reduction = $9,000 - $7,500 = $1,500
- New liability = $75,000 - $1,500 = $73,500
On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for a total of 56 months. The lease term spans five years. The company has a calendar year end. What amount is the company’s lease expense for the current calendar year?
So even though its 56 months x $28,900 = 1,618,400 / 60 =26,973.3 per month
26,973.3 x 7 months* = $188,813 for the 1st year.
*Jun to Dec = 7 months!
Note: even though they only paid 56 months, you still have to evenly spread the lease total payment across 5 years or 60 months.
On December 31, Year 1, Grove Co. leased a machine from Farm, Inc. for the machine’s 7-year useful life. Equal annual payments under the lease are $105,000, including $7,500 allocated annually for taxes and insurance, and are due on December 31 of each year. The first payment was made on December 31, Year 1. The present value of lease payments at the inception of the lease was $576,500. The lease is appropriately accounted for as a finance lease by Grove. In its December 31, Year 2, balance sheet, Grove should report a right-of-use asset equal to
ROU Asset
ROU Asset calculation for Year 2:
Initial ROU asset value = $576,500
Annual amortization = $576,500 ÷ 7 years = $82,357
After one year: $576,500 - $82,357 = $494,143 (the correct answer)
Key Point: When a question asks about “right-of-use asset,” focus on:
- The initial asset value
- The amortization calculation
- The time period that has passed
When it guaranteed payments included as a part of lease payments?
Lease Guaranteed Payments
Only when Guaranteed residual value is likely to exceed leased asset’s expected residual value.
Sorel Co. enters a lease for machinery from Sherman Co. Sorel appropriately accounts for the lease as a finance lease. The lease contains a bargain purchase option of $3,000 exercisable at the end of the three-year lease term. Sorel agrees to an annual lease payment of $11,000 due at the beginning of each period. Sorel knows the implicit interest rate is 4%. The present value factor of a single sum for three periods at 4% is .88900, the present value factor of an ordinary annuity for three periods at 4% is 2.77509, and the present value factor of an annuity due for three periods at 4% is 2.88609. What amount will Sorel record as the lease liability at the inception of the lease?
Also, when a Bargain purchase option is exercisable at end of lease term you account for the PV amt of the single sum + the PV of the annual pmts (subject to payment end or beg)
Bargain Purchase Option = 3000 x .88900 = $2,667
Annuity Due (Implicit Rate) = 11,000 x 2.88609 = $31,746.99
Total = 34,413.99
When payments are made beg of each period its considered an Ordinary Annuity Due (use that PV factor!)
payment called for by the bargain purchase option would be added at its PV
What is the impact of an accounting error on depreciation expense and how would it be corrected in subsequent year?
Accounting Errors
It would Understate Accum. Deprec. and also to correct you would need to adjust RE for the current year by debiting the account.
How do you determine the Dividend Payout Ratio?
F/S Ratios
= Cash Dividend/Net Income
The dividend payout ratio (Cash dividends / Net income) measures the percentage of a company’s earnings that is distributed in the form of cash dividends, allowing investors to better comprehend their return on the stock during the period.
Inventory
The $1,050,000 cost is allocated based on the relative sales value of the lots, as computed below. Answer: 4,200
How do you determine the Proceeds for a specific type of stock (CS or PS) when you receive proceed for both?
Equity
You take the FV divide that by Total FV of the two stocks to get the % of the two stocks and allocate the proceeds based on %.
What is the formula for “Times Interest Earned Ratio”?
F/S Ratio
What is the JE with a company issues 5000 shrs of $100 par convertible preferred stock for 110 per share?
Now lets say one shr of PS can convert into 3 shr of $25 CS. How would you record the JE on the conversion?
Equity
What are the steps to liquidate a partnership, Smith and Jones, who shares profit and loss with a ratio of 60:40, respectively? What is Smith Distributed capital?
Use the below information:
Other Assets: 450,000
Smith Loan: 20000
Account Payable: 120,000
Smith Capital : 195,000
Jones Capital: 155,000
Note: Other Assets are sold for 385,000
Equity
Sell Non Cash Assets: 385000-450000 = -65,000
Allocate Loss to Partners: Smith % of loss 60% x -65k = -39,000
Pay the liabilities with the cash received: 385,000-120,000 = 265,000
Distribute based on capital account:
Smith Capital 195,000 - 39000 - 20000 = $136,000
Smith Loan to the Company must be paid back to him before distribution of capital.
Edge Company has 500,000 shares of no par common stock with a stated value of $8 per share issued and outstanding as of January 1, Year 5, originally issued for $14 per share. During Year 5, Edge Company had the following transactions involving its own stock:
- On March 6, acquired 12,000 shares of treasury stock at a cost of $12 per share
- On April 18, resold 4,000 shares of treasury stock at $15 per share
- On June 11, resold an additional 2,000 shares of treasury stock at $18 per share
If Edge uses the cost method of accounting for treasury stock, what will be the balance in additional paid-in capital from treasury stock as a result of these transactions?
Equity
When stock dividend is declared does it affect Assets, Liabities or Equity?
Equity
No, SE, Assets, Liabilities, and Equity is usually not affected from the declaration of stock dividend being declared.
ONLY cash dividends creates liabilities!!!
How should a partner who contributes the following item be treated on capital account?
* Assets
* Noncash Assets
* Liabilities assume by partnership
Equity
Assets = At FV
Noncash Assets = Asset FV - PV of Liab
Liabilities assume by partnership = at PV
How would you determine the current income tax expense based on the following below information?
Pretax Income: 100,000
Deprec in F/S > Tax Depreciation: 8,000
Equity Method, resulted in F/S Income: 35000
Dividend Received, 65% DRD: 25000
Effective Income Tax Rate: 30%
Pretax Book Income: 100,000
Temp Differences:
* 8000
* + 25000
* -35000
Permanent Difference:
* Deduct DRD (25000 x 65%) = -16250
Taxable Income: 81750 x 30% = 24,525
What is the JE to record a buyback/repurchase shares that is greater than issuance price = Par Value?
How do you determine deferred income tax expense?
= Temporary Differences x Future (Enacted) Income Tax Rate
At what point should you account for contingent events on disclosing and accrue?
Contingency
Anything remote should not be disclosed or accrue.
Only accrue for Probably + Estimatable LOSS
Everything else is disclosed but not Accrue.
When it comes to recording cash dividends, what are the three most important dates and what is the JE on them?
Equity
Date of Declaration
* Dr: RE
* Cr: Div Payable
Date of Record
* No Entry
Date of Payment
* Dr:Div Payable
* Cr: Cash
When there is a understated depreciation and it was recorded to Manuf. Overhead, what is the effect on Shareholder Equity and Asset?
Accounting Errors
The Effect is that RE is going to be overstating SE and also asset will be overstated since the Expense increase inventorable value being in MOH.
What is relevant in estimating the useful life of an intangible asset?
Intangible Assets
- Expected use
- Expected useful life related to the intangible
- Legal provisions that might limit or extend useful life.
Birk Co. purchased 30% of Sled Co.’s outstanding common stock on December 31, Year 1, for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. Assume Birk Co. uses the equity method to account for this investment. On December 31, Year 1, what amount of goodwill should Birk attribute to this acquisition?
Investments
Goodwill = Purchase Price - (Fair Value of Net Assets × Ownership %)
Using this question’s numbers:
Purchase Price = $200,000
Fair Value of Net Assets = $600,000
Ownership % = 30%
Step 1: Calculate fair value of your portion
$600,000 × 30% = $180,000
Step 2: Calculate goodwill
$200,000 - $180,000 = $20,000
Lessee
Revenue Recognition
Progress Billing to Date is not needed, However, Profit prev. recognized is needed.
Per the formula below referenced:
What is the basic criterion used to determine the reporting entity for a governmental unit?
Financial accountability
Governmental funds have a budgetary focus and use modified accrual accounting. The main emphasis of reporting is the sources, uses, and balances of current financial resources.
Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?
Subsequent Event
The real-world application is:
If you have a short-term liability ($500,000 in this case)
AND you issue stock to pay it off ($400,000 in this case)
AND this happens after year-end but before issuing financial statements
THEN you can reduce the short-term liability by that amount
So the practical impact is:
Original short-term liability: $500,000
Amount refinanced with stock: $400,000
= Remaining short-term liability: $100,000
