FAR 42 Flashcards
what do you do if you have an error correction where depreciation expense was not recorded properly or at all
You correct the error, but do not change the depreciation expense in the new year where you discovered the error.
You record the normal amount of depreciation for the year
Correcting the error would be to fix Acc depreciation and RE
example :
Althouse Co. discovered that equipment purchased on January 2 for $150,000 was incorrectly expensed at the time. The equipment should have been depreciated over five years with no salvage value. What amount, if any, should be adjusted to Althouse’s depreciation expense at January 2, the beginning of the third year, when the error was discovered?
Increase RE by 90,000 - to reverse the expense that you took in the first year
Increase accumulated depreciation by 60,000
Increase equipment by 150,000
A change that relates to having incorrectly expensed the cost of equipment is recognized by adjusting beginning retained earnings for the net effect of the adjustment as of the beginning of the earliest period presented and applying the correct principle for all periods being reported upon. If the equipment had been capitalized for $150,000, as of the beginning of the 3rd year, accumulated depreciation would be 2/5 or $60,000 and the carrying value of the asset would be $90,000, reported along with an increase to beginning retained earnings of $90,000 as well. During year 3, depreciation expense of $30,000 will be recognized but there will be no adjustment to depreciation as of January 2 of year 3.
Trouble Debt restructuring - what do you do if there is just a modification of terms?
For troubled debt involving only the modification of terms you compare:
the sum of total future cash payments is compared to the carrying amount of the debt
500 versus 400
This will help you determine if you have a gain on restructuring or a loss
What are the three ways to restructure trouble debt
1 - Transfer of property
I have a debt of 600 and I will give up an asset with FMV 500 and a book value of 300
Dr Notes payable 600
cr Old 300
cr gain on restructuring 100
cr gain on disposal 200
- Transfer of equity
- Modification of terms
If you have a modification of terms and the future payment are greater than the obligation
- You do not record a gain or loss - it is an adjustment to the interest rate
If you have a modification of terms and the future payments are less than the obligation
- You record a gain on restructuring - debtor
What are the rules for disclosing accounting policies
This is an integral part of the F/S
They describe the policies selected when GAAP allows alternative
They describe the methods of applying them
They describe any unusual or innovative principles in use
If asked to report Retained Earning - what do you do
Step 1: You first calculate Net Income:
Which can be done by looking at the trial balance and netting Total Revenue and total expenses
Earnings from Long Term contracts - costs and expense
6680 - 5180 = 1500
Step 2: Take out Taxes
1500 * 30% = 450
1500 - 450 = 1050
Then add net income to beginning balance of un appropriated retained earnings RE 900
Restricted RE are still considered part of RE so add these as well: 160
1050 + 900 + 160 = 2110 total RE
Can you capitalize debt issuance costs as part of the acquisition price of land?
No - Not debt acquisition costs - generally not finance costs - they are not capitalized into the purchase price of an asset
Only Interest costs for some self - constructed assets
When a company elects to use the fair value method to measure certain financial instruments - what are the rules
The FV method is irrevocable - so you can’t change it once you have done it.
But it is applied on an instrument by instrument basis - and applied to the whole instrument
what is the difference between physical capital maintenance and financial capital maintenance -
Physical capital - gains and losses are only reported when assets are disposed of or liabilities settled
This is what you use to report net income
Financial capital includes holding gains and losses. It is when there is a change in value - Like AFS
These are generally excluded from Net once,but are reported in comprehensive income
Comprehensive income includes both net income and OCI
It includes both actual gains and losses as well as holding gains and losses
Why is required payment for sales tax on projected retails that you will get back in 3 years a concurrent asset
It is an asset because it represents an economic resource that will provide probable future benefit
It is in the control of the entity
It results from a transaction or an event that has already happened
How how an item qualify for recognition in the financial statements
4 things
- Must meet the the definition of an element of financial statements, both B./S and income statement
- Must be measurable with reasonable reliability
- be relevant to users
- be based on info that is representationally faithful, verifiable and neutral
How is operating income calculated
Operating income = gross revenue
- expenses
= operating income
How is net revenues calculated
It is an income statement component
Gross Revenues
-less returns
= net revenues
How is net assets calculated
Assets - liabilities = equity
