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Financial Accounting > FAR > Flashcards

FAR Flashcards

1
Q

How are changes in accounting principle applied?

A

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

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2
Q

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A

A change of principle.

Applied retrospectively.

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3
Q

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A

A change in accounting principle.

Applied retrospectively.

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4
Q

How is a change in accounting estimate applied?

A

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

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5
Q

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

A

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

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6
Q

How is a correction of an accounting error made?

A

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

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7
Q

What are the requirements for a prior period adjustment?

A

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

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8
Q

How is a change from a non-GAAP accounting method to a GAAP method recorded?

A

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

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9
Q

How does an inventory error effect the financial statements?

A

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

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10
Q

How is a change in entity recorded?

A

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

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11
Q

What is a serial bond?

A

Any bond that matures in installments

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12
Q

What is a term bond?

A

Any bond that matures on a single date

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13
Q

What is a debenture bond?

A

A bond not secured by any collateral

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14
Q

What is a sinking fund bond?

A

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

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15
Q

What is the formula to calculate proceeds of a bond sale?

A

Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

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16
Q

How is the present value of a bond calculated?

A

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value

PLUS

Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)

17
Q

Which costs are included in bond issuance costs? How are they recorded?

A

Include Engraving; Printing; Legal; Underwriter; Registration

New Way: Subtracted from Carrying Amount of the Bond
Old Way: Amortized
Treatment: Retrospective Treatment to all prior periods presented
Effect: Increases Effective Interest Rate

18
Q

How are bonds reported when classified as trading securities?

A

Reported at FMV with unrealized gains and losses being included in earnings

19
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

20
Q

Describe the book value method when converting from bonds to stocks.

A

No gain or loss recognized

APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock

21
Q

What is the stated rate for a bond?

A

Rate on the face of the bond

22
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

23
Q

What happens when the bond’s market rate is greater than the stated rate?

A

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

24
Q

What happens when a bond’s market rate is less than the stated rate?

A

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

25
Q

How does accrued interest on a bond affect the purchase price?

A

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).

Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

26
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

27
Q

How is an interest payment on a bond calculated?

A

Cash for payment : Stated rate x Face amount

28
Q

What amount of interest is expensed on a bond interest payment?

A

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

29
Q

What are convertible bonds? Which recording method is used?

A

Bonds that can be converted to stock

Book value method used if no gain or loss

Market value method used if there is a gain or loss

30
Q

How is the retirement of bonds recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

31
Q

When is a gain recognized in a debt restructuring?

A

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

32
Q

What is the gain recognized under a settlement of debt?

A

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount

33
Q

For a creditor; how is a loan impairment recorded?

A

If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:

Effective Rate calculated using original rate; not modified rate

Financial Accounting (17 decks)

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