FAR (4th Deck) Flashcards
The lessee should recognize amounts probable of being owed under a residual value guarantee as a component of lease payments
Lessee
On the commencement date of the lease.
What are some examples of Enterprise funds?
State and Local Government Concepts
Laws and Reg where cost of services are recovered through Fees and Charges
If you had a significant loss from a flood that doesnt happen very often but it occurred after the F/S data and before the F/S was publised what type of subsequent even is it?
Subsequent Event
It is a type 2 event, not recognized in the same period and also because it is material is should be disclosed.
Under cost method, when is RE reduce as a result of a sale of treasury stock?
Equity
When the reissued price is less than cost, APIC is first reduced and then any remaining amount should be taking from RE. (As a reduction)
Equity
On the declaration date (January 15), TWO things happen simultaneously:
- The company recognizes the property dividend at fair value ($25,000)
- They must also recognize any gain/loss by comparing: Fair value on declaration date ($25,000) vs Original cost ($20,000). This results in a $5,000 gain
Then these two amounts net together to determine the final impact on Retained Earnings:
- Property dividend: -$25,000
- Gain recognition: +$5,000
- Net reduction to RE: $20,000
Important: The fair values on February 1 ($26,000) and February 15 ($24,000) don’t matter - we only care about the fair value on the declaration date (January 15).
“What’s the difference between small and large stock dividends? (Include % cutoff and valuation method)”
Equity
Small Stock Dividend:
- Less than 20-25% of outstanding shares
- Recorded at FAIR VALUE
Large Stock Dividend:
- Greater than 20-25% of outstanding shares
- Recorded at PAR VALUE”
On May 18, Year 2, Sol Corp.’s board of directors declared a 10% stock dividend. On the same date, the market price of Sol’s 3,000 outstanding shares of $2 par value common stock was $9 per share. The stock dividend was distributed on July 21, Year 2, when the stock’s market price was $10 per share. What amount should Sol credit to additional paid-in capital for this stock dividend?
Equity
Small Stk Div declared (< 20%) are recorded at date of declaration for the FV. Also, used to determine the APIC (FV - Par)
Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones report as common shares outstanding at December 31?
Equity
In this scenario, the 5% stock dividend and the 2-for-1 stock split are treated as if they had occurred at the beginning of year.
- The August stock dividend results in 2,500 (50,000 × 5%) additional shares issued as outstanding shares as of January 1 for a total of 52,500 (50,000 + 2,500).
- The September 2-for-1 stock split doubles the number of shares outstanding as of January 1, August 1, and December 31 to 105,000 (52,500 × 2) shares.
Equity
So in order to answer this question, it may look overwhelming however, if you know how to calc. for APIC or if you had understand (in Excerpt) that Treas. Stk is recorded at cost.
So you determine the APIC by ($50-36) x 3000 shrs = $42,000
Tres Stk = $36 x 3,000 = $108,000
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole’s
Equity
**APIC Only! **
RE is not affected because once RE is $0, the remaining goes to APIC when dividend declared exceeds RE Total Amount.
Remember: Liquidating Dividend is when RE hits 0 so you have to take from APIC
Which partner has the largest capital?
- Algee contributed cash of $50,000.
- Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property.
- Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value.
Equity
Equity
Understand that when the exercise price is > PAR it will always be an APIC increase, but RE are not affected.
At December 31, Year 1 and Year 2, Carr Corp. had 4,000 shares outstanding of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, Year 1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in Year 2 totaled $44,000. Of the $44,000, what amounts were payable to each class of stock?
Order of Dividends payment
Understand that when PS Div are not paid in the previous year, it is considered div in arrears and must be paid first.
It states that 44k is payable, so out of the 44k 12k is in arrears, so the PS that is owed is actually 36,000 because we know that current month (4k x $100 x 6% = 24k + 12k = 36k)
CS is 8 because that is the other remaining payable amount of 44k - 26k PS = 8k CS payable.
Equity
On July 1, Year 1, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Cove’s stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock?
This is a very good question to help you understand how to solve for APIC when the market value is not given.
When shares of Treasury stock are reissue/purchase/retired what happens to outstanding shares?
Equity
- Purchase Outstanding shares are reduced.
- Retired shares decreases outstanding shares.
- Sold, Outstanding shares are increased.
Authorized shares are N/A. No Effect or Changes.
Liquidating Dividends Facts
Equity
- Decreases RE, if > RE then decrease to 0 automatically
- Decreases APIC for anything > RE
- RE cannot be negative so anything < 0 past RE would be taken out of APIC.
Equity
What is purpose Quasi Reorganization?
Equity
A quasi-reorganization should not result in a write-up of net assets (eg, equity) and retained earnings must be zeroed out. Once the quasi-reorganization receives shareholder approval, readjustments are made.
- Generally, assets and liabilities are revalued to fair value, if required.
- The deficit in retained earnings is eliminated. (RE is negative, so you bringing it back down to zero) You do this by adjustment towards APIC.
- Paid-in capital (ie, par value and/or APIC) is adjusted, but not below zero.
Book Value Per Common Share
Equity
What is a Deferred Tax Liability?
Accounting for Income Tax
When future taxable income is more that the current taxable income amount. (aka, they took more expenses in the current year for tax purpose, therefore there will be more tax for the future)
Ex:
* You have an lower tax amt in current year due to increased in depreciation year 1. But in year 2, we would have a higher future Tax Income.
According to current generally accepted accounting principles, justification for the method of determining periodic deferred tax expense is based on the concept of
Accounting for Income Tax
Recognition of assets and liabilities.
What example is being shown based on the below excerpt? (to understand)
In its first four years of operations ending December 31, Year 4, Alder, Inc.’s depreciation for income tax purposes exceeded its depreciation for financial statement purposes by $145,000. This temporary difference was expected to reverse in Year 5, Year 6, and Year 7. The enacted tax rate is 30% for Year 4, and 35% for future years. Alder had no other temporary differences. In its December 31, Year 4, balance sheet, how should Alder report the deferred tax effect of this difference?
Accounting for Income Tax
There is definitely a deferred tax liability. Since more Tax Depreciation was taken in year 4, there would be more taxes in future years.
145,000 x 35% = 50,750.
On June 30, Year 1, Ank Corp. prepaid a $19,000 premium on an annual insurance policy. The premium payment was a tax-deductible expense in Ank’s Year 1 cash basis tax return. The accrual basis income statement will report a $9,500 insurance expense in Year 1 and Year 2.
Ank’s income tax rate is 30% in Year 1 and 25% thereafter. In Ank’s December 31, Year 1, balance sheet, what amount related to the insurance should be reported as a deferred income tax liability?
Accounting for Income Tax
24% x $9500 = $2,375
How do you find currentfederal income tax liability?
Determine taxable income x Current Enacted Tax Rate = Current tax Exp/Liab.
Less: Any Tax Prepayments
= Current Tax Liability
Taxable Inc = Pretax Inc - Permanent differences - Temp. Diff.
Permenant differences include:
How would you find Taxable Income with Pre Income?
Accounting for Inc Tax
You take the Pre Income Amt
Less: Permenant Differences
Less: Temporary Differences
= Taxable Income
x Enacted Tax Rate
= Tax Liability
Explain how a commitment works on a non-cancelable contract.
Contingencies
Lets say you have a 3 year contract where at minimum you are to purchase 200k units of an item/material/etc per Year. Well if you cancel then you still are obligated to ower that amt of the Minimum minus any amt you may have already paid for in the year.
So you are obligated to purchase 200k units no matter what per year as that is the minimum requirement.
When you have a unfavorable outcome, what estimate should you use? What key item?
Contingencies
You use the best estimate of the amount of the unfavorable outcome. Only if it exists at the B/S date.
When should you create a seperate contract based on modification to a current contract, what condition is needed?
Rev. Recognition
If a modification includes additional distinct goods or services that result in a significant change in the scope or price of an existing contract, the modification should be accounted for as a separate contract.
Praz Co. had $100,000 in accrual basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances. Under the cash basis of accounting, what amount of pretax income should Praz report for the year?
Special Purpose Framework
Read the question carefully!
It is asking for Cash basis (Under Cash Basis)
So you take the 100,000 accrual
Deduct: Increase in receivable (you havent received it yet)
Deduct: Decrease in Payable, Cash went out to pay liability.
Therefore, answer is 84,000
When a seller sells A/R, what is the difference between “with Recourse” & “Without Recourse”?
Trade Receivable
Without Recourse = Buyer Assumes the Risk for Uncollectible Account
With Recourse = Seller/Company is responsible for the A/R to be collected for the creditor.
If goods were transferred FOB shipping point to the buyer but it was excluded from Ending Inventory, what would be the effect on the omission towards assets and net income?
Accounting Changes and Error
That means COGS will be Overstated since there is Less Inventory.
Also, COGS being overstated would result in Understated Net Income
What are the differences between FOB Shipping point vs FOB destination?
FOB Shipping Point = Ownership of the goods are transfer to the buyer once goods are on carrier
FOB Destination Point = Seller retains the title until buyer receives the goods. (Note: if the seller holds the goods then they are still liability until buyer takes good.)
How do you find Return on Sale?
F/S Ratio
You take Net Operating Profit / Sales = Return on Sale
Note: Net Oper Profit is Net Income!
What is the accounting treatment for the following below?
* Change in Acct. Principle
* Change in Acct. Est.
* Change in Reporting Entity
* Error Correction
Accounting Changes and Errors
- Change in Acct. Principle = Retrospective
- Change in Acct. Est. = Prospective
- Change in Reporting Entity = Retrospective
- Error Correction = Retroactive
When it comes to foreign exchange transaction gain/loss, what is the rate that you would use
GPFR: For Profit Business
Always use the Spot Rate and take the Difference and multiply it base the currency given.
How does a completed contract work?
Rev Recog
If there are estimated remaining cost, then NO revenue, expense, or GP should be recognized for that year until the contract is fully completed, hence “completed-contract” method.
How do you find Bond Interest Expense?
Debt and Liabilties
In order to determine Discount or Premium on bond what is needed to determine and how?
Debt and Liabilities
Determine FV assignged to bond:
* Issue Proceed = (Issue Price x 109) (Note: 109 is the bond issue prem Given!)
* Less: FV of Warrant (Face Value/$Bond Issue Price) x $50
* = FV Assigned to Bond
Determine Bond Discount
* Bond FV: 1,000,000
* Less: FV Assigned to Bond (Calc. Above)
= Discount on Bond Payable
What is the accounting treatment for an intangible asset with a finite useful life?
Intangible Assets
The asset should be amortized over its useful life and is periodically tested for impairments.
How would you determine year end inventory valuation on shipping cost with the below info?
Total Shipping Cost incurred from oversea purchase = 2 Million
Purchase Inventory Unsold = 6 Million
Purchase Inventory during the year = 20 Million
Inventory
6 mil / 20mil = 30%
30% x 2,000,000 = $600,000
What is the inventory best pricing approximate specific identification for actual flow of costs for most manuf.?
Inventory
FIFO
What can be said about trading securities on the impact of the following?
Transferring of securities class as AFS to Trading Securities with Unrealized holding gain of 4,000.
Year End Market Value of 19,000 and Sold beg of Yr 4 for 22,000.
Investments
A gain of 7,000
4000 Unrealized gain
3000 Realized (22-19k)
Understand that both unrealized holding gain(losses) and realized are reported as earnings as incurred for trading securities.
When it comes to trade receivable, when should you record it at Present Value (PV) discounted at the Fair Mkt rate of interest?
Trade Receivable
- Trade term are non customary (meaning if its custom, you take the full amt)
- Interest Rate is unreasonable
- Issued for exchange of services rendered.
If any of these rules is present then you take the PV!
The government-wide statement of activities reports expenses by ________________ categorized as either a governmental activity or a business-type activity.
State and Local Government
FUNCTION!
How do you find Current and Quick Ratio?
F/S Ratio
How would youfind Total Selling Expense?
GPFR: For Profit
Advertising
Freight Out
Rent (sales dept.)
Sales Salary and Commission
= Total Selling Expense.
If a promise is given to a nongovernmental company, then what is the JE that should be recorded for EOY?
GPFR - NonProfit
Dr: Contribution Receivable
______________Cr: Revenue (without Donor Restriction)
When an intangible Asset has an finite useful life, how should the amortization be treated?
Intangible Assets
It should be Amortized over its useful lifeand periodically tested for impairments.
What is the impact of selling trading securities and also AFS securities pertaining to the impact on income statement?
Investments
Realized Gain + Unrealized Gain/Loss are taking into considered and reflected on the income statement.
Realized Gain = Sales Price - Carrying Value
At what point do you need to Account for Contingent Events to disclose and accrue? What is the requirement?
Contingencies
It MUST be probable and Estimable Loss
