FAR 5-7

Question 1

How do you derive taxable income from pretax financial income?

Answer 1

Add/subtract permanent and temporary differences from pretax financial income

Question 2

For there to be a gain on collection of a receivable, what should happen to the Yen exchangeable for $1?

Answer 2

Decrease

Explanation: Yen must be worth more dollars than on the transaction date; therefore, fewer yen must be equal to a dollar so the number of yen exchangeable into dollars decreased

Question 3

What is the formula for basic earnings per share?

Answer 3

Net income less preferred dividends (current period)
——————————————————
Weighted common shares outstanding

Question 4

Statements required for defined benefit pension plans? For defined contribution pension plans?

Answer 4

Both: Stmt of Net Assets Available for Benefits & Stmt of Changes in Net Assets Available for Benefits

Benefit: Stmt of Accumulated Plan Benefits & Stmt of Changes in Accumulated Plan Benefits

Question 5

Formula for determining gain on restructuring from modification of terms

Answer 5

Carrying amount of the debt - Total future cash payments = Gain

Question 6

What are the 3 Debt restructuring formulas?

Answer 6

Debt forgiven - CV asset trans = total gain

Debt forgiven - FV asset = gain on restructuring

FV asset - CV asset = G/L on disposal

Question 7

How are deferred tax liabilities and assets presented on the balance sheet?

Answer 7

All DTLs and DTAs are classified as non-current; they must also be netted and presented as one amount

Question 8

How are detachable warrants treated?

Answer 8

They are valued at FV

If the FV is not known, the issuance price not allocated to bonds is allocated to the warrants (and vice versa)

Question 9

What is the layout of the table used for bond amortization? Difference between straight-line and effective interest method?

Answer 9

Date - Beg CV - Int exp (CV x MKT) - Int pymt (FV x SR) - Amortization - End CV

Straight-line: amortization is used to derive interest expense (Amortization + Interest pymt = Interest expense)

Effective interest method: interest expense is used to derive amortization (Interest expense - Interest pymt = Amorization)

Question 10

What is the layout of the table used for bond amortization? Difference between straight-line and effective interest method?

Answer 10

Date - Beg CV - Int exp (CV x MKT) - Int pymt (FV x SR) - Amortization - End CV

Straight-line: amortization is used to derive interest expense (Amortization + Interest pymt = Interest expense)

Effective interest method: interest expense is used to derive amortization (Interest expense - Interest pymt = Amorization)

Question 11

What tax rate should be used for interim financial reporting?

Answer 11

The most current estimate of the annual effective tax rate should be used to determine the income tax provision for the current quarter

Question 12

What is the journal entry to record the amortization of a bond discount?

Answer 12

Dr: Interest expense xx
Cr: Amortization of bond discount xx
Cash (or interest payable) xx

Question 13

What is the journal entry to record the amortization of a bond premium?

Answer 13

Dr: Interest expense xx
Amort. of bond premium xx
Cr: Cash (or interest payable) xx

Question 14

Where are G/L on extinguishment of debt recognized?

Answer 14

As income from continuing operations

Question 15

What are examples of supplemental disclosures for the Statement of Cash Flows?

Answer 15

Indirect only: Interest; Income taxes

Both: Conversion of debt to equity; Schedule of noncash investing and financing activities

Question 16

When the government is not obligated in any manner for special assessment debt, which fund should be used to report the debt service transactions?

Answer 16

When govt is not obligated for special assessment, it acts as a custodian of the resources; therefore, a CUSTODIAL fund should be used.

Question 17

Bond liabilities are carried on the balance sheet net of -

Answer 17

Discount/premium and bond issuance costs

Question 18

What do investing activities include?

Answer 18

Investing activities include acquisitions and sales of long-term assets or investment assets

Note: includes proceeds from sale of long-term assets; gains/losses from sale are reversed out of operating activities for the indirect method (-gains, +losses to NI)

Question 19

When there is a written purchase option, over what period of time should the lessee amortize the lease?

Answer 19

The economic life of the asset

Question 20

When the 75% or 90% criteria are met in a lease, over what period of time should the lease be amortized? (owNEs)

Answer 20

Term of the lease

Question 21

Which interest rate is used to calculate ARO?

Answer 21

The credit adjusted interest rate

Question 22

Describe how an ARO works.

Answer 22

An ARO is initially booked at present value as an asset and a liability.

Each period, depreciation expense is booked –> ARO (asset-down) & accretion expense is booked –> ARC (liability-up) such that when the ARO must be satisfied, there is no asset on the books anymore and the liability is represented at current costs.

Question 23

How is a purchase of treasury stock classified in the Statement of Cash Flows?

Answer 23

As a financing activity

Question 24

What will the reversal of a DTA result in? Was there a profit or loss for tax purposes when a DTA exists?

Answer 24

Deductible because a DTA represents future tax savings