FAR (5th Deck) Flashcards
If a cereal co. distributes coupon to promote a product and has the following:
* expects 120,000 coupon to be redeemed.
* $.05 cents to retailer per coupon redeemed
* $.45 off each box purchased.
* Paid Retailers $25,000.
What is the liability for the coupon in Dec. 31 Year 4?
Contingencies
120,000 x (.45 + .05) = 60,000
Less: Amt paid to retailers = (25,000)
Liability at end of year = $35,000
What are some characteristic of Fair Value Characteristics?
Fair Value Measurements
- Market Based Measure
- Orderly Transaction
- Sale of Asset or Trans of Liability
- Three level input called FV Hierarchy.
When determining financing lease amortization expense what is the correct year to use?
Lessee Accounting
You must use the useful life of the lease dividing the PV of the lease payment cost.
A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?
Subsequent Event
Understand that even though the long was refinanced after year end, it would done before the F/S were issued. The company demonstrated ability and intent to refinance. So the 100k ST loan became a long term liability.
On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?
Debt
- June to Dec = 7 months
- 300,000 x 8% Effective Interest Rate = 24,000
24,000 x (7/12) = $14,000
What are some examples intangible assets and what is the accounting treatment towards a finite lived intangible?
Intangible Assets
Examples:
* Patents
* Copyrights
* Franchises
Accounting Treatment:
* Amortize over useful lives or legal lives
* Periodically Tested for Impairment
Frame Co. has an 8% note receivable dated June 30, Year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, Year 2, Year 3, and Year 4. The fair value option is not elected and there is no allowance for credit losses. In its June 30, Year 3, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?
Trade Receivable
You take the 150,000 less two payment in year 2 =
100,000 remaining year 3 x 8% x 12/12 = $8,000
On December 31, Year 9, Key Co. received two $10,000 noninterest bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is 0.944. The present value of $1 due in two years at 8% is 0.857. At what amounts should these two notes receivable be reported in Key’s December 31, Year 9, balance sheet?
Alpha & Omega
Trade Receivable
Example from question:
Alpha Co. note ($10,000): Face value because:
- 9 months (within 1 year)
- Customary trade terms
Omega Co. note ($8,570): Present value because:
- 2 years (long-term)
- Non-customary trade terms
- Noninterest bearing
PV calculation: $10,000 × 0.857 (PV factor) =** $8,570**
What is the rule on a Cloud Computing Arrangement on total expense recognized with no software license arrangement?
ALso, how should a software modification be treated?
Intangible Assets
The service contract should be expense per monthly based on when the maintenance period begins, so if a contract service cost 15,000 total x (10/12 months) = 12,500
Implementation cost are treated sperately per year expense based on the useful life of the modification(aka implementation)
How should a purchased software that is non customizable be treated?
Intangible Asset
How are start up cost generally treated for business?
Intangible
They are usually expense in the period incurred.
Note: Determining the amount and timing of the future benefit is challenging and by immediately expensing it would be a conservative approach.
How do find the average pricing method to determine COGS based on the below?
- 1/1 Beginning inventory 10,000 units at $3
- 1/5 Purchase 5,000 units at $4
- 1/15 Purchase 5,000 units at $5
- 1/20 Sales at $10 per unit 10,000 units
Inventory
What is the rule under lower cost or market method?
Inventory
“Replacement cost can be used ONLY when it falls between two limits:
Upper limit: Net Realizable Value (NRV)
Lower limit: NRV minus normal profit margin
Think of it like a sandwich - replacement cost must be between these two ‘slices of bread’ to be valid!”
Real-world example:
Let’s say you sell t-shirts:
- Selling price (NRV) = $20
- Normal profit margin = $5
- So your lower limit is $15 ($20 - $5)
If replacement cost is:
$17 ✅ (Use it - it’s between $15 and $20)
$22 ❌ (Too high - use $20 instead)
$13 ❌ (Too low - use $15 instead)
When replacement cost is ABOVE the net realizable value (ceiling), what value should be used for inventory under LCM method?
Inventory
Use the NET REALIZABLE VALUE (ceiling price)
Remember this rule:
- When replacement cost goes ABOVE the ceiling (NRV)
- We STOP at the ceiling and use NRV
- Think of it like a bouncer at a club - nothing gets past the ceiling!”
How do you calculate Warranty Expense for a period?
Warranty Expense = Total Sales × Warranty Percentage Rate
Remember:
- Based on ESTIMATED percentage of sales
- Record in SAME period as the sales
- Actual repair costs do NOT affect the expense calculation
How do you calculate Payroll Tax Liability vs. Expense for FICA taxes?
Real-world example:
Total Wages: $10,000
Federal Tax Withheld: $1,200
FICA Rate: 7% each side
Employee FICA: $10,000 × 7% = $700
Employer FICA: $10,000 × 7% = $700
- Total Liability = $2,600 ($1,200 + $700 + $700)
- Expense = $700 (only employer’s share)
Key Memory Trick:
“Liability includes ALL three (Federal + Both FICA shares)
Expense includes ONLY ONE (Employer’s FICA)”
How to calculate Commission Payable when salespeople receive both fixed salary and commission?
Payable and Accrued Liability
Three-Step Process:
Calculate Commission Earned = Net Sales × Commission Rate
Compare with Fixed Salary
Rules:
- If Commission > Fixed Salary: Pay the difference
- If Commission < Fixed Salary: No additional commission
- Don’t charge back if fixed salary is higher”
PPE
Real-world example using Commander Corporation:
Total Cost:
- Purchase Price: $240,000
- Installation: $12,000
- Total: $252,000
Calculate Percentages:
- Machine A: $50,000 ÷ $300,000 = 16.67%
- Machine B: $150,000 ÷ $300,000 = 50%
- Machine C: $100,000 ÷ $300,000 = 33.33%
Final Cost Allocation:
- Machine A: $252,000 × 16.67% = $42,000
- Machine B: $252,000 × 50% = $126,000
- Machine C: $252,000 × 33.33% = $84,000
Key Memory Trick:
“Think of it like splitting a restaurant bill based on what each person ordered - the total bill gets divided proportionally based on each person’s order value.”
Hall Co.’s allowance for credit losses had a credit balance of $24,000 at December 31, Year 1. During Year 2, Hall wrote off uncollectible accounts of $96,000. The aging of accounts receivable indicated that a $100,000 allowance for credit losses was required at December 31, Year 2. What amount of credit loss expense should Hall report for Year 2?
Trade Receivable
- Real-world example using Hall Co.:
- Beginning Balance = $24,000
- Write-offs = $96,000
- Temporary Balance = $24,000 - $96,000 = -$72,000
- Required Ending Balance = $100,000
- Credit Loss Expense = $100,000 - (-$72,000) = $172,000
Think of it like maintaining a target savings balance:
- You start with $24,000
- You spend $96,000
- Your balance is now negative $72,000
- You need $100,000
- Therefore, you must add $172,000 to reach your target
Given:
Beginning A/R: $125,000
Credit Sales: $75,000
Write-offs: $5,000
Ending A/R: $90,000
How to Calculate Cash Collections from Customers using A/R T-Account formula?
What is the about of cash received(Collections)?
Trade Receivable
Formula:
Beginning A/R + Credit Sales - Write-offs - Cash Collections = Ending A/R
Calculation:
$105,000 = $125,000 + $75,000 - $5,000 - $90,000
Cash to Accrual Basis
Special Purpose Framework
Cash Basis Pretax
Add:
* Increase in AR
* Decrease in AP
Deduct:
* Decrease in AR
* Increase in AP
Total Profit Recognized to Date formula
Rev Rec
= Total Contract Profit x % of Completion
Total Contract Profit = Total K Price - Total Est. Cost
% Complete = Cost incurred to date / Total Est. Cost
Return on Asset
Financial Ratio
Net Income / Avg Asset
% of Return on Asset
F/S Ratio
Asset Turnover x Profit Margin = % Return on Asset
Profit Margin = Net Income / Net Sales
Asset Turnover = Net Sales / Avg Assets
Net Sales Revenue
Rev Rec.
Sales Revenue needs to be NET of Return on Sale, ignore other items such as prior year return.
You should only worry about the estimate % of sales return and net the revenue for that month out.
What happens on cash Div Payment Date?
Payable and Accrued Liab
Dr: Div Pay
Cr: Cash
There is no effect on RE.
When is cloud computing arrangement capitalized?
Intangible Assets
- When the software includes a software license.
- Purchased software that is not customized should be capitalized and amortized over the software’s expected useful life.
The only time you expense is during the planning and design phase or training or maintenace.
Gross Margin
F/S Ratio
Gross Profit / Sales
Gross profit = Sales - COGS
According to ASC Topic 820, the fair value of an asset should be based upon
$ received to sell the asset
Total Machines Cost Allocation
PPE
Machine A B C needs to be totaled for denominator.
Base their cost to total cost to get allocated % x Total Lump Sum Amount = cost per machince
