FAR 6 Flashcards
Mary Reid is a senior accountant reviewing the year-end journal entries prepared by her staff accountant. Reid sees one journal entry that has a debit to unrealized loss for XYZ debt hitting other comprehensive income (OCI), with the notes to the journal stating that this relates to an impairment/credit loss situation. Reid reverses the entry, believing it to be incorrect. Which of the following situations on its own is not a valid reason for Reid reversing the entry?
A. XYZ debt is properly classified as held-to-maturity.
B. The fair value of XYZ debt is above amortized cost.
C. XYZ debt is properly classified as available-for-sale.
D. The fair value of XYZ debt is above the present value of expected cash flows.
Choice “C” is correct. If XYZ debt is appropriately classified as available-for-sale, that alone would not be enough of a reason to reverse a journal entry that debited an unrealized loss to OCI.
Available-for-sale debt securities will result in losses in OCI when the fair value is below the present value of expected cash flows and the present value is below amortized cost. The loss recorded in
OCI is equal to the difference between the present value and fair value. The credit loss recorded on the income statement is the difference between amortized cost and the present value
Assume Bonds Par value is $100k.
Jent Corp. purchased bonds at a discount of $10,000. Subsequently, Jent sold these bonds at a premium of $14,000. During the period that Jent held this investment, amortization of the discount amounted to $2,000.
What amount should Jent report as gain on the sale of bonds?
When a bond is purchased at a discount, it is purchased for less than the face value of the bond. The discount is reflected in the purchase price of the bond and the journal entry is recorded on that date. Assuming the bond had a face value of $100,000, the initial journal entry
would be:
Dr Inv In Bonds 90K
Cr Cash. 90K
Over the life of the bond, the discount will be amortized and will cause interest revenue recorded to be greater than the cash received for interest. This occurs because cash received at maturity will be $100,000, even though the investment cost only $90,000. The additional $10,000 received at maturity represents interest that must be recorded over the life of the bond rather than at maturity,
according to GAAP. During the time the bond was held, $2,000 of the discount was amortized. The amortization increases the investment in bonds to $92,000 (more interest revenue is recorded than cash received, so investments must increase for the journal entry to balance). The bonds were then sold for $14,000 more than face value, which, assuming a face value of $100,000, would generate proceeds of $114,000. The difference between the proceeds received and the book value of the
bonds would create a gain on sale of $22,000:
Dr Cash 114K
Cr Investment in Bonds 92K
Cr Gain on sale of bonds. 22K
When selling Equity securities what is included in the total price?
FV * shares + any brokerage commissions and taxes
What is the exception of when to record a loss for a Held to Maturity security?
For an HTM debt security based on the CECL model, a LOSS is recorded when Amortized costs > Present Value of the principal interest expected to be collected.
Original cost and current FV are NOT relevant when calculating credit loss. If amortized cost is BTW the FV and PV, this is an indicator and FV is higher than PV
Must indicate that amortized cost > than PV
Loss recorded = Amortized Cost - Present Value
When there is no valuation account being used by a company what is the J/E for year 1 when there is a gain and when its sold in year 2 for a loss?
Year 1:
Dr Stock D
Cr unrealized gain
Year 2 (Sale of stock)
Dr Cash
Dr Realized Loss
Cr Stock D (entire amount)
Where is the valuation account kept and when does it need to be eliminated?
Balance sheet and when the security is sold.
How is a liquidating dividend treated even if ownership in the equity security is less than 20%?
Reduces investment account on the balance sheet
When the CECL model is used for an AFS debt security that is below amortized cost and above present value of principal and interest expected to be collected how is the AFS debt security treated?
The AFS debt security must be written down to the lower fair value by recording a credit loss that is recognized on the Income Statement.
Written down the cost basis to FV
What does time interest earned measure?
Measures the ability of a company to cover interest chargers. The greater the ability, the less the risk of bankruptcy.
An increase in this measure is considered beneficial
Net income before tax + interest expense/ Interest expense
How is goodwill under the equity method for an investment treated?
Ignored, not amortized or tested for impairment, ENTIRE INVEDSTMENT USING EQUITY METHOD IS SUBJECT TO IMPAIRMENT TEST
What is Credit Loss equal to?
Credit loss = amortized cost - Present Value of expected cash flows
How do you calculate how much interest can be capitalized for a project in a given year?
1st) Take total expenditures accumulated for the year and calculate Average Accumulated Expenditures
Take Average Accumulated Expenditures and multiply it by interest %
2) Compare to total interest expense and must capitalize lower amount of Avoidable interest or actual interest cost incurred
What are the disclosure requirements related to risks and uncertainties under GAAP?
Estimates of the effects of changes in significant estimates
Disclosure of the relative importance of each business when an entity operates multiple businesses
A statement that actual results could differ from the estimates included in the financial statements
What are the three criteria that needs to be met in order for identified concentrations to be disclosed?
- The concentration exists at the Financial statement date
- The concentration makes the entity vulnerable to the risk of a near-term severe impact
- It is at least reasonable possible that the events that could cause the severe impact will occur in the near-term
