FAR 7

Question 1

When bonds are dated and issued at separate dates how do you accrue interest?

Answer 1

You accrue interest from January to the month that bonds are fate and add it to the premium or discount of the bond

Question 2

ovastar Corporation issued 2,000 of its $1,000, 10% ten-year bonds dated July 1, Year 1 on July 1, Year 1, at a time when the market paid 9% for bonds of similar risk. Interest is payable annually. The bonds were properly carried at $2,134,000 upon issue. On its December 31, Year 1 financial statements, Novastar Corporation would display the following balances

Answer 2

Interest expense = $2,134,000 × 9% × 1/2 = $96,030
Interest payment = $2,000,000 × 10% × 1/2 = $100,000
Premium amortization = $100,000 - $96,030 = $3,970
Unamortized premium = $134,000 - $3,970 = $130,030

Question 3

When an exchange lacks commercial substance and boot is received and the boot (cash) represents less than 25% of the total consideration (FMV + Cash) is gain recognized and how much?

Answer 3

1) Carrying Value of old machine (Cost - A/D)
2) FV of consideration obtained ( FV of new machine + Cash received)
3) FV of consideration - CV of asset given up = gain
4) Cash received / Total FV consideration = %
5) % * Gain = Gain recognized

Question 4

What is a failed sale?

Answer 4

IF the underlying lease in a sale-leaseback is a finance lease, it is considered equivalent to a repurchase and will therefor be considered a “Failed Sale.”

Question 5

In a business combination what are costs as expensed as incurred?

Answer 5

Fees paid to attorneys, fees paid to investment bankers, indirect costs such as temporary occupancy costs

Question 6

How is stock registration and issuance costs such as SEC filings treated in a business combination?

Answer 6

Direct reduction of the value of stock on the Balance sheet. These costs reduce APIC.

Question 7

what is the return on investment income in the equity moethod?

Answer 7

% of equity * Income

Question 8

What is the return of capital in the equity method?

Answer 8

% of equity * Dividend paid

Question 9

Effect of stock dividend?

Answer 9

Increases total shares

Question 10

Employees compensation for future absences should be accrued if:

Answer 10

1. Employees’ right to receive compensation is attributable to services already rendered
2. The lability relates to vested or accumulated rights
3. Payment is probable
4. The amount can be reasonably estimated

Question 11

If both interest %’s are known by the lessee which percentage should they use?

Answer 11

Implicit rate = lessor expects % used to discount cash flows

Incremental borrowing rate is not used when implicit rate is being used

Question 12

IF finding intercompany payable of a subsidiary to a payable what amounts are added and subtracted against each other?

Answer 12

(Accounts receivable Parent + A/R sub) - Consolidated amount = Subs payable amount for intercompany sales

Question 13

When stated interest rate and yield interest rate is given what percentage is used to determine present value?

Answer 13

Yield percentage rate

to find interest payment multiply Face Value of bond by stated rate

For interest payments multiply interest by the present value of ordinary annuity of 1

Question 14

How does a parent company report a subs plant assets under acquisition method?

Answer 14

BV of parent plant assets + Fair Value of Subs plant assets = Consolidated plant asset amount

Question 15

What is the theory behind the matching principal?

Answer 15

All expenses that correlate with sales or revenue must be recorded in the period that it happened in.

Ex: 80% paid means 20% was unpaid and not recorded

Also indirect selling expense % must be multiplied to total amount and applied to total number and recorded as a J/E

DR SBO Expense
DR Operating expense
CR accrued SBO expense
CR Accrued operating expense

Question 16

Where are (foreign exchange) Fair value hedge gains reported? Where are (foreign exchange) Cash flow hedge losses reported?

Answer 16

Fair value hedge gains are reported on current earnings. Cash flow hedge losses are reported on OCI.

Question 17

For an operating Lease from the Lessee’s perspective what is the initial journal entry and subsequent journal entries?

Answer 17

1) Dr ROU ASSET (Semi-annual Pmt * PV of an annuity)
(make sure that # of periods = frequency of payments)

   Cr Lease Liability 

2) Recording Lease Payments
Dr Lease Expense (Amount stays the same = semi-annual pmt before PV calculation)

Dr Lease Liability (solved by multiplying Carrying value by annuity %)

   Cr Cash - stays the same 

   Cr Accumulated amortization - ROU asset - changes

Question 18

How do you solve for the total interest paid over the life of the lease?

Answer 18

Total interest = Total pmts (Semi-annual payments * number of periods) - PV of lease PMTS

Question 19

Who keeps an operating lease on the books? (Lessor or Lessee?) What is the initial Journal entry?

Answer 19

Lessor will keep asset on B/S
On straight line basis

Dr Lease Receivable (Annuity payments * # of payments)
Cr Unearned Income

Question 20

What are the entries that the lessor makes for an operating lease each time they receive a payment? This entry is the same payment after payment.

Answer 20

Dr Cash ($ value of annuity payment same amount)
Dr Unearned Income ($ value of annuity payment same amount)
Dr Depreciation Expense (Carrying value - residual value / economic useful life of the asset)
Cr Rental Income ($ value of annuity payment same amount)
Cr Lease Receivable ($ value of annuity payment same amount)
Cr Accum. Dep. (Carrying value - residual value / economic useful life of the asset) if semi-annual divide payments by 2

Question 21

Does the lessor recognize interest income received over the life of the operating lease?

Answer 21

For an operating lease, the lessor has NO INTEREST INCOME only rental income! Each payment received each period is recognized as RENTAL INCOME

Question 22

What are the two statements needed for a defined contribution plan?

Answer 22

Statement of net assets available for the benefits of the plan and a statement of changes in net assets available for benefits.

Question 23

where is the net changes in the actuarial present value of accumulated plan benefits shown?

Answer 23

In the statement of changes in the accumulated plan benefits.

Question 24

What does the statement of changes in net assets available for benefits shows?

Answer 24

shows what is added to net assets such as investment income, employer contributions and participant contributions.

Shows a change in pension plan assets such as interest income, appreciation of plan assets, employer contributions

decrease in plan assets such as admin expenses and benefits paid to beneficiaries.

Also deduction in net assets, such as investment expenses, benefits paid and administrative expenses.

Changes during the year is added to the beginning balance to adjust and bring net assets available for benefits to the proper amount at the end of the year.

Question 25

What is shown on a defined benefit pension plan’s statement of changes in accumulated plan benefits?

Answer 25

change in a plans actuarial present value of plan benefits, changes in actuarial assumptions, the effect of plan amendments, and amounts paid to beneficiaries.

Question 26

where are a company’s net pension periodic costs reported? Where is the funded status reported.

Answer 26

Income statement

funded status is reported on the balance sheet

Question 27

When correcting an error relating to depreciation experience not booked in the prior year, do you add it to accumulated depreciation net of tax? If reported correctly for tax purposes.

Answer 27

No, not net of tax but at the gross amount. No tax effect.

Question 28

How do you calculate if a current liability exists using the % of completion method?

Answer 28

accumulated costs (actual costs accumulated) + Estimated earnings > Progress billing - no liability

if progress billings > accumulated actual costs + Estimated earnings then liability exists

Question 29

What is not a footnote disclosure for OCI and other comprehensive income?

Answer 29

Reclassification adjustments, that effect net income and OCI. These adjustments must be shown within the components of each statement to the proper accounts. Effecting line items.

And not presented in the footnotes.

Question 30

For depreciation changes in estimated useful life and depreciable base amounts stay aware how frequently they record depreciation and when the accounting department becomes aware of the change.