FAR 9

Question 1

What is the J/E for amortization in a 25% investment (Equity method)? Ex: Building 1.5 million over 50 years

Answer 1

(1,500,000 * .25)/50 = $7,500

Dr Equity in investee income (I/S) 7,500
Cr Investment in investee (B/S) 7,500

Land never amortized

Question 2

Even when a Parent owns 50% or more of voting stock in investee, what would disallow the parent to consolidate the sub into their F/S?

Answer 2

Exception: Significant doubt about the parent ability to control sub

ex: significant doubt about the parent’s ability to control is when sub is operating under severe foreign restrictions

ex: there is a lack of control due to a subsidiary being controlled in bankruptcy by a bankruptcy trustee

Question 3

Under the Fair value option how is Net income at year end impacted if loss occurs if dividends is paid out and Fair value of total shares decrease?

Answer 3

If Fair Value of shares outstanding decreases at year end and dividend is paid out. Dividends paid decreases income statement.

First reduce the original FV against the ending FV of shares than subtract out dividends paid. This will give total loss of stock investment at year end that is reported on the income statement.

Question 4

When parent-subsidiary relationship exists, what is the accounting concept recognized when F/S are consolidated?

Answer 4

Economic entity

Question 5

How are stock registration costs treated in a consolidation? What is expensed?

Answer 5

As a reduction in APIC

Expensed: Direct out-of-pocket fees such as legal feels and annual amortization on PPE such as building where FV exceeds BV.

No part of goodwill is shown as an expense

Question 6

When a AFS security has a FV below amortized cost but above the present value of the principal and interest expense to be collected, how would the credit loss be recorded using the CECL model under US GAAP?

Answer 6

Asset must be written down to the lower fair value by recording a credit loss that is recognized on the earning section of the income statement. Writing down the cost basis to FV.

Even though FV > PV of expected cash flows, an AFS can be sold at any time so credit loss is limited to difference btw amortized cost and FV.

Question 7

What is the formula for calculating end of year investment account using the equity method?

Answer 7

Initial Investment cost: XXX
+Net income ( $$$ * 25%) XXX
- Dividend received (pay attention in question if its total dividends paid or to the investor) XXX
- Deprecation of undervalued equipment ( 200,000 * 25% / $ years) XXX

End of year Investment in investee

Question 8

If a investor acquires 30% ownership under the equity method in July and wants to report total income of investment at year end, how is this treated?

Answer 8

Take total income made evenly throughout the year, multiply it by 30% and divide it in half since 30% ownership occurred half way through the year and income was made evenly throughout the year.

Question 9

When a parent sells a bond to a sub directly or indirectly how is it treated? Ex: Wagner owns a $1,000,000 Palmer bond (Parent) and sells it to Seal inc (Subsidiary who Palmer has 75% ownership control of for $975,000. When Palmer had a $1,075,000 carrying amount for this bond.

What is the effect of the subsidiaries purchase of the parents bond on retained earnings and noncontrolling interest reported on the parents consolidated balance sheet?

Answer 9

There would be a $100k increase in consolidated earnings and $0 effect on NCI. Purchase of the parents bond by the subsidiary is treated like the bond is retired when the F/S are consolidated at fiscal year end.

Since the bond was retired at $975,000 but had has a book value of $1,075,000 there was a $100K gain recognized when F/S were consolidated.

Noncontrolling interest would have been adjusted if the sub was the original issuer of the bond. And then the portion of the gain would have been reported to NCI.

Question 10

Pay attention on questions regarding goodwill with what is the total impairment loss and not taking the BV goodwill and subtracting it by the loss to find the carrying value of goodwill.

Question 11

When solving for Investor percentage of income at year end for a subsidiary and given Beg and year end Balance sheet what is the equation?

Question states something like what should the investor report as its share of earnings from the subsidiary in its year 1 income statement?

Answer 11

Share of earnings = Net Income

Solving for income: Subsidiary: Beg Retained earnings
+ N.I.: X - Plug or squeeze
-Dividend Paid
End Retained earnings

Earning from subsidiary:

Year 1 income * % owned = Investors share of Net income from Subsidiary

Question 12

When a loss is “reasonably possible” what is required?

Answer 12

Disclosure, and if range of estimates is given use the lowest amount if one amount is not better than another

Question 13

When an error occurs when a company is using the straight line method for a bond issued at a discount what is the effect at year end year 1 and the last year when the bond matures?

Answer 13

End of year 1 bond carrying value is overstated and at year end has no effect since all of the discount is amortized to 0 regardless if effective interest rate is used or straight line.

Question 14

How would sales tax be recorded by a company with an 8% sales tax rate and selling a TV at a cost of $2,000? If the company agrees to sell the TV for a flat $2000 to the customer and absorb the sales tax? What is the J/E?

Answer 14

1+Sales tax

1) $2,000/1.08 = $1,852

2) Dr Cash 2,000
Cr Sales Revenue 1,852
Cr Sales Tax Payable 148

Question 15

The market value of a bond issued at a discount (or a premium) is the present value of two cash flows.

Answer 15

1. The PV of the principal amount @ market (effective rate of interest), PLUS
2. The PV of All Future Interest Payments @ market rate
3. Both at the market (effective) rate of interest

Question 16

What is the equation to calculation Escrow Liability balance at year end? When there is a 10% maintenance fee to customers based on total interest earned?

Answer 16

Normal Credit Balance

Beg Balance + Escrow receipts for the year - Real Estate Taxes Paid + Interest Earned during the year - Maintenance fee charged to customers (Total Interest * 10% maintenance charge)

Question 17

What is the criteria for a debtor to be relieved of its obligations to the creditor? Is putting cash in an irrevocable trust considered an extinguishment of debt under GAAP?

Answer 17

1. Paying the creditor
2. Being released of the debt judicially or by the creditor

Considering debt as “extinguished” (defeasing debt) by placing cash in an irrevocable trust is not GAAP for “extinguishment of debt”

Question 18

When a bond is issued at a discount, is the interest expense greater than the Cash Payment?

When a Bond is issued at a premium, is the interest expense less than the cash payment?

Answer 18

When Stated rate < Market Rate = discount

Interest expense > Cash Payments to bondholders

Stated Rate > Market Rate = Premium

Interest Expense < Cash PMTS made to bondholders

Question 19

When is a gain contingency recognized? When is it not disclosed at all?

Answer 19

When realized, and not disclosed in footnotes if gain is remote.

Question 20

Which percentage are the PV factors based on, when calculate the Bond value amount? When a bond pmt is due at the end of the month which PV factor is used?

Answer 20

Based on the market rate percentage not the coupon rate.

For payments due at the end of the month use Present value of an ordinary annuity.

Payments made at the beginning of the month use PV of an ordinary annuity due.

Question 21

What is the calculation for Accretion expense related to an assets retirement obligation? What is the appropriate accretion rate?

Answer 21

Accretion rate % = Use the Credit-adjusted Risk-free Rate

Beginning ARO * Credit-adjusted Risk-free Rate = Accretion expense for the year

Accretion expense is the Increase in the ARO liability due to the passage of time

Question 22

How should a decommissioning liability treated on property that is already fully depreciated? Where would it be recognized?

Answer 22

Any change in the value of a liability after the property has been fully depreciated will be Recognized in PROFIT OR LOSS.

Question 23

When a company discounts a note receivable with recourse, what amount of the contingent liability for this note must the issuer disclose on its Y/E F/S?

What does it mean when issued with recourse?

Answer 23

The contingent liability for a discounted note receivable is the maturity value of $20,500, this is the amount that should be disclosed.

When note is endorsed “with recourse” the party that lends the note is liable if maker of the note does not pay. Thus creating a contingent liability.

Question 24

How do you calculate the interest rate of a debenture bond, when not given the interest rate explicitly?

What is the equation for GAAP (effective) interest expense?

What is the equation for Stated rate %?

Be careful if PMTS are semi-annual - must multiply % by 2.

Answer 24

GAAP interest expense = CV at Beg of period X Effective periodic interest rate

GAAP Interest expense/ CV at beginning of period = Periodic interest rate

Stated % rate = Interest PMT / Face value of bond

Question 25

Interest Paid on a discount bond in a given period is:

Interest paid on a premium bond in a given period is:

Answer 25

Interest Paid = Equal to the interest expense LESS amortization of discount

Interest paid = Equal to interest expense PLUS amortization of the discount

Question 26

As of December 1, Year 2 a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other
liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, Year 2 if no debt repayments were made in December?

Answer 26

The current liabilities ($400,000) consist of the $250,000 draw on the line of credit due within one year and $150,000 (1/5 of the $750,000), which represents the portion of the secured note due within the next year.

The long-term liabilities are $900,000, which consist of the four remaining installments of the secured note, which is $600,000 (4 × $150,000) plus the $300,000 three-year balloon note.

Question 27

What are examples of bond issuance costs?

Answer 27

Promotion costs + Engraving and printing + Underwriters Commissions = Total issuance costs

Amortized over the term of the bond using effective interest method (Market rate)

Question 28

What is the equation for troubled Debt restructuring?

Do not pay attention to down payment amount - Distractor

Answer 28

Face Value of Note Payable:
+
Accrued interest owed at date of restructuring:
=
Total Debt Owed:

Fair Value of Restructured Debt: Principal after Reduction:
+
Interest Payment agreed upon and required
= Restructured Debt

**Gain On Debt Restructuring = Total Debt Owed - Restructured Debt

Question 29

When bond is issued at a discount with a 10 year maturity and redeemed 3 years in, how do you calculate the total loss and the different components of the loss?

Answer 29

1) Unamortized amount = Original Amortization - amount of discount amortized

2) Unamortized Bond issuance cost = Total bond issuance costs / total years (Straight line)

Unamortized Bond issuance cost = Original Bond issuance cost - Amortized amount (Straight Line)

3) Multiply Face Value of Bond * premium called at

Add up all amounts for total loss

Question 30

When a noncancellable lease with a transfer of title occurs, will the Lessor record deprecation expense and interest revenue?

Answer 30

The Lessee will capitalize the lease since there was a transfer of title, the lessee will incur both depreciation and interest expense on the asset.

The Lessor will earn and book interest income when payments from the lessee are received. The Lessor removes the asset at the beginning of the lease and will not depreciate the asset.

Question 31

When a transfer of a leased asset occurs, how is the financial liability calculated?