FAR Concepts F4,F5,F6,F7

Question 1

Leaseholder Improvements

Answer 1

Capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease

Question 2

TEMP TAX DTA vs DTL how to account on tax return

Answer 2

• DTA from tax return

+ DTL to tax return

Question 3

Criteria for Discontinued Operations

Answer 3

Info from a qualifying component of the business which is the lowest level for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes from the rest of the entity

Question 4

Operating Segments 3 Criteria

Answer 4

10%
1. Revenue combined external and internal

2. Profit / Loss
   Absolute amount of its reported profit or loss is 10%
   or more of the greater, in absolute amount, of:
   A. The combined reported profit of all operating segments that did not report a loss
   B. The combined reported loss of all reporting segments that did report a loss.
   The combined profit of all reporting segments that did not report a loss is $58,000 ($0 + $5,000 +
   $3,000 + $50,000). The combined loss of all reporting segments that reported a loss is $9,000.
   $58,000 is greater than $9,000, so a segment is deemed reportable if exceeds $5,800 ($58,000 × 10%). Loss of $9,000, and Elvis, with income of
   $50,000, meet this criteria.
3. Assets

Question 5

Depletion (REAL)

Answer 5

(Cost of Land + Extraction Dev Costs + Anticipated Restoration Costs - (Residual Value) / Estimated Recoverable Units) x Units Extracted

R esidual Value
E xtraction/ Development cost
A nticipated Restoration cost
L and Purchase Price

Question 6

Present Value Rents

Answer 6

PV = annual rents x annuity due PV factor 
PV = n x i (n = 5, i = 8%) 

$323,400 = annual rents x 4.312
annual rents = $75,000
Total cash flows = 5 x $75,000 = $375,000

interest revenue equals $51,600 [$375,000 total cash flows less $323,400 present value of cash flows].

Question 7

Liability of a Lease Calculation

Answer 7

• Present value at Dec 31, Year 1 (start of lease) of 7 payments at 10%: $535,000
• Less: down payment at start of lease: (100,000)
• Equals: liability under capital (finance) lease at December 31, Year 1: 435,000
• Less: payment on Dec 31, Year 2: $100,000

*Less: 10% interest on PV of liability: (435,000 x 10%)
(43,500)

• Net payment applied to principal: (56,500)
• Equals: Liability under capital (finance) lease at December 31, Year $378,50

Question 8

Determining Amount of Discount / Premium of Bonds at Issue Date (warrants only method)

Answer 8

1. Determine # of warrants w/ provided info
2. Determine FV through adding FV bonds (given) and calc warrants (step 1)
3. Determine percentage of warrants to entire amount (use % to determine allocation of proceeds)
4. Take total proceeds - warrants (step 3) to determine bonds

PROCEEDS (given) = BONDS + WARRANTS (3)

5. Face amount of bonds - bonds (step 4) = discount / premium

Question 9

Capitalizing Interest on Assets

Answer 9

1. Cap Interest, % spent, not borrowed
2. Amount of Cap Interest Lower of
   a. Actual interest cost incurred
   b. Computed Cap Interest (avoidable interest)
   = interest rate to avg amount of accum expenditures

The interest rate paid on borrowings specifically for asset construction is used first

If the avg acum exp outstanding exceed the amount of the specific new borrowing, excess interest computed based on the interest rate for other borrowings of the company.

Construction loan toal avg accum exp ($625,000)
$500,000 × 12%
$ 60,000
Excess Expenditures
$125,000 × 10%
12,500
Capitalized interest
$ 72,500

Question 10

Capital Lease Recognition vs (Interest Rec, Rent Rec)

Answer 10

Interest Revenue Rec (not rent)

Lease Receivable, Interest Rev Decreases over Time

Initial payment no interest has occurred yet

Question 11

Warrants Only vs Market Value Method

Answer 11

Warrants Only: Only FV warrants known

Market Value: FV of warrants and bonds known

On Exercise Date issue stock to warrant holder
Dr Cash
Dr APIC Warrants
Cr CS
Cr APIC

Issue Warrants
Dr Cash
Dr Discount
Cr BP
Cr APIC Warrants

• Warrants —> 120,000 (Given)
• (CV + Warrants / Warrants)
  (1,080,000+120,000/120,000) = 10%
• (FV x %)
  (1,000,000 x 10%) = 100,000 warrant price

*Proceeds allocated to warrants is recorded as contributed capital

Question 12

Quick Ratio

Answer 12

Cash + Net Receivables + Short Term Investments / Current Liabilities

Question 13

Rising Prices LIFO vs FIFO, what happens to ending inventory and reported net income?

Answer 13

LIFO

1. Ending Inventory Lower
2. COGS Higher
3. Income Lower

• *FIFO reversed from above
• • LIFO prohibited under IFRS

Question 14

Calculating Book Value Per Common Share

Answer 14

• Stock equity / Totals # common shares
• Any preferred shareholder interest must be removed from shareholders equity before computing book value

Eliminated:

1. Par value preferred stock
2. Premium value preferred (shares if liquidated)
3. Div in arrears