Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FAR - CPA > FAR CPA Lessons 124-139 > Flashcards

FAR CPA Lessons 124-139 Flashcards

1
Q

What are the three key elements of a liability?

A
  1. A present obligation to transfer assets or provide services
    - It is unavoidable
    - Is the result of a part transaction or event
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define Current Liabilities

A

Must meet both criteria:

  1. Due within 1 year of the balance sheet.
  2. An obligation to be met by the transfer of a current asset or the creation of another current liability
  • accounts payable
  • wages payable
  • income taxes payable
  • utilities payable
  • accrued payables
  • some notes payable
  • many others.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define Noncurrent Liabilities

A

All Liabilities that do not meet the criteria necessary for classification as a current liability

  • bonds payable
  • some notes payable
  • lease liabilities
  • pension liabilities.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a definite liability?

A

Definite liabilities actually exist at the balance sheet date and do not depend on any future event

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a contingent liability?

A

Contingent liabilities have some uncertainty at the balance sheet date. Their existence is contingent on an event that may or may not occur after the balance sheet.

  • lawsuits
  • warranties
  • guarantees
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How are the values for current liabilities reported?

A

At the amount due or the nominal amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How are the values for noncurrent liabilities reported?

A

At the present value of all future payments (principal and interest), discounted at the prevailing rate of interest for similar debt on the date of issuance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Is deferred income tax a current or noncurrent liability?

A

Noncurrent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Accounts Payable

A
  • Represent the amount a business owes to suppliers or other entities that provided goods or services to the company
  • Typically for a short duration, usually 30 days
  • Recognized at the time of purchase or at the time services are received
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the entry to accrue a liability?

A

Debit expense and credit accrued liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Property Taxes

A

Property taxes are levied by state and local governments based on the assessed valuation of property as of a given date. The tax becomes a lien against the property on the date specified by law and thus legally the liability comes into existence on that date

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Accounting for property taxes

A
  • Entities accrues the expense over time
  • When the invoice arrives the difference between the estimated annual amount and the actual annual amount is treated as an increase or decrease to the monthly property tax expense
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Sales Tax

A

Firms collect sales taxes from their customers and periodically submit them to the state or local government. Between collection and submission of the tax, the firm has a liability to the government.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Journal Entries for sales tax

A

AP/Cash - Debit total amount
Sale/Revenue - Credit Net of sales tax
Sales tax payable - credit tax amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the two sources of definite payroll liabilities?

A
  1. Employer Costs (Gross salary, benefits, employer portion of taxes etc)
  2. Employee Costs withheld from paycheck (Tax withholdings, employee portion of benefits) personal expenses etc
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Appropriate FICA rates

A

6.5% on the first $110,000 of salary per year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the payroll taxes that only the employer pays?

A
  1. FUTA (Federal Unemployment Tax Act)

2. SUTA (State Unemployment Taxes)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Appropriate Medicate rates

A

1.5% with no limit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Appropriate FUTA rates

A

6% on the first $7,000 reduced by up to 5.5% for contributions to SUTA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Appropriate SUTA rates

A

5.5% on first $7,000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Formula for bonus - after tax and bonus

A

B = BR(OI - T - B)

B = Bonus
BR = Bonus Rate
OI = Operating income
T = Tax
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Formula for bonus - after tax before bonus

A 
B = BR(OI - T)
B = Bonus
BR = Bonus Rate
OI = Operating income
T = Tax
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Identify how asset retirement obligations are measured.

A

The Asset Retirement Obligation (ASO) is recognized as the time the cost becomes estimable

Debit - Asset Account
Credit - ARO Account

Fair value - The amount the firm would expect to pay today to cover future costs
Present value - the probability-weighted estimates of future cash flows are discounted using credit-adjusted risk-free rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Explain how asset retirement obligations are accreted over time.

A

The annual accretion expense and corresponding increase in ARO is found by multiplying the interest rate used in capitalizing the initial amount by the beginning balance in the ARO. The annual expense is considered an operating expense, not interest expense. Thus, the ARO gradually increases over time (to the final amount expected to be paid) while the net book value of the asset declines through the depreciation or depletion process. Only the initial fair value (present value) is capitalized to the asset and is subject to depreciation or depletion.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Identify when to accrue an environmental obligation.

A

An environmental obligation stems from a legal action in violation of one of various Environmental Protection Acts

An environmental liability must be accrued when the liability is both probable and reasonably estimable. Frequently the company would accrue an environmental liability when it has been named the potentially responsible party (PRP) for the environmental remediation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Define Contingency

A

An existing condition (at the balance sheet date) involving uncertainty as to a possible loss that will be resolved when a future event occurs or fails to occur.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Define probably

A

Based on professional judgment, the probability of occurrence is considered very high or a near certainty.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Define reasonably possible

A

Based on professional judgment, the probability of occurrence is neither very high nor remote. In other words, when probability of occurrence is considered along a spectrum of possibilities, the probability of occurrence is not at either end of the spectrum, but is in the large middle section of the spectrum.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Define remote

A

Based on professional judgment, the probability of occurrence is considered to be very low, or as the title implies, remote.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

When are gain contingencies recorded?

A

Gain contingencies are not accrued but rather are recorded when the actual gain takes place.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

When are loss contingencies recorded?

A

AAP requires that if a contingent loss is both probable and estimable, then an estimated loss and estimated liability is recognized—actually recorded in the accounts in the amount estimated.

  • the defendant in a lawsuit, or
  • provides product warranty, or
  • provides rebates or premiums on the product.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

How to account for a Loss Contingency if it is Probable and Cannot be Reasonably Estimated

A

the loss contingency should be disclosed in the footnotes to the financial statements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

How to account for a Loss Contingency if it is Reasonably Possible

A

regardless of whether the loss can be reasonably estimated, the loss contingency is disclosed in the footnotes to the financial statements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

How to account for a Loss Contingency if it is Remote

A

whether the loss can be reasonably estimated or not, the loss contingency can be disclosed in the footnotes to the financial statements. Footnote disclosure is permitted but not required.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

How are contingencies treated when they are acquired from an acquisition?

A
  1. If the contingency is contractual (warranty etc) the contingency liability is recognized by the acquiring firm at fair value
  2. If the contingency is not contractual it must have more than 50% probability of becoming definite or it is not recognized
  3. As new information is obtained after acquisition, the contingency is reported at the greater of acquisition date fair value and the amount that would be recognized under normal contingency rules (changes are gains & losses)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Accounting for probable gain contingencies

A

The gain is disclosed in the footnotes (Not recognized) whether the gain can be reasonably estimated or not

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Accounting for reasonably possible gain contingencies

A

The gain is disclosed in the footnotes whether the gain can be reasonably estimated or not

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Accounting for remote gain contingencies

A

regardless of whether the gain can be reasonably estimated, footnote disclosure of the gain contingency is not recommended.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Accounting for Guarantees

A

The guarantor is required to disclose:

  1. The nature of the guarantee, terms, how it came into existence, and the triggering event
  2. The maximum future payable amount
  3. The carrying amount of the liability
  4. Description of recourse provisions or available collateral to recover the amounts paid

*Only record the liability if probably and estimable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Accounting for warranties, rebates and premiums

A

Accrue an estimated liability based on historical payments and disclose information regarding the liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Define provision under international accounting standards.

A

a liability that is uncertain in terms of timing and amount but is not of uncertain existence.
-recognized if the entity has a present obligation as a result of an obligating event that will result in an outflow that is more likely than not.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Define contingent liability under international accounting standards.

A

an unrecognized contingent obligation

-If the outflow of benefits is not more likely than not but reasonably possible, then the entity discloses the possible obligation and refers to it as a contingent liability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Describe the similarities and differences in reporting between U.S. and international accounting standards.

A

Accrued contingent obligation reported on the balance sheet
US GAAP - Contingent liability IFRS - Provision
Contingent obligation disclosed in the footnotes
US GAAP - Contingent liability IFRS - Contingent liability
Threshold for accrual of the contingent obligation US GAAP - Probable IFRS - More likely than not > 50%

  • IFRS in an estimated range you must record the mid point - under US GAAP record the lowest amount
  • IFRS requires discounting if there is a material difference between the expected amount paid and its present value - US GAAP does not typically allow this
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Define “more likely than not” under international accounting standards

A

In IFRS, more likely than not is interpreted to mean more than 50%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Examples of accruals

A
  • Utilities payable

- Wages payable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Examples of provisions

A
  • Income taxes payable
  • Property taxes payable
  • Compensated absences liabilities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Under IFRS when do you recognize provisions and contingent liabilities?

A
  • More likely than not & Estimable - Record and disclose
  • More likely than not but not estimable - disclose the obligation but don’t record (referred to as a contingent liability)
  • Remotely possible - There is no recognition or disclosure
48
Q

Gain contingencies under IFRS

A

If, later, the receipt of benefits from the insurance company becomes virtually certain (much higher than probable), then it is recognized; it is no longer contingent at that point. This is in contrast with U.S. standards, which require realization before recognition.

49
Q

Define simple interest notes

A

Simple interest notes have a face value that is also the maturity amount, the amount due at the end of the note term. The stated interest rate and face value determine the annual interest to be paid.

50
Q

Define installment notes

A

Installment Notes— Each payment includes principal and interest—have no maturity value because the last payment reduces the note payable balance to zero. These notes are often used to purchase plant assets and may be secured by those assets. A mortgage note is an example.

51
Q

At what amount are current notes payable reported?

A

Current notes payable are reported at the amount due when they mature

52
Q

At what amount are noncurrent notes payable reported?

A

Noncurrent notes are reported at the present value of future payments, discounted at the prevailing interest rate at time of issuance

53
Q

What are the two rates of interested relevant to notes payable?

A
  1. Stated rate

2. Yield or market rate

54
Q

Define Stated interest rate

A

Stated rate is the contractual rate listed in the note; this rate determines the cash interest payments.

55
Q

Define Yield or Market interest rate

A

Yield or market rate is the rate on notes of similar risk and term (the prevailing rate).

56
Q

How can you tell if a note is issued at a discount?

A

When the yield rate is greater than the stated rate, the note is issued at a discount (less than face)

57
Q

How can you tell if a note is issued at a premium?

A

When the yield rate is less than the stated rate, the note is issued at a premium (more than face).

58
Q

At what amount are notes issued for nonmonetary consideration measured?

A

At the more reliable of:

  • Fair Value of the consideration
  • Present Value of future cash payments discounted at the prevailing rate
59
Q

What is the effective interest method?

A

Required by GAAP - Periodic interest expense is computed as the product of the yield rate at the date of issuance, and the beginning net note liability (present value).

60
Q

What is the straight-line interest method?

A

GAAP allows only if it results in interest expense amounts not materially different from the effective interest method

  • An equal amount of discount or premium amortization is recognized each period.
61
Q

What is the gross method of recording a note and interest?

A

separates the face value (note payable) and discount or premium in different accounts.

62
Q

What is the net method of recording a note and interest?

A

uses one combined net account (note payable), which is the present value and net note liability under the effective interest method.

63
Q

What disclosure requirements are there for notes payable?

A
  • The fair value (Estimate of the amount required to pay off the notes at the balance sheet date)
  • details of noncurrent notes such as interest rates, assets pledged, call and conversion provisions
  • restrictions, and the aggregate maturity amounts for each of the five years following the balance sheet date
64
Q

Explain Annuity in advance

A

An annuity due in a series of payments where the first payment is made at the beginning of the first period.

65
Q

Explain Ordinary Annuity

A

The first payment is made at the end of the first period

66
Q

Formula to compute the effective rate of interest

A

Interest paid / Cash Received

67
Q

Identify the seven items of information required to account for a bond issue.

A
  1. Face (maturity) value
  2. Stated (coupon) interest rate
  3. Interest payment dates
  4. Market (yield, effective) interest rates
  5. Bond Date
  6. Issuance Date
  7. maturity Date
68
Q

Define Bond

A

A financial debt instrument that typically calls for the payment of periodic interest with the face value being due at some time in the future. The bondholder (creditor or investor) pays the issuing firm an amount based on the stated and market rates of interest and receives interest and the face amount in return, over the bond term

69
Q

What are bond issue costs?

A

The cost of printing, registering, and marketing the bonds

70
Q

What does bond price refer to?

A

The current market price of a bond exclusive of accrued interest

71
Q

What does bond proceeds refer to?

A

The sum of the bond price and any accrued interest

72
Q

Secured versus unsecured bonds (debentures)

A

A secured bond issue has a claim to specific assets. Otherwise, the bondholders are unsecured creditors and are grouped with other unsecured creditors. An unsecured bond is backed only by the credit of the issuing firm and is called a debenture.

73
Q

Serial versus single maturity term bons

A

A serial bond matures serially, that is at regular or staggered intervals. The total face value of this issue is paid gradually rather than all at once

74
Q

Callable versus redeemable bonds

A

An issuer can retire callable bonds before maturity at a specified price. The bondholder can require a redeemable bond to be retired early.

75
Q

Convertible versus nonconvertible Bonds

A

A convertible bond can be converted into capital stock by the bondholder; a nonconvertible bond cannot.

76
Q

What rate is used to record the selling price of a bond?

A

the selling price of a bond is equal to the present value of future cash flows face value and cash interest. The discount rate used for this calculation is the market rate of interest on the date the bonds are issued.

77
Q

If the bond’s Stated rate > market rate

A

The bond is issued at a premium

78
Q

If the bond’s Stated rate < market rate

A

The bond is issued at a discount

79
Q

When can the straight-line method not be used for bond amortization?

A
  1. The term to maturity is quite long and there is more than a minor difference between the market and stated rates, or
  2. when there is a very significant difference between the market and stated rates regardless of the length of the term
80
Q

Record the issuance of a zero coupon bond and subsequent interest expense.

A

These bonds pay no interest (coupon rate is zero), but the accounting procedure remains the same except that no cash interest is paid during the term. The entire amount of interest is included in the face value, just like a non-interest-bearing note
Cannot use straight line interest method.

81
Q

Compute and record accrued interest for bonds issued between interest dates.

A

When bonds are issued between interest dates, the total cash received by the company issuing the bonds equals to the selling price of the bonds plus interest (at the stated rate) accrued since the last interest date.

82
Q

Account for bond/debt issue costs at the issuance of the bonds and throughout the bond term.

A

Debt issue costs are reported in the balance sheet as a direct deduction from the liability’s carrying amount. They are not capitalized as an asset

Debt issue costs are amortized to interest expense over the term of the related debt instrument

83
Q

Analyze the effect of accrued interest and debt issue costs on the firm’s financial statements.

A

The effect of bond issue costs on the issuing firm’s financial statements is to (1) reduce the initial net bond liability and (2) increase interest expense in the future.

84
Q

Define amortization table

A

A bond amortization table shows the amounts for all journal entries and ending net bond liability for the entire bond term.

85
Q

How to determine the selling price of a bond

A
  • multiply the stated bond price by the present value of $1
  • multiply the annual interest amount by present value of a annuity
  • Add the two amounts together
  • The difference between the selling price and the stated price is the discount or premium to be amortized
86
Q

IFRS differences for bond accounting

A
  • IFRS requires the effective interest method in all cases
  • IFRS defines the amortization period as the expected term of the bond rather than the contractual period
  • IFRS - the FVO can only used for financial assets & liabilities that are managed and evaluated as a group
87
Q

What?are the three ways a firm can reclassify current liabilities to noncurrent status under GAAP.

A

These must occur between the balance sheet date & the date the financial statements are issued:

  1. Actually refinance the liability on a long-term basis
  2. Enter into a noncancellable refinancing agreement supported by a viable lender
  3. Issue equity securities replacing the debt
88
Q

What are the main differences between GAAP & IFRS for reclassify current liabilities to noncurrent

A

-IFRS requires the action to have taken place prior to the balance sheet date (not the financial statement date)

89
Q

What limit might be put on the reclassification of current liability to noncurrent?

A

It can be limited to the value of collateral put up by the debtor

90
Q

Where is the gain or loss recorded for early retirement of bonds?

A

Income from continuing operations

91
Q

What conditions must be met for debt to be considered extinguished?

A
  1. The debtor pays teh creditor and is relieved of any obligation related to the debt
  2. The debtor is legally released from being the primary obligatory of the liability, and it is probable that the debtor will make no further payments
92
Q

What is the net bond liability?

A

the face value of the bond plus or minus unamortized premium or discount, and less unamortized bond issue costs

93
Q

What is the accounting for retirement of bonds?

A
  1. Record interest and amortization of discount or premium, and amortization of debt issue costs, to the date of extinguishment.
  2. Remove the related debt accounts at their remaining amounts (face value, unamortized discount or premium, and any unamortized debt issue costs)
  3. Record the gain or loss, which is the difference between the current bond price and the net bond liability.
94
Q

In computing the gain or loss on a bond retirement, the price paid for the bonds is compared to what values?

A

net bond liability of the bonds retired

95
Q

To what account are gains and losses of extinguishment (Or derecognition) reported under IFRS?

A

Other income - the same category as interest expense

96
Q

For a restructuring to be considered a Troubled-debt restructure, the both of the following must hold:

A
  1. The creditor granted a concession in the expectation that more ultimately will be received from the debtor compared with other strategies, such as forcing the debtor into bankruptcy.
  2. The debtor is in financial difficulty, which means that without the concession, it is likely that the debtor will default.
97
Q

Debtor recording of settlement troubled-debt restructure

A
  1. Records a gain for the difference of book value (including unpaid interest) and FV
  2. Records a gain or loss on the disposal of nonmonetary assets transferred in full settlement
  3. Removes the debt accounts from the books
  4. Records any stock issued in settlement at FV
98
Q

Creditorrecording of settlement troubled-debt restructure

A
  1. Records a loss for the difference between BV of the receivables and the FV or stock of the debtor received
  2. Removes the receivable accounts from the books
  3. Records assets received at fair value
99
Q

TDR - Modification Type 1

A

In modification of terms, restructures in which the nominal sum of the restructured flows is less than or equal to the book value of the debt plus accrued interest, the debtor:

  • Reduces the carrying value of the debt to the nominal sum of restructured cash flows
  • Records a gain for the difference between the book value and the nominal sum of restructured cash flows
  • Records no further interest; all future cash payments are returns of principal
100
Q

TDR - Modification type 2

A

Modification type 2—In modification of terms restructures in which the nominal sum of the restructured flows is greater than the book value of the debt plus accrued interest, the debtor:

  • Records no gain or loss and does not change the carrying value of the debt
  • Computes the new rate of interest equating the present value of restructured cash flows and the book value of the debt
  • Records interest expense based on the new rate for the remainder of the loan term
101
Q

When is a modification considered a Significant modification under IFRS

A

A modification is significant if the difference between the present values of the two debts (computed with the original rate of interest) is 10% or more of the present value of remaining cash flows on the old debt.

102
Q

Accounting for significant modifications under IFRS

A

When the modification of the original loan is considered significant, the transaction is treated as an extinguishment of the old debt and recognition of the new debt. The new debt is recorded at fair value. Any gain or loss is fully recognized and any costs or fees reduce the gain or increase the loss on retirement.

103
Q

Accounting for a modifications that is not sognificant under IFRS

A

If the 10% threshold is not met, then the difference in present values is deferred and amortized over the new debt term. The new debt is not measured at fair value but rather takes on the original loan book value plus or minus the loss or gain. Any costs or fees adjust the carrying value of the debt and are thus amortized over the new debt term. A deferred gain is a liability and its amortization is reported in other income.

104
Q

How to classify callable loans

A

current liability because the investor could call the loan to be paid back immediately

105
Q

How to classify loans that are callable on demand if a debt covenant is violated

A

Current Liability

106
Q

How to classify loans that are callable on demand if a debt covenant is violated, but the violation is waived

A

noncurrent liability

107
Q

Describe the basic content of a debt covenant.

A

A covenant, also called a “restriction,” is a section of the contract that describes the responses available to the creditor if certain events or conditions occur, such as the debtor’s current ratio declining below a certain level. The covenant may allow the creditor to call the debt (demand immediate payment). Covenants also protect the debtor from such actions should the conditions not occur (debtor maintains compliance with the covenant).

108
Q

What is the successful efforts method?

A

The successful efforts method expenses the cost of all unsuccessful exploration efforts immediately.

109
Q

The FASB has adopted accounting standards that require certain items related to equity are to be reported as liabilities. These items obligate the firm to deliver assets of a fixed monetary value, either cash or equity shares, in the future, and they include:

A
  1. Mandatorily redeemable shares
  2. Certain stock appreciation rights (discussed in a previous lesson)
  3. Financial instruments obligating the issuing firm to issue stock worth a fixed value
  4. Written put options and other financial instruments obligating the issuing firm to repurchase its own shares
110
Q

Explain how mandatorily redeemable shares are classified.

A

classified as liabilities if both of the following criteria are met.

(1) They are obligations to repurchase the firm’s equity shares or are indexed to such an obligation, and
(2) They require or may require the issuer to settle the obligation by transferring assets.

111
Q

The FASB has adopted accounting standards that require certain items related to equity are to be reported as liabilities. These items obligate the firm to deliver assets of a fixed monetary value, either cash or equity shares, in the future, and they include:

A
  1. Mandatorily redeemable shares
  2. Certain stock appreciation rights (discussed in a previous lesson)
  3. Financial instruments obligating the issuing firm to issue stock worth a fixed value
  4. Written put options and other financial instruments obligating the issuing firm to repurchase its own shares

-if the redemption is required only upon liquidation of the entity, then the classification is equity

112
Q

Obligations to Issue Shares of a Fixed Dollar Value

A
  • Firms may pay for services or goods by issuing stock after the goods or services are received.

When a firm agrees to issue shares in the future worth a fixed dollar amount, a liability rather than equity is recognized.

113
Q

Obligations to issue a fixed number of shares

A

when the number of shares is fixed rather than the dollar amount, the issuing firm records an owner’s equity account upon receipt of consideration. During the period between providing the goods or service, and receipt of stock, the vendor is at risk in the same way any other shareholder is at risk. If the stock price declines during this time, the value received by the vendor will also decline.

114
Q

Account for written put options.

A

The fair value of the option is reported as a liability. Changes in the option’s fair value are recognized at each year-end before the exercise. An increase in the fair value represents a potential decrease in the share price because the option is more valuable. The option will be exercised if the share price during the exercise period is less than fixed option price. At exercise, the firm extinguishes the liability and pays the option price. If the option is not exercised (because the share price exceeds the option price during the exercise period), the liability is extinguished and a gain is recorded.

115
Q

What are written put options?

A

As part of a share repurchase plan, firms may write an option allowing other entities to sell the firm’s stock to the firm at a fixed price (option price) on a specific date or during a specified period.

116
Q

What are debenture bonds?

A

Unsecured bonds

FAR - CPA (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions