FAR Deck - 2

Question 1

Treatment and recognition of Current Expected Credit Loss (CECL) for Available-for-Sale securities

Answer 1

Per the current expected credit loss (CECL) model, the expected credit loss is equal to the difference between amortized cost ($1,000,000) and the present value of expect.ed cash flows ($978,000). Credit Loss to be recognized in this case will be $22,000.

If the fair value exceeds the Unamortized Cost no, credit loss to be recognized. The resulting gain will be reported in Other Comprehensive Income Statement as Unrealized Gain on AFS.

Question 2

What is the effect of inventory overstated in the financial statements?

Answer 2

Understated COGS and Overstated Retained Earnings. Overstated Gross Margin.

Question 3

TRUE or FALSE:
Under Operating Lease, variable payments does not impact on the lease expenses.

Answer 3

TRUE!
Under Operating Lease, lease payments including variable payments are recorded straight line basis. Variable payments are known at the inception of the lease hence included in PV of Lease. There is NO interest expense under Operating Lease.

Question 4

What are Support Services expense of Not-for-Profit?

Answer 4

Support services summarize the functional expenses related to general and administrative costs, costs of membership development, and fundraising.

Fundraising contemplates inducing potential donors to contribute to the entity.

Membership activities involve seeking prospective members, ensuring current member satisfaction, etc. Membership activities mimic marketing activities (a general and administrative expense) in commercial settings

Question 5

TRUE or FALSE:
Gains and Losses from treasury stock transactions affect retained earnings under Legal Method of treasury stock accounting.

Answer 5

FALSE!
Under the legal method, the additional paid-in capital account is debited for losses (or credited for gains) when the treasury stock is repurchased.
However when additional paid in capital does not have enough balance to absorb loss on transaction, retained earnings is further reduced (balance debit to RE).

Question 6

TRUE or FALSE:
A primary difference between the cost method and legal method is the timing of the recognition of gains or losses on treasury stock transactions.

Answer 6

TRUE!

Question 7

TRUE or FALSE:
Treasury stocks are recorded at their reacquisition price under the cost method.

Answer 7

TURE! Treasury stock shares are recorded and carried at their reacquisition cost under the cost method.

Question 8

When a contribution revenue is recognized by a Not-for-Profit organization?

Answer 8

Cash contributions and unconditional pledges are recognized as contribution revenue
in the year in which the cash or pledge is received.

Question 9

What is considered as Contribution to Not-for-Profit?

Answer 9

Contributions to Not-for-Profit include transactions that are unconditional (not requiring future event to occur),
non-reciprocal, voluntary and not of an ownership investment.

Question 10

How contribution revenue is measured for Not-for-Profit?

Answer 10

The difference between the fair value of purchases and the amount transferred
is classified as Contribution revenue.

Question 11

TRUE or FALSE:
Exchange transaction (like resources provided for research) increases Net Assets without donor restrictions.

Answer 11

TRUE!

Question 12

TRUE or FALSE:
Charity care are recognized as revenue to Not-for-Profit and must be reported on the face of financial statements.

Answer 12

FALSE!
Charity care are those health care services provided but never expected to result in cash flows to the
hospital, are not recorded as receivable or as revenue.
Charity care is not recognized on the face of the financial statements but is disclosed.

Question 13

How federal grants received are recognized by a Not-for-Profit?

Answer 13

Federal grant funding received, subject to conditions associated with eligible cost principles, would not be recognized as revenue until conditions are satisfied.

Question 14

How debt securities and the equity securities are accounted by Not-for-Profit?

Answer 14

All debt securities and those equity securities that have readily determinable fair values
are measured at fair value in the statement of financial position.
Gains and losses on investments are reported in the statement of activities as net assets without restrictions.

Question 15

When the funds received by Not-for-Profit are recorded as as liabilities on the statement of financial position?

Answer 15

When funds received by the recipients that do not have variance power (do not have any latitude
with regard to use of the funds received) would recognize the asset received as a liability to the beneficiary.

Question 16

How to determine if Not-for-Profit organization is financially inter-related with other?

Answer 16

Financially interrelated Not-for-Profit definition per FASB-ASC 958-605 is-
1. Organization must be able to influence the operating and financial decisions of the other , and
2. Must have on-going economic interest in the net asset of the other.

Question 17

TRUE or FALSE:
Gains and losses on the investments are always recorded as net asset with restrictions.

Answer 17

FALSE!
Gains and losses on investments should be reported in the statement of activities as increases
or decreases in net assets without restrictions UNELSS OTHERWISE stipulated by donor or by law.

Question 18

How different types of government funds are accounted?

Answer 18

Governmental funds: Current financial resource measurement focus and modified accrual basis of accounting.

Proprietary Funds: Economic resources measurements focus and Accrual basis of accounting.

Fiduciary Funds: Economic resources measurements focus and Accrual basis of accounting.

Question 19

Types of Proprietary funds and accounting method used?

Answer 19

Proprietary funds includes - Enterprise Funds and Internal Service Funds

Accounting method - Economic resources measurements focus and Accrual basis of accounting.

Question 20

Types of Governmental funds and accounting method used?

Answer 20

Governmental funds includes - General fund, Permanent fund, special revenue fund, debt service fund and Capital Projects fund.

Accounting method - Current financial resource measurement focus and modified accrual basis of accounting.

Question 21

TRUE or FALSE:
Local governmental unit could have funds using both the Accrual basis and the Modified Accrual basis of accounting.

Answer 21

TRUE!

Question 22

TRUE or FALSE:
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

Answer 22

TRUE!

Question 23

TRUE or FALSE:
Due to the absence of seasonal fluctuations, the end of the preceding fiscal year is the appropriate period to include in addition to the most recent quarter end on Form 10Q.

Answer 23

TRUE!

Question 24

What is the sum-of-the-years’-digits method of depreciation?

Answer 24

The sum-of-the-years’-digits method is an accelerated method of depreciation where the earlier years reflect more depreciation expense than the later years. To calculate the denominator in the sum-of-the-years’-digits method, the following calculation is necessary:
[N × (N+1)]/2, where N is the estimated useful life

Question 25

TRUE or FALSE:

Capitalized interest can increase the total interest cost actually incurred for calculation on interest capitalization for the qualifying asset.

Answer 25

FALSE -
The total capitalized interest amount recognized may not exceed the total interest costs actually incurred by the entity during the stipulated period.

Question 26

How a loss on investment in debt security classified as available-for-sale recognized under CECL model?

Answer 26

Using Current Expected Credit Loss (CECL) model, loss on available-for-sale debt security should be recognized in Income Statement when the fair value of AFS is Lower than Amortized cost but above PV of future cash flows.

Question 27

TRUE or FALSE:

Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss

Answer 27

TRUE!

Question 28

How dividends are distributed to Common Stockholder when Preference Shares are participating?

Answer 28

Participating preferred stock splits dividend distributions with common shareholders only after the common shareholders have received percentage dividends equivalent to preferred shareholders. The remaining dividend is shared in relation to relative capitalization.

Question 29

TRUE or FALSE:
Shares that are acquired and resold at a lower price could lower retained earnings (debit) if the additional paid-in capital—treasury stock account cannot fully absorb the loss.

Answer 29

TRUE!
Under the cost method, if shares are acquired and reissued at a lower price, the additional paid-in capital—treasury stock account will absorb the loss until reaching $0, with the remaining loss recognized as a reduction (debit) to the retained earnings account.