FAR Deck 5

Question 1

Bond Interest Payment - Cash Payment

Answer 1

Cash Payment   =  Bond face value   X   Stated Rate    /
                                         # of payment periods per year

Question 2

Bond interest payments

Answer 2

Stated Rate = Annual interest Payment / Bond face value

Question 3

Stock Warrant

Answer 3

A stock warrant is when an issuer of bonds provide bondholders the right to buy a certain number of shares of the company at a fixed price for a specific period.

Question 4

A Detachable Stock Warrant

Answer 4

A detachable stock warrant is when the warrant can be sold separately in a secondary market.

Question 5

Calculation of gain or loss on bond redemption/retirement

Answer 5

Step : 1 Determine bond carrying value

            Bonds payable (face value)
         \+ Unamortized bond premium or 
         - Unamortized bond discount
         - Unamortized bond issue costs 
      =   Bond carrying value

Step 2 : Compare carrying value to cash paid

    Bond Carrying Value
 -  Cash paid to redeem bonds
=   Gain or loss on bond redemption

Gain = Carrying value > Cash Paid
Loss = Carrying value < Cash Paid

Question 6

Term bond

Answer 6

A single maturity date at the end of the bond term

Question 7

Serial Bond

Answer 7

Bonds with multiple maturity dates at regular intervals throughout thier lives

Matures in stated amounts at regular intervals

Question 8

Debenture

Answer 8

Debenture bonds are bonds that are unsecured by collateral and backed by the issuers general credit

Question 9

A finaance lease must meet at least one of five criteria

Answer 9

Special PO-T-75-90

1. Property of a specialized nature
2. Purchase option that is likely to be exercised
3. A title transfer
4. A lease term that constitues a major part of the assets life ( greater than or equal to 75)
5. A present value of lease payments equaling subsstantially all of the propertys fair value (greater than or equal to 90)

Question 10

Income tax expense (benefit)

Answer 10

Current income tax expense (benefit) + / - Deferred income tax expense (benefit)

Question 11

Deferred tax liability

Answer 11

• When future tax income will be more than future book income { taxes will be owed } , this creates a deferred tax liability.

For example, an installment sale is a deferred tax liability because for taxes, profit is prorated and reported when payments are received, rather than earned.

• Taxable temporary difference
• Future tax deduction will be less, resulting in future taxable income.
• Current tax depreciation exceeds accounting depreciation

Book expense < Tax return expense

Book income > Taxable income

Question 12

Deferred tax asset

Answer 12

• When future tax income will be LESS than future book income, a deferred tax asset is created.
• It represents an expected future tax deductible amount due to temporary timing differences between the accounting books and the tax return.

Ex. Warranty costs is a deferred tax asset becuase for taxes, warranty costs are recognized when paid.

• Deductible temporary difference

Book expense > Tax return expense

Book income < Tax income

Question 13

Annual effective tax rate

Answer 13

Total income tax expense / Pretax income (PTBI)

Question 14

Summary of Significant Accounting Policies

Accounting principles used (where GAAP allows alternatives) and the methods of applying those principles

Answer 14

• Revenue recongnition policies
• Inventory costing system (LIFO, FIFO)
• Depreciation method (eg. straight-line, sum-of-the-years’ digits)
• Long-term contract accounting (eg. over time, at a point in time)
• Criteria for classification of investments (eg. cash equivalents, trading securities)
• Basis of consolidation

Question 15

Accounting errors requiring corrections

Answer 15

• Mathematical errors
• Mistakes in applying GAAP
• Change from a non-GAAP principle to a GAAP principle
• Omission of material information