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1
Q

How are changes in accounting principle applied?

A

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

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2
Q

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A

A change of principle.

Applied retrospectively.

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3
Q

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A

A change in accounting principle.

Applied retrospectively.

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4
Q

How is a change in accounting estimate applied?

A

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

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5
Q

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

A

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

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6
Q

How is a correction of an accounting error made?

A

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

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7
Q

What are the requirements for a prior period adjustment?

A

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

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8
Q

How is a change from a non-GAAP accounting method to a GAAP method recorded?

A

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

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9
Q

How does an inventory error effect the financial statements?

A

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

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10
Q

How is a change in entity recorded?

A

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

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11
Q

How are changes in accounting principle applied?

A

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

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12
Q

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A

A change of principle.

Applied retrospectively.

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13
Q

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A

A change in accounting principle.

Applied retrospectively.

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14
Q

How is a change in accounting estimate applied?

A

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

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15
Q

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

A

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

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16
Q

How is a correction of an accounting error made?

A

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

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17
Q

What are the requirements for a prior period adjustment?

A

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

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18
Q

How is a change from a non-GAAP accounting method to a GAAP method recorded?

A

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

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19
Q

How does an inventory error effect the financial statements?

A

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

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20
Q

How is a change in entity recorded?

A

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

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21
Q

When is the fair value method used for recording interest in a separate company?

A

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

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22
Q

When is the equity method used when purchasing another company’s stock? How is it recorded?

A

Ownership 21% to 50%

Gives significant influence

Purchase Price - Par Value : Goodwill

Dividends received from the investee reduce the investment account and are not income

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23
Q

When are companies required to file consolidated financials? How is it recorded?

A

Ownership of other company is greater than 50%

Investment account is eliminated

Only parent company prepares consolidated statements; not subsidiary.

Acquired assets/liabilities are recorded at Fair Value on acquisition date.

Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

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24
Q

When is consolidation not required?

A

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

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25
What occurs under a step acquisition?
Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value Results in a Gain or Loss in current period
26
What is the difference between an acquisition and a merger?
Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent's financial statements Merged companies cease to exist and only the parent remains
27
How are acquisition costs recorded in a merger?
Expensed in period incurred - i.e. NOT capitalized: Accounting; Legal; Valuation; Consulting; Professional Netted against stock proceeds: Stock registration and issuance costs
28
# 1 How are changes in accounting principle applied?
Retrospective Application: Prior Periods adjusted Retained Earnings adjusted Completed Contract to % Completion Ex: LIFO to FIFO
29
# 1 Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate? How would it be applied?
A change of principle. Applied retrospectively.
30
# 1 Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?
A change in accounting principle. Applied retrospectively.
31
# 1 How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward). No backwards adjustment is made.
32
# 1 Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate? How would this change be applied?
Change in depreciation method would be a change in accounting estimate. It is applied prospectively.
33
# 1 How is a correction of an accounting error made?
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements. The correction of the error must be included in the footnotes.
34
# 1 What are the requirements for a prior period adjustment?
Effect is Material Is identifiable in Prior Period Couldn't be estimated in Prior Periods
35
# 1 How is a change from a non-GAAP accounting method to a GAAP method recorded?
It is treated as a correction of an accounting error. Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements Correction of the error must be included in the footnotes
36
# 1 How does an inventory error effect the financial statements?
Effect on Ending Inventory : Effect on Net Income If one is overstated- both overstated. If one is understated- both understated. Misstating inventory corrects itself after TWO periods.
37
# 1 How is a change in entity recorded?
Applied retrospectively. All prior periods presented for comparative purposes must reflect the change Footnote disclosures must be made Changing to Consolidated Statements
38
# 2 What is a serial bond?
Any bond that matures in installments
39
# 2 What is a term bond?
Any bond that matures on a single date
40
# 2 What is a debenture bond?
A bond not secured by any collateral
41
# 2 What is a sinking fund bond?
Cash is held in a sinking fund for repayment of bond at maturity 5 years of requirements and maturity details should be disclosed
42
# 2 What is the formula to calculate proceeds of a bond sale?
Present Value of the principal payment at maturity + Present Value of Interest Payments made : Market Value of Bond Proceeds
43
# 2 How is the present value of a bond calculated?
Step 1: PV of $1 @ Yield Rate (not Stated Rate) x Bond Face Value PLUS Step 2: PV of an Ordinary Annuity of $1 for Term @Yield x (Stated Rate x Face)
44
# 2 Which costs are included in bond issuance costs? How are they recorded?
Include Engraving; Printing; Legal; Underwriter; Registration Debited to a deferred charge account and amortized over life of Bond using S/L Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds Time of amortization begins when issued
45
# 2 How are bonds reported when classified as trading securities?
Reported at FMV with unreleased gains and losses being included in earnings
46
# 2 How are bonds amortized under the interest method?
Both discount and premium amortization amounts increase each year
47
# 2 Describe the book value method when converting from bonds to stocks.
No gain or loss recognized APIC is the plug for the difference between the Bond's Book Value and the Par Value of the Common Stock
48
# 2 What is the stated rate for a bond?
Rate on the face of the bond
49
# 2 What is the market rate on a bond?
Rate that bonds are currently selling for
50
# 2 What happens when the bond's market rate is greater than the stated rate?
Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value
51
# 2 What happens when a bond's market rate is less than the stated rate?
Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value
52
# 2 How does accrued interest on a bond affect the purchase price?
The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point). Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.
53
# 2 When does interest expense start accruing on a bond?
When the bonds are issued
54
# 2 How is an interest payment on a bond calculated?
Cash for payment : Stated rate x Face amount
55
# 2 What amount of interest is expensed on a bond interest payment?
Interest expense : effective yield x carrying value Any difference between expense and cash payment is applied as amortization against premium/discount
56
# 2 What are convertible bonds? Which recording method is used?
Bonds that can be converted to stock Book value method used if no gain or loss Market value method used if there is a gain or loss
57
# 2 How is the retirement of bonds recorded?
Gain or Loss is Ordinary Extraordinary if both unusual and infrequent
58
# 2 When is a gain recognized in a debt restructuring?
If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized
59
# 2 What is the gain recognized under a settlement of debt?
Gain recognized: Difference between cash paid and carrying amount of debt Difference between non-cash asset given and re-valued at FMV and debt carrying amount
60
# 2 For a creditor; how is a loan impairment recorded?
If future cash flows discounted at loan's Effective Interest Rate are less than Carrying Value: Effective Rate calculated using original rate; not modified rate

Far Accounting (2 decks)

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