FAR - Liabilities

Question 1

How can property taxes be accrued?

Answer 1

There are two methods which are acceptable:

1. accrued prior to the receipt of tax invoice
2. recorded as a payable upon receipt of the tax invoice

Question 2

What are the conditions to record vacation accruals?

Answer 2

All of the following conditions must be met:

1. Services have already been rendered
2. Obligation relates to the rights that vest or accumulate
3. payment of compensation is probable
4. amount can be estimable

**if only the first three conditions are met, then need to disclose

Question 3

What are examples of exit or disposal costs?

Answer 3

1. involuntary employee termination benefits (severance)
2. costs to terminate a contract that is not a lease
3. costs to consolidate facilities or move employees/equipment

Question 4

When should a liability be recorded for exit and disposal cost be recorded?

Answer 4

A liability must be recorded when all the following are met:

1. obligating event has occurred
2. results in a present obligation to transfer assets or provide services in the future
3. entity has little or no discretion to avoid the future transfer of assets

**must discount the liability to fair value

Question 5

How to record an asset retirement obligation (ARO)?

Answer 5

it needs to be recorded at present value. Debit to ARO (asset), and credit to ARO (liability)

after the initial measurement needs to be adjusted.
1 .debit accretion expense and credit ARO (liability)
2. debit depreciation expense and credit A/D

** the liability increases with the passage of time

Question 6

How are GAIN contingencies recorded in the financial statements?

Answer 6

They are not recognized but they are disclosed in the footnotes. If range is given provide the range

Question 7

How are LOSS contingencies recorded in the financial statements?

Answer 7

1. If the loss is PROBABLE and REASONABLY estimable, record and disclose
2. if the loss is REASONABLY possible, disclose in footnotes..either provide range of estimates or if not possible, state that estimate cannot be made
3. if the loss is remote, do not record or disclose

Question 8

How is a bond issued at a premium or discount calculated?

Answer 8

by taking the PV of the principal amount PLUS PV of all the future interest payments.

**both at the market (effective) rate of interest

Question 9

If the premium of a bonds payable transaction is not amortized, what is the impact on the interest expense and total shareholders’ equity?

Answer 9

Interest expense is overstated and total shareholders’ equity is understated

Question 10

How does the debt issuance costs impact the bonds payable account?

Answer 10

It reduces the bonds payable account. Debt issuance costs get amortized over the life of the bond.

Question 11

What is considered debt issuance costs?

Answer 11

Promotion costs, engraving and printing, underwriters’ commissions

Question 12

If the stated interest rate on the bond is greater than the market interest rate (effective), what is the impact on the price of the bond?

Answer 12

the bond will sell at a premium

Question 13

If a company issues bonds with a detachable warrant, how do they warrants impact the balance sheet at issuance date?

Answer 13

the fair value of the detachable stock warrant gets subtracted from the carrying value of the bond and recorded in SHE

Question 14

Is the straight line amortization method allowed under GAAP?

Answer 14

the SL method is not GAAP but is allowed if results are not materially different from the effective interest method

Question 15

How do you record a bond when it is sold between interest dates. For example the purchaser buys the bond on Sep 1 and the interest payment dates are June 1 and Dec 1?

Answer 15

the amount of interest that has accrued since the last payment date gets added to the price of the bond and recorded as bond interest expense (or payable)

Question 16

A $500 bond is issued at $450 with 2 detachable warrants. The FMV of the warrant is $10 each. What is the discount on the bond at issuance?

Answer 16

The discount is $70.

$500 - $20 - $30 = $430 is the bond carrying value

Question 17

What is the carrying amount of debt?

Answer 17

The carrying amount is equal to the face amount, plus any unamortized premium or minus any unamortized discount AND minus any unamortized debt issue costs

Question 18

How is the bond priced when the market rate is higher than the stated (coupon) rate?

Answer 18

The bond will be issued at a discount.

Question 19

How is the bond priced when the market rate is lower than the stated (coupon) rate?

Answer 19

The bond will be issued at a premium.

Question 20

What is the relationship of the interest expense and interest payable when a bond is issued at a premium?

Answer 20

Interest expense will be less than interest payable. Interest paid on a bond premium is interest expense PLUS amortization of the premium.

Question 21

What is the relationship of the interest expense and interest payable when a bond is issued at a discount?

Answer 21

Interest expense is greater than interest paid. Interest paid on a bond discount is interest expense LESS amortization of the discount.

Question 22

Land exchanged for debt in TDR..what is the entry and gain/loss for the debtor and creditor:

Face value of note: $500K
Accrued interest $60K
Land FV: $450K
Land CV L $360K

Answer 22

The debtor will recognize:

1. Gain on disposal of land (450 - 360) = $90K
2. Gain on restructuring (500+60-450) = $110K

Total gain is $200K

Dr NP 500
Dr Interest Pay 60
    Cr Land 360
    Cr Gain on disposal of land $360
    Cr Gain on restructuring $360

Credit will recognize $110K loss

Dr Land 450K
Dr Allowance for credit loss 110
Cr NR 360
Cr Int Rec $360

Question 23

When we modify the terms of a debt. how do we calculate the gain/loss on the new debt for the debtor and creditor?

Answer 23

debtor - compare the original face value plus accrued interest payments to the total future payments is face value plus undiscounted future interest payments

creditor - compare the original face value plus accrued interest to the PV of the cash flow payments. the note is discounted at the HISTORICAL rate

Question 24

If a bond is extinguished early how do you calculate the gain or loss?

Answer 24

Reacquisition price - the net carrying value = gain or loss

*carrying value is adjusted for unamortized discount, or unamortized premium, and unamortized issuance costs

Question 25

Bond extinguished early what is the impact and entry:

Bond FV: $1,000
Bond issued at a discount for $926K
Bond redeemed at 101
Unamortized discount and issuance cost: $65K

Answer 25

Reacquisition price $1,010K

Net Carrying Value $1000K - $65K = $935K

Total loss on extinguishment $1010 - $935K = $75K

Dr BP $1,000
Dr Loss $75K
Cr Discount on BP $65K
Cr Cash $1,010K

Question 26

For A TDR involving a modification of terms, how do you determine if the debtor should report a gain on the restructuring?

Answer 26

compare the carrying amount to the total future cash payments

Question 27

GAAP requires an accrual for employee’s comp for future absences when four criteria are met:

Answer 27

(1) The payment of compensation is probable,
(2) the amount can be reasonably estimated,
(3) the benefits either vest or accumulate, and
(4) the compensation relates to employees’ services that have already been rendered.

Question 28

On September 30, World Co. borrowed $1,000,000 on a 10% note payable. World paid the first of four quarterly payments of $250,000 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?

Answer 28

$775K. you reduce the note balance by the principal. $250K payment minus $25K

25K = 1,000K x 9% x (1/4)