FAR Misc. 3

Question 1

Aging the receivables

Answer 1

Estimating bad debts on the aging analysis of accounts receivable balances focuses on the balance sheet and emphasizes the valuation of assets. It results in a good matching of revenue and expense.

Question 2

Direct write off method

Answer 2

The (specific) “write-off method” overstates the collectible amount of accounts receivable by not allowing for those that become uncollectible. It results in a poor matching of revenue and expense.

Question 3

How do you account for a permanent impairment loss?

Answer 3

When a permanent impairment occurs, the book value is reduced and a loss is recorded. The loss is credited to accumulated depreciation. In addition, the current year’s depreciation expense should be added. The new book value is depreciated over the new life.
Accumulated depreciation, 1/1/92 $ 420,000
Loss ($900,000 - 420,000) - 300,000 180,000
Depreciation for 1992 ($300,000 / 3) 100,000
Accumulated depreciation, 12/31/92 $ 700,000

Question 4

What are the 4 criteria that have to be met in order to meet the reporting requirements for post-retirement benefits?

Answer 4

• The employer’s obligation relating to the employees’ rights to receive compensation for future absences is attributable to services already rendered.
• The obligation relates to rights that vest or accumulate.
• Payment of the compensation is probable.
• The amount can be reasonably estimated.

Question 5

How do you calculate adjusted cash balance?

Answer 5

Adjusted cash balance = Unadjusted cash balance +/- bank errors + credit memos - service charges

Question 6

How do you calculate the bond issue price?

Answer 6

Bond issue price is the sum of the present values of the maturity value and the interest payment annuity.

present value of principal= bond face x present value of $1

present value of interest= PV of ordinary annuity for

Question 7

What is the difference between FOB Shipping point & FOB Destination?

Answer 7

F.O.B. destination means that title passes when received by the buyer, and that packaging, shipping, and handling are costs of the seller.

F.O.B. shipping point means that title passes when the goods leave the seller’s location and that shipping is a cost of the buyer.

Question 8

When a corporation sells its treasury stock at a price that exceeds its cost, how should the excess be treated?

Answer 8

There is no gain or loss on the purchase and/or sale of treasury stock. Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”

Question 9

What is the primary purpose of a quasi-reorganization?

Answer 9

to eliminate a retained earnings deficit so that future earnings will be available for dividends rather than limited to offsetting the retained earnings deficit

Question 10

How can determine a liquidating dividend?

Answer 10

A dividend is a liquidating dividend to the extent that the dividend exceeds retained earnings. The amount in of excess=the liquidation dividend

Question 11

How is the remaining amount of an appropriation treated?

Answer 11

When the purpose of the appropriation has been achieved, it should be restored to unappropriated retained earnings.

Question 12

Stock option exercise dates

Answer 12

Stock options outstanding are reduced at the exercise date.

Stock options outstanding are increased at the date of grant.

Question 13

How are gains and losses on treasury stock treated?

Answer 13

Corporations are not permitted to report income statement gains and losses from treasury stock transactions. Instead, treasury stock “gains and losses” are reported as direct adjustments to stockholders’ equity. Gains are recorded by crediting APIC - Treasury Stock, while losses are recorded by first reducing any existing APIC - Treasury Stock to $0, and then debiting any additional loss to Retained Earnings.

Gains and losses on treasury stock transactions are never recorded on the income statement. Gains are recorded by increasing Additional Paid-in Capital―Treasury Stock. Losses are recorded by first eliminating any balance in Additional Paid-in Capital―Treasury Stock and then decreasing retained earnings.

Question 14

How is book value per share calculated?

Answer 14

Book value per share= total common stockholder’s equity/ common stock shares outstanding

Question 15

How do you calculate intrinsic value?

Answer 15

Under the intrinsic value method, a corporation measures the intrinsic value of options based compensation using the following formula:
Number of share options × Market price of the stock on the date of the grant less exercise price of the share option

Question 16

Who are required to disclose earnings per share?

Answer 16

EPS disclosures are required for all companies with publicly traded common stock or potential common stock including:
Stock options
Stock warrants
Convertible securities
"Contingent stock" agreement

Also required by companies that have made a filing or are in the process of filing with a regulatory agency (e.g., the SEC) in preparation for a public sale of common stock.

Question 17

How do you account for interest expense when computing EPS?

Answer 17

Interest expense (net of income tax) on debt considered would be added back to the numerator for diluted EPS if the effects are dilutive.

Question 18

When are convertible securities recognized in computing dulitive EPS?

Answer 18

Rule: Convertible securities are recognized when computing diluted EPS only if the conversion is dilutive.

Question 19

Dilutive stock options are used in the calculation of ?

Answer 19

Dilutive stock options would be used in the calculation of diluted EPS.

Question 20

What are out of the money stock options and how are they treated?

Answer 20

Out of the money stock options are antidilutive because the exercise price exceeds the market price of the stock.

Question 21

What are one of the differences between basic and diluted EPS?

Answer 21

A dilutive security will produce an earnings per share number below basic earnings per share. The formula for basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Basic earnings per share is $1.29, and a dilutive security will result in a lower earnings per share number

Question 22

What are the required disclosures of a statement of cash flows under the direct method under U.S. GAAP.

Answer 22

The major classes of gross cash receipts and gross cash payments.

The amount of income taxes paid.

A reconciliation of net income to net cash flow from operations.

Question 23

What is the purpose of the statement of cash flows?

Answer 23

he primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash disbursements of an enterprise during an accounting period.