FAR - Other (Errors...)

Question 1

What are the three criteria for a prior period adj

Answer 1

ASC 250

1. the effect of the adj is material to income from continuing ops
2. the adj can be identified with a prior period
3. the amount of the adj could not be estimated in prior periods

Question 2

What happens to prior period FS if an error is found?

Answer 2

ASC 250
Amounts for prior periods must be comparative as if error never occurred. This is for presentation purposes only. The actual journal entry made would be for the beginning balance of RE for the current period.

Question 3

What happens if Ending inventory is Overstated, what is the impact on other account COGS and NI

Answer 3

COGS will be Understated

GP will be overstated and NI overstated, RE overstated

Question 4

ASC450 what is the criteria of a contingency and how would it impact FS

Answer 4

Criteria are probable AND reasonably estimable.
If contingency, then debit to the liability account.
If not, then expensed when paid.

Question 5

IFRS includes what as prior period errors

Answer 5

Arithmetic mistakes, accounting policy application mistakes, recognition, measurement, presentation, and disclosure mistakes.

Changing accounting policies is NOT an error.
READ CAREFULLY

Question 6

What are revenue rec criteria

Answer 6

1. The revenue is realized or realizable
2. It is earned
   Note if it does not fulfill all requirements (ex selling a 2 year service contract, it cannot be fully recognized)

Question 7

What is the effect on 2011 ending RE if there is an understatement in ending inventory in 2009 and in 2010 but 0 in 2011?

Answer 7

No effect as the ending inventory of one period is beginning inventory of next period, errors in inventory determination affect income for only two consecutive periods. Thus 2009 is offset in 2010, 2010 is offset in 2011. For example, if EI was understated by 50k in 2009, NI would be 50k understated in 2009 and 50k overstated in 2010. RE in 2009 would be 50k under and 0 impact in 2010.

2011 RE will be correct even though 2011 net income was overstated.

Question 8

How do you calculate sum of the years digits depreciation ex for 275k machine with 10 year useful life and no salvage value.

Answer 8

Year 1 depreciation is Machine * 10 / ((10*11)/2) = 50k

Question 9

ASC250 - if there is a change in accounting entity, for example they become consolidated, how are FS impacted?

Answer 9

FS of all prior periods presented should be restated as there is a change in business entity or if there is changes in accounting principle.

Question 10

ASC250 - what is included as errors?

Answer 10

Math mistakes, mistakes in applying principles, oversights or misuse of available facts, and changes from unacceptable to acceptable GAAP

Question 11

The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported as…

Answer 11

In the period of change and future periods if the change affects both. Since it is inseparable, it is accounted for as a change in accounting estimate.

Question 12

An example of a change in accounting principle that would require retrospective application to all prior periods would be a change….

Answer 12

From using the % of completion method of accounting for long term construction contracts to the completed contact method. This is a change in accounting principle.

Beware of accounting estimate and correction of error. Estimate is prospective and error is corrected as a prior period adjustment/restatement. When comparative statements are presented, prior years statements are proactively restated.

Question 13

Company created a subsidiary for the purpose of buying an oil tanker depot at a cost of 1.5M. It is expected to operate for 10 years after which they are legally required to dismantle for a cost of 150k. In the 10th year, the actual cost is 155k. What amount of expense is recognized in FS in year 10?

Answer 13

5k expense for the difference between 155k and 150k

Question 14

IFRS, a voluntary change in accounting method that provides more reliable and relevant info and can be estimated. How should this change in accounting principle?

Answer 14

Retrospective application to the earliest period presented.

Prospective is only if the change in accounting principle if it is impracticable to determine the effects of the change.

Restatement/prior period adjustment is required for errors in FS.

Cumulative adjustments on the IS are NOT permitted.

Question 15

How is a change in the periods benefited by a deferred cost because additional info has been obtained treated?

Answer 15

Treated as a change in accounting estimate which are accounted for in period of change and future periods if the change affects both.

Question 16

ASC274 how should assets and liabilities be presented in personal FS?

Answer 16

At their estimated current values. Find the best estimate of the current value, for example market prices (for both debt and equity securities) or fair value.
Investments in life insurance are to be valued at their cash surrender value less outstanding loans on the policy.
Liabilities are measured at estimated current amounts.
Business interests that constitute a large part of a persons’ total assets should be shown separately from other investments at its estimated current value if the entity is marketable as a going concern. There is no separate listing of the entity’s assets and liabilities.

Question 17

ASC274 - where should the estimated income taxes on the excess of the estimated current values of assets over their tax bases be presented in the statement of financial condition? Why is it there?

Answer 17

It should be presented between liabilities and net worth in the statement of financial position.
Estimated taxes that would be paid if all the assets were converted to cash and all the liabilities were paid should be included with the liabilities.

Question 18

How does an employment contract affect the valuation of the net investment? What if the person owns 100% of the capital stock and the contract pays 100k annually for 10 years?

Answer 18

Does not affect the valuation of the net investment.

Investments in closely held businesses should be reported at their current values in personal FS.

Question 19

What statements are included in personal FS?

Answer 19

Statement of financial condition and statemet of changes in net worth
Statement of cash flows is not required.

Question 20

What happens in a partnership when a new partner invests less for a 1/3 interest? Example, new partner invests 25k for 1/3 of total capital of 90k.

Answer 20

In this case, the bonus 5k to that partner is taken from the existing partners charged in their profit and loss ratio.
If it was the other way around and the new partner paid 35k for value of 30k, the 5k would go to the existing partners in their profit and loss ratio.

Question 21

What values are used to determine the value contributed? How is the required contribution of a new partner calculated?

Answer 21

With all entities, investments in the capital of a partnership are measured at the FMV of the assets contributed as of the contribution date.
Amount to be contributed = Partnership interest of new partners X [Capital balance of existing partners+Amount to be contributed]
Solve for amount to be contributed

Question 22

How do you determine balance in capital accounts? What if a building is contributed but has a mortgage loan of 80k on it? However, the 80k is assumed by the partnership.

Answer 22

It would be the fair value of the assets contributed. Liabilities assumed by the partnership should be valued at the PV of the remaining cash flow. The individual partners must agree to the % of equity that each will have in the net assets of the partnership. This 80k loan is subtracted from the total building value.

Question 23

Goodwill method - each partner has equal initial capital balance. PA contributes assets with a FV of 60k and PB contributes 20k cash. If the split between profit and loss is 60:40 for A and B. What is A’s share of NI of 25k? What is B’s initial capital balance?

Answer 23

25k X 60% = 15k as allocation is 60:40. The relative capital balances do not impact allocation.
Generally the capital balance is determined by the proportionate share of each partner’s capital contribution. However, in recognition of intangible factors such as expertise, partners may agree to any proportion of capital. In this case, the total FV of contributed capital is 80k. Under goodwill method, it is assumed that the actual value of the partnership is 120k. Resulting goodwill of the partners must therefore be 40k. B’s initial capital is 60k.

Question 24

When a partnership is incorporated, what happens to BS and what is the JE?

Answer 24

Assets and liabilities are revalued to FMV on date of incorporation. SE will be assets less liabilities.
DR Current Assets 90
DR Equipment 30
CR Liability 10
CR Common Stock (at par value) 5
CR Additional contributed capital (110-5) 105

Question 25

What happens under the installment method of cash distribution for partnerships?

Answer 25

Final cash distribution is not based on the profit loss ratio, it is based on the balance in each partner’s capital account.

Question 26

Partnership liquidation - how is it distributed?

Given A,B,C share 4:3:3 and loss on sale of assets.

Answer 26

Distribution on liquidation is based on capital balances of the partners after adjusting them for any income/loss to the date of liquidation, including sale of assets, any loans or advances between partnership and partners. The loss on sale of assets is split by 4:3:3 ratio.

Question 27

What happens to disribution if the profit/loss is given in the following sequence:
- managing partner gets 10% of profit bonus
- each partner receives 6% interest on each of their average capital investment
- residual p/l is divided equally
How about salary allowances where A is given 15 and B 12? What situation does A make 3k more?

Answer 27

The distribution of bonus and interest is performed even if it results in a net loss. Must be done in sequence.
Salary allowances are credited to the partners’ accounts before sharing p/l. A makes 3k more in all situations with earning or loss.

Question 28

What happens on partner leaving when there is unrecorded goodwill? How does this impact the remaining members? Assume equal p/l ratio.

Answer 28

The withdrawing partner capital balance is removed from the books and the remaining partners’ capital accounts are reduced by the withdrawing partner’s share of the partnership’s total unrecorded goodwill in relation to their respective profit loss ratios. In this case, remaining partners’ capital accounts are reduced by 1/2 of the withdrawing partner’s share of the partnership’s unrecorded goodwill.