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A311 Intermediate Accounting > Final Exam > Flashcards

Final Exam Flashcards

1
Q

What reporting method is used when investor relationship lack significant influence (less than 20%)

A

Varies on the type of security (AFS, HTM, Trading)

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2
Q

What reporting method is used when investor relationship is significant (20%-50%)

A

Equity Method

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3
Q

What reporting method is used when investor relationship is controlling (50% or more)

A

Consolidate

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4
Q

Describe Selling Held to Maturity (HTM) Investment

A

Dr Cash (sale price) & discount, Cr Investment (face amt) & Gain/loss

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5
Q

What is a Parent

A

investor who controls another entity through majority stock ownership

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6
Q

What is a subsidiary

A

company controlled by another entity

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7
Q

What is consolidated

A

parent issued financial statements that include the financial statements of subsidiary

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8
Q

Describe Available for Sale (AFS) Investments

A

Used for debt or equity that does not qualify as HTM or Trading, Unrealized gains/losses recorded in Other Comprehensive Income (OCI), Recorded at Fair Value in Balance Sheet, (determine investment revenue by amortized cost & effective interest rate), initially recorded at cost

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9
Q

Describe Selling a Trading Security

A

Dr Cash (sales price) & discount on bond, Cr investment (purchase price) & Cr/Dr Realized Gain/Loss (reverse all balance sheet accounts associated with investment)

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10
Q

If a bond is sold for more than its maturity value, then what is it called

A

a premium

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11
Q

If a bond is sold for less than its maturity value, then what is it called

A

discount

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12
Q

Describe Held to Maturity (HTM) Investments

A

Used for debt that is planned to be held for its entire life, unrealized gain/loss is not recognized, investment reported at amortized cost (outstanding balance x effective rate or market rate)

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13
Q

Describe Trading (TS) Investments

A

used for debt or equity that is held in an active trading account for immediate resale, unrealized gain/loss is recognized in net income (therefore retained earnings), investment reported at fair value. Initially recorded at cost

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14
Q

Identify critical events that a company experiences with respect to investments that must be recognized in the acctg system

A

purchase of investment, sale of investment, investment revenue earned, & change in fair value.

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15
Q

How do you recognize investment revenue for HTM Security

A

Use the market rate amortized by months in year to get effective rate times the outstanding balance of the bond

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16
Q

Explain Comprehensive income

A

Includes Net income & OCI, which accumulate in shareholder equity as retained earnings and accumulated OCI

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17
Q

Explain Accumulated OCI

A

net fair value adjustments to date less net holding gains or losses to date

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18
Q

If the interest rate paid on a bond is lower than the market rate, then the bond will sale for an amount that is?

A

less than its maturity value

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19
Q

Identify the information necessary to calculate cash interest each period

A

stated interest rate and par value of debt security

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20
Q

Investment revenue earned on an investment in trading debt securities is calculated based on what

A

amortized value times the market interest rate

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21
Q

what is the price of a bond equal to?

A

the present value of future cash receipts

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22
Q

Transfer AFS or HTM to trading

A

include in current net income

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23
Q

transfer trading to AFS or HTM

A

none are recognized because they already have been recognized in income

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24
Q

Transfer HTM to AFS

A

OCI

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25
Q

Transfer AFS to HTM

A

Amortize to net income over remaining life

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26
Q

Investment income is reported how with the equity method

A

based on investee’s income times ownership percentage

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27
Q

how do you calculate investment revenue for a trading security

A

based on amortized cost times the market interest rate

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28
Q

what is the difference between fair value and equity method approach

A

recognition of income and dividends & treatment of holding gains/losses

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29
Q

what are considered financial instruments

A

cash, AR, AP, Stock options, common stock of another company

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30
Q

As the investee distributes net assets as dividends how is it recorded

A

DO NOT recognize as revenue, rather reduce the investment

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31
Q

Explain Fair Value option

A

used for HTM & AFS - essentially reclassing as trading security. it is irrevocable & applied to select securities

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32
Q

How is cash interest calculated

A

face amount times stated interest rate

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33
Q

Double Declining Depreciation

A

Cost time 2x S/L Rate (1/useful life)

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34
Q

Sum of years depreciation

A

(cost - residual value) x [n/(n(n+1)/2)] next year will lower denominator also 2nd yr includes remaining depr’n from partial year

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35
Q

S/L depreciation

A

(cost - residual value) / useful life

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36
Q

how are patents recorded

A

at cost

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37
Q

change of estimate is recorded how

A

current period & future periods

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38
Q

Rearrangements

A

expenditures made to restructure an asset without addition, replacement, or improvement. (moving assets to become more efficient) and are capitalized

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39
Q

improvements

A

the replacement of a major component and is capitalized

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40
Q

additions

A

the addition of major component to an existing assets and is capitalized

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41
Q

repairs and maintenance

A

expenditures to maintain a given level of benefit and is expensed

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42
Q

when is an impairment loss required for P, P, & E or finite-life intangible assets

A

if undiscounted future cash flows is less than book value then calculate by using Book Value less fair value

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43
Q

what is the cost allocation for plant & equipment

A

depreciation

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44
Q

what is the cost allocation for natural resources

A

depletion

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45
Q

what is the cost allocation for intangibles with a finite useful life

A

amortization

46
Q

what principle does depreciation, depletion, & amortization try to satisfy

A

matching principle

47
Q

is depreciation, depletion, & amortization used in the cost of inventory

A

yes, if used to manufacture a product

48
Q

Cost allocation needs 3 factors, what are they

A

service life, allocation base, allocation method

49
Q

service life

A

estimated use that company expects to receive from assets (units of time or units of activity)

50
Q

allocation base

A

value of usefulness that expected to be consumed (difference between initial value & residual value or salvage value)

51
Q

allocation method

A

pattern in which the usefulness is expected to be consumed (timed based or activity based

52
Q

time based cost allocation method

A

allocates cost over a period of time

53
Q

activity based cost allocation method

A

allocation of an asset’s cost base using a measure of an asset’s output or input

54
Q

straight-line depreciation

A

the equal amount of depreciable base is allocated to each year of service life

55
Q

sum-of-the-years’-digit method

A

systematic acceleration of depreciation by multiplying the depreciable base by a fraction that declines each year

56
Q

declining balance method

A

multiply beginning-of-year book value, not depreciable base, by an annual rate that is a multiple of the straight-line rate.

57
Q

double declining balance method

A

is 2 times the straight-line rate of depreciation annually

58
Q

unit-of-production method

A

computes depreciation rate per measure of activity and then multiplies this rate by actual activity to determine periodic depreciation.

59
Q

is activity based methods better than time based for depreciation

A

yes, but impractical at times

60
Q

group depreciation method

A

collection of assets defined as depreciable assets that share similar service lives and other attributes (no gain or loss determined at sale - included in accum depr’n)

61
Q

composite depreciation method

A

physically dissimilar assets are aggregate to gain the convenience of group depreciation (no gain or loss determined at sale - included in accum depr’n)

62
Q

depletion

A

base is cost less any anticipated residual value divided by estimated extractable tons

63
Q

what are some intangibles assets not subject to amortization

A

anything with an indefinite useful life. trademarks, goodwill,

64
Q

what is another option to partial year depreciation

A

half-year depreciation

65
Q

half-year depreciation

A

record half of a full years depreciation in year acquired and another half in year disposed.

66
Q

how is a change in depreciation, depletion, or amortization accounted for

A

same as an estimate (current period and future periods)

67
Q

error correction - what is the treatment of material errors occurring in a previous year

A
  • Previous years’ financial statements are retrospectively restated.
  • Account balances are corrected.
  • If retained earnings requires correction, the correction is reported as a prior period adjustment.
  • A note describes the nature of the error and the impact of the correction on income.
68
Q

When to Test for Impairment

A

only when events or changes in circumstances indicate book value may not be recoverable

  • A significant decrease in market price.
  • A significant adverse change in how the asset is being used or in its physical condition.
  • A significant adverse change in legal factors or in the business climate.
  • An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset.
  • A current-period loss combined with a history of losses or a projection of continuing losses associated with the asset.
  • A realization that the asset will be disposed of significantly before the end of its estimated useful life
69
Q

when is an impairment loss required for indefinite-life intangible assets other than goodwill

A

tested annually, If book value exceeds fair value, an impairment loss is recognized for the difference

70
Q

when is an impairment loss required for goodwill

A

when the fair value of the reporting unit is less than its book value. measured as the excess of the book value of the goodwill over its “implied” fair value - tested at least once a year, as well as in between annual test dates if something occurred that would indicate that the fair value of the reporting unit was below its book value

71
Q

How is implied fair value calculated

A

residual amount measured by subtracting the fair value of all identifiable net assets from the unit’s fair value.

72
Q

How are Costs of Defending Intangible Rights recorded

A

successfully defend an intangible right should be capitalized, but unsuccessfully defend an intangible right should be expensed.

73
Q

what occurs when a trading security is sold

A

the unrealized gains/losses are removed from fair value adjustment and net income at end of acctg period

74
Q

Cash flows from buying and selling trading securities are classified as

A

operating activities.

75
Q

Cash flows from buying and selling AFS securities are classified as

A

Investing activities

76
Q

“other-than-temporary” impairment loss is recognized in net income even though the security hasn’t been sold.

A

For equity investments, the question is whether the company has the intent and ability to hold the investment until fair value recovers. If it doesn’t, the company recognizes an OTT impairment loss in earnings and reduces the carrying value of the investment in the balance sheet by that amount

77
Q

What is disclosed for investments

A

Investors should disclose the following in the disclosure notes for each year presented:

  • Aggregate fair value.
  • Gross realized and unrealized holding gains.
  • Gross realized and unrealized holding losses.
  • Change in net unrealized holding gains and losses.
  • Amortized cost basis by major security type.
78
Q

When is the equity method used for investments

A

when an investor can’t control, but can significantly influence, the investee.

79
Q

Consolidated financial statements

A

combine the individual elements of the parent and subsidiary statements.

80
Q

The acquired company’s assets are included in consolidated financial statements

A

at their fair values as of the date of the acquisition, and the difference between the acquisition price and the sum of the fair values of the acquired net assets is recorded as goodwill.

81
Q

What is the single entity concept

A

The investor’s ownership interest in individual assets and liabilities of the investee is represented by a single investment account.

Initially, the investment is recorded at cost. The carrying amount of this investment subsequently is:

  • Increased by the investor’s percentage share of the investee’s net income (or decreased by its share of a loss).
  • Decreased by dividends paid.

As the investee prospers, the investor prospers proportionately.

82
Q

what governs the acquisition of investment assets

A

cost principle

83
Q

A CHANGE FROM THE EQUITY METHOD TO ANOTHER METHOD

A

Both the investment and retained earnings would be increased by the investor’s share of the undistributed earnings in years prior to a change to the equity method.

84
Q

A CHANGE FROM ANOTHER METHOD TO THE EQUITY METHOD.

A

the investment account should be retroactively adjusted to the balance that would have existed if the equity method always had been used. As income also would have been different, retained earnings would be adjusted as well.

85
Q

A concern with fair value accounting

A

management has much discretion over fair values, and may not be able to estimate fair values accurately

86
Q

accrual accounting

A

recognize revenue in period in which it records an asset for the related AR rather than period in which the AR is collected in cash

87
Q

the matching principle

A

recognize cost when related revenue is recognized

88
Q

SEC

A

sets accounting standards

89
Q

FASB’s conceptual framework qualitative characteristics of acctg info

A

relevance

90
Q

qualitative characteristic of understandability

A

who have a reasonable understanding of business and economic activities

91
Q

elements of financial statements do not include

A

monetary units

92
Q

permanent accounts would not include

A

interest expense

93
Q

What is disclosed in the summary of significant accounting policies disclosure note

A

Depreciation method

94
Q

the principal concern with accounting for related party transactions

A

differences beween economic substance and legal form

95
Q

lack of longterm solvency refers to

A

risk of nonpayment relative to liabilities in the capital structure

96
Q

not reportable operating segment according to gaap

A

represents more than 20% of total company rev.

97
Q

change in estimate

A

accounted for prospectively

98
Q

nonoperating income

A

tangentially related to normal operations

99
Q

extraordinary items

A

unusual, infrequent, and material gains and losses

100
Q

comprehensive income

A

total nonowner change in equity

101
Q

restructuring costs

A

costs generally associated with downsizing

102
Q

earnings quality

A

ability of reported income to predict future earnings

103
Q

earnings per share

A

required disclosure for publically traded corps

104
Q

change in accounting principles

A

accounted for retrospectively by revising prior years’ statements

105
Q

monetary asset

A

claim to a fixed amount of cash

106
Q

multiple step income statement

A

reports a series of intermediate subtotals

107
Q

expected cash flow statement

A

discount rate is the credit adjusted risk free rate

108
Q

annuity due

A

first cash flow occurs on the first day of agreement

109
Q

adjusted market assessment approach for estimating stand-alone selling prices

A

using competitors prices as base

110
Q

expected cost plus margin approach for estimating stand-alone selling prices

A

using cost and profit margin

111
Q

residual approach for estimating stand-alone selling prices

A

subtract sum of known stand-alone selling prices from total trans price of contract

A311 Intermediate Accounting (4 decks)

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