Financial Reporting & Disclosures

Question 1

Summarize the par value method of accounting for treasury stock

Answer 1

In this method, the stock is recorded at par value, with the excess of par value being recorded to additional paid-in capital - treasury stock.

Question 2

What is the format for a multi-step income statement?

Answer 2

Sales
- COGS
= Gross Profit
- Selling Expneses
- G&A Expenses
= Operating Income
+ Other income (e.g. gain on sale)
= Income from Continuing Operations
- Income Tax Expense
= Income before Discontinued Operations
+ / - Gain / (Loss) from Discontinued Operations (after tax)
= Net Income

+ / - OCI (PUFI)
= Comprehensive Income

Question 3

How do you account for losses from Discontinued Operations in Year 1?

Answer 3

For Year 1, ALL losses should be included in losses from Discontinued Operations (I.e. losses incurred BEFORE and after the decision to discontinue)

Question 4

How do you account for gains that are unusual in nature and infrequent in occurrence?

Answer 4

Gains / Losses that are either unusual in nature OR infrequent in occurrence should be reported as a gain / loss within Continuing Operations

Question 5

How are FX Gains / Losses on transactions accounted for?

Answer 5

Spot FX rate is used at the date of the transaction, and A/R is recorded using this rate
On Financial Statement date, Spot FX rate is used to record the gain / loss since transaction date
On payment date - Spot FX rate is used to record gain / loss since statement date

Question 6

What is the formula for Diluted EPS?

Answer 6

Net income for the year + income derived from convertible securities / WACSO (assuming that all convertible securities have been converted to Common Stock)

Question 7

What are the 3 different SEC Filing Classifications?

Answer 7

Smaller Reporting Company - Equity float of < $75M
Accelerated Filer - Equity float of $75M or more, but < $700M
Large Accelerated Filer - equity float of $700M or more

Question 8

What are the conditions to be satisfied to declare a segment as ‘Held for Sale’ to report it as part of ‘Discontinued Operations’?

Answer 8

1. Management has committed to the plan for sale of the segment
2. Segment is immediately saleable in its current condition
3. Management has a program in place seeking a buyer
4. Management is actively marketing the sale
5. The sale is probable and likely to be completed within the next year
6. Management has no plans to withdraw from the sale or significantly alter the plan for the sale

Question 9

What are the types of SEC filings to be done in a year?

Answer 9

Form 10-K - Annual filing that includes full set of audited financial statements, MD&A
Form 10-Q - Quarterly filing that includes a set of unaudited financial statements, and some MD&A
Form 8-K - required filings for major corporate events, such as acquisitions
Form S-1 - initial registration to be filed with the SEC when a public company wants to issue new securities

Question 10

How and when is a property dividend recorded by a company?

Answer 10

• A property dividend is recorded at the current market value of the property at the date of declaration
  The Book Value at date of declaration is used to determine the gain / loss
• That gain / loss is reported in Net Income for the period

Question 11

What is a Retained Earnings Appropriation?

Answer 11

A RE Appropriation is used to restrict earnings available for dividends
The appropriation reduces (debits) the ‘Unappropriated Retained Earnings’ and credits (sets up / increases ‘Appropriated Retained Earnings’

Question 12

What happens to Appropriated Retained Earnings once the reason for the appropriation is completed?

Answer 12

Once the reason for the appropriation (e.g. construction of a new plant) is complete, the amount is RETURNED back to Unappropriated Retained Earnings

Question 13

What accounts are impacted when a stock dividend is given?

Answer 13

• Retained Earnings decreases by the amount of the dividend declared (amount is determined by % of dividend declared x total shs x current MV of each share)
• Capital Stock - increases by Par value x # of shs issued
• Additional Paid-in Capital - increases by (difference between Par and MV) x # of shs issued

Question 14

What is the method used to determine how much of a dividend is to be paid to a common stock vs. Participating stock holder?

Answer 14

• Step 1 - calculate how much of the dividend is to be paid initially based on the original dividend payout %
• Step 2 - for the remaining amount, use the par amount x number of shs outstanding of each type to determine the ‘Relative Capitalization’
• Step 3 - spread out the dividend based on the weighted average of the relative capitalization

Question 15

How to apply a discount for a contract that has multiple contract obligations?

Answer 15

The best way to do this is to apply it proportionally to all obligations

Question 15

What happens to Retained Earnings when rights are issued, and exercised?

Answer 15

• NO impact to Retained Earnings when rights are ISSUED
• If the Exercise price is > Par value, but < Market Value - no impact, because the Common Stock account is credited at par, and Additional Paid in Capital is credited for the amount over par
• If the Exercise price is > Par value, and Market Value, Common Stock is still credited at par,

Question 16

What is a performance obligation?

Answer 16

A contractual commitment by a company to provide customer with a distinct good or service

Question 17

What is the 5 step approach for revenue recognition?

Answer 17

• Step 1: Identify the contract with the customer
• Step 2: Identify the separate performance obligations within the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the price to each of the separate performance obligations
• Step 5: Recognize the revenue as or when each performance obligation is satisfied

Question 18

How do you record issuing of shares for property?

Answer 18

The issuance of shares for property is recorded at the fair market value of the property, as follows:

• Common Stock outstanding increases by # shs x par value
• Additional Paid-in Capital increases by difference between par and FMV of the shares at the transaction date

Question 19

How to you record buy back of Treasury Stock, using the Cost Method?

Answer 19

It is bought back at the prevailing market value of the securities at the time of the purchase.

• Reduce the shares balance by # of shares bought back
• Reduce the Treasury stock account by the MV per shares x # of shares bought back

Question 20

What happens to Retained Earnings when you declare a property dividend?

Answer 20

You debit Retained Earnings (decrease) at the FMV of the property that is the dividend

Question 21

When a property dividend is declared and the market value of the property exceeds its book value, what happens to the excess?

Answer 21

The excess is treated as a gain and recognized, which in turn increases net income for the period.
The dividend itself is declared at the fair market value of the property, by debiting Retained Earnings

Question 22

How does a small stock dividend (20% to 25%) differ from a large stock dividend (>= 30%)?

Answer 22

When it is a small stock dividend, retained earnings is debited by:

Market Value x shares x stock % (so if 1,000 shares outstanding and 30% stock dividend, would be 300 shs x market value)

Entry:

Dr. Retained Earnings (at MV)
Cr. Common Stock (Par)
Cr. Additional Paid-in Capital (difference between Par and MV)

When it is a large stock dividend, retained earnings is debited as follows:

Dr Retained earnings for the stock div % x shs outstanding x par value
Cr. Common stock for the same number

Question 23

What is a Scrip Dividend, and how is it accounted for?

Answer 23

A Scrip Dividend is one where the company is short of cash at the time it is declared, and so uses a note payable to commit to paying for the dividend at a later date.

In such a case, 2 things to look out for:

Dr. Retained Earnings
Cr. Notes Payable

Second, sometimes scrip dividends bear interest between the declaration date and payment date, so that interest expense, and payable need to be accounted for separately as well

Question 24

Interest Income was accounted for Cash Basis, then changed to Accrual Basis - how is the change applied?

Answer 24

The change is applied retrospectively - because this is an ACCOUNTING ERROR Correction - NOT because it is a principle / policy change. That is because any statements according to GAAP, must be presented using accrual basis.

Either Accounting Error Corrections OR Principle / Policy changes are applied retrospectively - the purpose of this

Question 25

Depreciation - How do I account for an item that increases the life of an asset, during the current’s asset’s life?

Answer 25

• First calculate the amount of depreciation already expensed, and subtract it from the Asset’s starting value - Asset - Accum Dep = NBV
• Then add the new asset’s value to the existing asset NBV - example - if the existing remaining life is $100K (NBV), and the new asset is worth $152K, then the new NBV on which dep is calculated is $252K
• Next, add the extended useful life to the existing useful life remaining - example - if the existing useful life remaining is 9 years, and the useful life is extended 5 years, the new useful life to be used is 14 years
• Finally, the Depreciation Expense calculation is:
• Existing (Remaining NBV of Existing Asset + New Asset) / (Remaining Life of Existing Asset + Extension of life from asset added)
• In the example -
• 252,0000/14 years = 18,000 per year

Question 26

How do I correct an accounting error due to incorrect depreciation expense?

Answer 26

This would be applied RETROSPECTIVELY, since it is accounting ERROR:
- Calculate what the correct depreciation expense should have been.
- For errors all made in a current year, simply:
- DR Dep Exp / CR Accum Dep for the amount of the error
- For prior year, depending on the direction of the error (increase or decrease:
- DR / CR Retained Earnings and second side of the entry is - DR /CR Accumulated Depreciation