Financial Statement Accounts 2 Flashcards
1
Q
What basis of accounting is used for recognizing expense for compensated absences?
A
The basis is accrual.
2
Q
When is the expense associated with compensated absences accrued, even if the benefits do not vest or accumulate or if the obligation is not attributable to services rendered as of the balance sheet date?
A
When it is probable that benefits will be paid, and the amount is estimable.
3
Q
When is an amount less than the total benefit earned by employees accrued?
A
When not all earned benefits are expected to be paid.
4
Q
What is the exception to the requirement that compensated absence expense be accrued?
A
Sick pay benefits.
5
Q
What is the most likely recognition of the effect of a pay raise between the time of recognition of compensated absence liability and payment?
A
Increase in expense in the period of payment.
6
Q
What is the meaning of “accumulate” in the context of compensated absences?
A
Benefits carry over to future periods although there may be limits.
7
Q
List the three attributes of defined benefit plan accounting.
A
- Delayed recognition; 2. Net reporting; 3. Offsetting.
8
Q
At what amount are plan assets reported?
A
Fair value.
9
Q
Define “projected benefit obligation (PBO)”.
A
Obligation for defined benefit plans.
10
Q
List the outside entities that provide services for a sponsoring firm’s defined benefit plan.
A
Actuary and Trustee provide services for this.
11
Q
Define “service cost” as it relates to pension plans.
A
Amount of pension expense reported if interest cost and expected return are equal. It is the present value of benefits earned for a period.
12
Q
What is the basis of accounting for defined benefit plans?
A
Accrual is the basis of accounting for these plans.
13
Q
List the two important estimates in pension accounting.
A
- Discount rate; 2. Expected rate of return.
14
Q
List the two types of pension plans.
A
- Defined benefit; 2. Defined contribution.
15
Q
Define “pension expense”.
A
The cost to the firm of providing the pension benefits earned during the year.
16
Q
What is the pension liability balance for a defined contribution plan?
A
Amount of required contribution not paid.
17
Q
What is the term used for pension plans for which employees provide contributions?
A
Term used for these pension plans is Contributory.
18
Q
List the features of defined benefit and defined contribution plans.
A
Plans can be contributory or noncontributory.
19
Q
Define “interest costs” as they relate to pension plans.
A
Growth in pension obligation for a period.
20
Q
List the formula for the amount of return used in computing periodic pension expense.
A
Expected return = rate of return X beginning plan assets.
21
Q
What fund is available for retirement benefits?
A
Pension assets at market value.
22
Q
How do we compute the interest cost for a pension plan for a period?
A
Discount rate X beginning projected benefit obligation (PBO).
23
Q
What is the effect of recording the first three components of pension expense on pension liability?
A
Increase by the amount of pension expense.
24
Q
What is the formula for computing projected benefit obligation (PBO)?
A
Service cost to date + interest cost to date - benefits paid to date.
25
What is the effect of recording funding contributions on pension liability?
Decrease by amount of contribution.
26
What is the effect of payment of retirement benefits on pension liability?
There is no effect.
27
What method is used to compute prior service cost (PSC) amortization?
Straight-line or service method.
28
List the formula used to calculate projected benefit obligation (PBO) ending amount through prior service cost.
Service cost to date + interest cost to date - benefits paid to date + prior service cost.
29
List the two significant changes to which defined benefit plans are subject.
1. Prior service cost; 2. Pension gains and losses.
30
What is the prior service cost amortization method that recognizes more amortization in periods when more employees are working?
Service method.
31
Define "formal record" as it relates to pension plans.
The pension information maintained in the accounts.
32
What amount is subject to amortization for prior service grant amendments?
The initial present value of the increased benefits for service already rendered.
33
What accounts are prior service cost and pension gains/losses recognized in immediately?
They are recognized in other comprehensive income and pension liability.
34
What immediate changes in projected benefit obligation (PBO) will cause a change in pension liability?
Prior service cost (PSC) and PBO gains and losses.
35
What is the amount subject to periodic amortization for pension gains and losses?
Net gain or loss at the beginning of the period.
36
What is the amortization method that can result in no amortization even if there is a beginning net gain or loss?
Corridor (minimum) method.
37
List the two sources of pension gains and losses.
Changes in projected benefit obligation (PBO) and difference between actual and expected return.
38
What types of accounting transactions affect pension gains and losses?
Recognition of gains and losses; amortization of net gain or loss.
39
What is the effect of actual future life expectancy exceeding previous estimates?
Projected benefit obligation (PBO) increase (PBO loss).
40
How do we compute projected benefit obligation (PBO) at the balance sheet date?
Service cost to date + interest cost to date - benefits paid to date + prior service cost + or - net PBO gain or loss to date.
41
What is the effect of an increase in future life expectancy to a pension plan?
Projected benefit obligation (PBO) increase (PBO loss).
42
True or False: The amortization of the net gain or loss at the beginning of the year is a component of pension expense.
This is a true statement.
43
What is the formula for ending net gain or loss subject to amortization the following period?
Beginning net gain or loss - amortization of the beginning amount +/- Projected benefit obligation (PBO) change in the period + /- asset gain or loss.
44
List the criteria for recognition of nonretirement postemployment benefits on the accrual basis.
Obligation attributable to employee services already rendered; rights vest or accumulate; payment is probable; amount is estimable.
45
Which benefits are less uniform: nonretirement postemployment benefits or compensated absences?
Nonretirement postemployment benefits are less uniform.
46
When is the accrued amount for nonretirement postemployment benefits less than the total benefit earned by employees?
When not all earned benefits are expected to be paid.
47
List the conditions under which the accrual of a liability for postemployment benefits are necessary.
1. When the benefits meet the four criteria of "Accounting for Compensated Absences;" also 2. When the benefits not meet those four criteria, then "Accounting for Contingencies" is followed.
48
What basis of accounting is used for recognizing expense for nonretirement postemployment benefits?
The basis is Accrual.
49
List the steps in computing obligation for retirement benefits.
Compute EPBO (present value of benefits expected to be paid); then multiply EPBO by the fraction of the service period required represented by service to date (yields APBO).
50
What basis of accounting is used for recognizing the expense for retirement benefits other than pensions?
The basis is Accrual.
51
When is there no amortization of transition obligation for postretirement benefit expense?
When firms elected to recognize immediately the entire Accumulated Postretirement Benefit Obligation (APBO) as an accounting change, decreasing income in the year of transition.
52
What is the largest in magnitude in terms of postretirement benefit costs?
Postretirement healthcare coverage.
53
List the six components of postretirement benefit expense.
1. Service cost; 2. Interest cost; 3. Expected return on assets; 4. Amortization of prior service cost; 5. Amortization of net gain or loss at Jan. 1; 6. Amortization of transition obligation.
54
Beyond what date is no further service cost recognized for an employee?
Full eligibility date.
55
On what date does an employee meet the requirements to receive the levels of benefits expected to be paid?
Full eligibility date.
56
What is the primary measure of postretirement benefit obligation?
Accumulated Postretirement Benefit Obligation (APBO).
57
How are compensation expenses reported?
Reported as a component of income from continuing operations.
58
How is compensation expense determined after a change in estimated forfeitures?
Compensation expense in period of change is the amount resulting in total compensation through the period of change that equals the fraction of service period elapsed multiplied by the new estimate of total compensation expense.
59
What effect does the fair value of one option have on a stock price at grant date?
Higher prices yield higher fair values.
60
What is the accounting effect of the expiration of stock options?
No change in compensation expense or owners' equity.
61
What is the total compensation expense for a fixed stock option plan?
The fair value at grant date of options expected to vest.
62
How is compensation expense for a stock option plan measured?
Fair value of options granted are estimated using an option pricing model at grant date.
63
What is the effect of expected forfeitures on compensation expense recognized?
Reduces total compensation expense.
64
On what date is total compensation expense determined for a fixed stock option plan?
Grant date.
65
List the criteria for noncompensatory employee stock options plans.
1. Essentially all employees can participate; 2. Employee must decide within one month of firm setting the stock price to enroll in the plan; 3. Discount does not exceed employer cost savings inherent in issuing directly to employees; 4. Purchase price based solely on market price of the stock; 5. Employees can cancel their enrollment before purchase date for refund.
66
What does a stock option plan provide an employee?
Provides an employee with the option to purchase shares of employer firm stock at a fixed price in the future, after a reasonable service period.
67
What is the period over which compensation expense is recognized for a fixed stock option plan?
Service period - grant date to first exercisable date.
68
What is the net effect of accounting for a fixed option plan (assuming the options do not expire)?
Cash and owners' equity are increased by the cash paid in by the employees; retained earnings are reduced by the amount of compensation expense recognized.
69
What is the general treatment of option plans with vesting contingent on meeting a stock price target?
Same as fixed stock option plans if the target is met.
70
List the acceptable approaches to accounting for graded vested option plans.
Treat as one plan or treat each group with different vesting dates as different plans.
71
What is the accounting effect when no stock options are expected to vest because the performance target is not expected to be met?
Reverse compensation expense and the associated owner's equity account for the amount of expense recognized in previous periods.
72
What is the accounting effect when there is an expiration of option plans with vesting contingent on meeting a stock price target?
No change in compensation expense or owners' equity.
73
Describe the general approach to recognizing compensation expense for a performance option plan.
At end of each period, recompute total compensation expense based on performance level expected to be achieved. Recognize compensation expense for the period in the amount that results in total compensation through the period equaling the fraction of service period elapsed multiplied by the new estimate of total compensation expense.
74
Define "graded vesting plans".
Stock option plans that stagger the vesting dates.
75
Define "stock award plans".
Plans awarded for continuing employment, but the employee cannot sell the stock (the main restriction) until the award is vestedand the employee may not receive the shares until vested.
76
What account is credited when net method is used to record compensation expense for a stock award?
Paid in capital from stock award.
77
What account is credited when gross method is used to record compensation expense for a stock award?
Deferred compensation expense.
78
Describe the accounting treatment of forfeitures of stock awards not previously estimated.
Reversal of previously recognized compensation expense.
79
What is the total compensation expense to be recognized for a stock award?
Fair value of awarded stock at award date, less effect of estimated forfeitures.
80
List the two methods of recording compensation expense for stock awards.
1. Gross method; 2. Net method.
81
What compensation expense is associated with a stock award plan?
The number of shares awarded measured at the market price of the stock at grant date, recognized as expense over period the employee provides the service for which the grant was awarded.
82
What is the classification of the deferred compensation expense account?
The classification is Contra owners' equity.
83
When can compensation expense be negative for a period?
When the stock price falls to a level causing total compensation expense through the end of the period to be less than compensation expense recognized in previously periods.
84
What is the total compensation expense for stock appreciation rights (SARs) payable in cash?
Number of rights multiplied by the difference between the stock price at date of exercise, and the stock price at grant date.
85
What is the fair value of the stock appreciation right (SAR) at the exercise date?
The difference between grant date price and the price at exercise date.
86
Describe the features of a stock appreciation right (SAR).
1. Employee receives difference between stock price at grant date, and stock price at exercise date; 2. Pays nothing; 3. Specifies benefit in either cash or stock.
87
What type of account is credited when periodic compensation expense is recognized?
The account credited is Liability.
88
Define "current income tax provision".
The amount of income taxes due for the year (same as income tax liability).
89
Define "income tax expense".
The account reported in the income statement that measures the income tax cost for the year's transactions.
90
Define "deferred income tax".
The amount of income tax expense that is not currently due.
91
Define "income tax liability".
The amount of income tax the firm must pay on taxable income for a year.
92
Define "interperiod tax allocation".
The process of measuring and recognizing the total income tax consequences of transactions in the year.
93
Define "taxable income".
Income before tax for tax purposes.
94
Define "pretax accounting income".
Income before income tax for financial accounting purposes determined by applying GAAP.
95
What causes income tax to increase?
Taxable items.
96
Define "deferred income tax provision".
1. The amount of income tax expense that is not currently due; 2. Equals the net sum of the change in the deferred tax accounts.
97
Define "permanent difference".
An amount that appears in the tax return or income statement but never both.
98
What is the effect of a nontaxable revenue on income tax expense?
Income tax expense is not increased.
99
Are current year or future permanent differences used in the current year tax accrual entry?
Current year is used.
100
What is the effect of a nondeductible expense on income tax expense?
Income tax expense is not reduced.
101
List some common permanent differences.
1. Tax-Free Interest Income; 2. Life Insurance Expense Premiums on key employee; 3. Proceeds from life insurance on key employee; 4. Dividends Received Deduction; 5. Fines and penalties.
102
What general effect does income tax expense have on permanent differences?
The effect of a permanent difference on income tax expense is the same as its effect on the income tax liability for the period.
103
What is the effect of a nontaxable revenue on income tax liability?
Income tax liability is not increased.
104
If book depletion is $4,000 and tax depletion is $12,000, what is the amount of the permanent difference?
The amount is $8,000.
105
Define "deductible temporary differences".
Differences that initially cause a prepayment of taxes.
106
What type of differences are temporary differences caused by regular warranties?
Deductible differences.
107
Define "deferred tax asset".
A current temporary difference that causes current book income to be less than taxable income.
108
What type of differences are temporary differences caused by depreciation?
Taxable differences.
109
Define "temporary difference".
An item of revenue or expense that, over the total life of the item, will affect pretax accounting income and taxable income in the same total amount but will be recognized in different amounts in any given year for financial reporting and tax purposes.
110
What temporary difference causes future taxable income to exceed future book income?
Taxable temporary difference.
111
Are originating or future reversing temporary differences used in determining the change in deferred tax accounts?
Future reversing temporary differences are used.
112
Define "taxable temporary differences".
Differences that initially cause a postponement in the payment of taxes.
113
Define "deductible difference".
A temporary difference that causes future taxable income to be less than future book income is what type of temporary difference.
114
What type of deferred tax accounts do deductible temporary differences cause?
They cause Deferred tax assets.
115
True or False. Taxable temporary differences are differences which cause deferred tax liabilities.
True. They cause Deferred tax liabilities.
116
List the two categories of temporary differences.
1. Taxable Temporary Differences; 2. Deductible Temporary Differences.
117
What differences does the computation of income tax liability consider in terms of differences between book and tax?
It considers current period temporary and permanent differences.
118
What tax rate should be used when computing the change in the deferred tax accounts?
Enacted future tax rates (which could be the same as the current tax rate if rates have not been changed).
119
List the formula for computing the effect of a permanent difference on the effective tax rate.
Product of permanent difference and stated rate, divided by pretax accounting income.
120
How is income tax expense for a period computed?
It is a derived amount or "plug" figure, the net change caused by the changes in deferred tax accounts and the income tax liability.
121
How do permanent differences affect the tax accrual entry?
Taxable income excludes them; this exclusion is reflected in income tax expense - a plug figure.
122
How is the required ending deferred tax liability balance expressed?
Product of sum of future taxable differences and the future enacted tax rate.
123
What is the general formula for computing income tax expense?
Income tax liability plus or minus the change in the deferred tax accounts.
124
How is the change in the deferred tax liability account for a period expressed?
Required ending deferred tax liability balance less beginning deferred tax liability balance.
125
What tax rate is used for computing tax liability?
Current tax rate is the rate to apply.
126
If the tax rate changes as income levels change, what rate is used to determine the change in deferred tax accounts?
Average future enacted tax rate is used to determine the change in deferred tax accounts.
127
What effect does an originating deductible difference have on the tax accrual entry?
Increases the required ending deferred tax asset balance.
128
What effect does a reversing taxable difference have on the tax accrual entry?
Decreases the required ending deferred tax liability balance.
129
If future enacted tax rates are not the same as the current rate and future temporary differences originated in the current period, which rate(s) do(es) income tax expense reflect?
Both current and future enacted tax rates are reflected.
130
How are temporary differences with no balance sheet account association classified?
Based on expected year of reversal.
131
How are deferred tax accounts reported on the balance sheet?
Current assets and liabilities are netted. Noncurrent assets and liabilities are netted.
132
Why is the procedure for offsetting deferred tax accounts reasonable given the nature of the underlying differences?
It is reasonable because future deductible and taxable differences will naturally cancel in the relevant future periods.
133
List the four deferred tax accounts possible.
Classified separately, therefore: 1. Current deferred tax asset; 2. Noncurrent deferred tax asset; 3. Current deferred tax liability; 4. Noncurrent deferred tax liability.
134
How is the classification of a deferred tax account determined?
Same as asset/liability that caused the temporary difference.
135
How are deferred tax accounts offset for reporting?
Current accounts are offset; noncurrent accounts are offset; two net accounts remain for reporting.
136
Short-term prepaid rent gives rise to what type of deferred tax account and how is it classified?
Current deferred tax liability.
137
Organization costs give rise to what type of deferred tax account and how is it classified?
Deferred tax asset; classification depends on expected period of reversal.
138
What is the classification of the valuation allowance for deferred tax assets?
The classification is contra deferred tax asset.
139
List the evidence suggesting the need of a valuation allowance.
1. History of unused net operating losses; 2. History of operating losses; 3. Losses expected in future years; 4. Very unfavorable contingencies; 5. Very brief carryback or carryforward period.
140
List the sources for realizing a deferred tax asset.
1. Expectation of future taxable income; 2. Taxable income in prior years w/i carryback period; 3. Future taxable differences; 4. Tax planning strategies.
141
What does a history of unused net operating losses suggest?
Evidence suggesting that the deferred tax asset will not be realized.
142
Compute the ending valuation allowance if the total future deductible difference is $4,000, tax rate is 30%, and only $1,000 of future taxable income is assured.
$900 (deferred tax asset balance is $1,200, but only $300 is expected to be realized).
143
What percentage is used for determining realization of a deferred tax asset?
Fifty percent used.
144
When is a valuation allowance created for a deferred tax asset?
When there is a 50% or less chance of the deferred tax asset being fully realized.
145
How is the amount of a valuation allowance determined?
Enough to reduce deferred tax asset to amount that has a better than 50% chance of being realized.
146
Describe the accounting effect when actual tax benefit is greater than expected in a later year.
Reduce income tax expense for the difference between benefit recognized in previous year and the actual benefit.
147
What is the minimum probability of sustaining an uncertain tax position to reduce income tax expense for an uncertain tax position?
Greater than 50%.
148
Describe the accounting effect when the probability of sustaining an uncertain tax position is equal to or greater than the minimum for reducing income tax expense.
Recognize a reduction in income tax expense for the largest amount for which the cumulative probability of realization exceeds 50%, and an additional liability for the unrecognized portion.
149
Describe the accounting effect when actual tax benefit is less than expected in a later year.
Recognize income tax expense for the difference between benefit recognized in previous year and the actual benefit.
150
Describe the account effect when the probability of sustaining an uncertain tax position is less than the minimum for reducing income tax expense.
Report a liability for the uncertain tax position in addition to the income tax liability.
151
Define "uncertain tax position".
A position taken on the Firm's tax return that reduces income tax but which may be challenged by the Taxing Authorities.
152
What is the main reason for choosing the carryforward only option?
An expectation of higher future tax rates.
153
Refund of taxes paid in the past is a feature of which option for net operating losses?
Carryback-carryforward only.
154
What period of years can a net operating loss (NOL) be carried forward or back?
Two years back, twenty years forward.
155
List the net operating loss options a taxpayer has.
1. Carryback Carryforward Option; 2. Carryforward Only Option.
156
What account is credited when a net operating loss is recognized?
Income tax benefit.
157
Describe the general calculation of effect of net operating loss (NOL) on ending deferred tax asset balance for carryforward only option.
Increase by full NOL multiplied by the future enacted tax rate.
158
Describe the general calculation of effect of net operating loss (NOL) on ending deferred tax asset balance for carryback-carryforward option.
Increase by portion of NOL remaining after being used in the carryback, multiplied by the future enacted tax rate.
159
Define "net operating loss".
Negative taxable income (strictly a tax term).
160
What is the journal entry for recording a net operating loss carryback?
DR: Refund Receivable CR: Income Tax Benefit
161
What is the journal entry for recording a net operating loss carryforward?
DR: Deferred Tax Asset CR: Income Tax Benefit
162
Increase in deferred tax asset is a feature of which option for NOLs?
Both the Carryback Carryforward Option and the Carryforward Only Option.
163
What is the effective length of the taxing period for the carryback-carryforward option?
Effective length of the taxing period is 23 years.
164
Which years taxable income are absorbed by a net operating loss (NOL) carryback?
The taxable income two years before the year of the NOL is used first, then one year before the NOL.
165
What is the ending balance of deferred tax asset for a net operating loss (NOL) carryforward?
Product of enacted future tax rate and NOL remaining to carryforward.
166
What effect does income tax benefit have on income for financial reporting?
The effect of income tax benefit is an Increase.
167
What tax rate is used in computing a refund from carryback of net operating losses?
Tax rate paid on taxable for the previous two years.
168
How is a carryforward valued?
Product of enacted future tax rate and NOL remaining to carryforward.
169
What effect does a change in tax status from taxable to nontaxable have on deferred tax accounts?
Close the accounts against income tax expense (for example, closing a deferred tax asset increases income tax expense).
170
What should deferred tax accounts under international accounting standards be classified as?
The classification of this is all noncurrent.
171
True or False: The total of all deferred tax assets and deferred tax liabilities are not required to be disclosed.
False. Total of all deferred tax assets and deferred tax liabilities are required to be disclosed.
172
What is the required ending balance of a deferred tax asset when there are future deductible differences and an unused net operating loss (NOL) carryforward?
Product of future enacted tax rate and sum of future deductible differences plus unused NOL carryforward.
173
List the required disclosures for income taxes.
1. Current and deferred portions of income tax expense; 2. Any investment tax credits; 3. Benefits of operating tax loss carryforwards; 4. Government grants to the extent they are used to reduce income tax; 5. Adjustments to deferred tax accounts as a result of a change in enacted tax rates or tax status of the firm.
174
What effect does a change in tax status from nontaxable to taxable have on deferred tax accounts?
Apply interperiod tax allocation as usual; there are no beginning deferred tax balances to use.
175
What effect do future taxable differences have on ending deferred tax asset for a firm with an unused net operating loss carryforward?
No effect; taxable differences yield deferred tax liabilities.
176
What is the general expression for the change in deferred tax asset for a period for a net operating loss (NOL) carryforward that is not fully used up in the period?
End of period sum of future deductible differences plus unused NOL carryforward, multiplied by future enacted tax rate, less beginning deferred tax asset.
