JET - Key Explanations from Cumulative EQs Flashcards
Cash to Accrual with A/R and Write-offs
JET: Use A/R T-Account (or Formula) to plug in items that impact A/R (Beg + Accrued Revenue - Collections - Write Offs = Ending)
- Always know Collections if given Cash Revenue
- Likely solve for Accrued Revenue or Collections if given other components of A/R.
What is the primary protection for investors against fraudulent financial reporting by corporations?
The audit of the financial statements by independent third parties is the primary protection. The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the financial statements.
In a better world, this would be the correct answer but the incidence of fraudulent financial reporting indicates otherwise.
The audit of the financial statements by independent third parties is the primary protection, because independent third-party CPAs provide a more objective opinion of the accuracy of the statements.
The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the financial statements.
Accrued Interest at a Date in simple Note Example
JET: Pay attention to the Year (Dec 31 of Year 1 or Year 2 as example) as need to compound the interest for the second year.
On March 1, 2004, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2006.
What amount should Fine report as a liability for accrued interest at December 31, 2005?
2004: $10,000(.12)(10/12) $1,000
2005: ($10,000 + $1,000)(.12)(12/12) 1,320
Total accrued interest payable, December 31, 2005 $2,320
GM Method of Inventory
JET: Need Cost to Sales Ratio to calculate COGS off of amount Sold. May then need to plug into Inventory / COGS Equation to get EI (B + P = EI-COGS)
- GM = 40: 100-60 = 40 so 60% * Sales or
- Margin over cost = 66%: 166-100=66 so 100/166
AFS Investment Entries
The unrealized loss would be credited to the other comprehensive income account to reclassify the holding loss as a realized loss in the income statement for year 2. For purposes of illustration, assume the available for sale (AFS) securities were originally purchased for $5 and that the loss during year 1 was $1. The related entries would be: Purchase: DR. AFS Securities $5 CR. Cash $5 Year 1 End: DR. OCI (holding loss) $1 CR. AFS Securities $1 Year 2: DR. Cash $4 CR. AFS Securities $4 DR. Loss on AFS Securities $1 (I/S) CR. OCI (holding loss) $1 (B/S, Accumulated OCI)
Depreciable Base
The purchase price of the asset acquired less its salvage value is the asset’s depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.
ASC 820 and Fair Value: Purpose of Framework
A. Provide a uniform definition of “fair value” for GAAP purposes.
B. Provide a framework for determining fair value for GAAP purposes.
D. Establish expanded disclosures about fair value when it is used.
NOT: Establishing new measurement requirements for financial instruments, or for any other asset or liability, is not one of the purposes of the fair value framework. Measurement requirements or elections are determined by other pronouncements; the “Fair Value Measurement” pronouncement establishes standards to be followed in determining (measuring) fair value when it is used.
Equity Method Calculations
JET QUESTION: if own for partial year, still recognized all the undistributed earnings for whole year via Equity Method?
- Dividends are return OF Capital, so must reduce Investment.
- Undistributed Earnings increase investment so
- Net of the two increases the investment
- Must adjust for Ownership %
Grant uses the equity method because it has significant influence over South. Under the equity method, the investor recognizes its share of the undistributed earnings of the investee as an increase in the investment carrying value. Thus, at the end of 2004, the carrying value of the investment is $200,000 + .30($80,000-$50,000) = $209,000.
At its date of incorporation, Glean, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share.
There have been no other issuances or acquisitions of its own common stock.
Decrease R/E (Dr) and No Effect to APIC
Incorrect for additional paid-in capital. Under the cost method, additional paid-in capital from treasury stock transactions is credited when treasury stock is reissued at a price in excess of cost.
This account is to be debited before retained earnings when the opposite occurs: reissue treasury stock at less than cost (as happened in the question).
However, only one treasury stock reissuance has occurred. Therefore, there is no additional paid-in capital from previous treasury stock transactions to draw on. Therefore, the $4 difference between the purchase price and reissuance price is debited to retained earnings.
There is no effect on additional paid-in capital
Revenue Recognized vs Unearned Revenue (Liability)
JET Note: be SURE to read the question, do they want the revenue to recognize (say zero) or the unearned Liability (Liability NOT recognized)!
The unearned fees (current liability) balance is the sum of $40,000 cash received, plus the $48,000 present value of the note, for a total of $88,000. The remaining $12,000 (3 x $20,000 less the $48,000 present value) is interest to be recognized over the note term. No revenue is recognized until the service is performed.
On January 1, 2005, Hart, Inc. redeemed its 15-year bonds of $500,000 par value for 102.
They were originally issued on January 1, 1993 at 98 with a maturity date of January 1, 2008.
The bond issue costs relating to this transaction were $20,000. Hart amortizes discounts, premiums, and bond issue costs using the straight-line method.
What amount of loss should Hart recognize on the redemption of these bonds?
The bond term is 15 years. Retirement is 3 years before maturity. Therefore, under the straight-line method, 3/15 of both the total bond discount and bond issue costs would remain unamortized at the retirement date. These amounts are removed along with the face value of the bonds (bonds payable account).
The original discount was 2% of $500,000. The bond issue costs are removed because they no longer have any future benefit. The bond issue has been retired.
The journal entry for retirement:
Bonds payable 500,000
Loss 16,000
Bond Discount 2,000 02($500,000)(3/15)
Bond Issue Costs 4,000 $20,000(3/15)
Cash 510,000 $500,000(1.02)
Gavin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in effect when vacations are taken or when employment is terminated.
There was no employee turnover in 2005.
Additional information relating to the year ended December 31, 2005 is as follows:
Liability for accumulated vacations at December 31, 2004 $35,000
Pre-2005 accrued vacations taken from January 1, 2005 to 30 September 2005 (the authorized period for vacations) 20,000
Vacations earned for work in 2005 (adjusted to current rates) 30,000
Gavin granted a 10% salary increase to all employees on October 1, 2005, its annual salary increase date. For the year ended December 31, 2005, Gavin should report vacation pay expense of
The total vacation pay expense for 2005 is $31,500. This is the sum of two amounts:
(1) the amount earned in 2005, plus
(2) the increase in cost from earlier periods owing to wage increases in 2005.
These two amounts are:
(1) $30,000 as given in the problem - this amount is already updated for the most current rate
(2) $1,500 = ($35,000 - $20,000).10 = the amount of vacation pay yet to be disbursed on benefits earned before 2005; the liability for this amount is increased by the 10% pay increase.
The increase in pay rate on the pre-2005 benefits is treated as an estimate change. Therefore, it is handled in current and future years. Retroactive application does not apply in this case.
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:
Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity, making this the correct response.
Acid Test Ratio
The acid test ratio = liquid current assets/current liabilities
= (cash + net AR)/current liabilities = ($300 + $1,200)/$1,000 = 1.5.
The acid test ratio is a more stringent test of the ability to pay current debt because it excludes inventories and prepaids, assets which may not be immediately liquid.
