LT construction, Installment Sales, Non-monetary exchanges, Fin. Rep and Price Changes, Foreign Currency Accounting Flashcards
Exchanges lacking commercial substance: Gain and Loss rules
Gain:
No boot is received = no gain
Boot is paid (by you) = no gain
Boot is received = recognize proportional gain (>25%) rule
Losses:
ALWAYS RECOGNIZE
How to calculate Proportional Gain when dealing with exchanges that lack commercial substance
How to recognize:
Take boot rec. / fair val.
EG 4K boot received / 20K fair value = 20%
Realized gain = 20% x Gain; unrealized gain is the rest
What is Carrying Amount?
The term carrying amount is often used in place of book value.
The carrying amount refers to the amounts that the company has on its books for an asset or a liability. For example, the carrying amount of a company’s truck is the cost of the truck minus the accumulated depreciation on the truck.
Exchanges with Commercial Substance
when an exchange culminates in business consequence
When an exchange (non-monetary transaction) has commercial substance, gains and losses are recognized based on the difference between the fair val., and the book val. of the asset given up.
GAIN = FV of asset given up - BV of asset given up
IFRS exchange rules?
Under IFRS, exchanges of dissimilar assets are regarded as exchanges that generate revenue, and all Gains and Losses are recognized.
Journal entry to record Commercial substance G/Ls
New Truck - PLUG
Acc Dep - given
Old Truck - Original Cost
Cash - what you Give
Foreign subsidiary’s functional currency?
Currency of the environment – DEPENDS on the environment in which the subsidiary primarily generates and expends cash. (and this currency cannot be local if it is a highly inflationary environment).
Functional Currency of a Company
the 3 possible types
1) Foreign entity’s local currency
2) Currency in which the financial statements will be presented (currency of parent company)
3) A foreign currency other than the one in which foreign entity maintains its books
Essentially it is .the currency of the PRIMARY economic environment in which the subsidiary operates (usually local or reporting) .. good for assets, liabilities, and operations
Rule about Gains and Losses on forex transactions that are an “extension” of domestic parent operations?
Income from continuing operations.
Also known as “Translation from Local to Functional currency”
Translation adjustment rules?
Whatever you “adjust” functional currency to for financial statements, should not be a component of next income or OCI until disposed of.
Where should cumulative foreign exchange translation losses be reported?
Stockholder’s Equity contra-account, aka a debit to accumulated OCI
(if it were a Gain it would therefore go to S/E account, not contra-account)
When are transactions first journalized for the sake of calculating forex G/Ls?
The day title of goods passes.
Not date of contracting!
What rate do you use to “Translate” from reporting currency to EG USD?
Average Rate
What goes in OCI regarding foreign currency?
(hint: Transaction and translation are not the same).
TRANSLATION Gains and losses
Conversions associated with REMEASUREMENTS are reflected in INCOME
Translation Method:
All assets/liabilities translated to reporting currency using CURRENT rates (YE exchange rate)
Common stock/APIC translated using HISTORICAL rates
Capital accounts at HISTORICAL rate
Involuntary Conversions
Gain or Loss is recognized as:
Selling Price of condemned property (etc.) [LESS] carrying amount, or BV.
Advanced payment for goods that are to be manufactured and delivered within 6 months?
Current Liability
WHAT DID THEY SAY ABOUT REVENUE, AGAIN?!
Revenue is recognized in the PERIOD WITHIN which it is received, and can be matched.
What are current cost financial statements?
Report Assets (Eg goods sold, and inventory) at market val…
So you can mark them up/down
Differs from historical cost financial statements which, under GAAP, you cannot do this.
CALC HOLDING GAIN:
Replacement Cost - Purchase Price
how to calc. for inflation?
Nominal cost (dollars) - Constant Cost (dollars)
Where do Translation Losses hit?
Net income, OCI – not related to “forex losses” as seen in CASH FLOWS.
Gains from Remeasuring?
Part of Income from Continuing Operations
Forward contract Gains/losses?
Use forward rates:
YE - Contract Date forward rate
How to calculate Rental Revenue for Y2
Rent Receivable Y1 - Unearned Rent Y1 = Net Unearned Rentals, Y1
PLUS cash collections for Y2
[Find subtraction plug for Rental Rev]
= Rent receivable Y2 - Unearned Rent Y2 for Net Unearned Rentals, Y2
