Other MCQs Flashcards
What are debenture bonds?
Unsecured bonds
What are serial bonds?
Mature in installments at various dates
How is life insurance reported on a personal statement of financial condition?
Assets are presented at estimated current values.
Life insurance is reported at cash value less related outstanding lonans
How is an impairment loss on a long lived asset recorded?
The impairment loss is recorded as additional accumulated depreciation
Why does a switch from FIFO to LIFO affect current ratio?
In a period of rising inventory prices, current ratio will be reduced because inventory carrying value will be reduced (lower valuation) and higher cost of goods sold.
Current ratio includes current assets which includes current inventory.
Which funds are reported only in general purpose government fund financial statements and not in the government-wide statements?
Fiduciary resources because they are not available to finance government programs.
Dividends Received Deduction
70% of Dividends Received by Corporations is never taxed. Permanent difference, no deferred tax liability.
Returns of Merchandise
If anticipated and estimable, defer portion of profit in proportion to estimated returns.
Valuing Bonds with Warrants
Not detachable, entire value to debt.
Detachable:
If value of both Bonds and Warrants is known, allocate proportionately between them
Value (Warrants or Bonds/Total Value X Total Proceeds
If value of one is know, allocate remaining value to the other.
Total Proceeds less Value Bonds (Warrants) = Value Warrants (Bonds)
Consolidate COGS
COGS 1 + COGS 2 - COGS paid + Deferred Gain (on any goods still in Inventory bc EI is part of COGS calculation)
Entity Acquisition with Equipment with FV > CV
100% of the step-up to FV less 100% of the depreciation proportional to the step-up is added to the Assets of Parent and Assets of Sub in the Consolidated Statements regardless of percent of Sub acquired.
Big Company acquires 90 percent of Little Company on January 1, Year One. On that date, Little has unpatented technology that has not previously been recorded but is worth $100,000. It should have a life of five years. In addition, goodwill of $40,000 is recognized. By the end of Year One, Little reports net income for the period of $300,000. What amount should be recognized on the Year One financial statements as the noncontrolling interest in the net income of Little?
In the consolidation process, the amount allocated to the unpatented technology must be amortized. That amount will be $20,000 per year ($100,000 divided by five years). Conversely, goodwill is no longer amortized but rather checked annually for impairment. Thus, from a consolidation perspective, the income attributed to the subsidiary is $280,000 ($300,000 reported net income less amortization for the year of $20,000). The outside ownership (the noncontrolling interest in Little) holds 10 percent of the outstanding shares. Therefore, the noncontrolling interest in the net income of Little for this year is $28,000 ($280,000 times 10 percent).
In-process research and development
U.S. GAAP states that all future benefits that can be separated and sold or in which the company holds contractual rights should be identified and reported as intangible assets at fair value. In-process research and development qualifies and is, thus, capitalized at the fair value at the date of acquisition.
The test for goodwill impairment
The test for goodwill impairment is a two-step approach. 1. The book value of the division as a whole is compared to its fair value. If fair value is greater, goodwill is not viewed as having been impaired and the testing process stops.
- If book value is greater, the second step in the process must be carried out. The fair value of the individual assets other than goodwill must be compared to the fair value of the reporting unit as a whole to determine the current value of goodwill. If that figure is lower then the current reported value of goodwill, the reported asset is reduced and a loss recognized.
When less than 100 percent ownership is achieved, the fair value of the company as a whole must be determined to arrive at the goodwill to be recognized.
This total fair value can be determined using any one of the following:
- the market price of the shares
- the discounted amount of the expected future cash flows
- price paid by the new parent for the controlling portion
Consolidated Assets
Under normal conditions, consolidated assets are:
- book value of the two companies added together
- plus any allocations established at the date of acquisition
- subsequent intercompany balances owed by one company in the business combination to the other company, the two balances are offset or eliminated.
The entire amount is eliminated in consolidation regardless of the percentage of ownership.
Consolidated COGS
When the original transfer was made, the buyer recorded a purchase that becomes a component of its cost of goods sold although the merchandise was not bought from an outside party but, rather, resulted from an intercompany transfer. That artificial increase in cost of goods sold must be removed. In addition, ending inventory (another component of cost of goods sold) is overstated because inventory contains an unrealized gain that inflated the recorded cost. This unrealized gain is deferred by increasing cost of goods sold.
Still holds all inventory:
Consolidated cost of goods sold
$600,000 COGS 1 plus $500,000 COGS 2 less $100,000 intercompany purchase plus $10,000 deferral of ending unrealized gain
Consolidated total assets
$700,000 Assets 1 plus $400,000 Assets 2 LESS $10,000* unrealized gain in ending inventory
*or less 100,000 inventory 2 plus 90,000 inventory 1
Sold all inventory:
Consolidated cost of goods sold
$600,000 COGS 1 plus $500,000 COGS 2 less $100,000 intercompany purchase (no further COGS adj)
Consolidated total assets
$700,000 Assets 1 plus $400,000 Assets 2 less $100,000 intercompany sale (no inventory adj)
Regardless of the number of operating segments that a publicly-held company has, specific information must be disclosed for the enterprise as a whole. Which of the following disclosures is not required?
Profitability inside and outside of country is not required
Required disclosures include:
- major customers (single customer >= 10% rev)
- revenues by product line
- amount of sales generated outside of the country
company’s income tax expense-deferred reported
report the amount necessary to adjust the deferred liability from the beginning balance to the ending balance
In an acquisition, every intangible should be identified if it has fair value. For recognition to be required:
- the parent must either gain contractual rights to the asset (such as the noncompetition agreement) or
- be able to separate the intangible from the subsidiary and be able to sell it (such as the unpatented technology and the secret formula).
The company does not have legal rights to the employee (unless there is an employment contract). A person cannot be separated from the subsidiary and sold.
How many different types of proprietary funds can exist within a state or local government?
- Enterprise funds - account for activities such as a subway system or a municipal swimming pool which offer a service to the PUBLIC for a user fee.
- Internal service funds - account for activities such as vehicle garage or data processing center which offer a service to the OTHER AREAS OF GOVERNMENT for a user charge.
Diluted EPS for Stock Options and Warrants
Treasury Stock Method - proceeds from exorcise are used to purchase treasury stock at the average price per that period
Recognition of imposed nonexchange revenue (property taxes).
Receivable is recognized when an enforceable claim has been achieved based on applicable law and appears as an asset.
Revenue cannot be recognized until the period in which the money is required to be spent (or the first period in which use is allowed). Until then it is reported as deferred revenue
Accounting of an asset, such as this manufacturing plant, at the time it qualifies as being held for sale.
Reclassify on balance sheet and report at:
lower of book value or net realizable value
If book value is lower, there is neither a gain nor loss recognized.
If net realizable value is lower, a loss must be recorded to reflect the drop in reported value.
Depreciation of the asset is stopped when it qualifies as being held for sale.
Revenue recognition and tax impact of the installment sales method,
Revenues are recognized immediately for financial reporting purposes.
Tax impact is delayed until cash is collected. Future taxable income will increase taxes in the future, necessitating a deferred income tax liability at the present time.
Gain on Trade
FV Asset given up
Less
CV Asset given up
Only if the fair value given up is NOT KNOWN, is the fair value of the asset received used for reporting purposes.
Remeasurement of transactions denominated in a currency outside of its normal currency/ functional currency
In a remeasurement, cash, receivables, and payables are remeasured up or down whenever the exchange rate changes.
Inventory is not cash, a receivable, or a payable so it stays at original value and becomes cost of goods sold at that value when sold.
The gross profit is the sales price (unaffected) less the cost of goods sold (unaffected).
If this proposed transaction meets several rules, the asset must be classified as held for sale.
If all of these rules are met, the asset is reported at the lower of its book value or net realizable value making a loss is possible:
- an active program to find a buyer is in place
- the price is reasonable, the property is immediately available
- the sale is expected in one year. . If a reduction is required, a loss is recognized.
GOV
Budgetary amounts are recorded at the beginning of the period and then reversed out of the balances at the end.
Estimated revenues is reported (as a debit) to indicate the amount that is expected. Credit budgetary fund balance.
Appropriations are reported (as a credit) to show the amount approved expenditures for the period. Debit budgetary fund balance.
A surplus is indicated through a credit balance in the budgetary fund balance account. (More revenue)
An anticipated deficit is indicated through a debit balance in the budgetary fund balance account. (More expense)
Recognition of Derived tax revenues (income tax, sales tax)
Taxes on events (the earning of income or the making of a sale).
Recognize revenue within the government-wide financial statements (which use accrual accounting) for the period in the taxed event occurs.
In fund-based financial statements (for the governmental funds), modified accrual accounting is applied so that an additional standard must be met for revenue recognition. The resources must also be available (quickly enough so that the money can be used to pay current obligations).
Often a policy that “available” is identified as anything received in 60 days. Thus, amounts to be collected in the first two months of the next year are viewed as available to pay for prior year expenditures and recognized in that prior year within the fund-based financial statements.
Total income tax expense
Income Tax Expense (current) plus Income Tax Expense-Deferred (DTL)
Less DTA?
There can be as many as five components each year in the computation of pension expense for a defined benefit pension plan.
- The service cost (the increase in the obligation because employees have worked an additional year)
- Interest on the debt (projected benefit obligation).
- Income on the plan assets based on the expected rate rather than the actual rate. Earnings reduce the amount of pension expense (plan assets times the expected rate of return).
- Prior service cost
- Significant net gain or net loss
NFP that serves as a conduit for the money to another NFP.
The initial NFP does not typically recognize any contributed support at all (instead a liability would be recognized upon receipt). The designated recipient NFP recognizes contributed support as soon as the donation is first made.
If NFP is been given variance powers to change the beneficiary, it does gain control over the money and contributed support is recognized upon receipt. The final beneficiary must wait until the money is actually conveyed before recognition is made of the contributed support.
