Random Flashcards
When should a company expense interest of a machine it build for 1.) itself 2.) to sale?
- ) for it self, interest can be capitalized until after completion
- ) for sale, interest must be expenses as incurred
When should Startup costs be expensed?
As incurred
How is a sub’s goodwill treated in an acquisition?
It is not included in the price.
Price sub for 300k. NBV is 200. Id assets are 60 and sub’s GW is 10.
Price 300 GW 50 FV 250 ID 50= 60-10 NBV 200
During year 2, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows:
- ) All the undistributed earnings of Flame will be distributed as dividends in future periods.
- ) The dividends received from Flame are eligible for the 65% dividends received deduction.
- ) There are no other temporary differences.
- )Enacted income tax rates are 30% for year 2 and thereafter.
In its December 31, year 2 balance sheet, what amount should Taft report for deferred income tax liability?
180,000 - 30,000= 150,000 (permanent and temp difference)
Dividend received deduction is 65%
150,000 x 65%= 97,500 (permanent)
150,000x35%= 52,500 (temp)
52,500x30%=15,750 DTL
Should both or either bonds and equity securities be reported at FV in year end financials?
Yes, both.
What type of liability is recorded when Book value expense > Tax deductions?
DTA
What are the 3 criteria for a prior period adjustment?
1) the effect of the adjustment is material to income from continuing operations,
(2) the adjustment can be identified with a prior period, and
(3) the amount of the adjustment could not be estimated in prior periods.
what numbers are used to compute cumulative change to F/S?
Beg of the year numbers. the change would be recorded to RE.
Are debt and equity securities cash equivalents?
No
What is the formula for compensation expense, when accounting for stock compensations?
Expense= FV of equity instrument - employee contributions
Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been Internally developed? Purchased from an inventor?
yes to both
What is the ratio used to calculate percentage of completion method?
The total cost incurred to date to total estimated costs.
Are out going freight/ handling and wasted materials treated as inventory or expenses for the period?
How is transport insurance to the consignee treated?
Expensed for the period.
As part of the inventory. It is a cost needed to bring the inventory to its selling condition.
What are examples of permanent taxable differences?
Any tax-exempt interest
• Fines and penalties
• Life insurance premiums on key employees
• Dividends received deduction
What is a Derivative and its elements?
- ) A derivative is is a financial instrument (or other contract)
- ) 3 elements
a. ) Has one or more underlyings and one or more notional amount
b. ) require little or no initial net investment
c. ) Its terms require or permit a net settlement
When do you bifurcate and how do you allocate value?
Bifurcation should occur when if the two objects are not clearly and closely related and the embedded derivative must meet the definition of a derivative instrument.
The derivative is accounted for at fair value or mark to market value with gains and losses in the income statement and the remaining value is assigned to the other item.
What are translation losses or gains (adjustments)?
Are they reported in the income statement?
Where are gains/losses resulting from Purchases/Sales reported?
Gains or losses that result from converting Recording (foreign) into reporting (Final) currency. These are not included in NI, but instead included in OCI. The adjustment is used to balance (plug) the balance sheet after conversion.
How does topic ASC 440 require that sinking fund be disclosed?
It requires that LT term debt during the next 5 years be disclosed detailing the sinking fund and debt, including amounts, maturity dates and requirements.
According to SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements, the most relevant measurement of an entity’s liabilities at initial recognition and fresh-start measurements should always reflect
The credit standing of the entity
What are the 5 criteria for determining if a lease is a finance lease?
If ownership transfers at the end of the lease
• If there is a purchase option at the end of the lease that the
lessee is reasonably certain to exercise
• If the lease term is greater than or equal to 75% of the useful
life of the leased asset
• If the present value of the lease payments is greater than or
equal to 90% of the FMV of the leased asset
• If the asset is specialized in nature such that is has no
alternative use to the lessor after the lease
The inventory on December 31, year 1, using the dollar-value LIFO inventory method was $600,000. The Yr 2 inventory at yr 2 prices is 780,000. The Relevant price index at year-end (base year 1) is 1.20. What is the Yr2 inventory under dollar value method?
780/1.20= 650
650-600=50
50x1.2= 60
600+60=660,000
Which of the following statements concerning disclosure requirements for derivatives used as cash flow hedges is/are correct?
I. The net gain or loss recognized in earnings during the period must be disclosed.
II. The amount of gain or loss deferred in other comprehensive income must be disclosed.
III. A listing of each of the derivatives used for cash flow hedges and the amount of each must be disclosed.
I and II only
The moving-average unit cost
Beg Invenotry remaining at year end + Purchases =Ending inventory.
Ending inventory/units on hand
How should the costs of internally developed software after the development stage treated?
Costs may be amortized over the life of the asset.
How are abnormal freight charges for manufacturing inventory treated?
Expensed in the period
What rates can be used to translate cash flows?
Historical costs or weighted average cost (if not substantially different)
The method used to determine what information to report for business segments is referred to as the
Management approach
What inventory systems do the weighted average and moving average use?
Periodic and perpetual respectively.
Are FV prices adjusted for the cost of selling and transportation costs?
No to selling and yes to transport
What are types of R&D costs and can they be capitalized?
Costs in the development stage of a product, like testing and research, modification of design or process. These costs must be expensed when incurred. Equipment and facilities that have alternative uses can be capitalized.
Included:
Laboratory research
Conceptual formulation and design of possible products or process alternatives
Modification of the formulation or design of a product or process
Design, construction, and testing of preproduction prototypes and models
Design of tools, jigs, molds, and dies involving new technology
Design of a pilot plant
Developing a patent (excluding registration and legal fees)
Excluded:
Engineering follow-through
Quality control and routine testing
Troubleshooting
Adaptation of an existing capability to a particular customer’s needs
Routine design of tools, jigs, molds, and dies
Legal work in connection with patent applications
Software development costs
Fasb excludes acquisition, delvelooment or improvement of a product for use in its selling or admin costs
So r&d expenses must be to develop a product not something that helps a business perform.
How do you record a non monetary transaction with commercial substance? With and without cash involved? Without commercial substance?
Commercial substance is when an exchange is substance fully different or the CFs will dramatically change with the exchange.
A.) With commercial substance
If cash is involved, the giver of cash adds the cash value to the FV of equipment given. The receiver of cash subtracts it.
B.) Without commercial substance
- ) If there is a loss record loss and new equip at FV.
- ) If there is a gain with no cash received, then no gain. New equip is recorded at BK value + cash you paid.
How are intangible assets with finite useful lives treated?
Amortized over its useful life and tested for impairment periodically.
What is the formula for net patient service revenue?
Gross patient revenue - Charitable services - contractual adjustments.
What are provisions?
Accounts that are uncertain as to timing. (bad debts, taxes)
For an unrecognized firm commitment to qualify as a hedged item it must?
- Be binding on both parties.
- Be specific with respect to all significant items.
- Contain a nonperformance clause that makes performance probable.
When the US dollar for an item purchased decreases against the FC is it a gain or a loss?
This would be a gain. Bc you would have to pay less.
For example if the dollar fell from .75 to .74 against 1 FC. 500,000 for 1 FC
JE:
Dr AP 5,000
Cr FC gain 5,000
If there was an increase in the dollar from .74 to .76
JE:
Dr FC loss 10,000
Cr AP 10,000
When the US dollar for an item sold decreases against the FC is it a gain or a loss?
It is a loss. Bc you would get paid less
For example if the dollar fell from .75 to .72 against 1 FC. 500,000 for 1 FC
JE:
Dr FC loss 15,000
Cr AR 15,000
If there was an increase in the dollar from .72 to .74
JE:
Dr AR. 10,000
Cr FC gain 10,000
When a company elects not to bifurcate a hybrid instrument and accounts for the hybrid instrument at fair value, which method(s) of disclosure are permissIble?
- ) As a separate line item for fair value and non-fair value instruments on the balance sheet.
- ) As an aggregate amount of all hybrid instruments with the amount of the hybrid instruments at fair value shown in parentheses on the balance sheet.
What is the Journal entry for a company that had 15k in deferred tax liability PY. Recognized $8,000 of bad debt expense for the books, and wrote off $3,000 of accounts (this amount is deductible for tax purposes), recognized a $2,000 unrealized gain on trading securities purchased during the current year, credit sales for the year totaled $80,000. Collections on account were $60,000. The firm began the year with no accounts receivable balance.
DTA= (8k-3k= 5k) x .3= 1,500
DTL= (80k-60k= 20k) + 2k x .3= 6,600 (the 15k should be reduced to 6.6k. so reduced by 8,400)
Tax payable= (60k - 3k) x.3 = 17,100 + 15,000= 32,100
Dr Tax Exp 22,200 (plug)
Dr DTL 8,400
Dr DTA 1,500
Cr Tax Payable 32,100
what is the remeasurement process?
Where are the remeasurement adjustments recorded?
This process is used to convert Reporting currency to functional currency. For example, if a foreign co. uses a foreign currency, but its functional currency is the US dollar. These adjustments are recorded in the income statement under continuing ops.
JEs for a sales type lease as lessor:
Ex: FV of equip 25,771 Cost 20,000 Borrowing/implicit rate 8% 3 year lease/ useful life Annuity due
PV of annual payment:
25,771=lease payment x 2.78326
25,771/2.78326 = 9,259
1/1/01: inception
Dr lease AR 27,777 (9,259 x 3)
Cr unearned int 2,006 (plug)
Cr sales. 25,771
Dr COGS 20,000
Cr equip. 20,000
Dr cash 9,259
Cr lease AR. 9,259
12/31: year end
Dr unearned int 1,321. [(25,771- 9259) x 8%]
Cr int revenue. 1,321
1/1/02:
Dr cash 9,259
Cr lease AR 9,259
12/31/02:
Dr unearned int 686 [(16,512 + 1321-9259)x 8%]
Cr int revenue. 686
1/1/03
Dr cash 9259
Cr lease AR 9,259
what is a underlying?
any financial or physical variable that has either observable changes or objectively verifiable changes.
Exchange rates, commodity prices and insurance index
If the functional currency equals the local currency. Ex: a a 100% owned British subsidiary of a US parent company, reports its financial statements in local currency, what method is used to convert the F/S?
Current method, which uses the weighted average rate.
What is the general criterion for Hedging?
The general criteria for a hedging instrument are that sufficient documentation must be provided at the beginning of the process and the hedge must be “highly effective” throughout its life.
What are the JE of a quasi restructuring? Mgmt wants to reduce Assets by 150 and PP&E by 350.
Current assets $ 550,000
Property, plant, and equipment (net) 1,350,000
Other assets 200,000
Total assets $2,100,000
Total liabilities $ 600,000
Common stock 1,600,000
Additional paid-in capital 300,000
Retained earnings (deficit) (400,000)
Total Liabilities + Equity $2,100,000
1.) Reduce Assets
Dr RE 500
Cr C.A. 150
Cr PPE 350
RE deficit is now $900 (400 +500)
2.) Create enough APIC, with C/S to absorb deficit
Dr C/S 600
Cr APIC 600
APIC balance is now $900
3.) Absorb deficit with APIC
Dr APIC 900
Cr RE 900What is the accrual JE?
A firm has 100,000 in operating income. There are some differences between tax and book: 10k of municipal bond interest, Book rent exp 20k, tax rent expense 25k. 30% tax rate. 35% enacted tax rate for future years.
Dr tax expense 24,250 (plug)
Cr Deferred tax liability 1,750 (5,000 x .35)
Cr Tax payable 22,500 (75,000 x .30)*
*bond interest is not taxable so not included
What is the cost approach and the market approach?
Cost approach uses the price to replace an asset.
Market approach uses prices, transactions and other info from identical assets to value
What is the deferred tax benefit JE?
NOL of 40k 30% tax rate.
Dr DTA 12k
Cr income tax benefit 12k
Gain on an involuntary conversion (Pine has elected to replace the property within the statutory period using total proceeds) $350,000
Depreciation deducted for tax purposes in excess of depreciable deducted for book purposes 50,000
Federal estimated tax payments, year 3 70,000
Enacted federal tax rate, year 3 30%
Pretax book income of 800,000.
its current federal income tax liability on its December 31, year 3 balance sheet?
800,000
(350,000) Non taxable gain
(50,000) Not included in book income
400,000 Total
400,000 x 30% = 120,000 Tax payments
120,000
(70,000) Payments made
50,000 12/31 tax liability
Do credit indexes contracts meet the definition of a derivative?
Yes
What is a notional amount?
Shares of stock
Cv 120
Future expected cash flows 130
PV of future expected cash flows 100
Market value 105
What is the impairment?
$0
Expected cash flow is greater than CV
130>120
A company has an asset with CV of 120k, expected future cash flows of 130k, present value of expected future cash flows of 100k and market value of 105. What is the impairment loss?
0.
An impairment occurs when CV exceeds FV and the loss is only recognized if the CV is not recoverable. It’s not recoverable if it exceeds the sum of the expected value of undiscounted cash flows of the asset.
130 > 120. Not impairment loss
