Review-Time FAR Study Cards

Question 1

What is the Memory Tool for Allowance for Doubtful Running Balance?

Beginning balance in Allowance for Doubtful Accounts is a $2,000 credit. During the year, it writes off $1,500 in bad debts and recovers $500 previously written off. What is the ending balance in the Allowance for Doubtful Accounts?

Answer 1

Metal Bucket of Money labeled Allowance for Doubtful. When you w/o a bad debt, you pull some money out of the bucket(debit). If they end up paying, you add some money back. For every CY Allowance, you add money to the bucket.

$1000 Ending Balance

Question 2

What are the 3 types of ARO Measurement to establish the ARO?

Two items impacted when re-measured?

Answer 2

1a. Fair Value Measurement: The estimated cost to settle the obligation
1b. Discounting: Discounted to Present Value, using a credit-adjusted risk-free rate that should reflect the credit risk associated with the obligation
1c. Capitalization of ARO: liability is capitalized as part of the carrying amount and amortized over the useful life

2a. Carrying Amount increases over time as an expense. Called Accretion of the Discount
2b. When the ARO goes up, so does the Cost to Retire the Asset.

Question 3

What are the Financial Statement Titles under Cash Basis?

Answer 3

Statement of Assets and Liabilities - Cash Basis
Statement of Revenues Collected and Expenses Paid - Cash Basis

Question 4

What specific items hit OCI:

Answer 4

Pension Adjustments
AFS Debt: Securities, Hedges
Instrument Specific Credit Risk

Question 5

What specific debt/security instruments are included in OCI

Question 6

OCI Income reported net or before tax?

Answer 6

Either: If B/4 then aggregate income tax

Question 7

Direct Method when quoting an item in foreign country

Example: British sells to Japan. How do I say that 1 Pound equates to 1.59 Yen?

Answer 7

Say: 0.63Pounds = 1 Yen because the buyer’s currency must equal 1

Question 8

KEEP REVIEWING EPS/DILUTIVE EPS AND DIVIDEND SPLITS FOR ALL STOCK TYPES

Question 9

Large Accelerated Filers Timelines
Accelerated Filers Timelines

Question 10

Why would sale of TS at less than cost result in a net increase of Stockholder’s Equity?

Answer 10

Cash Received from Sale increases SE even as loss on sale reduces RE

Question 11

Are changes in Warranty and Useful Life considered changes in Estimate or Principle?

Question 12

How do Dividends interact with the following to get the Numerator?
Convertable Stock
Convertable Bonds
Preferred Stock
Cumulative Pref Stock
Participating Stock

Question 13

What are the different approaches to measure Fair Value?

Question 14

When do you use Fair Value instead-of Equity Method?

Question 15

Tell me about the different types of Government Funding Accounts?

Question 16

How do you determine BV per share on repurch of c/s when you have no $ amounts to go on?

Answer 16

Cost to Repurch / Shares Repurched
BV per Share depends on if Repurch was < BV
If that’s the case, then BV per share goes up as does the Ratio

Question 17

Bonus Payout before income taxes and after bonus:
Branch was $160K, payout 25% bonus for over $100K
How much is the bonus?

Answer 17

160-100 x 25%
60,000 - Bonus x 25%
60000 x 125%
60,000*1.25 = 75,000
Finally, 75,000 - 60,000 = 15K for bonus

Question 18

Tell me about Proprietary and Fiduciary Funds

Question 19

How do you Calc-in a New Partner?

Question 20

How is the carrying amount of an asset held for sale initially measured?

Answer 20

The initial measurement of an asset held for sale is at the lower of its carrying amount and fair value less costs to sell.

Question 21

What are the three types of intercompany eliminations?

Answer 21

Intercompany debt: Eliminates any loans offsetting notes payable and receivable, interest expense and interest income usually by a centralized treasury department

Intercompany revenue and expenses from interco sales.
revenues, cost of goods sold, and profits are all eliminated. Usually when a company is vertically integrated

Intercompany stock ownership which Eliminates the ownership interest of the parent company in its subsidiaries

Question 22

What is the primary purpose of a valuation allowance for deferred tax asset?
What does the reduction of the valuation indicate?

Answer 22

To reflect the likelihood of realizing tax benefits

An increase in realizing the tax benefit

Question 23

A major customer declares bankruptcy after the balance sheet date but b/4 financials are issued. What level of subsequent even is this?

Answer 23

Type I. Increase the Allowance for Doubtful Accounts to reflect the increased credit risk tied to the receivable.
Impacts BS and IS

Question 24

How is the consideration of Inventory different under Cash vs Accrual Basis?

Answer 24

Cash basis treats Inventory as an expense when purchased.
Accrual treats Inventory as an Asset when purchased and an Expense when sold using COGS

Question 25

How do you determine Compensation from Stock Options?

Answer 25

Fair Value of the Options split over the Vesting period

Question 26

FAR1A3001 What is the impact of recording items in OCI on a company’s net income?

Answer 26

This is kind of a trick question because it presents as an error but because it doesn’t specify there’s an error, we assume it’s asking if you should do this thing.
The correct answer is: No Direct Impact on Net Income

Question 27

How are prepaid expenses recorded in modified cash basis accounting?

Answer 27

In modified cash basis accounting, prepaid expenses are often treated similarly to accrual accounting, being expensed over the period they benefit.

Question 28

FAR2E30012

Whats the journal entry to record the investor’s share of the investee’s profit under the equity method?

Answer 28

B. Debit Income from Investment; Credit Investment

The investor’s share of profit increases the carrying value of the investment (credit) and is recognized as income (debit).

Question 29

FAR2I10002

How is a stock dividend recorded when it’s less than 25% of the existing shares?

Answer 29

Retained Earnings for the market value of the dividend and
credit common stock dividend distributable and
Credit common stock for the par value.

Question 30

FAR2A10027

A company discovers that a recorded check payment for $500 was actually a check for $50. What is the correct reconciliation action?

Answer 30

The company has overstated its expenses by $450 in the general ledger, so it should deduct $450 from the general ledger balance (D).

Adding or deducting the amount from the bank statement balance (A and B) is incorrect because the bank statement reflects the actual amount of the check. Adding $450 to the general ledger balance (C) would further increase the discrepancy.

Question 31

Restate this sentence so that it reflects the rule regarding Valuation Allowance of deferred tax asset.
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

Answer 31

A change in circumstance that results in a change in judgement concerning potential realization of a deferred tax asset should be recognized in Income from Cont Ops in the period which it occurs.

Question 32

If ending inventory is overstated, which of the following is true?

a) Gross Margin understated
b) COGS overstated
c) RE overstated
d) Cost of goods Available for Sale overstated

Answer 32

RE overstated because overstating inventory means COGS is understated. Since COGS reduces Retained Earnings, this means RE wasn’t reduced enough.

In other words, you sold more than you thought, you paid more than you thought which means you made less profit than you thought.

Question 33

How do I calculate the EPS when given:
Seven percent convertible bonds issued at par with each 1000 bond convertible into 40 shares of common stock
Tax rate of 30%

Answer 33

1000 x .07 x (1-.30) = 49 for NAICS
40 new shares so

49/40. = 1.22

Question 34

For basic EPS:
1) How do I calculate the Preferred Stock Dividend Requirement
2) how does this calculation impact NIACS?
3) what do i do with the dividends paid number
4) what about arrears?

For example:
Preferred Stock is $10 Par, 4% Cumulative, 25,000 shares issued and outstanding
16,000 dividends were paid to preferred stock

Answer 34

1) To determine the dividend requirement: Par * # of shares * percent.
10* 25,000 *.04 = 10,000
2) deduct this amount from Net Income

3) arrears —for basic EPS ignore the dividends paid amount
4) for Basic EPS only use the dividends for that period.

Question 35

When calculating Dilutive EPS
1) what do I do with the convertible bond stuff?
2) what do I do with the preferred dividends that were paid on convertible stock?
3) what if the convertible bonds showed current year amortization?

Answer 35

Convertible Bonds: Add back the Interest expense based on rate x Face value
Then subtract the tax according to the amount

Preferred Dividends: ignore those because it’s like they never existed if converted

Add back the Amortization for the period and make sure it’s hit with tax just like the interest expense

Question 36

Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?

Answer 36

FIFO would have the highest inventory balance and lowest COGS
Inventory Turnover is COGS/Average Inventory

When the denominator is higher, the ratio will be lower

Question 37

At what point are dividends booked as a liability? How do you report until then?

Answer 37

When they are declared. Until then, its a disclosure.
If Cumulative, make sure to include all years in Arrears

Question 38

Calc Retained Earnings:
Y1 Ending is $300K
Y2 Ending is $60K
Gain on sale of T-Stock under Cost is $20K

Answer 38

RE = $360K
Gain on T/S hits APIC and only hits RE with loss that exceeds APIC balance for that class of stock

Question 39

Which of the following impacts Retained Earnings:
Total Income since incorporation
Total Cash Dividends Paid
Total Value of Property Dividends Distributed
Excess of Proceeds over cost of T/S sold using Cost Method

Answer 39

Total Income since Incorporation (increase)
Total Cash Dividends Paid (decrease)
Total Value of Property dividends distributed (decrease)
Excess of proceeds over cost of TS (no impact)

Question 40

What are the Financial Statement Titles for the Modified Cash Basis?

Answer 40

Statement of Assets, Liabilities, and Equity - Modified Cash

Statement of Revenues Collected and Expenses Paid - Modified Cash

Question 41

Do Contingent Shares ever factor into BASIC EPS?

Answer 41

Yes, IF they are dilutive and all the conditions for issuance are met.

Question 42

T/S donated by a shareholder:
Does it reduce or increase Shareholder Equity?

Answer 42

No change. It does increase Book Value per share because it reduces the amount of Outstanding Common Stock shares.

Question 43

Property Dividend where Carrying Value is higher than Market Value.
How do you treat this?

Answer 43

It reduces the merch carrying amount (less of it on the books) which reduces Income from Cont Ops
It’s technically a loss which hits net income

Question 44

Things that happen which are both Unusual and Infrequent hit which part of Comprehensive Income?

Answer 44

Its Continuing Operations (net income)

Question 45

Property Dividend where FMV is different than BV.
How to Calc Gain/Loss

Answer 45

The difference between:
Fair Market Value (total) at time of declaration and Book Value at time of declaration

Question 46

4% convertible debentures with a principe of $10M due in 20 years at $1000 par and interest payable annually on November 1. Each debenture of $1000 is workth 20 shares of common stock.

How do I calc the Dilutive effect on NAIC?

Answer 46

Get the interest expense to add back into the numerator.

10M * 4% * (1-tax rate) then multiply by how many months in the period. If year ends June 30 and the bonds were there at the beginning of the year, then take half of the interest calculated

Question 47

Under fair value method, how are dividends received treated?

Answer 47

As dividend income on the income statement under non op

Question 48

Under equity method how are dividends received treated?

Answer 48

As a reduction to the investment and netted against the portion of net income

Question 49

Is payment of interest on bonds considered a financing, operating or investing activity?

Answer 49

Interest on bonds payable is an operating activity

Question 50

Is buying stock in another company considered an investing, financing or operating activity?

Answer 50

Investing

Question 51

Is paying dividends to shareholders considered an investing, financing or operating activity?

Answer 51

Financing

Question 52

How are dividends received from last year’s arrears treated in the current year?

Answer 52

Included in Net Income from Continuing Operations

Question 53

Foreign Exchange Currency: If the buyer’s currency doesn’t fluctuate in the given exchange rates, what do you do?

Answer 53

DIVIDE

Question 54

If Company purchases 10,000 shares, and then receives a stock dividend of 2,000 shares what is the Dividend income if a $1.50 per share is declared?

Answer 54

12,000 * 1.50 = $18000

Question 55

Saul Inc. reported the following:

Sales $100,000
Beg. Inventory: $10,000
End. Inventory: $5,000
Saul’s gross margin is 25%. What would be the amount of Saul’s purchases for the year?

Answer 55

The first step is to calculate cost of goods sold: If gross margin is 25%, then COGS is equal to 75% of $100,000, which is $75,000.

Purchases will equal COGS + Ending inventory – Beginning inventory: $75,000 + $5,000 – $10,000 = $70,000

Question 56

When adjusting notes to the financial statements due to an error in inventory valuation, which accounting principle is primarily being addressed?

Answer 56

Conservative because assets were over or understated

expenses and liabilities should be recognized as soon as possible, but revenues only when they are assured

Question 57

What are the two groups of expenses in non profit and give examples of each

Answer 57

Program which are directly related to the mission activities such as education and research
Support such as fundraising and sga

Question 58

How do I test if Preferred Convertable Stock is Dilutive

Answer 58

Take the effect on NIACS (such as Preferred Dividends) and divide that by the number of shares of CS created by the conversion

Question 59

How do I test if Convertable Bonds are dilutive?

Answer 59

Same way you get the shares added when bonds are converted.

Take the Face Value total (let’s say $10M) and divided by Face Value of each bond (let’s say $1000). Now you have number of bonds to multiply to get to # of shares added

Question 60

Land was exchanged for 13,000 shares of common stock. The land had a carrying value of $140K and an assessed value of $95K. The stock at that time FMV was $59 per share

How do you record this?

Answer 60

a) Land is debited at the FMV of the total stock transferred (59*13000)

b) C/S is credited (reduced) at Par * total shares transferred

c) APIC is the FMV-Par for total shares transferred

Question 61

How to record Property Dividends Distributed?

Answer 61

a) Retained Earnings for the FV of property dividend

b) Loss or Gain on Inventory

c) Inventory is reduced by BV

Question 62

Find the gross profit for Income Statement if given:
Contract Price
Costs so Far
Estimated Costs to Complete
Billed to Customers
Received from Customers

Answer 62

1) Find expected profit: Sales Contract - Total Costs / Estimated to Complete
2) get the percentage of costs incurred so far using both Costs numbers
3) multiply % by Expected Profit

Question 63

What is the definition of Bond Liability?

What is the Carrying Amount of the Bond Liability?

Answer 63

Its the whole amount the bond issuer has to pay back which includes both interest and principle
aka Future Cash Outflows

Face Value plus unamoritized premiums
OR
Face Value minus unamortized discount

Question 64

Double-Declining Depreciation:
What is Year 3 Depreciation Amount?
$80K Equip Purchase, 10% Salavage Value; 4 Year Useful Life

Answer 64

1) IGNOrE SALVAGE VALUE

2) Using Straight Line, get the Percentage that you will double
80,000 / 4 = 20,000
20,000 / 80,000 = .25 THIS is the rate to double

3) 80,000 x .50 for each year

Year 3 is 10,000

Question 65

The following info pertains to shipments of merch from Home to Branch.

In their consolidated, what amount should be included in Sales?

Home’s Cost of Merch $160
Intracompany Billing $200
Sales by Branch $250
Unsold merch at Branch $20

HINT: Which items above are considered Outside Sales

Answer 65

Sales by Branch : $250K
are to outside parties and are not considered for Interco Elimination

Question 66

Which of the following statements is correct regarding a discount bond redeemed at a premium to par under U.S. GAAP?

A) The greater the discount at issuance, the lower the loss upon extinguishment

B) The Bond Payable account will be debited at the premium prie paid to redeem the issue

C) Had a gain been booke when the bond was redeemed, it would have gone to OCI

D) Bond issuance costs not fully amoritized will increase the size of the loss booked.

Answer 66

D is correct… Any Unamortized bond issue costs will reduce the CV when the bond is redeemed. the loss is equal to the reaquisition price - CV
The lower the carrying value, the greater the loss

ALSO… The greater the discount at issuance, the lower the cv; thus the greater the loss on extinguishment

ALSO… The bond payable account will be debited at PAR when bond is redeemed

ALSO… Both gains and losses on bond redemptions are booked on the income statement

Question 67

Sold 300 shares of donated TStock at $40 per share.
Donated Stock had original fv of $32 per share

What’s the JE to record?

Answer 67

Cash of Sale Price x # of Shares
TS (credit) for Orig FV x # of Shares
APIC Sales Price - Orig FV

Question 68

What is the Income Tax Expense of 1st Quarter Interim if given:

Pretax Income of $200K
Effective 1st Quarter Tax rate 15%
Prior Year was 30%
Expected Annual Tax Rate for CY is 20%

Answer 68

Interim Period Tax Expense is the Estimated Annual Effective (20%) - Tax Expense recognized in the previous Interim Periods (none in this problem)

Use the 20% Rate

Question 70

Why is the. Arguing amount of a parents investment in a sub netted against the subs equity?

Answer 70

to avoid double counting of:
the investment and
the subsidiary’s assets and
liabilities in the consolidated statements

Question 71

When an account is written off under the allowance method, how is the balance sheet and income statement affected?

Answer 71

Under the allowance method, the estimated uncollectible amount is accounted for at the time of the sale. When a specific account is written off, accounts receivable and the allowance account are both decreased by the same amount, so there is no effect on the balance sheet or income statement.

Question 72

Jack Inc is converting their cash basis financial statements to the accrual basis. Jack Inc had the following transactions:

$500 of wages earned by employees but unpaid
$300 in office supplies received but not yet paid for
$200 in cash paid for employee bonuses from the prior year
$1,000 paid in rent for the following year
$500 that has been billed to customers but not yet received
$800 cash received for goods delivered in the prior year
$600 cash received from customers that paid in advance for their order
Which of the following is correct for the conversion to the accrual basis?

Answer 72

Under the cash basis, the $500 of wages and $300 of office supplies received wouldn’t be accounted for yet. Under the accrual basis these would need to be added to the accrued expenses account.

Question 73

What is the journal entry for expensing the incremental costs of obtaining a contract when they are deemed to be immaterial?

Answer 73

When the incremental costs of obtaining a contract are deemed to be immaterial, they are expensed immediately with an entry debiting Expense and crediting Cash or Accounts Payable.

Question 74

Which of these is not a focus in the Management’s Discussion and Analysis section in Form 10-K (Item 7, Part II)?

Answer 74

The Management’s Discussion and Analysis section in Form 10-K (Item 7, Part II) focuses on providing narrative context to the financial statements, discussing the company’s financial condition, results of operations, and future financial projections and strategies. Detailed quantitative data about market risk is covered in Item 7A, not in the MD&A section.

Question 75

ABC corp issued $100,000 of 8% serial bonds on Jan 1, Year 1. $10,000 of the bonds will be repaid each year, and interest is paid on Dec 31st of each year. The bonds were issued to yield 10%, and the proceeds were $90,000 based on the fair values on Jan 1, Year 1.

If ABC amortizes the discount using the effective interest method, what would the carrying amount of the bonds be on Jan 1, Year 2?

Answer 75

The carrying value of the bond equals the bond payable amount, minus the unamortized discount.

In year 1, part of the bond payable was paid back ($10,000), and part of the discount was amortized.

We know that the actual interest paid in Year 1 is the $100,000 x 8%, so $8,000. Interest expense on the other hand is the PV amount of $90,000 x the 10% market rate, giving us $9,000. The difference between the $9,000 interest expense and the $8,000 interest paid is amount of the discount amortized in Year 1, which is $1,000. This means the remaining unamortized discount is now $9,000 ($10,000 original discount – the $1,000 amortized).

Also, we know that on Dec 31 of Year 1, $10,000 of the bonds were repaid.

So the carrying value of the bonds on Jan 1, Year 2 is: $100,000 original face value – $10,000 repayment – $9,000 unamortized discount = $81,000

Question 76

What is the JE to establish a Valuation for Tax Asset?

What causes a decrease in the Valuation and what is the JE to adjust?

Answer 76

Income Tax Expense
Valuation Allowance (Deferred Tax Asset)

An increased likelyhood of realizing the Benefit will reduce the Valuation Allowance
Valuation Allowance
Income Tax Benefit

Question 77

Calc the Income Tax Expense and Current Taxes Payable when given:
Pretax CY = $500K
Tax Rate 30%
Temp Difference resulting in future taxable amounts $50K

What is/are the JE to record?

Answer 77

1) Pretax Income x 30% = $150,000 Current Tax Expense
2) Temp Diff * 30% = 15,000 Deferred Tax Liability
3) Total Income Tax Expense = 150+15 = $165,000

Current Tax Expense:
Tax Expense $150K
Tax Payable $150K

Deferred Liability:
Tax Expense $15K
Deferred Tax Liability $15K

Question 78

Calc Deferred Tax Asset/Liab that results from Book vs Tax Basis

A) What are some examples?

Answer 78

1) Allowance for Credit Losses because the loss is not deductible until it actually occurs.
2) LIFO vs FIFO (Book vs Tax Basis)
3) Depreciation - Useful Life of Book vs Tax

Question 79

Under Periodic, what is the relationship between Beg Inventory, Purchases, Ending Inventory, COGS?

What is the effect if Ending Inventory is Understated?

Answer 79

Begin + Purch = Ending + COGS

Question 80

What is the rule to recognize Dividends under the Fair Value Method?

Answer 80

Dividends received hit dividend revenue only up to the extent of the investor’s share of cumulative earnings since acquisition.
Excess dividends are called “Return on Capital”

Question 81

Under CECL, for HTM Debt Security…
Amortized Cost is between the Fair Value and Present Value of Future Cash Flows..
Is this recorded as a Gain or Loss?

Answer 81

Record a loss because Amortized is higher than Present Value

Question 82

How are gains treated on the Statement of Cash Flows using the Indirect method?

Answer 82

Gains are considered non-cash so they are subtracted from net income on the statement of cash flows

Question 83

When the Allowance for Uncollectible AR is below the CY Accounts deemed uncollectible, what do you do and how does this factor into the NRV of AR?

Answer 83

Do a JE to increase the value by the difference. This brings the Allowance Account up to cover PY and CY uncollectible.

Uncollectible Accounts Expense
Allowance

NRV = AR - Allowance

Question 84

How is a Gain on Disposal that represents a Strategic Shift in Operations considered and is it reported on the Income Statement?

What about Foreign Currency Translation Gain? What statement does it hit?

Answer 84

Strategic Shift in Operations is considered an Extraordinary item and is no longer a part of GAAP Income Statement

Foreign Currency Translation hits Comprehensive Income Statement, not Income Statement

Question 85

AR Turnover Ratio is calculated by:

Question 86

How does an error in Begin Inventory differ from Ending Inventory?

Answer 86

Begin Inv error fixes itself by the following year.

Ending Inventory does not fix itself. The effect on COGS is opposite the error of Ending Inventory. If Ending Inventory is understated, COGS will be Overstated

Question 88

How do I calculate loss on seg disposal if I’m only given Operating Loss, Impairment and Loss on Sale

Answer 88

Op loss + NET (impairment and loss on sale)

Then net of tax