Select Financial Statement Account Flashcards
1
Q
Define “monetary assets.”
A
An asset with fixed nominal value.
2
Q
Define “compensating balance.”
A
A minimum balance that must be maintained by the firm in relation to a borrowing. It is classified as current or non-current based on the related loan classification.
3
Q
List the items that are not included in cash.
A
- COD
- Legally restricted compensating balances
- Restricted cash flows
- Postdated checks received
- Checks written but not sent
- Advances to employees
- Postage stamps
4
Q
Describe bank overdraft rules.
A
Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, the overdrafts are reported as a current liability.
5
Q
List the items included in cash.
A
- Coin and currency
- Petty Cash
- Cash in bank
- Negotiable instruments, such as ordinary checks, cashier’s checks, certified checks, and money order
6
Q
Define “cash equivalents.”
A
- Treasury obligations (bills, notes, and bonds)
- Commercial paper (very short term corporate notes
- Money market funds
7
Q
What does separation of duties accomplish?
A
Separation of duties makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
8
Q
What effect do overdrafts have in IFRS?
A
They can be subtracted from cash rather than classified as a liability.
9
Q
List the 3 types of bank reconciliations.
A
- Bank to book
- Book to bank
- Bank and book to true
10
Q
List the adjustments needed to the ‘Balance Per Bank’ to arrive at true cash.
A
- Deposits in transit
- Cash on hand (deposited cash receipts, not petty cash)
- Outstanding checks
- Bank errors
11
Q
List the adjustments made to book balance to arrive at the bank balance.
A
- interest earned
- note collected
- service charges
- non-sufficient funds (NSF) checks
- errors in company’s records
12
Q
What is a deposit in transit?
A
Deposits made by a company that have not cleared the bank as of the bank statement date.
13
Q
What are outstanding checks?
A
Checks written and mailed by the company that have not cleared the bank by the bank statement date .
14
Q
What does cash on hand reflect?
A
Petty cash on hand and undeposited cash receipts.
15
Q
What does an NSF check represent?
A
“Non-sufficient funds” checks received from customers.
16
Q
What factors affect receivable valuation?
A
- trade discounts
- sales discounts
- sales returns and allowances
- uncollectible accounts
17
Q
List the characteristics of notes receivables.
A
- typically they are non-customer transactions
- they have a longer time frame
- they have an interest element
18
Q
What other name is used for customer accounts receivable?
A
Trade receivable.
19
Q
What is the measurement attribute of accounts receivable?
A
Net realizable value.
20
Q
List the characteristics of accounts receivables.
A
- typically they are related to customer contracts
- they have a short time frame
- typically they have no interest element
21
Q
How are receivables accounted for using the gross method?
A
Receivables are recorded at gross invoice price (before cash discounts).
22
Q
List the 2 methods of accounting for accounts receivables.
A
- gross
- net
23
Q
Do IFRS permit recognition of AR when there is a firm sales commitment?
A
Yes, in some instances when the recognition criteria have been met.
24
Q
Define “contra to sales.”
A
Sales discounts.
25
Are notes receivable typically related to customer transactions?
No, they are not typically related.
26
Describe the allowance method of accounting for bad debts.
Determine the amount uncollectible and provide an allowance to measure accounts receivable at net realizable value.
27
Describe the direct write off method for bad debts.
The direct write off method records bad debt expense only when a specific account receivable is considered uncollectible and is written off. The direct wire off method is rarely used.
28
What is the preferred method of accounting for uncollectible accounts receivable?
Allowance method.
29
Once the allowance is estimated based on the aging of the accounts receivable, what additional estimate is needed?
The entity must estimate the current and expected loss (CECL) associated with the accounts receivable.
30
Describe the balance sheet approach for calculating an allowance balance.
It is a % to ending accounts receivable.
31
What purpose does analyzing ending accounts receivable serve?
It enables the auditor to determine the needed or desired balance in the allowance account.
32
Define “market rate.”
Interest rate used to determine the present value of a note receivable.
33
Describe the difference between an interest bearing and a non-interest bearing note receivable.
- interest bearing note: the amount of cash to be collected from an interest bearing note is the face amount of the note plus interest
- non interest bearing note: the face amount of the note includes principal and interest that will be collected at maturity date
34
What do we call the (1) maker and (2) holder of a note?
1. The maker is the buyer or borrower
| 2. The holder is the seller or lender
35
How is the present value in a noncash transaction determined?
The fair market value of the non-cash asset or of the note receivable, whichever is more readily determinable
36
How is the present value in a cash transaction determined?
The amount of cash that exchanged hands.
37
At what value should a note receivable be recorded?
The present value of all future cash flows.
38
In the transfer of receivables, if the 3 conditions for a sale are not met, what happens?
The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.
39
Define “maker.”
A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.
40
What is the IFRS focus regarding sales or secure borrowing?
Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.
41
Describe a transaction with recourse.
The transferor is responsible for nonpayment on the part of the original maker of the receivable.
42
Describe a transaction without recourse.
The transferor is not responsible for nonpayment on the part of the maker of the receivable.
43
With respect to the transfer of receivable, what are the 3 conditions of a sale?
- The transferred assets have been isolated from the transferor, even in bankruptcy.
- The transferee is free to pledge or exchange the assets.
- The transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.
44
What is the accounting treatment when factoring with recourse, as accounted for as a sale?
The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.
45
Who bears the cost of bad debts when factoring without recourse?
The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.
46
What is the accounting treatment when factoring with recourse, as accounted for as a loan?
The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.
47
Who bears the cost of bad debts when factoring with recourse?
The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
48
Define “factoring.”
The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.
49
When does loan impairment occur?
When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.
50
How is the loss on impairment accomplished?
With a debit to bad debt expense and a credit to a contra-receivable account.
51
When a receivable is impaired, what should it be written down to?
The present value fo the future cash flows expected to be collected using the original effective interest rate for the loan or market value if more determinable.
52
What is the accounting treatment for loan impairments?
The receivable should be written down to:
- Present value of future cash flows using original effective interest rate,
Or
- Market value, if this value can be determined
53
List the methods through which interest revenue is recognized after a write down has occurred.
- Interest
| - Cost recover method
54
Who is the owner of consigned goods?
The consignor (firm that shipped the inventory to consignee).
55
What merchandise is included in ending inventory?
All owned inventory, regardless of location.
56
Is fixed overhead one of the four manufacturing input costs?
Yes, this is one of the input costs.
57
What elements affect fixed overhead rates?
They are subject to estimation errors and affected by the choice of denominator measure and the budgeting horizon reflected in the denominator.
58
How is the ownership of goods shipped free on board (FOB) destination determined?
The seller owns the goods until they reach the destination.
59
What does inventory for a typical business entity include?
Includes property held for resale, property in the process of production, and property consumed in the process of production.
60
What inventory costs are required to be capitalized?
All costs necessary to bring the item of inventory to salable condition.
61
COGS Formula
Beginning inventory + Purchases - Ending inventory = COGS
62
List the differences between periodic and perpetual applications of LIFO.
- In perpetual, each sale is costed with most recent purchase
- Perpetual results in a lower COGS in a period of rising prices
63
What accounts hold inventory acquisition cost during the period under a periodic system?
Purchases
64
List the differences between moving and weighted average cost flow assumptions.
- Moving average computes a new weighted average cost per unit after each purchase of inventory
- Moving average results in a lower COGS during a period of rising prices
65
What is the calculation for determining COGS?
Beginning inventory + Net Purchases - Ending inventory = COGS = Gross purchases + transportation in - purchases returns and allowances - purchase discounts
66
What does the acronym FIFO mean?
First in first out
67
List the LIFO cost flow assumptions.
- Ending inventory is composed of oldest inventory
- COGS is composed of newest inventory
- LIFO produces lower net income and ending inventory valuation in periods of rising prices
68
List the characteristics for the specific identification cost flow assumption.
- Specifically identifies cost of each item
| - Appropriate for large, costly, distinguishable products
69
List the FIFO cost flow assumptions.
- Ending inventory is composes of units most recently acquired
- COGS is comprised of oldest units
- It most closely matches most firms’ actual physical flows
- FIFO produces higher net income and higher valuation of inventory in periods of rising prices
70
List the weighted average cost flow assumptions.
- WA cost per unit is the average cost of all units held during the period
- each item is treated as if costed at WA cost
71
List the cost flow assumptions of a perpetual inventory system.
- Specific identification
- Moving average
- FIFO
- LIFO
72
List the WA cost per unit formula.
COG available for sale
Divided
of units available for sale
73
What inventory system is implied when the moving average cost flow assumption is utilized?
The perpetual inventory system is implied.
74
Which of the cost flow assumptions is the same for both the periodic and perpetual systems?
FIFO
75
For which method should an ending inventory count be made?
Both periodic and perpetual.
76
Which of the cost flow assumptions utilizes the latest purchases at time of sale?
LIFO
77
List the main differences between perpetual and periodic entries.
The use of the inventory account rather than purchases and recording cost of goods sold at sale.
78
What is the main reason for using LIFO in periods of rising costs?
Tax minimization
79
List the reason for LIFO liquidation.
- Poor planning
| - Lack of Supply
80
List some reasons to avoid LIFO liquidation.
- it increases taxes
| - it does not match current period expenses and revenues
81
What does ending inventory reflect in FIFO?
It reflects the latest costs.
82
List the attributes of FIFO.
- it most closely approximates the actual physical flow of goods for most companies
- balance sheet valuation of inventory is at more desired current cost
- matching revenues and expenses on the income statement is not ideal
83
What effect does using LIFO have on the income statement?
Matching of revenues and expenses on the income statement is significantly improved.
84
List the attributes of LIFO.
- matching of revenues and expenses is significantly improved over FIFO.
- income tax advantages are associated with LIFO
- Balance sheet presentation is less than ideal
85
How does the double extension method affect ending inventory?
The ending inventory is extended at both base year cost and ending current year cost.
86
List the steps in applying the dollar valued LIFO retail method.
- DV LIFO is applied to inventory at retail
- FIFO retail method cost / retail ratio is applied to the retail layer
- Cost layer is added to beginning inventory at DV LIFO cost
87
List the advantages of DV LIFO.
- it reduces the effect of the liquidation
- it allows companies to use FIFO internally
- it reduces clerical costs
88
Why would an entity utilize DV LIFO?
It reduces the effect of the LIFO liquidation.
89
Define “base year dollars.”
The price level for the pool in effect at the beginning of the year dollar value LIFO is adopted.
90
List the DV LIFO conversion index formula.
Ending inventory in current year $$$
Divided
Ending inventory in base year $$$
91
Describe the relative sales value method for recording costs.
Costs to be recorded for each item is based on its relative sales value to the total sales value of the group.
92
List the methods used for estimating ending inventory.
- Gross margin method
- Retail inventory method
- Dollar value LIFO retail method
93
Margin on Cost Formula
(Sales - COGS)
Divided
COGS
94
What ratio is multiplied to sales to estimate COGS?
The Cost
Divided
Sales Ratio
95
Which is always larger, margin on sales or margin on cost?
Margin on cost
96
List the gross margin % formula.
(Sales - COGS)
Divided
Sales
97
List the formula for ending inventory for the gross margin method.
(Beginning inventory + Net purchases)
Minus
(Sales x (Cost / Sales ratio))
=
Ending Inventory
98
What is included in the cost to retail ratio in the average (conventional) retail method?
The cost to retail ratio includes beginning inventory, along with current period net purchases abnormal shortage, freight in (cost only), and net markups (retail only) in both the numerator and the denominator of the cost to retail ratio.
99
What are net markdowns?
Net decreases in the original selling price.
100
What are net additional markups?
Net increases in the original selling price.
101
What is original selling price?
Cost plus initial markup
102
What are the steps in the basic retail method?
1. Ending inventory at retail is determined
2. Cost to retail ratio is calculated
3. #1 x #2 = ending inventory at cost
103
How is normal spoilage handled?
It is subtracted along with sales from goods available for sale at retail to arrive at ending inventory at retail.
104
What is in the cost/retail denominator?
Net purchases at retail plus additional markups minus additional markdowns.
105
What is in the cost/retail numerator?
Net purchases at cost.
106
List the 2 steps of dollar valued LIFO retail.
- apply DV LIFO
| - Multiply by the cost ratio
107
How is the holding loss reported under the allowance method?
Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss. Holding loss is not included in COGS.
108
What is the basis on which lower of cost or market can be applied?
- individual item, category, total inventory
| - must be consistent from year to year
109
How is the cost of ending inventory determined?
By applying one of the four cost flow assumptions
110
When lower of cost or market is used, how is the ceiling value fo inventory calculated?
By reducing the sale price by the estimated cost to complete and sell the inventory
111
List the formula to arrive at net realizable value.
Sales price - estimated cost to complete and sell the inventory
112
How is holding loss reported under the direct method?
Any holding loss related to inventory is simply included in COGS
113
Generally, what is replacement cost?
Market cost
114
Define “market cost”.
Generally replacement cost, subject to a range of value defined by an established ceiling value and an established floor value.
115
List the methods of recording lower of cost or market.
- direct method, or
| - allowance method
116
List the steps in lower of cost or market analysis.
- compute market value
| - value inventory at lower of cost or market
117
If an inventory error is discovered in year 2, where is the difference recorded?
In the beginning balance of retained earnings.
118
List the basic inventory equation.
Beginning inventory + net purchases = Ending inventory + COGS
119
In year 1 of an error, if purchases are understated, what is the impact on retained earnings?
The impact on retained earnings is overstated.
120
If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on COGS?
COGS is understated.
121
If an inventory error is discovered in year 3, what is the impact on retained earnings?
There is no impact on retained earnings; the error has self corrected.
122
What is the required accounting for a potential loss on a purchase commitment with the commitment can be modified?
The loss is required to be footnoted as a contingent liability but is not accrued in the accounts because the loss is not probable, given that the contract can be revised.
123
If a firm has a purchase commitment that cannot be modified and the price declines, what journal entry should be booked?
DR: Loss on purchase commitment
CR: Liability on Purchase commitment
124
Define “purchase commitment.”
Type of commitment made when a firm commits to the purchase of materials at a set unit price.
125
How do we account for the recovery of a purchase commitment loss?
A gain to the extent of the previously recognized loss.
126
What is the required accounting for a potential loss on a purchase commitment when the commitment cannot be modified?
- the loss must be accrued b/c the loss is probable and estimable
- inventory is recorded at market, and a loss is recorded for the difference between contract and market
- if contract is not executed as of the balance sheet date, the loss is recognized and liability is established
127
List the 3 methods of assigning value to inventory under IFRS.
1. FIFO
2. Specific Identification
3. Weighted Average
128
Under IFRS, is reversal of a write down of inventory permitted?
Yes
129
Can a company following IFRS standards use LIFO cash flow assumptions?
No.
130
When is inventory reassessed under IFRS?
At the end of each financial reporting period.
131
What is the net realizable value as defined by IFRS?
The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
132
Under IFRS, is inventory reported at lower of cost or market OR at lower cost or net realizable value?
Lower of cost or NRV
133
How are adjustments for NRV applied?
On an item by item basis.
134
List some examples of natural resources.
- gravel pits
- coal mines
- tracts of timber land
- oil wells, and others
135
How do land improvements differ from land?
Land improvements differ from land in that the improvements have a finite useful life and are depreciated.
136
List the requirements for inclusion in plant assets.
- currently used in operations
- have a useful life extending beyond 1 year
- have physical substance
137
List the considerations that must be given when electing to expense or capitalize an item.
- estimated time benefit
| - materiality
138
List the general rules on costs to capitalize.
- cash equivalent price
| - get ready costs
139
Define “get ready costs.”
All costs incurred to get the asset on the company’s premises and ready for use.
140
What is the general rule for capitalizing expenditures?
Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.
141
How is the price for group purchases recorded?
Total price is allocated to individual assets.
142
How is the cash equivalent price in the issuance of securities detrimind?
In the fair value of the asset acquired or of the securities issued, whichever can be most clearly determined.
143
Define “cash equivalent price.”
The amount of cash paid for the asset on acquisition date.
144
How are donated items recorded?
Recorded at fair market value.
145
List the limitation of recorded value of self constructed assets.
Market value at completion.
146
List the components of capitalized costs of self constructed assets.
- labor
- material
- overhead
- interest cost
147
Define “qualifying assets” for interest capitalization.
Assets constructed for an enterprise’s own use or assets intended for sale or lease that are constructed as discrete projects.
148
List the conditions that must exist to capitalize interest.
- qualifying expenditures have been made
- construction is proceeding
- interest cost is being incurred
149
List the interest capitalization formula.
Interest rate x average accumulated expenditures
150
What interest rates should be used to determine capitalized interest?
The average interest rate during period or the specific interest rate applicable to construction debt.
151
List the 2 step process involved in computing capitalized interest.
1. Compute the average accumulated expenditure
| 2. Apply the appropriate interest rate(s)
152
Define “avoidable interest.”
The amount of interest that would have been avoided had the construction not taken place.
153
What are the 2 allowed methods to compute total interest to be capitalized?
1. Weighted average method
| 2. Specific method
154
When are unpaid construction input costs included in average accumulated expenditures?
Not until cash is paid.
155
If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?
The interest revenue is reported separately with no effect on interest capitalized.
156
If average accumulated expenditure > total interest bearing debt, whey is there no interest expense?
All debt could have been avoided if construction had not taken place.
157
If AAE > total interest bearing debt, what is the interest expense for the period?
All interest cost is capitalized, and there is no reported interest expense for the period.
158
What is not included in AAE until paid in cash?
Any unpaid construction input costs.
159
Where should the amount of interest paid be disclosed?
In the statement of cash flows, as part of the statement, as a supplemental schedule, or in a footnote.
160
If AAE < total interest bearing debt, what is interest expense for the period?
The difference between total interest cost and the amount of interest capitalized.
161
When would you increase the asset’s account basis by the post acquisition cost?
When the productivity of the asset is enhanced rather than the useful life extended.
162
List the accounting approaches for post acquisition expenditures.
- Substitution
- Increase larger asset account by post acquisition cost
- Debit accumulated depreciation
163
What is the general rule on when to capitalize post acquisition expenditures?
Capitalize the expenditures if the asset becomes more productive or if the expenditure extend the asset’s life.
164
What is the useful life for depreciating an addition?
- if the addition is an integral part of the old asset, over the shorter of addition’s or old asset’s remaining useful life
- if not, over the addition’s useful life
165
List the non accelerated methods of depreciation.
- straight line method
- service hours method
- units of output method
166
What type of allocation is depreciation considered?
Systematic and rational allocation of capitalized asset cost to time periods.
167
What how do we calculate the annual straight line depreciation amount of an asset?
( cost - salvage value)
Divided
Useful life
168
Depreciation is included in overhead and allocated to production based on machine hours or direct labor for what type of asset?
Manufacturing assets
169
How do we calculate depreciation based on service hours?
- depreciation rate x service hours used
- deprecation rate =
(cost - salvage value)/estimated hours
170
Define “book value.”
Original cost less accumulated depreciation to date.
171
What depreciation method does not use salvage value?
Double declining method
172
How do we calculate the rate used in double declining balance?
Straight line rate : # of years divided into 1 (i.e., if 5 years 1/5=20%)
- twice the straight line rate: 20% x 2 = 40%
173
When is the inventory method of depreciation used?
When the inventory items are smaller homogenous groups of assets and individual records forthe assets are not maintained.
174
What depreciation method is used for group/composite assets?
The straight line method to groups rather than individual assets.
175
List the type of costs capitalized for natural resources.
- Acquisition
- Exploration
- Development
176
What costs are included in the full costing method for exploration costs?
All costs of exploring for the resource are capitalized to the natural resource account.
177
Define “depletion.”
Refers to the allocation of the cost of the natural resource to inventory.
178
List the methods of accounting for exploration costs.
- Successful efforts
| - full costing
179
List the depletion rate formula.
(Natural Resources Account Balance - Residual Value)
Divided
Total Estimated Units
180
What costs are included in the successful efforts method for exploration costs?
Only the cost of successful exploration efforts are capitalized to the natural resources account.
181
What is the classification of natural resources on the balance sheet?
Non current asset.
182
List the general test for impairment.
Book Value > Recoverable Cost
183
When is a held for sale asset impaired?
It is impaired when book value exceeds its fair value less cost to sell at the end of the reporting period.
184
How is the amount of impairment loss on asset in use determined?
The amount by which the carrying value of the asset exceeds its market value.
185
How is the amount of impairment loss on assets held for disposal determined?
Fair value less cost to sell.
186
How are assets grouped for impairment testing?
Assets are grouped at the lowest possible organizational level where cash flows can be identified.
187
What items must be reported for impairment losses?
Report the loss as part of ordinary income and also disclose:
- the asset impaired
- the events leading to impairment
- the amount of the impairment loss
- the method of determining fair value, including interest rate
188
List the impairment tests for assets in use.
- sum net future cash flows from asset (recoverable cost)
- if sum > book value, no impairment
- if sum < book value, impairment
189
How are assets grouped for impairment testing under IFRS?
At the “cash-generating unit” level.
190
Are reversals of impairment allowed under IFRS?
Yes.
191
Under IFRS, how is the impairment loss presented if the asset is carried at fair value?
Any impairment loss would be classified out of other comprehensive income and into earnings.
192
How frequently do companies have to review depreciation policies under IFRS?
Companies have to review the policies annually.
193
Under IFRS, is revaluation of PPE allowed?
Yes.
194
Under IFRS, how is interest during construction accounted for?
It is expensed or capitalized.
195
Under iFRS, what 2 methods can be used to adjust accumulated depreciation?
1. The proportional method
| 2. The rest method
196
What happens during the rest method?
Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation.
197
Where is revaluation surplus reported under IFRS until the PPE is sold?
It is reported in equity.
198
Define “non monetary asset.”
An asset that does not have a fixed nominal or stated value, as is the case with cash, accounts receivable, and other monetary assets.
199
What is the preferred valuation for an acquired asset in a non-monetary exchange?
The fair value of assets given in the exchange.
200
What is the fair value of acquired assets if cash is paid in exchange?
Fair value fo acquired asset = Fair value of asset exchanged + Cash Paid
201
What is the fair value of acquired assets if cash is received in exchange?
Fair value of acquired asset = FV of asset exchanged - Cash received
202
When do you use list price?
List price should not be used for fair value b/c they are notoriously inflated.
203
In a non-monetary exchange, under what circumstances is fair value not used to value an asset?
- FV of either asset is not determinable
- Exchange is made to facilitate a sale
- Exchange lacks commercial substance
204
List the characteristics of an exchange that indicate commercial substance.
- The amount of cash paid or received on exchange is significant in relation to the fair value of the assets exchanged
- The functions of the assets exchanged are different
205
When is there a lack of commercial substance in a non-monetary exchange?
When the cash flows to the firm are not significantly changed.
206
When loss is evident, what is the accounting treatment?
It is always recognized.
207
When gain is evident and cash is received, what is the accounting treatment?
The gain is recognized in proportion to the amount of cash received.
208
What is the accounting treatment for the valuation of an asset when the fair value is not determinable?
Recognize no loss or gain, and record the acquired asset at book value of old asset + cash paid or - cash received.
209
Under IFRS, how are gains and losses recognized in barter transactions?
Gains or losses are determined by reference to a nonbarter transaction.
210
How are assets transferred to an entity by the government accounted for under IFRS?
They are recognized as a government grant.
211
What guidance doe IFRS give when assets or resources are donated?
No guidance.
212
What is the required acctg treatment when an investor has control of an investee?
Treat as a subsidiary and consolidate investee with investor (consolidated financial statements)
213
What is the basis for general guidelines for determining the level of influence over an investee?
The nature and extent of ownership.
214
What is the basis for general guidelines for determining the level of economic influence over an equity investee?
The nature and extent of ownership rights.
215
List the investor’s considerations in selecting the correct accounting for an investment.
- the nature of the investment
- the extent of the investment
- management’s intent
216
List the investor’s considerations in selecting the correct accounting for an investment.
- whether the investment is a debt or equity security
- whether there is readily determinable fair value
- management’s intent on how long the investment will be held
217
Identify the 3 possible levels of influence over an investee for accounting purposes.
1. Not significant
2. Significant influence but not control
3. Control
218
Define “debt securities.”
Securities representing the right of the creditor to receive from the debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds.
219
Define “equity securities.”
Securities representing ownership or the right to acquire ownership interest.
220
List the guidelines for determining no significant influence in an investment.
The investment is
- in debt securities
- in nonvoting stock
- temporary in nature
- less than 20% ownership of voting stock
221
When are equity securities carried at fair value?
When there is no significant influence and fair value is readily determinable.
222
Which condition indicates that fair value is readily determinable?
1. Prices or bid and ask quotations are currently available on a securities exchange or in the over the counter market if the OTC prices are publicly reported
2. Prices or quotations are in a foreign market that has the breadth and scope of the US mkt.
3. Prices or quotations for investments on the fair value per share is published based on current transactions
223
Define equity securities.
Any security that represents ownership interest or the right to acquire or dispose of ownership interest.
224
What is “look through” with respect to valuing an equity security?
Look through means that the investor would look through the form of the investment to the nature of the securities held by the investee. Look through is not allowed in determining the nature of the investment.
225
What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?
The carrying amount of the investment would change when there is an observable transaction for a similar or identical security.
226
Equity investment can be carried at cost when....
FV is not readily determinable.
227
Where on the F/S are impairment losses on equity investments recorded?
In the income statement
228
How are dividends recorded for equity investments carried at cost?
As dividend income
229
Identify the 3 major equity method items recognized each period by an investor.
1. Recognize investor’s share of investee’s net income/loss
2. Recognize investor’s share of investee’s dividends declared
3. Recognize adjustment to share of investee’s net income/loss for “depreciation/amortization” of amount allocated to excess of fair value over book value
230
Under what conditions will an investment give the investor significant influence, but not control, over the investee?
When an investor owns 20% to 50% of the voting equity securities of an investee and there are no impediments to the investor exercising its voting rights to influence the investee’s operating and financial policies. Investments in nonvoting equity securities (e.g., preferred stock) or in debt securities do not convey influence.
231
At the time an investor makes an investment that gives it significant influence over an investee, what information must the investor determine in order to use the equity method of accounting?
At the time of investment, the investor must determine:
- book value of assets and liabilities of investee
- fair value of assets and liabilities of investee
- allocation of any difference between cost of investment and fair value of investee’ assets and liabilities
232
When an investor has significant influence over the operating and financial policies of investee, what method must be used to account for the investment in the investee?
The investment must be carried on the investor’s books and reported in the investor’s financial statements using the equity method of accounting.
233
At the time an investment gives the investor significant influence, but not control, over an investee, how will any difference between the cost of the investment and the book value of the investee’s assets and liabilities be allocated?
As an adjustment to the investee’s assets and liabilities to fair value, then
- if cost of investment > FV of investee’s net assets, to goodwill;
Or
- if cost of investment < FV of investee’s net assets, to gain
234
What is the required accounting if a change in an investor’s level of ownership results in a loss of significant influence, but the entire investment is not disposed of?
The investor must cease using the equity method of accounting and begin accounting for the investment at fair value if fair value is readily determinable. The investment will be adjusted to fair value at the date significant influence is lost, and any difference between fair value and the prior equity based carrying amount will be recognized as a gain or loss in current income.
235
What investments are classified as AFS?
Any debt investments not classified as either held to maturity or held for trading. The AFS category is the default category if an investment in debt does not meet the requirements of either held to maturity or held for trading.
236
How are AFS investments accounted for and reported in financial statements?
- recognize interest income
- amortize discount or premium, if any, on debt securities
- adjust investment to fair value at balance sheet date with any gain/loss reported as an item of OCI
237
How are AFS investments reporting in the balance sheet?
At FV as either current or noncurrent assets (based on the entity’s policy)
238
What amounts are included in a gain or loss recognized on the sale of an AFS investment?
The gain or loss recognized on the sale of AFS investment includes
- the difference between the carrying value of the investment and its selling price; and
- any unrealized gain or loss in accumulated OCI related to the securities sold
239
What amounts should be included in the initial recording of a held for trading investment?
- purchase price of the debt security
| - directly related cost of acquisitions (e.g., brokerage fee, transfer fee, etc.)
240
List the criteria for held for trading securities.
1. Applies to investments in debt securities
| 2. Investor buys for the purpose of selling in the near term
241
How are held for trading investments carried and reported?
At fair value, with changes in fair value reported in current income.
242
Where are unrealized holding gains and losses on investments held for trading reported?
In income (income statement) as part of income from continuing operations.
243
List the criteria for a held to maturity classification.
- the investment is a debt security
- investor has intent to hold to maturity
- investor has ability to hold to maturity
244
Under what conditions can a debt security sold before maturity be considered held to maturity?
The sale is near enough to the maturity date so that interest rate risk is substantially eliminated.
The sale occurs after the investor has collected a substantial portion (at least 85%) of the principal outstanding at acquisition date.
245
What amounts should be included in the initial recording of a held to maturity investment?
- purchase price of security
- directly related cost of acquisition (e.g., brokerage fee, transfer fee, etc.)
- accrued interest, if any, is not included in the cost of the investment
246
At what cost are HTM securities carried and reported?
At amortized cost.
247
What method is used to amortize a premium or discount on a security?
The effective interest method or straight line method if not materially different.
248
How is interest earned on HTM investments reported in the income statement?
Reported as another income item in the income statement t.
249
Where are HTM investments reported on the statement of cash flows?
As an investing activity.
250
The premium associated with an investment in a callable bonds is amortized over what period?
The premium is amortized to the earliest call date.
251
How is the value of a stock right determined when the per share market value of rights is given?
The carrying value of the investment at the time the rights are received is allocated between the shares of stock and the newly acquired rights based on the relative market value of each set (total share and total rights). The amount allocated to the total rights is then divided by the number of rights received to get the value of each right.
252
What entry is made by an investor who receives stock rights?
An entry is made to transfer some of the cost of the investment in the stock that “earned” the rights to an account for the rights. The entry is:
DR: Security Stock Rights
CR: Investement
253
What is the accounting treatment by an investor when a stock dividend is received?
The investor adjusts the per share cost, not total cost. Original cost is divided by the new total number of shares (after the stock dividend) to get the new per share cost.
254
What is the accounting treatment by an investor when a stock split occurs?
The investor adjusts the per share cost, not the total cost. Original cost is divided by the new total number of share (after the split) to get the new per share cost.
255
If stock rights are not exercised and lapse, what entry should the investor make?
The investor writes off the stock rights and recognizes a loss. The entry is:
DR: Loss on Expiration of Stock Rights
CR: Security Stock Rights
256
What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?
The carrying amount of the investment would change when:
- FV becomes readily determinable or there is an observable transaction for a similar instrument
- The investor buys additional shares of the subsidiary or sells some of the shares it already owns
257
How do we account for the transfer of an investment from HTM to Held for trading?
- credit held to maturity at unamortized cost
- debit trading at fair value
- recognize unrealized holding gain/loss in net income
258
How do we account for the transfer of an investment from HTM to AFS?
- Credit HTM at unamortized cost
- Debit AFS at fair value
- Recognize unrealized (holding) gain or loss to OCI
259
How do we account for the transfer of an investment from held for trading to held to maturity or available for sale?
- Credit trading at recorded fair value
- Debit held to maturity or AFS at current fair value
- Recognize unrealized holding gain/loss in net income
260
How do we account for the transfer of an investment from AFS to HTM?
- Credit AFS at recorded fair value
- Debit HTM at current fair value
- keep unrealized holding gain/loss in accumulated OCI in shareholders’ equity
- Unrealized holding gain/loss at date of transfer is amortized over remaining life of debt
261
What are the categories of investments under IFRS No. 9?
Under IFRS No. 9, the 2 categories of investments (and other financial assets) are:
1. Debt investments measured at amortized cost
2. All other investments, including debt instruments not at amortized cost and all equity investments
262
Under what conditions does IFRS No. 9 permit an investor to elect to measure a debt investment at fair value that would otherwise be measured at amortized cost?
An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of the fair value would eliminate or significantly reduce a measurement or recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases.
263
Under what conditions does IFRS No.9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income rather than through profit and loss (net income)?
If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income rather than through profit and loss (net income). The election must be made when the investment is first recognized, and it cannot be changed subsequently.
264
What conditions must be met under IFRS No. 9 for an investment in debt to be classified as debt instruments measured at amortized cost?
Two conditions must be met:
1. Business model test - where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value
2. Cash flow characteristic test - where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest
265
What method is used to amortize intangible assets?
Straight line, unless another systematic method can be shown as more appropriate.
266
What are intangible assets?
Long term operational assets that lack physical substance or presence but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date.
267
List the classification of intangible assets.
- Definite life intangibles
| - Indefinite life intangibles
268
What costs can be capitalized to an intangible asset?
Only external costs can be capitalized. Examples are registration of patent, successful legal defense of the patient, legal and accounting fees, and design costs
269
How is amortization of definite life intangibles recorded?
Debit amortization expense and credit the intangible asset (there is no accumulated amortization contra account as with tangible assets)
270
Under what conditions is the residual value of a definite life intangible not assumed to be zero?
When (1) the entity has a commitment from a 3rd party to purchase the intangible asset at the end of its useful life; or (2) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset’s useful life.
271
What is the impairment test for definite life intangibles?
1. The book value fo the definite life intangible is compared to the recoverable cost of the intangible asset. If BV > then RC, then
2. BV is compare to FV. If BV>FV, then impairment loss = BV - FV
272
What is the impairment test for indefinite life intangibles?
One step: BV compared to FV. If BV>FV, then impairment loss = BV-FV
273
When can impairment of an intangible be recovered?
Impairment of an indefinite or definite life intangible cannot be recovered.
274
List the items that are included in R&D.
- laboratory research
- conceptual formulation and design of products or process alternatives
- modification of current design
- design, construction, and testing or preproduction prototypes and models
- design of tools, jigs, molds, and dies involving new technology
- design of a pilot plant
275
List the items excluded from R&D.
- engineering follow through
- quality control and routine testing
- troubleshooting
- adaption of existing capability to customer’s needs
- routine design of tools, jigs, molds, and dies
- legal work in connection with patent applications
276
What is the general rule regarding R&D costs?
Expense costs as incurred
277
How are assets used in several R&D projects accounted for?
They are capitalized and depreciated to R&D expense.
278
How are fixed assets used temporarily in a R&D project accounted for?
Depreciation related to the time period is included in R&D expense.
279
How are fixed assets used in a single R&D project with no alternative use accounted for?
The entire cost is expensed as R&D immediately.
280
Define “research.”
The attempt to discover new knowledge aimed at the development of new products, services, processes, or techniques, or the significant improvement in an existing product.
281
What is by technological feasibility of a software?
When the program model or working model of the software is complete.
282
How do you account for costs incurred before technological feasibility is reached?
Expense as incurred.
283
How do you account for costs incurred after technological feasibility is reached?
Capitalize as computer software costs and amortize.
284
When software is developed to be marketed or sold to customers, how are software production costs accounted for?
Capitalize to inventory and expense as COGS.
285
How is customer support and maintenance accounted for?
Expense as incurred.
286
Describe the straight line method or accounting for software.
Book value at beginning of year divided by the number of years remaining in product sales life at beginning of year.
287
What is IFRS treatment of development costs?
Capitalize development costs.
288
What is IFRS treatment of research costs?
Expense research costs.
289
How are software costs handled in IFRS?
IFRS treats software costs the same as R&D.
290
Under IFRS, at what value can you report intangible assets?
Amortized cost or fair market value.
291
Provide examples of the class of assets you can carry at fair market value under IFRS.
- PPE
- Identifiable intangible assets
- Financial assets including investments and financial instruments
292
For intangibles other than goodwill, how much of the impairment loss can be recovered under IFRS?
The recover of an impairment loss is limited to the carrying value had the impairment not occurred.
293
At what level is goodwill impairment testing performed under US GAAP and IFRS?
Under US GAAP, goodwill impairment is tested at the reporting unit level.
Under IFRS, goodwill impairment is tested at the cash generating unit.
294
What is a cash generating unit?
The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
295
List the 3 key elements of liabilities.
1. Present obligation to transfer assets or provide services.
2. The obligation is unavoidable.
3. Result of past transactions or events.
296
How are CL valued and recorded?
Normally recorded at face value.
297
What do liabilities represent?
The represent outsider claims to a firm’s assets or enforceable claims for services to be rendered by the firm.
298
How should a short-term note payable refinanced every 6 months on a continuous basis be classified?
The classification of this note is current.
299
Which liability requires more future cash payments: a current liability reported at $2 million or a non-current liability reported at $2 million?
The non-current liability requires more future cash payments.
300
How are non-monetary liabilities paid?
Payable in services of non-monetary assets.
301
What account is credited in subsequent monthly property tax accrual entries after the tax bill is paid?
Prepaid property taxes.
302
Define “sales taxes payable.”
Account recognized for sales tax collected from customers.
303
What payroll taxes are paid only by the employer?
State and federal unemployment taxes are paid only by employer.
304
What payroll taxes are paid in equal amounts by the employer and the employee?
- federal insurance contributions act (FICA) tax
| - medicare
305
How is the total employer expense for payroll computed?
Gross pay + Employer payroll taxes + employer portion of employee fringe benefits
306
What basis of accounting is used for recognizing expense for compensated absences?
The basis is accrual.
307
What is the meaning of “accumulate” in the context of compensated absences?
Benefits carry over to future periods although there may be limits.
308
When is the expense associated with compensated absences accrued, even if the benefits do not vest or accumulate or if the obligation is not attributable to services rendered as of the balance sheet date?
When it is probable that benefits will be paid, and the amount is estimable.
309
What is the exception to the requirement that compensated absence expense be accrued?
Sick pay benefits
310
What is the most likely recognition of the effect of a pay raise between the time of recognition of compensated absence liability and payment?
Increase in expense in the period of payment.
311
When is an amount less than the total benefit earned by employees accrued?
When not all earned benefits are expected to be paid.
312
What account is credited in subsequent monthly property tax accrual entries after the tax bill is paid?
Prepaid property taxes
313
Define “contingency.”
An existing condition ( at the balance sheet date) involving uncertainty as to a loss that will be resolved when a future event occurs or fails to occur.
314
List the contingency’s probability of occurrence categories.
- probable
- reasonably possible
- remote
315
What is the meaning of “probable” in context of contingent liabilities?
Based on professional judgement, the probability of occurrence is considered very higher or near certainty.
316
What is the meaning of “reasonably possible” in the context of contingent liabilities?
Based on professional judgement, the probability of occurrence is neither very higher nor remote.
317
What is the meaning of “remote” in the context of contingent liabilities?
Based on professional judgement, the probability of occurrence is considered to be very low or as the word implies, remote.
318
Describe the accounting treatment when a loss contingency is probable and can be reasonably estimated.
Record loss and liability.
If only a range is estimable, must recognize the liability for the lowest amount in the range.
319
Describe the accounting treatment when a loss contingency is probable but not reasonably estimable.
Disclose in notes to the financial statements.
320
Describe the accounting treatment when a loss contingency is reasonably possible.
Disclose in the notes to the financial statements.
321
Describe the accounting treatment when a loss contingency is remote.
No disclosures in the notes to the financial statements are required.
322
Describe the accounting treatment when a gain contingency is probable.
Disclose in a footnote.
323
Describe the accounting treatment when a gain contingency is possible.
Disclose in a footnote.
324
What is the accounting and disclosure of an unasserted claim that is probable to occur?
If an unasserted claim is probable to occur, it must be disclosed and an estimated liability accrued.
325
What is the accounting treatment of excess actual loss over recognized loss on a contingent liability?
The addition loss is recognized in the period of resolution (the estimated loss was recognized previously).
326
In what period is a premium expense recognized?
Year of sale.
327
What account is debited when premiums are redeemed by customers?
Premium liability.
328
What is the definition of “provision” for IFRS?
Liability that is uncertain in terms of timing and amount but is not of uncertain existence.
329
What is meant by “more likely than not” with respect to the probability for a provision?
Greater than 50%.
330
List examples of US contingent liabilities equivalent to provisions under IFRS.
- warranty liability
| - premium liability
331
When are contingent liabilities recognized under IFRS?
They are not recognized.
332
For a rang of equally probable amount for a provision, what amount is used for recognition under IFRS?
Midpoint of the the range.
333
What is the distinction between notes payable and accounts payable?
1. Time period is usually extended.
| 2. Notes have an interest element.
334
Define “interest bearing note payable.”
A note in which the interest element is explicitly stated.
335
What is the reported amount of a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Present value of remaining cash flows discounted at the effective rate.
336
What is the amount of interest recognized for a period on a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Product of the effective rate at date of issuing the note and the principal balance at the beginning of the period.
337
What is the amount of interest recognized for a period on an installment note (one requiring equal periodic payments that include both principal and interest)?
Product of the effective rate at date of issuing the note and the principal balance at the beginning of the period.
338
What causes a premium on a note?
The yield rate is less than the stated rate.
339
What causes a discount on a note?
The yield rate is greater than the stated rate.
340
List the 2 different methods of amortizing a discount or premium on a note.
1. Effective interest method
| 2. Straight line method
341
List the 2 different methods of recording a note for which a discount or premium occurs.
1. Gross method
| 2. Net method
342
When is the straight line method not allowed for notes payable accounting?
Installment notes, and when the yield and stated rates are greatly different.
343
What is the net note balance for a note issued at a discount?
Face value less unamortized discount.
344
What is the amount of the periodic payment for an installment note issued at discount?
Face value divided by the annuity factor for the term of the note and the stated rate on the note.
345
What is the amount borrowed on an installment note issued at discount?
Product of the periodic payment and the annuity factor for the term of the note and the yield rate on the note.
346
Is a non interest-bearing not issued at a premium or discount?
Discount
347
What is the total interest expense recognized on a non-interest bearing note?
Total payments less amount borrowed.
348
What is the principal amount of a non-interest bearing note?
Present value fo the face amount discounted at the yield rate on the note.
349
Define “discount on note” for a note exchanged for cash and other privileges.
The amount of interest revenue recognized over the term of the note.
350
Describe 3 general aspects about the valuation of all long term liabilities.
1. Initially recorded at the present value of future cash flows.
2. Interest and amortization are recognized at the market interest rate on the date the liability was established.
3. Interest expense equals the liability balance at the beginning of the period times the mkt rate of interest the date the liability was recorded.
351
Define “bond.”
A financial debt instrument that typically calls for the payment of periodic interest (although a zero coupon bond pays no interest), with the principal being due at some time in the future.
352
Define “bond date.”
The first possible issuance date.
353
Define “issuance date.”
The date the bonds are actually issued.
354
Define “maturity date.”
The date the maturity value is paid, the end of the bond term.
355
Define “secured bonds.”
Bonds that have a claim to specific assets.
356
Define “serial bonds.”
Bonds that mature at regular or staggered intervals.
357
When are bonds sold at a premium?
When stated rate > mkt. rate
358
When are bonds sold at a discount?
When stated rate < mkt. rate
359
What method is required for premium/discount amortization?
Effective interest method.
360
Define “bond issue costs.”
The costs of printing, registering, and marketing the bonds.
361
Define “bonds proceeds.”
The sum of the bond price and any accrued interest.
362
Define “stated rate.”
Rate listed on the bond and used to calculate accrued interest and cash interest payments.
363
How are bonds issue costs accounted for?
They are treated as a direct reduction from the debt carrying value and amortized to interest expense over the term of the bonds.
364
How many months of interest are collected at issuance when bonds are issued between interest dates?
Number of months between the most recent interest payment date and the date of issuance.
365
What is the length of a bond term when bonds are issued between interest dates?
Period of time from issuance date to maturity date.
366
How is interest expenses on the current line of an effective interest bond amortization schedule computed, assuming semiannual interest payments?
Multiply 1/2 the yield rate at date of issuance by the book value fo the bond issue on the line above the current line.
367
How is total expense for a bond issue using an effective interest bond amortization schedule (assume a premium) computed?
Sum of the cash interest column less sum of amortization premium column.
368
Is the fair value option for financial liabilities required, and to what securities is it applied?
It is an option (not required) and can be applied to any and all financial liabilities.
369
What is the balance sheet effect of the fair value option applied to financial liabilities s?
Report liability at fair value.
370
What is the income statement effect of the fair value option applied to financial liabilities?
Recognize gain or loss for the change in the fair value adjustment of the liability during the period.
371
What is the international treatment of debt issue costs?
Reduction in the proceeds form the debt (same as US standards).
372
What is the international applicability of the fair value option?
The option is limited to liabilities that are part of a group with financial assets managed together.
373
List the criteria for reclassifying CL to long term.
- the intent to refinance the short term obligation must be proven
- the firm must demonstrate the ability to refinance the obligation
374
List the 3 ways to meet the “ability to refinance” requirement.
1. Actually refinance before issuance of the financial statements.
2. Enter into a non cancelable refinancing agreement supported by a viable lender
3. Issue equity securities replacing the debt
375
How does an entity show intent to refinance short term obligations?
The intent must be proven, possibly in the form of board of directors’ meeting minutes.
376
List the conditions that must exist for debt to be extinguished.
- debtor pays creditor and is relieved of obligation
| - debtor is legally released from being primary obligor
377
How are gains/losses form extinguishment of debt reported on the income statement?
Recognized as components of income from continuing operations.
378
List the steps to retire debt on the books.
- record interest, amortization of discount/premium, issue costs to date of retirement
- remove debt and related accounts
- record gain or loss
379
When determining whether a debt extinguishment results in a gain or a loss, how is that calculated?
Gain/Loss = Reacquisition price - Net Carry Amount
380
When determining whether a debt extinguishment results in a gain or a loss, what are the financial statement adjusting items?
Reacquisition items to be accounted for:
- debt issue costs
- any unamortized discount/premium
- difference between debt’s face value and reacquisition amount
381
What aspect of a debt restructuring must be present for the restructuring to be “troubled”?
Creditor makes a concession, and debtor must be in financial difficulty.
382
Describe the debtor’s recording of a settlement restructure.
- gain = book value of debt + unpaid accrued interest - mkt value of consideration transferred
- gain/loss on disposal of assets transferred
- remove debt from books
- record any stock issued at market value
383
What is the amount of interest to be recognized after a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?
No interest is recognized; all payments are considered principal payments.
384
What is the subsequent accounting treatment for restructured cash flows in a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?
They are all treated as principal payments.
385
Describe the post-restructure interest rate for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt.
Rate that equates the book value of the original debt with the present value of restructured cash flows.
386
What is the amount of interest to be recognized after a troubled debt restructure modifies the terms fo the original debt such that the sum of restructured cash flows is greater than the book value of the original debt?
Difference between the sum of restructured cash flows and the book value fo the original debt.
387
What is the international accounting standard treatment of settlement troubled debt restructures?
Same as US accounting but is considered an extinguishment.
388
List the 2 categories of modification of terms debt restructures for international accounting standards.
1. Significant modification
| 2. Not significant modification
389
Define “debt covenant.”
Restriction on debtor and possible responses by creditor.
390
List some examples of specific attributes in a covenant.
- minimum current ratio
| - maximum debt to equity ratio
391
Define covenant-lite loan.
Loan with less stringent restrictions
392
Define “debt covenant compliance.”
Steps taken by a debtor to meet the restriction and reporting such compliance.
393
Give an example of a response by a creditor if the debt covenant is violated by the debtor.
Require the debtor to pay the debt or refinance the debt.
394
What is the classification of liabilities that are due on demand?
Current liability.
395
What is the classification of a liability callable on demand if the debt covenant is violated and it is probable that the debtor will cure violation?
Noncurrent liability.
396
What is the classification of a liability subject to a subjective acceleration clause?
Current if it is possible the debt will be called; noncurrent if a remote chance exist of calling the debts.
397
When are mandatorily redeemable financial instruments classified as debt?
When they are obligations to repurchase equity shares and requires the issue to settle the obligation by transferring assets.
398
How should an obligation to issue shares of a fixed dollar value be classified?
Liability
399
How is an obligation to issue shares of a fixed $ value valued?
The fixed $ value agreed upon by the parties.
400
How should an obligation to issue fixed number of shares be classified?
Equity
401
How is an obligation to issue a fixed number of shares valued?
Fair value of shares at the time of agreement.
402
How is an option written by a firm allowing other entities to purchase the firm’s stock at a fixed price classified?
Liability
403
Which aspect of a compound financial instrument with characteristics of both debt and equity is measured first under IFRS?
The aspect is debt.
404
What does owners’ equity represent?
It represents the residual interest in the net assets of an entity that remains after deducting its liabilities.
405
What is the primary measurement basis for contributed capital?
The historical value of direct investments made in the firm by investors.
406
List the major owners’ equity accounts for a corporation.
- preferred stock
- common stock
- additional paid in capital, preferred
- additional paid in capital, common
- retained earnings
- treasury stock
- accumulated OCI
407
List the main types of ownerships in business organizations.
1. Sole propriertorship
2. Partnership
3. Corporation
408
List the 2 main owners’ equity categories.
1. Earned
| 2. Contributed
409
Define “legal capital.”
The par value of the stock or the stated value of the stock issued.
410
What purpose does legal capital serve?
- it establishes the minimum investment
| - it provides protection for creditors. (Dividends may not be paid from legal capital.)
411
List the types of common stock rights.
- voting
- dividend
- preemptive
412
List the types of preferred stock rights.
- nonvoting
- dividend preferences
- liquidation preferences
413
Define “authorized shares.”
The total number of shares that may be issued.
414
What is the number of common shares issued?
of shares ever issued by the firm but not retired = # of outstanding shares + # of treasury shares
415
How is the # of shares outstanding determined?
It is equal to the number of shares currently held by stockholders.
416
How is the # of shares in the treasury determined?
It is equal to the # of shares purchased by the issuing firm and not yet reissued.
417
Define “dividends in arrears.”
Unpaid dividends for a particular year on cumulative preferred stock.
418
Define “par value.”
The minimum legal issue price for capital stock in most states; this value appears on the stock certificate.
419
List the alternatives to par value when a stock does not have such value.
- stated value
| - no par value
420
What value is added to the contributed capital account when a no par stock has a stated value?
Contributed capital in excess of stated value (common).
421
List the requirements for stock sold on a subscription basis.
Contract stating:
- specifying share price
- # of shares
- payment dates
422
Describe the JE to record initial payment of stocks sold on subscriptions.
DR: Cash
DR: Subscription Receivable
CR: Common Stock Subscriptions
CR: Additional Paid in Capital (contract price-par)
423
Describe the JE for subsequent payments on stock sold on subscriptions.
DR: Cash
CR: Subscription Receivable
424
What is the classification of the stock subscriptions’ receivable account?
Contra owners’ equity (contra common stock subscribed)
425
How is stock issued for nonmonetary consideration valued?
Fair value fo stock or consideration, whichever is more reliable.
426
What is the basis of allocation for stock basket sale proceeds?
Fair value of individual stocks in the basket.
427
What is the accounting treatment for the retirement of preferred stock?
- all related OE accounts are removed
- debit differences to to RE
- credit differences go to contributed capital
428
What is the acctg treatment for the conversion of preferred stock?
- preferred stock accounts are transferred to common stock accounts
- if total preferred stock value is less than common stock par value, RE are debited
429
Under what condition is RE debited on conversion of preferred stock to common stock?
Total recorded value of preferred stock is less than par value of common stock on conversion.
430
For what amount is preferred stock additional paid in capital debited when called or redeemed?
Amount recorded from original issuance.
431
List the methods for accounting for treasury stock.
- cost method
| - par value method
432
Describe the cost method for acctg for treasury stock.
- purchases are debited at cost
| - reissuances debit cash, credit treasury stock at cost, and contributed capital from treasury stock is plugged
433
Describe the acctg treatment of purchases of stock under the par value method.
1. Treasury stock is debited at par
2. APIC is debited by amount credited when stock was originally issued
3. Cash is credited
434
Describe the acctg treatment of reissuance of stock under the par value method.
- treasury stock is credited at par
| - the remainder of the entry is treated like a stock issuance
435
Under the cost method of acctg for treasury stock, how is the treasury stock presented on the B/S?
Treasury is subtracted at the very bottom of the OE section of the B/S.
436
How is treasury stock presented on the B/S under the par value method?
It is reported as a subtraction from the common stock account, at par, in the B/S.
437
What is the effect on OE when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?
OE is increased by the difference in purchase cost and reissuance price.
438
What is the effect of treasury stock transactions on earnings?
There is no effect.
439
How can RE be affected by treasury stock transactions?
RE can be decreased (as a last resort) but never increased.
440
When is PIC from treasury stock decreased under the cost method?
When treasury stock is reissued for less than cost.
441
What is the relationship of total OE for cost and par method?
They are equal, although certain components of OE would show different balances.
442
What accounts may reflect different balances under the cost and par method for the same firm?
- treasury stock
- PIC in excess of par common
- PIC from treasury stock
- RE
443
When is paid in capital from treasury stock increased under the par method?
When treasury stock is purchased for less than the original issue price.
444
What is the effect on the treasury stock account under the cost method when donated stock is rec’d?
An increase for the FV of the stock rec’d.
445
What is the effect on the treasury stock account under the par method when donated stock is rec’d?
The effect on the treasury stock account is an increase for the par value of the stock rec’d.
446
What types of dividends require establishing a liability?
Those dividends involving a distribution of assets.
447
On what date are dividend liabilities established?
Declaration date.
448
List the JE to record cash dividend declaration and payment.
DR: RE (or Dividends)
CR: Dividends Payable
DR: Dividends Payable
CR: Cash
449
List the JE to record a declaration of property dividends (assuming asset FV exceeds BV)
DR: RE (@ FV @ declaration date)
DR: Asset (FV - BV)
CR: Dividends Payable (FV)
CR: Gain on Disposal (FV- BV)
450
List the JE to record payment of property dividend.
DR: Dividends Payable
| CR: Cash or Asset
451
Define “scrip dividend.”
A dividend in the form of an interest bearing note payable.
452
List the JE to record a scrip dividend declaration.
DR: RE
| CR: Scrip dividend payable
453
List the entry to record a scrip dividend payment.
DR: Scrip dividend payable
DR: Interest expense
CR: Cash
454
Define “liquidating dividends.”
- A return of capital rather than a return on capital
| - Reduces contributed capital account instead of RE
455
Define “stock dividend.”
A distribution by a firm of its stock to its shareholders in proportion to their existing holdings.
456
What is a small stock dividend?
% of dividend is less than 20% to 25%.
457
How is a small stock dividend accounted for?
Capitalize RE at mkt. price.
458
What is the date used to establish mkt price for small stock dividends?
Declaration date.
459
What is a large stock dividend?
% of dividend is greater than 20% to 25%.
460
How is a large stock dividend account for?
Capitalize RE or PIC at par value.
461
How is a stock split accounted for?
No acctg entry is needed.
462
List the order of dividend payment if nonparticipating preferred stock is outstanding.
1. Preferred: Dividends in arrears (if cumulative)
2. Preferred: Current period dividend
3. Common: remainder
463
List the order of dividend payment when partially participating preferred stock is outstanding.
1. Preferred: any dividends in arrears
2. Preferred: current period dividends
3. Common: Preferred % x total par outstanding
4. Preferred: additional %
5. Common: Remainder
464
List the order of payment for partially participating stocks.
1. Dividends in arrears
2. Current p/s dividend
3. Preferred stock receives up to an additional %
465
What dividends are paid before any other dividends are paid?
Preferred stock dividends in arrears.
466
Is there any additional participation to preferred stock if total dividends are not sufficient to provide common stock with dividends based on the fully participating preferred %?
There is no additional participation.
467
Is there any additional participation to preferred stock if total dividends are not sufficient to provide the partially participating preferred % to both common and preferred stock?
The remainder of dividends after the basic preferred % is provided to common, is multiplied by the ratio: total preferred par value to total par value of both classes of stock.
468
Describe the acctg entry to record stock rights issued to outside parties for service at issuance.
Record an expense and an OE acct equal to the difference between the mkt price and exercise price times the # of shares under option.
469
Describe the acctg entry to record stock rights issued to outside parties for services at excercise of rights.
Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.
470
List the reasons for appropriating RE.
- financial planning
- legal requirement
- contractural obligation
471
Define “restrictions on RE.”
External constraints placed on a certain portion of RE by an external party.
472
How should restrictions and appropriations on RE be reported?
They should be disclosed in footnotes.
473
What is often used to convey preemptive rights regarding stocks?
Stock rights
474
Define “RE appropriation.”
Management’s formal communication that a portion of RE has been declared off limits for dividends.
475
What is the effect of RE appropriations on assets?
Have no effect on assets.
476
Define “book value per share.”
Common stockholders’ equity per share of outstanding common stock at the end of the period.
477
Define “common stockholders’ equity.”
Total OE after preferred dividend claims are removed.
478
What is the effect of dividends in arrears on BV per share?
Decrease in BV per share.
479
What is the effect on BV per share of a transaction that increases earnings?
Increase in BV per share.
