Taxes and later Flashcards
Examples of PERMANENT Tax differences.
Items recognized in pretax financial income but not in taxable income are municipal bond interest, premiums paid by a beneficiary entity on insurance policies for its key executives, and the proceeds from such policies.
Examples of items recognized in taxable income but not in financial income are the dividends received deduction and percentage depletion.
How to calculate the Interest Payable on a Bond?
Interest payable = face amount of the bonds, times the nominal (stated) interest rate, times the portion of the interest period included in the accounting period. This is the only part of the equation that uses the STATED Rate, the others use the MARKET rate (PV of principal)
The yield rate and sale between interest periods for an amount including accrued interest do not affect interest payable.
What is the market price of a bond?
The market price of a bond is the sum of (1) the PV of the amount due at the end of the bond’s term (its face amount) + (2) PV of the periodic interest payments, both discounted at the prevailing MARKET rate.
The periodic payments are the only part using the STATED RATE.
Leases: At commencement what does the lessee recognize on its B/S?
Under both finance and operating leases, at the lease commencement date, a lessee must recognize a lease liability and a right-of-use asset.
How to amortize the lease liability after lease payment?
A lease payment has two components:
(1)interest expense and
(2)portion applied to the reduction of the lease liability.
The effective-interest method requires that the carrying amount of the liability at the beginning of each interest period be multiplied by the appropriate interest rate to determine the interest expense. The difference between the lease payment and the interest expense is the amount of reduction in the carrying amount of the lease liability. The carrying amount at the beginning of the period was $230,000 ($270,000 – $40,000 annual rent), and the interest expense is $23,000 ($230,000 × 10%). Thus, the reduction in the lease liability is $17,000 ($40,000 – $23,000).
How do Operating vs. Finance lease vary?
Amortization of the right-of-use asset and lease expenses vary.
Finance lease =
(1) ROU amortization is on SL over the shorter of life or term.
(2) Interest Expense and R-O-U amortization are separate
Operating lease =
(1) amortization is a plug of the periodic lease expense - interest expense.
(2) Lease expense is fixed.
How is the presentation of Finance vs. Operating leases on the Balance Sheet
In the balance sheet, a lessee must not present (1) finance lease right-of-use assets in the same line item as operating lease right-of-use assets or (2) finance lease liabilities in the same line item as operating lease liabilities. Moreover, they must be presented separately from other assets or liabilities, respectively.
How to calculate the PV paid for a bonds at inception?
There are 2 parts: (1) PV of Maturity and (2) PV of periodic Interest Payments.
Maturity PV uses the market AKA yield rate to calculate the principal amount
PV of periodic payments needs two parts: face value and PV.
face value is original amount * Stated rate. That result is then multiplied by the PV @ the market rate. This periodic PV sub-portion could be and annuity due factor if paid at the beginning on the term.
For Contingencies should not be recognized on probable gains, but how should be they be communicated?
Gain contigencies like offers to settle of court successfully defending a patent, should be CAREFULLY disclosed in the F/S DISCLOSURES but not RECOGNIZED UNTIL REALIZED.
For loss contingencies with a probable loss but only a range, what amount, if any should be accrued?
Accrued the minimum of the range despite being the least conservative option.
Equity stocks are NOT recorded in the BS at Fair Value.
They are recorded at relative costs.
One exception being, when the company issues stock in exchange for services received instead of paying with cash.
What’s the difference between the “Par” method and “cost” method for equities?
When is Retained Earnings affected by Dividends?
At decrease Ret. Ear. at DECLARATION
When cash dividends are declared, a liability to the shareholders is created because the dividends must be paid once they are declared. At the declaration date, retained earnings must be debited, resulting in a decrease in retained earnings. When the cash dividends are subsequently paid, the dividends payable account is debited and a cash account credited. Thus, at the payment date, the amount of retained earnings is not affected.
How to record STOCK DIVIDENds?
A stock dividend in which the number of shares issued is fewer than 20 to 25% of those outstanding is recorded as:
debit to retained earnings for the fair value of the stock issued
credit to the capital stock accounts.
A split-up effected in the form of a stock dividend, that is, a share distribution that is greater than 20 to 25% of the outstanding shares, requires
debit to retained earnings at least equal to the legal requirement in the state of incorporation (usually the par value of the shares).
Thus, the aggregate amount debited to retained earnings is $45,800 ($15,000 fair value of the 10% dividend + $30,800 par value of the 28% dividend).
What is the 1st step of TARP?
In a troubled debt restructuring effected as an asset exchange, the asset surrendered in settlement of the troubled debt must first be adjusted from its carrying amount to its fair value, with a gain or loss being recognized.
