Things to Remember

Question 1

For application of the cost or market approach to valuing inventory, which method would result in highest total inventory amount? Applying to inventory as a whole or each individual item in inventory?

Answer 1

Applying the lower of cost or market method to the ENTIRE inventory will result in the highest inventory number. For lower inventory, apply at an individual level.

Question 2

Should an impairment loss of a depreciable asset being credit to accumulated depreciation?

Answer 2

Yes, when the book value of a asset that is being depreciated is impaired, The AD should reflect previous depreciation, the amount of impairment, and future depreciation.

Question 3

How do you find interest revenue when just given a principal amount, interest rates for coupon, and interest rate for market, and # of payments?

Answer 3

First, You take the total principal and divide it by the PV of 1 annuity @ interest rate of note…then you multiply that # times the number of payments. This gives you total income from the note.

After this, you must find the PV of the note. This equals the Payment calculated in step 1 * PV of 1 annuity at market rate of interest.

Final step is to the PV of the note from the total from the total number of payments step.

Question 4

When the book method is used for convertible bonds, by what amount should stockholder equity increase upon conversion?

Answer 4

When using the book value method, the stock will take on the value of the carrying amount of the bonds at conversion date.

Question 5

How should the liability for a capital lease with a bargain purchase option be calculated @ beginning of lease term?

Answer 5

The bargain purchase amount should be mutiplied by the PV of 1 @ appropriate interest rate, and the payment amount should be multiplied by the PV of 1 annuity for appropriate rate. Add these two together and that is the liability.

Question 6

How to calculate the value of bonds and detachable warrants when they are sold together?

Answer 6

First you will want to calculate the FV of both the bonds and the warrants separately. Then you will add those two numbers together and that will give you total FV of the transaction.

Once that is done, you will figure out the proportionate value of both the bonds and the warrants.

Then, multiply the % of FV of bonds and % of warrants times the Total amount received in the transaction. This gives you the amount for each.

Question 7

How to handle a Loss carryback and carry forward for income taxes.

Answer 7

If loss occurs in Year 2, and exceeds the income of year 1, that loss can be applied to year 1 through a tax refund in Year 2, and also can be applied to Year 3 through a carry forward of the leftover loss, as well as a deferred tax asset for the carryforward amount of loss in year 2.

Basically Income Year 1 = 1= 300,000
Loss Year 2= 700,000
Income year 3= 1,200,000

Year 2 would include:

Income tax refund rec of (300,000.3)
DTA of (400,000.3)
For a total income tax benefit

Year 3 would include:
Taxable income reduction to 800,000
and reversal of Previous deferred tax asset from year 2.

Question 8

Do Stock Dividends reduce Retained Earnings? If so, what percentages and amounts should be used for the calculation?

Answer 8

Stock Dividends do reduce Retained Earnings. However, they have no impact on overall Stockholder Equity.

If a stock dividend is for a small amount (less than 20%) then the fair value of the shares is simply debited from Retained Earnings. If over 20%, the par value of the dividend is what is used to reduce Retained Earnings.

Question 9

How do you decrease Retained Earnings?

Answer 9

DEBIT ENTRIES…CREDITS are increases in RE.

Question 10

Should market declines in inventory be recognized at interim periods?

Answer 10

If a turnaround can reasonably be expected, then no.

Question 11

Does IFRS allow for Extraordinary Gains and Losses?

Answer 11

NO, this is an easy one to forget…so dont! and pay attention to the question.

Question 12

Are receivables monetary or nonmonetary assets?

Answer 12

Monetary because they change in value with the price level.

Question 13

Do Remeasurement Gains get reported in the income statement?

Answer 13

Yes, and Translation Gains and losses go to OCI.

Question 14

How is NCI to be reported in IFRS under the partial goodwill method?

Answer 14

Unlike US GAAP, where the NCI % is the difference between FV of investment and % investment in investee. IFRS calculates it as the % of total FV of net assets.

Question 15

What US GAAP method most closely represents the current cost for COGS and EI?

Answer 15

LIFO best represents the amounts that would be in the COGS and FIFO most closely represents the cost of EI.

Question 16

Do you use PV of Lease payments or FV (sales price) to determine the gain or loss on a Sales-Type Finance Lease? What about profit or loss on a sales type lease?

Answer 16

PV of Lease Payments. Profit or loss is based off the fv of the asset and the carrying amount in the books.

Question 17

According to IFRS, how should all profit on a sales type (capital) lease be recognized?

Answer 17

It should be amortized over the same life as used for the depreciation calculation.

Question 18

Do the amounts and types of permanent tax differences need to be disclosed on the financial statements?

Answer 18

NO, this is an exception to the normal rule of disclose everything. Since those permanent differences will never have an impact on earnings or taxes, there is no need to disclose it.

Question 19

How do you calculate the amount to report for investment in stock rights?

Answer 19

(FMV of Rights / FMV of Rights + FMV of Stock EX Rights) * Cost of Stock

Cost of stock being the 1st purchase price that they bought the stock and rights at…not the amount that the rights give them the right to purchase at.

Question 20

How will the Equity Method of recording treasury stock purchases compare to the Cost method of recording treasury stock in regards to APIIC and Retained Earnings?

Answer 20

The equity method will result in a lower APIC number than the cost method and the same RE number since neither method impacts Retained Earnings.

Question 21

In the Required Supplementary Information for Governmental Financial Statements, what is the minimum amount of years employer contributions expressed as percentages of annual covered payroll should be reproted?

Answer 21

The minimum is 6 years, or if the gov’t has been in operation for less than that time, all years should be presented.

Question 22

When reconciling the net increase in fund balance to the fund Financial Statements how should depreciation expense be reported?

Answer 22

Depreciation expense should be INCLUDED in the calculation as a subtraction from the Expenditures for Capital Outlays…that number should be reported net of depreciation.

Question 23

When determing a partners capital account balance, if a initial contribution has a mortgage outstanding, should that partners’ FV contribution be deducted by that mortgage amount?

Answer 23

YES, the capital account is the FV of asset - the mortgage on the asset.

Question 24

Which of the following are not considered standard operating procedure by IASB?

1) The IASB issues a discussion paper as its first publication on the new topic
2) The IFRS is approved unanimously by members of the IASB
3) An exposure draft is issued for public comment
4) Exposure drafts and final IFRS are drafted by the IASB staff

Answer 24

2…only 9 of the members have to approve the standards. And although not required, the IASB does generally issue a discussion paper.

Question 25

Do Property Dividends affect Net Income or Retained Earnings or APIC?

Answer 25

Property Dividends impact Net income for the FV of the dividend at declaration date.

Question 26

If the purchase of a building is made with both cash and the issuance of common stock, how should that be reflected in the cash flow statement?

Answer 26

The amount purchased with cash would be reported in the Investing section of the cash flow statement.

The amount purchased through issuance of common stock would be reported in the supplementary information to the statement of cash flows…for only the amount that was financed through stock, not total amount of purchase.

Question 27

When a government bills for property taxes, how should the revenue from that billing be reported?

Answer 27

Accounts Receivable should be debited and DEFERRED REVENUE should be credited. While the revenue should be reported since the gov’t has a enforceable claim, it should be deferred and not recognized until payment is available. As it is collected, Deferred Revenue will be Debited and Revenue will be credited.

Question 28

Which of the following is reported pre tax?
Income (loss) from operations
Income (loss) from continuing operations

Answer 28

Income From Operations!

Income from continuing operations is only there if discontinued operations are also reportable, and they are reported net of tax.

Question 29

For a discontinue operation that is held for sale in Year 2, but not year 1, would the results of Year 1 be classified as discontinued on the company’s Year 2 Financials that show the results of year 1?

Answer 29

Yes! For financial statements that show prior periods, if a reporting unit is classified as held for sale, that units operations from previous years that they were not classified as held for sale show up as a part of discontinued operations.

Question 30

How is the Goodwill Impairment Test performed under IFRS?

Answer 30

The carrying value of the asset is compared to the greater of the FV less costs to sell of the asset or its value in use, which is defined as the PV of future cash flows.

Question 31

Under IFRS, when depreciating a purchase with multiple elements, how should this be handled?

Answer 31

Say this is equipment. The total of the equipment should be depreciated over its life after subtracting out the other components of the equipment that also have their own useful lives.

Question 32

Under US GAAP, should all items of inventory be measured @ the lower of cost or market method or just particular parts?

Answer 32

ALL parts of inventory should be measured at a Lower of Cost or Market basis. These include: raw materials, work in process, and finished goods.

Question 33

How should a company report their dividends in arrears on preferred stock that that have not been paid?

Answer 33

These should be disclosed in a note to the financial statements, but not recognized anywhere.

Question 34

Should gains and losses on treasury stock only impact stockholder equity?

Answer 34

No, Gains will increase APIC will which increase SE, and losses will decrease APIC only to the extent that there are previous gains and then the losses would be reported in RE through a debit.

Question 35

How should contributions that relate to a major ongoing portion of the operation of an organization be valued for a non-profit?

Answer 35

While say a person purhcasing a ticket for a movie at 20 and fv being 3 would record a contribution of 17 and revenue of 3…this is different in the question’s cirucmstance.

When considered a major ongoing activity, the amount received is recognized as contribution revenue at its GROSS amount and the cost of the premium would be a fundraising expense.

Question 36

When preparing interim financial statements, how would a company apply GAAP?

Answer 36

They would apply them according to how the used the principles in their most recent annual report. They would NOT use what is projected for the current year or future years.

Question 37

When buying or selling equipment or assets to a 90% owned subsidiary, how much of the gain should be elimnated? How would this gain impact the depreciation expense on the asset?

Answer 37

ALL of the gain…not just the portion of gain for owner of the company…no gain should be there.

The gain would lead to an overstatement of depreciation expense of the (GAIN / remaining useful life of the asset). Therefore, the depreciation expense will need to be adjusted by that amount in the future years.

Question 38

How should capitalized interest be calculated?

Answer 38

It should be calculated as the lower of actual interest cost incurred or avoidable interest (computed capitalized interest)

Avoidable interest is calculated as the weighted average of the expenditures times their applicable rates.

If this number is not given, it could be calculated by taking total construction costs for the year and dividing them by 2 (if spread evenly over the year).

Question 39

How should the write down in value of a deferred tax asset be recorded?

Answer 39

It should be:

DR Interest tax expense
CR DTA Valuation allowance

Question 40

Do both Etraordinary Items and Discontiued operations have a separate EPS calculation and disclosure?

Answer 40

YEP, it is not just extra ordinary that must compute an disclose an EPS.

Question 41

Should a companies estimated effective tax rate used for interim periods take into account anticipated foreign tax rates?

Answer 41

Yes, it should take into account foreign rates and available tax planning alternatives.

Question 42

When should a liability be recognized under the percentage of completion method for construction contracts? And when would a asset be recognized?

Answer 42

A current liability should be recognized when Billings to Customers exceed Cost incurred. An asset results when Expenses incurred exceed billings.

Question 43

When should a deferred tax asset or liability arise?

Answer 43

Anytime income is recognized in the financial statements before it is reported as taxable income, a DTL will arise.

When an expense is recognized in Financials, but not taxable income, then a DTA will arise.

Question 44

What are the criteria for determining major funds for governmental reporting?

Answer 44

Major funds should be calculated based off from revenues, expenditures/expenses, assets or liabilities. NOT Fund balance or equity. 10% of all governmetal or enterpirise AND at least 5% of both governmental and enterprise.

Question 45

How should long term donor restricted cash contributions be classified in a non-profit statement of cash flows?

Answer 45

These should be considered Financing Activity Inflows.