Unit 4 questions Flashcards
For which type of material related party transactions is disclosure required?
Disclosure of material related party transactions is required for those other than
(1) compensation arrangements (officers’ salaries and expenses),
(2) expense allowances, and
(3) other similar items in the ordinary course of business.
Lemu Co. and Young Co. are under the common management of Ego Co. Ego can significantly influence the operating results of both Lemu and Young. While Lemu had no transactions with Ego during the year, Young sold merchandise to Ego under the same terms given to unrelated parties. In the notes to their respective financial statements, should Lemu and Young disclose their relationship with Ego?
Yes for Lemu and Yes for Young
Financial statements should disclose material related party transactions. A related party is essentially any party that controls or can significantly influence the management or operating policies of the reporting entity. Moreover, two or more entities may be under common ownership or management control such that the results of the reporting entity might vary significantly from those obtained if the entities were autonomous. In these circumstances, the relationship should be disclosed even though no transactions occurred between the parties.
In regard to related parties, GAAP require disclosure of:
(1) the nature of the relationship involved;
(2) a description of the transactions for each period an income statement is presented and such other information as is deemed necessary to an understanding of the effects of the transactions;
(3) the dollar amounts of transactions for each period an income statement is presented and the effects of any change in the method of establishing their terms;
(4) amounts due from or to related parties as of the date of each balance sheet, including the terms of settlement; and
(5) certain tax information required by GAAP if the entity is part of a group that files a consolidated tax return.
When a noninterest-bearing note is exchanged for property, and neither the note nor the property has a clearly determinable exchange price, the present value of the note should be the basis for recording the transaction. The present value is determined by:
discounting all future payments using an appropriately imputed interest rate.
Interest is only given on the what value?
On the face value at coupon rate
