Acct 383 Intermediate Accounting II

Other Comprehensive Income (OCI)

changes in stockholders' equity that do not result from net income (net loss) or transactions with shareholders Includes: adjustments from foreign currency translations, net holding gains/losses on certain types of investments, increase in fair value of investments in available for sale securities, loss on pension plan assets (actual return less than expected), loss from revising an assumption related to a pension plan, prior service cost, gain on postretirement plan assets (actual return more than expected), deferred gain/loss on derivatives reported on Comprehensive income statement

equity securities to purchase land

common stock is not publicly traded so the appraised value of the land is the best indicator of fair value

natural resources depletion

companies are allowed to use percentage depletion for income tax purposes depletion could exceed the assets cost for income tax purposes

software

costs incurred after technological feasibility is established but before software is available to customers is capitalized as an intangible asset amortization of capitalized computer software development costs begins when the product is available for release to customers GAAP amortization of capitalized software is the greater amount of amortization calculated using: 1) percentage-of-revenue method and Percent of revenue method: revenue received from sale/total anticipated revue x cost after feasibility and before release 2) straight-line method

contract contracts

costs of obtaining and fulfilling contracts should be capitalized as intangible assets if the contract term exceeds one year

stock dividend What is the effect of the declaration and subsequent issuance of a 5% stock dividend on each of the following?

decreases retained earnings increases paid in capital The stock dividend is a capitalization of retained earnings.

Replacement depreciation method

depreciation is recorded when assets are replaced. aggregate cost is increased depreciation expense is the amount paid for new or replacement assets any proceeds received from asset disposition reduces deprecation expense debit depreciation expense credit cash

Model Business Corporation act

designed to serve as a guide to states in the development of their corporation statutes.

accretion expense

difference between an asset retirement liability and the probability weighted expected cash flows

bond premium

difference between the selling price and the face amount of a bond that is sold for more than the face amount journal entry to recognize interest expense includes debit to bond premium

IFRS Depreciation Methods

diminishing balance, straight-line, units of production each component of an item of pp&e must be depreciated separately if its cost is significant

loss contingency Taylor company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss?

disclose the contingency and state that an estimate cannot be made

unit of production method

does not necessarily produce a declining pattern of depreciation over an asset's service life

earnings price ratio

earnings per share/market price per share A valuation ratio of a company's current share price compared to its per-share earnings. reflects the % earned for each dollar of market value of common stock relates earnings to the market value of equity rather than book value of equity common variation is the price-earnings ratio

asset trade-in Cedric company recently traded in an older model computer for a new model. The old model's book value was $312,000 (original cost of $652,000 less $340,000 accumulated depreciation) and its fair value of the old equipment is $290,000. Cedric paid $72,000 to complete the exchange which has commercial substance. Prepare journal entry to record exchange

equipment - new (290,000 + 72,000) = 362,000 loss (312,000 - 290,000) = 22,000 debit equipment new $362,000 debit accumulated depreciation $340,000 debit loss $22,000 credit equipment old $652,000 credit cash $72,000

coupons

expense is recognized either when the coupons are issued or when the coupons are redeemed

characteristics of liabilities

interest accrues as time passes on long-term liabilities future cash payments are certain and estimable the requirement of future cash payments

bond fair value Douglas-Roberts has bonds outstanding during a year in which the market rate of interest has risen. Douglas-Roberts has elected the fair value option for the bonds. What will the company report for the bonds in its statement of comprehensive income for the year?

interest expense and a gain If interest rates increase, the fair value of liabilities decrease creating a gain. Interest expense and a gain. Any portion of the change in fair value attributable to a change in general interest rates is reported in net income; any portion due to a change in credit risk is reports as OCI. Either way, net income or OCI, it increases total comprehensive income.

note noninterest bearing BVA Corporation exchanged a $96,000, noninterest-bearing, 3-year note for land with a fair value of $60,000. The $36,000 difference represents:

interest expense to be recorded over three years Interest expense to be recorded over three years. The note and the land are both recorded at the fair value of $60,000. Thus a discount of $36,000 is created, which is amortized to interest expense over the three year life of the note.

liabilities

involve a probable future sacrifice of economic benefits and arise as a result of past transactions or events cash collected from customers as refundable deposit or a s advance payments for products/services

goodwill impairment

level of testing: GAAP: reporting unit IFRS: cash-generating unit measured: excess of the book value over its implied fair value implied fair value: is a residual amount subtract fair value net assets (excluding goodwill) from the purchase price using the unit's previously determined fair value as the purchase price (fair value less costs to sell) debit loss on impairment of goodwill can not be reversed under both GAAP and IFRS typically reported as a separate component of operating expenses

characteristics of property, plant and equipment and intangible assets

long-lived revenue producing

bond call Brown Corporation exercised its call option to retire long-term notes. The excess of the cash paid over the book value of the notes should be reported as a(an):

loss from continuing operations When the amount paid to retire debt is greater than the carrying value of the debt, a loss is reported. Gains and losses from retiring long-term notes do not require special reporting and are included as part of continuing operations.

stock preemptive rights Westside Shipping issued "preemptive rights" to its existing shareholders without consideration whereby each shareholder is offered the opportunity to buy a percentage of any new shares issued equal to the percentage of shares he/she owns at the time. When Westside issues the rights, which of the following accounts will be increased?

neither common stock nor additional paid in capital are increased All the preemptive right conveys is the right to purchase stock if any is issued.

fixed asset turnover ratio Techvidia Corporation, a global technology company located in Santa Clara, California, reported the following information in its 2016 financial statements ($ in millions) Balance sheet: PP&E: 2016 - $490 and 2015 - $595 Income statement: net sales for 2016: $5,170 calculate the company's 2016 fixed-asset turnover ratio

net sales / average PP&E = fixed asset turnover ratio 5,170/542.5 = 9.53 times ($ in millions) Average PP&E = (490 + 525)/2 = 542.50

stock treasury purchase Gabriel Company views share buybacks as treasury stock. In its first treasury stock transaction, Gabriel purchased treasury stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the treasury stock on each of the following?

no effect on paid in capital no effect on retained earnings The treasury stock is deducted from total shareholders' equity as a separate line item - it is not part of either paid-in capital or retained earnings

stock reissue treasury stoc Dunavant Service Company views share repurchases as treasury stock. Dunavant purchased shares and then later sold the shares at more than their acquisition price. What is the effect of the sale of the treasury stock on each of the following?

no effect on retained earnings increase in paid in capital The difference between the cash received and the treasury stock balance is credited to paid-in capital-share repurchase.

Shareholders' Equity

ownership interest of the investors in a company resources of: paid-in capital retained earnings Accounts: preferred stock common stock additional paid-in capital net unrealized holding gains on investments retained earnings = net assets shareholder equity transactions can affect the return to shareholders: 1) when company buys back shares, the return on shareholders equity increases 2) buyback of shares uses assets, which decreases the resources available to earn net income in the future

notes payable Gruenwald Corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at the

present value of the cash payments using a 7% interest rate

bond issue price

present value of the interest payments and face value. present value of the future cash flows

capitalized cost of a patent

purchase price filing fees attorneys fees to successfully defend patent

capitalized cost in land purchase

purchase price real estate agent commission costs to remove an old building legal fees to secure title title insurance cost of grading delinquent property taxes

natural resources manfred mining company is required to restore a piece of land to its original condition after it completes extraction of precious metals. From a financial reporting perspective, t he related obligation is referred to as an asset

retirement obligation

stock preferred

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends. usually has a high par value and a % of par value dividend rate

retained earnings

the amount of net income retained in the corporation accumulated, undistributed net income or loss normally reported on balance sheet as a single amount accumulated deficit indicates the company has net losses

long-term liability Karin Company's loan is due on July 1, 2018. What conditions must Karin meet (at a minimum) so that the note can be classified as a long-term liability on the balance sheet at December 31, 2017?

the company must intent to refinance the obligation on a long-term basis the company must have demonstrated the ability to refinance the obligation on a long-term basis

stock IFRS

the critical feature that distinguishes a liability from equity is if the issuer is required to deliver cash or another financial instrument to the holder

property dividend Ragle corp issues 1,000 shares of its $5 par value common stock in exchange for equipment. The book value of the equipment on the investors books was $40,000, and its catalog list price was $45,000. The equipment could be purchased in the market for $42,000. The stock was not publicly traded. What is journal entries Placid corp issues 1,000 shares of its $1 par value common stock in exchange for equipment. The book value of the equipment on the investor's books was $20,000, and its catalog list price was $23,000. The quoted market price of the stock in The Wall Street Journal was $22 per share. Journal entry: On April 1, the board of directors of Waspi Corp declares a property dividend of 100,000 shares of Rourke Corp preferred stock that waspi had purchased in January for $10 per share. On April 1, the market value of the shares was $12 per share. The date of record is April 30, and the shares will be distributed on May 15. On September 1, the board of directors of Mayor Corp declares a property dividend of 10,000 shares of Plum Corps preferred stock that Mayor had purchased in May for $5 per share. On September 1, the market value of the shares is $6 per share. The date of record is September 30, and the shares will be distributed on October 15. The journal entry on September 1 will include:

the distribution of a noncash asset to stockholders recorded at fair value of the asset at the dividend declaration date reduces retained earnings, recognize gain on appreciation on income statement debit asset credit stock credit additional paid-in capital-excess of par common stock Ragle: debit equipment $42,000 credit common stock $5000 credit additional paid in capital-excess par $37000 Placid: credit additional paid-in capital $21,000 credit common stock par $1,000 Wasp: April 1 credit gain on appreciation of securities $200,000 May 15 debit property dividends payable $1,200,000 credit investment i Rourke securities $1,200,000 Mayor: Debit retained earnings $60,000 credit gain on appreciation of securities $10,000

copyright

the exclusive right of protection given to a creator or publisher of work, such as song, film, or painting, photograph or book

impairment loss disclosure

the facts and circumstances leading to the impairment the description of the impaired asset amount of loss the method used to determine fair value

allocation method

the pattern in which the usefulness is expected to be consumed things to consider when choosing an allocation method: 1) a systematic and rational allocation method 2) a pattern in which the services are obtained from its use

bonds convertible IFRS Preston Laird Company issued 5% bonds convertible into shares of the company's common stock. Preston Laird Company applies International Financial Reporting Standards. Upon issuance, Preston Laird Company should record

the proceeds of the bond issue as part debt and part equity IFRS requires the proceeds from convertible bonds to be allocated between debit and equity, GAAP requires all proceeds from the sale of convertible bonds be recorded as debt.

premiums (non cash items)

treated as separate performance obligations recorded as deferred revenue until the premium is delivered

goodwill impairment IFRS In 2016, Alliant Corporation acquired Centerpoint Inc. for $380,000,000, of which $60,000,000 was allocated to goodwill. At the end of 2018, management has provided the following information for a required goodwill impairment test: Fair value of Centerpoint $294,000,000 Fair value of Centerpoint's net assets (excluding goodwill) $260,000,000 Fair value of Centerpoint's net assets (including goodwill) $320,000,000 Alliant prepares its financial statements according to IFRS, and Centerpoint is considered a cash-generating unit. Assume that Ceneterpoints fair value of $294,000,000 approximates fair value less costs to sell and that the present value of Centerpoints estimated future cash flows in $299,000,000 Determine the goodwill impairment loss

under IFRS impairment loss is the difference between book value and the recoverable amount of the cash-generating unit. The recoverable amount is $299,000,000, the higher of the $299,000,000 value-in-use (present value of estimated future cash flows) and the $294,000,000 fair value less costs to sell book value - recoverable amount = impairment loss 320,000,000 - 299,000,000 = 21,000,000

goodwill impairment In 2017, Antle Inc. had acquired Demski Co. and recorded goodwill of $280 million as a result. The net assets (including goodwill) from Antle's acquisition of Demski Co. had a 2018 year-end book value of $615 million. Antle assessed the fair value of Demski at this date to be $735 million, while the fair value of all of Demski's identifiable tangible and intangible assets (excluding goodwill) was $586 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2018 is: a) 149 mil b) 131 mil (NOT) c) 0 d) none of these answer are correct

$0 book value of Demski of net assets (including goodwill) is $615 mil fair value $735 because book value is LESS than fair value - no impairment loss

self-constructed Joy corp builds a new office building. The averae accumulaated expenditures were $2,000,000. Joy borrows $1,500,000 on a construction loan at 6% interest, specifically to build the office building. Joy also has an additional loan for $3,000,000 at 8%. What amount of interest is capitalized?

$130,000 (1,500,000 x 6%) + (500,000 x 8%) = 130,000

note payable debt restructuring During 2016 Belair Company was encountering financial difficulties and seemed likely to default on a $600,000, 10%, four-year note dated January 1, 2014, payable to Second Bank. Interest was last paid on December 31, 2015. On December 31, 2016, Second Bank accepted $500,000 in settlement of the note. Ignoring income taxes, what amount should Belair report as a gain from the debt restructuring in its 2016 income statement?

$160,000 Belair owed a total of $660,000 ($600,000 principal and $60,000 in accrued, but unpaid interest). This debt was settled for $500,000, yielding a $160,000 gain.

stock retire The balance sheet of Holmes Services included the following shareholders' equity section at December 31, 2016: common stock ($1 par value, 100 authorized, 90 million issued and outstanding) $90 million Paid-in capital excess of par $540 million retained earnings $280 million Total shareholders equity $910 million On January 5, 2017, Holmes purchased and retired 1 million shares for $9 million. Immediately after the purchase of the shares, the balances in the paid-in capital - excess of par and retained earnings accounts are:

$540 paid in capital-excess of par $280 retained earnings he treasury stock is deducted from total shareholders' equity as a separate line item - it is not part of either paid-in capital or retained earnings.

dividends cash At the beginning of 2016, Priester Dental Supplies had outstanding 4 million shares of $100 par, 8% cumulative, non-participating preferred stock and 20 million shares of $1 par common stock. During 2016, Priester declared and paid cash dividends of $100 million. No dividends had been declared or paid during 2015. On January 12, Priester issued a 5% common stock dividend when the quoted market price the common stock was $20 per share. What amount of cash did Priester distribute to common shareholders?

$56 million $64 [8% x $100 par x 4 million shares x 2 years (the current year plus one year in arrears)].

research and development Delaware Company incurred the following research and development costs in 2018 salaries for lab research $560,000 materials used in R&D projects $360,000 purchase of equipment $1,060,000 fees paid to 3rd parties for R&D projects $480,000 patent filings and legal costs for a developed product $81,000 salaries, wages, supplies for R&D work performed for another company under contract $510,000 total $3,051,000 The equipment has a 8 yr life and will be used for a number of research projects. Depreciation for 2018 is $280,000 calculate the amount of research and development expense that Delaware should report in 2018 income statement

1,680,000 R&D expense: salaries for lab research: $560,000 Materials used in R&D projects $360,000 Fees paid to 3rd parties: $480,000 Depreciation on equipment: $280,000 total: $1,680,000 The patent filing and legal costs are capitalized as the cost of the patent. The salaries, wages and supplies for R&D performed for another company under contract are included as inventory and expensed as cost of goods sold using either the completed contract or percentage of completion method

depletion On April 17, 2018 the Loadstone Mining company purchased the rights to a coal mine. The purchase price plus additional costs necessary to prepare the mine for extraction of the coal totaled $3,920,000. The company expects to extract 980,000 tons of coal during a 4 year period. During 20118, 351,000 tons were extracted and sold immediately. Calculated depletion for 2018

3,920,000/980,000 = $4 per ton 2018 = 4 x 351,000 = 1,404,000

depletion On March 31, 2018, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $229,500, with estimated salable rock of 27,000 tons. During 2018, Belotti loaded and sold 4,600 tons of rock and estimated that 22,400 tons remained at December 31, 2018. At January 1, 2019, Belotti estimated that 9,200 tons still remained. During 2019, Belotti loaded and sold 13,800 tons. Belotti uses the units-of-production method. Belotti would record depletion in 2018 of:

39,100 229,500/27000 = 8.5 per ton 8.5 x 4,600 = 39,100

warranty liability Supreme Inc sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during 2017 are as follows: 2017:$10,000 2018: 25,000, 2019:15,000. Assume that actual warranty cost during 2017 were estimated. What is the amount of the estimate warranty liability that Supreme should recognize on its 2017 balance sheet?

40,000 25,000 + 15,000 = 40,000

contingent liability and loss Abbott corps attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott corporation should accrue a contingent liability and loss of:

400,000

bond On January 1, 2018, Nana Company paid $100,000 for 6,600 shares of Papa Company stock. The ownership in Papa Company is 10%. Nana Company does not have significant influence over Papa Company. Papa reported net income of $62,000 for the year ended December 31, 2018. The fair value of the Papa stock on that date was $62 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2018?

409,200

disposal of asset The Cromwell Company sold equipment for $35,000. The equipment originally cost $120,000, with estimated useful life of 10 years, and $20,000 residual value, was depreciated for 4 years using straight-line method. Cromwell should report the following on its income statement in the year of sale:

45,000 loss book value at disposal date: [120,000 - (4 x 120,000 - 20,000)/10)] = 80,000 asset sold for 35,000. $35,000 - 80,000 = 45,000 loss

percentage of revenue method Mico software began a new development project in 2015. The project reached technological feasibility on June 30, 2016, and was available for release to customers at the beginning of 2017. Development costs incurred prior to June 30, 2016 were $4,900,000 and costs incurred from June 30 to the product release date were $2,200,000. The 2017 revenues from the sale of the new software were $4,500,000, and the company anticipates additional revenues of $6,500,000.. The economic life of the software is estimated to be 4 years. 2017 amortization of the software development costs using the percentage of revenue method would be:

900,000 (4,500,000/(4,500,000 + 6,500,000)) x 2,200,000

deferred revenue interest On January 1, 2017, Merkel Company receives $1,814 from a customer related to products to be delivered on December 31, 2018. The company's effective interest rate is 5%. The company regularly sells the products for $2000 in cash. On December 31, 2017, Merkel should recognize interest expense of:

91 1814 x .05

bonds discount When a firm records bond interest at the effective rate for bonds issued at a discount, its net income in the bond's first year will be:

Higher than if the straight-line method were used. When bonds are issued at a discount, in the earlier years, interest expense is lower under the effective interest method than straight-line. As such, net income is higher.

biological assets

IFRS reporting living animals and plants, trees fruit, valued at fair value less estimated cost to sell, with changes i n fair value included in the net income calculation GAAP - valued at cost less accumulated depreciation or depletion

finite life intangible asset

if an impairment loss is recognized: 1) write-down book value is the new cost basis for future amortization 2) later recovery is prohibited

periodic interest on liabilitites

is the effective interest rate times the amount of the debt outstanding during the period

stock par value

An arbitrary amount selected by the corporation historically, par value was considered to be the amount of net assets that were not available for distribution to shareholders

net assets

Assets - Liabilities net assets = shareholders equity

intangible assets

assets that do not have physical substance

stock over par

credit common stock (par) credit additional paid-in capital-excess of par for amount over par

depletion rate

depletion base (cost of natural resource - residual value) / estimated extractable amount of natural resources

stock non cash

evidence of fair value an independent appraisal of the value of the asset the quoted market price the amount of cash that would be paid to purchase the asset selling price established in a recent issue of shares for cash

equipment purchased on interest bearing note payable

if interest rate is realistic, the company records the equipment at the present value of the note payable, which is the face amount of the note

Return on shareholders' equity

net income/avg shareholders equity

MACRS (Modified Accelerated Cost Recovery System)

system used to determine the depreciation of assets for tax purposes equivalent to: the double declining batch method with a switch to straight line

exchanged asset Alamos Co. exchanged equipment and $17,100 cash for similar equipment. The old equipment book value $81,900 and fair value $91,800 Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:

$9,900 gain 91,800 - 81,900 = 9,900 gain Fair value is more than book value = gain

bonds Bonds will sell at:

A premium if the stated rate exceeds the market rate. A premium if the stated rate exceeds the market rate. If the stated rate exceeds the market rate, investors will bid up the price of the bonds (creating a premium) until the effective rate on the bond equals the market rate.

reporting unit

An operating segment or component of a company for which discrete financial information is available that is regularly reviewed by management.

bearer bonds

Bonds made payable to whoever holds them (the bearer); also called unregistered bonds. years ago

stock ex-dividend date

date before which investors must purchase stock in order to receive a dividend usually 2 days before the date of record

retiring stock

paid-in capital in excess of par common stock

error in prior year In 2019, the controller of the Green Company discovered that 2018 depreciation expense was overstated by $50,000, a material amount. Assuming an income tax rate of 40%, the prior period adjustment to 2019 beginning retained earnings would be:

$30,000 credit 2018 net income understated by $30,000. [50,000 x (1 - .40)] = 30,000, causing beginning of 2019 retained earnings to be understated. The adjustment increases beginning retained earnings by the after-tax impact of the error

self-constructed assets

capitalization of interest for the average accumulated expenditures is the weighted-average expenditures during the construction period weighted-average expenditures is determined by weighting the individual expenditures by the number of months from incurrence to the end of the construction period two accounting issues: allocation of overhead and treatment of interest charges formula for capitalizing interest: weighted average accumulated expenditures X interest rate

stock split effected in the form of a stock dividend What is the effect of the declaration and subsequent issuance of a stock split (effected in the form of a stock dividend) on each of the following?

no effect on retained earnings no effect on paid in capital Common stock is increased for the par value of the shares issued, and paid-in capital - excess of par is debited for the same amount. Both of these accounts are paid-in capital accounts.

stock split not effected in the form of a stock dividend What is the effect of the declaration and subsequent issuance of a 5% stock dividend on each of the following?

no effect on retained earnings no effect on paid in capital No journal entry is made. The par value per share is reduced to maintain the same balance in the common stock account.

bond value effective interest method Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the

present value of future cash flows using original rates

capitalized costs of acquiring a building

realtor commissions legal fees to obtain title remodeling building

share mandatory redeemable preferred stock

reported as a liability on the balance sheet

unasserted claims and assessments

two step process to determine if they should be recognized or disclosed: step 1: is it probable a claim will be asserted? If no - no accrual or disclosure if yes - go to step 2 Step 2 - treat as if claim has been asserted (requires evaluating: the likelihood of an unfavorable outcome, whether dollar amount an be estimated) Then recognize contingency if conditions are met and amount can be estimated; otherwise disclose

Goodwill James company acquires Smith corporation for $10 million. The book value of Smith's net assets is $7 million, and fair value of net assets is $9 million. Goodwill will be recorded at:

$1 million $10 - 9 mill = 1 million

double declining balance partial year On October 1, year 1, Johnson Corp. purchased equipment for $100,000. The equipment has a useful life of 5 years with no residual value. Johnson uses the double-declining-balance method of depreciation. The partial year depreciation for year 1 is:

$10,000 the depreciation rate is 1/5 x 2 = 40%. 100,000 x 40% x 1/4 = 10,000 depreciation expense in year 1

depletion Felix Mining acquired a copper mine at a total cost of $3,000,000. The mine is expected to produce 6,000,000 tons of copper over its five-year useful life and have no residual value. During the first ear of opperations, 750,000 tons of copper was extracted. Depletion for the first year should be:

$375,000 750,000 / 6,000,000 = .125 depletion rate 3,000,000 x .125 = 375,000 or 3,000,000 / 6,000,000 = .50 .50 x 750,000 = 375,000

IFRS impairment standards

1) impairment loss reversal is required if initial impairment circumstances are resolved 2) record impairment loss on asset when book value exceeds the higher of: present value of estimated future cash flows or fair value less costs to sell 3) test for impairment at the end of each reporting period 4) impairment loss is the difference between book value and the recoverable amount

capitalized interest

Interest costs recorded as assets rather than interest expense assets built for company's own use assets build as discrete projects for sale or lease types of interest: specifically for a construction project other loans during the period of construction when unable to associate specific debt with projects, company should use the weighted-average interest rate on all interest-bearing debt (including construction loans) to compute capitalized interest begins with first expenditure ends when either the asset is substantially complete and ready for use or interest costs are no longer being incurred disclosure requirement: total amount of interest capitalized

Statement of Shareholders' Equity

It provides a detailed account of the firm's activities in the following accounts: Common stock & Preferred stock account, Retained earnings account, and Changes to owners' equity. when available for sale debt securities increase in value at year end, unrealized gains are reported as an increase in comprehensive income

bond price The price of a corporate bond is the present value of its face amount at the market or effective rate of interest:

Plus the present value of all future interest payments at the market or effective rate of interest. The price of a bond is equal to the present value of all future cash outflows, principal and interest, using the market or effective rate.

Shareholder Preemptive Rights

Preemptive rights give SHs the right to purchase the same percentage of newly issued stock as she currently holds of the total outstanding voting shares -- allows SHs to prevent their individual voting power from being diluted by the issuance of new shares (bc SH can maintain her current % of the total shares in the corp) *Must be expressly specified in the articles*

Net income

Revenues - Expenses items reported on income statement as net income: gain on sale of land, increase in fair value of investments in trading securities, loss on sale of patent, increase in fair value of bonds outstanding; fair value option

equipment exchange Felix Corporation exchanges equipment in a transaction that has commercial substance. The original cost of the equipment exchanges was $100,000, accumulated depreciation at date of exchange $80,000. Felix paid $30,000 cash to exchange the old equipment. The new asset received had a book value of $35,000 on the transferor's books. The fair values of the assets are unknown. What journal entries are required?

Since fair value of the new equipment is unknown, the value is the book value of the asset given up: (100,000 - 80,000 = 20,000) + cash paid $30,000 = 50,000 debit equipment new $50,000 debit accumulated depreciation $80,000 credit equipment old $100,000 credit cash $30,000

double declining balance method of depreciation On January 1, year 1, Paisley Corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation The asset has a 10-year useful life and a $10,000 residual value. What is the book value at the end of year 1?

The depreciate rate is 2 x 1/10 = 20% 200,000 x 20% = 40,000 depreciation expense in year 1 book value at the end of year 1 is cost less accumulated deprecition $200,000 - 40,000 = 160,000

When a note is issued in exchange for a machine, and interest on the note is not stated:

The note should be recorded at its present value, discounted at an appropriate market rate of interest, if fair values of the note and machine are unavailable GAAP requires use of an appropriate interest rate, if it is not stated and the fair value of the asset and the note are not known.

mortgage bond

a bond secured by a lien on real property

material error discovered in a subsequent period impacting retained earnings

a prior period adjustment is made tot he beginning balance of retained earnings previous financial statements are retrospectively restated a disclosure note describing the nature of the error and the impact of the correction on net income and earnings per share

Straight-line method of amortization

allocates the same amount to interest expense in each interest period

depreciation

allocation of the cost of a tangible fixed asset debit depreciation expense credit accumulated depreciation

amortization

allocation of the cost of an intangible asset not recorded for intangible assets with indefinite lives

depletion expense

allocation of the cost of natural resources to the periods extracted Portion of the cost (less the estimated residual value) of a natural resource asset that a company allocates as an expense to each accounting period over the asset's service life debit depletion expense credit natural resource

shareholder redemption privilege

allow preferred shareholders the option, under specified conditions, to return their shares for predetermined redemption price

shareholder right of conversion

allows the exchange of preferred stock f or common stock at a specified conversion ratio

IFRS redeemable stock Fancy Imports applies International Financial Reporting Standards. The company issued shares of the company's Class B stock. Fancy Imports should report the stock in the company's statement of financial position

among liabilities if the shares are manditorily redeemable or redeemable at the option of the shareholder. Under IFRS, both mandatorily redeemable and redeemable at the option of the shareholder are reported as liabilities since the critical feature is if the issuer is required to deliver cash to the holder and can be required to deliver cash to the holder.

trademark

an exclusive right to display a symbol, slogan, emblem word, or words legally registered or established by use as representing a company or product. considered indefinite

cost of land and buildings Pinwood company purchased two buildings on 4 acres of land. The lump-sum purchase price was $1,600,000. According to independent appraisals, the fair values were $765,000 (building A) and $425,000 (building B) and $510,000 for the land determine the initial valuation of the buildings and the land

appraisal fair values: 510,000 + 765,000 + 425,000 = 1,700,000 determine % of cost for each: land: 510,000/1,700,000 = 30% building A: 765,000/1,700,000 = 45% building B: 425,000/1,700,000 = 25% fair value x % of total fair value = initial valuation (% x 1,600,000) land: 30% x 1,600,000 = 480,000 building A: 45% x 1,600,000 = 720,000 building B: 25% x 1,600,000 = 400,000

addition

capitalized and depreciated over the remaining useful life of original asset or its own useful life, whichever is shorter example: a adding a new computer aided cutting device to an existing machine

stock issue Justin Corp issues 10,000 shares of $1 par value common stock for $5 per share. The journal entry to record this transaction will include

debit cash $50,000 credit common stock par $10,000 credit additional paid in capital in excess of par $40,000

IFRS - IAS No. 26

government grants are recognized in income over a period of time

bond discount AMC Corporation issued bonds at a discount. The long-term liability reported in AMC's balance sheet will:

higher than if the straight-line method were used Increase each year during the term to maturity. The bonds are recorded as maturity value minus unamortized discount. As the discount is amortized to zero, the reported liability increases.

revaluation method

is allowed for pp&E under IFRS only

mining

land purchased is reported in natural resources category

retirement or abandonment of an asset

loss must be recognized for the remaining book value no consideration is received can only be used if t he results do not materially distort income retirement method: depreciation expense is recorded when the assets are disposed of

stock splits effected in the form of dividends

may be recorded: capitalize retained earnings reduce the paid in capital in excess of par account

held for sale impairment

measured as the excess of the book value over the fair value, less costs to sell test for impairment when events or circumstances indicate book value may not be recoverable

fixed-asset turnover ratio

net sales/average fixed assets used to measure how effectively a manager is using plant, property and equipment

stock repurchases

often used to offset the effects of shares issued for stock awards and stock option programs

bond interest

periodic interest rate paid by bond issuers also called: coupon rate, nominal rate, stated rate

note payable - loan with lump-sum principal payment at maturity

periodic payment does not include a portion of principal

note payable - installment loan

periodic payment includes interest and a portion that reduces the outstanding loan

Substance over form

phrase used to indicate that accounting and reporting should reflect the underlying economic essence of a transaction

shareholder participating

preferred shareholders may receive additional dividends about that amount stated in the preferred stock certificate

stock dividend large

reduces retained earnings by par and increases common stock by par

implicit interest rate

the rate that equates the cash received with the amounts to be paid in the future used in situations when the interest rate is not readily apparent the rate used to measure and account for the transaction

comprehensive income

total change in equity for a reporting period not arising from transactions with owners

zero coupon bond

issued at deep discount and redeemed at full face value pay no interest

change in depreciation, depletion or amortization method

treated as a change in estimate that is achieved by a change in accounting principle accounted for prospectively in the current and future periods

Effective-interest method of amortization

recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period The process of transferring a portion of the premium or discount to interest expense; this method results in a constant effective interest rate

stock split in the form of a large dividend

reduces paid-in capital-excess of par has no effect on the par value of the stock

lump-sum acquisition of assets

requires an allocation is made to each individual asset based on the asset's relative fair value

Corporation (Private)

shares are held by only a few individuals

government grant

GAAP credit revenue (amount donated) credit cash (amount out of pocket) debit to asset (entire amount)

bargain purchase

fair value of net assets exceed the fair value of the consideration exchanged recorded as a gain on the income statement in the year of acquisition

note payable

annual payments - interest expense is calculated on the carrying value of the note, not book value

error correction Evans corp. incorrectly expensed $10,000 in the previous year when it purchased equipment. The entry to correct this error will include a:

credit to retained earnings

asset exchange Horton Stores exchanged land and cash of $4,700 for similar land. Book value $89,500 and fair value of $101,900 Assuming the exchange lacks commercial substance, Horton would record land-new and a gain/(loss) of:

land: 94,200 gain(loss): 0 land: book value + cash paid 89,500 + 4,700 = 94,200 the exchange lacks commercial substance and the new land is valued at the book value of the old land + cash given No gain is recognized because the exchange does not have commercial substance.

liability classification

liabilities are generally divided into current and long-term categories helps investors and creditors assess the risks associated with liabilities that require expenditures of cash or other assets in the near term

dividend cash

shareholder receives dividends in cash. reduces retained earnings and reduces cash (current asset)

capitalization of R&D

technologically feasible software development costs R&D purchased in a business acquisition R&d performed for sale to others when R&D is performed for other companies under contract, R&D costs are capitalized to the inventory account

indefinite life intangibles except for goodwill

test for impairment at least annually, or more frequently if indicated no amortization is recorded

held for use

that have significant impairment of value should be written down

depreciation Asset C3PO has a depreciable base of $20.35 million and a service life of 10 years. What would accumulated depreciation be at the end of year five under the sum-of-the-years-digits method?

$14.80 million denominator: 10(10+1)/2 = 55 numerator: sum of years 20.35 x [(10 + 9 + 8 + 7 + 6)/55] = 14.8

annualized effective interest rate Klein Corp. obtains a 6-month noninterest-bearing loan from its financial institution. The company signs a note for $10,000 and receives $9500 from the bank. What is the annualized effective interest rate on this loan?

10.53% (500/9500) x 12/6

Donated Assets

Donated assets are recorded at their fair value

commercial substance

In accounting for exchanges of nonmonetary assets, the basis for measuring the gain or loss on an exchange. If the future cash flows change (if the two parties' economic positions change) as a result of the transaction, the transaction is said to have commercial substance, and the parties to the exchange recognize a gain or loss on the exchange.

bond amortization schedule In a bond amortization table for bonds issued at a discount

The total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid Total interest expense for bonds issued at a discount is equal to the total interest payments over the life of the bonds plus the initial discount when the bonds are sold.

present value calculations in traditional approach

incorporates risk and uncertainty

subsequent expenditures

increase future benefits if: 1) extends useful life 2) increases quality of goods produced by the asset 3) increases operating efficiency of the asset repairing a major roof leak three years after use, cost of installing solar panels after three months of use of the building, additions, repairs and maintenance, improvemetns

capitalized cost of manufacturing equipment

insurance during transit freight-in set up cost purchase price trial runs

factoring receivables

the sale of accounts receivables to obtain short-term financing

patent

exclusive rights to manufacture a product or to use a process when developed internally, R&D cost are expensed as incurred

natural resources - full-cost method during 2017, the Mont Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2017 in Montana. 13 were dry holes. Most uses the full-cost method of accounting. Assuming that none of the oil found is depleted in 2017, what oil exploration expenses would be charged in 2017 on the income statement?

$0 the full-cost method allows for costs incurred in searching for oil and gas to be capitalized as assets and expensed when well is later depleted

IFRS revaluation

a revaluation surplus is included in other comprehensive income a revaluation resulting in a write-down is included as expense on the income statement possible only if: fair value can be determined by reference to an active market

bond between interest date On September 1, 2016, Contemporary Products, issued $16 million of its 10% bonds at face value. The bonds are dated June 1, 2016, and mature on May 30, 2026. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Contemporary Products would receive cash proceeds that would include accrued interest of:

$400,000 ($16,000,000 x 10% x 3/12).

bond discout On January 1, 2016, Blair Company sold $800,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $708,000, priced to yield 12%. Blair records interest at the effective rate. Blair should report bond interest expense for the six months ended June 30, 2016 in the amount of:

$42,480 $42,480: Under the effective interest method, the interest expense is computed as the beginning book value of the debt times the yield interest rate. ($708,000 x .12 x 6/12).

construction On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30,2019. Expenditures on project were as follows: January 1, 2018: $331,000 September 1, 2018: $492,000 December 31, 2018: $492,000 March 31, 2019: $492,000 September 30, 2019: $331,000 Dreamworld had $6,400,000 in 12% bonds outstanding through both years. Dreamworlds average accumulated expenditures for 2018 was:

$495,000 2018: 1/1/18: 331,000 x 12/12 = 331,000 9/1/18: 492,000 x 4/12 = 164,000 12/1/18: 492,000 x 0/12 = 0 2018 total $495,000

change is residual value On January 1, 2016, the Holloran Corporation purchased a machine at a cost of $55,000. The machine was expected to have a service life of 0 years and a $5,000 residual value. The straight-line depreciation method was used. In 2018 the estimate of residual value was revised from $5,000 to zero. Depreciation for 2018 should be: Assume in 2018, the company switched to the sum-of-the-years-digits depreciation method. Depreciation for 2018 should be:

$5,625 initial straight-line depreciation is 5,000 per year (55,000 - 5,000) / 10 revised depreciation after two years is: [55,000 - (2 x 5000] / 8 = 5,625 change to sum-of-the-years-digits: 8,889 [55,000 - (2 x 5000) - 5000] x 8/36 = 8,889

bond warrant On March 1, 2016, Big Brands Corporation issued $600,000 of 10% bonds at 105. Each $1,000 bond was sold with 50 detachable stock warrants, each permitting the investor to purchase one share of common stock for $35. On that date, the market value of the common stock was $30 per share and the market value of each warrant was $4. Big Brands should record what amount of the proceeds from the bond issue as an increase in liabilities?

$510,000 Big Brands received $630,000 from the issue of the 600 bonds and 30,000 warrants (600 bonds x 50 warrants per bond). The total market value of the warrants is $120,000 (30,000 warrants x $4). Thus the remaining $510,000 of the proceeds is allocated to the bonds.

non R & D cost

adaptation of an existing capability for a customer routine efforts to improve an existing product engineering follow-through in early phases of commercial production

self-constructed incremental approach

advocate including only the additional overhead costs incurred in the construction of the asset

bond between interest date On September 1, 2016, Expert Materials, issued at 98 plus accrued interest, $800,000 of its 10% bonds. The bonds are dated June 1, 2016, and mature on May 30, 2026. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Expert would receive cash of:

$804,000 $784,000 ($800,000 x .98) + $20,000 ($800,000 x .10 x 3/12).

straight-line method On January 2, 2018, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and December 31. Yves decides to utilize the straight-line method of amortization. On December 31, 2018 Yves should debit interest expense for

16,000 15,000 + 10000 amortization

depreciation change in estimate Fellingham Corporation purchased equipment on January 1, 2016, for $272,000. The company estimated the equipment would have a useful life of 10 years with a $18,800 residual value. Fellingham uses the straight-line depreciation method. Early in 2018, Fellingham reassessed the equipment's condition and determined that its total useful life would be only six years in total and that it would have no salvage value. How much would Fellingham report as depreciation on this equipment for 2018?

55,340 (272,000 - 18,800)/10 = 25,320 x 2 = 50,640 change in estimate: (272,000 - 50,640)/(6-2) = 55,340

average age Jennings Advertising Inc. reported the following in its December 31, 2018, balance sheet: equipment: 280,000 accumulated depreciation - equipment: $154,560 In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value at 8% of cost. What is the average age of the equipment owned by Jennings?

6 years 280,000 x 8% = 22,400 salvage 280,000 - 22,400 = 257,600 depreciation base 257,600/10 = 25,760 depreciation per year 154,560/2576 = 6 yrs average age

bond effective interest recognized On January 2, 2018, Meister Company issues $200,000 of 6% bonds. Interest of $6000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years. The bond issues for $191,684 with an effective interest rate of 7%. Effective interest recognized on June 30, 2018 will be equal to (round to whole dollars)

6,709 191,684 x .035

Return on shareholders' equity (ROE)

amount of profit management can generate from the assets that owners provide. computed: net income/average shareholders equity when preferred stock is outstanding, variation of ROE: net income - preferred stock dividends/average common shareholders equity limitation of: it uses book value of equity

accelerated depreciation

A higher amount of depreciation is recorded in the early years and a lower amount in the later years appropriate for: an asset that will be used extensively i n earlier years of its life for an asset that has high repair and maintenance costs later in life

IFRS Grants Cranston LTD prepares its financial statements according to IFRS. In October 2018, the company received a $6,000,000 grant, that represents 16% of the total cost of equipment that will be used to improve the roads in the local area. Cranston recorded the grant and the purchase of equipment as follows: debit cash $6,000,000 credit equipment $6,000,000 debit equipment $37,500,000 credit cash $37,500,000 Prepare the correcting entries required under the two alternative accounting treatments allowed under IFRS

Alternative 1: debit revenue $6,000,000 credit equipment $6,000,000 Alternative 2: debit revenue $6,000,000 credit deferred revenue $6,000,000

sum-of-the-years'-digits (SYD) method of depreciation

an accelerated method where depreciation expense decreases each year by decreasing the numerator each year in the depreciation rate

cost of land On March 1, 2018 Beldon Corp purchased land as a factory site for $72,000. An old building on the property was demolished, and construction began on a new building that was completed on December 15, 2018. Costs incurred in 2018: demolition of old building $5,000 Architect's fees (new building) $11,000 Legal fees for title investigation of land $8000 Property taxes on land (beginning March 1, 2018) $4,200 Construction costs $620,000 Interest on construction loan $6,000 Salvaged materials resulting from the demolition of the old building were sold for $3,200 Determine the amounts that Beldon should capitalize as the cost of the land and new building

Capitalized cost of land: purchase price: $72,000 Legal fees 8,000 demolition 5,000 salvage -3,200 total cost of land $81,800 Cost of new building: Capitalized cost of building: construction costs $620,000 architects fees 11,000 interest on construction loan $6,000 total cost of building $637,000

bond between interest date If bonds are issued between interest dates the entry to record the issuance of the bonds will:

Include a credit to accrued interest payable Include a credit to accrued interest payable. When bonds are issued between interest payment dates, the cash received is made up of two components: the price of the bond and the interest accrued, but unpaid, since the last interest payment date. The credit relating to the accrued interest portion is interest payable.

Comprehensive Income

Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners. GAAP - may be reported as: a separate statement immediately following the income statement or an expanded version of the income statement

Goodwill

an asset representing the value of a company over and above its identifiable tangible and intangible assets internally developed goodwill are not capitalized and are expensed as incurred

double declining balance depreciation A machine is purchased on September 30, 2018 for $60,000. useful life is estimated at 4 years, with no residual value. The company's fiscal year ends on December 31. What is double declining Depreciation for 2019? Straight-line depreciation method depreciation for 2018?

Double declining balance: 26,250 2018 depreciation: 60,000 x 50% x 3/12 = 7,500 2019 depreciation: 60,000 x 50% x 9/12 = 22,500 + 60,000 - 30,000 x 50% x 3/12 = 3,750 7500 + 22,500 + 3750 = 26,250 Straight line depreciation 2018: 3,750 [1/4 x (60,000/4)] = 3,750

corporation raise capital

Equity financing: issuing stock, creates ownership interests in the assets, owners of corporation are its shareholders, operating at a profit debt financing: issuing debt, notes, bonds, leases and other liabilities, creates creditors' interest in the assets of the business

notes payable On July 1, 2018 Ross-Livermore Industries issued nine-month notes in the amount of $600 million. Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions

Fiscal Year Ends: Principal (million) x Rate x Time = Interest Expense December 31, 2018 $600 x 12% x 6/12 = $36 million September 30, 2018 $600 x 10% x 3/12 = $15 million October 31, 2018 $600 x 8% x 4/12 = $16 million January 31, 2019 $600 x 8% x 7/12 = $28 million

IFRS development costs

GAAP and IFRS treat research costs as an expense IFRS treats development costs as an intangible asset

Property, Plant and Equipment (PP&E)

GAAP valued at: cost less accumulated deprection (book value) IFRS IAS no.16: allows book value or at its fair value (revaluation)

depreciation equipment with maintenance/repairs partial year On June 30, 208, Rosetta Granite purchased a machine for $124,000. The estimated useful life of the machine is 8 years, with no residual value. An important component of the machine is a specialized high-speed drill that will need to be replaced in 4 years. The $22,000 cost of the drill is included in the $124,000 cost of the machine. Rosetta uses the straight-line depreciation method for all machinery. Calculate deprecation for 2018 and 2019 applying GAAP and IFRS

GAAP: 2018: 124,000/8 = 15,500 x (6/12) = 7750 2019: 124,000/8 = 15,550 IFRS: machine cost: 124,000 - 22,000 = 102,000 drill cost: 22,000 2018: machine: 102,000/8 = 12,750 x (6/12) = 6375 drill: 22,000/4 =5500 x (6/12) = 2750 2018 total: 9125 2019: machine: 102,000/8 = 12,750 drill: 22,000/4 = 5500 2019 total: 18,250

goodwill impairment In 2016, Cordova Inc. acquired Cordant Corporation and $140 million in goodwill was recorded. At the end of its 2018 fiscal year, management has provided the following information for a required goodwill impairment test (in millions) Fair value of Cordant (approximates fair value less costs to sell) $980 Fair value of Cordant's net assets (excluding goodwill) $900 Fair value of Cordant's net assets (including goodwill) $1,050 Present value of estimated future cash flows $1,000 Assuming that Cordant is considered a reporting unit, the amount of goodwill impairment loss that Cordova should recognize according to GAAP is? Goodwill impairment loss according to IFRS is?

GAAP: $60 million Implied fair value of goodwill of $80 (980 - 900) is $60 less than book value of $140 IFRS: $50 million book value of the cash generating unit of $1,505 - recoverable amount of $1,000 = $50 million. Recoverable amount is the higher of value in use $1,000 (present value of estimated cash flows) and fair value less costs to sell $980

goodwill

GAAP: intangible should be recognized apart from goodwill when: it is an identifiable asset, it arises from contractual or legal rights, it can be separated from the acquired entity characteristics: indefinite life subject to impairment testing cannot be separable from company as a whole cannot be directly associated with any specific identifiable right

bond discount When a bond issue sells for less than its face value, the market rate of interest is:

Higher than the stated rate of interest. Higher than the stated rate of interest. The discount created will be amortized to generate additional interest expense (recognized over the life of the bond). This is added to the interest expense created by the periodic interest payments (computed at the stated rate of interest) to increase the total interest expense to that of the market rate of interest.

impairment loss Declarmen Corporation owns factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below are date related to the factory's assets (in millions) book value $570 undiscounted sum of future estimated cash flows $630 present value of future cash flows $525 Fair value less cost to sell (determined by appraisal) $540 The amount of impairment loss that Declarmen should recognize according to IFRS is? The impairment loss according to GAAP>

IFRS: $30 mill book value $570 - fair value less cost to sell $540 = 30 GAAP: none Step 1 of impairment test: Because the sum o f undiscounted cash flows $630 is greater than book value $570, there is no impairment

bonds discount AMC Corporation issued bonds at a discount. The long-term liability reported in AMC's balance sheet will:

Increase each year during the term to maturity. The bonds are recorded as maturity value minus unamortized discount. As the discount is amortized to zero, the reported liability increases.

balance sheet intangible assets and journal entries Janes Company provided the following information on intangible assets: a. A patent was purchased from the Lou Company for $1,700,000 on January 1, 2016, with estimated useful life of the patent to be 10 years. The patent was carried on Lou's accounting records at a net book value of $550,000, when Lou sold it to Janes. b. During 2018, a franchise was purchased from the Rink Company for $700,000, with contractual life of 10 years. Janes records a full year of amortization in the year of purchase. c Janes incurred research and development costs in 2018 as follows: materials/supplies $160,000 personnel $200,000 indirect costs: $80,000 total $440,000 d. Effective January 1, 2018, based on new events, Janes estimates the remaining life of the patent purchased from Lou is only 5 more years. 1) prepare entries for years 2016 - 2018 2) prepare a schedule showing the intangible asset section of Janes December 31, 2018 balance sheet

Journal entriles: 1/1/16 debit patent $1,700,000 credit cash $1,700,000 amortization expense: december 31, 2016 and 2017: (1,700,000/10) = 170,000 per yr 12/31/16 debit amortization expense $170,000 credit patent $170,000 12/31/17 debit amortization expense $170,000 credit patent $170,000 12/31/18 debit franchise $700,000 credit cash $700,00 amortization of patent: (700,000/10) = 70,000 per year 12/31/18 debit amortization expense $70,000 credit franchise $70,000 5/20/18 debit research and development expense $440,000 credit cash $440,000 amortization of patent service life change: cost: 1,700,000 previous annual amortization (1,700,000/10) = 170,000 per year 2 yrs: 170,000 x 2= 340,000 (1,700,000 - 340,000 = 1,360,000)/5 = $272,000 12/31/18 debit amortization expense $272,000 credit patent $272,000 2) partial balance sheet on December 31, 2018 franchise: 700,000 - 70,000 = 630,000 patent: 1,360,000 - 272,000 = 1,088,000 Intangible assets: Franchise: $630,000 Patent: $1,088,000 total intangibles $1,718,000

declining balance depreciation

Multiply cost less accumulated depreciation by an annual rate that is a multiple of the straight-line rate

stock treasury stock reissued In yr 1, Rim corp purchases 1,000 shares of treasury stock for $10 per share. In yr 2, Rim reissues 100 shares of treasury stock for $12 per share. In yr 3, Rim reissues 500 shares of its treasury stock for $9 per share. The journal entry in yr 3 to record re-issuance of treasury stock: In yr 1, Clark purchased 1,000 shares of treasury stock for $10 per share. In yr 2, Clark reissued 200 shares of treasury stock for $14 per share. Journal entry to record the yr 2 transaction: In yr 1, Boise purchased 10,000 shares of treasure stock for $5 per share. In yr 3, Boise reissued 1,000 shares of treasury stock for $8 per share. The journal to record the transaction in yr 3:

Rim: debit paid-in capital-treasury shares $200 debit retained earnings $300 Clark: credit treasury stock for $2,000 Boise: credit treasury stock $5000 credit paid in capital - treasure stock $3,000 when reissued at more than purchase price debit cash credit treasure stock (at original purchase price) credit paid in capital-share repurchase (amount over original purchase price) when reissued at less than purchase price debit cash debit paid in capital - share repurchase (up to balance) debit retained earnings (to balance) credit treasury stock (at purchase amount)

Contingent Liability

a potential liability that depends on some future event liability is accrued if it is BOTH: probable the confirming event will occur and the amount can be at least reasonably estimated dollar amount is classified as: known, reasonably estimable

IFRS Goodwill Impairment

book value of the cash generating unit - recoverable amount = goodwill impairment loss recoverable amount is the higher value of in use (present value of estimated cash flows) and fair value less costs to sell

fair value of impaired asset

can use: price of similar assets the market price of the asset the sum of the discounted expected cash flows cannot use: sum of the undiscounted expected cash flows

improvement

The cost of replacing a major component of an asset with a new component with the same characteristics recording cost of improvements: capitalize the cost of the new component reduce the accumulated depreciation account record a disposition of the old component and an acquisition of the new component

registered bond

a bond registered in the owner's name by the issuing company present day

stock treasury Treasury stock transactions may cause:

a decrease in the balance of retained earnings The only impact on shareholders' equity accounts of treasury stock transactions are: Paid-in capital - treasury stock may either increase or decrease, and retained earnings may decrease.

Quasi Reorganization Linwood corp has a deficit in retained earnings of $100,000 after revaluing all accounts in a quasi reorganization. Prior to the quasi reorganization, Linwood had a balance of $75,000 in the common stock account and $120,000 in paid in capital excess of par. The journal required to eliminate the deficit in retained earnings:

a firm undergoing financial difficulties, but with favorable future prospects, may use a quasi reorganization to write down inflated asset values and eliminate an accumulated deficit. steps: 1) revalue assets 2) eliminate the deficit balance in retained earnings 3) date retained earnings effect on the balance sheet is to restate assets at fair value Linwood: debit pain in capital in excess of par $100,000

fair value Brubaker Company issued 11% bonds, dated January 1, with a face amount of $400,000 on January 1, 2016. The bonds sold for $369,908 and mature in 2035 (20 years). For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Brubaker determines interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2016, the fair value of the bonds was $365,000 as determined by their market value on the NYSE. Brubaker's statement of comprehensive income for the year will include:

a gain from change in the fair value of debt of $5,309 A gain from change in the fair value of debt of $5,309. This is the difference between the fair value and the book value at Dec. 31, where the book value is the $369,908 increased by the discount amortization on June 30 and Dec. 31. Any portion of the change in fair value attributable to a change in general interest rates is reported in net income; any portion due to a change in credit risk is reports as OCI. Either way, net income or OCI, it increases total comprehensive income.

bond indenture

a legal document that details all the conditions relating to a bond issue includes specific promises made to bondholders he.d by a trustee (commercial bank or other financial institution)

Reverse stock split

a method used to raise the market price of a firm's stock by exchanging a certain number of outstanding shares for one new share

IFRS shareholders equity

classifed at: share capital and reserves

amortization of bond discounts

results in the bond being valued at the present value of the associated future cash flows on the balance sheet

stockholder common

rights: vote for corporate directors dividends when declared distribution of assets in liquidation

stock combination Sanderson Sofas, a family-owned corporation, issued 6.75% bonds with a face amount of $12 million, together with 2 million shares of its $1 par value common stock, for a combined cash amount of $22 million. The market value of Sanderson's stock cannot be determined. The bonds would have sold for $9 million if issued separately. Sanderson should record for paid-in capital - excess of par on the transaction in the amount of:

$11 million Increase each year during the term $13 million ($22 - $9) would be allocated to the common stock. The Common stock account would be credited for $2 million, with the remaining $11 million going to paid-in capital - excess of par to maturity. The bonds are recorded as maturity value minus unamortized discount. As the discount is amortized to zero, the reported liability increases.

costs of successfully defending intangible rights

GAAP: capitalized and amortized over the remaining useful life of related intangible right IFRS: expensed, except when expenditure increases future benefits of intangible right

patent In January of 2018, the Phillips Company purchased a patent at a cost of $100,000. In addition, $10,000 in legal fees were aid to acquire the patent. The company estimated a 10 year useful life for the patent and uses the straight-line amortization method for intangible assets. In 2020, Phillips spent $25,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 20108 related to the patent should be:

$113,000 unamortized balance at 1/1/2020: [8/10 x (100,000 / 10,000)] = 88,000 88,000 would be written off in 2020, along with the 25,000 in legal fees

stock property dividend Encore Industries owned investment securities with a book value of $45 million on August 12. At that time, Encore's board of directors declared a property dividend consisting of these securities. The fair value of the securities was as follows: What amount of gain should Encore recognize in earnings in connection with this property dividend?

$13 million

stock treasury The corporate charter of CD, Inc. authorized the issuance of 6 million, $1 par common shares. During 2016, its first year of operations, Pharaoh had the following transactions: Feb 4 - sold 4 million shares at $15 per share Oct 12 - purchased 1 million treasury shares at $18 per share Dec 30 - sold 1 million treasury shares at $20 per share What amount should CD report as additional paid-in capital in its December 31, 2016, balance sheet?

$58 million On Feb 4, additional paid-in capital was credited for $56 [4 million shares x $14/share ($15 - $1 par)]. On Oct 12, there was no impact on the account. On Dec 30, it was credited for $2 [1million shares x $2/share ($20 - $18 cost)].

straight line depreciation

(cost-residual value)/useful life

goodwill impairment GAAP In 2016, Alliant Corporation acquired Centerpoint Inc. for $390,000,000, of which $60,000,000 was allocated to goodwill. At the end of 2018, management has provided the following information for a required goodwill impairment test: Fair value of Centerpoint $306,000,000 Fair value of Centerpoint's net assets (excluding goodwill) $270,000,000 Fair value of Centerpoint's net assets (including goodwill) $330,000,000 1) determine impairment loss 2) determine impairment loss assuming the fair value of Centerpoint is $366,000,000

1) to determine impairment loss first determine the implied fair value of goodwill: Fair Value of Centerpoint $306,000,000 Fair value of centerpoint's assets (excluding goodwill) $270,000,000 implied fair value: 306,000,000 - 270,000,000 = 36,000,000 measurement of impairment loss: book value of goodwill $60,000,000 - implied fair value of goodwill 36,000,000 = impairment loss of 24,000,000 2) because fair value of the reporting unit is $366,000,000 exceeds the book value of $330,000,000 there is no impairment loss

construction Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $80,000. Interest computed on the average accumulated expenditures for the warehouse construction was $60,000. What amount of interest should Liddy expense for the year.

50,000 incurred interest: 30,000 + 80,000 = 110,000 less interest computed on construction loan 110,000 - 60,000 = 50,000

cost of land On July 1, 2018, Larkin Co. purchased a $560,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2018 as follows: demolition $80,000 legal and other fees to close escrow $13,300 Proceeds from sale of scrape $9500

643,800 560,000 + 80,000 + 13,300 - 9,500 = 643,800

Teradene Corp purchased land as a factory site and contracted with Maxtor Consturction to building a factory. Tereadene made the following expenditures related to the acquisition of the land, building and equipment for the factory: purchase price of land $1,310,000 demolition and removal of old building $91,000 clearing and grading the land before construction $205,000 various closing costs in acquiring the land $53,000 architect's fee for plans new building $61,000 payments to Maxtor for building construction $3,360,000 equipment purchased $915,000 freight on equipment $43,000 trees, plans landscaping $56,000 sprinkler system installation for landscaping $6,100 cost to build special platforms and install wiring for the equipment $23,000 cost of trial runs to ensure proper installation of equipment $8,100 Fire and theft insurance on factory for first year of use $35,000 In addition, Teradene purchased four forklifts from Caterpillar, $27,000 cash and signed a noninterest-bearing note requiring the payment of $81,000 in one year. An interest rate of 8% properly reflects the time value of money for this type of loan. Determine the initial valuation of each of the assets acquired in the above transactions

Land: purchase price $1,310,000 demo and removal $91,000 clearing/grading $205,000 closing costs $53,000 total land cost $1,659,000 Building: architects fees $61,000 construction $3,360,000 total building cost $3,421,000 equipment: purchase price: $915,000 freight: $43,000 special platform $23,000 trial runs $8,100 total cost of equipment $989,100 Land improvements: lanscaping $56,000 sprinkler $6,100 total cost of land improvements $62,100 Forklifts: PV = 27,000 + [81,000 x .92593] = 102,000 Present value of $1: n=1, i=8% from PV of $1 Prepaid insurance: $35,000

fair value of bonds

change in interest rates cause changes in the fair value of liabilities (bonds payable) change results in a reported gain or loss decline in market interest rates = rise in bond prices

lump-sum purchase of assets

cost must be allocated to the individual assets because the assets have different useful lives

stock retired In year 1, Sofia Corp issued 1,000 shares of $1 par value common stock for $10 per share. In year 4, Sofia repurchased and immediately retired 100 shares of stock a t $6 per s hare. Journal entries in year 1, Frill corp issued 1,000 shares of $1 par value common stock for $10 per share. In year 3, Frill repurchased and immediately retired 100 shares of the stock a t $12 per share. Journal entries:

debit paid-in capital-excess of par debit common stock (par amount) credit cash Sofia: debit common stock - par $100 debit additional paid in capital excess of par $900 credit additional paid in capital - share repurchase $400 credit cash Frill: debit common stock - par $100 debit additional paid in capital excess of par $900 debit retained earnings $200 credit cash reduces: retained earnings, common stock and paid-in capital in excess of par stock is immediately retired: equity accounts are reduced for the amount in which the shares were originally sold (paid in capital in excess of par, common stock and retained earnings)

start-up Freitas corporation was organized early in 2018. The following expenditures were made during the first few months of the year: attorneys fees in connection with the organization of the corporation $15,200 state filing fees and other incorporation costs $6,400 purchase of a patent $22,600 legal and other fees for transfer of the patent $4,500 purchase of equipment $32,800 pre-opening salaries $43,100 total $124,600 prepare a summary journal entry to record the $124,600 in cash expenditures

journal entries: debit start up expenses $43,100 debit equipment $32,800 debit patent $27,100 debit organization cost expenses $21,600 credit cash $124,600 patent: (22,600 + 4500) = 27,100 organization cost expense: (15,200 + 6,400) = 21,600

asset exchange Horton Stores exchanged land and cash of $4,500 for similar land. Book value $88,600 and fair value of $102,000 Assuming the exchange has commercial substance, Horton would record land-new and a gain/(loss) of:

land: 106,500 gain $13,400 fair value is greater than book value = gain 102,000 - 88,600 = 13,400 gain land price = fair value + cash paid 102,000 + 4,500 = 106,500

bond discount When bonds are issued at a discount and interest expense is recorded at the effective interest rate, interest expense in the earlier years of the term to maturity will be:

less than if the straight line method were used Less than if the straight-line method were used. Under the effective interest method, the interest expense is computed by multiplying the market rate times the beginning-of-period book value. As the discount is amortized, the book value increases, causing the interest expense to increase over time. Since the total interest expense is the same regardless of the method used, the interest expense will be less than straight-line in the earlier years (and higher in later years).

Accrued Liabilities

liabilities for expenses that have been incurred but not paid at the end of the accounting period interest payable, wages and salaries payable, income tax payable

indefinite life intangible

normally have a zero residual value except if a company has a commitment from another company to purchase its indefinite life intangible asset at the end of its useful life at a specific price, the company uses the pre-specified sale price as a residual value should be tested for impairment annually or more frequently if events or changes in circumstances indicate possible impairment

held for sale assets

not depreciated or amortized If fair value less costs to sell is below book value, an impairment loss is recognized

noninterest-bearing note

notes that bear interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset. purchase value/total loan amount = factor use PV of $1 to find interest rate if interest rate is unknown, and the fair value of the asset is available from price lists and previous purchases, the asset is valued at the fair value of the asset

bond detachable stock warrants

warrants can be exercised separately from the bonds warrants can be sold by the bondholder to another investor issue price is allocated between debt and equity

intangilbe assets

recorded at original purchase price two categories: intangibles with indefinite lives intangibles with finite lives when acquired in a business acquisition that are technologically feasible: expensed immediately if abandoned tested for impairment amortized over the estimated life IFRS: intangible assets may be valued at cost less accumulated amortization or fair value method of amortization: should reflect the pattern of use of the asset is most commonly straight-line

depreciation A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation for the second year of the asset's life using the sum-of-the-years-digits method is: depreciation for the second year of the asset's life using the double declining balance method is:

sum-of-the-years-digits: 7,000 (40,000 - 4000) x 7/36 double declining balance: 7,500 [40,000 - (2/8 x 40,000)] x 2/8

assets to be sold impairment

test for impairment when classified as held for sale

interest capitalization On January 1, 2018 the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The only interest-bearing debt the company had outstanding in 2018 was long-term bonds with a book value of $10,200,000 and an effective interest rate of 10%. Construction expenditures in 2018: January 1: $520,000 March 1: $612,000 July 31: $492,000 September 30: $620,000 December 31: $320,000 calculate the amount of interest capitalized for 2018

weighted average: 1/1: 520,000 x 12/12 = 520,000 3/1: 612,000 x 10/12 = 510,000 7/31: 492,000 x 5/12 = 205,000 9/30: 620.000 x 3/12 = 155,000 12/31: 320,000 x 0/12 = 0 total: 1,390,000 average accumulated expenditures: 1,390,000 x 10% = 139,000 capitalized interest in 2018

change in estimates

would be treated on a prospective basis in the current and future periods: change in useful life of an asset and increasing the residual value of an asset

stock retire The balance sheet of Epsom Services included the following shareholders' equity section at December 31, 2016: common stock ($1 par value, 100 authorized, 90 million issued and outstanding) $90 million Paid-in capital excess of par $540 million retained earnings $280 million Total shareholders equity $910 million On January 5, 2017, Epsom purchased and retired 1 million shares for $9 million. Immediately after retirement of the shares, the balances in the paid-in capital - excess of par and retained earnings accounts are:

$534 paid in capital-excess of par $278 retained earnings in millions Common stock is debited for $1 ($1/share x 1); Paid-in capital is debited for $6 ($6/share x 1); Cash is credited for $9; Retained earnings is debited for $2

depreciation Cutter Enterprises purchased equipment for $84,000 on January 1, 2018. 5 year life and $8,700 residual value. Using the sum-of-the-years'-digits method, depreciation for 2019 and book value at December 31, 2019 would be: a) 22,400 and 33,600 respectively b) 20,080 and 38,820 c) 22,400 and 24,900 d) 20,080 and 30,120 (Not)

$20,080 and $38,820 2018: 84,000 - 8,700 x 5/15 = 25,100 2019: 84,000 - 8,700 x 4/15 = 20,080 depreciation for 2019 book value: 84,000 - 25,100 - 20,080 = 38,820

GAAP impairment standards

1) record impairment loss on asset when book value exceeds the undiscounted sum of estimated future cash flows 2) test for impairment when events indicate that book value may not be recoverable 3) impairment loss reversal is prohibited 4) impairment loss is the difference between book value and fair value

bonds - straight-line method -discount on bonds payable On January 2, 2018, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and December 31. Yves decides to utilize the straight-line method of amortization. On December 31, 208, Yves should credit the "discocunt on bonds payable" account for

1000 500,000 x (1-.98)/10

estimated warranty liability Greenbaum inc sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $20,000 (40%) and $30,000 (60%), Year 2: $30,000 (70%) and $20,000 (30%). The company's effective interest rate is 5%. Calculate the estimated warranty liability using the expected cash flow method

49,251 [(20000 x .4) + (30000 x .60) x .95238] + [(30000 x .7) + (20000 x .3) x .90703]

Software Axcel Software began a new development project in 2017. The project reached technological feasibility on June 30, 2018, and was available for release to customers at the beginning of 2019. Development costs incurred prior to June 30, 2018 were $4,300,000 and costs incurred from June 30 to project release date were $1,750,000. The 2019 revenue from the sale of new software were $4,000,000 and the company anticipates additional revenues of $6,000,000. The economic life of the software is estimated at 4 yrs. Amortization of the software development costs for the year 2019 would be:

700,000 development cost for capitalization occur AFTER feasibility is established until the release date The periodic amortization is the greater of percentage of revenue or straight line method of the softwares useful life staright line: 1,750,000/4 = 437,500 Percent of revenue method: revenue received from sale/total anticipated revue x cost after feasibility and before release 4,000,000/10,000,000 = .40 x 1,750,000 = 700,000

self-constructed asset Baker is building a new warehouse. The warehouse qualifies as a self-constructed asset. During the year, Baker has weighted-average expenditures on the construction project of $600,000. Although Baker does not borrow money specifically to build the warehouse, it has two loans outstanding during the year. Loan A is for $400,000 at 6% interest, and Loan B is for $800,000 at 9% interest. What is the interest rate used to capitalize interest on the warehouse?

8% 400,000 x 6% = 24,000 800,000 x 9% = 72,000 24,000 + 72,000 = 96,000 96,000/1,200,000 = 8%

IFRS revaluation Jasper Inc prepares its financial statements according to IFRS. At end of its 2016 fiscal year, the company chooses to revalue its equipment. The equipment cost $810,000, had accumulated depreciation of $360,000 at the end of the year after recording annual depreciation, and had a fair value of $495,000. After the revaluation, the equipment account will have a balance of:

891,000 495,000/(810,000 - 360,000 = 1.1 810,000 x 1.1 = 891,000

debenture bond

A bond backed only by the reputation of the issuing company. secured only by "full faith & credit" of issuing corporation

stock non-mandatory redeemable preferred stock

IFRS - liability GAAP - equity

land improvements

are capitalized and then expensed over periods benefited by their use

start-up costs

are expensed in the period incurred include legal fees, state fees to incorporate, organization costs, one-time opening costs for a retailer

stock common above par

credit common stock for the par amount credit common stock for the amount in excess of par

stock record date

date that a determination is made as to recipients of a dividend no entry required on the record date

stock split Canton has 60,000 shares of $10 par issued and outstanding. Canton declares a 2-for-1 stock split. What is the par value and number of shares outstanding after the stock split? Miles corp declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles wishes to capitalize retained earnings, the journal entry required to record the stock split would include a debit to:

the division of a single share of stock into more than one share usually decreases the market price per share number of shares outstanding increases par value will not change not effected in the form of a stock dividend: Canton: $5 par and 120,000 shares Miles: debit retained earnings $20,000 or debit paid in capital in excess of par $20,000

patent impairment Jung Inc. owns a patent for which it paid $75 million. At the end of 2018, it had accumulated amortization on the patent of $13 million. Due to adverse economic conditions, Jung's management determined that it should assess whether an impairment loss should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $44 million, and the patent's fair value at that point is $31 million. Under these circumstances, Lester:

would record a $31 million impairment loss on the patent 75 m - 13 m = 62 m book value undiscounted future cash flows $44 m fair value $31 M book value is greater than future cash flows, is impairment loss measurement: book value 62 m - fair value 31 m = 31 m impairment loss

self-constructed assets cost components

direct materials, direct labor and manufacturing overhead

When the 2016 year began, Senatobia Furniture's shareholders' equity included the following: 6 million shares of $1 par common stock $6 million paid in capital - excess of par $114 million 1 million shares of $100 par, 9% cumulative, non participating preferred stock $100 million retained earnings $140 million The company earned $48 million during 2016. At the end of the year, the board of directors declared and paid the contracted amount of preferred dividends as well as $3 per share to common shareholders. No dividends had been declared or paid during 2015. On January 5, the company distributed a 3 for 2 common stock split effected in the form of a stock dividend. What is the balance in retained earnings to be reported on the 2016 balance sheet?

$143 million $140 million (beginning balance) + $48 million (net income) - $27 million (common stock dividend - $3/share x 6 million shares x 3/2 split adjustment) - $18 million [preferred stock dividend - 9% x $100 par x 1 million shares x 2 years (the current year plus one year in arrears)].

depreciation change in estimate Nanki Corporation purchased equipment on January 1, 2016, for $615,000. In 2016 and 2017, Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $11,000 residual value. In 2018, due to changes in technology, Nanki revised the useful life to a total of 5 yrs total with no residual value. What depreciation would Nanki record for the year 2018 on this equipment?

$154,667 (615,000 - 11,000)/8 = 75,500 x 2 = 151,000 2 yrs depreciation change to 5 yrs total, no residual (615,000 - 151,000)/(5-2) = 154,666.67 or 154,667

exchange land Lassiter corp. exchanges land in a transaction that lack commercial substance. Lassiter's original cost of the land exchange was $100,000. In exchange for the land, Lassiter receives a tract of land with a fair value of $200,000 and $50,000 cash. What is the gain that Lassiter should recognize?

$30,000 part of the transaction is a monetary transaction, and a partial gain may be recognized. The total gain is $250,000 received less $100,000 book value given = 150,000 total gain. however, the gain recognized is calculated as: $50,000/(200,000 + 50,000) = 20% 20% x 150,000 = 30,000

bond discount On June 30, 2016, Mabry Corporation issued $5 million of its 8% bonds for $4.6 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2016?

$30,000: Under the effective interest method, the interest expense is computed as the beginning book value of the debt times the yield interest rate. The difference between the interest expense and the interest payment represents the amortization of the discount. Here, the interest expense is $230,000 ($4,600,000 x .10 x 6/12) and the interest payment is $200,000 ($5,000,000 x .08 x 6/12).

double-declining balance On January 1, year 1, Laramy Corp. purchased equipment for $100,000. Laramy uses the double-declining-balance method of depreciation. The equipment has a useful life of 10 years with no residual value. In year 3, Larmy changes to the straight-line method of depreciation. What is the accumulated depreciation at the end of year 3?

$44,000 The DDB rate is 2 x 1/10 = 20% depreciation for 1 yr = 20% x 100,000 = 20,000 The book value at the end of yr 1 is $80,000 depreciation expense in yr 2 is 80,000 x 20% = 16,000 straight line depreciation in yr 3 is 100,000 - 36000/8 = 8,000 accumulated depreciation at end of yr 3 $20,000 + 16,000 + 8,000 = 44,000

stock issue The corporate charter of Pharaoh Tent Co. authorized the issuance of 6 million, $1 par common shares. During 2016, its first year of operations, Pharaoh had the following transactions: Feb 4 - sold 4 million shares at $15 per share Oct 12 - retired 1 million shares at $18 per share Dec 30 - sold 1 million shares at $20 per share What amount should Pharaoh report as additional paid-in capital in its December 31, 2016, balance sheet?

$61 million On Feb 4, additional paid-in capital was credited for $56 [4 million shares x $14/share ($15 - $1 par)]. On Oct 12, it was debited for $14 (1 million shares x $14/share). On Dec 30, it was credited for $19 [1million shares x $19/share ($20 - $1 par)].

stock dividend The following data were reported in the shareholders' equity section of the Jetson Company's comparative balance sheets for the years ended December 31: common stock, $1 par per share: 2016 $306 million 2015 $300 million paid in capital excess of par: 2016 $174 million 2015 $150 million retained earnings: 2016 $314 million 2015 $300 million During 2016, Jetson declared and paid cash dividends of $45 million. The company also declared and issued a stock dividend. No other changes occurred in shares outstanding during 2016. What was Jetson's net income for 2016?

$89 million The beginning balance in retained earnings ($300) + net income (?) - cash dividends ($45) - the amount capitalized in the stock dividend [$6 (common stock) + $24 (paid-in capital - excess of par)] = ending balance in retained earnings ($314).

bonds convertable On June 30, 2016, Kerr Industries had outstanding $40 million of 8%, convertible bonds that mature on June 30, 2017. Interest is payable each year on June 30 and December 31. The bonds are convertible into 2 million shares of $10 par common stock. At June 30, 2016, the unamortized balance in the discount on bonds payable account was $2 million. On June 30, 2016, half the bonds were converted when Kerr's common stock had a market price of $25 per share. When recording the conversion using the book value method, Kerr should credit paid-in capital - excess of par:

$9 million The book value of the bonds converted is $19 million. This is the book value of the 1 million common shares issued. Par value is $10 million, leaving $9 million for paid-in capital-excess of par.

bonds issued between interest dates National Storage issued $90 million of its 10% bonds on April 1, 2016, at 99 plus accrued interest. The bonds are dated January 1, 2016, and mature on December 31, 2035. Interest is payable semiannually on June 30 and December 31. What amount did National receive from the bond issuance?

$91.35 million National Storage received $89.1 million from the sale of the bonds ($90 million x .99) and $2.25 million in accrued interest ($90 million x .05 x 3/6) or ($90 million x .10 x 3/12).

Asset exchange Pensacola Inc. exchanged old equipment for new equipment in two exchange transactions. Each transaction has commercial substance. Equipment A: cash received $12,500 book value $74,600 fair value $81,400 Equipment B: cash received: $9,800 book value: $60,400 fair value: $55,300 For equipment B, Pensacola would record a gain/(loss) of:

($5,100) book value - fair value 60,400 - 55,300 = (5,100)

sale of equipment before service life ends journal entries Mercury Inc purchased equipment in 2016 for $313,000. The equipment was expected to produce 310,000 units over the next 5 years, with residual value of $34,000. The equipment was sold for $167,900 part way through 2018. Actual production was: 2016; 44,000 units, 2017; 70,000 units; 2018; 35,000 units. Mercury uses units-of-production depreciation and all depreciation has been recorded through the disposal date. 1) Prepare journal entries for the sale 2) assume equipment sold for $181,900, prepare the journal entries to record sale

1) debit cash 167,900 debit accumulated depreciation: 134,100 debit loss on sale: 11,000 credit equipment: 313,000 accumulated depreciation: (313,000 - 34000)/310,000 = .90 depreciation rate total accumulated depreciation 2016 through 2018 =149,000 x .90 = 134,100 2) debit cash $181,900 debit accumulated deprecition $134,100 credit gain on sale $3,000 credit equipment $313,000

patent amortization and litigation On September 30, 2016, Leeds LTD acquired a patent in conjunction with the purchase of another company. The patent, valued at $7,600,000 was estimated to have a 10 yr life and no residual value. Leeds uses the straight line method of amortization for intangible assets. At the beginning of January 2018, Leeds successfully defended its patent against infringement. Litigation costs totaled $560,000. 1. calculate amortization of the patent for 2016 and 2017 2. prepare journal entry to record litigation costs in 2018 3. calculate amortization in 2018 4a. prepare journal entry to record 2018 litigation costs, assuming Leeds used IFRS 4b. calculate amortization for 2018 assuming Leeds uses IFRS

1) amortization 2016 & 2017 2016: 7,600,000/10 = 760,000 x (3/12) = 190,000 2017: 7,600,000/10 = 760,000 2) journal to record litigation debit patent $560,000 credit cash $560,000 3) amortization for 2018 7,600,000 - 950,000 (amortization to date) = 6,650,000 + 560,000 litigation = 7,210,000 new unamortized cost 7,210,000/8.75 (10 ys - 1 1/4 yrs) remaining life = 824,000 new annual amortization 4a) IFRS litigation is an expense debit litigation expense $560,000 credit cash $560,000 4b) IFRS 2018 amortization 7,600,000/10 = 760,000

impairment loss IFRS Chadwick Enterprises, Inc. operates several restaurants throughout the Midwest. Three of its restaurants located in the center of a large urban area have experienced declining profits due to declining population. The company's management has decided to test the assets of the restaurants for possible impairment. The relevant information is presented below: book value $7,700,000 estimated undiscounted sum of future cash flows: $4,600,000 fair value $4,100,000 1) determine impairment loss 2) determine impairment loss assuming that the estimated undiscounted sum of future cash flows is $8,000,000 and fair value is $5,600,000

1) book value exceeds the higher of: the asset's value-in-use (present value of estimated future cash flows) and fair value less costs to sell In this case they are the same: $4,100,000 because book value of $7,700,000 exceeds this amount $4,100,000, there is an impairment loss Impairment loss is difference between book value and the recoverable amount (which also is higher of the asset's value-in-use (present value of estimated future cash flows) and fair value less costs to sell. book value: 7,700,000 recoverable - 4,100,000 impairment 3,600,000 2) book value 7,700,000 exceeds fair value less costs to sell/value-in-use $5,600,000 7,700,000 - 5,600,000 = 2,100,000 impairment loss In GAAP,, because the undiscounted sum of future cash flows of $8,000,000 exceeds book value of $7,700,000 there is no impairment loss

impairment loss GAAP Chadwick Enterprises, Inc. operates several restaurants throughout the Midwest. Three of its restaurants located in the center of a large urban area have experienced declining profits due to declining population. The company's management has decided to test the assets of the restaurants for possible impairment. The relevant information is presented below: book value $8,300,000 estimated undiscounted sum of future cash flows: $4,900,000 fair value $4,400,000 1) determine impairment loss 2) determine impairment loss assuming that the estimated undiscounted sum of future cash flows is $8,600,000 and fair value is $5,900,000

1) recoverability test: because the undiscounted sum of future cash flows of $4,900,000 is less than book value of $8,300,000, there is an impairment loss measurement: book value: $8,300,000 fair value: - 4,400,000 impairment $3,900,000 2) recoverability test: because the undiscounted sum of future cash flows is $8,600,000 exceeds the book value of $8,300,000 there is no impairment loss

construction On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30,2019. Expenditures on project were as follows: January 1, 2018: $330,000 September 1, 2018: $495,000 December 31, 2018: $495,000 March 31, 2019: $495,000 September 30, 2019: $330,000 Dreamworld had $6,500,000 in 12% bonds outstanding through both years. The average accumulated expenditures for 2019 by the end of the construction period was: a) 1,379,400 b) 2,145,000 c) 1,709,400 d) 1,072,500 Not correct

1,709,400 2018: 1/1/18: 330,000 x 12/12 = 330,000 9/1/18: 495,000 x 4/12 = 165,000 12/31/18: 495,000 x 0/12 = 0 2018 total expenditures: 1,320,000 2018 average expenditures: 495,000 495,000 x 12% = 59,400 59,400 + 1,320,000 = 1,379,400 2019: 2018: 2,379,400 x 9/9 = 1,379,400 3/1/19: 495,000 x 6/9 = 330,000 9/30/19: 330,000 x 0/9 = 0 2019 average expenditures: 1,709,400

deferred revenue On January 1, 2017, Merkel Company receives $1,814 from a customer related to products to be delivered on December 31, 2018. The company's effective interest rate is 5%. The company regularly sells the products for $2000 in cash. On January 1, 2017, Merkel should recognize deferred revenue of:

1,814 (deferred revenue) 2000 x .9073 = 1814 present value of $1, n=2, i=5%

oil and gas The Manguino OIl Company incurred exploration costs in 2018 searching and drilling for oil a s follows: well 101: $60,000 well 102: $70,000 well 103: $90,000 wells 104-108: $360,000 total: $580,000 It was determined that wells 104-108 were dry holes and were abandoned. Wells 101, 102, and 103 we redetermined to have sufficient oil reserves to be commercially successful. 1. prepare summary journal entry to record the indicated costs assuming that the company uses the full-cost method of accounting for exploration costs. All of the exploration costs were paid in cash 2. prepare summary journal entry to record the indicated costs assuming the company uses the successful efforts method of accounting for exploration costs.

1. full cost method debit oil wells $580,000 credit cash $580,000 2. successful efforts method debit oil wells $220,000 debit exploration expense $360,000 credit cash $580,000

software On September 30, 2018 Athens Software began developing a software program to shield personal computers from malware and syware. Technological feasibility w as established on February 28, 2019, and the program was available for release on April 30,2019. Development costs: Sept 30 thru Dec 31, 2018: $2,250,000 Jan 1 thru Feb 28, 2019: $850,000 March 1 thru April 30, 2019 $450,000 Athens expects a useful life of four years for the software and total revenues of $6,100,000 during that time. During 2019, revenue of $1,220,000 was recognized. 1. prepare the journal entries to record the development costs in 2018 and 2019 2. calculate the required amortization for 2019

1. journal entries 2018: debit research and development expense $2,250,000 credit cash $2,250,000 2019 debit research and development expense $850,000 debit software development costs $450,000 credit cash $1,300,000 2. Percentage of revenue method: 1,220,000/6,100,000 = 20% x 450,000 = $90,000 straight line method: 1/4 or 25% x 450,000 x 8/12 = 75,000 The percentage of revenue method is used since it produces the greater amortization $90,000

interest capitalization On January 1, 2018, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2019. The company b orrowed $2,050,000 at 11% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2018: $6,000,000 , 16% bonds $4,000,000 , 11% long-term note Construction expenditures incurred in 2018: January 1: $840,000 March 31: $1,440,000 June 30: $1,088,000 September 30: $840,000 December 31: $640,000 Calculate the amount of interest capitalized for 2018 using the specific interest method

1/1: 840,000 x 12/12 = 840,000 3/31: 1,440,000 x 9/12 = 1,080,000 6/30: 1,088,000 x 6/12 = 544,000 9/30: 840,000 x 3/12 = 210.000 12/31: 640,000 x 0/12 = 0 total expenditures $4,848,000 average expenditures $2,674,000 Weighted average rate of all other debt: 6,000,000 x 16% = 960,000 4,000,000 x 11% = 440,000 total debt $10,000,000 total interest $1,400,000 1,400,000/10,000,000 = 14% capitalized interest: average accumulated expenditures: $2,674,000 construction loan: 2,050,000 x 11% = 225,500 other loans (not construction) (2,674,000 - 2,050,000 = 624,000) x 14% = 87,360 total capitalized interest: 225,500 + 87,360 = 312,860

depreciation replacement method Canliss Mining uses the replacement method to determine depreciation on its office equipment. During 2016, its first year of operations, office equipment was purchased at a cost of $23,000. Useful life of the equipment averages four years and no salvage value is anticipated. In 2018, equipment costing $5,300 was sold for $450 and replaced with new equipment costing $6,300. Canliss would record 2013 depreciation of: a) 3650 (NOT) b) 4850 c) 5850 d) none are correct

5,850 6300 replacement cost - 450 in proceeds = 5,850

warranty expense Supreme Inc sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during 2017 are as follows: 2017:$10,000 2018: 25,000, 2019:15,000. Assume that actual warranty cost during 2017 were estimated. What is the amount of the estimate warranty expense that Supreme should recognize on its 2017 balance sheet?

50,000

change in residual amount At the beginning of 2017, Western Inc acquired a building for $10.6 million. Depreciation for 2017 and 2018 was calculated using the straight-line method, a 25-year useful life, and a $2.6 million residual value. In 2019, the estimates of useful life and residual value were changed to 20 years (total) and $660,000 respectively. What is depreciation on the building in 2019?

516,667 (10.6 mil - 2.6 mil)/25 = 320,000 initial depreciation per year x 2 years = 640,000 10.6 mil. - 640,000 - 660,000/18 remaining years

depletion During 2018, the Longhorn Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2018 in west Texas. 13 of the 20 were dry holes. Longhorn uses the successful efforts method of accounting. Assuming that none of the oil found is depleted in 2018, what oil exploration expense would Longhorn charge for this activity in its 2018 income statement? a) $0 b) $35 mil - NOT c) $65 mil d) $100 mil

65 mil successful efforts method 13 x 5m = 65 mil exploration expense 7 x 5m = 35 mil oil deposit full-cost method: oil deposit 100 mil

natural resources - successful efforts method during 2017, the Mont Oil Company incurred $5,000,000 in exploration costs for each of 20 oil wells drilled in 2017 in Montana. 13 were dry holes. Most uses the full-cost method of accounting. Assuming that none of the oil found is depleted in 2017, what oil exploration expenses would be charged in 2017 on the income statement?

65,000,000 the dry wells are expensed under the successful efforts method of accounting 13 x 5m = 65,000,000

depreciation change in method Broadway Ltd. purchased equipment on January 1, 2016, for $780,000, estimating a 6 yr useful life and no residual value. In 2016 and 2017, Broadway depreciated the asset using the straight-line method. In 2018, Broadway changed to sum-of-years'-digits depreciation for this equipment. What depreciation would Broadway record for the year 2018 on this equipment?

? 208,000 (correct - but how did I get that) 780,000/6 = 130,000 x 2 = 260,000 change in estimate (780,000 - 260,000) = 520,000 520,000

depletion - change in estimate On March 31, 2018, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $314,500, with estimated salable rock of 37,000 tons. During 2018, Belotti loaded and sold 5,600 tons of rock and estimated that 31,400 tons remained at December 31, 2018. At January 1, 2019, Belotti estimated that 16,800 tons still remained. During 2019, Belotti loaded and sold 11,200 tons. Belotti uses the units-of-production method. Belotti would record depletion in 2019 of: a) 191,088 b) 181,248 c) 180,168 d) 177,968

? 314,500/37000 = 8.5 37000 - 5600 = 31400 remaining 314,500 - (5600x8.5) = 266,900 266,900/31,400 = 8.50 change in estimate 266,900/16,800 = 15.8869 11,200 x 15.89 = 177,968

loss contingency

A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. (Loss is probable and not reasonably estimable or loss is reasonably possible and not reasonably estimable) When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts. categories: probable - confirming event is likely to occur reasonably possible- the change that the confirming event will occur is more than remote but less than likely remote - the chance that the confirming event will occur is slight noncollectable receivables does not result in the recognition of a liability

Return on Assets (ROA)

Measures how profitably a company uses its assets. Net income / total assets.

Accumulated Other Comprehensive Income

This account includes the cumulative amount of all previous items reported as other comprehensive income. reported on balance sheet

bond interest difference between the effective interest and the interest paid represents

amortization of a discount or premium

impairment

an asset's significant decline in value occurs when undiscounted sum of estimated future cash flows is less than the asset's book value issues when accounting for impairment: how to measure the impairment loss and when to recognize the impairment two categories for recognizing and measuring impairment losses: 1) assets to be held and used 2) assets held for sale overstating impairment loss: future income is unrealistically high future depreciation, depletion or amortization is unrealistically low current-year income is low

exchange of assets

asset that has commercial substance is valued at the fair value of the asset given or received debit new equipment for fair value debit accumulated depreciation credit equipment old for original cost credit if gain debit if loss asset lacking commercial substance is valued at the book value of the assets given when cash is received in an exchange that lacks commercial substance, the amount of gain is based on the portion of cash received relative to the total assets received

debt or equity securities

assets acquired by issuing debt or equity securities: first indicator of fair value is the fair value of the debt or equity securities given

long-term assets

assets other than those that are current usually classified in either intangible assets or property, plant and equipment

nonmonetary exchange

basic principle is to value assets acquired using fair value of assets given

IFRS - amortization of capitalized development costs

begins when: the asset is ready for use development is complete

Bonds (Convertible)

bonds that can be exchanged for shares of stock at the option of the bondholder The value of the conversion feature is not recognized separately

change in service life patent Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the patent on a straight-line basis since 2014, when it was acquired for $22.5 million at the beginning of 2014. Due to rapid technological advances, management decided the patent would only benifit the company over a TOTAL of 6 yrs, rather than the 9 yr life being used to amortize its cost. The decision was made at the beginning of 2018. Prepare year-end journal entry for patent amortization in 2018. No amortization was recorded during the year.

calculation of annual amortization after the estimate change: 22,500,000 cost/9 yrs = 2,500,000 per year x 4 yrs = 10,000,000 22,500,000 - 10,000,000 = 12,500,000/2 ys remaining = 6,300,000 new annual amortization

asset exchange Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substanace: Case A: paid 14,200 cash book value 50,500 fair value 59,200 Case B: paid 8,100 cash book value: 39,700 fair value: 34,700 In case A, Grand Forks would record new equipment at:

case A: equipment new: $73,400 fair value + cash given 59,200 + 14,200 = 73,400 case B: gain/(loss): ($5,700) book value - fair value 40,100 - 34,400 = (5,700)

stock combination Clam Corp issues 1,000 shares of $10 par value preferred stock and 3,000 shares of $1 par value common stock for $48,000. The fair value of the preferred stock is $20 per share, and the fair value of common stock is $10 per s hare. What amount is allocated to paid in capital-excess of par, common stock? Ship corp issues 1,000 shares of $10 par value preferred stock and 4,000 shares of $1 par value common stock f or $100,000. The fair value of the preferred stock is unknown, but the fair value of the common stock is $8 per share. The journal entry to record the transaction: brian corp issues 5,000 shares of $10 par value preferred stock and 20,000 shares of $1 par value common stock for $150,000. The fair value of the preferred stocks $20 per share, and the fair value of the common shares is unknown. What is the amount allocated to he paid in capital-excess of par?

cash received usually the sum of the separate market values each stock is recorded at its market value when sum doesnt equal market value total selling price is allocated between the two securities in proportion to their relative market value clam corp: relative market value: 30,000/50,000 x 48000 = 28,800 less 3,000 par value common stock = 25,800 ship corp journal entry debit cash 100,000 credit common stock par $4,000 credit additional paid in capital - common stock $28,000 credit preferred stock par $10,000 credit additional paid-in capital - preferred stock $58,000 brian: debit cash 150,000 credit additional paid-in capital-excess of par common $30,000 credit credit common stock par $20,000 credit preferred stock par $50,000 credit preferred stock excess of par $50,000

goodwill On March 31, 2018 Wolfson Corporation acquired all of the outstanding common stock of Barney Corp for $17,600,000 in cash. The book values and fair values of Barney's assets and liabilities: book value current assets: 6,600,000 and fair value 8,100,00 book value Property, plant and equip. $11,600,000 and fair value $14,600,000 book value other assets $1,060,000 and fair value $1,560,000 book value current liabilities $4,600,000 and fair value $4,600,000 book value long-term liabilities $6,600,000 and fair value $6,100,000 calculate the amount of goodwill

consideration exchanged $17,600,000 assets: 24,260,000 - liabilities assumed of 10,700,000 = 13,560,000 17,600,000 - 13,560,000 = 4,040,000 in good will

franchise

contractual agreement in which one entity grants the purchaser the exclusive right to use the trade name, formulas and product rights within a specific geographic area for a specific period time accounting rules: capitalize cost of the franchise amortize the cost of the franchise over its life expense periodic payments as incurred intangible assets: initial purchase price legal costs for franchise agreement amortization: debit amortization expense credit franchise

depletion base

cost of a natural resource less its anticipated residual value

capitalized land improvements

cost of fences, sidewalks, parking lots

restoration costs

costs to restore land or other property to its original condition after extraction of the natural resource ends.

bond convertible IFRS On January 1, 2016, Ventrini International issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ventrini's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ventrini applies International Financial Reporting Standards. Upon issuance, Ventrini should

credit bonds payable $9,900,000 99% x $10 million. Using IFRS, companies use the net method and do not record discounts and premiums.

stock payment date

date that corporate assets are transferred to shareholders

stock declaration date

date that the corporate board of directors announces a dividend debit retained earnings credit dividends payable

equipment exchange Cheng Corp. exchanges equipment in a transaction that has commercial substance. The original cost of the asset surrendered was $90,000, and its accumulated depreciation at the date of exchange was $40,000. The asset received had a fair value of $40,000 and a book value of $35,000. What journal entry should be recorded:

debit accumulated depreciation $40,000 debit loss on exchange $10,000 debit equipment new $40,000 credit equipment old $90,000

impairment loss Marston acquired assets for $100,000. At the end of year 3, the assets had accumulated depreciation $40,000. An impairment loss was indicated, and the fair value of the assets was $48,000. The journal entry to record the impairment loss:

debit accumulated depreciation $40,000 debit loss on impairment $12,000 credit assets $52,000

stock at par

debit cash (for amount after any issue costs) credit common stock (par) credit additional paid-in capital - excess par (after par amount - less issue costs)

bond - accrued payment at year end On December 31, 2018 Werner Inc has $1 million face amount, 6% bonds outstanding. The bonds were issued at a discout and pay interest semi-annually on March 31 and September 30. On December 31, 2018, Werner Inc should

debit interest expense credit interest payable credit discount on bonds payable

IFRS revaluation Corr reports its financial statements in accordance with IFRS and uses the revaluation option for its equipment. At the end of year 3, the revaluation surplus has a credit balance of $10,000. At the end of the year 3, Corr has equipment with a carrying value of $200,000, which is revalued at $175,000. The entry to record the adjustment to fair value would include which of the following?

debit to revaluation surplus - OCI $10,000 debit to revaluation expense $15,000

research and development cost

design, construction and testing of prototype or model searching for applications of new research findings modification of a formula or design FASB requires these costs to be expensed because it is difficult to objectively determine the future benefits include: salaries, depreciation on R&D equipment, payment for services in connection with R&D activities, testing and preproduction prototypes and models, materials used in the lab, allocation of indirect costs related to research GAAP disclosure requirements: R&d either as separate line item on income statement or in a disclosure note

capital budgeting

decisions are made by estimating future cash flows and using net present value model

stock retire Motorsports Company retires shares it buys back. In its first share repurchase transaction, Motorsports purchased stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the stock on each of the following?

decreased paid in capital decreased retained earnings Paid-in capital is reduced (debited) for the purchase price. Cash is credited for the amount paid to reacquire the stock. The (debit) plug is to retained earnings.

dividend On April 1, 2018 Rawlings declares a dividend of $.30 per share. Rawlings has 100,000 shares authorized, and 40,000 issued and outstanding. The date of record is April28, and the payment date is May 15. The journal entry on May 15: Bell corp has following classes of equity: Preferred stock, $10 par, 8% dividend rate: $100,000 Common stock, $1 par: $50,000 The preferred stock is noncumulative and nonparticipating. No dividends were paid in 2016 or 2017. In, 2018,Bell declared a dividend of $90,000. The common stockholders will receive a dividend of: Linx corp has following classes of equity: Preferred stock, $10 par, 8% dividend rate: $100,000 Common stock, $1 par: $50,000 The preferred stock is cumulative and nonparticipating. No dividends were paid in 2016 or 2017. In, 2018, Linx declared a dividend of $90,000. The common stockholders will receive a dividend of:

distribution of assets to shareholders becomes a liability on the date of declaration any portion of a dividend that does not represent a distribution of earnings is debited to additional paid in capital portion of dividend this is a liquidating dividend reduces additional paid in capital Rawlings: debit dividends payable $12,000 credit cash $12,000 40,000 x .30 Bell: 82,000 to common stockholders 8,000 preferred stock holders (100,000 x 8% = 8,000) Linx: 66,000 Preferred dividends: 100,000 x .08 = 8,000 for each of the 3 years = 24,000 66,000 to common stock holders

stock dividend Reynolds corp has 100,000 shares of $1 par value common stock issued and outstanding. Reynolds declares a 20% stock dividend when the fair value of the stock is $8 per share. The debit to retained earnings for the stock dividend is:

distribution of stock to current shareholders reason for using is to capitalize retained earnings into the common stock and paid in capital account does not reduce assets or create liability small stock dividend is usually less than 25% small stock dividend: reduces retained earnings for fair value, increases common stock by par value, increases additional paid in capital, earned capital is reclassified as invested capital reynolds: 160,000 100,000 x 8 x .20 = 160,000

asset exchange Bloomington Inc. exchanged land for equipment and $2,500 in cash. Land carried a book value of $104,300 and fair value of $88,500. Assuming that the exchange has commercial substance, Bloomington would record equipment and a gain(loss) of:

equipment: 86,000 loss: (15,800) fair value is less than book value: equipment valued at fair value - cash given 88,500 - 2,500 = 86,000 loss: fair value is less than book value book value - fair value 104,300 - 88,500 = (15,800)

shareholder cumulative

for preferred shareholders - dividends, if not declared, accumulate and must be paid in the future when a dividend is declared

shareholder noncumulative

for preferred shareholders - noncumulative - dividends are paid in the current year only if declared

Oil & Gas generally accepted methods for accounting for GAAP

full-cost method successful efforts method

characteristics of debt

future payment of specific or estimated amount of cash, at a specific or projected date with periodic interest incurred

disposal of an asset

gain/loss measured as: consideration received less the book value of the asset sold

bond trustee

holds the bond indenture represents the rights of the bond holders appointed by bond issuer

group depreciation

if an asset is sold: the assets cost is removed from the books no gain/loss is recorded the assets are depreciated over the average service life of assets in the group calculated by: multiplying the group depreciation rate by the total cost of assets in the group for that period group and composite methods: both apply straight-line depreciation to the assets based on average service lives of the assets

equipment purchased for R&D

if it has an alternative future use, the cost of the equipment is capitalized and depreciated as R&D expense in the current and future periods

Bonds sold between interest dates On April 1, Munchin Comany sells $800,000 face amount, 6% bonds. The bonds pay interest semi-annually on June 30 and Dec 31. The effective rate for this company is also 6%. When the bonds are sold, Munchin should receive:

include accrued interest in price $812,000 800,000 + (800,000 x .06 x 3/12)

natural resources costs

includes: exploration costs before production begins acquisition cost for the use of land restoration costs at the end of extraction development costs

shareholder nonparticipating

preferred shareholders receive a dividend equal to the amount stated in the preferred stock certificate

Asset Retirement Obligation (ARO)

recognized only if it is a legal obligation Existing legal obligation associated with the retirement of a long-lived asset. Examples include decommissioning, dismantling, restoring, reclaiming, removal, closure, and post closure cost. Measured at fair value added to the "cost" of the asset with a liability of the same amount recorded. expected cash flow approach: to measure asset at fair value, the accountant must make the assumption of the expected cash flows and the probabilities of cash flows liability is recognized at the inception of the asset's life if a legal obligation exists over the asset's life as incurred if asset retirement obligation does not equal the restoration costs at the end of an asset's life, the difference is recognized as a gain or loss on the retirement of the asset in current earnings

bond discount A discount on bonds should be reported on the balance sheet:

reduction of the face amount of the bond A discount on bonds is a contra liability account and therefore deducted from the face amount when presented on the balance sheet

self-constructed full-cost approach

requires the allocation of overhead to self-constructed assets

depletion with restore land Jackpot mining company operates a copper mine in central Montana. The company paid $2,000,000 in 2018 for the mining site and spent an additional $800,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately 4 years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibility for the restoration costs: cash outflow and probability: 1. 500,000 - 25% 2. 600,000 - 40% 3. 800,000 - 35% To aid extraction, Jackpot purchased some new equipment on July 1, 2018 for $160,000. After t he copper is removed from the mine, the equipment will be sold for an estimated residual amount of $40,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 15% The company expects to extract 12 million pounds of copper from the mine. Actual production was 3.6 million pounds in 2018 and 5 million pounds in 2019 compute depletion and depreciation on the mine and equipment for 2018 and 2019. Units-of-production method is used to calculate depreciation on equipment

restoration cost: 1. 500,000 x 25% = 125,000 2. 600,000 x 40% = 240,000 3. 800,000 x 35% = 280,000 total: 645,000 use PV of $1 n=4, i=15% 645,000 x .57175 = 368,781 3,168,779 Present value of probable restoration costs: 368,781 Cost of copper mine: mining site: 2,000,000 development cost: 800,000 restoration cost: 368,781 total cost: 3,168,781 Journal entries: debit copper mine $3,168,781 credit cash 2,800,000 credit asset retirement liability $ 368,781 depletion expense (mine) 3,168,779/12,000,000 = .2641 per pound 2018 depletion: 3,600,000 x .2641 = 950,760 2019 depletion:5,000,000 x .2641 = 1,320,500 Deprecation expense equipment (160,000 - 40,000)/12,000,000 = .01 per pound 2018: 3,600,000 x .01 = 36,000 2019: 5,000,000 x .01 = 50,000

IFRS revaluation method cordier company prepares its financial statements in accordance with IFRS. Cordier elects the revaluation method for its intangible assets. The cost of the intangible asset during the year was $10,000, and its value in an active market is determined to be $12,000 at the end of the year. The journal entry to record the revaluation will include a credit to:

revaluation surplus - OCI for $2000

research and development IFRS NXS Semiconductor prepares its financials according to IFRS. The company incurred the following expenditures during 2018 related to the development of a chip to be used in mobile devices. salaries for basic research $3,460,000 materials used in basic research $340,000 other cost incurred in basic research $1,230,000 development costs $1,810,000 legal and filing fees for a patent for the new technology $51,000 The development costs were incurred after NXS established technological and commercial feasibility and after NXS deemed the future economic benefits to be probable. The project was successfully completed, and the new chop was patented near the end of the 2018 fiscal year. Which of the expenditures should NXS expense in its 2018 income statement:

salaries for basic research $3,460,000 materials used in basic research $340,000 Other costs incurred for basic research $1,230,000 total: $5,030,000

Available for Sale securities

securities neither expected to be sold in the near future nor held to maturity unrealized gain is reported on the statement of shareholder's equity as an increase in comprehensive income when its fair value has increased at end of year

bonuses

should be recognized when the targets are met

Stock Treasury Stock

stock repurchased by company does not receive dividends has no voting rights when purchased cost is reported as a reduction in shareholders equity increases the return on shareholders equity ratio debit treasury stock credit cash when reissued greater than cost: increase both cash and shareholders equity amount over cost increases paid-in capital-treasury shares the number of shares issued remains the same debited to a contra equity account called treasury stock GAAP - treasury stock recorded as either cost or par value method

depreciation On January 1, 2018 the Excel Delivery Company purchased a delivery van for $40,000. At the end of its 5 year service life, it's estimated the van will be worth $4000. During the five-year period, the company expects to drive the van 100,000 miles. Calculate annual depreciation for the 5 year life of the van:

straight line (40,000-4,000)/5 = 7200 sum-of-the-years-digits: (40,000 - 4000) = 36,000 depreciation base depreciation rate: 5(5+1)/2 = 15 is denominator numerator: number of years, minus 1 for following years 2018: 36000 x 5/15 = 12,000 2019: 36000 x 4/15 = 9600 2020: 36000 x 3/15 = 7200 2021: 36000 x 2/15 = 4800 2022: 36000 x 1/15 = 2400 double declining balance: (1/5) x 2 = 40% beginning year book value x depreciation rate = depreciation 2018: 40,000 x 40% = 16000 2019: 24,000 x 40% = 9600 2020: 14,400 x 40% = 5760 2021: 8,640 x 40% = 3456 2022: 5184 - depreciation is amount necessary to reduce book value to residual value = 1184 units-of-production (40,000 - 4000)/100,000 = .36/mile depreciation rate actual miles driven x depreciation rate = depreciation 2018: 15000 x .36 = 5400 2019: 31000 x .36 = 11,160 2020: 22000 x .36 = 7920 2021: 27000 x .36 = 9720 2022: 28000 - depreciation is amount needed to reduce book value to residual value - 1800

change in service life office equipment Wardell Company purchased a minicomputer on January 1, 2016 a t a cost of $45,000. The computer was depreciated using the straight-line method over an estimated 5 yr life with $3,000 residual value. On January 1, 2018 the estimated useful life was changed to 10 yrs, and residual value was changed to $1,800. Prepare year-ed journal entry for depreciation in 2018 (no depreciation was recorded during the year) Prepare year end journal entry for depreciation in 2018 assuming sum-of-the-years digits method

straight line method after the estimate change: 45,000 - 3000 = 42,000/5 yrs = 8,400 per year x 2 yrs = 16,800 45,000 - 16,800 = 28,200 undepreciated cost 28,200-1800 = 26400/8 (10yr - 2yrs = 8yrs remaining) = 3,300 new annual depreciation journal: debit depreciation expense $3,300 credit accumulated depreciation - computer $3,300 sum-of-years-digits after estimate change: 45,000 cost previous depreciation: 2016 (45,000 - 3000 = 42,000 x 5/15) = 14,000 2017 - (42,000 x 4/15) = 11,200 45000 - 11200 = 19800 undepreciated amount 19800 - 1800 = 18,000 x (8/36) = 4000 2018 depreciation 4,000 journal: debit depreciation expense $4000 credit accumulated depreciation - computer $4000

depreciation partial year On October 1, 2018, the Allegheny Corporation purchased machinery for $191,000, with estimated service life of 10 years, and residual value of $4000. Machine is expected to produce 340,000 units during its life. Calculate depreciation for 2018 and 2019. Units of production in 2018: 17000, units produced in 2019; 32000

straight line: 191,000 - 4000 = 187,000/10 = 18,700 per year 2018: 18700 x 3/12 =4675 2019: 18700 sum-of-years-digits 10(10+1)/2 = 55 2018: 187,000 x (10/55) x (3/12) = 8500 2019: 187,000 x (10/55) x (9/12) = 25,500 + 187,000 x (9/55) x (3/12) = 7,650 2019: 25500 + 7650 = 33150 double declining balance (1/10 x 2) = 20% 2018: 191,000 x 20% x (3/12) = 9550 2019: 191,000 x 20% x (9/12) = 28,650 + (191,000 - 38,200) x 20% x (3/12) = 6088 2019: 28650 + 6088 = 34738 150% declining balance (1/10) x 1.5 = 15% rate 2018: 191,000 x 15% x (3/12) = 7163 2019: 191,000 x 15% x (9/12) = 21,488 + (191,000 - 28,650) x 15% x (3/12) = 6088 2019: 21488 + 6088 = 27576 units-of-production (191,000 - 4000)/340,000 = .55 per unit depreciation rate 2018: 17,000 x .55 = 9350 2019: 32000 x .55 = 17600

allocation base

the cost of the asset that is expected to be consumed

service life (useful life)

the estimated use that the company expects to receive from the asset before disposing of it may be limited by: regulatory, legal or contractual requirements

early extinguishment of debt

the issuer retires debt before its scheduled maturity date if debt is retired for less than book value = gain if debt is retired for more than book value = loss

troubled debt restructuring

the original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor (borrower).

Debt to Equity Ratio - default risk

total liabilities/stockholders equity provides information regarding a company's risk that it will be unable to pay its debt when due

cash rebates

unredeemed cash rebates related to current year sales should be estimated and the amount treated as a liability and a reduction in revenue

commercial paper

unsecured notes sold in minimum denominations of $25,000 with maturities ranging from 30 to 270 days.