CPA- FAR
EPS calculation
(Net income- preferred dividends)/Weighted avg. shares outstanding
For an unrecognized firm commitment to qualify as a hedged item it must
1.Be binding on both parties.2.Be specific with respect to all significant items.3.Contain a nonperformance clause that makes performance probable.
If there was a $2750 net of tax loss on available for sale debt securities that were previously recorded in OCI, what amount would be the reclassification adjustment added or deducted when the securities are sold? Assume a 30% tax rate.
2750 would be added. The 2750 had been previously deducted from OCI when the loss occurred. When the securities are sold the loss will be included in NI so the 2750 must be added back to OCI to avoid taking the loss twice.
average days sales in inventory formula
365/inventory turnover note: inventory turnover= net credit sales/avg inventory
A large accelerated filer must file its 10Q within
40 days after quarter end. (A large accelerated filer is a company with market value of $700 million or more.
During a business combination, the following would require the acquirer to reconsider the acquiree's classification:
A HTM debt investment A held for trading debt investment A derivative instrument used for speculative purposes On the other hand, a lease classified as a sales type capital lease would NOT require the acquirer to reconsider the classification as it wouldn't change.
A change in accounting principle is
A change from one generally accepted principled to another generally accepted principle.
Contingent consideration liability when a company A acquires company B
A contingent consideration liability is the obligation of an acquirer to transfer additional consideration, if specific conditions are met. Contingent consideration liabilities are initially recognized at fair value and adjusted to fair value each period until the contingency is resolved or expires. The change is recognized as a gain/loss in the period of the change.
In a statement of cash flows, an increase in inventories should be presented as:
A deduction from Net income
A nonmonetary exchange should be recorded at:
A nonmonetary exchange is recognized at fair value unless the fair value is not determinable, the exchange transaction is to facilitate sales to customers, or the exchange transactions lacks commercial substance.
Translation loss vs Remeasurement loss
A remeasurement loss would be reported as an item in current income. A translation loss would be reported in OCI as a debit.
Reportable segment
A segment should be reported if it has at least 10% of the revenues, 10% of the profit or loss, or 10% of the combined assets of the entity.
Formula to adjust service revenue from cash basis to accrual basis
Accrual basis service rev= Cash fees collected+ ending AR- Beginning AR+ Beginning unearned fees - ending unearned fees
If a company switches from the weighted average cost method to FIFO at end of year 1, for both financial statement and income tax purposes and this change results in a $150k increase in beginning inventory for year 2, assuming a 30% tax rate, what is the Period-Specific effect on the accounting change for year 1 ended?
An increase of 150k for inventory in beginning of year 2, would also mean a before tax increase of 150k to NI for year 1 ended. Period-specific events must be reported net of year 2 effects, the tax effect is 30% *150k= 45k. This must be subtracted to leave the period specific effect : 150k-45k= 105k Overall, inventory would increase by 150k, NI would increase by 105k and income taxes payable would increase by 45k.
Revenue- Contributions with a donor restriction
An unrestricted $50k pledge to be paid the following year would be recognized this year but as a contribution with a donor restriction. The restriction is "time" A $25k cash gift restricted for scholarships would be a contribution with a donor restriction, the restriction is purpose restriction. A will that stipulates that the college is named as beneficiary for $10k would NOT be recognized as revenue until the amount is distributable.
Where on the balance sheet should accumulated other comprehensive income be reported?
As a separate item under stockholder's equity
The amount of income tax applicable to transactions that are not reported in the continuing operations section of the income statement is computed
As the difference between the tax computed based on taxable income without including the item and the tax computed based on taxable income including the item.
Goodwill should be tested for value impairment at which of the following levels?
At the reporting unit level
Health care organizations financial statements should include:
Balance sheet Statement of Operations Statement of changes in net assets Statement of cash flows
Under IFRS, the method used when preferred shares are converted into ordinary shares is
Book value method
The present value of the minimum lease payments should be used by the lessee in the determination of a(n):
Both finance leases and operating leases
Effective interest rate on a borrowing
Company obtained a $2M loan, annual interest rate is 12%. Loan requires 400k compensating balance, which is 200k more than they would have otherwise. The checking account earns annual interest of 6%. Effective interest rate calculation: Gross annual interest= 2m*12%= 240k Compensating balance has 200k more than they usually have in their account. The interest on that 200k that can be earned is 200k*6%=12k Net annual interest cost= 240k-12k=228k Net available proceeds from the borrowing=2m-200k (the excess compensating balance)=1.8m Effective annual interest= 228k/1.8m= 12.67%
Accounting for goods on consignment and how they affect current assets
Consignment goods (for goods that are sent out to another to sell) should be included in inventory at their cost for the company that sends the goods. They should NOT appear in AR.
IFRS reports PP&E using the
Cost model or the revaluation model
Current cost accounting
Current cost accounting is a method of valuing and reporting assets, liabilities, revenues, and expenses at their current cost at the balance sheet date or at the date of their use or sale. A holding gain is recorded as an increase in an item's value. You can compare the original cost to the cost now (ej. replacement cost) to see if there's a holding gain for the item.
Stock dividend JE
Dr. Retained earnings Cr. Common Stock Cr. Additional paid in capital RE decreases. Total stockholder's account is unaffected.
Weighted average shares outstanding calculation
Ej. 1/1 Common stock outstanding 39,000 2/1 Issued a common stock dividend 3,000 7/1 Issued common stock for cash 8,000 $39k * 12/12 + $3k *12/12 + $8k *6/12 = $46k note: the stock dividend doesn't use 11/12 for the outstanding period because stock dividends are treated as if they occurred at the beginning of the year.
Assets can be grouped for composite depreciation purposes. How do we calculate the composite life of the assets?
Ej. A company owns 3 machines: (S/L basis) Machine a: Cost 550k salvage 50k useful life 20 yrs Machine b: Cost 200k salvage 20k useful life 15 yrs Machine c: Cost 40k salvage 0 useful life 5 yrs Step 1, calculate depreciation for each machine : A= 25k depre B= 12k depre C=8k depre; Total depreciation is 25+12+8= 45k Total depreciable= 500+180+40=720k 720k/45k=16 years is the composite life of the assets
If a company purchases shares of another and they also receive rights, the cost of the investment will need to be allocated between the stockS and the rights based on their relative fair values
Ej. FV of stock 500 × $90 =$45,000; FV of rights 500 × $10 =5,000 Total FV$ 50,000 Cost of investment is 36k. Cost allocated to stock =36k * (45k/50k) Cost allocated to rights= 36k* (5k/50k)
Sum of the Years Digits method of depreciation
Ej. For an asset with an estimated useful life of 4 years. (4+3+2+1=10) Year 1 depreciation= 4/10. X (Cost-salvage) Year 2 depreciation= 3/10. X (Cost-salvage) Year 3 depreciation= 2/10. X (Cost-salvage)
How are fines and corporate income taxes classified?
Fines are imposed revenue whole corporate income taxes are an example of derived revenue
A company purchases 2000 shares of 6% $20 par preferred stock for $108k. Each share also has one stock warrant attached. The market price of the preferred stock on a date is $50/share and the market price of the stock warrants if $10/warrant. On y date, the stock warrants are sold for 19,800.. What should be the gain on the sale of the stock warrants?
First we had to calculated the combine market value of a stock and warrant: 50+10= 60 Allocation: Warrant: 10/60 * 108k (cost)=18,000 Stock: 50/60 * 108k= 90,000 The selling price of the warrants was 19,800 so a gain of 1,800 was recorded. : 19800-18000=1800
Different types of hedges and how to report their gains/losses
Forecasted transaction hedge: It is a cash flow hedge with changes in the FV of the forward contract reported in OCI but NOT as a translation adjustment. Firm commitment hedge: It is a FV hedge, with changes in the FV of the forward contract reported in current income Investment in available-for-sale securities hedge: It is a FV hedge with changes in the Fv of the forward contract reported in current income. Net investment in foreign operations hedge: The hedge of a net investment in foreign operations offsets the change in the value of the translated financial statements of the foreign operation, which also are reported as a translation adjustment.
When estimating the effective tax rate for interim reporting
Foreign tax rates and capital gains should be considered
Deferred tax asset
Generally this is created when the company is paying more tax than it records. in an example of a company that uses DDB depreciation for book purposes but S/L for tax purposes, the depreciation for book purposes will be greater than depreciation for tax purposes. Less expense for tax purposes means they ll have to pay more taxes now, but less in the future.
Which of the following rates may be used to translate the cash flow statement?
Historical exchange rates (the rates in effect at the time the transaction occurred) or at weighted-average exchange rates
Liquidating dividend example. Company A owns shares of Company B.
If company B has NI of 40k and they pay dividends of 50k then the additional 10k would come out of prior RE. Under the cost method, liquidating dividends are treated as a reduction int he investment account whereas normal dividends are treated as income. Liquidating dividends decrease both retained earnings and Additional paid in capital
Pension liability calculation
If the PBO (Projected benefit obligation) exceeds the fair value of the plan assets, a pension liability should be recognized. See the following example: PBO 14.5 million Pension asset/lability (200k) Plan assets at fair market value 7m unrecognized prior service cost 2.55m PBO-Plan assets fair value= 14.5-7= 7.5m should be the liability. The liability is currently at 200k, so an adjustment of 7.3m will be needed to bring it to the 7.5m total .
Deferred tax asset vs deferred tax liability
If you record a greater expense deduction in your tax return you will pay less tax now since your taxable income will be less so a deferred tax liability will be created for the future. If you record a lesser expense deduction in your tax return now, then your taxable income will be greater now so a deferred tax asset will be created for the future.
Double declining balance method of depreciation
Ignores salvage value. DDB= 200%/Useful life X Book Value
Current asset
In terms of length, a current asset is either an operating cycle or one year, whichever is longer.
If a company has a contract in which 70 products are sold for $80/unit and the contract is later modified to include 25 additional products at $40/unit (and 30 of the original products has already ben transferred) what approach would we use to value the remaining products? (the 40 products at the original cost and the 25 at the new cost)
In this case the price of the additional products doesn't reflect standalone pricing so a blended price should be calculated for all of the remaining products (40 from original price and 25 at the new price) Original remaining= 40 *80= $3200 New price= 25*40=$1000 Total = $4200 Units left=65 (40+25) Blended price= 4200/65=64.62
How are discontinued operations that occur at midyear initially reported?
Included in NI and disclosed in the notes to interim financial statements
G&A expenses
Includes items like accounting and legal fees and rent (that's not allocable to the sales team as that would be selling expenses). Interest is NOT part of g&a. It is part of financial expenses or other expenses. A loss on the sales of equipment would be other expenses and losses, NOT g&A.
Calculating income tax expense
Income tax expense is the net sum of the income tax liability for the year, the changes in the deferred tax accounts, and the change in the valuation account for deferred tax assets ej. Tax liability (current portion of income tax expense): 13,000 Less increase in deferred tax asset -5000 Plus increase in valuation account (.10*20000)= 2,000 ( it is the amount of deferred tax asset not likely to be realized) Equals income tax expense= 10,000
Segment reporting test
Information on an operating segment should be reported if it comprises at least 10% of the entity's total revenues of if the segments profit/loss is at least 10% of the entire entity's profit/loss or if the segments assets are 10% or more of the total entity's assets. After determining the reportable segments, it should be ensured that the total external revenue attributable to those segments comprise at least 75% or more of the entity's total revenue. If this is not met, then additional segments would have to be added till they reach the 75% threshold. (Even if they don't meet the 10% rule) Ej. A company has 50m total revenue, and out of this, 30m is to external customers. Operating segments must report at least 75% of the unaffiliated revenuee, so 30m*75%=22.5m
A change from the cash basis of accounting to the accrual basis of accounting
Is considered a change from an unacceptable principle to a generally accepted one. This is classified as a correction of an error and it's reported as a prior period adjustment.
Attribution period for employees for accruing post retirement benefits is
It begins the date of the hire and the end is on the date of full eligibility.
During a business combination, how would Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree be recorded?
It would be a part of the business combination transaction. On the other hand, Payment by the acquirer to reimburse the acquiree for cost it incurred in carrying out the business combination would be expensed and not part of the business combination
When should a long-lived asset be tested for recoverability?
Long-lived assets need to be tested for impairment when facts or circumstances indicate that the carrying amount may not be recoverable
Loss contingencies: When to accrue?
Loss contingencies should be accrued only if it is probable that a liability has been incurred at the BS date and the amount of the loss is reasonably estimable. If the contingency is not probable but is reasonably possible, it would be disclosed in the footnotes.
The method chosen for determining what information to report for business segments is the
Management approach
How should comprehensive income be reported?
May be reported in a separate statement or in a combined statement of income and comprehensive income
Stock splits affect
Only the number of shares outstanding and the par value of the stock. They DON'T affect total stockholders equity, assets or additional paid in capital
What does R&D involve?
R & D involves the search for new knowledge and translation of that knowledge toward new products and processes and improvements in existing products and processes. Things included would be: designing, constructing, and testing preproduction prototypes, and the cost of R&D equipment Troubleshooting would NOT be included.Periodic design changes would also NOT be included. All R&D costs are to be charged to expense when incurred.
In non profits, the characterization of net assets is
Residual interest. Residual interest is what remains .The difference between assets and liabilities (net assets)
Impairment losses
Restoration of previously recognized impairment losses is prohibited
Which of the following would a nongovernmental not-for-profit educational institution report as program services?
Teacher salaries. These would be program expenses. Supporting expenses would be things like publicity costs, management salaries, fundraising expenses
When capitalizing an asset that was sold in exchange for for a note
The asset should be capitalized at the PV of the note received and stated interest payments discounted at the market rate (incremental borrowing rate) or at the fair market value of the asset, whichever is more clearly evident.
If a company consolidates financial statements with its subsidiary, how do you calculate total current assets?
The assets of the acquired firm are recorded at their FVs. Ej. Parent company current assets =100k Subsidiary current assets= 20k If FV of subsidiary inventory were 5k more than their carrying amount. FV of subsidiary current assets would be 25k. Total consolidated current assets= 100k+25k= 125k
Under the translation method of converting, income statement items are converted using what rate?
The average exchange rate. (Translation is used when the functional currency is the foreign currency)
Conversion of preferred stock to common stock
The book value method must be used. Ex. Company issued 5000 shares of $100 par convertible preferred stock for $110 per share. Each share of preferred can be converted to 3 CS shares of $25 par. On year 2 all of the preferred stock was converted. Accounts affected: Cr. CommonStock= 15kshares * 25= 375k Cr. APIC CS= 550k-375k= 175k (the 550k is the carrying amount of the preferred stock that was converted.(5kshares *$110) Dr.Preferred stock 500k Dr. APIC Preferred stock. 50k
During a business combination, how would you treat equipment that the subsidiary has whose market value is in excess of book value as of the date of combination?
The consolidated balance sheet prepared immediately after the acquisition would treat the excess as plant and equipment. The general rule is that any amount paid in excess of netbook value to the extent of fair value will be treated as a revaluation of the equipment. Any amount above that would be treated as goodwill.
Consolidated net income between entity A that acquires entity B. Acquisition is started on 12/1 and completed by 12/31.
The consolidated net income recognized by entity A for the year would be ONLY its net income (Not entity B NI). In general, entity B's NI before the closing of the combination would not be included in consolidated net income.
The capitalizable costs for an intangible asset under IFRS are the same as GAAP.
The cost of the asset is the cash paid to acquire the asset, including the cost to obtain legal title and control of the asset. This cost will include the purchase price. taxes, and the legal costs to register the asset.
One Canadian dollar can be exchange for 90 cents USD.
The direct quotation of this would be the rate expressed in USD, so: $.90/1. The indirect quotation would be the inverse of the direct quotation, so: 1/$.90
Net patient service revenue
The formula is: + Gross patient service rev (including ancillary rev) -Charitable services =Patient service rev -Less contractual adjustments =Net Patient Service Rev
Under IFRS, if the intangible asset's carrying value is greater than its recoverable amount it is considered to be impaired. The recoverable amount is
The greater of its net selling price (fv less cost of disposal) or its value in use.
A gain on disposal of a business segment should be included in
The income statement in the calculation of the gain or loss from discontinued ops. A foreign currency translation gain is recorded in OCI
Quick ratio
The quick ratio is calculated by dividing quick assets by current liabilities. Quick assets are those current assets that can be quickly converted to cash. Because inventory and prepaid rent are not quickly converted to cash, they are not classified as quick assets
If a company has a short term loan and it decides to refinance it through issuance of long term bond AFTER year end but before issuance of financial statements, how would the loan be classified?
The refinancing would reclassify it from a current liability to a noncurrent long term liability. The refinancing happened BEFORE the financial statements were issued, thus meeting the requirements,
According to ASC Subtopic 350-40, costs of internally developed software after the development stage may be capitalized and amortized over the asset's economic life
The software should be recorded at cost and amortized over its useful life.
FIFO vs Weighted avg
The weighted average method recognized more cost of goods sold.
A property dividends
They affect retained earnings directly and the unrecognized holding gain/loss should be recognized when the assets are distributed as property dividend. Ej. 1/1. 10k shares at cost of $20k. On 1/15 declaration date: property dividend of the stock declared. At that time market value of the stock was $25k JE: Dr. Retained Earnings 25k Cr. Investment (Cost) 20k Cr. Gain 5k (There's a net decrease of 20k to RE. 25-5=20)
Stock appreciation rights
They entitle the holder to receive cash equal to the excess of the market price of the stock on the exercise date over the market price on the grant date. The company would recognize the stock appreciation rights as compensation expense.
Credit indexed contracts
They meet the definition of a derivative instrument and must be accounted for using ASC Topic 815. Adjustable rate loans, mortgage-backed securities, and variable annuity contracts are NOT required to be accounted for under ASC Topic 815 as Derivatives and Hedging.
If a company issues a loan and along the way it incurs loan origination costs (attorney fees, title insurance, etc), how will the loan origination fees be classified?
They will be deferred and recognized over the life of the loan
Available for sale debt security- unrealized gains and losses
They would be reported in OCI. Ej. Company has available for sale debt security as cost of 150k year 1. At Dec year 1, the securities have a market value of 172k. In year 2, the securities are sold for 185k. Year 1 income shows no gain. (since it goes to OCI) Year 2 income shows a $35k gain (185k-150k) (excess of selling price over cost)
Gains on exchange rates of foreign transactions
This is calculated by comparing the balance sheet date rate to the rate when the transaction is settled. Ej. A foreign payable transaction fixed in the foreign currency was established in 12/15 and was settled (paid) on 1/3. There was a gain in currency fluctuation between 12/15 and 12/31 and also between 12/31 and 1/3. The gain would be calculated by comparing the balance sheet date 12/31 to 1/3.
Percentage of completion method
This is used by construction companies in accounting for long term constructions contract and they use the cost to cost method to recognize profit. costs to date/total estimated costs * Estimated profit Expected losses must be recognized in full in the period in which the expected loss is discovered.
Corridor approach
This is used to determine gain or loss amortization. Under this approach, only the unrecognized net gain or loss in excess of 10% of the greater of the projected benefit obligation (PBO) or the market-related asset value (M-RAV) is amortized. Ej. PBO= 1,530,000 M-RAV= 1,650,00 Unrecognized net loss=235,000 Avg. remaining service period=5.5 yrs 1,650,000* 10%= 165,000. corridor 235,000-165,000= 70,000. excess that will need to be amortized over 5.5yrs. Amortization=70k/5.5=12,727 This will become part of pension cost
Research and development projects
Under GAAP, all research and development costs are expensed as incurred. The only exception would be if equipment is purchased that could be used for FUTURE projects. These would be depreciated over its useful life.
Under IFRS they have recognized provisions while under GAAP we have contingent liabilities
Under IFRS, for something to be classified as a recognized provision, there must be a 50% chance or more likelihood of happening. Under GAAP, for something to be recognized as a contingent liability it must be probable, which is defined as 90% likelihood or more of happening.
Where would receipts from the sales of property, plant, and equipment and other productive assets appear in the cash flow statement?
Under investing activities
According to ASC Topic 815, any financial or physical variable that has either observable changes or objectively verifiable changes qualifies as a(n)
Underlying An underlying is commonly a specified price or rate such as a stock price, interest rate, currency rate, commodity price, or a related index
Hedge accounting is permitted for 4 types of hedges:
Unrecognized firm commitments. Available-for-sale securities. Foreign currency denominated hedge forecasted transactions. Net investments in foreign operations.
How do you calculate goodwill when a company acquires another company?
We would need to compare how much the acquiring company is giving up. (whether its cash, stocks or combination or both) & compare this to the FV of the net assets of the company being acquired. (total assets-total liabilities= FV of the net assets). If we are paying more than the FV of the net assets, then we have goodwill.
Pension Cost
When calculating pension costs the following factors will add/subtract: +Service cost -Return on plan assets +Interest cost on benefit obligation +Amortization of actuarial loss +Amortization of unrecognized net obligation
When using remeasurement, the exchange rates would vary based on
Whether the account is monetary or non-monetary
Calculating asset retirement obligation
beginning balance of asset retirement obligation + additional unconditional retirement obligations (discounted) -payments towards the settlement of the retirement obligation +accretion expense (Expense recognized on the asset retirement obligation due to passage of time)
Operating transactions denominated in a foreign currency are converted to the functional currency using the
current (spot) exchange rate
A deferred tax asset is recognized for all deductible temporary differences.
ex. Company has 500k accounting income and 800k taxable income year 1. Temporary differences related to product warranty costs that the company expected to be paid are as follows: Year 2 100k Year 3 50k Year 4 50k Year 5 100k The tax rates are 35% for year 1, 30% for years 2 to 4 and 25% for year 5. So: Year 2 100k * 30%=30k Year 3 50k*30%=15k Year 4 50k*30%=15k Year 5 100k *25%=25k. 30+15+15+25= 85k deferred tax asset at end of year 1.
The successful efforts method
expenses the cost of all unsuccessful exploration efforts immediately, thus reducing NI.
The specific identification method
is required for inventory items that are NOT interchangeable and goods that are produced and segregated for specific projects.
An enterprise fund
is used to account for the activities of a governmental unit to which the government provides goods and services which are (1) rendered primarily to the general public, (2) financed substantially or entirely through user charges, and (3) intended to be self-supporting.
The following items are reported in the financing section of the cash flow statement:
net cash used in financing activities: -cash paid to retire bonds payable -payment of cash dividend +sale of treasury stock Converting preferred stock to common stock is NOT classified as a cash flow from financing activity. It is a non cash item that would show up in a separate schedule at the bottom of the cash flow statement.
A complete set of IFRS financial statements includes the following
statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.
Vista, A non profit organization purchased stock in XYZ using net assets without donor restriction and paid $50k. At year end, Vista received a cash dividend of $3k and the value of the XYZ stock at year end was $65k. What amount would Vista report on its current year statement of activities from XYZ?
$18k increase in net assets without donor restriction. The unrealized gain on XYZ of 15k and the dividend revenue of 3k would both be included in the statement of activities as net assets without donor restriction
Oz, a nongovernmental not-for-profit organization, received $50,000 from Ame Company to sponsor a play given by Oz at the local theater. Oz gave Ame 25 tickets, which generally cost $100 each. Ame received no other benefits. What amount of ticket sales revenue should Oz record?
$2500 Entry: Cash 50,000 Ticket sales revenue 2,500 Contribution revenue 47,500 (Since Ame received something in exchange for their contribution the transaction is a part exchange/part contribution).
Data for a defined benefit pension plan for the current year are as follows: PBO, January 1, $200mn Assets, January 1, $160mn Pension expense, $60mn Funding contribution, $50mn The ending pension liability balance is
$50m The beginning pension liability is 200-160= $40 m pension expense =60- funding contribution 50= 10 Ending pension liability 40+10= $50m
On January 1, year 1, Kent Corporation purchased a machine for $50,000. Kent paid shipping expenses of $500 as well as installation costs of $1,200. The machine was estimated to have a useful life of 10 years and an estimated salvage value of $3,000. In January year 2, additions costing $3,600 were made to the machine in order to comply with pollution control ordinances. These additions neither prolonged the life of the machine nor did they have any salvage value. If Kent records depreciation under the straight-line method, depreciation expense for year 2 is
$5270 Cost to depreciate= 50k+500+1200-3000=48700 48700/10=4870 annual depreciation Additions increase the service potential of an asset so it should be capitalized. The additions were done in year 2, so it should be amortized for 9 remaining years: 3600/9=400 4870+400=5270
A company A owns 30% of CS of company B and 100% of company B preferred stock. Company B declared dividends of $100k CS and $60k preferred stock. Company A exercises significant influence over B and uses the equity method to account for its investment. What amount of dividend revenue should A report in its income statement?
$60,000 The preferred dividends are reported as dividend revenue while the common dividends received are recorded as a reduction of the investment account instead of as dividend revenue.
Helene, Corp. reports a net operating loss in year 1 of $20,000. In year 2, the company reports income of $10,000. What amount of year 2 income may be offset by the carryforward of the year 1 net operating loss?
$8000 A company may not offset all of its income using the carryforward. This is referred to as the 80% limitation.
On 12/31 A company paid 400k cash and issued 80k shares $1 par CS to an unsecured creditor in order to extinguish a debt. The company owed the unsecured creditor a total of $1.2m. The company's CS was trading at $1.25 on 12/31. As a result of this transaction, the company's total stockholder's equity had a net increase of?
$800k Total consideration given= 400k+ (80k*1.25)=$500k This was given in order to extinguish a debt of $1.2m with the creditor. 1.2-500k=$700k Gain. So total stockholders equity is increased by: 100k (80K CS+ 20K Additional paid in) + 700k gain (by way of net income) = $800k
The following information pertains to Seda Co.'s pension plan: Actuarial estimate of projected benefit obligation at January 1, 2005$ 72,000 Assumed discount rate 10% Service costs for 2005 $18,000 Pension benefits paid during 2005 $15,000 If no change in actuarial estimates occurred during 2005, Seda's projected benefit obligation at December 31, 2005 was
$82,200 Projected benefit obligation (PBO), January 1, 2005$72,000 Plus interest cost (growth in PBO), .10($72,000)$7,200 Plus service cost $18,000 Less benefits paid in 2005 ($15,000) PBO, December 31, 2005 $82,200 note: service cost is measured based on the pbo
Doe Corporation owned 1,000 shares of Spun Corporation. These shares were purchased in year 1 for $9,000. On December 15, year 1, Doe declared a property dividend of one share of Spun for every ten shares of Doe held by a stockholder. On that date, when the market price of Spun was $14 per share, there were 9,000 shares of Doe outstanding. What gain and net reduction in retained earnings would result from this property dividend?
1000 shares purchased for $9000 means each share was $9/share. 9000/10=900 shares to be distributed. 900 x 14=$12,600 (will reduce RE) 900 X 9 (COST)=$8100 12600-8100= 4500 Gain 12600 decrease in RE -4500 lESS increase from gain $8100 Net Decrease in RE
The enterprise fund had the following balances: Prepaid insurance 43k Depreciation year 1 129k Provision for doubtful accounts 14k What amount should be reflected in the statement of revenues, expenses and changes in fund net position ?
143k Enterprise funds follow accrual accounting, so it would be 129k depreciation+ 14k provision for doubtful accounts. Note: Provision for doubtful accounts is the same as bad debt expense
A company has a cash at a checking account and a savings account. The savings account has a book balance of 155k as of 12/31 The balance on the checking account is -7000 as of 12/31. What amount should be classified as cash on their balance sheet?
155k is the cash they would report in their balance sheet. The -7000 from their checking account would be reported as a liability,
Problem on temporary and permanent differences. A company reported for financial statement purposes the following revenue and expenses that were NOT included in taxable income: Premium on officers life insurance $5,000 Interest revenue on municipal bonds $10,000 Estimated future warranty costs to be paid in year 2 and year 3 $60,000 Tax rate is 30% for now and future years. The deferred tax benefit to be applied against current income tax expense is:
60,000*.30= 18,000 This is the future tax benefit since in the future the 60,000 warranty costs will be deductible. (Yet these costs already reduced accounting earnings in year 1). The benefit is recorded as a deferred tax asset sinc eit reduces income tax expense in year 1 relative to income taxes payable of that year. Note: the insurance premiums and municipal bonds interest are permanent differences and do NOT result in future tax benefits.
For Accelerated filers that are required to file 10-k with the SEC, the maximum # of days after their fiscal year end to file their 10k is:
75 days. However, large accelerated filers with 700million of public float have a deadline of 60 days. Nonaccelerated filers have a 90 day deadline.
12/31 If a company has 975k in cash Cash legally restricted for additions to plant 600k Bank certificates of deposits (due 2/1 year 2 purchased 9/1 year 1) 250k What amount should be reported under cash and cash equivalents?
975k only The bank certificates would not be included because we have to look at the maturity date from the date they were purchased and they were for longer than 3 months.
A statement of financial position, which reports net assets with donor restriction and net assets without donor restriction, is required for which one of the following organizations?
A private, not for profit hospital. It is not required for government affiliated non profits.
Calculating income tax expense
A company reported taxable income of $400k and pre tax financial statement income of $300k. The difference resulted from 60k non deductible premiums on the company's officers and 40k of rental income received in advance. Tax rate is 30%. What amount should be reported as income tax expense? (current portion) 400k*30%=120k The current portion of income tax expense is the amount currently due and is equal to the tax liability for the period.
A deferred tax liability is considered
A non-current liability The portion of a mortgage payable that's due within 12 months is considered a current liability.
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?
A patent. The recoverability test is applied to definite-life intangible assets only. Goodwill doesn't have a definite life so it wouldn't apply to it.
Put option Call option Forward contract Swaption
A put option provides the holder the right to sell the underlying at an exercise or strike price, anytime during a specified period of time A call option provides the holder the right to acquire an underlying at an exercise or strike price, anytime during the option term A forward contract is an agreement between two parties to buy and sell a specific quantity of a commodity, foreign currency, or financial instrument at an agreed-upon price, with delivery and/or settlement at a designated future date A swaption is an option on a swap that provides the holder with the right to enter into a swap at a specified future date
small stock dividend vs large stock dividend
A small stock dividend is considered to be small if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend. On declaration date, the JE transfer the market value of the shares from RE to additional paid in cap. Ex/ Dr. RE (at market) 1200 Cr. Common stock dividend distributable (par) 10 Cr. Paid in capital in excess of par. 1190 When the shares are distributed: Dr. Common stock dividend distributable 10 Cr. Common stock A large stock dividend (more than 20-25%) On declaration date, the JE transfers the par value of the shares being issued from RE to additional paid in cap. Ex/ Dr. RE 100 (par) Cr. Common stock dividend distributable 100 When the shares are distributed: Dr. Common stock dividend distributable 100 Cr. Common stock. 100
Stock dividends
A stock dividend of less than 20-25% of outstanding shares is recorded (on the date of declaration) at the FV of the shares to be issued.
Warranty services can be recorded at the fair value only if the contract can be settled by
A third party. Therefore, in instances where a 3rd party is involved in warranty settlement, the FV is considered the settlement amount of the contract.
On 12/31 special insurance costs, incurred but unpaid, were not recorded. These insurance costs were related to work-in-process. What is the effect of the omission on accrued liabilities and retained earnings year end?
Accrued liabilities- Understated Retained earnings- Unaffected. The JE should be: Dr. Work in process Cr. Accrued payables Note that work in process is an asset and only once it's completed and sold will it be expensed.
Which of the following expenses related to the business acquisition should be included, in total, in the determination of net income of the combined corporation for the period in which the expenses are incurred?
Acquisition costs such as finder's fees are expensed in the period incurred. On the other hand, registration fee for equity securities are a reduction in the issue price of the securities so they wouldn't be included as as expenses.
Derivative financial instruments should be measured at FV and reported in the balance sheet as assets and liabilities.
Also, gains and losses on derivative instruments not designated as hedging activities should be reported and recognized in earnings in the period of the change in FV.
Under IFRS No. 9, investments in debt securities made under an entity's business model plan to make and hold such investments solely to receive cash from interest and principal repayment, and when there is no accounting mismatch, should be reported at
Amortized cost. Amortized cost is par value plus any unamortized premium/discount It can also be calculated by looking at the cost and subtracting any amortized amount.
Presenting consolidated financial statements this year when statements of individual companies were presented last year is
An accounting change that results from a change in the business entity and it should be reflected in financial statements that are restated for all prior periods presented.
On January 1, year 3, Roem Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $500,000 increase in the January 1, year 3 inventory, which is the only change that could be calculated from the accounting records. Assume that the income tax rate for all years is 30%. Retrospective application would result in
An increase in ending inventory in the year 2 balance sheet Restrospective application requires applying the new principle to the earliest period presented. Since beginning inventory year 3 went up, that would mean that ending inventory for year 2 went up (as it would be the same). This change would also cause a decrease is COGS for year 2.
A cash-basis taxpayer company prepares financials under accrual basis. Which of the following would cause an increase in deferred income tax liabilities?
An increase in prepaid insurance and also an increase in rent receivable. Explanation: If prepaids have gone up, that means the company has already paid something, which will be able to be deducted entirely for tax purposes thus reducing taxable income now. However, for financial statement purposes it's not deducted now but later at which point it wont be deductible anymore for tax purposes so taxable income will be greater in the future and thus have a deferred tax liability. An increase in rent receivable gets recognized as revenue for financial reporting purposes but not yet on the tax statements since it hasn't been received. It will be taxed later in the future when it's received so a deferred tax liability is created. On the other hand, an increase in warranty obligations would NOT cause an increase in deferred tax liabilities because it would be expensed now for financial reporting purposes but not for tax purposes (since it hasn't been paid). It would be expensed later when the warranties are paid and therefore would reduce taxable income in the future (creating a deferred tax asset instead).
An unrealized gain on held-to-maturity securities is disclosed
An unrealized gain on held-to-maturity securities is disclosed Gains are reflected in the financial statements only when they are realized (i.e., upon sale or for other than temporary declines in value).
When a corporation enters into a noncancelable purchase commitment, (ej. purchase commitment to buy inventory) and there is a decline in market value below the contract price
An unrealized loss should be recorded in the period of decline and reported in NI. The nature of the contract should also be disclosed in a note to the financial statements.
The determination of whether an interest holder must consolidate a variable interest entity is made
By reassessing on an ongoing basis
Possible Characteristics of firm commitments:
Are evidenced by a contractual obligation They can be the hedge item in a FV hedge They are subject to the risk of change in FV They have NOT been recorded as an asset or liability yet. A firm commitment occurs when an entity has a contractual obligation or contractual right, but no transaction has been recorded (and no asset or liability recognized) because GAAP requirements for recognition have not yet been met
Ross Corporation recorded a provisional amount for an identifiable asset at the date of its acquisition of Layton Inc. because the asset's fair value was uncertain. Before the measurement period ends, Ross obtains new information that indicates that the asset was overvalued by $20,000. How should Ross report the effects of this new information?
As an increase in recorded goodwill If it is determined during the measurement period that a provisional amount is not accurate, the change is recognized by retrospectively adjusting the provisional amount and making a corresponding adjustment to goodwill
A quasi reorganization eliminates an accumulated deficit and permits the company to continue as if it were legally reorganized.
Assets will be revalued at fair market value and retained earnings is charged against additional paid in capital to eliminate the deficit. Retained earnings has a normal credit balance so for example, if during a quasi reorganization (due to the company having substantial deficit) it has a debit balance in RE (The deficit). This deficit is eliminated against additional paid in capital: Dr. Paid in capital. (A Decrease in contributed capital) Cr. Retained earnings (An increase)
During a business combination, when the FV of the net identifiable assets exceeds the consideration paid, we have a
Bargain purchase. This will be treated as a gain in the current period.
The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the
Beginning of the earliest period reported (or at time of issuance, if later).
Fair value disclosure of financial instruments may be made in the:
Body of financial statements and also in the footnotes to the financial statements.
A company issues a 15 year $500k bond at 98. The bond issuance costs are $20k. Entry:
Cash 490k Discount 10k bond issuance cost 20k (capitalized) Bonds payable 500k Cash 20k If the company decides to redeem the bond early at 102 (at the end of year 12; meaning there's still 3 full years left before maturity), the JE for retirement would be: Bonds payable 500k loss 16,000 (plug) Discount 2000 (10k * 3/15 unamort. years left) Bond issuance cost 4000 (20k * 3/15 yrs left) Cash 510k (500k * 1.02)
Cash Flow hedge vs Fair Value hedge
Cash flow hedge: Gains/losses on the hedging instrument are recognized in AOCI. With cash flow hedges you are fixing your cash flows (amt paid/amt received) at a certain percent instead of paying/receiving whatever the market value is at that date. In cash flow hedges, the item being hedge is measured using the PV of expected cash inflows/outflows. Fair Value hedge: Gains/losses on the hedging instrument are recognized in income. With Fair value hedges, you want to only pay/receive the market value instead of paying/receiving a fixed percent.
Cash payments to suppliers are converted to cost of goods sold as follows
Cash payments to suppliers + increase in AP -Increase in inventory =Cost of Goods Sold
Company purchase $1m life insurance for its CEO on 1/1 year 2.. Cash surrender value 1/1/Y3 43,500 Cash surrender value 12/31/Y3 54,000 Annual advance premium paid 1/1/Y3 20,000 Dividend received 7/1/Y3 3,000 How much should the company report as life insurance expense for year 3?
Cash surrender value (CSV) is an asset to the company. Here the CSV increased by 10,500 in year 3. We also know that they paid a premium of 20k. Part of the premium paid wouldn't be considered expense but a payment to increase the CSV. The remaining would be insurance expense So: 20-10500= 9500 insurance expense. The 3k dividend is related to the company owning the life insurance policy and it reduces insurance expense 9500-3000=6,500 insurance expense. Initial entry Dr.Cash surrender value 10,500 Dr. Insurance expense 9,500 Cr. Cash 20,000 Dr. Cash 3,000 Cr. Insurance expense 3,000
Chance in accounting estimate Change in accounting principle Correction of an error
Change in accounting estimate: Examples would be switching from s/l depreciation to DDB. Also, changing the salvage value of a depreciable asset. These changes are handled on a prospective basis. Change in accounting principle: Example would be a change from using percentage of completion method to completed contract method. These require retrospective application to all prior periods. Correction of an error: Example would be a change from non-gaap accounting method to GAAP. (ej. cash basis to accrual basis).
On April 1, year 1, Parson Corp. purchased 80% of the outstanding stock of Sloan Corp. for $700,000 cash. Parson determined that the fair value of the net identifiable assets was $800,000 on the date of acquisition. The fair value of Sloan's stock at date of acquisition was $18 per share. Sloan had a total of 50,000 shares of stock issued and outstanding prior to the acquisition. What is the amount of goodwill that should be recorded by Parson at date of acquisition?
Consideration transferred= $700k +FV of non-controlling interest $180k (10k shares at 18/s) -FV of net identifiable assets ($800k) Goodwill recognized $80k
In accounting for a long-term construction contract using the percentage-of-completion method, the amount of income recognized in any year would be added to
Construction in progress. When revenue is recognized, the entry would be: Dr. Construction in progress Cr. Income on long term contract Note that the progress billings on contracts account is used when the customer is billed, not when revenue is recognized.
Costs to capitalize in connection with a trademark
Cost of a successful defense (legal fees) and registration fees in connection with a trademark should be capitalized.
Plant Company acquired controlling interest in Seed Company in a legal acquisition. Which one of the following could not be part of the entry to record the acquisition?
Debit: Goodwill. Goodwill cannot be debited at the time of acquisition, though it may be recognized at the time of consolidation.
The purchase of treasury stock
Decreases common stock outstanding
On March 31, year 1, Dallas Co. received an advance payment of 60% of the sales price for special-order goods to be manufactured and delivered within five months. At the same time, Dallas subcontracted for production of the special-order goods at a price equal to 40% of the main contract price. What liabilities should be reported in Dallas' March 31, year 1 balance sheet?
Deferred revenues: 60% of main contract price Payables to subcontractor: None One of the three essential characteristics of a liability is that the transaction or event obligating the entity has occurred. The deferred revenue has been received, and thus a liability exists. The subcontractor has not produced the special-order goods as of March 31 so no liability should be recorded for the subcontractor payable.
Under IFRS, the discount rate to be used for pensions is
Determined by the market yield at the end of the reporting period for high quality corporate bonds having a similar term or maturity.
Governmental accounting Another typical closing entry at year end
Dr. Appropriationsxx Cr. Expenditures xx Cr. Encumbrances xx Cr. Budgetary Fund Balance xx
Governmental accounting What entry is made when the budget is initially recorded?
Dr. Estimated Revenues Cr. Appropriations Cr. Budgetary Fund balance Appropriations represent the maximum expenditure for the year and are established at the beginning of the year with a credit balance. At year end, when accounts are closed the entry would reverse for whatever remains so: Dr. appropriations Dr. Budgetary fund bal Cr. Estimated Rev
When Dividends are declared the journal entry is
Dr. Retained earnings Cr. Dividends payable
Dollar value LIFO example A firm uses the dollar value LIFO retail method and has $2,000 in beginning inventory at retail at the beginning of the current year. The base year equivalent of this amount is $1,600. The base year index is 1.00. The beginning inventory reported in the Balance Sheet is $800. During the current year, the firm purchased $12,000 of inventory at cost and marked that up to $40,000. Sales for the year were $28,000. The relevant ending price index is 1.60. What amount does this firm report as inventory in its Balance Sheet at the end of the current year?
EI Retail, current index=$2,000 + $40,000-$28,000 = $14,000 EI retail, base=14,000/1.6=8,750 Increase in EI retail, base = $8,750-$1,600 = $7,150 Increase in EI retail, current = $7,150(1.6) = $11,440 cost to retail ratio=12000/40000=.30 Increase in EI, cost = .30($11,440) = $3,432 EI, cost = $800 + $3,432= $4,232
Intercompany receivables/payables are
Eliminated. The consolidated entity does not show any intercompany receivables/payables.
If a company decides to change during year 5 from the FIFO method to weighted average method, What is the cumulative effect of this?
Ex. Inventory balances under each method: Fifo Weighted Avg. Jan 1, year 5. 71k 77k Dec 31, Year 5 79k 83k Income tax rate is 30% Solution : Accounting changes are measured as of the beginning of the year of change. So: 77-71=6,000 6000*70%= 4200 (after tax difference) This 4200 cumulative effect would be reported as an adjustment to the beginning bal. of retained earnings in the year of the change.
Permanent differences
Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers' life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern's effective tax rate? Both the 20k int rev and the 10k paid for the life insurance are permanent differences. Taxable income= 200k-20k+10k=190k tax liability=190k*30%= 57k 57k/200k=28.5% Note: Only life insurance premiums that are paid on policies where the company is the beneficiary are added back to net income.
Leases with a bargain purchase option must be classified as
Finance leases. Also note that for finance leases, the PV of the minimum lease payments must be at least 90% of the FV of the leased asset at inception The lease term should also be 75% or more of the assets useful life.
Choose the correct statement concerning transactions involving the issuance of shares in payment of obligations for goods and services.
When the value of shares to be issued is fixed, the number of shares to be issued is variable.
An equipment was acquired on 1/1 year 3 for $100k. It had 10 yr useful life and no salvage value. on 12/31 year 4 the following info was obtained: Expected value of undiscounted cash flows $72k Fair value estimated with in-use valuation premise 74k Fair value estimated with in-exchange valuation premise $70k What is the impairment loss to be recognize in year 4?
First we have to calculate the CV of the equipment as of 12/31 year 4. Two years of depreciation have passed so 100-20=80k We will need to compare the CV of the asset to its FV to calculate the impairment loss. The fv will be by using the most advantageous market and assuming the highest and best use of the asset. In this case the best use is at 74k. So impairment loss is 80k-74k=6k
Per ASC Topic 740, the tax benefit of an operating loss carryforward or carryback shall be reported in the same manner as the source of income (loss) in the current year.
For example, a company with a loss from discontinued segments the previous year was carried forward and reduced current taxes payable on year 2 continuing operations. Therefore, the tax benefit from the loss would be included in this years income from continuing operations.
. All foreign currency transactions hit income statement.
Foreign Currency Translations are the only foreign currency items that hit other comprehensive income. Translation is when you redoing the financials from the functional currency to a different reporting currency. Do not confuse translation for transactions. All foreign currency transactions hit income statement.
Depletion expense calculation
Formula is : Net cost of resource/Units of resource=Depletion charge per unit Ex. Company acquired land to extract resource. The land cost is $9m, cost to restore land is $1.5m. The land has a salvage value of $1M after restoration. 5 million tons of resource will be able to be extracted. So 9+1.5=10.5m total cost 10.5-1 salvage= 9.5m net cost 9.5m/5m (total extractable resources)=$1.90
Capitalizing expenditures
Generally, an expenditure should be capitalized if it increases the original useful life of an asset or increases either the quantity or quality of services. If none of these three criteria are met, the expenditure shall be expensed because it merely maintains the asset at its current level.. For example, replacing an old roof with a fireproof roof or doing major improvements to the electrical system of a plant would both be capitalizable. Repainting a plant building on the other hand, would be expensed.
Discontinued Operations - how to calculate the loss
If a parent company wants to dispose of a subsidiary and the requirements are met for classification as discontinued ops (held for sale), then the parent company should present the income/loss from operations of the subsidiary and the gain/loss on disposal. Ej. Parent A wants to dispose subsidiary B. Carrying value of B is $8m and its FV less cost to sell is $6.5m. Subsidiary B also had a loss of $2m. Parent should report a loss from discontinued ops of: (8m-6.5m)+2m loss=$3.5m
Black scholes merton formula, binomial model and discounted cash flows are examples of which valuation technique:
Income approach
Renwood, Inc. contracted for services to be provided over a period of time in return for 2,000 shares of Renwood's $5 par common stock when the service is completed. At the time, Renwood stock was selling for $10 per share. When the service was completed, Renwood's stock price was $12 per share. Therefore, Renwood
Increases contributed capital in excess of par $10k. Total owner's equity: CS is $10k Additional paid is capital is $10k This is recorded at signing. Subsequent changes in stock price do not change the total amount of owner's equity recorded.
Allam Inc. contracted for services to be provided over a period of time with full payment in Allam's $2par CS when the service is completed. At the time of the agreement, Allam's stock was trading at $20 per share. The agreed-upon total value of the contract is $20,000. When the service was completed, Allam's stock price was $25 per share. Therefore, Allam
Increases the common tock account by $1600. The $20k contract value is fixed so the number of shares is variable. In this case, when the service is completed, the $20k contract can be converted to 800 stocks. (20,000/25 Share price)=800 stocks. The entry would be Dr. Liability 20k Cr. Common stock 1600 (800 shares* 2 par) Cr. Additional paid in 18,400
On 7/1 2014 A company purchases a HTM investment $1m 8% bond for $946k including accrued interest of $40k. The bonds were purchased to yield 10% interest. They mature on 1/1/2021 and pay interest annually on jan 1. What amount should be reported on the balance sheet on 12/31/2014?
Initial investment cost=946k-40k=906k (note, the initial investment cost should exclude the accrued interest) Interest revenue for 6 months= 906k*.05=45,300 Interest cost for 6 months= 1m*.04=40,000 45300-40000=5300 discount amortization investment in bond balance=906k+5300=$911,300
If a company is using the group depreciation method for several assets and one of them gets retired early due to damage and insurance recovery was received, the net book value of these group asset accounts would be decreased by the:
Insurance recovery received. The cash received would equal the reduction in net book value (cost-accum. depre) Dr. Cash (amt received) Dr. Accumu Depre (plug) Cr. Asset (orig. cost)
When a company uses the effective interest method to amortize a discount on bonds payable, interest expense will be
Lower in earlier years when compared to interest expense under the straight-line method. Using the straight line method instead of the effective interest method would also be overstating the bond carrying amount . (s/l would be amortizing more in the beginning than effective interest method).
In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity?
Merger- Yes Acquisition- No Consolidation- Yes In a merger and in a consolidation, at least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities.
Diluted EPS calculation
NI-Preferred dividends/weighted avg. common shares+contingent shares
In business combinations accounted for as acquisitions, costs of registering securities and issuing common stock are
Netted against the proceeds and reduce the additional paid in capital account. Example: Company issued 200k shares $5 par CS to acquire company B. Market value of the stock is $12. Legal and consulting fees associated with the purchase is 110k. Registration and issuance cost is 35k. What should be recorded in additional paid in capital? Debit investment Cr. Common stock 1,000,000 Cr. Additional paid in capital 1,365,000 (1.4m-35k)
A company reported a net operating loss of $670,000 in year 1 when the current tax rate is 25% and the enacted tax rate for future years is 20%. The company appropriately recorded a deferred tax asset. In year 2, the company reports taxable income of $425,000. Following the net operating loss offset tax rules, the company appropriately applies the net operating loss to offset taxable income. How much of the deferred tax asset account is used in year 2?
Note: NOL limitation: No more than 80% of taxable income may be offset with prior nol. 425K * 80%=340K 340K*20%=$68K Note that at the beginning of year 2, the total deferred tax asset is 134k (670k*20%). Only 68k of this amount will be used in year 2.
When the functional currency of a foreign subsidiary is the local foreign currency, balance sheet accounts are translated using the current exchange rate (the rate in effect at the balance sheet date)
On the other hand, if the functional currency was the US dollar, balance sheet accounts would be remeasured using a combination of historical and current rates.
A firm is applying international accounting standards to its defined-benefit pension plan. At the end of the current year, the actuary informs the firm that the plan has experienced an actuarial gain of $2mn. The average remaining service period of plan participants is ten years. Therefore,
Other comprehensive income is immediately increased. OCI is always increased through the increase in pension gains/losses
Company A owns 20% or company B's preferred stock and 80% of its common stock. Company b's outstanding stock at 12/31 is: 10% Cumulative preferred stock $100k Common stock $700k Company B reported NI of $60k for year ended 12/31. B doesn't elect the FV option. What amount should A record as equity in earnings of B?
Out of the $60k NI, we will have to pay the preferred stock first. 10% of 100k is 10k, so that part of NI will all go to preferred stock. 60k-10k= 50k Available to Common stock holders. Company A owns 80% of company B, so 50k*80%= $40k If asked to combine with preferred dividends: 10k available to preferred dividends * 20%= $2k Total= 2k+40k= $42k Equity in earnings of B
For non-profits, conditional grants received should be recorded as
Refundable advances
A company has 2.5m shares of CS outstanding on 12/31 year 1. An additional 500k shares were issued on 4/1 year 2 and250k shares on 7/1 year 2. On 10/1 year 2 the company issued 5000, $1000 face value 7% convertible bonds. Each bond is convertible to 40 shares of CS. No bonds were converted in year 2. what is the number of shares to be used in computing basic EPS and diluted EPS, respectively, for year ended 12/31 year 2?
Remembering that eps formula is: NI-Preferred divs/weighted avg cs outstanding: The weighted avg in here would be: 1/1/2 outstanding 2.5m 4/1/2 issuance (500k * 9/12 of year) 375k 7/1/2 issuance (250k* 6/12 of year) 125k Total = 3,000,000 For diluted EPS: the formula is NI-preferred divs/weighted avg cs outstanding + convertible 5000 bonds*40= 200k *3/12=50k So shares for diluted is: 3m+50k=3,050,000
In year 3, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The change should be reported in Brighton's financial statements as a
Retrospective application to the earliest period presented if practicable. A change in inventory method no longer receives cumulative effect treatment on the income statement. The accounting change is given retrospective application to the earliest period presented, if practicable.
If a company donates services to a non profit that would've been ordinarily paid for by the non profit (ej. Air conditioning repair services), then the non profit would recognize the donated/contributed services as:
Revenue without donor restriction and as expenses on the assets without donor restriction. Since this donation replaces skilled services that would ordinarily have been paid for, it is recorded as expenses and unrestricted revenues.
Capitalized software amortization
Rules: The annual amortization (depreciation) will be the greater of its straight line amortization or the percentage of expected total revenues earned during the period multiplied by total capitalized amount. After this, you'll arrive at the assets net book value. Next you;ll compare this net BV to the NRV. If the BV is less than then NRV, that will be your capitalized basis. If the BV is greater than the NRV, then the asset will need to be written down to NRV. Ej. On 12/31/04 a company had capitalized software costs of $600k, with econ. life of 4 years. Sales for 2005 were 10% of expected total sales of the software. At 12/31/05, the software had a NRV of $480k, What amount should be reported as net capitlized cost of computer software on 12/31/05? Percentage of expected total revenue=10%*600k=60k amortization s/l amortization=600k/4=150k The greater of the two is the 150k as the amount to amortize. Capitalized cost is 600k- 150k amortization = 450k net book value. This 450k net BV is less than the NRV of 480k, so no further write down is required.
Which of the following is an accurate statement from the GASB Concepts Statements about service efforts and accomplishments reporting?
Service efforts and accomplishments reporting is necessary for assessing accountability and making informed decisions.
Under GAAP, recoveries of impairment losses
Shall not be recognized. (IFRS allows it for indefinite intangible assets up to the initial carrying amount).
Which of the following is required for private, not-for-profit organizations?
Statement of financial position, statement of activities, and a statement of cash flows. Moreover, all not-for-profit organizations must report expenses by nature and function in one place: on the face of the statement of activities, as a schedule in the notes to the financial statements, or as a separate financial statement.
Government hospitals classify revenues into three broad categories: Patient Service Revenues, Premium Fees, and Other Revenues.
The Other Revenues category includes revenues generated by ongoing activities of the hospital other than patient care. Revenues from educational programs are included in this category. Government hospitals record unrestricted gifts as Nonoperating Gains in the General Fund. If we assume that the hospital is not a government entity, The unrestricted gifts would be classified as Revenues from Contributions.
An asset retirement obligation is recorded when a firm has a probable and estimable future cost to reclaim the property exploited at the end of the project life.
The amount is the fair value or present value of future cash payments to be made. The asset retirement obligation is recorded as a debit to the natural resources account (depletion base) and a credit to a liability.
On January 2, Year 4, Gill Co. issued $2,000,000 of 10-year, 8% bonds at par. The bonds, dated January 1, Year 4, pay interest semiannually on January 1 and July 1. Bond issue costs were $250,000. What amount of bond issue costs are unamortized at June 30, Year 5, assuming straight-line method?
The bond term is 10 years. The bond issuance costs will be amortized s/l using the length of the contract (interest payments date here are irrelevant). At 6/30/05 8.5 years remain in the bond term, so 8.5/10 *250k= $212,500 remains unamortized
Company A acquires company B. Calculating total assets in the consolidated financial statements
The calculation would involve: Company's A assets- investment in B + Company's B's assets at FV + Goodwill Remember that goodwill is calculated as the excess of the cost of the investment over the FV of the net assets purchased (fv of company B net assets). ( Net assets= assets-liabilities)
Calculating the current portion of income tax expense
The current portion of income tax expense is the tax liability for the year. The tax rate for the current year is applied to taxable income to compute this amount Ex: Pre tax financial income 150k Permanent difference -12k 138k Temporary difference- depreciation -9k Taxable income 129k Tax rate 40% current portion of income tax expense= 40% * 129k=51,600
The value assigned to a noncontrolling interest in an acquiree would not be based simply on the proportional share of that interest in the net assets of the acquiree (Statement I), but rather on the separately determined fair value of the noncontrolling interest.
The fair value per share of the noncontrolling interest in an acquiree does not have to be the same as the fair value per share of the controlling interest (Statement II), because there is likely to be a premium in value associated with having control of an entity that the noncontrolling interest would not enjoy.
A firm is applying international accounting standards to its defined-benefit pension plan and has pension gains and losses. As a result,
The firm's earnings will not be affected. Pension gains and losses are recognized immediately and in full in accumulated other comprehensive income. However, they are not subsequently amortized to earnings.
Governmental Accounting- General fund and accruing revenue
The general fund uses modified accrual accounting. Sales taxes are recorded when measurable and available. The general fund of a local government would accrue sales taxed held by the state which will soon be remitted to the local government. On the other hand, sales taxes collected by merchants would NOT be accrued by the local governments general fund until the state actually holds them for remittance to the local government units. For government wide statements, however, which uses full accrual accounting basis, those sales tax revenues would be accrued.
Wilburn Corp. signs an agreement to lease land and a building for 20 years. At the end of the lease, the property will not transfer to Wilburn. The life of the building is estimated to be 20 years. Wilburn prepares its financial statements in accordance with IFRS. How should Wilburn account for the lease?
The land is recorded as an operating lease and the building is recorded as a finance lease. IFRS provides that because land has an indefinite life, if title is not expected to pass at the end of the lease term, then it is separately treated as an operating lease.
Compensation expense On Jan year 1 Company granted an employee and option to purchase 3000 shares of their $5 par CS at $20 per share. The option became exercisable after 2 years of service on 12/31 year 2. The option was exercised on 1/1 year 3. The market price of the stock and the stock options were as follows: Jan year 1. Market price stock: $30. market price of stock option:$8 Dec yr 2 Market price of stock $50 market price of stock option: $9 Jan yr 3 market price of stock $45 market price of stock option: $11 For year 1, Doro should recognize compensation expense of
The market value of stock option would be the compensation expense for the company (Spread out over the 2 years required holding period). Total compensation expense is mv of option at grant date $8*3000=24k At end of year 1: 24k/2=12k compensation expense as of Dec year 1.
In a cash flow hedge, the item being hedged is measured using
The present value of expected cash inflows or outflows.
The interest rate applied to the net lease receivable is
The rate that amortizes the net lease receivable to zero at the end of the lease term. The lessor must determine the rate that will amortize the net lease receivable to zero by the end of the lease term.
In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 2, Pulham has a receivable from Angles. How should the receivable be reported in Pulham's Year 2 financial statements?
The total receivable should be disclosed separately. Although the equity method is often called a "one-line" consolidation, intercompany receivables remain separate from the investment account. Intercompany profit or loss is eliminated but that affects the income recognized by Pulham, not the receivable.
The functional currency of Nash, Inc.'s subsidiary is the Swiss franc. Nash borrowed Swiss francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash's translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash's consolidated financial statements?
The translation loss less the exchange gain is reported as "other comprehensive income" under one of three alternatives and "accumulated other comprehensive income" in the stockholders' equity section of the balance sheet. Note: The exchange gain is reported in OCI because ASC Topic 830 says that foreign currency transactions designated as economic hedges of a net investment in a foreign entity should be reported in OCI. Thus, both the translation loss and the exchange gain are to be reported in OCI.
Which of the following should be disclosed in a company's financial statements related to deferred taxes?
The types and amounts of existing temporary differences and The nature and amount of each type of operating loss and tax credit carry-forward. Note: Permanent differences don't give rise to deferred tax assets/liabilities so they wouldn't be disclosed in relation to deferred taxes.
Provisions are accounts that are uncertain as to amount or timing
These would include estimated amounts, such as warranty liabilities, bad debts, and taxes. A note payable is not uncertain as to amount or timing. (In GAAP provisions are called contingencies).
Deferred tax assets and deferred tax liabilities can be netted against each other only if
They relate to the same taxing authority.
Bargain purchase in a business combination
This happens if the identifiable assets of the business being acquired are more than the consideration being given (Transaction price). If this is the case, we would have a bargain purchase and this is recorded as a gain in the income statement.
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of
Total costs incurred to date to total estimated costs.
A sale of goods was denominated in a currency other than the entity's functional currency. The sale resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed so that a loss was incurred. The loss should be included as a:
Transaction loss reported as a component of income from continuing operations. Note: treatment of individual transactions- foreign currency transaction Translation is concerned with converting financial statements NOT individual transactions.
General principles of accounting for foreign currency operating transactions
Transactions are recorded in terms of the functional currency Gains/Losses result from changes in currency exchange rates Foreign currencies are converted using the current or spot exchange rate Note that gains/losses are NOT deferred until transactions are settled, rather such gains/losses are recognized in current income of the period in which the currency exchange rate changes.
Percentage of completion and completed contract methods
Under both of these methods, when progress billings are sent, "Billings on constructions in progress" is credited for the amount billed. This is shown on the balance sheet as a contra account to construction in progress.
Held to maturity debt securities
Unrealized gains/losses are not reported in NI. However, gains/losses will be recognized in NI when the securities are sold. Also, any permanent decline in value of the security will be included in NI. (The impaired security is written down to FV and the write down is included in earnings as a realized loss).
Exchange of non monetary assets
When a nonmonetary exchange transaction does not result in a significant difference in cash flows, the book value is used to record the transaction. Also, when the exchange of nonmonetary assets includes an amount of monetary consideration, the receiver of monetary consideration has realized a partial gain on the exchange
Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.
On July 1, year 2, Ran County issued realty tax assessments for its fiscal year ended June 30, year 3. On September 1, year 2, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year's real estate tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, year 2, Day paid the first of two equal installments of $12,000 for realty taxes. What amount of this payment should Day record as a debit to real estate taxes payable?
When the warehouse was purchased on 9/1/Y2, it would be recorded at its total cost before any credit for accrued realty taxes. The offsetting credits would be to cash for the net amount paid, and to real estate taxes payable for two months' taxes ($12,000 × 2/6 = $4,000). At the end of September and of October, Day would record property tax expense each month as follows: DR: Real estate tax expense2,000CR: Real estate taxes payable2,000 Therefore, at October 31, Day has a balance of $8,000 in the payable account ($4,000 + $2,000 + $2,000). On 11/1/Y2, Day would record the semiannual payment as follows: DR: Real estate taxes payable8,000DR: Prepaid real estate taxes4,000CR: Cash12,000 The prepaid real estate taxes would then be expensed $2,000 per month at the end of November and December.
A company enters into an agreement to sell one of its divisions and this was consummated on 12/31 year 2 and resulted in a gain of 400k. The divisions's operations had losses before income tax of 125k in year 1 and 225k in year 2. The company's tax is rate is 30% for both years. What is the gain/loss reported from discontinued ops for years 1 and 2?
Year 1: There's a loss from the division of 125k. So -125k* 70%=-87,500 loss Year 2: There's a loss from the division of 225k and a gain on disposition of 400k; so: 400k-225k= 175k*70%=122.5k gain
Impairment losses of intangibles cannot be reversed. However, impairment losses of plant assets held for disposal
can be reversed up to the extent of the previous losses.
Costs to fulfill a contract that benefit a period of less than one year are
expensed in the period in which they are incurred.
The correction of an error affecting the income of prior periods is accounted for as a
prior period adjustment. This adjustment corrects the beginning RE balance in the period the error was discovered. An example would be a failure to provide for uncollectible accounts in the previous period. (Bad debt expense not being calculated and therefore NI and RE being overstated in the prior period. The solution is to adjust RE in the current period. Note: The effect of a decrease in the estimated useful life of a depreciable asset or the cumulative effect of a change from a depreciation method would be treated as a change in estimate and are accounted for currently and prospectively, therefore prior RE is unaffected.
Changes in the value of a forward contract used for speculative purposes, measured using the forward rate, are
recognized in the period in which the forward rate changes and are not deferred until the contract matures.
Potentially dilutive securities
should be included in the diluted EPS calculation only int the year in which they are dilutive.
A Prior period adjustment is defined as
the correction of an error affecting prior-year income The adjustment reverses the error by correcting beginning retained earnings in the year of discovery. Note that events such as a change in the estimated useful lives of fixed assets purchased in prior years or a switch from the straight line to double declining balance method of depreciation are considered to be changes in estimate and they are treated currently and prospectively only, so prior periods are unaffected.
Under IFRS, what valuation methods are used for intangible assets?
the cost model or the revaluation model.
An account that's related to interest expense would be
unamortized bond discount. If the unamortized bond discount account decreases from one period 5000 to the next 4500, this means that it was amortized by 500. The entry would debit interest expense. From a cash flow statement perspective, if we have total interest expense of 4300 and we know that there was a bond discount amortization of 500, then we know 500 of the total 4300 interest expense is a non cash transaction. So 4300-500= cash paid for interest.