Financial Section - FAR

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported where?

"Part of continuing operations" found on the income statement in the other revenues and gains category

An entity analyzed a patent with a net carrying value of 500k for impairment. The entity determined the following: Fair value = 495k and undiscounted future cash flows = 515k. What is the impairment loss that will be reported? What if the undiscounted future cash flows is 499k?

$0, because the first step is to do the test for recoverability in which the carrying value is compared to undiscounted future cash flows. In this scenario because it fails this test and the carrying value is less, the impairment loss results in $0. If the undiscounted future cash flows is 499k then it passes that test and goes on to the next test, which is carrying - fv = 5k for impairment loss

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2k pounds (Ex Rate, 1 pound = $1.43). At the companys December 31 fiscal year end, the Ex rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January in the subsequent year. What amount would the company recognize as a gain(loss) from the foreign currency transactions when the receivable is collected?

$100 gain, because they would recognize a $40 gain @ year end then a $100 gain the following period. 1.50-1.45 = 0.05 * 2k = 100

The corridor approach - how to calculate the extent that an unrecognized gain will reduce current-year net periodic pension cost. What is this formula?

(Unrecognized G/L - (10% of the beg. PBO or FV of plan assets whichever is greater)) / average remaining service life

Dividend Received Deduction what are the exclusions at what ownership level?

0-20% is 50% DRD 20-80% is 65% DRD Over 80% is 100% DRD

Japes City issued $1,000,000 general obligation bonds at 101 to build a new city hall. As part of the bond issue, the city also paid a $500 underwriter fee and $2,000 in debt issue costs. What amount should Japes City report as other financing sources?

1,010,000 - The other expenditures are not netted against debt proceeds in governmental funds. These amounts will be accounted for as debt service expenditures and vouchers payable

If common stock is $10 par, 100k shares authorized and 50k shares issued of which 5k have been reacquired and are held in a treasury, and the total common stockholders equity is 2.2m. What is the book value per share of the common stock?

BV per CS = Common shareholders' equity / common shares outstanding 2.2m / 45k = $49

The reconciliation of governmental fund financial statements to a government-wide presentation would be more likely found in a city's?

Basic Financial Statements

When consolidating all intercompany transactions must?

Be eliminated. Even if the parent owns less than 100% of sub.

During a finance lease, additional direct costs like taxes should _____ ? What about additional direct costs not including taxes?

Be expensed when paid if they are taxes. They do not increase the amount of lease liability. Otherwise if its not taxes, then it increases the amount of the liability.

Key Co. received 2, 10k non-interest-bearing notes. The market interest rate is 8%. Note 1 is due in 9 months @ PV of 8% = 0.944. Note 2 is due in 2 years at 0.857. How should they be represented on the balance sheet?

Because Note #1 does not exceed one year, it is recorded at its face amount of 10k. While the 2nd note is at 8,570.

How do you calculate change in retained earnings?

Beg. RE +/- Net income/loss - dividends declared +/- prior period adjustments +/- Account changes reported retrospectively = Ending RE

What are the 2 external financial statements for a Government fund?

1. Balance sheet 2. Statement of revenues, expenditures and changes in fund balance

What are the 4 ENHANCING qualitative characteristics?

1. Comparability 2. Verifyability 3. Timeliness 4. Understandability

When testing property, plant and equipment or an intangible asset with a finite life, for impairment you must do what 2 things?

1. Determine the amount of the impairment by using undiscounted future net cash flows 2. Calc. amount of the impairment by using fair value compared with its carrying amount

What are the 5 Governmental type funds? (GRaSPP)

1. General Fund 2. Special Revenue Fund 3. Debt Service Fund 4. Capital Projects Fund 5. Permanent Fund

What are the 2 external financial statements for a Fiduciary fund?

1. Statement of fiduciary net assets 2. Statement of changes in fiduciary net assets

What are the 2 government wide financial statements? What does each include?

1. Statement of net position - includes "RUN" Restricted, Unrestricted and Net Investment in Capital Assets 2. Statement of activities - Includes General and "Program" Revenues. Program revenues are "SOC" - Services, Operating Grants & Contributions, Capital Grants & Contributions. While general are all other revenues.

Assume that 1m bonds due in 5 years were issued on Jan 1st, Year 1, at a discount for 926,399. Bond issuance costs of 20k were incurred. 2 Years later, on Jan 1st, Year 3, the entire issue is redeemed at 101 and canceled. On this date, unamortized discount and bond issuance costs totaled 62,792. 1.) Record the JE. 2.) Record the JE if the bond was initially at a premium of $1,081,109 and redeemed and canceled for 96 with an unamortized premium of 52,421.

1.) Bond initially sold at a discount: Bonds Payable - 1m (PLUG) loss on extinguishment of bonds - 72,792 Discount on BP and bond issuance cost - 62,792 Cash - 1.01m 2.) Bond initially sold at a premium: Bonds payable - 1m Premium on BP and Bond issuance cost - 52,421 Cash - 960k (PLUG) Gain on extinguishment of bonds - 92,421

With bonds, how are bond issuance costs handled? What is an example of a JE if we have a bond sold @ 100k, 95, incurred 3k of bond issuance costs, and what is the bond liability amount at initial date? What if the bond was sold at 104 JE, and what is the bond liability amount at initial date?

1.) Bond issuance costs are amortized as interest expense over the life of the bond using the effective interest method. An ex of a JE is: Cash - 92k Discount and bond issuance costs - 8k Bond payable - 100k Here the 8k is going to be amortized over the length of the loan, but this reduces the value of the bond payable to 92k. Cash - 101k Bond Premium and issuance costs - 1k (***This is because the premium gets reduced by the bond issuance costs) Bond Payable - 100k Bond liability gets increased to 101k becuz of the premium.

On the statement of cash flows for Proprietary funds, what is considered Non-capital financing activity?

1.) Cash receipts from grants 2.) Cash receipts from property taxes 3.) Any internal transfers of money One important thing is that all of these are receiving the money. If you are not receiving, for ex: if the water and service fund transfer money in lieu of taxes to the general fund, that would be considered Operating Activities.

Bilings Co. held equipment on its books with an original purchase price of 500k. a remaining useful life of 10 years, and a carrying value of 415k. On Jan. 1st, Year 3, Billings sold the equipment to Crane Inc. for 490k, the equipment at the time of sale had a FV of 470k. Crane agreed to lease back the equipment to Billings for 5 years at an annual lease cost of 112,396.50 with an implicit interest rate of 4.75%. Prepare the journal entries for Billings if the criteria to qualify the transfer a sale are met? And 2 are not met?

1.) Criteria for sale met: Cash - 490k A/D - 85k Financing Liability - 20k (490k-470k) Gain on sale - 55k (470k-415k) Equipment - 500k 2.) Criteria for sale are not met (essentially no sale): Cash - 490k Financing Liability - 490k *remember in a failed sale the asset remains on the books and you still record depreciation and interest expense

What is the measurement focus and basis of accounting for: 1.) Government-Wide Financial statements 2.) Government fund 3.) Proprietary fund 4.) Fiduciary fund

1.) Economic resource focus and Accrual 2.) Current financial resource focus and Modified Accrual 3.) Economic resource focus and Accrual 4.) Economic resource focus and accrual

Hull Co. is indebted to Apex under a 500k 12% 3 year note dated dec. 31st Year 1. Hull owed 60k in accrude interest on Dec. 31st Year 3 because it had difficulties paying the interest off. Under a troubled *debt restructuring* on December 31st Year 3, Apex agreed to settle the note and accrued interest for a tract of land from Hull having a FV of 450k and cost of 360k. 1.) Prepare the JE to record the transaction on Hull's books 2.) Prepare the JE to record the transaction on Apex's books

1.) Hull's books (Hull is one giving up land): Note Payable - 500k Interest Payable - 60k Gain on troubled debt restructuring - 110k Gain on land disposal - 90k Land - 360k 2.) Apex's Books Allowance for credit losses - 110k Land - 450k Interest Receivable - 60k Note Receivable - 500k

Gain/Loss rules on a Non-commercial substance transaction exchange (where cash flows are not expected to change significantly)? (There are 5 rules, involves boot rec'd/paid)

1.) If transaction is at a loss = recognize full loss (ex: A @ 10k BV, 8k FV in exchange for B @ 8k FV gives a loss of 2k that must be shown) 2.) No Boot is received = No gain 3.) Boot paid is < 25% of FV received = No gain 4.) Boot received is < 25% of boot + FV received = gain recognized in proportion by taking % of boot/*total* FV received * realized gain 5.) Boot received > 25% of boot received + FV received = recognize full gain

Interest revenue of 40k from was transferred from the capital projects fund as required by the bond indenture. 1. What is the Journal Entry? 2. Where is this reported?

1.) Interfund transactions are always the same, cash and interfund transfers: Cash - 40k Interfund transfers - 40k 2.) Tricky - Interfund transfers in/out are always posted in the "Other Financing Sources" Section on the statement of revenues, expenditures and changes in fund balances

Assume that Progressive Township has budgeted or appropriated 100k for the purchase of 2 sanitation trucks at the beg. of the year. Then assume that a purchase order is issued to purchase the two sanitation trucks at an estimated cost of 45k each. 1.) Prepare the JE to set up the encumbrance 2.) Prepare the JE's when the invoice is actually received for one of the trucks and the actual cost is 44k. Assume second truck is backordered 3.) End of year 2nd truck still on backorder, what JE is needed?

1.) JE #1: record encumbrance based of estimated cost Encumbrances - 90k Budgetary Control - 90k 2.) JE #2: When we receive the invoice, you must back out the entire encumbrance and record an expenditure Budgetary control - 45k Encumbrances - 45k Expenditures - 44k (remember no fixed assets in gov.) Vouchers payable (or cash) - 44k 3.) JE #3: must close out the encumbrance account and add the amount to an unassigned fund balance Budgetary Control - 45k Encumbrances - 45k Unassigned fund balance - 45k Fund balance, committed - 45k

For Financial information to be useful we need?

1.) Relevance 2.) Faithful Representation

On the governmental-wide statements, assets and liabilities account balances coming from the accounts below should be reported how? 1.) Internal Service Fund 2.) Enterprise Fund 3.) Fiduciary Funds 4.) Government Funds 5.) Special Assessment debt, repaid from *general* resources of the government

1.) Reported in governmental activities section 2.) Business-type activity 3.) Not reported 4.) Governmental activities section 5.) General long-term liability section in the governmental activities column of the statement of net position because its repaid from general resources of the government

1/2.) What is the difference between the stated and market rates? 3.) When is there a discount or premium?

1.) Stated is the rate of interest paid to the investors 2.) Market rate is the rate of interest actually earned by the bondholder 3a.) If the Market rate is higher than the stated rate, the bond is trading at a discount. 3b.) If the Market rate is lower than the stated rate, the bond is trading at a premium because the investor will pay more than face value due to the higher return compared to the market offered

What are the 3 external financial statements for a Proprietary fund?

1.) Statement of net position (BS) 2.) Statement of revenues, expenses, and changes in fund net position (IS) 3.) Statement of Cash Flows

Compute weighted average common shares outstanding if: 1.) 1/1 Shares outstanding = 1m 2.) 3/31 2 for 1 stock split 3.) 4/1 additional shares sold = 3m 4.) 12/1 reacquired shares = 500k

1.) beg. shares 1m 2.) stock split 1m more (cuz applied at 1/1) 3.) 3m sold so we have 3m more outstanding shares for 9 months 3m * 9/12 = 2.25m 4.) sold 500k so -500k * 1/12 = -41,667 WA common shares outstanding ends up at 4,208,333

U.S. GAAP says to amortize Goodwill how long?

10 Years for books and 15 years for tax

X Company has outstanding 100k shares of common stock and $500k in 6 percent bonds convertible into 10 shares for each $1k bond. Net income for the year is $100k. Compute the diluted EPS assuming a 34% tax rate.

100k + (30k * (1-34%)) = 119,800 for numerator 500k / 1k bonds = 500 bonds * 10 shares = 5,000 shares + 100k shares outstanding = 105k denom. Answer = 1.14 ****However, if we did not include the conversion it would be 100k / 100k which is 1.00. Therefore, the conversion is antidilutive and we will not include them. Final answer = 1.00

Parker Co. amended its pension plan on January 2 of the current year. It also granted 600k of unrecognized prior service costs to its employees. The employees are all active and expect to provide 2,000 service years in the future with 350 service years this year. What is Parker's unrecognized prior service cost amortization for the year?

105k = 600k * (350/2k) Prior year service cost will be assigned equally to each service year as shown here.

Super Seniors is a NFP that provides services to seniors. Super employs a full time staff of 10 people at an annual cost of 150k.In addition, 2 volunteers work as part-time secretaries replacing last year's full-time secretary who earned 10k. Services performed by other volunteers for special events had an estimated value of 15k. What amount should Super report for salary and wage expenses?

160k - You include the amount that would normally be paid if it is a normal part of the program or supporting service of the program (like this is)

Bard Co. owned several subs at December 31st. The following table shows each sub's total liabilities, excluding intercompany transactions, and percentage of stock owned by Bard: Brock Co. - 4m - 70% owned Harl Co. - 2m - 48% owned Portor Co. - 7m - 80% owned Nortin Co. - 5m - 100% owned What amount should Bard include as liabilities in its consolidated balance sheet at December 31st?

16m (liabilities of any company greater than 50% ownership is 100% included in the consolidated balance sheet.)

An entity purchases 5k of inventory with the terms 2/10, net 45. Entity pays at day 44. Under Perpetual Inventory system and the gross method is used to record the entries

1st entry: Inventory - 5k AP - 5k 2nd entry @ 44 days: AP - 5k Cash - 4900 Purchase Discounts*** - 100 *** This would be the inventory account if the company used a perpetual inventory system

Calculate the non-controlling interest amount in a 75% 300k outstanding common stock purchase for 280k in FV of assets?

25% * 400k = 100k non-controlling interest

If you have 700k shares authorized of common stock and 300k shares outstanding. Then declare a 10% stock dividend, how many shares are outstanding after the dividend?

330k Stock dividends go off of shares outstanding.

For NFP, you receive a contribution of 500k without donor restrictions and a contribution of 200k with donor restrictions. Where should the cash inflows be represented? Operating, finance or investing?

500k - Operating receives all contributions without donor restrictions 200k - Finance receives all contributions with donor restrictions

King Inc. owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?

550k because 450k from King's and 200k - 100k (which is intercompany portion) making 550k total.

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year1?

60,000. - REMEMBER you dont report dividend income through the equity method, only fair value. The 60k in dividend income is from the preferred non-voting shares. Equity method only applies to common stock.

During the year, Private College received the following: 1.) A 50k pledge without donor restrictions to be paid *the following year* 2.) A 25k cash gift donor-restricted for scholarships in year 2 3.) a notice from a graduate that the college is named as a beneficiary of 10k in the graduates will 4.) $1,500 received for subscriptions with a FMV to subscribers of $1,000 5.) $10,000 to be used only upon completion of a alumni center that was 75% complete at December 31, Year 1 What amount of contribution revenue should be reported in the statement of activities for this year?

75,500 - The 50k pledge is reported even though it is to be paid the following year. The 25k is reported even though it has donor restrictions for following year. The 10k is not because graduate can change its will. $500 over FMV. 0 out of the 10,000 because it requires a future event to occur and thus is conditional (not included).

Sun Co. was constructing fixed assets that qualified for interest capitalization. Sun had the following outstanding debt issuances during the entire year of construction: $6,000,000 face value, 8o/o interest. $8,000,000 face value, 9o/o interest. None of the borrowings were specified for the construction of the qualified fixed asset. Average expenditures for the year were $1,000,000. What interest rate should Sun use to calculate capitalized interest on the construction?

8.57%, a weighted average method of the debt available is used when the borrowings are not tied specifically to the asset.

Give the Journal entry for the following transaction: Foxy Co., exchanged old cars for a building. Future cash flows will change. The book value of the cars total 40k, ( A/D of 62k, cost of 102k). The Fair Value of the cars is 45k. In addition they pay 20k cash.

Building - 65k A/D - 62k Cash - 20k Cars - 102k Gain on sale - 5k

During a finance lease, what period of time should the lessee amortize the leased property? What if it is a leasehold improvement?

All assets except leasehold improvements: Over the economic life of the asset. (Lease term does not matter at all) Leasehold improvements: amortized over life of the improvements or the remaining life of the lease, whichever is shorter

What happens to the subs equity accounts in consolidation

All equity accounts on the consolidated balance sheet are eliminated

How do you allocate proceeds of stock when you have a *convertible *preferred stock and common stock?

Allocate proceeds based on fair market values pro rata, not based off of par value

What is the entry to write off an uncollectible account?

Allowance for DA Accounts receivable Remember this has no impact on net income.

What is form 10-K?

Annual AUDITED financial statements filed by U.S. registered companies 60-90 days after fiscal year end

When a transaction has commercial substance what do you recognize? (Chapter 3, M6 in Becker, good one to re-study)

A G/L on the difference of the assets you are giving up BV and FV (if BV is 50k and FV is 40k then you would have a loss of 10k debited)

CARINBIG - Steps to consolidation

CAR = Common stock, APIC, RE is eliminated I = Investment in sub account is eliminated N = Noncontrolling interest account is created B = Balance sheet is adjusted for Fair Value for 100% of subs assets/liab even if not getting 100% I = Identifiable intangible assets are recorded at Fair Value G = Goodwill is recorded if purchase price > Fair Value of net assets, if it is under then a Gain is recorded

FIFO periodic and FIFO perpetual always produce the same amounts of what?

COGS (LIFO will not)

Green co. incurred leasehold improvement costs for its leased property. The estimate life of the improvements was 15 years. The remaining term of the lease was 20 years. How should the leasehold costs be handled?

Capitalized and depreciated over 15 years (always the lower of the life of the improvement or the term of the lease for leasehold improvements)

What is the entry to record the collection of an account previously written off?

Cash Allowance for DA

What account does adjusting journal entries NEVER effect?

Cash account

What is a consignment arrangement? Who has the assets on their books?

A consignment is when a consignor delivers good to an agent (the consignee) to hold and sell on the consignor's behalf. The consignor (true owner/seller) maintains the inventory on their books because they still have the title and risk of loss.

What must be done if there is substantial doubt about a going concern?

A disclosure must be made in the footnotes and the financial statements would be continued to be prepared under the going concern basis of accounting.

From the LESSOR Side: What is the criteria for a finance lease? (OWNES) What about a direct financing lease? What about an operating lease?

A finance lease is when 1 or more of the following are met: 1.) Ownership transfers by end of lease term 2.) Written option to purchase the underlying asset 3.) NPV of all lease payments and any guaranteed residual value is 90% or more of the assets fair value 4.) The term of the lease is greater than 75% of the entire Economic life remaining for the asset. 5.) The asset is Specialized such that it will not have an expected, alternative use to the lessor when the lease term ends. Direct financing lease is when BOTH of these are met: 1.) Present value of the sum of the lease payments, lessee guaranteed residual value not included in the lase payments, and any third-party guaranteed residual value is 90% or more of the assets fair value 2.) Collection of the lease payments is probable. An operating lease is when none of the financing lease criteria is met and only 1 or none of the direct financing lease criteria is met.

From the LESSEE Side: What is the criteria for a finance lease? (OWNES) What about a direct financing lease? What about an operating lease?

A finance lease is when 1 or more of the following are met: 1.) Ownership transfers by end of lease term 2.) Written option to purchase the underlying asset 3.) NPV of all lease payments and any guaranteed residual value is 90% or more of the assets fair value 4.) The term of the lease is greater than 75% of the entire Economic life remaining for the asset. 5.) The asset is Specialized such that it will not have an expected, alternative use to the lessor when the lease term ends. There is NO Direct financing lease option for Lessee's Operating occurs when none of the above is met.

Other Comprehensive Basis of Accounting (OCBOA) what is it?

A term used to encompass bases of accounting that are not GAAP. Bases included are cash, modified cash, regulatory basis and income tax basis.

Formula to calculate net pension expense (SIR AGE)

ADD: Service Cost ADD: Interest Cost (Beg. PBO * Discount Rate) SUB: Return on Plan Assets (Beg. FV * Expected Rate) ADD: Amortization of prior service cost (Unrecognized Prior Year Service Cost / Avg. Service Life) SUB: Gains and ADD Losses ADD: Amortization of Existing Net Assets (Prior Year Assets unrecognized / Avg. Service Life)

The FASB amends the Accounting Standards Codification through the issuance of

Accounting standards updates

Antidilution conversions, what are they?

Antidilution is when *EPS increases* due to the conversion. We never include antidilution conversions.

How is Goodwill calculated under Acquisition method and equity method?

Acquisition = Acquired entities FV over FV of assets receiving including intangible assets Equity = Excess of stock purchase price over FV of net assets receiving

On January 1, Year 1, Big company exchanged 10k shares of $10 PV common stock with FV of 415k for 100% of the outstanding stock of Sub Co. in a business combination accounted for as an acquisition. In addition, Big Co. paid 35k in legal fee's. At the date of acquisition, the fair and book value of Sub Co's net assets totaled 300k. Registration fee's were 20k. Prepare the JE to record the acquisition method? Then prepare the ELIMINATION Journal Entry.

Acquisition JE: Stock registration and issuance costs are a direct reduction of the value of APIC and increase cash credit. Investment in Sub - 415k Legal Expense - 35k Common Stock - 100k APIC - 295k (315k - 20k) Cash - 55k ELIM: where you record FV - assets receiving (FV is investment, assets receiving is APIC, and Gw is difference) APIC - Sub - 300k Investment - 415k Goodwill - 115k

What software expenses are expensed and what are capitalized?

Any costs related to the planning, design, coding and testing of software are expensed as long as they happen before "technological feasibility". Otherwise, they are always capitalized

What parts of Goodwill are capitalized or expensed?

Any goodwill internally created is immediately expensed.

Separate fund financial statements should be presented for governmental and proprietary funds to report what?

Additional and detailed information about the government

Once the bank rec is completed what do you do to the books?

Adjust the books to reflect corrections made by the bank like NSF checks or notes collected by the bank and credited to the account etc.

A county's balances in the general fund included the following: Appropriations $745,000 Encumbrances 37,250 Expenditures 298,000 Vouchers payable 55,875 What is the remaining amount available for use by the county?

Appropriations is the beg. of year amount we expect to pay. So we are at 745k. Then during the year we have 298k of actual expenditures and 37,250 of actual encumbrances (expected expenditures). Vouchers payable is not an expense item and is already included in the expenditure amount. Therefore, the final remaining available appropriations is *409,750.* ***One thing is remember is that in Governmental all budgeted, activity and encumbrances are booked then reversed entirely for the exact same amount.

If a bond payable due March 31st, 3 months after year end, is being refinanced with a long-term bond, how should be represented on the balance sheet?

As a non-current liability with a separate disclosure of the note refinancing.

The year-end exchange rate is used for what items?

Assets/liability accounts.

Accounts Receivable is presented on the balance sheet at what? What method is used for GAAP purposes to handle allowance for doubtful accounts?

At its net realizable value (so gross AR - allow = NRV) The Allowance method is used for GAAP and accrual accounting. But for Federal income tax method the direct write-off method is used.

Operating Cash Flow Ratio

Cash flow from operations / Current Liabilities

What makes deposits held as a compensating balance against borrowing arrangements with a lending institution a cash or cash equivalent? What makes it NOT a cash or cash equiv?

Cash/cash equiv = if these deposits are not legally restricted. If the deposits are legally restricted then they are not cash/cash equiv.

How should the effect of a change in accounting estimate be accounted for?

Changes in accounting estimates are accounted for only prospectively and they do not affect previous periods.

Jenkins Inc. leases a truck to Briggs Co. for four years at 5k per year with initial direct costs of 450 and an implicit rate of 6% (PV of these lease payments is 17,325). On the date the lease commences the carrying value is 22k and fair value is 24,216. Jenkins expects that the truck will be worth 8,700 (6,891 PV @ 6%) when the lease ends. If this lease is a *Direct Finance* Lease, determine the *lessor's* JE's on commencement date and first payment. Tip: Direct Finance leases record interest income from the lessor side. Lessee reports interest expense/amortization expense

Commencement date: Residual value - 6,891 Lease receivable - 17,775 (includes direct leasing costs) Truck - 24,216 (recorded at FV) Cash - 450 First payment: Cash - 5k Interest income - 1,480 (total residual value and lease receivable * 6%) Lease receivable - 3,520

Noncompensatory stock options are stock options that the employer can not record what?

Compensation expense

What is convertible preferred stock?

Convertible preferred stock can be exchanged for common stock. It typically pays a lower stated dividend because it can be exchanged for common stock.

On January 1, Year 10, Poe Corp. sold a machine for 900k to Saxe Corp., its wholly owned sub. Poe paid 1.1m for this machine, which had A/D of 250k. Poe estimated a 100k salvage value and depreciated the machine on the S-L method over 20 years, a policy that Saxe continued. In Poe's December 31, Year 10, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as:

Cost: 1.1m A/D: 300k What's going to happen is all intercompany transactions are going to be eliminated when creating the consolidated balance sheet. The machine is then going to be put at cost on the consolidated balance sheet and have the normal A/D because all the gain etc. is going to be eliminated.

What are the incremental costs of obtaining a contract? How do we recognize them?

Costs incurred that would not have been incurred if the contract had not been obtained. They are recognized as an asset and amortized/capitalized. If the costs would have been incurred regardless of whether the contract was obtained or not then they recognize an expense.

What balance does a gain account have?

Credit

What is the difference between cumulative preferred stock and noncumulative?

Cumulative provides that any dividends not paid in a year accumulate and must be paid in the future before dividends can be paid to common shareholders. Noncumulative means they do not accumulate.

Current Ratio

Current Assets/Current Liabilities

Perform double declining balance for this: 10k asset, 2k SV, useful life of 5 years

DDB does not include Salvage Value right away, but total depreciation can not make the asset net book value drop below it! Perform Straight-Line to the remaining balance each year depreciable then double it. Year 1: 4k Year 2: 2,400 Year 3: 1,440 Year 4: 160 (plug remaining)

Cash conversion cycle

Days sales in Accounts receivable + days in inventory - days of payables outstanding

What balance does a loss account have?

Debit

What two funds of the governmental funds do not report encumbrances?

Debt service fund and permanent fund

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be?

Deducted from the cost of the land. Land's total cost is the price for the land and all costs necessary to put the land in place and condition for the construction. If you sell anything like a building etc. that was on the land, you deduct the proceeds from the cost of the land.

what are deferred revenues? Deferred expenses? what are accrued revenues? Accrued expenses?

Deferred Revenues - Cash received before you earn the revenue Deferred Expenses - Cash paid before before the expense is incurred Accrued Revenues - Cash is received after the revenue is earned Accrued Expenses - Cash is paid after the expense has been incurred

With discounts and relinquishment of discounts whats the trick to always know whether debit or credit?

Discount always pairs with cash. Even unamortized portions when you relinquish debt is always paired with the cash account. - Then you know premiums are always opposite of cash.

What depreciation method is the only method that avoids salvage value in immediate calculations, but is important in the end?

Double-Declining Balance

Times Interest Earned

EBIT / Interest Expense

gains and losses from changes in the effective portion of a derivative designated and qualified as a cash flow hedge should be recognized where?

Effective portion for cash flow hedges should be recognize din Other comprehensive income. While the ineffective portion should be in current net income.

When do you record an encumbrance vs a voucher payable?

Encumbrances are recorded as commitments are incurred, vouchers are recorded when a liability is incurred and the expenditure is known (i.e. when you record the expenditure)

Days in Inventory

Ending Inventory / COGS / 365

Days of Payables Outstanding

Ending accounts payable / COGS / 365

Days Sales in Accounts Receivable

Ending accounts receivable (net) / (Net Sales / 365) *Keep in mind net sales is just sales for the period - discounts and returns

Equity securities show up where? While available for sale/trading show up where? And Held-to maturity shows up where?

Equity - Income Statement Available for Sale - Other comprehensive income/loss if they were not impaired. But if they were impaired then it goes in Earnings Held-to-maturity - not recognized

The Historical Exchange rate is used for what accounts?

Equity only accounts

At the beginning and end of the year for Governmental account you must make what entry if the estimated revenues is 2m and estimated appropriations is 1.95m? *Make sure you know the exact name of these JE's because on exam they will try to trick you on similar names of the debits/credits

Estimated revenue control - 2m Budgetary control (deficit) - NONE here, just put this to show it could appear here if appropriations are higher Appropriations control - 1.95m Budgetary control (surplus) - 50k At the end of the year you just reverse everything by the same amount

How does one account for start-up or organizational expenses?

Expense immediately, they will be portrayed as an intangible asset, but always expense right away.

In an acquisition, any direct costs associated with the company who is buying the other company should be recorded how? (Ex: legal fee's)

Expensed in the period incurred

Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

FIFO because the first first costs inventoried are the first costs transferred to COGS. Therefore in a period of rising prices, FIFO will have lowest COGS and highest net income.

Where are all companies required to present earnings per share?

Face of the income statement

On Jan 1, Big Corp acquired a 40% interest in Small company for 300k. At the date of acquisition, the net assets of Small had a book value of 750k. During Year 1, Small Co. had net income of 90k and paid a 40k dividend. Report the 3 Journal Entries needed. Remember (BASE) where you Add income and SUB dividends

Fact 1: 40% of 750k = 300k so no difference in purchase price Investment in Small Co. - 300k Cash - 300k *MUST KNOW: Earnings affect investment income, Dividends only reduce the carrying amount of the investment* Investment in Small Co. - 36k Equity in Investee Income - 36k Cash - 16k Investment in Small Co. - 16k

All derivative instruments are measured at _____________.

Fair value

Compensatory stock options and stock purchase plans are valued at?

Fair value of the options issued

Marketable debt securities are kept at?

Fair value, with holding gains and losses included in Earnings

What is the presentation for the statement of net position for a fiduciary fund? What about for a governmental fund?

Fiduciary = Assets and deferred outflows of resources minus liabilities and deferred inflows of resources equals net position Governmental = Assets and deferred outflows of resources minus liabilities and deferred inflows of resources PLUS net position

Fundamental Assumptions and Principals - What is: Measurement Principal?

Financial statements use a mixed attribute system that allows assets and liabilities to be measures at various bases.

Weighted Average inventory method - used only by periodic systems Unit cost = 4.25 for 4k units = 17k, 4.50 for 2k units = 9k, 4.75 for 3k units = 14,250. Total = 9k units purchased for $40,250 What is the weighted avg. cost of goods sold and ending inventory if they sold 4k units?

First do the total cost/total units purchased to get $4.4722 per unit then 4.4722 * 4k units sold = 17,889 COGS Ending inventory = 5k units remaining * 4.4722 = 22,361

Hodge Corp. weekly payroll totals 25k. The entire amount is subject to FICA and Medicare (7.65%) and unemployment taxes (2%). The company withholds 3k for income taxes. Prepare both journal entries needed.

First is to record the weekly payroll: Salaries & Wages Expense - 25k FICA taxes - 1,913 Withholding Taxes Payable - 3k Cash - 20,087 (net paycheck) Then a second JE related to employer's tax expense bc they pay their own portion of FICA/medicare: Payroll Tax expense - 2,413 FICA taxes payable - 1,913 Unemployment Taxes Payable - 500

Soup Kitchen signed a Fixed-price contract to have a new kitchen built for 1m, they borrowed 500k to finance the construction. The loan is payable in 5, 100k payments + interest at 11%. Soup planned to finance the balance of the construction costs using the companies existing debt which had a weighted average interest rate of 9%. During Year 1, Soup had average accumulated expenditures of 600k and incurred actual interest costs on all borrowing of 150k. What is the capitalized interest cost?

First we need to know how capitalizing interest rates work. You always capitalize the lower of the actual interest cost incurred (150k here) or the computed capitalized interest (500k * 11% + 100k * 9% = 64k). The lower is 64k, so we capitalize the 64k with the construction costs and immedietly expense the remaining 150k - 64k = 86k as interest expense

What is the focus of the fund financial statements?

Fiscal Accountability (aka Compliancy)

Treasury stock method formula of adding WA shares outstanding when having stock options or warrants. Given: 1k options to purchase 10k common shares. Exercise price = 15, avg market price = 20.

Formula = # of shares - (# of shares * exercise price / avg. market price) Formula = 10,000 - (10,000 * 15 / 20) = 2,500 added shares to WA common shares outstanding

GAAP vs IFRS - Goodwill testing level?

GAAP tests goodwill for impairment at each reporting entity IFRS tests goodwill for impairment for each cash-generating unit

Starlight Enterprises acquired a 90% ownership in Lunar by purchasing 90k of lunars 100k common shares for 900k cash. The assets Starlight received had a BV of 600k and FV of 800k. Under GAAP, the consolidated balance sheet of Starlight and Lunar would report goodwill in the amount of? What about under IFRS?

GAAP: 200k (Remember consolidated balance sheets are shown at 100% not 90%, so its like we paid 1m for it - 800k fv received) IFRS: 180k (IFRS does not have the consolidated balance sheet at 100%, so at 90% the FV of the assets received is only 720k.)

At the end of Year 1, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During Year 2, all of these securities were sold for $104,500. At the end of Year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane's Year 2 income statement?

Gain of 10,500. Which is done by doing the REALIZED gain from the securities sold of 12,500 - 2,000 from the unrealized portion of the securities not sold.

If you purchase 40% of a company for 300k and the FV is 600k and the Net Book Value is 550k. Determine what is the asset fair value difference and Goodwill? Which do you amortize?

Goodwill = purchase price - FV = 60k here, which you can not amortize Asset value adjustment = FV - NBV = 20k amortized 10 years

What are the 3 groups of funds and the acronym for each? And how is each accounted for? And what is their measurement focus?

Governmental (GRaSPP) - Modified Accrual - Current financial resources measurement focus, Proprietary (SE), Fiduciary (CIPPoE)

One importing thing to note about held-to-maturity debt securities that makes it different from available for sale and trading securities is what?

Held-to-maturity has its cost amortized and NOT marked to FMV. Therefore, there is NO unrealized G/L. They report a credit loss account instead at the end of the maturity. No transaction inbetween purchase and end.

Under GAAP fixed assets are reported on what basis?

Historical Cost

under IFRS dividends paid during a period is reported on the statement of cash flows in? What about GAAP?

IFRS = Operating or Financing cash flow* However, dividends received must be reported in Operating or Investing GAAP = dividends paid must be reported in financing

under IFRS interest paid during a period is reported on the statement of cash flows in? What about GAAP?

IFRS = Operating or Financing cash flow* However, interest received must be reported in Operating or Investing GAAP = Interest must be reported in operating

What type of depreciation does IFRS use and how do you calculate it? if we have a machine cost 250k which lasts 25 years and a cylinder 20k which lasts 10 years and a inspection cost 5k for 5 years. What is the depreciation?

IFRS uses Component depreciation. It's really simple every addition or cost is depreciated separately over their life. We have separate depreciation of 10k, 2k, and 1k per year.

How to figure out those very difficult problems with overstating and understating of inventory results in what to the retained earnings. What steps should you take in an example of overstated ending inventory balance of $1,000.

If ending inventory is overstated by $1,000 then COGS is understated by the same $1,000 and results in net income being overstated by $1,000 and Retained Earning has a $1,000 overstatement. So if you are going from EI its flip, flip again then same.

What rate does the lessee use when calculating the present value of minimum lease payments?

If given: always use the rate implicit in the lease. If not given, use the incremental borrowing rate of the lessee.

When exchanges occur between two assets, when do you recognize a gain or loss?

If the exchange has commercial substance (i.e. future cash flows will change), then you must recognize a Gain or loss on the difference in the book value and fair market value of the asset you are giving up. Even if you give 500k cash along with a 5k car that has a 3k book value, as long as you are giving up a car with a fair value difference from book you must recognize that difference.

In a Sale-leaseback what are the requirements to consider it a sale?

If the lease was considered a finance lease to begin with. Otherwise it's a failed sale-leaseback and no g/l is recorded.

If I buy out and acquire Pearl Lantana, how would I record all of Pearl's assets and liabilities? What if the FV of the net assets/liab. receiving is more than the fair value given?

In an acquisition always record the assets and liabilities at FV as of the closing date. If the FV of net assets/liab. receiving is more than the FV giving, the difference results in a gain in earnings on the acquisition date. This is called a bargain purchase in an acquisition.

When do you use an encumbrance?

In governmental accounting systems when you have an obligation to spend (ex: purchase orders)

A gain that is both unusual and infrequent should be reported as what?

Income from continuing operations

Where is gain or loss on bond retirements reported?

Income from continuing operations

Under IFRS fixed assets are reported initially how? Subsequently what 2 ways and describe those ways?

Initially they are reported at cost, but then to account for them their carrying value is changed for two ways: Cost model - where the initial reporting is then adjusted based on accumulated depreciation and or impairment Revaluation model - asset is *revalued* to a fair value, then subtract accumulated depreciation and impairment

Amortization of a bond discount is reported as?

Interest Expense

What is the one exception to the rule of Modified Accrual Basis Accounting that says to record expenses when they become measurable?

Interest and principal on LT debt - Need to record when they become due and payable, not when they accrue. ex: On Jan 2nd, the City of Walton issued 500k, 10-year, 7% bonds. Interest is payable annually beg. Jan 2nd of the following year. What amount of bond interest is Walton required to report at the close of this fiscal year, September 30th? Answer: 0

Inventory is always stated at what? What about precious metals?

Inventory is stated at its cost. Precious metals on the other hand are kept at there Net realizable value.

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows?

Investing activities will have a 400k cash inflow, and operating activities will have a 100k addition to net income (because it will be a loss and a loss increases operating net income, if it was a gain then it would decrease operating net income)

Using the equity method of acquisitions and acquired 100% of Company B. What is the ending investment account balance if the acquiring company was bought at $25 a share on closing date of 100k shares $10 PV stock. The company bought out had 350k net income and 150k dividends.

Investment @ FV: 2.5m + Net Income: 350k - Dividends: 150k Ending investment: 2.7m If they acquired only 70%, the dividends of 70% would be eliminated in consolidation. However the 30% left over would be considered a dividend reduction in "Non-controlling interest" on the equity side of the balance sheet.

What does fully or partially participating in preferred stock mean?

It means after the preferred share holders get their specific amount, the excess (which is usually just sent to common shareholders) will be given pro-rata to both common and preferred. Fully means there is no limit on how much they can receive and partially means there is a limit given.

What does comprehensive income represent?

It summarizes all changes in equity from nonowner sources. This is because it only includes net income and other comprehensive income items. Investments, dividends, distributions are all things that are not shown in comprehensive income which are stockholder equity items

What is the trick with the *cost method for treasury stock*? Ex: You buy back 200 shares previously sold for $20 each. 100 Shares repurchased were sold at $22. What is the JE? What if 100 were sold at $13 after the prev. sold 100 @ 22?

JE #1: Cash - 2200 Treasury stock - 2k APIC - 200 JE #2: When at a loss, you cant have APIC over the balance in APIC for the sale on this stock. Remainder goes to RE Cash - 1300 APIC - 200 RE - 500 Treasury stock - 2k

The City of Lester *acquired* photocopiers to be used by the city's *finance department* for 25k at the beginning of the fiscal year Jan 1st. Ownership of the copiers will transfer to the city at the end of the lease. The lease has a three-year term and carries interest rate of 10%. Payments are to be made annually on December 31st of each year and are computed at 10,053. 1.) Prepare the JE's

JE #1: Lease is initially recorded in governmental lease accounting as a capital outlay expenditure funded by other financing sources Expenditure - Capital Outlay - 25k Other financing sources - 25k JE #2: Lease payments are then recorded as expenditures as well Expenditure - Principal - 7,553 Expenditure - Interest - 2,500 Cash - 10,053

The City of Lester *leased* a small parcel of municipal property to a private company previously used in the city's *Water and Sewer Fund* for 25k at the beginning of the fiscal year Jan 1st. Ownership of the parcel will *Not* transfer to the company at the end of the lease. The lease has a three-year term and carries interest rate of 10%. Payments are to be made annually on December 31st of each year and are computed at 10,053. 1.) Prepare the JE at inception and payment at end of year

JE #1: Leasing property out so record lease receivable and deferred inflow of resources Lease receivable - 25k deferred inflow of resources - 25k JE #2 Cash - 10,053 Interest income - 2,500 Lease receivable - 7,553 Deferred inflows of resources - 8,333 Revenue - 8,333

The City of Lester *leased* a small parcel of municipal property to a private company previously used in the city's *general governmental operations* for 25k at the beginning of the fiscal year Jan 1st. Ownership of the parcel will transfer to the company at the end of the lease. The lease has a three-year term and carries interest rate of 10%. Payments are to be made annually on December 31st of each year and are computed at 10,053. 1.) Prepare the JE's

JE #1: Recognize revenue immediately for the portion that is available and measurable amounts in the current year Lease Receivable - 25k Revenue - 7,553 Deferred inflows of resources - 17,447 Interest receivable - 2,500 Interest revenue - 2,500 JE #2: record cash received Cash - 10,053 Lease receivable - 7,553 Interest receivable - 2,500

The city of Lester *acquired* photocopiers to be used by the city's Enterprise fund for 25k at the beginning of the fiscal year Jan 1st. Ownership of the copiers will *Not* transfer to the city at the end of the lease. The lease has a three-year term and carries interest rate of 10%. Payments are to be made annually on December 31st of each year and are computed at 10,053. 1.) Prepare the JE at inception and payment at end of year

JE #1: Under prop/fid lease accounting and it is not #1 a ST lease or #2 a contract that transfers ownership you record as a right of use asset with a liability Right of use asset - 25k Lease liability - 25k JE #2 Lease liability - 7,553 Interest expense - 2,500 Cash - 10,053 Amortization expense - 8,333 Accum. Amortization - 8,333

On Jan 1, Year 1, ABC Co. granted options exercisable after December 31, Year 2, to purchase 10k shares of $5 par common stock for $25 per share. On the grant date, the market price of the stock was $20 per share. On the exercise date the market price of the stock was $35 per share. Using an acceptable valuation model, the options had a total fair value of 50k. The options are to serve as compensation for Year 1 and 2. Prepare the JE's to account for the stock and if all options were exercised. What if only one half of the options are exercised?

JE #1: Year 1 (50k fair value / 2) Compensation Expense - 25k APIC - Stock options - 25k JE #2: Year 2 Compensation Expense - 25k APIC - Stock options - 25k JE #3a: Options fully exercised Cash - 250k APIC - Stock options - 50k (remove from books) Common Stock - 50k APIC - Common Stock - 250k (plug) JE#3b: (only half options are exercised) Cash - 125k APIC - Stock options - 25k Common stock - 25k APIC - Common Stock - 125k APIC - stock options - 25k (other half) APIC - Expired stock options - 25k (retiring)

What is a form 6-K?

Just like Form 10-Q but its SEMIANNUALLY and for foreign private companies

In a period of rising prices which method gives the lowest ending inventory cost?

LIFO

In your scenario at Pearl Lantana you are considered the what?

Lessee (a Lessee is the tenant)

What is an example of a deferred tax liability?

MACRS depreciation over SL depreciation is the most common. If MACRS says $1800 depreciation expense, SL says 1k and there is a 30% income tax rate, then the deferred tax liability would be $240 (800*30%)

What are the inherent risks of all derivative instruments?

Market and credit risk

Another term for the imputed interest rate?

Market rate (imputed is the market rate used when a note has no bearing interest)

Goodwill Impairment Test: Omega Inc. has 2 reporting units, Alpha and Beta, which have BV of 500k and 675k respectively. They reported Goodwill for the year of 50k and 75k respectively. Omega determined at the EOY the FV's were 480k and 700k for goodwill respectively. Determine whether the reporting units' goodwill is potentially impaired?

Max possible impairment is the 50k for Alpha and 75k for Beta. The actual impairment is 20k, because Alpha's GW was re-valued at 480k and prev. was 500k. Meanwhile Beta has no impairment because his was measured higher then BV, so no adjustment.

What are the requirements to be considered a "Major Fund"? What fund will always be a major fund?

Must meet both criteria: 1.) Has 10% or more of the corresponding total revenues/expenditures, assets/liabilities of all governmental funds OR all enterprise funds 2.) Has 5% or more of all governmental funds AND all enterprise funds *The general fund will always be a major fund

Diluted EPS formula?

NI + interest on dilutive securities / WA number of common shares outstanding (assuming all dilutive securities are converted to common stock)

With a bond that is legally obligated to be maintained in the debt service fund and is issued on July 1, Year 1 with a term of 10 years, face amount 1m, 6% IR, issued at 101. What is the bond premium to be amortized in the debt service fund for the year ended December 31, Year 1?

NONE - you don't amortize bond premium/discount in the governmental funds because of the measurement focus. Instead, the entire bond proceeds amount is reported initially as other financing sources then interest is received over time.

When distributing property instead of cash to shareholders how should we handle it?

Need to create a JE on the date of declaration restating the property at fair value and taking the gain or loss and decreasing retained earnings property distribution - loss - Retained earnings -

Return on Equity

Net Income / Average total equity

Profit Margin

Net Income / Net Sales

Gross Margin

Net Sales - COGS (or GP) / Net Sales

Accounts Receivable Turnover

Net Sales / Average Accounts Receivabl

Asset Turnover

Net Sales / Average Total Assets

Financing activities include cash flows from?

Non-current liabilities and equity activities ex: stock, cash dividends, bonds, notes and other borrowings

Difference between how to account for a nonliquidating dividend and a liquidating dividend with the Fair Value Method (<20%)?

Nonliquidating dividend - recorded in net income Cash - Dividend income - Liquidating dividend - reduces the carrying amount of the investment account and records dividend income Cash - Investment - Dividend Income -

What are the balance sheet items not found in a general fund? What are the unique ones that are found?

Not found: - No fixed assets (so no depreciation expense obv.) - No Long Term Debt other than other financing sources revenue/expense item Found: Fund Balances instead of equity section like committed and unassigned

When do you capitalize interest costs and they are NOT expensed?

ONLY when it is part of construction costs. So just buying a building with a loan the building does not get the interest capitalized.... Same with Land. Interest is only capitalized with construction

What happens when a company declares a large stock dividend (greater than 20% of previous outstanding shares)? Ex: LMT Corp. declares a 40% stock dividend on its 1m shares of outstanding $10 par value common stock. On the date of declaration, LMT stock is selling for $20 per share. Complete the JE for date of declaration and distribution.

On the date of declaration: (1m shares outstanding * 40% = 400k shares @ $10 pv) Retained earnings = 4m Common Stock distributable = 4m On date of distribution: Common Stock distributable = 4m Capital stock = 4m

Where are revaluation losses reported? Where are losses from impairment shown?

On the income statement - revaluation losses On the income statement as a component of income from continuing operations - Impairment Losses

All adjusting journal entries hit what accounts?

One income statement account and one balance sheet account

If you receive a stock dividend of 2k shares @ market value of $35 each share. Then receive a cash dividend of $2 per share. What is the dividend income for the year?

Only 4k because stock dividends are not income, they are just an increase in your stock shares held and decreases your cost basis per share.

Consolidated financial statements are prepared by who?

Only the parent company prepares the consolidated financial statements because they are the consolidated reporting entity.

IFRS uses what method to calc. year-end inventory balance?

Only uses NRV (selling price of inventory - cost of completion/disposal)

What is the focus of government-wide financial statements?

Operational Accountability

difference between ordinary annuity vs annuity due?

Ordinary annuity is when the payments occur at the end of each period while annuity due occur at the beginning of each period.

Where are revaluation gains reported?

Other Comprehensive income

How is a patent amortized?

Over the shorter of its estimated life or remaining legal life

January 1st, Year 1, Samuel Co. Issued 100k shares of $5 PV common stock and 25k shares of $10 par fully participating 8 percent cumulative preferred stock. No dividends were paid in Year 1. Cash dividends of 101k were declared and paid in Year 2. Determine the dividend to be paid out on the preferred and common stock.

Preferred for Year 1 and 2 = 40k Common stock gets (if possible) their percentage of 8% * 500k so 40k to CS. That leaves us with 21k which is split pro-ratably. The pro-rata is 250k PS and 500k CS. Final amount is *47k for PS and CS is 54k.

Price Earnings Ratio

Price per share / basic earnings per share

For contingency purposes, when you are able to reasonably estimate the amount of the loss, probable means you do what? Reasonably possible? Remote?

Probable** = Record (if given a range, record the minimum of the range as an accrual) Reasonably possible = disclose Remote = ignore ** probable gains even if reasonably estimated are not recorded, but instead disclosed. Never record gains unless you actually get the gain.

Net Method for cash discounts

Purchases are recorded net of the discount. If payment is made within discount period, no adjustment is necessary. But if it is not then a purchase discount lost account is debited.

Periodic Inventory System, What is the formula and how does it work? What would be the JE to record 20k units sold for $7 per unit and cost $5 per unit? What if they bought 50k units for $6 a unit to be held as inventory?

Quantity is determined only by physical count. The actual COGS for the period is calc. by doing beg. inventory + purchases - ending inventory. Cash - 140k Sales revenue - 140k Purchases - 300k Cash - 300k NO COGS/Inventory entry

What is form 10-Q?

Quarterly UNaudited financial statements

Gross method for cash discounts

Records purchase without regard to the discount. If invoices are paid within the discount period then a purchase discount is credited.

Universe Co. issued 500k shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 pr share. By what amount will Universe decrease stockholders' equity for the dividend? (REMEMBER stockholders equity is different than retained earnings) Prepare the JE.

Retained Earnings - 1.5m (increase) Common Stock - 1.5m (reduction) Net affect is 0 to stockholders equity.

When a change in accounting entity occurs (i.e. another company joins in a consolidated return) how should the change be reported in the financial statements?

Retrospectively, prior financial statements need to be restated along with the current year to reflect the information for the new reporting entity

A promise/pledge to contribute in 3 years is considered what?

Revenues and gains WITH donor restrictions - because a promise to contribute has a time restriction implied

Jewelry Unlimited sells a $10k bracelet and collects 7% sales tax. Prepare the entry for the sale.

Sales tax is not a revenue or expense item until you remit to the government. Cash - 10,700 Sales Revenue - 10k Sales Tax Payable - 700

Jenkins Inc. leases a truck to Briggs Co. for four years at 5k per year with initial direct costs of 450 and an implicit rate of 6% (PV of these lease payments is 17,325). On the date the lease commences the carrying value is 22k and fair value is 24,216. Jenkins expects that the truck will be worth 8,700 (6,891 PV @ 6%) when the lease ends. If this lease is a *Sales-Type* Lease, determine the *lessor's* JE's on commencement date. Tip: Sales type leases you completely rid yourself of the asset on the books and record a g/l

Sales type lease (lessor) - lease expense - 450 Residual value - 6,891 (reported at PV @ 6%) Lease receivable - 17,325 Cash - 450 Gain - 2,216 (6,891 + 17,325 - 22k truck) Truck - 22k (remove asset from books)

What is form 20-F & 40-F?

Same as a 10-K but for foreign private companies. (must be audited remember!)

What category does advertising expense fit in to in expenses?

Selling expense

Where are discontinued operations reported?

Separately from continuing operations on the income statement NET OF TAX ex of discontinuing operations are: gain or loss's or impairment losses

Anderson Co. completes the manufacturing of Coffee Bean Roasters after it enters into an agreement with Smooth and Bold Coffee Company to manufacture the roasters. The roasters were finished manufacturing on September 1st. Due to delay S&B requests Anderson Co. maintains the coffee roasters in a separate section of its warehouse until January 10th Year 3. S&B paid for the roasters on October 1, Year 2. On what date can Anderson Co. recognize the revenue from this bill-and-hold agreement?

September 1, Year 2 - because revenue in a bill and hold agreement is recognized when the product is ready for transfer and completed on that date.

If my company, BD Inc., owns 80% of Siegel company which owns 65% of Pell company who should use the equity method and who should use the consolidation method?

Siegel will use consolidation method to properly form their company and Pell then I will use consolidation method to form all of ours. So therefore, everyone, including the 3rd sub. is using consolidation method.

Jordan Corp. has a 40k, 90 day note from a customer dated on Sept 30, Year 3, due December 30, Year 3 and bearing interest at 12%. On October 30 (30 days later) Jordan Corp. takes the note to its bank, which is willing to discount it at a 15% rate. The note was paid by Jordan's customer at maturity on December 30. What amount is interest income to Jordan Corp. in the end?

So this is tricky and a couple things you'll need to remember. Essentially what is going on was Jordan received a written promise to be paid 40k, 12% 90 days. But, Jordan needed the money quicker so he went to the bank after 30 days and said give me my money now and I'll give you this note. The bank said sure, but we want 15% interest of the *final* value of the note. The total or final value of the note is 40k * 12% * 90/360 = 41,200 The bank gives Jordan the final value of the note (so 41,200) but receives 41,200 * 15% * 60/360 = $1,030. So Jordan only gets $40,170 from the bank and his interest income in the end is just $170.

A company acquires another company at 70% and the sub declares and pays a cash dividend. What effect will this dividend have on retained earnings and non-controlling interest?

So what happens in this scenario is the consolidated balance sheet shows 100% of the sub's assets and liabilities.... Then we have a new equity account that is 30% * amount paid for sub. 70% of the dividends are not put towards as a deduction in retained earnings because they will be eliminated in consolidation. So NO change at all in RE The 30% remaining will result in a reduction in "Noncontrolling Interest" account on the equity side of the balance sheet.

Dollar-Value LIFO method if given: Year 1 = 250k cost 1.0 index, Year 2 = 278,250 cost, 1.05 index, Year 3 = 364k cost, 1.12 index?

Start from the beginning years and work your way forward. First year has cost of 250k / index of 1.0 = base layer for Year 1 of 250k. Then year 2 you do 278,250 / index of 1.05 = 265k - base layer of 250k = 15k * index of 1.05 = 15,750. Then final layer is 364k/1.12 index = 325k - 265k = 60k * 1.12 index = 67,200. Making final total 332,950 for the layers.

Jan 1st, Year 2, I enter into an *Financing lease* for a 3 year asset with annual payments of 18k per year @ 5.75%. PV = 2.685424. Prepare the JE for the lessee at the commencement date, and end of year 2, end of year 3. Remember finance leases, we do report interest expense and amortization expense.

Start of lease - always same as operating: Right of use asset - 48,338 Lease liability - 48,338 End of year 2: Interest expense - 2,779 Lease liability - 15,221 Cash - 18k Amortization expense - 16,113 (the *asset* recorded SL'd so 48,338 / 3) Acc. Amortization - Right of use asset - 16,113 End of year 3: Interest expense - 1,904 Lease liability - 16,096 Cash - 18k Amortization expense - 16,113 Acc. Amortization - Right of use asset - 16,113

Jan 1st, Year 2, I enter into an *operating lease* for a 3 year asset with annual payments of 18k per year @ 5.75%. PV = 2.685424. Prepare the JE for the lessee at the commencement date, and end of year 2, end of year 3. Remember operating leases, as a lessee we do not report interest expense. Instead of reporting interest expense we report interest included in lease expense as SL.

Start of lease: Right of use Asset - 48,337 Lease liability - 48,337 End of year 2 (first payment date): Lease expense - 18k (always SL) Lease liability - 15,221 (18k - (48,337*5.75%)) Acc. Amortization - Right of use asset - 15,221 Cash - 18k End of year 3: Lease expense - 18k Lease Liability - 16,096 (18k - (33,116*0.0575)) Cash - 18k Acc Amort - Right of use asset - 16,096

What is the primary purpose and focus of the statement of activities for a NFP? What about Statement of financial position?

Statement of Activities: To demonstrate how the organizations resources are used in providing various programs and services. Statement of Financial Position: To provide relevant information about the assets, liabilities and net assets and their relationship to one another.

What are the 3 external financial statements for a non-for-profit entity?

Statement of financial position (BS) Statement of activities (IS) Statement of Cash Flows (CF)

If you see the word fundraising as an expense for NFP you know right away it is what?

Supporting Service section of expenses on the statement of activities

Management and general expenses for Non-Profits should be reported where?

Supporting Services section of the statement of activities

Funded status of the pension plan is calculated how? What does a positive fund status mean? or negative?

Take the fair value of plan assets - PBO at year end = funded status Positive fund status means the pension is overfunded. While a negative means it is underfunded.

Fundamental Assumptions and Principals - What is: Monetary unit assumption?

That the effects of inflation are not reflected in the financial statements. Money is the appropriate basis by which to measure economic activity.

What exchange rate does income statement accounts use?

The Weighted Average Rate

When preparing interim financial statements, income tax expense is estimated each quarter using what?

The annual effective income tax rate

Net Income credit balance means what?

The company is profitable

Fundamental Assumptions and Principals - What is: Entity Assumption?

The economic activity can be accounted for when considering an identifiable set of activities (e.g. separate corporation or division)

What happens when a non-monetary asset is involuntarily converted? ex: building goes up in flames and costs a company 250k BV on building with a 280k FV and a 12k fee for removal and clean-up. What is the loss on this involuntary conversion?

The entire amount of gain or loss must be recognized as a gain or loss on involuntary conversion. In this example it is 262k for the building because it includes any costs associated with the transaction. Loss on non-monetary asset - 262k Building - 262k

Fundamental Assumptions and Principals - What is: Going Concern Assumption?

The entity will continue to operate in the foreseeable future

Notes to financial statements are represented in what presentation? (The first note is usually: and the rest are usually: )

The first note is always the summary of significant accounting policies. Ex: Criteria for determining which investments are treated as cash equivalents while the remaining are always information relevant to decision makers (e.g. investors, creditors etc.)

If there is a subsidiary with foreign currency, *NOT* using its functional (local) currency the foreign currency must be what? Where is the G/L from the remeasuring?

The foreign currency must be remeasured at its functional currency with the remeasured G/L reported in the consolidated income statement.

A company from the UK uses british pounds in its normal operations, reports in the European Union in euros and reports in the United States in dollars. The company is owned by a private equity firm in Japan. What is the company's *Functional* currency?

The functional currency is the local or reporting currency of the entity. In this case the functional currency is the British pound. ***When it translates to the reporting entities currency it would later then be the Japanese yen.

Under the effective interest method of bond discount or premium, Company A is making 3 annual loan payments of $1k each. There is no stated rate of interest. The Present value of the aggregate loan payments at the appropriate interest rate of 10% is $2,486. Compute the effective interest method by setting up the schedule of payment, interest portion, principal portion and remaining principal?

The idea is to do 4 columns, cash payment, interest expense, principal paid and carrying value where the carrying value is = prev. carrying value - principal paid and the principal paid is = cash payment - interest. 0,0,0,2486 1k, 249, 751, 1735 1k,174,826,909 1k,91,909,0

What is the market value of an inventory item? What if they only give us 2 items?

The middle value of an inventory's replacement cost, market ceiling and its market floor. Where Replacement Cost = cost to purchase the item Market ceiling = NRV Market Floor = NRV - Profit So if Replacement cost is $18, MC = $29 and MF = $21 then the market value is $21 because its the middle one If they only give 2 items, always pick the lowest.

What happens to the subs net income account when consolidating (more than 50% ownership)

The parent takes their net income and records it as earnings of subsidiary. This increases net income of the parent.

What is "Legal Capital"

The portion of stockholders' equity that cannot be used for dividends. It must be retained in the business for the protection of creditors. Appropriated retained earnings is considered legal capital.

When ever assets are purchased requiring fixed payments extending beyond one year? The assets should be valued at what?

The present value of the future payments

Investing activities include cash flows from?

The purchase or sale of non-current assets. ex: purchasing securities, property plant and equipment, making loans to other entities

What is hedging?

The use of a derivative to offset potential losses

FOB Destination

Title becomes buyers when they receive the goods

FOB Shipping Point

Title becomes the buyer's at beginning of shipping point

Total debt ratio

Total Liabilities / Total Assets

Debt to Equity

Total liabilities / Total equity

Common Shareholders Equity formula

Total shareholders equity - preferred stock outstanding at PV - cumulative preferred dividends in arrears = Common shareholders equity

Unrealized gains and losses on trading securities are reported where? What about unrealized gains and losses on available for sale debt securities? What about unrealized gains and losses on held-to-maturity securities?

Trading securities are included in earnings so recognized in net income while available for sale debt securities are recognized in other comprehensive income Held-to-maturity securities are not recognized in the financial statements

Fair value does not include what?

Transaction costs

If there is a subsidiary with foreign currency, using its functional (local) currency the foreign currency must be what? Where is the G/L from the translation?

Translated to the reporting currency of the reporting entity. The G/L is reported in other comprehensive income in the "Translation Adjustment" account.

Treasury stock method of computing WA shares outstanding?

Treasury stock method assumes the proceeds from the exercise of stock options and warrants will be used by the company to repurchase treasury shares at the prevailing market price, resulting in an increase in shares outstanding.

At December 31, Bren Co. had the following Deferred Tax items: 1.) A Deferred Tax Asset of 90k related to a current asset. 2.) A deferred tax liability of 75k related to a non-current asset. What will Bren report under *IFRS*?

Under IFRS you always net all tax asset and liabilities and enter them as non-current no matter what. A 15k non-current deferred tax asset.

When given a stated rate and market rate that differ how do you calc. the issue price?

Use the stated rate's interest actually paid * the Present Value of ordinary annuity at the Market Rate's interest %

When do we report unrealized G/L's and when do we report realized gains and losses?

We report unrealized when we still have the debt or equity security. Then when we sell it we report realized gains and losses and backout the unrealized portion.

In acquisitions, always record your investment in the subsidiary at what?

Whatever Fair Value you give for the sub.

What are the key components of when to record a revenue or transfer for fiduciary funds?

When fiduciary funds receive any sort of "Contribution" it is then revenue. Otherwise, expect it to be a transfer from another fund.

When is no segment needed in segment reporting?

When one segment has revenue or profit/losses or total assets of over 90% then you don't report segments.

Research and Development costs are ALWAYS expensed right away, except in what case? ex: R&D costs of 250k for Machine A that will be used for one research project. Also spend 250k on Machine B that will be used 2 years on a research project and 8 years on alternative future uses. What amount of R&D is expensed in year 1?

When the R&D costs "have developed alternative future uses" then you capitalize them Answer: Machine A is immediately expensed fully. Then Machine B has 25k which is expensed in year 1 and 25k in year 2. Meaning only 275k is expensed in Year 1, and 25k will be expensed in Year 2.

What date does fixed asset depreciation start?

When the asset is placed in service

When should legal fee's be capitalized?

When the outcome of the litigation was successful

When do we use the permanent fund?

When we report resources that are legally restricted to the extent that only earnings (interest) and not principal may be used

When do you use the equity method?

When you acquire between 20 and 50 percent interest in a company that says they have significant influence, OR under 20% and a line that says "ability to exercise significant influence" exists.

When do you use present value of $1 or future value of $1?

When you have a single lump sum payment use of $1 calcs. Otherwise for identical payments over multiple periods use the annuity due or ordinary annuity

On Jan 1st, Year 1, Loud Corp. Granted Mort its president, 10k stock appreciation rights expiring on Jan 3, Year 4. Upon exercise, Mort may receive cash for the excess of market price of the stock on that date over the market price on the grant date and service period runs for 2 years. Market prices were on grant date $30, December 31st Year 1 $45, December 31st Year 2 $40. Mort exercised all of his rights on Jan 2, Year 3. Prepare the JE's that should be recorded.

When you have appreciation rights you must allocate compensation expense calc. by the market price over grant date price on the portion that is allocated proportionally each year. The excess is a liability JE #1: Grant Date price = 30, Year 1 MP = 45. So 15 * 10k shares = 150k / 2 years = 75k Compensation Expense - 75k Liability for Stock Appreciation Plan - 75k JE #2: Grant Date price = 30, Year 2 MP = 40. So 10 * 10k shares = 100k - 75k expense already taken*** = 25k Compensation Expense - 25k Liability for Stock Appreciation Plan - 25k JE #3: Exercises appreciation option - reverse out total liability and credit cash! Liability for Stock Appreciation Plan - 100k Cash - 100k

On January 2nd, Year 2, Lake Mining Co's board of directors declared a cash dividend of 400k to stockholders. The current retained earnings balance is 300k and APIC is 150k. What is the amount of the liquidating dividend?

Whenever you have a distribution above your retained earnings the portion in excess is a liquidating dividend so here we have a liquidating dividend of 100k.

Sum of years digits depreciation method for this: Asset cost 21k, SV 1k, life 4 years Find the asset depreciation amount for all 4 years

Year 1: 8,000 (1 + 2 + 3 + 4 = 10, 4/10 * 20k) Year 2: 6k (3/10 * 20k) Year 3: 4k (2/10 * 20k) Year 4: 2k (1/10 * 20k)

Find the "Composite" asset life? Composite life groups all assets in a class and depreciates together, depreciation on a straight-line method for: Machine A: 550k cost, 50k SV, 20 yr life Machine B: 200k cost, 20k SV, 15 yr life Machine C: 40k cost, 0 SV, 5 yr life

You have to first get the totals, we have total cost of 790k, total SV of 70k, and total annual depreciation of 45k. Then do 790k-70k = 720k / 45k is the composite life of the assets is 16 years.

Far State University, a NFP institute, established the Far foundation to raise funds for university. The university and the foundation are financially *interrelated*. During the current year an alumnus donate investments for a fair value of 25m and a basis of 15m to the foundation and specified that the earnings from the investments *must be used to fund scholarships* at Far State University. Determine how the university should account for this donation. b.) What if the donation was between non-interrelated parties? c.) What if the donation was between non-interrelated parties but they have variance power over where the funds go?

a.) Interrelated - from foundation point of view where they must use the funds for scholarships so they do not have variance power Investments - 25m Contribution Revenue - 25m b.) Non-interrelated - W/o Variance power Investments - 25m Refundable advance liability - 25m c.) Non-interrelated - With Variance power Investments - 25m Contribution Revenue - 25m Always value at fair value

deferred tax liabilities and deferred tax assets should be categorized how on the balance sheet?

always recorded as Non-current liabilities/assets and netted against one another so there is just one account.

What is form 11-K?

annual financial statements of an entity's employee benefit plan

gains and losses from changes in the fair value of a derivative designated and qualified as a fair value hedge should be recognized where?

current net income in the period in which the fair value of the derivative changes.

go through all of F3-M3 inventory questions again

dont be lazy

Perpetual inventory system, how does it work? What would be the JE to record 20k units sold for $7 per unit and cost $5 per unit? What if they bought 50k units for $6 a unit to be held as inventory?

inventory system that maintains a continual record of inventory purchased and sold. Purchases of inventory are recorded as Inventory, not purchases. Cash - 140k Sales Revenue - 140k COGS - 100k Inventory - 100k Inventory - 300k Cash - 300k

Earnings Per Share

net income - preferred dividends / weighted average common shares outstanding

Earnings per share formula?

net income - preferred dividends / weighted average common shares outstanding (remember time-weighted on shares sold/reacquired, stock dividends and splits applied at beg.)

Return on Assets (ROA)

net income/average total assets

gross profit is?

sales - cogs

Any goodwill created in an investment account for under the *equity* method is..

subject to nothing. No amortization, no impairment test, nothing.

Long position - futures

the futures trader who commits to purchasing the asset in the future

Short position - futures

the futures trader who commits to selling the asset in the future

Call option

the option to buy shares of stock at a specified time in the future

put option

the option to sell shares of stock at a specified time in the future

Debentures are?

unsecured bonds

Management is required to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern (when)....

within one year after the date that the financial statements are issued.

Re-do chapter 3 - M7, toughhhh questions on intangibles.

you got wrecked on this section, must re-do

Quick Ratio

(Cash + short term securities + receivables) / Current Liabilities

For a put option if the option to buy back is greater than the original purchase price then the contract is considered what? What if its less?

1. A Financing Arrangement - The expected Market value has to be less than the buyback price as well. if the option to buy back is less than the original purchase price it is considered: 1. a lease

Bank Rec: Tell me if add or deduct from books 1. Deposits in transit (when money is sent to bank but not yet entered in books) 2. Outstanding Checks 3. Service Charges 4. Bank Collections 5. Errors 6. NSF checks 7. Interest Income

1. Add 2. Deduct 3. Deduct 4. Add 5. Depends 6. Deduct 7. Add

Formation of partnership Example: A & B share P/L's 60:40 and have capital accounts of 30k and 10k respectively. C invests 35k to be 1/3 partner. What is the bonus amount and what happens to the other partners receiving the bonus? What if they recognize it as Goodwill, what is goodwill amount then?

1. BONUS portion = 10k (solved: 30k = a, 10k = b, 35k = c | this would mean 25k would be normal contribution, but instead donated 35k so 10k is bonus portion). This bonus is sent to the other partners increasing their capital. 2. Goodwill portion goes off of the implied value, so if C contributes 35k for 1/3 they are implying the company is worth 105k. Therefore, the total GW amount is 30k in the end because total contributions equal 75k. This 30k GW is then sent to other partners based on their ratio's increasing their capital.

Overall: What are the types of changes that can occur? 4 How do we treat the changes? What are examples of them?

1. Changes in Accounting Estimates - Prospectively only -ex: Depreciation change 2. Changes in Accounting Principals - Make an adjustment to Beg. RE for the earliest period presented, and if prior period (comparative) financial statements are presented, these periods need to be restated - ex: Inventory valuation changes 3. Changes in Accounting Entity - All previous financial statements along with current year need to be restated to reflect information for the new reporting entity - ex: a 3rd company joins a consolidated return 4. Error Corrections - Correct the error in the prior year financial statements for which the error occurred in and make a prior period adj. to RE ex: Changes from Cash basis to Accrual basis (cash is non-GAAP, so this is just a plain ERROR)

What is the 5 step approach to recognizing revenue? ISTAR

1. Identify the contract with the customer 2. Separate the performance obligations in the contract 3. Transaction Price determination 4. Allocate the transaction price to the separate performance obligations in the contract 5. Recognize revenue when or as the entity satisfies performance obligation

What are the two reasons why an accounting principal may be changed? Ex: you change your 10 year depreciation life to 5 year after 3 years

1. Required by GAAP to change 2. Alternative principal is preferable and more fairly presents the information

What is the financial statement preparation order?

1st - a TB is prepared 2nd - adjusting entries are made and an adjusted trial balance is made 3rd - the income statement is compiled from the adjusted trial balance 4th - statement of owners equity 5th - the balance sheet is created 6th - the Statement of Cash flows is prepared last

Brock corp. has the following expenses. What is the total of selling expenses? Where half of the rent is owned by the sales department. 1. Accounting & Legal Fee's - 120k 2. Advertising - 150k 3. Freight Out - 80k 4. Interest - 70k 5. Loss of sale of LT Investment - 30k 6. Officers Salaries - 225k 7. Rent for office space - 220k 8. Sales Salaries and Commissions - 140k

480k Comprised of: Advertising, freight out, 50% of rent, sales salaries and commissions

Clear Co's TB is: 1. Cash 50k (where 10k includes in bond sinking fund for LT payable) 2. AR - 20k 3. Allow. for DA - 5k 4. Deposits received from Customers - 3k 5. Merchandise Inventory - 7k 6. Unearned Rent - 1k 7. Investment in Trading Securities - 2k What amount should he report as Total Current Assets on the BS?

64k = 40k + 15k (<AR - Doubtful Acc) + 7k + 2k The 3k for deposits receives from customers and the 1k unearned rent represent liabilities because they own this money back eventually

If given 2 similar assets at a quoted price of 76 w/ transaction costs of 4 and 74 w/ transaction costs of 1. Which is the fair value?

74, because you pick the most advantageous position after transaction costs (while transaction costs dont impact the fair value, they still make the person pick a more advantageous position). In this example 74 would be better then 76.

Moving Average Method - Who can use it? Unit cost = 4.25 for 4k units = 17k, 4.50 for 2k units = 9k, 4.75 for 3k units = 14,250. Sold 3k units after you bought the 4k, and sold 1k units after you bought the 2k. What is the COGS? What is the ending inventory?

@ time of first 4k purchase its the only one so its 4k * 4.25 = 17k @ time of 2nd purchase of 2k units we only had 1k of the 4k left so (1k * 4.25) + (2k * 4.50) / 3k units = 4.4167 * 3k units so now the cost of inventory is 13,250 @ time of final purchase of 3k units you had 2k units at 4.4.167 = 8,833 and 3k units at 4.75 = 14250 so 8,833 + 14,250 / 5k units = 4.6166 * 5k units = 23,083. The COGS is 3k units @ 4.25 and 2k units @ 4.4167 = 17,167 The ending inventory is 23,083 THIS method can only be used in a perpetual system

ABC Corp. has a 3 year warranty against defects in the machinery it sells. When a warranty claim is made, ABC Corp. satisfies the claim by replacing the machinery. Warranty costs are estimated at 2% of sales in the year of sale, and 4 and 6% in the succeeding years. ABC sales and actual warranty expenses for Year 1-Year are: Year 1: 250k sales, 10k actual warranty costs Year 2: 500k sales, 20k actual warranty costs Year 3: 750k sales, 30k actual warranty costs Prepare the JE's for account for the warranties in Years 1-3. What is the balance in the warranty liability account at the end of year 3?

ABC's total liability needs to be accrued in year 1 even though it will not be incurred that year. JE Year 1: Warranty Expense - 30k (250k*12%) Warranty Liability - 30k Warranty Liability - 10k Inventory - 10k JE Year 2: Warranty Expense - 60k Warranty Liability - 60k Warranty Liability - 20k Inventory - 20k JE Year 3: Warranty Expense - 90k Warranty Liability - 90k Warranty Liability - 30k Inventory - 30k Ending balance in the warranty liability account = 120k

When a component is classified as "Held for Sale" what is step 1?

An impairment analysis of the component must be conducted

Percentage of Sales Method: ABC co. estimates that 2 percent of its 200k sales on credit will not be collected. The credit balance in the allow. for uncollectible accounts before the adjustment is $1,000. Prepare the JE to record the adjustment to the allowance account at year-end.

Bad debt exp - 4,000 allow for uncollectible accounts - 4k This makes the ending balance in uncollectible accounts = 5k, yes this means that the beg balance does not factor in.... Percentage of SALES method does not care about the beg. balance

Journal entry example for direct write off method: Year 1, credit sale of 10,000 is recorded. Year 2 the company determines that the AR was uncollectible. Record year 2 in direct write off method.

Bad debt expense - 10k AR - 10k

Accounts Payable Turnover

COGS / Avg. Accounts Payable

Inventory Turnover

COGS / Avg. Inventory

Dividend Payout

Cash Dividends / Net Income

Return on Sales

EBIT / Sales

Fundamental Assumptions and Principals - What is: Periodicity Assumption?

Economic activity can be divided into meaningful time periods like quarters/years

What are subsequent events?

Events that occur after the balance sheet date but before the financial statements are issued

Who is the primary users of general purpose financial reports?

Existing and potential investors, lenders and other creditors

Contract Liability(Asset) - Account must be used when an entity has an obligation to transfer (receive) goods or services usually from a contract Ex: On Jan 1st. Anderson Co. enters into a noncancelable contract with Tanner Co. for the sale of an excavator for 350k. The escavator will be delivered to Tanner on April 1st. The contract requires Tanner to pay 350k in advance on Feb 1st, but Tanner makes the payment March 1st. What are the JE's for Anderson Corp?

Feb 1st. Accounts Receivable: 350k Contract Liability: 350k March 1st. Cash 350k Accounts Receivable 350k April 1st. Contract Liability 350k Revenue 350k

On Jan. 1st, Anderson Co. Enters into a contract with Tanner Co. for the sale of two excavators for 350k each. The contract requires one excavator to be delivered to Tanner on Feb 1st and states that payment for the delivery of the first excavator is conditional on the delivery of the second excavator. The 2nd is delivered on June 1st. What are the JE's for Anderson Corp.

Feb 1st. Contract Asset 350k Revenue 350k June 1st. Account Receivable 700k Revenue 350k Contract Asset 350k

For the formation of a partnership, the assets contributed are recorded at what for GAAP and Tax?

GAAP = FMV Tax = NBV

When do you use gains and losses instead of revenues/expenses?

Gains and losses are nonoperating

Difference between the gross method and net method of account receivable measuring with discounts like 2,10 n/30?

Gross method records the initial sale as if no discount occurred, then if payment is received within the 10 days then another entry is made to record that Net method records sales and accounts receivable net of the available discount. An adjustment is not needed if payment is received within the discount days, but if it isnt then an adjustment is needed.

On a multistep income statement where is interest reported?

Interest expense is not considered a Selling expense or a general/admin expense. It is under both of those as an "other expense"

What kind of change is a inventory valuation change? Like a change in year 2 from LIFO to FIFO and you are doing year 3's statements? What about a change in depreciation method?

Inventory valuation changes is a cumulative effect and requires an adjustment to the beg. balance of RE. - This is a change in accounting principal so applied retrospectively Depreciation method changes are accounted for as a change in estimates, which we know only affects prospectively. Therefore you don't need to change a beg. balance RE ever for depreciation changes.

What type of measurement is fair value?

Market-based measure

According to the FASB and IASB conceptual frameworks, what does the concept of faithful representation include? - 3 things

Neutrality, completeness and freedom from error

How do you know what the cumulative effect of change is when having accounting principal changes and given Noncomparative financial statements? What about Comparative financial statements?

Noncomparative financial statements being presented means the cumulative effect of a change in an accounting principal is equal to the difference between Beginning Retained Earnings in the *Period of Change* and what the Beginning Retained Earnings would have been if the accounting change had been applied retroactively to all affected prior accounting periods Comparative financial statements is the same as above except the cum. effect is equal to the difference between beg. RE in the FIRST PERIOD PRESENTED and what the beg. RE would have been if the new principal had been applied to all prior periods. The cumulative effects in BOTH cases are net of tax

What is comprehensive income the total of?

Other comprehensive income (which appears after NI) and Net Income

What are the items included in just other comprehensive income? PUFIER

Pension Adjustments Unrealized gains and loss on AVAILABLE-FOR-SALE DEBT Securities Foreign Currency items Instrument-specific credit risk EFFECTIVE portion of cash flow hedges Revaluation SURPLUS (under IFRS only)

Cash or cash equivalents must be what?

Readily available cash within 90 days from the date of purchase. So if you bought a bond on 12/1 and it matured 1/31 of the following year then it counts as a cash equiv. But if it didnt mature until 4/31 then no.

Important you know question (Pass key says it will be on exam requiring you to convert cash basis balance sheet to accrual) ABC company had cash collections of 50k, made cash payments of 20k and reported cash basis net income of 30k for Year 6. The company has determined the following: Beg: AR = 10k, Prepaid insurance = 2k, unearned service revenue = 20k, salaries payable = 3k Ending: AR = 15k, Prepaid insurance = 4k, unearned service revenue = 5k, salaries payable = 7k If converting from cash to accrual, what is the revenue and expenses? *TIP: you know how to do the operating statement of a cash basis, this is doing everything backwards from that or the opposite, think of what it means to do accrual accounting.

Revenue formula: cash collections of 50k + ending AR 15k - beg. AR 10k (because accrual recognizes cash when earned having AR go up means we earned more cash) - ending unearned revenue 5k + beg. unearned revenue 20k = 70k revenue Expense formula: 20k cash payment + ending salaries payable 7k - beg. salaries payable 3k - ending prepaid insurance 4k + beg. prepaid insurance 2k = 22k expenses

Burbank company has a $12,650 cash balance EOY and the bank statement has this: 1. Cash balance $10,050 2. Bank service charge of $10 3. NSF Check of $90 4. Deposits in transit of $3,000 5. Outstanding checks of $500

Start with our Book balance of $12,650. 1. Deduct $10 2. Deduct NSF check of $90 New Adjusted Cash balance = $12,550 Then do Bank balance of $10,050 1. Add Depo in Transit of $3,000 2. Deduct Outstanding Checks of $500 True Balance = $12,550

When are the only times a journal entry includes the bad debt expense account? Otherwise what are the other accounts used?

The only time we use bad debt expense account is if we have a provision done during the year and it thinks we need higher allowance for DA, or at the end of the year when we make our adjustment to allowance for DA we will say okay we have 20k in allowance for DA right now, and we need 30k to be the amount we wont receive. So then you have to make an 10k bad debt exp and 10k allow adjustment. Otherwise the entries are always just accounts receivable paired with allowance for DA.

When does substantial doubt exist within the going concern of an entity?

When it is more likely to occur that the entity will not be able to meet its obligations as they become due within one year from the financial statement ISSUANCE DATE (Not balance sheet date, weird IK)

Deferrals

When you pay for items before getting the benefit for it. Ex: prepaid expenses and unearned revenues

Percentage of accounts receivable method: DEF Co. estimates that the balance in the allow account must be 2 percentage of year-end accounts receivable of 80k. The balance before the adjustment was 1k. Prepare the JE

bad debt expense - 600 allow for uncollectible accounts - 600

At the end of each accounting period, all components of comprehensive income are closed to the _________________.

balance sheet in the stockholders equity section

Accrual Accounting?

revenues are recognized when they are earned and expenses are recognized in the same period as the related revenue, not necessarily in the period in which the cash is received or expended by the company

What is form 8-K?

the form filed with SEC to report a significant event ex: one company acquiring another company

What is the objective of financial reporting?

to provide information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity