IA2

Loss on Early Extinguishment of Debt =

call price - carrying value

Estimated forfeiture

comp exp * (1-est. forfeiture) / years

Periodic Loss Occurs for Profitable Project: Revenue Recognized Over Time

cost revenue CIP

Stated<market

discount

Liability cannot

exceed comp exp

•If the employee will receive cash or can elect to receive cash, the award is considered to be a

liability

when exercised

liability sar plan Cash

Diluted EPS w/ convertible bonds

net income + after tax interest / shares + convertible shares

Jan 1 2021 entry

no entry

A change in reporting entity occurs when

one company acquires another

Stated>Market

premium

For a change from the equity method to another method of accounting for long-term investments, GAAP requires the ___________ application of the new method

prospective

Changes to LIFO are handled

prospectively

If the character of an investment changes (i.e. cost method to equity or vice versa),

the old method is discontinued and the new method begins to be used from the date of the influence change forward.

Adjusted Financial Statement Income

•Starts with a company's net income or loss •Adjustments are then made to increase or decrease AFSI •adjust to conform income and expense items related to pensions to those for regular federal income tax •subtract accelerated tax basis depreciation for tangible assets and amortization on certain assets (i.e., qualified wireless spectrum) •subtract financial statement net operating losses carryforwards (limited to 80% of AFSI)

When Unexercised Options Expire

PIC- S.O. Paid-in capital—expiration of stock options

The equity method: a. Recognizes investment revenue when dividends are paid by the investee b. Increases the investee's net assets when a dividend distribution is received c. Views the dividend payment as returning assets to its investors in the form of cash payment d. Counts the payment of dividends twice

C

Balance of Investment

Purchase Price + Income - Dividends - Adjustment

On January 2, 2021, Garner, Inc. bought 30% of the outstanding common stock of Moody, Inc. for $60 million cash. At the date of acquisition of the stock, Moody's net assets had a book value and fair value of $180 million. Moody's net income for the year ended December 31, 2021, was $30 million. During 2021, Moody declared and paid cash dividends of $6 million. On December 31, 2021, the fair value of 100% of Moody's stock was $650 million. On December 31, 2021, Garner's investment account should be reported at: $60.0 million. $65.0 million. $67.2 million. $71.1 million.

$60 million + (30% × $30 million) − (30% × $6 million) = $67.2 million.

Share-based compensation plans include

(1) stock award plans, (2) stock option plans, (3) stock appreciation rights (SARs),

Basic EPS

(Net Income - Preferred Dividends)/(Weighted Average of Shares Outstanding)

Revenue recognized this period=

(total revenue x completed to date) - revenue recognized in prior periods

Antidilution

- When EPS increases do not show diluted EPS

At the beginning of 2021, Flaherty Company had retained earnings of $350,000. During the year Flaherty reported net income of $100,000, sold treasury stock at a "gain" of $36,000, declared a cash dividend of $60,000, and declared and issued a small stock dividend of 3,000 shares ($10 par value) when the fair value of the stock was $20 per share. The amount of retained earnings available for dividends at the end of 2021 was

$350,000 + $100,000 - $60,000 - (3,000 ´ $20) = $330,000.

Effective interest

Balance * rate

SAR Equity December 31, 2021, 2022, 2023, 2024

Comp exp PIC- SAR plan

Journal Entry - December 31, 2021, 2022, 2023, 2024

Compensation Exp. PIC- restricted stock

Stock Options Journal Entry - December 31, 2021, 2022, 2023, 2024

Compensation Expense PIC- stock options

Reporting method for Control (>50%)

Consolidation

Upon completion when project is over loss:

Cost of construction Revenue from long-term contracts 5,000,000 CIP 100,000

On June 30, 2021, Mabry Corporation issued $15 million of its 8% bonds for $13.8 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2021. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2021? a.$48,000 b.$60,000 c.$69,000 d.$90,000

D Interest expense ($13,800,000 × .10 × 6/12) 690,000 Discount (difference) 90,000 Cash ($15,000,000 × .08 × 6/12) 600,000

Subsequent Event

If contingency comes into existence after fiscal year-end -No liability accrues, but description provided in notes

No adjustments for:

Land or goodwill

Journal entry for treasury stock

Treasury Stock 6,000 (300 shrs * $20 purch price) Cash 6,000

When the exercise price exceeds the market price, the securities are _____________ and are excluded from the calculation of diluted EPS.

antidilutive

Is change in useful life a change in accounting principle?

no

Change in Accounting Principle examples

•A switch by hundreds of companies from FIFO to LIFO in the mid-1970s, for example—was a result of heightened inflation •Changes within a specific industry •Changes that might be mandated when the FASB codifies a new accounting standard

Changing Depreciation, Amortization, and Depletion Methods

•Considered to be a change in accounting estimate that is achieved by a change in accounting principle Accounted for prospectively

Stock Appreciation Rights

•Enable an employee to benefit by the amount that the market price of the company's stock rises without having to buy shares •Employees are awarded the share appreciation •Share appreciation -The amount by which the market price on the exercise date exceeds a prespecified price (usually the market price at the date of grant) •Usually payable in cash or the recipient has the choice between cash and shares

IF the fair market value of the investment is readily determinable:

•Record the investment at the purchase price •Record dividends through dividend income •Record any fluctuations in investment fair value to unrealized holding gains/losses as applicable

SARs payable in cash (liability)

•The fair value of the SARs is estimated and that amount is recognized as compensation expense over the requisite service period •The fair value is periodically re-estimated in order to continually adjust the liability (and corresponding compensation) until it is paid •The periodic expense is the fraction of the total compensation earned to date by recipients of the SARs reduced by any amounts expensed in prior periods

First interest expense

PV * market rate

Journal entry to Recognize Investment Income

Investment Investment Revenue

•If the employer can elect to settle in shares of stock rather than cash, the award is considered to be

equity

•Compensation now is measured as the _______ of the stock options at the grant date

fair value

If dilutive earnings per share decreases,

the securities are dilutive and are assumed converted.

Gain on entire retirement =

(Sell price - purchase price) + discount

In each of the following independent cases, it is assumed that the corporation has $800,000 of 6% preferred stock and $3,200,000 of common stock outstanding, each having a par value of $10. No dividends have been declared for 2019 and 2020. (a) As of 12/31/21, it is desired to distribute $250,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and nonparticipating? (b) As of 12/31/21, it is desired to distribute $800,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and participating up to 11% in total? (c)On 12/31/21, it is desired to distribute $816,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and participating?

(a)$144,000 ($800,000 x .06 x 3 yrs.). (b)$184,000 ($800,000 x .06 x 3 yrs.) + [$800,000 x (.11 -.06)]. (c) $240,000 ($800,000 x .06 x 3 yrs.) + ($800,000 x .12)

•Stock option plans give employees the option to purchase

-A specified number of shares of the firm's stock -At a specified exercise price -During a specified period of time

Accounting for early extinguishment:

-Account balances of the debt must be removed from the books -Any difference between the outstanding debt and the amount paid to retire that debt represents either a gain or a loss

The assumed conversion of convertible bonds or preferred stock has two effects on dilutive earnings per share:

-increases the denominator by the number of common shares issuable upon conversion, -increases the numerator by decreasing after-tax interest expense on convertible bonds, and dividends on convertible preferred stock.

Journal Entry for United Intergroup purchased 30% of Arjent, Inc.'s, common stock for $1,500,000 cash

Investment 1,500,000 Cash 1,500,000

Critical events that an investor experiences in the life of an investment

1. Purchasing the investment 2. Recognizing investment revenue •For debt: Interest •For equity: Dividends 3. Holding the investment during periods in which the investment's fair value changes •Unrealized holding gains and losses 4. Selling the Investment •Realized gains and losses

The Retrospective Approach

1. Revise Comparative Financial Statements 2. Adjust Accounts for the Change 3. Disclosure Notes

Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares of 8% preferred stock with a par value of $5. The preferred stock is cumulative and participating. Dividends have been paid in every year except the past two years and the current year. Assuming that $366,000 will be distributed, and the preferred stock is also fully participating, how much will the common stockholders receive?

1.Pref Par = 120,000*8%*$5=$600,000 Com Par = 600,000*$2 = $1,200,000 Total Par = $1,800,000 2. Pref owed 2 years arrears plus current year = 8% * $600,000 * 3 = $144,000 Com 8% * $1,200,000 = $96,000 3. Total dividends $366,000 - (144,000+96,000) = $126,000 remaining / $1,800,000 Total Par = 7% 4. Pref 7% * $600,000 = $42,000 Com 7% * $1,200,000 = $84,000 Total Preferred = $186,000 Total Common = $180,000

Compute the weighted-average number of shares of common stock outstanding.

100,000 + [50,000 × (9/12)] - [12,000 × (8/12)] = 129,500

Compute the weighted average number of shares of common stock outstanding.

100,000 × (1.50) + [50,000 × (9/12) × 1.50] = 206,250

Inflation Reduction Act of 2022

15% corporate alternative minimum tax 1% excise tax on stock repurchases $80 billion in increased funding for the IRS for enforcement activities, modernization, and the hiring and training of new auditors

Anders, Inc., has 15,000 shares of 5%, $100 par value, cumulative preferred stock and 60,000 shares of $1 par value common stock outstanding at December 31, 2021. There were no dividends declared in 2019. The board of directors declares and pays a $135,000 dividend in 2020 and in 2021. What is the amount of dividends received by the common stockholders in 2021?

15,000 ´ $100 ´ .05 = $75,000 ($135,000 ´ 2) - ($75,000 ´ 3) = $45,000.

On 1/1/X1, Omega Corporation's net worth was as follows: Common stock (15,000 shares, $10 par value) $150,000 Additional paid-in capital 30,000 Retained Earnings 60,000 Total $240,000 On 1/1/X1, Alpha, Inc. purchased 2,500 shares of Omega Corporation at a price of $29 per share. Omega Corporation's equity securities are not readily marketable. Alpha could not attribute any of the excess cost over book value to any specific Omega assets and considered this excess to be goodwill. Omega's earnings and dividends for the next three years were as follows: Year Net Income Dividends 20X1 10,000 6,000 20X2 25.000 30,000 20X3 80,000 40,000 Assuming Alpha, Inc. did not have significant influence over Omega Corporation, complete the journal entries for 20x1, 20x2, and 20x3.

2,500 shares purchased/15,000 total shares = 16.67% •20x1 Investment in Omega 72,500 Cash 72,500 (2,500 shares * $29) Cash 1,000 Investment income from Omega 1,000 (dividends 6,000 * 16.67%) •20x2 Cash 5,000 Investment income from Omega 4,834 Investment in Omega 167 (Liquidating Dividend = (10,000+25,000) - (6,000+30,000) = (1,000) * 16.67% = 167) •20x3 Cash 6,668 Investment income from Omega6,668

On January 2, 2021, Germane, Inc. bought 30% of the outstanding common stock of Quality, Inc. for $56 million cash. At the date of acquisition of the stock, Quality's net assets had a book value and fair value of $120 million. Quality's net income for the year ended December 31, 2021, was $30 million. During 2021, Quality declared and paid cash dividends of $10 million. On December 31, 2021, Germane's should report investment revenue of: $3 million. $6 million. $9 million. $30 million.

30% × $30 million = $9 million.

Luther Inc., has 4,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2021, and December 31, 2020. The board of directors declared and paid a $10,000 dividend in 2020. In 2021, $48,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2021?

4,000 ´ $50 ´ .06 = $12,000 ($12,000 - $10,000) + $12,000 = $14,000.

TMT =

AFSI x 15% - CAMT foreign tax credits.

Percentage of completion

Actual costs to date ÷ Total cost (est. + actual)

Journal Entry for the adjustments for excess paid over book

Invest Revenue Investment in Equity

On January 2, 2021, Worth Co. issued at par $1,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 20 shares of common stock. No bonds were converted during 2021. Worth had 200,000 shares of common stock outstanding during 2021. Worth's 2021 net income was $450,000 and the income tax rate was 30%. Worth's diluted earnings per share for 2021 would be (rounded to the nearest penny):

Basic EPS = $450,000/200,000=$2.25 ($1,000,000 /$1,000) ´ 20 = 20,000 shares $1,000,000 ´ .07 ´ (1 - .30) = $49,000 net of tax interest from bonds ($450,000 + $49,000) / (200,000 + 20,000) = $2.27 Basic is less than diluted, therefore antidilutive so exclude and diluted eps is $2.25 (same as basic)

On December 31, 2010, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2011, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2011. Four million treasury shares were sold on October 1st. Net income for the year ended December 31, 2011, was $150 million. The income tax rate is 40%. Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2006. The options are exercisable as of September 13, 2010, for 30 million common shares at an exercise price of $56 per share. During 2011, the market price of the common shares averaged $70 per share. $62.5 million of 8% bonds, convertible into 6 million common shares, were issued at face value in 2007. Required: Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2011.

Basic EPS: (150-27)/ (190) = $.65 Diluted EPS $150 - $27 + $5 - [40% ($5*)] /200 (1.05) - 24 (10/12) (1.05) + 4 (3/12) + (30 - 24**) + 6 = 126/202 = $.62

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 5% convertible bonds outstanding during 2021. The preferred stock is convertible into 40,000 shares of common stock. During 2021, Hanson paid dividends of $.60 per share on the common stock and $2 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2021 was $400,000 and the income tax rate was 30%. Compute the Basic and Diluted EPS.

Basic: [$400,000 - (20,000 ´ $2] / 200,000 = $1.80 Diluted: [$400,000 + ($1,000,000 ´ .05 ´ .7)] / [200,000 + 40,000 + (1,000 ´ 45)] = $1.53

Journal entry to close accounts

Billings on construction contract CIP

Loss on Early extinguishment Journal Entry

Bond Payable ( FV) Loss (Call price - carry value) Discount (BP-carry value) Cash (call price)

On January 1, 2022, Masterwear Industries called its $700,000, 12% bonds when their book value was $676,288. • The indenture specified a call price of $685,000. • The bonds were issued previously at a price to yield 14%. Journal Entry

Bonds payable (face amount) Loss on early extinguishment ($685,000 − 676,288) Discount on bonds payable ($700,000 − 676,288) Cash (call price)

KB purchased 40% of the stock of RiteCo, Inc. for $500,000 on 1/1/2021, and accounts for the investment using the equity method. At 1/1/2021, 40% of the fair value of RiteCo's net assets is $500,000, and 40% of the book value of RiteCo's net assets is $200,000. One half of the difference is attributable to land, and the other half to a building being depreciated over 10 years. To account for this difference, during 2021 KB would reduce its investment in RiteCo by: a.$300,000 b.$150,000 c.$15,000 d.$6,000

C

Portland's Best Coffee has a litigation claim of $100,000 against it. As of 12/31/2021, Portland considered it probable that it would lose $75,000 on the claim. After the 2021 year-end, but before issuance of the financial statements, Portland settled the litigation for $60,000. How much of a litigation liability should Portland show in its 12/31/2021 financial statements? a.$100,000 b.$75,000 c.$60,000 d.$0

C

Chism Corporation issued $10 million face amount of bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. The following is a partial bond amortization schedule for the bonds. Payment Cash Effective Decrease in Outstanding Interest Balance Balance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 4 400,000 What is the interest expense on the bonds in 2022? a.$119,241 b.$342,961 c.$680,759 d.$800,000

C Semiannual effective rate = $344,632 ÷ $11,487,747 = 3% Interest expense = $341,261 + ($11,316,611 × 3%) = $680,759

To record construction costs

CIP Cash/Materials

To recognize revenue

CIP Cost of construction Revenue from LT

Note about gains/losses from treasury stock

Cannot go negative, therefore you hit RE. Gains/Losses do not go through the income statement. FASB does not want companies (using insider trading) increasing EPS by trading their own stock.

To record cash collections

Cash Accounts Receivable

Journal Entry to receive dividends

Cash Investment

Journal Entry to sell investment

Cash Loss/Gain (NI) Investment

When Options are Exercised

Cash (ex. price x shares) PIC- S.O. (comp exp.) Common Stock (par x shares) PIC- excess (remainder

Journal entry to issue bond

Cash --PV Discount/premium -- Diff Bonds Payable --FV

During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share. Journal Entry to record purchase of stock

Cash 18,000,000 Common stock 2,000,000 Paid-in capital - excess of par 16,000,000

On March 31 Crenny sold 200 shares of Treasury Stock for $25 per share.

Cash 5,000 (200 shrs * $25 purch price) Treasury Stock 4,000 (200 shrs * $20 cost) PIC:TS 1,000

On June 30 Crenny sold last 50 treasury shares for $1 per share

Cash 50 (50 shrs * $1 purch price) PIC:TS 900 RE 50 Remainder Treasury Stock 1,000 (50 shrs * $20 cost)

On April 30 Crenny sold 50 shares of treasury stock for $18 per share

Cash 900 (50 shrs * $18 purch price) PIC:TS 100 Treasury Stock 1,000 (50 shrs * $20 cost)

Journal entry for Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000.

Cash 945,000 Common stock 80,000 Paid-in capital - excess of par, common* 640,000 Preferred stock 200,000 Paid-in capital - excess of par, preferred** 25,000

Yoder, Inc. has 150,000 shares of $10 par value common stock and 75,000 shares of $10 par value, 6%, cumulative, participating preferred stock outstanding. Dividends on the preferred stock are one year in arrears. Assuming that Yoder wishes to distribute $405,000 as dividends, the common stockholders will receive

Common Stock $1,500,000 ´ 6% = $90,000 (current year) $1,500,000 ´ 10%*= 150,000 (participating) $240,000 *$405,000 - $90,000 - ($750,000 ´ 6% × 2) = $225,000 $225,000 ————-- = 10%. $2,250,000

To record progress billings

Debit Accounts Receivable and Credit Progress Billings on Construction Contract

1) The journal entry to record the final bond payment (not the final interest payment) at maturity is as follows:

Debit Bond payable and credit cash

Reporting method for significant Influence (>20%)

Equity method

interest expense over life =

FV + (FV-PV) or FV - (FV-PV) if premium

SAR Cash: comp exp

FV x shares x (year/total years) - previous years

Reporting method for no significant Influence (<20%)

Fair Value through NI

S&L Financial buys and sells securities which it classifies as available-for-sale. On December 31, 2021, a bond has an amortized cost of $800,000. The bond's fair value adjustment has a debit balance of $20,000, but the bond's fair value is now $825,000. The journal entry to adjust the fair value adjustment will include:

Fair value adjustment 5,000 Gain on investments (unrealized, OCI) 5,000

total compensation expense:

Fair value per share x shares

Journal entry to record Issued 40,000 common shares to attorneys in exchange for legal services.

Legal expenses 360,000 Common stock 40,000 Paid-in capital - excess of par 320,000

Upon completion when costs exceed revenue:

Loss on long-term contracts Construction in progress (CIP)

Intrinsic value=

Market price of the shares - Option price at which they can be acquired

Diluted EPS w/ preferred stock

NI/ shares + convertible

Periodic Loss Occurs for Profitable Project: Revenue Recognized Upon Project Completion

No entry

Journal entry when stock awarded

PIC- restricted Common Stock Paid in capital excess

The shareholders' equity of WBL Industries includes the items shown below. The board of directors of WBL declared cash dividends of $8 million, $20 million, and $150 million in its first three years of operation - 2011, 2012, and 2013, respectively. Required: Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating.

Preferred = 8% x $200=$16, Preferred will have $16 dividends allocated annually Preferred Common 2011 $ 8 million* $ 0 2012 20 million** 0 201320 million***130 million (remainder)

The two primary types of restricted stock plans

RS Awards RS Units

Restricted Stock Plans

Subject to forfeiture by the employee if employment is terminated within some specified number of years from the date of grant Not free to sell the shares during the restriction period •Once the shares vest and the restrictions are lifted, paid-in capital -Restricted stock is replaced by common stock and paid-in capital -Excess of par •Any market price changes that might occur after that don't affect the total compensation

CAMT =

TMT - (Regular Tax Liability + BEAT Liability)

Regular Tax Liability =

Tax Liability - Regular Foreign Tax Credits

Correction of Errors

The correction of an error is not actually an accounting change but its accounted for similarly. It is accounted for retrospectively, like a change in reporting entity and like most changes in accounting principle.

Bond issue costs

subtract from pv to get new pv, then calculate new effective interest

compensation expense is allocated over:

the vesting period

comp exp with forfeiture:

total comp x (1-forfeiture) x(year/total years) - previous comp exps

Change in Reporting Entity

•Change from reporting as one type of entity to another type of entity •Occurs as a result of: -Presenting consolidated financial statements in place of statements of individual companies, -Changing specific companies that constitute the group for which consolidated or combined statements are prepared, -Changes in accounting rules, or -One company acquiring another •Reported by recasting all previous periods' financial statements as if the new reporting entity existed in those periods •A disclosure note should describe the nature of the change and the reason it occurred

Prospective Approach

•Effects of a change are reflected in the financial statements of only the current and future years

Retrospective Approach

•Financial statements issued in previous years are revised •Statements are made to appear as if the newly adopted accounting method had been applied all along or that the error had never occurred •Then, a journal entry is created to adjust all account balances affected

IF the fair market value is NOT readily determinable:

•Follow the COST method of accounting for investments •Record the investment at the purchase price •Record dividends through dividend income •Record liquidating dividends as a reduction to the investment account

For significant influence, follow the EQUITY method of accounting for investments

•Investment is recorded at the purchase price •Investor's "share" of investment's net income is recorded as investment income •Dividends received are recorded as a reduction to the investment as they are reducing the underlying value of the investment (derived from retained earnings) •Excess purchase price paid over the value of investor's share of the investment is amortized/depreciated depending on what it is allocated to (assuming it is allocated to an amortizing or depreciating asset) •Amortization/depreciation is recorded as a reduction to investment income and the investment

Modified Retrospective Approach

•New standard applied only to the current period •Adjust retained earnings balance at beginning of year

SARs payable in shares (equity)

•The fair value of the SARs is estimated at the grant date and we accrue that compensation to expense over the service period •The cash settlement of an equity award is treated like the repurchase of an equity instrument •The total compensation is not revised for subsequent changes in the price of the underlying stock