ACG 3141- Test 2

Revenue (or Gross Profit) To Be Recognized To Date

= percent complete x estimated total revenue (or gross profit)

Current-Period Revenue (or Gross Profit)

= revenue (or gross profit) to be recognized to date - revenue (or gross profit) recognized in prior periods

Repurchase Agreements

Allows company to transfer asset to customer but have unconditional obligation or right to repurchase asset at later date If repurchase price is greater than or equal to selling price, then it's financing transaction

Liquidating Dividends

Any dividend not based on earnings reduces corporate paid-in capital Return of S/H investments rather than profits Must be disclosed

Cumulative Preferred Stock

Constitutes dividend in arrears If company fails to pay dividend, it must make it up in later year before paying any dividends to common stockholders Not liability until dividend declared Note to financial statements

Stock Compensation

Recognize compensation cost using fair value method - companies use acceptable option-pricing models to value options at DATE OF GRANT

Variable Consideration for Contracts Extending Past 1 Period

Recognize if: 1. They have experience with similar contracts and are able to estimate cumulative amount of revenue and 2. Based of experience, they don't expect serious reversal of revenue previously recognized

Completed Contract Method

Recognize revenues and gross profit only when contract is completed

Stock Compensation- Allocating Compensation Expense

Recognizes compensation expense in periods in which its employees perform service (service period= vesting period= time between grant and vesting date)

Percentage-of-Completion Method

Recognizes revenues and gross profits each period based upon progress on construction Buyer rights: seller will perform Seller rights: can require progress payments Continuous sale occurs

Stocks Issued in Noncash Transactions

Record stock issued at fair value of stock issued or fair value of noncash considerations received, whichever is more clearly determinable

Treasury Stock

Reduces stockholders' equity Contra-equity account Normal debit balance

Restricted Stock

Restricted stock plans transfer shares of stock to employees, subject to agreement that shares can't be sold, transferred, or pledged until vesting occurs

Time Value pf Money

When contract involves significant financing component Measure sales revenue at fair value Not necessary if payment occurs in less than 1 year

Property Dividends

"Dividends in kind" 3 JEs: 1. Reevaluation of assets to be distributed to fair value 2. Declaration of dividend 3. Payment of dividend

Product or service is distinct when customer is able to:

-Benefit from good or service on its own OR -Together with readily available resources Interdependence= one performance obligation

Costs of Issuing Stock

-Underwriting costs -Accounting and legal fees - Printing costs - Taxes Should be reported as reduction of paid-in capital

Types of Dividends

1. Cash 2. Property 3. Liquidating 4. Stock All but stock dividends reduce total stockholders' equity

Construction Journal Entries

1. Construction costs 2. Billings 3. Collections 4. Recognize revenue and gross profit

If-Converted Method

1. Conversion at beginning of period (or at time of issuance) -> affects denominator 2. Elimination of related interest, net of tax -> affects numerator

Return on Equity

= (Net income - Preferred dividends) / Average common stockholders' equity Measure of profitability from S/Hs perspective

Basic Earnings Per Share

= (Net income - Preferred dividends) / Weighted-average number of shares outstanding

Payout Ratio

= Cash dividends / (Net income - Preferred dividends) Measure of cash flow to common S/Hs

Percent Complete

= costs incurred to date / most recent estimate of total costs

Allocating Transaction Price to Separate Performance Obligations

Based of relative fair values (proportional method) If not available: 1. adjusted market assessment approach 2. expected cost plus margin approach 3. residual approach

At Time of Debt Conversion

Book value method No gain or loss recognized 1. Close out bond and discount/premium at book value 2. Record equity at BV of bonds

Incremental Method

Can't determine fair value for one of classes

Selling Treasury Stock Above Cost

Cash -> T/S -> APIC- T/S

Selling Treasury Stock Below Cost

Cash APIC- T/S -> T/S

Stock Warrants

Certificates entitling holder to acquire shares at certain price within stated period

Contract Modifications

Change in contract terms while it is ongoing Separate performance obligation if promised goods and services are distinct and company has right to receive amount of consideration that reflects standalone selling price Use blended price if not separate

Book Value per Share

Common stockholders' equity / Outstanding shares Not as useful If BV doesn't equal FV, it loses relevance How much each share would receive if company is liquidated

When to Recognize Revenue

Company satisfies its performance obligation when customer obtains control of good or service 1. company has right to payment for asset 2. company has transferred legal title to asset 3. company has transferred physical possession of asset 4. customer has significant risks and rewards of ownership 5. customer has accepted asset

Complex Capital Structure- Diluted EPS

Exists when business has convertible securities, options, warrants, or other rights that, upon conversion or exercise, could dilute earnings per share Report basic and diluted

Proportional Method

Fair value known for each class

Stock Options

Give key employees option to purchase ordinary shares at given price over extended period of time

Control

Gives customer sole ability to derive remaining benefits from good or service

Consignments

Manufacturers deliver goods but retain title to goods until they are sold Consignor ships merchandise to consignee who acts as an agent in selling merchandise Consignor makes profit and carries inventory Consignee makes commission on sale

Detachable Stock Warrants

Involves 2 securities - debt security - warrant to purchase common stock

Stock Dividend

Issuance by corporation of its own stock to its stockholders on pro rata basis, without receiving any consideration Company transfers, from retained earnings to to capital stock and APIC, fair value of stock issued Reclassification of stockholders' equity Small stock dividend (less than 25%)

Induced Conversions

Issuer offers additional consideration, or "sweeteners" Recorded as Debt Conversion Expense

Diluted EPS- Options and Warrants

Measure dlutive effects of potential conversion using treasury-stock method Assumes: 1. exercise occurs at beginning of year or date of issue if later 2. that company uses proceeds to purchase common stock for treasury Don't affect net income, but do affect total number of shares outstanding

Variable Consideration

Price dependent on future events Companies estimate amount of revenue to recognize -expected value -most likely amount ---whichever is more predictive of consideration company will receive

Expected Value

Probability-weighted amount in range of possible consideration amounts Large number of contracts with similar characteristics

Preemptive Rights of Stockholders

Right of shareholders (unless prohibited in articles of incorporation) to share proportionately in any new issues of stock of same class Protects existing stockholders from involuntary dilution of ownership interest when corporation issues additional stock Makes it difficult to issue new stock

Large Stock Dividend

Same effect on market price as stock split

Most Likely Amount

Single most likely amount in range of possible consideration outcomes Appropriate if contract only has 2 possible outcomes