FAR - Financial Statement Accounts

Stock Appreciation Rights (SARs)

(1) employee receives the difference between the stock price at grant date, and the stock price at exercise date, (2) pays nothing, (3) the SAR specifies payment of the benefit in either cash or stock (employee may have a choice). The accounting issue is whether the arrangement involves debt or equity. If stock will be issued, SAR is accounted for as a stock option plan.

When would dividends be considered income?

<20% ownership, dividends are income. Stock dividends are never income.

Retail Inventory Method steps

Calculate ending inventory at retail. Calculate the cost/retail ratio {includes markups/downs, freight-in, returns, etc.}. Calculate ending inventory at cost by cost/retail ratio * ending inventory at retail.

Loss on early extinguishment of bonds

Cash paid - debt book value + unamortized debt issue costs

Two main categories of owners' equity (not accounts)

Earned Capital and Contributed Capital

Revenue Recognition Principle General Requirements

Earned, Realizable and Related Expenses can be determined. Cash Collection does not matter.

Bond Discount/Premium amoritzation methods

Effective Interest Method and Straight Line (only if not materially different).

What method is used to amortize a premium or discount on a security?

Effective interest method or straight-line method if not materially different.

Payroll Liabilities

Employee withholding's to pay on behalf of employee. Not an expense. Employer portion taxes and costs are an expense (FICA, Unemployment Tax, Medicare)

Cash Stock Appreciation Rights accounting

End of year JE = (Stock Price at grant date - Stock Price at BS date) * # of SARs / years to vest = Debit Compensation expense and Credit SAR Liability

Conversion index in Dollar Value LIFO =

Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars

Accounting treatment if a joint venture is not a variable interest entity or the investor is not the primary beneficiary.

Equity method for JV

Cost method for Investments

Equity only. No significant influence or readily available FV. Stays at cost unless permanent decline in value or Liquidating dividend.

Bond purchase price includes/excludes the accrued interest.

Excludes. Purchase price - accrued interest = carrying value. Carrying value - face value gives premium or discount. Amortize prem/disc based on number of months, not years divided by months.

Investment Classifications of GAAP vs. IFRS

GAAP has Held to Maturity, AFS and Trading. IFRS has Held to maturity - debt at amortized cost, and Fair Value through profit or loss - debt at FV and all equity at FV.

_____ does not allow for component depreciation.

GAAP. IFRS allows components of a larger asset to be depreciated differently from the larger asset.

Change in Forfeiture Estimates for Stock Option Compensation

Recalculate the total compensation expense using new estimate. Multiply by (# of years that should be expensed already / # of years in service period) - Year 1 expense = amount that should have already been expensed and should therefore be expensed in year 2.

Permenant unrealized loss to an AFS investment should be recorded to what?

Recognized in earnings. Conservatism.

Stock Split Effected in Form of a Stock Dividend

Reduces PIC - Common and increases Common Stock by same amount

Equity Securities

Securities representing ownership interest or right to acquire or dispose of ownership interest.

Sum of Years Digits

[# years remaining * (cost - salvage)] / sum of years sum of years 1+2+3+4....

Depletion

allocation of the natural resource being extracted to resource inventory. Debit to inventory and Credit to contra account. (natural resources account bal. - residual value) / (total estimated units)

In substance defeasance

debtor firm places assets into an irrevocable trust for the purpose of retiring debt

Cost/Sales Ratio

sales / COGS

Margin on Cost vs Margin on Sales

"(sales - cost = gross margin) Margin on Sales = gross margin / sales. Margin on Cost = gross margin / cost. (margin on sales) / (1 - margin on sales) = margin on cost(margin on cost) / (1 + margin on cost) = margin on sales"

Valuation Allowance for Deferred Tax Assets

"More likely than not that % of deferred tax asset would not be realized." Deferred Tax Asset ending balance * % given. (50% or less requires Valuation Allowance, Contra to DTA) Credit Valuation Allowance account, Debit Income Tax Expense.

What is the difference between IFRS and US GAAP with recognizing revenue and AR from a sales commitment?

"US GAAP - Not recognized IFRS - May be recognized 1. There are probably future economic benefits. 2. Revenue can be measured reliably. 3. Costs can be measured reliably. 4. Significant risk and rewards of ownership are transferred. 5. Managerial involvement is not retained as to ownership or control. 6. Therefore, a firm sales commitment may meet the IFRS criteria for recognition, but in the U.S. the revenue and asset from a firm sales commitment would not be recognized."

A firm factors $5,000 of receivables with recourse at a fee of 4%. Uncollectible accounts are estimated to be $500. The transfer is accounted for as a sale. What is the loss to be recorded by the transferor?

$700 loss. 4% of $5000 + Uncollectible accounts of $500 = $700

The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. What is the amount remitted?

(50 - 8) * .98 * .96 = $39.51

T/F A holding gain results from holding an item while the market value experiences a decline

(F) A holding gain results from holding an item while the market value increases. Thus, the holding gain would be equal to the current market value less the value on the books.

T/F During a period of rising prices, the LIFO cost flow assumption results in a higher net income as compared to FIFO

(F) During a period of rising prices, the LIFO method will result in higher priced items being charged to cost of goods sold, thus lowering net income. It is the FIFO method which would produce a higher net income because the cost of goods sold would reflect the older or lower cost goods.

T/F Stock dividends of 40% of the outstanding shares of stock are valued at fair market value on the date of declaration.

(F) Large stock dividends are recorded at par. A stock dividend of 40% of the shares outstanding is considered a large stock dividend.

T/F A premature sale of held-to-maturity securities may be considered maturity if at least 80% of the principal has already been collected

(F) Premature sale of held-to-maturity securities are considered at maturity if either (1) the sale occurs so close to maturity that interest rate risk is virtually eliminated, or (2) the sale occurs after at least 85% of the principal has been collected.

T/F Under the LIFO method, the cost of goods sold balance would be the same whether a perpetual or periodic inventory system is used

(F) The cost of goods sold would be different because a periodic system will compute the cost of goods sold based on the total goods sold and total purchases for a period, whereas a perpetual one will match each good sold with the most recent purchase on an ongoing basis

T/F When a company makes a liquidating dividend, it debits the common stock account.

(F) When a company makes a liquidating dividend, a company usually debits additional paid-in capital rather than retained earnings. Common stock cannot be debited because it is considered legal capital which is only eliminated upon the dissolution of the corporation.

T/F In a period of rising prices, when a company changes from FIFO to LIFO the net income will tend to decline as will working capital

(T) A change from FIFO to LIFO will tend to result in a decrease in net income and working capital. This is because the LIFO method will put the more recent/higher priced items on the income statement (last in) and the older/less expensive goods will be carried in inventory. Thus, net income will be lower due to higher cost of goods sold, and working capital will be lower due to the lower inventory asset balance

T/F The price index for dollar-value LIFO is a measure of changes in price levels between the current year and the base year

(T) A price index provides a measure of the changes in price between base year and the current year. The price index is generally used to compute changes in inventory levels.

T/F Scrip dividends are a liability on the date of declaration.

(T) All dividends are liabilities on the dates declared.

T/F Under the LIFO method, an inventory liquidation will result in higher profits in a period of rising prices

(T) In a period of rising prices, a liquidation of older inventory, which carries lower costs, will result in a decline in the cost of goods sold and higher profits.

T/F Inventory should be reported at the lower of cost or market and it may be based on the values of individual items, categories, or the total inventory

(T) Inventory should be carried at the lower of cost or market. In determining the lower of cost or market it may be based on the values of individual items, item categories, or even total inventory.

T/F For trading securities, some realized gains/losses are excluded from earnings.

(T) Some unrealized holding gains and losses on trading securities could have already been included in income as unrealized components. Thus, to recognize them again upon realization would result in an erroneous doubling of the actual gain/loss.

The use of LIFO for book and tax purposes will result in a lower tax payment in a period of rising prices.

(T) The LIFO method results in the most recently purchased inventory items being expensed first. In a period of rising prices this would result in a lower net income and thus a lower taxes payable. The IRS allows the use of LIFO for tax only if it is also used for external reporting purposes as well.

T/F The dollar-value LIFO method preserves old inventory costs by charging current costs to cost of goods sold

(T) The dollar-value LIFO method groups inventory into layers and charges the most recent items to cost of goods sold before using older layers which have older inventory costs.

T/F Under the dollar-value LIFO method, increases and decreases in a layer would be measured based upon the change in the total dollar value of the layer

(T) The dollar-value LIFO method measures changes in inventory layers based upon the total dollar value change in the layer.

T/F The gross margin method uses historical sales margins to estimate the cost of inventory

(T) The gross margin method uses historical margins on sales to estimate the cost of inventory. This method is typically used for interim reporting only because it may not be precise enough for the year-end financial statements.

T/F The link-chain method uses a cumulative index to value the base cost of ending inventory

(T) The link-chain method uses a cumulative index to compute the base cost of inventory. The cumulative index is equal to the current year's prices divided by the prior year's prices, multiplied by the prior year's cumulative index. The link-chain method is only used in limited circumstances.

T/F A loss on a purchase commitment should be recorded when the contract price is greater than the market and it is anticipated that a loss will occur when the contract is completed

(T) When the market price of a contract to purchase goods falls below the contract price and it is foreseeable that the contract will result in a loss, then a loss on the purchase commitment should be recorded.

Percentage of Completion calculation

(cost incurred to date / estimated total project cost) Denominator also = cost to date + estimated remaining cost. Profit recognized = fraction from % complete * (contract price - estimated total project cost) [Debit to CIP) Total of Expense incurred, plus profit recognized = Construction revenue.

What if a purchase at year-end was not recorded in the year of purchase (year 1), but rather was recorded in the next year (year 2), the year of payment? Assume the goods were counted in EI in year of purchase.

1. 1st year: purchases are understated, CGS understated, net income overstated, ending retained earnings overstated. 2. 2nd year: purchases are overstated, CGS overstated, net income understated, ending retained earnings is correct (error has counterbalanced). If discovered in year two, a JE would be made to debit prior period adjustment and credit purchases.

Annual accrual basis financial statements for defined contribution plans

1. A statement of net assets available for benefits as of the end of the plan year. 2. A statement of changes in net assets available for benefits for the year then ended 3. A statement of cash flows is not required but encouraged. 4. A general description of the plan agreement including vesting, allocation provisions, the disposition of forfeitures, and a description of significant plan amendments adopted during the period.

Annual accrual basis financial statements for defined benefit plans

1. A statement reporting net plan assets at fair value available to pay pension benefits at the beginning or end of the year (end of year preferable). 2. A financial statement reporting the changes for the year in net plan assets at fair value available to pay pension benefits. 3. A statement of the actuarial present value of accumulated plan benefits as of at the beginning or end of the year (using the same date as plan assets in 1). 4. Additional information about factors affecting the change in actuarial present value of accumulated plan benefits from the previous year. 5. The term "accumulated plan benefits" is used because this reporting requirement applies to other types of employee benefits, in addition to pension plans. 6. A statement of cash flows is not required but encouraged. 7. A general description of the plan including vesting and benefit provisions, plan amendments adopted in the current year, funding policy, and a description of the priority order of participant's claims upon plan termination.

Available for Sale Investments Classifications

1. All investments not classified as Held to maturity or Trading Investments. [Record at cost. Debt Securities - recognize periodic interest income and amortization of prem./disc. Equity Securities - Recognize dividends received as dividend income. B/S - Recognize Unrealized holding Gain/Loss. (Accumulated Other Comprehensive Income). Statement of Cash Flows - Investing Activity]

IFRS Revenue Recognition Criteria

1. Amount of transactions revenue and costs can be measured reliably. 2. It is probable that the economic benefits associated with the transaction will flow to the seller. 3. Sale of goods: seller must have transferred to the buyer the risks and rewards of ownership. 4. Rendering of services: the stage of completion can be measured reliably.

Held to Maturity Investments Classifications

1. Applies only to debt securities. 2. Investor must have positive intent and ability to hold the securities to maturity. 3. Sale of debt before maturity only if near enough to maturity os interest rate risk is none and investor has collected substantial portion (>85%) of principal outstanding through periodic payments. [Record at cost (directly related costs included). Recognize periodic interest income. Fair Value Option: Normally, temporary changes in the FV should not be recognized, however, GAAP permits investor to elect FV option for most financial assets which are held to maturity. B/S - Current if less than one year to maturity. Statement of Cash Flows - Investing Activity.]

Steps in Determining Asset Impairment

1. Are Future net cash flows recoverable (undiscounted cash flows compared to carrying amount). (yes, no impairment) 2. For use = CV-FV Depreciate new basis, no reversal of loss. For sale = CV - FV - Cost to Sell, No depreciation, reversal permitted.

Allocation of Bonds with Detachable Warrants

1. Both Known - allocate total bond price in proportion to those fair values. 2. Only one FV known - Allocate the remainder of the total bond price to the other security.

Trading Investments Classifications

1. Both debt and equity securities. 2. Investor buys and holds for the purpose of selling int he near term with the objective of making profit. [Record at cost (including related costs). Carry and report at Fair Value. Must amortize Prem./Disc. for debt security. Recognize realized gain or loss at date of sale. Statement of Cash Flows - Operating Activity.]

IFRS requirement for classification as Held to Maturity

1. Business Model Test - holding the instrument is to collect contractual cash flows. 2. Cash Flow Characteristic Test - contractual terms of instrument provide cash inflows on specific dates. [Transfer from HTM only when business model objectives change]

Net Operating Loss (NOL) Options

1. Carryback Election - Carry back up to 2 years to refund taxes paid, remainder is carried forward for up to 20 years. 2. Carryforward election - used for up to 20 years to offset income tax expense. Firms would tend to choose option 2 if income tax rates have increased or are going to increase.

Two step process for computing capitalized interest.

1. Compute average accumulated expenditures, or the avoidable debt (amount of debt that could have been retired had construction not taken place). 2. Apply the appropriate interest rate to get the avoidable interest.

Three steps to calculating the dollar value LIFO inventory.

1. Convert end of year inventory to base year prices (EOY x (1.0 /1.1 {rate})). 2. Determine the increase in inventory at base year prices (EOY from above - BOY = increase/decrease). 3. Convert the increase in inventory to current year prices (increase/decrease from above x 1.1 {rate} added to BOY DV LIFO).

Types of Questions on Equity Method

1. Determine balance in investment account at specific date. 2. Determine investment income for the year. 3. change from cost to equity method. 4. Watch out for interim purchases of stock, the Equity accrual and the amortization of the differential are only the portion of the year owned. The dividends are recognized on their declaration date!

Non-compensatory Plan Criteria

1. Essentially all employees can participate. 2. Employee must decide within one month of the firm setting the price for the stock whether to enroll in the plan. 3. Discount does not exceed the employer cost savings inherent in issuing directly to employees (<5% market price meets this criterion). 4. Purchase price must be based solely on the market price of the stock. 5. Employees can cancel their enrollment before purchase date and obtain a full refund.

Three criteria for capitalizing interest.

1. Expenditures have been made (cash payments, transfers of other assets or the incurrence of interest-bearing debt). 2. Activities that are necessary to get the asset ready for its intended use are in progress. 3. Interest cost is being incurred (only actual interest cost is capitalized).

Classification of the deferred tax account

1. If a temporary difference is related to a current liability or asset, then the associated deferred tax account is also classified as current. 2. If a temporary difference is related to a noncurrent liability or asset, then the associated deferred tax account is also classified as noncurrent. Current Asset/Liability net together and non-current Asset/Liability net together.

Two amounts of Defined Benefit Accounting for Financial Reporting

1. Income Statement: Annual Pension Expense - PV cost of benefits earned during the year, +- adjustments - continuing operations. 2. Balance Sheet: Pension-related asset/liability - FV of pension fund - Projected Benefit Obligation (PBO) {disclosed, not reported formally}, Negative - underfunded plan, Positive - over-funded plan.

What are the three approaches to Lower Cost or Market applications?

1. Individual basis. 2. Category basis. 3. Total basis

What is required for a firm to convert Current Liablilities to Long Term Liabilities?

1. Intent - actions of board of directors and documentation with financial institution. 2. Ability - taking one of three actions - if the action occurs before FS issued, liability reported as NCL under GAAP (IFRS must be done before BS date) 1] Extinguish debt by issuing stock. 2] Refinance the current liability with noncurrent debt. 3] Enter into an irrevocable agreement to refinance the current liability with noncurrent debt.

Uncertain Tax Position Two-Step Approach

1. Is the uncertain position more likely than not to be sustained? 2. If yes, then a probabilistic approach is applied to determine the amount of benefit recognized in the current year (amount allowed when cumulative probability reaches 50%). If not, the income tax expense is not reduced and an additional tax liability is recognized (Liability for unrecognized tax benefit)

Seven items of Identification for Bonds

1. Issue Date. 2. Bond Date (first issue date). 3. Face Value. 4. Coupon or Stated Rate. 5. Effective Interest, Market or Yield Rate. 6. Interest Payment Dates. 7. Maturity Date.

List the investor's considerations in selecting the correct accounting for an investment.

1. Nature of Investment. 2. Extent of Investment. 3. Management's Intent

Pension Gains/Losses sources

1. PBO Changes - actuarial updates of PBO from experience estimates changes (ex. actual turnover exceeded estimated turnover in the past) Decrease in PBO is a gain. 2. Asset changes - difference between actual and expected return on plan assets. Net 1 and 2 together. JE Debit Pension Gains/Losses - OCI for losses and credit Pension Liability (opposite for gain)

Methods of Contract Accounting

1. Percentage of Completion (PC): Recognize profit as work proceeds, Required if total project cost is estimable. 2. Completed Contract (CC) Recognize no profit until completion.

Revenue Recognition Principle SEC Criteria

1. Persuasive evidence of an arrangement exists. 2. Delivery has occurred or services have been performed. 3. The seller's price to the buyer is fixed or determinable. 4. Collectability is reasonably assured.

General Dividend Order

1. Preferred (dividends in arrears) 2. Preferred (current period dividend) 3. Common (matching amount = preferred percentage * total par of common outstanding) 4. Preferred (additional percentage) 5. Common (remainder)

Bond issued between interest dates treatment

1. Purchaser "nets" only the number of months earned. 2. Price of bond + accrued interest = net proceeds from sale. Premium and discounts unaffected. Bond term is # of months less than stated term. First interest payment must debit accrued interest payable, interest expense is plug figure.

What are the advantages of using Dollar Value LIFO?

1. Reduces the Effect of the Liquidation Problem -- The Dollar-Value LIFO conversion technique takes a company's ending inventory in FIFO dollars (usually) and converts them to LIFO dollars. In doing so, the impact of the liquidation problem is reduced. 2. Allows Companies to Use FIFO Internally -- Most companies prefer to use FIFO for internal management reports and internal operating decisions. Dollar-Value LIFO allows companies an opportunity to do so. 3. Reduces Clerical Costs -- As mentioned earlier, most LIFO companies prefer LIFO for external reporting purposes and prefer FIFO for internal purposes. Through the use of Dollar-Value LIFO, a company can maintain a FIFO system for internal purposes, and then convert those results to LIFO for external purposes. Please note that through the use of Dollar-Value LIFO, a company must maintain only a single inventory system (FIFO) during the accounting period, thus reducing clerical costs.

Revenue Recognition at Completion of Production

1. Relatively stable market for goods. 2. Any related marketing costs are nominal. 3. Units produced are homogeneous. [ex. Gold mining]

Non-retirement Post-employment Benefits Accrual requirements

1. Same 4 criteria for compensated absences (Obligation attributable to employee services already rendered; rights vest or accumulate; payment is probable; amount is estimable.). 2. If payment is probable and compensation can be estimated but not the other two requirements, the accounting standards for contingencies applies. If not all benefits are expected to be paid, only record amount expected to be paid.

Bonds with Detachable Warrants accountanting guidelines

1. Separate any accrued interest from the proceeds. 2. Allocate the total bond price to the bonds and warrants (bond handled as before)(discount/premium calculated after allocation is made) 3. Record the allocation to the warrants in Owners' Equity account.

Amortization of Net Pension Gain or Loss methods

1. Straight line method - Net pension G/L / Denominator (service life of employees or whatever the change was) 2. Minimum Corridor Amortization method - = (net pension gain/loss - Corridor Amount) / Denominator (avg. remaining service life)

Three accounting approaches for Post-Acquisition Expenditures.

1. Substitution - remove accum. depr. and the asset from the books and capitalize the post-acquisition expenditure to the larger asset. 2. Increase the larger asset account by the post-acquisition cost (mostly used for increases to productivity instead of useful life). 3. Debit accumulated depreciation - turn back the clock (increase useful life).

Compensated Absences Criteria

1. The obligation is attributable to services rendered. 2. The rights vest or accumulate (right to benefit, accumulate to certain date). 3. Payment is probable. 4. Amount is estimable.

What are the differences between IFRS and US GAAP concerning inventory valuation?

1. US GAAP uses lower cost or market, IFRS uses lower cost or net realizable value. 2. US GAAP does not allow the reversal of write down while IFRS does. 3. LIFO is permitted under US GAAP, but prohibited under IFRS. 4. The same cost method does not need to be applied to similar inventory items under GAAP, but IFRS requires the same method to all inventory.

Double Declining Balance

2 * straight line rate * NBV{cost - accumulated depr} With DDB, no SLV - No salvage value depreciated. BV can not drop below salvage value.

What is the effective rate of interest on a 1-year, 5%, $5,000 loan requiring a $300 compensating balance to be maintained?

5.3% = (5000*.05)/(5000-300)

Book Value Per Share

= (Total OE - Preferred Stock Claims) / Ending # common shares outstanding OR = Common stockholders' equity / Ending # common shares outstanding

Stock Option Expense Calculation

= Total Fair Value of Options at issue * (1 - [forfeiture rate]) Total compensation expense / # years in service period = yearly compensation expense. JE for yearly expense = Debit Compensation Expense, Credit PIC-Stock Options

Deferred Revenue

A liability recognized when cash is received before the service is provided or before the goods are shipped to customers.

Relative Sales Value method

A method of allocating joint costs in which the allocation is based on the relative sales value of the products at the split-off point

Uncertain Tax Positions

A position taken on the Firm's tax return that reduces income tax but which may be challenged by the Taxing Authorities. Deductions, credits and revenue exemptions that may not be sustainable on audit by the IRS. Income tax expense reduced if it is more likely than not (>50%) that the position will be sustained.

Liquidating Dividends

Acceptable in certain industries (coal mining for example) where depletion is used. Retained earnings and contributed capital are debited at declaration. Return OF capital instead of return ON capital.

Modification of Terms Type 2 of Troubled Debt Restructuring Accounting for Debtor and Creditor

Accounting is not symmetric. Creditor records a loan impairment but debtor does not recognize a gain. Interest is recognized at the new lower interest rate over the new term.

Modification of Terms Type 1 of Troubled Debt Restructuring Accounting for Debtor and Creditor

Accounting not symmetric. Debtor records new liability at new carrying value (sum of restructured cash flows) and recognizes gain = BV - sum of restructured cash flows. No interest is recognized during the new loan, all payments treated as principal. Creditor records a loan impairment (loss)

Bond issue costs complication

Accounting, Legal, Printing and Underwriting fees. All to be Capitalized to a deferred charge (asset) account and amortized as expensed over the bond term (same as discount/premium). JE for Initial sale = Debit - Deferred bond issue costs, Credit - Cash. JE for Amortization = Debit - Bond issue expense, Credit - Deferred bond issue costs.

APBO Amortization of Transition Obligation

Accumulated Post-retirement Benefit Obligation (APBO) at date of transition, amortized over number of years as post-retirement benefit expense.

Accumulated Post-retirement Benefit Obligation (APBO) Calculation

Accumulated Post-retirement Benefit Obligation (APBO) is the fraction of Expected Post-retirement Benefit Obligation (EPBO) earned by the employee as of balance sheet date. Numerator is # of years worked, denominator is # of years needed to earn benefits.

What costs are capitalized for Natural Resources?

Acquisition, exploration and development costs.

Stock Dividends to Investor effects

Adjust per share basis of the investment, Recognize additional shares, Reduce per share cost (no income effect until shares disposed)

Stock Split to Investor effects

Adjust per share basis of the investment, Recognize additional shares, Reduce per share cost. Increases shares outstanding and reduces per share value proportionately (no income effect until shares disposed)

Under which cost flow assumption is Lower Cost or Market applied?

All cost flow assumptions

What are the two objectives of estimating uncollectible accounts?

Allowance method (contra to AR) must be used if bad debts are probable and estimable 1. Match bad debt expense with revenues. 2. State the accounts receivable on the balance sheet at net realizable value.

Quasi-Reorganization Steps

Allows a firm to "start fresh" if they have a negative retained earnings balance. RE must be 0 and this must be approved by lenders and owners. 1. Update overstated asset values against retained earnings. 2. Use contributed capital accounts to absorb all or part of the deficit in retained earnings. 3. Reduce the common stock account, and par value, if necessary.

Current provision for income tax

Also called the tax liability for the year, is the current tax rate multiplied by taxable income

Transfers between Classifications recorded at what value?

Always establish new account at Fair Value. (Caused by change in investor intent or ability to hold to maturity)

Disclosure Items required for Imparment losses

Amount, When it occurred, Segment it is related to, Where on income statement it is recorded, and the Reason for impairment.

Contra Account

An account that reduces a related account on a financial statement

Permanent Difference in Income Tax

An amount that appears in the tax return or income statement but never both. These include items of revenue or expense that are never taxable or deductible; also taxable and deductible items that never appear in the income statement. This type of difference is also called a non-temporary difference.

Temporary Difference in Income Tax

An item of revenue or expense that, over the total life of the item, will affect pretax accounting income and taxable income in the same total amount, but will be recognized in different amounts in any given year for financial reporting and tax purposes.

A company is an accelerated filer that is required to file Form 10-K with the U.S. Securities and Exchange Commission (SEC). What is the maximum number of days after the company's fiscal year-end that the company has to file Form 10-K with the SEC?

Annual 10-K reports are due within 75 days for fiscal years for accelerated filers as defined in 17 CFR 240.12b-2. The requirement is 90 days for other filers. The deadline for filing quarterly reports (10-Q) is 40 days for accelerated filers.

Defined Contribution Plan

Annual employer contribution is defined. Employee bears risk of fund performance and benefits.

Defined Benefit Plan

Annual retirement benefit is defined based on formula. Employer bears the risk of fund performance and is liable for the benefits. Retirement period could be a payment per year.

How is holding loss reported under the allowance method?

Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.

Dollar Value LIFO Retail method

Apply DV LIFO method to retail dollar inventory first, then apply the retail method (cost ratio) to deflate amounts back to cost.

How are assets grouped for impairment testing?

Assets are grouped at the lowest possible organizational level where cash flows can be identified.

What is the criteria for a transfer of AR to be considered a sale instead of secured borrowing?

Assets are isolated from transferor. Transferee is free to exchange the assets. No agreement for repurchase (repo). (Much more complex under IFRS)

Impaired Asset Categories

Assets held in use, Assets held for disposal (sale), Assets to be disposed of other than sale (abandonment, spin-off to shareholders).

What are investee's called under IFRS?

Associates

What is considered the conventional retail inventory method?

Average LCM. The cost ratio includes beg. inventory, along with current period purchases, in both the numberator and the denominator, but excludes net markdowns from the cost ratio calculation.

What are the items on each of the reconciliations using the bank and book to true balance format?

Balance per bank + Deposits in Transit + Cash on Hand - Outstanding Checks +- Errors made by Bank = True Cash Bal. Balance per Book + Interest Earned + Note Collected - Service Charges - NSF Check =- Error in Firm's Records = True Cash Bal.

What are the three simple bank reconciliation formats and where do they start and end?

Bank to book - Start at bank, adjust to book. Book to bank - Start at book, adjust to bank. Bank and book to true balance - Bank and book balances separately reconciled to true cash balance (CPA Exam tests this format)

What is the effect in the inventory equation if Ending Inventory is understated?

Beg. Inv. (no) + Purchases (no) = Goods Available (no) - Ending Inventory (under) = COGS (over), Net Income (under), Retained Earnings (under)

What is the effect in the inventory equation if Ending Inventory of year one is understated in year 2?

Beg. Inv. (under) + Purchases (no) = Goods Available (under) - Ending Inventory (under) = COGS (over), Net Income (under), Retained Earnings (no)

Cost of Goods Sold =

Beg. Inv. + Net Purchases = Goods Available for Sale - End Inv. = COGS

Inventory Equation

Beg. Inv. + Net Purchases = Goods Available for Sale - End Inv. = COGS

Describe the T-Account transactions for the Allowance account

Beginning Bal (Credit) - Write offs Debit + Expense (Credit) = Ending Bal (Credit)

Fair Value Option for Bonds

Bond issue is reported at fair value. Discount/Premium amortization calculated in background. Change in FV recognized in earnings as unrealized gains and losses (increase in FV causes unrealized loss)

Book Value Method Conversion of Bonds

Book Value (face plus/less unamortized premium/discount) is transferred to the capital stock account and contributed capital in excess of par account. (no gain or loss)

Accounting for Costs

Can be an Asset (prepaid), an Expense, a Liability or a Loss (impairment, incidental to the entity). All would be debits. Asset vs Expense = consider matching principle or that the cost represents a future economic benefit.

Definite/Indefinite Life Intangibles; Capitalization and Amortization

Capitalize external costs only. Amortize Definite over useful life, usually no residual value and straight line method.

Who can apply the fair value option to equity investee's under IFRS?

Certain investors; venture capitalists, mutual funds or unit trusts.

Which of the following would be included in Cash; 1. Certificates of Deposit 2. Treasury Bonds 3. Compensating Balances 4. Bond Sinking Fund

Certificates of Deposit, Compensating balances and Bond Sinking Fund are both restricted, so they would not be included in cash. Original maturity of less than 90 days would be included. (Also not included are; restricted cash funds, post-dated checks received, checks written but not sent, advances to employees, postage stamps)

Purchase Commitment

Commitment to purchase goods from a supplier to lock in prices. Not recorded when contracted, however, if the market price of the item declines below the contract price, may have to recognize a loss.

Construction in Progress account and Billings account

Construction in Progress (CIP) is an inventory account. Billings is contra to CIP to avoid double counting.

>50% Equity Ownership (Level of economic influence, Valuation basis, Reporting Classification, B/S Presentation)

Control, Equity method or cost method, Subsidiary, Consolidated financial statements

Minimum Corridor Method

Corridor amount = 10% of the larger of PBO or assets at Jan 1.

Treasury Stock accounting methods

Cost Method and Par Method

Cost to Retail Ratio

Cost of AFS inventory / retail price of AFS inventory

Stock Issue Costs Treatment

Costs reduce the contributed capital in excess of par account. Costs have served purpose and no future benefits exist. Unlike debt issuance, there is no benefit period for stocks.

Modification of Terms Type 1 of Troubled Debt Restructuring

Creditor accepts a new loan agreement with a nominal sum (not PV) of restructured cash flows less than book value. SUBSTANTIAL MODIFICATION

Modification of Terms Type 2 of Troubled Debt Restructuring

Creditor accepts a new loan agreement with nominal sum (not PV) of restructured cash flows greater than book value. (BV of troubled debt immediately before the restructure includes accrued interest) SLIGHT MODIFICATION

Settlement of Troubled Debt Restructuring

Creditor accepts assets less than Book Value of Debt.

What requirements must exist for a debt restructuring to be troubled?

Creditor makes a concession, and debtor must be in financial difficulty.

Liquidating dividend

Cumulative dividends declared are in excess of the cumulative earnings since acquisition of the investment. Difference between Cumulative NI and Dividends recorded as Return of Investment. (Invest 500, NI or 300, Dividend of 400 = $100 of 500 returned)

Working Capital

Current Assets - Current Liabilities

Defined Benefit Plan accounts reported in Financial Statements

Current year plan expenses on the income statement and an asset for over-funded/liability for underfunded. Asset/Liability calculated as difference between Plan Assets and Projected Benefit Obligation (PBO) which are recorded in Disclosures.

What are the requirements to be included in plant assets?

Currently used in operations, have a useful life > 1 year, have physical substance, it is not held for investment purposes

A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except: A. It will be reclassified as an asset held for sale. B. It will be classified as a current asset. C. It will no longer be depreciated. D. It will be valued at historical cost.

D. It will be valued at historical cost. (Only assets used in current operations are included in the category of property, plant and equipment (PPE) on the balance sheet. Assets that are held for sale are reclassified from PPE to 'assets held for sale' and are no longer depreciated.)

IFRS Defined Benefit Liability calculation

DBO (similar to PBO) - Plan assets at FV = Funded Status +- unrecognized net pension G/L - unrecognized PSC = Defined Benefit Liability

Stock Award Plans Gross Method

Debit Deferred Compensation Exp. for entire fair value of stocks awarded, Credit Common Stock and PIC-CS. (Deferred comp exp is contra OE account) Each year, JE for amortization is Debit Compensation Expense, Credit Deferred Compensation Exp.

Gift Card Forfeiture Treatment

Debit Gift Card Liability. Some states require money to be sent to unclaimed property department.

Small Stock Dividend JE

Debit RE (Fair Value at Declaration date), Credit Common stock (par value) and Contributed Capital in Excess of Par, Common.

Large Stock Dividend JE

Debit RE (Par Value), Credit Common Stock (Par Value)

Treasury Stock Cost Method

Debit Treasury stock for the cost of repurchasing stocks (reissue cost higher than cost to repurchase treasury stock, credit PIC, debit PIC for opposite {credit balance - account not lower than 0})

Gain on early extinguishment of bonds

Debt book value - unamortized debt issue costs - cash paid

An investor has little or no influence if the investment is:

Debt securities, non-voting equity securities, temporary in nature, or voting equity securities but only own a small % of total issue.

Settlement of Troubled Debt Restructuring Accounting for Debtor and Creditor

Debtor recognizes a Gain of BV - Fair Value of consideration given. Could be loss or gain on disposal of assets given. Creditor recognizes a loss of BV - fair value of consideration received.

Scrip Dividend

Declares dividend but does not have cash to pay so promise to pay dividend in the future plus interest. Treated like note payable.

Stock Subscription Sale Default

Depends on contract. Can 1. Return all payments to subscriber. 2. Issue shares in proportion to payments made. 3. Subscriber receives no refund or shares.

Treasury Stock Par Method

Difference between original issue price and par value is debited to Contributed capital in excess of par, common. Difference between repurchase cost and original issue cost goes to contributed capital from treasury stock. For Re-issuance, Contributed capital treasury stock is exhausted, the rest is taken from RE.

Where are purchase returns and allowances recorded under the perpetual system?

Directly as credits to the inventory account

Straight Line Method for Amortization of Bonds

Discount amortization is the discount amount divided by the number of years/months of the bond term. It is a constant number through the life of the term. Method can only be used if there is not a large difference between the coupon rate and the market rate.

Non-Interest Bearing Note

Discount face value by market rate discount factor. Debit Cash and Discount for cash discounted amounts. Interest payments Debit interest expense and credit discount. (Watch 1/2 year questions!)

Method that uses a price index to measure changes in inventory.

Dollar-value LIFO

T/F A mortgage note pays equal monthly payments at the end of each month. Interest revenue for a particular month is based on the principal balance at the end of the month.

FALSE

According to FASB Statement No. 109, Accounting for Income Taxes, justification for the method of determining periodic deferred tax expense is based on the concept of

FAS 109 adopted the asset/liability approach.

During a period of rising prices, this method results in a higher net income.

FIFO

The cost of goods sold balance is the same whether a perpetual or periodic inventory system is used.

FIFO

This method most closely matches the physical flow of inventory.

FIFO

When FIFO is used internally, the ending inventory under ______ is used as current cost for Dollar Value LIFO.

FIFO

Which cost flow assumption yields the same inventory amount under both perpetual and periodic systems?

FIFO (LIFO is different becuase a cost is assigned after each sale under perpetual system)

At what amount should short term notes receivables be recorded?

Face Value. Only long term notes should be recorded at present value.

What is factoring receivables also known as?

Factorying is a sale of receivables

T/F If a parent uses the cost method on its books to carry a subsidiary, under normal circumstances the carrying amount of the investment in the subsidiary will change each operating period.

False.

T/F If an internal price index is used, that index is the ratio of the current-year ending inventory as measured in current dollars, to the base-year inventory when LIFO was adopted.

False.

T/F Under IFRS, intangibles can be revalued to fair market value on an asset by asset basis, not the entire class of intangible assets.

False.

T/F When a liquidation occurs in DV LIFO, the earliest layer is assumed sold first.

False.

T/F When converting the change in inventory for the period in base-year dollars to the change in inventory in current-year dollars, the ratio of base index to current year index is used.

False.

Stock Rights/Options

For current shareholders (preemptive right) - No JE until exercise. Outside Party - Credit Stock Rights Outstanding (OE) for difference between purchase price and market value on date of issue. Credit Cash and debit an Expense account.

Which is included in the cost of inventory; freight-in or freight-out?

Freight-in is included. Freight-out is part of selling expenses.

Who calculates the impairment loss under the equity method as carrying value less the fair value?

GAAP. IFRS is carrying value less the recoverable amount.

What costs are capitalized for PPE?

Get Ready Costs - all costs necessary to bring the asset to its intended condition and location. Extending useful life or improves quality or quantity of an assets services without extending it's useful life - maintenance expensed, not capitalized. Capitalizing costs related to asset means increasing the asset account.

Stock Option Components Needed

Grant Date - Date manager is awarded option. Vesting Date - date the employee can begin to exercise options. Service Period - From grand date to vesting date. Compensation expense - recognized during the service period. Exercise period - after vesting date, the period during which the option can be exercised

If average accumulated expenditures is (greater/less) than total interest bearing debt, then there will be no interest expense for the period.

Greater, the debt would be paid off if the AAE hadn't been spent on the construction.

Method that uses historical sales margins to estimate ending inventory.

Gross profit

Net Purchases =

Gross purchases + Transportation (freight in) - purchase returns and allowances - purchase discounts

Debt Securities Publicly Traded or Privately Issued

Held-to Maturity - Amortized cost and investment-noncurrent. Trading or AFS - Fair Value, Investment - current or noncurrent.

What are the effects of LIFO in times of rising prices?

Highest COGS, Lowest NI and Lowest Ending Inventory

Does GAAP or IFRS require uniform accounting policies to be applied (ex. LIFO and FIFO)

IFRS

Who requires and who encourages reporting dates for investor and investee be within 3 months. IFRS/GAAP

IFRS Requires, GAAP Encourages. Under IFRS, significant transactions and events of an investee that occur between the end of an equity method investee's accounting period and the later end of the investor's accounting period must be adjusted in the equity amounts reported by the investor

Intangibles IFRS and GAAP differences

IFRS allows revaluation for assets in active markets. IFRS allows reversal of impairment loss. IFRS requires estimated life and amortization method be reviewed annually.

Goodwill IFRS and GAAP differences

IFRS done at cash generating unit level, GAAP is reporting unit level. IFRS has one step test, does not have Qualitative step. Impairments cannot be reversed under either GAAP or IFRS.

Joint Venture investments can be marked up to fair value at setup under GAAP or IFRS?

IFRS for non cash investments. (ie. land) Record gain of portion of the total gain.

_____ requires an annual review of the life and method of depreciation.

IFRS. GAAP only requires a review when an event occurs. IFRS allows revaluation to fair value but it must be done to all assets of the same class (accumulated depreciation must also be adjusted using the proportional or reset method).

GAAP vs IRS Income Tax

IRS taxes sales made with cash received in current period. GAAP recognizes taxes on sales where cash has not yet been received and will reflect the amount that will ultimately be payable on the year's transactions. The difference between the tax amounts will be a Deferred Tax Asset or Liability.

IFRS Requirement for Contract Accounting

If Percentage of Completion cannot be used, the Cost Recovery Method (aka Zero Profit) must be used. Construction revenue recognized is the same amount as Construction expenses.

Extended Warranties

If cost of claims is estimable, recognize revenue in proportion to cost of claims incurred. If not, recognize revenue on a straight line basis.

Stock Right to Investor determination of value

If option price<market price, stock right has value, cost of original shares allocated to rights based upon market values of rights and stock. (sold, exercised or permitted to lapse)

Sales with a Right of Return Revenue Recognition

If returns are not estimable as of the balance sheet date, then no sales with a right of return still effective can be recognized. (The same holds for the other five criteria as well.) The six criteria are expansions of the general earned and realizable criteria for revenue recognition.

Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income, rather than through profit and loss (net income)?

If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.

Impairment of Equity Securities classified as AFS fair value

If the loss is other than temporary (OTTI) or when the security is sold, reclassify the losses from AOCI to earnings.

When is a note receivable recorded at market value?

If the stated interest rate is equal to the market rate of interest, the present value of future cash flows will be equal to the face amount of the note. In this situation, no discounts will exist. If the stated interest rate is not equal to the market rate of interest, the present value of future cash flows will not be equal to the face amount of the note. In this situation, a discount related to the note will exist.

When would a purchase commitment loss have to be recognized?

If the terms of the contract can not be modified, the loss must be accrued. A loss account would be debited and the committment liability credited. If the terms can be modified, the loss should be disclosed in the footnotes.

Who is the factor with a factoring transaction occurs?

In a factoring, the transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business. The transferor prefers to pay the factor a fee in return for the factor's administration of the receivables.

When is a note receivable recorded at present value?

In accordance with U.S. GAAP, all notes are recorded at the present value of future cash flows (notes of less than one-year term need not be recorded at present value). The discount rate used in this calculation is the market rate of interest on the date of note creation (this rate may be different from the note's stated rate -- the rate that appears on the note). Furthermore, any discounts related to notes will be amortized by applying the effective interest method.

Bargain Purchase recognition

Income statement Ordinary gain in year of acquisition.

What are the two approaches to estimating bad debt expense?

Income statement approach = Credit Sales * Uncollectable rate = Expense Balance sheet approach = AR Ending Bal * Uncollectable rate = Allowance Ending bal (Use T account to determine Bad Debt Expense [BB + Bad Debt Expense - Write Offs = EB])

Bond Discount/Premium amoritzation calculation

Interest Expense = Market rate * Bond Carrying Value [keep in mind # of months]. Difference between interest paid, the coupon rate, and the interest expense gives disc/prem amortization amount. Amortization will bring carrying value closer to par value (100).

What are the two methods through which interest revenue is recognized after a loan impairment or write down has occured?

Interest and cost recovery methods. Interest method debits the Allowance for decline in note value with each payment and credits interest revenue. Cost recovery method only affects the allowance when the note is recovered.

Notes Payable Gross Method Interest Payment

Interest expense debited. Discount credited/ Premium debited and Cash Credited.

Notes Payable Net Method Interest Payment

Interest expense debited. Notes Payable debited/credited (depending on discount/premium) and Cash Credited.

Interest Method of Amortization

Interest payment is face rate (9%) times face value ($100), minus the market rate (10%) times the book value which gradually decreases. [Ex. 5-year 9% $100,000 bond issued in a 10% market for $96,149] (http://www.accountingcoach.com/bonds-payable/explanation/10)

What is Illusionary income (aka. phantom or inventory profits) assiciated with Inventory?

Inventory costs have been rising. Sales for the year are $100,000 and cost of goods sold is $70,000 under LIFO and $60,000 under FIFO. The $70,000 of cost of goods sold under LIFO is an approximation to the cost of replacing the inventory sold during the period because it represents later purchases in the year. If the firm chooses FIFO, it reports $10,000 more in pretax earnings but that amount really is not disposable income because it must be used to replace higher cost inventory in the next accounting period. The $10,000 is thus illusory income

Free-on-board (FOB)

Inventory in transit. The entity with rights usually has the risk of loss. Free indicates who has NO risk.

Is inventory considered a current asset?

Inventory is always considered a current asset. (often most important because it is a source of revenue)

Accounting treatment if a joint venture investor has unilateral control.

Investor consolidates JV

Porportionate Consolidated Method

Investor recognizes its share of JV assets, liabilities, revenues and expenses.

Impairment of Debt Securities classified Amortized Cost

Is there intent to sell? (if OTTI, recognize loss to earnings) Will the entity be required to sell? (if OTTI, recognize loss to earnings) Does the entity believe that cost is recoverable? (if yes, credit loss to earnings, other losses to OCI)

How is a receivable with a possible discount recorded?

It can be recorded in the Gross or Net method. A discount can be deducted (net) from the AR amount initially or it can be recorded gross and adjusted if the customer pays within terms.

When is interest expensed and when is it capitalized with accounting for PPE?

It is expensed when purchasing PPE but can be capitalized when building an asset (end of year moving interest expense back to the construction of assets)

If used for tax purposes, this method must also be used for financial reporting purposes.

LIFO

This method results in the lowest ending inventory in a period of rising prices.

LIFO

Which inventory cash flow assumption most likely aligns with the matching principal; FIFO or LIFO?

LIFO (FIFO - a company will be matching the revenues of the current year with the cost of merchandise acquired in a prior accounting period.)

Which inventory cash flow assumption favors the balance sheet? The income statement? FIFO or LIFO.

LIFO favors the income statement because the cost of goods sold (and therefore gross margin and income) are considered to be much more current or relevant. FIFO favors the balance sheet becuase the inventory value in the B.S. is a current and relevant amount.

List the components of capitalized costs of self-constructed assets. What is the limitation of recorded value of self-constructed assets?

Labor, material, overhead, interest cost. Market Value at completion.

Which method of inventory cost valuation produces significant tax savings under US GAAP?

Last-in First-out (LIFO) produces tax savings or pretax favorable income effect. Disclosure required to show components of inventory in FIFO basis to give FIFO balance.

Other Than Temporary Impairment factors

Length of time the market value has been below cost. Financial condition of issuer and near term prospects of recovery. Intent and ability of holder to retain the investment to allow for any anticipated recovery of the decline in value. [OTTI taken directly to earnings]

What are the effects of FIFO in times of rising prices?

Lowest COGS, Highest NI and Highest Ending Inventory

Which is always larger, margin on sales or margin on cost?

Margin on cost

Convertible Bond Market Value vs. Book Value Method

Market Value will yield a Gain or Loss on conversion. Contributed cap. in excess of par will be the gain or loss.

Market Value Method Conversion of Bonds

Market value of stock or bonds, whichever is more reliable, is allocated to the capital stock account and contributed capital in excess of par account. A gain or loss is recorded equal to the difference between the total market value recorded and the remaining book value of the bonds.

Intangibles must be separately identified in disclosures. Categories are:

Marking, Customer, Artistic, Contract, Technology and Goodwill.

What is the rationale for capitalizing interest for constructed assets?

Matching Principal - asset under construction can't provide revenues until completed so interest is deferred until revenues can be earned. Interest can be expensed through depreciation of the asset. Avoidable Interest - if the construction had not taken place, the firm could have paid off more debt thus avoiding interest.

What is the criteria for Significant Influence with <20% ownership?

May exercise significant influence if; 1. Has representation on board of directors. 2. Participates in investee policy making. 3. Has material intercompany transactions. 4. Is technologically interdependent with investee. 5. No other single investor has material voting ownership of investee.

What is the criteria for a lack of Significant Influence with >20% ownership?

May lack significant influence if; 1. Investee opposes investor. 2. Standstill agreement exists. 3. Other investor owns more and votes as a block. 4. Cannot get representation on Board of Directors.

Goodwill impairment Quantitative Assessment

Measure FV of entity as a whole and compare to carrying value. If FV is less than CV, must reevaluate assets and liabilities to get implied goodwill. This will be compared to carrying value of goodwill to determine loss.

Goodwill impairment Qualitative Assessment (pre-step) Factors

Micro-economic conditions, Industry and market conditions, Firm specific conditions. If it is more likely than not that goodwill is impaired, must perform quantitative test. (Optional)

Compensating Balance

Minimum balance that must be maintained by the firm in relation to a borrowing. Such a balance increases the ffective rate of interest on the borrowing and reduces the risk to the lender. (restricted cash)

Legal Capital

Minimum capital of a corporation is usually the par value of the stock or the stated value of the stock issued. Legal requirement establishes the minimum investment necessary to become a part of the ownership group of a corporation. Protection for Creditors because dividends can not be paid from legal capital.

LIFO Liquidation

More units are sold than are purchased in the year, therefore beginning inventory must be used providing a liquidation amount. It created higher tax liabilities due to a lower COGS due to prior period purchases. Distorts the marching of current period costs with current revenues.

Property Dividends other than Cash

Most commonly an investment in securities of other firms. Measured at fair value at date of declaration. G/L recorded on asset distributed. Unrealized holding G/L is also recorded at time of distribution. Only the carrying value affects RE.

What is the difference between a moving average inventory and weighted average inventory system?

Moving average is used under perpetual and is calculated after every purchase.

Average cost must be calculated each time additional inventory is purchased.

Moving-average

Net Operating Loss (NOL) Carryforward

NOL amount * Future period tax rate. Debit Deferred Tax Asset, Credit Income Tax Benefit.

When preferred stock is called and retired, which account or aggregate category of accounts can be increased? Total Owners' Equity Retained Earnings

Neither. When a firm retires preferred stock, cash is paid to the shareholders reducing total owners' equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.

Floor in determining market value

Net realizable value less the normal profit margin

Ceiling Value in determining market value

Net realizable value which is the selling price less the cost to complete

How are changes in Depreciation for Taxing purposes handled?

No change. Deferred Tax Liability remains the same.

Stock Award Plans Net Method

No initial entry. Year end JE Debit Compensation Expense, Credit PIC-Stock Award. At date of Vesting, Debit PIC-Stock Award (close account) and Credit Common Stock and PIC-CS.

Stock Dividends vs Other Dividends

No liability at declaration as with regular dividends. OE is reduced for dividends except for stock dividends.

0-20% Equity Ownership (Level of economic influence, Valuation basis, Reporting Classification, B/S Presentation)

Nominal, Cost or Fair Value, Trading AFS, Investment - Current or noncurrent

Cumulative Preferred Stock vs Non Cumulative

Non Cumulative stock will not receive unpaid dividends (dividends in arrears). After the year end, these dividends are forgotten.

Preferred Stock Participation

Nonparticipating - only the annual dividend percentage. Fully Participating - dividends allocated based on total par value of preferred and common stock outstanding. Partially Participating - receives dividends up to an additional percentage, remaining goes to common.

Preferred Stock Rights

Nonvoting. Dividend Preferences. Dividends in Arrears. Liquidation Preferences

Notes Payable Net Method Balance Sheet Account

Notes Payable account = face value - discount or + premium

Notes Payable Gross Method Balance Sheet Account

Notes Payable account = face value. Discount/Premium account (contra to Notes Payable) used to give the Net Note Payable.

Permanent Differences in Income Taxes

Occur when GAAP or IRS recognize an item but not both. (Government Bond interest is income to GAAP but not the IRS) (Fines and penalties not deductible but are expenses for GAAP) (Life Insurance premiums on key employees where the firm is beneficiary are not deductible, proceeds not taxable but are gain under GAAP) (Dividends received deduction not taxable) (Depletion)

Exploration Costs Successful Efforts

Only the cost of successful exploration efforts are capitalized, unsuccessful efforts are expensed. The Full Cost method includes all costs because in order to find a good hole for oil, we had to drill unsuccessfully until we found it.

Gross Margin Inventory Method GAAP Acceptable uses

Only when it is not possible to determine ending inventory becuase of a fire or other loss. Otherwise unacceptable under US GAAP. It is an estimate of COGS and then ending inventory value is inferred.

Types of Liabilities

Operating Liabilities - usually current (AP). Financing Liabilities - usually non-current (Notes Payable). Special Liabilities - (Contingencies)

Owners Equity upon conversion of bonds

Owner's Equity is increased by the book value of the bonds under the book value method.

Pension Liability Gain/Loss Check

PBO - Plan Assets = beg. bal. Pension Liability + Pension Expense - Funding amount

Final (complete) formula for PBO at a balance sheet date

PBO = SC to date + interest cost to date − benefits paid to date + PSC + net PBO gain or loss to date.

Bond Issue Price = ?

PV of Face Value discounted based on factor using Market/Yield Rate, plus the PV of annuity (interest payments) using the Market Rate discounted at annuity factor.

PV of Long Term Note Payable

PV of Face Value discounted based on factor, plus the PV of annuity (interest payments) discounted at annuity factor.

What is the treatment for Software Development intangibles?

Part definite life intangible, part not intangible. Only expenditures beyond technological feasibility are capitalized. Amortize expenditures beyond technological feasibility. Net realizable value test for capitalized amount.

Debt Covenant

Part of debt contract that describes the responses available to the creditor if certain events or conditions occur. May allow the creditor to call the debt. Protects debtor from such actions should the conditions not occur.

What are the two methods of Inventory maintenance?

Periodic and Perpetual. Periodic is done at a specific time while perpetual is done constantly.

Which inventory system uses the inventory account for purchases and sales?

Perpetual System (COGS is recorded at time of sale)

Held for Sale Criteria

Plan to sell the asset. Asset must be available for sale. Active program to find a buyer. Sale expected to occur in one year. Asset is being actively marketed. Sale of the asset is probable.

What are the categories of Plant Assets and which are depreciated/depleted?

Plant and Equipment (depreciated), Land Improvements (depreciated), Land (not depreciated), Natural Resources (depleated).

Cash Surrender Value

Premiums Paid - Cash Surrender Value of Ins. Policy = Ins. Expense

Base-Year Dollars when using Dollar Value LIFO

Price level for the pool at the beginning of the year Dollar Valued (DV) Last In First Out (LIFO) adopted.

Accounting treatment if a joint venture is a variable interest entity.

Primary beneficiary consolidates JV

Liability 3 key elements

Probable obligation, in the future, result of a past transaction

What is included in inventory?

Property held for resale, property in the process of production (finished goods, work-in-process, raw materials), property consumed in production (material, labor, overhead). Capitalize all costs to bring the inventory to sale (freight, insurance in transit, taxes, packaging). Consignment is NOT included.

Investment property (IFRS)

Property not being used in the normal business function. Usually being held for the appreciation of capital or receiving payments. [Fair value method or Cost method]

Basket Sale Allocating Methods

Proportional Method - When both securities have established market values, the allocation will be based on their respective fair market values. Incremental Method - When only one security has an established fair market value, that security is assigned proceeds equal to the known fair market value. Any incremental proceeds are allocated to the remaining security sold.

Transfer from Trading to Held to maturity AFS

Rare - Unrezalized G/L is recorded in Income, then going forward, AOCI.

Mandatory Redeemable Preferred Stock

Redeemable preferred stock at a specified future date at a specified price. Classified as debt! Not classified as Owners' Equity and Dividends are interest expense. JE will debit RE for amount paid over par to call stock or credit Contributed Capital for amount paid less than par.

What circumstances would increase contributed capital from treasury stock?

Reissue at a price exceeding cost under the Cost Method, or purchase at a price less than original issue price under Par Value Method.

What circumstances would decrease contributed capital from treasury stock?

Reissue at a price less than cost under Cost Method, or purchase at a price exceeding original issue price under Par Value Method.

Imputed interest rate

Represents the debtor's incremental borrowing rate

Stock Award Plans

Restricted stock awarded to employee that is restricted until vested. Measured at market price at grand date and is expensed over service period. Recorded under Gross Method or Net Method Forfeitures - reduce compensation expense in year awards are forfeited.

Revenue Recognition Rrinciple

Revenue is not recognized unless it is (1) earned, and (2) realizable.

Preemptive Rights

Rights of common shareholders allow current shareholders to maintain their existing percentage of the firm in the event of a new stock issuance by the firm. {not always present}

FOB destination (who bears risk?)

Risk of loss is free to place of destination (buyer) so the seller bears risk and inventory is included in sellers inventory.

FOB shipping point (who bears risk?)

Risk of loss is free to shipper (seller) so the buyer bears risk and inventory is included in buyers' inventory.

How is a share retirement treated?

Same as Par Value Method treasury stock purchase except that common stock account is used instead of treasury stock. 1. If the purchase price is less than the original issue price, then contributed capital from stock retirement is credited. 2. If the purchase price is greater than the original issue price, then contributed capital from stock retirement is debited until exhausted, and retained earnings is debited for the remainder, if any.

Debt Securities

Securities representing the right of buyer/holder (creditor) to receive from the issuer (debtor) a principal amount at a specified future date and (generally) to receive interest as payment for providing use of funds.

What is recourse when selling AR to a third party?

Selling AR with recourse means that if the maker (original debtor) defaults, the original creditor must assume all the payments on the receivable

Pension expense for a period - 5 components

Service cost (SC) (always increase expense), Interest cost (always increase expense), Expected return on plan assets (always decrease expense), Amortization of prior service cost (always decrease expense), Amortization of net gain or loss (Increases expense for losses, decreases expense for gains).

Current Liability classification

Settled with current asset. Expectation that the firm's liquidity will be reduced. NOT the same as short term.

21-50%% Equity Ownership (Level of economic influence, Valuation basis, Reporting Classification, B/S Presentation)

Significant, Equity method or Fair value, Equity Investment, Investment-noncurrent

Small vs. Large Stock Dividends

Small - less than 25% of outstanding shares, capitalized at market value on declaration date. Large - greater than or equal to 25%, capitalized at par value.

Method that is appropriate when there is a relatively small number of significant dollar value items in inventory.

Specific identification

What are the 4 cost-flow assumptions?

Specific identification, weighted average, FIFO and LIFO

Stock Subscription Sale

Stock Subscriptions Receivable - Contra OE. Initial payment, PIC and Common Stock Subscribed are credited, Stock Subs Rec. and Cash debited. When payments are made, Receivable credited, Cash debited. When final payment is made, Common Stock Subscribed debited and Common Stock account is credited for par value of shares subscribed.

Graded vesting plans

Stock option plans that stagger the vesting dates.

Amortization of Prior Service Costs methods

Straight line - Yearly PSC amortized = Prior Service Cost / average # of service years remaining Service Method - Yearly PSC amortized depends on # of employees still working in that year = (Prior Service Cost / Total number of service years) * Employees working in the year Annual JE - Debit Pension Expense, Credit PSC - OCI Both methods provide same amortization amount of the first year.

Average Accumulated Expenditures

The amount of expenditures on the construction cost during the period. Pseudo measure of avoidable debt (how much would I have to borrow to incur expenditures). Weighted average or Simple average.

Treasury Stock

The cost or par value of the common stock of a firm purchased by that firm, depending on the method used by the firm. Treasury stock of Coca-Cola Company, for example, is stock of Coca-Cola purchased by Coca-Cola. This account is a negative or contra OE account.

What is included in the Average Lower of Cost or Market (LCM) or Conventional Retail Inventory Method cost ratio?

The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator but excludes net markdowns from the cost ratio calculation.

What is amortized or depreciated in Equity Method Accounting?

The difference between the FMV and BV of identifiable assets, NOT goodwill.

What is the premium or discount on a bond?

The difference between the stated and effective rate of interest.

How does the double-extension method affect ending inventory?

The ending inventory is extended at both base year cost and ending current year cost.

Why is it called Equity Method Accounting?

The equity investment balance sheet account is a mirror image of the subsidiary's Retained Earnings account. Cr. Beg. Bal, + Cr. NI, - Dr. Dividends = End Bal. [Dividends are reduction in equity, not income]

How is the present value in a noncash transaction determined?

The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.

If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, what value should be used to initially debit the building account.

The fair value of the building, not the fair value of the stocks.

IFRS difference on Past Service Costs

The firms vested percentage is applied to PSC and the vested portion of the service costs are expensed immediately. ($500 PSC, 70% vested = $350 expensed immediately, $150 amortized over appropriate # of periods)

What is the recoverable amount under IFRS when calculating impairment loss?

The higher of the fair value less the cost to sell or the assets value in use.

Contributed Capital

The historical value of direct investments made in the firm by investors.

In year one of an error, if purchases are understated, what is the impact on Retained Earnings?

The impact on Retained Earnings is overstated

According to IFRS guidance on equity method accounting, under what circumstances would the investor be required to recognize the associate's (investee's) losses that exceed the investor's investment?

The investor has guaranteed the obligations and commitments of the associate.

Retained Earnings

The net of the firm's earnings to date less dividends to date, plus or minus other items including prior period adjustments and certain accounting changes.

What is the difference between recording interest bearing notes receivables and non-interest bearing notes?

The non-interest-bearing note will be recorded at the discounted amount. Interest will then be recorded or amortized based on the implied interest rate (DR Note Rec, CR Interest Revenue)

Under IFRS, what is value in use when calculating impairment loss?

The present value of the future cash flows generated from the asset or cash generating unit.

What is the risk of accounting loss on AR?

The risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that would be suffered if those who owe it failed to make any payments and the receivables proved to be of no value.

Accrual Period for Tax Expense

The tax-paying firm accrues the property tax monthly as expense over the fiscal year of the taxing authority because the expense should be recognized in the same period the firm benefits from the services provided by the governmental unit (taxing authority).

What is the maximum amount of interest a company can capitalize?

The total amount of interest actually paid throughout the period.

When are the following recorded under the Gross method and Net method of AR recording; Trade Discount, Cash Discount?

Trade Discount recognized initially under both methods. Cash Discounts recorded initially under net method only and under gross after payment is received.

Where would the gain or loss go for these two types of securities; Trading Securities and Available-for-sale Securities?

Trading Securities - Income Statement. AFS Securities - Accumulated Other Comprehensive Income. Trading Security will be sold in short term so put the mark to market gain or loss in the income where as AFS securities may not be sold for a while and therefore put the gain/loss in AOCI.

Bond Issue JE

Treated as gross method = Debit Cash and Discount, Credit Bonds Payable and Premium. Cash is debited bond price amount (100=par)

T/F Under IFRS, impairment compares the carrying value to the greater of net selling price (market value less disposal) or value in use (discounted cash flows).

True

T/F Under IFRS, impairment testing is done at a cash generating level.

True

T/F DV LIFO retail applies DV LIFO to retail dollars, and then applies the FIFO cost to retail ratio to the increase in retail inventory as measured in current period prices

True.

T/F Goodwill is based on the expectation that the purchased firm will have higher earnings than would otherwise be expected of a firm with its assets and capital structure.

True.

T/F The ending DV LIFO inventory balance for any year can be expressed as the sum of all layers expressed in terms of the current dollars for those years.

True.

T/F Using the dollar value LIFO method, the computation of change in inventory is first performed in base year dollars to remove the effects of price level changes.

True.

IFRS vs US Impairment Differences

US GAAP - Two step process (undiscounted cash flows to carrying value, then Fair Value used for impairment calculation) No Discounting. No reversals permitted unless held for sale. IFRS - One step process (recoverable amount is the higher of fair value less cost to sell or value in use) Discounting required in evaluation stage. Impairment loss reversals allowed except Goodwill.

Fair Value for Bonds IFRS and US GAAP differences

US GAAP - debt issue costs are capitalized and amortized over the bond term. IFRS - Debt issue costs (transactions costs) reduce any premium or increase any discount: a reduction in the proceeds from the debt.

Transfer from AFS to Held to maturity

Unrealized G/L in AOCI is amortized over remaining life of the debt.

Transfer from AFS to Trading

Unrealized G/L in AOCI is recorded in Income

Transfer from Held to maturity to AFS

Unrealized G/L is recorded in AOCI.

Transfer from Held to maturity to Trading

Unrealized G/L is recorded in Income

Net Operating Loss (NOL) Carryback

Use benefit to receive taxes paid in previous two years (EARLIER year first). (NOL amount * previous years tax rates) Debit Tax Refund Receivable, Credit Income Tax Benefit. Remaining NOL * future period tax rate. Debit Deferred Tax Asset, Credit Income Tax Benefit.

Gross Margin Inventory Method

Used to estimate the value of unobserved inventory (i.e. inventory destroyed in a fire or flood)

Common Stock Rights

Voting. Dividend Rights (after preferred). Preemptive Rights. Last to receive during liquidation.

Method that averages the cost of all items on hand and purchased during the period.

Weighted-average

What causes goodwill?

When a company pays more than the FMV of identifiable assets - liabilities. Goodwill = unidentifiable asset. Plug figure of Price Paid - Net FMV.

What is the difference between Pledging and Assigning Receivables?

When accounts receivable are assigned, the borrower assigns rights to specific accounts receivable as collateral for a loan. The lender has the right to seek payment from these receivables should the borrower (original creditor for the accounts receivable) default on the loan. The borrower reclassifies the receivables as accounts receivable assigned, a subcategory of total accounts receivable. Pledging of accounts receivable is less formal than assignment. Rights to specific receivables are not noted as collateral, and accounts receivable are not reclassified. Neither the accounting for the receivables nor the loan is affected by the pledge. Receivables in bulk are transferred to a trustee and can be used for payment of the loan in the event of default by the borrower (original creditor for the accounts receivable). The cash flows from the receivables are used to pay the loan. Footnote disclosure of the pledge is required.

Installment Method of Revenue Recognized

When collectability is uncertain or the term is very long. Debit Sales for the amount recorded but not collected and credit COGS and Deferred Gross Profit (DPG). When installment payments are received, DPG will be debited and Recognized Gross Profit (RGP) will be credited for the gross profit portion of the payment. [Match gross margin % to specific year for multi year questions. Ending DGP = (sum of products of gross margin % by year) * (remaining AR for each year) ]

When is a post-acquisition cost capitalized vs expensed?

When the asset is more productive or has a longer useful life. Maintenance and repairs would be expensed.

Pension Plan Curtailment

occurs when the sponsor stops accruing the pension benefits for a portion of the future services of plan participants

Reported value of Non-Current liabilities

present value of all future payments (principal and interest) discounted at the interest rate for similar debt on the date of issuance.

Stock Right calculation

right purchase value per share - FMV of stock (ex-rights) = FMV of each right. Ex-rights + FMV of right = rights on. (FMV right / Rights on) * stock purchase amount = value of stock rights to investor. Debit stock rights and Credit investment for value of right.

Depreciation

systematic and rational allocation of capitalized plant asset cost to time periods. The termsystematic implies that the allocation is not random but rather is made on an orderly basis. The term rational means that the process can be supported by appealing to how the asset is used. The process of depreciation matches the cost of the plant asset to periods in which the asset is used to generate revenue. DEPRECIATION IS NOT VALUATION

What is included in the Acquisition cost of natural resources?

the cost to acquire natural resources including full purchase price of the property and the cost to lease the property

Natural Resource Exploration Costs

the costs to locate the natural resource before development. Two methods: Successful Efforts and Full Costs

ABO (accumulated benefit obligation)

the present value of unpaid pension benefits through the balance sheet using current salaries. This calculation is the same as for PBO except that the latter uses future salaries. (Reported in footnotes)

VBO (vested benefit obligation)

the present value of vested benefits; In most situations, the following relationship holds: PBO > ABO > VBO. (Reported in footnotes)