Midterm Discussion Questions (13,14,15)

Critically discuss the recognition and disclosure of provision, contingent liability and contingent assets under IFRS rules.

A contingent asset is a possible asset that may arise because of a gain that is contingent on future events that are not under an entity's control. According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material

What factors influence the dividend policy of a company? What are the principal considerations of a board of directors in making decisions involving dividend declarations?

1. Stability of Earnings: 2. Financing Policy of the Company: 3. Liquidity of Funds: 4. Dividend, Policy of Competitive Concerns: 5. Past Dividend Rates: 6. Debt Obligations: 7. Ability to Borrow: 8. Growth Needs of the Company: 9. Profit Rate: 10. Legal Requirements:

Define (a) a contingency and (b) a contingent liability. Under what conditions should a contingent liability be recorded? Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

determinable current liabilities can be precisely measured, and the amount of cash needed to satisfy the obligation and the date of payment are reasonably certain. Determinable current liabilities include accounts payable, short-term debts, dividends payable, unearned revenues, third-party collections, and accrued liabilities. contingent liability refers to an amount that you could potentially owe depending on how certain events transpire. (lawsuit liability, investigation, warranty)

Distinguish among and discuss accounting entries for cash dividends, property dividends, liquidating dividends, and stock dividends.

Cash DVD: Declaration: retained earnings dvd payable Record: no entry Payment: dvd payable cash Property DVD: Declaration: equity investments unrealized g/l-inc retained earnings prop dvd payable Distribution: prop dvd payable equity investments liquidating dividends: Declaration: retained earnings PIC-common DVD payable Payment: DVD payable cash Stock dividends: Declaration: retained earnings CS dvd distributab PIC- common Distribution: CS dvd distributab common stock

What are the two methods of amortizing discount and premium on bonds payable? Explain each.

straight-line method: that in each period throughout the bond's life the value of the adjustment is the same. Effective Interest Method: reflects what the change in the bond price would be if we assumed that the market discount rate doesn't change.

Define and critically discuss the nature of a non-current liability and its importance and risks associated to a company. From what sources might a corporation obtain funds through long-term debt?

"if does not meet the definition of a current liability, it must be long-term." •Used when amount of capital needed is too large for one lender to supply. •Represents a promise to pay a sum of money at designated maturity date, plus periodic interest at a specified rate on the maturity amount (face value). •Paper certificate, typically a $1,000 face value. •Interest payments usually made semiannually. 1. (a) Funds might be obtained through long-term debt from the issuance of bonds, and from the signing of long-term notes and mortgages.

The absence of restrictive provisions, what are the basic rights of stockholders of a corporation? Why is a pre-emptive right important?

-right to share in the company's profitability, income, and assets; -a degree of control and influence over company management selection; -preemptive rights to newly issued shares; -general meeting voting rights. preemptive rights are important to shareholders because it allows existing shareholders of a company to avoid involuntary dilution of their ownership stake by giving them the chance to buy a proportional interest in any future issuance of common stock.

How are current liabilities related to current assets? How are current liabilities related to a company's operating cycle? How does the acid-test ratio differ from the current ratio? How are they similar?

Because most companies pay current liabilities of out current assets, the relationship between the two is represented by the current ratio, defined as current assets divided by current liabilities. Because current liabilities are by definition tied to current assets and current assets by definition are tied to the operating cycle, liabilities are related to the operating cycle. The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. The current ratio is the proportion (or quotient or fraction) of the amount of current assets divided by the amount of current liabilities. The quick ratio (or the acid test ratio) is the proportion of 1) only the most liquid current assets to 2) the amount of current liabilities.

Define and discuss the nature of a current liability and explain elements or factors inherent in the concept of a liability in general. Why is the liabilities section of the balance sheet of primary significance to bankers?

Current liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities. Long-term debt consists of all liabilities not properly classified as current liabilities. As a lender of money, the banker is interested in the priority his/her claim has on the company's assets relative to other claims. Close examination of the liability section and the related footnotes discloses amounts, maturity dates, collateral, subordinations, and restrictions of existing contractual obligations, all of which are important to potential creditors. The assets and earning power are likewise important to a banker considering a loan.

Under what conditions of bond issuance does a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise? How should discount on bonds payable be reported on the financial statements? Premium on bonds payable?

Discount on bonds payable occurs when a bond's stated interest rate is less than the bond market's interest rate. Premium on bonds payable (or bond premium) occurs when bonds payable are issued for an amount greater than their face or maturity amount. This is caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds. Discount on Bonds Payable will always appear on the balance sheet with the account Bonds Payable. In other words, if the bond is a long-term liability, both Bonds Payable and Discount on Bonds Payable will be reported on the balance sheet as long-term liabilities.

What is off-balance-sheet financing? Why might a company be interested in using off-balance-sheet financing? What are some forms of off-balance-sheet financing? Explain how a non-consolidated subsidiary can be a form of off- balance-sheet financing.

Off balance sheet items are in contrast to loans, debt and equity, which do appear on the balance sheet. Most commonly known examples of off-balance-sheet items include research and development partnerships, joint ventures, and operating leases. The goal of off-balance sheet financing is to reduce or maintain a company's debt at at or below a prescribed level so that its debt-to-equity ratio is low.

Distinguish between common and preferred stock. Where in the financial statements is common and preferred stock normally reported?

The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders. All preferred stock is reported on the balance sheet in the stockholders' equity section and it appears first before any other stock.

What factors must be considered in determining whether or not to record a liability for pending litigation? For threatened litigation? How are the terms "probable," "reasonably possible," and "remote" related to contingent liabilities?

pending litigation: (a) The time period in which the underlying cause for action occurred. (b) The probability of an unfavorable outcome. (c) The ability to make a reasonable estimate of the amount of loss. threatened litigation: (a) The degree of probability that a suit may be filed, and(b) The probability of an unfavorable outcome. If both are probable, the loss reasonably estimable, and the cause for action dated on or before the date of the financial statements, the liability must be accrued. The terms probable, reasonably possible, and remote are used in GAAP to denote the chances of a future event occurring, the result of which is a gain or loss to the enterprise. If it is probable that a loss has been incurred at the date of the financial statements, then the liability (if reasonably estimable) should be recorded. If it is reasonably possible that a loss has been incurred at the date of the financial statements, then the liability should be disclosed via a footnote. The footnote should disclose (1) the nature of the contingency and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made. If the incurrence of a loss is remote, then no liability need be recorded or disclosed (except for guarantees of indebtedness of others, which are disclosed even when the loss is remote).

For what reasons might a corporation purchase its own stock? Discuss the propriety of showing: - Treasury stock as an asset. - "Gain" or "loss" on sale of treasury stock as additions to or deductions from income. - Dividends received on treasury stock as income.

to re-invest in itself. The repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. Because there are fewer shares on the market, the relative ownership stake of each investor increases. Treasury Stock is a contra equity item. It is not reported as an asset; rather, it is subtracted from stockholders' equity. These "gains" or "losses" should be considered as additions to or reductions of paid-in capital. In some instances, the "loss" should be charged to Retained Earnings. The shares of treasury stock will not receive dividends, will not have voting rights, and cannot result in an income statement gain or loss.