Hughes Final
Liquidation Priorities
. The UPA (Uniform Partnership Act) has a ranking of order of payment of liabilities, including: I. Debts to Creditors (other than Partners) II. Debts to Partners (other than for capital and profits), such as loans III. Debts to Partners in respect of Capital (Capital account balances) IV. Debts to Partners in respect of Profit (Profit %)
Current Rate Method (aka Functional Currency Translation Approach)
1) All Assets and Liabilities are translated using the Current Spot Rate (C) (at the BS Date) 2) Revenues and Expenses are translated using an Average Spot Rate (A) for the current period NOTE: The Average Rate is a practical substitute, approximating translation of each Revenue & Expense item at the Current Spot Rate on the date of each transaction (which would be very difficult to implement) 3) Translation Gains/Losses are included in OCI (BS - Equity section) & included in Comprehensive Income
Bonus vs Goodwill Total net assets
1) Bonus Method - Total Net Assets and Total Partnership Equity remain the same 2) Goodwill Method - both Net Assets and Total Partnership Equity increase
Gov Proprietary and Fiduciary funds
1) Governmental Funds a) General fund b) Special Revenue fund c) Capital Projects fund d) Debt Service fund e) Permanent fund 2) Proprietary Funds a) Enterprise fund b) Internal Service fund 3) Fiduciary Funds a) Pension Trust fund b) Investment Trust fund c) Private-Purpose Trust fund d) Agency fund
Temporal Method
1) Monetary Assets (cash and receivables) and Liabilities (payables) are translated at the Current Spot Rate 2) Assets and Liabilities carried at historical cost are translated at the Historical Exchange Rate (H) (the Spot Rate on the date the asset/liability was recognized on the books) (i.e. Inventory) 3) Assets and Liabilities carried at FMV (Trading & AFS securities) are translated at the Current Spot Rate 4) Revenues and Expenses are translated at the Average Spot Rate for the current period EXCEPTION: Expenses related to historical cost assets (i.e. Depreciation & Amortization) are translated at historical cost 5) Translation Gains/Losses are included on the IS (Other Gains & Loss
Modified Accrual Accounting System
1) Revenues are recorded when a receivable can be recorded 2) Expenditures are recorded when a liability is incurred 3) Matching is not an issue, because there is no attempt to allocate costs
Reporting Currency
Currency P uses for consolidated financials statements
Functional Currency
Currency Parent and or sub use to carry on business
Local Currency
Currency commonly used in subs country
Current Unrestricted Funds vs Current Restricted Funds 1 concep 2 calc
Current Unrestricted Funds are 1) Spent at the discretion of the governing board 2) Similar in function to the General Fund 3) Used to pay all operating expenses Current restricted funds 1) Everything that has legal, contractual or external restrictions 2) These funds are currently available, but have limits on how they can be used How do we know its restricted? The donor said so.
Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carr's unidentifiable asset should be debited for A. $46,000 B. $16,000 C. $8,000 D. $0
D The goodwill and the bonus methods are two means of adjusting for differences between the carrying amount and the fair value of partnership net assets. Under the goodwill method, assets are revalued. Under the bonus method, assets are not revalued. Instead, adjustments are made to partnership capital accounts. Consequently, total partnership capital differs between the two methods, and an unidentifiable asset may be debited under the goodwill but not the bonus method.
Common methods of distributing partnership income
Fixed Ratio - each Partner gets a fixed portion of the income or loss (for example, 50:50) Capital Balances - Partners distribute income in the ratio of their capital balances (Pro rata allocation based on Capital balances), which allows them to maintain their proportional equity interests a) Weighted Avg. Capital Balances provide more detailed allocation b) Weighted Avg. Capital Balance = Sum of: [Each Capital Balance (at the date it changes) x (# months balance existed/12)] Example: 1/1-3/31 Balance = 60,000 x 3/12 = 15,000 4/1 - 6/30 Balance (After 30,000 increase) = 90,000 x 3/12 = 22,500 7/1-12/31 Balance (After 10,000 decrease) = 80,000 x 6/12 = 40,000 Weighted Avg. Balance = 15,000 + 22,500 + 40,000 = 77,500 c) Profit/Loss % per Partner = Partners' Weighted Avg. Capital Balance ÷ Total of All Weighted Avg. Capital Balances Interest on Capital Investment - Partners earn ROI similar to the return they'd get somewhere else a) This can be a more complex allocation, because the Partners have to determine which Capital Balance to use - beginning or ending b) The Interest Rate used can also make a big difference in the allocation c) A Problem: Should interest be paid even if there isn't enough income?
Forward vs Spot Rate
Forward rate - rate at which currencies can be exchanged at some future date Spot rate - rate at which currencies can be exchanged today
Tuition issue
Free question but anyway. School records full amount of tuition and fees even if school is giving loans or give scholarships waived tuition and fees are expenditures
General Fund Balance Change conceptual and calc
General Fund Balance = Net (Financial Resources - Claims to Resources) Reduction of General Fund balance = Purchases > Encumbrances Reduction of General Fund balance = Appropriations > Revenues Increase of General Fund balance = Appropriations > Expenditure Encumbrances (EOY) = Purchase Orders - Goods Received = Encumbrances - Invoices Unencumbered/Unreserved Fund Balance Appropriation NOT committed/spent = Appropriations - Encumbrances - Expenditures
Goodwill =
Implied BV - BV of Partnership Capital
Transaction gains/losses in currency exchange
Interim BS Dates = (Spot Rate at Interim BS date - Spot Rate at Transaction date) x FC Units Settlement Date = (Spot Rate at Settlement date- Spot Rate at Interim BS Date date) x FC Units FOCUS ON INTERIM
Interpret JE
Look at phone picture
Contributions and Pledges
WHEN CAN YOU START COUNTING CONTRIBUTIONS AS PLEDGES. ITS UNCONDITIONAL AND IT IS CALCULATED USING AN ALLOWANCE FOR DOUBTFUL CONTRIBUTIONS Contributions a. All NFPs under FASB jurisdiction are required to recognize contributions and pledges as revenue in the period received 1) Restricted contributions are listed as Restricted Assets 2) All other contributions are listed as Unrestricted Assets & inflows from operating activities 3) Contributed assets are booked at FMV at the Balance Sheet date Pledges 1) Signed commitments to give in the future 2) Are revenues recorded at the present value of the expected receipts, if the promise is non-revocable 3) There should be an allowance for uncollectible pledges
Reporting of the Translation Adjustment (Current Rate Method) or Re-Measurement Gain/Loss (Temporal Method) depends on the translation method used
a) Re-measurement (Temporal Method) - Re-Measurement Gain/Loss is included on the IS (Other Gains & Losses) b) Translation (Current Rate Method) - Translation Adjustment is included in OCI (BS - Equity section) & included in Comprehensive Income
Similarity to normal business financials
a. An entity very similar to a business 1) Carries on quasi-commercial activities (i.e. public utilities, rental property, etc.) 2) The traditional fund system doesn't provide adequate information b. The records very closely parallel traditional business organization records 1) Balance Sheet: (Current + Noncurrent Assets) = (Current + Noncurrent Liabilities) + Net Assets 2) Income Statement: Operating Revenue - Operating Expenses Operating Income + Non-operating Revenues - Non-operating Expenses + Capital Contributions + Additions to Endorsements Income before Other Items + Other Revenue - Other Expenses Increase (Decrease) in Net Assets (Fund Balance) + Beginning Net Assets Ending Net Asset
Simple One-Step Liquidation: Step-by-step
a. Sell noncash assets b. When assets are sold above or below their BV the Partners absorb the Gains/Losses 1) Assets sold for less than BV - the loss is allocated to the Partners (using the % indicated in the Partnership Agreement) 2) Assets sold for more than BV - the gain is allocated to the Partners (using the % indicated in the Partnership Agreement) c. When there's enough cash, the creditors should be paid d. The right of offset allows loans from Partners (used to pay off creditors) to be added to their capital balances e. If a Partner has a deficit (negative) capital balance, he or she has two options 1) If the Partner is personally bankrupt (Assets < Debts), the deficit balance must be allocated to the remaining partners in their residual profit and loss ratio (using the % indicated in the Partnership Agreement) 2) If the Partner is personally solvent (Assets > Debts), the deficit is settled by a cash payment by the Partner 3) After either option, that Partner's capital balance ends up being zer0 f. When there's nothing left but cash and positive (credit) capital balances, the remaining cash is distributed to the Partners 1) The cash is distributed based on the Partner's capital balances (NOT their profit sharing ratios) 2) After the final remaining cash is distributed to the Partners, there are no balances in any accounts and the Partnership is liquidated
General Fund
all funds except those in special funds - the "left over" fund a. Most day-to-day transactions involving the government entity runs through the general fund
Enterprise Funds
any activity that provides goods or services sold to external users 1) Enterprise funds are used for any fund where goods or services are sold to external users 2) The enterprise is accounted for like a for-profit entity 3) Often, Enterprise Funds are services such as public utilities, airports, parking lots, and recreational facilities 4) A fund must be accounted for as an enterprise fund if: a) Revenues from the activity must be used to pay off its debt b) Laws or other regulations require that costs must be paid by users' fees, not taxes or other revenues c) The enterprise charges users fees large enough to recover costs
Internal Service Funds
provide goods or services to other funds or agencies on a cost reimbursement basis 1) Used to provide goods or services for other parts of the governmental funds 2) Fees are charged for the goods or services on a cost reimbursements basis 3) Established with resources from other funds or general obligation bonds 4) Bonds are not shown as part of the fund, but are on the Statement of Net Assets and the Debt Service Fund
marshalling of assets
the order in which creditors of Partners and creditors of the Partnership make claims against assets 1) Partnership assets are used to pay off a) Partnership creditors b) Personal creditors of Partners whose claims were not settled by personal assets 2) Personal assets are used to pay off a) Personal creditors b) Partnership creditors not satisfied from Partnership assets, regardless of the capital balance of the Partner c) Other Partners, to eliminate a deficit capital balance 3) In general: a) A Partner's personal assets MUST be used to satisfy his/her personal creditors, before being used to satisfy the Partnership's creditors b) If a Partner's Net Worth (Assets - Liabilities) is < 0: 1) The Partner CANNOT be held responsible for ANY Partnership liabilities 2) The Partner's personal creditors can garnish (legally take claim to) any payments the Partner receives from the Partnership, in settlement of his/her capital interests
1.2. If, on March 31, the copper mining company concluded that the hedge was 100% effective, it should record the hedged copper inventory in the March 31 statement of financial position at A. $4,350,000 B. $4,250,000 C. $3,000,000 D. $2,900,000
1.2. C. On March 31, the company recognized a loss and liability for the futures contracts of $100,000 [5 million lb. × ($0.83 contract price - $0.85 futures price)]. If the hedge was completely effective, the loss on the hedging derivatives must have been offset by a $100,000 gain on the hedged item. For a fair value hedge, changes in the fair value of the hedged item attributable to the hedged risk are reflected as adjustments to the carrying amount of the hedged recognized asset or liability or the previously unrecognized firm commitment. The adjustments to carrying amount are accounted for in the same manner as other components of the carrying amount of the asset or liability. Thus, the inventory should be recorded at $3,000,000 [(5 million lb. × $0.58) original cost + $100,000 gain in fair value].
Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant's cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant's capital account should be credited for A. $12,000 B. $15,000 C. $16,000 D. $19,000
38. D. This transaction is to be accounted for under the bonus method. The incoming partner invests $15,000 fair value of land for a 20% interest in the capital of the new partnership. Hence, the incoming partner's capital account should be credited for 20% of the total capital following the investment. The total capital following the investment by the new partner equals $95,000 ($60,000 + $20,000 + $15,000). Because 20% of this amount is $19,000, Grant's capital account should be credited for $19,000.
Accrual Basis of Accounting
Accrual accounting is required for NFPs 1) Record revenue when it is earned 2) Record expenditures when material or service is received Emphasis is still on disclosures of sources and uses of funds rather than Net Income
Implied FMV of Partnership =
Amount New Partner Invested ÷ % Interest Received part of same question as goodwill above
Sequence of events for apropriation encumbrance etc.
Appropriation > Encumbrance > Expenditure > Disbursement Appropriations a) Maximum authorized expenditures b) Recorded in financial records in order to establish control over spending resources c) Lapsing of appropriations 1) Generally, any Encumbrances not fulfilled in one year are carried over to the next year & the Appropriation of the first year is shown as the source of the funds 2) If Appropriations lapse, any Encumbrances made in the current year have to be rerecorded in the next year and they must come out of next year's Appropriatio Encumbrances a) When a contract is signed that will later use resources, the funds are encumbered (set aside or promised) b) Encumbrances help tie Appropriations to what is left to spend c) An Encumbrance is formally recorded in the accounting records d) Encumbrances "held over" from one year to the next create a Restriction of the Fund Balance for those contracts made in one year, but completed in the next e) (Purchases > Encumbrances) = Reduction of the General Fund balance f) (Appropriations > Revenues) = Reduction of the General Fund balance g) (Appropriations > Expenditures) = Increase of General Fund balance h) Encumbrances (EOY) = Purchase Orders/Encumbrances - Goods Received /Invoices i) Available Resources (EOY) = Appropriations - Encumbrances - Expenditures j) NOTE: Encumbrances are NOT used in Proprietary funds Expenditures a) The expected payment required to fulfill a contract, as recorded by an encumbrance b) Tied to current period Appropriations c) Remember: Expenditures are recognized in the period in which the fund liability is incurred Disbursements - actual payments to fulfill encumbrances
Available Resources =
Appropriations - Encumbrances - Expenditures
Partnership Admissions and withdrawals. Bonus vs Goodwill method
Bonus Method 1) New Partner a) Partnership assets are increased only by FMV of actual assets received b) Total Equity is redistributed as needed to allocate capital as in the new agreement 2) Partner withdraws a) Assets of the Partnership are paid to the Withdrawing Partner b) If there's a difference between equity decrease and asset decrease, it is allocated to the remaining Partners' equity accounts Goodwill Method 1) A new asset (Goodwill) is created 2) It can go to the new Partner or to the original Partners' 3) It can go to the Withdrawing Partner or to the remaining Partners
Capital vs Profit Interest
Capital Interest - claim against the Net Assets of the Partnership (aka Equity Interest) (Profit Interest)- how Partner's Capital interest will increase or decrease as a result of subsequent operations
Re measurement rules
Monetary assets and liabilities (cash, receivables and most liabilities) are translated at the Current Spot Rate Non-monetary assets and liabilities carried at historical cost are translated at the Historical Spot Rate when the transaction occurred - the date of acquisition or date of transaction, whichever is later Non-monetary assets carried at current or future cost (inventories, marketable securities) are translated the Current Spot Rate Paid-in Capital is translated at the Historical Spot Rate (at the date P acquired Sub) Revenues and expenses related to assets and liabilities carried at Historical Cost are translated at the same Historical Spot Rate (depreciation, amortization) as the underlying asset or liability Other revenues and expenses are translated at the Average Spot Rate
Hedging Gains and Losses recognized where?
Recognized on the Income Statement.
3 Statements for NFP
Statement of financial position (Balance Sheet) including a)unrestricted net assets b)temporarily restricted net assets - donor imposed restrictions c) permanently restricted net assets - endowments Statement of Activities (Income Statement) Statement of Cash Flows