Specific Transaction

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Chape Co. had the following information related to common and preferred shares during the year: Common shares outstanding, 1/1 700,000 Common shares repurchased, 3/31 20,000 Conversion of preferred shares, 6/30 40,000 Common shares repurchased, 12/1 36,000 Chape reported net income of $2,000,000 at December 31. What amount of shares should Chape use as the denominator in the computation of basic earnings per share?

700,000 12/12 700,000 - 20,000 9/12 - 15,000 +40,000 6/12 +20,000 -36,000 1/12 - 3,000 702,000

Interim Tax formula

(cumulative year-to-date income x estimated annual tax rate) -any tax expense recognized in prior interim periods

Diluted EPS formula

*(net income - preferred stock dividends + adjustments to income for assumed conversion of potential common stock) / (weighted avg common shares outstanding + shares from assumed conversion of potential common shares)*

Basic EPS formula

*(net income - preferred stock dividends) / (weighted avg common shares outstanding)* (NOTE:The denominator is not just the ending # of shares. If any shares were issued in the year you're calculating EPS for, *you need to multiply the # of shares by the % of the year they've been outstanding*. So if 1,000 shares were issued on July 1, you would multiply 1,000 x (6/12), which would be 500 shares)

Under what circumstances does reporting currency = functional currency (local currency) ?

1. If the local economy is in hyperinflation, which means inflation of 100% or more for 3 straight years, the reporting currency is the functional currency 2. If the foreign operations could not operate without the U.S. entity's operations, then the reporting currency is also the functional currency 3.The subsidiary's operation is self-contained, and generates and expends cash primarily in the local foreign currency.

Characteristics of variable interest entity (VIE) includes

1. It is thinly capitalized. 2. Control of the activities and decision-making in a variable-interest entity generally resides with the variable-interest holders (not the equity holders) 3. The risks and rewards associated with a variable-interest entity mostly accrue to the variable-interest holders. 4. The value of a variable-interest entity depends on the net asset value of the variable-interest entity.

Finch Co. reported a total *asset retirement obligation of $257,000* in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at *undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000*. *Finch paid $87,000 toward the settlement* of previously recorded asset retirement obligations and recorded an *accretion expense of $26,000*. What amount should Finch report for the *asset retirement obligation in this year's balance sheet*?

257K beg balance + 68K discounted CF - 87K cash paid + 26K accretion expense = 264K

How to account for lease improvement?

Any costs for leasehold improvements are capitalized to a 'leasehold improvement' asset account and amortized over *the shorter of* either the *remaining lease term, or the useful life of the improvement*

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic earnings per share for the current year?

Basic EPS = [$200,000 - (8,000 x $20 x .10)]/25,000 = ($200,000 - $16,000)/25,000 = $7.36.

(From above) What amount is the net gain or loss that would be recognized on the raw material and related forward contract by Buyco over the life of the contract?

Because Buyco entered into the forward contract (hedging instrument) to hedge the risk of change in the fair value of the raw materials (hedged item), the change in the fair value of the forward contract over the life of the contract offsets the change in the fair value of the raw materials. *Specifically, the decrease in the value of the raw materials, $700 ($20,000 - $19,300 = $700), was offset by the increase in the value of the forward contract of $700 (given), so the net gain recognized over the life of the contract was $700 - $700 = $-0-*.

Which one of the following correctly reflects a set of events that may result in a sequence of related hedges? A. Firm commitment -> forecasted transaction -> recognized liability. B. Firm commitment -> recognized liability -> forecasted transaction. C. Forecasted transaction -> firm commitment -> recognized liability. D. Forecasted transaction -> recognized liability -> firm commitment.

C. Forecasted transaction -> firm commitment -> recognized liability.

Example of changes in estimate includes

Change depreciation life of the assets.

Example of error corrections includes

Change from cash to accrual basis of accounting

Example of changes in accounting principal includes

Change inventory value method (LIFO to FIFO),

Describe foreign currency exchange and option contract

FX exchange contract: *this is an obligation to buy or sell a foreign currency*. It is likely to result in gain(loss) for contract holder when entered into speculation FX option contract: *this gives the right to buy or sell a foreign currency, but not an obligation to do so*. It is not likely to result in gain(loss) for contract holder when entered into speculation since the contract holder has the option of whether or not to exercise the contract option to exchange currencies

What item for which risk associated with the item *cannot be hedged* for accounting purposes?

Fair value of an investment accounted for using the equity method of accounting.

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?

Fair value of net assets acquired: Assets ($350,000) - Liabilities ($70,000) = $280,000 Cost of Investment: Stock (20,000 shares x $10/share) =$200,000 Contingent consideration @ fair value = 10,000 Total cost of investment = 210,000 FV of net assets > Cost of investment = Gain = $70,000

What are characteristics of financial instruments?

I. They result in the exchange of cash or ownership interest in an entity. II. They impose on one entity a contractual obligation and grant another entity a contractual right.

Under what circumstances do we "remeasure"?

If the U.S. dollar is the functional currency but record in local foreign currency, the statements are remeasured (we remeasure what it record into US dollar)

foreign currency transaction gain should be reported in

Income statement (as current income)

Define Merger, Consolidation, and Acquisition

Merger: Entity A merges with entity B. Entity B no longer exists in a merger, just entity A Consolidation: Entity A and entity B consolidate their net assets and become entity C. Entity A & B no longer exist, just the new entity C Acquisition: Entity A acquires a controlling interest in entity B, but BOTH entity A and B continue as separate legal entities

______ application is used with change in estimate, and it means

Prospective; The new estimate is applied to the current and future years. Does not need to be applied to prior years

Define Recording, Reporting, and Functional currency

Recording currency: the currency that the foreign books and financial statements are in Reporting currency: the currency that the final financial statements will be in Functional currency: the currency of the primary economic environment that the entity operates in.

On January 2, 20X8, Fiserveco acquired a five-year right to service mortgage contracts for which it paid $120,000. Fiserveco estimated that servicing and other fees would generate $400,000 over the five-year period. During 20X8 the contract generated $100,000 in revenues. Which one of the following is the amount of expense, if any, that Fiseerveco should recognize in 20X8 as amortization of its servicing asset?

Since Fiserveco acquired the servicing rights asset in the market, it should recognize a servicing asset at its fair value, which is the cost to Fiserveco in the market. Therefore, it should recognize an asset of $120,000 on January 2, 20X8. That servicing asset should be amortized each period over the life of the contract in the same proportion that period revenues have to expected total revenues. During 20X8, $100,000 of an expected $400,000 total revenues was earned. Therefore, $100,000/$400,000, or ¼ of the servicing asset should be amortized. One-fourth of $120,000 = $30,000, the correct answer.

On October 1, 2008, Buyco entered into a legally enforceable contract to acquire *raw material inventory in 180 days for $20,000*. In order to mitigate the risk of a change in the value of the raw materials, Buyco also entered into a qualified 180-day forward contract to hedge the fair value of the raw materials. *At December 31, 2008, the value of the raw materials had decreased by $500*, and the *fair value of the futures contract had increased by $480*. On *March 29, 2009, the date the raw materials were delivered to Buyco, they had a fair value of $19,300*, and the *forward contract had a fair value of $700*. Which one of the following is the amount by which the *derivative is ineffective* as a fair value hedge for 2008?

Since during 2008 the change in the value of the raw materials decreased more than the value of the forward contract increased, the difference is the amount by which the derivative is ineffective as a fair value hedge. Specifically, the decrease in the value of the raw materials, $500, was offset by the increase in the value of the forward contract of $480, so the hedge was ineffective by *$500 - $480 = $20*,

(From above) What amount is the net gain or loss that would be recognized on the raw material and related forward contract by Buyco in its 2009 net income?

Specifically, the decrease in the value of the raw materials, $200 ($20,000 -$500 - $19,300 = $200), was offset by the increase in the value of the forward contract of $220 ($700 - $480 = $220), so the *net gain* recognized in 2009 was $220 - $200 = $20, which is the correct answer.

(From above) What amount is the amount of net gain or loss that would be recognized on the raw materials and related forward contract by Buyco in its 2008 net income?

Specifically, the decrease in the value of the raw materials, $500, was offset by the increase in the value of the forward contract of $480, so the *net loss *recognized in 2008 was $500 - $480 = $20, which is the correct answer.

On December 30, 2004, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment's useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 2004 at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in *current liabilities for this capital lease in its December 31, 2004 balance sheet?*

The lease liability at the end of 2004 is $115,000 ($135,000 - $20,000) because the first payment has been made and it consisted only of principal. The entry to be made at the end of 2005 will be: Dr Interest expense .10($115,000) 11,500 *Dr Lease liability 8,500* Cr Cash 20,000 *The amount of the lease liability to be extinguished in 2005 is $8,500 as shown in the entry.* Therefore, as of December 31, 2004, the current portion of the lease liability is $8,500, the amount due within 1 year of the balance sheet date.

Oak Co. leased equipment for its entire 9-year useful life, *agreeing to pay $50,000 at the start of the lease term on December 31, 2004* and $50,000 annually on each December 31 for the next 8 years. The present value on December 31, 2004 of the nine lease payments over the lease term, using the rate implicit in the lease, which Oak knows to be *10%, was $316,500*. The December 31, 2004 present value of the lease payments using Oak's incremental borrowing rate of *12% was $298,500*. Oak made a timely second lease payment. What amount should Oak report as capital lease liability in its December 31, 2005 balance sheet?

The lessee uses 10% because it is the lower of the two rates and is known to the lessee. The lease liability balance immediately after the first payment (at inception) is $266,500 ($316,500 - $50,000). The first payment includes no interest because it is made immediately. The entry for the 12/31/05 payment is: *Dr Lease liability 23,350* *Dr Interest expense .10($266,500) 26,650* *Cr Cash 50,000* *The ending lease liability balance is $266,500 - $23,350 = $243,150.*

(From above) What about under cost method?

Under the cost method of accounting, the parent does NOT adjust the investment in the sub. The parent's investment in the sub will be the same on the investment date as at the date of combination. The noncontrolling interest is the portion of the subsidiary NOT owned by the parent

In June 2004, Northan Retailers sold refundable merchandise coupons. Northan received $10 for each coupon redeemable from July 1 to December 31, 2004, for merchandise with a retail price of $11. At June 30, 2004, how should Northan report these coupon transactions?

Unearned revenues at the cash received amount.

For a U.S. entity, a foreign currency transaction (e.g. import/export) will be denominated (settled) in

a currency other than the dollar

When the transferred asset remains under the control of the acquirer, the asset is transferred at ___________.

carrying value

The hedge of a forecasted transaction to be denominated in a foreign currency is a _______ hedge.

cash flow (The risk being hedged is the variability in expected cash flows (inflows or outflows) on the planned transaction that would result from changes in the exchange rate.)

Under Retrospective Application, the adjustment to retained earning is either a "cumulative effect" of _____________ or a "prior period adjustment" for ____________

change in accounting principle; error correction (Accounting changes are measured as of the beginning of the year of change.)

Contingent consideration should be included in the

cost of an acquired business at fair value as of the acquisition date

If the instrument is used for speculation, then any gains or losses are recognized in

current income

In a lease that is recorded as a sales-type lease by the lessor, interest revenue should be recognized over the period of the lease using the ___________ method.

effective interest

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in _________.

estimate

On the date of a business combination using acquisition accounting, the consolidated stockholders' equity will

exactly equal the parent company stockholders' equity. This will continue to be the case as long as the parent company uses a complete equity method of accounting for the subsidiary.

Acquisition-related costs incurred to carry out a business combination, including both direct costs of acquisition (e.g., finders' fees; legal, accounting, and consulting fees; etc.) and general expenses related to an acquisition (e.g., cost of acquisition department), are ___________

expensed when incurred

Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at _________

fair value

The hedge of an available-for-sale investment denominated in a foreign currency is a _________ hedge.

fair value (The risk hedged is the effect of exchange rate changes on the fair value in dollars of the investment.)

When a forward contract is entered into for speculative purposes, the contract is measured using the ________ as of the dates the contract is initiated and at any subsequent measurement date(s) (e.g., balance sheet date).

forward rates

Intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity if they either have

future benefits that arise from contractual or legal rights (e.g., trademarks, copyrights, franchise agreements, etc.) or are capable of being separately sold transferred, licensed, rented, or exchanged (e.g., customer lists, databases, etc.).

A gain on an import transaction would occur when the recorded amount is _________ the settlement amount, and a loss on an export transaction would occur when the recorded amount is __________ the settlement amount.

greater than; greater than

*When there is a gain on a receivable that is denominated in a foreign currency*, it means that the same number of foreign currency units translates into more/less dollars. Thus, the number of units per dollar raised/declined.

more; declined

For a U.S. entity, a foreign currency transaction will be denominated (settled) in _______, but measured and recorded on the U.S. entity's books in _______.

non-dollars; dollars

In cash flow hedge, the difference in the fair value of the derivative up to the amount of change in present value of expected cash flow is recognized in _________. This is the effective portion c. the amount different than the change in present value of expected cash flow is recognized in ________, this is the ineffective portion

other comprehensive income; current income

The future asset retirement costs are capitalized as an asset, and as a liability. The amount capitalized is the weighted__________________________. The asset's base is depreciated over its ___________.

present value of the future costs to retire the asset; useful life

Goodwill =

price paid for the business - FV of the NET ASSET

Net rental income =

rent revenue - expenses associated with the property (such as broker fee which is allocated throughout the lease term, annual depreciation, and insurance)

Under Translation, assets and liability are translated using _______ rate, Income statement accounts are translate using ________ rate at the date the item was earned or incurred and _________ rate for that period. Common stock is translated at _______ rate. Dividend declared is translated at _______. Translation gain/losses are report as ________

spot; exchange; weighted avg exchange; historical; spot exchange rate on the date the dividends were declared; OCI

Under Remeasurement, all monetary assets and liabilities (AP/AR) are remeasured using _______ rate, Non-monetary items like fixed assets, prepaid assets, COGS, depreciation, common stock are remeasured using _______ rate, revenues/expenses and inventory that occurred evenly throughout the year and are remeasured using _______ rate. Remeasured gain/loss are report as ________

spot; historical; weighted avg; Income from continuing operation.

Measure period =

the period after the acquisition date during which the acquirer may adjust any provisional amounts recognized as part of the business combination, and it may extend for as long as one year after the acquisition date.

The net lease receivable initial balance is

the present value of the minimum lease payments (payments expected to be received under the lease) plus the present value of the residual at the end of the lease term.

For a capital lease, the amount recorded initially by the lessee as a liability should normally equal to

the present value of the minimum lease payments at the beginning of the lease.

When the sub's functional currency is something other than the functional currency, then

the sub's financials are 'remeasured' from recording currency to functional currency, and then 'translated' from functional currency to US dollars

changes in the fair value of the forward contract (hedging instrument) that are equal to or less than the change in the translated value of the financial statements of the foreign operation are reported as a

translation adjustment in other comprehensive income

Under the cost method of carrying an investment in a subsidiary, the parent recognizes

its share of the *subsidiary's dividends declared and, ultimately, the cash received in payment of the dividend*. The dividend income (CR.) so recognized by the parent would be eliminated in the consolidating process against the retained earnings decrease (DR.) recognized by the subsidiary. *Share of Net income/Net loss is not recognized under cost method.*

For business combination, The __________ of a business combination determines the entry accounts (i.e., which accounts to debit and/or credit), and the __________(acquisition method) determines the amounts at which the entries will be made (i.e., fair value).

legal form; accounting method

A gain can occur in a business combination only when the investment value in the acquired entity is _____ than the fair value of the entity's net assets

less

Assume Instco acquires an option to buy (a call option) 100 shares of Opco for $50 per share when the market price of Opco is $45 per share and that Instco paid a premium of $1.00 per share to acquire the options. What is the *underlying* related to Instco's options? *notional amount*?

$50.00 per share; 100 shares

On January 1, 2005, Park Co. signed a 10-year operating lease for office space at $96,000 per year. The lease included a provision for additional rent of 5% of annual company sales in excess of $500,000. Park's sales for the year ending December 31, 2005 were $600,000. Upon execution of the lease, Park paid $24,000 as a bonus for the lease. Park's rent expense for the year ending December 31, 2005 was

$96,000 annual amount is recognized each year + $2,400 is included in the rent expense each year ($24,000 total bonus/10-year term) + .05($600,000 - $500,000) or $5,000 additional rent = 103,400

At the beginning of the current year, *a firm invested $30 million in a natural resources site*. This amount was applied to the acquisition of the mineral rights, exploring for the resource (full-costing method is used), and development. In addition, the firm *must bring the property back to its original state three years from today*. Two estimates of the future cost for that future effort are: (1) $6 million with 30% probability, and (2) $4 million with 70% probability. 6% is the appropriate risk adjusted rate of return. The present value of $1 in three years at 6% is 0.83962. *By the end of the current year, the firm had removed 20% of the total estimated resource in the deposit*. Compute depletion and accretion expense for the current year.

*Asset retirement obligation beginning balance = [$6,000,000(.30) + $4,000,000(.70)](0.83962) = $3,862,252*. This is the present value of the expected future cost of reclaiming the property. The risk-adjusted rate of return is used because the probabilities account for the uncertainty of the cash flow amounts. *This beginning balance is added to the $30 million figure for a total of $33,862,252 capitalized depletion base*. *Depletion is 20% of that amount or $6,772,450*. Accretion expense is the growth in the asset retirement obligation for the year or *.06($3,862,252) = $231,735*.

Jay's lease payments are made at the end of each period. Jay's liability for a capital lease would be reduced periodically by the

*Minimum lease payment less the portion of the minimum lease payment allocable to interest*. (Each lease payment includes interest based on the lease liability at the beginning of the period. The amount of each payment exceeding the interest component is the amount of principal reduction. This amount reduces the lease liability used to compute the interest portion of the next payment. Thus, the interest component decreases with each payment as more principal is paid off.)

How are spot and forward rates used in accounting for a forward contract hedging instrument?

*The forward rate is used as the basis for determining the change in value of a forward contract.* As the forward rate changes, so also will the carrying value of the forward contract, resulting in exchange gains and losses. *The spot rate is used to determine the premium or discount on the forward contract. *

On May 15, 2003, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, 2004, at a selling price of $500,000. The segment reported $195,000 in operating losses for 2003. The segment is expected to lose $30,000 from operations in 2004. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its 2003 income statement?

*There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss.* Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for 2003.

What are some differences between IFRS and GAAP related to business combination ?

1. Under GAAP, contingent assets and liabilities can be recognized if criteria is met. Under IFRS, contingent assets are not recognized 2. Under GAAP, goodwill allocation is to the reporting units. Under IFRS, goodwill is allocated to the cash-generating units 3. Goodwill impairment testing is a one-step process under IFRS, and a two-step process

A owns 60% of B and 40% of C. A wants fully control C and decided to let B acquire some C's stock. What is the minimum % of share B must acquire for A to gain control of C?

11%. 40% + 11% = 51% > 50%

What kind of elimination is required in every consolidating process? 1. intercompany Receivable/payable 2. intercompany investment 3. intercompany Rev/Exp

2. intercompany investment elimination

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive? A. Cumulative 8%, $50 par preferred stock. B. Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock. C. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock. D. Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.

A is is not dilutive because it does not have a conversion option. B is not dilutive, The numerator effect is $70 saving in interest ($1,000 x .10 x (1-.3)), and the denominator effect is 20 more shares outstanding. 70 / 20 = $3.50, which is greater than the BEPS of $1.29. *C is dilutive, The numerator effect is $49 saving in interest ($1,000 x .07 x (1-.3)), and the denominator effect is 40 more shares outstanding. 49 / 40 = $1.225, which is less than the BEPS of $1.29.* D is not dilutive, The numerator effect is $6 saving in preferred dividends ($100 x .06), and the denominator effect is 4 more shares outstanding. 6 / 4 = $1.50, which is greater than the BEPS of $1.29

What legal forms of business combination will result in the need to prepare consolidated financial statements?

Acquisition

Transaction cost includes

All costs associated with a business combination are expensed as incurred. This includes legal fees, audit fees, finder fees, etc

On February 1, Rayco transferred a bond it owned with a maturity value of $50,000 to Dayco as security for a short-term loan from Dayco. By terms of the agreement, Dayco cannot resell or otherwise use the bond except as collateral for its loan to Rayco. Rayco defaulted on its repayment of the loan from Dayco on August 1 when the bond had a fair value of $48,000. On what date and in what amount should Dayco recognize the bonds on its books?

August 1, by $48,000 (FV). Since the transfer of the bond is used only as security for the loan, and not as a sale of the bond, Dayco would not recognize the bond on its books at the time of the transfer. The bond would be recognized on Dayco's books on the date Rayco defaulted and at its fair value at that time.

Dunn Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Dunn's past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Dunn's liability for stamp redemptions was $6,000,000 at December 31, 2005. Additional information for 2006 is as follows: Stamp service revenue from stamps sold to licensees $4,000,000 Cost of redemptions (stamps sold prior to 1/1/06) 2,750,000 If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost would be $2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31, 2006?

Beginning liability balance $6,000,000 Plus estimated redemptions for 2006: .80($2,250,000) 1,800,000 Less actual redemptions in 2006 (2,750,000) Equals ending liability balance $5,050,000

Define change in estimate, change in accounting principal, and error correction

Estimate changes: this is when you change the estimated useful life of PPE or change depreciation methods Accounting principle changes: this is changing from one GAAP principle to another such as LIFO to FIFO Error correction: this is when an error is discovered that affects prior year income

Does estimated disposal gains or losses recognized?

Estimated disposal gains are not recognized, only estimated losses.

When domestic dollar is weaken, accounts receivable dominated in Foreign currency creates exchange ________; accounts payable dominated in foreign currency creates exchange _________

Gain(From $1USD = $100JPY to $1USD = $75JPY); Loss

Under what circumstances do we "translate"?

If the local foreign currency is the functional currency, the statements are translated to USD.

At the inception of a capital lease, the guaranteed residual value should be

Included as part of minimum lease payments at present value.

Define accretion expense

It means the ARO is increased each year as time goes on. It equals *ARO balance x the interest rate at initial measurement*. Annual accretion expense is an operating expense and is NOT considered interest expense

When domestic dollar is strengthen, accounts receivable dominated in Foreign currency creates exchange ________; accounts payable dominated in foreign currency creates exchange _________

Loss(From $1USD = $100JPY to $1USD = $125JPY); Gain

Under IFRS, When a probable (< 50%) outflow of benefits is implied, and the amount is estimable, is the liability still contingent?

No, This is a recognized liability for international accounting standards, not a contingent liability.

On January 1, 20x1 Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. Ritt's cost reflects an appropriate fair value measure for all of Shaw's outstanding common stock. The original cost to the noncontrolling investors for the 20% of Shaw's common stock not acquired by Ritt was $200,000. At the date of Ritt's purchase, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) which were $100,000 in excess of the carrying amount. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared immediately following the business combination?

Noncontrolling interest at the date of the business combination should be the noncontrolling interest proportionate share of total fair value at that date, including goodwill. The total fair value of Shaw (including goodwill) at the date Ritt acquired 80% of Shaw's common stock would be $1,218,750 ($975,000/.80). The noncontrolling interest would be .20 x $1,218,750 = $243,750, the correct answer. The investment eliminating entry made immediately following the business combination would be: DR: (Various) Identifiable Net Assets $1,100,000 Goodwill 118,750 CR: Investment in Shaw $975,000 Noncontrolling Interest (in Shaw) 243,750

______ application is used with error correction and change in accounting principals, and it means

Retrospective; The change is prior years is recorded and an adjustment to retained earnings is made. This requires that prior year financials are RESTATED

Douglas Co. leased machinery with an economic useful life of 6 years. For tax purposes, the depreciable life is 7 years. The lease is for 5 years, and Douglas can purchase the machinery at fair market value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting?

Since Douglas neither obtains ownership at the end of the lease nor has a bargain purchase option, it must amortize the asset over the life of the lease (5 years)

On January 1, 2005, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 2005 and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2005, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh's December 31, 2005 balance sheet, the capital lease liability should be

The entry at December 31, 2005: Dr Interest expense ($112,500 x .08) 9,000 Dr Lease liability 1,000 Cr Cash 10,000 *The ending lease liability for 2005 is $111,500 ($112,500 - $1,000 from entry)*.

Invern, Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of a 2005 accident, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit's probable outcome on Invern's 2005 financial statements?

The information about self-insurance (which means no insurance) is irrelevant to the problem except that if the firm loses the lawsuit, there will be no insurance coverage. This is a contingent liability. It is probable, and the amount is estimable. Therefore, expenses (or a loss) and a liability are recognized for $190,000.

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the *intrinsic value* of the call option at the time of initial investment?

The intrinsic value of a call option is the difference between the exercise (strike) price and the market price. This call option has an *exercise price of $9 / share and the market price is $10 / share. Therefore, there is a $1 / share intrinsic value* (I can buy the stock at a price less than the market). The option is to purchase 100 shares so the total intrinsic value is $100.

In the Long-Term Liabilities section of its balance sheet at December 31, 2003, Mene Co. reported a capital lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, 2004 and January 2, 2005. Mene's incremental borrowing rate on the date of the lease was 11%, and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31, 2004 balance sheet, what amount should Mene report as capital lease obligation, net of current portion?

The total lease liability after paying the lease payment on 1/2/04 is $75,000 because the current portion of the liability on 12/31/03 was paid on 1/2/04. The lessee uses the lessor's implicit interest rate of 10% because that rate is lower than the lessee's borrowing rate, and the lessee knows the lessor's implicit rate. 12/31/04 to recognize interest expense *Interest expense .10($75,000) 7,500* *Lease liability 7,500* The total lease liability at 12/31/04 is $82,500 ($75,000 + $7,500). But on 1/2/05, a $9,000 payment will be made, which will reduce the total lease liability by that amount to $73,500 ($82,500 - $9,000).

Steam Co. acquired equipment under a capital lease for 6 years. Minimum lease payments were $60,000 payable annually at the year's end. The interest rate was 5% with an annuity factor for 6 years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?

This lease is capitalized because the present value of the lease payments is 90% or more of the fair value of the asset (in this case, 100%). *The capitalized lease liability at inception is $60,000 x 5.0757 = $304,542.* Interest expense at the end of the first year is .*05 x $304,542 = $15,227.* A capitalized lease liability is much like a mortgage note with payments including both principal and interest. The principal portion of the first payment is $60,000 - $15,227, or $44,773.

Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease, and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for 5 years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

Total interest over the term equals the difference between total lease payments and the fair value of the property at inception. *The lease payment is $75,000 ($323,400/4.312).* Thus, *total interest is 5($75,000) - $323,400 = $51,600.*

What is the adjustment under remeasure, then translate?

Translate adjustment goes to OCI, remeasure adjustment goes to income from continuing operation.

Changes in the fair value of contingent consideration resulting from occurrences that occur after the acquisition date are recognized as gains or losses when the contingent consideration is classified as an ____________.

asset or a liability

(From above Note) You'll get questions that ask you what amount of preferred stock dividends to subtract: a. What do you do if the preferred stock is cumulative? b. What do you do if the preferred stock is non cumulative?

a. you subtract one full year of the dividends- no matter what amount is paid or declared b. you subtract the only the amount of preferred dividends declared that year

The carrying amount of the asset before the transfer will be

allocated to the component sold and the component retained based on the relative fair values of the components at the date of the transfer.

What are 4 criteria for determining if a lease is a capital lease instead of an operating lease?

i. If ownership transfers at the end of the lease ii. If there is a bargain purchase option iii. If the lease term is greater than or equal to 75% of the useful life of the leased asset iv. If the present value of the lease payments is greater than or equal to 90% of the cash price of the leased asset

During consolidation process, How does subsidiary's income and dividend's affect parent's investment under equity method?

i. The sub's income increased the parent's investment ii. The sub's dividends decreases the parent's investment

In an acquisition, the acquiring entity recognizes (debits) on its books as an __________ in the acquired entity, but in a merger and in a consolidation, the ____________ of the acquired entity/entities are recorded on the books of the acquiring entity, not an investment in the acquired entity.

investment; assets and liabilities


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