CPA - FAR - Select Transactions
What is an operating lease? What two calculations are involved in operating lease accounting from the lessee's perspective?
- A lease greater than 12 months other than a finance lease 1.) Calculation of interest 2.) Calculation of amortization of right-of-use asset
What is a forecasted transaction? Does it have FV risk or CF risk?
- A transaction that is expected to occur for which there is no firm commitment; when the transaction does occur, it will be at the prevailing market price - Has CF risk
How do NFP entities record investments? Do NFP entities use the same categories for investments as for-profit entities?
- Account for at FV - Gains/losses reported as changes to net assets without donor restrictions (unless there is a donor imposed restriction) - No, they do not use the same categories
What is a firm commitment (aka purchase or sales commitment)? Does it have FV risk or CF risk?
- An agreement that is binding on both parties and is legally enforceable and specifies all significant terms (including quantity to be exchanged, fixed price, timing of transaction); includes a disincentive for nonperformance - Has FV risk
With regards to an accounting principle change and retrospective application, what if it is impractical to determine the cumulative or period-specific effects?
- Apply the change as of the beginning of the earliest period for which retrospective application is practicable (which may be the current period) - When the cumulative effect as of the beginning of the current period cannot be determined, then the change is made prospectively as of the earliest date possible.
For NFP and government health care organizations, how are uncollectible net patient revenues recorded? How is additional bad debt expense treated for Other Revenues for NFP and government/public organizations?
- As contra-revenue account (NOT as bad debt expense) - NFP: bad debt expense part of operating expenses - Public/Government: bad debt expense reduces net patient revenue
In conversion of financial statements using translation method, at what rate are assets and liabilities converted? At what rate is equity converted? The income statement?
- Assets/liabilities at the current rate (spot rate on B/S date) - Equity at historical rates - Income Statement at weighted average rate for the year
For fundraising events that are not minor, are revenues reported at gross or net? How are revenues reported if the event is incidental or peripheral?
- At gross, unless the event is minor/incidental - As a gain (and expenses are reported parenthetically)
What is the accounting treatment for derivative contracts entered into for speculative purposes? What rate is used at each measurement date, and how are gains/losses treated?
- At the contract date, record forward contract at FV using forward rate - Adjust forward contract's carrying value as an asset or liability at B/S date and at settlement date - Any gains/losses go to net income
At what amount is sales revenue recorded when a contract has a significant financing component? How are interest entries recorded?
- At total face value - Dr. Cash Cr. Interest Revenue Cr. Note Receivable
How does the FASB define "highly effective" in terms of hedging effectiveness? How often is effectiveness assessed?
- Between 80% - 125% correlation - At each B/S date (quarterly)
What type(s) of hedge can be used to hedge a foreign currency denominated asset or liability? Where are gains/losses recognized?
- Both a FV hedge (for the change in the carrying value of the asset/liability) and a CF hedge (for the foreign exchange risk) - FV hedge gains/losses go to net income - CF hedge gains/losses go to OCI
In financial reporting for not-for-profit entities, how are expenses reported?
- By nature and function (either in face of Statement of Activities, in notes to financial statements, or in a separate statement) - Expenses are only reported for net assets without donor restrictions
In terms of option contracts, what is a call versus a put? Are they assets or liabilities? What does the phrase "in-the-money" versus "out-of-the-money" mean?
- Call is a right to buy - Put is a right to sell - An asset - In-the-money means that the option is advantageous to exercise in relation to the market price; out-of-the-money means that the option is not advantageous to exercise in relation to the market price
Which items are eligible for hedge accounting?
- Commodity price risk - Foreign exchange risk - Interest rate risk - Credit risk
When are conditional vs. unconditional pledges recognized in NFP accounting? If the occurrence of a conditional promise event is remote, how is this categorized?
- Conditional: wait until condition is met - Unconditional: recognize in the period the pledge is made - If remote, a conditional promise may be categorized as unconditional
What is the difference between conditions and restrictions with regards to NFP financial reporting?
- Conditions dictate when contribution revenue is recognized (must remove condition to recognize it) - Restrictions dictate where contribution revenue is recognized (in which class of net assets)
When is a contract liability versus contract asset created?
- Contract Liability: when a customer pays in advance (e.g. Unearned Revenue) - Contract Asset: when an entity performs its obligations before the customer pays
What are indemnification rights and how are they treated by an acquirer?
- Contract provisions that limit the acquirer's liability for uncertainty related to identified assets or liabilities - Acquirer recognizes this as an asset
How do each of the following affect the Construction in Process account? - Project Billings - Construction Costs Incurred - Gross Profit
- Credit to CIP - Debit to CIP - Debit to CIP
Will a deferred tax asset or a deferred tax liability result in the following situations? - GAAP assets > tax value - GAAP liabilities > tax value - GAAP assets < tax value - GAAP liabilities < tax value
- DTL - DTA - DTA - DTL
For a government health care organization, under which method must the Statement of Cash Flows be prepared? How many categories are there in the Statement of Cash Flows?
- Direct method must be used - 4 categories (Financing Activities are split between Capital vs. Noncapital)
Direct vs. Indirect Exchange Rates
- Direct: the domestic price of one unit of a foreign currency - Indirect: the foreign price of one unit of a domestic currency
What is an FX forward or futures contract? What is the distinction between forward and future contracts (i.e. where are they traded?)
- Establishes an obligation to buy or sell a foreign currency - Forward: traded OTC - Futures: traded on an exchange
How are costs to fulfill a contract treated when... - The cost has an amortization period of less than 1 year - The cost benefits a period greater than 1 year - The costs are direct and incremental with respect to the contract
- Expense - Capitalize and amortize over term of contract - Capitalize and amortize over term of contract
In the event of an uncertain tax position, when there is a 50% chance or less that the deduction will be accepted/sustained, how is income tax expense affected? How is current income tax payable affected? Are there any other liabilities involved?
- Expense is not affected/reduced - Current income tax liability is reduced - A second liability is recognized for the uncertain deduction
In the event of an uncertain tax position, when there is a greater than 50% chance that the deduction will be accepted/sustained, how is income tax expense affected? How is current income tax payable affected? Are there any other liabilities involved?
- Expense is reduced for the largest amount for which the cumulative probability exceeds 50% - Current income tax liability is reduced for the full deduction - A second liability is recognized for unrecognized tax benefit (gap between the first two)
In conversion of financial statements using translation method, how are items on the income statement converted?
- For items occurring evenly throughout the year, use weighted average rate - For items that occurred on one date, use exchange rate on that date
From the lessor's perspective in a sales-type lease, which of the following are affected if a residual value is guaranteed versus unguaranteed? Describe how the affected element(s) are affected when the residual value is unguaranteed. - Lease payment to charge lessee - Gross profit - Sales revenue - COGS - Lease Receivable - Unearned Interest - Equipment Cost
- From the list, only sales revenue and COGS are affected (since both are adjusted by an equal amount, gross profit is not affected) - Subtract the PV of residual value from sales revenue and COGS in the JE
What is a board-designated endowment fund?
- Funds set aside by the governing body of the NFP to be spent for a specific purpose - Accounted for as part of net assets without donor restrictions
How is a split-interest agreement accounted for when it is irrevocable vs. revocable?
- Irrevocable: Record assets at FV, liability for annuity portion for donor/third party, contribution revenue for NFP's portion - Revocable: Record assets at FV, record a refundable advance, contribution revenue is recognized when the trust fund becomes irrevocable or the funds are distributed to the NFP
In conversion of financial statements using translation or remeasurement method, how is COGS determined?
- It is computed, not converted - Beginning Inventory + Purchases - Ending Inventory = COGS - Use applicable exchange rates of these components to calculate COGS
In conversion of financial statements using translation or remeasurement method, how is retained earnings determined?
- It is computed, not converted - Beginning RE + NI - Dividends = Ending RE
If one of the five criteria are met for the lease classification test, how would the lessor classify this? How would the lessee classify this?
- Lessor: Sales-type lease - Lessee: Finance lease
With regards to the 90% PV test for lease classifications, what interest rate is used by the lessor? What rate is used by the lessee?
- Lessor: always uses the lessor's implicit rate/rate of return - Lessee: uses the lower of the lessee's incremental borrowing rate OR the lessor's implicit rate (if known and if lower than the incremental borrowing rate)
At what amount are FX futures/forward and options contracts measured? Where are gains/losses recorded?
- Measured at FV, with changes in FV resulting in gains or losses? - If it's an economic (natural) hedge or speculation, or a FV qualified hedge, recognize gain/loss in net income - If it's a CF qualified hedge, recognize gain/loss in OCI
In conversion of financial statements using remeasurement method, at what rate are assets and liabilities converted (both monetary and nonmonetary)? At what rate is equity converted? The income statement?
- Monetary assets/liabilities at the current rate (spot rate on B/S date) - Nonmonetary assets/liabilities at historical rates - Equity at historical rates - Income Statement at weighted average rate for the year or historical rates if determinable
What is variance power, as it relates to a NFP entity? How are these intermediary funds recognized if the NFP does/does not have variance power?
- NFP receives donations as an intermediary, to be used/transferred to other beneficiaries - If the NFP has unilateral right to redirect use of assets to parties other than the specified beneficiary, this is variance power and contribution revenue is recognized (contributions with donor restrictions) - If NFP does not have variance power, a liability is recognized instead of contribution revenue
What are the Equity accounts for NFP colleges/universities? What are the Equity accounts for Public colleges/universities?
- NFP: Net Assets with Donor Restrictions; Net Assets without Donor Restrictions - Public: Net investment in capital assets; Restricted Net Position; Unrestricted Net Position
What are the Equity accounts for NFP health care organizations? What are the Equity accounts for Public health care organizations?
- NFP: Net Assets with Donor Restrictions; Net Assets without Donor Restrictions - Public: Net investment in capital assets; Restricted Net Position; Unrestricted Net Position
Under what circumstances does a contract modification result in a new separate contract, versus a modification to the existing contract? How is each accounted for?
- New Separate Contract if additional goods/services are distinct and consideration for the additional goods/services reflects proper standalone pricing - Account for as a new separate contract; does not impact accounting for existing contract - Modification if additional goods/services are not distinct, or if additional goods/services are not priced at proper standalone pricing - Account for contract modification using a prospective approach (e.g. blended price)
No NFP entities commonly use fund accounting? Why or why not?
- No, they do not - Since external reporting is entity-wide, fund accounting has a secondary role
Is a customer's right to return merchandise a performance obligation of the seller? How should sellers account for a right of return?
- Not a separate performance obligation - Debit Sales Returns & Allowances and credit either Allowance for Sales Returns & Allowances (if making an adjusting entry) or A/R (if return has actually happened) - Also debit Estimated Inventory Returns or Returned Inventory
What are derivatives held for speculation, and how are they accounted for?
- Not designated or qualify to hedge risk; entered into to obtain a profit - Adjust to FV at B/S date and changes in FV go to earnings
What is a foreign exchange (FX) transaction? What is the objective of FX reporting?
- One that will be settled in a foreign currency but is reported in USD - Reflects the changes in the values of the currencies; report the economics of the transaction and expected cash flows of the transaction
Output Method vs. Input Method for revenue recognition
- Output Method: recognize revenue based on value of goods transferred relative to remaining goods - Input Method: recognize revenue based on proportion of expected inputs (e.g. cost) to total inputs of the project
What are quasi-endowments and how are they reported?
- Principal that is set aside by the governing body of the NFP - Appear to be set up as an endowment, but formed from NFP itself rather than an external party - Accounted for as part of net assets without donor restrictions
In governmental healthcare, how are noncash contributions recorded if they are.... - Materials - Services relevant to the main operating mission of the hospital - Services relevant to support/administration
- Record as inventory and Other Operating Revenue - Record as an operating expense and Other Operating Revenue - Record as an operating expense and Nonoperating Gain
Are the following disclosures with respect to financial instruments recommended or required? - Fair value measurements - Concentrations of credit risk - Market risks
- Required - Required - Recommended
What criteria must be met in order for a sale to qualify as a sale-leaseback? What is a failed sale, and how is it accounted for?
- Sale must meet revenue recognition criteria, otherwise this is considered a failed sale (e.g. when the terms of the subsequent lease meet the finance lease criteria) - Failed sale is accounted for as a financing transaction
Memberships can have both a contribution and a service element. How are each recognized?
- Service element: recognize revenue over the period(s) that the benefits are provided - Contribution element: recognize revenue when received
What is charity care, as it relates to health care organizations, and how is it treated?
- Services to persons who have demonstrated they are unable to pay and for which revenue is never expected to be collected - Not recognized as revenue, receivable, or bad debt expense
How is gift card revenue treated from a revenue recognition standpoint? What happens if a gift card benefit is forfeited from a customer?
- Similar to unearned revenue - Record "Gift Card Liability" when cash received and recognize revenue once gift card is redeemed - If forfeited, extinguish liability and recognize "Forfeited Card Revenue" as Other Revenue
What are performance (variable) stock option plans? How are changes in expected # of shares to be issued handled? If no options vest, how is previously recognized compensation expense treated?
- Stock option plans that require a performance target to be met before vesting occurs - Change is applied to current period, such that total compensation expense through the current year reflects the revised rate - Reverse the previously recognized expense
What is a split-interest agreement, as it relates to NFP accounting? What is a lead interest vs. a remainder interest?
- The NFP shares benefits in a trust with the donor or other third-party beneficiary - Lead Interest: NFP receives distributions during the term of the agreement - Remainder Interest: NFP receives distributions only at the end of the agreement
What is a remeasurement adjustment? Where is it reported?
- The amount needed to balance the debits and credits when performing the conversion of foreign financial statements using the remeasurement method - Part of income from continuing operations and flows through RE
What is a translation adjustment? Where is it reported?
- The amount needed to balance the debits and credits when performing the conversion of foreign financial statements using the translation method - Part of OCI and flows through AOCI
Assume you enter into an FX forward contract to sell euro at a certain rate. What rate is used - the forward rate or spot rate? What is the JE on the following dates? 1.) When the forward contract is entered 2.) At the B/S date (assume rate decreases (i.e. USD strengthens) 3.) At the settlement date (assume USD strengthens)
- The forward rate is used 1.) No JE; record a memo entry 2.) Dr. Forward Contract Cr. Gain 3.) Dr. Forward Contract Cr. Gain Dr. Cash Cr. Forward Contract (zero out)
Assume you enter into an FX options contract to buy euro at a certain rate. What rate is used in measuring the FV of the options contract? What is the JE on the following dates? 1.) When the options contract is purchased 2.) At the B/S date (assume valuation increases) 3.) At the settlement date (assume valuation decreases)
- The option premium is used 1.) Dr. FX Option Cr. Cash 2.) Dr. FX Option Cr. Gain 3.) Dr. Loss Cr. FX Option Dr. Cash Cr. FX Option (zero out)
What is the definition of a measurement period as it relates to acquisitions? What is the maximum length of time a measurement period can be?
- The period after the acquisition date during which the acquirer may adjust any provisional amounts (identifiable assets/liabilities, noncontrolling interest, consideration transferred, goodwill/bargain purchase amount, etc.) - Cannot exceed one year from the acquisition date
Define underwater endowments. How are they reported?
- The portion of an endowment that has fallen below the originally donated amount or threshold that the donor specified remain intact - Accumulated losses are reported as part of net assets with a donor restriction - Disclose in the Statement of Financial Position the FV of the underwater endowment funds, the original endowment amount, and the amount of the deficiencies
What are market risk disclosures, as they relate to financial instruments?
- The possibility of loss from change in market value due to changes in economic circumstances (e.g. changes in market rate of interest or changes in the rate of inflation)
What are the two types of contract assets?
- Unconditional (e.g. Accounts Receivable) - entity has unconditional right to payment - Conditional (use Contract Asset account as the debit account) - entity must complete another performance obligation before it has an unconditional right to consideration
In the remeasurement method of foreign financial statement conversion, what is the remeasurement conversion process for the following items on the income statement? - Revenues/expenses that occur evenly throughout the year - Revenues/expenses that relate to nonmonetary items - Significant transactions that occur on only one date
- Use weighted average rates - Use historical rates - Use historical rates
What is a natural or economic hedge? How is it accounted for?
- Uses a derivative to offset the price of a commodity, interest rate, anticipated purchase, foreign exchange exposure, etc. - No special hedge accounting; mark to market the derivative (record at FV) and the exposure to earnings
What is hedge accounting? How does something quality for hedge accounting?
- Uses a derivative to offset the price of a commodity, interest rate, anticipated purchase, foreign exchange exposure, etc., but meets specific criteria for special accounting for the hedging instrument and the hedged item - Requires formal documentation of the hedge strategy, the entity's objective for undertaking the hedge, what items are being hedged, what is the hedging instrument, what derivative is being used
What are regular/pure endowments? How are endowment earnings treated?
- When an external party donates resources with the stipulation that it must remain intact forever (a permanent restriction by the donor) - Endowment earnings may be either restricted (in terms of time or purpose) or unrestricted
When does functional currency equal reporting currency? In this scenario, what conversion process is used? Where are gains/losses reported?
- When foreign operations are an extension and integral component of the US entity's operations; foreign entity's cash flows are in USD; foreign entity could not exist independent of US entity -Remeasurement is used - Gains/losses reported in income statement
When does functional currency equal local currency? In this scenario, what conversion process is used? Where are gains/losses reported?
- When foreign operations are relatively self-contained and integrated within the country in which located; the foreign entity is functioning in the local currency - Translation is used - Gains/losses reported in OCI
At what point is a local economy determined to be hyperinflationary? In this scenario, what is the functional currency?
- When the cumulative inflation rate is 100% or more over a 3-year period - The reporting currency is the functional currency, since the local currency is unstable
What is a sale-leaseback? How is this lease likely to be classified?
- When the seller-lessee sells the asset and immediately leases it back - Essentially there are two transactions: the sale of the asset and the leaseback - Likely to be classified as an operating lease (lessor and lessee) or short-term lease (lessee)
How does an unguaranteed vs. guaranteed residual value affect the lessor's calculation of lease payments? How does it affect the amount the lessee will record as the lease liability?
- Will be the same regardless of unguaranteed or guaranteed (reduce from FV to determine amount to recover through lease payments) - If a guaranteed residual value, take the difference bw guaranteed residual value and estimated salvage value; the PV of that difference plus the PV of the annual lease payments is the amount to capitalize as the lease liability
In a multi-year pledge, what is the amount to be recognized in year 1? In future years beyond year 1?
- Year 1: Contributions Without Donor Restrictions is recognized for net amount expected to be collected within 1 year - Years 2+: Contributions With Donor Restrictions (Time) is recognized at NPV
Can an entity hedge a net investment in a foreign currency denominated AFS debt security? If so, what type of hedge is used and where are gains/losses recognized for both the hedged item and the hedging instrument?
- Yes, an entity can do this - A FV hedge is used - Both the changes in the FV of the hedged item and the changes in the FV of the hedging instrument are recognized in net income
Can an entity hedge a net investment in a foreign operation? If so, what is being hedged, what type of hedge is it, and where is the gain/loss recognized?
- Yes, an entity can do this - The risk of exchange rate changes on translation of the subsidiary's financial statements to USD is being hedged - The FASB classifies it as a FV hedge - G/L recognized in OCI (along with the G/L from the translation adjustment)
What are the 5 steps of revenue recognition?
1. Identifying the Contract with Customers 2. Identifying Separate Performance Obligations 3. Determining the Transaction Price 4. Allocating the transaction price to separate performance obligations 5. Recognizing Revenue When (or as) Each Performance Obligation is Satisfied
In an operating lease, what JEs are recorded by the lessor to: 1.) Record lease payment at the beginning of the year 2.) Recognize lease revenue throughout the year
1.) Dr. Cash Cr. Unearned Lease Revenue 2.) Dr. Unearned Lease Revenue Cr. Lease Revenue
JE for lessor to record at end of direct financing lease for the return of the equipment under each of the following circumstances: 1.) Residual Value is equal to the Guaranteed Residual Value 2.) Residual Value is less than the Guaranteed Residual Value
1.) Dr. Equipment Cr. Lease Receivable 2.) Dr. Equipment - residual value Dr. Cash - difference/plug Cr. Lease Receivable - zero out
JE for tax accrual entry for 1.) Year of originating difference 2.) Year of reversing difference
1.) Dr. Income Tax Expense Cr. Deferred Tax Liability Cr. Income Taxes Payable (or Cash) 2.) Dr. Deferred Tax Liability Cr. Income Taxes Payable (or Cash)
In a business combination, for a contingency that is initially recorded at acquisition, how are fair value changes treated when the contingency is a (1) liability or an (2) asset
1.) Adjust to the higher of acquisition date FV or amount to be recognized under ASC 450 2.) Adjust to the lower of acquisition date FV or best estimate of future settlement amount
In a direct financing lease from the lessor's perspective, what two calculations are needed to determine the deferred gross profit to recognize each period?
1.) Amortization of gross lease receivable (using implicit interest rate - identical to amortization in sales-type lease) 2.) Amortization of net lease receivable (using effective rate); net lease receivable is the gross lease receivable less the deferred gross profit - Reduction in deferred gross profit is the difference between #1 and #2 above
What is the amount of compensation expense when a stock purchase plan is.... 1.) Noncompensatory 2.) Compensatory
1.) Amount paid by employer 2.) Amount paid by employer plus discount
Are the following items eligible for FV Hedge, CF Hedge, or both? 1.) A Recognized Asset or Liability 2.) Firm Commitment 3.) Forecasted Transaction
1.) Both 2.) FV Hedge Only 3.) CF Hedge Only
What two mathematical models are used to evaluate hedging effectiveness?
1.) Cumulative Dollar Offset (the dollar change in hedging instrument relative to the dollar change in hedged item) 2.) Regression Analysis
2 Criteria for a Performance Obligation to be Considered Distinct
1.) Customer can benefit from good/service on its own or with other readily available resources 2.) Good/service is separate from other promises in the contract
For fundraising events, what are the two options for reporting expense?
1.) Deduct from revenue to arrive at a net revenue figure 2.) Report as a separate line in the expense section
How are each of the following items for colleges/universities reflected in the income statement? 1.) Scholarship Allowances 2.) Scholarship Expense 3.) Tuition Waivers
1.) Deduction from gross tuition revenue to derive net tuition revenue 2.) As an expense 3.) As an expense
In a business combination, for contingent consideration that was offered by the acquirer, how are changes recognized when the contingent consideration is (1) equity-based or (2) asset-or-liability based?
1.) Do not remeasure; adjust equity elements when contingency is settled 2.) Adjust to FV at each reporting date and recognize gain/loss in current income
What are the three types of contributions in NFP accounting?
1.) Donated Assets 2.) Donated Services 3.) Pledges to Give (which may have conditions and/or restrictions)
As it relates to the "unconditional" characteristic of non-for-profit contributions, what is a "condition" (i.e. what are the 2 scenarios of a condition)?
1.) Donor has the right to return assets previously transferred 2.) Promisor has the right to be released from the promise to transfer assets
JE to record a legal merger/consolidation when 1.) There is goodwill 2.) There is a bargain purchase
1.) Dr. Assets of S Dr. Goodwill Cr. Liabilities of S Cr. Cash 2.) Dr. Assets of S Cr. Liabilities of S Cr. Cash Cr. Bargain Purchase Gain * Assets and Liabilities are recorded at FV
JE to record a legal acquisition when 1.) There is goodwill 2.) There is a bargain purchase
1.) Dr. Investment in S $ paid Cr. Cash $ paid 2.) Dr. Investment in S FV of Net Assets Cr. Cash $ paid Cr. Bargain Purchase Gain Difference
When a contract has variable consideration (e.g. performance bonus), what are the two methods of measuring the transaction price, and when is each used?
1.) Expected Value Method (use when there are more than two possible outcomes and/or when an entity has other contracts with similar characteristics) 2.) Most Likely Amount Method (use when there are two discrete possible outcomes)
How are lease executory costs (e.g. property taxes, insurance, maintenance) treated when the payments are made to the.... 1.) third-party involved in the expense 2.) lessor (payments are fixed)
1.) Expense as incurred 2.) Include in lease liability amount
How are initial direct costs treated from the standpoint of the lessor if the lease is a(n).... 1.) Sales-type lease 2.) Operating lease
1.) Expense initial direct costs at inception of lease 2.) Defer the initial direct costs and amortize as expense over the term of the lease
For health care organizations, which standards guide each of the following: 1.) NFP 2.) Private (for-profit) 3.) Public
1.) FASB 2.) FASB 3.) GASB
For colleges/universities, which standards guide each of the following: 1.) NFP 2.) Public
1.) FASB 2.) GASB
What are the two types of hedge accounting?
1.) Fair Value (FV) Hedge - the hedged item has fixed cash flows and variable FV (FV Hedge Accounting converts cash flows to variable and FV to fixed) 2.) Cash Flow (CF) Hedge - the hedged item has variable cash flows and fixed FV (CF Hedge Accounting converts cash flows to fixed and FV to variable)
Is an exchange gain or an exchange loss recognized in each of the following situations? 1.) USD weakens and the Accounts Receivable is denominated in a foreign currency 2.) USD strengthens and the Accounts Receivable is denominated in a foreign currency 3.) USD weakens and the Accounts Payable is denominated in a foreign currency 4.) USD strengthens and the Accounts Payable is denominated in a foreign currency
1.) Gain 2.) Loss 3.) Loss 4.) Gain
What are characteristics of a derivative?
1.) Has an underlying (specified price or rate) and notional amount (specified unit of measure) or payment provision (if -> then) 2.) Requires no or very small initial investment 3.) Permits or requires settlement in cash in lieu of delivery of the underlying asset
How is an impairment loss treated for a financial asset classified as a debt security in each of the following situations? 1.) The entity does not expect to hold the debt security until recovery of its carrying amount 2.) The entity expects to hold the debt security until recovery of its carrying amount
1.) If the entity does not expect to hold the debt security until recovery of its carrying amount, the loss is recognized in current income. 2.) If the entity expects to hold the debt security until recovery of its carrying amount, the loss must be separated into two components: (1) Any portion of loss in fair value attributable to credit standing of the issuer is recognized in income and (2) any other loss in fair value is recognized in other comprehensive income, net of tax.
From the acquirer's perspective, how are the following items treated? 1.) In process R&D of the acquiree 2.) Goodwill on the acquiree's books
1.) Include and capitalize 2.) Exclude from capitalization of the assets acquired
How are variable lease payments treated by the lessee when.... 1.) the variable payment amounts are known 2.) the variable payment amounts are not known
1.) Include in lease liability at PV of each amount 2.) Expense the variable payment amount in the period incurred
How are initial direct costs treated from the standpoint of the lessee with regards to... 1.) The right-of-use asset amount 2.) The lease liability amount
1.) Include in right-of-use asset amount and amortize 2.) Do not include as part of lease liability amount
To what hedges/situations do (1) the short-cut method and (2) the critical terms match apply, as it relates to qualitative assessment for hedge accounting?
1.) Interest rate swaps for interest-rate risk 2.) CF hedges of groups of forecasted transactions
With regards to contingent consideration cash flows, in which section of the statement of cash flows would each of the following be: 1.) On the date of acquisition 2.) Within 3 months of acquisition 3.) After 3 months of acquisition
1.) Investing Activity 2.) Investing Activity 3.) Financing Activity up to the contingent liability, and Operating Activity in excess of contingent liability
How are each of the following contract losses accounted for under the completion of production method? 1.) A single period loss 2.) An overall loss
1.) N/A; completion of production method does not involve analysis of profit/loss on a period by period basis 2.) Recognize 100% of loss in period it occurs
Are the following college/university financial statements associated with NFP colleges/universities or government/public colleges/universities? 1.) Balance Sheet 2.) Statement of Net Position 3.) Statement of Revenues, Expenses, & Changes in Net Position 4.) Statement of Activities 5.) Statement of Cash Flows
1.) NFP 2.) Public 3.) Public 4.) NFP 5.) Both
Are the following health care organization financial statements associated with NFP hospitals or government/public hospitals? 1.) Statement of Financial Position 2.) Balance Sheet/Statement of Net Position 3.) Statement of Revenues, Expenses, & Changes in Net Position 4.) Statement of Operations 5.) Statement of Changes in Net Assets 6.) Statement of Cash Flows
1.) NFP 2.) Public 3.) Public 4.) NFP 5.) NFP 6.) Both
How is the CIP account reflected in the following situations? 1.) Costs + Profit > Progress Billings 2.) Costs + Profit < Progress Billings
1.) Net Asset 2.) Net Liability
In financial reporting for not-for-profit entities, what are the two categories of Net Assets?
1.) Net Assets With Donor Restrictions 2.) Net Assets Without Donor Restrictions
Are the following a separate performance obligation, when it comes to revenue recognition? 1.) Assurance-Type Warranties 2.) Extended Service-Type Warranties
1.) No 2.) Yes; allocate portion of transaction price and recognize as time goes on
How many entities are there in each of the following legal forms: 1.) Merger 2.) Consolidation 3.) Acquisition
1.) One single entity 2.) One single entity 3.) Multiple entities; consolidate
If none of the five criteria are met for the lease classification test, what are the two options of how the lessor could classify this?
1.) Operating lease 2.) Direct financing lease
In terms of the acquisition method, as it relates to replacement of share-based payments as a form of consideration, how is this cost treated in each of the following situations: 1.) Replacement is required and relates to services rendered pre-combination 2.) Replacement is required and relates to services rendered post-combination 3.) Replacement is not required
1.) Part of cost of acquired business 2.) Expense in post-combination financial statements as salary expense 3.) Expense in post-combination financial statements as salary expense
What are the two methods of recognizing profit for long term contracts, and in which situations is each used?
1.) Percentage of Completion Method: required when project costs are estimable; recognize profit as completed over time; used for long-term construction contracts 2.) Completion of Production: use when there is a lack of dependable estimates; recognize profit once the work is substantially completed
In financial reporting for not-for-profit entities, what are the two functional categories?
1.) Program Services (expenses that are related to the primary mission of the organization; results in the goods/services provided by the organization) 2.) Supporting Services (expenses that do not directly relate to the primary mission of the organization; Management & General and Fund Raising)
How are (1) contractual and (2) non-contractual contingencies of the acquiree recognized by the acquirer?
1.) Record at FV 2.) Record at FV if more likely than not, otherwise do not recognize
When the functional currency is not the local currency or the reporting currency, how do you convert those financial statements?
1.) Remeasure from local currency to functional currency; will have a remeasurement adjustment in the I/S 2.) Translate from functional currency to reporting currency; will have a translation adjustment in OCI
How are the following items treated, as it relates to college/university reporting? 1.) Operating Grants (Public college/university) 2.) Capital Grants/Gifts (Public college/university) 3.) Grants for Private college/university
1.) Reported as nonoperating revenue 2.) Reported after nonoperating revenue (expenses) 3.) Reported as operating revenues (below tuition revenue); section depends on whether there are donor restrictions
What are the two components of a financial instrument contract?
1.) Results in the exchange of cash or ownership interest 2.) Imposes on one party a contractual obligation and on another party a contractual right
How are the following foreign currency hedges accounted for? 1.) Investment in available for sale securities 2.) Net investment in foreign operation
1.) Same as with a FV hedge 2.) As a FV hedge, but hedge gain/loss offsets translation adjustment in OCI
What are the 4 criteria in NFP accounting for being able to recognize a donated service as both a revenue and expense at fair value?
1.) Services required specialized skills that would otherwise have been purchased 2.) Person possesses those skills from #1 above 3.) The value of the services can be measured 4.) The entity controls the employment and duties of the service provider/donor
What three criteria must be met for a NFP to elect NOT to capitalize a collection?
1.) The collection is held for public exhibition, education, or research rather than for financial gain 2.) The collection is protected and preserved 3.) Subject to a policy that requires proceeds of items sold to be used to acquire other items for the collection or to maintain the collection (the latter part of this is pending)
What are the 5 criteria for a lessee to consider a lease a finance lease? How many criteria must be met for it to be considered a finance lease?
1.) Title to the leased asset transfers to the lessee 2.) Lessee has the option to buy the leased asset at the end of the lease at an amount viewed as a bargain (called a bargain purchase option) 3.) Lease term is for the major part (75% or more) of the remaining useful life of the asset 4.) PV of the minimum lease payment amounts to or exceeds substantially all (90% or more) of the fair value of the leased asset at lease inception 5.) The asset is specialized in nature and has no alternative use to the lessor at the end of the lease term If any one of these criteria are met, then the lease is a finance lease
What are the two ways control of a business may be obtained?
1.) Transferring consideration to the acquired entity or its owners 2.) Without transfer of consideration, like by contract or through the lapse of veto rights held by minority shareholders or acquiree reacquires enough of its own stock so that a remaining shareholder has a controlling interest
In not-for-profit accounting, what are the 4 characteristics of a contribution?
1.) Unconditional (if a measurable performance-related barrier, limited discretion, or purpose stipulation, then it is conditional) 2.) Nonreciprocal 3.) Voluntary 4.) Not an ownership investment
What are the 4 types of Not-For-Profit Organizations?
1.) Voluntary Health and Welfare Organizations 2.) Other Not-For-Profit-Organizations 3.) Healhcare 4.) Colleges and Universities
An NOL carryforward may offset up to _____% of taxable income in a given year
80%
A merger occurs between Entity A and Entity B. In terms of legal form, what is the end result?
A + B -> A (Entity B no longer exists; Entity A is the sole survivor)
A legal acquisition occurs between Entity A and Entity B. In terms of legal form, what is the end result?
A + B -> A + B (both entities remain after the acquisition; for accounting purposes, they consolidate results)
A consolidation occurs between Entity A and Entity B. In terms of legal form, what is the end result?
A + B -> C (Entity C is the new entity and is the sole survivor)
What type(s) of hedge can be used to hedge a foreign currency denominated forecasted transaction?
A CF hedge only (for both the change in the price of the commodity and for the foreign exchange risk)
What are embedded derivatives?
A derivative that is embedded in a host contract (e.g. debt instruments, equity instruments, leases, etc.)
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
What are option contracts?
A right to buy or sell
Definition of a business combination
A transaction (consideration is transferred) or event (could be lapse of contract terms) where an entity obtains control (>50% voting ownership) of a business (integrated set of assets/activities capable of providing a return)
What does retrospective application mean?
All financial statements for each prior period presented should reflect the new accounting principle Cumulative effect reflected in beginning assets/liabilities and opening balance of RE for the earliest period presented
When you bifurcate a hybrid instrument into the host instrument and the embedded derivative, how do you account for this?
Allocate carrying value of hybrid contract between new embedded derivative instrument and the remaining host contract (derivative instrument at FV and remaining value to host contract)
If multiple performance obligations are in a contract, how is transaction price generally allocated?
Allocated proportionately based on standalone prices (can estimate this if needed)
In a finance lease, what is the calculation for the amortization expense the lessee should record?
Amortization Expense = Right-of-Use Asset / Shorter of Lease Term or Asset's Useful Life
What is pushdown accounting?
An acquiree records the revaluation of assets (including goodwill) and liabilities directly on its books; plug in JE is "Revaluation Capital," an equity account that is eliminated upon consolidation
Is a change from an erroneous accounting principle to a correct principle considered an error correction, or a change in principle?
An error correction
What is the difference between an exchange and a contribution?
An exchange occurs when the resource provider is receiving commensurate value in return for the resources transferred
How is an impairment loss treated for a financial asset classified as available for sale?
An impairment loss must be reported through income
In terms of the acquisition method, what is contingent consideration? How is it recorded if the consideration is cash? How is it recorded if the consideration is equity?
An obligation or right that depends on future outcome - If cash, record a contingent liability - If equity, record as equity
What are forward contracts?
An obligation to buy or sell in the future at a price set now; facilitated directly through contracting parties
What are futures contracts?
An obligation to buy or sell in the future at a price set now; facilitated through a clearinghouse or exchange
How is a change in depreciation methods accounted for?
As a change in accounting estimate; prospectively
How is a change in estimated warranty costs accounted for?
As a change in estimate, i.e. prospectively
If funds are received by a NFP that have a condition, how is this recorded?
As a liability, until the condition is met
In terms of the acquisition method, how is a right to return recorded by an acquirer?
As a receivable (asset)
If an accounting estimate was based on negligence or bad faith, how is the new estimate treated?
As an error correction, i.e. restatement
If there is an accounting principle change that cannot be separated from an estimate change, how is this accounted for?
As an estimate change (i.e. prospectively)
In a multi-year pledge in NFP accounting, for the future year portions (where revenue was recognized at NPV), if the NPV of the pledge increases at the end of the period, how is this increase treated?
As contribution revenue (NOT as interest)
In an operating lease, how does a lessor recognize lease revenue (conceptually speaking)?
As time passes and the lease performance obligation is fulfilled
How are derivatives recorded?
At FV
In terms of the acquisition method, at what value is contingent consideration measured?
At fair value as of the date of acquisition
When a contract is paid with noncash consideration, at what amount is revenue recorded?
At the fair value of the consideration received
How are auxiliary services (e.g. residence halls, food services) reported for colleges/universities?
Auxiliary revenues and expenses are each reported as a single line item in the operating section of the income statement
What are scholarship allowances, as it relates to accounting for colleges/universities?
Awards to students to cover tuition (e.g. Pell Grants) that are reduction in charges and do not involve an actual payment of resources to the students
When there are multiple performance obligations in a contract, how is transaction price allocated?
Based on proportional fair value of each performance obligation's standalone price in relation to the total standalone prices of all performance obligations in the contract
When converting foreign financial statements using translation or remeasurement, are GAAP adjustments done before or after translation?
Before translation
What type(s) of hedge can be used to hedge a foreign currency denominated firm commitment?
Both a FV hedge (for the change in the price of the commodity) and a CF hedge (for the foreign exchange risk)
Are gift card and container deposit liabilities definite or contingent liabilities?
Both are definite liabilities
In a CF hedge, how are changes in the FV of the the hedging instrument treated? Changes in the present value of CF associated with the hedged item?
Both are recognized in OCI, until the period(s) in which the hedged item affects income, at which point the deferred gain or loss remaining in accumulated other comprehensive income should be reclassified to (and recognized in) income in the period(s) in which the hedged items affect income
What are Voluntary Health and Welfare Organizations?
Broad based organizations that provide free or low-cost services with financial support derived from voluntary contributions and grants; the resource providers are NOT the primary recipients of services
JE (and amounts) to record sale of asset (for the lessee and for the lessor) in a sale-leaseback
Buyer-Lessor: Dr. Equipment - FV Cr. Cash - FV Seller-Lessee: Dr. Cash - FV Dr. A/D - zero out Dr./Cr. Loss/Gain on Sale - plug Cr. Equipment - cost/zero out
How are expenses reported for health care organizations?
By function
If a donation is made with a time restriction, and that time restriction is met in the same period, how is this treated?
Can be treated as not having a time restriction (i.e. as unrestricted support)
With regards to stock option plans, what are the two methods of adjusting for forfeitures?
Can recognize forfeitures as they occur, or can estimate from the grant date and revise as necessary over the service period
In financial reporting for not-for-profit entities, what is included in the Investing Activities?
Changes in cash restricted for long-term purposes
In a principal-agent relationship, what kind of revenue does the agent recognize?
Commission revenue
What is the accounting treatment when a stock award is forfeited?
Compensation expense is reversed; prior year statements are not adjusted; treated as a change in estimate
In financial reporting for not-for-profit entities, what is included in the Financing Activities?
Contributions & investment earnings that are restricted for capital asset-related, endowment, or other long-term purposes
Calculation of intrinsic value for an option
Difference between strike price and market price
JE in import transaction on mark-to-market (B/S) date (assume USD strengthened)
Dr. A/P Cr. FX Transaction Gain
JEs in export transaction on settlement date (assume USD weakened between last mark-to-market date and settlement date)
Dr. A/R Cr. FX Transaction Gain Dr. Investment in FC Cr. A/R Dr. Cash Cr. Investment in FC
JE in export transaction on transaction date (assume inventory is sold)
Dr. A/R Cr. Sales
JE when stock award is vested
Dr. APIC - Restricted Stock Cr. C/S Cr. APIC - C/S
In a finance lease, regardless of whether the payments are at the beginning or end of the period (annuity due or ordinary annuity), what JE does the lessee need to record at the end of the period?
Dr. Amortization Expense Cr. Right-of-Use Asset
If an asset is being transferred as consideration in an acquisition to the shareholders of the acquiree (assume that asset's FV is higher than its carrying value), what JEs are recorded by the acquirer?
Dr. Asset Cr. Gain on Asset Revaluation Dr. Investment in S Cr. Asset (at FV) Cr. Cash (if any)
JE to record donation of an asset other than cash to a NFP (assume no restrictions or conditions) At what amount is this recorded?
Dr. Asset (e.g. Inventory of Supplies) Cr. Net Assets Without Donor Restrictions
JE to record a legal merger or consolidation at acquisition date
Dr. Assets Received Cr. Liabilities Assumed Cr. Consideration Given
JE to record cash gift, without a donor-imposed restriction or condition
Dr. Cash Cr. Contribution - Without Donor Restrictions
JE to record cash donation with purpose restriction
Dr. Cash Cr. Contributions - With Donor Restrictions
JE to record cash donation with timing restriction
Dr. Cash Cr. Contributions - With Donor Restrictions * Funds will reside in Net Assets with Donor Restrictions until the time in which it may be used arrives
JE to record leaseback part of transaction for a sale-leaseback from the buyer-lessor's perspective (assume an ordinary annuity cashflow)
Dr. Cash Cr. Lease Revenue Dr. Depreciation Expense Cr. A/D
What JE is recorded by the seller-lessee in a failed sale/financing transaction (i.e. failed sale of a sale-leaseback)
Dr. Cash Cr. Note Payable
JE to record cash gift, with a donor-imposed condition
Dr. Cash Cr. Unearned Contribution (liability)
JE at exercise of a stock option plan
Dr. Cash (# shares * strike price) Dr. APIC - Stock Options (compensation expense) Cr. C/S (par) Cr. APIC - Stock Options Exercised (plug)
JE (and amount) for lessor to record first payment received from the lessee in a sales-type lease (assume annuity due)
Dr. Cash (full payment amount) Cr. Lease Receivable (full payment amount)
JE to record receipt of funds for a permanent endowment in NFP accounting
Dr. Cash - Restricted for Endowment Cr. Contributions - With Donor Restrictions
JE (and amounts) to record lessor's receipt of lease payment (assume an ordinary annuity) in a direct financing lease
Dr. Cash - annual payment amount Dr. Deferred Gross Profit - appropriate amortization from two amortization tables Cr. Lease Revenue (based on effective rate and net lease receivable; interest amount) Cr. Lease Receivable (based on implicit rate and gross lease receivable; principle amount)
Accounting for short-term lease from the lessor's perspective
Dr. Cash/Lease Receivable Cr. Lease Revenue
JE for each year of service period of stock award
Dr. Compensation Expense Cr. APIC - Restricted Stock
JE to record compensation expense of a stock option plan
Dr. Compensation Expense Cr. APIC - Stock Options
JE to record compensation expense for a stock appreciation right plan reflected as a liability How is this JE different if the SAR is reflected as equity?
Dr. Compensation Expense Cr. SAR Liability Credit would go to APIC if reflecting as equity
JE to record compensatory stock purchase plan
Dr. Compensation Expense ($ paid by employer + discount) Dr. Cash ($ paid by employee) Cr. C/S Cr. APIC
JE to record noncompensatory stock purchase plan
Dr. Compensation Expense ($ paid by employer) Dr. Cash ($ paid by employee) Cr. C/S Cr. APIC
As it relates to health care organizations, how are contractual adjustments accounted for?
Dr. Contractual Adjustments (contra revenue) Cr. Accounts Receivable This entry is recorded after the gross revenue entry is recorded
JE and amount in year of NOL
Dr. Deferred Tax Asset (future enacted tax rate * NOL) Cr. Income Tax Benefit Due to Loss Carryforward
JEs in import transaction on settlement date (assume USD weakened between last mark-to-market date and settlement date)
Dr. FX Transaction Loss Cr. A/P Dr. Investment in FC Cr. Cash (USD) Dr. A/P Cr. Investment in FC
JE in export transaction on mark-to-market (B/S) date (assume USD strengthened)
Dr. FX Transaction Loss Cr. A/R
JE in year where we use part of NOL to reduce taxable income
Dr. Income Tax Expense Cr. DTA Cr. Income Taxes Payable or Cash
JE for Tax Accrual
Dr. Income Tax Expense plug Dr. Deferred Tax Asset $ received later Cr. Income Tax Payable $ to pay now Cr. Deferred Tax Liability $ to pay later
In a finance lease, what JE is recorded by the lessee for the first payment (assume it is an ordinary annuity)?
Dr. Interest Expense Dr. Lease Liability Cr. Cash
JE in import transaction on transaction date (assume inventory is purchased)
Dr. Inventory Cr. A/P (USD)
What is the JE to retrospectively adjust for a change in inventory methods, assuming that the inventory balance needs to be increased?
Dr. Inventory Cr. Beginning Retained Earnings
JE to record a legal acquisition at acquisition date
Dr. Investment in Subsidiary Cr. Consideration Given
Accounting for short-term lease from the lessee's perspective
Dr. Lease Expense Cr. Cash/Lease Payable
In an operating lease, what JE is recorded by the lessee to recognize the lease expense at the end of the year?
Dr. Lease Expense (full annual payment amount) Cr. Right-of-Use Asset (portion applied to principal) Cr. Lease Liability (interest portion = % * carrying value of liability)
In an operating lease, what JE is recorded by the lessee for the first payment (assume it is an annuity due)? At what amount?
Dr. Lease Liability Cr. Cash Amount is the full annual payment amount
In a finance lease, what JE is recorded by the lessee for the first payment (assume it is an annuity due)? What JE is recorded for the end of that period? What JE is recorded for the payment at the beginning of the next period?
Dr. Lease Liability Cr. Cash Dr. Interest Expense Cr. Lease Liability Dr. Lease Liability Cr. Cash
JE (and amounts) for lessor to record direct financing lease at the inception of the lease
Dr. Lease Receivable - fair value of asset Cr. Deferred Gross Profit - plug Cr. Asset/Equipment - cost of asset
JE (and calculations) for lessor to record sales-type lease at the inception of the lease (using the gross method)
Dr. Lease Receivable - undiscounted total of $ payments + residual value Dr. COGS - cost Cr. Unearned Interest - plug Cr. Asset - cost Cr. Sales Revenue - PV of annual lease payments/FV
JE to record multi-year pledge, assuming 10% is estimated to be uncollectible
Dr. Pledges Receivable (full amount) Cr. Allowance for Uncollectible Pledges (total amt estimated to be uncollectible) Cr. Contributions w/o Donor Restrictions (net of uncollectible) Cr. Contributions w/ Donor Restrictions (NPV and net of uncollectible) Cr. Discount on Pledges Receivable
In a finance lease, what JE is recorded by the lessee at the inception of the lease to record the lease?
Dr. Right-of-Use Asset Cr. Lease Liability
In an operating lease, what JE is recorded by the lessee at the inception of the lease to record the lease? At what amount?
Dr. Right-of-Use Asset Cr. Lease Liability Amount is the PV of amount to be recovered through lease payments
JE to record leaseback part of transaction for a sale-leaseback from the seller-lessee's perspective (assume an ordinary annuity cashflow) - JE to record lease at inception - JE at year-end
Dr. Right-of-Use Asset Cr. Lease Liability Dr. Lease Expense - annual payment Dr. Lease Liability - principle component of amort. table Cr. Right-of-Use Asset - principle component Cr. Cash - annual payment
JE to record exercise of a stock appreciation right plan reflected as a liability How is this JE different if the SAR is reflected as equity?
Dr. SAR Liability Cr. Cash Debit would go to APIC if reflecting as equity
JE for lessor to accrue interest in a sales-type lease (assume annuity due) and then to record the receipt of the lessee's payment the next day
Dr. Unearned Interest Cr. Interest Revenue Dr. Cash Cr. Lease Receivable
What are concentrations of credit risk disclosures?
Entities must disclose significant concentrations of credit risk (possibility of loss from failure of counter party to perform according to the terms of the contract) associated with financial instruments; Concentration of credit risk means there are contracts of material value with parties that have the same characteristics (same industry, same country or geographic region, similar economic characteristics)
What are Other Not-For-Profit Organizations?
Essentially a not-for-profit that benefits their members; resource providers CAN be primary recipients of services
What is an FX options contract?
Establishes a right to buy or sell a foreign currency, but not the obligation to do so
What are swap contracts?
Exchange of cash flow stream usually associated with interest on debt; fixed interest payments for variable rate payments
Non-Governmental Not-for-Profit Organizations follow which set of accounting standards?
FASB
In an operating and finance lease, how is the annual lease payment calculated from the lessor's perspective?
FV of Equipment Less: PV of [Un]guaranteed Residual Value Divided by: PV Factor of Annuity Due for X years at X%
If a certain % is provided for stock option plan forfeitures, what is the formula to calculate compensation expense?
FV of Options * (1 - %)^n Where "n" is the # of years in the service period
What does it mean for fair value to be practicable to estimate?
Fair value estimates can be made without incurring excessive costs; it is a cost/benefit assessment
Over what period of time is compensation expense recognized for a stock appreciation right plan?
From the grant date up to and including the exercise date (compare FV of stock at those dates)
Which contracts are more liquid: futures contracts or forward contracts?
Futures contracts are more liquid, because they are facilitated through a clearinghouse or exchange
Government-run healthcare and government-run colleges/universities follow which set of accounting standards?
GASB
Calculation for Net Patient Revenues
Gross Patient Revenues Less: Charity Services Less: Contractual Adjustments Less: Uncollectible Accounts ---------------------------------------- Net Patient Revenues
How is net tuition revenue determined?
Gross Tuition Revenue Less: Uncollectible Accounts Less: Scholarship Allowances
What are the components of income tax expense/provision
Has a current and a deferred component
What is hedging?
Hedging is a risk management strategy which involves using offsetting (or counter) transactions or positions so that a loss on one transaction or position would be offset (at least in part) by a gain on another transaction or position (and vice versa)
When do you need to bifurcate?
If the host contract and the embedded derivative are NOT clearly and closely related (i.e. triggering event for derivative is related to host instrument), then the derivative must be separated
At what value are FX transactions measured and reported? At what rate?
In USD, using the spot rate at the date of the transaction
Where are exchange losses or gains reported for foreign currency denominated transactions?
In current-period income statement as component of income from continuing operations.
In what part of the annual report are the SEC's required qualitative and quantitative disclosures located?
In the management's discussion and analysis
Formula for effective tax rate
Income Tax Expense / Pretax GAAP Income
What are initial direct costs, as it relates to leases?
Incremental costs incurred because of the execution of a lease
How long can an NOL be carried forward?
Indefinitely
If there is a presence of future taxable income, future taxable differences, or certain tax planning strategies in place, does this tend to support or not support that a valuation allowance for deferred tax assets is needed?
Indicates that a valuation allowance is NOT needed
How does market price of a stock and changes in market price affect the compensation expense during the service period of a stock option plan?
It has not effect
How is sales revenue recorded when there is consideration payable to a customer (e.g. volume discount or discount for early payment)?
It is recorded net of that discount, assuming it is likely that the customer will take advantage of the discount; if the customer does not take advantage of the discount, credit Sales Discount Forfeited (Other Revenue account)
If a hedged forecasted transaction is no longer expected to occur, how should the deferred gain or loss in accumulated other comprehensive income be treated?
It should be reclassified to (and recognized in) income immediately
How would a FV hedge affect a fixed interest rate?
It would convert the fixed rate to a floating rate
How would a CF hedge affect a variable cash flow?
It would convert the variable CF to a fixed CF
Monetary vs. Non-monetary
Monetary - to be received/settled with a fixed and determinable cash value; A/P, A/R, cash & cash equivalents, etc. Non-Monetary - Prepaids, inventory, fixed assets, etc.
What is time value for future and forward contracts?
Most commonly calculated as the time value of money
When an entity wants to do a change in accounting principle, what must it do?
Must justify that the new accounting principle/method is preferable; publicly traded companies obtain letter of preferability from their auditors which they file with SEC
If both the host instrument and an embedded derivative are accounted for/measured at fair value with changes in FV reported in earnings, is there a need to bifurcate?
No
Is a contra valuation account needed for a DTL?
No
May fair values of different financial instruments be netted?
No
What is a perfect hedge?
No possibility of future gain or loss
As it relates to CF hedges, can business combinations qualify for CF hedging? A parent's equity in a subsidiary? An entity's own equity instruments?
No to all
With a prospective application of a change in accounting estimates, do we record a cumulative effect in beginning retained earnings? Are prior statements restated?
No to both
Do NFP entities have an option to imply a time restriction on depreciable property donated to the NFP?
No, they do not; this option was eliminated by ASU 2016-14
Is fund-level reporting required for colleges/universities?
No; financial reporting is entity-wide
Are deferred tax assets/liabilities classified in the balance sheet as current or noncurrent?
Noncurrent
Do the acquiree's or acquirer's operating results (income/loss) up to the date of combination enter into determination of consolidated net income as of the date of the combination?
Only the acquirer's (acquiring firm's) operating results enter into consolidated net income The acquiree's operating results up to the date of the combination will be closed (or treated as closed) to its retained earnings.
The statement of revenues, expenses, and changes in net position for a governmental healthcare are required to distinguish between ________________ and _______________________ activities
Operating and nonoperating
Formula for Option Value (as it relates to intrinsic value and time value)
Option Value = Intrinsic Value + Time Value
What is a term endowment?
Principal is donated by an external party to be invested and then can be spent after passage of time (at which point it is reclassified to net assets without donor restrictions)
What does restatement mean, as it relates to an error correction?
Prior period financial statements are restated The earliest balance in RE will include an adjustment for the effect on all years prior to the earliest balance
How is a change in estimate accounted for?
Prospectively
How is a change to equity method accounting accounted for?
Prospectively
In a business combination, once the measurement period has closed, how are adjustments to the changes in fair value estimates treated?
Prospectively
How are changes in forfeitures accounted for, with regards to stock option plans?
Prospectively; current period amount booked should catch up YTD to total amount needing to be recognized to date
JE to record expenditure of cash on an expense that meets a purpose restriction
Reclassifying Entry: Dr. Net Assets with Donor Restrictions Cr. Net Assets without Donor Restrictions Expense Entry: Dr. Expense - Net Assets without Donor Restrictions Cr. Cash
How are each of the following contract losses accounted for under the percentage of completion method? 1.) A single period loss 2.) An overall loss
Recognize entire loss in period it occurs for bot types of losses
How is an error correction accounted for?
Restatement
How are changes in the fair value of a derivative treated?
Results in a gain/loss recognized in earnings, unless it meets specific criteria for hedging
If an accounting standard update does not specify transition guidance, how is the adoption treated?
Retroactively (except for PCC standards) Not considered a change in accounting principle if it is the initial adoption of a principle to new events or for transactions that were immaterial in the past
How is a change in the reporting entity (e.g. first time consolidation or changes in the set of entities in the consolidate group) accounted for?
Retrospectively (as a change in accounting principles)
How is a change in accounting principle/method accounted for (i.e. from one acceptable GAAP to another acceptable GAAP)?
Retrospectively; adjust retained earnings at the beginning of the year of change, and prior financial statements are retrospectively adjusted
What are bill-and-hold arrangements?
Seller retains physical possession of the goods for a substantive reason
What are stock appreciation rights?
Stock-based compensation plans that base total compensation on an increase in the firm's stock price over a period of years
How is the amount of gross profit to recognize determined under the percentage of completion method?
Take total costs incurred to date / Total Estimated costs Multiply that % by total estimated gross profit of the contract Back out gross profit recognized in previous years to determine current year gross profit to recognize
The deferred tax provision is based on what?
The change in assets/liabilities
How is a reacquired right asset treated in the future periods after a business combination?
The cost is amortized
Definition of reporting currency
The currency in which the final (often consolidated) statements are prepared (e.g. USD)
Definition of local/recording currency
The currency in which the foreign books and initial financial statements are prepared
Definition of functional currency
The currency of the primary economic environment in which an entity operates and generates net cash flows; can be the local currency, the reporting currency, or an "other" currency
What is the acquisition date?
The date on which the acquirer obtains control of the business
Define spot rate
The exchange rate at current date.
Define forward rate
The exchange rate today for delivery on a specified future date.
What is the amount of compensation expense recorded for a stock option plan? How is that expense recognized?
The fair value of the option at the grant date, adjusted for forfeitures Amortized SL over the service period
At what amount is total compensation expense recorded for stock awards?
The fair value of the stock at the grant date
What is the value of an NOL carryforward?
The future enacted rate * NOL loss The tax saved, not the loss amount
What rate should be applied when calculating deferred tax accounts?
The future enacted tax rate
From the lessee's perspective, how is a bargain purchase option treated?
The lessee includes the present value of the bargain purchase option in calculation of lease liability
In an operating lease, who records depreciation on the asset?
The lessor (they own the asset and continue to record it on their B/S)
Which foreign financial statement conversion method is also known as the temporal method?
The remeasurement method
How are the acquisitions of "inexhaustible fixed assets" (aka collections) treated in NFP accounting?
The transaction (asset and contribution revenue) is not recorded and is not reflected in the face of the financial statements; it is only disclosed in the notes
What do the below list of items have in common? - Tax exempt interest - Fines & penalties - Life insurance premiums on key employees where the entity is the beneficiary - Proceeds from life insurance policy described above - Depletion differences - 50% of meals expense - Dividends Received Deduction (DRD)
They are all permanent differences, with regards to income tax
In a FV hedge, how are the hedging instrument and hedged item recognized on the B/S?
They are both adjusted to FV at the B/S date
How are acquisition costs treated?
They are expensed as incurred and not treated as part of the cost of the acquired business
In a CF Hedge, how are gains/losses for the hedged item and on the hedging instrument treated?
They are included in OCI; when the the transaction impacts net income, reclassify from AOCI to the applicable line item in net income for the line item that is being hedged
In a FV Hedge, how are gains/losses for the hedged item and on the hedging instrument treated?
They can be netted against each other and are included in net income in the line item that is being hedged
In what way do progress billings affect the recognition of contract profit?
They do not affect contract profit
With regards to revenue recognition, how are nonrefundable upfront fees treated?
They represent a receipt of payment in advance and the revenue should be recognized over the period of time that services are provided
What is the purpose of a foreign currency hedge?
To mitigate the changes in the value of assets, liabilities, forecasted transactions, and firm commitments that are denominated in a foreign currency; can use either cash flow hedge or fair value hedge
What is the relationship of the "Unearned Interest" account in relation to "Lease Receivable"?
Unearned Interest is a contra account to Lease Receivable Net Lease Receivable = Gross Lease Receivable - Unearned Interest
In governmental healthcare, what types of contributions would fall under "nonoperating gains?"
Unrestricted bequests/cash donations, donated services, unrestricted earnings on investments
What is an import transaction?
When a US company purchases goods or services denominated in a foreign currency
What is a net operating loss?
When deductions exceed taxable income (i.e. negative taxable income)
In what circumstance is a valuation allowance needed for deferred tax assets?
When it is more likely than not (>50%) that a certain portion of the DTA will not be realized
In what circumstance does a lessor have a direct financing lease?
When none of the 5 lease criteria are met by the lessor and lessee alone; criteria #4 (90% of asset's fair value is recovered) is met only because a third-party guarantees the residual value PV of minimum lease payments by lessee + PV of guaranteed residual value from a third-party guarantor = Substantially all (90% or greater) of the asset's fair value
In what circumstance can the economic use test and the PV % test NOT be used to determine if a lease can be classified as a finance lease?
When only 25% of the total useful life of the asset remains
What is an export transaction?
When the US company sells a good or service denominated in the foreign currency, and the collection from that foreign entity is in foreign currency
When are stock appreciation rights reflected as a liability, versus equity?
When the cash is to be paid, or if the employee can elect to receive cash, it is reflected as a liability
What is bifurcation?
When the embedded derivative is separated from the host contract and accounted for as a freestanding derivative
In what scenario do you use both remeasurement AND translation to convert foreign financial statements?
When the functional currency is not the local currency or the reporting currency
Under what circumstances do stock options expire? What is the JE required to reflect this?
When the stock price fails to rise above the option exercise price Dr. APIC - Stock Options Cr. APIC - Expired Stock Options
What is a short-term lease?
When the term of a lease is less than 12 months
In classifying a lease, what must be considered before the 5 criteria are considered?
Whether the lease is cancelable (we typically assume a lease is noncancelable); if it's cancellable, then the 5 criteria cannot be applied
What are collections, as it relates to NFP accounting?
Works of art, historical treasures, and similar assets
Do financial assets need to be assessed for impairment?
Yes
Do permanent differences impact the effective tax rate?
Yes
Do temporary differences cause changes in the deferred tax accounts
Yes
Does retrospective application have an impractibility exception?
Yes, if the entity has made every effort but is unable to make a reasonable estimate of the impact of the change or it requires significant estimates that cannot be objectively made for prior periods (including management's intent)
Are retrospective adjustments and their cumulative effect reported net of tax?
Yes, include the tax impact
Is there an exception to the requirement for quantitative assessments with regards to hedging?
Yes, qualitative assessments are permitted if all aspects of hedging relationship exactly match and there is support that the hedge will be highly effective in subsequent periods
