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My CPA-FARmodule13

Notecards I made from Wiley's 2012 CPA Exam Review

Define Future Value (FuV) of an Amount. the amount available at some point in the future if amount is deposited today and earns compound interest for "n" periods -Can make a PV table into FV by dividing 1 by the PV number
Define Present Value (PV) of a Future Amount The amount you would pay now in order to receive a future amount after "n" periods getting an "i" interest rate -Can make a FV table into PV by dividing 1 by the FV number
What extra steps are needed when interest is compounded more than once a year? 1. multiply n by the number of times interest is compounded annually. Gives the total number of interest periods 2. Divide i by the number of times interest is compounded annually. Gives appropriate interest rate for each interest period
Define FuV of an Ordinary Annuity amount available n periods in the future as a result of a deposit of an amount (Amt) at the end of every period 1 thru n
Define PV of an Ordinary Annuity the value today, given a discount rate, of a series of future payments
What is meant by the phrase "annuity due"? How do you calculate this in a regular PV of a Future Amount problem? PV of an Ordinary Annuity? 1. the payments are made at the beginning of each year instead of at the end 2. n-1 to find the number of periods 3. Grab # from table x (1+i) to convert to an annuity due factor
How do is PV/FuV calculated? Annuity? 1. PV or FuV= # from table x Lump Sum 2. PVA or FuVA= # from table x periodic payment amount
In dealing with a notes payable, define discount? Premium? 1. Face amount of the note (amount to paid) is greater than the present value 2. Face amount of the note is less than the notes present value
How do you account for a note exchanged for cash AND unstated rights/ privileges (agreement to pay cash for loan and offer discount on goods)? 1. Determine PV of note and PV of unstated right/privilege 2. Determine one PV above and then find difference of face value of note and PV to find PV of undetermined one
In a note exchanged for a noncash asset, how is the PV of the note calculated? assume the interest rate is fair. face amount of the note is assumed to equal PV - means no discount/premium to be considered - calculate interest rate by multiplying rate x face value
When is the assumption that the interest rate is fair not true? 1. interest rate not stated 2. stated rate is unreasonable (low and high) 3. stated face amount of the note is materially different from current market value of a similar note
If the interest rate is not fair, and the note was transferred in a non cash transaction, how is PV calculated? 1. If goods exchanged have a reliable fair market value this is the present value of the note 2. If not, then check market value. If present the market value= PV 3. If not again, then interest rate must be imputed. Use imputed rate to determine PV of no
What should short term notes be recorded at? long term? 1. Maturity Value 2. Present value
When a note is exchanged at cash only, what should the PV be recorded as? the cash exchanged. May be less/greater than the face amount of the note and then a discount/premium is present
When a loan origination cost is incurred by a lender how is the cost recognized? What about a loan origination fee charged to the borrower by the lender? 1. defer and recognize costs over the life of the loan (add to principal) when costs are directly related and wouldn't have been charged if not for the loan 2. Both lender/borrower defer and recognize fee over life of the loan (both deduct from principal
What is the relationship between discount/premium and interest expense? Discount is additional interest over life, premium is a reduction of interest expense over the life of the loan. -Both amortized to interest expense over life using effective interest rate
Under IFRS, what borrowing costs must be capitalized? if relate to acquisition, construction, or production of a qualifying asset (one that takes a substantial amount of time to get ready for use)
When investing in bonds, and the market rate exceeds the contract rate, how does this impact the book value and maturity value? The book value will be less than the maturity value (Sell at a discount)
How is the market value of a bond calculated? Equal to the maturity value and interest payments discounted to the present
What is the difference between a term bond and a serial bond? Term bond- mature on a single date Serial bond- mature in installments
If a company elects the fair value option for reporting a bond, what adjustments should be included? when must this election be made? can it be on a case by case basis? How are premium/discounts recognized? Gains/losses in reevaluating? 1. nonperformance risk, credit risk, or instrument-specific credit risk 2. Date item is recognized 3. Yes, must apply to entire instrument tho 4. Not reported 5. Include in income statement for current period
When are bonds issued/acquired at the face amount? premium? discount? 1. Yield amount= face amount 2. Yield amount< face amount 3. Yield amount> face amount
What are the steps of valuing a bond? 1. Find present value of the bond price using the market rate 2. Find present value of annuity of interest using the market rate 3. add figures together
How is the effective interest method amortization always calculated? Effective interest rate x Net book Value - Effective interest rate= amount of actual interest (5% market rate paid semi annually=2.5%)
If the reporting period does not coincide with interest dates of a bond, what adjusting entries must be made? 1. Show accrued interest expense/revenue with payable/receivable 2. Show accrued premium/bond investment opposite interest expense/revenue
Define convertible bonds. What happens when they are issued? 1. having the right to convert the bonds into common stock 2. at issue, no value is given to the conversion feature
Describe the approach of accounting for bond conversions by valuing at cost? Debits to bonds payable and bond premium (credit bond discount) equal to book value of the bond Credits to common stock and paid excess of par equal to book value -No gain/loss is recorded
Describe the approach of accounting for bond conversions by valuing at market? - Either the market of stocks or bonds (whichever more reliable) - Use book value of other item - Recognize gain/loss as represent a culmination of earnings process
When dealing with debt issued with detachable purchase warrants, how is the money allocated? 1. Take the market value of bond and warrant and add them together 2. Find the percentage make up of the WARRANT in this number 3. multiply the percentage by the issue price 4. allocate number to PIC-Stock warrants 5. Bond- market value to bonds payab
Is debt considered extinguished when it is refinanced with other debt? When creditors agree to grant relief to debtors? Legally released from being primary obligor of debt by judge or creditor? 1. Yes 2. No 3. Yes
How do you calculate the gain/loss of a debt extinguishment? When is it recognized? 1. Difference between bond's reacquisition price and its Face value -/+ premium/discount and issue costs (i.e BV-Cash Paid) 2. In period debt is extinguished
Under IFRS, what is meant by the term "compound instruments?" Financial instruments with characteristics of both debt and equity (convertible bonds, bonds with detachable warrants)
Under IFRS, how are compound instruments accounted for? -separate the instrument into its components of debt and equity - liability component is initially recorded at fair value, residual value is assigned to the equity component - each component is presented in its appropriate section of the balance sheet
What requirements must be met for a creditor to make a trouble debt restructuring? 1. theres a concession 2. debtor is experiencing financial difficulties
When the debtor settles debt with a non cash asset, what steps are taken? 1. Record gain/loss to record asset at fair value 2. Match up asset at fair value with loan payable plus interest, record gain or loss
When the creditor agrees to settle debt with a non cash asset, how is it recorded? Debit the asset at the fair value, match it up with the loan payable plus interest, record a gain or loss
If debt is restructured by modifying the terms, how does the debtor deal with this if they stand to pay more money? less? settle some while modifying? 1. Don't adjust debt carrying value, compute new interest rate to make PV of new future cash flows= carrying amount (principal+accrued interest) 2. reduce carrying amount to new value. no more interest recognized 3. account for settled amount first
If debt is restructured by modifying the terms, how does the creditor deal with this? 1. Find PV of restructured amount using original interest rate 2. Find PV of interest (annuity) using original interest rate and multiplying it by it restructured amount x restructured rate 3. recognize gain/loss
If a creditor realizes that the entire debt its owed will not be paid, how does it show this impairment? Calculate PV of the amount that is thought will be paid (use periods left and original interest) Subtract carrying value (includes accrued interest) by this amount to get impairment Debit Bad debt expense, Credit allowance for doubtful accts by impairme
How does IFRS deal with debt restructuring/modification? extinguish original liability, recognize a new one
Define a defined contribution plan. (pensions). What accounting is necessary? 1. employer agrees to contribute 'x' amount to pension plan 2. Debit expense Credit Liability-> Debit Liability Credit Cash
Define a defined benefit plan. (pensions) employer agrees to pay 'x' amount of a benefit at retirement. Determined by formula and estimates done by actuaries.
If a plan is overfunded or underfunded, where should it be reported? On the balance sheet as a non-current asset or a liability (current or non-current or both)
What number is used to calculate the accumulated benefit obligation number? Projected benefit obligation? 1. current salary amounts 2. estimated future salary amounts
What is meant by the term "funded Status of pension plan?" The difference between the projected benefit obligation and the fair value of the plan assets
If a pension plan is a mended and the PBO increases or decreases what needs to be done? An increase is recognized as a prior service cost. A decrease is a credit. Both should be amortized over the future periods of service of the employee
If a company has multiple plans should it net the underfunded plans against the overfunded plans? NO this may not be done
How is pension expense calculated? (A-SPIDER) Service Cost (PV current period additions) + Interest on PBO + (settlement rate*Beg PBO) Actual Return on Plan Assets - (possibly +) Prior service cost or credit + (possibly -) Gain or loss from actuarial changes +/-
In determining pension expense, how do you calculate the actual return on plan assets? End Bal Plan Assets at FV - Big Bal Plan Assets at FV + Benefits - Contributions
What are prior service costs? When amortized? Calculate with expected future years of service? straight-line basis? 1. allowance for past services rendered 2. over present & future periods 3/4. Group employees by years remaining. Multiply # employees in group by years 3. Divide by total years remaining of all employees. 4. Add groups. Divide by # employees. Get ave
Define the corridor approach to amortizing unrecognized gains/losses steaming from previous periods as part of a pension plan. Find 10% of PBO and 10% of the market value of plan assets. If unrecognized gain/loss is greater than this number, amortize it over active service years of employees remaining
What broad footnote disclosures are required for a pension plan? Change in PBO, Change in plan assets, Change in OCI, amounts recognized in the balance sheet
When a company amends its pension plan to include prior service costs, how do you calculate the the amount of unrecognized prior service cost to be amortized? look at projected benefit obligation. Subtract amount after amendment by previous amount
What is the IFRS's 'Projected Unit Credit Method' equal in US GAAP? benefits-years-service method
Under IFRS, how are pensions unrecognized gains/losses recognized differently? Company may recognize a portion, and use the US GAAP accounting with the corridor approach, or they may recognize the entire unrecognized gain/loss
Under IFRS, when may a company net together the assets and liabilities of separate pension plans? Only when it is legal for the assets of one plan settle the liability of the other plan
To determine if the risks/ownership has passed in a direct financing or a sales-type lease (for a lessor. capital=lessee), what 1/4 criteria must the lessor and lessee meet? 1. title is transfered 2. lease contains a bargain purchase option 3. lease term >= 75% of useful life (not started w/in last 25% original useful life) 4. PV of min lease payments >= 90% of FV of asset- investment tax credit (25% see c)
In addition to the 1/4 criteria needed by the lessor and lessee, what 2 additional criteria are needed by just the lessor? 1. Can predict collectable amount 2. no important uncertainties yet to be incurred
In an operating lease, how are initial direct costs handled by the lessor? carried as an asset on the balance sheet, amortized over length of lease by straight line basis. Shown net of amortization on balance sheet
How are uneven payments accounted for in an operating lease? Try to match payments with use, so find the average payments a year and those are the expenses/revenues a year any overpayment/underpayment use liability or unearned account
In an operating lease, how is a lease bonus fee accounted for by the lessor? lessee? 1. treat fee as unearned rent amortize to revenue on a straight line basis 2. treat as prepaid rent, recognize as rental expense over the lease term on a straight-line basis
In an operating lease, how is a refundable security deposit treated by a lessor? lessee? non refundable. lessor? lessee? 1. liability until returned 2. receivable until returned 3. unearned revenue until considered earned (end of lease) 4. prepaid rent until considered earned (end of lease)
In an operating lease, what happens when a lessee makes improvements to leased property? What if its made in lieu of rent? 1. capitalized to leasehold improvements and amortized over shorter of remaining lease life or useful life of improvement 2. expense it in the period incurred
In an operating lease, what is commonly on the lessor's income statement? The lessee's? 1. rent revenue (include amortization of lease bonus & nonrefundable security deposit), depreciation expense, amortization of initial direct cost, maintenance expense 2. rent expense (same as lessor rent expense), amortization of improvements made
In an operating lease, a lessee terminates the lease. How are costs recognized? at fair value on the day of termination. If company ceases to use the asset FV of termination costs is lease rentals remaining - estimated sublease rentals that could be obtained (even if dont intend to)
What is going on in a direct financing lease? i.e define the lessee wants a product but doesn't have the means to get so turns to a financier (bank) who purchases it for the lessee and leases it to them (financier makes interest on the transaction)
Define bargain purchase option. allows the lessee to purchase leased property for lower than the expected FMV at the exercise date of option
Define residual value. can be guaranteed or unguaranteed. lessee may buy leased asset at end of term for residual value or allow lessor to sell the asset and lessee has to make up for difference from price to residual value (if any)
If there is a guaranteed residual value, what is it considered a part of? how does the lessor account for it? lessee? 1. minimum lease payment/ final lease payment 2. in receivable account, should be only amount left at end of lease 3. in payable account, should be only amount left at end of lease. would depreciate asset down to guaranteed residual value
Who has to account for the unguaranteed residual value? the lessor (unless title transfers). PV of the unguaranteed residual value should be included in net investment. -Excess over the guaranteed residual value at the end is thought part of unguaranteed residual value -at end of lease, adjust orig. estimate
Define a sales-type lease. a manufacturer/dealer lease an asset that would otherwise be sold outright for profit - result in gross profit in the period of sale and interest revenue over the term of the lease
What are the journal entries to record a sales-type lease similar to a sold asset- Debit COGS, Credit Inventory Debit Lease receivable, Credit Sales. Unearned interest
In a sales-type lease, how is unguaranteed residual value accounted for? guaranteed? 1. taken out from sales and cost of sales at PV. COGS is subtracted by the PV of unguaranteed too 2. considered part of sales revenue
If a leased asset is returned less than the residual what is the difference if it were guaranteed or unguaranteed in the accounting? guaranteed get cash back from the lessee unguaranteed recognize a loss
In a capital lease, how does the lessee calculate the PV of Minimum Lease Payments? discounts future payments using the lesser of the lessee's incremental borrowing rate or the lessor's implicit rate
In a capital lease, is there any accounting a lessee should do once the leased asset is on their books? Yes, amortize the asset under lessee's normal amortization policy. Use useful life for time period if tittle passes or a bargain purchase option exists. Use lease term if 75% useful life or 90% test is criteria used to deicide the lease is a capital lease
How are initial direct costs in a lease accounted for by the lessor in an operating lease? in a sales-type lease? a direct financing lease? 1. capitalized and amortized to expense in proportion to the recognition of revenue 2. charge to operations in the year the sale is recorded 3. add to the net investment in the lease
Define sale-leaseback. the seller sells an asset and then immediately leases it back. Represents two separate transactions
In a sale-leaseback, how does a seller/lessee retain substantially all the rights to the property/ sale recognized? a minor portion/ sale recognized? more than a minor portion but less than substantially all/ sale recognized? 1. PV of rental payments is 90% or more of the FV of asset. Not a sale, gains are deferred 2. PV 10% or less of FV of asset, thought of as gain on sale recognized in full 3. PV 10-90% FV of asset. Gain recognized up to PV of rental payments, rest deferr
In a sale-leaseback, when should a loss be recognized when the FV of an asset is less than its BV? Sales price is less than BV, but FV and PV are greater than BV? 1. immediately 2. artificial loss, defer
What are the disclosure requirements in a lease? in essence all terms are required. Especially- general description of the arrangement and minimum future payments to be received (paid) by the lessor (lessee) for each of the five succeeding years
Under IFRS, how do the 4 criteria for determining the type of lease differ? Very similar but there is no defined threshold and is based more on judgement
Under IFRS, when does a lease start? commencement date? 1. earlier of the date of the lease agreement or date of commitment to the lease agreement 2. date the lessee is entitled to use the leased asset
Under IFRS what accounting is done in a lease of land and building? the land and building are separated with the land being an operating lease b/c of its indefinite life and the building thought of as a financing lease (assuming it meets criteria). Min lease payments allocated in proportion to the FV's
Created by: Bsantoro
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