ACC 310 Exam 2 - self made deck

compounding formula; FV=

FV = PV X (1+i)^n

compounding formula; PV=

PV = FV/(1+ i)^n

comprehensive income =

NI + Other Comprehensive Income (OCI)

OCI

Unrealized “paper” gains

AOCI

Accumulated Other Comprehensive Income
holding place for unrealized gains and losses

how to calculate OCI

total of net unrealized gains/losses (ex: foreigh currency, defined benefit plans, hedges, available for sale securities*)

Types of Debt Investments

Held to Maturity (HTM) long-term
Available for Sale (AFS) middle
Trading Securities (TS) short-term

types of equity investments

Fair Value Method (FV)*
Equity Method (EQ)*
Financial Consolidation (FC)

Major Events for debt investments

1. purchasing the debt investment'

2. receiving interest

3. changes in fair value (unrealized gains/losses)

4. selling the debt investment (realized gains/losses)

Trading securities

can be debt or equity investments
expected to be sold in short term
reported at fair value on the balance sheet
Unrealized gains/losses (changes in FV) are recorded in the Income Statement

trading securites example JE (at purchase for 125,000)

DR- Investments (trading securities) 125,000

CR- Cash 125,000

trading securities example JE (on 12/31 the FV of investment is 140,000; purchased at 125,000)

DR- Investments (TS) 15,000
CR- Unrealized holding gain - Net Income. 15,000

historical cost

Records an asset or liability at the original price paid or received at the time of acquisition

market value

what you could sell it for

fair value

reasonable estimate of the asset

what types of investments go to the Income statement (Unrealized holding gain/loss- NI)?

Trading Securities
Equity

what types of investments go with Unrealized holding gain/loss - OCI?

Available for sale

when are changes in FV ignored?

Held to Maturity investments

what is recognized over time with HTM investments?

Interest Revenue

how are TS, AFS, HTM all recorded at the purchase of a security?

historical cost

what are AFS securities reported at?

fair value

Where are unrealized gains/losses for AFS securities recorded? And closed to?

recorded in OCI
closed to AOCI - equity account that is temporary

If AFS security is bought at 500,000, the FV on 12/31 is 490,000, what is the JE?

DR- Unrealized holding loss (AFS) - OCI 10,000
CR- Investments (AFS) 10,000

DR or CR? Unrealized holding gain

CR; debit investment

DR or CR? Unrealized holding loss

DR; credit investment

insignificant influence and method used

*0-20%, fair value method

*changes in fair value from one period to the next are reported as gains and losses in the income statement

significant influence and method to use

*20-50%

*use equity method

4 events to account for in Equity FV method

1. purchasing equity investment

2. receiving dividends (if declared)

3. changes in FV

4. selling the equity investment

what is the similar method we use as the debt TS?

Fair Value method

what is the FV method recorded at?

Fair value

in the equity method, what is the initial investment recorded at?

cost

what is the equity method roll forward formula?

Beginning Investment balance (BS)

±/- proportionate share of investee’s earnings — (NI x % of ownership) (IS)

- proportionate share of investee’s dividends (IS)

= Ending Investment balance (BS)

what do i need to do to get the proportionate share of earnings/dividends for equity method?

multiply NI and dividends by the % of ownership
ex) company aquired 45% of equity securities…. times the NI and dividends by 45%

how do received dividends affect the investment account in the EQ method?

decrease; so credit investments

what is the life of a capital asset?

1. acquisition

2. depreciation

3. disposal

tangible long term assets

land, land improvements, buildings, equipment, and natural resources

intangible long term assets

patents, trademarks, copyrights, franchises, and goodwill

*always use straight line amortization

Capitalize

record an expenditure as an asset to extend life/improve output

Expense

cost is deducted immediately on the income statement in the period it is incurred, which reduces current net income

capitalizing JE

debit asset

credit cash or payable

expense JE

debit expense

credit cash or payable

long term assets are reported at…

historical cost

For expenditures after acquistion…

expense for current period

capitalize expenditure as an asset if it increases future beenfits

what are the 3 methods to determine depreciation expense?

Straight- line

Double Declining method

Activity-based

what is the most common depreciation method?

straight line

accumulated depreciation

lifetime sum of depreciation expense to date

on the BS as a contra asset

Book Value equation

assets cost - accumulated depreciation

SL Dep. formula

Another term for DDB

accelerated method

step 1 for DDB

SL rate = 100%/# of years of useful life

step 2 of DDB

DDB rate = SL rate x 2

step 3 of DDB

Depreciation Expense = BV x DDB
BV = cost - acc. dep.

when do you stop depreciating in DDB?

when you hit salvage value

examples of activity based depreciation

miles driven in truck, pages printed
*depreciation based on usage of an asset

what are the 2 steps of Activity-based depreciation?

1. Depreciation rate per unit = (cost - salvage value)/ Total Untis expected

   1. Depreciation Expense = Actual # of units x depreciation rate per unit

how do you calculate the new depreciation expense if there is a change in estimate?

DONT GO BACK AND ADJUST, JUST CALCULATE GOING FOWARD

New Dep. = (current BV - New salvage value)/ New estimated remaining useful life

steps for removing asset from the books

record cash

remove asset (at OG cost)

remove accum. dep. for that asset

solve for gain/loss, if any

Effect of depreciation expense

*it is debited

*reduces net income and stockholder's equity

*acc depr is a contra asset with a natural credit balance that balances out depr exp

Purchases of intangible assets

Purchase cost+ plus costs getting the asset ready to use

*patents (legal life of 20yrs)

*copyright (life of creator + 70 yrs)

*trademark=10yrs

what intangibles do we NOT amortize

trademarks and goodwill

internally- developed intangible assets

R + D, advertising expense, SG&A, Wage Expense

internally developed assets are generally _____ except _____. Legal fees are ____

generally expensed; except software-related developments are capitalized; legal fees are capitalized

purchased intangible assets

patents, copyrights, trademarks, franchise rights, goodwill

Purchased intangible assets are ____ and _____ and recorded at _____

capitalized and amortized; recorded at cost (includes all fees)

what method do we use if there is a finite useful life for an intangible asset

Straight-line amortization

what do we do if intangible asset has an indefinite useful life

no amortization, monitor for impairment

goodwill calculation

Acquisition Price - FV of net assets acquired
*net assets = assets - liabilities

Impairment Loss =

BV - FV

what accounts need to be checked at least annually for impairment?

Inventory
Investments (some)
PPE
Intangibles

Long-lived assets with finite life intangibles (PPE) impairment test

if BV > future cash flows —> impaired, loss
if BV < future cash flowa —→ No impairment or loss

Indefinite Life intangibles, except goodwill impairment test

if FV < carrying value, then impair to FV

Goodwill impairment test

if FV < carrying value then impair to FV

focus on the “reporting unit”

steps to determine if finite life assets are impaired:

1. get BV

2. estimate undiscounted sum of future cash flows

3. if sum of cash flows is greater than BV, do nothing it’s not impaired

4. if sum of cash flows is less than BV, it’s impaired and write it down to the FV

goodwill impairment calculations

1. estimate FV of reporting units

2. compare BV to FV of reporting units
   if FV < BV, impaired and write goodwill down by the difference

liabilities that are not interest bearing

AP, accrued wages, deferred rev, any accrural

liabilities that are interest bearing

notes payable, bonds payable, mortgage, leases, short/long term debt

amoritization table order

1. date

2. cash paid (TVM PMT calculation)

3. Interest expense (CV x market rate) - gets smaller as you go down

4. Decrease in CV (cash paid - int exp)

5. Carrying value (will go down until 0)

Contingent Liability

*a potential liability that depends on some future event

*only recorded if a loss is probable and the amount is reasonably estimable

*disclosure is only not required if payment has remote chance of being paid

difference between debt and liabilities

Debt is strictly what you borrowed and have to pay back
Liabilities include your debts plus any other operational or legal promises you have to fulfill
Liabilities include your debts plus any other operational or legal promises you have to fulfill

bond

borrow cash from public debt markets

breaks debt into very small chunks

allows companies to access many investors and very large amounts of cash

bond price reflects its ____ at issuance

fair value

bonds are issued at par when…

coupon rate = market rate

bonds are issued at a discount when…

coupon rate < market rate

bond price < bond payable

cash coupon < interest expense

bonds are issued at a premium when…

coupon rate > market rate

bond price > bond payable

cash coupon > interest expense

bonds: interest expense =

CV x market rate

bonds: cash payment =

face value x coupon rate

do you add or subtract the discount amortization for a bond to the CV?

add

Why lease?

1. reduced upfront cost

2. lower monthly payments

3. easy disposition of the asset

   1. less worry about declining asset values

JE for operating lease contract

debit operating lease

credit lease payable

leases are recorded as an ___

asset

what represents ownership claim of the company?

stockholder’s equity

equity equation

E = A - L

what is included in contributed capital

common stock

preferred stock

Additional Paid in Capital (APIC)

treasury stock

contra equity account — reduces total equity on BS; company buys back stock

no voting rights, no dividends rights

why would you purchase treasury stock?

boost stock price

improve financial ratios

signal confidence to market

shares held by investors

Outstanding stock

what equals issued shares

outstanding shares + treasury stock

Additional paid in capital (APIC)

*only when par value stock is issued

*Common Stock = shares time Par value

*APIC is difference between cash received and common stock

*Cash recorded at market price

when do you debit APIC?

when it is reducing equity
resold at a lower cost per share

when stock prices are raised during an IPO, what JE is needed?

NONE! The company recorded the stock at the issue price, and it doesn’t remeasure its own equity when the market price changes.