ACC 3302 exam 2

temporary investments

• to be considered, the security must be

• readily marketable

• intended to be converted into cash within the current operating cycle or one year, whichever is longer

held-to-maturity securities

• keep until maturity

• don’t care about their FV/ will get FV @maturity so doesn’t matter

• record @ amort cost

• unrealized holding G/L = not recognized

• income effects = interest when earned, G/L from sale

trading securities

• bought bonds and sell in the short term (no more than a year)

• care for FV b/c that’s what you get when you sell them

• unrealized holding G/L → NI “b/c it’s only a year so there is no volatility”

• valuation = FV

• income effect = interest when earned; G/L from sale

available-for-sale securities

• get rid whenever you want to sell

• valuation = FV

• unrealized holding G/L = recognized as OCI and is a separate component of SHE

• income effects = int when earned; G/L from sale

consolidated financial statements

• financial statements of the parent and subsidiary are combined to present the two companies as a single entity

• all intercompany accounts (sales, rec, pay,) are eliminated for the combined statement

4 things in OCI

• gain/loss on securities

• cash flow hedges

• pension plan

• foreign currency exchanges

fair value

• the price tha would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date

derivatives

• financial instruments that acquire its value from other security from another security

• derive value from an underlying security

• ex: stock option

purpose of a derivative: hedging derivatives

• purchased by companies to manage risk because the FV of the derivative can be used to offset the change in FV of an asset that is at risk

• often purchase derivatives to offset the risk of interest rate fluctuation, foreign currency exchange rates, or changes in the price of some commodity that is uses in its business

purpose of a derivative: speculation derivative

• purchased in an attempt to make a profit from trading in securities

• higher risk companies

  • recognize on BS as A and L

  • report at FV

  • G/L recognized immediately in income

FV hedge

• used to offset the exposure to changes in the FV of an asset or liability on the balance sheet or the FV of a commitment by the firm

FV hedge: interest rate swap

• involves one party making interest payments based on a fixed or variable rate while the other party does the opposite

cash flow hedge

• derivative used to offset the exposure to variability in cash flows

  • recognize on BS as A and L

  • report at FV

  • G/L recorded in equity as part of OCI

  • G/L are accumulated and reported in income when the hedged transaction’s cash flows affects earnings

cash flow hedge: futures contract

• gives the holder the right and the obligation to purchase an asset at a present price for a specified period of time

FMV level 1

• most desirable

• quoted market prices in active markets for identical assets or liabilities

FMV level 2

• observable inputs other than quoted market prices for the A or L

• ex: quoted price for a similar building recently sold when none is available for the specific building (HGTV)

FMV level 3

• least desirable

• unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use developed based on the best information available in the circumstances

revenue

• inflows or other enhancements of assets of an entity or settlement of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations

recognition

• includes depiction of an item in both words and numbers with the amount included in the totals of the financial statements

revenue recognition principle

• revenue is recognized in the accounting period when the performance obligation is satsified

• helps to for which year to account for

contract

• an agreement between two or more parties that creates a legally enforceable rights and obligations

• can be written, oral, or implicit from customary business practices

performance obligation

• promise in a contract with a customer to transfer to the customer a good/service (or a bundle of goods/services) that is distinct

distinct

• must be both

• capable of being distinct → customer can benefit from the good/service on it’s own

• separately identifiable from other promises in the contract → distinct within the context of the contract to see if it was able to stand alone

a contract exists if it

• has been approved by both seller and customer

• specifies the seller’s and customer’s rights and obligations

• specifies payment terms

• has commercial substance (one or two must do something)

• is probable that the sller will collect substantially all of the amount it is entitled to receive

transaction price

• amount of consideration that a company expects to receive in exchange for transferring goods and services

transaction price: fixed vs various consideration

• fixed: over a short period of time

• various: estimated as either the expected value or the most likely amount

transaction price: right of return

• reduce revenue by estimated returns

transaction price: TVM

• if delivery and payment are not within 1 year of each other

transaction price: noncash consideration

• use fair value

transaction price: payment by seller to customer

• reduce transaction price by discount or rebate

allocate

• this step is for multiple performance obligations

• each one in proportion to the relative fair value of the good/service underlying all of the performance obligations in the contract

the best measure of the FV of an individual performance obligation when there are multiple performance obligations in the same contract is the ___

• stand-alone sales price

recognize revenue

• performance obligation is satisfied when the customer obtains control of the goods/services

• recognized as point in time or over time

• “the control has passed”

recognize revenue: point in time

• company has a right to payment for the asset

• company has transferred legal title to the asset

• company has transferred physical possession of the asset

• customer has significant risk and rewards of ownership

• customer has accepted the asset

recognize revenue: over time

• customer consumes the benefit of the seller’s work as it is performed

• customer controls the asset as it is created

• seller is creating an asset that has no alternative use to the seller, and the seller has the legal right to receive payment for progress to date

recognize revenue: over time → percentage of completion

• revenues and gross profit are recognized each period of the construction based on the progress of the construction toward completion

recognize revenue: over time → cost-recovery method

• only after all construction costs are incurred is gross profit recognized

input measures

• progress toward completion is measured based on efforts devoted to the project

• actual hours worked to date as a % of total hours expected for project completion

• actual costs incurred to date as % of total costs expected for project completion (most often used)

output measures

• progress toward completion is measured based on results achieved on the project

• ex: actual units produced as % of total units to be produced

recognize revenue: accounts receivable

• seller has not been paid but has unconditional rights to receive payment because company has satisfied its performance obligation with the customer

recognize revenue: contract asset

• seller has not been paid but does not have unconditional rights to receive payment because the company has satisfied one performance obligation but must satisfy another performance obligation in the contract before it can bill the customer

• step down from A/R

• debit contract A

transaction price: variable consideration → expected values

• probability weighted amount

• may be appropriate to use this method if there are several possible outcomes

transaction price: variable consideration → most likely amount

• may be appropriate to use this method if only two outcomes possible

temporary difference

• timing of recognition is different

• difference between the tax basis of an A/L and its reported CV or BV in the GAAP based financial statement

• over a period of time the exact same rev/exp will be the same @ some point

originating difference

• an initial temporary difference between the book basis and the tax basis of an A/L

reversing difference

• a temporary difference that originated in a prior period and “turns around” in subsequent periods

interperiod tax allocation

• inter=across

• allocation of income tax exp to various accounting periods

• difference reverses over a period of time so that in total the tax exp recognized for tax and accounting purposes is the same

liability method of recording temporary differences

• def tax amt reported on the BS is the effected of temp diff that will reverse in future and that are measured using the currently enacted income tax rates and laws that will be in existence when the temp diff reverses

• use tax rate the yr the diff reverses that’s already been enacted in law

deferred tax consequence

• future effects on IS resulting from temporary differences at the end of the current year

deferred tax liability

• amount of taxes that would be payable on those taxable amounts in future years based on the provisions of the tax law

deferred tax asset

• amount of deferred tax consequence attributable to temp differences and net operating loss carryforwards that will result in tax deductions in future years

current income tax expense (benefit)

• amounts of income tax paid or payable for a year as determined by applying the provisions of the enacted tax law to the taxable income or operating loss for that year

income tax currently payable

• amount of income tax paid or payable for a year as determined byapplying the provisions of the enacted tax law to the taxable income or operating loss for that year

intraperiod tax allocation

• affects one acct. period

• inc tax exp applicable to pretax income from cont. ops. is stated separately from other components of NI and is based on the normal tax rates applied to this income

• income tax is allocated to

  • income from cont ops

  • income or loss from the ops of a disc segment

  • G/L from the disposal of a disc segment

  • prior period adjustments (statement to RE)

operating loss carryforwards

• the IRS allows corporations to offset taxable income in future years with a reported loss in the current year

• carryforward indefinetely

• up to 80% of taxable income

lease

• an agreement conveying the right to control the use of PPE for a stated period of time in return of periodic payments

lessee

• party acquiring the use of the property

lessor

• party giving up use of the property

bargain purchase option

• provision allowing the lessee to purchase the property for a price that is significantly lower than the underlying assets expected FV at the date the option becomes exercisable

• onwership transfer

commencement of the lease

• the date on which a lessor makes an underlying asset available for use by a lessee

• beginning of lease

estimated economic life of leased property

• regardless of the lease term, the estimated remaining period during which the property is expected to be usable for the purpose that was intended at the commencement of the lease

estimated residual value

• estimated FV of the leased property at the end of the lease term (life of the lease)

executory costs

• normal expenses associated with owning a leased asset, such as insurance, maintenance, and property taxes

FV of leased asset

• price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

• provision may or may not exist

• benefits the lessor

guaranteed residual value

• provision in a lease agreement that requires the lessee to not only return the leased asset at the end of the lease term but also to guarantee that the value of the residual value will be a certain amount

interest rate implicit in the lease

• the interest rate that, at the commencement of the lease, causes the aggregate PV of the lease payments and unguaranteed RV to be equal to the FV of the leased asset

lease term

• the noncanelable period for which a lessee has the rightg to use an underlying asset

lease payments

• payments that are required to be paid by the lessee to the lessr over the life of the lease

• generally include

  • fixed payments: payments specified in the lease contract and fixed over the term of the lease

    • include rental payments and executory costs

lease payments: residual value guaranteed by the lessee

• lessor: full GRV for both classification and measurement

• lessee

  • classification: full GRV payment

  • measurement: GRV that is probable of being owed by the lessee

short term lease

• lease term of 12 months or less

• may elect to expense the lease payments as incurred

unguaranteed residual value

• portion of the estimated residual value of the leased property that is not guaranteed by the lessee

• lessee does not have any obligation to the lessor at the end of the lease except to return the leased asset to the lessor

finance lease expenses

• interest exp: effective interest method

• amortization exp: straight line

operating lease exp

• lease exp (interest): effective interest method; same amount as for finance lease

• lease exp (amortization): cash pmt - interest exp

• lease exp: sum of interest component and amortization component is reported on the income statement as lease exp resulting in an equal amount of lease exp throughout the life of the elase

lessee - operating lease

• right to use but not control the asset (think of an apartment)

lessee - finance lease

• right to use and control asset

lessor - operating lease

• retains control of asset

lessor: sales-type

• transfer control

• w/o selling profit

• w/ selling profit

derivatives should be reported at ____ on the balance sheet not ____

• fair value

• historical cost

G/L resulting from ____ in derivatives should be recognized in income immediately

• speculation

G/L resulting from ____ are reported in different ways depending on the type of hedge

• hedge transcation

purpose of derivative: speculation

• recognize on BS as A and L

• report at FV

• G/L recognized in income immediately

  • has to be reported

  • all at FV

purpose of derivative: hedging → FV

• recognize on BS as A and L

• report at FV

• G/L recognized in income immediately

  • same steps as another derivative (s)

purpose of derivative: hedging → cash flow

• recognize on BS as A and L

• report at FV

• G/L recorded in equity as part of OCI

• G/L are accumulated and reported in income when hedged transaction’s affects earnings

accounting method and financial statement presentation of investments similarities

• if FMV not determinable, the investment account is carried at acquisition cost and dividends and interest are recognized as revenue

• permanent decline in FMV of an individual security requires the write-down of the cost basis and the realization of the loss on the income statement