FAR CPA

Question

Question

Answer

If there is commercial substance to an exchange, the exchange is measured at:

Fair Value. The gain is equal to the old asset's fair value and it's book value. If the fair value was 30 and its book value is 25, the gain is 5.

How does retail inventory method establish lower of cost or market valuation for ending inventory?

By excluding net markdowns from the cost to retail ratio.

Can consolidated financial statements be prepared from a business combination that was accounted for using the acquisition method OR the pooling of interests method?

Yes to both. The pooling of interest method CANNOT be used anymore for business combinations, combinations that happened before that still need to be consolidated.

Does a foreign sub using the local currency as its functional currency has their financials translated or remeasured?

Translated.

Does a foreign sub using US dollars as its functional currency has their financials translated or remeasured?

Remeasured.

Under translation, common stock is translated at the what exchange rate?

The historic exchange rate.

500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued at $103 per share. What is the journal entry to record the retirement?

DR preferred stock for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500

Working capital:

current assets - current liabilities

Acid test:

(cash + net receivables)/current liabilities

Acc Rec turnover:

Sales/ avg net receivables

Inventory turnover:

COGS/ avg inventory

Times interest earned:

EBIT/ interest expense

Return on total assets:

(net income + after-tax interest expense)/ avg total assets

Return on equity:

Net income / avg owners equity

Dividend payout ratio

Common dividends / net income

What are the 2 primary qualitative characteristics?

Relevance and Faithful representation

2 components of relevance:

Predictive value and confirmatory value

3 components of Faithful Representation

Completeness, neutrality, and free from material error

What are the 4 enhancing characteristics?

Comparability, verifiability, timeliness, and understandability

Times interest earned is:

income before interest and income tax over interest expense

What is a central characteristic of a joint venture?

Shared control. None of the participating parties are likely to have unilateral control of the joint venture.

What is the defensive-interval ratio?

The ratio of quick assets to daily operating expenditures. The ratio is showing the length of time in days that the firm can operate with its present liquid resources- so it's a liquidity measure.

Inventory turnover ratio:

COGS/ avg inventory for the period

Where are G/L on remeasurment and translation booked?

Remeasurement is on the income statement, translation go in an equity account. Remeasurement is when the foreign sub's currency is the US dollar. It's translation if the sub's currency is the local foreign currency.

Receivables turnover ratio:

Net sales / avg net accounts receivable

What statements are usually included in personal financial statements?

A statement of financial condition and a statement of changes in net worth.

If a donation is conditional, how should it be accounted for?

As a refundable advance.

For donation of specialized services to a nonprofit, at what value should they be recognized?

Fair value.

For a NP, are contributions spread over a few years restricted or non restricted?

The contribution in the current year is non restricted(unless it comes with an actual restriction), and the contributions for future years are recognized at present value and are RESTRICTED.

When are the payments for an "Annuity Due" made?

At the beginning of each period.

How is a lease payment calculated when the lease payments are due at the beginning of the period?

You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.

What is the journal entry at the inception of a capital lease and the payments are due at the beginning of each period?

DR: Leased asset for its fair value amountCR: Lease Liability for plug amountCR: Cash for the payment amount

How do you calculate the interest expense at the end of the year on a capital lease with payments at the beginning of the period? What is the journal entry?

You multiply the remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR: Lease liability

How does the LESSOR in a capital lease determine the amount of Lease Receivable?

Multiply the payment by the number of payments.

What is the journal entry by the LESSOR for a capital lease with payments at the beginning of each period?

DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for BV amountCR: Sales for the FV amount

Working capital formula

current assets - current liabilities

Acid test formula

(cash + net receivables) / current liabilities

Acc Rec turnover formula

Sales / avg net receivables

Inventory turnover

COGS / avg inventory

Avg collection period for acc receivable?

Net credit sales / avg net acc receivable.... then you divide 365 by that number

What financial statements are required for the Governmental funds?

1)Balance sheet and 2) Statement of revenues, expenditures, and changes in fund balance

What statements are required for the Proprietary funds?

1)Statement of Net Postition2)Statement of revenues, expenditures, and changes in net position3)Statement of cash flows

What statements are required for the fiduciary funds?

1)Statement of net position2)Statement of changes in fiduciary net positiion

Which fund type does the government-wide financials EXCLUDE that are included on the CAFR?

Fiduciary funds.

What are the 3 sections of the CAFR?

1) Introductory2) Financial3) Statistical

If an investment in 30% of another company is accounted for using the fair value method, what is recognized as net income from the investment?

Cash dividends received and increases in the fair value of the investment are recognized in net income from the investment. The portion of the company's net income is NOT recognized in net income from the investment.

A contest prize expense is the present value of the?

Total cost incurred. If the prize is an annual $50,000 payment for 20 years and the company takes out an annuity of $418,250 after making the initial $50,000 payment, the contest prize expense in the current year is $468,250.

The ending balance of the asset retirement obligation should be the:

Beginning balance + the DISCOUNTED cash flow estimate of the new asset + accretion expense - the amount paid during the year.

The debt service fund records cash transfers from the general fund as what, and cash payments as what?

Operating transfers and Expenditures.

During a period of inflation, would a perpetual inventory system result in the same dollar amount of ending inventory as a periodic inventory system under FIFO and LIFO?

Yes with FIFO, No with LIFO. The perpetual system would be calculating COGS based on the latest goods acquired prior to each sale versus all the latest goods acquired during the period under a periodic system.

Does a NOL carryforward directly reduce taxes or taxable income?

Taxable income. If the NOL is 40,000 and taxable income is 60,000, then it reduces taxable income down to 20,000, which is then multiplied by the tax rate.

During a business combination, can the acquisition date be before, on, or after the closing date?

It can be any of the 3.

For state or local governments, encumbrances outstanding at year end should be reported as:

Assigned or committed fund balance.

What does income and dividends from a sub do to the investment account under the equity method?

Income increases the investment, and dividends reduce the investment account.

What is the focus of proprietary funds?

Income determination. Proprietary funds use accrual accounting and they are similar in reporting to private businesses.

What is the entry in the General Fund to record equipment purchased with a capital lease?

DR: ExpendituresCR: Other financing sourcesThe general fund doesn't record fixed assets. The general fund fixed asset account group would record the acquired equipment.

What are funds classified as that can only be used for a specific purpose because of restraints imposed by formal action of the government's highest level of decision making authority?

According to GASB Statement No. 54, amounts that can only be used for a specific purpose, because of constraints imposed by formal action of the government's highest level of decision-making authority, should be reported as Committed Fund Balance. The Restricted Fund Balance classification should be used when constraints are placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation.

What is the process for recording collection of accounts that had been written off?

First you debit accounts receivable and credit allowance for doubtful accounts to restore the amounts that had been written off. Then you debit cash for the amount collected, and you credit accounts receivable to take them off the books since they've been collected.

In the general fund, what 3 accounts are affected when property taxes are levied?

Revenue control is credited, property taxes receivable is credited, and allowance for uncollectible taxes is credited. Bad Debt Expense is ONLY an accrual accounting concept, and IS NOT used in modified accrual accounting.

When the direct method for LCM is used, what is the journal entry to write down inventory?

DR: Cost of goods soldCR: Inventory

When using the allowance method under LCM, what is the JE to write down inventory?

DR: Holding lossCR: Allowance for LCM

Under the fair value option, what is recognized as income from the investment company?

Cash dividends and the increase in fair value of the investment are both recognized in net income of the investor.

How does the installment sale method work?

Each payment consists of return of cost and gross profit. You calculate the gross profit percentage by taking the sales price and subtracting the carrying value, and then dividing that number by the sales price. Then you multiply the principal portion of the payment by the gross profit percentage, and then add in the interest payment amount, and that is the amount of revenue to recognize. The return of cost portion of the payment is NOT recognized as revenue.

Gains or losses on retirement of debt used to automatically be classified as extraordinary gains or losses, but now they are:

immediately recognized in full in income from continuing operations.

What rate is used to calculate the amount of dividends from a foreign currency?

The spot rate on the date of declaration is used regardless of translation or remeasurement.

How is the refinancing of a liability due within a year treated under GAAP and IFRS?

Under GAAP, if the refinancing happens before the ISSUANCE date of the financial statements, then it can be considered long term again. Under IFRS, the refinancing has to happen before the BALANCE SHEET DATE for it to be considered a long term liability again.

How is interest expense and dividends paid classified as far as cash flow under IFRS?

Interest expense and dividends paid can be classified as EITHER operating or financing activities.

How is interest revenue and dividend revenue classified under IFRS for cash flows?

They can both be either cash flows from operating OR investing activities.

If the percentage of completion method cannot be applied, how are profits recognized on long-term contracts under GAAP and IFRS?

Under GAAP the profits will be recognized once the job is completed- which is the completed contract method. Under IFRS, all profits will be recognized when all the costs have been recovered- the cost recovery method.

If an IFRS company decides to revalue its equipment each year, what effect would a drop of $2000 in value above regular depreciation be?

It would be a 2000 expense for that year, recognized in income. BUT.... an increase in the value would go under other comprehensive income.

What is the main capital lease criteria under IFRS?

That the lease life is a "major portion" of the equipment life. Thus, a lease of 60% of the equipment's life would qualify as a capital lease.

If both parties consider a lease to be a capital lease, what interest rate do they both use under IFRS?

They both use the implicit rate built into the contract.

Under IFRS, a contingent loss must be recognized if it is...

More likely than not. Even just 51% vs 49% meets this criteria.

How is a prior service cost due to a change in the projected benefit obligation due to a contractual adjustment treated under IFRS and GAAP?

Under IFRS it is expensed immediately to the extent that benefits have vested. Under GAAP it is recorded to accumulated other comprehensive income and then amortized to expense over the years the employees are expected to work.

A bond with face value of 100k is sold at 110k due to a convert option into common stock. How is this recorded under GAAP and IFRS?

Under IFRS 100k would be the liability and the 10k is recorded as equity. Under GAAP the full 110k is debt until it is actually converted.

How is an impairment loss on equipment determined under IFRS?

A loss must be recognized if the book value exceeds the higher of the PRESENT VALUE of the future cash flows and the fair value less necessary costs to sell the equipment.

GAAP vs IFRS research and development costs?

Under GAAP all research and development costs are expensed as incurred. Under IFRS, research costs are expensed, but development costs are capitalized if the company believes that future economic benefits are probable and that the product being developed is commercially and technically feasible.

How are legal costs to successfully defend a patent treated under GAAP and IFRS?

Under GAAP the costs are added to the cost of the patent. Under IFRS the costs are expensed UNLESS the cost increase the future benefits to be derived from the asset.

How are biological assets valued under IFRS?

At fair value less costs to sell.

How is the reversal of an impairment loss recorded under IFRS?

The recovery of an impairment in value must be recognized if the circumstances that caused the impairment are reversed.

A company has two checking accounts: one with 100k and one with negative 10k. How are they reported under GAAP and IFRS?

Under GAAP the negative is reported as a liability, so the cash line will show 100k. Under IFRS they are netted so the cash line would show 90k.

In a period of rising prices, a company that wants to maximize profits will use what inventory method?

FIFO. In rising prices using FIFO, the earliest goods will be sold first which makes COGS lower and NI higher.

Formula for ending DV LIFO balance:

Beginning DV LIFO + (increase at base-year dollars)(price index)300,000 + (400,000 - 300,000)(1.1) = 410,000

What is the ceiling and floor of LCM?

Ceiling is Net Realizable Value and Floor is NRV less a normal profit margin.

Explain LCM

If replacement cost is within the range of the ceiling and floor, then market is replacement cost.If the RC is greater than the ceiling, then market is the ceiling amount.If RC is less than the floor, then market is limited to the floor amount.

How are trademarks classified, capitalized, amortized, and impaired?

They can be either definite or indefinite life, only expenditures made to external parties are capitalized, amortization depends on whether they are definite or indefinite life, as does impairment.

How are customer lists classified, capitalized, amortized, and impaired?

They can be either definite or indefinite life, only expenditures made to external parties are capitalized, they are amortized, impairment is decided by the recoverable cost test.

How is an initial franchise fee classified, capitalized, amortized, and impaired?

Can be definite or indefinite life, only capitalize expenses to external parties, amortization depends on definite or indefinite, as does impairment.

When a liability has a carrying value less than fair value, does an unrealized gain or loss exist?

An unrealized loss exists. It would be a debit to Impairment loss, and a credit to the liability to increase it to its fair value.

In financial statements prepared on the income-tax basis, how should nondeductible expenses such as meals be reported?

Included in the expense category in determination of income. These are still business expenses and need to be included to calculate income on the financial statements.

For grants, what is a prime factor in determining eligibility for accrual?

The expenditure of resources (spending the money)

What would an entity most likely do to hedge an investment in a foreign operation?

Borrow from another foreign entity with the same foreign currency as the operation being hedged. Since borrowing is a liability, any changes in the foreign currency would offset the investment.

If intercompany fixed asset balances are NOT eliminated, will consolidated income or loss be overstated.

Both can be overstated.

When there is NOT commercial substance to an exchange, gains are recognized:

In proportion to the amount of cash received.

Under the cost method, is the Sub's income or dividends recognized by the parent?

Dividends are recognized as income to the parent.

When transferring a receivable, the loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the:

Transferred portion. Usually the total carrying value will be allocated between the portion of the asset surrendered and portion retained, based on relative fair values.

For estimating income taxes for personal financial statements, assets and liabilities measured at their tax bases should be compared to assets and liabilities measured at their:

Estimated current value and estimated current amount.

Before assets are distributed as a property dividend, the unrecognized holding gain or loss is:

Recognized. If a firm pays a property dividend of a stock it bought for 20,000 when its market value is 25,000, there is a debit to retained earnings for 25,000 and a gain on disposal of 5,000 is recognized.

Bond prices and interest rates are inversely related. When interest rates increase,

the market value of bonds decrease, because there are now better opportunities on the market.