Exam 2 (how to)

how to

Purchase price of a bond

amortization table

interest = pmt * (r / pmts per year)

principal = interest - pmt

cv = previous cv + principal

Held to maturity securities (when you have to record JE for the entire year)

amortization table

htm debt investments is used as premium/discount account to bring to par value

trading security investments

adjust the fair value at eoy using FVA and unrealized gain/loss accounts

to get rid of the account upon sale of securities, debit or credit realized gain/loss and this will offset the JE regarding the actual realized gain/loss

AFS debt investments 

use amortization table to find book value of the asset

adjust the fair value at eoy using FVA and unrealized gain/loss accounts

to get rid of the account upon sale of securities, debit or credit realized gain/loss and this will offset the JE regarding the actual realized gain/loss

The FVA account is temporary and gets updated to real value amount yoy until sale

equity method (significant influence)

multiply gains/losses by the % share parent company owns

equity method (significant influence) (inflated value of equipment)

multiply gains/losses by the % share parent company owns

(difference of BV and FV) * (%/useful life) = amount to amortize per year

No Difference between book taxes and income taxes.

income tax expense = revenue * tax rate

permanent differences

effective tax rate

temporary differences

1. list out the differences in depreciation expense for book and tax

2. list out the differences of net income for book and tax

3. make je for DTL and income taxes payable, then fill in income tax expense

reversal of temporary differences

When (pre-tax income-taxable income = negative) then you need to do a reversal of the DTL account

1. Find income taxes payable

2. reverse DTL based on the JE you need to make to make the balance 0

How to do a DTL entry

1. find taxable income —> income taxes payable

2. See what income or expenses can be pushed back and apply the tax rate to that amount

Temporary differences (book > tax): DTA

Taxes paid on expenses now but not performed yet is an asset

• same as temp DTL

Examples of DTA

1. warranty

2. bad debt

Examples of DTL

1. accelerated depreciation

2. installment sales

what is income taxes payable always equal to

taxable income * tax rate

what is DTA or DTL always equal to

(difference in taxable income and book income) * tax rate

what is income tax expense always equal to

the balancing entry between income tax payable and DTL and or DTA

reversals of DTA

When liabilities are used up by actually doing the work needed to honor the liability, but you already paid tax on the revenue related to the expense, you need to get rid of the asset and reduce income tax expense for the current period

Pretax income > taxable income

reversals of DTA (forfeit)

the %* asset = valuation allowace

future income tax rates

set up table that multiplies amount used by tax rate and add it up to get the DTA that needs to be accounted for today

carryback

when there is an NOL in the last year, companies can stack the loss to gains and get tax refunds

carryforward

record DTA for the loss * tax rate bc you can carry the loss forward

Income taxes payable = (income - carry forward) * (tax rate)

Equity-Classified Award

find the

1. vesting period

2. fv

3. % chance

Accounting for an Option Exercise

find the 

1. vesting period

2. fv

3. % chance

4. exercise price

5. common stock price

Equity-Classified Award-Forfeiture Change

find the

1. fv

2. total stock - forfeiture 

x year is going to be equal to the (fv/vesting period) * (x years) - previous years expenses

AKA

1. find fv w/ % forfeiture applies

2. multiply by x years

3. subtract previous expenditures

Liability-Classified Award

right to sell back the shares makes them a liability

change in fair value

the last year amount disclosed is going to be the liability account balance, so you need to balance the t-chart since the account is a permanent one

grant price forfeiture

same premise as % forfeit but fv applies to the grant price

Stock Appreciation Rights

same premise as % forfeit but fv applies to the fv price

Restricted Stock

same premise as equity based compensation but with different je

employee stock purchase plans

account for the discount

when full time are the only ones allowed the difference is salary expense

defined contribution plans

record as expense