Accounting 4501 Final

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  1. What is the fair value hierarchy?
    Level 1: Uses quoted prices from active markets for identical assests to determine fair vale. This is the prefered method.

    Level 2: Quoted prices from an active market for similar assets  or quoted prices from less than active markets

    Level 3: Covers unobservable inputs such as managements estimates of expected future cash flows or abnormal earnings, which are then used in valuation model approaches to fair value measurment.
  2. What is the entry to record purchase of bond?
    • Dr: Marketable securities - bonds
    •      Cr: Cash
  3. What is the entry if you have a loss on bond while still holding bond?
    • Dr: Unrealized holding loss
    •      Cr: Marketable adjustment - Bond
  4. What is the entry if there is a gain on the bond?
    • Dr. Marketable adjustment - Bond
    •     Cr: Unrealized holding gain
  5. What is the marketable adjustment account?
    • A contra asset marketable securities account.
    • So that investments are always carried at fair value.
  6. What are the four requirements for a capital lease?
    • 1. Lease transfers ownership of the asset by end of lease term.
    • 2. Lease contains a bargain price purchase option
    • 3. Noncanceable lease term is 75% or more of economic life of the asset
    • 4. Present value of minimum lease payments equals or exceeds 90% of the current fair market value of leased asset
  7. Amortization scheduel
    • Date      Interest      Cash        Liability       Lease     
    •              Portion      Payment   Reduction    Liability
  8. Interest portion calculation for amortization scheduel
    Lease liablity X interest rate
  9. Liability reduction =
    Cash payment - interest portion
  10. Balance sheet effects due to capital lease?
    • Assests go up
    • Liabilities go up: Current and long term
    • ROA goes down
    • D/E goes up
    • and you will now have depreceation expense
  11. Journal entry to record capital lease obligation?
    • DR: Capital leases
    •     CR: Obligation under capital leases (Liability)
  12. Journal entry to record capital lease expenses?
    • DR: Interest expense
    • DR: Obligation under capital lease
    •       CR: Cash

    • DR: Depreceation expense
    •       CR: Accumulated depreciation
  13. What is the journal entry if lease is operating lease?
    • DR: Rent expense
    •       CR: Cash
  14. Why would an analyst want to do constructive capitalization of leases?
    Due to the capitalization of the lease showing the companies true financial position on the balance sheet
  15. How to calculate constructive capital lease from operating lease?
    • Take the average decrease in last 3 years:
    • Minues each year seperatly and then divide by 2.
    • Then subtract that number from last years payment
    • Take total payments and divide by that number to make sure it gives us the number of years on lease remaining.
  16. Tax is based on the?
    GAAP is based on the?
    • Cash basis
    • Accrual Method
  17. Tax expense
    Income tax payable
    • Tax expense is based on book income =
    • IBT X Tax rate

    • Income tax payable=
    • Taxable income X tax rate
    • or value on tax return
  18. Effective tax rate formula
    Tax expense/book income
  19. Book income formula
    Fed tax expense/tax rate = BI
  20. Transfer prices
    • Sales prices between subsidiaries
    • How to lower taxes
  21. Valuation allowance
    means the company doesnt think the income will be as good this year
  22. Unrecognized tax benefits
    Contingent liabilities
  23. Entry to record income tax expense
    • DR: Income tax expense
    • either DR: DTA - depends on problem
    •        CR: Income tax payable
    •        CR:either DTL - depend on problem
  24. Types of incentive based compensation
    • Salary: Base compensation
    • Short term incentives : Based on accounting numbers. Revenue, EBIT, any measure of profits, costs, ROA,ROE
    • Long Term incentives: Based on pay for performance. Also based on stock based compensation. This bridged the gap between management and owners. ROA over 3 years
  25. Pros and cons of accounting based incentive meausre
    • Pros:
    • Incentive to work harder and improve companies earnings.

    • Cons:
    • Earnings management problems.
    • Change in policies by management to manipulate numbers.
    • Focus on only short term performance.
    • Management will manipulate earnings around bonus tiers. (Cookie jar reserves)
    • Can manage earnings up or down based on bonus threshold.
  26. Pros and cons of short term incentives VS long term incentives
    • Pros:
    • Long term - Stock options are a pro for tech industry where companies do not have cash flow to pay employees. Can motivate managment to improve stock price.
    • Long Term - Stock appriciation rights do not dilute shares

    • Cons:
    • Long Term: When options are exerised it causes ownership to be diluted.
    • Short Term: Both accounting and non accounting figures can be manipulated in short term incentives (Bonuses)
  27. Current GAAP for stock option valuation
    # of options x FV (Black sholes model) / # of vesting years
  28. Journal entry to record stock option value
    • DR: Compensation expense
    •       CR: PIC-SO
  29. Journal Entry if stock options are exercised
    • DR: Cash (Option price)
    • DR: PIC - SO
    •       CR: Common Stock (PAR)
    •       CR: PIC - in excess of par
  30. 3 items needed to properly back dating stock options
    • 1. Pay right taxes
    • 2. Appropriate accounting
    • 3. No fraud in record keeping
Card Set:
Accounting 4501 Final
2012-12-05 21:12:32
4501 Final

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