FAR 3

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Author:
dan1braden
ID:
198078
Filename:
FAR 3
Updated:
2013-02-05 21:26:52
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Accounting
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Description:
Bonds, leases, current liabilities, current receivables
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  1. what is a bond?
    a agreement to borrow money and payback in a certain amount of time. PS. people who hold bonds account for them as investments.
  2. what are the types of bonds?
    • 1. term bonds- pay interest over bond, and all principle paid at the end.
    • 2. serial bonds- pay interest and principle during installments.
    • 3. convertible bonds- bonds that can be converted into CS
    • 4. callable bonds- bonds that can be redeemed by the issuer whenever
    • 5. convenant- restrictions on bonds set by the issuer
  3. are bonds kept at FV or PV?
    bonds are kept at present value because they tend to be long term. Present value means that bonds are calculated using bonds and unamortized discounts/premiums
  4. Bonds Journal Entries?
    • JE at Par Value
    • CASH 1000
    •     B/P 1000

    • INTEREST EXP 800
    •     CASH 800

    • JE Discount
    • CASH 900(PV OF BONDS)
    • DISCOUNT 100
    •     B/P 1000

    • INTEREST EXP 100
    •     DISCOUNT 20
    •     CASH 80

    • JE Premium
    • CASH 1100
    •     PREMIUM 100
    •     B/P 1000

    • INTEREST EXP 60
    • PREMIUM 20
    •     CASH 80
  5. How is interest expense calculated with regards to bonds?
    interest expense is calculated using effective interest method. So interest expense is calculated taking the PV of Bonds x market yield rate of the bonds
  6. what do you do with bond issue costs?
    bond issue costs should be amortized over the life of the bond
  7. what do we do with accrued interest payable with regards to bonds payable?
    this is interest that has been accumulated on the bonds since issued and they should be expensed immediately in the present value of the bonds through the cash account.
  8. what is the cash account in regards to bonds payable?
    cash account is PV of Bonds + Accrued interest - BIC
  9. what happens when a bond is retired?
    you reverse the initial entry and a gain/loss can occur.
  10. what is a bond sinking fund?
    this is a fund that is set up strictly for the retirement of the bonds by putting cash aside. interest and dividends are added to the fund balance.
  11. what are the two methods for accounting for convertible bonds?
    2 methods that are used to account for convertible bonds are the book value method(no G/L plug to APIC) and market value method(APIC only valued to FV of stock and Plug to G/L).
  12. convertible bonds book value method J/E?
    Book value method J/E

    • B/P X
    • PREMIUM X
    •     BIC X
    •     CS(@PAR) X
    •     APIC(PLUG) X
  13. convertible bonds under market value method J/E?
    Market value method

    • B/P X
    • PREMIUM X
    • LOSS(PLUG)
    •     BIC X
    •     CS(@PAR) X
    •     APIC(FMV) X
    •     GAIN(PLUG) X
  14. how to account for bonds with detachable stock warrants?
    bonds with detachable warrants are viewed as 2 separate securities so they need to be valued differently. To do this we use the FMV approach. Example Journal Entry

    • CASH X
    • DISCOUNT X
    •     B/P X
    •     APIC WARRANTS X
  15. Bonds under IFRS?
    accounted for same as GAAP except with convertible bonds and bonds with warrants. They both are broken up into equity and liability sections. The liability gets reported at FV and the rest goes to the equity section.
  16. what is a lease?
    lease is a contract, which conveys the right to possess and use lessor's property for a specified period of time, in return for cash payments. Goal here is substance over form.
  17. how many types of leases do we have?
    from the lessors standpoint we have an operating lease(true rental) or non operating lease(sales type or direct financing) and the the lessees standpoint we have an operating lease and a capital lease.
  18. what is an operating lease and how is it accounted for?
    • operating lease is simply viewed as a true rental for both the lessee and the lessor. The basic J/E look like this:
    • CASH X
    •     RENT REV X

    • RENT EXP X
    •     CASH X

    important aspects are: lessor depreciates the asset, also the lessor amortizes direct lessee costs(legal fees, commissions), and the lessor has to expense all executory costs(taxes, maintenance, etc), security deposits that are refundable are a liability until returned and security deposits that are not refundable are viewed as unearned revenue.
  19. when accounting for leases do leases have to be recognized uniformily?
    Yes all payments for leases have to recognized equally regardless of how actual payments are made. always recognize uniformally.
  20. what are the disclosures related to operating leases?
    operating leases require a good description of the lease terms and also include the MLP for next 5years.
  21. what is a capital lease?
    a capital lease is a lease that is treated as a sale because of the substance over form restriction. also a capital lease is only on the lessees perspective and has to meet 1 of 4 criteria.

    • 1. TT-TITLE TRANSFER
    • 2. BPO-BARGAIN PURCHASE OPTION
    • 3. 75-LEASE TERM GREATER THAN 75%OF USEFUL LIFE
    • 4. 90-MLP GREATER THAN 90% OF FMV OF ASSET.

    *SPECIAL NOTE IF MEETS 1 OR 2 THEN DEPRECIATE BASED ON USEFUL LIFE, HOWEVER IF MEETS 3 OR 4 DEPRECIATE BY LESSOR OF LEGAL LIFE OR USEFUL LIFE.
  22. how does a lessee record a capital lease?
    the lessee records the lease at the lower of FV OR PVMLP.

    • PVMLP- includes annual payments + BPO + guaranteed residual value.
    • There are two rates to use for the PVMLP. They can use the incremental borrowing rate(market rate) or the implicit borrowing rate(lessors made up rate).

    *USE THE INCREMENTAL BORROWING RATE UNLESS THE IMPLICIT RATE IS LOWER.

    • THE J/E for capital leases
    • LEASE ASSET X
    •     LEASE LIABILITY X

    • LEASE LIABILITY X
    •     CASH X

    • DEP EXP X
    •     ACCUM DEP X

    • LEASE LIABILITY X
    • INTEREST EXP X
    •     CASH X
  23. what is a nonoperating lease?
    lessor reports the lease as a sale if same one of the 4 criteria are met and 2 additional ones

    • 1. TT
    • 2. BPO
    • 3. 75
    • 4. 90
    • 5. Collectibility of lease payments are reasonably assured.
    • 6. There are no significant uncertainties regarding reimbursements.

    • There are two types of non operating leases
    • 1. Sales type lease(interest and g/l)
    • 2. Direct financing lease(interest)
  24. what is a sales type lease?
    interest and gains/losses can occur. looked at as being a true sale. J/E

    • LEASE REC. X
    •     DEF. INTEREST REV X
    •     ASSET X
    •     GAIN(PLUG) X

    • ONCE A PAYMENT IS RECEIVED.
    • CASH X
    •     LEASE REC X
    • DEF INT REV X
    •     INT REV X
  25. what is a direct financing lease?
    this is looked at as a sale, but a sale as if you are the middle man and therefore, no gain or loss occurs. J/E

    • LEASE REC. X
    •     ASSET X
    •     DEF INT REV(PLUG) X
  26. what is a sale leaseback?
    • a sale leaseback is when a property owner sells property, then leases it back right away and what the fasb doesn't want is people to have huge gain and technically be in the same place. So the FASB came up with the sale leaseback to defer the gain to a certain extent to ensure that this doesn't happen. Defer gain against expense for both capital and operating leases. 3 types of sale lease backs to determine gain to be deferred.
    • 1. If PV of Rental Payments>90% then capital lease and defer entire gain.
    • 2. If PV of Rental Payments between 10% and 90% then defer only a portion of the gain and decide whether operating or capital on same 4 criteria.
    • 3. If PV of Rental Payments <10% then operating lease and recognize all the gain.

    • Example Sale leaseback J/E 
    • CASH X
    •     ASSET X
    •     DEF GAIN X

    • OPERATING LEASE
    • RENT EXP X
    •     CASH X
    • DEF GAIN X 
    •     RENT EXP X

    • CAPITAL LEASE
    • DEP EXP X
    •     ACCUM DEP X
    • DEF GAIN X
    •     DEP EXP X

    *DEFER GAIN ONLY UPTO PVMLP OR WHAT YOU SOLD IT FOR.  
  27. leases under IFRS?
    • same as GAAP, except instead capital lease call it a financing lease. the same four rules just judgement based instead of rules based.
    • 1. TT
    • 2. BPO
    • 3. MOST OF ASSETS USEFUL LIFE
    • 4. MOST OF PVMLP
  28. what is a current liability?
    a current liability is a obligation that is settled within 1yr or the operating cycle whichever is longer.
  29. what are accounts payable?
    • accounts payable are an account that is used to record an obligation that you owe usually from something you purchased. some special considerations to accounts payable are the following 2/10, N/30. There are two methods too account for A/P.
    • 1. gross method-purchases are shown at gross and no discount is assumed. 
    • PURCHASES 100
    •     A/P 100

    • A/P 100
    •     CASH 90
    •     DISCOUNT 10

    • 2. The net method- this method not gross and assumes discount is taken. 
    • PURCHASES 90
    •     A/P 90

    • A/P 90
    • EXP 10
    •     CASH 100
  30. what is a warranty cost and whats the journal entry?
    a warranty cost is a cost incurred when a product is sold. simple journal entry

    • WARRANTY EXP X
    •     WARRANTY PAYABLE X
  31. what is a service contract?
    • a service contract is a contract that is made with a service such as a cell phone carrier. they don't earn the entire revenue once contract is signed but instead over life. Journal entry are as follows:
    • CASH X
    •     UNEARNED REV X
  32. what are coupons or premiums? 
    • coupons like shares are issued, the problem you run into is the costs associated with the coupons are uncertain, since some will never be used. To help determine the cost look at these steps
    • 1. Determine the total face value of coupons issued. 
    • 2. Add handling fee percentage
    • 3. Multiply by percentage of coupons expected to be redeemed. 
    • 4. Subtract payments already made
  33. what are compensated absences and how do they belong in liabilities?
    • compensated absences are when an employer is paying employees for being sick. so the question is do we accrue for compensated absences? YES. we do if:
    • 1. Probable and estimable
    • 2. Services have already been performed.
    • 3. Accumulate/vests- this means that the absences accumulate year to year and they vest meaning can be taken with them when they leave. 

    *Special note Vacation days are always accrued regardless of the tests above. 

    To Accrue the sick pay and vacation pay here is journal entry

    • SICK PAY EXP X
    •     LIABILITY X

    • VACATION EXP X
    •     LIABILITY X
  34. whats the deal with bonuses?
    • some companies pay bonuses and if so they should accrue for them. journal entry is simply:
    • BONUS EXP X
    •     ACCRUED LIABILITY X
  35. whats the deal with subscriptions on publications?
    this is when a company sells subscriptions of magazines to people such as CARANDDRIVER. Journal entries are simple

    • CASH X
    •     UNEARNED REV X

    Then when paid.

    • UNEARNED REV X
    •     REVENUE X 
  36. what are dividends payable and what do i need to know?
    dividends payable are when a company decides to pay its common stock and preferred stock shareholders for investing with the company. Simply Journal Entries:

    • R/E X
    •     DIVIDENDS PAYABLE X

    • DIVIDENDS PAYABLE X 
    •     CASH X
  37. what is a contingency and do i accrue or disclose info?
    a contingency can either be a gain or loss that can occur in the future as a result of a prexisting condition. 

    • Contingency Liability- we are going to look at if you disclose or accrue or both. 
    • Disclose if the liability is either reasonably possible, or probable to happening regardless of being estimable. 
    • Accrue if the liability is probable and is estimable. 

    • Gain Contingency- when do we disclose or accrue or both. 
    • Disclose-if reasonably possible or probable regardless or being estimable. 
    • Accrue- we never accrue gains.... conservatism in play here. 
  38. what are subsequent events?
    • a subsequent even is an event that occurs after the balance sheet date, but before the F/S are issued. There are 2 types
    • TYPE 1- existed at B/S date. Accrue and Disclose and use the original report date.
    • TYPE 2- condition existed after B/S date but before issued. These should be disclosed but not accrued and use a dual date for the F/S's
  39. Interest on notes payable?
    • Notes payable can be recorded differently depending on different lengths of time. If N/P are in ordinary business, then they are recorded at face value. If the N/P is long term meaning after 1yr or ordinary bus cycle whichever is longer then record at Present Value like most Liabilities. Journal Entries look as such....
    • N/R X
    •     CASH X

    • CASH X 
    •     N/P X
  40. what is non-interest bearing note?
    a non-interest bearing note is a note that does not have interest stated or its unreasonable. In this case use the FMW of goods
  41. Trouble Debt Restructuring?
    • I have debt and im in trouble. I need to restructure my debt so that I can survive. there are 3 ways to do this:
    • 1. Transfer of Property-give property to resolve the debt issue. In doing this look:
    • YOU OWE(1000)
    • SELL ASSET(700)
    • ASSET CV(500)

    • Debtor records
    • N/P 1000
    •     ASSET 500
    •     GAIN 200
    •     EXTRA GAIN 300

    • Creditor records
    • ASSET 700
    • LOSS 300
    •     N/R 1000

    • TO DETERMINE GAIN = SELL ASSET VS ASSET CV
    • TO DETERMINE EXTRA GAIN = YOU OWE VS SELL ASSET

    2. Transfer of Equity-give cs to cover debt

    • Debtor records
    • N/P X
    •     C/S(@PAR)
    •     APIC(@FMV)
    •     GAIN X

    • Creditors record
    • INVESTMENT STOCK X
    • LOSS X
    •     N/R X

    • 3. Modification of terms-this is when you change interest rate, maturity rate, or face amount. so you journal entry will look something like this:
    • N/P 500
    •     N/P 400
    •     GAIN 100 
  42. current liabilities under IFRS?
    • same as GAAP, however, a couple differences exist.
    • 1. short-term obligations being refinanced can be charged to L/T only if there is an agreement. This is opposed to GAAP that requires intent and ability.
    • 2. Contingent liability- if instead of accure they use the terminology such as provisions. and they have a provisions account.
  43. what are receivables?
    • arise from the sale of goods and are current if its within the operating cycle or 1yr whichever is longer. Simply journal entry is:
    • A/R X
    •     REVS X
  44. how are receivables accounted for meaning valuation?
    • A/R should always be reported at their NRV(gross amount of A/R - costs to collect).
    • 2 methods
    • 1. Gross method- assume discount not taken
    • A/R 100
    •     SALES REV 100

    • CASH 90
    • EXP 10
    •     A/R 100

    • 2. net method- assume the discount is always taken right away.
    • A/R 90
    •     SALES REV 90

    • CASH 100
    •     A/R 90
    •     INCOME 10

    • *TRADE DISCOUNTS COULD ARISE AND ITS REPORTED NET OF SALES
    • *SALES RETURNS AND ALLOWANCES-AMOUNTS EXPECTED TO BE RETURNED.
    • Journal entries involving above:

    • SALES RETURNS X
    •     ALLOWANCE FOR RETURNS X
  45. what do we do with uncollectibles in regard to receivables?
    • uncollectibles are the idea that not all receivables will be collectible. here is how we account for them:
    • A/R 100
    •     SALES 100

    • BAD DEBT EXP 10
    •     ALLOWANCE 10
  46. how do we handle bad debt exp?
    • there are two ways to account for bad debt expense which are the direct write-off method and the allowance method. only the allowance method is used by GAAP.
    • Direct write-off example:
    • A/R 10
    •     SALES 10

    • BAD DEBT EXP 5
    •     A/R 5

    • Allowance method example:
    • A/R 10
    •     SALES 10

    • BAD DEBT EXP 5
    •     ALLOWANCE 5

    • Now to calculate bad debt expense we have 2 methods.
    • 1. I/S approach- simply multiply A/R by a certain % of credit sales.
    • 2. B/S approach- using an aging report. multiply by percentages and get ending uncollectible meaning we have to minus beg uncollectible to get uncollectible this period.
  47. how can we use our A/R to get money instead of waiting?
    • there are several methods available to get money... they are the following:
    • 1. Pledging- borrow money and use A/R as collateral
    • 2. Assigning - borrow cash and promise A/R to someone once money comes in.
    • 3. Factoring- gets money by selling A/R with/without recourse.
  48. when do we know if a sale or transfer of A/R is made?
    • a sale is only recorded if control is surrendered. these 3 criteria decide if control is surrendered:
    • 1. assets isolated & out of reach of transferer
    • 2. transferee can do whatever they want with the asset.
    • 3. the transferor may not have a repurchase or redemption agreement.

    • If all these are met then its a sale and would be considered factoring of A/R and journal entry looks like this:
    • CASH X
    •     A/R X

    • If not all these are met then its a borrowing so its assigning or pledging of A/R here is entry:
    • CASH X
    •     N/P X
  49. what accounts can arise if a sale of A/R takes place?
    • if a sale is made with A/R then 2 extra accounts can arise... here they are:
    • 1. Factors holdback-this occurs because factor gives A/R, but A/R is not really worth full amount so they require extra from protection of returns or discounts.
    • 2. Recourse obligation- protection against uncollectibles. this happens with recourse.
    • HERE IS SOME EXAMPLES:
    • with recourse
    • CASH X
    • LOSS FACTOR X
    • ALLOWANCE X
    •     A/R X
    •     RECOURSE OBLIGATION X

    • without recourse
    • CASH X
    • LOSS X
    • ALLOWANCE X
    •     A/R X
  50. how are A/R reported in regards to impairments?
    • Every asset is tested for impairment at least once a year. This is how testing goes:
    • 1. NRV vs Expected future cash flow decides loss
    • 2. CV vs FV gives loss amount
    • 3. Book it--
    • LOSS 10
    •     A/R 10
  51. what is the accounting concerns with interest of receivables?
    when looking at receivables and interest rates we can have deferred interest account come up with when goods or services are given for N/R.

    • for example
    • N/R received for goods or services @ reasonable rate J/E
    • N/R 10
    •     ASSET 7
    •     GAIN 3

    • N/R received for goods or services @ unreasonable rate
    • N/R 10
    •     DEF. INT 1.2
    •     ASSET 7
    •     GAIN 1.8
  52. Receivables and loans under IFRS?
    The IFRS brings an account called "loans and receivables" created by providing goods and services. This account is for A/R and L/R which are recorded at FV. Any changes are recorded at amortized cost.

    IFRS also calls allowances "provisions" just a terminology difference.

    IFRS always allows impairments to be written back up.

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