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2012 Edition - Financial Final Review

FINANCIAL

1

Accounting Changes

Classification and Approaches

Changes in Accounting Estimate

Changes in Accounting Principle

Changes in Accounting Entity

Error Corrections

Summary of Accounting Changes and Necessary Treatments

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2012 Edition - Financial Final Review

NOTES

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

SUMMARY NOTES
I.

CLASSIFICATION AND APPROACHES

Changes in an accounting estimate

Changes in an accounting principle

Changes in the reporting entity

Error correction

In accounting for accounting changes and error corrections, the objective is to maintain the validity of
comparative information.

Accounting change approaches:

II.

Prospective application

Retrospective application (cumulative effect)

Restatement approach

CHANGES IN ACCOUNTING ESTIMATE (prospective approach)
Adjustments for changes in accounting estimate are made in the current and future accounting periods.
They do not affect previous periods. Examples include:

Change in useful life

Change in salvage value

Settlement of litigation

When a change in accounting principle is inseparable from a change in accounting estimate, it should be
reported as a change in accounting estimate.

III. CHANGES IN ACCOUNTING PRINCIPLE - Retrospective Application (cumulative effect)
General rule: Any change from one generally accepted accounting principle to another generally accepted
accounting principle is recognized by adjusting beginning retained earnings for the cumulative effect of the
change, net of tax. Prior period financial statements are restated (IDEA).
The cumulative effect of a change in accounting principle is computed as of the beginning of the earliest
year presented, regardless of the actual date of the change, by applying the new principle to the item to be
changed since inception. The difference between the two principles is the catch-up amount for all prior
affected periods. It includes direct effects and only those indirect effects that are entered into the accounting
records.
Under IFRS, when an entity applies an accounting principle retroactively or makes a retrospective
restatement of items in the financial statements, the entity must (at a minimum) present three balance sheets
(end of current period, end of prior period, and beginning of prior period) and two of each of the other financial
statements (current period and prior period). The cumulative effect adjustment would be shown as an
adjustment of the beginning retained earnings on the balance sheet for the beginning of the prior period. U.S.
GAAP does not have a three balance sheet requirement.

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

If the error occured in a year presented.000) 3.000 $28. ERROR CORRECTIONS (restatement approach) Error corrections require retroactive restatement by adjusting the beginning balance of retained earnings. GAAP does not have an impracticality exemption for error corrections. . Under IFRS.800. An example of a change handled in this manner is a change in inventory cost flow assumption to LIFO (U.000. the error is corrected in those prior financial statements. Hence. it is considered impractical to try and rebuild those old cost layers. No adjustment should be made to Retained Earnings. U.S. when it is impracticable to determine the cumulative effect of an error. All rights reserved.700. Impractical to Estimate If it is considered impractical to accurately calculate this cumulative effect adjustment. The new depreciation method should be used as of the beginning of the year of change in estimate and should start with the current book value of the underlying asset. CHANGES IN ACCOUNTING ENTITY (retrospective application) Include changes in the companies that make up the consolidated or combined financial statements from year to year.2012 Edition . Change in Depreciation Method A change in the method of depreciation. all these statements would be restated as though all the companies were always combined. the entity is required to restate information prospectively from the earliest date that is practicable. Exceptions to the General Rule (prospective application): 1. GAAP only).000.000. net of tax. These changes should be accounted for as changes in estimate and are handled prospectively. IV.000) Cumulative effect of accounting change (net of tal( el(pense of $2. Since a cumulative effect adjustment to LIFO would require the reestablishment and recalculation of old inventory layers. V. then the change is handled prospectively (like a change in estimate).300. Year 1 $28. 2.Financial Final Review A.000 Beginning balance (as previously reported) Prior period adjustments: Correction of error (net of tal( benefit of $1.S. in the earliest year presented. The concept of a change in accounting entity is not discussed in IFRS.000 Beginning balance (restated) 1-4 © 2011 DeVry/8ecker Educational Development Corp. amortization. Gracie Company STATEMENT OF RETAINED EARNINGS (Partial) For the Year Ended December 31. if 5-year comparative statements are presented.000) (2. or depletion is considered to be both a change in method and a change in estimate.

FIFO to Average beginning retained earnings of earliest year presented Changes in principleExceptions {require prospective treatment) • From any inventory valuation • Prospective application. the method to LIFO (U. consolidated FS against the beginning balance of the retained earnings under • Report consolidated FS in the caption of "Prior Period place of individual statements Adjustments" • Restate all financial statements presented Neither a change in principle nor a change • Change from cost method to • Retroactive adjustments (plus equity method or minus) net of tax. against in estimate the beginning balance ofthe earliest retained earnings presented under the caption of "Prior Period Adjustments" • Restate all financial statements presented Correction of errors • From cash to accrual • Retroactive adjustments (plus or minus) net of tax. . account for in the current statement "above the line" • Residual value • No cumulative effect • Bad debt % • Loss accruals 1-5 © 2011 DeVry/Becker Educational Development Corp. against • Errors made in prior the beginning balance ofthe statements retained earnings under the caption of "Prior Period Adjustments" • Restate all financial statements presented that are affected Changes in estimate • Depreciation method • Useful life of depreciable asset • Prospective application. • Adopt a new standard compute cumulative effect and • Change methods of inventory report net of tax by adjusting costing. GMP beginning inventory of the only) year of change is the first LIFO • Change depreciation methods -SUo SYD layer • Apply new depreciation method to remaining book value as of the beginning of the year Changes in entity • Consolidation of a subsidiary • Retrospective adjustments not previously included in (plus or minus) net oftax. SUMMARY OF ACCOUNTING CHANGES AND NECESSARY TREATMENTS Accounting Changes From one GMP!IFRS principle to another GMP!IFRS principle Example(s) Income Statement Statement of Retained Earnings Retrospective application.Financial Final Review VI.S.2012 Edition . All rights reserved.

Financial Final Review NOTES 1-6 © 2011 DeVry/Becker Educational Development Corp. .2012 Edition . All rights reserved.

The machine was being depreciated on a straight-line basis. the machine had an estimated useful life of six years with no salvage value. What is the amount of the depreciation expense that should be recorded for the year ended Year 4? 1. Assuming that Schreiber can justify the change. Year 1.000 $0 $24. An accounting change was made in Year 4. Year 10. Year 1 for $600. The machine was depreciated by an accelerated method for book and tax purposes.000 $560. Schreiber changed to the straight-line method for financial statement purposes.000 $36. 4. in its Year 3 statement of retained earnings. Schreiber Company purchased a $300. 3. Schreiber's income tax rate is 40%.2012 Edition . Year 4.000 decrease in the beginning inventory at January 1.000 2. The change will result in an $800.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 On January 1.000. On the date of acquisition. . Year 10 in the statement of retained earnings is: 1.000 $240. The machine's carrying amount was $120. Year 2. Year 10. 2. On January 1. 3. 4. 3.000 $100. All rights reserved. The tax rate is 30%. what amount should Schreiber report as the cumulative effect of this change? 1.000 $0 QUESTION 3 On December 31. $0 $800.000 QU ESTION 2 Gonzales Company purchased a machine on January 1. Gonzales determined that the machine had an estimated life of eight years from the date of acquisition. Brown Company changed its inventory valuation method from the weighted average method to FIFO for financial statement purposes.000 $60. $60. $75. 1-7 © 2011 DeVry/Becker Educational Development Corp. The cumulative effect of this accounting change for the year ended December 31. Year 3. 4. On January 1.000 machine with a five-year useful life and no salvage value.000 on December 31. 2.

3. Prior period adjustment resulting from the correction of an error. GAAP. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. During the current year by a weighted average of the purchases. Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. 4. During the eight months ending August 31. 3. The cumulative effect of the change is shown as an adjustment to beginning retained earnings on the balance sheet for: 1. All rights reserved. Retrospective application. by a weighted average of the purchases. 3. August 31 of the current year.S. Prospective application.Financial Final Review QUESTION 4 The proper accounting treatment to account for a change in inventory valuation from FIFO to LIFO under U. QUESTION 7 On August 31 of the current year. By reporting pro forma amounts for prior periods. QUESTION 6 How should the effect of a change in the accounting estimate be accounted for? 1. Component of income after extraordinary item. Harvey uses IFRS and is on a calendar year basis. By restating amounts reported in financial statements of prior periods. January 1 of the prior year. GAAP is: 1. 2.S. Harvey uses U. QUESTION S Lore Co. .2012 Edition . 4. December 31 of the current year. 4. As a prior period adjustment to beginning retained earnings. 2. The cumulative effect of the change is determined: 1. changed from the cash basis of accounting to the accrual basis of accounting during the current year. 1-8 © 2011 DeVry/Becker Educational Development Corp. Ignored. Prior period adjustment resulting from the change in accounting principle. 2. January 1 of the current year. 2. QUESTION 8 On August 31 of the current year. 4. In the period of change and future periods if the change affects both. As of January 1 of the current year. is on a calendar year basis and does not present comparative financial statements. 4. Retroactive approach. 3. The cumulative effect of this change should be reported in Lore's current year financial statements as a: 1. 3. Harvey Co. 2. Component of income before extraordinary item. As of August 31 of the current year.

2012 Edition - Financial Final Review

TASK-BASED SIMULATIONS

TASK-BASED SIMULATION 1:
AIlcounllnll T.._nte

Accounting Treatments

Authoritative Literature

I

Help

I

On January 1, Year 2, Riggs Corporation hired a new controller. During the year, the controller working with Riggs' outside accountants
and President, made changes to existing accounting policies, instituted new accounting policies, and corrected several errors in prior
year accounting. Riggs uses U.S. GAAP and does not present comparative financial statements
For each of the transactions below, identify the classification of the transaction by double-<:Iicking in the shaded cells under
·Classification" and selecting from the list provided. Also, identify the general accounting treatment required for each transaction's
classification by doubl&-clicking in the shaded cells under "Treatment" and selecting from the list provided. The aveilable treatments are:

Retrospective application
Include the cumulative effect of the adjustment resulting from an accounting change in the Year 2 financial statements as an
adjustment to beginning retained eamings.

Retroactive teSlatement 8DProach
Adjust the Year 2 beginning retained eamings if the error or change affects a period prior to Year 2.

Prospective application
Report Year 2 and future financial statements on a new basis, but do not adjust the beginning retained eamings.

CI...ifieation

Transaction

Treatment
-

1. Riggs manufactures heavy equipment to customer specifications on a contract basis. On the
basis that it is praferable, accounting for thase long-term contracls was switched from the
completed-contract method to the percentage-of-<:omplelion method.
2. As a result of a production breakthrough, Riggs determined that manufacturing equipment
previously depreciated over 15 years should be depreciated over 20 years.
3. The equipment that Riggs manufactures is sold INith a five-year warrenty. Because of a
production breakthrough, Riggs reduced its computation of warranty costs from 3% of sales to
1% of salas.
4. Riggs changed from FIFO to average cost to account for its raw materials and work in process
inventories.
5. Riggs sells extended service contracls on its products. Because related services are
performed over several years, in Year 2 Riggs changed from the cash method to 1I1e accrual
method of recognizing income from 1I1e88 service contr1lCts.
6. During Year 2, Riggs determined that an insurance premium paid and entirely expensed in
Year 1 was for the period January 1, Year 1, through January 1, Year 3.
7. Riggs changed its method of depreciating office equipment from an accelerated method
straight-line method to more closely reflect costs in later years.

to the

8. Riggs instituted a pension plan for all employees in Year 2 end adopl8d U.S. GAAP
Standards relating to employer's accounting for pensions. Riggs had not previously had a
pension plan.
9. During Year 2, Riggs increased its investment in Brunner, Inc. from a 10% interest, purchased
in Year 1, to 30%, and acquired a seat on Brunner's board of directors. As a result of its
increased investment, Riggs changed its method of accounting for investment in subsidiary from
the cost method to the equity method.
10. Based on improved collection procedures, Riggs changed the percentage of credit sales
used to determine the allowance for uncollectible eccounts from 2% to 1%.

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2011 DeVryjBecker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

Change in accounting principle

Retrospective application

Change in accounting estimate

Restatement approach

Correction of an error in
previously presented financial
statements

Prospective application

Neither an accounting change
nor an error corrrection

-

Solution

1.

Change in accounting principle I Retrospective application
Switching from the completed-contract method of accounting to the percentage of completion method is a change in
accounting principle.
In this case, the cumulative effect of a change in GAAP should be shown on the statement of retained earnings
against beginning retained earnings net of tax.

2.

Change in accounting estimate I Prospective application
A change in the lives of fixed assets is considered a change in estimate.
A change in accounting estimate affects only the prospective (current and subsequent) periods, not prior periods or
retained earnings. Simply implement the change and continue with the accounting in future periods.

3.

Change in accounting estimate I Prospective application
A change in the computation of warranty costs from 3% of sales to 1% of sales is a change in accounting estimate.
A change in accounting estimate affects only the prospective (current and subsequent) periods, not prior periods or
retained earnings. Simply implement the change and continue with the accounting in future periods.

4.

Change in accounting principle I Retrospective application
A change in an inventory pricing method from FIFO to average cost is a change in accounting principle.
In this case, the cumulative effect of a change in GAAP should be shown on the statement of retained earnings
against beginning retained earnings net of tax.

5.

Correction of an error in previously presented financial statements I Restatement approach
A change from the cash method to the accrual method is a correction of an error in previously presented financial
statements.
When comparative financial statements are not issued (as in this case), a correction of an error requires restatement
of the retained earnings from the prior period end by adjusting (net of tax) the opening balance of the current retained
earnings statement.

6.

Correction of an error in previously presented financial statements I Restatement approach
The change of the accounting practice of expensing insurance premiums when paid rather than allocating them to
the periods benefited is a correction of an error in previously presented financial statements.
When comparative financial statements are not issued (as in this case), a correction of an error requires restatement
of the retained earnings from the prior period end by adjusting (net of tax) the opening balance of the current retained
earnings statement.
(continued)

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

(continued)

7.

Change in accounting estimate I Prospective application
A change in the depreciation method from an accelerated method to the straight-line method for the purpose of
more fairly presenting the financial statements is a change in accounting method and change in estimate,
which shall be treated as a change in estimate.
The new depreciation method should be used as of the beginning of the year of change in estimate and should
start with the current book value of the underlying asset.

8.

Neither an accounting change nor an error correction I Prospective application
Instituting a pension plan and adopting statements of accounting standards to account for it, is neither and
accounting change nor an accounting error.
When a company institutes a pension plan for the first time, it affects only the prospective (current and
subsequent) periods, not prior periods or retained earnings.

9.

Neither an accounting change nor an error correction I Restatement approach
A change from the cost method (less than 20% ownership) to the equity method (20% or more ownership and
an influential seat in the board of directors) of accounting for an investment in subsidiary is neither an
accounting change nor a correction of an error. Proper GAAP rules were followed for the situations.
When a corporation goes from not having significant influence in an investee « 20%) to having significant
influence in an investee (20% or more and < 50%), the equity method should be used, and the periods during
which the cost method was used are retroactively restated.

10. Change In Accounting Estimate I Prospective application
A change in the percentage of credit sales used to determine the allowance for uncollectible accounts (bad debt)
is a change in accounting estimate.
Changes in accounting estimate are recognized only in the current and future years under the prospective
approach (Le., implement the new method and continue into future years).

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

000 $77.000 79. All rights reserved. an entity changed from the average cost method to the FIFO method to account for its finished goods inventory. Accounting treatment for transaction 3. . Dollar amount of transaction Change in accounting principle Retrospective application Change in accounting estimate Restatement approach Correction of an error in previously presented financial statements Prospective application Neither an accounting change nor an error corrrection 1-12 © 2011 DeVry/Becker Educational Development Corp. Enter the appropriate amount in cell 83.000 82. Year 2.Financial Final Review TASK-BASED SIMULATION 2: FIFO LIFO Authoritative Literature I Help I Effective January 1. Classification of transaction 2.2012 Edition . ~ Ix I II B A 1. Cost of goods sold under each method was as follows: Years Average Cost Prior to Year 1 Year 1 FIFO $71.000 For cells 81 and 82. double-click in the shaded cells and select from the list provided.

All rights reserved. 2.000 Change $9. Change in accounting principle A change in the cost method used to account for inventory is a change in accounting principle.2012 Edition .l1 1.000 3.000 79. 3. Retrospective application A change in the cost method used to account for inventory is accounted for using a retrospective application (cumulative effect).000 82.000 1-13 ~ 2011 DeVryjBecker Educational Oevelopment Corp. .Financial Final RevIew -1l:'lL~. $9.000 $77.000 Yeat3' Prior to Year 1 Year 1 Average Cost FIFO $71.000 $8.

DoprocIIlIon IAulhorllative L"erature I Help I In January of Year 1. On December 31.. Classification of transaction 2. Year 2. Accounting treatment for transaction 3. double-click in the shaded cell and select from the list provided.2012 Edition . For cells 81 and 82.. All rights reserved.000. The machine was depreciated using the straight-line method. the entity discovered that depreciation on the machine had been calculated using a 25% rate. «tP Ix I II A B 1. . Dollar amount of transaction Change in accounting principle Retrospective application Change in accounting estimate Restatement approach Correction of an error in previously presented financial statements Prospective application Neither an accounting change nor an error corrrection - 1-14 © 2011 DeVry/Becker Educational Development Corp. an entity purchased a machine with a five-year life and no salvage value for $40.Financial Final Review TASK-BASED SIMULATION 3: Straight-fine Depreciation 8tnolght~l. Enter the appropriate amount in cell 83.

000) = $10.000) Total = $2. The Year 1 depreciation expense (and net income) were determined using the incorrect 25% rate. 3. Restatement approach The incorrect recording of depreciation is corrected for all prior periods by adjusting the beginning retained earnings net of tax of the period in which the error is discovered if no comparative statements are issued (the restatement approach).000 1-15 ~ 2011 DeVryjBecker Educational Development Corp.000 Correct: Year 1 depreciation (20% )( $40. 100%/5 2. =20%) is a correction of an error.000) is a prior period correction. The difference (5% )l $40.000) = ($8. Incorrect: Year 1 depreciation (25% )( $40.Financial Final RevIew -lnl~1 1..000 The error was discovered in Year 2. All rights reserved. Correction of an error in previously presented financial statements The use of a 25% rate rather than the proper 20% rate (e. therefore. .000 = $2.2012 Edition .g. $2. the Year 2 depreciation expense will be calculated using the proper 20% rate.

.rch Withn I I Advanced Search I PreviOUS Result II Next Result I FASS Literature Uniform CPA Examination Authoritative Literature Il' FASS Import To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above.lre I Home I I Help Recent Page Visits I r Enter Search Here I Prev.Financial Final Review TASK-BASED SIMULATION 4: Research R.llndex Search I~ext I~ata-.tur. .. All rights reserved. FASBASC I -- l-eJ-eJ-c=J Some examples of correctly fonnatted FASB ASC responses are 205-10-05-1. 323-740-S25-1. 260-10-55-99 and 115-60-35-128A T Research B"'ck Allthoritiltive Uterat\. It' Original Pronouncements as A IV Current Text IV TopIc.ous Match II Table of Contents ~ FASS Liter. 41 I • Solution Source of answer for this question: FASS ASC 250-10-45-21 Keyword: Change in Reporting Entity 1-16 © 2011 DeVry/Becker Educational Development Corp.arch Authoritative Literature I Help I How is a change in reporting entity accounted for? Find the proper citation that provides guidance to answer this question.2012 Edition .. Correctly formatted FASB ASC topics are 3 or 4 digits. Type the topic here. 260-1 0-60-1 A. Use the buttons to the right and the links above the text box to perform more detailed or advance searches. I 5e.

Financial Final Review FINANCIAL 211 Accrual Accounting Revenue Recognition Principle • Completed Contract Method Percentage of Completion Method • Installment Sales Method Cost Recovery Method • • Intangible Assets Accounts Receivable • 2A-1 ttl 2011 DeVry/Becker Educational Development Corp. Impairment . All rights reserved.2012 Edition .

Financial Final Review NOTES 2A-2 © 2011 DeVry/Becker Educational Development Corp. . All rights reserved.2012 Edition .

. revenue is recognized when it is earned and realized or realizable.GAAP Under U. GAAP. Under IFRS. PERCENTAGE OF COMPLETION METHOD The percentage of completion method recognizes revenue as it is being earned on a long-term construction contract (matching concept) and hence is the preferred method under U.S. and 4) construction contracts. 2) rendering of services. Each category has additional revenue recognition criteria. and dividends. revenue/income is recognized based on the ratio of the cost incurred to date to the total estimated cost. xxx Construction in progress xxx Cash / Accounts payable xxx Accounts receivable xxx Progress billings Losses (100%) for the completed contract method are recognized in full as they are discovered.g. All rights reserved. The completed contract method is prohibited under IFRS. if the final outcome of the project cannot be reliably measured. . then the cost recovery method is required. 3) revenue from interest. a deferred credit (liability) is recognized. installment sales method and cost recovery method. REVENUE RECOGNITION PRINCIPLE A. e. which occurs when the earnings process is complete.S. COMPLETED CONTRACT METHOD The completed contract method is a method for recognizing revenue on long-term construction contracts under U. the completed contract method must be used and revenuelincome is recognized when the contract is completed. III. There are exceptions to the revenue recognition principle for special situations. • It is probable that economic benefits from the transaction will flow to the entity.Financial Final Review SUMMARY NOTES I.2012 Edition . revenue transactions are divided into four categories: 1) sales of goods.S. IFRS Under IFRS. Common revenue recognition criteria for all four categories include: • Revenue and costs can be measured reliably. 2A-3 © 2011 DeVry/Becker Educational Development Corp. GAAP and the required method under IFRS. an exchange has taken place and collection of the sales price is reasonably assured. royalties. When cash is received in advance of the revenue being earned. inclusive of the percentage of completion method. unearned revenue.S. U. If the percentage of completion on the contract can be reasonably estimated. GAAP. II. If the percentage of completion on a contract cannot be reasonably estimated. B.

V.2012 Edition . 2A-4 © 2011 DeVry/Becker Educational Development Corp.Cost of goods sold 2. 100%). All rights reserved. No gross profit is recognized until the original cost of the asset is recovered. =Cash collections x Gross profit % Deferred gross profit = Installment receivables x Gross profit % COST RECOVERY METHOD (Cash basis) The cost recovery method is an alternative to the installment sales method when there is doubt as to collectibility.g. As such. 4 Steps 1. Construction in progress XXX XXX Cash / Accounts payable XXX Accounts receivable Progress billings XXX Construction in progress XXX XXX Current gross profit calculation of Current Gross Profit Step #1 Total Gross Profit Contract Price (Total Estimated Cost) Gross Profit Step #2 % Completed Cost to Date Total Estimated Cost Step #3 Gross Profit Earned to Date Step #1 x Step #2 Step #4 Current Gross Profit Gross Profit Earned to Date (Gross Profit Previously Recognized) Current Gross Profit IV.Financial Final Review Losses for the percentage of completion method are recognized in full as they are discovered (e. revenue is recognized when the earnings process is complete. . If no reasonable estimate can be made of the amount that will be collected. gross profit is not recognized until the cash is actually collected. INSTALLMENT SALES METHOD (Cash basis) Under the revenue recognition principle.. and the earnings process is not complete until collection of the sales price is reasonably assured. Gross profit = Sales . the installment method can be used. Gross profit % = Gross profit / Sales 3. Earned gross profit 4.

Under IFRS. intangible assets are reported at cost less amortization (finite life intangibles only) and impairment. such as goodwill. resulting in bad debt expense for the period. but is subject to the impairment test. • For intangible assets with finite lives. There are two GAAP methods to compute bad debt expense using the allowance method. or have indeterminate lives. trademarks. franchises. copyrights. ACCOUNTS RECEIVABLE Accounts receivable are reported at their net realizable value (AR . is amortized over its useful life. or restoring intangible assets that are not specifically identifiable. Income Statement Approach Bad debts are estimated as a percentage of net credit sales. Revaluation losses are reported on the income statement and revaluation gains are generally reported in other comprehensive income. GAAP) or the revaluation model. The Direct Write-off Method is not GAAP. • Costs of developing.S. Internally developed intangibles are expensed when incurred under U. revalued intangible assets are reported at fair value on the revaluation date less subsequent amortization and impairment. INTANGIBLE ASSETS • Patents. the cost of the asset. but development costs can be capitalized if certain criteria are met. maintaining.Allowance for Doubtful Accounts). All rights reserved. and goodwill are common intangible assets.S. • Purchased intangibles are recorded at cost.S. Allowance for D/A Write-ofts Beginning Balance Recoveries Bad Debt Expense (% of Credit Sales) Ending Balance 2A-S © 2011 DeVry/Becker Educational Development Corp.Financial Final Review VI. research costs related to internally developed intangibles must be expensed. • Intangible assets that have no legal or economic lives are considered to have indefinite useful lives. . A. generally using the straight-line method. Under the revaluation model. • Under U. These intangible assets are not amortized but are reviewed for impairment periodically. VII. less its residual value. GAAP because research and development costs cannot be capitalized. are expensed when incurred. intangible assets are reported using the cost model (same as U. • Under IFRS. GAAP.2012 Edition . • Goodwill cannot be amortized.

GAAP. GAAP does not permit the reversal of impairment losses unless the asset is held for disposal.S. The impairment loss is calculated as the amount by which the carrying amount exceeds the fair value of the asset. This results in the ending balance for allowances for doubtful accounts and the bad debt expense is the "Plug. All rights reserved." Allowance for D/A Write-ofts Beginning Balance Recoveries Bad Debt Expense (Plug) Ending Balance (based on AIR not expected to be collected) c. emphasis is on the valuation of the receivables.Financial Final Review B. A. When testing an intangible asset with an indefinite life (including goodwill) for impairment. the test for recoverability is performed by comparing the fair value of the asset to its carrying value because it is difficult. 2A-6 © 2011 DeVry/Becker Educational Development Corp.. The company retains title to the receivables but pledges that it will use the proceeds to payoff the loans. Pledging A company may use its accounts receivable as collateral for loans. intangible or fixed). Without recourse means that the buyer assumes the risk of any losses on collection. IMPAIRMENT (For intangibles and long-lived assets) The carrying amounts of intangibles (including goodwill) and fixed assets held for use and to be disposed of need to be reviewed at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. VIII. U. GAAP) The future cash flows expected to result from the use of the asset and its eventual disposition need to be estimated when testing for impairment.S. With recourse means the seller retains the risk of any losses on collection. an impairment loss needs to be recognized.S. Impairment Test (U. Pledging requires note disclosure only. if the sum of undiscounted expected (future) cash flows is less than the carrying amount. Factoring A company may sell its receivables to a factor either with or without recourse. an impairment loss needs to be recognized. The process used to determine impairment depends on the type of asset (Le. if not impossible. Under U.2012 Edition . If the fair value is less than the carrying amount. D. Balance Sheet Approach Bad debts are estimated as a percentage of ending accounts receivable or based on an aging of accounts receivable. . to estimate future cash flows.

or one level below an operating segment. 1. 2A-7 © 2011 DeVry/Becker Educational Development Corp. Compare the implied fair value of the goodwill to the carrying value of the goodwill. IFRS define the recoverable amount as the greater of the asset's fair value less costs to sell and the asset's value in use. goodwill impairment is calculated on the reporting unit level. which is the greater of the CGU's fair value less costs to sell and its value in use. 2. 3. GAAP) Under U. it cannot be reversed. The goodwill of one reporting unit may be impaired. 1. Determine the fair values of the reporting units and of the assets and liabilities of those reporting units. 4. 2. The evaluation of goodwill impairment is a two-step process: Step 1: Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount. . A reporting unit is an operating segment. A cashgenerating unit is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. If the implied fair value of the goodwill is less than its carrying amount. The impairment loss is first allocated to goodwill and then allocated on a pro rata basis to the other assets of the CGU. D. Value in use is the present value of the future cash flows expected from the CGU. The goodwill impairment test is a one-step test in which the carrying value of the CGU is compared to the CGU's recoverable amount. Goodwill Impairment (IFRS) Under IFRS. goodwill impairment testing is done at the cash-generating unit (CGU) level. GAAP. there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit's goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for (other impairments are evaluated before goodwill). Impairment Test (IFRS) Under IFRS. there is no goodwill impairment and Step 2 is not necessary. All rights reserved. If the fair value of a reporting unit is less than its carrying amount. Once the goodwill impairment loss has been fully recognized. Goodwill Impairment (U. including goodwill. while the goodwill for other reporting units mayor may not be impaired.S. Assign goodwill to the reporting units. an impairment loss for a long-lived asset other than goodwill is calculated by comparing the carrying value of the asset to the asset's recoverable amount. Allocate the fair value of the reporting unit to all assets and liabilities of the unit. recognize a goodwill impairment loss.2012 Edition . Step 2: Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. IFRS allow the reversal of impairment losses.Financial Final Review B. An impairment loss is recognized to the extent that the carrying value exceeds the recoverable amount. Assign assets acquired and liabilities assumed to the various reporting units. Value in use is the present value of the future cash flows expected from the intangible asset. If the fair value of a reporting unit is more than its carrying amount.S. Any fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit. C.

b. . Impairment of Intangible Assets (Including Goodwill) The impairment of an intangible asset is recorded by reducing the cost basis of the intangible asset (credit intangible asset) and recording an impairment loss. The cost is then depreciated over the remaining life. All rights reserved. Total Impairment The obsolete asset and related accumulated depreciation are removed from the accounts. and a loss is recognized for the difference. 2.Financial Final Review E. If the intangible asset is not totally impaired and the intangible asset has a finite life. Impairment Depends on Asset Type 1.2012 Edition . Impairment of Long-lived Tangible Assets a. then the new cost basis is amortized over the remaining life. Partial Impairment The asset should be written down to a new cost basis through the accumulated depreciation account. 2A-8 © 2011 DeVry/Becker Educational Development Corp.

2012 Edition . All rights reserved.Financial Final Review FINANCIAL 28 Additional Topics • • Segment Reporting Notes to Financial Statements Interim Reporting SEC Reporting Requirements • • First-Time Adoption of IFRS Foreign Currency Accounting Research and Development • Franchises Computer Software • 2B-1 ttl 2011 DeVry/Becker Educational Development Corp. Imputing Interest .

2012 Edition . .Financial Final Review NOTES 28-2 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.

• Whose operating results are regularly reviewed by the enterprise's chief operating decision maker. An operating segment is a reportable segment if it has at least 10% of the combined amounts of either: • Revenue from sales to unaffiliated customers and intersegment transfers for all of the entities reported. which includes methods. Straight Line). C. and for the corresponding periods of the preceding fiscal year.Financial Final Review SUMMARY NOTES I. Costs and expenses that clearly benefit more than one interim period are allocated to the periods affected. If this limit is not achieved. Under SEC Regulation S-X. interim financial statements should be reviewed and should include: 1. additional segments must be disclosed despite their failure to satisfy one of the thresholds. and criteria (e. NOTES TO FINANCIAL STATEMENTS Notes are an integral part of the financial statements. methods: LIFO. Income tax expense is estimated each quarter using the effective tax rate expected to be applicable to the full fiscal year. INTERIM REPORTING A.. Income statements for the most recent fiscal quarter. B. or • Profit or Loss. II. A balance sheet for the corresponding fiscal quarter for the preceding fiscal year is not required unless it is necessary to understand the impact of seasonal fluctuations. IFRS requires an explicit and unreserved statement of compliance with IFRS in the notes to the financial statements.g. but reporting minimums are outlined by the SEC. or • Assets If the segment does not meet the 10% limit.S. Interim financial statements are an integral part of the annual financial statements. The financial statements may also include income statements for the cumulative 12 month period ended during the most recent fiscal quarter and for the corresponding preceding period. 2. Balance sheets as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year. The other notes provide the details of the financial statements. policies.2012 Edition . U. it is not separately disclosed unless all the reportable combined sales to unaffiliated customers is less than 75% of the total company sales revenue made to outsiders. The first note is the Summary of Significant Accounting Policies. III. FIFO. GAAP does not establish presentation minimums for interim reporting. . SEGMENT REPORTING An operating segment is a part of an enterprise: • That engages in business activities. All rights reserved. • For which discrete financial information is available. 28-3 © 2011 DeVry/Becker Educational Development Corp. for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter.

S.Financial Final Review 3. it is required to submit a registration statement to the SEC that includes disclosures about the securities being offered for sale. interim period MD&A. The financial statements may also present statements of cash flows for the cumulative 12 month period ended during the most recent fiscal quarter and for the corresponding preceding period. This form contains unaudited financial statements prepared using U. IV. and audited financial statements. The filing deadline for Form 10-K is 60 days after the end of the fiscal year for large accelerated filers. Analysis.2012 Edition . 2. Statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter. A. Securities Offering Registration Statements When a company issues new securities. interim financial statements are required to include. Form 10-K Form 10-K must be filed annually by U. Form 10-Q Form 10-0 must be filed quarterly by U. changes in securities and trading markets. and certain disclosures. registered companies (issuers). including a summary of financial data. GAAP. The following is a brief overview of several significant forms that must be filed by companies registered with the SEC. 28-4 © 2011 DeVry/Becker Educational Development Corp. registered companies (issuers). Condensed statements of changes in equity cumulatively for the current financial year and for the comparable year-to-date period of the immediately preceding financial year. changes to accountants or financial statements. The filing deadline for Form 10-0 is 40 days after the end of the fiscal quarter for large accelerated filers and accelerated filers. Under IFRS.S. Condensed balance sheets as of the end of the current interim period and as of the end of the immediately preceding financial year.S. All rights reserved. and changes in corporate governance or management. 75 days after the end of the fiscal year for accelerated filers. information similar to that filed in the annual filing. management's discussion and analysis (MD&A). at a minimum: 1. Condensed statements of cash flows for the current financial year-to-date and the comparable year-to-date period of the immediately preceding financial year. 4. D. and for the corresponding period for the preceding fiscal year.S. These forms are filed electronically through the Electronic Data Gathering. GAAP. 3. C. Form 8-K This form is filed to report major corporate events such as corporate asset acquisitions or disposals. . B. and 90 days after the end of the fiscal year for all other registrants. D. and Retrieval (EDGAR) system and are available online to the public. and 45 days after the end of the fiscal quarter for all other registrants. and audited financial statements prepared using U. SEC REPORTING REQUIREMENTS The SEC requires that more than 50 forms be filed to comply with reporting requirements. These forms contain financial disclosures. Condensed statements of comprehensive income (single-statement or two-statement presentation) for the current interim period and the cumulative year-to-date with comparative statements for the comparable periods (interim and year-to-date) of the immediately preceding financial year.

4 and 5 These forms are required to be filed by directors. Remeasurement Method Foreign currency remeasurement is the restatement of foreign financial statements from the foreign currency to the entity's functional currency in the following situations: • The reporting currency is the functional currency. VI. two income statements (if using the two-statement approach to presenting comprehensive income). 1.Financial Final Review E. Regulation S-X outlines the form and content of financial statements to be included in SEC filings. and related notes.2012 Edition . officers. amortization and cost of goods sold). changes in owners' equity. All rights reserved. . two statements of cash flows. Foreign Currency Translation Foreign currency translation is the conversion of a financial statement of a foreign subsidiary into financial statements expressed in the reporting currency of the parent company. end of prior period. and beginning of prior period). Balance sheet related items are converted using the appropriate historical rate. The method used to convert the financial statements depends on the functional currency of the subsidiary. FOREIGN CURRENCY ACCOUNTING Foreign currency accounting includes: A. A gain or loss is plugged to net income to get the required balance needed to adjusted retained earnings so that the balance sheet balances. 28-5 © 2011 DeVry/Becker Educational Development Corp. FIRST-TIME ADOPTION OF IFRS An entity's first IFRS financial statements are the first annual financial statements in which the entity adopts IFRS and makes an explicit and unreserved statement in those financial statements of compliance with IFRS. An entity's first IFRS financial statements must include at least three balance sheets (end of current period. The income statement is then converted using a weighted average exchange rate for all items except those related to the balance sheet (depreciation. and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet. • The entity's books of record must be restated in the entity's functional currency prior to translating the financial statements from the functional currency to the reporting currency. *Remeasurement gains and losses are included in income. or beneficial owners of more than 10 percent of a class of equity securities of a registered company. annual financial statements filed with the SEC must be audited and must include balance sheets for the two most recent fiscal years and statements of income. two statements of changes in equity. two statements of comprehensive income. Under Regulation S-X. Forms 3. V. Remeasurement starts with the balance sheet and converts monetary items using current/yearend exchange rates and non-monetary items using historical exchange rates.

10 . Translation Method Foreign currency translation is the restatement of financial statements denominated in the functional currency to the reporting currency.$0. buying from and selling to) denominated in (to be settled in) a foreign currency. Translated net income is transferred to retained earnings. retained earnings is rolled forward. Assets and liabilities on the balance sheet are then converted using the current/year-end exchange rate.000 x ($O.000 pesos x $0.000 pesos x 0.OB)] 2.000 Cash (100. 28-6 © 2011 DeVry/Becker Educational Development Corp.000 pesos. Green paid for the goods on 3!1Nr 2. The exchange rates were: Date Rate 12/1!Yr 1 $0. Foreign exchange transaction gains and losses must be computed at a given balance sheet date on all recorded transactions denominated in foreign currencies that have not be settled.000 pesos x ($0.000 Accounts payable 12!31!Yr 1 10.09 The journal entries related to this foreign currency transaction are: 12!1!Yr 1 Transaction Date Purchases (100.000 adjustment) 8.$2.08 3!1!Yr 2 $0.09) 9.10 12/31!Yr 1 $0. *Translation gains and losses are part of other comprehensive income (PUEE). B.10 exchange rate) 10. All rights reserved. Foreign Currency Transactions Foreign currency transactions are transactions with a foreign entity (e.000 Balance Sheet Date Accounts Payable [100. common stockiAPIC are converted using historical exchange rates.OB .000 Foreign exchange transaction gain 3!1!Yr 2 2.000 Settlement Date Accounts Payable ($10. On 12!1Nr 1 Green company purchased goods on credit for 100.000 *Transaction gains and losses are included in income from continuing operations.. Translation starts with the income statement and converts all elements using a weighted average exchange rate.g.000 original balance .Financial Final Review 2.000 Foreign exchange transaction loss [100.09)] 1.2012 Edition .$O. and then a gain or loss is plugged to OCI to make the balance sheet balance. .

Notes are recorded at present value when the interest rate is not stated or when the stated interest rate is unreasonably low. costs in the preliminary project stage and costs incurred in training and maintenance are expensed. testing. In general.S. GAAP. research costs must be expensed.g.. Expense as Operating Expenses (Not R&D) Routine periodic design changes. Alternative Use Capitalize and then depreciate as R&D expense if alternative use on other future projects is planned. but development costs may be capitalized if certain criteria are met. IX. post production cost. research costs related to computer software development are expensed and development costs may be capitalized if certain criteria are met. GAAP. market research. research and development costs must be expensed in the period incurred. Money is not loaned for free or for a below-market interest rate. leased.S. RESEARCH AND DEVELOPMENT A. 28-7 © 2011 DeVry/Becker Educational Development Corp. or licensed. Capitalized costs are amortized using the greater of the straight-line method or a percentage of revenue basis. Capitalized costs are amortized on a straight-line basis. quality control testing. Exceptions to expensing include: 1." Substantial performance means that the initial services required of the franchisor have been performed and there is no obligation to refund any payment received. . 2. X. executive salaries. and salaries of research staff. All rights reserved. building will be used for other projects. engineering. labor. costs related to computer software developed to be sold. IFRS does not provide specific guidance for computer software development costs. items to be expensed as R&D include: equipment. modification. overhead. FRANCHISES The franchisor reports revenue from franchise fees when all material conditions of the sale have been "substantially performed. B. IMPUTING INTEREST Notes receivable and notes payable contain an interest element. and commissions. COMPUTER SOFTWARE Under U.S.GAAP Under U.2012 Edition . material. For computer software developed for internal use. Costs after the preliminary project stage are capitalized. U. e. VIII. IFRS Under IFRS. The difference between the face amount of the note and the present value of the note is recorded as a discount and amortized over the life of the note. costs are expensed until technological feasibility has been established and capitalized after that. Under IFRS. design.Financial Final Review VII.

Financial Final Review NOTES 28-8 © 2011 DeVry/Becker Educational Development Corp. All rights reserved. .2012 Edition .

2012 Edition . All rights reserved. .Financial Final Review FINANCIAL 311 Marketable Securities • • Trading Securities Available-far-Sale Securities • Held-to-Maturity Securities Realized Gains and Losses • Summary of Marketable Security Investments 3A-l © 2011 DeVry/Becker Educational Development Corp.

.Financial Final Review NOTES 3A-2 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.2012 Edition .

PYFE). which are reported directly on the income statement. ~ (!ill ~ (!ill xxx Unrealized loss xxx Available-for-sale securities xxx Available-for-sale securities xxx Unrealized gain Under IFRS. These securities are classified and reported as either current assets or non-current assets. depending on the intent of the corporation. Unrealized gains and losses on trading securities are included in income. unrealized gains and losses on available-for-sale securities are reported in other comprehensive income. All rights reserved. Trading securities are normally reported as current assets. Held-to-maturity debt securities are valued and reported at amortized cost. III. Foreign exchange gains and losses on available-forsale equity securities are included in other comprehensive income. Available-far-sale are valued and reported at fair value at the end of the current reporting period. 3A-3 ~ 2011 DeVryjBecker Educational Development Corp.Financial FInal Review SUMMARY NOTES I. Investments that do not meet the qualifications of trading or held to maturity securities are classified as available-far-sale. xxx Unrealized loss xxx Trading securities xxx Trading securities xxx Unrealized gain AVAILABLE-FOR-5ALE SECURITIES Available-far-sale securities are securities (both debt and equity) that could be available for sale in the future. HELD-TO-MATURITY SECURITIES Held-to-maturity securities are investments in debt securities where the company has both the positive intent and ability to hold the securities to maturity. Unrealized gains and losses on available-far-sale securities are included in equity as accumulated other comprehensive Income until the securities are sold (e. except for foreign exchange gains and losses on available-far-sale debt securities. Held-to-maturity securities are reported as current or non-current assets.g.2012 Edition . TRADING SECURITIES Trading securities are securities (both debt and equity) that are bought and held principally for the purpose of selling them in the near term. . Trading securities are valued and reported at fair value at the end of the current reporting period.. ~ (!ill ~ (!ill II. as appropriate.

orted Unrealized Gain/Loss Realized Gain/Loss Trading stocks and bonds Current or noncurrent Fair value at balance sheet date Income statement Income statement Available-far-sale stocks and bonds Current or noncurrent Fair value at balance sheet date Other comprehensive income P.Financial FInal Review IV. Trading Securities !!ll! xxx Cash [!ill Trading securities xxx [!ill Realized gain XXX XXX [!Ii] Cash [!ill Realized loss XXX XXX Trading securities [!ill AVtliltJble-tor-StJle Securities Facts: V. Not applicable .!J.2012 Edition . Cost $100 FV 1/01!Year 1 $120 Sold 9/15/Year 1 $150 [!Ii] Cash [!Ii] Unrealized gain (PY. Permanent declines in value (impairments) for available-for-sale securities are treated as realized losses and included in income.FER Realized gain/loss in income statement Unrealized gain/loss is reversed Held-to-maturity bonds Current or noncurrent Amortized cost None 3A-4 ~ 2011 DeVryjBecker Educational Development Corp.FE) $150 20 [!ill Available-for-sale securities [!ill Realized gain $120 SO SUMMARY OF MARKETABLE SECURITY INVESTMENTS SUMMARY OF MARKETABLE SECURITIES INVESTMENTS Classl/lcation Balance Sheet Re/J. REALIZED GAINS AND LOSSES The sale of securities results in realized gains and losses that are included in income. All rights reserved.

Year 2. Deutsch should report an unrealized holding gain on the NCB stock of $22. On its 12/31Near 2 balance sheet.2012 Edition .300 $50. 1.000 $380. owned the following marketable equity securities in its available-for-sale portfolio at December 31. Year 1: Cost $100. 3A-S © 2011 DeVry/Becker Educational Development Corp.000.000 in stockholders' equity. Which of the following statements is correct? I. III. None of the listed answers are correct. which was formed on January 1.000 3. I only is correct.000 QUESTION 2 Deutsch Imports has three securities in its available-for-sale investment portfolio.000 $117.600 $100.000 A Company B Company C Company Total Market Value $130.000 $120.000 The decline in value of C Company is considered permanent. Deutsch should report the NCB stock at its fair value of $100.500 Market Value 12131/Year 1 12131/Year 2 $93. All rights reserved. if any. $50. I and III only are correct. 2.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 Sykes Company. . I and II only are correct.400. Year 1. 4.000 $58. $80.000 4. Deutsch should report an unrealized holding gain on the NCB stock of $22.000. How much loss.000 180. II. Information about these securities is as follows: Security NCB TRR Enson Cost $78.000 $0 $53.000 210. should Sykes include in its Year 1 earnings? 1.000 70. On its income statement for the year ending December 31. 3.700 TRR was sold in Year 2 for $127.000 20. $30.000 $330. $0 2. On its 12/31Near 2 balance sheet.

. Year 2. All rights reserved. in accumulated other comprehensive income on the balance sheet? 1.000 120.000 4.'s investments in marketable equity securities: Trading Available-for-sale Cost $150. $65.'s investments in marketable equity securities: Trading Available-for-sale Cost $150.000 What amount should Tyne report as net unrealized loss on available-for-sale marketable equity securities at December 31. $20.2012 Edition .000 Market value 12/311Y2 12/311Y1 $155. 3A-6 © 2011 DeVry/Becker Educational Development Corp.Financial Final Review QUESTION 3 The following data pertains to Tyne Co. $15. $50.000 4.000 150.000 2.000 3.000 2.000 $100.000 What amount should Tyne report as unrealized gain (loss) in its Year 2 income statement? 1. $0 $10. $55. $60.000 QUESTION 4 The following data pertains to Tyne Co.000 Market value 12/311Y2 12/311Y1 $155.000 150.000 $100.000 130.000 3.000 130.000 120.

Unrealized gains and losses resulting from changes in the value of securities receive no accounting treatment. Marketable security description/accounting treatment Classification - 1. Investments in bonds issued by a corporation which the investing company will not liquidate prior to collection of principal and interest due. Cash activity associated with the purchase and sale of securities displayed in the cash flows from operating activities in the statement of cash flows. 4.2012 Edition . 3. All rights reserved. Equity securities purchased by an entity that has no immediate plans to sell them. Unrealized gains and losses resulting from changes in the value of securities are accounted for through other comprehensive income. 2. Securities purchased by a corporation with idle/ excess cash and the corporation routinely buys and sells these securities as ongoing cash requirements. Trading securities Available-for-sale securities Held-to-maturity securities 3A-7 © 2011 DeVry/Becker Educational Development Corp. 5.Financial Final Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Definition 'i' Dellnlllon IA_live uterature I Help I Select the proper classification or accounting treatment for the marketable securities transactions (or situations) below by clicking in the shaded cell and selecting from the list provided. 6. .

All rights reserved. Trading securities Cash activity from trading securities is displayed in cash flows from operating activities while cash flows from available-far-sale and held-to-maturity securities are displayed in the investing activities section of the statement of cash flows. Held-to-maturity securities Held-to-maturity securities are valued at amortized cost. Non-permanent changes in the fair value of held-la-maturity securities do not result in any adjustment to the displayed value of the investment. Trading securities Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. 4.2012 Edition . Available-for-sale securities Investments that do not meet the qualifications of trading securities or held-to-maturity securities are classified as available-far-sale securities.Financial FInal Review Solution 1. 6. 2. Available-for-sale securities Unrealized gains and losses resulting from changes in the fair value of available-far-sale securities are accounted for as a component of other comprehensive income. 3. 3A-8 ~ 2011 DeVryjBecker Educational Development Corp. _ Held-to-maturity securities Investments in debt securities shall be classified as held-to-maturity if the reporting enterprise has the positive intent and ability to hold those securities to maturity. . 5.

2012 Edition . Other comprehensive income ending balance for Year 2 3A-9 © 2011 DeVry/Becker Educational Development Corp. For each of the securities listed below. Compute the amount of unrealized gain or loss in other comprehensive income as a result of marketable securities transactions for Year 1.000 125.000 120.ble 8ecurlllu I A _ I.Financial Final Review TASK-BASED SIMULATION 2: Marketable Securities 'i IIarka. Avaifable-for-sale securities Gorman Corporation Jubilee Creations 5. enter the amount requested in the shaded cell. Cost Fair Value 12/31/Year 1 Activity In Year 2 Purchases Sales Fair Value 12/31/Year 2 Held-to-maturity securities 45.000 105. • Delphi. Compute the carrying amount of each security at December 31. . 1.000 140. Gorman. Compute the ending balance for accumulated other comprehensive income for Year 2. Compute the amount of recognized gain or loss on the income statement as a result of marketable securities transactions. Trading securities Delphi Corporation 4. Use this information as the data for your marketable securities task solution. All rights reserved.Jlarature I Help I The following data has been provided relative to the investment portfolio of the Zarbo Corporation.. and Jubilee securities were purchased during Year 1..000 Avallable-for-sale securities Gorman Corporation Jubiliee Creations 65.000 55.000 Arbor Corporation Trading securities Delphi Corporation 100. Year 2. Available-far-sale securities Gorman Corporation 3. Held-la-maturity securities Arbor Corporation Trading securities Delphi Corporation Avaifable-for-sale securities Gorman Corporation Jubilee Creations 2.000 Additional notes: • Securities of the Arbor Corporation were purchased at par.000 75.000 125.000 130. Compute the amount of unrealized gain or loss on the income statement as a result of marketable securities transactions.

3A-10 ~ 2011 DeVryjBecker Educational Development Corp.Unrealized gain (50.000) Gonnan Corpot'Btion Inception to date raalized gains or loss8& are would ba displayed in the year in which available-for-sale securities are sold. Jubilee Creations Cost Fairvalua Year 1 Unrecognized gain Year 1 Fair value Fair value Year 2 Unrecognized loss Year 2 Ending balance Year 2 . Trading securities Delphi Corporaijon 105.000).000 The S50.000 Delphi Corp. Jubilee Craalions securities are displayed at fair value 8& shown. The securities of 1I1e Arbor Corporation are displayed III their orlglnel purchase price ($55.000 ($10.000 Trading securities are displayed III their fair value as shown above. All rights reserved.000) Recognized loss (60.000 4.000) S5. Selling price 65. Trading securities DBlphi Corporation (15.000 130. FV at Year 1 120. 2.000) 3.000 Held-to-maturity securities are valued and displayed at1l1eir amortized cost. Available-for-sale securities (60. Delphi Corp.2012 Edition .000 unrealized loss on 1he Gorman securities has been reversed upon tha sale of securities in Year 2. Held-to-maturitv securities Arbor ColpOl8tion 55.000 Availabl&-for-sala securities are displayed atlheir fair value.Unrecognized gain $125.000 Original cost (125. 5. FV at Year 2 105.000 Unrealized 1088 In Income statement 15.Financial FInal Review Solution 1. Compute the amount of unrealized gain or loss In other comprehensive income as a result of marketable securities transactions for Year 1.000) Available for sale securities Gennan Corporation JubifiBs Craations Unrealized gains and losses 88BOciated with the change in value of trading securities are reported in the income statement while changes in 1I1e value of available-for-eale securities are reported in other comprehensive income.000 140.Unrealized loss Jubiliee Creations .000) 15. . Gorman Corporation s10ck was sold and 1herefore would not be displayed.000 The amount of unrealized gains and losses on available-for-sale securities displayed in other comprehensive income include 1he changes In value from year to year for securities owned at the end of the year.000 $15. Available-for_le securities Gorman Corporation . Availabl&-for-saie securities Gorman Corporation Jubiliee Craatlons 130. The security was purchased III par so there was no premium or discount to amortize by year end.000 $140.

.l I I ~~~:::I::X it' FASB Import Uniform CPA Examination Authoritative Literature To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above.. Type the topic here. ~I Solution Source of answer for this question: FASB ASC 320-10-35-34 Keyword: Impairment of Equity Securities 3A-ll © 2011 DeVry/Becker Educational Development Corp. . If Reuarch Back Authoritirtive Literature 'Homo I Help I I Recent Page Vlallll search IEnter Search Here iTable of Contents I Prev'O\J<I~1ltch II Search W. : ..ture ~ Original Pronouncements 8S A H . ....Financial Final Review TASK-BASED SIMULATION 3: Research T _a"'" IA _ l i v e U1erature I Halp I In a prior period. .. ..... ......th. All rights reserved. . ... an entity recognized an impairment loss on a marketable security classified as available-forsale.au< Result II Next Re". . Correctly formatted FASB ASC topics are 3 or 4 digits. The security subsequently recovered a portion of its fair value. .. .. . Use the buttons to the right and the links above the text box to perform more detailed or advance searches. : . . : .. ... 323-740-S25-1...n Next 1~1ltch I Advanced Search I Prev.. ~ FASB Literature FASB Liter.. : ... : = .. . : . .2012 Edition . . . ..it . . FASBASC I . 1- I c=J -c=J ... Find the proper citation that provides guidance on this issue. The entity wants to know whether the cost basis of the security can be adjusted to reflect the recovery..... ..c=J I Some examples of correctly formatted FASB ASC responses are 205-10-05-1.. . . 260-10-60-1 A. 260-10-55-99 and 115-60-35-128A .

.2012 Edition . All rights reserved.Financial Final Review NOTES 3A-12 © 2011 DeVry/Becker Educational Development Corp.

Financial Final Review FINANCIAL 38 Business Combinations • • Equity Method • 38-1 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.2012 Edition . Cost Method Consolidation .

2012 Edition . . All rights reserved.Financial Final Review NOTES 38-2 © 2011 DeVry/Becker Educational Development Corp.

income from the investee is the amount of cash dividends received. I.2012 Edition . Liquidating dividends are dividends in excess of retained earnings. unrealized gains/losses on available for-sale securities are included in other comprehensive income.. Unrealized gains/losses on trading securities are included in income. 2001. FV adjustments for noncurrent assets other than land are subject to depreciation (e. All rights reserved. Even if the investor owns less than 20% of the stock of an investee company. but exercises significant influence. With the cost method. equipment). The carrying amount of the investment is reduced by the pro rata share of the dividends paid by the investee. . FV adjustment is the difference between the FV and BV of the assets and/or liabilities of the investee. the equity method must be used. which were initiated after JulV 1. Cash dividends EQUITY METHOD The equity method must be used if the investor has significant influence over the investee. Investment (Trading/Available-for-Salel I Cost Unrealized gains Unrealized losses Liquidating dividends Income Other Comprehensive Income (Trading Securities) (Available-far-Sale) Income (Available-for-Sale) I II.g.Financial Final Review SUMMARY NOTES ACQUISITION CONSOLI DATE DO NOT CONSOLIDATE 100 COST OR EQUITY USED INTERNALLY • Pooling is not available for new acquisitions. the equity method must be used. 38-3 © 2011 DeVry/Becker Educational Development Corp. However. With the equity method. income/loss from the investee is the pro rata share of the investee's income/loss. if the investor owns less than 20% of the stock of an investee company. The investment is accounted for as either a trading or an available-far-sale security at fair value. but exercises significant influence. COST METHOD The cost method should be used when the investor owns less than 20% of the investee's voting stock and does not exercise significant influence.

CONSOLIDATION A. The following is a summary of the accounting for costs related to an acquisition business combination: • Direct out-of-pocket costs are expensed as incurred. (Debit: Expense) • Bond issue costs are capitalized and amortized.Financial FInal Review Cost % of net income Investment % of cash dividends FV adjustment Depreciation Income % of Net income FV adjustment Depreciation Under both U.C . (Debit: Expense) • Stock registration and issuance costs are a direct reduction of the value of the stock issued.P. (Debit: Paid-in capital account) • Indirect costs are expensed as incurred. B. whichever is the more clearly evident. stock. III. The accounting for an acquisition begins at the date of acquisition. etc.2012 Edition . joint ventures are accounted for using the equity method. 38-4 ~ 2011 DeVryjBecker Educational Development Corp. GAAP and IFRS. The parent's investment in the subsidiary is eliminated. Acquisition Method In a business combination accounted for as an acquisition. An investor is considered to have parent status when more than 50% of the voting stock of the investee has been acquired. . debt securities.I.subsidiary XXX R i!li! Retained earnings . All rights reserved. The investment is valued at the fair value of the consideration given or the fair value of the consideration received. When to Consolidate Consolidated financial statements are prepared when a parent-subsidiary relationship has been formed. Do not consolidate when subsidiary is in legal reorganization or bankruptcy (parent does not control the sUbsidiary).S.su bsidiary A !!ru A. (Debit: Bond issue costs) Consolidating Workpaper Eliminating Journal Entry The year end consolidating journal entry known as the consolidating workpaper eliminating journal entry (EJE) is: $XXX C !!ru Common stock . the subsidiary may be acquired for cash.subsidiary XXX I [!ill Investment in subsidiary N [!ill Noncontrolling interest ~ !!ru Balance sheet adjusted to fair value XXX !!ru Identifiable intangible asset fair value XXX !!ru Goodwill XXX G $XXX XXX The consolidated balance sheet will report the equity of the parent company only.

and a loss is recognized in income from continuing operations if the goodwill is impaired. Instead. A reconciliation at the beginning and end of the period of the carrying amount of the equity attributable to the noncontrolling interest is shown on the consolidated statement of changes in equity.S.2012 Edition . noncontrolling interest (and goodwill) can be calculated using either the full goodwill method. or the partial goodwill method. Noncontrolling Interest Noncontrolling interest is recognized in the consolidated financial statements when the parent company owns less than 100% of the subsidiary. Under IFRS. GAAP. noncontrolling interest on the balance sheet is calculated as: Noncontrolling interest (BS) = Fair value of subsidiary's net assets x Noncontrolling interest percentage D. All rights reserved. Under the partial goodwill method. the noncontrolling interest included in equity on the balance sheet is calculated as: Noncontrolling interest (BS) = Fair value of subsidiary x Noncontrolling interest percentage Noncontrolling interest must be recognized as a line item deduction on the income statement for the portion of the subsidiary's net income not allocated to the parent company: Noncontrolling interest in net income of subsidiary = Subsidiary net income x Noncontrolling interest percentage Comprehensive income attributable to the noncontrolling interest is presented on the consolidated statement of comprehensive income. Under U. GAAP.S. . 3B-S © 2011 DeVry/Becker Educational Development Corp. Fair Value Adjustment/Goodwill The difference between the fair value of the subsidiary and the book value of the subsidiary net assets should be allocated as follows: 1.Fair value of subsidiary's net assets acquired Goodwill recognized in a business combination is not amortized.Financial Final Review c. goodwill is calculated as follows: Goodwill = Acquisition cost .S. Identifiable intangible assets recorded at fair value. 3. Under U. Noncontrolling interest on the balance sheet is the noncontrolling shareholder's share of the fair value of the subsidiary. Balance sheet adjustment of the subsidiary's assets and liabilities from book value to fair value. GAAP. which is the method required under U. goodwill is calculated as follows (full goodwill method): Goodwill = Fair value of subsidiary . it is tested for impairment. 2.Fair value of subsidiary's net assets IFRS permits the use of the full goodwill method or the partial goodwill method. Goodwill is excess. Under the partial goodwill method.

2012 Edition . F. This entry is made if the books are open.Financial FInal Review E. All rights reserved. The excess depreciation on the gain must also be eliminated. A working paper eliminating entry in the period of the intercompany sale eliminates the intercompany gain/loss and adjusts the asset and the accumulated depreciation to their original balances on the date of sale. Eliminate 100% of Intercompany Transactions Pavable / Receivable In a consolidated balance sheet. all intercompany payables and receivables are eliminated. . the acquisition cost is first allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets acquired. This creates a negative balance in the acquisition cost account. Gain When a subsidiary is acquired for less than the fair value of 100% of the underlying assets acquired. !!l2 xxx Account payable xxx Accounts receivable [!G] Inventorv Affiliated companies often sell inventory to one another. Any intercompany profit from the intercompany inventory transaction must also be eliminated against the purchaser'S ending inventory and cost of goods sold. !!l2 XXX Gain [!G] Equipment XXX [!G] Accumulated depreciation XXX !!l2 [!G] XXX Accumulated depreciation XXX Depreciation expense (RE) 38-6 ~ 2011 DeVryjBecker Educational Development Corp. which is recognized as a gain in the period of the acquisition. !!l2 xxx Sales [!G] Cost of goods sold xxx [!G] Cost of goods sold (RE) XXX [!G] Inventory XXX Fixed Assets The gain or loss on the intercompany sale of a depreciable asset is unrealized from a consolidated financial statement perspective until the asset is sold to an outsider. Intercompany sales and intercompany cost of goods sold should be eliminated.

bond interest payable and bond interest receivable. e. This gain/loss is not reported on either company's books. XXX Bonds interest payable XXX Bond interest receivable !!l2 Bonds payable XXX !!l2 Premium on bonds payable XXX i!ll'! Loss XXX t!ii] Investment in bonds XXX t!ii] Discount on bonds payable XXX t!ii] Gain XXX Acquisition Method Summary Assets Fair value Liabilities Fair value Retained earnings Income Goodwill Noncontrolling interest Investment in subsidiary Intercompany transactions Parent only After acquisition date Yes (subject to Impairment adjustment) Yes (up to 49%) Eliminated Eliminate 100% 38-7 ~ 2011 DeVryjBecker Educational Development Corp. the debt is considered to be retired and a gain/loss is recognized. i!ll'! t!ii] G.Financial FInal Review Bonds If one member of the consolidated group acquires an affiliate's debt from an outsider. This gain/loss on extinguishment of debt is calculated as the difference between the price paid to acquire the debt and the book value of the debt. but is recorded on the consolidated income statement through an elimination entry.. All rights reserved.2012 Edition .g. All intercompany account balances are also eliminated. .

2012 Edition .Financial Final Review NOTES 38-8 © 2011 DeVry/Becker Educational Development Corp. All rights reserved. .

earned evenly throughout the year.000 38-9 © 2011 DeVry/Becker Educational Development Corp. Sled's stockholders' equity was $500. QUESTION 2 On July 1.000 2. what amount of income from this investment should Houston report? 1.000.000 outstanding shares of common stock for $20 per share. 2. and its carrying amount exceeded the proportionate share of Ima's market value. Astro's net income for the year ended December 31. Astro paid $40. 4. $20. Year 1 was $120. Houston Corp.000 4. purchased 30% of Sled Coo's outstanding common stock on December 31 for $200.000. and its carrying amount exceeded the proportionate share of Ima's market value. 3.000 in dividends to its common stockholders. The balance of the dividend reduced Pal's carrying amount for its Ima investment. All rights reserved.000 shares of Astro Company's 10. $18. investment. and the fair value of its identifiable net assets was $600. $6. what amount of goodwill should Birk attribute to this acquisition? 1.000 QUESTION 3 Birk Co.000 3.000.000. $50. $12. Cost method. This reflects that Pal accounts for its Ima investment by the: 1. purchased 3. $36.000 3. Year 1. On that date. On December 15. $0 2. Equity method. $30. and Ima incurred a loss in the current year.000 4.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 Pal Corpo's current year dividend income included only part of the dividend received from its Ima Corp. and only a portion of Ima's current year dividends represent Ima's earnings. Equity method. Cost method. In its Year 1 income statement. Year 1.2012 Edition . On December 31. .

$950.000 In the December 31 consolidated balance sheet. 20% of the gain on sale. Inc. 4. The carrying amounts of Pod's identifiable net assets approximated their fair values. balance sheet.000 $6. with a market price of $18 a share.000. 3. $1. $2.500. Year 1. Pod reported net income of $100.300.000 for Year 1.800. 50% of the gain on sale.000 4.000 2.900.000 QUESTION S Port.000 2.000 Saxon $1. $210. and paid no dividends. Saxon Corporation was merged into Philadelphia Corporation. In its December 31. Philadelphia issued 200. Kean Co. $270.000 $2. owns 100% of Salem. .500. purchased a 30% interest in Pod Co.300. for all of Saxon's common stock.000 4. Salem's recorded depreciation expense on the equipment will be decreased by: 1.500. 2. $280. In the business combination. In the consolidated income statement. $1. except for land whose fair value exceeded its carrying amount by $200. Year 1.000 3.000. On this date.450. QUESTION 6 On December 31. $220. Pod's stockholders' equity was $500. what amount should Kean report as investment in subsidiary? 1. Port sold Salem delivery equipment at a gain.000.000 3B-10 © 2011 DeVry/Becker Educational Development Corp. Inc. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value.000 1.Financial Final Review QUESTION 4 On January 2.000 2. 331/3% of the gain on sale. On January 1. Kean accounts for this investment using the equity method. additional paid-in capital should be reported at: 1.000 shares of its $10 par common stock.2012 Edition . for $250. All rights reserved.000. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment.000 850.000 3.000 150. 100% of the gain on sale. The stockholders' equity section of each company's balance sheet immediately before the combination was: Common stock Additional paid-in capital Retained earnings Philadelphia $3.

In addition. the fair values of all of the assets and liabilities of Socrates except for land were equal to their book values of $200. All rights reserved.000 4.000 for all the assets and liabilities of Script Corporation.000 shares of its $10 par value common stock for all the outstanding 20. $70.000 3. $70. $60. At that date. How much gain should Post recognize from this acquisition? 1.000 2.000 3.000 4.000 and a fair value of $210.000.000 for finder's fees to consummate the acquisition. Script Corporation's assets had a book value of $200. $100.000 3B-11 © 2011 DeVry/Becker Educational Development Corp. $40. The replacement cost/fair value of the land was $40.000 in excess of its book value. $0 2.2012 Edition . Plato paid $10.000 shares of Socrates Company's $5 par value stock.S. $50. What amount should Plato record as goodwill under U. Plato's shares were traded on the New York Stock Exchange at $30 per share on the acquisition date. Socrates had no identifiable intangible assets. GAAP? 1.000. $10.000. Plato Company issued 10. Script's liabilities had a book value (equal to fair value) of $40.Financial Final Review QUESTION 7 On February 1. .000 QUESTION 8 Post Company paid $100.

All rights reserved.2012 Edition . .Financial Final Review NOTES 3B-12 © 2011 DeVry/Becker Educational Development Corp.

All rights reserved.Financial Final Review FINANCIAL 411 Inventory • Perpetual and Periodic Concepts Inventory Valuation Methods • Inventory Costing Methods Dollar-value LIFO • • Gross Profit Method Co nve ntio na IReta i I Method 4A-l (t) 2011 DeVry/Becker Educational Development Corp. .2012 Edition .

All rights reserved.Financial Final Review NOTES 4A-2 © 2011 DeVry/Becker Educational Development Corp.2012 Edition . .

International Financial Reporting Standards (IFRS) Under (FRS. A. the cost of inventory includes all costs incurred in getting the inventory onto the premises and ready for sale or use. Periodic Inventory . inventory is valued at the lower-of-cost-or-net realizable value. PERPETUAL AND PERIODIC CONCEPTS Inventory is property held for resale. inventory is valued at the lower-of-cost-or-market. a running total of the inventory is maintained as goods are purchased and sold and the cost of goods sold is updated as sales occur. property held in production (work-in-process). With the periodic method. 2. Under both IFRS and U. Cost is determined using an appropriate inventory cost flow assumption. II. FOB Destination Title passes to the buyer when goods are received. FOB Shipping Point Title passes to the buyer when goods are shipped and in transit. GAAP. .S. Hence.Cost of Goods Sold Beginning inventory xxx Plus: Purchases XXX Equal: Cost of goods available for sale xxx Cost of goods sold B.S. U. but no possession. Net realizable value is net selling price less costs to complete and sell the inventory. With the perpetual method. a category. Hence title passed when shipped. provided the current replacement cost does not exceed net realizable value (the "market ceiling") or fall below net realizable value reduced by normal profit margin (the "market floor").2012 Edition . XXX (XXX) Less: Ending inventory Goods in Transit 1. Market generally means current replacement cost. provided that the method most clearly reflects periodic income.GAAP Under U. and the cost of goods sold cannot be determined until the end of the period when the ending inventory is counted. Cost is determined using an appropriate inventory cost flow assumption. a running total is not maintained. or total inventory.S. the appropriate inventory valuation method can be applied to a single item. Just like the cost of any other asset. 4A-3 © 2011 DeVry/Becker Educational Development Corp.Financial Final Review SUMMARY NOTES I. GAAP. or raw materials consumed in the process of production. All rights reserved. INVENTORY VALUATION METHODS A. B. no title and no possession until received. Inventory is accounted for under either a periodic method or a perpetual method.

if ending inventory is understated. and net income is overstated.. All rights reserved. FIFO. LIFO UFO inventory consists of the older costs and the cost of goods sold consists of the most recent costs. Beginning inventory Purchases Units Units Cost Total Costs Total Units 100 200 $5 $6 $500 $1700 100 300 4A-4 © 2011 DeVry/Becker Educational Development Corp.00 $5. .. h d .Financial Final Review III. Note that if ending inventory is overstated. Errors in ending inventory have the same effect on net income (move in the same direction). and reports the highest prices in cost of goods sold and hence the lowest net income. INVENTORY COSTING METHODS The common inventory cost flow methods are specific identification. Cost of goods available for sale W elg te average cost per Unit = .. Moving Average $5.. In periods of decreasing prices. In periods of rising prices. then cost of goods is understated. .2012 Edition . FIFO and LIFO will have opposite effects on inventory. LIFO reports the lowest inventory.used with perpetual inventory The unit cost changes each time there is a new purchase. .. On the CPA Exam...67 . cost of goods sold and net income. FIFO results in the highest inventory. errors in beginning inventory move in the opposite direction. Ending inventory -----+ Weighted average -----+ Averaging methods Used with periodic inventory . LIFO is not permitted under IFRS. the effects are of course the opposite. Moving Average . therefore: LIFO = Lowest ending inventory I Lowest net income FIFO = Highest ending inventory I Highest net income Questions related to the effect of overstatement and understatement errors are common on the exam.... B.' : : : .. prices are generally rising. .Number of units available for sale C. and weighted average. the opposite is true. LIFO. A. FIFO FIFO inventory consists of the most recent costs and the cost of goods sold consists of the older costs. and reports the lowest cost of goods sold and hence the highest net income.

.000 =$65.000 $50.000 40. All rights reserved. a price index is used.000 + $15. It can be computed internally or obtained from external sources.2012 Edition .000 ?? (b) 1/1/X1 Year 1 Layer $60.000/$60. . Date At Base At Current At Dol/or Year Cost Year Cost Value LIFO $50." • Each pool is assigned a conversion index.000 Step #2: $10.000 12/31/X1 =3/2 =$15.000 [b) V. • The company groups similar inventory items into "pools. DOLLAR-VALUE LIFO • Inventory under dollar-value UFO is measured in dollars and is adjusted for changing price levels.000 $50. d Ending inventory at current year dollar Pnce In ex = -----'''-----'------'----Ending inventory at base year dollar 2.000 x 3/2 Step #3: $50.000 10. Internally computed price index formula: . When converting from FIFO to dollar-value LIFO. Calculation 1.000 [a) Step #1: $90. The LIFO layer added in the current year is multiplied by the price index and added to the dollar-value LIFO computation. Sales 100% CGS 80% (Plug) Gross Profit 20% 4A-5 © 2011 DeVry/Becker Educational Development Corp. A. The gross profit % is known and is used to calculate cost of goods sold.Financial Final Review IV.000 ?? (aJ $90. GROSS PROFIT METHOD The gross profit method can be used to prepare interim financial statements.

CONVENTIONAL RETAIL METHOD Converts inventory at retail to inventory at cost. markdowns are excluded.Financial Final Review VI.000 x . resulting in lower of cost or market.000 5.000 Purchases 3. whereas.000 Sales (30.000 12.000 Ending Inventory at Retail Ending Inventory at LCM (15. All rights reserved. = 40% Cost/Retail ratio .000) Markdowns $15.000 $35.000) [5. This is accomplished via a cost/retail ratio.2012 Edition . Markups are included in the ratio. At Cost Beginning Inventory At Retail $15.000 Markups Available for Sale $50.40) 4A-6 © 2011 DeVry/Becker Educational Development Corp.

Year 1 1.750.000 $500.000 110 Price index at 12/31/Year 2 (base year Year 1) Giddens' inventory at dollar-value LIFO at December 31. Goods were in transit from a vendor to Mixon on December 31.200.000 4A-7 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .000 $1.000 $1. On December 31. $1. The invoice cost was $50. What would be the adjusted inventory at December 31. 2. Year 1? 1. a manufacturer of small tools.000 Accounts payable at December 31. Year 1.000 QU ESTION 2 Mixon Corporation.500.800.000 under the dollar-value LIFO method.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 Giddens Company adopted the dollar-value LIFO inventory method on December 31. 2.000.000 Additional information follows: 1 Included in the physical count were tools billed to a customer FOB shipping point on December 31. All rights reserved. . $440. 3. Inventory data for Year 2 are as follows: 12/31/Year 2 inventory at year-end prices $550. Year 1. Year 1.000 Net sales (sales less sales returns) 8. These tools had a cost of $28. 4. 4.000 $1. Year 1 (based on a physical count of goods in Mixon's plant at cost on December 31. and the goods were shipped FOB shipping point on December 29.715. Year 2 is: 1.700.000 $510. 3.000 and were billed at $35. Year 1 waiting to be picked up by the common carrier. Year 1) $1. The shipment was on Mixon's loading dock at 5:00 PM on December 31. Year 1. Year 1: Inventory at December 31.000. provided the following information from its accounting records for the year ended December 31.750.000 $550. Giddens' inventory was in a single inventory pool and was valued at $400. Year 1. 2.

000 understated $1. QUESTION 4 The Loyd Company had 150 units of product Omega on hand at December 1.000 $75. 3. 3. The cost of inventory at December 31.300 overstated By what amount would Year 1 earnings be overstated or understated if these errors are not corrected? 1. $1. $21 $20 $28 $26 4A-8 © 2011 DeVry/Becker Educational Development Corp. 2.2012 Edition . $6.000 QUESTION S Simmons.000 overstated $2. Year 1 under the LIFO method would be: 1. $100.S.400 understated Year 2 $8. 2. 4.000 $104.000 $125.400 understated. Data regarding an item in its inventory is as follows: Cost Replacement cost Selling price Cost of completion Normal profit margin $26 20 30 2 7 What is the lower-of-cost-or-market for this item? 1. Purchases of product Omega during December were as follows: Date December 7 December 14 December 29 Units 100 200 300 Unit Cost $440 $460 $500 Sales during December were 500 units. GAAP) to value its inventory. 3. . 4. $6.400 overstated. Year 1 costing $400 each. $1. All rights reserved. 4.Financial Final Review QUESTION 3 The financial statements of Seabrooke Imports for Year 1 and Year 2 had the following errors: Ending inventory Rent expense Year 1 $4. Inc. 2. uses lower-of-cost or market (U.600 overstated.600 understated.

3. Inc.800 $118. 4.500 4A-9 © 2011 DeVry/Becker Educational Development Corp. $18 $26 $28 $30 QUESTION 7 The following information pertained to Azur Co.Financial Final Review QUESTION 6 Simmons.140 30.2012 Edition .420 5.800 10. 2.560 What amount should Azur report as cost of goods sold for the year? 1.360 $128.280 15. 2. . $102. Data regarding an item in its inventory is as follows: Cost Replacement cost Selling price Cost of completion Normal profit margin $26 20 30 2 7 What is the lower of cost or net realizable value for this item? 1. uses lower of cost or net realizable value (IFRS) to value its inventory.840 20. for the year: Purchases Purchase discounts Freight-in Freight-out Beginning inventory Ending inventory $102. All rights reserved.220 $123. 4. 3.

2012 Edition .Financial Final Review NOTES 4A-10 © 2011 DeVry/Becker Educational Development Corp. . All rights reserved.

2. 4.2012 Edition . In each of the following independent circumstances. Replacement cost is less than net realizable value net of normal profit margin and historical cost is less than net realizable value but greater than the net realizable value net of normal profit margin. 5. Historical cost is less than net realizable value net of normal profit margin. The net realizable value exceeds both historical cost and replacement value. Inventory historical cost is less than replacement cost but more than net realizable value. 1.S. Inventory historical cost exceeds replacement cost and replacement cost exceeds net realizable value. Historical cost was greater than net realizable value net of normal profit margin. Replacement value is less than cost. 7. 3. . GAAP. 6. Abbott Corporation has a purchase agreement with Blake Industries to buy product for a price 25 percent more than cost. Inventory replacement cost is greater than historical cost but less than net realizable value. All rights reserved. select the value of inventory that Blake Industries should use by double-clicking in the shaded cell and selecting from the list provided.Financial Final Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Inventory Inventory Authorltallve Literature I Help I Blake Industries is computing the value of its inventory for financial statement presentation under U. Replacement cost is less than both the historical cost and the net realizable value net of normal profit margin. The net realizable value net of normal profit margin is less than both historical cost and replacement values. Historical cost Replacement cost Net realizable value Net realizable value net of normal profit margin 4A-ll © 2011 DeVry/Becker Educational Development Corp. an amount far more than the product's replacement costs or current net realizable value outside of the purchase agreement.

3. Historical cost Inventory is valued at the lower of historical cost or market. Market is less than historical cost. determine the market value and select the lower of cost or market. Inventory would be valued at market which is net realizable value. In this case. the order of values is as follows: Historical cost Replacement cost Net realizable value Net realizable value net ofnormsl profit margin The net realizable value is the market value in this circumstance. Market is the median (middle) value of the inventory's replacement cost. Inventory would be valued at historical cost. Market is less than historical cost. Inventory would be valued at market which is net realizable value. Net realizable value net of nonnal profit margin Inventory is valued at the lower of historical cost or market. Net realizable valua Inventory is valued at the lower of historical cost or market. determine the market value and select the lower of cost or market. Determine the solution by ordering the values presented. net realizable value (market ceiling) and net realizable value net of nonnal profit margin (market floor). 2. Market is the median (middle) value of the inventory's replacement cost. net realizable value (market ceiling) and net realizable value net of nonnal profit margin (market floor). In this case.Financial FInal Review Solution 1. Net realizable value Inventory is valued at the lower of historical cost or market. All rights reserved. Determine the solution by ordering the values presented. In this case. determine the market value and select the lower of cost or market. the order of values is as follows: Net realizable value Historical cost Net realizable value net ofnormal profit margin Replacement cost The net realizable value net of normal profit margin is the market value in this circumstance. net realizable value (market ceiling) and net realizable value net of nonnal profit margin (market floor). 4. the order of values is as follows: Net realizable value Replacement cost Historical cost Net realizable value net ofnormal profit margin The replacement cost is the market value in this circumstance. . (continued) 4A-12 ~ 2011 DeVryjBecker Educational Development Corp. Market is greater than historical cost. the order of values is as follows: Replacement cost Historical cost Net realizable value Net realizable value net ofnormal profit margin The net realizable value is the market value in this circumstance. Determine the solution by ordering the values presented. Market is the median (middle) value of the inventory's replacement cost. Inventory would be valued at market which is net realizable value net of normal profit margin. Determine the solution by ordering the values presented. Market is less than historical cost.2012 Edition . Market is the median (middle) value of the inventory's replacement cost. net realizable value (market ceiling) and net realizable value net of normal profit margin (market floor). determine the market value and select the lower of cost or market. In this case.

In this instance. Blake is assured of a sales price from its purchase contract with Abbott regardless of the market price. Market is the median (middle) value of the inventory's replacement cost. Historical cost Inventory is generally valued at the lower of historical cost or market. Inventory would be valued at historical cost. In this case. 4A-13 © 2011 DeVry/Becker Educational Development Corp. net realizable value (market ceiling) and net realizable value net of normal profit margin (market floor). Determine the solution by ordering the values presented. All rights reserved. 6. Inventory would be valued at historical cost.Financial Final Review (continued) 5. Replacement cost Inventory is valued at the lower of historical cost or market. Determine the solution by ordering the values presented. In this case. net realizable value (market ceiling) and net realizable value net of normal profit margin (market floor). The lower of cost or market rule does not apply if the company has a firm sales price contract. Inventory would be valued at market. . determine the market value and select the lower of cost or market. Market is less than historical cost. Historical cost Inventory is valued at the lower of historical cost or market. Market is greater than historical cost. the order of values is as follows: Net realizable value Net realizable value net of normal profit margin Historical cost Replacement cost The net realizable value net of normal profit margin is the market value in this circumstance. the order of values is as follows: Net realizable value Historical cost Replacement cost Net realizable value net of normal profit margin The replacement cost is the market value in this circumstance.2012 Edition . which is replacement cost. determine the market value and select the lower of cost or market. 7. Market is the median (middle) value of the inventory's replacement cost.

'. 260-10-55-99 and 115-60-35-128A . IEnter search Here I PreVlO\j.Financial Final Review TASK-BASED SIMULATION 2: Research Research I Authorilallve Literature I Help Comparisons of inventory costs with market value are necessary to determine fair presentation of inventory. Use the buttons to the right and the lin ks above the text box to perform more detailed or advance searches . .kI IV Current Text 5eardJ Next j~etdJ I Seer. Market value.2012 Edition . How do the professional standards define market in relation to inventory valuation? Type the topic here. Result II I Next Result I FASB Literature Uniform CPA Examination Authoritative Literature lV Topical Index II:' FASB Import To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above. . 260-1 0~0-1 A. Correctly formatted -- FASB ASC topics are 3 or 4 digits. All rights reserved. I Research Back Authoritative lher:lture I Home I H~lp I Recent Peae Vis".h V-lith n I I Advanced Search I PrevlO\j. is subject to a specific definition. 323-740-S25-1 . however.<&tch iii Table of Contents ~ FASB Literature Ortg~al Pronouncement••• A I. FASB ASC I l-eJ-eJ-c=J Some examples of correctly formatted FASB ASC responses are 205-10-05-1. • • Solution Source of answer for this question: FASB ASC 330-10-20 (Glossary) Keyword: Lower of cost or market 4A-14 © 2011 DeVry/Becker Educational Development Corp.

. All rights reserved.Financial Final Review FINANCIAL 48 Fixed Assets Non-monetary Exchanges • • • • General Concepts Reporting Fixed Assets Investment Property (IFRS) Interest on Self-constructed Assets Depreciation • Impairment of Fixed Assets 4B-1 ttl 2011 DeVry/Becker Educational Development Corp.2012 Edition .

. All rights reserved.Financial Final Review NOTES 48-2 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .

including any cash given or received in the transaction. • Gains/Losses are always recognized on exchanges having commercial substance. if any) xxx xxx xxx Accumulated depreciation of asset given up Cash received (if any) Loss (if any) B. • All losses are recognized on exchanges lacking commercial substance. Exchanges Having Commercial Substance (U.S. .2012 Edition .S. GAAP.S. GAAP) If projected cash flows after the exchange are not expected to change significantly. NON-MONETARY EXCHANGES Non-monetary exchanges are categorized either as exchanges that have "commercial substance" or exchanges that "lack commercial substance. GAAP) An exchange has commercial substance if the future risk. 48-3 © 2011 DeVry/Becker Educational Development Corp. • Gains/Losses are the difference between the FV and BV of the old asset. A fair value approach is used. C. • The fair value of assets given up is assumed to be equal to the fair value of assets received. Exchanges of similar assets are not regarded as exchanges that generate revenue and no gains are recognized. nonmonetary exchanges are characterized as exchanges of similar assets and exchanges of dissimilar assets. xxx Old asset at historical cost xxx Cash given (if any) XXX Gain (if any) xxx Exchanges Lacking Commercial Substance (U. then the exchange lacks commercial substance and a book value approach is used.Financial Final Review SUMMARY NOTES I. • Gains are recognized based on the nature of the transaction: =No gain o No boot received o Boot given o Boot >= 25% of total consideration received = Recognize all gain o Boot < 25% of total consideration received = Recognize gain in proportion to boot received =No gain Exchanges of Similar Assets and Dissimilar Assets (IFRS) Under IFRS. All rights reserved. timing or amount of cash flows change as a result of the transaction." A. Exchanges of dissimilar assets are regarded as exchanges that generate revenue and are accounted for in the same manner as exchanges having commercial substance under U. New asset (FV of old asset plus cash given.

S. GAAP does not have an investment property classification.S. B. Investment property is reported on the balance sheet using the cost model or the fair value model. investment property is defined as land and/or buildings held to earn rental income or for capital appreciation. fixed assets are revaluated to fair value by asset class at a specific point in time and then reported as follows: Carrying value (revaluation model) = Fair value on revaluation date . REPORTING FIXED ASSETS Under U. III. All rights reserved. U. freight in.2012 Edition . installation. Fair Value Model Under the fair value model. GENERAL CONCEPTS The cost of a fixed asset (or any other asset) is the cost to acquire the asset and place it in condition for its intended use. . Cost Model Under the cost model. GAAP. A.S. IV. the fair value of the investment property must be disclosed. • Extraordinary repairs should be capitalized if they increase the usefulness of the asset and should be recorded by decreasing accumulated depreciation if they increase the life of the asset. • Sometimes. investment property is reported at historical cost less accumulated depreciation. revaluation losses are reported on the income statement and revaluation gains are reported in other comprehensive income as revaluation surplus. land improvements are.Accumulated depreciation .Subsequent accumulated depreciation . fixed asset carrying value can be calculated using the cost model or the revaluation model.Subsequent impairment When fixed assets are revalued under IFRS. investment property is reported at fair value and is not depreciated. sale taxes. The amount paid must be allocated to the various assets acquired.Impairment Under IFRS. Under the revaluation model. As an example. GAAP. INVESTMENT PROPERTY (IFRS) Under IFRS. The investment property should be revalued with regularity so that the carrying value does not differ materially from fair value. • Ordinary repairs are expensed. the carrying value of a fixed asset is calculated as follows: Carrying value =Historical cost . generally on a relative fair value or appraisal value basis. When the cost model is used. A gain or loss arising from a change in the fair value of investment property is recognized in earnings in the period in which it arises. purchased equipment would include purchase price. fixed assets are acquired in a "basket" purchase.Financial Final Review II. • Land is not a depreciable asset. 48-4 © 2011 DeVry/Becker Educational Development Corp. When the fair value of a revalued asset differs materially from its carrying amount. etc. The cost model is the method used under U. not capitalized. a further revaluation is required.

Depreciation expense Declining Balance The salvage value is not considered upfront. Under IFRS. All rights reserved. Depreciation is caused by physical factors such as wear. Sum-of-Years'-Digits Depreciation rate Remaining life SYD The numerator is the remaining life of the asset at the beginning of the current year. it is considered at the end. sum-of-the-years-digits.2012 Edition . DEPRECIATION Generally. Component depreciation is required under IFRS. GAAP. INTEREST ON SELF-CONSTRUCTED ASSETS Interest on self-constructed assets is capitalized based on the weighted average of the accumulated expenditures multiplied by an appropriate interest rate and cannot exceed actual interest costs.S. VI. Separate significant components of a fixed asset with different lives should be recorded and depreciated separately. the depreciation method used must match the expected pattern of fixed asset consumption. the depreciation methods on the CPA exam include straight-line.Financial Final Review V. The carrying amount of parts or components that are replaced should be derecognized. This is not required under U. A. BV x * Rate = Depreciation for the period 100% *Rate=--=R N If double = 2R If 150% = 1. Interest on inventory routinely manufactured is not capitalized. Depreciation is a rational and systematic cost allocation process closely tied to properly matching revenue and expenses. Straight-Line Cost-Salvage value Estimated useful life 2.5R N = Useful life 4B-5 © 2011 DeVry/Becker Educational Development Corp. tear and use. and declining balance methods. . Depreciation expense Units-of-Production {Productive Output} Cost -salvage value Depreciation Units produced or = Depreciation rate xhours used in a period expense Total estimated units or hours = 3. The asset should never be depreciated below the estimated salvage value. 1. The denominator is the sum of the digits for the number of years of asset life (3-year life = 1 + 2 + 3 = 6): Remaining life ( Cost-Salvage value ) x---=---SYD B.

Depreciate new cost 3. Under U. if the total undiscounted cash flows is less than the carrying amount. Write asset down 2.000) < Net carrying value> (100.000 Undiscounted future net cash flows $80. . The asset is written down to its fair value. there is no impairment loss and the second step of the impairment test is not needed.000 5.2012 Edition . IMPAIRMENT OF FIXED ASSETS Fixed assets are reviewed for impairment at least annually.2QQ ~ Positive + I No impairment loss + I I Impairment Assets held for use I Assets held for disposal I Fair value < Net carrvlng value> Impairment I $60.000) $40. The details of the accounting treatment are actually slightly different for long-term assets to be held and used than for longterm assets to be disposed of.000 (100. The first step of the impairment test is a screening test to determine if the asset is impaired. In the first step. Restoration not permitted Fair value < Net canylng value> Impairment loss + Cost of disposal $60. Restoration is permitted under IFRS for both fixed assets held for sale and fixed assets held for use. All rights reserved.000 1100.S. PARTIAL IMPAIRMENT xxx Impairment loss xxx Accumulated depreciation TOTAL IMPAIRMENT xxx Accumulated depreciation Impairment loss xxx Asset XXX 48-6 © 2011 DeVry/Becker Educational Development Corp. the impairment test is a two-step test that is similar in concept to the two-step impairment test for goodwill. there is an impairment loss.Financial Final Review VII. GAAP. and an impairment loss is recognized in income from continuing operations. If not. $120. Restoration Is permitted Under IFRS.000 (100. No depreciation taken 3. impairment exists if the carrying value of the fixed asset exceeds the higher of 1) fair value less costs to sell and 2) value in use (present value of expected future cash flows).000 $45000 Total Impairment Loss 1.000) ~ lli. the total future undiscounted cash flows expected from the use of the asset is compared to the carrying amount of the asset. The second step of the impairment test measures the amount of the impairment loss by the difference between the fair value of the asset and the carrying amount of the asset. Write asset down 2. Income statement presentation depends on whether the assets are to be held and used or are to be disposed of.000\ 'Pss S4000Q 1.

0 8. GAAP. 48-7 ~ 2011 DeVryjBecker Educational Development Corp. Deferred tax assets are never subject to impairment. if the undiscounted cash flows are greater than the carrying value then no further impairment testing is required. Partial impairments are written off with a debit to accumulated depreciation. 0 5. False The test for impainnent compares the carrying value of the asset to ita undiscounted cash flows. Depreciation is not recorded on assets held for use after they have been adjusted for impairments.S. 3. 7. 0 7. Impairment testing is based upon comparisons of carrying values to undiscounted future net cash flows. False Costs of disposal are considered in determining impairments for assets held for disposal. True Total impairments are written off with a debit to accumulated depreciation that writes off the asset as follows: DR DR CR 4. the inventory value may be restored to its pre-impairment value if circumstances warrant. Tru. 0 3. All rights reserved. Total impairments are written off with a debit to accumulated depreciation. The actual amount of the impairment is computed based upon a comparison of the carrying value of the asset and the fair value of the asset.2012 Edition . Check all the assertions below that are true under U. The test for impainnent compares the carrying value of the asset to ils undiscounted cash flows. Assets held for use are written up by the associated cost of disposal before computing impairment losses. . Once impairments have been recorded on impaired inventories held for resale.-nt IAuthoritative Literature I Help I The carrying amount of assets either held for disposal or held for use should be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 0 4. 0 6. etc. Impairment losses are computed based upon a comparison of carrying values to the undiscounted future net cash flows. Restoration of assets held for disposal subsequent to recording impairment is permitted. 0 2. Loss due to impairment Accumulated depreciation $XXX $XXX Fal•• Depreciation is recorded on assets held for use after impairment is recorded. 2. Tru. 8. 6. Solution 1. Impairment does not apply to assets whose valuation is prescribed by other specific provisions of generally accepted accounting principles such as: deferred tax assets in addition to financial instrumenta. If the undiscounted cash flows are less than the carrying value. mortgage seNicing rights. Furthennore costs of disposal effectively reduce carrying value. $XXX XXX Accumulated depreciation Loss due to impairment Asset $XXX False Partial impairments are recognized as an increase in losses from impairments and a credit to accumulated depreciation recorded as follows: DR CR 5. impairment is indicated. Tru. 0 1. not assets held for use. not increase carrying value.Financial FInal Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Impairment Impeln.

. All rights reserved.Financial Final Review NOTES 48-8 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .

Financial Final Review FINANCIAL 511 Leases • • • Operating Leases Capital (Finance) Leases Criteria for Capital (Finance) Lease Accounting .Lessor Sale-Leasebacks SA-l (0 2011 DeVry/Becker Educational Development Corp. .2012 Edition .Lessee Criteria for Direct Financing / Sales Type (Finance) Lease . All rights reserved.

2012 Edition . . All rights reserved.Financial Final Review NOTES SA-2 © 2011 DeVry/Becker Educational Development Corp.

if any (Present Value of $1) • Residual value guaranteed by the lessee. GAAP) or finance lease (IFRS) transfers substantially all of the benefits and risks of ownership of property to the lessee. . Operating leases are considered off-balance sheet financing because the use of an asset is provided without any corresponding liability being recognized (although there is an economic and legal obligation to pay). GAAP. Leasehold improvements should be amortized over the lease term or the asset/improvement life. The life of the lease is at least 75% of the asset's economic life. the lessee records rent expense over the lease term. Seventy-five (75%) percent rule. The present value of the minimum lease payments is at least 90% of the FV of the leased asset. whichever is shorter. Straight-Line Method For an operating lease. Written option for bargain purchase (called a bargain purchase option). CAPITAL (FINANCE) LEASES A capital lease (U. II. Capitalized Amount The capitalized amount is the lesser of the fair value of the asset at the inception of the lease or the present value of the minimum lease payments. Under IFRS. The lessor records rent revenue. A.Include: • Required payments (Present Value of Annuity) • Bargain purchase option. a lease is classified as a finance lease if the lease transfers substantially all the risks and rewards of ownership to the lessee.S. OPERATING LEASES No risks or rewards have been transferred to the lessee. III. It is an installment purchase in the form of a lease.Financial Final Review SUMMARY NOTES I.2012 Edition . Minimum Lease Payments .LESSEE Under U. All rights reserved. The lessor must do the same when recording rent revenue. The lessor has the rights to the asset and continues to depreciate the asset. The lessee must take the total rent expense to be paid for the entire lease term inclusive of a lease bonus or exclusive of free rent and divide it evenly over the entire lease term .S. Ninety (90%) percent rule. CRITERIA FOR CAPITAL (FINANCE) LEASE ACCOUNTING . if any (Present Value of $1) SA-3 © 2011 DeVry/Becker Educational Development Corp. a lessee must capitalize a leased asset if one of the following four conditions is met: Ownership transfers at end of lease (upon the final payment or a required buyout). it is an operating lease. If a lease does not meet the requirements of a capital (finance) lease.straight-line method.

000 34.600 27.000 6.000 10.Financial Final Review Minimum Lease Payments .400 50.000 12!31!Yl Capital (Finance) Lease $10.000 12!31!Y3 10.000 3.000 12!31!Yl 12!31!Yl $10. 1. B. initial direct costs paid by the lessee are added to the amount recognized as a finance lease asset.000 $4. The interest component for a period is the carrying amount of the lease at the beginning of the period times the interest rate that was used to capitalize the lease.400 6.000 10. The greater portion of the payment at the beginning of the lease term is interest.2012 Edition . Under IFRS.000 Lease Obligation 12!31!Yl Lease Obligation 10.000 Cash 5A-4 © 2011 DeVry/Becker Educational Development Corp.000 6. the liability must be paid off over the term of the lease.000 40. and taxes). Lessee's Incremental Borrowing Rate Effective Interest Method Once the asset is capitalized and the liability is recognized.000 12!31!Y2 10. . maintenance. Interest Rate Use the lower (lesser) of: C.Exclude: Executory costs (Insurance. Lease payments are separated into an interest component and a principal component using the effective interest method of amortization. All rights reserved. Date Lease Payment Interest Expense (10%) Principle Reduction $50. Implicit Rate (if known by lessee) 2. The remainder of the lease payment is the principal component.000 Cash 12!31!Yl Lease Liabilitv Interest Expense Lease Obligation 4.000 50.

• Performance by the lessor is substantially complete.GAAP: Criteria Depreciation Period Qwnership Transfers Asset Life Written Bargain Option Asset Life ~inety Lease Term (90%) Rule ~eventy-five (75%) Rule Lease Term IFRS: The depreciation period is the shorter of the lease term and the useful life of the asset. 5A-5 © 2011 DeVry/Becker Educational Development Corp.Financial Final Review D.S. GAAP.2012 Edition .S.S. SALE-LEASEBACKS A sale-leaseback is a transaction where the lessee sells an asset to another party and subsequently leases it back. defer all gains and amortize over the leaseback period. Depreciation Period U. A sales-type lease is referred to as a finance lease of an asset by a manufacturer or dealer lessor. A direct-financing lease is simply referred to as a finance lease. If any costs have yet to be incurred they are predictable. Under U. GAAP. "Substantially All" Rights Retained (Greater than 90%) If the present value of the rent payments is equal to or greater than 90% of the fair value of the asset. IFRS: A lessor classifies a lease as a finance lease if the lease transfers substantially all the risks and rewards of ownership to the lessee. All rights reserved. CRITERIA FOR DIRECT FINANCING/SALES TYPE (FINANCE) LEASE . two conditions must be met in addition to one of the four classification criteria for a capital lease ("OWNS"): • The collectibility of the lease payments must be reasonably predictable. If there is a reasonable certainty that the lessee will own the leased asset after the lease term.LESSOR U. V. IV. The leaseback will either qualify as a capital (finance) lease or as an operating lease.GAAP: Direct Financing Lease =Interest Income only Sales Type Lease = Gross Profit plus Interest Income For the lessor to account for the lease as a direct financing lease or a sales-type lease under U. . then the leased asset should be depreciated over its useful life. the accounting for gains on a sale-leaseback is dependent on the rights to remaining use of property retained by the seller/lessee: A.S.

Financial Final Review B.2012 Edition . a portion of the gain is deferred for an amount up to the present value of the minimum lease payments and the excess is recognized immediately. any profit or loss is recognized immediately (no deferral). the (operating) leaseback is considered a minor leaseback and the transaction is accounted for as two separate transactions. All rights reserved. "Minor" Portion of Rights Retained (Less than 10%/No Deferral) If the present value of the rental payments is 10% or less of the fair value of the asset. 2. Rights Retained are Less than "Substantially All" but Greater than "Minor" (Between 90%-10%) If the present value of the minimum lease payments is greater than 10% and less than 90% of the fair value of the asset. . or if the leaseback period is 10% or less of the asset's remaining life. fair value and selling price. If the sales price is equal to fair value (general rule). Operating Lease Gains (and losses) are recognized based on the relationship between the leased asset's carrying amount. IFRS Under IFRS. Finance Lease Gains are deferred and amortized over the lease term. C. the accounting for gains is dependent on the classification of the lease as operating or finance. a sale with full gain or loss recognized immediately and a separate lease. SA-6 © 2011 DeVry/Becker Educational Development Corp. 1. D.

000.000. Year 1.000 halfway through the lease. $266. GMP at: 1.000 annual payments at the beginning of each year. contracting to pay $50.000 4.800 3.S.2012 Edition .980 2. $300. For Year 1. Aggregate lease payments had a present value on January 1. $243.000 on signing the lease and $50. LaGuardia Company signed a five-year non-cancelable lease for a new machine with a fair value of $80. At December 31. $259. Year 2.000 based on an appropriate interest rate. Eve's total capital (finance) lease liability is: 1. $0 2.000 1. Year 1. What amount should Tom V. Eve Company leased a machine under a capital (finance) lease for a period of ten years.000 2. nor was there any bargain purchase option.500 3.000 SA-7 © 2011 DeVry/Becker Educational Development Corp. Year 1 of $40. $305. The machine had a useful life of 10 years.000 The entire amount was charged to rent expense in Year 1.000 QUESTION 2 On January 1.000 QUESTION 3 On December 1.000 annually on December 31 of each of the next nine years.000 400. $200. On that date. $1. Tom V. The present value at December 31. . $7.200. Year 1 of the ten lease payments discounted at 10% was $338. increasing to $400. Title did not pass to LaGuardia.000 4.000 600. with no salvage value.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 On December 31. $6. LaGuardia uses straight-line depreciation for all of its plant assets. $8. Year 1. requiring $8.000. Tom V. $303.200. Company entered into an operating lease for office space for its executives for 10 years at a monthly rental of $200. All rights reserved. have charged to expense for the year? 1. paid the landlord the following amounts: First month's rent $ Last month's rent Installation of new carpet $ 200. LaGuardia should record depreciation (amortization) expense for the leased machine under U.200 4.000 3.

$30. GAAP.000 Estimated remaining useful life 15 years In Stalla's December 31. Year 1 balance sheet. $0 SA-8 © 2011 DeVry/Becker Educational Development Corp.2012 Edition . Stalla Corporation sold an asset to Newt Corporation and simultaneously leased it back for one year. The following information pertains to the sale and the leaseback: Sales price $720.S. . $20. Year 1. All rights reserved.000 Present value of minimum lease payments 30.Financial Final Review QUESTION 4 On December 31.000 Carrying amount 700. $2. Stalla uses U.000 2. the deferred profit from the sale of this asset should be: 1.000 3.000 4.

Year 1? 2. Year 4.000 Times: 12 months x 12 Times: 6 months Total Year 1 expense 2.Financial FInal Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Operating Lease OpendllllJ Leaee Aulhorllalive LIleralure I I Help Hanne Corporation manufactured a piece of equipment at a cost of $7.000. $690. . Inc.000. What income or loss before income taxes should Hanne appropriately record as a result of the above facts for the year ended December 31.2012 Edition . What expense should Tanya.000 Monthly rental income $ 115.000 Year 2 Income $1.000 and are due on the first of the month.000 Divided by: Asset life + 8 ( Year 2 Depreciation 875. The lease is appropriately recorded on the books of both corporations as an operating lease for accounting purposes. Year 1. Answer the questions below.000 $505. All rights reserved. Year 1. at a price of $8. Year 1. The lease is for a three-year period expiring on June 3D.000 Total Year 2 income on lease SA-9 ~ 2011 DeVryjBecker Educational Development Corp.000. Year 1.000 Monthly rental expense $ x 6 $ 690. Inc. On July 1. to June 30. ~ fx II I 1. inserting the correct dollar amounts in the shaded cells. 115. Equal monthly payments under the lease are $115.000) $ 505.380. appropriately record as a result of the above facts for the year ended December 31. Year 2? Solution I 1.000. The first payment was made on July 1. Hanne leased the equipment to Tanya.000 and held it for resale from January 1.000 Equipment cost $ 7. The equipment is being depreciated on a straight-line basis over an eight-year period with no residual value expected.

Year 2? Capital lease 10% $0 Operating lease 13% $80.Financial Final Review TASK-BASED SIMULATION 2: Safe / Leaseback T Sale I Leaseback I Authoritative Literature I I Help On January 2. Under the terms of the leaseback.320 [$864.422 [$826. GAAP? 2. The cash paid was equal to the present value of the minimum lease payments. What amount of interest expense should be recognized by Hanne Corporation at December 31.320 x 13%] $112. and its estimated remaining life is 10 years. how would the lease be reported for financial accounting purposes under U.040 [$800. Year 1? 5.400 $783.000 ~ ~ $86. Hanne uses the straight-line method of depreciation.000 $800.000 x 10%] ~ 8 $107. For each of the items below.S. 1. Year 2? 6. GAAP. All rights reserved. are based on an implicit interest rate of 10%. Hanne uses U. What amount of depreciation is recorded on the books of the lessee (Hanne Corporation) at December 31. Annual year-end payments of $153.880 - ~ '- I Cancel I ~ I Cancel I . The first payment is made December 31. and ownership does not transfer at the end of the lease term.000. - ~ I Cancel I . which include executory costs of $3. Over what period of time should Hanne depreciate the equipment? 3.000 x 13%] $0 $0 9 years ~ 10 years 0 $96. Hanne's incremental borrowing rate is 13%.76 at 10% and 5.742 $730. which is known to Hanne.400 [$864. Which interest rate should be used by Hanne to calculate the present value of the minimum lease payments? 4. The rounded present value factors of an ordinary annuity for 9 years are 5.400 x 10%] $86.000.2012 Edition .~ ~ SA-lO © 2011 DeVry/Becker Educational Development Corp. No bargain purchase option exists in the lease.400 $864.2 at 13%.440 $653.000. Year 1. Hanne Corporation sold equipment to Breana Manufacturing for cash and immediately leased it back for 9 years. Year 1. The carrying amount of the equipment was $540.S. double-elick in the shaded cell and select the appropriate answer from the list provided. What is the amount of the lease liability on the books of Hanne Corporation at December 31.

. Following Is the calculBllon for the amount of Interest: Step 1 Lease liability at 112/Year 1 Times 10% Year 1 IntllreBt expensa Step 2 Year 1 lease pa)TYIent Less: Executory costs Less: Year 1 interasl expense Yaar 1 leasa principal reduction Slap 3 Lease liability at 112/Year 1 Less: Year 1 principal reduction Lease liability al12J31/Year 1 Times 10% Year 2 intllreBt expensa 8. least seventy-fIVe percent (75%) of the asset's economic life is committed in the lease term 9yeara Hanne should deprBclBte the asset over the lease term of 9 years bBCBuse the lease qualified as a capital lease only under the 75% and the 90% rules.400 !. All rights reserved.000 The asset Is depreciated over 9 years. $80.. The leaae is amortized uaing the 10% Implicit rate.1.400 ( 69..76 Net amount $864.400) ~ $854.'s) inaemental borrowing rate of 13% and Breana's rata is KNOWN to Hanns. Ownership Ownership transfers at the end of the leaae Written A written bargain purchase option exists Ninety Ninety percent (90%) of the FMV of the leased property <= to the present value of the minimum lease payments Seventy-five At. Capital Lea. above. as Identified In Item number 3 (above). 4.600) $800. Written Depreciate over a88Bilife (1Bg81 form) Ninety % FMV Depreciate over lease term (substance overform) Seventy-five % Life Depreciate over lease term (substance over form) 10% Breana's rete (the lessor's nete) of 10% should be used to calculate the present velue of the minimum lease payments (and thus the asset value) becauss that rate is LOWER than Hanne's (the lass. The sale-leaseback transaction is classified as a capital lease because the term of 9 years is greater than 75% of the equipment's eslimaled remaining economic life (10 years).] SA-ll ~ 2011 DeVryjBecker Educational Development Corp..-.000) ( 88..) Recall the following mnemonic to determine if a lease qualifies as a capital lease (only one criterion need be met 10 classify the lease as capilal): 2. $ 864.UdAD $153.. .000 ( 3.000 x 5. .. $96..040) Lease liability at 12J31/Year 1 Less: Year 2 lease principal reduction Lease liability at 12131/Yaar 2 $800.000 /9 = $864. If there is no transfer of ownership and the lease term also does not contain a bargain purchase option.000 ( 63. as Indicated In the answer 10 Item 2..440 Using the information obtained in item 6.!!% ~ $730. Recall the following rules: Depreciate over aB8Bt life (Iegel tam) Ownership 3.2012 Edition . Year 2: Year 2 lease pa)TYIent Less: Executory costs Less: Year 2 interasl expense Yaar 2 leasa principal reduction $153. following is the calculation for the lease liability at December 31..000 Executory costs (3..000 1L.Financial FInal Review I Solution 1.000 =$96.960) ~ ~ [Note that all of the other answer options consider the liability at various yaar-ends using either the 10% rate or the 13% rate.-. the asset cannot be deprecleted over lls estimated remaining life.040 Note that the question asks for the interest axpenae afl8r two le8&B payments (on December 31. 5.000) $150. Year 2).000 ( 3. discussed below.000 To arrive at PVMLP: Annual lease pa)TYIents $153.1Q% l.000) ( 80. [Note that the present velue of the minimum lease payments Is also greater than 90% of the fair velue of the property as determined by the cash sale.

Correctly formatted FASB ASC topics are 3 or 4 digits FASB ASC 1 -- 1- c=J -c=J -c=J Some examples of correctly formatted FASB ASC responses are 205-10-05-1. 323-74D-S25-1 .H':". 260-1 0-Q0-1 A. •I I Solution Source of answer for this question: FASB ASC 840-20-25-1 Keyword: Operating leases SA-12 © 2011 DeVry/Becker Educational Development Corp. .rable of Contents ~ FASB Literature Neltt Sear.h With n I Advanced Search I Prevlous Result II j~etdJ Neltt Result FASB Literature It:I Ortg~aIPronouncement ••• ltt. Type the topic here.~:"'=':=':::":'----------------------------I1I ~~::::'::X Uniform CPA Examination Authoritative Literature Il' FASB Import To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above.dJ )Enter search Here I PreVIOUs I~etct. III . how should rent be charged to expense over the lease term? Find the proper citation that provides guidance in answering this question.2012 Edition . 260-10-55-99 and 115-60-35-128A T Research I Back Authoritative lher:lture I Home I H~rp I Recent Peae Visits Se". Use the buttons to the right and the links above the text box to perform more detailed or advance searches.Financial Final Review TASK-BASED SIMULATION 3: Research _'U RMaarch I Authoritative Literature I Help I Under operating leases. All rights reserved.

. All rights reserved.Financial Final Review FINANCIAL 58 Bonds Bond Terminology Issuance of Bonds Issuance of Bonds Between Interest Dates Amortization of Premiums and Discounts • • Convertible Bonds Bonds with Detachable Warrants Retirement of Bonds 58-1 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .

. All rights reserved.2012 Edition .Financial Final Review NOTES 58-2 © 2011 DeVry/Becker Educational Development Corp.

Cash xxx Bonds Issue Costs XXX XXX XXX Bonds Payable Premium on B!P OR XXX XXX XXX Cash Bonds Issue Costs Discount on B!P XXX Bonds Payable Under IFRS.the number of periods from the bond date to the maturity date.g.The interest to be paid to the bondholders. the discount is amortized over the contractual life of the bonds. The effective/market rate is the rate of interest for bonds of similar risk and maturity on the date the bonds are sold. Under IFRS. GAAP. Stated/nominal/coupon rate . A premium results when the market/effective rate is lower than the stated/coupon rate because investors are willing to pay more than the bond's face value (e. If bonds are issued at par. including both the principal and interest payments using the effective rate of interest. ISSUANCE OF BONDS The selling price of a bond is equal to the present value of the future cash payments related to the bond. Among the elements of the contract: II. Frequency of interest payments (annual. All rights reserved. BOND TERMINOLOGY A bond indenture is a contract that specifies the terms between the bond issuer and the bondholders.000 and are quoted in 100s. Bonds are generally sold in denominations of $1.S. c.. bond issue costs are debited to a deferred charge (asset) account at bond issuance and are amortized straight-line over the life of the bond.S. 98. Under U.S. GAAP. A discount results when the market/effective rate exceeds the stated/coupon rate because investors will pay less than the bond's face value (e. 99). bond issue costs are deducted from the carrying value of the liability and amortized using the effective interest method. the premium is amortized over the expected life of the bonds. the discount is amortized over the expected life of the bonds.Financial Final Review SUMMARY NOTES I. Under IFRS. 103). Life of the bond . Under U. 97. Under U. the premium is amortized over the contractual life of the bonds. Face value . .g.2012 Edition . 101. b.. GAAP. d. 5B-3 © 2011 DeVry/Becker Educational Development Corp. a. 102. the stated rate of interest equals the effective rate of interest. semiannual). The effective market rate of interest on a bond is also referred to as the yield.The total dollar amount of the bond.

S. All rights reserved.000 x . and is used to adjust the carrying amount of the bond by decreasing the unamortized premium or discount. There are 2 methods to amortize bond discount or premium: a. With the effective interest method. ISSUANCE OF BONDS BETWEEN INTEREST DATES When bonds are issued between interest dates.04) **(950.05) 5B-4 © 2011 DeVry/Becker Educational Development Corp.000 950.U. the carrying amount of the bond is equal to the face.000 6/30/X1 40.875 34. Effective interest amortization method .000 47.625 965.000 47.500 957. Bonds Payable XXX Interest Expense XXX AMORTIZATION OF PREMIUMS AND DISCOUNTS The carrying amount of a bond is the bond's face value plus the unamortized premium or minus the unamortized discount. Straight-line method . At the maturity of a bond.000. the amount of interest that has accrued since the last interest payment is added to the price of the bonds and is reimbursed at the next interest payment date to the purchaser. GAAP. b. The interest component is equal to the carrying amount of the bond at the beginning of the period times the effective interest rate.500 42.tolerated when not material under U.500 12/31/X1 40.875 7. prohibited under IFRS.500 7. Date Bond Face Net carrying value lC Coupon Rate lC Effective Interest rate Interest Paid Interest elCpense Cash Interest 4%· Interest Expense 5%·· Amortized Discount 1/1/X1 Amortization Unamortized Discount Carrying Amount 50. (The purchaser gets the full interest payment regardless of how long he/she has held the bond.2012 Edition . . each interest payment is divided into an interest and principal component. The straight-line method amortizes the premium or discount equally over the life of the bonds.000 x .S.Financial Final Review III.375 *(1.) xxx Cash XXX Discount B/P IV. GAAP/IFRS. The difference between the interest component and the interest payment is the amortization of the premium or discount.

GAAP.Gain/DR . . The bond liability is recorded at fair value. On the CPA exam.000 Cash OR Interest Expense XXX Premium on B/P xxx XXX Cash V.S.500 Interest Expense 7. CONVERTIBLE BONDS Under U. and additional paid-in capital is credited for the excess of the bond's carrying value over the stock's par value less any conversion costs.Financial Final Review 47. All rights reserved. a liability (bond) and an equity component (conversion feature) should be recognized when convertible bonds are issued. Under the market value method. no separate recognition is given to the conversion feature when convertible bonds are issued. no gain or loss is recognized. with the difference between the actual proceeds received and the fair value of the bond recorded as a component of equity.2012 Edition .500 Discount on B/P 40. gain or loss is recognized. Under the book value method. 5B-5 © 2011 DeVry/Becker Educational Development Corp. Book Value Method xxx xxx Bonds Payable Premium on B/P xxx xxx Common Stock APIC(plug) (No gain/loss) OR Market Value Method xxx xxx Bonds Payable Premium on B/P Common Stock XXX} FV xxx APIC (CR .Loss for the difference) Under IFRS. the conversion of convertible bonds may be recorded under either the book value method or the market value method (normally not GAAP).

g.Gain/DR .Financial Final Review VI. the gain or loss is recognized as an extraordinary item only if the retirement meets the criteria of both unusual and infrequent event. SB-6 © 2011 DeVry/Becker Educational Development Corp. The total proceeds received from the issuance must be allocated between the bonds and the warrants. VII. If both the market value of the warrants and the market value of the bonds are given (or can be calculated)..2012 Edition . allocate to the warrants based on the total fair value of the warrants and the remainder to the bonds. If the market value of the warrants only is given (or can be calculated). GAAP. allocate to the warrants and the bonds based on their relative fair values: xxx xxx Cash Discount on B/P xxx xxx Bonds Payable APIC .Stock Warrants OR xxx Cash xxx xxx xxx Bonds Payable Premium on B/P APIC . BONDS WITH DETACHABLE WARRANTS When a bond is issued with detachable stock warrants. All rights reserved. 101). Bonds are retired as a % of face value (e.Loss for the difference) Under U. RETIREMENT OF BONDS Corporations can call or retire bonds prior to maturity.S. 98.Loss for the difference) OR xxx Bonds Payable BV{ xxx xxx Discount on B/P Cash (CR .Stock Warrants If the warrants are not detachable no allocation of proceeds is needed. two separate securities are issued.Gain/DR . The warrants give the bondholder the right to buy stock at a fixed price within a specific time period. xxx xxx Bonds Payable BV { Premium on B/P xxx Cash (CR . .

000 2. $515.000 $20.100 3. Immediately after issuance. Each bond carried a detachable warrant for one share of Wayne's common stock at a specified option price of $25 per share. 8% term bonds dated October 1. What amount should Dixon report for interest payable in its December 31. Interest is payable annually on June 30. $48.080. Year 1 balance sheet.000 of its 10-year. $1. Wayne Corporation issued 1.000 for $520. $1. Year 1 balance sheet? 1. Year 1.000 to yield 10%. $900.000 3.667 4. The market rate was 6%.000 and the market value of the warrants was $120.000 QUESTION 2 On July 1. Year 1. what amount should Wayne report as bonds payable? 1. $43. $511. resulting in a bond discount of $61. Planet Corporation sold Ken Company 10-year.000 58-7 © 2011 DeVry/Becker Educational Development Corp.000. The bonds pay interest semiannually on June 30 and December 31. Dixon Corporation issued $800. $57. Year 3. $504. 8% bonds with a face amount of $500.400 4. Cobb uses the effective interest method of amortizing bond discount. Interest is paid every April 1 and October 1.000 plus accrued interest.000 face value bonds with detachable stock warrants at par.600 $15. The bonds were issued for $939.000 4.000 which mature in ten years. At June 30.080.000. $16. Year 1.000 3.667 QUESTION 4 On December 30. 10-year. $1. In its December 31.200 $31.810 2. Cobb's unamortized bond discount should be: 1. $17.500 2. Cobb Company issued 9% bonds in the face amount of $1 . Year 1. All rights reserved. Year 1. Year 1. what amount should Planet report as bond interest expense and long-term liability in the balance sheet and income statement for Year 1? BlS I/S 1. The bonds were sold to yield 10%.400 $4.000 3. $11.000 of its 8%. with total proceeds of $700. For the six months ended December 31.800 4. .200 2.000.000. $10. the market value of the bonds without the warrants was $1. $500.000. $52.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 On July 1.200.2012 Edition .600 QUESTION 3 On November 1. $1.

$1.Financial Final Review QUESTION S On July 1. the carrying amount of the bonds was $1. Using the book value method.450.000 3. and Wake's common stock was publicly trading at $40 per share.000 of its 10% convertible bonds into 50. All rights reserved.000 4.000.000. Wake Company's shareholders converted $1. what amount of additional paid-in capital should Wake record as a result of the conversion? 1. $1. .000 shares of its $1 par value common stock.2012 Edition . $500.000.950. after recording interest and amortization.000 2. On the conversion date.500.400. Year 1. $1. the market value of the bonds was $1.000 58-8 © 2011 DeVry/Becker Educational Development Corp.500.

.2012 Edition . All rights reserved.Financial Final Review FINANCIAL 611 Income Statement / Deferred Taxes Presentation Order of the Major Components of an Income and Retained Earnings Statement Comprehensive Income • Accounting for Income Taxes 6A-l ttl 2011 DeVry/Becker Educational Development Corp.

. All rights reserved.Financial Final Review NOTES 6A-2 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .

IFRS prohibits the reporting of extraordinary items. B. PRESENTATION ORDER OF THE MAJOR COMPONENTS OF AN INCOME AND RETAINED EARNINGS STATEMENT Reported on Income Statement A. Deferred income tax expense/benefit. Interperiod Tax Allocation 1. Income (or Loss) from Continuing Operations (Report Gross. except those resulting from investments by owners and distributions to owners. then Net of Tax) Income from continuing operations includes operating activities (Le.Financial Final Review SUMMARY NOTES I. C. revenues. Income (or Loss) from Discontinued Operations (Report "Net of Tax") The (normal) loss from discontinued operations can consist of three "elements": (1) an impairment loss. All of these amounts are included in discounted operations in the period in which they occur. Current income tax expense/benefit. All rights reserved. II. 6A-3 © 2011 DeVry/Becker Educational Development Corp. and administrative expenses). (2) income/loss from actual operations. COMPREHENSIVE INCOME Comprehensive income includes all changes in equity during a period. costs of goods sold. and b. other comprehensive income includes: Pension adjustments Unrealized gains and losses on available-for-sale securities Foreign currency items Effective portion of cash flow hedges Revaluation surplus (IFRS only) III..2012 Edition . Comprehensive income is net income plus other comprehensive income. selling expenses. .g. ACCOUNTING FOR INCOME TAXES A. and income taxes. other revenues and gains and other expenses and losses). It is the cumulative effect (calculated as of the beginning of the first period presented) of a change from one acceptable method of accounting to another ("GAAP to GAAP" or "IFRS to IFRS") because the new method presents the financial information more fairly than the old method. and (3) a gain/loss on disposal. Total income tax expense or benefit for the year is the sum of: a. Change in Accounting Principle (Report "Net of Tax") The cumulative effect of a change in accounting principle is presented net of tax. Extraordinary Items (Report "Net") Extraordinary items are presented net of tax and include items that are unusual in nature and occur infrequently. non-operating activities (e.. Reported on Statement of Retained Earnings D.

rents collected in advance). These differences affect only the period in which they occur. 2. multiplied by the current tax rate. total income tax expense/benefit can be depicted as follows: K CURRENT TAX RATE K TEMPORARY DIFFERENCE - FINANCIAL STATEMENT FUTURE (ENACTED] TAX RATE DR DEFERRED TAX EXP DR CURRENT TAX EXP CR CURRENT LIABILITY + CR DEFERRED LIABILITY OR . which reverse in future periods. 1. (b) Revenues or gains that are included in taxable income. (2) Enter into taxable income.DR DEFERRED ASSET TOTAL TAX EXPENSE CR PEFERREP TAX BENEFIT B. They do not affect future financial or taxable income.g. Permanent differences are items of revenue and expense that either: (1) Enter into pretax GAAP financial income. interest income on state or municipal obligations. or the change in deferred tax liability or asset account on the balance sheet from the beginning of the current year to the end of the current year (called the "Balance Sheet Approach"). 3. b.2012 Edition . but never enter into taxable income (e. Thus. sales on account). but never enter into pretax GAAP financial income (e. All differences are either permanent differences or temporary differences.. before they are included in financial accounting income. respectively. 4. Current income tax expense/benefit is equal to the taxable income for the current year. which results in a deferred tax asset (Le. which results in a deferred tax liability (Le. Temporary Differences Temporary differences are the differences between the tax basis of an asset or liability and its reported amount in the financial statement that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled.. 6A-4 © 2011 DeVry/Becker Educational Development Corp. after they have been included in financial accounting income.. life insurance. Deferred income tax expense/benefit is equal to temporary differences multiplied by the future tax rate. (a) Revenues or gains that are included in taxable income. Permanent differences do not affect the deferred tax computation. dividends received deduction).Financial Final Review 2..g. All rights reserved. Permanent Differences a. They only affect the current tax computation. There are four basic causes of temporary differences. Differences There are two types of differences between pretax GAAP financial income and taxable income. . proceeds/expense).

Under IFRS. 1. A deferred tax asset that relates to product warranty liabilities (accrued expenses) would be classified as "current" because warranty obljgations are part of the current operating cycle. Under U. All rights reserved. a deferred tax asset is recognized when it is probable that sufficient taxable profit will be available against which the temporary difference can be utilized. warranty expense). after they have been deducted for financial accounting income. 6A-S © 2011 DeVry/Becker Educational Development Corp.. Current financial income is less than current taxable income. . For example: a. F. 2. IFRS prohibits the use of a valuation allowance. accelerated tax depreciation). Unearned rent (taxable income before book income) 2.. a valuation allowance should be recognized to reduce the amount of the deferred tax asset. Balance Sheet Presentation 1. Installment sales (used for tax purposes) 4. Unearned interest (taxable income before book income) Expense Later E. If it is more likely than not that part or all of a deferred tax asset will not be realized. Prepaid expenses (cash basis for tax) 3. (c) Expenses or losses deducted from taxable income.2012 Edition . Estimated liability/warranty expense (allowance for GAAP and direct write-off for tax) Valuation Allowance Deferred tax assets are created by transactions that defer the tax benefits of expenses or transactions that recognize tax income before book income. Current financial income is greater than current taxable income. Expense First 1. before they are deducted from financial accounting purposes.S. Contractor accounting Deferred Tax Assets A deferred tax asset is a future receivable. b. deferred tax items should be classified based on the classification of the related asset or liability for financial reporting. GAAP. Deferred Tax Liability A deferred tax liability is a future payable. Depreciation expense greater for tax than for book Revenue Later D. 3. which results in a deferred tax liability (Le. A deferred tax liability that relates to asset depreciation (fixed assets) would be classified as "noncurrent" because the related assets are noncurrent. (d) Expenses or losses deducted for taxable income. Revenue First 1. which results in a deferred tax asset (Le. Bad debt expense (allowance for GAAP and direct write-off for tax) 4.Financial Final Review C.

current or noncurrent) based on the expected reversal date of the temporary difference. Such items include: a. The NOL offsets taxable income. all current deferred tax assets and liabilities and all non-current deferred tax assets and liabilities should be offset (netted) and presented as one amount. current and noncurrent amounts should not be netted.2012 Edition . All rights reserved. Deferred tax assets related to carry forwards. Under U. Under U. GAAP. Percentage of completion method used for contracts for GAAP financial income (no asset or liability) but completed contract method used for tax purposes.S. deferred tax items not related to an asset or liability should be classified (e. However. b. GAAP. Deferred tax assets and deferred tax liabilities may be netted if the entity has a legally enforceable right to offset current tax assets against current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authorities. and c. 4. deferred tax assets and deferred tax liabilities are reported as noncurrent on the balance sheet. Organization costs expensed for GAAP financial income (no asset) but deducted in later years for tax purposes. Carryback benefit: l!ru (!ill Income tax refund receivable Benefit due to loss carryback (income tax expense) Carryforward benefit: l!ru (!ill Deferred Tax Asset Benefit due to loss carryforward (income tax expense) 6A-6 ~ 2011 DeVryjBecker Educational Development Corp. Under IFRS.S. . Operating Loss A net operating loss (NOL) occurs when tax-deductible expenses exceed taxable revenues. G.S. or 2) carry the NOL forward up to 20 years. In this case the corporation pays no income taxes and it may select one of two options under the U. 3.g. Internal Revenue Code (IRC): 1) carry the NOL back 2 years (to the earlier year first then to the second) and then carry any remaining NOL forward up to 20 years.Financial FInal Review 2.. An NOL carryback results in a refund of taxes paid in prior years.

000 3.000. Year 1. During Year 1.000 4.000 gain on reacquisition and retirement of long-term bonds. $545. Before income taxes.000 2.S.000. Year 1 50.000 The carrying amount of the component on May 15.000 3. disposal costs incurred by Moran totaled $15. A $500.000 loss on the disposal of its entire retail store business. $600.000 May 15 . Year 2 15. $365. approved a plan to dispose of a component of its business. Year 1 $130.December 31. Moran Inc. $15. In its current year income statement. what would be the total amount to be included in extraordinary items under U. $400.000 4. what amount should Moran report for discontinued operations in its Year 1 Income Statement? 1. which was the current fair value of the component. It plans to operate only as a wholesaler in the future. .000 loss on the abandonment of assets that are no longer being used. Year 2. $100. Ray frequently acquires and retires its debt.000 January 1 . $380. at a selling price of $500.000 QUESTION 2 Ray Corporation had the following transactions during the current year: A $100. A $100.000. $0 6A-7 © 2011 DeVry/Becker Educational Development Corp.000 2. All rights reserved.January 31. The component had actual or estimated operating losses as follows: January 1 .Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 On May 15. Ray has never abandoned any of its various businesses previously.May 14. It is expected that the sale will occur on February 1.2012 Edition . GAAP? 1. Year 1 was $850.

The depreciation difference will reverse equally over the next three years at enacted tax rates as follows: Year Year 2 Year 3 Year 4 Tax rate 30% 25% 25% In Cavan's Year 1 Income Statement. $250.000 (600.000 400. the deferred portion of its provision for income taxes should be: 1.000 Pretax accounting income Taxable income Difference Differences: Interest on municipal income Lower financial depreciation Total $ $ 100.000 Pretax accounting income Taxable income Difference Differences: Interest on municipal income Lower financial depreciation Total $ $ 100.000) $ 400.000 4. $120.000 300. $180.000 Cavan's effective income tax rate for Year 1 is 30%. $80. .000 3. Year 1: $1. $100. $300. the current portion of its provision for income taxes should be: 1.000 300. Year 1: $1.000 400. All rights reserved.000 2.000 6A-8 © 2011 DeVry/Becker Educational Development Corp. $150.000.000 Cavan's effective income tax rate for Year 1 is 30%.000.000 2.000 3.000 4.000 QUESTION 4 Cavan Company prepared the following reconciliation between book income and taxable income for the current year ended December 31.Financial Final Review QUESTION 3 Cavan Company prepared the following reconciliation between book income and taxable income for the current year ended December 31. $90.2012 Edition . The depreciation difference will reverse equally over the next three years at enacted tax rates as follows: Year Year 2 Year 3 Year 4 Tax rate 30% 25% 25% In Cavan's Year 1 Income Statement.000) $ 400.000 (600.

Year 1 Debit $25. Net income 6A-9 ~ 2011 DeVryjBecker Educational Development Corp.000 10. Enter your answers in the shaded cells.000 300. Extraordinary item 5. GAAP. All rights reserved. a publicly-owned company using U.000 100. Inoome before extraordinary item 4. Total expenses and losses 3.000 Total assets $9.000 10.Financial FInal Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Celculatlona Calculations Authoritative Literature I Help I The following condensed trial balance of Allen Corporation. The carrying value of the plant was $650.000 5. one of Allen's foreign factories was expropriated by the foreign government. The potential dilution from the exercise of stock options held by Allen's officers and directors was not material.000 110.000 2.000 2.000. • Allen frequently disposes of equipment with both gains and losses.000.900.S.000.000 40.080.900. '<If' Ix II I 1.000 750.000 250.000 payment from the foreign government in settlement.000 250. has been adjusted except for income tax expense: AI/en Corporation CONDENSED TRIAL BALANCE June 30.000. and Allen received a $900. Year 1 follow: • The weighted average number of common shares outstanding during Year 1 was 200. Total revenues 2. Complete the following single-step income statement.000 Total liabilities 5% preferred stock cumulative Common stock Retained earnings Machine sales Service revenues Interest revenue Gain on sale of factory Cost of sales-machines Cost of services Administrative expenses Research and development expenses Interest expense Loss from asset disposal 425. • During Year 1.2012 Edition . Allen has never disposed of a factory. . • Allen's tax rate is 30%.000 Other infonnation and financial data for the year ended June 30.

Financial FInal Review Solution 1.000 Extl80rdlnery geln (net of tax) ($900. Total expenses and losses Expenses: Cost of sales machines $425.2012 Edition . Extraordinary gain (net of tax) $ 175.000 Income tax expense 9.000 1 989.010. Net income $ 196.000 2 Extraordinary gain (net of tax) 5. All rights reserved.000 Total expenses and losses 3.000 x 30% $9.000 Interest revenues 10. Total Revenues Revenues: $750. .000 Total revenues 2.000 .000 Income before extraordinary gain 4.000 Interest expense Loss from asset disposal 40.30%) = =$175.000 $1.$650. Income before extraordinary items 21.000 Research and development expenses 110.000 Cost of services 100.000) x (1 .000 6A-l0 ~ 2011 DeVryjBecker Educational Development Corp.000 Administrative expenses 300.000 Net income 1 2 = = Income tax expense $30.000 Machine sales Service revenues 250.000 5.

8. All rights reserved. Treasury stock was sold in excess of its cost.2012 Edition . indicate whether the item results in a temporary difference. 3. There was no impairment loss during the year for financial reporting purposes. or no difference for an accrual basis taxpayer. Depreciation deducted for tax purposes was in excess of the depreciation expense for financial reporting purposes. 2. Proper 15-year amortization was deducted on the tax return. 6. has been adjusted except for income tax expense: For each of the following independent situations.000 of start-up costs during the current year.S.Financial Final Review TASK-BASED SIMULATION 2: Tax Reconciliation 'f Tax Reconciliation I Authoritalive Literature I Help I The following condensed trial balance of Allen Corporation. 1. 7. a permanent difference. a publicly-owned company that uses U. Temporary difference Permanent difference No difference 6A-ll © 2011 DeVry/Becker Educational Development Corp. Rental revenue was received during the current fiscal year in full payment for a three-year lease entered into in the current fiscal year. 5. The company paid a penalty to the IRS for late payment of income taxes. The company incurred and paid $4. Double-click on the shaded cells and make a selection from the list provided. Goodwill exists on the balance sheet. GAAP. Bad debt expense under the allowance method was in excess of amounts actually written off under the direct write-off method. . 4. Interest revenue was received on an investment in a state bond.

This is a temporary difference because bad debts are fully written-off under both methods. Temporary difference Goodwill is amortized over 15 years for tax purposes and subject to an impairment test for financial reporting purposes. No difference Treasury stock sold in excess of cost is added to paid in capital and is not reported as a gain for either financial reporting or tax purposes. 5. it is reported as income in the year received. it is never deductible on a tax return. while the direct write off method is required for tax purposes. No difference The startup costs will be expensed in the current year for both financial and tax reporting purposes. Generally this is a temporary difference because start up costs are always expensed for financial reporting purposes. Temporary difference The allowance method should be used for financial reporting purposes. while tax rules allow the deduction of $5. However. the depreciation will be the same. .2012 Edition . Temporary difference Tax law and GAAP use different depreciation schedules. 4.Financial FInal Review Solution 1. 8. Over time. Permanent difference State bond interest income is reported as revenue for financial reporting purposes but is tax-exempt.000. Note: Many students incorrectly label this a permanent difference. For tax purposes. goodwill will eventually be written off as impaired for financial reporting purposes. Permanent difference Although the penalty is an expense for financial reporting purposes. 8. Temporarydifference The rent revenue received in advance is deferred and not immediately recognized as revenue for financial reporting purposes. 3. since the question indicates that the startup costs were $4.000 in the year the costs are incurred and then a 180 month amortization of the remainder. 7. However. the costs will be fully expensed for tax and financial purposes. the theory is that over time. All rights reserved. 6A-12 ~ 2011 DeVryjBecker Educational Development Corp. 2.

000 (4. 1. Other comprehensive income 2. Comprehensive income Solution 1.000) Foreign currency translation gain Pension funded status adjustment Assuming a tax rate of 30%.000) 40.000) $383.000) (77.000 (120. $460.000) (26.000) (26.000) Net Income Effective portion of unrealized losses on cash flows hedge derivatives Unrealized losses on marketable securities classified as AFS 40.000) lC 30% tax (33. .000 (110.000) (4.000 Net income Other comprehensive income (net of tax) (120.000 Comprehensive income 6A-13 ~ 2011 DeVryjBecker Educational Development Corp.000 $460. All rights reserved. calculate the following by entering the appropriate values in the shaded cells.ooo 2.Financial FInal Review TASK-BASED SIMULATION 3: 1~ Tax Reconciliation Tax Reconciliation I Authoritative Literature I Help I The following information pertains to the current year annual report to the shareholders of Texas Corporation.2012 Edition . $383. sn.

. lher:lture I Home I H~rp I Recent Peae Vis". Research Back Authoritativ. Use the buttons to the right and the links above the text box to perform more detailed or advance searches. . .... 323-74D-S25-1 .. Type the topic here. Search )Enter 'Search Here I PreVIous I~atch III Table of Contents ~ FASB Literature Ortg~al Pronouncement••• A 1kI Next j~atdJ I Sear<h 'oHith n I I Advanced Search I PrevIous Re5Ult III Next Result I FASB Literature IV Current Text Uniform CPA Examination Authoritative Literature (E) TopIc. All rights reserved. FASB ASC 1 1- c=J. 260-10-60-1 A. .2012 Edition .c=J. Correctly formatted FASB ASC topics are 3 or 4 digits..Financial Final Review TASK-BASED SIMULATION 4: Research Reaearch Authoritalive Literature I Help The CEO of Logan Corporation wants to disclose EPS in the notes to the financials only..c=J Some examples of correctly formatted FASB ASC responses are 205-10-05-1.llndex Il' FASB Import To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above. Find the proper citation that defines the location of EPS presentation in the financial statements.1 I • Soiution I Source of answer for this question: FASB ASC 260-10-45-2 Keyword: EPS presentation 6A-14 © 2011 DeVry/Becker Educational Development Corp. 260-10-55-99 and 115-60-35-128A ..

2012 Edition .Financial Final Review FINANCIAL 68 Pensions • Pension Plans Pension Obligations . .Defined Benefit Pension Plans • Pension Plan Funded Status Reporting Changes in Funded Status .OCI • Pension Plan Contributions Pension Expense Components (SIRAGE) • Accounting for Postretirement Benefits Other than Pensions 68-1 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.

.Financial Final Review NOTES 68-2 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.2012 Edition .

service cost.S. . GAAP. A pension plan is reported as a current liability to the extent that the benefits payable in the next 12 months exceed the fair value of the plan's assets. a noncurrent liability. Defined benefit pension plans are reported on the balance sheet based on funded status: Fair value of plan assets <PBO or DBO> Funded status Under U. companies are required to aggregate all overfunded (fair value of plan assets> PBO) pension plans and report them as a noncurrent asset on the balance sheet. Defined benefit plans define the benefits to be paid to employees based on factors such as years of service and compensation levels at retirement. the funded status (DBa .2012 Edition . 68-3 © 2011 DeVry/Becker Educational Development Corp. The Accumulated Benefit Obligation (ABO) is the actuarial present value of benefits attributed by a formula using current and past salary levels. PENSION OBLIGATIONS . employee retirement benefits are determined based on the value of such contributions upon retirement. All underfunded (fair value of plan assets < PBO) pension plans should also be aggregated and reported as a current liability. a change in the funded status of a pension plan due to pension net losses or gains or prior service cost is reported in the period incurred as a component of accumulated other comprehensive income. GAAP.S. the pension liability is called the Defined Benefit Obligation (DBO). or both. IV. A liability is reported if the plan is underfunded (DBa> fair value of plan assets) and an asset is reported if the plan is overfunded (DBa < fair value of plan assets). REPORTING CHANGES IN FUNDED STATUS Under U. net of tax. PENSION PLANS There are two types of pension plans: defined benefit and defined contribution. Any unrecognized net transition obligation (or asset) is also reported in accumulated other comprehensive income. Defined contribution plans specify the amount of the employer's contributions to the plan.Financial Final Review SUMMARY NOTES I. The DBa is very similar to the U.S. and interest cost and is computed using future salary levels.fair value of plan assets) of the pension plan is reported on the balance sheet as the net defined benefit liability (asset). PENSION PLAN FUNDED STATUS Pension plans are accounted for on the accrual basis. III. GAAP PBO. Under IFRS. All rights reserved. IFRS do not specify whether an entity should classify the net defined benefit liability (asset) as current or noncurrent. Under IFRS. The PBO is used in the calculation of funded status.DEFINED BENEFIT PENSION PLANS The Projected Benefit Obligation (PBO) is the actuarial present value of all benefits attributed by the plan's benefit formula. II.

2012 Edition . 68-4 ~ 2011 DeVryjBecker Educational Development Corp. or net transition obligation to net periodic pension cost: i!lil ~ i!li! ~ Net periodic pension cost Other comprehensive income Deferred tax benefit . prior (past) service cost is reported as a component of service cost on the income statement in the period incurred.Financial FInal Review To report net loss or prior service cost: i!lil ~ i!lil ~ Other comprehensive income Pension benefit asset/liability Deferred tax asset Deferred tax benefit .income statement Reclassification adjustment to record amortization of net gain or net transition asset to net periodic pension cost: i!lil ~ i!lil ~ Other comprehensive income Net periodic pension cost Deferred tax expense . Reclassification adjustment to record amortization of net loss. prior service cost. and net transition assets or obligations remain in accumulated other comprehensive income until recognized in net periodic pension cost through amortization.OCI Deferred tax liability Pension net gains or losses. prior service cost.OCI Under IFRS. All rights reserved.OCI Deferred tax benefit .income statement Deferred tax expense . . Pension gains and losses are reported in other comprehensive income in the period incurred and are not reclassified (amortized) to the income statement.OCI To report net gain i!lil ~ i!lil ~ or net transition asset: Pension benefit asset/liability Other comprehensive income Deferred tax expense .

GAAP. Journal entry to record the service cost.income statement 68-5 ~ 2011 DeVryjBecker Educational Development Corp. All rights reserved. and existing net obligations or assets are amortized and charged to net periodic pension cost over a specified period of time.2012 Edition . defined benefit cost includes service cost and net interest on the defined benefit liability (asset). gains and losses. The components of defined benefit cost are generally reported separately on the income statement. there is no requirement that these amounts be aggregated and presented as one amount.S. net periodic pension cost is reported in total on the income statement. Under IFRS. PENSION PLAN CONTRIBUTIONS An employer's contribution to its defined benefit pension plan(s) increases the pension benefit asset (overfunded pension plans) or decreases the pension benefit liability (underfunded pension plans). interest cost and return on pIon assets components ofnet periodic pension cost: ~ [!G] ~ [!G] Net periodic pension cost Pension benefit asset/liability Deferred tax asset Deferred tax benefit .S. Under U. GAAP. Pension benefit asset/liability Cash PENSION EXPENSE COMPONENTS (SIRAGE) Under U. the amount of the net periodic pension cost is calculated using the following six components: + Service cost (current) + Interest cost (on the Projected Benefit Obligation) Return on plan assets (expected or actual) + Amortization of unrecognized prior service cost -/+ (Gains) and losses -/+ Amortization of Existing net (asset) or obligation Prior service cost.Financial FInal Review v. Journal entry to record pension plan contribution: ~ [!G] VI. .

Postretirement benefits must be accrued during the period the employee works. ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Postretirement benefits include: • Health care insurance • Life insurance • Welfare benefits • Tuition assistance Postretirement benefits must be reported on the balance sheet (funded status and DCI components).2012 Edition .Financial Final Review VII. • Payment is probable. which is the present value of future benefits that have vested as of the measurement date: Fair value of plan assets <APBO> Fu nded status 68-6 © 2011 DeVry/Becker Educational Development Corp. The calculation of the funded status of a postretirement benefit plan is done using the APSD (accumulated postretirement benefit obligation). called the "attribution period" (date hired to date fully vested). All rights reserved. • The employees' rights accumulate or vest. and • The amount of benefits can be reasonably estimated. . income statement (SIRAGE) and footnotes in the same manner as pensions if: • The obligation is attributable to employees services already rendered.

What amount should Do It Right record as a pension asset/liability on the December 31. $250.000 5.580. $2.180.000 The company reported net periodic pension cost of $310.000 35. GAAP? 1.Financial Final Review MULTIPLE-CHOICE QUESTIONS QU ESTION 1 The following information pertains to Burnel Corporation's defined benefit pension plan for Year 1: Service cost Actual and expected gain on plan assets Unexpected loss on pension plan assets related to a Year 1 disposal of a subsidiary Amortization of unrecognized prior service cost Annual interest on pension obligation $160. GAAP pension expense in its Year 1 Income Statement? 1. Year 7: Fair value of plan assets Accumulated benefit obligation Projected benefit obligation Unrecognized prior service cost Unrecognized transition obligation Unrecognized net gain Expected benefit obligation .000 50.S.000 40.000 275.000 What amount should Burnel report as U.000 current liability 2.930.000 2. The company's effective tax rate is 40%.000 contribution to the pension plan during Year 7.Year 8 $5.000 3.180.000 400. Inc. $210.S.000 noncurrent liability 3.000 4. All rights reserved.000 on its income statement and made a $500.000 140.400. Year 7 balance sheet under U. $650. $650.2012 Edition . .'s actuary provided the company with the following information regarding its defined benefit pension plan for the year ended December 31. $180.000 QUESTION 2 Do It Right. $2. $220.000 250.000 noncurrent asset 4.000 current asset 68-7 © 2011 DeVry/Becker Educational Development Corp.000 4.000 3.

Year 7. What amount should Do It Right report in accumulated other comprehensive income related to its pension plan on the December 31.500 decrease in other comprehensive income.580. All rights reserved. The company's effective tax rate is 40%. 3. Inc. 2. Year 8 financial statements under U. $35. $35. $700.S. GAAP? 1. amended its overfunded pension plan on December 31. . How should the prior service cost be reported in the December 31. On December 31. Year 7. $490.000. Year 7 balance sheet under U. resulting in the recognition of prior service cost of $700. $535.930.000 400.000 increase in net periodic pension cost. The company has an effective tax rate of 30%.S. On December 31.Financial Final Review QUESTION 3 Do It Right.000 The company reported net periodic pension cost of $310. Inc.000 3. 68-8 © 2011 DeVry/Becker Educational Development Corp. resulting in the recognition of prior service cost of $700.000. GAAP? 1.000 on its income statement and made a $500.Year 8 $5. 2. GAAP? 1.000 275. $700. $490.000 3.000 decrease in net income. Year 7. amended its overfunded pension plan on December 31. 4.000 QUESTION 4 Giant Jobs. 3.000 4. Giant Job's employees had an average remaining service life of 20 years.2012 Edition .S. $489. $321.000 increase in pension benefit asset. Year 7 financial statements under U. $24.000 2.000 increase in net periodic pension cost. The company has an effective tax rate of 30%.000 decrease in comprehensive income.'s actuary provided the company with the following information regarding its defined benefit pension plan for the year ended December 31.000 decrease in net income. How will the amortization of the prior service cost affect Giant Job's December 31. $24. QUESTION S Giant Jobs Inc. Year 7: Fair value of plan assets Accumulated benefit obligation Projected benefit obligation Unrecognized prior service cost Unrecognized transition obligation Unrecognized net gain Expected benefit obligation . Year 7.400.000 contribution to the pension plan during Year 7. $815. Giant Job's employees had an average remaining service life of 20 years.000 140.500 increase in pension benefit asset. 4.000 250.000 4.

2012 Edition . Stock Options Earnings per Share . All rights reserved. Stock Dividends.Financial Final Review FINANCIAL 711 Stockholders' Equity Stockholders' Equity • • Treasury Stock Dividends. and Stock Splits • Retained Earnings • • 7A-l ~ 2011 DeVry/Becker Educational Development Corp.

All rights reserved.Financial Final Review NOTES 7A-2 © 2011 DeVry/Becker Educational Development Corp.2012 Edition . .

TREASURY STOCK Treasury stock (TS) is stock that has been issued and then repurchased by the issuer. Treasury stock is reported as a contra account to equity. issued. All rights reserved. Mandatorily redeemable preferred stock is classified as a liability because it has a maturity date. C. l!ru Cash 5 [ijil Common Stock 1 [ijil APIC-CS 4 Preferred stock (PS) may be cumulative. GAAP: the cost method and the par value method. B. When treasury stock is reacquired for less than the original issue price (gain).2012 Edition . Number of shares: authorized. When TS is reissued for more than its acquisition price the gain is recognized by crediting APIC-Treasury Stock. TS is recorded at cost. When TS is reacquired for more than the original issue price (loss). Par value method. When the TS is reissued for less than its acquisition price the loss is recognized by debiting APIC-Treasury Stock. CS $1 par value issued at $5 per share. 7A-3 ~ 2011 DeVryjBecker Educational Development Corp. APIC-Treasury Stock is recognized. IFRS requires the cost method. Cumulative preferred stockholders receive current dividends and all dividends in arrears (unpaid from prior years) before dividends are paid to common stockholders. or participating as to the payment of dividends and generally has a preferred claim to assets on liquidation of the business. .Any amounts available for dividend distribution after both preferred and common stockholders receive a specified payment based on the same percentage is divided between preferred and common stockholders on a pro-rata basis. II. TS is recorded at par value. STOCKHOLDERS' EQUITY Common stock (CS) nonnally has a par (or stated) value. noncumulative. and outstanding. l!ru Cash 30 [ijil Preferred Stock 10 [ijil APIC-PS 20 A. similar to debt instruments.S. There are two methods used to account for treasury stock under U. The total cost of a treasury share is deducted from the total of the stockholders' equity on the balance sheet. Retained earnings is debited if there is not a sufficient balance in the APIC-TS account. The total cost of the TS (par value) is deducted from the common stock account on the balance sheet. Only outstanding shares are entitled to dividends. Participating preferred stock . any APIC-Treasury Stock is eliminated and then retained earnings is reduced. PS $10 par value is issued at $30. Authorized: Legal number of shares available for sale (maximum). Outstanding: Shares issued less treasury shares. Hence. Cost method. Issued: Number of shares sold. and APIC is reduced for the amount of additional paid-in capital that was initially recognized on issuance.Financial FInal Review SUMMARY NOTES I.

000 Note: Retained earnings may be debited. III. Property dividends are recorded at fair value.200 2.000 shares of $10 par value CS are sold for S15 per share CHART oF JOURNAL ENTRIES 150.000 Common Stock APIC-CS Par Value Method Cost Method 2. AND STOCK SPLITS Cash dividends .Financial FInal Review Gains and losses on treasury stock transactions are not reported on the Income statement. No entry Payment date .The date the dividends are actually disbursed.000 1.500 Cash Cash APIC-TS Retained earnings Treasury stock 2.000 500 1.The date the stockholders must own the stock in order to receive the dividend declared. 7A-4 ~ 2011 DeVryjBecker Educational Development Corp. Orilinallssue 10. All rights reserved.Dates: Declaration date !!l2 Retained earnings l!Ii! Dividends payable Record date .400 2. 3.000 Cash 100.400 1. such as inventories and investment securities.400 600 Treasury stock APIC-CS Cash 300 APIC-TS 600 Retained earnings 100 Treasury stock 1. . A company cannot report income dealing in its own stock. Buy Back Below 200 shares repurchased for $12 per share Treasury stock Cash Reissue Above Cost 100 shares repurchased for $12 are resold for $15 2. Properly dividends .000 Cash 1. but never credited in treasury stock transactions.200 300 Treasury stock APIC-TS Reissue Below Cast 100 shares repurchased for $12 are resold for $3 Treasury stock APIC-CS Cash APIC-TS 300 300 600 1. STOCK DIVIDENDS. SUMMARY 1.000 50.500 1. Treasury stock does not vote and does not receive dividends. i!li! l!Ii! Dividends payable Cash Cash dividends may be declared on common and/or preferred stock. 4. Treasury stock is not an asset.Distribute non-cash assets.2012 Edition . DIVIDENDS.

2012 Edition . a type of binomial model. can be used to determine the fair value of the option. The basis of each share of stock is adjusted accordingly. The statement requires the use of a valuation technique or model that returns the best estimate of the fair value of the option. B. (In a reverse split. Stock split . . The risk-free rate of return for the expected term of the option. IV. The exercise price. Either a Black-Scholes model or a lattice model.A distribution of a stock dividend of less than 20-25% of the outstanding capital stock is recorded at fair (market) value (small dividend). F. The expected dividends on the stock.The number of shares outstanding is increased. property. C. A portion of retained earnings may be appropriated (restricted) for legal reasons or as a discretionary action of management.The right to acquire shares of stock on the payment of a defined amount. RETAINED EARNINGS Beginning retained earnings + Net income/loss Dividends (cash. and the par value is decreased. greater than 20-25% of the capital stock is recorded at par value (large dividend). The models that estimate the value of stock based compensation should consider the following variables: A. D.Amount in excess of retained earnings. Memo entry only when the rights are issued. STOCK OPTIONS Compensatory stock options should be valued at the fair value of the options issued. RETAINED EARNINGS Retained earnings (or deficits) are cumulative earnings (or losses) during the life of the corporation that have not been paid as dividends. Liquidating dividends . All rights reserved. 7A-S © 2011 DeVry/Becker Educational Development Corp. Stock rights/stock warrants . the opposite is true. The expected volatility of the stock. The appropriated retained earnings is distinguished from the unappropriated retained earnings account in the Balance Sheet. E. The compensation expense is allocated over the service period. and stock) declared ± ± Prior period adjustments Accounting changes (cumulative effect) Treasury stock (when necessary) + Adjustment from quasi-reorganization Ending retained earnings V.Financial Final Review Stock dividends .) There is no change in the total book value of shares outstanding and a memo entry is used to acknowledge a stock split. Note: The recipient of stock dividends and stock splits recognize no income. The current price of the stock. The expected life of the option. Fair value will be given on the CPA exam.

the options had a total fair value of $50. 400.000 EARNINGS PER SHARE All public entities must present earnings per share on the face of the income statement. granted options exercisable after December 31. to purchase 50. options.Has only common stock. weight each total of shares outstanding by the amount of time that the total was outstanding.If securities that can be converted into common stock.000 Journal Entry: To allocate compensation cost to Year 2 operations !!l2 [!ill 25. The options are to serve as compensation for services during Year 1 and Year 2. Journal Entry: To record the exercise of the options Cash (50.000 shares of $1 par common stock for $8 per share. Green Co.stock options 25.000 Compensation expense Additional paid-in capital. All rights reserved. all options are exercised. and warrants. • Complex capital structure .OOO Common stock (50. Journal Entry: January I. An entity with a simple capital structure is required to present basic earnings per share (EPS).2012 Edition . Stock dividends and stock splits are treated as if they had occurred at the beginning of the earliest period presented. Using an acceptable valuation model. To determine the weighted average number of shares outstanding.000 On January I.000 Additional paid-in capital. 7A-6 ~ 2011 DeVryjBecker Educational Development Corp.Financial FInal Review EXAMPLE Accountll1l for Stack Options On January I.stock options 25. Year 3. or no other securities that can become common stock. Basic EPS: Income available to common shareholders / Weighted-average number of common shares outstanding The income available to common shareholders must be reduced by the dividends declared on noncumulative preferred stock.000 Additional paid-in capital-stock options 50.000 SO. All entities with complex capital structures must present basic and diluted per share amounts (assuming that there is dilution). or by the dividends accumulated in the current period on any cumulative preferred stock whether or not those dividends have actually been declared.000. inclusive of convertible preferred stock. . Year 1.000 x $8) 400. • Simple capital structure .000 x $1 par) Additional paid-in capital in excess of par (common stock) VI. convertible bonds.No entry required Journal Entry: To allocate compensation cost to Year 1 operations i!li! [!ill Compensation expense 25. Year I. Year 2.

or contingent issuance of stock) that can be converted into common stock. it is assumed that the company will receive $30. When the options are assumed to be exercised for the purposes of computing diluted EPS.2012 Edition .600 = 400 shares 7A-7 © 2011 DeVry/Becker Educational Development Corp.000 stock options outstanding.000. 1. stock option or warrant. . If the average market price is $50 per share. EXAMPLE: A company has 1. which are exercisable at $30 each. All rights reserved. which can be used to purchase 600 shares of stock ($30. The incremental shares (difference between the shares "sold" and the shares "reacquired") are added to the denominator. then the options are "in the money" and therefore dilutive.000/ $50 share = 600 shares).000 options = Shares added to denominator 50 average price 1. exercise.Financial Final Review Diluted EPS: Diluted EPS is calculated taking into consideration any security (convertible preferred stock. An assumption is made that "in the money" (average market price> exercise price) options and/or warrants are exercised and that the proceeds from the exercise are used to buy back shares for the treasury. Income available to common shareholders + Interest on conversion of bonds (net of tax) Weighted average number of common shares assuming all dilutive securities are converted to common stock Options and warrants are accounted for using the treasury stock method. The company will need to issue 400 new shares (1000 shares . No anti-dilution is presented. convertible bonds. Any conversion. . The 400 newly issued shares will be added to the weighted average number of common shares outstanding when computing diluted EPS. or contingent issuance that has an antidilutive effect (increases EPS or decreases loss per share) is not included in the calculation.600 repurchased).000 .000 x 30 option price) . (1.

All rights reserved.2012 Edition . .Financial Final Review NOTES 7A-8 © 2011 DeVry/Becker Educational Development Corp.

$34. • Fully participating as to dividends.000 $22.000 shares of common stock. Compared to the cost method of accounting for treasury stock.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 Boone Corporation's outstanding capital stock at December 15 consisted of the following: • 30.500 QUESTION 2 On September 1. 5.000 $37. $10 par value.000 $37.000 2.2012 Edition . Royal Corp.000 $92. acquired treasury shares at an amount greater than their par value.000 $15. does the par value method report a greater amount for additional paid-in capital and a greater amount for retained earnings? Additional paid-in capital Retained earnings 1.000 shares originally issued for $15 per share. $75. $10.000 shares of 5% cumulative preferred stock.000. • 200. What was the amount of dividends payable to Boone's common stockholders? 1. had the following stock issued and outstanding: • Common stock. No dividends were in arrears. $5. 4.500 QUESTION 3 Purple Corp.000 $15. No No No Yes 7A-9 © 2011 DeVry/Becker Educational Development Corp. statement of stockholders' equity should report: Common stock Preferred stock Additional paid-in capital 1.000 4. Year 1. $5.500 2. $47. a newly formed company. no par. Yes Yes 2. $10 par value. . All rights reserved. Yes No 3. but less than their original issue price. Royal's September 1. par value $1 per share.500 $70.000 3. 1. Year 1.500 $0 4. $75. Boone declared dividends of $1 00. $40.. On December 15.000 3. $1 stated value.500 shares originally issued for $25 per share. • Preferred stock.

000 shares of common stock. and $2.000 and the income tax rate was 30%. The preferred stock was convertible into 40.50 3. $3.000.000 shares of common stock. Hutchins paid dividends of $1.000 and the income tax rate was 30%. During the current year.30 4.000.35 3. Diluted earnings per share for the current year was (rounded to the nearest penny): 1. Each $1.000 of 10% convertible bonds outstanding during the current year.000.000 bond was convertible into 50 shares of common stock. Hutchins paid dividends of $1.000 shares of convertible preferred stock. All rights reserved. $4. During the current year. The net income for the year was $1.000 shares of common stock. and $2.Financial Final Review QUESTION 4 Hutchins Company had 200. $4. $5. Each $1. .000 bond was convertible into 50 shares of common stock.00 per share on the preferred stock. $5.000.06 7A-10 © 2011 DeVry/Becker Educational Development Corp. $3. $4.00 per share on the common stock and $2. The preferred stock was convertible into 40.2012 Edition .000 shares of common stock. Basic earnings per share for the current year was (rounded to the nearest penny): 1.55 QUESTION 5 Hutchins Company had 200. $3.000 shares of convertible preferred stock. The net income for the year was $1. 50.00 per share on the preferred stock.00 2.53 4.000 of 10% convertible bonds outstanding during the current year. 50.00 per share on the common stock and $2.00 2.

000 shares authorized.Reissued 2. and an assessed value for property taxes of $90.Purchased 5. 100. Common dividends . The dividend was paid on November 25. Authorllallve Literature I Help I Kansas.Declared a property dividend of marketable securities held by Kansas to common shareholders. Year 1 of the prior year had the following balances: PrefelT8d stock.000 • October 1.586. The company's income tax rate is 30%.000 100. The dividend was paid on January 5.000 Additional paid-in capital 1.000 issued and outstanding Common stock. Year 3 . Year 2 .000 shares of common stock to Ram Co. Year 2) 736.Before closing the accounting records for Year 2.686. Year 1. is a publicly-held company whose shares are traded in the over-the-counter market.000 shares of treasury stock for $16 per share. 150.000. . $100 par value. All rights reserved. Year 2 . The securities had a carrying value of $600. The stockholders' equity accounts at December 31. Inc. • May 10. 5.000 and had an estimated useful life of eight years when purchased.50 per share to all common shareholders of record November 15. fair value on relevant dates were: Date of declaration (May 10. the stock had a market price of $11 per share. Year 2 . Common dividends .cash. • November 4. Year 2 .000 Date of distribution (June 1. • January 16.000.Declarad a cash dividend of $1.000 Retained earnings Total stockholders' equity $2. Year 2 -Issued 13. The patent was properly capitalized at $320.Financial FInal Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Retained Earnings R*lned ~Ing. • March 1. • December 20. $1 par value. ~~fx I I Prior period adjustment. Transactions in treasury stock are legal in the state of incorporation. in exchange for land. Kansas became aware that no amortization had been recorded for the prior year for a patent purchased on July 1.2012 Edition . Kansas uses the cost method to account for treasury stock. Calculate the following amounts as they would be reported on the Year 2 Statement of Retained Earnings.000 800.000 issued and outstanding $ 200. Enter the appropriate values in the shaded cells. The appropriate correcting entry was recorded on the same day. Year 2) $720.000 Transactions during Year 2 and other information relating to the stockholders' equity accounts were as follows: • February 1.000 shares authorized. • Adjusted net income for Year 2 was $838.000. Year 2) 758.000. The land had a carrying value on Ram's books of $135.property. 2. Year 2 . On the date issued.000 Date of record (May 25. Preferred dividends. 6% cumulative.Declared the required annual cash dividend on prefelT8d stock for Year 2.000 shares of its own common stock to be held as treasury stock for $14 per share. 7A-ll ~ 2011 DeVryjBecker Educational Development Corp. Year 3.

000.000 common shares outstanding on Nov.000.000.Property (fair market value of marketable securities on date of declaration) 7A-12 ~ 2011 DeVryjBecker Educational Development Corp. All rights reserved.000 2.000.000 Less 30% income tax (6. $720. patent amortization not recorded: Patent cost $320. Preferred dividends ($100 par value at 6% x 2. Prior period adjustment which reduces beginning retained earnings balance for prior year error. $12.Cash (110. I $14. Common dividends .Financial FInal Review Solution 1.000) Prior period adjustment (net of tax) $14.000 I Useful life 8 years = $40.000 outstanding shares) 3. Common dividends . . $165. 4 = $1.OOO/year x 1/2 year = $20.2012 Edition .50) 4.

150.000 Additional paid-in capital 800. Year 3 .000 Retained earnings 1.000. Enter the appropriate values in the shaded cells. 100. Kansas uses the cost method to account for treasury stock. 2. 7A-13 ~ 2011 DeVryjBecker Educational Development Corp. • Adjusted net income for Year 2 was $838. The dividend was paid on January 5. • March 1. Year 2) $720.586. • November 4.000 shares of common stock to Ram Co. is a publicly-held company whose shares are traded in the over-the-counter market. • December 20. Treasury stock. The patent was properly capitalized at $320. • January 16. Inc.000 Date of record (May 25.000. Year 2) 736. Year 2 . the stock had a market price 01 $11 pershare. calculate the following amounts as they would be reported on the Year 2 statement of Stockholders' Equity. Year 2 . including treasury stock transactions. Year 3.Declared the required annual cash dividend on preferred stock for Year 2. The company's income tax rate is 30%. and an assessed value for property taxes of $90.000 • October 1.Declared a cash dividend of $1.000 shares authorized. The stockholders' equity accounts at Decembar31. Year 1. On the date issued.2012 Edition . fair value on relevant dates were: Date of declaration (May 10.Financial FInal Review TASK-BASED SIMULATION 2: Stockholders' Equity Stoc:kho'dere' Equity Authorilative Literature I Help I Kansas. 6% cumulative.000 Total stockholders' equity $2.000 Date of distribution (June 1.000 shares authorized. • May 10. Year 2 -Issued 13. The land had a carrying value on Ram's books 01 $135. Kansas became aware that no amortization had been recorded for the prior year for a patent purchased on July 1. Year 2 . $100 par value. Additional paid-in capital. 5. Year 1 of the prior year had the following balances: Preferred stock. Amount of common stock issued.686.000 issued and outstanding $ 200. . in exchange for land. The appropriate correcting entry was recorded on the same day.000 shares of treasury stock for $16 per share. Year 2 .Declared a property dividend of marketable securities held by Kansas to common shareholders. The securities had a carrying value 01 $600.Purchased 5.Reissued 2.000.50 per share to all common shareholders of record November 15. The dividend was paid on November 25. Transactions in treasury stock are legal in the state of incorporation.000 Transactions during Year 2 and other information relating to the stockholders' equity accounts were as follows: • February 1.000 issued and outstanding 100. $1 par value. ~~fx I II Number of common shares issued at December 31. Year 2 .000.000 Common stock.Before closing the accounting records for Year 2.000 and had an estimated useful life 01 eight years when purchased. Year 2. All rights reserved. Year 2) 758.000 shares of its own common s10ck to be held as treasury stock for $14 per share.

000 (28.000 756.000 lC 4.000 113.000 $2) $934.000) 113.000 13.000 Date Transaction End of prior year Balance 211 Near 2 Shares for land 3J1Near2 10/1Near 2 Purchase treasury stock Reissue treasury stock Outstanding Issued 100.000 --- 2.000 lC $14) 28.000 100.000 500 108.000 -- (5.000 $113. All rights reserved.000 shares x $1) $100.Financial FInal Review Solution 1.000 7A-14 ~ 2011 DeVryjBecker Educational Development Corp.000 treasury shares lC $14 cost (2.000 Excess (2. I 113.000 13.000 land for shares (13.000 12 Weighted average 108.000 113.a Total = 100.000 = 330.000) $42.000 shares treasury stock sold )( $16 $32.000 110. 100.000 less cost of treasury stock (2.250 Alternative solution: Date Transaction End of prior year Balance 211 Near 2 Shares for land 3J1Near2 Purchase treasury stock 10/1Near 2 Reissue treasury stock Outstanding 100.000 Balance Weighted Average Months $113.000 3.000) 108.299.000 113.000 13.000 = 113.166) x 3/12 (5. $42.000) treasury shares lC 3.250 Weighted average 2.2012 Edition .000 Balance Weighted Average Months x 1 x 110.000 108.000 2.000 x 12112 x 11/12 = 11.000 13.916 x 10/12 = (4.000 4.000 5.000 2.000 1.000 shares x $1 par) land for shares (13.000 shares x $10) 130.000 Balance (100. . $934.000 Beginning balance.000 x 7 x .000 treasury shares $14 cost lC $14 cost $70. 12131Near 1 $800.000 113.

Gracie Corp. Using an acceptable valuation model. Record compensation expense for the year ended December 31. the options had a total fair value of $150. Year 2 4. Record compensatory stock options at grant date 2.2012 Edition . assuming all the options were exercised on January 2. In addition. Double click in the shaded cells of Column A and select the appropriate account from the list provided. Complete the following journal entries. enter the appropriate amounts in the shaded cells of Columns B & C.Financial Final Review TASK-BASED SIMULATION 3: Stock Options T Stock Options I Authoritative literature I Help I On January 2. Year 1 3. . Record exercise of option at January 2. A B C DEBIT CREDIT -. for each specific date. Record compensation expense for the year ended December 31. Year 3 Additional paid-in capital CIS Additional paid-in capital stock options Cash Common stock Compensation expense Deferred compensation No entry required Retained eamlngs 7A-iS © 2011 DeVry/Becker Educational Development Corp. All rights reserved. Year 3. granted compensatory stock options exercisable beginning January 2. to purchase 100.- - 1. Year 3.000 shares of $2 par common stock for $6 per share.000. Year 1.

000/2 year service period). 2. . a reversal of the amounts recorded in APIC stock options and credit to shares purchased at par (100.000 shares at $2 per share).000 Additional paid-in capital: stock options $75.000 CR Common stock CR Additional paid-in capital CIS 150.Financial FInal Review Solution I 1. January 2. All rights reserved. No journal entry is required of the grant date of stock options. Year 1 Not applicable.000 Compensation expense is ratably allocated to the benefiting periods ($150. 7A-16 ~ 2011 DeVryjBecker Educational Development Corp.000 550.000 $200. January 2. Year 2 DR CR Compensation expense $75. December 31. Year 1 DR CR Compensation expense $75. 4. Year 3 DR Cash DR Additional paid-in capital: stock options $600.000 Exercise of the stock options is recorded as a charge to cash at the exercise price (100.000/2 year service period).000 Compensation expense is ratably allocated to the benefiting periods ($150.000 shares at $6 per share). and a credit to APIC common stock for the difference. 3. December 31.000 Additional paid-in capital: stock options $75.2012 Edition .

R. All rights reserved.::J FASB L1terlIluro l. ·1 I • I Solution Source of answer for this question: FASB ASC 260-10-45-22 Keyword: Purchased put options 7A-17 © 2011 DeVry/Becker Educational Development Corp. ch Here I iTable of Contents q.C]- c=J Some examples of correctly formatted FASB ASC responses are 205-10-05-1.a. Use the buttons to the right and the links above the text box to perform more detailed or advance searches. 260-1 0-S0-1 A. FASB ASC I -- 1.2012 Edition . ylslts ~5e. Correctly formatted FASB ASC topics are 3 or 4 digits.Financial Final Review TASK-BASED SIMULATION 4: Research Stockholders' Equity I Authoritative literature Help I What is the treatment of purchased put options in the computation of diluted earnings per share? Find the proper citation that provides guidance to answer this question.C]. 323-740-S25-1. Type the topic here. . 260-10-55-99 and 115-6G-35-128A .search Back Authoritative literature J Home I H~rp I Recent Pia.k1 Original Pronouncements as A Previous Mlltch II' Ne>:t Mlltch II 5e<!r<h With" I I Advanced Search I PrevJOUs Result II Ne>:tResult I FASS Literature !kI Current Text fV Topical Index ltJ FASB Import Uniform CPA Examination Authoritative Literature To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above.rch IEnter 'Se.

2012 Edition . All rights reserved. .Financial Final Review NOTES 7A-iS © 2011 DeVry/Becker Educational Development Corp.

IFRSvs.2012 Edition .Financial Final Review FINANCIAL 78 Cash Flows • Operating Activities .S. .Direct Method • Investing Activities • Financing Activities Non-Cash Investing and Financing Activities • Cash Equivalents .Indirect Method • • • Methods of Presentation Operating Activities .GAAP • Additional Supplemental Disclosures 78-1 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.U.

Financial Final Review NOTES 78-2 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.2012 Edition . .

Depreciation expense andlor the accumulated depreciation on assets disposed of. and gains/losses on assets disposed of are a few key accounts that must be considered in determining the balance of the cash used or provided by the investing activities.Financial Final Review SUMMARY NOTES I. • Cash received from customers • Cash paid to suppliers and employees • Operating expenses paid in cash (excluding amounts such as depreciation and amortization) • Interest received and paid • Dividends received (not dividends paid) • Taxes paid • Purchase and sale of trading securities classified as current assets INVESTING ACTIVITIES Investing activities generally involve changes in non-current assets. All rights reserved. equipment and marketable securities (excluding trading securities classified as current assets). such as depreciation. Other adjustments to net income include changes in current assets and current liabilities. OPERATING ACTIVITIES . A "reconciliation of net income to net cash" is required under U.Indirect Method (reconciliation of net income to net cash) The indirect method begins with accrual net income and reconciles it to cash flow from operating activities by adding non-cash amounts. III. GAAP. Under U. operating activities require a reconciliation of "net income to net cash" for both methods. Regardless of the method of presentation. In addition. GAAP. OPERATING ACTIVITIES . METHODS OF PRESENTATION The direct method and the indirect method are the two methods of presentation for the statement of cash flows. GAAP and IFRS encourage the use of the direct method. A presentation of cash flow per share is prohibited. inclusive of the purchase or sale of property. The two methods are identical except for the cash flows from operating activities and for some disclosures. inventory. 78-3 © 2011 DeVry/Becker Educational Development COrp. Both U. There are two approaches to presenting the operating activities but the results are the same./ Financing activities (CFF) . . plant.S. etc. amortization and losses on dispositions of assets and subtracting gains on dispositions of assets. investments. II. the sections of the statement of cash flows are: . The totals for the "reconciliation" and "cash basis income statement" are the same.Direct Method (cash basis income statement) These amounts are accrual amounts reported in the income statement and adjusted to the cash basis.S./ Operating activities (CFO) ./ Supplemental disclosures Investing and financing activities are the same presentation for the direct and indirect methods. AlP./ Investing activities (CFI) . Operating activities include: IV.2012 Edition .S. such as AIR. the direct method requires a cash basis income statement.

U.S. or exchanging bonds for stock. the issuance or re-acquisition of company stock and dividends paid. VIII. highly-liquid investments (maturing 90 days or less from the date of purchase) that are readily convertible into cash or so near their maturity that the risk of changes in value is insignificant. GAAP in classifying cash flows related to interest. and income taxes. GAAP IFRS Interest received CFO CFO orCFI Interest paid CFO CFO orCFF Dividends received CFO CFO orCFI Dividends paid CFF CFO orCFF Taxes paid CFO CFO. entering into a capital lease.S. CFI. The following table summarizes the classification differences between U. VI. FINANCING ACTIVITIES Financing activities generally involve changes in non-current liabilities and stockholders' equity.S. including payment or retirement of long-term notes.2012 Edition . IFRS VS.S. VII. GAAP IFRS allows more flexibility than U.Financial Final Review V. CFF IFRS classifies taxes paid as CFO. These transactions are not included on the body of the statement of cash flows but are included in supplemental disclosures. 78-4 © 2011 DeVry/Becker Educational Development Corp. GAAP and IFRS: Transaction U. Look for a transaction that is. but allows allocation to CFI or CFF for portions specifically identified with investing and financing activities. in effect. IX. Cash equivalents are included with cash in the statement of cash flows. NON-CASH INVESTING AND FINANCING ACTIVITIES (supplemental) Certain transactions do not affect cash: purchasing assets with a note. ADDITIONAL SUPPLEMENTAL DISCLOSURES Interest paid and income taxes paid must be disclosed. All rights reserved. a barter transaction. . CASH EQUIVALENTS Cash equivalents are short-term. long-term bonds. dividends.

000 99. Inc."'1Me "'S 1".Financial Final Review ILLUSTRATIONS: DIRECT METHOD (preferred presentation) Letterman.000 $ 185.000) (2.000) (3.000 (10..A Cash and cash equivalents at the end of the year Reconciliation of net income to net cash provided by operating activities: Net income $ 50.000) Net cash provided by operating activities $ 91. STATEMENT OF CASH FLOWS For the Year Ended 12/31/Year X Cash flows from operating activities: Cash received from customers Cash paid to suppliers and employees Income taxes paid $125.·edMei-ho.000 Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year ".OOO) Net cash used in investing activities Cash flows from financing activities: (2.OOO) 20. .000 6.000 Decrease in accounts receivable Increase in inventory Increase in accounts payable Increase in income taxes payable 41.000 Adjustments to reconcile net income to net cash provided: $ 25.000 $ 91.000 Total adjustments Net cash provided by operations 78-5 © 2011 DeVry/Becker Educational Development Corp..000) Cash dividends paid Net cash used in financing activities 86. All rights reserved.000 Cash flows from investing activities: Cash paid to purchase equity securities (3.2012 Edition .000 (30.Ai.OOO) (4.

000 99.2012 Edition .000 Increase in inventory (10.000) Net cash used in investing activities Cash flows from financing activities: (2.000 .000 Net income Adjustments: Decrease in accounts receivable $25.000 6. (2.000 $185.000 Net cash provided by operating activities Cash flows from investing activities: cash paid to purchase equity securities (3.000 Total adjustments 91.Financial Final Review INDIRECT METHOD Letterman.000) Increase in accounts payable Increase in income taxes payable 20. STATEMENT OF CASH FLOWS For the Year Ended 12/31/Year X Cash flows from operating activities: $ 50.000) cash dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 78-6 © 2011 DeVry/Becker Educational Development Corp.000) (3. Inc.000) 86.000 41. All rights reserved.

$716.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 During Year 1. Black Knights Company reported cost of goods sold of $450.000 95. .000 3.000 4. $650.000) $750.000 decrease What amount should the Black Knights Company report as cash paid to suppliers in its cash flow statement. $535. $597.000.suppliers $160. net cash used in financing activities should be: 1. $250.000 4. $570.000) Distribution in Year 1 of cash dividend declared in Year 0 to preferred shareholders Carrying value of convertible preferred stock of Brianna converted into common shares Proceeds from sale of treasury stock (carrying value at cost $86.000 QUESTION 2 In its year-end income statement. $717. All rights reserved.000 62.2012 Edition . Changes occurred in several balance sheet accounts during the year as follows: Inventory Accounts payable .000 On its Year 1 statement of cash flows.000 120.000 3.000 2.000 2. Brianna Company had the following transactions related to its financial operations: Payment for the retirement of long-term bonds payable (carrying value $740.000 78-7 © 2011 DeVry/Becker Educational Development Corp. $330.000 decrease 40. prepared under the direct method? 1.

Financial Final Review NOTES 78-8 © 2011 DeVry/Becker Educational Development Corp. . All rights reserved.2012 Edition .

Year 2. Year 1 and Year 2: Assets Year 2 Year 1 Cash Net change increase (decrease! $313. Inc. Inc.000 Treasury stock at cost 52.000 Additional paid-in capital 303.000 (22. Inc. On August 8. Marigold.000 Total liabilities and stockholders' equity 52. Goodwill was determined to be impaired by $3.000 and had a carrying amount of $34. equipment was purchased for $127.000 Rose Corporation: $110.000 $195. Marigold. 6.000 Land 385. Year 2.000011 its common stock. Year 2. Inc. equipment was sold for $40. Inc.000.086.000) 11. Marigold. long te"" 300.000.000 215.000.000 440. Year 2. 12. There were no intercompany transactions other than the dividend paid to Marigold. On September 30. issued 10.000 474. .000. 2. 4.000 Plant and equipment 755. 5.000 Mar1<etable equity securities for trading.000 123.000 Accounts payable and accrued liabilities 595.000) (3.500. as of December 31.000 170. On May 15. at cost 175. by its subsidiary.000 Liabilities and Stockholders' Equity Current portion of long-term note $150.000 -0- Allowance to reduce marketable equity securitiee to market (13. 3. All rights reserved. On January 20. On December 15. reissued all of its Treasury stock for $44.086.000 52.000 480.000 (150.000 450. Year 2.000 Common stock par $10 580.000 690.486.000 195.Financial FInal Review TASK-BASED SIMULATIONS TASK-BASED SIMULATION 1: Cash Flows Authoritative Literature I Help I Below are the consolidated work paper balances of Marigold.000 60.000.000 121.000) Deferred income taxes 44. Rose Corporation. On February 5.000) Inventories 595. Deferred income taxes represent temporary differences relating to the use of methods for income tax reporting and the allowance for financial reporting on accounts receivable.000 136.000) 36. paid a cash dividend of $58.000) (24. 11.000 100.000 140.000) (54. There was no change in the ownership interest in Rose Corporation during Year 1 and Year 2.000 180.000 (199. and its subsidiary. Sales were $2.000 shares of its common stock for land having a fair value of $215. 10.200.000 Note payable.000 9. Purchases were $1. Year 2.486. Inc.000.000 $118.000 $ -0- Minority interest in net assets of subsidiary 179. Rose Corporation.000 $2. Rose Corporation paid a cash dividend of $50. owns 70% of its subsidiary.2012 Edition .000 Retained earnings 335.000.000 65.000) Accumulated depreciation Goodwill Total assets 57. Marigold. 7.000 $150.000 Accounts receivable (net) 418.000 Additional information: 1.000) (145. 8.000 12.000 32.000 70.000 on its common stock.000 525.000 161.000 18.000 175. (continued) 78-9 ~ 2011 DeVryjBecker Educational Development Corp. The equipment cost $62. Net income for Year 2 was as follows: Consolidated net income: $198.000 on the date of sale.

Financial Final Review (continued) For each account below. Year 2 Cash Flows From Operating Activities: f---f---- f---f---f---f---f---- f---f---f---f---f---- Total adjustments $0 Net cash provided by operating activities $0 Cash Flows From Investing Activities: f---f---- $0 Net cash used in investing activities Cash Flows From Financing Activities: f---f---- f---- Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year $0 Cash and cash equivalents at end of year Supplemental Disclosure of Noncash Investing and Financing Activities: n 7B-10 © 2011 DeVry/Becker Educational Development Corp. Enter the corresponding amounts in the shaded cells of Column C. . and Subsidiary Consolidated Statement of Cash Flows for the Year Ended December 31. Year 2. reconcile the beginning and ending balances to assist in determining the effect on cash flows for the year ended December 31. Double-elick on the shaded cells of Column B and select from the list provided. All rights reserved.2012 Edition . Marigold Inc.

II Cancel I .2012 Edition . All rights reserved.Financial Final Review Adjustments to reconcile net income to net cash provided by operating activities Capital expenditures for equipment Cash dividend paid to minority shareholder of subsidiary Cash dividend paid by parent company Cash paid to suppliers Cash received from customers Changes in current assets and liabilities Decrease in accounts receivable Decrease in allowance to reduce marketable securities to market OK II Cancel - II 1 III I Depreciation Gain on sale of equipment Impairment of goodwill Increase in AlP and accrued liabilities Increase in deferred income taxes Increase in inventories Interest paid Interest received Issuance of common stock to purchase land for $215.000 Minority interest in net income of subsidiary OK II Cancel 1 I Net income Principal payment on note payable Proceeds from sale of equipment Proceeds from sale of treasury stock OK 7B-11 © 2011 DeVry/Becker Educational Development Corp.

2012 Edition - Financial FInal Review

Solution
-

---

Marigold Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Year Ended December 31, Year 2
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$198,000

Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in net income of subsidiary

$ 33,000
82,000

Depreciation
Impairment of goodwill

3,000

Gain on sale of equipment

(6,000)

Changes in current assets and liabilities:
22,000

Decrease in accounts receivable
Increase in inventories

(70,000)

Increase in AlP and accrued liabilities

121,000

Increase in deferred income taxes

12,000

Decrease in allowance to reduce marketable securities to market

(11,000)

$186,000

Total adjusbnents

$ 384,000

Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:

$ 40,000

Proceeds from sale of equipment
capital expenditures for equipment

(127.000)

Net cash used in investing activities

$ (87,000)

CASH FLOWS FROM FINANCING ACTIVITIES:

$ 44,000

Proceeds from sale of treasury stock
cash dividend paid by parent company

(58,000)

Gash dividend paid to minority shareholder of subsidiary

(15,000)
(150.000)

Principal payment on note payable
Net cash used in financing activities

$(179,000)

Net increase in cash and cash equivalents

118,000

cash and cash equivalents at beginning of year

$ 195,000

cash and cash equivalents at end of year

$ 313,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Issuance of common stock to purchase land for $215,000

78-12
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2011 DeVryjBecker Educational Development Corp. All rights reserved,

2012 Edition - Financial FInal Review

TASK-BASED SIMULATION 2: Rules

J'J

Rul. .

IAuthoritative Literature I

Help

I

From the following list of statements, select three that are true with regards to cash flows under U.S. GAAP. Only three
items can be selected at a time.

o
o

1. Under either the direct or indirect method, cash flows from investing activities are reported the same.
2. Under the indirect method, the Statement of Cash Flows begins with Net Income.

o

3. Under the indirect method, a reconciliation of net income to net cash provided by operating activities is required to
be provided in a separate schedule.

o

4. Material non-cash investing and financing activities do not have to be disclosed under either the direct or indirect
method.

o

5. Interest paid during the year is reported in the operating activities of the Statement of cash Flows under the direct
method.

o

6. Interest paid is a required additional disclosure for the Statement of Cash Flows under the direct method.

o

7. cash flows per share is a required disclosure under both the direct and indirect method of presenting the
Statement of Cash Flows.

78-13
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2011 DeVryjBecker Educational Development Corp. All rights reserved.

2012 Edition - Financial FInal Review

Solution

1.

True
The only section of the body of the Statement of Cash Flows that differs between the two methods is the section that
presents operating activities. Under the direct method, this section shows the major classes of operating cash receipts
and disbursements directly. In contrast, the indirect method reports these cash flows by adjusting net income to
reconcile it to net cash flows from operating activities.

2.

True
Under the indirect method, net income is adjusted.

3.

False
The reconciliation of net income to cash provided by operating activities is in the body of the statement under the
indirect method. Under the direct method, it is provided in a separate schedule.

4.

False
The disclosure of material non-cash investing and financing activities is required under both the direct and indirect
methods of presentation.

5.

True
Interest paid is reported in the operating activities section of the body of the Statement of Cash Flows under the direct
method. Under the indirect method, the change in the interest payable is disclosed in the body, and the interest paid is
a required disclosure.

6.

False
Under the direct method, interest paid is shown in the operating activities section of the Statement of Cash Flows (I.e.,
in the body of the statement, not as an additional disclosure). It is an additional disclosure under the indirect method.

7.

False
Cash flows per share should not be reported.

78-14
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2011 DeVryjBecker Educational Development Corp. All rights reserved.

lt! IEnter Se~r(h Here - I Pr"". 323-740-S25-1. Correctly formatted -- FASB ASC topics are 3 or 4 digits. All rights reserved..c::::=J Some examples of correctly formatted FASB ASC responses are 205-10-05-1.••tch I St:~rchWlthin I I Advanced Search I Pr"~OIl.. • • Solution Source of answer for this question: FASS ASC 230-10-50-1 Keyword: Cash Equivalents Policy 7B-15 © 2011 DeVry/Becker Educational Development Corp. Type the topic here.·le>:!: .2012 Edition .nt Pag' VI. 260-10-55-99 and 115-6Q-35-128A 'I I ReseMch B3Ck Authortl:adve Ltlerature 1l!2m! I I Help Rec.Financial Final Review TASK-BASED SIMULATION 3: Research Research Authoritative Literature I Help I An entity presenting a statement of cash flows should disclose its policy for determining which items are cash equivalents. . Match 11 .. FASBASC I 1- CJ -CJ ... Find the citation that provides guidance on this disclosure.s A fJ Current Text FASS f] Topicel Index IV FASB Import Seorch .. Use the buttons to the right and the lin ks above the text box to perform more delailed or advance searches . 260-1 0-60-1 A.Result II r'Jm Result I literature Uniform CPA Examination Authoritative Literature To access Authoritative Literature: Click on Table of Contents folders at left to locate and open appropriate documents OR Perform a search for a particular topic by entering text in the text box above.fable of Contents <V FASB Lnorolure tJ Original Pronouncement.

2012 Edition - Financial Final Review

NOTES

7B-16
© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

FINANCIAL

8

Governmental Accounting

Fund Accounting - Measurement Focus

Fund Accounting - Basis of Accounting

Fund Structure

Fund Accounting - Mechanics

Fund Accounting - Fund Balance Classifications

GASB 34 Model - Government-wide Reporting

GASB 34 Model - Fund Financial Statements

GASB 34 Model - Infrastructure

Reporting Units

I nte rfu n d Activity

Financial Statement Samples

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

NOTES

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

Capital projects funds account for resources used for the acquisition or construction of major capital assets by a governmental unit.2012 Edition .The general fund accounts for the ordinary operations of a governmental unit that are financed from taxes and other general revenues. Proprietary funds • Internal Service . • Investment Trust .Pension trust funds account for resources of defined benefit and defined contribution plans. Fund Categories and Fund Types Eleven fund types (GRSPP SE PAPI) are classified in the following three generic categories: 1. . and not principal. • Enterprise .Debt service funds account for the accumulation of resources and the payment of interest and principal on all "general obligation debt. Governmental funds • General. All transactions not accounted for in some other funds are accounted for in this fund. Fiduciary funds • Pension . • Permanent . • Debt Service . A. 2.Agency trust funds account for resources temporarily in the custody of a governmental unit.Private purpose trust funds account for all other trust arrangements under which principal and income are for the benefit of specific individuals. • Special Revenue . 3. may be used for purposes that support the reporting government's programs. restrictions or limitations and constituting an independent fiscal and accounting entity." • Capital Projects .Financial Final Review SUMMARY NOTES I.Permanent funds are used to report resources that are legally restricted to the extent that income. The basis of accounting and measurement focus contribute to the accountability objectives of each fund type.Enterprise funds account for the acquisition and operation of governmental facilities and services that are intended to be primarily (over 50%) self-supported by user charges. All rights reserved. • Private Purpose . Each fund is a self-balancing set of accounts.Investment trust funds account for external investment pools. as well as post retirement benefit plans. 8-3 © 2011 DeVry/Becker Educational Development Corp. private organizations. and other governments.Special revenue funds account for revenues from specific taxes or other earmarked sources that are restricted or committed to finance particular activities of government.Internal service funds account for goods and services provided by departments on a cost reimbursement fee basis to other departments. • Agency . FUND STRUCTURE A fund is a sum of money or other resource segregated for the purpose of carrying on a specific activity or attaining certain objectives in accordance with specific regulations.

Accounting is nearly identical to commercial accounting used in "for profit" entities. There is no underlying exchange transaction that produces these revenues. The Proprietary Fund and Fiduciary Fund Types use this focus. 2. Modified Accrual Basis of Accounting The current financial resources measurement focus is accomplished using the modified accrual basis of accounting. B." 4. 1. Derived non-exchange tax revenues are accrued based on the timing of receipt. Derived Non-exchange Tax Revenues A sales tax or an income tax is considered to be "derived" tax revenue. Proceeds from long-term debt are recorded in the governmental funds as "other financing sources. Depreciation expense is recorded. The difference between modified accrual and accrual primarily relates to the timing of revenue recognition.Measurement Focus Measurement focus describes the reporting objective that the application of fund accounting is designed to achieve. 8-4 © 2011 DeVry/Becker Educational Development Corp. it is a tax that comes as a result of economic activity." Economic Resources Measurement Focus Financial statement readers are focused on the determination of operating income. Payment of principal and interest are recorded as "expenditures. The Governmental Fund Types use the current financial resources measurement focus. There are two measurement focuses: A. FUND ACCOUNTING .Financial Final Review II. the government does not provide a specific service in exchange for the revenue earned: 1. financial position and cash flow. 1. Capital outlay expenditures are reported on the face of the governmental fund types operating statements. . 3. Receipts due at year end and actually received within 60 days of year end are accrued and recognized as revenue.2012 Edition . All rights reserved. Current Financial Resources Measurement Focus Financial statement readers are focused on the sources. uses and balances of current financial resources. changes in net assets. Non-current assets and liabilities are NOT reported on the governmental fund types balance sheets.Basis of Accounting Basis of accounting describes the accounting principles used to accomplish the measurement focus of each fund category. Revenues are generally accrued when they are both measurable and available (due AND collected within 60 days of year end). III. There are two bases: A. The focus often includes a budgetary element. Non-current assets and non-current liabilities are recorded on the balance sheet. There are four classifications of non-exchange revenues that serve as the basis for most governmental fund resources. FUND ACCOUNTING .

Voluntary Non-exchange Transactions Resources are willingly conveyed by a govemment to another for a particular purpose or use without an equal exchange of value. Actual ActiVity Actual activities are recorded as they happen throughout the year. Budgetary Activity To record the bUdget into the accounting records.2012 Edition . Modified accnJal also creates important expenditure recognition differences. Capital purchases are identified as capital outlay because of their long term nature but they are accounted for as expenditures and they are not reported in the balance sheet. including no interest accnJal. All rights reserved. Generally.· !!Iil ~ XXX Capital outlay expenditures XXX Cash or vouchers payable 8-5 ~ 2011 DeVryjBecker Educational Development Corp. Government Mandated Non-exchange Transactions Grants are conveyed by one govemment to another. (a state.. 3. etc. amending or closing the budget. Leins on property (allowed by law) are used to enforce property tax collection. all spending is recorded currently as "expenditures. cars can be impounded. Expenditures are typically recorded as they are incurred. driver's licenses can be revoked. Revenues are recognized when eligibility requirements are met and the revenues are both measurable and available. FUND ACCOUNTING . IV. !!Iil xxx Estimated revenue control ~ Appropriations control xxx ~ Budgetary fund balance XXX BUdgetary fund balance can also be a debit. Revenues are recognized when restrictions are met. A. . or a county) to mandate certain activities.Mechanics Fund accounting mechanics generally focus on the accounting for the governmental funds and require knowledge of the journal entries used to record the budget. Any balancing amounts are posted to bUdgetary fund balance. Collection of fines is based upon enforcement of a penalty resulting from the violation of law (e. and encumbrances. B.g. B. Accrual Basis of Accounting The economic resources measurement focus is accomplished using the accrual basis of accounting where revenues are recorded when earned and expenses are recorded when incurred. actual activities. Imposed non-exchange revenues are typically accrued when billed since collection is not in doubt. Budgetary accounts are only impacted when establishing. no depreciation expense is recorded on govemmental fund financial statements. BUdgetary accounts are recorded at the beginning of the year and are closed at the end of the year. Imposed Non-exchange Revenues Fines and property taxes are imposed non-exchange revenues since the taxpayer's obligation is imposed by an enforceable claim by the government. In addition.Financial FInal Review 2. the following entry is used.). 4.

!!rn xxx Debt service . rather an encumbrance of appropriated funds. Encumbrances are recorded and closed throughout the year. All rights reserved. Reserve for encumbrances. At year-end. generally collected within 60 days of year-end. if encumbrances are still outstanding. and encumbrance activities separately. they are reported as a component of committed or assigned fund balance and disclosed if appropriations do not lapse. budgetary fund balance XXX Upon receipt of goods the encumbrance offunds associated with the issued order is reversed and the related expenditure . actual.current XXX ~ Property tax revenue XXX Encumbrance Activity Encumbrances are recorded when purchase orders are issued. 8-6 ~ 2011 DeVryjBecker Educational Development Corp.principal expenditure ~ xxx Cash In addition.debt proceeds The modified accrual basis of accounting records (accrues) revenue when it is measurable and available. Both bUdget and actual activities are recorded during the year and then closed at the end of the year. Entries to record the encumbrance of funds and the receipt of goods are as follows for internal accounting purposes (reserves are not used for external reporting): To record the issuance of a purchase order. Property tax receivable . !!rn ~ Encumbrances XXX Reserve for encumbrances. new debt proceeds are recorded as other financing sources.Financial FInal Review Principal payment on debt is displayed as an expenditure since there is no noncurrent debt recorded on the governmental fund financial statements. No "bad debt expenditure" is recognized. .s recorded. !!rn c. !!rn ~ !!rn ~ D.2012 Edition . budgetary fund balance XXX Encumbrances XXX Expenditure XXX Vouchers payable XXX Relationship Between Accounts at Year-end Governmental funds record bUdget. a resource inflow: !!rn ~ xxx Cash xxx Other financing sources . The issuance of a purchase order does not represent a liability. Note the entry below to record property tax receivable (imposed non-eXChange revenue) and the related allowance for uncollectible taxes. Only the amount available is recorded as revenue. Tax receivable is recorded when the tax is levied but only available revenue is recognized.current XXX ~ Allowance for uncollectible taxes .

000 4.DDD ofsupply is still on hand) !!ru Inventory of supply !!ru Expenditures 1. 8-7 ~ 2011 DeVryjBecker Educational Development Corp.2012 Edition ..Fund Balance C/assfflcations Governmental fund balances are classified in anyone of five ways: A. result in a reported negative unassigned fund balance. constitutional provisions or enabling legislation. Assigned Assigned fund balances are constrained by the government's intent to be used for specific purposes but are neither restricted nor committed. the fund balance should be reclassified as being non-spendable fund balance .000 [ijil Inventory of supply 4.000 Under the purchase method the remaining inventory must be placed in the balance sheet (it was all expensed at the beginning) and because it cannot be spent in that year. however. . All rights reserved. debt covenants).. Committed Committed fund balances represent resources that can only be used for specific purposes pursuant to constraints imposed by formal action of the government's highest level of decision making authority.spendable Non-spendable fund balances represent resources that are non-spendable because they are not in spendable form (e. E. At the time ofpurchase The Consumption method: The Purchase method: !!l2 Expenditures !!l2 Inventory of supply 5.g. Unassigned Unassigned fund balances is the residual classification for the General Fund. Over expenditure of resources in other governmental funds may. inventories or prepaid expenditures) or legally or contractually required to be maintained intact (e.000 Vouchers payable 5. C.000 Vouchers payable At year-end (assumption: 1. D. contributors.. committed or assigned to specific purposes within the general fund. permanent fund principal).g. This classification represents fund balance that has not been assigned to other funds and that has not been restricted. B. v.000 Si! 5. laws. Non. The general fund should be the only fund that shows a positive unassigned fund balance amount.. FUND ACCOUNTING .g. other governments. Inventory of Supplies When government bUys supply inventory two methods can be used for the transaction: Purchase and Consumption.Financial FInal Review E.inventory. Restricted Restricted fund balances represent resources whose use has been limited by such external sources as creditors (e.000 5.000 Nonspendable FB inventory 1.

The basic structure includes the presentation of: • Basic financial statements (comprised of government-wide financial statements. .2012 Edition . Fiduciary funds are excluded from the government-wide financial statements but are included as part of the fund financial statements. • Other Supplementary Information (Optional) may be included. Government-wide financial presentations are prepared using the economic resources measurement focus utilizing the accrual basis of accounting.Financial Final Review VI. 8-8 © 2011 DeVry/Becker Educational Development Corp. fund financial statements and notes to the financial statements) • Required supplementary information Fund financial statements emphasize fiscal accountability while government-wide financial statements emphasize operational accountability. A matrix to keep in mind for GASB 34 reporting categorizes our fund structure mnemonic as follows: Governmental GRSPP Business TyPe Excluded E PAPI S Government-wide financial statements are the: ./ Statement of Net Assets . • A Statement of Cash Flows is not prepared for government-wide presentations. a letter that presents a brief. Financial presentations are integrated by the reconciliation of fund financial statements to government-wide presentations. • Following the basic financial statements is RSI that includes multi-year pension data./ Statement of Activities • Required Supplementary Information (RSI) is presented both before and after the basic financial statements. infrastructure data for governments using the modified approach for infrastructure and budgetary disclosures. Optional information includes budget variances and individual financial statements for non-major funds. GASB 34 MODEL .Government-Wide Reporting The GASB 34 reporting model focuses the reader on both government-wide and fund financial statements using an integrated approach to hjghljght both the operational and fiscal accountability requirements of the government. All rights reserved. The government-wide financials include presentation of governmental activities and business type activities such as the enterprise funds. • Preceding the basic financial statements is the management's discussion and analysis. objective and easily readable analysis of the government's activities.

2012 Edition - Financial FInal Review

VII.

GASB 34 MODEL - Fund Financial Statements
Fund financial statements are presented for all funds based on their applicable measurement focus and
related basis of accounting. Only major funds are reported separately; non-major funds are reported in the
aggregate. Individual non-major funds may be reported as optional supplementary information.

A.

B.

C.

D.

Governmental Fund Financial Statements Presented

Balance Sheet

Statement of Revenues, Expenditures, and Changes in Fund Balance. Included in this statement
are also other financing sources (proceeds from debt and interfund transfers) and other financing
uses.

Proprietary Fund Financial Statements Presented

Statement of Net Assets

Statement of Revenues, Expenses and Changes in Fund Net Assets

Statement of Cash Flows

Fiduciary Fund Financial Statements Presented

Statement of Fiduciary Net Assets

Statement of Changes in Fiduciary Net Assets

Determination of Major Funds
GASB 34 em phasizes reporting by major fund rather than fund type. To qualify as a major fund the
two following criteria must be met:

E.

1.

An individual fund's total assets, or liabilities or revenues, or expenditures/ expenses, are at
least 10% or more of the corresponding total assets, or liabilities or revenues, or expenditures/
expenses of all governmental funds or enterprise funds (e.g., a special revenue fund's assets
would need to be 10% of the assets for the governmental fund financial statement category, a
Water & Sewer fund's assets would need to be 10% of all enterprise funds' assets).

2.

The same individual fund's total assets, or liabilities or revenues, or expenditures/expenses, are
at least 5% or more of the corresponding total assets, or liabilities or revenues, or
expenditures/expenses of all govemmental funds and enterprise funds combined (e.g., a
special revenue fund's assets would need to be 5% of the combined asset amounts for
governmental and enterprise funds, a Water & Sewer fund's assets would need to be 5% of the
combined asset amounts for govemmental and enterprise funds).

Reconciliation of Fund Statements to Government-Wide Statements
Because of the different measurement focus and related basis of accounting used, the govemmental
fund balance as reported in the balance sheet must be reconciled to net assets of government-wide
statements as reported in the statement of net assets.
1.

The difference in measurement focus provides the following reconciling items:
a.

Add non-current assets.

b.

Subtract non-current liabilities.

c.

Add internal service fund net assets.

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2011 DeVryjBecker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

2.

The difference in basis of accounting produces the following reconciling items:
a.

Adjust for accrual of revenue accounted for on the full accrual basis of accounting rather
than the modified accrual basis of accounting.

b.

Adjust for accrual of expenses accounted for on the full accrual basis of accounting rather
than the expenditures accrued on the modified accrual basis of accounting.

3.

The changes in fund balance displayed in the governmental fund statement of revenues,
expenditures, and changes in fund balances must be reconciled to changes in net assets of the
governmental activities column as reported in the statement of activities of the governmentwide statement.

4.

The difference in measurement focus produces the following reconciling items:

5.

a.

Subtract debt proceeds (not accounted for as other financing sources in the governmentwide financial statements).

b.

Add capital outlay (not accounted for as expenses in the government-wide financial
statements).

c.

Add Internal Service Fund changes in net assets accounted for in the proprietary funds.

The difference in basis of accounting produces the following reconciling items:
a.

Adjust for accrual of revenue accounted for on the accrual basis of accounting rather than
the modified accrual basis of accounting.

b.

Adjust for accrual of expenses accounted for on the accrual basis rather than the
expenditures accrued on the modified accrual basis.
Statement of Revenues, Expenditures,
and Changes in Fund Balance

Balance Sheet

@
@

GRASPP - Fund balance

@

GRASPP - Net change in fund balance

Assets (non-current)

Other financing sources

CD
®
®

Liabilities (non-current)

®
®
®
®

Basis of Accounting

Service (internal) fund net income
Basis of Accounting

@

Accrued

@

Additional accrued

®

Revenues and

®

Revenues and

®

F.

Service (internal) fund net assets

Expenditure - capital outlay (net of depreciation)

®

Expenses

Expenses

Statement of Cash Flows
The Statement of Cash Flows is only used for the proprietary funds. The direct method is required
and it is prepared in a manner similar to the commercial version, with the following differences:
1.

There are four categories (instead of the three) and the order of the categories is the following:
a.

Operating activities.

b.

Non-eapital financing activities.

c.

Capital and related financing activities.

d.

Investing activities.
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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

2012 Edition - Financial Final Review

2.

Interest income/cash receipts are reported as "investing activities" (not as operating activities).
Interest expense/cash payments are either:
a.

Capital and related financing, or

b.

Non-capital financing.

3.

Capital asset purchases are reported as "financing activities" (not as investing activities).

4.

A reconciliation of operating income (instead of net income) to net cash provided by operations
is required.

VIII. GASB 34 MODEL - Infrastructure
Infrastructure can have an impact on both the statement of net assets and statement of activities. Included
among the capitalized non-current assets on the government-wide statement of net assets should be
eligible infrastructure, such as roads, drainage systems, and bridges. Consequently, depreciation of such
assets is required, and should be reported in the statement of activities.
However, if the government is unable to arrive at the cost data for its infrastructure, the use of a modified
approach (no capitalization needed) is acceptable, provided that supplementary information describing the
infrastructure, its condition and estimation of expenses needed to maintain condition, is included in the
(RSI). A complete new professional assessment of the infrastructure condition is necessary every three
years.

IX.

REPORTING UNITS
Reporting units (the primary government and its component units) are the governmental version of
"consolidations." When to consolidate and how to consolidate is important under the GASB 34 model.

A.

Primary Governments and Component Units (When)
A government is viewed as a stand-alone or primary government if it has a separately elected
governing board, it is a legal entity and it is financially independent.
A government that cannot stand by itself is a component unit of another government and should
present its financial statements with the primary government.

B.

Discrete vs. Blended Presentation (How)
Component units are presented either discretely or in a blended format. Generally, component units
are presented as discrete (separate columns) on the primary government's financial statements.
Blended presentations are made when the component unit either exclusively serves the primary
government or when the component unit's governing body is substantially the same as the primary
government's governing body. Blending involves consolidation of activities.

X.

INTERFUND ACTIVITY
Interfund activity is subject to specific requirements related to financial statement display and disclosure and
can be classified as follows:

Reciprocal interfund activity

Non-reciprocal interfund activity

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© 2011 DeVry/Becker Educational Development Corp. All rights reserved.

o Loans not expected to be repaid within a year. Non-reciprocal Interfund Activity • Represents non-exchange transactions between funds.Financial Final Review A. • Disclosures specific to transfers include: o Transfers that do not occur on a routine basis. Interfund reimbursements are not displayed as interfund transactions. Government-wide Financial Statement Displays of Interfund Activity • Interfund activity within a particular column displayed on the governmental activities or business type activities financial statements (intra-activity transaction between governmental funds and internal service funds) is eliminated prior to the preparation of governmental-wide financial statements. Reciprocallnterfund Activity • Includes exchange-type transactions between funds. o Transfers that are not consistent with the activities of the fund making the transfer. • Interfund activity between columns displayed on the governmental activities or business type activities financial statements (inter-activity transaction between governmental funds and enterprise funds) is reported as "internal balances" on statement of net assets and "transfers" (revenues or expenses). . Transactions of this type are accounted for as revenues and expenses. These are normally reported as other financing sources and uses after nonoperating revenues and expenses. • Interfund services provided and used represent sales and purchases between funds at external pricing. in the statement of activities. • Interfund payments of expenses made by one fund on behalf of another fund are accounted for as reimbursements.2012 Edition . 8-12 © 2011 DeVry/Becker Educational Development Corp. B. • Unrealizable balances are reclassified as transfers. C. • Interfund activity between the primary government and its fiduciary funds should be reported as if between external parties. • Interfund transfers of assets between funds without the exchange of equivalent value represent interfund transfers. They are not eliminated. All rights reserved. • Interfund Loans are expected to be repaid and are accounted for as interfund receivables and payables (due from/due to).

500 2.104.000 337.000 130.000.500 1.487.000 390.000 1.000 130.000 2.Financial Final Review XI.000 Non-current liabilities Due within one year Due in more than one year Total liabilities NET 46.000 Total net assets 8-13 © 2011 DeVry/Becker Educational Development Corp.835.000 450.500 3.000 390.000 1.000 1.000 Internal balances 450.000 2.000 (450.000 ASSETS Invested in capital assets net of related debt Restricted Capital projects 1.200.000 6.635.868.500 223.500 520.227.550.000) Cash 520.000 5.000 Debt service 668.750.000 766.074.000 670.250.000 1.975. Year 1 PRIMARY Governmental Activities GOVERNMENT Business-type Activities Total Component Units ASSETS 4.000 Unrestricted 581. FINANCIAL STATEMENT SAMPLES Progressive Township Statement of Net Assets December 31.268.000 Inventories Capital assets Total assets LIABILITIES 95.000 127.000 185.763.000 8.827.000 6.000 5.500 13.000 2.000 400.000 1.500 8.504.000 1.000.000 Receivables 940.610. .074.000 Accounts payable 1.000 4.000 5.000 1.2012 Edition .385. All rights reserved.000 3.500 383.313.000.802.000 96.677.000 3.000 Deferred revenue 95.518.322.

000 293. and transfers Change in net assets Net assets-beginning Net assets-ending 1.000 100.500 3.000 600.000 8-14 © 2011 DeVry/Becker Educational Development Corp.000) (947.000 565.000 390.088.000 (900.000 246.000 185.524.000 1.500 5.000 300.050.000 2.000 505.000 1.000 1.000 1.000 1.000 1.000.550.000 1.000 Business-type activities: Water Sewer Parking facilities 300.000 1.500) (348.435.000) (700.000 300. Year 1 NET {EXPENSES) REVENUES AND CHANGES IN NET ASSETS PROGRAM Operating Indirect Expense Functions/Programs Expenses Allocation REVENUES Charges for Services PRIMARY GOVERNMENT COMPONENT UNITS Capital Grants Grants and and Contributions Contributions Governmental Activities Business-type Activities Total Total Primary government: Governmental activities: General government Public safety Culture and recreation Other functional classifications Interest on long-term debt Total governmental activities 563.000 295.000 2.000 195.000 300.000 505.000 90.835.000 312.693.500) 200.270.300.731.500 3.000 8.000 500. special items.500) 1.000 (1.000 312.195.000 .000 78.000 2.000 835.000 2.000 1.000.500 700.620.385.000 81.000) (107.000 (348.500) (787.000 465.000) General revenues Taxes: Property taxes Franchise taxes Investment earnings Transfers Total general revenues.000) (107.620.000 505.000 650.000) (2.500) 8.500) (787.000 (2.2012 Edition .435. All rights reserved.360.000 6.147.000 1.500 2.000 835.000 60.000 Component units: Landfill Public school system Total component units 300.000 255.930.000) (246.038.000 2.000) (2.000 1.000) (947.000.283.254.360.000 860.000 107.400.500 4.000 185.000 1.000 81.435.025.000 4. 60.000) (246.000 Total business-type activities Total primary government 692.360.Financial Final Review Progressive Township Statement of Activities For the Year Ended December 31.500 215.791.

100.000 Liabilities: Accounts payable Due to other funds Payable to other governments Deferred revenue 250.Financial Final Review Progressive Township Balance Sheet Governmental Funds December 31.000 95.000 Total liabilities 460.100.000 50.000) 1.627.000 3.000 2.000 100.000 450.527. 8-15 © 2011 DeVry/Becker Educational Development Corp.000 55.000 5.000 6.550.500.000 83.000 Note: This simplified example assumes no differences between fund financials and government-wide financials pertaining to the basis of accounting.000 300.000 80.000) 163.000 80.000 359.000 1.000 60.000 244.000 110.140.000 510.436.000 95.000 Total assets 2.000 (3.000 510.000 2.000 3.000 158.100.000 56.000 1.000 1.000 510.000 100.000 (7.000 45.000 20.527.000 668.000 2.000 61.000 28.000 162.000 162.000 74.000 600.000 28.087.000 LIABILITIES AND FUND BALANCES Fund balances: Non-spendable Inventories Restricted for Debt service Capital projects funds Committed to urban renewal Assigned: Sanitation Special revenue funds Unassigned: General fund Special revenue funds Total fund balances Total liabilities and fund balances 55.950.000 1.000 J 4.296.000 1.000 359.000 300.000 5.000 753.000) 4.420.000 2.574. All rights reserved.000 184.000 510.000 61.000 1.000 Center Construction Other Governmental Funds Total Governmental Funds ASSETS Cash Receivables Due from other funds Receivables from other governments Inventories 800.000 450.000 65.000 60.000 600.000 510.500.026.000 (7.000 Total governmental fund balances Capital assets used in governmental activities that are not reported in fund financial statements Other long-term assets not available to defray the cost of current expenses and are not reported in fund financial statements Long-term liabilities including bonds payable not recorded in fund financial statements Internal service fund used for governmental activities Net assets from governmental activities 45.000 116.000 6.000 184.000 1.000 80.000 60.000 259. .087.000 20.000 270.000 60.2012 Edition .000 65.436.000 620.000 50.140. Year 1 Convention General Fund HUD Programs Convention Development Tax Convention Center Bonds 250.

500.000 250.000) 1.000 (452.000 957.000 5.000 (120.620.000 393.000 120.202.500 2.000 40.000 375.000 465.000 .000 30.000 126.960.000 120.000 1.000 384.000 17.032.000 85.000 2. Year 1 General Fund HUO Programs Convention Development Tax Convention Center Bonds Convention center Construction Other Governmental Funds Total Governmental Funds REVENUES Property taxes Fees and fines Intergovernmental Charges for services Interest earnings Total Revenues 1.000.000 1.000 978.000 36.000 20.000 111.000) 2.000) (250.000 (14.000 211.500 58.795.000) (462.440.195.000 162.080.000 360. Expenditures.500 (244.000 25.000 40.000 97.000 55.000) 71.000) (560.097.000 125.500 280.000 1.000 370.809.000 860.161.000 40.080.000 20.000 450.000 600.000 1.000 78. All rights reserved.330.000 2.000 18.000 600.140.000 80.000 241.000 960. 10.000 1.620.000) OTHER FINANCING SOURCES (USES) Proceeds of long-term capital-related debt Transfers in Transfers out Total other financing sources and uses Net change in fund balances Fund balances-beginning Fund balances-ending 2.000 375.000 259.000 510.000 10.400.000 960.000 1.000) 370.000 (250.516.500 4. and Changes in Fund Balance Governmental Funds For the Year Ended December 31.000 (384.000 940.000 1.000 1.000 8-16 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .500 184.500) EXPENDITURES Current: General government Public safety Culture and recreation Other functional classifications Debt service: Principal Interest and other charges Capital outlay Total expenditures Excess (deficiency) of revenues over expe nd itu res 450.000 78.755.000 17.500 2.000 40.000 787.000 110.500 940.000 36.000 1.Financial Final Review Progressive Township Statement of Revenues.000 200.000 40.000 100.627.000 1.000.000 189.500 (830.000 1.000) 711.000 4.000 60.

500 Net change in fund balances .000) Bond proceeds 360.000 Payments Capital outlay expense in excess of depreciation: 787. Year 1 1. 8-17 © 2011 DeVry/Becker Educational Development Corp.080.Financial Final Review Progressive Township Reconciliation of Governmental Fund Operating Statements and the Statement of Activities December 31. .000) Public safety (25.2012 Edition .000) Culture and recreation (10.500 * Note: Our example includes the significant assumption that no reconciliation items resultfrom different bases of accounting.total governmental funds Bond proceeds reflected as debt in excess of payments: (2.330.000) Other functional classifications (50.000) Revenues in the statement ofactivities that do not provide current financial resources and are not reported in the funds * Net revenue (expense) of internal service funds 18.000 Capital outlay Depreciation expense: General government (35. All rights reserved.000 Change in net assets of governmental activities 295.

2012 Edition .Financial Final Review NOTES 8-18 © 2011 DeVry/Becker Educational Development Corp. . All rights reserved.

At September 30.000 bond issue outstanding with a stated rate of 6% issued at . 4. 4. Debit budgetary fund balance. General Fund $1. Year 1.000 $24. government would record property tax revenue of: 1. the town would: 1. 2. The County found that it had paid $15. 2. 3.000 for miscellaneous supplies in November Year 0 and issued a $30.000 QU ESTION 2 The City of Lawrence has a $20. $25.000 yielding 6% that qualified for treatment as a capital lease to buy equipment used in general governmental operations. the County had received $20. The City also had a master lease agreement with a balance of $200.000.000. Lease payments were made through the general fund. 3. $45.855 to yield 7%. Appropriations do not lapse. By August Year 1.000 applied to properties with unpaid property tax bills in May Year 2. Credit budgetary fund balance.000 $15. Interest is payable on April 1 and October 1. The bond indenture required the uses of formal debt service fund accounting. Year 2.000.000 8-19 © 2011 DeVry/Becker Educational Development Corp.000 $350.200.000. 4.000 $1. Properties subject to delinquent property taxes were auctioned for taxes of $800.000 PO to a sole source vendor for miscellaneous supplies in December Year O. the governmental funds of the City of Lawrence would display accrued interest payable of: 1.000 $10.000 $24. Some $24.000 $0 Debt Service Fund $300. Year 1? 1.000 $1. All rights reserved.000 $0 $0 QUESTION 3 The Township of Thomasville recorded more appropriations than estimated revenues for the coming fiscal year.000 are collected from November Year 1 through March Year 2 with liens of $1 .800.000 $24. For purposes of internal reporting.000 related to the order but did not pay the vendor until October pending tax receipts. 4.000.000 in its General Fund for miscellaneous supplies for its fiscal year ended September 30.000 $30. In integrating its adopted budget with its financial accounting records. QUESTION 4 The County of Deutsch appropriated $45.000. what was the County of Deutsch's reserve for encumbrance at September 30. Credit reserve for encumbrances. 3. . 2. Monthly interest had not been paid at year-end. At December 31.000 were assessed in October of Year 1 to fund budgeted operations for the fiscal year ended September 30. Debit reserve for encumbrances. Year 2.000. 3.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 Property taxes for the Town of Farrell of $25.2012 Edition . 2.

that $1.632.602.2012 Edition . . 3. 3.000 5. General government fixed assets amounted to $160. Compensated absences charges. All rights reserved. the County had received $20. Year 1. 4.000 excluding land and had an average life of 20 years.000. Year 1 is: 1. 4.000 would be collected within 60 days of year-end.000 would be collected more than 60 days from year-end. It was estimated that 3% would be uncollected. What was the County of Deutsch's available appropriation at September 30.000.000 in its General Fund for miscellaneous supplies for its fiscal year ended September 30. 4. 2. and Changes in Fund Balances for the year ended December 31.000 in its governmental funds Statement of Revenues. The change in net assets in the governmental column in the government-wide statement of activities for the year ended December 31.000 3.000 of property taxes had been deferred at the end of the previous year and was recognized under modified accrual as revenue in the current year.500. Additional information: 1.000 in the modified accrual statement.000 purchase order to a sole source vendor for miscellaneous supplies in December Year O. $370. Property taxes had been levied in the amount of $20. Appropriations do not lapse. The land had a basis of $800.832.000.000 related to the order but did not pay the vendor until October pending tax receipts.000 for principal. The modified accrual statement reflected debt service expenditures in the amount of $1 . The County found that it had paid $15.002.000. and that $400.000 for interest and $1.000.000. The modified accrual statement reported proceeds from the sale of land in the amount of $1 .202. 3.000. $15.000. on the full accrual basis.000. The City had recognized the maximum permitted under modified accrual accounting.000 QUESTION 6 The City of Richardson reported a change in fund balances of $2.000 $10. amounted to $100.000 4. No adjustment was necessary for interest accruals at year-end. Capital outlay expenditures amounted to $10.000 for miscellaneous supplies in November Year 0 and issued a $30. Year 1. Year 1? 1. By August Year 1.Financial Final Review QUESTION S The County of Deutsch appropriated $45. $0 2. Expenditures.000 more than under the modified accrual basis. 2. 4. 6.000 8-20 © 2011 DeVry/Becker Educational Development Corp. 5.000 $5.

Financial Final Review TASK-BASED SIMULATION TASK-BASED SIMULATION: MFBA MFBA IAuthoritative Literature I Help I For each of the fund types listed below. Generic or Specific Fund Types Basis of Accounting 1. Permanent Fund 4. ~ Modified accrual Full accrual Cash Modified cash 8-21 © 2011 DeVry/Becker Educational Development Corp. identify the basis of accounting used in each instance by double-clicking on the shaded cells and selecting the appropriate response. Fiduciary Fund 6.. General Fund 3. . Internal Service Fund . All rights reserved.2012 Edition . Proprietary 2. Private Purpose Fund 5.

8-22 ~ 2011 DeVryjBecker Educational Development Corp. Full accrual Proprietary funds (SE) use the full accrual basis of accounting. 2. .2012 Edition . which use the full accrual basis that both complements and facilitates the economic resources measurement focus. All rights reserved. Modified accrual The Permanent Fund is a Governmental (GRSPP) Fund. 6. which use the full accrual basis that both complements and facilitates the economic resources measurement focus. Full Accrual Fiduciary funds (PAPI) use the full accrual basis of accounting. 3. Full Accrual The Internal Service Funds are Proprietary (SE) Funds. 4. which uses the modified accrual basis that both complements and facilitates the financial resources measurement focus. which both complements and facilitates the economic resources measurement focus. Modified accrual The General Fund is a Govemmental (GRSPP) Fund. 5. Full Accrual The Private Purpose Funds are Fiduciary (PAPI) Funds. which uses the modified accrual basis that both complements and facilitates the financial resources measurement focus. which both complements and facilitates the economic resources measurement focus.Financial FInal Review Solution 1.

Industry Applications . All rights reserved.Financial Final Review FINANCIAL 9 Not-for-Profit Required Financial Statements • • • • Net Asset Classification Statement of Cash Flows Revenue and Support Recognition Expense Classification and Display Split Interest Agreements • Special Rules for Donated Services and Works of Art • • Accounting for Marketable Securities Pass-through Contributions to Non-profit Beneficiary • 9-1 © 2011 DeVry/Becker Educational Development Corp.2012 Edition .

.Financial Final Review NOTES 9-2 © 2011 DeVry/Becker Educational Development Corp. All rights reserved.2012 Edition .

II./ Statement of Financial Position . a gift of a CD that must be held until maturity and then can be spent as the organization wishes).e. • Time: The donated assets are restricted until a fixed period passes (e. Time restrictions may also be implied by availability. Temporarily Restricted Only donors may restrict assets. while all other non-profit organizations are encouraged to present it: A. The two major classifications are: • Voluntary health and welfare organizations (VHWO) • Other non-profit organizations (ONPO) I. • Operating purposes other than to provide goods or services at a profit. There are three net asset classifications: A. contributions receivable generally increase temporarily restricted net assets. cancer research./ Statement of Cash Flows Voluntary Health and Welfare organizations (entities that are nearly entirely supported by contributions) are required to present the following additional financial statement. NET ASSET CLASSIFICATION The reporting objectives of non-profit organizations include presentation of the net assets at the balance sheet date and the components of the change in net assets on the Statement of Activities for the year ending on the balance sheet date.2012 Edition . Net assets contributed with donor-imposed temporary restrictions may be satisfied by fulfilling donor requirements as to: • Purpose: The money must be spent as the donor stipulates (i. • Absence of ownership interest. B. • Acquisition of Plant: The donated assets are restricted until land is purchased and/or a facility is built...g. Management or Board can designate or identify assets to be used for a particular purpose. 9-3 © 2011 DeVry/Becker Educational Development Corp. Statement of Functional Expenses The objective of the statement of functional expenses is to present the programmatic and support expenses displayed horizontally on the Statement of Activities in separate columns and to analyze the expenses by object (natural classifications). However. REQUIRED FINANCIAL STATEMENTS All non-profit entities are required to prepare three basic financial statements on the full accrual basis: ./ Statement of Activities . The FASB has the primary responsibility of providing guidance on generally accepted accounting principles for non-profit entities.Financial Final Review SUMMARY NOTES Non-profit entities as described by the AICPA possess the following characteristics: • Contributions of significant amounts of resources received from providers who do not expect commensurate or proportionate return. . Unrestricted Net assets free of donor restrictions on usage. a designation is not a restriction. All rights reserved. youth education).

Revenues typically represent exchange transactions in which the non-profit organization earns resources in exchange for a service performed (e.Financial Final Review C. Conditional promises are not recorded and conditional gifts received in advance of satisfying conditions are recorded as liabilities. • Include receipts of unrestricted resources designated by the governing body to be used for longlived assets. • Include investment in equipment. 9-4 © 2011 DeVry/Becker Educational Development Corp. Other Types of Financing Activities Include receipts and disbursements associated with borrowing and receipts of dividends and interest restricted to reinvestment. III. Cash and Cash Equivalents Donor-restricted securities that may otherwise meet the cash equivalent criteria in commercial accounting are excluded. Permanently Restricted Net assets contributed with restrictions. • Conditional is not the same as restricted. fees).. . Financing Activities 1. IV. • Recognition of revenue relates to the treatment of gifts or promises to give. There are three categories of cash flow activities: A. • Disbursements of these restricted contributions for either temporary investments or the purpose for which they were intended are classified as investing activities.g. STATEMENT OF CASH FLOWS The Statement of Cash Flows is the same as the statement issued by commercial enterprises with a few unusual features. such as an endowment fund where the corpus must be retained in perpetuity and interest income can be used by the NPO in accordance with the donor's stipulations. REVENUE AND SUPPORT RECOGNITION Non-profit accounting focuses on two terms (conditional and restricted) that are often used interchangeably in conversation but that have two distinct accounting meanings. B. C. • Classification of net assets relates to donor-imposed restrictions on contributions. All rights reserved. Either the direct or indirect method can be used. 2.2012 Edition . Proceeds from Restricted Contributions • Include cash received with donor-imposed restrictions limiting its use to purchases of long-term assets or annuity agreements. Investing Activities • Include proceeds from the sale of works of art or purchases of works of art. Resource inflows in non-profit organizations are generally displayed in the financial statements as either revenue or other support. Support often represents unconditional contributions. Operating Activities • Include applicable agency transactions. D. • Include proceeds from the sale of assets that were received in prior periods and whose sale proceeds were restricted to investment in equipment.

" The absence of variance power over the resources creates a liability rather than revenue. All expenses are presented in the unrestricted column in the Statement of Activities. i!Ii1 xxx Assets held in trust ~ Liability to beneficiary xxx ~ Contribution revenue (temporarily restricted) XXX Disbursements associated with split interest agreements are classified as financing activities on the Statement of Cash Flows.Financial FInal Review A. Program expenses relate to the mission of the organization while support services relate to the organization's administrative. • Exchange transactions represent the sale of goods or services in exchange for a fee.2012 Edition . V. Other Revenue Transactions and Issues • Agency transactions relate to receipts of resources over which the non-profit organization has no discretion or "variance power. VI. membership development and fund raising expenses. Conditional Promises Cash contributions that can only be used upon meeting a condition and conditional promises to give are not recorded as revenue until the condition is met. Conditional contributions rgood faith deposits") are displayed as a liability titled "Refundable Advance. Cash Contributions and Unconditional Promises Cash contributions and unconditional promises are displayed as support upon receipt or accrual. Receivables are recorded at their present value with the difference between face and present value recognized as contribution revenue over time. Conditional promises to give are not recorded. and recorded as temporarily restricted unless otherwise restricted by the donor. • Temporarily restricted donations for which restrictions will be satisfied within the year of receipt may be classified as unrestricted in the event that the non-profit organization consistently applies this policy. All rights reserved. II C. Exchange transaction revenue is unrestricted. • Gifts-in-kind represent non-cash contributions recorded as both support and an offsetting expense. measured at their fair value or present value at acquisition. SPLIT INTEREST AGREEMENTS Agreements such as charitable remainder trusts represent donor contributions structured to simultaneously donate assets to the non-profit organization and share those assets with a beneficiary. not interest. Split interest agreements are displayed separately on the non-profit organization's financial statements. The total amount of each functional expense (the expenses by individual program or support service) is displayed on the face of the Statement of Activities or disclosed in the notes to the financial statement. D. . EXPENSE CLASSIFICATION AND DISPLAY Expenses are defined as program or support services. Multl-year Pledges Unconditional promises receivable over a period of years are recognized as temporarily restricted since amounts have an implied time restriction. 9-5 ~ 2011 DeVryjBecker Educational Development Corp. B.

the beneficiary (e. Services that meet the criteria are recorded as revenues and assets or expenses at their fair value as follows: i!Ii1 xxx Expense or asset Si! xxx Contributions . The services must either enhance a physical asset or meet the following criteria: they require specialized skills. DONATED SERVICES AND DONATED WORKS OF ART Contributions of services are recorded as revenue SOME of the time...g. the donation is recorded as a liability. and the beneficiary is a smaller non-profit organization. Principles are largely driven by application of the concept of variance power. The pronouncement considers the common situation of a foundation. A.PROFIT BENEFICIARY FASB ASC 958-605 defines the manner in which separate organizations that either receive or benefit from contributions account for the donations. B. are otherwise needed and are measured easily. Any loss not absorbed by temporarily restricted balances is applied to unrestricted net assets. if the art is sold.g. The work of art is cared for by the non-profit organization. . All rights reserved. IX. Without Variance Power If a recipient organization receives donations on behalf of another non-profit and does not have any discretion with regard to the use of the contribution. The item is held for public viewing. General Rule: Recipient (e. i!Ii1 Si! xxx Asset xxx Refundable advance 9-6 ~ 2011 DeVryjBecker Educational Development Corp. PASS·THROUGH CONTRIBUTIONS TO NON.Financial FInal Review VII. Losses on permanently restricted marketable securities have unusual rules. ACCOUNTING FOR MARKETABLE SECURITIES Investments in securities are displayed at their fair values and increases and decreases in the fair value of securities are classified as Unrestricted in the Statement of Activities unless there are donor stipulated restrictions. The statement also considers instances where the recipient is a federated or community-wide organization such as the United Way. which raises money for another non-profit organization. a Foundation) 1. Typically eamings on permanent endowments are temporarily restricted. Losses on investments of pennanent donor-restricted endowments are first applied as a reduction of temporarily restricted net assets to the extent that restrictions on previously recognized gains have not been satisfied and remain classified in the temporarily restricted category. the recipient. must be used to purchase other works of art.Non-operating revenue Donated works of art are NOT required to be recorded by the recipient if all of the following criteria are met: A.2012 Edition . and C. Investment income (dividends and interest) are reported in the period earned in the net asset category as either unrestricted or restricted as stipUlated by the donor. VIII. Proceeds. a university).

Beneficial interest XXX XXX Contribution revenue INDUSTRY APPLICATIONS A. the donation is recorded as revenue. deductions are made from gross revenue for reporting purposes to display revenues net..g. 9-7 ~ 2011 DeVryjBecker Educational Development Corp. a Foundation) and Beneficiaries (e. Although patient service revenue is accounted for on a gross basis. and similar reductions are considered either expenditures or a separately displayed allowance reducing revenue. xxx Asset xxx Revenue General Rule: Beneficiary (e.g. tuition waivers. the donation is generally not recorded on the beneficiary'S books unless a financial relationship exists.. B. a University) Recipients and beneficiaries are deemed to be interrelated if one organization has the ability to influence the decisions of the other AND one organization has an ongoing interest in the other. Changes in value are recorded on the beneficiary'S books as follows: !!l2 ~ x. . Scholarships. C. Financially Interrelated Recipients (e. Beneficiaries recognize an interest in the net assets of the recipient when they are financially interrelated with the recipient.g. The interest is adjusted for the beneficiary'S share of the change. University and Institutions of Higher Learning Revenue Recognition Student tuition and fees should be reported at gross amount. With Variance Power If a recipient organization receives donations on behalf of another non-profit and has discretion regarding the use of the contribution..Financial FInal Review 2. xxx Receivable xxx Contribution revenue With Variance Power If a recipient organization receives donations on behalf of another non-profit and has discretion with regard to the use of the contribution. Charity care. the value of services that a health care organization gives away. !!l2 ~ Interest in net assets XXX Equity transaction (Statement of Activities) XXX Beneficiaries recognize a beneficial interest in an unconditional right to receive specified cash flows from pools of assets. Without Variance Power If a recipient organization receives donations on behalf of another non-profit and does not have any discretion with regard to the use of the contribution. All rights reserved. the donation is recorded as revenue on the beneficiary's books. !!l2 ~ 2. is not displayed in the financial statements.2012 Edition . a University) 1. even if the full amount is not expected to be collected. !!l2 ~ B. Health Care Organization Revenue Recognition Patient service revenue should be accounted for on the accrual basis at usual and customary fees.

Financial Final Review NOTES 9-8 © 2011 DeVry/Becker Educational Development Corp. All rights reserved. .2012 Edition .

Year 2. 2.000 $100. The financial statements that the Felix Nursing Home.000. As a result of the above transaction. used the remaining $5. On its Statement of Cash Flows for the year ended December 31.000. Operailng $110. Conditional restricted revenue of $10. is a health care provider organized as a not-for-profit organization whose activities are regulated by State licensure rules. 4. Year 2.000 on July 1. On February 2.000 QU ESTION 3 Balfour Animal Shelter. Year 1. 3. Year 1.000 $0 Financing $0 $0 $0 $110. received $10. Inc is a not-far-profit organization that received marketable securities from a donor with a fair value of $100. the Walton Farms Boys Home would display cash flows from the securities transaction as: 1. is required to produce are: 1. Walton Farms Boys Home elected to sell the securities for $110.000 and Temporarily Restricted Net Assets of $5. 9-9 © 2011 DeVry/Becker Educational Development Corp.000 to purchase more equipment as intended by the bequest. Unrestricted Net Assets of $10.2012 Edition . 2. Year 1 financial statements: 1. a non-profit organization.000. All rights reserved.000. Statement of Financial Position Yes Yes Yes Yes Statement of Activitv Yes Yes Yes Yes Statement of Cash Flows Yes Yes No No Statement of FuncilonalExpenses Yes No No Yes QUESTION 2 Walton Farms Boys Home. the Shelter used $5.000 $0 $10. 4. Unrestricted revenue of $5. Temporarily Restricted Net Assets of $10. Balfour Animal Shelter would record the following on its December 31. 4.000 to purchase grooming equipment and on March 15.000 and begin construction on the dormitories. 2.000 from Agnes Balfour to fund the acquisition of grooming equipment on December 1. Inc. 3. .Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 The Felix Nursing Home.000 $0 Investing $0 $110. Year 2. Inc. On January 8. 3. Year 2. The securities were donated with the stipulation that proceeds would be used to build new dormitories.

Faith Church should record revenues from contributed services of: 1. 3.000 to the Carton Museum under the terms and conditions of a charitable remainder trust that guarantees Mr.000 $0 $3. The vehicle had a fair value of $9.000 Permanently Restricted $0 $0 $0 $0 Unrestricted $0 $0 $0 $0 Temporarily Permanently Restricted Restricted $0 $0 $6. Altruistic a life-time tax free annuity of $20.000 $6.000 QUESTION 6 The City of Lawrence's United Way received a donation of a vehicle from a concerned citizen on January 1. Year 1 financial statements: 1. $35. An An An An increase increase increase increase in in in in unrestricted net assets of $200. 2. On their December 31.000.000 $42.000 Temporarily Restricted $0 $0 $9.750.000. As a result of the transaction above. The Lawrence Day Care is a United Way organization but does not have the ability to influence United Way policy. Albert Altruistic donated $200.000 $40. The church purchased the organ itself for $250. 2. Year 1 who directed that the vehicle was to be donated to the Lawrence Day Care Center. As a result of his contribution.000.000. Year 1 financial statements. .2012 Edition .000 and a remaining useful life of three years. each organization should display the following Net Asset changes based on this transaction: Lawrence Day Care Lawrence United Way 1. temporarily restricted net assets of $200. the Carton Museum would record the following on its December 31. and went on to stipulate that the Lawrence United Way could use the vehicle for a period of one year prior to the transfer. All rights reserved.000 per year and bequeaths the remainder to Carton for use in their operations in furtherance of the mission of the museum. Unrestricted $0 $3. The United Way elects to use the vehicle.250. Other congregation members stepped forward to help with general labor assistance valued at $7. 4.000 $47.000 for this work. QUESTION S Faith Church decided to replace their electric organ with a multiple rack pipe organ.000 $0 9-10 © 2011 DeVry/Becker Educational Development Corp. 3. temporarily restricted net assets of $115. Independent actuaries have estimated that the museum's liability has a present value of $84.000 and a congregation member stepped forward to assemble the organ and perform the necessary carpentry work for $5.750. a non-profit organization. 2.Financial Final Review QUESTION 4 On December 30. The congregation member is a skilled craftsman that normally charges $40. 4. 4. 3. Year 1. unrestricted net assets of $115.000 $0 $0 $0 $9.

and Other Topics Variable Interest Entities (VIEs) • Financial Instruments • • • 10-1 (C) 2011 DeVry/Becker Educational Development Corp. Financial Instruments.Financial Final Review FINANCIAL 10 VIEs. Derivatives Partnerships Contingencies . All rights reserved.2012 Edition .

2012 Edition . All rights reserved.Financial Final Review NOTES 10-2 © 2011 DeVry/Becker Educational Development Corp. .

Primary Beneficiary The primary beneficiary is the entity that has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance.2012 Edition . sales of receivables. Absorbs the risks and rewards of the SPE. Under U. then the investor (parent) company determines whether consolidation is necessary under the voting interest model (consolidate when ownership is >50% of the investee's voting stock. 10-3 © 2011 DeVry/Becker Educational Development Corp. 4. Definition A variable interest entity is a corporation. Is benefited by the SPE's activities. as previously covered). Has a residual interest in the SPE. and: C. U. 2. all consolidation decisions are evaluated first under the VIE model. VARIABLE INTEREST ENTITIES (VIEs) A.Financial Final Review SUMMARY NOTES I. GAAP. trust. and must consolidate. GAAP Consolidation Rule Under U. A special purpose entity (SPE) is a specific type of VIE created by a sponsoring company to hold assets or liabilities. partnership.S. LLC or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks the sufficient financial resources to support its activities. or 2.. D. Has decision-making powers that allow it to benefit from the SPE. securitization of loans). B. IFRS Consolidation Rule IFRS focus on the accounting for special purpose entities. 3.S. Receives the expected VIE residual returns. GAAP. an SPE when the company: 1.S. Under IFRS.g. often for structured financing purposes (e. If consolidation is not required under the VIE model. 1. All rights reserved. Absorbs the expected VIE losses. the primary beneficiary of a variable interest entity must consolidate the variable interest entity. . synthetic leases. a sponsoring company controls.

g. Hedging instruments: • No hedge designation. Changes in fair value are fully included in income. Ownership interest in an entity (stock. Its terms require or permit a net settlement. and demand deposits 2. • Examples of common derivatives are forward contracts. Cash.. Financial instruments are: 1. partnership.. • Fair value hedg&-A fair value hedge hedges an exposure to changes in fair value of a recorded asset or liability or recognized firm commitment. D. Changes in fair value are included in income but are offset by changes in the fair value of the hedged item. GAAP.g. and options. swaps. • Derivatives are reported as assets or liabilities and are measured at fair value just like other financial instruments. Just speculation. Derivatives Disclosure Fair value must be disclosed for all financial instruments for which it is practicable to estimate that value together with the related carrying amounts. disclosure of market risk is required. rate. Disclosure of market risk is encouraged but not required under U. • A notional amount is a specified unit of measure on which the derivative is valued. Under IFRS. No initial net investment (or smaller than would be expected). and B. 10. and C. . Contracts that both: 4. Convey to the second entity a contractual right to do the opposite. e. Disclosure of concentrations of credit risk is required. foreign currency. One or more underlyings. 10-4 © 2011 DeVry/Becker Educational Development Corp.g. Impose on one entity a contractual obligation or duty b. Credit risk is the possibility of loss from the failure of another party to perform according to the terms of a contract. III. futures. $10 a bushel. • An underlying is a specified price. e.000 bushels. or other variable. B.000. • The value or settlement amount is the amount determined by the multiplication of the notional amount and the underlying. DERIVATIVES Derivatives derive their value from other securities. and one or more notional amounts or payment provisions (or both). e.2012 Edition . LLC) 3. FINANCIAL INSTRUMENTS A. 10.. All rights reserved.Financial Final Review II.000 bushels x $10 per unit = $100.S. A derivative must have all three of the following characteristics: A. a.

Financial Final Review • Cash flow hedge-A cash flow hedge hedges an exposure to variability in the cash flows of a recognized asset or a forecasted transaction. ACCOUNTING FOR HEDGES: REPORTING GAINS AND LOSSES Type of Hedge Instrument Accounting for Changes in Fair Value No hedge designation Income Statement Fair value hedge Income Statement offset by changes in fair value of the hedged item Cash flow hedge Ineffective portion Income Statement cash flow hedge ~ffective portion (PUF~) In DCI then in Accumulated DCI in ~quity 10-5 © 2011 DeVry/Becker Educational Development Corp. changes in fair value of the effective portion of a cash flow hedge are included in the stockholders' equity as part of other comprehensive income (OCI) until the related cash flows are realized. .2012 Edition . All rights reserved. Changes in fair value of the ineffective portion of a cash flow hedge are included in income.

10-6 © 2011 DeVry/Becker Educational Development Corp.000 Land 5. Bonus Method The old capital plus the new partner's investment equals the total new capital. Any difference between the total new capital of the partnership and the total of the old capital plus the investment by the new partner is goodwill for the old partners and is allocated to their capital accounts in the old partnership profit/loss sharing ratio. capital (60%) V. . Goodwill Method Goodwill = Total new capital . V. All rights reserved. capital (40%) 1. Contingent Losses 1. Remote: ignore (unless guarantee of indebtedness of others.000 120 80 X. then disclose). capital Three basic methods are available for accounting for a new partner's contributions: A. "Exact" Method No goodwill or bonus is recorded. Probable: likely to occur. partnership income or loss is distributed among the various partners in accordance with their profit/loss sharing ratio. 2. capital B. If the partnership agreement does not give a profit/loss sharing ratio. capital (60%) V. Cash 1. the new partner's capital account is credited for an amount different than his/her investment.000 Green. However. Cash 1. PARTNERSHIPS Contributions to a partnership are recorded at fair value.2012 Edition . capital C.000 Division of Profits/Losses For partnership operations. 3. capital D. In the exact method. Contingent Gains Contingent gains that are probable or reasonably possible may be disclosed. If a range of amounts is given.Financial Final Review IV. capital (40%) Green. adjust for the smaller amount and disclose the difference in the notes to the financial statements.(Old capital + New partner's investment).000 400 Goodwill X. Any difference between the new partner's contribution and the amount credited is a bonus to/from the new partner and is divided based on the old partner's profit/loss ratio.200 Green.000 Green. Possible: a note disclosure is required. the exact amount that the new partner contributes is the exact amount credited to his/her capital account.000 1. then the division is equal. 240 160 1. Cash 1. B. 5. CONTINGENCIES A. An adjusting entry and a note disclosure are required.

2012 Edition .Financial Final Review NOTES 10-7 © 2011 DeVry/Becker Educational Development Corp. . All rights reserved.

2. 3. 3. 4. All rights reserved. 2. 2.2012 Edition . 3. 4. Fair value No No Yes No Yes Yes Yes No QU ESTION 2 Disclosures about the following kinds of risks are required for most financial instruments. Ineffective portion in Current income Current income Other comprehensive income Other comprehensive income Current income Other comprehensive income Current income Other comprehensive income 10-8 © 2011 DeVry/Becker Educational Development Corp. Market risk Yes Yes Yes No No Yes No No QUESTION 3 A change in the fair value of a derivative qualified as a cash flow hedge is determined to be either effective in offsetting a change in the hedged item or ineffective in offsetting such a change. . Concentration of credit risk 1. 4.Financial Final Review MULTIPLE-CHOICE QUESTIONS QUESTION 1 Which of the following must be disclosed for most financial instruments? Carrying value 1. How should the effective and ineffective portions of the change in value of a derivative which qualifies as a cash flow hedge be reported in financial statements? Effective portion in 1.