If checks are written by year-end but not mailed until after year-end, are the related invoices still accounts payable?
Yes. Checks written but not mailed by year-end remain unpaid, so the invoices stay in accounts payable at year-end. [RULE]
Deferred income tax liabilities are classified how on the balance sheet?
Deferred income tax liabilities are excluded from current liabilities and classified as noncurrent. [RULE]
What does it mean if vacation or sick days do not vest?
Vest = earned and kept
Do not vest = use it or lose it
How are carryover sick days reported if they are not payable in cash?
They may be tracked in employee leave records, but no liability is reported in the financial statements because there is no cash payment obligation. [RULE]
One caution:
If the question says unused sick days are paid at termination, convertible to cash, or otherwise vested in a way that creates payment, then that changes it — then you may need an accrual.
How is a balloon payment accounted for?
Record the note at unpaid principal, accrue interest separately, and reclassify the balloon amount to current when it becomes due within one year. [RULE]Record the note at unpaid principal, accrue interest separately, and reclassify the balloon amount to current when it becomes due within one year. [RULE]
What are dividends in arrears?
Unpaid prior-year dividends on cumulative preferred stock that must be paid before any dividends go to common stockholders. [VOCAB]
Are dividends in arrears a liability?
No. They are disclosed, not recorded as a liability, unless the board declares the dividend. [RULE]
When should a company record vacation expense using the expected usage rate?
Vacation expense is recorded based on the best estimate of vacation days employees are expected to use, not the total days granted.
How do you account for probable, reasonably possible, and remote loss contingencies?
Probable and estimable = accrue and disclose
Reasonably possible = disclose only
Remote = usually neither accrue nor disclose.
Interest expense =
Carrying Value × Market Rate
What is a warrant?
A warrant is a security that gives the holder the right to buy the issuer’s stock at a fixed price (exercise price) within a specified time.
In short, a warrant is like a long-term option to buy stock at a set price, providing potential upside if the stock price rises above that price.
How are detachable warrants treated at bond issuance?
The total proceeds from the bond issuance are allocated between the bonds and the detachable warrants based on their fair values at issuance.
What if the fair value of the bonds is unknown but the warrants’ fair value is known?
Assign the fair value of the warrants to the warrants, and the remainder of the proceeds to the bonds.
Are warrants classified as liabilities or equity?
Warrants are classified as equity, not liabilities
What journal entry is made when bonds with detachable warrants are issued?
Debit Cash (total proceeds)
Credit Bonds Payable (face value)
Credit Warrants (fair value)
Debit or Credit Discount/Premium on Bonds (difference)
When are warrants exercised, what happens?
The holder pays the exercise price, and the company issues common stock, increasing cash and equity.
When a company issues bonds with detachable stock warrants, how is the total issuance price allocated between the bonds and the warrants?
Allocate the total proceeds first to the warrants based on their fair value (if known)
The remaining amount is allocated to the bonds (long-term debt).
A company issues $1,000,000 bonds with 10,000 detachable warrants. The bonds sell at 102% ($1,020,000 total). Each warrant’s fair value is $5.
Total warrant value =
10,000×5=50,000
Amount allocated to bonds =
1,020,000−50,000=970,000
Bonds recorded at $970,000 (a discount from $1,000,000 face)
Why did i use 4% for the present value of the principal shouldnt that be the stated rate
The market price of a bond is the present value of the bond’s future interest and principal cash flows, discounted at the market rate of interest.
It is the bond’s selling price, determined by discounting:
future interest payments
plus repayment of principal
using the market rate, not the stated rate.
What happens to net income if an expense is overstated?
Overstated expense → Net income is understated
Because:
Net Income=Revenues−Expenses
Higher expenses reduce net income
How are bond issuance costs treated?
Bond issuance costs reduce cash received and increase the bond discount.
The total discount (including issuance costs) is amortized over the bond’s life using the effective interest method.
when you see “interest payable” or “interest payment,” you know to use the face value and stated rate. When you see “interest expense,” use the carrying value and effective rate
When a bond is issued at a discount, how do you calculate the total interest expense over the bond’s life?
Interest Expense = Cash Interest Paid + Amortization of Discount
The discount amortization increases interest expense because the bond was sold for less than face value.
Interest expense is always more than the cash interest paid for discount bonds.
Journal entry for each period:
Debit Interest Expense (higher amount)
Credit Discount on Bonds Payable (amortization)
Credit Cash (actual interest paid)
What are the rules for interest expense when it comes to troubled debt restructuring
Case 1: Total future cash payments ≤ carrying amount
no future interest expense
payments reduce principal directly
Case 2: Total future cash payments > carrying amount
future interest expense is recognized
In a troubled debt restructuring, when is no future interest expense recorded?
No future interest expense is recorded when the total future cash payments under the restructured debt are less than or equal to the carrying amount of the original debt. [RULE]
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INTERCO TRANS17
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Equity Method19
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General Terms1
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Balance Sheet - Assets - Cash & Cash Equivalents8
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Balance Sheet - Assets - Trade Receivables24
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Balance Sheet - Assets - Inventory2
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FAR – Week 1: Conceptual Framework & Financial Statements52
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FAR - Week 1: Income Statement15
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Liabilities54
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Stockholders Equity11
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EPS66
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REVENUE RECOGNITION65
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MINI EXAM 18
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F3 ASSETS58
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F4 LIABILITIES38
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F5 Investments, Statement of Cash Flows, and Income Taxes17
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F5 NFP11
