FAR Memorization

Question 1

What are the 6 items in the summary of significant accounting policies?

Answer 1

1) Revenue recognition policies
2) Inventory costing system
3) depreciation method
4) Long-term contract accounting
5) Criteria for classification of investments
6) Basis of consolidation

Question 2

Process for consolidated financial statements

Answer 2

1) Record account balances of separate entities on the consolidating worksheet
2) Record adjusting entries
3) Record eliminating entries
4) Complete consolidating worksheet
5) Prepare formal consolidated FS from worksheet

Question 3

Steps to report a business combination

Answer 3

1) Combine assets and liabilities
2) Eliminate parent investment account and subsidiary equity
3) Eliminate intercompany transactions

Question 4

What are the 4 major financing activities for the CF statement?

Answer 4

1) Issuance of common and preferred stock
2) Treasury stock transactions
3) Dividend payments
4) Borrowing and repaying debt (principal payments)

Question 5

What are the 4 major investing activities for the CF statement?

Answer 5

1) Collection of principal on loans made by entity
2) Acquisition and disposal of long-term assets
3) Proceeds from corporate-owned life insurance policies
4) Major repairs (capitalized to PPE)

Question 6

During a period of rising prices what effect on purchasing power do monetary items have for the following

Assets
Liabilities
Nonmonetary Items

Answer 6

Assets - decrease
Liabilities - increase
Nonmonetary items - no effect

Question 7

What are the 7 costs included in inventory?

Answer 7

1) Acquisition cost (net of trade discounts)
2) Warehousing cost
3) Insurance, repacking
4) Freight in (paid by buyer) FOB shipping point, destination is a selling cost for the supplier
5) Transportation of consigned goods
6) Costs to bring to saleable condition
7) Normal spoilage

Question 8

How are the weighted average and moving average costing methods treated (perpetual or periodic)?

Answer 8

weighted average - Periodic (end of the period)
moving average - perpetual (Avg cost of units at time of each sale)

Question 9

How do you calculate ending inventory under the retail inventory method?

Answer 9

1) Find the Goods available for sale
Beginning inventory + purchases + freight in + net markups = goods available for sale

2) calculate Goods available for sale percentage
GAFS at cost / GAFS at retail

3) Calculate ending inventory at retail
GAFS - net markdowns - losses and employee discounts - sales at retail

4) multiply ending inventory at retail by goods available for sale percentage

Question 10

What is the template to use for dollar value LIFO questions?

Answer 10

Picture this horizontal not vertical.

End Inv @ current cost
Price index
End inv @ base cost
Layer @ base cost
layer @ current cost

Question 11

What 4 criteria must be in a contract in order for it to be a contract?

Answer 11

1) Parties are committed to perform
2) Contract rights and payment terms are identifiable
3) Contract has commercial substance
4) Collection is probable

Question 12

What are the three types of marketable debt securities, how are each reported on the balance sheet, and where are holding gains and losses reported?

Answer 12

Trading - FV - net income
Available for sale - FV - comprehensive income
Held-to-maturity - amortized cost - N/A

Question 13

How are trading, available for sale, and held to maturity securities affected by the fair value method?

Answer 13

Trading - no effect
AFS - unrealized gains are reported in NI instead of comprehensive income
HTM - carrying value is adjusted to FV on each BS date with increase/decrease recognized as a component of net income

Question 14

How is an investment with less than 20% ownership treated? (Take me through the flow chart)

Answer 14

1) Does the security have a readily determinable FV?

If yes, then use the FV method (reporter at FV on BS and report dividends, unrealized and realized gains (losses) in net income)

If no, then there are two options
1) Adjusted cost method (is elected) - Valued at cost less impairment losses
2) Practical expedient method - Use FV calculated consistent with an investment company

Question 15

How do the following reclassifications (transfers) work for debt securities?

To Trading
From trading
From AFS to HTM
From HTM to AFS

Answer 15

All are revalued at FV

To trading - Recognized in earnings
From trading - N/A (already been recognized and is not reversed)\
AFS to HTM - Recognized in OCI, transferred to AOCI and amortized over remaining life
HTM to AFS - Recognized in OCI

Question 16

Explain the effective interest method and how to amortize a bond discount or premium.

Answer 16

To calculate the effective interest method you first have to find the carrying value of the bond which is the issue price plus or minus the discount/premium and less any accrued interest.

Once that is done you take the issued price multiplied by the issue rate or stated rate

Next you multiply the CV by the yield rate.

Now subtract the two numbers and you have your amortization of bond premium or discount

If it is a discount you add that to the CV of the bond and if it is a premium you subtract it. This is because over the life of the bond the amortization will bring the CV to the issue price.

Question 17

How do you calculate deferred income tax liability under the equity method using the dividends received deduction.

Answer 17

1) take the equity earnings less any current dividends received
2) Multiply that numbers by the dividend received deduction percentage
3) Subtract number 2 from number 1
4) Multiply number 3 by the tax rate and that equals your DTL

Question 18

What percentage is a small stock dividend and what is it recorded at? What is a large stock dividend and what is it recorded at?

Answer 18

Small stock - less than 20-25%, report at FV
Large stock - greater than 20-25%, report at par value

Question 19

How do you calculate amortization for a Right-if-use asset?

Answer 19

You take the PV payments (or lease liability) and divide it by the lessor of the lease term or the useful life. If the asset moves to the lessee or there is a purchase option that is reasonably certain to be exercised then it will be over the useful life no matter what.

Question 20

JEs for the treasury stock: Par Value method
1) When repurchase price < par value and original APIC-C/S
2) Repurchase price > par value and original APIC-C/S

Answer 20

Rp < par value
Debits
Treasury stock (par value)
APIC-C/S (original amt.)

Credits
Cash
APIC-T/S

RP > par value
Debits
TS (par value)
APIC - C/S (original amt)
APIC-T/S (if exists from previous T/S transactions)
Retained earnings (if insufficient APIC-T/S)
Credits
Cash

Question 21

JE for treasury stock transactions using the cost method
1) Repurchased stock (recorded at cost)
2) Reissued at a a price greater than cost
3) Reissued at a price less than cost
4) Retired the stock

Answer 21

1) Debit treasury stock at cost and credit cash
2) Debit cash for amount received and credit treasury stock at cost, then credit APIC T/S
3) Debit cash, APIC -TS and RE (only if insufficient APIC-TS) and credit treasury stock at cost
4) Debit CS and APIC CS and credit TS and APIC TS (Only if original issue price is more than the cost of the treasury stock)

Question 22

What is the formula for the Allocation of partnership net income/loss to partners?

Answer 22

Partnership income/loss to be allocated
subtract
Special allocations (bonuses)
allowances granted to partners (salary and interest)
equals
Remaining net income/loss to be allocated to partners.

Question 23

Steps for the admission of a new partner using the bonus method (4 of them)

Answer 23

1) Determine total partnership capital (Add the FV of new partners contribution to existing partnership capital accounts)
2) Determine new partner’s share of total partnership capital (step 1 * new partners % of capital interest purchased)
3) Determine amount of bonus (difference between FV or contribution and step 2)
4) Determine who receives bonus (use old partner’s profit/loss ratio to allocate) (if contribution > step 2 bonus to old partners if contribution < step 2 bonuse to new partner

Question 24

Steps for the admission of a new partner using the Goodwill method (3 of them)

Answer 24

1) Determine the implied BV of the partnership (New partner contribution/new partner’s ownership %)
2) Determine the old partners’ share of implied BV (Implied value of partnership*Old partners’ %)
3) Calculate goodwill (old partner share of implied value - old partner capital account balances

Question 25

Steps for the admission of a new partner using the Exact method (3 of them)

Answer 25

1) Determine the old partners new % ownership in the new partnership (100% - new partners % ownership) 2) Determine the value of the new partnership capital (old partners capital account/old partners new % ownership in the new partnership 3) Determine new partners contribution (Value of the new partnership capital * New partners % ownership