Acct 5120 Exam 1 Chapter 12, Appendix A, & Chapter 13

Front 1

What are the reporting methods for an investor who "lacks significant influence" over the operating and financial policies of the investee?

Back 1

Held to Maturity (HTM), Trading (TS), & Available for Sale (AFS).

Front 2

What qualifies as an investment classified as Held to Maturity?

Back 2

An investment in a debt security for which the investor has the "positive intent and ability" to hold to maturity.

Hint 2

i.e. Bonds

Front 3

What qualifies as an investment classified as Trading?

Back 3

An investment in debt or equity held in an active trading account for immediate resale.

Hint 3

Stock invested in another company to possibly gain from the short-term changes in price of those stocks.

Front 4

What qualifies as an investment classified as Available for Sale?

Back 4

An investment in debt or equity that does not qualify as Held to Maturity or Trading. Not actively trading but hopeful to sell.

Hint 4

Stock

Front 5

What all must be known when calculating the price of bonds?

Back 5

• The term length of the bond.
• number of annual payments.
• Stated bond rate.
• Market rate of similar bonds.
• PV of market rate of future cash flows on the principle amount.
• PV of the market rate of future cash flows of the interest payments.

Front 6

Explain the Effective Interest Rate Method.

Back 6

The amount paid for an investment will equalize the difference in the market rate of interest from the stated rate of interest. This will be equalized on the financial statements by a premium or discount that changes the carrying amount of the investment.

Front 7

What is the journal entry to record the purchase of a bond who's stated rate is greater than the market rate?

Back 7

Debit Bond Investment (face amount)

Debit Premium on Bond Investment

Credit Cash (effective mkt rate)

Front 8

What is the journal entry to record the purchase of a bond who's stated rate is less than the market rate?

Back 8

Debit Investment account

Credit Disc. on Investment

Credit Cash

Front 9

What is the journal entry to record the interest payments received until the maturity of a bond purchased for a discount?

Back 9

Debit Cash

Debit Discount on Bond Investment

Credit Interest Revenue ((market rate * carrying value) / annual periods)

Hint 9

The discount portion of the entry will take the value of the investment back to face value by the end of the investment.

Quiz Q9

Front 10

What type of account is Discount on Investments?

Back 10

Contra asset account.

Hint 10

It cancels out the investments account.

Front 11

What are the 5 main things FASB wants from accounting?

Back 11

Relevance, Timeliness, Reliability, Comparability, & Consistency.

Front 12

True or False: Both debt & equity securities can be categorized as trading securities.

Back 12

True.

Hint 12

Quiz Q1

Front 13

True or False: Net unrealized holding gains (losses) are reported in the income statement for trading securities.

Back 13

True.

Hint 13

Quiz Q2

Front 14

True or False: Both trading securities and securities available for sale are reported at their fair values.

Back 14

True.

Hint 14

Quiz Q3

Front 15

True or False: Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

Back 15

False.

Hint 15

Quiz Q4

Front 16

True or False: Unrealized gains and losses are included in other comprehensive income for securities that are classified as available for sale.

Back 16

True.

Hint 16

Quiz Q5

Front 17

What would Long-term bonds be classified as on the balance sheet?

Back 17

Held-to-maturity.

Hint 17

Quiz Q6

Front 18

Common stock held as available for sale is reported on the balance sheet at:

Back 18

Fair value.

Hint 18

Quiz Q7

Front 19

Debt securities held to maturity are reported on the balance sheet at:

Back 19

Amortized cost.

Hint 19

Quiz Q7

Front 20

Which of the following investment securities are not reported at fair value in the balance sheet? A. Common stock held as available for sale securities. B. Debt securities held to maturity. C. Preferred stock held as trading securities. or D. All of these choices are reported at fair value.

Back 20

B. Debt securities held to maturity.

Hint 20

Quiz Q7

Front 21

Preferred stock held as trading securities is reported on the balance sheet at:

Back 21

Fair value, adjusted at each recording period date.

Hint 21

Quiz Q7 & Notes from Chapter 12

Front 22

Gains / Losses on investments classified as Trading Securities are recognized on the:

Back 22

Income Statement as Net Income.

Front 23

Investments classified as Trading Securities are closed out to:

Back 23

Retained Earnings as a part of shareholder's equity.

Hint 23

Generally Short-term assets.

Front 24

In which of the three main investment categories for investor's who lack significant influence, are fair values and subsequent growth of an investee not relevant for reporting?

Back 24

Held-to-maturity securities.

Hint 24

Quiz Q8

Front 25

Securities that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as:

Back 25

Trading Securities.

Hint 25

Quiz Q10

Front 26

In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:

Back 26

Operating activities.

Hint 26

Quiz Q11

Front 27

Investments in securities available for sale are reported at:

Back 27

Fair value on the reporting date.

Hint 27

Quiz Q12

Front 28

Accumulated Other Comprehensive Income (AOCI) in the shareholder's equity section of the balance sheet reflects changes in the fair value of securities for which type of securities?

Back 28

Securities available for sale.

Hint 28

Quiz Q13

Front 29

When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as:

Back 29

Dividend income.

Hint 29

Quiz Q14

Front 30

When the equity method of accounting for investments is used by the investor, the investment account is increase when:

Back 30

The investee reports positive net income for the year.

Hint 30

Quiz Q15

Front 31

What are some incentives to invest?

Back 31

Ownership (control & cash flow), alliances, obligations to generate returns / income, to beat competition.

Front 32

What is the journal entry to record the change in fair value when investments have lost value?

Back 32

A debit to Net Unrealized Holding Gains / Losses - I/S & a credit to Fair Value Adjustment.

Front 33

How can you determine the carrying value of a bond purchased at a discount, that you have already received interest payments on?

Back 33

Look at the discount on bond account, which will reflect what has not been amortized, then put that against the face value of the bond. Face minus discount equals carrying value.

Front 34

What is defined as amortized cost of bonds?

Back 34

Face amount of the bond Less: Discount on bond investment.

Front 35

What is the treatment of Unrealized Holding Gains / Losses on investments Held-to-maturity?

Back 35

They're not recognized.

Hint 35

Are unrealized holding gains/losses relevant for a financial instrument held til maturity?

Front 36

What is the treatment of Unrealized Holding Gains / Losses on investments classified as Trading Securities?

Back 36

Recognized in NET INCOME & therefore in retained earnings as par of shareholder's equity.

Hint 36

Generally short-term assets: Classified as Operating Activities on the statement of cash flows, generally.

Front 37

What is the treatment of Unrealized Holding Gains / Losses on investments classified as Available for Sale?

Back 37

Recognized in Other Comprehensive Income, & therefore in Accumulated Other Comprehensive Income in shareholder's equity on the balance sheet.

Front 38

Net Income --> Retained Earnings

OCI --> AOCI

Back 38

Trading Securities --> Net Income

Available for sale --> OCI

Front 39

NOTICE: When purchasing an investment when you own about 20% or less.

Back 39

Front 40

What are the steps to follow when selling an investment?

Back 40

Remove all accounts on the Balance Sheet related to that investment as of the date it's sold (no further amortization or allocation required). Back out any unrealized gains or losses that relate to sold investments. Notice the hint.

Hint 40

Sometimes called reclassification when you back out holding gains/losses because it moves out of AOCI & moves any amount remaining to Retained Earnings. This all happens at the next reporting date.

Front 41

What is reclassification, regarding unrealized holding gains & losses?

Back 41

It is the automatic result of backing out AOCI as it moves any remaining amounts into Retained Earnings.

Front 42

What type of balance does the Fair Value Adjustment account have?

Back 42

Credit Balance.

Hint 42

Contra Investment account

Front 43

What is the only difference between OCI & Net Income?

Back 43

Timing.

Front 44

When are companies required to report using the Equity Method?

Back 44

When they have significant influence over an investor, usually signified by an ownership between 20 & 50%, but not always.

Front 45

How does the Equity Method view two companies?

Back 45

As a single entity. AKA "One-line consolidation".

Front 46

How are the assets & liabilities of an invested-in company treated if the investor has significant influence & chooses to use the Equity Method?

Back 46

All of the investor's equity interest (assets & liabilities) are put in a single account.

Front 47

What is the effect on the investor when an investee reports net income when the investor has significant influence over investee?

Back 47

The investor reports investment income equal to the percentage of ownership times Net Income or decreased by Net Loss.

Front 48

What is the effect on an investor when an investee pays a dividend?

Back 48

The carrying amount of the investor's investment is decreased by the amount paid in dividends.

Hint 48

Their equity position has decreased, even though they received cash as part of the dividend disbursement.

Front 49

Where is dividend income recorded as an investor when they have significant influence over the investee, on the statement of cash flows?

Back 49

Operating cash flows

Front 50

At what amount are the equity interests of the investor reported at on the date of the investment?

Back 50

Fair Value

Front 51

What is done with the difference between the fair value and book value of the investee's assets & liabilities?

Back 51

It is valued and depreciated similar to an amortization on a building for certain types of assets.

Front 52

What types of adjustments are needed, in regards to a significant investment, for land & goodwill?

Back 52

No adjustments are needed for land or goodwill. We don't depreciate or amortize these assets.

Front 53

How to determine the depreciable base for depreciation adjustments for a significant investment?

Back 53

Fair value less book value = the difference. The difference times percentage of ownership = the depreciable base.

Front 54

What financial instrument derives its value from an underlying asset?

Back 54

A derivative. Used to hedge. Used as a form of insurance against risk.

Front 55

Why do derivatives have to be recorded on the balance sheet at fair value?

Back 55

Because they meet the criteria for an obligation.

Front 56

Cash flow hedges are deferred as?

Back 56

OCI until it can be recognized in earnings.

Front 57

Hedges require substantial disclosure.

Back 57

Because they can be very large & risky.

Front 58

What is the journal entry if you bet wrong on a swap?

Back 58

Debit Holding Loss - Swap

Credit Interest Rate Swap

Debit Notes Payable

Credit Holding Gain

Hint 58

$ amount is the same for all four.

Front 59

Why distinguish between current & non-current liabilities?

Back 59

It is important in inferring a company's ability to pay its obligations.

Front 60

What is the difference between being solvent & being liquid?

Back 60

Solvent: Assets = Liabilities (you have enough assets to cover your liabilities)

Liquid: Ability to generate cash either from operations or by the nature of your assets.

Hint 60

The house example: solvent but not liquid. My ability to generate cash is not very strong. It will take a long time to sell my house.

Front 61

What makes a liability current?

Back 61

Obligations payable due within one year or within the firm's operating cycle, whichever is longer.

Front 62

When should a long-term obligation be reported as a current liability?

Back 62

If it, or a portion of it, is maturing within one year.

If it is callable or, in other words, if the creditor can demand full payment in the upcoming year.

Front 63

When should a short-term obligation be reported as a non-current liability?

Back 63

When the company intends and has the ability to refinance the obligation on a long-term basis.

Hint 63

You can prove this circumstance by using the financing agreement. IMPORTANT

Front 64

What is the journal entry to record when your investments have gained value?

Back 64

Debit Fair Value Adjustment

Credit Unrealized Holding Gain

Front 65

How much cash would be received on a 12%, 9-month, $60 million, non-interest bearing note?

Back 65

$54,600,000. Rate * face amount * period of the note.

Hint 65

The %age is also worded, "interest was discounted at issuance at a 12% discount rate".

Front 66

What is the entry to record a warranty on a product sold?

Back 66

Debit Warranty Expense

Credit Warranty Liability

Front 67

What is the entry for when someone claims the warranty?

Back 67

Debit Warranty Liability

Credit Cash/Wages/Etc.

Front 68

Accounting Treatment of Loss Contingencies

Back 68

Probable & Known = Liability accrued and a disclosure note.

Probable & Reasonably Estimable = Liability accrued and a disclosure note

Front 69

When must a company accrue a liability for the cost of future compensated absences?

Back 69

When the obligation relates to employee services already rendered or the obligation relates to rights that vest or accumulate.

Front 70

What are vested rights?

Back 70

Employer makes payments even if employee quits.

Front 71

What are Accumulated rights when it comes to compensated absences?

Back 71

Employee carries unused rights into future periods (vacation days).

Front 72

What is a common example of unearned revenue?

Back 72

Gift cards, tuition, subscriptions, rent, time shares, etc.

Front 73

Are unearned revenues current or non-current?

Back 73

It depends on when the obligation is expected to be satisfied.

Front 74

How to account for sales with sales tax? Sell $100 with 7% tax.

Back 74

Debit Cash $107

Credit Sales Revenue $100

Credit Tax Payable $7

Front 75

What are common examples of Loss Contingencies?

Back 75

Lawsuits, warranty, insurances, government fines, politics, weather, etc.

Front 76

What is a bell weather?

Back 76

A court case whose decision will set the precedent for future cases that are similar to it.

Front 77

How do we account for warranties?

Back 77

With the accrual basis in the year of sale.

Front 78

What is the entry to reduce a warranty estimate for the year?

Back 78

Debit Estimated Warranty Liability

Credit Cash

Hint 78

Front 79

Entry to record the sale of a gift card?

Back 79

Debit Cash

Credit Unearned Revenue Gift Card

Hint 79

IMPORTANT

Front 80

How to annualize a partial-year-note's interest rate?

Back 80

Multiply the rate by 12 / number of months on the note.

Front 81

What is an accrued liability?

Back 81

An expense already incurred but not yet paid.

Hint 81

i.e. salaries & wages payable, income taxes payable, interest payable, etc.

Front 82

What is the journal entry to record a loss contingency that is reasonably estimable & probably to occur?

Back 82

Debit Loss or expense

Credit Liability or Asset (to decrease the value of the asset affected)

Front 83

What is a subsequent event and how should it be handled?

Back 83

It is an event that happens after a company's fiscal year end but before statements are released. They need to be handled by issuing a disclosure note under subsequent events.