AC 305
INTERMEDIATE ACCOUNTING II
Course Syllabus
I.
II.
III.
Reference Material:
A.
Text: Intermediate Accounting (Comprehensive Volume)
by Skousen and Stice, 16th Edition
B.
Study Guides
C.
Printed Lecture Notes
(Instructor prepared)
(Instructor Prepared)
Course Objectives:
A.
To apply the conceptual framework presented in
Intermediate Accounting I to additional accounting
methods and practices.
B.
To question the validity of current accounting practices
when appropriate.
C.
To present accounting procedures and topics that were
not covered in Principles of Accounting or Intermediate
Accounting I.
D.
See study guides for specific chapter objectives
Learning Experiences:
A.
Lecture-discussion using computer slide shows and Elmo
video camera
B.
Extra problem work and case discussions in small groups
C.
Weekly homework assignments
2
IV.
Course Content:
A.
B.
Week #1
Week #2
1.
2.
Course Introduction
Discussion of Chapter
Employee Compensation
1.
Discussion of Chapter
Employee Compensation
Exam over Chapter 17
2.
C.
Week #3
1.
2.
3.
D.
Week #4
1.
2.
E.
Week #5
1.
2.
3.
F.
Week #6
1.
2.
3.
G.
Week #7
1.
2.
H.
Week #8
1.
2.
17
Objectives:
17
Objectives:
Discussion of Chapter 8 Objectives:
Complexities of Revenue Recognition
Discussion of Chapter 14 Objectives:
Investment in Debt & Equity Securities
Exam over Chapters 8 & 14
Discussion of Chapter
Leases
Exam over Chapter 15
15
Objectives:
Discussion of Chapter 12 Objectives: Debt
Financing
Discussion of Chap. 19 - Part 1 Objectives:
Derivatives
Exam over Chapters 12 & 19 - Part 1
Discussion of Chap. 19 - Part 2 Objectives:
Contingencies,Business
Segments,and
Interim Reports
Discussion of Chapter 13 Objectives:
Equity Financing
Exam over Chapters 19 (Part 2) and 13
Discussion of Chapter
Income Taxes
Exam over Chapter 16
16
Objectives:
Discussion of Chapter 18 Objectives:
Earnings Per Share
Discussion of Chapter 20 Objectives:
Accounting
Changes
and Error Corrections
3.
Exam over Chapters 18 & 20
3
V.
VI.
Student Evaluation:
A.
Seven Hourly Exams
1. Combination of essay questions and problems
2. Weight--1/7 of total grade (each)
B.
Grading
1. A =
2. B =
3. C =
4. D =
5. F =
Scale
90%--100%
80%--89%
70%--79%
60%--69%
Under 60%
Special Policies:
A. Students are dropped for non-attendance when they are
absent for two consecutive weeks.
B. There will be no make-ups on daily quizzes, but I will
drop the following number of low quiz scores:
1. MWF class - 5
2. T-Th class - 4
3. Night class - 1
C. Exams:
1. I will drop your lowest exam grade, but if you
an exam this will be the grade that is dropped.
2. If you miss a second exam, you will need a
reason for a makeup exam.
3. The final exam will not be dropped as the lowest
unless you make at least a C- for the final
grade.
miss
good
exam
exam
D. Reports, bonus work, and other assignments to be
submitted:
1. You may submit assignments prior to the due date.
2. The assignment is due at the beginning of the period
on the due date.
3. If the assignment is late the following number of
points will be deducted:
(a) 2 points if submitted on the same day
(b) 3 points for each day the assignment is late.
E. Reasonable efforts will be made to accommodate the
testing and note-taking needs of students covered by the
Americans with Disabilities Act.
4
Intermediate Accounting II
Chapter 17 Study Guide
Test Objectives:
1.
Be able to record the following journal entries:
(a) a payroll payment and related employee withholding
(b) payroll tax liabilities of the employer
2.
Name the three conditions that require compensated absences
to be recognized as liabilities according to FASB Statement
#43.
3.
Indicate the journal entry to record accrued vacation pay.
4.
Explain when sick pay must be accrued.
5. Define or describe the following:
(a) ERISA
(b) contributory pension plan
(c) defined contribution pension plan
(d) defined benefit pension plan
6. Explain why defined benefit plans are harder to account for
than defined contribution plans.
7. List two factors that must be estimated
determining future pension benefits.
by
actuaries
in
8. Explain what is meant by vested pension benefits.
9. List the four major issues that face accountants in relation to
the accounting for defined benefit pension plans.
10. Explain why funding decisions were not part of the answer for
question #9.
11. Explain how the following approaches to
calculating future
pension benefits differ, and indicate which method is usually
required by FASB Statement #87:
(a) accumulated benefit approach
(b) projected benefit approach
5
Chapter 17
12. Explain how to present the projected pension benefit obligation
(PBO) and the fair value of pension assets on the balance
sheet
according to Statement #87, and give the reason for this
treatment.
13. Name two costs that increase the net periodic pension expense
and one factor that decreases it on the books of most firms.
14. Explain how to calculate the following pension costs:
(a) service cost
(b) interest cost
15. Explain how to determine the settlement interest rate.(TBAIC)
16. Name the rate used to determine the expected return on pension
assets.
17. Give the formula to calculate each of the following:
(Fill in missing parts)
(a) projected benefit obligation at the end of the year
(b) fair value of pension plan assets at the end of the year.
18. Be able to show the journal entry for the following pension
transactions:
(a) to record the computed pension expense, given the added
interest costs, the added service costs, and the actual
return on pension assets
(b) to record a contribution to the pension fund.
19. Indicate the financial statement presentation for each of the
pension accounts in question #18, given the beginning balance
in the net pension asset/liability account.
20. Name the two components of net periodic pension expenses in
addition to those listed in question #13.
21. Provide the following information in relation to prior service
costs (PSC):
(a) two situations in which it is calculated
(b) timing of its recognition
6
Chapter 17
22. Be able to complete a pension worksheet similar to the one on
page 1026, given the following information:
(a) PBO at beg. of the year
(b) fair value of pension assets at the beg. of the year
(c) unrecognized PSC
(d) service costs for the current year
(e) pension contribution for the current year
(f) pension benefits paid for the current year
(g) fair value of pension assets at the end of the year
(h) settlement interest rate
(I) long-term expected rate of return on pension plan assets
(j) amortization rate for current year for the unrecognized
PSC
23. Be able to calculate the following to be used in the worksheet
in #22:
(a) beg. balance in the prepaid/accrued pension costs account
(b) interest cost
(c) actual & expected return on pension assets and any
deferred gain or loss
(d) amortization of unrecognized PSC
24.
Given the following information, be able to prepare an
amortization schedule using the total service years approach:
(a) unrecognized PSC
(b) # years of remaining service
(c) annual anticipated employee attrition
(d) total # of employees
25.
From the data in #24, be able to calculate the annual
amortization using the average remaining service life approach.
7
Chapter 17
26. Provide the following information in relation to pension gains
or losses:
(a) two types of situations that create them
(b) two alternatives for the timing of their recognition
(See the footnote on page 1030.)
27. Provide the following information in relation to actual versus
expected return on pension plan assets:
(a) formula used to calculate a deferred gain and a deferred
loss
(b) formula used to calculate the expected return on pension
plan assets
(c) alternatives for calculating the market-related value of
pension plan assets
(d) effect of a deferred gain on net pension expense
(e) effect of a deferred loss on net pension expense
28. Explain how the treatment of deferred gains and losses due to
actuarial changes differ from the gains and losses in #27, and
explain two ways that a loss can add to future pension costs.
29. Provide the following information in relation to the
amortization of an unrecognized net pension gain or loss from
prior years:
(a) when it is amortized
(b) formula used to determine the corridor amount
(c) method of amortization commonly used
(d) amortization time period
(e) effect of a gain amortization on net pension expense
(f) effect of a loss amortization on net pension expense
30. Provide the following information in relation to minimum
pension liability:
(a) reason for its calculation
(b) formula used to calculate it
(c) amount of additional liability to recognize if accrued
pension liability is equal to or greater than it
(d) amount of additional liability to recognize if the accrued
pension liability is less than it
(e) amount of the total liability to recognize if a prepaid
cost balance exits
(f) treatment of an excess of the fair value of pension plan
assets over present value of the accumulated benefit
obligation
(g) justification for the treatment in part f
8
Chapter 17
30. Minimum pension liability (continued):
(h) amount of the additional liability that is debited to an
intangible asset account called deferred pension cost
(I) amount of the additional liability that is debited to a
contra equity account called excess of additional pension
liability over unrecognized prior service costs
(j) how minimum pension liability affects comprehensive income
31. Define and give an example of each of the following:
(a) pension settlements
(b) pension curtailments
32. Explain the treatment of unrecognized pension gains and losses
under the following situations:
(a) full settlement
(b) partial settlement
(c) curtailment
33. Explain two differences in IFRS #19 and U.S. GAAP.
34. Indicate the primary purpose of FASB Statement #106.
35. Explain the difference in accounting for other postretirement
benefits under FASB Statement #106 compared to the accounting
for pension under FASB Statement #87:
(See lecture notes)
(a) service cost
(b) interest cost
(c) total obligation
(d) minimum liability
9
Chapter 17
Assignments:
1. Exercise 17-21 (The gross wages are $28,348.)
2. Exercise 17-23 (Also present the necessary journal entry.)
3. Exercise 17-25
4. Exercise 17-27 (Case #1 only)
5. Exercise 17-31
6. Exercise 17-33
7. Exercise 17-35
8. Exercise 17-37
9. Exercise 17-38
10.
Calculate the ABO and PBO for an employee assuming the
following:
(a) Annual pension payments = highest salary X ( 2% X years of
service)
(b) Length of time with the company = 10 years
(c) Highest salary to date = $50,000
(d) Expected retirement in 25 years
(e) Expected annual increase in salary = 3%
(f) Expected annual pension payments = 15
(g)
Discount
rate
=
8%
10
Intermediate Accounting II
Chapter 8 Study Guide
Test Objectives:
1. Indicate when revenue should be recognized in each of the
following situations:
(a) consignment sales
(b) bill-and-hold arrangements (such as layaway sales)
(c) up-front, nonrefundable fee in addition to a monthly
payment for services
(d) future receipt of rent as a percent of tenant sales that
exceed a specified level
(e) companies that engage in channel stuffing
2. Indicate the amount of revenue that a broker should report on
an order with a sales price of $500 and a broker=s commission
of $75.
3. Explain how the following methods act as an exception to the
substantial completion concept of revenue recognition:
(a) percent-of-completion accounting
(b) proportional performance method
4. Name four elements that should be
completion accounting is to be used.
present
if
percent-of-
5. Explain how the Tax Reform Act of 1986 affects the use of the
percent-of-completion method for tax purposes.
6. Explain how the degree of completion and the earnings to date
are determined under the cost-to-cost method, and name an
example of costs that should be ignored in applying this method.
7. Give two examples of work performance measures used under the
efforts-expended method.
8. Explain how the output measure method could be applied to the
construction of a highway.
9. Be able to show the following journal entries related to
construction contracts:
(a) to record construction costs incurred
(b) to record billing to the customer
(c) to record cash collections
11
Chapter 8
10. Explain why the receivable and inventory accounts related to
construction are listed as current assets even though they
will not be converted to cash within one year.
11. Explain the balance sheet placement of Progress Billings
and Construction in Progress accounts assuming the following:
(a) Progress Billings is greater
(b) Construction in Progress is greater
12. Be able to show the two entries necessary to record the
completion of the construction contract under the completed
contract method.
13. Be able to show the following entries related to the
percent-of-completion method, cost-to-cost approach:
(a) periodic revenue recognition given the total estimated
costs, costs incurred during the current period, and the
contract price
(b) the completion of the project
14. From the following information, be able to calculate the
recognized revenue for the second period for the example in
objective #13:
(a) actual costs completed to date
(b) revised estimate of total costs
15. Explain when a revised estimate of costs to complete the
contract may cause a loss to be recognized in the current
period even though a profit is expected on the total project.
16. Explain the acceptable accounting practice required when an
estimated increase in costs causes an estimated loss on the
total project.
17. Identify the measurement that should be used under the
proportional performance method of treating long-term service
contracts:
(a) if a contract involves a specified number of identical or
similar acts
(b) if a contract involves a specified number of defined but
not identical acts
(c) if no pattern of performance can be determined or if the
contract involves an unspecified number of similar or
identical acts with a fixed period for performance.
12
Chapter 8
18. List three types of costs associated with service contracts.
19. Be able to show the following journal entries relating to the
proportional performance method of accounting for service
contracts assuming the use of the cost-to-cost method of
measurement:
(a) the receipt of the total contract price in advance
(b) the payment of initial direct costs
(c) the payment of direct performance costs for the current
period
(d) the recognition of revenue for the current period
(e) the write-off of the initial direct costs
(f) the payment of indirect costs for the current period
(record to the contract costs account)
20. Name three methods of dealing with uncertainty of cash
collections, and describe each method in terms of when revenue
and/or income is recognized and the treatment of product or
direct costs.
21. Explain why the installment method may be especially acceptable
for some real estate contracts.
22. Be able to show the journal entries necessary to record the
following transactions under the installment sales and cost
recovery methods:
(a) the installment sale
(b) the cost of the installment sale
(c) the receipt of payment for the first year
(d) the closing of installment sales and cost of installment
sales for the first year
(e) the recognition of gross profit on the first year's sales
13
Assignment: (Note: when calculating percent of completion round the
% to two places)
1. Exercise 8-27
2. Work Exercise 8-27 assuming the company is using the percent-of
completion (cost-to-cost) method of revenue recognition. (The
total cost estimate for 2008 is $3,930,000.)
3. Exercise 8-32 (2007 only)
4. From the following information, calculate the amount of gross
profit to recognize from a long-term construction contract
using the percent of completion (cost-to-cost) method of
revenue recognition:
(a) total contract price - $5,000,000
(b) Year #1 total estimated costs - $3,500,000
total costs incurred to date - $1,500,000
(c) Year #2 revised total estimated costs - $3,400,000
total costs incurred to date - $2,500,000
(d) Year #3 revised total estimated costs - $3,300,000
total costs incurred to date - $3,300,000
5. Show the journal entries necessary to record the following
transactions under the installment sales method:
Year #1
(a) the installment sales in the amount of $210,000
(b) the cost of the installment sales in the amount of $157,500
(c) the receipt of payment for year #1 sales in the amount
of $100,000
(d) the closing of installment sales and the cost of
installment sales
(e) the realization of gross profit
Year #2
(a) the installment sales in the amount of $270,000
(b) the cost of the installment sales in the amount of $191,700
(c) the receipt of payment for year #1 sales in the amount
of $84,000 and year #2 sales in the amount of $200,000
(d) the closing of installment sales and the cost of
installment sales
(e) the realization of gross profit
6. From the data in question #5, show the entry to record the
realization of gross profit for years 1 and 2 using the
cost recovery method.
14
Chapter 8 (continued)
7.
Show the following journal
entries relating to the
proportional performance method of accounting for service
contracts assuming the use of the cost-to-cost method of
measurement:
(a) the receipt of the total contract price in advance,
$100,000
(b) the payment of initial direct costs, $2000
(c) the payment of direct performance costs for the current
period, $20,000 (total estimated at $40,000)
(d) the recognition of revenue for the current period
(e) the write-off of the initial direct costs
(f) the payment of indirect costs for the current period, $3000
15
Intermediate Accounting II
Chapter 14 Study Guide
Test Objectives:
1. Name and describe the four categories of debt and equity
securities.
2. Provide the following information for each of the categories in
question #1:(See exhibit 14-8.)
(a) type of security
(b) value used for the balance sheet
(c) treatment of temporary changes in value
3. Be able to show the journal entries for the following
transactions using the asset method:
(a) to record the purchase of a debt investment with accrued
interest
(b) to record the receipt of the first interest payment on the
debt security in part (a).
(c) to record the receipt of interest and the amortization of a
bond discount or premium on a bond investment.
4.Indicate the method used to account for long-term equity
investments in each of the following situations:(See exhibit 149)
(a) When one company acquires more than 50% of the voting stock
of another company
(b) When one company owns 20 to 50% of the voting stock of
another company and is able to exercise significant
influence over the operations of the other company
(c) When one company owns less than 20% of the voting stock
of another company and is unable to exercise significant
influence over the operations of the other company
(d) When accounting for an investment of preferred stock (TBAIC)
5.Explain why a company that owns 20 to 50% of the voting stock of
another company may not use the equity method.
6.Name two factors used to determine if a company exercises
significant influence over another company.
7.Explain what is meant by consolidated financial statements.
16
Chapter 14
8.Be able to show the journal entries required to record the
following transactions relating to a equity security under
treated as an available-for-sale security:
(a) Purchase of the investment
(b) Receipt of dividends
9. Be able to
method:
(a) Entry
(b) Entry
of the
(c) Entry
show the following journal entries under the equity
to record the purchase of the investment
to record the recognition of a proportionate share
earnings of the investee
to record the receipt of dividends
10. Explain how to calculate the proportionate share of earnings
under the equity method. (To be answered in class.)
11. Explain how to treat a net loss reported by the investee under
the equity method. (To be answered in class.)
12. Name the two values that must be compared to determine if an
adjustment to the investee's reported net income is needed.
13.
Be able to calculate the total market value of common
stockholders' equity (net assets) given the purchase price of
the stock and the ownership percentage.
14.
Indicate two reasons why the book value of the common
stockholders' equity may be less than the market value of the
common stockholders' equity.
15. Be able to show the journal entry necessary to adjust the
reported income of the investee under the equity method
assuming the book value of the common stockholders' equity is
less than its market value.
16. Indicate the method used to account for joint ventures when
a company owns 50% or less of the joint venture.
17. Be able to show the journal entries to record the following
transactions under the cost method and indicate the account
classification of each debit and credit:
(a) loss in value of trading securities
(b) gain in value of trading securities
(c) loss in value of available-for-sale securities
(d) gain in value of available-for-sale securities
17
Chapter 14
18. Indicate the debit and credit necessary to record a permanent
decline in the market value of an individual security.
19. Be able to show the journal entry necessary to record the
following transactions relating to the sale of a held-tomaturity security:
(a) to update the accrued interest and the amortization of the
bond discount or premium
(b) to record the sale of the investment given the carrying
value, selling price, and the accrued interest
20. Given the following information, be able to record the
two journal entries for a trading security sold at the end
of the year:
(a) Original cost
(b) cumulative amount in the market adjustment account
(c) selling price
21. Indicate the value used to record a reclassified security under
FASB Statement #115.
22. Explain the treatment of the change in value for the following
transfers:
(a) from trading securities (the unrealized change not
previously recorded)
(b) to trading securities (any unrealized change not previously
recorded)
(c) from held-to-maturity to available-for-sale securities (any
unrealized change in value)
(d) from available-for-sale to held-to-maturity securities (any
unrealized change previously recorded to equity)
23. Explain the two types of amortization that may be recorded on
a security reclassified from an available-for- sale security
to a held-to-maturity security.
24. Indicate the section of the cash flow statement used to show
purchases and sales of each of the following:
(a) trading securities
(b) available-for-sale securities
(c) held-to-maturity securities
25. Indicate the asset classification of each of the following:
(a) trading securities
(b) available-for-sale securities
(c) held-to-maturity securities
Chapter 14
18
26. Explain the only significant difference in FASB Statement #115
and IAS #39
27. Indicate the value used to record the investment account under
each of the following situations:
(See separate expanded material.)
(a) the company changes from the equity method to the cost
method
(b) the company changes from the cost method to the equity
method
28. Be able to calculate the amount of the adjustment in switching
from the cost method to the equity method given the following
information: (See separate expanded material.)
(a) % ownership each previous year
(b) total income or loss reported by the investee each previous
year
(c) dividend received by the investor each previous year
29. Be able to show the journal entry necessary to record the
adjustment to the investment account when changing from the
cost method to the equity method.
(See separate expanded material.)
30. Indicate the value generally used to record loan receivables
and the exception to this rule under FASB Statement #114.
31. Define impairments according to FASB Statement #114.
32. Indicate the interest rate used to calculate the amount of the
impairment at its discounted present value.
33. Be able to show the journal entries necessary to record the
following in relation to a loan impairment:
(a) recognition of the impairment loss given the carrying value
of the loan and the present value of the expected payments
(b) the recognition of interest revenue after the impairment
given the balance of the loan receivable, the balance of
the allowance account, and the contract rate of interest.
19
Chapter 14
Assignments:
1. Exercise 14-23
(also show entries a and c using the asset
method, and for entry e, assume a cost of 103.45 X the amount
of the bonds sold.)
2. Exercise 14-24 (Just record the receipt of the dividends.)
3. Exercise 14-25
4. Exercise 14-26
5. Exercise 14-27 (Just show the entries to record the recognition
of the share of the investee's income and the adjustment to
this income caused by the amortization of the broadcast license
on Dec. 31, 2007.)
6. Exercise 14-31 Assume $1259 of the discount has been amortized
by Dec., 2008, and assume that the discount is amortized on
available for sale securities but not on trading securities.
7. Exercise 14-34
8. From the following information, calculate the adjustment
required due to a switch from the cost method to the
equity method of accounting for the stock of XYZ Company
and show the journal entry necessary to record the adjustment:
Year
% Ownership
Dividend Paid
Total Income
of XYZ Company
5%
$1500
$50,000
#2
5%
$2000
$70,000
#3
25% Switched to equity method
#1
20
Intermediate Accounting II
Chapter 15 Study Guide
Test Objectives:
1. Explain how a lease can be a form of off-balance sheet
financing, and indicate the concept used by the FASB to
eliminate this practice.
2. Name two advantages to the lessee and the lessor of a lease over
a purchase or sale.
3. Explain the difference between a capital lease and an operating
lease.
4. Explain the following lease characteristics or provisions:
(a) noncancellable
(b) bargain purchase option
(c) beginning of the lease term
(d) end of the lease term
(e) residual value
(f) guaranteed residual value
(g) minimum lease payments
(h) executory costs
5. Name and describe two discount rates that must be considered in
computing the present value of the minimum lease payments, and
indicate how the rates are used by the lessee and the lessor.
6. List the four criteria used by FASB Statement #13 to determine
if a lease is a capital lease, and indicate the number of these
criteria that must be met before the treatment is
applicable.(Note: An additional criterion that must be met by
all capital leases is that they are noncancellable.)
7. List two additional requirements that must be met by the
lessor to treat the lease as a capital lease.
8. Name the type of lease that is excluded from the economic
life criterion of the capital lease tests.
9. Explain why many lessees use the incremental borrowing rate to
discount the lease payment even though it is usually higher than
the implicit rate.
21
Chapter 15
10, Explain when to record a lease as a capital lease
under international standards.
11. Be able to calculate and show the journal entry necessary to
record an initial capital lease agreement on the books of the
lessee given the following information:
(a) annual rental payments with the first payment at the
beginning of the year and each subsequent payment at the
end of the year.
(b) amount of the annual rental payment to cover executory
costs
(c) the present value factor for the rental payments
(d) discount rate used to determine the present value
(e) the lease period (same as the estimated economic life of
the leased equipment)
12. Indicate when an amount that is less than the present value of
the lease payments (exclusive of executory costs) is used as
the capitalized value of the lease. (See footnote #8 on
p.903.)
13. Be able to calculate and show the journal entries to record
two annual payments for the first year of the lease in
objective #11.
14. Be able to calculate and record the annual amortization of the
equipment on objective #11 assuming the straight line method.
15. Show the balance sheet presentation of any balances associated
with the above lease at the end of the first year.
16. Indicate the amortization period used under each of the
following situations:
(a) the lease qualifies under the ownership transfer or the
bargain purchase option criterion
(b) the lease only qualifies under the lease term or present
value criterion
17. Explain how a bargain purchase option and a lessee- guaranteed
residual value affect the calculation of the present value of
the lease payments.
22
Chapter 15
18. Indicate the present value table that would be used for each of
the following lease payments:
(a) annual payments starting at the time of the lease agreement
(b) annual payments starting at the end of the year
(c) a bargain purchase payment
(d) a lessee-guaranteed residual value payment
19. Be able to show the two entries necessary to record the
exercise of a bargain purchase option given the following
information:
(a) bargain purchase price
(b) balance of the lease obligation
(c) balance in the leased equipment account
(d) balance in the accumulated amortization account
20. From the information in objective #19, be able to show the
journal entry necessary to record the failure to exercise the
bargain purchase option.
21. Explain the treatment of any gain or loss on the purchase of a
leased asset that does not have a transfer of ownership or
purchase option in the contract.
22.Indicate the section of the statement of cash flows affected by
the following capital lease transactions on the books of the
lessee:
(a) portion of the lease payment that is allocated to interest
(b) portion of the lease payment that is allocated to the lease
obligation
(c) amortization of the leased asset
23. Describe the following types of capital leases in terms of the
type of companies involved as lessors, how the transaction is
viewed, and the type(s) of revenue recognized by the lessor:
(a) direct financing lease
(b) sales-type lease
24. Give two examples of initial direct costs incurred by a lessor.
25. Indicate the treatment of initial direct costs for each of the
following types of leases on the books of the lessor:
(a) operating lease
(b) direct financing
(c) sales-type
23
Chapter 15
26. Be able to answer objective #11 for a lessor assuming a direct
financing capital lease.
27. Be able to calculate and show the journal entries to record the
receipt of annual lease payment (two payments)
for the first year for the lease in objective #26:
28. Show the balance sheet presentation of any balances associated
with the above lease at the end of the first year.
29. Explain how a bargain purchase and residual value are initially
treated in a direct financing capital lease on the lessor's
books.
30. Explain how the final entry would differ with a guaranteed
versus an unguaranteed residual value in a direct financing
capital lease.
31. Be able to calculate the profit or loss from the sale of the
leased asset and the interest revenue from a sales-type
capital lease given the following information:
(a) annual lease payment and the lease period
(b) executory costs associated with the annual lease payment
(c) fair market value of the leased equipment
(d) cost of the leased equipment
(e) initial direct costs
32. Be able to show the journal entries necessary to record the
following transactions using the data in objective #31:
(a) entry for the initial lease and first payment at the
beginning of the year
(b) lease payment at the end of the year
24
Chapter 15
33. Show the income statement presentation of appropriate items
from objective #32.
34. Show the effect of a bargain purchase option or guaranteed
residual value on each of the following in a sales-type capital
lease given the present value of the option payment:
(a) the receivable account
(b) sales
(c) cost of goods sold
35. Answer objective #34 assuming an unguaranteed residual value.
36. Explain why many lessors want to treat a lease as a capital
lease and many lessees want to treat a lease as an operating
lease, and explain how the fair market value criterion can
allow both parties to achieve their goals.
37. Explain how the entry to record the sale of the leased asset
during the lease period differs on the books of the lessor
compared to the lessee.
38. Indicate the section of the statement of cash flows affected by
the following capital lease transactions on the books of the
lessor:
(a) portion of the lease payment allocated to interest income
(b) portion of the lease payment allocated to the lease
principle under a direct financing lease
(c) portion of the lease payment allocated to the lease
principle under a sales-type lease
(d) payment of initial direct costs
(e) amortization of initial direct costs
39. Complete the following disclosures required of a lessee in
relation to all leases that have initial or remaining
noncancellable lease terms in excess of one year:
(a) gross amount of
recorded as capital leases
and related
(b) future minimum
(c)
for each period
(d) a general
of the lease
(e) the
necessary to reduce lease payments
to
25
Chapter 15
40. Indicate the treatment of leases under the 1996 proposal
titled, AAccounting for Leases:A New Approach@.
41. Explain what is meant by a sale-leaseback transaction, and
explain FASB's recommendation in relation to a gain and a loss
from the sale on the books of the seller-lessee.
26
Chapter 15
Assignment:
1. Case 15-65 (Just indicate how to classify each of the three
leases.)
2. Exercise 15-26
3. Exercise 15-28 (Also show the balance sheet presentation of the
lease liability at the end of the first year,
and show how the lessor would report the
receivable on its balance sheet at the end of
the first year.)
4. Exercise 15-29
5. Exercise 15-30 (Be sure to calculate the accrued interest
first.)
6. Exercise 15-32 (Parts 2 and 3 only) (On part 3, you will have to
calculate the implicit rate of interest using
table VI on page TVM-26.)
7. Exercise 15-37 (On part 3, assume an implicit rate of 10.5% to
avoid interpolation.)
8. Problem 15-49 (part 1 only)
27
Intermediate Accounting II
Chapter 12 Study Guide
Test Objectives:
1. Name three requirements for a liability as defined by FASB.
2. Which one of the following executory contracts is a liability:
(a) a labor contract
(b) a capital lease agreement.
3. Explain how a liability can be created without the probable
future transfer of cash.
4. Give an example of a liability in which the entity to whom the
obligation is owed cannot be identified.
5. For each of the following, indicate if the criterion for
classification as current or noncurrent is one year or (one year
or the current operating cycle), whichever period is longer:
(a) accounts payable for the purchase of merchandise
(b) notes payable from a bank loan.
6. For each of the following, indicate if the debt should be
classified as current or noncurrent:
(a) bonds to be paid with regular cash within one year
(b) bonds to be paid with sinking fund cash within one year.
7. Name and give an example of the three categories of liability in
terms of their uncertainty, explain the difference between the
last two, and indicate when the last category is shown as a
liability on the balance sheet.
8. Explain why the net method of recognizing purchases should
probably be used by most firms.(TBAIC)
9. Explain the difference between a trade notes payable and a
nontrade notes payable.
10. Explain two situations when it is necessary to create a
discount on notes payable
11. Give the account classification of discount on notes payable.
12.
Indicate the journal entry to record the issuance of a
noninterest bearing note payable given the following
information from a loan transaction:
(a) face value
(b) present value of the face value
Chapter 12 (continued)
28
13. Cite the two conditions that must be met before a short-term
obligation that is expected to be refinanced may be properly
excluded from the current liability classification.
14. Name four conditions that should exist in relation to a
refinancing agreement as explained in question #13.
15. Explain the disclosure requirement for a short-term obligation
that is excluded from current liabilities due to a refinancing
agreement.
16. Cite two reasons why management may prefer the issuance of
bonds over stock.
17. Be able to describe or define the following terms:
(a) bond indenture
(b) term bond
(c) serial bond
(d) secured bond
(e) collateral trust bond
(f) debenture bond
(g) bearer or coupon bond
(h) deep-discount bond
(I) junk bonds
(j) convertible bond
(k) commodity-backed or asset-linked bond
(l) callable bond
(m) contract rate
(n) market or effective rate
(o) bond premium
(p) bond discount
(q) market yield
18. Name two circumstances in which junk bonds are issued.
19. Explain how U.S. Government bond price quotations differ from
other bond quotations.
20. Be able to calculate the selling price of a bond given the
following information:
(a) face value
(b) contract rate
(c) PV factor for the face value
(d) PV factor for the periodic interest
29
Chapter 12 (continued)
21. Be able to record the following journal entries on the issuer's
books:
(a) issue of bonds at face value
(b) issue of bonds above face value
(c) issue of bonds below face value
(d) issue of bonds between interest dates
(e) interest payment with accrued interest
22. Explain the current generally accepted practice in relation to
the treatment of bond issuance costs on the issuer's books,
and
explain the alternative method that will become the
accepted
practice in the future.
23. Indicate the effect of the following on the actual interest
expense associated with a bond issue:
(a) amortization of a bond premium
(b) amortization of a bond discount
24. Explain when the straight line method of amortization is
acceptable.
25. Be able to calculate the annual amortization of a bond discount
or premium using each of the following methods:
(a) straight line
(b) effective interest
26. Be able to record the following journal entries on the issuer's
books:
(a) a compound entry to record the amortization of a bond
discount and the interest payment
(b) a compound entry to record the amortization of a bond
premium and the interest payment
(c) a compound entry to record the adjustment for accrued
interest and the amortization of a bond discount
(d) a compound entry to record the adjustment for accrued
interest and the amortization of a bond premium
27. Indicate the effect of a discount amortization on each of the
following in preparing the cash flow statement:
(a) adjustment to net income under the indirect method
(b) adjustment to interest expense under the direct method
28. Indicate the effect of a premium amortization on each of the
following in preparing the cash flow statement:
(a) adjustment to net income under the indirect method
(b) adjustment to interest expense under the direct method
30
Chapter 12 (continued)
29. Be able to record the following journal entries on the books of
the issuer:
(a) retirement of bonds at maturity
(b) redemption of bonds
30. Indicate the proper treatment of bonds not presented for
payment at maturity.
31. Indicate the classification of a gain or
redemption on the income statement. (TBAIC)
loss
on
bond
32. List three features usually associated with convertible bonds.
33. Explain an advantage of convertible bonds to an issuer.
34. Be able to record the issuance of convertible bonds on the
books of the issuer assuming debt and equity components are not
separated. (given the face value and the selling price as a %
of face value)
35. Be able to record the entry in question #34 assuming the debt
and equity portions of the convertible security are separated
and given the selling price of the bond without the conversion
feature.
36. Explain the current acceptable accounting practice in relation
to the treatment of the bond proceeds attributable to the
conversion features of the bond according to APB Opinion #14
and IFRS #32.
37. Be able to record a bond conversion on the books of the issuer
assuming no gain or loss is recognized.
(Given the face value, unamortized discount or premium, and the
par value of the stock.)
38. Be able to record the transaction in #37 assuming a gain or
loss is recognized and given the market value of the stock.
39. Explain how the most widely accepted method of recording the
issuance of convertible bonds is theoretically inconsistent
with the method most commonly used to record the conversion
of the convertible bonds.
40. Explain what is meant by the off-balance-sheet financing,
and name its most common form.
31
Chapter 12 (continued)
41. Explain how each of the following create off-balance- sheet
financing:
(a) unconsolidated entities
(b) variable interest entities
(c) joint ventures
42. Explain how FASB Statement #94 affected using unconsolidated
entities as a source of off-balance-sheet financing.
43. Indicate which of the following would require a sponsor
to treat a VIE as a dependent VIE:
(a) outside equity financing of less than 10%
(b) the sponsor cosigns a loan for the VIE
44. Explain what is meant by troubled debt restructuring, give two
examples how it might be implemented, and indicate the primary
accounting question in these cases.
45. According to FASB Statement #15, indicate if in the following
situations a gain or loss should be recognized:
(a) asset swap
(b) equity swap
(c) modification of terms if new total payments exceed the
debt's carrying value
(d) modification of terms if new total payments are less than
the debt's carrying value
46. Indicate how the following are calculated and reported in an
asset swap:
(a) gain or loss on disposal
(b) gain on restructuring
47. Be able to record the necessary journal entry for an asset swap
on the books of the issuer of the debt given the following
information:
(a) market value of the asset
(b) carrying value of the asset
(c) face value of the bonds
(d) unamortized discount or premium
(e) interest payable
48. Indicate how to calculate a gain from restructuring in an
equity swap.
32
Chapter 12 (continued)
49. Be able to record the necessary journal entry for an equity
swap from the following information:
(a) market value of the stock
(b) par value of the stock
(c) face value of the bonds
(d) unamortized discount or premium
(e) interest payable
50. Indicate how to calculate a gain from restructuring in a
situation when the terms of the debt are modified.
51. Be able to record the necessary journal entry for the
modification of the terms of a bond issue from the following
information:
(a) face value
(b) interest payable
(c) unamortized discount or premium
(d) total payment to be made after restructuring and less than
carrying value of the bonds
33
Chapter 12
Assignments:
1. Exercise 12-25 (parts a & b only)
2. Exercise 12-28 (parts a & b only) (Record the premium
amortization as a compound entry with the interest payment on
July 1 and with accrued interest on Dec. 31.)
3. Exercise 12-29 (Calculate on a semiannual basis and do 2007
only)
4. Exercise 12-33
5. A Company decides to finance a plant expansion through the sale
of convertible bonds. From the following information, show
the entry necessary to record the sale of the bonds and
the subsequent conversion of $100,000 of the bonds:
(a) face vale $1,000,000
(b) bond selling price 101
(c) conversion terms - 40 shares of $20 par common stock for
each $1000 of bonds
(d) unamortized premium of $900 on the $100,000 bonds that are
converted.
(e) the bonds are treated as debt when sold
(f) market price of the stock on the date of conversion is $30
6. Record the same entries for the company in question #5 with
the following changes:
(a) assume the bonds are treated as debt and equity when sold
(b) assume the selling price of the bond w/o the conversion
feature is 98
(c) assume the unamortized discount is $900 at conversion
7. In a debt restructuring, a company that owes $150,000 on a note
payable and $2000 of accrued interest is allowed to liquidate
the debt transferring land with a book value $120,000 and a
fair market vale of $140,000. Show the entry to record the
asset swap.
8. Exercise 12-39
Enterprises.)
(Just
record
on
9. Exercise 12-40 (parts a and b only)
the
books
of
MedQuest
34
Intermediate Accounting II
Chapter 19 Study Guide - Part 1
1. Name three measurements relating to an asset or financial
instrument that determine the value of derivatives.
2. Describe the following types of risk, and give an example of
each:
(a) price risk
(b) credit risk
(c) interest rate risk
(d) exchange rate risk
3. Describe the following types of derivatives, and give an example
of each:
(a) swap
(b) forward contract
(c) futures contract
(d) option
4. Explain how a futures contract differs from a forward contract.
5. Explain the difference between a call option and a put option.
6.
Explain how
derivatives.
an
option
differs
from
the
other
types
of
7. Define the following terms:
(a) hedging
(b) fair value hedging
(c) cash flow hedging
8. Explain the treatment of the change in the fair value of
derivatives assuming the following:
(a) the derivative does not serve as a hedge
(b) the derivative serves as a fair value hedge
(c) the derivative serves as a cash flow hedge.
9. Give two examples of hedge ineffectiveness that would cause
a derivative to be classified as a derivative that does
not serve as a hedge.
35
Chapter 19 - Part 1
10. Record the following journal entries in relation to an interest
swap:
(a) to record an increase in the fair value of the swap
(b) to record cash received from the swap (Given the
amount received and the present value
recognized previously)
(c) the closing of other comprehensive income
11. Record the following journal entries in relation to a forward
contract:
(a) exchange gain from a credit sale
(b) loss from the forward contract to hedge the risk from (a)
Assignment:
1. Exercise 19-25
2. Exercise 19-26
3. Exercise 19-28