According to the FASB conceptual framework,

assets are probable future economic benefits

obtained or controlled by a particular entity as a
result of past transactions or events.
Revenues are inflows or other enhancements of assets and/or
settlements (decreases) in liabilities resulting from the entity's
ongoing major operations, not from "incidental" operations.
When a fixed asset is sold, gain or loss is
recognized as part of income from continuing
operations. The amount of the gain or loss is
equal to the difference between the proceeds
from the sale and the carrying amount of the
fixed asset sold.
The cumulative effect of a change in
accounting principle equals the difference
between retained earnings at the beginning of
period of the change and what retained
earnings would have been if the change was
applied to all affected prior periods, assuming
comparative financial statements are not
presented. Beginning retained earnings of the
earliest year presented is adjusted for the
cumulative effect of the change.
Changes in estimates affect only the current
and subsequent periods (not prior periods and
not retained earnings).
Unrealized losses (or gains) resulting from
changes in market value of available-for-sale
debt investments should be reported as a
component of other comprehensive income in
shareholders' equity. Unrealized gains and
losses on debt investments held for trading
debt securities and equity investments would
be included in net income.
Comprehensive income is the change in equity
(net assets) of a business enterprise during a
period from transactions and other events and
circumstances from nonowner sources. It
includes all changes in equity during a period
except those resulting from investments by
owners and distributions to owners.
Only footnote disclosure is required for a
"reasonably possible" loss. The nature of the
contingency should be disclosed as well as the
nature of the possible loss or range of loss.
Equity in net income of another company,
general corporate expenses, interest, income
tax expense, and gains or losses on
discontinued operations are all not included in
segment profit unless they are included in the
determination of segment profit reported to
the "Chief Operating Decision Maker."
To be significant enough to report on, a
segment must be at least 10% of: 1. Combined
revenues (whether intersegment or affiliated
customers), or 2. Operating profit (of all
segments not having an operating loss), or 3.
Identifiable assets.
Operating profit by segments is based on the
measure of profit reported to the "Chief
Operating Decision Maker." Interest expense,
income taxes, and general corporate expenses
are not allocated to the divisions solely for the
purposes of segment disclosures; they may be
allocated if that is how the segments report to
the "Chief Operating Decision Maker."
Operating profit by segments is based on the
measure of profit reported to the "chief
operating decision maker." Allocations for
general operating costs and interest, etc.,
should not be made solely for purposes of
segment disclosures
To be significant enough to report on, a
segment must be at least 10% of: 1. Combined
revenues (whether intersegment or
unaffiliated customers), or 2. Operating
income, or 3. Identifiable assets.
A segment meets the size test if the absolute
amount of its reported profit or loss is 10% or
more of the greater, in absolute amount, of: 1.
The combined reported profit of all operating
segments that did not report a loss, or 2. The
combined reported loss of all operating
segments that did report a loss.
The entire amount of a gain or loss from sale of
fixed assets should be reported during the
period (quarter) incurred.
Assets contributed by partners to a partnership
are valued at fair market value of the assets,
net of any related liabilities.
Upon the formation of a partnership, tangible
assets (inventory and real estate) would be
recorded at fair market value at the date of the
investment
Assets contributed by partners to a partnership
are valued at fair market value of the assets,
net of any related liabilities.
Assets contributed by a partnership (or sole
proprietorship) to a corporation in its
formation are valued at the assets fair market
value, less any related liabilities assumed by
the corporation (e.g., mortgage note on real
property). Stock issued is credited at par value
and any difference is credited to additional
paid-in capital.
F.O.B. destination means that title passes when
received by the buyer, and that packaging,
shipping, and handling are costs of the seller.
F.O.B. shipping point means that title passes
when the goods leave the seller's location and
that shipping is a cost of the buyer.
The moving-average method assumes the
company has perpetual records. A new
weightedaverage cost is computed after each
purchase and issues are priced at the latest
weighted average cost.
Consignor must include consigned goods (in
the hands of the consignee) in his own
inventory, at his cost plus warehousing costs of
consignor before goods are transferred to
consignee plus shipping costs to consignee.
Cost of land includes all costs necessary to put
the land in place and condition for
construction of the plant. Any proceeds from
the sale of any existing buildings (or standing
timber, or soil) or scrap are deducted from the
cost of the land.
interest costs incurred during the construction
period of machinery to be used by a firm as a
fixed asset, should be capitalized as part of the
historic cost of acquiring the fixed asset.
Interest costs on the fixed asset subsequent to
the construction period as well as all interest
costs on the routine manufacture of machinery
for sale to customers (inventory) should be
expensed in the income statement for the
period incurred
Expense ordinary repairs but capitalize
expenditures, which are "additions" or "benefit
several periods" or "improve efficiency" as is
the case in this question
Capitalize all costs necessary to put a fixed
asset in place, in the required condition, at the
proper time for its intended use. The collating
and stapling attachment along with related
installation costs should be capitalized.
Capitalize costs that improve the quality,
efficiency, or productive capacity of a fixed
asset.
Under the units-of-production depreciation
method, the cost of a fixed asset is allocated to
expense based on the number of units
produced during the period relative to the
total number of units expected to be produced
over the asset's life. Accordingly, the total
number of units over the asset's life must be
able to be estimated
Straight-line depreciation is the same each
year, as shown by pattern I. Sum-of-the-years'-
digits depreciation starts at a level higher than
straight line and declines at a constant rate to
the depreciation base, as shown by pattern II.
Double-declining balance depreciation starts at
a level higher than SYD and declines rapidly to
the depreciation base, but not at a constant
rate, as shown by pattern III
In all depreciation methods except declining
balance, salvage value is subtracted from an
asset's cost in arriving at the depreciation base.
If salvage value is improperly excluded from
the depreciation computation, depreciation
will be overstated and net income under-stated
for both the straight-line method and the
production or use method (and sum-of-year's-
digits method)
Gains or losses on disposal of fixed assets
(including involuntary conversions) are
recognized during the period incurred based
on recorded amount (NBV). Any insurance
proceeds must be included in the
determination:
Depreciable property constructed on leased
land is depreciated over the life of the property
or the term of the lease, whichever is shorter.
Goodwill acquired in an arms-length
transaction is capitalized, but internally created
goodwill is expensed because an objective
measure of its value is difficult to obtain
: Dividend revenue, under the fair value
method, should be recognized to the extent of
cumulative earnings since acquisition and
return of capital beyond that point.
Unrealized gains and losses are reported as
follows: trading debt securities-reported at fair
value with unrealized gains and losses included
in earnings (along with "realized" gains and
losses, if any). Available-for-sale debt
securities-reported at fair value with
unrealized gains and losses reported as a
separate component of other comprehensive
income until realized.
Equity securities are generally reported at fair
value through net income (FVTNI). Unrealized
holding gains and losses on equity securities
are included in earnings as they occur.
Equity securities are reported at fair value with
unrealized gains and losses included in
earnings. Fair value becomes the new basis
(revalued cost) for computing realized gains or
losses upon sale.
Investor records as revenue its "share of the
investee's earnings" (not "dividends received")
under the equity method. Dividends from an
investee company are recorded by the investor
as a reduction in the carrying amount of the
investment on the balance sheet of the
investor. Changes in the market value of
investee's common stock are not considered
income to the parent under the equity
method. Under the fair value method, receipt
of a dividend is recorded as income and does
not affect the investment account.
Undervalued asset amortization affects both
the investment account (an asset) and the
investment income account (a revenue), while
cash dividends affect the investment account
but not the investment income account.
: Under both the fair value and equity
methods, liquidating dividends reduce the
carrying amount of the investment account
When two or more purchases of stock cause
ownership to go from less than 20% to more
than 20%, the equity method should be used
starting on the date significant influence is
acquired and going forward. Retroactive
adjustments of prior periods are not required.
When two or more purchases of stock cause
ownership in an investee to go from less than
20% to more than 20%, the cost of acquiring
the additional interest in the investee is added
to the carrying value of the investment and the
equity method is adopted as of the date that
significant influence is acquired and going
forward. On December 31, Year 1, the total
carrying value of the investment in Tot is
$200,000 ($50,000 original investment +
$150,000 cost of additional shares to acquire
significant influence). Pare will use the equity
method starting on December 31, Year 1, and
will add its share of Tot's earnings to the
investment in subsidiary beginning in Year 2.
In a vertical chain, where parent co. owns
more than 50% of subsidiary co., and
subsidiary owns more than 50% of a third
company, consolidate:
100 percent of all intercompany balances
among members of the consolidated group are
eliminated.
All intercompany billings are eliminated in
consolidation.
When members of a consolidated group have
intercompany bond holdings, the bonds are
eliminated in consolidation and the difference
(gain or loss) between the discounted issue
price and the premium on reacquisition would
be included in retained earnings
: Fixed asset cost is based on original cost from
the outside world and remains the same on
the consolidated financial statements.
"Combined financial statements" do not
eliminate "equity" accounts (they are all added
across); however, all other intercompany
"transactions" and "balances" are eliminated in
combined financial statements just as they are
in consolidated financial statements.
100% of a purchased subsidiary's shareholders'
equity (including common stock) as of the date
of acquisition is eliminated in consolidation.
At date of acquisition, the consolidated equity
will be equal to the parent company's equity
plus the fair value of any noncontrolling
interest. The subsidiary company's equity
accounts are eliminated.
In an acquisition, the net income of a newly
acquired subsidiary will only be included in
consolidated net income from the date of
acquisition. Therefore, only 20 percent of Sago
net income is included in consolidated
earnings until June 30 and 95 percent
thereafter
All four of the following must be met in order
to meet the reporting requirements for
postemployment benefits: 1. The employer's
obligation relating to the employees' rights to
receive compensation for future absences is
attributable to services already rendered. 2.
The obligation relates to rights that vest or
accumulate. 3. Payment of the compensation is
probable. 4. The amount can be reasonably
estimated.
Employees' compensation for future absences
(mostly vacation) should be accrued if: 1.
Services have already been rendered, and 2.
The obligation relates to vested or
accumulated rights, and 3. The amount can be
reasonably estimated, and 4. Payment is
probable.
Accrued compensated absences generally
includes "vacation pay" but not "sick pay." Sick
pay usually (and in this fact situation) does not
vest.
Long-term debt that matures within one year
should be classified as a current liability, unless
retirement is to be accomplished with other
than current assets.
: Contingencies that might result in gains
usually are not reflected in the accounts since
to do so might be to recognize revenue prior to
its realization. The accounting concept of
conservatism applies: "anticipate all losses but
not gains."
Only footnote disclosure is required for a
"reasonably possible" (not "probable") loss.
The nature of the contingency should be
disclosed as well as the nature of the possible
loss or range of loss or that an estimate cannot
be made.
Gain contingencies which are reasonably
possible (or probable) and for which an
amount can be reasonably estimated, should
not be "accrued" but should be disclosed in a
note to the financial statements in a manner
that does not give the impression that
realization of a gain is likely. Gain contingencies
should never be accrued in the financial
statements.
: Only footnote disclosure is required for a
"reasonably possible" (not "probable") loss.
Bonds or notes due within one year are shown
as "noncurrent" if the issuer has the intent and
ability to refinance with a new issuance of
long-term debt. This intent and ability must
usually be demonstrated through refinancing
of the debt after the balance sheet date, but
before the issuance of the financial
statements. Separate disclosure of the
refinancing is required.
Current maturities of long-term debt in the
balance sheet should include amounts due and
payable within 12 months of the balance sheet
date.
A non-interest bearing note should be
recorded at its present value calculated using
the prevailing market interest rate. The market
interest rate is then used to calculate interest
on the note.
Loan origination fees shall be deferred and
recognized over the life of the loan as an
adjustment of interest income (similar to the
treatment of bond discount amortization).
Trade notes and accounts receivable with
customary trade terms not exceeding one year
may be recorded at face amount.
Bond issue price is the sum of the present
values of the maturity value and the interest
payment annuity.
: Discount or premium on the sale of bonds as
well as the bond issuance costs are included in
the carrying value of the bonds on the balance
sheet.
Bond liability is shown on the balance sheet
net of unamortized discount.
All costs associated with the issuance of bonds
should be amortized over the "outstanding"
term of the bonds.
In a troubled debt restructuring, if the debtor
achieves full settlement of the debt by
transferring assets having a fair market value
that is less than the amount of the debt, a gain
is recognized for the difference between the
carrying value of the payable at the date of
transfer and the fair market value of the asset
at the date of the transfer.
A troubled debt restructuring exists when a
creditor grants a concession to a debtor that it
would not otherwise consider for economic or
legal reasons (bankruptcy chapter 11
reorganization). Gain is recognized by debtor if
the face amount of the payable exceeds the
FMV of assets and/or equity transferred.
A troubled debt restructuring exists when a
creditor grants a concession to a debtor that it
would not otherwise consider for economic or
legal reasons (bankruptcy chapter 11
reorganization). Gain is recognized by debtor if
the face amount of the payable exceeds the
FMV of assets and/or equity transferred.
In a troubled debt restructuring, if the debtor
achieves full settlement of the debt by
transferring assets having a fair market value
that is less than the amount of the debt, a gain
is recognized for the difference between the
carrying value of the payable at the date of
transfer and the fair market value of the asset
at the date of the transfer.
A troubled debt restructuring exists when a
creditor grants a concession to a debtor that it
would not otherwise consider for economic or
legal reasons (bankruptcy chapter 11
reorganization). Gain is recognized by debtor if
the face amount of the payable exceeds the
FMV of assets and/or equity transferred.
If any one of the following conditions is met, a
lease is considered a finance lease under U.S.
GAAP and is treated as if owned by the lessee:
1. The lease transfers ownership to the lessee
by the end of the lease term. 2. The lease
contains a written purchase option that the
lessee is reasonably certain to exercise. 3. The
present value at the beginning of the lease
term of the "minimum lease payments" equals
or exceeds the fair value of the leased property
(generally 90 percent of FV is the minimum
threshold). 4. The lease term is the major part
(75 percent or more) of the estimated
economic life of the leased property. 5. The
asset is specialized such that there is no
alternative use to the lessor.
If the underlying lease in a sale-leaseback is a
finance lease, it is considered equivalent to a
repurchase and will therefore be considered a
"failed sale."
: The lessee shall record an operating lease as
lease expense using the straight-line basis.
Even though there is a variable payment, the
payment is known at commencement of the
lease term; therefore, the variable payments
will be used in calculation of the present value
of the lease liability. There is no separately
recorded interest component for an "operating
lease."
For a finance lease, the minimum lease
payment is allocated between principal and
interest using the interest rate inherent in the
lease. The portion allocated to principal
reduces the remaining lease liability. The
process is similar to a home mortgage.
Lessee should use the rate implicit in the lease
(if known by the lessee) to discount cash flows.
Finance leases should be recorded as both an
asset and liability at the present value of the
minimum lease payments. The asset is
depreciated. The liability is amortized using the
interest method. Each payment is allocated
between principal and interest. The liability is
reduced by the amount of principal reduction.
The lease liability should be segregated
between current (due within one year) and
non-current (due beyond one year).
Accordingly, the reduction in lease liability
each year is equal to the current liability at the
end of the previous year.
A lease is a finance lease if its term represents
the major part of the economic life of the
asset, with 75% serving as a reasonable
quantitative threshold. The rate to use to
calculate present value is the lease's "implicit
rate" if known by the lessee.
Capitalized equipment should be depreciated
in accordance with the lessee's normal
depreciation policy, not to exceed the
estimated useful life, unless the lease does not
transfer ownership or contain a bargain
purchase option, in which case the shorter
lease period should be used.
Capitalized equipment should be depreciated
in accordance with the lessee's normal
depreciation policy, not to exceed the
estimated useful life, if the lease transfers
ownership or contains a purchase option.
Amortization of leasehold improvements
should be over the life of the improvements or
the remaining life of the lease, whichever is
shorter. Since there is uncertainty as to
whether the lease will be renewed, the
renewal option is not a factor
The present value rate used to value a finance
lease is the rate implicit in the lease if known
by the lessee.
Amortization of leasehold improvements
should be over the life of the improvements or
the remaining life of the lease, whichever is
shorter. In this case, the lease term is equal to
or less than each category of improvements,
accordingly all improvements should be
amortized over 10 years. Since there is
uncertainty as to whether the lease will be
renewed, the renewal option is not a factor.
The present value rate used to value a finance
lease is the lease's "implicit rate," if known by
the lessee.
In a finance lease, the difference between the
fair value of the leased asset and its cost at
inception is recognized as a gain or loss.
In a sales-type (finance) lease, any difference
between the fair value of the leased asset and
its carrying value is recognized as
manufacturer's or dealer's profit:
Unearned interest revenue in a sales-type
lease is amortized over the period of the lease
using the interest method:
"Translation" adjustments are not included in
determining net income for the period but are
disclosed and accumulated as a component of
other comprehensive income in consolidated
equity until sale or until liquidation of the
investment takes place.
The functional currency of a company may be:
1. A foreign entity's local currency, which is
typically the one in which the entity keeps its
books; 2. The currency in which the financial
statements will be presented, which is the
currency of the parent company; or 3. A
foreign currency other than the one in which
the foreign entity maintains its books.
The functional currency of an entity generally
depends upon the environment in which the
entity generates and expends cash (unless
there is a requirement by law to use another
currency), which may be any of the above
three. However, the functional currency cannot
be the local currency if the foreign entity
operates in a highly inflationary environment
(i.e., approximately 100% over three years).
Foreign exchange transactions gains and losses
are generally included in determining net
income for the period in which exchange rates
change.
If an entity's books are not maintained in its
functional currency, remeasurement into the
functional currency is required. Any gains or
losses are included in determining net income
and are classified as part of continuing
operations.
Balance sheet accounts are generally included
at the current exchange rate, except for: 1. A
self contained subsidiary with a 3 year inflation
rate of 100% or more (hyperinflationary
economy). 2. A foreign entity which does not
maintain its accounts in a foreign functional
currency.
"Translation adjustments" are not included in
determining net income for the period but are
disclosed and accumulated as a component of
other comprehensive income in consolidated
equity until disposed of. However, gains or
losses from remeasuring the foreign
subsidiary's financial statements from the local
currency to the functional currency should be
included in "income from continuing
operations" of the parent company.
Whenever income is recognized in the financial
statement before it is reported as taxable
income, a deferred tax liability should be
reported. Even though a loss was recognized in
Year 2, on a cumulative basis the financial
statements have recognized income that has
not yet been recognized for tax purposes.
Accordingly, a deferred liability will still exist at
the end of Year 2 (however, it will be less than
the deferred liability reported at the end of
Year 1).
the current portion of income tax expense is
the amount payable to IRS.
Deferred taxes should be computed based
upon the enacted tax rates when the
difference will reverse:
Establish deferred tax using enacted annual tax
rate (current tax rate for the related years)
when temporary differences (will) reverse.
Deferred tax liability on temporary difference:
There is no gain or loss on the purchase and/or
sale of treasury stock. Any "difference" goes to
"paid-in capital," or if there is not enough paid-
in capital to absorb a loss, the loss would be
debited (subtracted) from "retained earnings."
A retained earnings appropriation debits
(reduces) "unappropriated retained earnings"
and sets up (credits) "appropriated retained
earnings." It does not affect the income
statement.
There is no requirement to appropriate
retained earnings for any purpose. Retained
earnings may be set aside for future purposes
by classifying a portion as "appropriated."
Note: "Losses" on treasury stock would reduce
paid in capital in excess of par
Cumulative preferred stock dividends are paid
on par value (not sales price) of preferred stock
and have a "preference" over common stock
dividends until all past preferred stock
dividends are paid.
Allocate "issue proceeds" of a basket purchase
or sale of convertible preferred stock based on
relative fair market values:
A stock dividend (less than 20-25% of stock
outstanding) is treated by transferring the FMV
of the stock dividend at declaration date from
retained earnings to capital stock and paid-in
capital. There is no effect on total
shareholder's equity because all transfers take
place within shareholder's equity.
Use FMV of asset (not cost) to reduce retained
earnings when property dividend is declared.
The cost of asset will be adjusted to FMV
(difference treated as "gain or loss on disposal
of asset") when a property dividend is
declared. Retained earnings is reduced for
both cash and property dividends
A stock dividend (less than 20-25% of the stock
outstanding) transfers the FMV of the stock
dividend at declaration date from retained
earnings to capital stock and paid-in capital.
There is no effect on total stockholders' equity
because all transfers take place within
stockholders' equity.
A "liquidating dividend" is a return of capital
(which decreases additional paid-in capital)
and not a distribution of earnings (which
decreases retained earnings). Assume 80%
distribution of earnings and 20% liquidating
with a $100,000 dividend:
A liability for a cash dividend is incurred and
recorded on the declaration date.
Dividends declared and paid in the form of
assets other than cash are recorded by the
distributing corporation at fair market value at
date of declaration.
Stock dividends and stock splits are not
considered income to the recipient. Therefore,
investors do not record stock dividends at fair
market value. They simply reallocate the
investment account balance (under either
method -- cost or equity) over more shares so
that value per share decreases.
That portion of proceeds in excess of stocks'
par value is credited to "additional paid-in-
capital" at the time the rights are exercised.
The difference between book value and fair
market value of the property dividend should
be recorded as gain/loss on disposal of asset.
Convertible securities are recognized when
computing diluted EPS only if the conversion is
dilutive.
If stock dividend or a stock split (or reverse
split) changes common stock outstanding, the
computation of EPS shall give retroactive
recognition for all periods presented using the
new number of shares because the reader's
primary interest is presumed to be related to
current capitalization.
Contingent shares are included in the
calculation of basic EPS as of the date all
conditions have been satisfied. (In this
question, the dates the new outlets were
opened.)
All potentially dilutive convertible bonds and
preferred stock are used in computing diluted
EPS.