- Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. Revenues are inflows or enhancements of assets from an entity's major operations.
- When a fixed asset is sold, any gain or loss is recognized as part of continuing operations income based on the difference between proceeds and carrying amount.
- Changes in estimates only affect current and future periods, while accounting principle changes affect prior periods through an adjustment to beginning retained earnings.
- Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. Revenues are inflows or enhancements of assets from an entity's major operations.
- When a fixed asset is sold, any gain or loss is recognized as part of continuing operations income based on the difference between proceeds and carrying amount.
- Changes in estimates only affect current and future periods, while accounting principle changes affect prior periods through an adjustment to beginning retained earnings.
- Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. Revenues are inflows or enhancements of assets from an entity's major operations.
- When a fixed asset is sold, any gain or loss is recognized as part of continuing operations income based on the difference between proceeds and carrying amount.
- Changes in estimates only affect current and future periods, while accounting principle changes affect prior periods through an adjustment to beginning retained earnings.
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.