Intermediate Accounting II Semester of notes
Intermediate Accounting II Semester of notes ACCT 302
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This 16 page Bundle was uploaded by Shogo Okuda on Tuesday October 28, 2014. The Bundle belongs to ACCT 302 at University of Washington taught by Staff in Spring2011. Since its upload, it has received 112 views. For similar materials see Intermediate Accounting II in Accounting at University of Washington.
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Date Created: 10/28/14
ACCTG302 Notes 113 Impairment of Value Way We recognize and measure an impairment loss differs depending on Whether the assets are to be held and used or are being held to be sold For assets to be held and used different guidelines apply to 1 PPE and intangible assets W nite useful lives subject to depreciation depletion or amortization and 2 Intangible assets With inde nite useful lives not subject to amortization PPE and nite life tangible assets are tested for impairment only When events or changes in circumstances indicate book value may not be recoverable Determining Whether to record an impairment loss and actually recording the loss 2 2 step process 1 Recoverability test impairment loss is required only When the undiscounted sum of future CF is less than BV 2 Measurement of impairment loss impairment loss is the excess of book value over fair value The PV of future CF often is used as a measure of FV For assets held for sale if book value exceeds fair value less cost to sell an impairment loss is recognized for the difference An analyst must decide Whether to consider asset impairment losses as transitory in nature or as a part of permanent earnings ACCTG302 Notes 16 Intangible Assets Acquisition Intangible assets generally represent exclusive rights that provide bene ts to the owner Companies can 1 Purchase intangible assets from other entities or 2 Develop intangible assets internally Intangible assets w nite useful lives are amortized intangible assets with inde nite useful lives are not amortized Purchased intangible assets are valued at their original cost Patent exclusive right to manufacture a product or to use a process When a patent is developed internally the RampD costs are expensed as incurred But capitalize legal and ling fees to secure the patent Copyright an exclusive right of protection given to a creator of a published work such as a song lm painting photograph or book Trademark tradename exclusive right to display a word a slogan a symbol or an emblem Franchise contractual arrangement under which the franchisor grants the franchisee the exclusive right to use the franchisor s trademark or tradename and may include product and formula rights within a geographical area usually for a speci ed period of time Good Will unique intangible asset in that its cost can t be directly associated with any speci cally identi able right and it is not separable from the company itself Good will can only be purchased through the acquisition of another company Goodwill along with other intangible assets with inde nite useful lives is not amortized In b combination an intangible asset must be recognized as an asset apart from goodwill if it arises from contractual or other legal rights or is separable Most RampD costs are expensed in the periods incurred RampD costs entail a high degree of uncertainty of future bene ts and are dif cult to match with future revenues RampD expense includes the depreciation and amortization of assets used in RampD activities Start up costs expensed in the period incurred Organization costs related to organizing a new entity such as legal fees and state ling fees to incorporate type of start up costs so they are expensed GAAP requires the capitalization of software development costs incurred after technological feasibility is established Depreciation method 1 Ratio of current revenues to current and anticipated revenues or 2 The straight line percentage over the useful life of the asset For business acquisitions made during scal years beginning on or after December 15 2008 the FV of in process research and development is capitalized as an inde nite life intangible asset ACCTG302 Notes 120 Chl2 Investments Lacks signi cant in uence over the operating and nancial policies of the investee a HTM reported at amortized cost b Trading securities FV c AFS FV excluded from net income and reported in OCI Has signi cant in uence over the operating and nancial policies of the investee typically owns between 20 and 50 of the voting stock of the investee a Equity method investment cost adjusted for subsequent earnings and dividends of the investee Controls the investee owns more than 50 of the investee a Consolidation nancial statements combined HTM used for debt that is planned to be held for its entire life TS used for debtequity that is held in an active trading account for immediate resale Also used if the fair value option has been elected AFS used for debt or equity that does not qualify as held to maturity or trading ACCTG302 Notes 118 Ch11 Subsequent Expenditures Expenditures that simply maintain a given level of bene ts are expensed in the period they are incurred Expenditures can increase future bene ts in the following ways 1 An extension of the useful life of the asset 2 An increase in the operating ef ciency of the asset resulting in either an increase in the quantity of goods or services produced or a decrease in future operating costs 3 An increase in the quality of the goods or services produced by the asset Repairs and Maintenance Made to maintain a given level of bene ts provided by the asset and do not increase future bene ts not beyond those originally anticipated expensed as incurred Additions Additions involve adding a new major component to an existing asset and should be capitalized b c future bene ts are increased Might include costs of tearing down and removing a wall of the existing building Improvements Improvement s involve the replacement of a major component of an asset 3 methods to record the cost of improvements 1 Substitution recorded as both 1 A disposition of the old component and 2 The acquisition of the new component 2 Capitalization of new cost include the cost of improvement as a debit to the related asset account wout removing the original cost and AD of the original component 3 Reduction of accumulated depreciation Rearrangements Rearrangements expenditures made to restructure an asset wout addition replacement or improvement Objective is to create a new capability for the asset and not necessarily to extend its useful life ex rearrangement Costs of defending Intangible Rights If intangible right is successfully defended the litigation costs should be capitalized and amortized over the remaining useful life of the related intangible Unsuccessful 06 expensed as incurred bc they provide no future bene t The BV of any intangible asset should be reduced to realizable value Ch1O Dispositions and Exchanges Involuntary conversions same as voluntary conversions proceeds are recorded the BV of the lost assets are removed and a gainloss is recognized for the difference Exchanges FV not determinable BV plus cash given No gainloss recognized ACCTG302 Notes 127 Reclassify between 2 reporting categories transferred at FV on the date of transfer Any unrealized gainloss at reclassi cation should be accounted for a manner consistent with the classi cation into which the security is being transferred Trading 2 include in current net income Trading HTMAFS there is none already recognized in NI HTM AFS report as a separate component of shareholder s equity OCI P HTM 2 don t write off any existing unrealized holding GL but amortize it to NI over the remaining life of the security FV amount becomes the security s amortized cost basis FV option Unlike most trading securities purchases and sale of investments accounted for under the FV option are likely to be classi ed as investing activities in the statement of CF bc those investments are not held for sale in the near term and therefore are not operational in nature Choosing the FV for HTM and AFS 7 FV option for signi cant in uence investments Not reclassi ed as TS shown on their own line in the BS or are combined w equity method investments with the amount at FV shown parenthetically Financial Instruments and Investment Derivatives Financial instrument 1 Cash 2 Evidence of an ownership interest in an entity 3 A contract that a imposes on one entity an obligation to deliver cash say AP or another nancial instrument and b conveys to the second entity a right to receive cash AR or another nancial instrument or 4 A contract that a imposes on one entity an obligation to exchange nancial instruments on potentially unfavorable terms say the issuer of a stock option and b conveys to a second entity a right to exchange other nancial instruments on potentially favorable items say the holder of a stock option Derivatives nancial instruments that derive their values from some other security or index Disclosure recognition and measurement distinguishing between liabilities and equities Financial Futures Future contract agreement between a seller and a buyer that requires the seller to deliver a particular commodity at a designated future date at a predetermined price Fair Value risk risk that the investment s value might change Cash ow risk risk of having to pay more cash or receive less cash The effectiveness of a hedge is in uenced by the closeness of the match between the item being hedged and the nancial instrument chosen as a hedge Forward contract 1 Calls for delivery on a speci c date whereas a future contract permits the seller to decide later which speci c day within the speci ed month will be the delivery date 2 Unlike a futures contract it usually is not traded on a market exchange 3 Unlike a futures contract a forward contract does not call for a daily cash settlement for price changes in the underlying contract GL on forward contracts are paid only when they are closed out Options purchased to hedge exposure to the effects of changing interest rates Gives its holder the right to either to buy or to sell the Asset at a speci ed price and within a given time period Foreign currency futures similar to nancial futures except speci c foreign currencies are speci ed in the futures contracts rather than speci c debt instruments Interest rate swaps exchange xed interest payments for oating rate payments or vice versa W out exchanging the underlying principal amounts Accounting for derivatives a Derivatives designed as hedges and those not designated as hedges b The effective portion and the ineffective portion of GL from intended hedges Carried on balance sheet as either assetsliabilities at FV Derivative not designated as hedging instrument 8 GL immediately on earnings Used to hedge P a recognized immediately in earnings along With an offsetting LG on the item being hedged or B deferred in CI until it can be recognized in earnings at the same time as earnings are affected by a hedge transaction Which Way depends on Whether derivative is designated as a FV hedge b CF hedge or Foreign currency hedge FV Hedges FV hedge used to hedge against the exposure to changes in the FV of an asset or liability or a rm commitment When derivative is used to reflect changes in FV the other side of the entry recognizes a GL to be included CURRENTLY in earnings CF Hedges CF hedge used to hedge against the exposure to changes in cash in owsout ows of an asset or liability or a forecasted transaction When the derivative is adjusted to reflect changes in FV the other side of the entry is a GL to be deferred as a component of OCI Effect matching the earnings effect of the derivative With the earnings effect of the item being hedged ACCTG302 Notes 14 Property Plant and Equipment and Intangible Assets Acquisition and Disposition Long lived revenue producing assets typically are classi ed in 2 categories 1 Property plant and equipment include land buildings equipment machinery autos and trucks Natural resources such as oil and gas deposits timber tracts and mineral deposits also are included 2 Intangible assets lack physical substance and the extent and timing of their future bene ts typically are highly uncertain Include patents copyrights trademarks franchises and goodwill Land improvements usually do not have inde nite life unlike land Costs of land improvements are capitalized and depreciated Asset retirement obligation is measured at fair value and is recognized as a liability and corresponding increase in asset valuation Expected cash ow approach incorporates speci c probabilities of cash ows into the analysis use discount rate equal to the credit adjusted risk free rate Assets acquired in noncash transactions are valued at the fair value of the assets given or the fair value of the assets received Whichever is more clearly evident Assets acquired by issuing common stock are valued at the fair value of the securities or the fair value of the assets Whichever is more clearly evident Donated assets are recorded at their fair values Revenue is credited for the amt paid by an unrelated party Fixed asset turnover ratio Net SalesAv g xed assets 2 dif culties in connection With assigning costs to self constructed assets 1 Determining the amt of the company s indirect manufacturing costs to be allocated to the construction 2 Deciding on the proper treatment of interest incurred during construction The cost of a self constructed asset includes identi able materials and labor and a portion of the company s manufacturing overhead costs Only assets that are constructed as discrete projects qualify for interest capitalization Only interest incurred during the construction period is eligible for capitalization The interest capitalization period begins when construction begins and the rst expenditure is made as long as interest costs are actually being incurred ACCTG302 Notes 111 Ch11 Property Plant and Equipment and Intangible Assets Utilization and Impairment Depreciation Depletion and Amortization Depreciation depletion and amortization are processes that attempt to satisfy the matching principle Depreciation depletion and amortization for an asset used to manufacture a product are included in the cost of inventory Service life the estimated use that the company expects to receive from the asset Allocation base the value of the usefulness that is expected to be consumed Allocation method the pattern in Which the usefulness is expected to be consumed Service life or useful life amount of use that the company expects to obtain from the asset before disposing of it Allocation base the total amount of cost to be allocated over an asset s service life Residual salvage value amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs Timebased methods allocates the cost base according to the passage of time Activity based method allocates an asset s cost base using a measure of the asset s input or output Straightline an equal amount of depreciable base is allocated to each year of the asset s service life Sum of the year s digits SYD method multiplies depreciable base by a declining fraction Declining balance methods multiply beginning of year book value not depreciable base by an annual rate that is a multiple of the straight line rate Units of production method computes a depreciation rate per measure of activity and then multiplies this rate by actual activity to determine periodic depreciation A company does not have to use the same depreciation method for both nancial reporting and income tax purposes Group depreciation method de nes the collection as depreciable assets that share similar service lives and other attributes Composite depreciation method used When assets are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation Depletion allocation of the cost of natural resources Amortization allocating the cost of intangible assets Periodic amortization percentage of software development costs is the greater of 1 The ratio of current revenues to current and anticipated revenues or 2 The straight line percentage over the useful life of the asset Half year convention to record one half of a full year s depreciation in the year of acquisition and another half year in the year of disposal ACCTG302 Notes 29 Ch13 Current liabilities and Contingencies Money provided by owners or must be borrowed Liabilities PV but except for ones within 1 yr are not immaterial Common obligations AP notes payable CP income tax liability dividends payable and accrued liabilities AP obligations to suppliers of merchandise or of services purchased on open account Trade notes payable differ from AP in that they are formally recognized by a written promissory note Line of credit allows a company to borrow cash wout having to follow formal loan procedures and paperwork Secured speci ed asset of the borrower is pledged as collateral or security for the loan Commercial paper unsecured notes sold in minimum denominations of 25000 w maturities ranging from 30 to 270 days Accrued liabilities expenses already incurred but not yet paid payable We accrue loss contingencies only when the obligation is both a probable and b can be reasonably estimated ACCTG302 Notes 217 CH 14 Long Term Notes Discounts and premiums are less likely for notes than on bonds Implicit rate of interest the rate implicit in the agreement Installment Notes Periodic cash payments are larger and there is no lump sum payment at maturity Cash payments for interest are in operating activities Debt to Equity default risk If a company earns a return on borrowed funds in excess of the cost of borrowing the funds shareholders are provided With a total return greater than What could have been earned With equity funds alone 2 favorable nancial leverage Times interest earned ratio compare interest payments With income available to pay those charges 1 Interest is deductible for income tax purposes income before interest and taxes is a better indication of a company s ability to pay interest than is income after interest and taxes ie net income 2 Income before interest and taxes is a rough approximation for CF generated from operations ACCTG302 Notes 215 Ch 14 Straightline method interest expense and revenue is a plug gure resulting from calculating the amount of discount reduction Underwriting or private placement Debt issue costs recorded separately and are amortized over the term of the related debt Premium discount is unaffected by debt issue costs bc they are recorded in a separate account Debt Retired Early Convertible into Stock or Providing an Option to Buy Stock Early extinguishment of debt when debt of any type is retired prior to its scheduled maturity date When debt is retired for less than CV K Reason for convertible bonds a To sell the bonds at a higher price lower effective interest cost b To use as a medium of exchange in MampA c Enable smaller rms or debt heavy companies to obtain access to the bond market ACCTG302 Notes 222 CH14 Appendix B Troubled debt restructuring changing the original terms of a debt agreement motivated by nancial dif culties experienced by the debtor 1 Debt may be settled at the time of the restructuring 2 The debt may be continued but With modi ed terms ACCTG302 Notes 125 Chl2 Impairment of Investments Other than temporary impairment FV of HTMAFS declines below the amortized cost of the investment Equity does the company has the intent and ability to hold the investment until FV recovers No recognize OTT impairment loss in earnings and reduce Carrying Value Debt more complicated Investors has signi cant in uence Lacks signi cant in uence lt20 equity ownership pX Has signi cant in uence 20 50 equity ownership Has control gt50 ownership consolidation Equity method can be used when an investor can t control but can signi cantly in uence the investee Consolidated nancial statements combine the individual elements of the parent and subsidiary statements Signi cant in uence own between 20 and 50 of the investee s voting shares Varies by type of investment Equity Method ACCTG302 Notes 224 Ch15 Leases Lessor provides a lessee Fundamental right and responsibilities of ownership are retained by the lessor operating leases Many contracts are in reality installment purchasessales Capital leases direct nancing or sales type leases off balance sheet nancing Capital leases agreements that we identify as being formulated outwardly as leases but which are in reality essentially installment purchases Bargain purchase option BPO provision in the lease contract that gives the lessee the option of purchasing the leased property at a bargain price Bargain renewal options gives the lessee the option to renew the lease at a bargain rate Rent abatement when the initial payment or several payments is waived Leasehold improvements not include movable assets ACCTG302 Notes 31 Leases Bargain purchase option a Is included in the computation of the amount to be capitalized as an asset and a liability by the lessee b Reduces the amount of the periodic rent payments the lessor will need to receive from the lessee to recover the desired selling price Gross investment in the lease total of periodic rental payments and any residual value Guaranteed residual value is considered an additional lease payment that is to be paid in property or cash or both Executor costs maintenance insurance taxes and any other costs usually associated w ownership Initial indirect costs legal fees commissions evaluating the prospective lessee s nancial condition and preparing and processing lease documents Net investment in the lease PV of the gross investment in the lease Sale leaseback transaction owner of an asset sells it and immediately leases it back from the new owner Real estate leases fact that land has an unlimited life causes us to modify how we account for some leases involving real estate Leveraged lease a 3rd party LT creditor provides nonrecourse nancing for a lease agreement between a lessor and lessee ACCTG302 Notes 210 Chl4 Bonds and Long Term Notes Bonds obligate the issuing corporation to repay a stated amount at a speci ed maturity date Also agrees to pay interest to bondholders between the issue date and maturity Bond indenture describes the speci c promise made to bondholders Debenture bond secured only by the full faith and credit of the issuing corporation Subordinated debenture not entitled to receive any liquidation payments until the claims of other speci ed debt issues are satis ed Mortgage bond backed by a lien on speci ed real estate owned by the issuer Coupon bonds Callable redeemable Mandatory sinking fund redemptions retire a bond issue gradually over its term to maturity Serial bonds provide a more structured Way to retire bonds on a piecemeal basis retired in installments during all or part of the life of the issue Convertible bonds retired as a consequence of bondholders choosing to convert them into shares of stock Effective interest method recording interest each period as the effective market rate of interest multiplied by the outstanding balance of the debt
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