Exam 1 Study Guide
Exam 1 Study Guide MGMT 351
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This 6 page Study Guide was uploaded by Emily McIlhattan on Saturday February 14, 2015. The Study Guide belongs to MGMT 351 at Purdue University taught by Byong Ro in Winter2015. Since its upload, it has received 477 views. For similar materials see Intermediate Accounting II in Accounting at Purdue University.
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Date Created: 02/14/15
MGMT 3351 Exam 1 Study Guide Ch 12 19 16 15 Liabilities Bonds Notes Leases Income Taxes Current Liabilities Ch 19 Liabilities Main Criteria 1 Probably future sacri ce of economic resources assets to ful ll 2 Present obligations that 3 Result from past events a Current Liability to be clearedpaid by 1 sacri cing economic resource or 2 creating another liability in one operating cycle whichever is longer 0 Report at Present Value in theory 1 Determinable no need to estimate amounts are known reported on balance sheet AP DP NP Interest Rent accrued Exp taxes Unearned Rev 2 Estimated with reasonable accuracy Warranty liab record at point of sale liability for sales promotions liability for gift cards 1You don t know total warranty expense until all warranty claims have gone through b Line of Credit special nancing arrangement with lender that allows a borrower to use lender s money up to a limit without going through usual approval process only used amountliability 3 Contingency pending lawsuit may result in a gain or loss only loss is recognized if 1 Likelihood is probable and 2 Its amount is reasonably estimable An environment liability is considered probable when the company admits responsibility Gain contingency is not recognized as an asset unless its likelihood is highly likely Disclose Reasonably possible in Notes 0 Fair Value Option Companies have the option to report nancial AampL at their balance sheet date fair values on BSl BV is not equal to FV o FVgtBV gain unrealized o FVltBV loss unrealized gain or loss is recorded in NI on US Executory Contract contract in which neither party has performed anything yet thus not a reallegal contract at this time not a liability Chapter 12 Longterm Liabilities Bonds and Notes 1 Longterm liability initially recorded at Historical Cost Acquisition Cost PV of all Future Cash ows 2 BVlnitial Cost Sum of discount amortization or premium amortization 3 4 a OR Face Value Discount Balance or Premium Balance i Face Value market value given at a point in time ii It is important to use PV concepts because it is important to record real value of Longterm liabilities not just FaV or sum of all Future Cash Flws Longterm Notes Payable a Market trading If sold on market there is a prevailing interest rate on similar notes effective rate market wide or yield rate b No market stated rate only i PVPrice PV of interest PV of Face Amount 1PVOAnr FaVPVSnr market rate unless there isn t one then use stated rate ii quot at which it should be selling market value and time of issuance 1Rs Rm PV FaV 2Rs lt Rm PVlt FV 3Rsgt Rm PV gt FaV Bonds Payable securities issued for longterm debt nancing liability to issuer and investment asset to the buyers a lssuer records receipt of cash and receipt of longterm liability b Purchaser records payment of cash and bond investment i Know the Various Types of Bonds 5 Three ways to retire bonds prior to Maturity 6 7 8 a Redemption purchasing them from bond holders on market b Conversion i Features higher price and lower interest rate c Re nancing interest rate on new debt is lower than old i Gain or loss may result 1Two methods aBV Method no gain or loss recorded at BV bMV Method recorded at MV of debt or stock whichever is more clearly evident usually stock gain loss recognized Pricing same way as Notes Payable a Record in 4 steps lssuance lnterest payment FYE adjustment Maturity Effective lnterest Method a Interest Expense RmCVbeg cash interest discount amortization or premium amortization Restructuring Troubled Debt special arrangement under which the creditor grants a concession to the debtor because the nancial dif culties a Asset Swap i Debtor recognizes gain or loss on disposal gain FMV BV of asset 1And Value of debt FMV gain on restructuring 2what the debor gains the creditor loses b Equity Swap c Continuation of Modi ed Terms involves interest maturity date or both i No gain situation value of old debt gt new new being Face Val Future interest ii Gain Situation Value of old gt New less future value of debt 9 Offbalance Sheet Financing using nonowners capital yet keeping debt of 35 a Why they are in essence debt or liabilities but no recognized as debt on the bs so not included in companies assessment of risk b Problem they don t show on bs so users creditors and investors don t see them and can be misinformed Chapter 15 Leases 1 Lease contract under which one party Lessee pays rents and acquires the right to use an asset that is owned by another party lessor a FV normal selling price discount if any i MLP Minimum Lease Payments MRP GRVBPO any possibly payment required at end of lease 1BPO bargain purchase option to purchase leased asset at the end of the lease for bargain price b PVee MRPExCostsPVOAnr GRVor BPOPVSnr c PVor same as PVee except include RV regardless d ExCosts ownership costs of a leased asset maintenance i Grolnvest lessors gross investment in leases asset 2 Lessee s Capital Lease a Criteria i Ownership transfer to lessee when lease expiries ii BPO makes it reasonable assured that a purchase will occur 1quot if either then use economic life for depreciation iii Lease term gt 75 of assets economic life iv PVee of MLP gt 90 of the assets FV to lessor assets life for 3 and 4 b CL assumes ownership of the leased asset is almost transferred to the lessee under 4 criteria so lessee takes as much bene ts from assets as would the owner c For interest expense lessee uses lower of implicit or borrowing rate d If BPO PV of MLP would be increased by the PV of the Bp amount used to record initial asset and liability if not purchased loss would be recorded if GRV treated same way 3 Operating Lease Lessee treated as a rental unless longterm 4 Lessors s CL a Sales Type Leases must meet 4 criteria at same time treated like a sale i Meets 1 of CL criteria ii Pro t or loss iii Collectability is assured b c iv No lessor s costs yet to be considered all costs need to be re ected in the rent Direct Financing Lease recorded at PV ulRev is computed as difference between the total expected lease payment and the FV or cost of leased asset lease is an investment i Charge Excost to Lessee ii lnitial Direct Costs are recorded as separate asset increase net least investment l lower implicit rate earned by lessor Sales Back Lease Agreement asset owner sells the asset back to the buyer and immediately leases it back to the seller 5 More information ignoring executor costs the total cost fo a lease over the entire lease term is the same regardless of whether the lease is a CL or OL however total cost is evenly spread out over the lease period if the lease is an OL while more lease cost is allocated to the earlier year in the term in a CL Chapter 16 income taxes 1 Permanent Differences revenues and expenses that are included in pretax accounting income but not tax income or vice versa only affect the period in which they ariseD no interperiod tax allocationD no deferred taxes affect one period a Can never reconcile 2 Temporary Differences between tax basis of Assets or Liabilities and 3 5 reported BV for nancial accounting arises because of the timing difference of an expense or revenue recognition and results in a future taxable or deductible amount a In a given year and reverses in later years affecting multiple years interperiod tax allocation Deferred Taxes NOL net operating loss Deferred Taxes a TDs that reduce Tax income this year taxable amount next year Def Tax Liab this year i Tax liability whose payment is deferred from this year to the future b TDs that increase Tax Income this year deductible next year Def Tax Asset i Future tax prepaid this year quotKnow how these can be reconciled and how they appear on the income and balance sheet a Classifying Deferred tax asset and deferred tax liability on balance sheet current or noncurrent based on the classi cation of the related asset or liability if there is no related asset or liability classi cation is based on the timing of the TDs reversal in the future warranty expense no crossover allowed 6 Tax rate if change has been enacted use the rate in which TD will reverse but if not use the rate in effect or expected to be in effect each year 7 NOL Carryover taxable revenue lt taxable deductible expense so there is a loss a It can be carried i Back 2 yearsgt lTx Refund Rec lTx Bene tLoss CB ii Forward 20 yea rs Def Tax Asset Allowance for DTA Income Tax bene tloss CB iii Both 22 years all above accounts 1 Apply current year loss to earlier year rst b Carryback to compute CB bene ts NOL is applied to earlier year rst in JE in loss year c Carryforward lf realization of future tax bene t is more likely than not no allowance i This means more than 50 likely ii Otherwise Allowance for DTA which would be computed using future tax rates in effect when the loss CF bene ts will be realized 8 Uncertain Tax Position a Assess probability that the tax bene t of a DTA is likely to be realized in the future b Determine amount of bene t 9 Other info a Change in balance of deferred taxes does not affect the actual taxes paid in cash for a year it affects income tax expense for the year b Def Tax Asset can be netted against Def Tax Liab but only on the bass of current vs noncurrent noncurrent vs current no crossover Study Tips Understand the Hand out problems that were gone over in class included in my other notes for this course Be able to do the practice exam questions well
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