Intermediate Financial Accounting Course Review
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Double-Declining DepreciationDouble the depreciation rate of Straight Line method(1/# of years) x 2Chapter 13: Current Liabilities and ContingenciesInterest bearing notes: charge against interest expense to interest payableNon-interest bearing notes: charge against interest expense to notes payableSales tax:PST is not recoverableGST and HST are recoverableProvisionsExpense method: set up warrant liability, charge expenses against itRevenue method: create unearned warranty revenue and charge against that every year to warranty revenue and expense expensesChapter 14: Long-Term Financial LiabilitiesEntry for issuance of bondDR. Cash Cr. Bonds payableAmortizing bond premium discount:Straight line methodJournal entry for discount:Add/subtract to bonds payable, offset interest expenseEffective interest methodPeriod interest expense = carrying value x market rateAmount to amortize is Interest paid – interest expenseNo straight line under IFRSBond issue costs:Subtract issues costs from PV, recalculate interest rateExtinguishment of DebtNeed to recognize gain/loss if earlyDebt modifications:Substantial if PV (using original eff. Rate) is 10% different Recognize gain or lossMinor:No gain or lossFind new effective rate using original PV and new flowsARO:Journal entriesFind PV of AROAdd ARO to assetDepreciation expense for ARO charge to zeroInterest expense ARO balance to add to ARO balanceEnd with ARO Dr. and Credit cash plus gain/lossChapter 15: Shareholder’s EquityIssuing shares at par value → anything over is contributed surplusShares sold by subscription:Dr. Subscription receivable Cr. Shares subscribedDr. Cash Cr. Subscriptions ReceivableDr. Shares subscribed Cr. Common sharesMore than 1 type of security, how to allocate?Relative fair value: proportionate to totalResidual value: value and allocate first and proceedShare issue costs: Credit share capital for amountJournal entry for dividend when declaredDR. Dividends (Cash) Cr. Dividend PayableCash Dividend amount preferred by rate on book value of sharesStock dividend amount calculated on fair value, not book valueStock dividend JE:DR. Dividend (Stock) Cr. Common Shares→ This is just a rearrangement within the equity category
Chapter 16: Complex Financial instrumentsMeasurement: IFRS requires fair value method; ASPE allows both (easier first)Convertible Debt Issue Example:Find PV of bond using market IR PMT → difference from par is contributed surplus (conversion rights)Cash Bonds Payable Contributed Surplus (conversion rights)When convertible debt is converted, need to cancel contributed surplus (conversion rights)Induced conversion:Bonds PayableLoss (FV-carrying value)Contributed Surplus – conversion rightsRE (premium minus the loss) Common shares CashNormal retirement:Bonds PayableContributed surplus – conversion rights Contributed surplus – conversion rights expired CashEarly retirement:Bonds PayableExpense – Debt RetirementContributed surplus – conversion rightsRE CashDerivatives:Recognize gains and losses (in net income), treat as assetForwards:Measured at fair valueRecognize gain and loss on derivative asset/liabilityFutures:Same as forwards but exchange traded → readily available market valuePurchase commitment:Not treated as derivative if company intends to take delivery of goodsDirect stock award:Fair value compensation expense, allocated over service periodOptions:Compensation expense: determined at grant date and allocated over required service periodDR. Compensation expense Cr. Contributed Surplus – stock optionsCSOP JE:CashContributed surplus – stock options Common sharesESOP JE:Treated like investment transactionDr. Cash Cr. Contributed surplus – stock optionsDr. CashDr. Contributed surplus – stock options Cr. Common sharesCSOP is expensed, ESOP receive cash for contributed surplus – stock optionsChapter 17: EPSSimple capital structure:EPS=(Net Income – Preferred Shares)/(Weighted avg. # of shares)Calculate weighted avg. # of shares:Levels (amounts): portion of year outstanding * amountLayers (changes): BB*12/12 + each change *months outstandingIf common shares will be issued in the future, assume already taken place (includes passage of time)Complex capital structure:Diluted EPS=(Net Income avail. +Income from potential dilution)/(weighted avg. # of shares plus share dilution)Only apply if lowers EPSFor each dilutive instrumentFind after tax add. To net income/dilution = EPS ranked lowest to highest and apply sequentiallyOptions and warrantsTreasury stock method:Use cash from issue to buy back shares → net new shares issuedReverse treasury stock method (put options):Issue shares to raise enough cash to buy shares → net new sharesDilutive EPS:If options in money, exercise to find new EPSCalculate stand alone EPS on convertible bonds and preferredRank, and add if lowering, stop if gets to greaterIf negative EPS, all dilutive are deemed antidilutiveChapter 18: Income Taxes