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Financial Accounting

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Academic year: 2023

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Consequently, the fair value of the building must be determined to calculate the amount of any reportable loss. At this point, the owner cannot recover even the book value of the asset through continued use.

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In a Set of Financial Statements, What Information Is Conveyed about Intangible Assets?

  • Identifying and Accounting for Intangible Assets
  • The Balance Sheet Reporting of Intangible Assets
  • Recognizing Intangible Assets Owned by a Subsidiary
  • Accounting for Research and Development

Realize that the use of historical cost means that a company's intangible assets such as patents and trademarks may be worth much more than what appears on the balance sheet. Many intangible assets (such as trademarks and copyrights) are reported on the balance sheet of their creator at a value significantly below the actual value.

Figure 11.3 Big Company Buys Little Company, Which Holds Assets with These Values
Figure 11.3 Big Company Buys Little Company, Which Holds Assets with These Values

Acquiring an Asset with Future Cash Payments

It is the historical price of the patent, the present value of the cash flows without future interest. The present value of the payments (principal) is the cash that is paid after all future interest is mathematically removed.

Figure 11.5 Present Value—Acquisition of Patent and Recognition of Year One Interest
Figure 11.5 Present Value—Acquisition of Patent and Recognition of Year One Interest

End-of-Chapter Exercises

What is the book value of the patent listed on Christiana's balance sheet at the end of 20X5? What is the book value of the patent listed on Christiana's balance sheet at the end of 20X7?

Figure 11.12 Webworks Financial Statements 337   Financial Accounting
Figure 11.12 Webworks Financial Statements 337 Financial Accounting

In a Set of Financial Statements, What Information Is Conveyed about Equity Investments?

  • Accounting for Investments in Trading Securities
  • Accounting for Investments in Securities That Are Available for Sale
  • Accounting for Investments by Means of the Equity Method
  • The Reporting of Consolidated Financial Statements
  • End-of-Chapter Exercises

Understand that the reporting of investments in the ownership shares of another company depends on the purpose of the acquisition. Which of the following is not a reason why investments in trading securities are presented at fair value on the balance sheet.

Figure 12.2 Receipt of Dividend from Investment in Stock
Figure 12.2 Receipt of Dividend from Investment in Stock

In a Set of Financial Statements, What

Information Is Conveyed about Current and Contingent Liabilities?

Basic Reporting of Liabilities

A debt that is expected to be settled within one year from the balance sheet date is classified as a current liability1. The amount reported as current liabilities is particularly important in this analysis because those debts must be met in the near future. Not surprisingly, analysts are concerned when current liabilities grow relatively high compared to current assets, because the organization may not be able to meet those obligations in a timely manner.

Determining the liabilities to be included on a balance sheet often requires considerable thought and analysis. Current liabilities are typically those reported debts that must be satisfied within one year from the balance sheet date. Because a company must be able to meet its debts as they fall due, analysts pay close attention to this total.

Figure 13.1 Liability Section of Balance Sheet, Johnson & Johnson and Subsidiaries as of December 28, 2008
Figure 13.1 Liability Section of Balance Sheet, Johnson & Johnson and Subsidiaries as of December 28, 2008

Reporting Current Liabilities Such as Gift Cards

Unredeemed Gift Card Obligations.” Over the past decade, the importance of gift cards has increased dramatically for many businesses. How does a company like Best Buy account for the thousands of gift cards it sells each year? To illustrate, suppose a company sells 10,000 gift cards with a redemption value of $50 each.

Answer: One reason gift cards have become so popular with businesses is that a percentage will never be redeemed. As a result of this accounting issue, a note to the financial statements produced by Best Buy explains: "We recognize revenue from gift cards when: (i) the gift card is used by the customer, or (ii) it is probable that the gift card will be. redeemed by the customer is remote ('gift voucher break'), and we determine that we have no legal obligation to transfer the value of unredeemed gift vouchers to the relevant jurisdictions.". The company must ensure that income for such gift cards is not reported until an appropriate time.

Figure 13.3 Year-end Adjusting Entry to Recognize Debt for Three Days’ Work
Figure 13.3 Year-end Adjusting Entry to Recognize Debt for Three Days’ Work

Accounting for Contingencies

They believe a loss is likely and that $800,000 is a reasonable estimate of the amount that will eventually have to be paid as a result of the damage done to the environment. Decision makers analyzing the Wysocki Corporation should realize that the amount reported is not an exact measure of the ultimate loss. By the time the exact amount of loss is determined, investors and creditors have already incorporated the original information into their decisions, including the uncertainty of the outcome.

Answer: As a result of the conservatism inherent in financial accounting, the timing used in recognizing gains does not follow the same rules that apply to losses. GAAP requires a contingent loss to be recognized when it is probable that it will occur and a reasonable estimate of the amount can be made. It is the best estimate of the amount that a company would rationally pay to settle the liability on the balance sheet date or to transfer it to a third party.

Figure 13.9 Two Ways to Fix an Estimation
Figure 13.9 Two Ways to Fix an Estimation

Accounting for Product Warranties

There are no claims in the first year, but similar programs have historically resulted in 3 percent of refrigerators being repaired at an average cost of $90. Revenues from the sale of refrigerators are recognized in the first year, so the warranty costs arising from these revenues are also included at that time. In this adjusting entry, the change in expense is not recorded in the sales period.

Due to the matching principle, the estimated expense was recognized in the same period as the revenue generated from the sale of the product. Due to the specified conditions, this extended warranty does not become active until January 1, the second year. I am interested in the terms of current liabilities as well as the age of these liabilities.

Figure 13.15 January 1, Year One—Sale of Extended Warranty Covering Years 2–4
Figure 13.15 January 1, Year One—Sale of Extended Warranty Covering Years 2–4

End-of-Chapter Exercises

Past experience has told Sierra that about 4 percent of toasters need repair at an average cost of $10 each. What journal entry would Maxout make at the end of the second year after the purchase of the computer, assuming the customer also purchases an extended warranty. Which of the following is not a criterion that must be met for an item to be classified as a liability.

On December 31, OK Buy's accountant determines that 3 percent of the outstanding gift cards will never be redeemed for various reasons. What is the balance in OK Buy's unearned revenue account on December 31 after all of the above transactions have been recorded. On account, Webworks is buying sixty-five keyboards for $117 each and ninety of the new flash drives for $20 each.

Figure 13.26 Webworks Financial Statements
Figure 13.26 Webworks Financial Statements

In a Set of Financial Statements, What Information Is Conveyed about Noncurrent Liabilities

  • The Issuance of Notes and Bonds
  • Accounting for Zero-Coupon Bonds
  • Pricing and Reporting Term Bonds
  • Issuing and Accounting for Serial Bonds
  • Bonds with Other Than Annual Interest Payments
  • End-of-Chapter Exercises
  • Debt Financing

Subsequently, when Brisbane makes the first required six-month interest payment on November 1, the net effect will be interest for one month - the period since the date of issue (six months minus five months). Answer: In Chapter 11, "What Information Is Conveyed About Intangible Assets in a Series of Financial Statements?", the effective rate method of reporting a present value over time was demonstrated. The price of the bond is determined by calculating the present value of the required cash flows using the effective interest rate negotiated by the two parties.

1As explained in Chapter 11, "What Information Does a Series of Financial Statements Convey About Intangible Assets?", the present value of $1 can be determined mathematically using the formula $1/(1 + i)n. The interest rate stated in the contract multiplied by the face value yields the amount of the cash payments. In addition, as a serial bond, the first payment of the face value is made at the end of the first year.

Figure 14.1 May 1, Year One—Cash of $400,000 Borrowed on Long-term Note Payable
Figure 14.1 May 1, Year One—Cash of $400,000 Borrowed on Long-term Note Payable

In Financial Statements, What Information Is Conveyed about Other Noncurrent Liabilities?

  • Accounting for Leases
  • Operating Leases versus Capital Leases
  • Recognition of Deferred Income Taxes
  • Reporting Postretirement Benefits
  • End-of-Chapter Exercises

Note that the lessee can account for the lease either as an operating lease or as a capital lease based on the terms of the contract. Record the opening entry for a capital lease with an asset and a liability calculated at the present value of future cash flows. This contract does not appear to meet any of the four criteria for a capital lease.

Abilene records both the leased aircraft and the liability at the present value of the required cash payments. The aircraft will be used by Abilene for the seven-year term of the lease. For a capital lease, the present value of future payments by the lessee is reported as a liability.

Figure 15.4 December 31, Year One—Capital Lease Recorded at Present Value
Figure 15.4 December 31, Year One—Capital Lease Recorded at Present Value

In a Set of Financial Statements, What Information Is Conveyed about Shareholders’ Equity?

  • Selecting a Legal Form for a Business
  • The Issuance of Common Stock

The limited liability offered by a corporation is one of the main reasons for its popularity. Critics have long argued that dividend collection is not a new profit-making process. Shares of ownership of a corporation (capital stock) are issued to raise money for operations and growth.

2A list of the typical contents of the statute is available in the "Constitutional act". However, unless such guarantee is given, the debt is the debt of the company and not of the members of the ownership. However, specific rights are determined by the laws of the country of incorporation and vary slightly from country to country1.

Figure 16.1 Shareholders’ Equity—Kellogg Company as of January 3, 2009
Figure 16.1 Shareholders’ Equity—Kellogg Company as of January 3, 2009

Typical Corporate Ownership Structure

Issuing and Accounting for Preferred Stock and Treasury Stock

Define "treasury stock" and provide reasons for a corporation to spend its money to acquire treasury stock. To illustrate this, assume that Chauncey Company subsequently sells one hundred thousand shares of its treasury stock for $5.00 each. The "capital in excess of cost treasury stock" is the same type of account as the "capital in excess of par value".

Answer: Interestingly, selling your own shares below cost is a transaction that is not well covered in the US. The most common approach appears to be to first remove any equity in excess of cost recorded by selling previous shares of equity at a premium. A capital balance of $100,000 in excess of the cost of treasury stock was created in the previous journal entry.

Figure 16.5 Issue Ten Thousand Shares of $100 Par Value Preferred Stock for $101 per Share
Figure 16.5 Issue Ten Thousand Shares of $100 Par Value Preferred Stock for $101 per Share

The Issuance of Cash and Stock Dividends

The day on which Hurley's Board of Directors formally decides on the payment of this dividend is referred to as the declaration date. When the dividend is set by the board, the record date is also set. All shareholders who own the shares on that day are eligible to receive the dividend.

The ex-dividend date is the first day on which the investor is not entitled to a dividend. Because the receipt of the dividend has been forfeited, the market price of the stock typically falls by approximately the amount of the dividend on the ex-dividend date, although a myriad of other market factors always affect stock price movements. Whether owners of preference shares have lost their right to the first year's dividend.

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Figure 11.8 Acquisition of Intangible Asset—Recognition of Interest and Amortization
Figure 11.7 Acquisition of Intangible Asset—Present Value of an Annuity Due
Figure 11.10 Computation of Liability Principal at End of Year Two
Figure 11.12 Webworks Financial Statements 337   Financial Accounting
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