FAR Study Group Q3 2016

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  • #784853
    Anonymous
    Inactive

    Problem:

    Following are selected balance sheet accounts of Zach Corp. at December 31, 1991 and 1990, and the increases or decreases in each account from 1990 to 1991. Also presented is selected income statement information for the year ended December 31, 1991, and additional information.

    Selected income statement information for the year ended December 31, 1991

    Sales revenue…………………..$155,000

    Depreciation………………………..33,000

    Gain on sale of equipment……….13,000

    Net income………………………….28,000

    Selected balance sheet accounts…………..1991………..1990………Incr/(Decr)

    Assets: Accounts receivable………………$ 34,000$ …..24,000………$10,000

    Property, plant, and equipment……………..277,000…….247,000……..30,00 0

    Accumulated depreciation………………….(178,000)……(167,000).. …..(11,000)

    Liabilities and stockholders' equity:

    Bonds payable……………………………………49,000….. ….46,000…………3,000

    Dividends payable……………………………….8,000……….. .5,000………….3,000

    Common stock, $1 par………………………..22,000……….19,000…… …….3,000

    Additional paid-in capital………………………9,000…………3,000…. ……….6,000

    Retained earnings……………………………..104,000………. 91,000………..13,000

    Additional information:

    1. Accounts receivable relate to sales of merchandise.

    2. During 1991, equipment costing $40,000 was sold for cash.

    3. During 1991, $20,000 of bonds payable were issued in exchange for property, plant, and equipment. There was no amortization of bond discount or premium.

    This question represents an activity that will be reported in Zach's statement of cash flows for the year ended December 31, 1991. Determine the amount that should be reported in Zach's 1991 statement of cash flows.

    Question: What are the proceeds from sale of equipment?

    (DR) Cash………..31,000 (plug = answer)
    (DR) Acc. Dep…. x = 22,000
    (CR) Equip……….40,000
    (CR) Gain…………13,000

    (DR) Dep. Exp…..33,000
    (CR) Acc. Dep…..33,000

    Since we're trying to get a (CR) of 11,000 on our T-account, it's gonna be 33,000 – x = 11,000, where x = 22,000.

    Correct me if my approach is wrong!

    #784854
    pracap
    Participant

    Hey Ninjas,
    Can anyone help me to amortize BIC with Premium?

    I have Becker simulation material which is old and does not include the new rules of Bond Issuance cost. Below is the SIM question on bonds.

    On January 1, Year 1, Acorn Financial Corp. issued 800 convertible bonds. Each $1,000 face value bond is convertible into 5 shares of common stock. The bonds have a 10 year term to maturity and pay interest semi-annually. Acorn's common stock has a par value of $20.00 per share. The bonds have a stated interest rate of 4% and pay interest semi-annually. The convertible bonds were sold for $875,500. Bond issue costs of $50,000 will be subtracted from the bond sale proceeds to be received by Acorn. The bonds were sold to yield a market interest rate of 3%. Acorn will use the effective interest method to amortize the bond discount and/or premium. Round all amounts to the nearest dollar.

    Requirements:

    1) Record the journal entry for the issuance of the convertible bonds on January 1, Year 1. Select “no entry” if no journal entry is required on this date.

    January 1, Year 1

    2) Record the journal entries on June 30, Year 1 to recognize interest expense and the amortization of the bond issue cost for the first six months of Year 1.

    June 30, Year 1

    3) Record the journal entries on December 31, Year 1 to recognize interest expense and the amortization of the bond issue cost for the second half of Year 1.

    December 31, Year 1

    4) Assume that the bonds are converted on January 1, Year 2 and Acorn uses the book value method to account for the conversion of bonds into common stock. Record the journal entry for the conversion.

    January 1, Year 2

    5) Assume that the bonds are converted on January 1, Year 2 and Acorn uses the market value method to account for the conversion of bonds into common stock. Assume the market price of the common stock on the date of conversion was
    $ 250.00 per share. Record the journal entry for the conversion.

    January 1, Year 2

    AUD - 81
    BEC - 79
    FAR - 80
    REG - 79
    pracap
    #784855
    Anonymous
    Inactive

    Someone correct me if I'm wrong, but Bond Issuance costs should be a direct reduction of the PV of the Bond. I think the first journal entry would be:

    Dr. Cash 825500
    Cr. Premium 25500
    Cr. Bond Payable 800000

    Since the bonds are convertible (not detachable stock warrants) all the proceeds go to bonds for BV and MV method at issue date.

    #784856
    jmc0434
    Participant

    Bonds are not my strong suite (which I am glad I saw this question!) but I agree with AdSa. BICs are a direct reduction to the carrying amount of the bond.

    Face = 800,000
    CV = 825,500
    Premium = 25,500
    Coupon Rate = 4% / 2 = 2%
    Mkt Rate = 3% / 2 = 1.5%

    Journal Entries

    1. Bond Issuance
    Dr. Cash 825,500
    Cr. Premium on Bonds 25,500
    Cr. Bonds Payable 800,000

    2. June 30, Year 1
    Dr. Bond Interest Expense 12,383
    Dr. Premium on Bonds 3617
    Cr. Cash 16000

    3. December 31, Year 1
    Dr. Bond Interest Expense 12328
    Dr. Premium on Bonds 3672
    Cr. Cash 16000

    4. Bond Conversion – Book Value
    Dr. Bonds Payable 800,000
    Dr. Premium on Bonds 18,211
    Cr. Common Stock 80,000
    Cr, APIC 738,211

    5. Bond Conversion – Market Value
    Dr. Bonds Payable 800,000
    Dr. Premium on Bonds 18,211
    Dr. Loss on Conversion 181,789
    Cr. Common Stock 80,000
    Cr, APIC 920,000

    Let us know what the correct answer is!

    BEC - 79
    AUD - 89
    REG - 80
    FAR - 7/19/16

    #784857
    jmc0434
    Participant

    @eleuthromania – I agree with that approach although it may have taken me a few minutes to understand what exactly was going on.

    For the Sale of Equipment it would be

    Dr. Cash 31,000
    Dr. ADA 22,000
    Cr. Gain on Sale 13,000
    Cr. Equipment 40,000

    I believe from this transaction the cash proceeds are considered as an investing activity while the gain is considered an operating activity.

    BEC - 79
    AUD - 89
    REG - 80
    FAR - 7/19/16

    #784858
    se7en.14
    Participant

    Penn Corp. paid $300,000 for the outstanding common stock of Star Co. At that time, Star had the following condensed balance sheet:

    Carrying Amounts:

    Current assets $ 40,000
    Plant and equipment (net) $380,000
    Liabilities $200,000
    Stockholders' equity $220,000

    The fair value of the plant and equipment was $60,000 more than its recorded carrying amount. The fair values and carrying amounts were equal for all other assets and liabilities. The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). What amount of goodwill, related to Star's acquisition, should Penn report in its consolidated balance sheet?

    A: 20,000
    Measurement of Goodwill

    The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b):

    a.The aggregate of the following:
    ……..1.The consideration transferred measured in accordance with this Section, which generally requires acquisition-date fair value (see paragraph 805-30-30-7)
    ……..2.The fair value of any noncontrolling interest in the acquiree
    ………3.In a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree.
    b.The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Topic.

    letter b: I thought it was only just assets and not incl liabilites? thats what I see in becker page 33.or am i just confused..

    .
    #784859
    gigabyte2001
    Participant

    Futures contracts anyone?

    The Gleim example says – Co will need to buy 100k of Commodity B in the future, so to hedge against price increase, they purchase a futures contract for 100k of commodity b at 3.05. Then they buy 100k of Commodity B at the spot rate of 3.20.

    I don't understand why they buy later at the spot rate when they have a contract at 3.05?

    AUD - 87
    BEC - 78
    FAR - 82
    REG - 93
    .

    B - 11/11/16
    A - 4/16/16 87!!
    R - 2/17/17
    F - 7/26/16 - Waiting for 8/23

    #784860
    jmc0434
    Participant

    @se7en.14 – The valuation does include liabilities. You would compare the Fair Value of Net Assets (equity) to the total consideration given to calculate if there is goodwill or a gain in the acquisition. So in this case

    Total Consideration = 300,000
    FV of Net Assets = 280,000 (220,000 + 60,000)
    Goodwill = 20,000

    BEC - 79
    AUD - 89
    REG - 80
    FAR - 7/19/16

    #784861
    gigabyte2001
    Participant

    @se7en.4 – The math I would do:
    Consideration = 300k

    Value –
    Current Assets 40k
    PPE: 380k
    PPE FV Inc: 60k
    Total Assets: 480k
    Less Liab: 200k
    Value = 280k

    Consideration less Value = 20k Goodwill

    The original Goodwill on the books doesn't count because it's not an “identifiable asset” (at least that's what Gleim says.)

    Does that help?

    AUD - 87
    BEC - 78
    FAR - 82
    REG - 93
    .

    B - 11/11/16
    A - 4/16/16 87!!
    R - 2/17/17
    F - 7/26/16 - Waiting for 8/23

    #784862
    gigabyte2001
    Participant

    Does Becker by chance say “Net Assets” rather than “Assets”? Gleim uses the net identifiable assets term which is assets, not including goodwill, minus liabilities.

    AUD - 87
    BEC - 78
    FAR - 82
    REG - 93
    .

    B - 11/11/16
    A - 4/16/16 87!!
    R - 2/17/17
    F - 7/26/16 - Waiting for 8/23

    #784863
    jmc0434
    Participant

    @gigabyte2001 – I have seen Becker use both “net assets” and “net identifiable assets”

    BEC - 79
    AUD - 89
    REG - 80
    FAR - 7/19/16

    #784864
    jmc0434
    Participant

    @gigabyte2001 – Future contracts… I have not gotten here for my review yet but I believe the Company bought a futures contract at a 3.05 exchange rate and when the sale actually occurs the spot rate was at 3.20. So when the company “cashs in” the futures contract to buy 100k of Commodity B at 3.05 they will recognize a gain??

    That is the only thing I can think of that makes sense because I agree it does not make sense for them to buy commodity B at the spot rate if they already bought a futures contract at a lower exchange rate.

    Let me know what the correct answer is!

    BEC - 79
    AUD - 89
    REG - 80
    FAR - 7/19/16

    #784865
    nadroj
    Participant

    The Futures contract settles financially, unless they do an EFP, right?

    #784866
    gigabyte2001
    Participant

    On the futures, I would come up with the same net result as Gleim, but in less steps.
    I would:
    debit Inventory for FMV at 3.2,
    credit cash for 3.05 from the contract price
    credit gain for the difference.

    Their example has 3 JE's,
    Dr Inv & Cr Cash at the 3.2 rate,
    Dr Futures & Cr Gain for the difference
    Dr Cash & Cr Futures for the difference when paid.

    That suggests when inventory is bought, the entity pays market price of 3.20 and then i'm confused. Either way, you end up with 3.20 for Inventory, 3.05 for cash and .15 for the gain.

    AUD - 87
    BEC - 78
    FAR - 82
    REG - 93
    .

    B - 11/11/16
    A - 4/16/16 87!!
    R - 2/17/17
    F - 7/26/16 - Waiting for 8/23

    #784867
    pracap
    Participant

    @jmc0434
    @AdSa
    Thanks for your response. In fact Becker text has been updated with an example for only bonds issued at discount with BIC and not for Premium.
    Am wondering, as to amortization schedule for Premium with BIC. I have for discount with BIC.

    Has anybody knows amortization schedule for Premium with BIC? Is it the net amount (premium-BIC) to be considered for amortization?

    AUD - 81
    BEC - 79
    FAR - 80
    REG - 79
    pracap
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