Intermediate Financial Accounting Course Review

Double-Declining Depreciation

• Double the depreciation rate of Straight Line method
• (1/# of years)  x 2

Chapter 13: Current Liabilities and Contingencies

• Interest bearing notes: charge against interest expense to interest payable
• Non-interest bearing notes: charge against interest expense to notes payable
• Sales tax:

• PST is not recoverable
• GST and HST are recoverable

• Provisions

• Expense method: set up warrant liability, charge expenses against it
• Revenue method: create unearned warranty revenue and charge against that every year to warranty revenue and expense expenses

Chapter 14: Long-Term Financial Liabilities

• Entry for issuance of bond

DR. Cash

        Cr. Bonds payable

• Amortizing bond premium discount:
• Straight line method

• Journal entry for discount:

Add/subtract to bonds payable, offset interest expense

• Effective interest method

• Period interest expense = carrying value x market rate
• Amount to amortize is Interest paid – interest expense

• No straight line under IFRS
• Bond issue costs:

• Subtract issues costs from PV, recalculate interest rate

• Extinguishment of Debt

• Need to recognize gain/loss if early

• Debt modifications:

• Substantial if PV (using original eff. Rate) is 10% different

• Recognize gain or loss

• Minor:

• No gain or loss

• Find new effective rate using original PV and new flows

• ARO:

• Journal entries
• Find PV of ARO
• Add ARO to asset
• Depreciation expense for ARO charge to zero
• Interest expense ARO balance to add to ARO balance
• End with ARO Dr. and Credit cash plus gain/loss

Chapter 15: Shareholder’s Equity

• Issuing shares at par value → anything over is contributed surplus
• Shares sold by subscription:

Dr. Subscription receivable

        Cr. Shares subscribed

Dr. Cash

        Cr. Subscriptions Receivable

Dr. Shares subscribed

        Cr. Common shares

• More than 1 type of security, how to allocate?

• Relative fair value: proportionate to total
• Residual value: value and allocate first and proceed

• Share issue costs: Credit share capital for amount
• Journal entry for dividend when declared

DR. Dividends (Cash)

        Cr. Dividend Payable

• Cash Dividend amount preferred by rate on book value of shares
• Stock dividend amount calculated on fair value, not book value

Stock dividend JE:

DR. Dividend (Stock)

        Cr. Common Shares

→ This is just a rearrangement within the equity category

Chapter 16: Complex Financial instruments

Measurement: 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 Payable

Loss (FV-carrying value)

Contributed Surplus – conversion rights

RE (premium minus the loss)

        Common shares

                Cash

• Normal retirement:

Bonds Payable

Contributed surplus – conversion rights

        Contributed surplus – conversion rights expired

        Cash

• Early retirement:

Bonds Payable

Expense – Debt Retirement

Contributed surplus – conversion rights

RE

        Cash

• Derivatives:

• Recognize gains and losses (in net income), treat as asset

• Forwards:

• Measured at fair value
• Recognize gain and loss on derivative asset/liability

• Futures:

• Same as forwards but exchange traded → readily available market value

• Purchase commitment:

• Not treated as derivative if company intends to take delivery of goods

• Direct stock award:

• Fair value compensation expense, allocated over service period

• Options:

• Compensation expense: determined at grant date and allocated over required service period

DR. Compensation expense

        Cr. Contributed Surplus – stock options

• CSOP JE:

Cash

Contributed surplus – stock options

        Common shares

• ESOP JE:

Treated like investment transaction

Dr. Cash

        Cr. Contributed surplus – stock options

Dr. Cash

Dr. Contributed surplus – stock options

        Cr. Common shares

CSOP is expensed, ESOP receive cash for contributed surplus – stock options
Chapter 17: EPS

• Simple capital structure:

• EPS=(Net Income – Preferred Shares)/(Weighted avg. # of shares)

• Calculate weighted avg. # of shares:

• Levels (amounts): portion of year outstanding * amount
• Layers (changes): BB*12/12 + each change *months outstanding

• If 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 EPS

• For each dilutive instrument

• Find after tax add. To net income/dilution = EPS ranked lowest to highest and apply sequentially

• Options and warrants

• Treasury stock method:

• Use cash from issue to buy back shares → net new shares issued

• Reverse treasury stock method (put options):

• Issue shares to raise enough cash to buy shares → net new shares

• Dilutive EPS:

• If options in money, exercise to find new EPS
• Calculate stand alone EPS on convertible bonds and preferred
• Rank, and add if lowering, stop if gets to greater

• If negative EPS, all dilutive are deemed antidilutive

Chapter 18: Income Taxes