Cash - Answer Money that is FREE and CLEAR and available to be spend in current operations.
Not Cash: - Answer Security deposits & bond sinking funds
Three-Month Rule - Answer Highly liquid securities with ORIGINAL maturity dates of three months or less are treated as cash.
Bad Debts - Dir...
CPA Exam WITH ANS 2024 – FAR
Cash - Answer Money that is FREE and CLEAR and available to be spend in current
operations.
Not Cash: - Answer Security deposits & bond sinking funds
Three-Month Rule - Answer Highly liquid securities with ORIGINAL maturity dates of
three months or less are treated as cash.
Bad Debts - Direct Write-Off Method - Answer - No entry for bad debts until customer
actually defaults.
- At default, the cutomer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - Answer Income Statement Approach
Balance Sheet Approach
Income Statement Approach - Answer - Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: - Answer Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach - Answer - Estimate of bad debt expense is based on the
balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected - Answer Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - Answer - Assignment of A/R normally is done with
recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - Answer - With or without recourse.
Pledging A/R - Answer - Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes - Answer APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year,
there is no requirement to impute interest to that note.
Held-to-Maturity Securities - Answer - Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Trading Securities - Answer - Equity or Debt securities held primarily for sale in the near
term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement
Available-for-sale Securities - Answer - Debt or Equity securities not classified as either
HTM or Trading
- Debt is classified on BS by maturity date
- Equity securities are classified by mgt's intent
- Carried on BS at aggregate FMV
- Unreal G/L go directly to SH equity (other comprehensive income)
Derivatives - Answer Investment that derives its value from something else (asset or
liability)
Hedging - Answer Strategy of investing in a derivative to counteralance the potential
loss from another security or transaction
Non-Hedge Derivatives - Answer - Record on BS as asset or liability at FMV
- Report unrealized G/L on IS
Fair Value Hedge - Answer Protects against potential loss from the change in an asset's
or liabilities's FMV
- Record on BS as asset or liability at fair market value
- Report unrealized holding G/L on IS
Cash-Flow Hedge - Answer Protects against potential loss from an asset's or liability's
future cash flow
- Record on BS as asset or liability
- Unreal G/L depend on whether hedge is effective
- Effective cash flow hedges counterbalance losses elsewhere
- Ineffective cash flow hedges are reported on the IS
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