Accounting 4501 Final

Level 1: Uses quoted prices from active markets for identical assests to determine fair vale. This is the prefered method.

Level 2: Quoted prices from an active market for similar assets  or quoted prices from less than active markets

Level 3: Covers unobservable inputs such as managements estimates of expected future cash flows or abnormal earnings, which are then used in valuation model approaches to fair value measurment.

• Dr: Marketable securities - bonds
•      Cr: Cash

• Dr: Unrealized holding loss
•      Cr: Marketable adjustment - Bond

• Dr. Marketable adjustment - Bond
•     Cr: Unrealized holding gain

• A contra asset marketable securities account.
• So that investments are always carried at fair value.

• 1. Lease transfers ownership of the asset by end of lease term.
• 2. Lease contains a bargain price purchase option
• 3. Noncanceable lease term is 75% or more of economic life of the asset
• 4. Present value of minimum lease payments equals or exceeds 90% of the current fair market value of leased asset

• Date      Interest      Cash        Liability       Lease     
•              Portion      Payment   Reduction    Liability

Lease liablity X interest rate

Cash payment - interest portion

• Assests go up
• Liabilities go up: Current and long term
• ROA goes down
• D/E goes up
• and you will now have depreceation expense

• DR: Capital leases
•     CR: Obligation under capital leases (Liability)

• DR: Interest expense
• DR: Obligation under capital lease
•       CR: Cash

• DR: Depreceation expense
•       CR: Accumulated depreciation

• DR: Rent expense
•       CR: Cash

Due to the capitalization of the lease showing the companies true financial position on the balance sheet

• Take the average decrease in last 3 years:
• Minues each year seperatly and then divide by 2.
• Then subtract that number from last years payment
• Take total payments and divide by that number to make sure it gives us the number of years on lease remaining.

• Cash basis
• Accrual Method

• Tax expense is based on book income =
• IBT X Tax rate

• Income tax payable=
• Taxable income X tax rate
• or value on tax return

Tax expense/book income

Fed tax expense/tax rate = BI

• Sales prices between subsidiaries
• How to lower taxes

means the company doesnt think the income will be as good this year

Contingent liabilities

• DR: Income tax expense
• either DR: DTA - depends on problem
•        CR: Income tax payable
•        CR:either DTL - depend on problem

• Salary: Base compensation
• Short term incentives : Based on accounting numbers. Revenue, EBIT, any measure of profits, costs, ROA,ROE
• Long Term incentives: Based on pay for performance. Also based on stock based compensation. This bridged the gap between management and owners. ROA over 3 years

• Pros:
• Incentive to work harder and improve companies earnings.

• Cons:
• Earnings management problems.
• Change in policies by management to manipulate numbers.
• Focus on only short term performance.
• Management will manipulate earnings around bonus tiers. (Cookie jar reserves)
• Can manage earnings up or down based on bonus threshold.

• Pros:
• Long term - Stock options are a pro for tech industry where companies do not have cash flow to pay employees. Can motivate managment to improve stock price.
• Long Term - Stock appriciation rights do not dilute shares

• Cons:
• Long Term: When options are exerised it causes ownership to be diluted.
• Short Term: Both accounting and non accounting figures can be manipulated in short term incentives (Bonuses)

# of options x FV (Black sholes model) / # of vesting years

• DR: Compensation expense
•       CR: PIC-SO

• DR: Cash (Option price)
• DR: PIC - SO
•       CR: Common Stock (PAR)
•       CR: PIC - in excess of par

• 1. Pay right taxes
• 2. Appropriate accounting
• 3. No fraud in record keeping