ACG 5026 Final Exam Questions and Detailed Answers
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Course
ACG 5026
Institution
ACG 5026
Identify and account for leases (operating and capital) A lease is a contract between an owner of an asset and a party desiring to use the asset. Lessor- the owner of an asset, lessee- the party desiring to use the asset. Advantages- often requires less equity investment, payments may be structured...
ACG 5026 Final Exam Questions and
Detailed Answers
Identify and account for leases (operating and capital) ✅A lease is a contract between
an owner of an asset and a party desiring to use the asset. Lessor- the owner of an
asset, lessee- the party desiring to use the asset. Advantages- often requires less
equity investment, payments may be structured to meet lessee's needs, asset may be
used for only part of its useful life, less retains tax benefit of depreciation. Operating
lease method- No balance sheet reporting of leased asset nor the lease liability. Lease
payments are recorded as rent expense when paid. Capital lease method- leased asset
and liability reported on the lessee's balance sheet, asset is depreciated. Lease liability
is amortized like debt.
Describe and interpret pension accounting ✅Defined contribution plan- Company
makes periodic contributions to an employee's account, some plans require employee
matching contributions
defined benefit plan- company makes payments to an employee after retirement.
Payment is predefined based on years of service, retirement age and salary. Funding
Determined by federal law and investment opportunities
Describe and interpret income tax accounting ✅Companies often maintain two sets of
books, GAAP reporting and income tax reporting. Deferred tax liabilities arise when
taxable income is less than financial income, temporary differences that lead to deferred
tax liabilities.
Describe the characteristics of debt and that of equity ✅Debt- formal legal contract,
fixed maturity date, fixed periodic payments, security in case of default, no voice in
management, interest expense deductible.
Equity- no legal contract, no fixed maturity date, discretionary dividends, residual asset
interest, voting rights (common), dividends not deductible, double taxation
Explain and account for stock issuance and repurchase treasury stock ✅Used to
obtain cash and other assets for use in the business. Creates an increase in assets and
stockholders' equity. -common stock/preferred stock account increases by par value X #
shares sold. -additional paid in capital account increases by remainder of issue price.
No effect on the IS. repurchase- how it works, a company buys its own stock from
investors at the market price. Reasons for repurchase - to reduce the # of shares
outstanding in order to increase the value of possible undervalued stock (sends a
positive signal to the market that affects share price favorably), to offset the dilutive
effects of an employee stock option program. Accounting for treasury stock never
results in a gain or loss on the IS. Difference between the cost of the stock and the
resale price is an adjustment to additional paid in capital. A contra stockholder's equity
account, deducted from total stockholder's equity on the balance sheet.
, Explain and account for dividends and stock splits ✅Cash dividends- Reasons for
dividend payments vary, most paid in cash and quarterly. No effect on profit. Stock
dividends- retained earnings is reduced, contributed capital is increased. Stock splits-
not monetary transaction, no financial statement effects
Discuss other comprehensive income items ✅A more inclusive notion of company
performance than net income. Includes all recognized changes in equity that occur
during a period except those resulting from exchanges with owners. Includes effects
that are considered outside of management's control. (net income viewed as a measure
of management's performance). Includes net income plus foreign currency adjustments,
unrealized changes in market values of available-for-sale securities and derivatives and
adjustments to pension and other benefit plans. Displayed separately in stockholder's
equity section of balance sheet as other comprehensive income (OCI)
Describe basic and diluted EPS ✅Earnings per share- reported on the face of the IS,
at least one and potentially two EPS amounts are required. Basic- always required,
diluted- required with complex capital structures (exist if dilutive securities are
outstanding). Dilutive securities are securities that can converted into shares of common
stock that would reduce/dilute earnings per share upon conversion. 3 types- stock
options, convertible debt, convertible preferred stock. Preferred dividends and non-
controlling interests are subtracted bc EPS is the amount of income per common share
available for dividend payment to common shareholders.
Explain why companies purchase the equity securities of other companies ✅Called
financial investments. Aimed at activities such as short-term investment of excess cash,
alliances for strategic purposes, and market penetration or expansion. Accounting for
investments depends on the degree of influence or control that the investor company
can exert over the investee company. 3 levels of influence/control- passive (investor
cannot exert influence over the investee company, < 20% owned by investor),
significant (investor can influence but not control investee, between 20%-50%
ownership of outstanding voting stock), and controlling (has control over the investee,
50% or more ownership)
Explain the concept of fair value with respect to accounting treatment ✅US GAAP
defines fair value as the amount that an independent buyer would be willing to pay for
an asset. For an asset that is actively traded on financial markets, fair value is the
amount that we would receive by selling that asset, referred to as "mark-to-market." Fair
value is also used when there is no active market for the asset, this is referred to as
"mark-to-model." US GAAP requires that firms use their fair value hierarchy to disclose
the methods used to determine fair value. Level 1- values based on quoted prices in
active markets for identical assets/liabilities. Level 2- values based observable inputs
other than level 1 (interest rates, yield curves) Level 3- values based inputs observable
only to the reporting entity.
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