Exam 1 Study Guide for Intermediate Financial Accounting II | ACCT 414, Exams of Accounting

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Spring 2009 – Exam 1 – Study Guide for Acct 414

Format for exam

20 multiple choice questions (you will get at least 4 “free misses”) covering all the items discussed below. Many of these questions are non-numeric but others require a financial calculator. MC is 90 points of the 200. Problem on leases (definitely) – the most points are allocated to this problem and it covers both lessee and lessor accounting. The problem is similar to problems on old exams. Problem on construction accounting (definitely). The problem is similar to problems on old exams, as discussed below. Short problems (worth maybe a little more than a multiple choice question) from which you will pick several from a set. I’m still trying to evaluate whether I’ve included too many so I won’t provide an exact count here! The advantage of the short problems (as compared to a multiple choice question) is that you can earn partial credit for your answer. These problems are similar to “other problems” on old exams. See discussion below. What you need to understand about leases:

1. General understanding of terminology including initial direct costs, executory costs, renewal penalties, bargain renewal options, third-party guarantees, residual values, lease term, etc.
2. You need to know the BASIC rules (first page of MSWord file that had the journal entry examples - or those 2 flow charts from ppt) in order to classify leases.
3. You need to know the five indicators under IFRS and be able to explain why the classification might be different than it is under US GAAP. The only example so far is from Fall 2008 exam and our projects.
4. How to find the PVMLP for general situations (e.g., title transfer, bargain purchase options, etc.). This includes knowing what interest rates to use in the PVMLP computations under US GAAP and IFRS (they are different).
5. How to find the interest rate implicit in a lease and other present value problems like determining the amount of the payment needed to earn a certain rate of return for the lessor.
6. You need to be able to make the journal entries for the lessee (operating and capital) and know what useful life over which to amortize the leased asset (useful life if title transfer or BPO, otherwise lease term)
7. You need to be able to do the journal entries for a sales type lease when there is an unguaranteed residual value and for a direct financing lease and for an operating lease.
8. Points to remember: a) An unguaranteed residual value is NEVER part of the minimum lease payments (lessor or lessee) but a guaranteed residual value is included (in both lessor and lessee if guaranteed BY the lessee and just in lessor's MLP if guaranteed by a 3rd party). b) The lessor's amortization table starts with fair market value of the asset if it is a sales type lease c) The lessor's amortization table starts with fair market value of the asset PLUS initial direct costs if it is a direct financing lease d) The lessee’s amortization table starts with the PVMLP unless that amount is MORE than the fair market value. In other words, never start the lessee table with an amount greater than FMV. e) You should know definitions of initial direct costs (IDC) and executory costs and know what to do with them for each type of lease. Remember, IDC affects lessor only and executory costs affect both lessor and lessee but are subtracted from lease payment but ONLY when paid by the lessor. However, I’ve never given a problem with executory costs so this would be a topic for a multiple choice question. On the other hand, I may well have initial direct costs in a problem!

Other topics:  You should know how to record a serial bond including year-end interest accruals - using the effective interest method and the bonds outstanding method (I might give you a choice but I might ask for one or the other or both).  There will be at least one problem on troubled debt restructuring which will require selected journal entries for creditor (but not for the debtor). You need to know how to find the present value of the cash flows to determine the restructured receivable for the creditor – always use the original interest rate.  I'll throw in a few present value problems similar to first homework assignment but some of them will be related to leases and/or troubled debt situations.  In all problems, you need to "think like an accountant" and be aware of the need to do year- end accruals of interest, depreciation, etc.  Fair value option problem will be similar to the one on the slides or in the homework & related handout. In other words, I’ll ask for balance sheets one year later (like the slides) or one day later (like the homework). In the first situation, you have to consider interest revenue and interest expense. See also Exam 1 from Fall 2008. In the “one day later” situation, presume interest revenue and interest expense are both zero.  Fair value – know what the three levels of inputs are and be prepared for a problem like the one we did for homework. In other words, know what types of investments would be reported in each level. This is discussed also in the “fair value” lecture slides.  You need to be able to determine the fair value of a bond at a later date (we did those as part of the serial bond homework and some of the in-class examples). There are also a few examples on Exam 1 from the last few semesters.  Be prepared for a simple long-term construction accounting question (percentage of completion, completed contract, or zero contract method) similar to homework but short - you need to know how to make all the journal entries but I will only ask for selected entries. See Exam 1 from Spring 2007 & 2008 or Fall 2007 or Exam 2 from Fall 2008 for examples.  International financial reporting standards (IFRS). Questions will be related to leases and construction accounting primarily since that is where you have the best notes and that’s the ones we worked in class and for homework. There as an IFRS question on the Fall 2008 exam 1 that you should look at. I don’t remember if the Fall 2008 Exam 2 included any IFRS questions related to construction accounting but you could check. Practicing on old exams can be very helpful – just remember that this exam will NOT cover debtor accounting in troubled debt situations. Also, older exams have not been up-dated for changes in GAAP. Lease questions are fine

• use any of the old exams. The same will not be true for pensions and I’ve been adding new topics like fair value and fair value option so you need to use your homework for study purposes. Most importantly, there are no multiple choice questions on the old exams so I suggest you practice some in the recommended Gleim EQE book or from other CPA exam review materials you might have.