Area 3

Question 1

Consolidated balance sheet prepared immediately after the purchase of an entity, the consolidated stockholders equity is calculated as:

Answer 1

Equity reported is always = acquirer’s equity + any noncontrolling interest

Purchasing a controlling interest (greater than 50%) in another entity the resulting business conbination is viewed as a single economic entity. Any identifiable assets’ FMV adjustments are reflected in consolidated assets

Question 2

ROU assets should be amortized over what term

Answer 2

ROU assets are amortized over the shorter of the lease term or the asset’s useful life unless there is a purchase option reasonable certain to be excerised or title transer; then the ROU asset is amortized over the asset’s useful life

Question 3

Accounting changes types and treatment

Answer 3

Change in accounting principle -> retrospective
Change in accounting estimate -> prospective
Change in reporting entity -> retrospective
Error correction -> retroactive

Question 4

Preparing financial statements under the cash basis of accounting. What statement would be included (hint: similar to income statement for GAAP)

Answer 4

The statement of revenues collected and expenses paid

Question 5

How is gross profit reported on combined financial statements?

Answer 5

Any interco gross profit remaining in ending inventory must be eliminated

Interco gross profit = seller’s GP rate * interco sales remaining in the buyer’s ending inventory

Combined F/S DO NOT include the parent company

Question 6

Variable interest entity (VIE)

Answer 6

Exists when an investor has controlling financial interest in another entity but the amount of control isn’t proporionate to its ownership. VIE is a separate legal entity. Required to prepare consolidated F/S with the VIE

Typical characteristics:
- VIEs are not self-sufficient
- Investors do not participate in a VIE’s gains and losses
- A VIE’s value is affected by another entity’s value

Question 7

Under an operating lease, lease-related expenses include
Hint: 2 items

Answer 7

Monthly lease payments (rent) and the monthly amortization of leasehold improvements

Question 8

When there is a change in the reporting enity, how should the change be reported in the financial statements?

Answer 8

Retrospectively, including note disclosures, and appliation to all prior period financial statements presented

Question 9

What is included in the lease liability of a finance lease

Answer 9

lease liability = PV of lease payments, including purchase option, any nonrefundable fees and any residual value guarantee
Lease with a purchase options likely to be exercised is a finance lease

Question 10

Finance lease criteria

Hint: S-PO-T-75-90

Answer 10

Specialized lease property
Purchase option reasonable certain to be exercised
Transfers title at end of lease
Lease term major part of remaining economic life (>=75%)
PV of lease payments substanially all of leased item’s FV (>=90%)

Question 11

Finance Lease: lessee interest expense

Answer 11

interest expense = lease liability balance * interest rate * time period

Note: The interest rate used for this calculation should be the lease’s implicit rate if known or lessee’s incremental borrowing rate

Question 12

Debt securities reported at

Answer 12

HTM reported at amortized cost; AFS and trading reported at FV -> when FV option not elected

Question 13

Unrealized gain/loss for AFS

Answer 13

Unrealized gain/loss for AFS reported to OCI and transferred to AOCI. When AFS is sold the difference is treated as realised gain/loss and any unrealized holding gain/loss is removed.

Question 14

Net carrying value (FV)

Answer 14

AFS securities - allowance for credit losses - unrealized losses (FV adjustment)

Question 15

What is a derivative

Answer 15

A derivative is a financial instrument that has no net investment, an underlying and a notional amount, and a net settlement

Question 16

Fair Value hedge

Answer 16

Used for recognized assets and liabilities (items with fixed valued)
Changes in value reported on income statement
FV hedge is reported at FV with unrealized gains/losses recognized in net income in the period of change on the same line as the corresponding gain/loss on the hedged item

Question 17

Cashflow Hedge

Answer 17

Used for forecasted transactions (items with variable cash flows)
Changes in value reported in other comprehensive income

Question 18

Call option valuation

Answer 18

time value + intrinsic value

Question 19

Intrinsic value

Answer 19

(market value - exercise price) * # of shares

Question 20

Put Options

Answer 20

Right to sell the stock to a given party
Expect stock will decline in value
Exercise if FMV of stock < strike price

Question 21

Call Options

Answer 21

Right to buy the stock from a given party
Expect stock will increase in value
Exercise if FMV of stock > strike price

Question 22

Two inherent risks with interest rate swaps that cannot be reflected on the FS but must be disclosed

Answer 22

1 the risk of exchanging a lower interest rate for a higher rate (interest rate risk)
2 the risk that the counterparty might default on the agreement (credit risk)

Question 23

To qualify for simplified hedge accounting rules for IR swaps:

Answer 23

the variable rate on the swap and the orginal debt must be linked to the same index
the IR swap’s fair value at inception must be close or equal to zero
the notional amount must be less than or equal to the debt’s principal balance

Question 24

How to record transactions of foreign currency

Answer 24

Transactions of foreign currency (AR / AP) are initally recorded at the transaction date exchange rate. On settlement date they are revalued with the settlement date exchange rate with any gains or losses reported in the income statement

Question 25

Transaction date (foreign currency)

Answer 25

record transaction in functional currency using transaction spot rate

Question 26

Balance sheet date (foreign currency)

Answer 26

remeasure transaction using balance sheet spot rate; recognize foreign currency gain or loss in income for difference in rate

Question 27

Settlement date (foreign currency)

Answer 27

remeasure transaction using settlement date spot rate; recognize foreign currency gain or loss in income for difference in rate

Question 28

Remeasure vs. translate

Answer 28

local = functional -> no effect
function not = reporting -> translate reported as OCI (equity)
local not = functional -> remeasure reported on income statement
functionl = reporting -> no effect

Question 29

FV Hedge requirements

Answer 29

1 document the relationship between the hedge and the hedged risk
2 indicate the hedge is expected to be highly effective
3 explain how the entity measures the hedge’s effectiveness

Question 30

Foreign currency gains/losses: record AR/AP at exchange rate

Answer 30

if rate increases -> receivable gain; payable loss
if rate decreases -> receivable loss; payable gain