Chapter 3: Marketable Securities & Business Combinations

Question 1

What are the 3 classifications of securities?

Answer 1

Trading
Available for sale
Held to maturity

Question 2

Trading Security: How is this reported on the BS? Unrealized G/L?

Answer 2

Current & Fair Value

Income Statement

Question 3

AFS Security: How is this reported on the BS? Unrealized G/L (GAAP & IFRS)?

Answer 3

Non-current & Fair Value
GAAP: OCI
IFRS: AFS debt securities reported on I/S

Question 4

Held-to-Maturity Security: How is this reported on the BS? Unrealized G/L?

Answer 4

Non-current & Amortized Cost

No Unrealized G/L

Question 5

Treatment of transfers between classes.

1) Trading to any other class
2) any other class to trading
3) held-to-maturity to AFS
4) AFS to held-to-maturity

Answer 5

1) No adjustment needed
2) I/S
3) OCI
4) Amortize G/L from OCI

Question 6

(GAAP) Which securities recognize impairment? How do you recognize impairment loses? Reversals of impairment? What about IFRS?

Answer 6

AFS & HTM
Recognize impairment on I/S
HTM - no reversal
AFS - reversal on OCI not I/S
(IFRS) - reversal on I/S allowed

Question 7

JE - Sale (gain) of trading securities

Answer 7

DB: Cash
CR: Trading Security
CR: Realized gain on trading security

Question 8

JE - Sale (gain) of AFS

Answer 8

DB: Cash
DB: Unrealized gain on AFS (out of AOCI)
CR: AFS Security
CR: Realized gain on AFS

Question 9

What disclosures in the FS must be made for AFS and HTM securities?

Answer 9

aggregate FV
unrealized g/l
amortized cost
info on maturities

Question 10

What are the three degrees of control? When do you use them?

Answer 10

Cost method: 0% - 20%
Equity method: 20% - 50% (could be less than 20% if significant influence)
Consolidate: 50% or more

Question 11

(Cost Method - B/S) JE for acquisition

Answer 11

DB: Investment in Investee
CR: Cash

Question 12

(Cost Method - B/S) JE for YE mark to market (gain/loss)

Answer 12

(LOSS)
DB: unrealized holding losses (OCI)
CR: Investment in investee (or valuation acct)
(GAIN)
DB: Investment in investee (or valuation acct)
CR: unrealized holding gains (OCI)

Question 13

(Cost Method - B/S) JE for liquidating dividend in excess of RE

Answer 13

DB: Cash
CR: Investment in Investee

Question 14

(Cost Method - I/S) JE for Cash Dividends

Answer 14

DB: Cash
CR: Dividend Income

Question 15

(Equity Method - B/S) JE for acquisition

Answer 15

DB: Investment in Investee
CR: Cash

Question 16

(Equity Method - B/S & I/S) JE for increase of % of earnings

Answer 16

DB: Investment in investee
CR: Equity in Earnings

Question 17

(Equity Method - B/S) JE for Cash Dividends

Answer 17

DB: Cash
CR: Investment in investee

Question 18

(Equity Method - B/S & I/S) JE for amortized GW over NBV

Answer 18

DB: Equity in Earnings
CR: Investment in investee

Question 19

(Equity Method) When are the two instances that GW is created in purchase? How are they treated?

Answer 19

1) Difference between FV & NBV
Amortized over life of asset
2) Difference between purchase price & FV
Nothing

Question 20

What makes up the B/S accounts for Cost & Equity Methods?

Answer 20

Cost Method: Purchase price

Equity Method: Purchase price + investee income - amortization of GW over NBV - dividends

Question 21

What makes up the I/S accounts for Cost & Equity Methods?

Answer 21

Cost Method: Cash dividends (not over RE)

Equity Method: Investee income - amortization of GW over NBV

Question 22

What are the two NCI GWmethods & their formulas?

Answer 22

(GAAP) Full GW Method: NCI = FV sub * NCI %

(IFRS) Partial GW Method: NCI = FV sub net ID assets * NCI %

Question 23

What are the two general GW methods & their formulas?

Answer 23

(GAAP) Full GW Method: GW = FV sub - FV sub Net Assets

(IFRS) Partial GW Method: GW = Acquisition Cost - FV sub net assets acquired

Question 24

What consists of FV sub’s net Identifiable assets?

Answer 24

in-process R&D, contracts, intangibles other than GW, software, un-patented technology

Question 25

What is the treatment for successful In-process R&D? Failure of IP-R&D?

Answer 25

Success = amortize
Failure = impair/write-off

Question 26

When do you use the acquisition method?

Answer 26

Control is over 50% & must consolidate

Question 27

How do you record the investment in sub for acquisition method?

Answer 27

Acquisition Price (original cost) = Investment in Sub = FV of consideration given

Question 28

How do you treat the following instances during the initial acquisition: 1) Finders Fees; 2) Registration Fees/SEC Filings; 3) Indirect Costs; 4) Bond Issue Costs

Answer 28

1) Expense
2) Reduce APIC of Parent
3) Expense
4) Capitalized & amortize

Question 29

What is the eliminating JE for consolidation?

Answer 29

"CAR IN BIG"
DB: C/S - Sub
DB: APIC - Sub
DB: RE - Sub
CR: Investment in Sub
CR: NCI
DB: B/S Adjustment to FV
DB: ID assets to FV
DB: Goodwill

Question 30

How do you find RE in sub if the beginning RE is not given?

Answer 30

Ending RE + Dividends - NI = Beginning RE

Question 31

For the B/S, what is the Acquisition Date NCI formula? After acquisition date?

Answer 31

= FV of sub * NCI %

= Beg. NCI + NCI % of Sub NI - NCI % of sub dividends

Question 32

What’s the treatment for going from 1) non-control to control; 2) control to more/less control; 3) Control to non-control?

Answer 32

1) re-measure C/S to FV & recognize in I/S
2) Adjust APIC
3) recognize G/L on sale of stock in I/S & re-measure C/S to FV & recognize in I/S

Question 33

What’s the main item that needs to be disclosed under the acquisition method?

Answer 33

Disclosure of the consolidation policy used