Deck 1

Question 1

When do you use cost method? Equity method?

Answer 1

Cost - No significant influence (typically 20%, but non-voting stock, or preferred stock.
Equity - Significant influence (20-50%).
(F3-19)

Question 2

How to record stock dividends/stock splits (cost and equity method)?

Answer 2

Stock div: BOTH METHODS; not considered income, memo entry only.

(F3)

Question 3

Cash Dividends: How do you record for cost method? Equity method?

Answer 3

Cost: INCOME (earnings) to the investor - dr. cash, cr. div income [IS]. (does not affect the investment acct).

Equity: NOT income (treat as bank withdrawal)/ a decrease in invest - dr. cash, cr. investment in investee.

(F3)

Question 4

In a business combination, goodwill (GAAP) is a calculation of:

Answer 4

FV of sub-FV of subs net assets..
the residual paid above the FV of the identifiable net assets..(If not 100% owned, make sure to calc 100%) ex, refer to F3-18. 17, GW not amortized or tested for impairment.

Question 5

When are consolidated FS prepared?

Any exceptions?

Answer 5

When a parent-subsidiary relationship has been formed. An investor is considered to have parent status when control over investee is more than 50%.

Except when sig doubt exists regarding the parent ability to control the sub such as: sub in legal reorganization, or bankruptcy.

Question 6

The acquisition method has two distinct acctg characteristics: 1) net assets acquired (regardless of % acquired) are recorded at ______.
2) when companies are consolidated, the subs entire equity (CS, APIC, RE) is ______.

Answer 6

1) Fair Value
- FV of finished goods/ inventory= selling prices less costs to sell
2) Eliminated (not reported). Parents equity is used.

Question 7

What is Additional Paid in Capital?

Answer 7

Account in equity section of BS. Represents additional amount paid by an investor for company shares, over the par-value price. (SE acct)

Question 8

In the consolidated BS prepared immediately after acquisition, the consolidated stockholders equity should amount to:

IS, consolidated NI should amount to:

Answer 8

The parent company’s equity, plus FV of any noncontrolling interest. The subs equity accounts are eliminated (regardless of % owned).

Parents NI, when equity method is used

Question 9

What is CAR IN BIG?

Answer 9

Acquisition date eliminating entry:
Dr: CAR - BV of net assets (CV Assets-Liab)
Cr: I - investment in sub
Cr: N - Non controlling interest
Dr: B - BS adjusted to FV
Dr: I - identifiable intangible assets at FV
Dr: G - goodwill/Cr: gain (if invest in sub is less than FV/FV is greater than invest in sub)

Question 10

How are the following business combination costs/expenses in an acquisition treated?:

1. direct out-of-pocket costs (finders fees/legal fees)
2. Stock registration and issuance costs (SEC filling fee)
3. indirect costs/acquis costs
4. bond issuance costs, debt securities issuing/registering

Answer 10

1. and 3. Expensed as incurred in cur period (Debit Exp)
2. direct reduction of value of the stock issued (Debit APIC for the parent)
3. capitalized and amortized (Debit bond issue costs)

Question 11

In a business acquisition, how is goodwill calculated under the IFRS partial goodwill method?

Answer 11

GW=Acquisition cost-FV share of subs net assets acquired (parents share of FV of subs net assets)

Question 12

How is NCI calculated under US GAAP?

under IFRS?

Answer 12

GAAP: NCI = FV of sub x NCI%
IFRS: NCI = FV of sub net assets x NCI%

Question 13

After intercompany transactions, what amount should the parent report as intercompany payables or receivables?
if FS are consolidated?

what if FS Not consolidated?

Answer 13

100% of ALL intercompany transactions (even when NCI exists)- payables, receivables (BS). Interest exp/income, gain on sales, depr exp, sales/COGS (IS), loans/advances are eliminated.

If FS not consolidated then separate report in FS and footnote disclosure (disclosed separately)
f3-46

Question 14

Intercompany transaction - Parent sells machine to (51%owned) Sub for 800K. Parent paid 1,000K originally for this machine. On Parents consolidated BS what amount would be recorded as the machine?

Answer 14

The effect of the interco sale should b eliminated. Machine should be reported on consol BS at Parents cost of 1,000K. Depreciation should continue as if the sale had not occured

Question 15

Define Trading securities. What value are they reported at? Where are unrealized G/L reported?

Answer 15

Bought and held for the purpose of selling them in the near term. MUST be reported at FV. Unrealized holding G/L - included in earning ([I]DEA)
good ex- F3, simulation 1, Q2

Question 16

Define Held to maturity marketable securities. What value are they reported at?

Answer 16

HTM only if corp has positive intent and ability to hold these securities to maturity. Value at Amortized Cost (reported at carrying amount/CV).
component of earnings and of comprehensive income.

Question 17

What are Available for sale securities? What value are they reported at? Where are unrealized G/L reported?

Answer 17

Securities not meeting trading of HTM definitions. Carried at market value. Reported at FV each yr until it is sold (yr sold it will have no value on the books at yr end). Unrealized G/L - reported in OCI.