How are business combination costs/expenses in an acquisition are treated: 1. Direct out of pocket costs 2. Stock registration and issuance costs 3. Indirect costs 4. Bond Issue costs

1. Debit: Expense 2. Debit: APIC 3. Debit: Expense 4. Debit: Bond issue costs (capitalize and amortize)

F3 Flashcards by Jenni Buckner

Under the cost method, dividends (not earnings) are reflected as income by the investor. The cost basis of the investment account is reduced only if:

Shares of stock are sold, or
Cumulative dividends exceed cumulative earnings (a return of capital), or
Sub incurs losses that substantially reduced net worth

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Are cost method investments adjusted for changes in market value?

No.

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How is dividend revenue recognized under the cost method?

Should be recognized to the extent of cumulative earnings since acquisition and return of capital beyond that point

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Under Equity method - what does the investor record as revenue

Share of the investee’s earnings (no “dividends received”)

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How are dividends from an investee company recorded by the investor under equity method?

As a reduction in the carrying amount of the investment on the BS of the investor

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

Direct out of pocket costs
Stock registration and issuance costs
Indirect costs
Bond Issue costs

Debit: Expense
Debit: APIC
Debit: Expense
Debit: Bond issue costs (capitalize and amortize)

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When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, the following steps are required:

The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account.
Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account.
The total negative balance in the acquisition account is recorded as a gain.

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When the equity method is used to account for investments in common stock, which of the following affect(s) the investor’s reported investment income?

A change
in market value
of investee’s
common stock AND/OR

Cash dividends
from investee

Neither -

Rule: Investor records as revenue its “share of the investee’s earnings” (not “dividends received”) under the equity method.

Dividends from an investee company are recorded by the investor as a reduction in the carrying amount of the investment on the balance sheet of the investor.

Changes in the market value of investee’s common stock are not considered income to the parent under the equity method.

Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account.

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Trading Securities:
~Curr or Non Curr
~Reported at
~Unrealized G/L
~Cash Flow Category

~Current
~FV
~IS
~Operating or Investing

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AFS:
~Curr or Non Curr
~Reported at
~Unrealized G/L
~Cash Flow Category

~Non current
~FV
~OCI
~Investing

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HTM:
~Curr or Non Curr
~Reported at
~Unrealized G/L
~Cash Flow Category

~Noncurrent
~Amortized Cost
~None
~Investing

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J/E for Unrealized Loss on Trading (IS) and AFS (OCI)

DR: Unrealized Loss on trading sec or AFS
CR: Valuation Account (FV adj)

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Transfers B/N Categories:

Trading to any other

~How is transfer accounted for?
~Unrealized holding g/l

It has already been recognized in income so no adj is necessary

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Transfers B/N Categories:

Any other to Trading

~How is transfer accounted for?
~Unrealized holding g/l

Recognize in current earnings

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Transfers B/N Categories:

HTM (debt) to AFS

~How is transfer accounted for?
~Unrealized holding g/l

Record in OCI

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Transfers B/N Categories:

AFS (debt) to HTM (debt)

~How is transfer accounted for?
~Unrealized holding g/l

Amortize G/L from OCI with any bond premium/discount amort

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J/E for sale of Trading Security

DR: Cash
CR: Trading Sec
CR: Realized gain on trading sec ( I D E A

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J/E for sale of AFS

DR: Cash
DR: Unrealized gain on AFS (PUFE) (Out of AOCI)
CR: AFS Sec
CR: Realized gain on AFS ( I D E A)

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Business Combinations/Consolidations:

Cost Method
Equity Method
Acquisition Method

Cost Method = Do not Consolidated = No significant influence (50%)

Cost Method BS J/E

Record all costs of acquisition
Unrealized g/l and adj to FV at year-end
Record a return of capital or liquidating dividend is a dividend in excess of investor’s share of RE

DR: Investment in investee
CR: Cash
DR: Unrealized Holding losses (OCI)
CR: Investment in Investment (or valuation account)
* If unrealized gain - reverse j/e
DR: Cash
CR: Investment in Investee

Cost Method IS J/E

Record dividends to the investor/parent (from investee) are income (earnings to the investor/parent:
Distribution that exceeds investor’s share of the investee’s RE

DR: Cash
CR: Dividend Income
DR: Cash
CR: Investment in Investee

Equity Method:

Exercise Significant Influence

Largest Shareholder
Majority of Board

Equity Method

BS J/E

To record at cost
Record increase by the investors/parents ownership % of earnings of investee
Decrease by the investor’s parents ownership % of cash dividends from investee

J/E to Record at Cost:
DR: Investment in Investeee
CR: Cash
J/E to record increase by the investors/parents ownership % of earnings of investee:
DR: Investment in Investee
CR: Equity in earnings/Investee Income
J/E to record decrease by the investor’s/parent’s ownership % of cash dividends from investee
DR: Cash
CR: Investment in investee

Equity Method:

IS J/E

Record investee earnings (investor’s/parent’s % of ownership of earnings of investee)

Record investee earnings (investor’s/parent’s % of ownership of earnings of investee)
DR: Investment in investee
CR: Equity in earnings/investee income

Equity Method BASE Formula

Beg Balance + Investor’s share of investee’s earning - Investor’s share of investee’s dividends =Ending Balance

Equity Method: | J/E to amortize asset FV difference (prem) over related asset's life

DR: Equity in Investee Income (Reducing income like bank service charge) CR: Investment in Investee (lowers income from sub (investee))

How is goodwill amortized under equity method

No amortization nor impairment test

Under the equity method- where is preferred stock dividends recorded?

As dividend revenue on the IS

Equity Method - What does the undervalued asset amortization affect? And Cash Dividends

Both the investment account (an asset) and the investment income account (a rev), while cash divends affect the the investment account but not the investment income account. J/E for Undervalued asset amort: DR: Equity Rev(IS) CR: Investment acct (BS) J/E for Cash Div: DR: Cash (BS) CR: Investment Acct (BS)

Acquisition Method: Parent Company J/E: 1. Acquisition for Cash 2. Acquisition for parent CS (use FV at date of transaction closes

``` To record the acquisition for cash DR: Investment in subs CR: Cash To record the acquisition for parent CS (use FV at date of transaction closes): DR: Investment in sub CR: CS (parent at par) CR: APIC (parent/FV-par) ```

Acquisition Method: Consolidating Workpaper Eliminating J/E

``` C DR: CS - sub A DR: APIC - Sub R DR: RE - sub I CR: Investment in sub N CR: NCI B DR: BS adj to FV I DR: Indentifiable Intangible Assets to FV G DR: Goodwill ```

What does CAR Equal in Acquisition of Old books?

Assets- Liabilities

Acquisition Method: Investment in Sub ``` How to treat? ~Originial Cost 1. Direct out of pocket 2. Stock registration and issuance costs 3. Indirect cost 4. Bond Issue costs ```

~Measured by the FV (on date the acq is completed) of the consideration given (DEBIT: Investment in sub 1. Direct out of pocket = exp 2. Stock registration & issuance cost = debit APIC 3. Indirect Cost = exp 4. Bond issuance cost = capitalize & amort (debit bond issue cost)

Acquisition Method - Where is NCI reported?

Consolidated Equity

Acquisition Method: How is goodwill accounted for?

No amortization or impairment

Step Acquisition: Non-Control --> Control

~Previous CS adj to FV | ~Recognize in IS

Step Acquisition: | Control --> "More" or "Less" Control

~Equity Transaction (no g/l recognized on the IS -- APIC)

Step Acquisition: | Control --> Non-control

~Sale = G/L --> IS ~Adj remaining CS to FV ~Recognize in IS

Acquisition Method: Finished goods- | Work in Progress inventor:

Finished goods- are based upon selling price less disposal costs and a reasonable profit allowance Work in Progress: based upon the estimated selling price of finished goods less cost to complete and dispose and a reasonable profit allowance

BASE Formula for RE:

Beg Balance +Income -Dividend Paid =End Balance

How to account for intercompany transactions?

~Eliminate 100% of Intercompany transactions (BS and IS eliminated) ~Not Consolidated = Not eliminated

Workpaper Elimination Intercompany Merchandise Transactions:

DR: Intercompany Sales DR: RE (profit in beg inventory) CR: Intercompany COGS CR: COGS (Intercompany profit included in COGS of the purchasing affiliate) CR: EI (Intercompany profit in the inventory remaining)

Intercompany transactions...How to correct... 1. Inventory to outsiders 2. Inventory sill on hand

Inventory sold to outsiders → Correct COGS Inventory still on hand → Correct EI

``` J/E -- Intercompany Bond Transactions 1. Bonds issued to outsider 2. Reacquired by sub 3. Workpaper elimination (consider retired and recognize g/l) ```

J/E for bonds issued to outsider DR: Cash CR: Bonds Payable CR: Prem on Bonds Payable J/E Reacquired By Sub DR: Investment in Bonds CR: Cash ``` J/E Workpaper Elimination (Consider Retired and Recognized G/L) DR: Bonds Payable DR: Prem CR: Investment in Bonds CR: Gain on Extinguishment ```

J/E - Intercompany Sale of Land 1. Parent J/E for selling land to sub 2. Sub J/E for purchasing land from parent 3. Workpaper elimination

J/E (Parent)record parent sold land to sub DR: Cash CR: Land CR: Intercompany gain on sale of land J/E (SUB) for purchase of land from parent DR: Land CR: Cash Workpaper elimination DR: Intercompany gain on sale of land CR: Land

J/E - Intercompany Profit on Sale of Dep FA 1. Sub J/E for selling FA to parent 2. Parent J/E for buying FA from sub 3. Parents J/E to record depreciation 4. J/E workpaper elimination - eliminate g/l on intercompany sale & restore asset and accum dep to correct amts 5. Correct dep - elimination of excess dep

``` J/E (Sub) - Sub sells FA to parent DR: Cash DR: Accumulated Dep CR: Machinery (org cost) CR: Intercompany gain on sale of FA ``` J/E (parent)- buys FA from sub DR: Machinery CR: Cash J/E to record dep on parents books DR: Dep Expense CR: Accum Dep J/E Workpaper Elimination - Eliminate g/l on intercompany sale & restore asset and accum dep to correct amts DR: Intercompany gain on sale of machin CR: Machinery (par cost - org cost) CR: Accum Dep (amt on sub) J/E to correct depreciation - elimination of excess dep DR: Accum Dep CR: Dep Expense

What happens to consolidate equity on the date of acquisition?

The consolidated equity will be equal to the parent company's equity plus the FV of any NCI. The subs company's equity accounts are eliminated.