F3 Flashcards
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
Are cost method investments adjusted for changes in market value?
No.
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
Under Equity method - what does the investor record as revenue
Share of the investee’s earnings (no “dividends received”)
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
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)
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.
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.
Trading Securities: ~Curr or Non Curr ~Reported at ~Unrealized G/L ~Cash Flow Category
~Current
~FV
~IS
~Operating or Investing
AFS: ~Curr or Non Curr ~Reported at ~Unrealized G/L ~Cash Flow Category
~Non current
~FV
~OCI
~Investing
HTM: ~Curr or Non Curr ~Reported at ~Unrealized G/L ~Cash Flow Category
~Noncurrent
~Amortized Cost
~None
~Investing
J/E for Unrealized Loss on Trading (IS) and AFS (OCI)
DR: Unrealized Loss on trading sec or AFS
CR: Valuation Account (FV adj)
Transfers B/N Categories:
Trading to any other
~How is transfer accounted for?
~Unrealized holding g/l
FV
It has already been recognized in income so no adj is necessary
Transfers B/N Categories:
Any other to Trading
~How is transfer accounted for?
~Unrealized holding g/l
FV
Recognize in current earnings
Transfers B/N Categories:
HTM (debt) to AFS
~How is transfer accounted for?
~Unrealized holding g/l
FV
Record in OCI
Transfers B/N Categories:
AFS (debt) to HTM (debt)
~How is transfer accounted for?
~Unrealized holding g/l
FV
Amortize G/L from OCI with any bond premium/discount amort
J/E for sale of Trading Security
DR: Cash
CR: Trading Sec
CR: Realized gain on trading sec ( I D E A
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)
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:
- Acquisition for Cash
- 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
- Direct out of pocket = exp
- Stock registration & issuance cost = debit APIC
- Indirect Cost = exp
- 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…
- Inventory to outsiders
- 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
- Parent J/E for selling land to sub
- Sub J/E for purchasing land from parent
- 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
- Sub J/E for selling FA to parent
- Parent J/E for buying FA from sub
- Parents J/E to record depreciation
- J/E workpaper elimination - eliminate g/l on intercompany sale & restore asset and accum dep to correct amts
- 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.
