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FAR OVERALL > F3 > Flashcards

F3 Flashcards

1
Q

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:

A
  1. Shares of stock are sold, or
  2. Cumulative dividends exceed cumulative earnings (a return of capital), or
  3. Sub incurs losses that substantially reduced net worth
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2
Q

Are cost method investments adjusted for changes in market value?

A

No.

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3
Q

How is dividend revenue recognized under the cost method?

A

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

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4
Q

Under Equity method - what does the investor record as revenue

A

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

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5
Q

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

A

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

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6
Q

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
A
  1. Debit: Expense
  2. Debit: APIC
  3. Debit: Expense
  4. Debit: Bond issue costs (capitalize and amortize)
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7
Q

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:

A
  1. The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account.
  2. Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account.
  3. The total negative balance in the acquisition account is recorded as a gain.
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8
Q

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

A

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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9
Q 
Trading Securities:
~Curr or Non Curr
~Reported at
~Unrealized G/L
~Cash Flow Category
A

~Current
~FV
~IS
~Operating or Investing

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10
Q 
AFS:
~Curr or Non Curr
~Reported at
~Unrealized G/L
~Cash Flow Category
A

~Non current
~FV
~OCI
~Investing

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11
Q 
HTM:
~Curr or Non Curr
~Reported at
~Unrealized G/L
~Cash Flow Category
A

~Noncurrent
~Amortized Cost
~None
~Investing

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12
Q

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

A

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

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13
Q

Transfers B/N Categories:

Trading to any other

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

A

FV

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

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14
Q

Transfers B/N Categories:

Any other to Trading

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

A

FV

Recognize in current earnings

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15
Q

Transfers B/N Categories:

HTM (debt) to AFS

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

A

FV

Record in OCI

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16
Q

Transfers B/N Categories:

AFS (debt) to HTM (debt)

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

A

FV

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

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17
Q

J/E for sale of Trading Security

A

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

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18
Q

J/E for sale of AFS

A

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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19
Q

Business Combinations/Consolidations:

Cost Method
Equity Method
Acquisition Method

A

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

20
Q

Cost Method BS J/E

  1. Record all costs of acquisition
  2. Unrealized g/l and adj to FV at year-end
  3. Record a return of capital or liquidating dividend is a dividend in excess of investor’s share of RE
A
  1. DR: Investment in investee
    CR: Cash
  2. DR: Unrealized Holding losses (OCI)
    CR: Investment in Investment (or valuation account)
    * If unrealized gain - reverse j/e
  3. DR: Cash
    CR: Investment in Investee
21
Q

Cost Method IS J/E

  1. Record dividends to the investor/parent (from investee) are income (earnings to the investor/parent:
  2. Distribution that exceeds investor’s share of the investee’s RE
A
  1. DR: Cash
    CR: Dividend Income
  2. DR: Cash
    CR: Investment in Investee
22
Q

Equity Method:

A

Exercise Significant Influence

  • Largest Shareholder
  • Majority of Board
23
Q

Equity Method

BS J/E

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

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

24
Q

Equity Method:

IS J/E

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

A

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

25
Q

Equity Method BASE Formula

A

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

26
Q

Equity Method:

J/E to amortize asset FV difference (prem) over related asset’s life

A

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

27
Q

How is goodwill amortized under equity method

A

No amortization nor impairment test

28
Q

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

A

As dividend revenue on the IS

29
Q

Equity Method - What does the undervalued asset amortization affect?

And Cash Dividends

A

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)

30
Q

Acquisition Method:

Parent Company J/E:

  1. Acquisition for Cash
  2. Acquisition for parent CS (use FV at date of transaction closes
A 
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)
31
Q

Acquisition Method:

Consolidating Workpaper Eliminating J/E

A 
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
32
Q

What does CAR Equal in Acquisition of Old books?

A

Assets- Liabilities

33
Q

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
A

~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)
34
Q

Acquisition Method - Where is NCI reported?

A

Consolidated Equity

35
Q

Acquisition Method: How is goodwill accounted for?

A

No amortization or impairment

36
Q

Step Acquisition: Non-Control –> Control

A

~Previous CS adj to FV

~Recognize in IS

37
Q

Step Acquisition:

Control –> “More” or “Less” Control

A

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

38
Q

Step Acquisition:

Control –> Non-control

A

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

39
Q

Acquisition Method: Finished goods-

Work in Progress inventor:

A

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

40
Q

BASE Formula for RE:

A

Beg Balance
+Income
-Dividend Paid
=End Balance

41
Q

How to account for intercompany transactions?

A

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

42
Q

Workpaper Elimination Intercompany Merchandise Transactions:

A

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)

43
Q

Intercompany transactions…How to correct…

  1. Inventory to outsiders
  2. Inventory sill on hand
A

Inventory sold to outsiders → Correct COGS

Inventory still on hand → Correct EI

44
Q 
J/E -- 
Intercompany Bond Transactions
1. Bonds issued to outsider
2. Reacquired by sub
3. Workpaper elimination (consider retired and recognize g/l)
A

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
45
Q

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
A

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

46
Q

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
A 
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

47
Q

What happens to consolidate equity on the date of acquisition?

A

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.

FAR OVERALL (18 decks)

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