F3

Question 0

On the Balance sheet, marketable securities classified as HTM are valued at

Answer 0

AMORTIZED COST

Question 1

On the balance sheet, marketable securities classified as trading or available for sale are valued ..

Answer 1

At FAIR VALUE

Question 2

How are unrealized gains and losses on trading securities recognized?

Answer 2

Recognized on the income statement

Question 3

How are unrecognized gains & losses on available for sale securities recognized?

Answer 3

Unrealized G/L on AFS securities are reported in OCI.

Under IFRS - foreign exchange gains & losses on AFS debt securities are reported on the IS.

Question 4

When is the cost method of accounting for investments used?

Answer 4

The cost method also known as the FV method is used when investor owns less than 20% of the investees voting stock and does not exercise significant influence. Lacking evidence to the contrary - it is assumed that no sig influence can be excersied between 0-20%. The original investment under cost method is accounted for in the same manner as marketable equity securities.

Question 5

List three conditions when losses on marketable securities classified as AFS are recognized in income.

Answer 5

Sale of security. Transfer of the security to trading classification. Other than temporary decline of the individual security below cost (impairment)

Question 6

How are dividends distributed by the investee treated by the investor receiving them?

Answer 6

Stock dividend issued by the investee are not recognized by the investor. Cash dividends received by the investor are accounted for as dividend income.

Question 7

When a marketable equity security is transferred from trading to AFS or vice versa what cost is it transferred?

Answer 7

Transferred at FV which then becomes new basis. for securities transferred into trading the diff is treated as a realized g/l and is recognized on IS. For a security transferred from trading category the unrealized holding gain or loss will already have been recognized in earnings. Transfers to and from the trading category should be rare.

Question 8

How are gains and losses on financial instruments that hedge trading securities reported?

Answer 8

Reported in earnings, consistent with reporting unrealized gains and losses on trading securities.

Question 9

How are gains and losses on financial instruments that hedge AFS securities reported?

Answer 9

Reported in earnings together with the offsetting gains and losses on the AFS securities attributable to the hedged risk.

Question 10

What disclosures should be made for AFS and HTM securities?

Answer 10

Aggregate FV, Gross unrealized holding gains/losses, Amortized cost basis by type, Information about the contractual maturity of debt securities.

Question 11

State the criteria to consolidate subsidiaries

Answer 11

Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary. Do NOT consolidate when control is not with owners (as in bankruptcy of subsidiary)

Question 12

Identify the three levels of control and the appropriate accounting method for each.

Answer 12

No significant influence - cost method - trading / afs at fv.
Significant influence but 50% or less ownership - equity method
Control - Cost or equity method (internal acctng) Consolidated financial statements (external reporting)

Question 13

How is the year-end “investment in investee” reported on the balance sheet calculated under the equity method?

Answer 13

Beginning investment in investee + Investors share of investees earnings - Investors share of investee dividends - Amortization of FV differences = Ending investment in investee.

Question 14

How is an investors equity method investment reported on the income statement?

Answer 14

Investors share of investees earnings - amortization of FV differences = Equity in earnings / investee income.

Question 15

How are joint ventures accounted for under IFRS and US GAAP?

Answer 15

Joint Ventures are accounted for using the equity method under both GAAP & IFRS.

Question 16

In a step acquisition what is the accounting treatment when significant influence is acquired?

Answer 16

Going from the cost method to the equity method is handled like a change in accounting principle - applied retroactively. Go back retroactively with the equity method but not with the new ownership percentage. Prior period financial statements are restated.

Question 17

When are consolidated statements prepared?

Answer 17

When the parent company has control over the subsidiary company. Control is achieved when more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy reorganization).

Question 18

In acquisition accounting, state the consolidating work paper elimination entry. CARINBIG

Answer 18

Dr. CS / Subsidiary Dr. APIC - Subsidiary Dr. Retained Earnings - Subsidiary Cr. Investment in subsidary Cr. Non controlling Interest Dr. BS Adjustment to FV Dr. Identifiable intangible assets to fair value Dr. Goodwill

Question 19

How are expenses relating to the combination treated under the acquisition method?

Answer 19

Direct out of pocket costs are expensed. Stock related costs are a reduction in value of the stock issued (normally a debit to additional paid in capital) Indirect costs are expensed. Bond issue costs are capitalized and amortized.

Question 20

In an acquisition, how are acquired identifiable intangible assets amortized?

Answer 20

Finite life - amortize to residual value over expected useful life.
Indefinite life - Do not amortize.

Question 21

How is goodwill calculated under the US GAAP acquisition method?

Answer 21

US GAAP - Goodwill is the excess of the fair value of the subsidiary (acquisition cost + NCI) over the fair value of the subs net asset including intangible assets at FV. Goodwill = FV of subsidiary - FV of subsidiarys net asset. Goodwill recorded in a business combo is not amortized. The entire investment is subject to the impairment test.

Question 22

How is the goodwill calculated under the IFRS acquisition method?

Answer 22

Goodwill is recognized using the full goodwill method (same as US GAAP) or partial goodwill. Under partial goodwill method, goodwill is the excess of the acquisition cost over the FV of the subs net assets acquired. Partial goodwill = Amortization cost - FV of subsidiary’s net assets acquired.

Question 23

How is Noncontrolling interest (BS) calculated under US GAAP?

Answer 23

Noncontrolling Interest (NCI) = FV of subsidiary x NCI%

Question 24

How is the noncontrolling interest (BS) calculated under IFRS?

Answer 24

IFRS permits the use of the full goodwill method or the partial goodwill method. Full goodwill (same as GAAP) = NCI = FV of sub x NCI%

Partial Goodwill : NCI = FV of subsidarys net identifiable assets x NCI%.

Question 25

How is noncontrolling interest on the income statement calculated?

Answer 25

Subsidiary Net Income x Noncontrolling Interest % = NCI in net income.

Question 26

In a business combination what is the treatment of an acquisition in which the acquisition cost is less than the FV of 100% of the net assets acquired?

Answer 26

The acquisition cost is allocated to the fv of 100% of the bs accts and the fv of 100% of the identifiable intangible assets. This creates a negative balance in acquisition account which is recorded as gain.

Question 27

Name several pro forma workpaper elimination entries when producing consolidated financial statements.

Answer 27

Eliminate - the effects of intercompany div, parents invest in sub act, entire stkhldr equity sec of the sub, effects of the g&l & adj for excess depr on the sale of pp&e bw affiliates. all intercompany sales & purchases. all other interco. bs & is accounts. Interco. profit in cogs and in beg and end inv relate to an interco sale of merch bw affiliates. adj : recognize nci adj bs to the sub to fv establish gw.

Question 28

State the workpaper elimination entry for intercompany inventory transactions

Answer 28

DR. RE (Intercompany profits in Beg. Inv)
DR. Intercompany Sales
CR. Intercompany cost of goods sold
CR. Cost of goods sold (interco profit in good sold)
CR. End Inv (Interco profit in end inv)

Question 29

State the workpaper elimination entry for intercompany bond transactions

Answer 29

DR. Bonds Payable
DR. Premium (or credit discount)
CR. Investment in affiliates bonds
CR. Gain on extinguishment of bond (or debit loss on extinguishment of bonds)

Question 30

State the workpaper elimination entry for intercompany land transactions

Answer 30

DR. Intercompany gain on sale of land

CR. Land

Question 31

State the workpaper elimination entry for intercompany depreciable assets transactions

Answer 31

Elimination entry 1 - Eliminate intercompany gain & adjust assets & accum. depr to original amts
DR. Intercompany gain on sale of machinery CR. Machinery CR. Accumulated depreciation
Elimination entry 2 - Eliminate excess depreciation : DR. Accumulated depreciation CR. Depreciation expense.

Question 32

When are combined financial statements prepared?

Answer 32

Companies are under common control / common management. Unconsolidated subsidiaries are combined.

Question 33

When preparing combined financial statements, identify the requirements

Answer 33

Intercompany transactions and balances among these companies are eliminated. NCI treated like consolidated FS. Capital Stock & RE are added across, not eliminated. IS are added across.

Question 34

Describe Push Down Accounting

Answer 34

Reports Assets & Liabilities at FV in seperate FS of sub. In effect consolidation adjs are “pushed dwn” in2 records. Assets & Liab are adjusted to fmv at date of acquistion. RE of the sub are transferred to PIC. NI of each sub incl. depr, amortiz, and interest exp based on FV rather than historical cost. SEC requires push down acctg for each “substantially wholly owned sub.”