F3 Flashcards
What are the 3 classifications of debt securities and how are they reported?
Held to Maturity - Amortized Cost, Available-for-sale - Fair Value, Trading - Fair Value
What are AFS investments? Where are their unrealized G/Ls reported?
Investments in marketable securities the company does not intend to sell in the near-term and their unrealized gains or losses should be reported in OCI
What does a permanent impairment of AFS security results in?
write-down and charge to income as realized loss
What happens when marketable securities are transferred between trading and AFS?
Transfer is made at fair value and the difference is recorded as unrealized gain or loss on the income statement. The new carrying about becomes the basis for future gains or losses
Where are unrealized gains/losses on trading securities recognized? Where are realized gains/losses on trading securities recognized?
Both reflected on the income statement
When selling AFS security at a loss, what do we do?
Eliminate unrealized loss from OCI by crediting it and recorder realize loss on the income statement by debiting it
Under IFRS, foreign-exchange gains and losses recorded?
Gains are recorded in OCI while losses are recorded on the income statement
Differentiate between the 3 types of marketable equity securities
Trading securities held with the intent of selling them in the near future, held to maturity securities are held with the intent to hold until the debt investment matures and for AFS securities, we are not sure what we_re going to do with them they are the default classification
Exceptions to consolidating majority owned subsidiary:
Legal reorganization or bankruptcy and/or subsidiary operates under extreme restrictions (we have significant doubt on the parent company_s ability to control the subsidiary)
Reporting consolidated financial statements is consistent with what concept?
The economic entity can be identified with the unit of accountability
When is dividend revenue recognized and when is return of capital recognized?
Dividend revenue recognized to the extent of cumulative earnings since the acquisition and a return of capital beyond the point of acquisition
Is a stock dividend income? How are they recorded?
No, it increases the number of shares held and decreases the cost basis per-share. Stock dividends are recorded as memo entries under the equity method
Under the cost method, how are receipts of dividends recorded?
Recorded as income and does not affect the investment account
How are dividends recorded by the investor under the equity method?
Dividends are recorded by the investor as a reduction in the carrying amount of the investment on the balance sheet of the investor
When the cost method investor becomes an equity method investor, what must happen to the investment account?
The investment account must retroactively reflect the proportionate share of the investee_s income recognized at each level investment
What affect do changes in land values have on equity?
BV and FV difference on land is not amortized, so the difference has no effect on equity in earnings
What do we do with undervalued beginning inventory?
Record additional COGS associated by DR: investment income and CR: investment value
What is the effect of liquidating dividends under both cost and equity methods?
Liquidating dividends reduce the carrying amount of the investment account
What method is used to account for preferred stock and why?
Always use the cost method because there is never significant influence exercised as individuals holding preferred stock do not have voting rights
Under the Equity method, what do we do with goodwill?
Ignore it
What companies use combined statements?
Companies under common management, unconsolidated subsidiaries, or several corporations owned by one individual
What happens to equity and intercompany balances in combined financial statements?
Do not eliminate equity accounts as they are added across, but intercompany transactions and balances are eliminated in combined f/s just like consolidated financial statements
What is the main difference between consolidated and combined f/s?
Combined f/s –> there is no parent company
What are consolidated dividends paid equal to?
They are the same as parent dividends paid since dividends paid by the subsidiary are 100% eliminated in consolidation
When a company owns less than 50% of common stock of the investee corporation, what determines whether or not the cost or equity method is used?
Equity method - significant influence, Cost method - no significant influence
How is the purchase of a parent company bond by a subsidiary treated?
Treated as if the bond were retired when the financial statements are consolidated. The gain or loss is calculated by bond’s book value - amount retired at
How are assets reported when the parent company purchases and asset from a subsidiary?
The asset should be reported at the parent_s original cost - the subsidiary’s recorded gain
What happens when members of the consolidated group have intercompany bond holdings?
The bonds are eliminated in consolidation and the gain or loss difference between the discounted price and the premium on reacquisition would be included in a retained earnings
When should we report the dividend amount in consolidated financial statements?
When they are part of the noncontrolling interest
What do we do with consultant and finder fees?
Expense in the period incurred
What do we do with registration fees for equity securities?
Record a decrease APIC in stockholders equity
What do we do with indirect costs?
Expense as incurred
What do we do with bond issue costs?
capitalize and amortize
How is goodwill calculated under the US GAAP full goodwill method?
fair value of subsidiary - fair value of subsidiary_s net assets
How is goodwill calculated under the IFRS partial goodwill method?
acquisition cost - fair value of subsidiary_s net assets acquired
How do we calculate the investment in subsidiary?
(par value of stock x the number of shares) + APIC
What happens when a subsidiary is acquired with acquisition costs < than the fair value of the underlying assets?
Balance sheet is adjusted to fair value, Identifiable intangibles recognized at fair value, and Total negative balance in acquisition account recorded as gain
How do we treat direct costs?
Expense in the period incurred
When is net income of newly acquired subsidiary included and consolidated?
From the date of acquisition
Under acquisition accounting, how are net assets acquired?
Based on fair market value
What is fair value of finished goods and merchandising inventory based on?
selling price - disposal costs and reasonable profit allowance
What is the formula for total consolidated stockholders equity?
common stock + APIC + noncontrolling interest + retained earnings
At the date of acquisition, what does consolidated equity equal?
parent company’s equity + fair value of any noncontrolling interest (subsidiary’s equity accounts have been eliminated)
When acquisition price > fair value of net assets, how do we present assets and liabilities?
at fair value
What happens when an investor sell shares going from control to non-control?
The investor recognizes gain or loss from sale remeasures the remaining non-consolidated interest to fair value fair value adjustment is recognized as gain or loss on the income statement
What do we do with the difference between the fair value of the subsidiary and the book value of net assets acquired?
First allocate to adjusting 100% of the balance sheet from book value to fair value, then recognizing 100% of fair value of identifiable intangible assets, and recognize any excess as goodwill
How are registration and issuance costs recorded?
as a direct reduction to value of stock issued by reducing APIC
What happens when an investor goes from non-control to control through step acquisition?
Previously held equity investment is adjusted the fair value the adjusted amount is recognized as a gain or loss by the investor
Under IFRS partial goodwill method, how is NCI calculated?
FV of subsidiary_s net assets x NCI %
Under the acquisition method, how are total assets calculated?
Requires 100% of the fair value of the subsidiaries assets be recognized, so total assets = book value of parent assets + fair value of subsidiary assets
Under the acquisition method, how is goodwill calculated?
The excess of FV subsidiary over FV subsidiary’s net assets
In a bargain purchase where the fair value of net assets acquired is more than the consideration exchange for the net assets, how is the difference recognized?
As a gain by the acquirer at the time of acquisition
How are acquisition costs associated with the business transaction treated?
Expensed as incurred in the current period
How are temporary losses on AFS securities treated? What is these temporary losses turn into recoveries? What if the recoveries are NOT temporary?
Temporary losses are credited to an asset valuation account and debited directly to OCI - Do not record a loss in the income statement Subsequent recoveries in market value are debited to the valuation account and credited to OCI If not temporary, record a debit to realize loss in income statement and credit the cost of the individual security account
How are the security_s unrealized holding gain or loss is accounted for when converted to and from trading?
From trading: unrealized holding gain or loss at date of transfer will already have been recognized in earnings and is not reversed To trading: unrealized holding gain or loss at data transfer is recognized immediately and earnings
For trading or AFS securities, what do journal entries from marking to market look like?
Unrealized gain (CR) or unrealized loss (DR) are offset by a change in company’s valuation account
When is gain or loss on intercompany sale of a depreciable asset realized in consolidated financial statements?
When the asset is sold to an outsider
