F3 NoteCards

Question 1

Held-to-maturity securities reported at what?

Answer 1

Amortized Cost

Question 2

Available-for-sale securities reported at what?

Answer 2

Fair Value, with unrealized gains/losses (from cost to market) reported as a component of OCI

Question 3

Trading securities reported at what?

Answer 3

Fair Value, with holding gains and losses (from one year to the next) included in earnings on the Income Statement

Question 4

Trading Securities definition

Answer 4

• Can be debt or equity securities

- Bought and held principally for the purpose of selling them in the near term (current assets)

Question 5

Available-For-Sale Securities definition

Answer 5

• Can be debt or equity securities-

- Doesn’t meet the other two classifications (usually noncurrent assets)

Question 6

Held-to-Maturity Securities definition

Answer 6

• Debt securities only

- Company has positive intent and ability to hold these securities to maturity

Question 7

IFRS: Unrealized Gains/Losses Rule

Answer 7

• Unrealized gains/losses for all AFS securities reported as OCI
• Foreign Exchange gains/losses for AFS Equity securities reported as OCI
• Foreign Exchange gains/losses for AFS DEBT securities reported on I/S

Question 8

2 exceptions to not reporting consolidated statements:

Answer 8

1- Subsidiary is in legal reorganization

2- Subsidiary is in bankrupt

Question 9

When AFS security is determined to be impaired due to a permanent decline in fair value,

Answer 9

Asset must be written down to the lower fair value by recording a loss recognized in the earnings section of the income statement

Question 10

A held-to-maturity bond is reported at what?

Answer 10

It’s carrying value

Question 11

3 Degrees of Control for Consolidation

Answer 11

1- No Significant Influence (0%-20%)- do not consolidate - cost method
2- Significant Influence (20%-50%)- do not consolidate - equity method
3- Control (<50%) - consolidate - cost or equity method

Question 12

Dividend Income

Answer 12

Just cash received. If stock dividend granted, not included in dividend income. Stock dividend gets memo entry only

Question 13

If a company owns less than 20% of stock and does not exercise significant influence, what method is used?

Answer 13

Cost Method

Question 14

If a company owns less than 20% of stock but DOES exercise significant influence, what method is used?

Answer 14

Equity Method

Question 15

Cost Method is also known as:

Answer 15

Fair Value Method or Available-for-Sale Method

Question 16

Cost Method: carrying amount of the investments account stays the same from the date of acquisition unless:

Answer 16

1- Shares of stock in the investee are purchased/sold
2- There is an accumulated dividend in excess of accumulated earnings resulting in a return of capital (liquidating dividend)
3- Basis is adjusted to FV as required by marketable equity securities
4- Investee incurs losses that substantially reduce net worth

Question 17

The “Investment in Investee” is NOT adjusted for:

Answer 17

Investee earnings

Question 18

The “Investment in Investee” is adjusted to:

Answer 18

Fair Value

Question 19

Cash dividends from the investee are reported as:

Answer 19

Income by the investor (parent)

Question 20

Are stock dividends and stock splits considered income to the recipient?

Answer 20

No.

Question 21

Criteria for using equity method

Answer 21

-Investor exerts significant influence over operating and financial policies of invested
OR
-Ownership of 20%-50% of investee’s voting stock

Question 22

Equity Method: investment originally recorded at:

Answer 22

Price paid to acquire the investment

Question 23

Investment account is adjusted as:

Answer 23

Income is earned and dividends are paid

Question 24

Equity Method not appropriate when:

Answer 24

• Bankruptcy
• Investment is temporary
• Lawsuit/complaint filed

Question 25

Accounting Rules for Equity Method (BASE)

Answer 25

B- Beginning balance
A- Add: investor’s share of investee’s earnings (think bank interest)
S- Subtract: investor’s share of investee’s dividends (think bank withdrawals)
E- Ending balance

Question 26

Asset Fair Value Difference is:

Answer 26

Difference between book value of equity method and fair value of equity method

Question 27

Goodwill is calculated:

Answer 27

Difference between purchase price of investment and fair value of equity method

• Must be computed each time there is a transaction (or at least annually)
• Goodwill created in an investment under equity method is ignored (not amortized or tested)

Question 28

How to account for Joint Ventures

Answer 28

Under both GAAP and IFRS, use the equity method

Question 29

Changing from Cost to Equity Method

Answer 29

The investment account and RE account are adjusted retrospectively for the difference

Question 30

What to do with excess fair value (for anything but land)

Answer 30

Multiply by % owned, and divide over it’s useful life. Then deduct from income

Question 31

Full Goodwill/FV/NBV Calculation

Answer 31

Goodwill = Excess
FV x % ownership
NBV x % ownership

Purchase price less % owned of fair value = goodwill

Question 32

Preferred stock is accounted for using the:

Answer 32

Cost method

Question 33

Calculation difference between cost and equity method

Answer 33

Cost Method- just multiply NI by ownership %

Equity Method- (NI- Dividends Paid) multiplied by ownership %

Question 34

Cash Dividend under equity method:

Answer 34

Not reported as dividend revenue- just reduces investment account

Question 35

NON-Voting Stock means use

Answer 35

Cost Method