F4 Flashcards
What is the threshold to have significant influence in an entity?
20% Common Ownership.
Where should unrealized gains and losses on AFS securities go?
To OCI. (pUfer)
Where should unrealized gains and losses on trading securities go?
To the Income Statement, as a component of net income.
What value should each of the following be reported at?
- ) Trading Securities
- ) Available for Sale
- ) Held-to-Maturity
- ) Fair Value
- ) Fair Value
- ) Amortized Cost
Which part of the Statement of Cash Flows should each of the following be reported on?
- ) Trading Securities
- ) Available for Sale
- ) Held-to-Maturity
- ) Cash flow from Operations
- ) Cash flow from Investing
- ) Cash flow from Investing
How should an investor account for an investment in an investee if they own less than 20%?
Fair Value Method.
What method is used if the investor owns 20%-50% of an investee?
Equity Method.
When an investor received a dividend that is in excess of their share of undistributed earnings, how is the excess accounted for?
Liquidating dividend - as a decrease in the investor’s basis in the investment:
DR: Cash
CR: Investment in Investee (asset)
What is the treatment of a permanent loss on an available for sale security?
Temporary losses are unrealized and go to OCI for AFS.
Permanent impairment is treated by having the asset written down to it’s FV and charged to income as if the loss is realized.
When reclassifying from a trading security, what is the treatment for any unrealized G/L’s?
The unrealized G/L’s are already in earnings and cannot be reversed.
When reclassifying to a trading security, what is the treatment for any unrealized G/L’s?
Shall be recognized in earnings immediately.
When reclassifying a Held-to-Maturity debt security to AFS, what is the treatment of any unrealized G/L’s?
Shall now be reported in OCI.
When reclassifying a AFS to Held-to-Maturity security, what is the treatment of any unrealized G/L’s?
Amortize out of OCI over remaining life of the security.
Where would the loss of any permanent impairment go for the following security tpyes?
- ) Trading
- ) AFS
- ) HTM
All go immediately to the income statement.
If an entity owns 25% of an investee, what method should be used to account for the investment?
Equity method.
If an entity owns 5% of an investee, what method should be used to account for the investment?
Fair value method.
How much % of an investee does an entity need to hold in order to have “significant influence”?
20% - 50% (using equity method)
What would the JE look like to record an investment in an investee in which an entity obtains 40% ownership?
DR: Investment in Investee (@FV)
CR: Cash
What would the JE look like to record an your share of earnings in an investee of which you own 35% common ownership of?
DR: Investment in Investee (increase asset)
CR: Equity in Investee Income (% of earnings you own)
How should you record receiving a dividend in an investee of which you own 40% common of?
DR: Cash
CR: Investment in Investee (lowering asset) (not recorded as div. revenue)
When an investee’s assets FV are greater than their BV under the equity method (20%-50% ownership), how is the difference treated?
Amortized over the life of the asset (except land)
DR: Equity in Investee
CR: Investment in Investee
*reduction of income & asset
How do you calculate goodwill using the equity method?
Purchase price of % of investee
(Less) FV of assets of investee @ %
Equals = Goodwill
If an entity is accounting for it’s investment in an investee using the equity method, and the investee has earnings & equipment that the FV of exceeds it’s BV, do a conceptual calculation to find the ending value of the investment in the investee @ year end.
Beginning Investment in Investee
Plus: % of Earnings
(Less) Amortized portion of % of equipment
Ending Investment in Investee
How much % does an entity have to own of an investee to consolidate?
50%
A parent acquires a sub’s 100% of common ownership and has stock issuance costs that are included in the acquisition, how are these accounted for in the acquisition JE?
As a reduction of APIC.
What would be the JE to acquire a sub for cash under the acquisition method? (>50%)
DR: Investment in Sub
CR: Cash
What would be the JE to acquire a sub for stock under the acquisition method? (>50%)
DR: Investment in Sub
CR: Common Stock (@ par)
CR: APIC (@ FV)
Explain the concept of “elimination” during the consolidation process.
When consolidating a parent and a sub, an entry needs to take place to account for the entire consolidation.
This entry elminates:
- The equity on the sub’s balance sheet
- The investment in the sub on the parents bs
- Adjusts balance sheet items to FV
DR: Common Stock - sub DR: APIC - sub DR: Retained Earnings - sub CR: Investment in Sub CR: NCI (if not 100%) DR: Balance Sheet adjustments to FV DR: Identifiable Intangible assets to FV DR: Goodwill (if excess)
What’s the numanic to remember the consolidating JE?
CAR IN BIG
Common Stock APIC Retained Earnings Investment in Sub NCI Balance sheet adjustments Identifiable Intangible assets to FV Goodwill
How should acquisition costs be treated? (Legal fees, consultant/accounting fees, etc.)
Expense as incurred.
Stock issuance costs are the only costs that do not get expenses, and instead are treated as a reduction of APIC.
If there is an excess of the FV of the assets of a sub over the BV, what is the treatment in the acquisition method in your consolidated JE?
First adjust the assets to FV. If there is still an excess, then recognize goodwill.
BIG
Step 1: Balance sheet adjusted to FV
Step 2: Identify intangibles
Step 3: Allocate remaining to goodwill (plug figure)
What is a major difference between public and private companies when it comes to allocating to goodwill in the acquisition method for consolidations?
For private companies, intangibles are included in the Goodwill plug figure instead of being separately identified (non-competes, etc). Then, they must amortize goodwill over a 10 year period.
If a parent paid less than the FV of the net assets of a sub, what is the treatment of the excess?
- ) Balance sheet adjustment to FV
- ) Identifiable intangibles
- ) GAIN (not goodwill)
You record goodwill if the parent paid more than the FV. In this case, the parent paid less than FV, so they can recognize a gain by crediting it in the consolidating entry. (pg F4-58)
Conceptually, what is the difference between the full & partial goodwill methods?
Full goodwill assumes a portion of goodwill goes to NCI, partial goodwill only creates goodwill for the parent.
Which method is used under U.S GAAP? Full or partial goodwill method?
Full goodwill method only for U.S GAAP.
Which method is used under IFRS? Full or partial goodwill method?
Either is acceptable.
Regarding the partial and full goodwill methods, in what situation would each result in the same consolidating entry?
When the parent owns 100%. They only differ when the parent owns less than 100%, and there is NCI involved.
When determining goodwill amounts during consolidation, what is relevant?
a. ) BV of the sub’s assets
b. ) FV of the sub’s assets
b.) FV of the sub’s assets
FV of sub - FV of sub net assts = Goodwill
What % of intercompany transactions must be eliminated for external reporting purposes?
100%
Both a parent and a sub pay dividends during the year, does anything require elimination?
Yes, eliminate 100% of sub paid divs.
If a parent sells inventory to a sub for a profit, and then that sub sells that inventory to an outsider, what needs to happen for consolidation purposes?
Fix COGS amount to eliminate profit parent recognized.
If a parent sells inventory to a sub for a profit, and the inventory is still held by the sub @ YE, what needs to happen for consolidation purposes?
Fix ending inventory amount to eliminate profit parent recognized.
Where is NCI (if at all) included in consolidated financial statements?
Equity section of consolidated balance sheet.
When an entity attempts to maintain it’s goodwill, what amount of those costs should be capitalized?
None - expense as incurred.
Once goodwill is impaired, what are the rules for reversals of the initial impairment?
Reversals are prohibited.
When conceptually trying to figure out goodwill and non-controlling interest for full goodwill and partial goodwill method, what is a key distinction between the two to keep in mind to figure out the calculations? In other words, what is the conceptual major difference between the two of them?
Full goodwill method assumes some goodwill is built into the NCI, partial goodwill gives no credit for goodwill to the NCI.
There is an implied goodwill value in NCI for full goodwill. Where in the partial method, you’re only concerned about the goodwill that YOU paid for.
If interest rates go up, why do the value of bonds go down?
If interest rates increase, then the bond’s interest rate would be less attractive to investors now than when the bonds were originally issues. This would most likely cause a decline in the bond’s market value. Remember, bonds are held at amortized cost not FV
Should you disclose the BV or FV for most financial instruments?
Both BV & FV must be disclosed
When reducing an investment under the equity method because of fair values in excess of book values, which two items never get amortized and therefore never reduce the investment & income from investee?
- ) Land
- ) Goodwill
*indefinite lives
If an investor owns 50% of the preferred stock of an investee during the year and gets paid $60,000 in dividends from that ownership, what amount is included as dividend revenue?
$60,000 - bc its preferred stock you account for that investment with the FV method (no voting rights)
*if it were common stock, the $60k would be a reduction in the investment
What are a few major exceptions to consolidating a VIE?
- ) NFP’s
- ) Employee benefit plans
- ) Bankruptcy
Direct costs in a business combo are generally treated how?
Are there any exceptions to this rule?
Direct costs are expensed in the period incurred.
However, registration and issuance costs of equity would be treated as a reduction of APIC
What is the major conceptual difference between the full goodwill method and the partial (IFRS only) goodwill method?
Full = implied value to total sub acquired, some goes to portion acquired some goes to NCI
Partial = no implied value to total. Find FV of what you acquired and find goodwill for portion acquired only. (FV of all * % acquired - consideration = Goodwill) (FV of all * NCI% = NCI)
P company acquired 100% of S company by issuing 250,000 shares of stock. When they announced it, their stock was trading at $5 a share. When the deal was finalized, it was trading at $10 a share. What is the total consideration paid by P company?
$10 a share X 250,000 shares = $2.5M
*Always use the price on the date it was finalized.
