F4 - F5 Flashcards
How are marketable DEBT securities measured?
CV (amortized cost), for both long and short-term securities, unless there is a permanent decline in market value
How are credit losses (CECL) measured?
the difference between the amortized cost and the Fair Value (or PV of expected cash flows)
note: any additional difference between the PV and FV is recorded as an unrealized G/L
interest revenue vs. interest receivable
interest revenue: PV (excluding accrued interest) x market rate x months/year
interest receivable: Face Value x coupon rate x months/year
T/F: Significant influence cannot be exercised by holding non-voting stock.
True - the fair value method has to be used instead
T/F: You should test goodwill for impairment when using the equity method.
False: any goodwill created in an investment accounted for under the equity method is IGNORED. It is neither amortized nor tested for impairment; the entire investment (using the equity method) is subject to the impairment test
What method (for investments) do you use for preferred dividends and why?
Fair Value method (credit dividend revenue) - b/c preferred dividends don’t allow you to exercise significant influence
T/F: A stock dividend is not reported as dividend income.
True - it just means more shares and a lower price per share
-cash dividends are reported as dividend income (for the Fair Value method)
How to deal with undervalued assets and investments:
- take the difference between the FV and CV
- multiply that by the % of ownership
- divide by the useful life of the asset
- take this amount and subtract it from investment income
Goodwill calculation
FV of the subsidiary (full amount, not just what was paid)
- BV of net assets
- Excess of FV (compared to the carrying amounts)
- FV of identifiable intangibles
note: noncompete agreements are included as intangibles
How do you treat intercompany transactions for companies/subsidiaries with various %s ownership?
for consolidation (acquisition; control) - exclude (bc these transactions will get eliminated)
for fair value - include
for equity method - include
Intercompany quick calculations:
sub’s payable to the parent for intercompany sales – use A/R
parent’s intercompany profit - use gross profit
parent’s intercompany sales - use revenue
How do you treat assets and liabilities for consolidated FS?
add them to the consolidated FS for companies with a controlling interest BUT do not take the percentages; add them using the full amounts
How to calculate consolidated RE for the parent company?
Beg. RE for the parent
+ Net Income for the parent
- Dividends paid by the parent
= Ending RE
note: do NOT include the net income of any subsidiaries
note: add NCI %s of net income and dividends
How to calculate total SHE for the parent in consolidated FS?
parent’s total SHE + NCI
Do all unrealized and realized gains (regardless of the type of security) need to be presented net of tax?
yes
T/F: Anything paid before refinancing of a long-term note/bond is classified as a current asset.
True - it would go under prepaids
How are expenses affected when accruing liabilities?
Debit expenses to increase them along with a credit to liabilities to accrue for them
What do you reduce the note payable by to get the current balance?
principal only
(calculate the total amount of interest, then calculate the total amount of interest due within one quarter/month/etc. and subtract that by the total cash payment which in theory includes both principal and interest)
How do you calculate interest income?
- total amount of the note x present value factor
- x market rate
- divide/multiply for monthly rate, if necessary
OR
- annual payment x # of years
- subtract present value of the note (aka principal)
Calculations for interest expense vs. interest payable:
interest expense: CV x mkt rate
interest payable: FV x coupon rate
What rate do you use when calculating accrued interest (which goes into the bond issuance price)?
stated rate
How do you calculate the net carrying value of debt that is being retired (for troubled debt restructuring)?
Face amount
- unamortized discount
- unamortized bond issuance costs
= net carrying value
Which investment method should you use on preferred stock?
Fair Value Method (NOT equity method)
-use dividend income for cash dividends
T/F: Under both the fair value and equity methods, liquidating dividends reduce the carrying amount of the investment account.
True
T/F: Stock dividends increase the amount of common shares outstanding.
True - multiply the % of the stock dividend by the # of common shares outstanding
How to solve the “liability from unredeemed coupons” question:
- amount of units sold x % estimated of redeemed coupons
- subtract coupons already processed
- multiply by net cost ($/unit earned - #/unit expensed)
How should you treat intercompany dividends?
they should be eliminated
any NCI dividends (of acquired companies) is included in the consolidated statement of cash flows and consolidated statement of equity
What is the formula for future cash receipts from bonds?
PV = FV * PV factor
(in other words, divide the PV by the PV factor)
How should you calculate the PV of a note that’s less than 12 months?
-if it’s not in the ordinary course of business, take the PV (and credit notes payable with that amount)
—(FV * PV factor) + (FV * PV factor * interest rate * 9/12)
if it’s in the ordinary course of business, do NOT take the PV (and credit notes payable with the face amount)
How do you calculate revenue from bonds at the end of the year (if sold at a discount)?
(face value * coupon rate) + discount
*prorate for half a year for semi-annual payments if necessary
If an entity is the primary beneficiary (spends/contributes the most) of another entity (partnership/VIE), what method of accounting should they use? (F4)
consolidation
*NOT the equity or fair value methods; % of ownership doesn’t matter in this case
How are stock registration costs treated?
as a direct reduction of the value of the stock (debit Paid in Capital); NOT expensed
Under the acquisition method, how do you transfer assets and liabilities from the subsidiary to the parent’s FS?
take the difference in fair value and add or subtract
ex. if the BV is 100k but the FV is 150k, add 50k to the FS
note: for in-process R&D, record it at fair value on the parent’s FS, disregarding any cost already associated with it
T/F: For consolidation, the parent’s SHE will always include the parent’s SHE and NCI (use beg. and ending RE of the sub and net income and dividends).
true
Under the acquisition method, what will the parent company report as dividends paid?
only the dividends that their company pays (NOT dividends from the subsidiary b/c these are eliminated in consolidation)
*this applies EVEN IF there is NCI involved (less than 100% ownership)
How are acquisition costs treated?
expensed as incurred in the current period
T/F: Acquisition costs are included in the initial investment amount (first JE).
true; they’re expensed as incurred but still included in the initial investment amount (but not amortized)
When recording the JE for dividends paid under the equity method, what is the first step you should do before multiplying the amount of dividends paid by the ownership %?
you should multiply the amount of the subsidiary’s RE by the ownership % – if this amount is less than the dividends paid by sub x ownership %, you have a liquidating dividend
DR Cash – dividends paid by sub x ownership %
CR Dividend Income - sub’s RE x ownership %
CR Investment in sub - plug
What’s the JE to record the amortization of investment premium for undervalued equipment (under the equity method)?
DR Equity in earnings/investee income
CR Investment in sub
calculation: (difference between FV and BV / remaining useful life) x ownership %
How should you record investment income under the equity method?
DR Investment in sub
CR Equity in earnings/investee income
*note: make sure to subtract preferred dividends when calculating net income from sub
How do you calculate depreciation expense for an ARO?
beg. CV of ARO / useful life
*do NOT use the cost
What is the year-end JE for AROs?
DR Accretion Expense (increases over time)
DR Depreciation Expense
CR ARO (to increase it over time)
CR AD
How do you determine the balances of ARC and ARO at year-end?
ARC at 12/31 = Beg. ARC - depreciation expense
ARO at 12/31 = Beg. ARO + accretion expense
In order to find the updated balance in unamortized discount or premium, what should you do?
solve for interest expense, interest payment (cash), and amortization and either add or subtract (discount/premium) from the beg. CV; the difference between the face amount and the new CV is the unamortized discount or premium
How would you calculate the new CV if there’s a new discount later in the term of the bond?
beg. CV - (beg. CV x new discount rate x # months remaining)
