F4 - F5

Question 1

How are marketable DEBT securities measured?

Answer 1

CV (amortized cost), for both long and short-term securities, unless there is a permanent decline in market value

Question 2

How are credit losses (CECL) measured?

Answer 2

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

Question 3

interest revenue vs. interest receivable

Answer 3

interest revenue: PV (excluding accrued interest) x market rate x months/year

interest receivable: Face Value x coupon rate x months/year

Question 4

T/F: Significant influence cannot be exercised by holding non-voting stock.

Answer 4

True - the fair value method has to be used instead

Question 5

T/F: You should test goodwill for impairment when using the equity method.

Answer 5

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

Question 6

What method (for investments) do you use for preferred dividends and why?

Answer 6

Fair Value method (credit dividend revenue) - b/c preferred dividends don’t allow you to exercise significant influence

Question 7

T/F: A stock dividend is not reported as dividend income.

Answer 7

True - it just means more shares and a lower price per share

-cash dividends are reported as dividend income (for the Fair Value method)

Question 8

How to deal with undervalued assets and investments:

Answer 8

1. take the difference between the FV and CV
2. multiply that by the % of ownership
3. divide by the useful life of the asset
4. take this amount and subtract it from investment income

Question 9

Goodwill calculation

Answer 9

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

Question 10

How do you treat intercompany transactions for companies/subsidiaries with various %s ownership?

Answer 10

for consolidation (acquisition; control) - exclude (bc these transactions will get eliminated)
for fair value - include
for equity method - include

Question 11

Intercompany quick calculations:

Answer 11

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

Question 12

How do you treat assets and liabilities for consolidated FS?

Answer 12

add them to the consolidated FS for companies with a controlling interest BUT do not take the percentages; add them using the full amounts

Question 13

How to calculate consolidated RE for the parent company?

Answer 13

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

Question 14

How to calculate total SHE for the parent in consolidated FS?

Answer 14

parent’s total SHE + NCI

Question 15

Do all unrealized and realized gains (regardless of the type of security) need to be presented net of tax?

Answer 15

yes

Question 16

T/F: Anything paid before refinancing of a long-term note/bond is classified as a current asset.

Answer 16

True - it would go under prepaids

Question 17

How are expenses affected when accruing liabilities?

Answer 17

Debit expenses to increase them along with a credit to liabilities to accrue for them

Question 18

What do you reduce the note payable by to get the current balance?

Answer 18

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)

Question 19

How do you calculate interest income?

Answer 19

1. total amount of the note x present value factor
2. x market rate
3. divide/multiply for monthly rate, if necessary

OR

1. annual payment x # of years
2. subtract present value of the note (aka principal)

Question 20

Calculations for interest expense vs. interest payable:

Answer 20

interest expense: CV x mkt rate
interest payable: FV x coupon rate

Question 21

What rate do you use when calculating accrued interest (which goes into the bond issuance price)?

Answer 21

stated rate

Question 22

How do you calculate the net carrying value of debt that is being retired (for troubled debt restructuring)?

Answer 22

Face amount
- unamortized discount
- unamortized bond issuance costs
= net carrying value

Question 23

Which investment method should you use on preferred stock?

Answer 23

Fair Value Method (NOT equity method)
-use dividend income for cash dividends

Question 24

T/F: Under both the fair value and equity methods, liquidating dividends reduce the carrying amount of the investment account.

Answer 24

True

Question 25

T/F: Stock dividends increase the amount of common shares outstanding.

Answer 25

True - multiply the % of the stock dividend by the # of common shares outstanding

Question 26

How to solve the “liability from unredeemed coupons” question:

Answer 26

1. amount of units sold x % estimated of redeemed coupons
2. subtract coupons already processed
3. multiply by net cost ($/unit earned - #/unit expensed)

Question 27

How should you treat intercompany dividends?

Answer 27

they should be eliminated

any NCI dividends (of acquired companies) is included in the consolidated statement of cash flows and consolidated statement of equity

Question 28

What is the formula for future cash receipts from bonds?

Answer 28

PV = FV * PV factor

(in other words, divide the PV by the PV factor)

Question 29

How should you calculate the PV of a note that’s less than 12 months?

Answer 29

-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)

Question 30

How do you calculate revenue from bonds at the end of the year (if sold at a discount)?

Answer 30

(face value * coupon rate) + discount

*prorate for half a year for semi-annual payments if necessary

Question 31

If an entity is the primary beneficiary (spends/contributes the most) of another entity (partnership/VIE), what method of accounting should they use? (F4)

Answer 31

consolidation

*NOT the equity or fair value methods; % of ownership doesn’t matter in this case

Question 32

How are stock registration costs treated?

Answer 32

as a direct reduction of the value of the stock (debit Paid in Capital); NOT expensed

Question 33

Under the acquisition method, how do you transfer assets and liabilities from the subsidiary to the parent’s FS?

Answer 33

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

Question 34

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).

Answer 34

true

Question 35

Under the acquisition method, what will the parent company report as dividends paid?

Answer 35

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)

Question 36

How are acquisition costs treated?

Answer 36

expensed as incurred in the current period

Question 37

T/F: Acquisition costs are included in the initial investment amount (first JE).

Answer 37

true; they’re expensed as incurred but still included in the initial investment amount (but not amortized)

Question 38

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 %?

Answer 38

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

Question 39

What’s the JE to record the amortization of investment premium for undervalued equipment (under the equity method)?

Answer 39

DR Equity in earnings/investee income
CR Investment in sub

calculation: (difference between FV and BV / remaining useful life) x ownership %

Question 40

How should you record investment income under the equity method?

Answer 40

DR Investment in sub
CR Equity in earnings/investee income

*note: make sure to subtract preferred dividends when calculating net income from sub

Question 41

How do you calculate depreciation expense for an ARO?

Answer 41

beg. CV of ARO / useful life

*do NOT use the cost

Question 42

What is the year-end JE for AROs?

Answer 42

DR Accretion Expense (increases over time)
DR Depreciation Expense
CR ARO (to increase it over time)
CR AD

Question 43

How do you determine the balances of ARC and ARO at year-end?

Answer 43

ARC at 12/31 = Beg. ARC - depreciation expense
ARO at 12/31 = Beg. ARO + accretion expense

Question 44

In order to find the updated balance in unamortized discount or premium, what should you do?

Answer 44

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

Question 45

How would you calculate the new CV if there’s a new discount later in the term of the bond?

Answer 45

beg. CV - (beg. CV x new discount rate x # months remaining)