F4- Financial Instruments, Business Combinations and Goodwill

Question 1

Bonds to be held until maturity (AFS) are recorded at what?

Answer 1

Amortized Cost

Question 2

Equity Securities a company does not intend to sale in the near term and classified as what? Gain/losses are included where?

Answer 2

AFS Securities and as a separate component of OCI

Question 3

Dividend Revenue under the FV method

Answer 3

Should be recognized to the extent of cumulative earnings since acquisition and return of capital. The portion to be included on the income statement would be the amount “not” in excess of investor’s share in the investee’s undistributed earnings since the date of the investment

Question 4

Short-t5erm Investments

Answer 4

Discounts/premiums are not amortized

Question 5

Any temporary difference on AFS are recorded as what? (difference between mid-year and year end)

Answer 5

“Net unrealized loss” in OCI

Question 6

When are losses on securities recognized on the I/S?

Answer 6

Once the loss in value is considered permanent.

Question 7

Trading securities unrealized gain/losses are reported where?

Answer 7

Income statement

Note: AFS unrealized losses are recorded in OCI but gains go to the income statement

Question 8

how are trading securities valued?

Answer 8

FV

Question 9

FV option for recognizing financial assets/liabilities calculation:

Answer 9

Income is calculated as the amount of the dividend received (*ownership%) +/- appreciation/decline in the investment during the year

Question 10

FV Option of accounting can’t be used for what:

Answer 10

Leases, Investment in Sub and Pensions

Question 11

Temporary Losses on AFS/Trading securities:

Answer 11

AFS: Should be credited to an allowance account and debited directly to OCI (other than temporary losses should be debited to income statement and credit to the security account)

Trading: Should be credit to allowance account and debit income statement

Question 12

Switching categories of securities from AFS to Trading

Answer 12

AFS -> Trading = unrealized holding gain/loss with be recognized immediately in earnings

Trading -> AFS = unrealized holding gain/loss was already recognized in earnings

Question 13

Equity Method: Receiving Dividends

Answer 13

When a company receives a dividend from a company they invest in using the equity method, the dividend should be accounted for by reducing the unit cost of all the stock owned in that company.

FV method: dividends are considered income

Question 14

Equity Method and its affects on income

Answer 14

The investor records revenue as their “% share of the investee’s earnings” not dividends received

Question 15

Equity Method: Inventory/land appreciation

Answer 15

Investor would record:

FIFO inventory FV increased so the investor would:
-Record the additional COGS associated (thus decreasing earnings)

Land FV increased so the investor would:
-No effect on equity earnings

Question 16

Equity Method: Calculating total investment

Answer 16

Purchase Price
+Share % of earnings
-Share % of dividend received
=YE Balance

Question 17

When an investor acquires significant influence then what??

Answer 17

Equity method is used from that point forward. Only recognize income from the investee from that point forward.

Question 18

Calculating Goodwill:

Answer 18

Difference between:

Purchase Price and FV of assets received

Question 19

Equity Method: Calculating Investment Income: Acquiring Assets with Excess Fair Value

Answer 19

Excess FV Amortization

(Excess FV * Ownership %)
/Useful life (PPE - Inventory just * ownership %)

=Equity Investment Income

Question 20

Preferred Stock Ownership and the Equity Method

Answer 20

Doesn’t allow investor to have significant influence: Must use FV Method - Dividend Income goes straight to I/S

Question 21

When calculating revenue from investment and preferred stock is involved:

Answer 21

Subtract preferred dividends before calculating revenue from investment.

Also add dividend revenue:
$dividends * ownership%

Question 22

Goodwill created in an investment accounted for under the equity method:

Answer 22

IGNORED

Question 23

FV Method:

Answer 23

Dividends are considered income for the year.

Question 24

Reporting Consolidated Financials is done under what accounting concept?

Answer 24

Economic Entity

Question 25

Vertical Chain in Consolidation:

Answer 25

Parent Co. owns >50% of sub and Sub owns >50% of third company = Consolidate

Question 26

VIE Entities:

Answer 26

Must be able to dictate activities, share in losses and earnings.

Not required to have >50% ownership

Question 27

Variable Interest in an entity:

Answer 27

Most liabilities (except short term - A/P) represent Variable interests

Question 28

When does a company have insufficient equity investment at risk?

Answer 28

When the companies “equity investment at risk” is less than the equity investment at risk of similar Non-VIE entities.

Question 29

Acquisition Method: Calculating APIC

Answer 29

Total Investment (FV of stock * # of shares)

-Common Stock (at Par Value)

= APIC

Question 30

Direct Costs under the acquisition method are recorded how?

Answer 30

Deducted in determining NI of the combined corporation for the period in which the costs occurred.

Question 31

Net Assets Acquired using acquisition method of accounting:

Answer 31

Based on FMV

Question 32

Acquisition Method: Registration and Issuance Costs/Legal Expenses

Answer 32

Registration Costs reduce value of stock issued (subtract directly from APIC)
APIC = (MV-PAR * Shares) -
Registration Costs

Legal and Consulting Fees/Finder Fees (acquisition costs) are directly expensed

Question 33

When acquisition price exceeds the FV of net assets acquired, how should the assets be presented?

Answer 33

FV

Question 34

Goodwill under IFRS (partial) and Non-Controlling Interest

Answer 34

Acquisition price - ((FV of net assets acquired) *ownership%))

Non-controlling interest = Same Except (*NCI%)

Question 35

Goodwill under US GAAP (common stock acquisition)

Answer 35

Goodwill = (FV of Subsidiary - FV of Assets Acquired)
Example:
FV of sub x 75% = 300,000 (acquisition price)
FV = $400,000
GW = 400,000 - FV of net assets

Question 36

IFRS (common stock acquisition)

Answer 36

NCI = FV of subsidiary assets * NCI%

Question 37

US GAAP: FV of Sub Acquisition and NCI

Answer 37

FV of sub = (Acquisition price / % acquired)

NCI = (Fv of Sub * %NCI)

Question 38

Calculating Gain when working with Goodwill:

Answer 38

( Total Investment (common stock + contingent consideration given) - BS Adjustment (FV-BV) )

Question 39

Business acquisition: How does the acquirer recognize a bargain purchase?

Answer 39

As a gain in earnings on the date of acquisition

Question 40

Dividends paid in acquisitions:

Answer 40

Dividends paid by subs are eliminated in consolidation

NCI isn’t (only left on consolidated BS)

Question 41

Inter-company sales:

Answer 41

Take (total revenue (both companies) - consolidated = inter-company sales)

Question 42

Inter-company payables:

Answer 42

Take (total AR - consolidated = inter-company payable)

Question 43

Intercompany Sales:

Answer 43

The effect of these sales should be eliminated

Question 44

Intercompany Sales: Getting to carrying value of inventory

Answer 44

(Total Revenue - Consolidated) = Intercompany Revenue

• COGS % (1-GP%)
• % on the consolidated B/S (unpaid amount)

Question 45

Calculating Intercompany COS:

Answer 45

(Total COS (both companies) - Intercompany Sales) = Adjusted COS

Question 46

Fixed Asset Costs and Consolidation

Answer 46

Fixed Asset cost from outside world is used and remains on the Balance Sheet (amount is net of gains recognized earlier)

Question 47

Unrealized Gross Profit (subsidiaries inventory)

Answer 47

((Shipments from - Shipments to)/Shipments From)

*Inventory Acquired from Subsidiary

Question 48

Difference in depreciation expense:

Answer 48

Original Depreciation Expense (before intercompany sale) - Depreciation Expense if there was no intercompany sale

Question 49

Getting to income from RE Statement:

Answer 49

1/1: Balance

  \+Income **Squeeze

=Income before Dividend payment

+/-Dividend Payment

12/31: Balance

Question 50

At date of Acquisition: SE will equal what?

Answer 50

(SE at date of acquisition will equal the SE of the parent company) + FV of any NCI

-subsidiaries SE is eliminated completely

Question 51

Net income after acquisition:

Answer 51

NI should not change from parent’s (if equity method used)

Question 52

Acquisition Method requires what in regards to recognizing assets of subsidiaries?

Answer 52

+100% of the FV of subsidiaries assets be recognized.

+BV of parents

=New total

Question 53

Goodwill impairment test: GAAP vs IFRS

Answer 53

GAAP: each reporting unit

IFRS: each CGU (cash generating unit)
-One step process:
Compare: ( > of FV - cost to sale or Value in
use/recoverable amount) vs Carrying value