F4 OLD

Question 1

Describe the financial instrument fair value option under U.S. GAAP.

Answer 1

On specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings. The fair value option is irrevocable.

Question 2

On the balance sheet, debt securities classified as trading or available-for-sale are valued how?

Answer 2

At fair value.

Question 3

How are unrealized gains/losses on debt securities classified as trading securities recognized?

Answer 3

Unrealized gains and losses on trading securities are recognized on the income statement.

Question 4

How are unrealized gains/losses on debt securities classified as availabe-for-sale recognized (assuming no expected credit loss)?

Answer 4

Unrealized gains and losses on available-for-sale securities with no expected credit loss are reported in other comprehensive income (OCI).

Question 5

On the balance sheet, debt securities classified as held-to-maturity are valued how (assuming no expected credit loss)?

Answer 5

At amortized cost.

Question 6

List three conditions when losses on debt securities classified as available-for-sale are recognized in income.

Answer 6

1) Sale of the security
2) Transfer of the security to trading classification
3) When there is an expected credit loss on the available-for-sale security. The credit loss reported in net income cannot exceed the amount by which fair value is below amortized cost.

Question 7

When a marketable debt security is transferred from trading to available-for-sale, or vice versa, at what cost is it transferred?

Answer 7

• Transferred at fair value, which then becomes the new basis.
• For a security transferred into the trading category, the difference is treated as a realized gain or loss and is recognized on the income statement.
• For a security transferred from the trading category, the unrealized holding gain or loss will already have been recognized in earnings.

note: transfers to and from the trading category should be rare

Question 8

When does credit loss have to be booked for debt investments?

Answer 8

A credit loss must be reported on an available-for-sale or held-to-maturity debt security when it is probable that the amounts due (principal and interest) will not be collected.

Question 9

How is a credit loss recognized for an available-for-sale or held-to-maturity debt security?

Answer 9

When there is an expected credit loss, the investment should be reported at the present value of the principal and interest that is expected to be collected. The credit loss is the difference between amortized cost and the present value.

For an available-for-sale security, the credit loss cannot exceed the amount by which fair value is below amortized cost, because the investor has the option to sell an available-for-sale investment if the loss on the sale will be less than the expected credit loss.

Question 10

How is the realized gain or loss calculated for trading and available-for-sale debt securities when they are sold?

Answer 10

Trading Securities
Realized gain/loss = Selling price vs the adjusted cost (original cost +/- unrealized gains or losses previously recognized in net income)

Available-for-Sale Securities
Realzied gain/loss = Selling price vs the original cost, adjusted for any credit losses recorded on the income statement from previous periods (note that any unrealized gains or losses in AOCI must be reversed)

Question 11

How are equity securities typically valued?

Answer 11

Equity securities are typically carried at fair value through net income (FVTNI), with unrealized gains and losses included in earnings.

Question 12

Describe the “practicality exception” for equity securities.

Answer 12

For equity investments that do no have a readily determinable fair value, this exception allows an entity to measure equity investments at cost, less impairment, plus/minus observable price changes of identical or similar investments from the same owner.

Question 13

How are nonliquidating and liquidating dividends distributed by equity securities reported by the investor receiving them?

Answer 13

Nonliquidating dividends received by the investor are accounted for as dividend invomce.

Liquidating dividends received by the investor are accounted for as a return of capital.

Question 14

Describe the recognition of an impairment loss on equity securities if a qualitative assessment indicates that impairment exists.

Answer 14

Impairment losses apply to equity securities valued using the practicality exception. If impairment exists, the cost basis of the security will be written down to fair value with the write-down reflected as a realized loss and included in earnings.

Question 15

How is the realized gain or loss calculated for equity securities when they are sold?

Answer 15

Realized gain/loss = Selling price vs the adjusted cost (Original cost +/- unrealized gain or losses previously recognized in net income)

Question 16

How is the year-end investment in investee reported on the balance sheet calculated under the equity method?

Answer 16

Beginning investment in investee
+ Investor’s share of investee earnings
- Investor’s share of investee dividends
- Amorization of FV differences
= Ending investment in investee

Question 17

How is an investor’s equity method investment reported on the income statement?

Answer 17

Investor’s share of investee earnings
- Amortization of FV differences
= Equity in earnings/investee income

Question 18

State the criteria to consolidate subsidiaries

Answer 18

Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary.

Do not consolidate when control is not with owners (as in bankruptcy of subsidiary).

Question 19

What is a variable interest entity (VIE)?

Answer 19

A corporation, partnership, trust, llc, or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks sufficient financial resources to support its activities.

Question 20

Who is the primary beneficiary of a VIE and how does the primary beneficiary account for its ViE investment?

Answer 20

The entity with the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and:

1) Absorbs the expected VIE losses; or
2) Receives the expected VIE residual returns.

The primary beneficiary must consolidate the VIE.

Question 21

Who consolidates when one entity receives the expected returns from a VIE an another entity absorbs the expected losses?

Answer 21

The entity that aabsorbs the expected losses consolidates.

Question 22

In acquisition accounting, state the consolidating workpaper elimination entry.

[CARINBIG]

Answer 22

dr Common stock - subsidiary
dr Apic - subsidiary
dr Retained earnings - subsidiary
cr Investment in subsidiary
cr Noncontrolling interest
dr Balance sheet adjustments to fair value
dr Identifiable intangible assets to fair value
dr Goodwill

Question 23

How are expenses relating to the combination treated under the acquisition method?

Answer 23

• Direct out-of-pocket costs are expensed
• Stock-related costs are a reduction in value of the stock issued (normally a debit to additional paid-in-capital).
• Indirect costs are expensed.

Question 24

How is noncontrolling interest (balance sheet) as of the acquisition date calculated under U.S. GAAP?

Answer 24

Noncontrolling interest (NCI) = FV of subsidiary x NCI %

Question 25

How is noncontrolling interest on the income statement calculated?

Answer 25

Subsidiary net income
x Noncontrolling interest %
= NCI in net income

Question 26

In an acquisition, how are acquired identifiable intangible assets amortized?

Answer 26

• Finite useful life: amortized to residual value over expected life. Subject to the two-step impairment test.
• Indefinite useful life: do not amortize. subject to the one-step impairment test.

Question 27

How is goodwill calculated under the U.S. GAAP?

Answer 27

US GAAP
goodwill = fv of subsidiary - fv of subsidiary’s net assets

Question 28

In a business combination, what is the treatment of an acquisition i which the acquisition ocst is less than the fair value of 100% of the net assets acquired?

Answer 28

The acquisition cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of the 100% of the identifiable intangible assets. This creates a negative balance in the acquisition account, which is recorded as a gain.

Question 29

Name several simple workpaper elimination entries that are necessary to eliminate intercompany payables and receivables when producing consolidated financial statements.

Answer 29

• accounts payable / accounts receivable
• bonds payable / bonds receivable
• accrued bond interest payable / accrued bond interest receivable

Question 30

State the workpaper elimination entry for intercompany inventory transactions.

Answer 30

dr Retained earnings (intercompany profit in beginning inventory)
dr Intercompany sales
cr intercompany cost of goods sold
cr Cost of goods sold (intercompany profit in goods sold)
cr Ending inventory (intercompany profit in ending inventory)

Question 31

State the workpaper elimination entry for intercompany bond transactions

Answer 31

dr Bonds payable
dr Premium (or credit discount)
cr Investment in affiliates bonds
cr Gain on extinguishment of bonds (or debit loss on extinguishment of bonds)

Question 32

State the workpaper elimination entry for intercompany land transactions

Answer 32

dr intercompany gain on sale of land
cr land

Question 33

State the workpaper elimination entries for intercompany depreciable assets transactions

Answer 33

elimination entry #1 - eliminate intercompany gain and adjust asset and accumulated depreciation to original amounts:
dr Intercompany gain on sale of machinery
cr Machinery
cr Accumulated depreciation

elimination entry #2 - eliminate excess depreciation:
dr Accum depr
cr Depreciation expense

Question 34

When a parent company owns less than 100% of the stock of a subsidiary company what amount of the subsidiary’s assets, liabilities, and equity are included on the consolidated balance sheet?

Answer 34

The consolidated balance sheet includes 100% of the parent’s subsidiary’s assets and liabilities, but does not include the subsidiary’s equity. Noncontrolling interest is presented as part of equity, separately form the equity of the parent company.

Question 35

What 3 considerations must be taken into account when preparing consolidated statements of cash flow tha are no present when preparing statements of cash flow for a nonconsolidated entity?

Answer 35

1) When reconciling net income to net cash provided by operating activities, total consolidated net income (including net income attributable to both the parent and the noncontrolling interest) should be used.

2) The financing section should report dividends paid by the subsidiary to noncontrolling shareholders. Dividends paid by the subsidiary to the parent company should not be reported.

3) The investing section may report the acquisition of addcxitional subsidiary shares by the parent if the acquisition was an openmarket purchase.

Question 36

Define goodwill.

Answer 36

• Excess of the fair value of a subsidiary over the fair value of the subsidiary’s net assets.
• Costs of maintaining and/or developing goodwill cannot be capitalized.

Question 37

How is goodwill impairment analyzed under U.S. GAAP?

Answer 37

Goodwill impairment is analyized by comparing the carrying value of the reporting unit (including goodwill) to the fair value of the reporting unit (including goodwill).

Fair value > Carrying value, then there is no impairment.

Fair value < Carrying value, then there will be an impairment charge equal to the difference between fair value and carrying value.

note: the impairment charge cannot exceed the value of the goodwill allocated to the reporting unit

Question 38

Under U.S. GAAP, a private company may elect to apply the alternative method of goodwill accounting. Describe the steps of this method.

Answer 38

• Amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity can demonstrate that another useful life is more appropriate.
• Make an accounitng policy election to test goodwill for impairment at either the entity level or the reporting unit level when a triggering event occurs that indicates that the fair value of an entity (or reporting unit) may be below its carrying amount.
• This alternative method must be applied to all existing goodwill and any goodwill generated in future business combinations.