F5

Question 1

Unrealized gain (loss)

Answer 1

Trading debt securities are reported at fair value (Market not cost) with unrealized/realized gains reported at earnings (Net Income)

unrealized gain(losses) for AFS is reported at OCI until realized and reported net of tax in OCI.

Gain(loss)= Fair value - Cost

for AFS securities (recorded at fair value both trading securities/AFS) transferred into trading category: unrealized amounts will need to be recognized in earnings immediately after changing to trading.

Question 2

Held to maturity

Answer 2

reported at amortized cost not fair value.
marketable debt securities, both “long” and “short” term, are reported at carrying amount (amortized cost) unless there is a permanent decline in market value.

unrealized gain/loss reported in Net Income (Income statement)

Question 3

AFS present value of expected cash flow

Answer 3

• credit loss: amortized cost - present value of expected cash flows

allowance for credit losses 23,000= 250,000 - x
250,000 - 23,000 = 227,000

There’s no credit loss if the present value is higher than amortized cost.

Reporting realized gain(loss) on AFS: credit loss if the present value of the investment is less than its amortized cost. $2,000 loss= 33,000 present value - 35,000 amortized cost.

Credit loss on the income statement for AFS securities if the present value of the investment is less than its amortized cost(purchase price). The remaining loss is recognized as unrealized loss in OCI.

Credit loss= present value - amortized cost (purchased price)

Question 4

Marketable equity securities

Answer 4

reported at fair value through Net Income (FVTNI). Unrealized gains/losses are included in earnings.

Question 5

AFS credit loss under CECL model

Answer 5

under the “current expected credit losses” CECL model: if an AFS has a fair value below amortized cost but above the present value of future cash flows the asset must be written down to the lower of fair value by recording a credit loss recognized on the earnings section of income statement.

Question 6

Electing fair value option

Answer 6

fair value option ( eligible financial instruments not typically measured at fair value) is applied to individual financial instruments or an entire instrument and not to specific risks or assets of similar characteristics.

Question 7

Short term AFS

Answer 7

• Discount (face value - cost) is not amortized on short-term investments
  -accrued interest is a receivable, does not affect cost.
  -Investment would be recorded at cost on the date of purchase
• the investment would reflect fair value at the end of the year.
  -unrealized gain/loss is reported to OCI.

Question 8

Receiving cash dividend Equity vs. Fair value method

Answer 8

Fair value, dividend is recorded as income and does not affect the investment account

Equity method, dividend is recorded as a decrease in the investment account.

Question 9

When ownership goes from less than 20% to more than 20%, the equity method should be used

Answer 9

the equity method should be used starting on the date of significant influence and going forward. Retroactive adjustments are not required.

The equity method should be used when an investor can exercise significant influence over the investee. Even if an investor owns less than 20%, if the exercise significant influence then the equity method should be used.

-The equity method is not appropriate when the investor does not exercise significant influence.

Question 10

reporting investment income under the equity method

Answer 10

Undervalued asset amortization will decrease investor’s reported investment income but cash dividends received will only affect the balance sheet investment account not investment income.

Undervalued asset amortization affects both the investment account (an asset) and the investment income account (revenue). Cash dividends affect the investment account but no investment income account.

Question 11

degree of influence

Answer 11

No significant influence over another company, regardless of ownership percentage, the fair value method should be used.

Question 12

How to record 2% stock dividend under equity method

Answer 12

dividend revenue is not recorded when a stock dividend of the same shares in the same company are received.

Initial investment (or cost) of the total stock owned should not be changed simply because additional shares are obtained. The total investment should be spread over a larger amount of shares.

Should be recorded with a memorandum entry that reduces the unit cost of all stock owned.

cash dividends are treated as a return of capital rather than investment income.

Question 13

effect of dividend (liquidating dividend) on investment account

Answer 13

Equity: decreases the carrying amount of the investment

Fair value: Reduces the carrying amount of the investment.

Question 14

To find the investment amount under equity method

Answer 14

Investment account: beg. balance + share of net income

Question 15

Calculating goodwill

Answer 15

Purchase price - fair value

Question 16

Including liabilities from consolidated balance sheet

Answer 16

If a company owns more than 50% of stocks in a subsidiary, then they should include the liabilities in a consolidated balance sheet.

Question 17

Intercompany gains

Answer 17

One entry must recognize the intercompany sale and gain on sale. Second entry eliminates the intercompany gain on the sale.

Question 18

Under the Acquisition method

Answer 18

The equity amount of a subsidiary before and at acquisition is not carried forward to the consolidated financial statements. The equity amounts of the subsidiary are eliminated under the acquisition method. Only the parent’s equity is included in the consolidated financials.

–Reporting retained earnings under the acquisition method: 100% of the subsidiary equity accounts are eliminated or ignored in consolidation. Only include the parent company.

-acquisition method is needed when an investor owns more than 50 percent of the voting stock, as this will require the preparation of consolidated financial statements

Question 19

cost/accumulated depreciation on consolidated balance sheet

Answer 19

– Intercompany sale should be eliminated or ignored.
— Cost should be shown on the consolidated balance sheet at the parent company cost (how much they paid for the asset)
— Depreciation should continue as if the sale had not occured.

Question 20

If a company c holds company A (parent company of company B) and sells it to company B when the carrying amount is higher than the sell price then

Answer 20

– Increase in retained earnings
– $0 effect on noncontrolling interest because the parent company issued the bonds (elimination has no impact on noncontrolling interest)
–The purchase of the parent company bond is treated as if the bonds were retired.
– If the retired price is lower than the carrying value then it is an increase to retained earnings.

Question 21

intercompany bond holdings of a consolidated group

Answer 21

– Bonds are eliminated in consolidation and the difference between (gain or loss) the discounted price and premium on reacquisition would be included in retained earnings.

The price of the bond is eliminated and only the difference between the purchase price and re-purchase price is included in retained earnings (increase or decrease).

If a premium is paid to “retire” the bonds then it is a decrease in retained earnings. Because they are paying more to retire the bonds.

Question 22

Parent company buying stock from a wholly owned subsidiary

Answer 22

$0 gain or loss because you cannot make o lose money selling stock to yourself. Treated as a treasury stock transaction.

Question 23

Consolidated statement of cash flows

Answer 23

– In reconciling net income to net cash from operations, total net include should include the parent company and noncontrolling interest.
– Dividends paid by the subsidiary to noncontrolling interest shareholders are reported in cash flows statement not the dividends paid to the parent company.

Question 24

How to calculate and find intercompany sales

Answer 24

Revenue - subsidiary
+ Revenue - parent
= total revenue - revenues (consolidated) = Intercompany sales

Question 25

Carrying amount

Answer 25

Cost - accumulated depreciation = carrying amount

The carrying amount of an asset should be recorded at the parent’s company original cost minus or plus any gain or loss.

Question 26

Parent company (owns 80%) advanced cash to company B

Answer 26

• All intercompany transactions like loans and advances should be eliminated upon consolidation.

Question 27

Amount of dividends to be reported in consolidated financials

Answer 27

Jane owns 90% of Dun and 100% of Beech. Dun and Beech declared cash dividend of $100,000.

– The only dividend amount that should appear in the consolidated financials are non-intercompany transactions. The dividend paid to outsiders and not Jane (the parent company).

–In this ex, the only non-controlling interest is the 10% that Jane doesn’t own of Dun since they own 100% of Beech.

So the consolidated financials would report $100,000 x 10% = $10,000 in dividends.

Question 28

Share of earnings from subsidiary

Answer 28

– You are looking for the parent’s share of the subsidiary’s Net income

Ending retained earnings = Beg. Retained earnings + Net Income - dividends paid

Net income x %owned = share of earnings.

Question 29

Unrealized intercompany profit

Answer 29

Gross profit: Revenue - COGS

Add both companies Gross profit and subtract from the consolidated gross profit to find how much is unrealized/eliminated.

Question 30

To find payable intercompany sales

Answer 30

Add accounts receivable for both companies subtracted from the consolidated AR.

Question 31

To find percentage acquired when goodwill is given/not given

Answer 31

– Goodwill = purchase price - fair value of net assets acquired

195,000 = 585,000 (purchase price) - x
585,000 - 195,000 = 390,000

To find % acquired: 390,000/1,300,000 (fair value) = 30%

If there’s no goodwill: 585,000 (purchase price) / 1,300,000 (fair value) = 45%

Question 32

Recording investment amount under fair value method

Answer 32

The fair value method is used when an investor owns less than 20% of an investee’s common stock and does not exercise significant influence over the investee.

Investment is carried at fair value through net income (FVTNI). Earnings of the investee are not recorded by the investor and dividends received are considered income and does not affect investment account but earnings.

Dividend is a cash receipt and will increase the income account.

2 for 1 stock split does not increase investment account. Number of shares will double and the cost per share is halved but there’s not change to the investment amount.

Question 33

Accounting for partnership withdrawal or dissolution or admission

Answer 33

Bonus method: increases or decreases individual partner accounts without changing total net assets of the partnership

Goodwill method: Increases the individual partner accounts and changes the total net assets of the partnership

so net assets don’t change under bonus method but changes under goodwill method.

Question 34

Partnership contributions

Answer 34

Assets contributed to a partnership are valued at fair market value of the assets, net of any liabilities.

partners agreeing to share profits equally doesn’t affect their partnership capital accounts from contribution of assets.

Question 35

To calculate initial capital balance

Answer 35

Partner that contributed less money gets goodwill allocated to them using the following process if they agree each partner has an equal initial capital balance.

— calculate implied value of the partnership

Implied value= partner that paid the most.
Contribution x2 if there are two partners.

calculate goodwill:
Goodwill = implied value - total partner contributions

Partner’s initial capital balance = cash contribution + goodwill.

Upon the formation of a partnership, tangible assets (inventory and real estate) would be recorded at fair market value at the date of the investment.

Question 36

Bonus method

Answer 36

– when the purchase price is more or less than the book value of the net capital account

– If interest is less than the amount contributed, bonus to old partners

– If interest is more than the amount contributed, bonus to new partner.

Under the bonus method, any premium paid to the retiring partner is allocated to the remaining partners’ accounts, based on the profit and loss ratios of the remaining partners

Question 37

When calculating partnership capital account for the year

Answer 37

– subtract the partner’s total interest from the profit.