F5 Investments St Of Cash Flows Income Taxes

Question 1

Valuation of goodwill

Answer 1

The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.

Question 2

Equity Method used

Answer 2

The equity method is appropriate for use when an investor exercises significant influence over an investee. Although “significant influence” may be evident based on qualitative factors, the general rule is that a company that owns between 20 to 50 percent of the voting stock of another investee company is able to exercise significant influence. In this question, 25 percent ownership would indicate significant influence.

Question 3

Acquisition Method

Answer 3

Under the acquisition method, the preacquisition equity of the subsidiary is not carried forward in an acquisition and will carryforward zero amount. However, consolidated equity will be equal to the parent’s equity balance.

Question 4

Permanent book to tax difference

Answer 4

A permanent difference is a difference that affects taxable income or book income, but never both. Tax penalties paid to tax authorities are recorded as expenses in book income, but these penalties cannot be used as a deduction to reduce taxable income in calculating the tax liability.

Question 5

Fair Value Method

Answer 5

Regardless of the degree of ownership, if the company does not exercise significant influence, it should use the fair value method.

Question 6

Deferred Tax Liability

Answer 6

A deferred tax liability may result from depreciation of tangible assets because the MACRS depreciation method used for tax purposes is an accelerated method. The depreciation expense taken on the tax return may be in excess of the depreciation taken on the income statement, which will result in a deferred tax liability.

Question 7

Deferred Tax Asset

Answer 7

A temporary difference that decreases future taxable income results in the recognition of a deferred tax asset, which will be reported as noncurrent.

All deferred tax assets (DTA) and deferred tax liabilities (DTL) are reported as noncurrent on the balance sheet.

Question 8

Interim period tax expense

Answer 8

Interim period tax expense is the estimated annual effective tax rate applied to the year-to-date income before taxes minus the tax expense recognized in previous interim periods.

Question 9

Bonus Method

Answer 9

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 10

Concentration of credit risk

Answer 10

Concentration of credit risk is required disclosure in the notes to the Financial Statements.

Question 11

Criterion for classifying a lease as a finance lease by a lessee

Answer 11

There are five criteria that may be used to determine whether a lessee should capitalize a lease, and only one criterion has to be met in order to capitalize. If the lease term is equal to 75 percent or more of the economic life of the asset, then the lessee will capitalize the lease on its books.

Question 12

Legal costs defending several patents

Question 13

Capitalize interest

Answer 13

There are three conditions which are necessary to begin capitalizing interest, including: expenditures for the building have been made; interest cost is being incurred; and permits have been filed. The capitalization period starts on March 1, as all three conditions are met. The capitalization period ends on November 15 when the building is substantially complete and ready for its intended use.

Question 14

Finance lease

Answer 14

Rule: If any one of the following conditions is met, a lease is considered a finance lease under U.S. GAAP and is treated as if owned by the lessee:

The lease transfers ownership to the lessee by the end of the lease term.
The lease contains a written purchase option that the lessee is reasonably certain to exercise.
The present value at the beginning of the lease term of the “minimum lease payments” equals or exceeds the fair value of the leased property (generally 90 percent of FV is the minimum threshold).
The lease term is the major part (75 percent or more) of the estimated economic life of the leased property.
The asset is specialized such that there is no alternative use to the lessor.

Question 15

Noncash Property contributed by partner

Answer 15

Partners’ contributions to the partnership are valued at the fair market value at the date of contribution of the noncash property contributed. Thus, the partner’s capital account would be credited for the fair market value of the property at the date of contribution.

Question 16

Purchase of parent company stock by subsidiary

Answer 16

The purchase by the member of a consolidated group of stock of another member of the consolidated group is treated as a treasury stock transaction. This follows the theory of consolidated financial statements presenting one economic entity. (You cannot make money selling stock to yourself.)

Question 17

Unrealized gain and losses

Answer 17

Unrealized gains and losses are reported as follows: trading debt securities-reported at fair value with unrealized gains and losses included in earnings (along with “realized” gains and losses, if any).

Unrealized gains and losses (assuming no impairment) on available-for-sale securities are recognized in other comprehensive income (OCI) in the period incurred. The impact of the unrealized gain or loss will show net of tax, either as an individual line item or in aggregate with other components of OCI.

Question 18

Start-up costs

Answer 18

GAAP requires that start-up costs, including organizational costs, be expensed as incurred, without exception.

Question 19

Accounts Receivable Turnover

Answer 19

= Net Credit Sales / Average Accounts Receivable (Beginning AR + Ending AR)

Question 20

Fair value of nonfinancial asset

Answer 20

The fair value of nonfinancial asset is the value of its highest and best use.

Question 21

Capitalized interest

Answer 21

Capitalized interest equals the smaller of the total interest incurred or the avoidable interest.

Question 22

Inventoriable costs

Answer 22

Merchandise purchased plus freight-in, insurance, and warehousing costs (net of purchase returns and cash discounts) are inventoriable costs.

Freight out is a selling expense which is treated as a period expense, not a product (inventoriable) cost.

Question 23

Consolidation

Answer 23

All intercompany transactions, including loans and advance, should be eliminated upon consolidation. The percentage ownership here is irrelevant.

Question 24

Disclosures on Significant Accounting Policies

Answer 24

“Basis” of profit recognition on long-term construction contracts.

Accounting details

Question 25

Summary of significant accounting policies

Answer 25

Measurement basis

Accounting principles & methods

Criteria & policies such as basis of consolidation, depreciation methods, revenue recognition.

Question 26

Deferred Tax Assets and Liabilities

Answer 26

Under U.S. GAAP, deferred tax assets and liabilities are netted.

Question 27

Intercompany Transactions are eliminated. We don’t show profit or loss.

Answer 27

The total amount of this intercompany sale and cost of goods sold should be eliminated prior to preparing consolidated financial statements.

The intercompany profit must be eliminated from the ending inventory and the cost of goods sold of the purchase affiliate.

100 percent of the profit should be eliminated, even if the parent’s ownership interest is less than 100 percent.

Question 28

Deferred tax assets and liabilitied

Answer 28

Under U.S. GAAP, deferred tax assets and liabilities are netted.

Question 29

Record income tax liability - current and deferred

Answer 29

Dr: Tax expense - current
Dr: Tax expense - deferred
Cr: Tax liability - current
Cr: Deferred tax liability

Question 30

Deferred tax assets and deferred tax liabilities

Answer 30

All deferred tax assets and deferred tax liabilities are reported on the balance sheet net, and are classified as non-current.

Question 31

Intercompany billings

Answer 31

All intercompany billings are eliminated in consolidation.

Question 32

Equity securities (Marketable Equity Securities)

Answer 32

Equity securities are generally reported at fair value through net income (FVTNI). Unrealized holding gains and losses on equity securities are included in earnings as they occur.

Question 33

Marketable Debt Securities

Answer 33

Marketable debt securities, both “long” and “short” term, are reported at carrying amount (amortized cost) unless there is a permanent decline in market value.

Question 34

Amount recognized as tax benefit

Answer 34

The amount to be recognized is the amount that has a more than 50 percent chance of occurring.

Question 35

Equity Method - Disclose accounting policies

Answer 35

A company owning a 22% investment in another company in which the investment is accounted for using the equity method is considered as having “significant influence” over the company and is required to disclose the company’s accounting policy for the investment

Question 36

Investments excluded from the fair value option

Answer 36

Excluded from the fair value option are investments in subsidiaries, pension benefit assets/liabilities and assets and liabilities recognized under leases. Therefore, fair value measurement is not an option for these capital leases.

Question 37

Consolidated Equity

Answer 37

At date of acquisition, the consolidated equity will be equal to the parent company’s equity plus the fair value of any noncontrolling interest. The subsidiary company’s equity accounts are eliminated.

Question 38

Deferred tax assets and liabilities

Answer 38

Under U.S. GAAP, deferred tax assets and liabilities are netted.

Question 39

Deferred Tax Assets

Answer 39

A deferred tax asset results from a temporary timing difference between what is reported on the financial statements and what is reported on the tax forms.

A deferred tax asset is recognized when the company will benefit from a tax perspective in the future, which occurs when taxable income reported on the tax return exceeds pretax income in the current period on the income statement.

An example of how this can occur is when expenses first appear on an income statement, but are not deductible on the tax forms until a future year; this will cause pretax income to be lower on the income statement than taxable income on the tax forms.

Question 40

Permanent differences

Answer 40

The below are permanent differences:

Premium on officer’s life insurance with Lake as owner and beneficiary

Interest received on municipal bonds

Long-term loss accrual in excess of deductible amount

Question 41

deferred tax assets and deferred tax liabilities

Answer 41

All deferred tax assets and deferred tax liabilities are reported on the balance sheet net, and are classified as non-current.

Question 42

The primary purpose of a statement of cash flows is to provide relevant information about:

Answer 42

The cash receipts and cash disbursements of an enterprise during a period.

Question 43

Permanent Differences types

Answer 43

-municipal bonds
-term life insurance on death of officer

Question 44

Equity securities

Answer 44

Equity securities are generally reported at fair value through net income (FVTNI). Unrealized holding gains and losses on equity securities are included in earnings as they occur.

Question 45

Which type of investment is ineligible for reporting at amortized cost?

Answer 45

Shares of publicly traded companies are equity instruments, and equity instruments are generally not reported at amortized cost. Amortized cost accounting is more appropriate for debt instruments with fixed or determinable payments and a fixed maturity.

Question 46

Bond Discount Amortization

Answer 46

Bond discount amortization is a non-cash item that increases interest expense and therefore decreases net income.

Under the indirect method, the amortization of a bond discount should be eliminated by adding the amount back to net income in the operating section.

Question 47

Disclosure for most financial instruments

Answer 47

Both carrying value (amount) and fair value must be disclosed for most financial instruments (when it is practicable to estimate fair value).