F5-Investments, Statement of Cash Flows, and Income Taxes

Question 1

Trading debt securities reported at

Answer 1

FV on the Balance Sheet.

Question 2

Under the fair value method, dividends received:

Answer 2

recognized as dividend revenue to the extent of cumulative earnings since acquisition and return of capital beyond that point. (part of the dividends will be recognized as income & part will be a return of capital)

Question 3

The fair value cannot be applied to:

Answer 3

financial assets or liabilities recognized under leases.
to pension or postretirement benefit obligations.
to all assets of similar characteristics.

Question 4

The fair value option is applied to:

Answer 4

individual financial instruments (applied to an entire instrument, and not to specific risk).

Question 5

Unrealized gains and losses from marking available-for-sale debt securities (equity) to FV at the balance sheet date are treated…

Answer 5

as other comprehensive income items, net of tax. However, once it is transferred into the trading category, those unrealized amounts will need to be recognized in earnings

Question 6

Held-to-maturity securities are valued…

Answer 6

at amortized cost; adjustments to fair value and the resulting unrealized gains/losses are not recorded.

Question 7

Gain or loss of an equity (available for sale) security sold next year=

Answer 7

fair value on the previous year balance sheet date - fair value of the current year balance sheet

Question 8

For held-to-maturity securities, based on the current expected credit losses (CECL), record a loss…

Answer 8

when amortization cost > PV of the principal + interest to be received (the PV of the expected future cash flows).

Question 9

Concentration of credit risk is required

Answer 9

disclosure in the notes to the Financial Statements.

Question 10

The excess of an asset’s fair value over its book value..

Answer 10

is amortized over the life of the asset.

Question 11

Equity method investment income =

Answer 11

(Reported net income x investor’s % of the share) - Excess fair value amortization

Question 12

Under Equity method, voting common stock ownership requires…

Answer 12

20% to 50% and a significant influence over the company is also be a factor.

Question 13

If an investor receives a stock dividend under equity method, investor should make

Answer 13

a memorandum entry that reduces the unit cost of all investee’s stock owned.

Question 14

If the ownership less than 20%:

Answer 14

• Liquidating dividends are recorded as a reduction of the investment in balance sheet.

*Dividend income from an equity security is recognized in net income.

Question 15

Under the equity method, calculating investment in a company:

Answer 15

Ending carrying amount = ( initial carrying amount + investor’s share of earnings) - investor’s share (%) of dividends.
OR
Ending investment = Beginning investment + investor’s income - investor’s dividends

Question 16

Equity method ignores…

Answer 16

goodwill.

Question 17

When do we use the acquisition method?

Answer 17

We use acquisition method to prepare consolidated financial statements based on fair value when the parent company owns more than 50% of the voting stock of the subsidiary.

Question 18

When parent company sells merchandise to subsidiary :

Answer 18

intercompany profits of subsidiary % from ending inventory and parent % from COGS will be eliminated.

Question 19

Consolidated stockholders’ equity of parent =

Answer 19

Consolidated stockholders’ equity of parent = common stock + APIC + R/E + noncontrolling interest

Note: If the parent ownership interest is %80, noncontrolling interest will be 20%

Question 20

Under the acquisition method, include only…

Answer 20

parent’s equity balance and do not carry over subsidiary’s preacquisition equity.

Question 21

CAR IN BIG

Answer 21

Eliminating investment of subsidiary use,

CAR IN BIG:

Common stock
APIC
Retained earnings

Investment
Noncontrolling Interest

Book value (due to fair value excess over BV)
Intangibles
Goodwill (Fair value of net assets - Book value of the assets)

Question 22

Fair value of the net assets =

Answer 22

total assets - total liabilities

Question 23

Bonus amount =

Answer 23

(Total equity x % of interest of new partner) - Invested amount by a new partner

Question 24

Under the bonus method:

Answer 24

If interest < contributed amount, bonus to old partner(s).
If interest > contributed amount, bonus to new partner(s).

Question 25

Goodwill Method

Answer 25

recognized intangible asset.

Question 26

Goodwill allocation to old (original) partners=

Answer 26

Total net worth of the new partner - total capital (equity)

Total net worth a new partner = the amount invested (capital) / % of partnership

Question 27

Goodwill method increases..

Answer 27

the individual partners accounts and changes total assets of the partnership.

Question 28

Bonus method increases (or decreases) …

Answer 28

the individual partners accounts without changing total net assets of the partnership.

Question 29

When incorporating a partnership, assets and liabilities are recorded…

Answer 29

at their fair values.

Answer 30

1 - Price of sold assets - BV of the assets = Loss
2 - Cash of sold assets - A/P = Cash balance after paid off A/P
3 - Allocate the loss to the partners based on their ratio
4 - Subtract loan from loan owner partner’s capital account to offset it
5- Allocate the remaining cash balance to the partners based on their ratio

Question 31

Under the indirect method, total cash paid and income taxes:

Answer 31

will be reported as supplemental disclosures in statement of cash flows.

Question 32

Changes between cash and cash equivalent items do not affect…

Answer 32

the cash position of the company and not reported as cash outflow. For example, purchasing a three-

Question 33

Under indirect method, adjustments for cash flows from operating: gains are…

Answer 33

subtracted from and losses are added to net income.

Depreciation expense: add
Goodwill impairment: add
Decrease in A/R: add
Increase in inventory: subtract
increase in A/P: add
Decrease tax payable: subtract
Increase in prepaid insurance: subtract
Gain on sale of equipment: subtract

Question 34

Sections of statement of cash flows:

Answer 34

Cash flows from operating: Collecting tax refund, A/R, dividends received, interest payments

Cash flows from Investing: Purchase/sale fixed assets, purchase another company’s common stock, down payment of purchased asset, capital expenditures, sale of property, plant and equipment (reported gain +carrying amount), loans to others (notes receivable), purchase/sale of available-for-sale securities

Cash flows from financing:
Payment of dividends, proceeds from barrowing, notes payable, issuance of common stock

Question 35

GAAP does NOT require

Answer 35

intraperiod income tax allocation to operating income.

Only the items are shown “net of tax” allowed:
* accounting principle changes (treated retrospectively)
* income from continuing operations
* discontinued operations

Question 36

Under GAAP, the asset and liability approach (BS approach)…

Answer 36

determines income tax.

Question 37

Deferred tax expense arises due to temporary differences

Answer 37

between GAAP and tax accounting.

Question 38

A temporary difference is a difference between

Answer 38

the tax basis of an asset or liability and its reported amount in the financial statements.

An item is included in calculation of net income in one year and in taxable income in a different year creates a temporary difference.

Question 39

Effective tax rate =

Answer 39

Income tax expense / Pretax income

Question 40

Municipal bond income is subtracted…

Answer 40

when calculating taxable income. It is a permanent difference.

Question 41

Paid insurance premiums are added

Answer 41

when calculating taxable income. They are permanent differences.

Question 42

Increase in tax liability (deferred tax expense) :

Answer 42

added to current total income tax expense. Depreciation on tangible assets results a deferred tax liability.

Question 43

Increase in deferred tax asset (benefit):

Answer 43

subtracted from current total income tax expense. More taxes paid now and less taxes in the future.

Question 44

Current income tax expense =

Answer 44

taxable income x enacted tax rate

Question 45

Deferred Income Tax Liability =

Answer 45

FS accrual method revenue - the installment method for income tax

Question 46

When preparing interim financial statements, income tax expense is estimated each quarter using…

Answer 46

the effective tax rate expected to apply to the entire year.

Question 47

For the deferred tax liability: When tax depreciation (the asset’s financial reporting basis) > book depreciation (tax basis),

Answer 47

use future tax rate for the difference that is expected to be reversed.

Question 48

Deferred taxes are not affected by

Answer 48

premiums on officer’s life insurance and interest received on municipal bonds because they are permanent differences.

Question 49

All deferred tax assets and deferred tax liabilities are reported

Answer 49

as non-current.