F5 - Investments, Statement of Cash Flows, and Income Taxes Flashcards
What is the amount of a deferred tax benefit that should be recognized?
The amount that is more likely than not (>50%) to be sustained upon examination by tax authorities.
Note: Cumulative likelihood counts.
Income from continuing operations is related to income tax expense whereas taxable income is related to…
Income taxes payable
How do you calculate taxable income from income from continuing operations?
Start with income from continuing operations, add/subtract temporary/permanent differences (DTEs need to be subtracted, DTBs need to be added). This results in taxable income.
How is expected credit loss determined on AFS & HTM debt securities?
PV of future cash flows LESS carrying amount of the security.
On AFS and HTM debt securities, what amount of the expected credit loss hits the income statement?
All of it does on HTM securities. And all of it does on AFS securities with two exceptions:
1) if the FV of an AFS security exceeds the book value, the credit loss is still booked, but no loss is recorded on the income statement. An unrealized gain is recorded in OCI in the amount of the difference.
2) if the FV of an AFS security is less than the carrying value but greater than the PV, then the loss on the income statement is limited to the difference between the FV and the carrying amount.
When a bonus is paid to a departing partner, how is it allocated to the remaining partners?
The bonus is allocated based on the partner’s agreed-upon p&l proportions excluding the departing partner. If there is no agreed upon ratio, then it is split evenly.
When assets are revalued in a partnership, how is the revaluation allocated to the partners’ capital accounts?
It is allocated based on the agreed-upon p&l distribution. If there is no agreed upon distribution, then it is split evenly.
When cash is paid to a departing partner, how is it allocated to the remaining partners? (Goodwill method)
Under the goodwill method, a noncash asset is created in the amount of the cash paid to the exiting partner DIVIDED BY their agreed-upon p&l allocation
Note: if there is no agreed upon p&l allocation, then an even p&l split is assumed.
How are dividends received treated for tax purposes?
Dividends issued to a stockholder with less than 20% ownership results in a 50% deduction on any dividends received. This results in a permanent book-to-tax basis difference.
Note: 20% - 80% ownership is 65% deduction. 80% or more is 100% deduction
Are AFS debt securities held at amortized cost or fair value?
Fair value (with unrealized gains/losses recorded to OCI)
When an AFS debt security is reclassified to HTM, what happens to the unrealized holding gains/losses in OCI?
Any unrealized gains/losses will be amortized over the remaining life of the security as an adjustment of yield similar to the amortization of a premium/discount when interest revenue is recorded.
If a partnership is being dissolved, and a partner has made an advance but has a negative capital balance, what is the procedure?
Step 1 - decrease the advance (liability) and increase the partner’s capital balance (equity)
Step 2 - if the partner’s capital balance is still negative, the negative amount needs to be distributed among the remaining partners according to their agreed upon p&l allocation.
Step 3 - the remaining cash can then be distributed to the partners based on their respective capital accounts.
If an investor acquires significant influence (equity method), and the fair value of the investee’s net assets exceeds the book value of its net assets, at what amount should the investment be recorded?
The investment should be recorded at cost. The excess of the net asset’s FV over their BV should be amortized over their useful life.
Under the equity method, how do preferred dividends affect the investment’s increase due to a change in Net Income?
Under the equity method, the investment is increased as follows: investment + Net Income available to common shareholders (AKA Net Income LESS preferred dividends)
Under the equity method, when the investee has net assets with FV in excess of BV, what is the debit to amortize the difference over the useful life of the net assets?
The debit would be to equity in earnings / investee income NOT a separate depreciation on investment account.
