F5 - Investments, Statement of CF, and Income Taxes Flashcards
What are the two important rules for treating dividends under the FV method?
1) Dividends received are recofnized as dividend revenue to the extent of the investor’s share of cumulative earnings since acquisition.
2) Dividends received in excess o fthe investor’s share cumlative earnings are treated as a return of capital
Based on the current expected credit losses (CECL) model for a held-to-maturity (HTM) debt security, when is a loss recorded?
A loss is recorded when the amortized cost exceeds the PV of the principal and interest expected to be collected.
How is OCI loss and credit loss recorded for available-for-sale (AFS)?
AFS devt securities will result in losses in OCI when the FV is below the PV of expected CF and the PV is below amoritzed cost (Amort. Cost > PV > FV).
The loss recorded in OCI is equal to the difference between the PV and FV.
The credit loss recorded on the income statement is the difference between amort. cost and PV.
If an investor uses the equity method to account for ites investment in ABC Co. common stock, how should the investor record a 2% stock dividend receved from ABC Co.?
As a memo entry reducing the unit cost of all ABC Co. stock owned. The total investment in ABC will simply be spread over a larger amount of shares thereby reducing the unit cost of all ABC stock owned.
What is a liquidating dividend?
a reduction of the investment account
What are the required supplemental disclosures under the indirect method in the statement of cash flows?
Cash paid for interest and income taxes is required, and not for dividend payments because dividends paid is a line-tem disclosure in the financing section.
How are gains/losses treated in the operating activities section in teh CF statement?
Generally, gains are subtracted and losses are added from/to NI because they are captured in total under the ivnesting activities section. However, if for example, a gain is from a trading security then it does not need to be subtracted from NI because the sale from the trading security shoudl be included in operating cash flows.
What activity section is dividends received captured under withing the CF statement?
Operating activities.
What items does GAAP require intraperiod income tax allocatin (i.e., nte of income tax)?
GAAP requires intraperiod income tax allocatin to income from continuing operations, discontinued operations, and accounting principle changes treated retrospectively.
NOT operating income.
How do you determine if a temporary difference in transactions will be a deferred tax liability (DTL)?
F/S income first | Tax return income later
1. Installment sales
2. Contractors account (% vs. Completed)
3. Equity method (undistributed dividends)
Tax return expense first | F/S expense later
1. Depreciation expense
2. Amortization of franchise
3. Prepaid expenses (cash basis for tax)
Future tax liability = Tax income later or Tax deduct first
How do you determine if a temporary difference in transactions will be a deferred tax asset (DTA)?
F/S expense first | Tax return expense later
1. Bad debt expense (allowance vs. direct)
2. Est. liability/warranty exp.
3. Start-up expenses
Tax return income first | F/S income later
1. Prepaid rent
2. Prepaid interest
3. Prepaid royalties
Future tax asset = Tax income first or Tax deduct later
What are teh NOL deduction thresholds and their application for taxable years?
NOLs can be elected to be carried back for up to 5 years entirely, or NOLs can be carried forward indefinitely for up to 80% of taxable income.
How do you attribute the proper amount of goodwill to an acquisition?
1) Use the purchased % of C/S on the acquisition date to identify the relevant amount of NBV equity purchased.
2) Take the investment cash paid less the proportioned (%) NBV.
3) Allocate the net identifiable assets (FV - NBV) by using the same purchased %.
4) step 2 excess amount less step 3 allocated identifiable net assets equals excess to goodwill.
