Far 2 Flashcards
Reconciling Bank Balance to Book Balance
Bank Balance \+ Deposits in Transit -Outstanding Checks \+/- Bank Errors \+/- Errors on Ledgers =Book Balance
*There are only two reconciling items for the balance per bank statement, and these are deposits in transit and outstanding checks.
Any other reconciling items like service charges, NSF checks, interest income and error are only reconciling items to the balance per the books or general ledger balance.
**When your reconciling book and bank balance……If a company has more than one bank account and one bank account has a negative balance, that would be listed as a liability/payable on the balance sheet instead of just being netted against the other bank accounts
Cash and Cash Equivilents
Assets that are readily available and unrestricted
Cash, coins or currency, cash in bank, checks, money orders, checkbook balance, petty cash
cash equivalents: U.S. Treasury bills, Commercial paper, money market funds
***MUST have a maturity date with less than 3 months (90 days) from the date of purchase to be considered cash equivelent
CASH that is in a bond sinking fund is RESTRICTED for use and would not be included under “cash” on the balance sheet
- if a check is not mailed out until the next year then you need to include it as cash still in the year it is recorded, so add it back to the checkbook balance
- A post dated check should not be included in cash equivalent bc it is dated after the B/S date
-A legal right of offset requires a company with different bank accounts to offset overdrawn accounts with positive balances in other accounts of the same bank to arrive at cash
Account Receivables
Recorded at Net Realizable Value (NRV) on the B/S which is the amount of cash the company actually expects to collect
***items that reduce A/R:
sales discounts, sales returns, non-collectible amount
-When a company offers discounts, the sales can be recorded under the net or gross method……
Net method: A/R is recored with the discount already factored in
Gross method: When A/R is recorded the gross amount is shown along with a journal entry for the discount
-Uncollectible A/R- there has to be some sort of estimate of A/R that wont actually be collected….
Direct Write off Method & Allowance Method
Direct Write off Method
Rarely used. Doesn’t conform to GAAP.
When the account becomes uncollectible, it is written off to bad debt expense and A/R is reduced by the same amount
Journal Entry:
Bad Debt Expense X
A/R X
- Net income is reduced under the “direct write off method”
- Working Capital is also reduced under the “direct write off method”
Allowance Method
The allowance is a contra account to A/R, so it has a credit balance.
Journal Entry:
To write of uncollectible amount…
Allowance for Doubtful Accounts X
A/R X
(This entry has no effect on Net income, and the allowance account is lowered/decreased when debited)
To bring allowance back where it needs to be…
Bad Debt Expense X
Allowance for Doubtful Accounts X
Under the Allowance Method, there is the Income Statement Approach and the Balance Sheet Approach….
% of Sales
OR
% of A/R
Income Statement Approach:
Estimates bad debt as a % of SALES. It directly calculates the amount of bad debt expense.
B/S Approach:
This approach estimates bad debt allowance as a % OF A/R not sales. It directly calculates the ending balance of the allowance account.
ex.
A/R at year end
x % estimated that will become uncollectible
=Allowance for uncollectible A/R
Secured Borrowing
If the receivables are transferred by the transferee DOES NOT have the right to sell the receivables and the transferor keeps control…
it is SECURED BORROWING. They are just using their receivables as collateral and receiving a loan.
Cash X
Note Payable X
Factoring Receivables
This means a company assigns their receivables to a factor (like a bank) for a fee, and receives cash in return.
-This can be done with recourse or without recourse. Without recourse is considered a sale of the receivables.
Journal entry for factoring receivables WITHOUT recourse is a sales transaction, and transfers the risk of uncollectible to the buyer(A SALE OF THE RECEIVABLES):
Cash X
Loss on sale of receivables X
A/R X
Journal entry for factoring receivables WITH RECOURSE:
Cash X
Loss on the sale of receivables X
A/R X
Recourse LiabilityX
Is the receivable transferred a LOAN or a SALE?
There is 3 criteria for determining if a transfer of accounts receivable is a loan or sale…
IF all 3 are met, its is a SALE.
If any are not met it is a LOAN.
1. Control is given up
2. Transferee has rich too sell the receivables
3. There is no agreement that lets the company keep control of the receivables
The allowance for uncollectible amounts balance calculation…
Beginning Balance at 1/1 (Balance for allowance for uncollectible amounts at beginning of year)
+ Credit sales for the year ended x % it is likely uncollectible
=Total uncollectible
- Bad Debts written off during year
=year end allowance for uncollectible amounts balance
+estimated uncollectible accounts per aging
=Adj. for uncollectible A/R
Aging the Receivables Method
A method of estimating uncollectible amounts that emphasizes ASSET VALUATION rather than income measurement is the ALLOWANCE METHOD BASED ON AGING THE RECIEVEABLES
Discounting a note to a Bank (basically selling it to the bank for cash)
DISCOUNTING is the process of converting notes receivable to cash.
Factoring is when you convert accounts receivable to cash!
Face Value of Note x Interest rate on notes =Interest \+Face Value =Maturity Value of Note (what it's worth) x Discount % by bank =discount Maturity Value-Discount =Proceeds from bank
“Accounts Receivables Net”
Trade A/R
-Allowance for uncollectible
+Claim against shipper for goods lost in transit (before year end)
=Current Net Receivables
- Consignment goods are inventory not A/R
- Security deposits are not A/R and are not generally a current asset
What is the uncollectible Accounts Expense?
The provision. So It is what they estimate the uncollectible accounts expense will be.
Ex. Estimates it will be 2% of credit sales.
Credit sales is 1,000,000 for the year so…
The uncollectible Accounts Expense is 20,000. (2% of 1,000,000)
How to find the ending balance for uncollectible accounts balance
Beginning balance for uncollectible accounts
+ Uncollectible Accounts Expense (Provision)
=Subtotal
- Write offs
=ending balance for uncollectible accounts
Gar received a $60,000, 6 month, 10% interest bearing note from a customer. After holding the note for 2 months, Gar was in need of cash and discounted the note at the Bank at 12%. What amount of cash did Gar receive from the bank?
Face Value of note=
$60,000 x 10% x 6/12 months
=$3,000
so... 60,000+$3,000= $63,000 x 12 %x 4/ 12 months =$2,520 63,000-2,520= $60,480 would be Gar's proceeds from the bank
Discounting note to a bank
The proceeds received from the bank are the
MATURITY VALUE less the DISCOUNT. The discount is always applied to the maturity value.
When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account…
DECREASES both the accounts receivable and the allowance for doubtful accounts.
journal entry to write-off uncollectible accounts:
allowance 4 doubtful accounts X
A/R X
both accounts are DECREASED.
Allowance for uncollectible Accounts
Accounts Recieveble
-Allowance 4 doubtful accounts
=Net Accounts Receiveable
Aging Method for calculating uncollectible accounts
The balance in the allowance account is determined by multiplying receivables by the uncollectible %
*The existing balance in the allowance account is not used. It is used to determine the expense for the next year!
% of Receivables Method
The ending balance in the allowance account is equal to the total estimated uncollectible amount.
Allowance for uncollectible accounts: Beginning balance \+Expense (squeezed) =subtotal -write-offs =ending balance
Allowance method is consistent with accrual basis of accounting
Direct Write off is NOT consistent with accrual accounting
BASE calculation
B: Beginning allowance for uncollectible accounts balance
A + Uncollectible Accounts Expense
S-Accounts Written off
E Ending Balance for allowance for uncollectible accounts
Inventory
The different ways to value inventory are to use either:
1. Lower of cost or Net Realizable Value
2. Lower of cost or Market
…
to calculate the carrying value of inventory
FIFO and Average-cost Method
These use lower of cost of Net Realizable Value (NRV)
LIFO
This uses lower of cost or market
Inventory LOSSES should generally be recognized in the interim statements. (Permanent declines in inventory market value should be reflected in interim F/S in the period occurred.)
Net Realizable Value
NRV
Selling Price - Costs of completion
Lower of cost or market
This is replacement cost subject to a ceiling and floor.
*if replacement cost is between ceiling and floor, these use replacement cost
- Ceiling=NRV
- Floor=NRV-Profit Margin
FIFO
First in first out.
When prices are rising using FIFO, COGS is the lowest and provides the highest net income, also the highest ending inventory
LIFO
Last in first Out.
When prices are rising using LIFO, this gives the highest COGS and lowest Net income, and lowest ending inventory
*LIFO provides tax advantages bc it causes lower net income
Inventory Equation
Use for questions that are like
“purchases were overstated, what was the effect?”
Beginning inventory \+Purchases =Goods available for sale -Ending Inventory =Ending inventory
Gross Margin Method
Sales- COGS
=Margin
Retail Inventory Method
Used to estimate the cost of ending inventory.
- calculate ending inventory at retail prices
- calculate the cost to retail ratio
- apply cost to retail ratio to ending inventory at retail prices to get ending inventory at cost
IFRS Vs. GAAP in INVENTORY
IRFS:
- Inventory is valued at lower of cost or NRV
- LIFO is not allowed
- Reversal of inventory write-downs IS allowed under IRFS
GAAP:
- Reversal of inventory write-offs IS NOT ALLOWED under GAAP.
- LIFO is allowed
PP&E
PP&E are assets that produce revenue for the business. Their cost is allocated over time through depreciation.
PP&E includes:
- Buildings
- Machinery and Equipment
- Land (only asset that is not depreciated)
- Land improvements -are depreciated
- Natural Resources- oil, well, coal mine. Instead of being depreciated they are “depleted”
Carrying Amount of PP&E
Historical Cost (includes capitalized costs)
-Accmulated Depreciation
-Impairment Losses
=Carrying Amount (what they would be listed on the books)
Capitalized Costs for PP&E
These are costs included in the asset account instead of being expensed.
Two basic categories:
1. Costs to get the asset ready for use
2. Costs to extend the assets useful life or improve productivity
Disposal of PP&E Assets
When a PPE item is sold, a gain or loss is recognized based on the amount realized from the sale compared to the carrying amount of the asset sold.
Impairment Losses
An asset’s value should be written down if it’s FV becomes less than carrying value.
*When an assets FV is written down, this is an impairment loss
F.O.B destination
Title passes when received by the buyer
AND
Packaging, shipping, and handling are costs to the seller
F.O.B shipping
Title passes when the goods leave the seller’s location
AND
that shipping is a cost of the buyer
COGS
beginning balance \+Purchases -Purchase Discounts \+Freight in \+transportation to consignees -ending inventory ( including inventory held by consignees) =cogs
- Include Freight in
- Freight out is a selling expense not inventory
COGS- LIFO
Ending inventory-FIFO
LIFO most closely approximated the current COGS
FIFO most closely approximates ending inventory
Perpetual Inventory System
When the FIFO inventory method is used:
A Perpetual inventory system results in SAME as in PERIODIC inventory system
When the LIFO inventory is used:
Under a perpetual system, LIFO will have different inventory values than a period system bc a cost is assigned after each sale
LIFO
COGS is highest
Inventory is lowest
Net income is lowest
FIFO
COGS is the lowest
Inventory is highest
Net income is highest
How to find dollar value LIFO inventory using the RELEVANT PRICE INDEX
inventory valued at 1/1 =$500,000
relevant price index=1.10
base year cost at Dec. 31=525,000
525,000-500,000=25,000
25,000 X1.1= 27,500
500,000+27,500=
$527,500 is the dollar value LIFO inventory
Disadvantage of Periodic inventory system
Disadvantage is that the COGS used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
This is because inventory is determined by a physical count, usually at least annually, but is not constantly up to date
Purchase Commitments
When the Current Market Value of the inventory is less than the fixed purchase price in a commitment…
- the loss must be recognized in the income statement
- a liability must be recognized on the balance sheet
- and a description of the losses must be described in the footnotes
- ** A loss is only recorded in a purchase agreement when the purchaser is OBLIGATED to purchase a fixed number of units
- if not obligated to purchase a fixed number of units, just have a fixed purchase price, then no loss is recorded.
Net Realizable Value (NRV)
Selling Price - Costs to complete
FIFO using lower of cost or NRV
Lower of cost or NRV is what you would report as inventory under FIFO
Direct Material+ Direct Labor +Overhead =COGS
When all the inventory is sold in a period, the Cost of goods available for sale equals the cost of goods sold which is the DM+DL+OH
Periodic Inventory System
+ the Gross Profit Method
A company using a periodic inventory system must estimate COGS in interim F/S bc periodic systems do not continuously update inventory amounts throughout the year like perpetual.
The Gross Profit Method is a way to estimate values under a periodic system using Gross Profit % from PREVIOUS reporting periods and applying it to current period sales revenue
Carrying amount for PP&E
Historical cost (what they PURCHASED it for, includes capitalized costs)
- Accumulated Depreciation
- Any impairment losses
=Carrying amount
purchased for
-accumulated depreciation
=carrying value
cash X
accumulated depreciation X
machinery X
gain on sale X
OR
cash X
accumulated depreciation X
loss on sale X
machinery X
Capitalized Costs
Costs included in the asset account instead of being expensed
they can be…
1. Costs to get the asset ready for use- sales tax, testing cots, shipping costs
- cost to extend the assets useful life or increase productivity
- if it just maintains the asset like an oil change, this is a regular expense and NOT CAPITALIZED!
Impairment Losses for PP&E
If the carrying value is GREATER than the sum of future net cash flows…
then we have an impairment loss.
the impairment loss is…
Carrying Value
- Fair Value
=Impairment loss
Journal Entry:
Impairment Loss X
Accumulated Depreciation X
Non-Monetary Exchanges in PP&E
When one asset is exchanged for another asset
Does a transaction have “Commercial substance”?
- YES it does if the asset acquired will significantly change the cash flows to the company, or if the asset acquired int he exchange is significantly different than the items exchanged
-if the asset received doesn’t really change anything than it “lacks commercial substance”
PP&E Non- Monetary Exchanges WITH COMMERCIAL SUBSTANCE (will significantly change the cash flow to the company)
- The valuation of the new asset should be its FAIR VALUE and gains/losses are recognized on the exchange.
- if the Assets fair value can’t be determined, then no gain or loss is recognized, and the new asset would be recorded at the BOOK value of the old asset +CASH paid, or less cash recieved
-Fair Value+Cash paid
OR
Fair Value-Cash received
PP&E Non- Monetary Exchanges WITHOUT COMMERCIAL SUBSTANCE (will not change anything really)
If there is a loss, record the loss and then record the new asset at its FAIR value
-If there is a gain but there is no cash received, then no gain is recognized but you record the new asset at the BV of the asset exchanged+any cash you paid
PP& E Assets
“HELD FOR SALE”
- Management must have an active plan to sell the asset
- The sale is highly probable within a year
- The asset is available for sale in its current condition
- The company is marketing the asset for sale
*Asset “held for sale” are kept on the books at the LOWER of :
-the carrying amount
OR
-the FV - costs to sell
Once assets are listed for “held for sale” they are no longer depreciated and listed under “other assets” on the balance sheet and not included in PP&E
Depreciation Methods for PP&E
Non-Accelerated Methods:
- straight line
- service hours method
- units of output
Accelerated Methods:
- sum of years digits
- double declining
A revaluation gain in other comprehensive income
historical cost- accumulated depreciation= carrying amount
when….
FV> carrying amount
WE HAVE A REVALUATION GAIN
*This gain is treated in Other Comprehensive income
it would be a revaluation loss if..
FV
How much interest should be capitalized during the year?
CAPITALIZE the LOWER of
-avoidable interest
OR
-actual interest
avoidable interest:
Total expenditures/ 2
x interest rate on specific borrowing (ex.construction)
*total expenditures must be divided by 2 to arrive at “average accumulated expedentures” if the expenditures were occurred evenly throughout the year
actual interest:
amount borrowed x interest %’s
- *Construction period interest is capitalized based on the weighted average of accumulated construction.
- If the average accumulated expenditures outstanding exceed the amount amount the company borrowed, interest on the excess is computed based on the interest rate for other borrowings of the company.
Straight Line Deprecation Method
Cost-Salvage Value/
Total # of years
*Use the cash equivalent value/Fair Value for the Cost of the asset then subtract the salvage value/ # of years
(don’t use what they actually paid if the Fair Market Value is given)
*Group Depreciation and Composite Depreciation use the straight-line depreciation method
- the group method is for groups of SIMILAR assets
- the composition method is for a collection of DISSIMILAR assets
Service Hours Depreciation Method
(Cost-Salvage Value/
Total Service hours)
x hours used
Units of Output Depreciation Method
(Cost-Salvage Value/
Total Units)
x units produced
Sum of Years Digits Depreciation Method
(# of years remaining
x (cost- salvage value))/
Sum of the years
ex. 3 years would be 3+2+1=6
so..
1/6 x (cost-salvage value)
would be the depreciation for the year
Double Declining Depreciation Method
2 x straight line rate x
(Cost- Accumulated depreciation)
ex.)
2 x 1/10 (if 10 years)= 20% double declining %
- The double declining balance rate is 50% (2 x 25% straight line rate)
- salvage value is not included in the double dealing depreciation method
Depreciation Methods should be disclosed in the “summary of significant policies”
Composition of Fixed assets (or any other account) should NOT BE disclosed in the “summary of significant accounting policies”
If accumulated depreciation equals original costs, then the asset has been depreciated to $0
Depreciable assets should NOT be depreciated below salvage value under any deprecation method.
ex. if a depreciable asset has an estimated 15% salvage value, then no depreciation method should the a/d equal original costs.
IFRS requires component depreciation…. which means that machinery, component, and inspection cost are recognized and depreciated separately
ex.
Machinery cost of $300,000 and an estimated life of 15 years. the cost of the machinery included $55,000 cost of component that must be replaced every 10 years and an initial inspection fee of $5,000 every 5 years.
using straight line depreciation…the depreciation expense for the year end is…
Machinery: 300,000-55,000-5,000= $240,000/15 years
machinery=16,000
component=55,000/10 years=
$5,500
Inspection= 5,000/5 years=
$1,000
16,000+5,500+1,000=
$22,500 total annual straight line depreciation
To FIND COMPOSITE LIFE….
total up the estimated costs for each, subtract the total salvage values.. to get the depreciable costs. You then divide the depreciable costs/annual depreciaton.
Depreciable Base of an asset
Depreciable Base=
COST-SALVAGE VALUE
Salvage Value
what the company expects to sell the asset for in future years
When a permeant impairment occurs….
the book value is reduced and a loss is recorded. The loss is credited to accumulated depreciation. The current years depreciation expense should also be added!
ex. Accumulated depreciation for that year \+Loss \+Depreciton for the year =Total accumulated Deprecation for the year
If you sell your warehouse and use the proceeds to acquire a new warehouse… the excess of the proceeds over the carrying amount of the warehouse sold should be reported as..
A PART OF CONTINUING OPERATIONS on the income statement, under “other revenues and gains”
Because of a bookkeeping error, no deprecation was recognized in year 1’s F/S….. they realized this when preparing for year 2’s F/S.. what is the depreciation for year 2 then?!
Depreciation for year 2 would be the same as it should have been if there was no error.
ex. 200,000/5 years= 40,000 a year…
Year 2 Depreciation would be 40,000 still not 80,000
the 40,000 depreciation that was missed in year 1 should be treated as a “PRIOR PERIOD adjustment” in year 2 bc it is a correction of an error
ALSO, the beginning Retained Earnings of year 2 should be adjusted, net of tax!
If salvage value is excluded from the depreciation computation…..
In all depreciation methods, except double declining balance, salvage value is subtracted from an assets cost in arriving at the depreciation base. if salvage value is excluded from the computation…
DEPRECIATION is OVERSTATES
and
NET INCOME is
UNDERSTATED
Journal Entry with Accumulated Depreciation and Gain example
Cash 5,000
Accumulated Depreciation $85,500
Equip 90,000
Gain on sale 5,000
Investments… THE FAIR VALUE OPTION
When a company holds Financial assets as INVESTMENTS..
TRADING SECURITIES AND AVAILABLE FOR SALE SECURITIES
are reported at FAIR VALUE in the financial statements
Equity Method
If a corporation purchases more than 20% of another corporation, then they must use the EQUITY METHOD.
**Under the Equity Method…..
Income increases the investment account, and dividends decrease the investment account
ex. if ABC corp purchases 25% of XYZ corp and uses the equity method of accounting, what effect does XYZ”s net income and dividends have on ABC’s balance sheet for the investment in XYZ?
- Income increases the investment account, dividends decrease the investment account
Government Fund/government wide accounting
Under government fund accounting, the full proceeds from the sale of a capital asset is available for the fund to use, so they record all of it. When fund balances are transferred over to the government-wide statements……
only the gain or loss on the sale would be recorded, so you would subtract the book value of the capital assets sold during the year
Contingent Gain/ Contingency gains
ARE NEVER RECORDED UNTIL…
money is actually received.
Materiality and Relevance are defined by what influences or makes a difference to a decision maker
are defined by…
what influences or makes a difference to a DECISION MAKER
R+D Costs
Any research and development moving towards establishing a product… but once commercial production has started or anything to do with an existing product, its no longer R&D
“Effective” Tax Rate
The effective tax rate is….
taxes actually paid over net income
- keep in mind that muni bond interest is not included in taxable income and is subtracted because it isn’t taxable but was previously counted as revenue in net income
- also you would add back an officers life insurance premiums where the company is the beneficiary bc that is taxible
Dividends on a
Noncumulative preferred stock have been declared…
For computing basic EPS (Earnings Per share), how should the income available to common shareholders be calculateD?
Declared dividends on a noncumulative preferred stock and the current year dividends on the cumulative preferred stock should be added to the net loss would be included in calculating Earnings Per Share. This makes the net loss greater when calculating basic EPS.
Dividends in the prior year are NOT included because they were included in previous years calculation of EPS
DEFINED BENEFIT PENSION PLAN…formula for determining a pension asset or liability
Formula:
PROJECTED BEEFIT OBLIGATION
-the FV of the PLANS ASSETS
- If the projected benefit obligation is greater than the Fv of the assets, then you have a liability. if the FV is greater, you have a asset
- REMEMBER.. the word obligation just means a future liability
Investments- Trading and AFS SECURITIES at FV
- trading securities and AFS (Available for sale) securities are treated at Fair Value
- Trading Securities are debt or equity held for SHORT TERM… reported at FV at the balance sheet date, and unrealized gains and losses are included in earnings. Dividends received from trading securities are also included in income
- AFS securities are debt or equity securities that are available for sale but are not classified as trading securities. They are also reported at FV at the balance sheet date, BUT unrealized gains/losses are included in “OTHER COMPREHENSIVE INCOME”. Dividends received from AFS securities are also included in income
EX. ABC purchased 10 shares of XYZ for $1,000 and classified it as a TRADING security
Journal entry:
Trading security $1000
cash $1000
now… the FV of XYZ share is 1,250 so the journal entry would be..
Trading security $250
Unrealized gain
$250
now… the FV of XYZ is $950… so the journal entry would be
Unrealized loss $300
Trading Security $300
NOTICE
Unrealized gains are credited, and Unrealized losses are debited
Journal Entry for investments with unrealized gains or unrealized losses
Investment in XYZ X
Unrealized Gain X
Unrealized Loss X
Investment in XYZ X
AFS Securities
-AFS securities are debt or equity securities that are available for sale but are not classified as trading securities. They are also reported at FV at the balance sheet date, BUT unrealized gains/losses are included in “OTHER COMPREHENSIVE INCOME”. Dividends received from AFS securities are also included in income
AFS securities are evaluated for impairment. For AFS securities, if a decline in FV is considered PERMANENT, and goes below the amortized cost, it is a realized loss in earnings and the investment is written down to FV
Held to Maturity investments
HTM investments are reported at AMORTIZED COSTS. These are debt securities that the investor intends to “Hold until maturity” of the investment. The FV option can be elected for held to maturity investments.
The investment is recorded at cost if you amortize. Unrealized gains and losses are NOT tracked for HTM investments.
HTM investments are evaluated for impairment. Impairment would be a DECLINE in FV that is considered other than temporary and goes below the amortized costs of the investment.
*an impairment loss is recognized in earnings and the investment is written down to Fair Value!
Equity Method
used when an investor owns more than 20% but less than 50% of voting shares in an entity and has “significant influence” over the investee
*If the investment is greater than the proportionate FV of net assets, the excess is GOODWILL. However, goodwill from the equity method is not separated on the B/S, it is just included in the investment account.
Recording the investment:
The cost of the investment is recorded as “Investment in XYZ”
Investment in XYZ $100,000
Cash $100,000
*DIVIDENDS REDUCE/LOWERS the investment account on your books!!!
ex. if XYZ pays $10,000 in dividends then ABC (30% ownership in XYZ) would make the journal entry:
Cash $3,000
Investment in XYZ $3,000
*INCOME is the OPPOSITE! It INCREASES the investment.
ex. if XYZ had net income of 30,000, ABC’s share as a 30% owner is $9,000. The entry is:
Investment in XYZ $9,000
Investment Income $9,000
ex. if XYZ reported a loss of $30,000…
Investment Loss $9,000
$9,000
- An equity method investment can be evaluated for impairment just like an AFS investment. If the change in FV is considered other than temporary (PERMANENT), the investment is written down to FV and a loss is recognized in income.
- keep in mind that the rules for dividends only apply to the common stock of the investee. if the investor also had preferred stock, dividends received from the preferred stock would be regular dividend income
Intangible Assets
Intangible assets are either created or acquired. There are assets that don’t have a physical form, but are useful to a business for LONGER than 1 YEAR!
-Intangibles are separate from financial assets or investments.. they are not stocks or other securities
- Intangibles either have a definite life, or an indefinite life, but all intangibles can be evaluated for impairment.
- Definite Life-patents, copyrights, useful life means how long the asset will provide a benefit
- Indefinite Life-trademarks, there is no foreseeable limit on the life of the asset
-they can be IDENTIFIABLE or UNIDENTIFIABLE
Identifiable: copyrights, customer lists, patents
Unidentifiable: goodwill
Definite Life Intangibles VS. Indefinite Life Intangibles
Definite Life:
-has a finite life
-patents and copyrights
-you capitalize external costs (like legal fees)
-They are amortized over their useful life straight line method
-there is impairment if BV is greater than recoverable cost
impairment loss= BV-FV
Indefinite Life:
- no foreseeable limit on life of the asset
- trademarks
- you capitalize external costs (legal fees)
- They are NOT amortized
- Impairment loss is BV-FV
Goodwill
Goodwill is the excess over FMV of the acquired companies assets. It represents brand value, customer loyalty, etc.
- Goodwill is not amortized but it can be impaired
- A private company can elect to amortize goodwill on a straight line basis over a 10 year period
- Impairment loss on goodwill is if the entity carrying value of goodwill is greater than the entity’s Fair value. The difference would be impairment loss!
- If goodwill is impaired… impairment loss isa a part of continuing operations.
