FAR 9

Question 1

What is the cheat way to determine the amount of net unrealized loss/gain on AFS

Answer 1

The amount = Market Value at the end of the year - cost = amount of unrealized gain/loss

Cost = 150,000
market value = 130,000
150,000 - 130,000 = 20,000

20,000 = the amount of unrealized loss for the year

20,000 also equals the amount in AOCI

Question 2

How is it possible that highly valuable resources which provide benefits to the company may not be reported on the balance sheet

Answer 2

Examples are internally developed intangibles

These do not qualify as assets at the time they are being acquired or they are not subject to reliable measurements

To be reported as an asset accession must have occurred (not probable)

To be an asset - it must have a future benefit to be derived

A restriction does NOT prevent an item from being reported as an asset

Question 3

What happens to the valuation account when AFS security increases in valuation of $30,000

Answer 3

The increase in valuation would be recognized in OCI and a reduction in allowance of 40,000

dr. OCI 30,000
cr. valuation allowance 30,000

Question 4

What is the JE for reporting unrealized Gains for an AFS

Answer 4

dr. Investment

cr. OCI

Question 5

Under IFRS what is the equity method of accounting approach

Answer 5

The equity method approach used for joint ventures under IFRS is known as the:

Proportionate Consolidation Approach

Question 6

When is Equity Method of accounting applied?

Answer 6

You own more than 20% of a company, but less than 50%

You must also have significant influence -

You can own 20- 49% and have another investor block your interest - if this is the case then you must use Fair Value option

You can also own less than 20% but also have significant influence and therefore account for it as equity

Question 7

How do you account for an investment that switches to equity method

Answer 7

you do it prospectively

Question 8

What do you do if the investment is greater than the proportionate FV of net assets

Answer 8

This is good will

Goodwill is not separated on the balance sheet - it is included in the investment account

Question 9

What are examples of times when you can have less than 20% ownership of an investment, but maintain significant influence and therefore account for it using the equity method

Answer 9

• If you have representation on the board
• If you are technologically interdependent with the investee
• Participation in policy-making processes
• Material inter-entity transactions
• Material inter-entity transactions

Question 10

What is the impact of dividends and preferred dividends from an investee and how are they accounted for

Answer 10

Dividends are considered a return on investment and lower the investment account.

dr. Cash $3,000
cr. Investment in XYZ $3,000

This rule only applies to common stock of invested. If the investor had preferred stock then the dividends received would be considered regular dividend income

dr. cash $4,000
cr. dividend income $4,000

This amount (preferred stock) would be reported as dividend income on the income statement

Question 11

How do you account for Goodwill for a investment accounted for using the Equity Method?

Answer 11

If the investment is greater than the proportionate FV of net assets the excess is goodwill

Goodwill from the equity method is NOT separated on the balance sheet - it is included in the investment account

Question 12

JE for the Equity method - Recording investment, received dividends, receiving income

Answer 12

Record Investment:

dr. Investment in XYZ $100,000
cr. Cash $100,000

Receive dividends:

dr. Cash $3,000
cr. Investment in XYZ $3,000

Net Income: XYZ had net income of $30,000 and you own 30% of XYZ - your portion is $9,000

dr. Investment in XYZ $9,000
cr. Investment income $9,000

Question 13

How do you handle impairments with equity methods investments

Answer 13

you can evaluate an equity method investment for impairment

If the change in FV is considered other than temporary, the investment is written down to FV and a loss is recognized in income.

Question 14

How do you amortize the “goodwill” in an equity investment

Answer 14

You by 25% of XYZ for $500,000

Book Value of the shares is $400,000 because there is an undervalued intangible asset
You determine the useful life if the intangible asset is 10 years

500K - 400K = $100,000

$100,000 / 10 = $10,000

So each year you will amortize $10,000 which will reduce you investment in XYZ

dr. amortization expense $10,000
cr. Investment in XYZ $10,000

Question 15

Under equity method when inventory and land amounts exceed carrying amount - how does this affect the investors reported equity

Answer 15

On the day you buy the investment - if the assets and liabilities of the investee are over or under valued at the acquisition date, the investor’s share of investors net income is adjusted to reflect income as if the items had been reported at their fair values on the acquisition date

If after you bought the investments there is an adjustment to inventory - you will make an adjustment to your investment account. Sold the inventory that was overvalued so you would decrease your investment

Land is not depreciated so it does not have any income statement effect unless it is impaired or disposed of

Question 16

What do you need to disclose in your notes when you account for something under the equity method

Answer 16

• The name of each investee and percentages of ownership in each
• The entity’s accounting policies for investments in common stock
• The difference between carrying amount of the investment and the amount of the entity’s underlying equity in the investors net assets and the entity’s accounting treatment of the differences

Question 17

What is income from equity investment when you have net income plus FV exceeding carrying value on equipment

Answer 17

The investment is increased by net income and reduces by amortization of the equipment

you own 40% of invested and they report next income of $150,000

Your portion is $60,000

There is also equipment that exceeds its fair value by $100,000 with a 5 year life

100,000/5 * 40% = 8000 = you piece of the amortization

So total amount of income from this investment on you income statement: 60,000 - 8,000 = $52,000

Question 18

when you account for an investment using the fair value method of accounting what do you include in net income attributable to the investment

Answer 18

You include the change in fair value (+/-)

and the dividend income

fair value increase by $10,000
dividends = $6,000

total amount in your net income attributable to the investment = $16,000

Question 19

How do you calculate goodwill for your investment

Answer 19

If on date of acquisition you are buying 30% of XYZ company for $200,000

On that date book value of company was $500,000 and fair value was $600,000

30% of $600,000 = $180,000 = the fair value of your investment

You paid $200,000 so the difference is 200-180 = $20,000

$20,000 = goodwill which you will amortize

Question 20

Is the receiving of a stock dividend recognized as dividend income?

Answer 20

No - only cash dividends are recognized as dividend income