FAR - Cash & Equivalents 3 Flashcards
Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value except
Internally generated cash flow projections for a related asset or liability.
Internally generated cash flow projections are not observable and would be considered a Level 3 input. Level 3 inputs are unobservable inputs that are used in the absence of observable inputs. They should be based on the best available information in the circumstances.
An entity should report an investment in marketable equity securities that does not result in significant influence or control over the investee at
Fair value, with holding gains and losses included in earnings.
Unrealized holding gains and losses on an investment in equity securities that do not result in significant influence or control over the investee are reported in earnings. On a statement of financial position, these securities are reported at fair value.
Park Co. uses the equity method to account for its January 1 purchase of Tun, Inc.’s common stock. On January 1, the fair values of Tun’s FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park’s reported equity in Tun’s earnings for the year?
Inventory Excess: DECREASE
Land Excess: NO EFFECT
The equity method of accounting requires the investor’s proportionate share of the investee’s reported net income to be adjusted for acquisition differentials. Thus, the difference at the date of acquisition of the investee’s stock between the fair value and carrying amount of inventory is such an adjustment when the inventory is sold. A similar adjustment for items of property, plant, and equipment is required when the assets are depreciated or sold. Assuming that the FIFO inventory was sold during the year and the land was not, Park’s proportionate share of Tun’s reported net income is decreased by the inventory differential allocated at the date of acquisition.
Election of the fair value option (FVO) for financial assets
Results in recognition of unrealized gains and losses in earnings of a business entity.
A business measures at fair value the eligible items for which the FVO election was made at a specified election date. The unrealized gains and losses on financial assets are reported in earnings at each subsequent reporting date.
For interim financial reporting, the computation of a company’s second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated
Foreign Tax Rates: YES
Available Tax Planning Alternatives: YES
The estimated annual effective tax rate should be based upon the statutory rate adjusted for the current year’s expected conditions. These conditions include anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other tax planning alternatives. The rate should also include “the effect of any valuation allowance expected to be necessary at year end for deferred tax assets related to originating deductible temporary differences and carryforwards during the year.”
Sage, Inc., bought 40% of Adams Corp.’s outstanding voting common stock on January 2 for $400,000, which equaled a proportionate share of the fair value of the net assets. The carrying amount of the net assets at the purchase date was $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during the year. During the year, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31?
$42,000
Sage holds 40% of the investee’s voting common stock and is assumed to exercise significant influence. It should therefore account for the investment on the equity basis by recognizing its proportionate share of the investee’s net income. For this purpose, the investee’s net income of $120,000 should be adjusted for the $10,000 excess of fair value over the carrying amount of the inventory sold and for the portion of the difference between the fair value and carrying amount of the plant that has been consumed (depreciated). This adjustment equals $5,000 ($90,000 difference ÷ 18 years). Thus, Sage should report investment income of $42,000 [($120,000 – $10,000 – $5,000) × 40%].
Plack Co. purchased 10,000 shares (2% owner ship) of Ty Corp. on February 14 and did not elect the fair value option. Plack received a stock dividend of 2,000 shares on April 30, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15. In its income statement for the year, what amount should Plack report as dividend income?
$24,000
Plack Co. owns 2% of the stock of Ty Corp. Accordingly, this investment should be accounted for using the fair value method. If the fair value of the stock is not readily determinable, the measurement alternative may be selected. This alternative is cost minus any impairment, plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer. Under either method, dividends from an investee are accounted for by the investor as dividend income unless a liquidating dividend is received. The recipient of a stock dividend does not recognize income. Thus, Plack should report dividend income of $24,000 [(10,000 shares + 2,000 shares received as a stock dividend on April 30) × $2 per share dividend].
On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly-traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the current year?
$1,020,000
An investment in a debt security is initially classified as available for sale if the entity does not (1) plan to hold it to maturity or (2) intend to sell it in the near term. Consequently, the debt security is not initially classifiable as held-to-maturity or trading, respectively. At the reporting date, the classification is reassessed. Because Barton intends to sell the investment during the first quarter, the investment should be reclassified as a trading debt security. Trading debt securities are measured at fair value. Thus, the bonds should be reported at $1,020,000. NOTE: Available-for-sale debt securities also are measured at fair value. But unrealized gains and losses are recognized in other comprehensive income, not earnings.
At October 31, Dingo, Inc., had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported in Dingo’s October 31 classified balance sheet?
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
Current assets include cash available for current operations and items that are the equivalent of cash. Hence, the account used for regular operations is current. Cash that is restricted to use for other than current operations is designated for the acquisition or construction of noncurrent assets or segregated for the liquidation of noncurrent debt. Amounts that are clearly to be used in the near term (1) to liquidate noncurrent debt, (2) to make payments to a sinking fund, or (3) for similar purposes also should be classified as noncurrent. Moreover, they need not be recorded in a special account. The overdraft should be treated as a current liability and not netted against the other cash balances. If the company had another account in the same bank with a positive balance, netting would be appropriate because the bank would have a right of offset.
According to the FASB’s conceptual framework, which of the following attributes should not be used to measure inventory?
Present value of future cash flows.
The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.
On July 2, Year 4, Wynn, Inc., purchased as a short-term investment a $1 million face-value Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Wynn sold the bonds for $920,000. In its December 31, Year 4, balance sheet, what amount should Wynn report for the bond if it is classified as an available-for-sale security?
$945,000
Available-for-sale debt securities should be measured at fair value in the balance sheet. Thus, the bond should be reported at its fair value of $945,000 to reflect the unrealized holding gain (change in fair value).
On January 2 of the current year, Otto Co. purchased 40% of Penn Co.’s outstanding common stock. The carrying amount of Penn’s depreciable assets was $1,000,000 on January 2. Penn’s depreciable assets had an original useful life of 10 years and a remaining useful life of 5 years. Otto recognized $8,000 amortization for the current year ending December 31 related to its investment in Penn due to the excess of fair value over book value on these assets. What was the fair value of Penn’s depreciable assets on January 2 of the current year?
$1,100,000
The equity method requires the investor’s share of the investee’s earnings or losses and the investment account to be adjusted for the difference at the acquisition date between the fair value and the carrying amount of the investee’s net assets. This adjustment (amortization) is made as the assets are sold or consumed in operations (depreciated). The difference between the fair value and the carrying amount of Penn’s depreciable assets on the purchase date is depreciated over 5 years. Therefore, Otto’s share of this difference is $40,000 ($8,000 total annual amortization × 5 years). Since Otto holds 40% of Penn, the entire difference between the fair value and the carrying amount of Penn’s depreciable assets is $100,000 ($40,000 ÷ 40%). Accordingly, the fair value of Penn’s depreciable assets on January 2 of the current year is $1,100,000 ($1,000,000 + $100,000).
Collins Company reported net income of $350,000 for the year. The company had 10,000 shares of $100 par value, noncumulative, 6% preferred stock and 100,000 shares of $10 par value common stock outstanding. Also, 5,000 shares of common stock were in treasury during the year. Collins declared and paid all preferred dividends as well as a $1 per share dividend on common stock. Collins Company’s basic earnings per share of common stock for the year was
$2.90
The numerator for BEPS consists of income available to common shareholders (net income – noncumulative preferred dividends declared). For Collins, this amount is $290,000 [$350,000 – (10,000 shares × $100 par × 6%)]. The denominator consists of the weighted-average number of common shares outstanding. Because (1) no shares were issued during the year, (2) no splits occurred, and (3) treasury stock is not outstanding, the denominator is 100,000 shares. BEPS is therefore $2.90 ($290,000 ÷ 100,000).
The following information pertains to Ceil Co., a company whose common stock trades in a public market:
Shares outstanding at 1/1 100,000 Stock dividend at 3/31 24,000 Stock issuance at 6/30 5,000 What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share (BEPS) for the year ended December 31?
$126,500
BEPS measures earnings performance based on common stock outstanding during all or part of the period. BEPS equals income available to common shareholders divided by the weighted-average number of shares of common stock outstanding. The weighted-average number of common shares outstanding is determined by relating the portion of the reporting period that the shares were outstanding to the total time in the period. Weighting is necessary because some shares may have been issued or reacquired during the period. The stock dividend is assumed to have occurred at the beginning of the period. The BEPS denominator is 126,500, based on 124,000 shares outstanding for the entire year (100,000 beginning balance + 24,000 stock dividend) and 5,000 additional shares issued on June 30. 124,000 × (6 ÷ 12) = 62,000 129,000 × (6 ÷ 12) = 64,500 126,500
At the beginning of Year 2, a company invested $40,000 in a debt security. At that time the security was appropriately classified as an available-for-sale security. At the end of Year 2, the security had a fair value of $28,500. The change in fair value is deemed temporary. How should this change in fair value be reported in the financial statements?
As an unrealized loss of $11,500 as part of other comprehensive income.
Available-for-sale (AFS) debt securities are recognized initially at cost (the amount paid). At the balance sheet date, they are remeasured at fair value. Unrealized holding gains and losses from remeasurement are reported in other comprehensive income (OCI) if they are temporary. Accordingly, the $11,500 ($40,000 – $28,500) decline in fair value is reported in OCI. However, a permanent decline in the fair value is recognized directly in earnings.
