FAR Chapter# 3 Flashcards
FAR 3-1 - MARKETABLE SECURITIES | On the balance sheet, marketable securities classified as trading or available-for-sale are valued at?
At fair value
FAR 3-2 - MARKETABLE SECURITIES | On the balance sheet, marketable securities classified as held-to-maturity are valued at?
At amortized cost
FAR 3-3 - MARKETABLE SECURITIES | How are unrealized gains/losses on trading securities recognized?
Unrealized gains and loses on trading securities are recognized on the income statement.
FAR 3-4 - MARKETABLE SECURITIES | How are unrealized gains/losses on available-for-sale securities recognized?
Unrealized gains and loses on available-for-sale securities are reported in other comprehensive income.
Note: Under IFRS, Foreign exchange gains and losess on AFS debt securities are reported on the income statement.
FAR 3-5 - MARKETABLE SECURITIES | List three conditions when losses on marketable securities classified as available-for-sale are recognized in income.
Sale of the security
Transfer of the securitiy to the trading classifiication
Permanent decline of individual security below cost
FAR 3-6 - MARKETABLE SECURITIES | When a marketable equity security is transferred from trading to available-for sale, or vice versa, at what cost is it transferred?
Transferred at fair value, which then becomes new basis.
For a security transferred inot the trading category, the difference is treated as a realized gain or loss and is recognized on the income statement.
For a security transferred from the trading category, the unrealized holding gain or loss will already have been recognized in earnings.
Note: Transfers to and from the trading category should be rare.
FAR 3-7 - MARKETABLE SECURITIES | How are gains and losses on financial instruments that hedge trading securities reported?
Reported in earnings, consistent with reporting unrealized gains and losses on trading securities.
FAR 3-8 - MARKETABLE SECURITIES | How are gains and losses on financial instruments that hedge available-for-sale securities reported?
Reported in earnings together with the offsetting gains or losses on the available-for-sale securities attributable to the hedged risk.
FAR 3-9 - MARKETABLE SECURITIES | What disclosures should be made for available-for-sale and held-to-maturity securities?
Aggregate fair value
Gross unrealized holding gains and losses
Amortized cost basis by type
Information about the contractual maturity of debt securities
FAR 3-10 - BUSINESS COMBINATIONS | State the criteria to consolidate subsidiaries.
Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary.
Do not consolidate when control is not with owners (as in bankruptcy of subsidiary).
FAR 3-11 - BUSINESS COMBINATIONS | Identify the three levels of control and the appropriate accounting method for each.
No significant influence
Cost method: Trading or available-for-sale securities, at fair value
Significant influence but 50% or less ownership
Equity method
Control
- Cost or equity method (internal accounting) - Consolidated financial statement (external reporting)
FAR 3-12 - EQUITY METHOD | How is the year-end “investment in investee” reported on the balance sheet calculated under the equity method?
Beginning investment in investee \+ Investor's share of investee earnings - Investor's share of investee dividends - Amortization of FV differences = Ending investment in investee
FAR 3-13 - EQUITY METHOD | How is an investor’s equity method investment reported on the income statement?
Investor’s share of investee earnings
- Amortization of FV differences
=
Equity in earnings / investee income
FAR 3-14 - EQUITY METHOD | How are joint ventures accounted for under IFRS and U.S. GAAP?
Joint ventures are accounted for using the equity method under both U.S. GAAP and IFRS.
FAR 3-15 - EQUITY METHOD | In a step-by-step acquisition, what is the accounting treatment when significant influence is required?
Going from the cost method to the equity method in handled like a change in accounting principle - retroactively.
Go back retroactively with equity method but not with the new ownership percentage.
Prior period financial statements are restated.
FAR 3-16 - CONSOLIDATED FINANCIAL STATEMENTS | When are consolidated financial statements prepared?
When the parent company has control over the subsidiary company. Control is achieved when mor than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization).
FAR 3-17 - CONSOLIDATED FINANCIAL STATEMENTS | In Acquisition Accounting , state the consolidating workpaper elimination entry. CARINBIG
Dr. Common stock - Subsidiary Dr. APIC - Subsidiary Dr. Retained earnings - Subsidiary Cr. Investment in subsidiary Cr. Noncontrolling interest Dr. Balance sheet adjustments to fair value Dr. Identifiable intangible assets to fair value Dr. Goodwill
FAR 3-18 - CONSOLIDATED FINANCIAL STATEMENTS | How are expenses related to the combination treated under the acquistion method?
Direct out-of-pocket costs are expensed.
Stock-related costs are a reduction in value of the stock issued (normally a debit to additional paid-in-capital).
Indirect costs are expensed.
Bond issue costs are capitalized and amortized.
FAR 3-19 - CONSOLIDATED FINANCIAL STATEMENTS | In an acquistion, how are acquired identifiable intangible assets amortized?
Finite useful life: Amortized to residual value over expected useful life.
Indefinite useful life: Do not amortize.
FAR 3-20 - CONSOLIDATED FINANCIAL STATEMENTS | How is goodwill calculated under the U.S. GAAP acquisition method?
U.S. GAAP:
- Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus noncontrolling interest) over the fair value of the subsidiary’s net assets, including identifiable intangible assets at FV.
- Goodwill = Fair value of subsidiary - Fair value of subsidiary’s net assets.
- Goodwill recorded in a business combination is not amortized. The entire investment is subject to the impairment test.
FAR 3-21 - CONSOLIDATED FINANCIAL STATEMENTS | How is goodwill calculated under the IFRS acquisition method?
IFRS:
- Goodwillis recognized using the full goodwill method (same as U.S. GAAP) or the partial goodwill method.
- Under the partial goodwill method, goodwill is the excess of the acquisition cost over the fair value of the subsidiary’s net assets acquired.
- Partial goodwill = Acquisition cost - Fair value subsidiary’s net assets acquired.
FAR 3-22 - CONSOLIDATED FINANCIAL STATEMENTS | How is noncontrolling interest (balance sheet) calculated under. U.S. GAAP
NCI = FV of subsidiary x NCI %
FAR 3-23 - CONSOLIDATED FINANCIAL STATEMENTS | How is noncontrolling interest (balance sheet) calculated under IFRS?
IFRS permits the use of the full goodwill method or the partial goodwill method.
Full Goodwill Method (same as U.S. GAAP)
NCI = FV of subsidiary x NCI%
Partial Goodwill Method
NCI = FV of subsidiary’s net assets x NCI%
FAR 3-24 - CONSOLIDATED FINANCIAL STATEMENTS | How is noncontroling interest on the income statement calculated?
Subsidiary net income
x Noncontoling Interest %
=
NCI in net income
FAR 3-25 - CONSOLIDATED FINANCIAL STATEMENTS | In a business combination, what is the treatment of an acquisition, in which the acquisition cost is less than the fair value of 100% of the net assets acquired?
The acquistion cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. This creates a negative balance in the acquistion account, which is recorded as a gain.
FAR 3-26 - INTERCOMPANY TRANSACTIONS | Name several pro forma workpaper elimination entries when producing consolidated financial statements.
Eliminate:
- The effects of intercompany dividends.
- Parent’s investment in sub account.
- The entire stockholder’s equity section of the sub.
- The effects of the gain or loss and adjust for the excess depreciation on the sale of property, plant and equipment between affiliates.
- All intercompany sales and purchases.
- Intercompany profit in cost of goods sold, and in beginning and ending inventories related to intercompany sale of merchandise between affiliates.
Adjust:
- Recognize noncontrolling interest.
- Adjust the balance sheet of the sub to fair value.
- Establish goodwill.
FAR 3-27 - INTERCOMPANY TRANSACTIONS | State the workpaper elimination entry for intercompany inventory transactions.
Dr. Retained earnings (intercompany profit in beginning inventory)
Dr. Intercompany sales
Cr. Intercompany cost of goods sold
Cr. Cost of goods sold (intercompany profit in goods sold)
Cr. Ending inventory (intercompany profit in ending inventory)
FAR 3-28 - INTERCOMPANY TRANSACTIONS | State the workpaper elimination entry for intercompany bond transactions.
Dr. Bonds payable
Dr. Premium (or credit discount)
Cr. Investment in affiliates bonds
Cr. Gains on extinguishment of bonds (or debit loss on extinguishment of bonds)
FAR 3-29 - INTERCOMPANY TRANSACTIONS | State the workpaper elimination entry for intercompany land transactions.
Dr. Intercompany gain on sale of land
Cr. Land
FAR 3-30 - INTERCOMPANY TRANSACTIONS | State the workpaper elimination entry for intercompany depreciable assets transactions.
Elimination Entry 1 - Eliminate intercompany gain and adjust asset and accumulated depreciation to original amounts:
Dr. Intercompany gain on sale of machinery
Cr. Machinery
Cr. Accumulated depreciation
Elimination Entry 2 - Eliminate excess depreciation:
Dr. Accumulated depreciation
Cr. Depreciation expense
FAR 3-31 - COMBINED FINANCIAL STATEMENTS | When are combined financial statements prepared?
Companies are under common control.
Companies are under common management.
Unconsolidated subsidiaries are combined.
FAR 3-32 - COMBINED FINANCIAL STATEMENTS | When preparing combined financial statements, identify the requirements.
Intercompany transactions and balances among these companies are eliminated.
Noncontrolling interests treated like consolidated financial statements.
Capital stock and retained earnings are added across, not eliminated.
Income statements are added across.
FAR 3-33 - PUSH DOWN ACCOUNTING | Describe push down accounting.
Reports assets and liabilities at fair value in separate financial statements of subsidiary. In effect, consolidation adjustments are “pushed down” into the records.
- Assets and liabilities are adjusted to fair market value at date of acquisition.
- Retained earnings of the subsidiary are transfered to paid-in capital.
- Net income of each subsidiary includes depreciation, amortization, and interest expense based on fair values rather than historical cost.
- The SEC requires push down accounting for each “substantially wholly owned subsidiary.”
