FAR CPA Lessons 37-47

Question 1

When does an entity have control of another entity?

Answer 1

1. It is the primary beneficiary of a variable interest entity
2. It has greater than 50% ownership of another entity

Question 2

Benefits of consolidated financial statements

Answer 2

• Presents all economic resources and obligations of the economic entity
• Presents economic substance over legal form
• More decision useful than the separate financial statements

Question 3

When should you not consolidate?

Answer 3

1. A foreign subsidiary can be controlled by a foreign government
2. When the subsidiary is in bankruptcy

Question 4

Circumstances that effect consolidation

Answer 4

• The date of the consolidation
  - consolidated are the date of business combination or at subsequent dates
• Ownership percentage
• The type of accounting the subsidiary uses
• Intercompany transactions

Question 5

Which financial statements get combined at the date of acquisition?

Answer 5

Balance Sheet Only

Question 6

How do you consolidate equity in consolidated balance sheet at the date of acquisition?

Answer 6

Use only the parent company’s balances for equity, the subsidiaries should be eliminated.

Question 7

What are the basic elimination entries for consolidated financial statements

Answer 7

• Eliminate the equity investment in the subsidiary and the equity reported by the subsidiary
• Record the incremental revaluation of fair value (Including goodwill)
• Eliminate intercompany receivables and payables
• Eliminate intercompany sales and expenses
• Eliminate intercompany profits

Question 8

How to determine the amounts to record on the consolidated financial statements for the balance sheet

Answer 8

Balance Sheet (P + S + fair value increment - intercompany balances)

Question 9

How to determine the amounts to record on the consolidated financial statements for the income statement

Answer 9

Income Statement (P entire year + S since acquisition - depreciation fair value increment)

Question 10

How to determine the amounts to record on the consolidated financial statements for the Equity Accounts

Answer 10

Equity Accounts (common stock of P only)

Question 11

How to determine the amounts to record on the consolidated financial statements for Retained Earnings

Answer 11

Retained Earnings (P only if P uses full equity method)

Question 12

Equity Method Investment Accounting

Answer 12

The equity investment in parents company mirrors the equity in the subsidiary. If the equity method is used to consolidate you would account for the subsidiaries net income and dividends at the consolidated level along with FV adjustments and depreciation adjustemts

Question 13

Cost Method Investment Accounting

Answer 13

No adjustments are done at the consolidation level. The adjustments are done at the subsidiary level at the date of the investment to reflect the change in fair value, goodwill, investment etc.

Question 14

How to determine the subsidiary end of year net book value

Answer 14

Beginning net book value + S Net Income - S Dividends Paid

Question 15

How to calculate Noncontrolling Interest Equity (NIE)

Answer 15

End of Year Net Book Value
\+ 100% FV increments
- accumulated depreciation
= S adjusted Net Book Value
* Noncontrolling interest in S %
= Noncontrolling Interest Equity

Question 16

How to calculate Income to Noncontrolling Interest

Answer 16

S Net Income
- Depreciation/ amortization of differential
- Goodwill Impairment Loss
= S adjusted net income
NCI % ownership of S
= Income to noncontrolling interest

Question 17

Identify the accounts affected by intercompany inventory transactions.

Answer 17

Sales
Cost of Goods Sold
Inventory

Question 18

What is downstream transaction?

Answer 18

when the parent sells to the subsidiary

Question 19

What is an upstream transaction?

Answer 19

when the subsidiary sells to the parent

Question 20

Identify the accounts affected by intercompany fixed-asset transactions.

Answer 20

Fixed Assets
Accumulated Depreciation
Depreciation Expense

Question 21

Identify the accounts affected by intercompany bond transactions.

Answer 21

Bond Payable
Premium or Discount on Bonds Payable
Investment in Bonds
Premium or Discount on Investment in Bonds
Interest Income
Interest Expense
Interest Receivable
Interest Payable

Question 22

When are combined financial statements appropriate rather than consolidated financial statements?

Answer 22

Common control - one individual owns two or more entities

Common Management - two or more entities under common management

Unconsolidated subsidiaries - combine results of two or more unconsolidated subsidiaries

Question 23

Define Variable Interest Entity (VIE)?

Answer 23

A VIE is a legal entity which by design:

• Cannot finance its activities without additional subordinated financial support
• OR-
• Expected losses exceed its total equity investment at risk
• OR-
• Its equity holders as a group don’t have direct or indirect ability to make decisions about the VIE’s activities
• OR-
• Shareholders do not control the entity

Question 24

What are the legal characteristics of a Variable Interest Entity (VIE)?

Answer 24

• May be a partnership, joint venture, legal trust, or corporation
• Set up for a well-defined, limited purpose
• Sponsor or sponsors provide most of its resources
• Activities are governed largely by contract or agreement and rest with sponsors, not shareholders
• Risks and rewards are largely attributable to sponsors
• Value of sponsor interest increases/decreases with changes in net asset value of the VIE

Question 25

What are the two conditions a primary beneficiary must meet?

Answer 25

1. Power Criterion - Power to direct the activities of VIE that significantly impact the VIE’s economic performance
2. Losses/benefits (or risk/rewards) criterion - Has the obligation to absorb losses from or right to receive benefits of the VIE

Question 26

Under IFRS, one entity (investor) controls another entity (investee) when the investor has:

Answer 26

• Power over an investee through existing rights that give it the ability to direct the activities that significantly affect the investee’s returns; and
• Exposure, or rights, to variable returns from its involvement with the investee; and
• The ability to use its power over the investee to affect the amount of the investor’s return.