FAR - F1 & F2: Standard Setting, Income Statement, and Reporting Requirements Flashcards

Question

F1: Reclassification adjustments must be shown in the financial statement that discloses comprehensive income

Answer 1

To avoid double counting an item previously reported as comprehensive income (e.g. unrealized gain), which are now reported as part of net income (e.g. realized gain).

Answer 2

Is a balance sheet account and is reported in the statement of financial position.

Answer 3

Comprehensive Income

Answer 4

Loans to officers

Answer 5

Officer's compensation/Salaries and Loans to officers Officers' expenses are not related party transactions because these are incurred in the ordinary course of business and not considered to be compensation.

Answer 6

Goodwill acquired in an arms-length transaction is capitalized, but internally created goodwill is expensed because an object measure of its value is difficult to obtain.

Answer 7

``` To determine Revenue/Expenses/Payments during a year B => Beginning Balance A => Additioin S => Substraction E => Ending Balance ```

Answer 8

Unearned revenue is recognized as revenue once "Substantial Performance" on such future services has occurred. Earned Revenue - Franchisor should report revenue from initial franchise fees when all material conditions of the sale have been "substantially performed." Substantial Performes means: 1. Franchisor has no obligation to refund any payment 2. Initial services required of the franchisor have been performed. 3. All conditions of the sale have been met.

Answer 9

Under U.S. GAAP requires that goodwill be tested for impairment at the reporting unit level. **Under IFRS goodwill should be tested for impairment at each cash-generating unit (CGU)

Answer 10

Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.

Answer 11

revenue cannot be recognized until services have been performed.

Answer 12

Matches expenses against revenues in the same accounting period. (Expenses are necessarilly incurred to generate revenues. All expenses incurred to generate a particular revenue should be recorded in the same period in which the revenue is recorded)

Answer 13

a. Technological Feasibility is established upon completion of: i. A detailed program design or ii. Completion of a working model b. Accounting for costs i. Expense costs - planning, design, coding and testing incurred until technological feasibility has been established for the project. ii. Capitalize costs - coding, testing and producing product masters incurred after technological feasibility has been established and product is released for sale.

Answer 14

Add increases in current assets. For example, when AR increases, the increase is not considered to be income under the cash basis because the cash has not been collected, but the increase is income under the accrual basis. Subtract decreases in current assets. Conversely, when AR decreases, then cash-basis counted it as revenue when the cash was collected, but under the accrual basis, the income was recognized in a prior period and should not be recognized again in the current period. Add decreases in current liabilities. For example, when AP decreases, this represents a cash outflow that is recorded as an expense under the cash basis. However, under the accrual basis the paid expenses were recorded in a prior period and should not be recorded again in the current period. Subtract increases in current liabilities. Conversely, when AP increases, this represents expenses incurred under the accrual basis method that have not been recorded under the cash basis method because they have not been paid. Therefore, starting with the $70,000, we add the $2,000 decrease in AP, subtract the $200 and $100 increases in unearned revenue and wages payable, add the $300 increase in prepaid rent, and finally subtract the $800 decrease in accounts receivable: $70,000 + $2,000 - $300 + $300 - $800 = $71,200

Answer 15

In which the carrying value of a cash-generating unit (CGU) is compared to the CGU's recoverable amount, which is the greater of the CGU's fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). "Impairment loss = Recoverable amount - Carrying value"

Answer 16

* *Research Costs will always be expensed * *Development costs may be capitalized if all of the following criteria are met: 1. Technical feasibility has been established 2. The company intends to complete the asset. 3. The company has the ability to sell or use the asset 4. Sufficient resources are available to complete the development and sell/use the asset. 5. The asset will generate future economic benefits. * *Under U.S. GAAP, 1. All research and development costs are expensed except for materials, equipment, or facilities that have alternate future uses are capitalized and depreciated over their useful lives. 2. Legal fees incurred to apply for a patent and to successfully defend the patent rights are capitalized as an asset. 3. Equipment purchased for current and future projects will be capitalized are depreciated. 4. The software maintenance costs are expensed, and the software modification costs are capitalized and amortized over the useful life.

Answer 17

Deferred revenue represents future income collected in advance. * *1. When Gift Certificate SOLD Deferred Revenue is increased. 2. When Gift Certificate REDEEMED, Deferred Revenue is decreased. 3. When Gift Certificate LAPSE/EXPIRED Deferred Revenue is decreased.

Answer 18

Under Completed Contact method, Revenue is recognized when the contract is completed, however expected losses are recognized immediately in their entirety. * *Expected losses on contracts are recognized prior to job completion (Conservatism) * **The Expected profit on project is not recognized until completion. ***Revenue is recognized when the job is completed, not when progress billings are collected or when they exceed recorded costs.

Answer 19

Under percentage-of-completion, appropriate profit should be recorded. **Estimated losses are recognized in full immediately (Conservatism) ***Income previously recognized would be used to calculate the income recognized in the consecutive years. **Costs incurred to date" vs "Total estimated costs" is the basis for recognizing revenue, not progress billings.

Answer 20

4-Steps process: 1. Compute gross profit = Contract price less 2. Compute % of Completion = (Cumulative)Total Cost to Date/Total estimated cost of contract 3. Compute Gross profit earned to date (cumulative) = Gross profit x % of completion 4. Compute gross profit earned for current year = Gross Profit earned to Date less ** An estimated loss on the total contract is recognized immediately in the year it is discovered. **Any previous gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss.

Answer 21

**Net Assets: If the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings, the excess is reported as a current asset. **Net Liability: If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognition, the difference is reported as a current liability. **No Asset or Liability: If the two amount are equal. no asset or liability is recognized.

Answer 22

1. Accrual Methods - When earned and realized/Realizable. Collection is reasonably assured and degree of uncollectibility is estimatable. 2. Installment sales method - When cash is collected. Collection is not reasonably assured and no basis for determining collectibility. 3. Cost Recovery Method - Recover cash first before profit/Revenue is recognized. Collection is not reasonably assured and no basis for determining collectibility.

Answer 23

1. Calculate Gross Profit(G.P) = Sales - COGS 2. Calculate Gross Profit % = Gross Profit/Sales 3. Realized Gross Profit (I/S) = Cash Collected x GP% 4. Deferred Gross Profit (B/S) = Receivable Balance X GP% **Total GP = Total Sales x GP%

Answer 24

1. Contracts - e.g. BONDS 2. Derivatives - Value or settlement amount is derived from the value of another unit of measure. e.g. OFFS O - Options F - Futures F - Forwards S - Swaps

Answer 25

Hedging is the use of a derivative to offset anticipated losses or to reduce earnings volatility. When a hedge is effective, the change in the value of the derivative offsets the change in value of a hedged item or the cash flows of the hedged item.

Answer 26

1. Option Contract i. Call Option - Hope price goes up - buy ii. Put Option - Hope price goes down - sell if P< $76 : gain since P goes down - Gain $75 - $69 = $6 x 10000 = 60,000 Gross <20,000) Cost Net Profit = $40,000 2. Future Contract - Publicly traded i. Long/Buy Profit - When Price goes up ii. Short/Sell Profit - When Price goes down

Answer 27

**When a nonmonetary exhange lacks commercial substance, the general rule is that no gain or loss is recognized and the book value approach is used. **When a non-monetary exchange has commercial substance, the transaction is accounted for using the fair value of the asset surrendered or received, whichever is more evident. **When a nonmonetary transaction has commercial substance, gains and losses are recognized based on the difference between the fair value and the book value of the asset given up. "Gain = FV asset given up - BV asset given up" =90,000 - (140,000 - 80,000) =30,000 "Loss = BV asset given up - FV asset given up"

Answer 28

Under the rule of conservatism, losses are recognized in all nonmonetary exchanges when the book value exceeds the fair value of the asset given up.

Answer 29

1. Under IFRS, losses are recognized in full in all nonmonetary exchanges. 2. Under IFRS, gains on nonmonetary exchanges of dissimilar assets are recognized in full. No gains are recognized on nonmonetary exchanges of similiiar assets.

Answer 30

The company will only recognize a gain if it received boot/cash. **If there is no boot/cash in the transaction. then no gain is recognized. **If the boot/cash exceeds 25% of the total consideration, the transaction is considered to be monetary.

Answer 31

**"Current/Constant dollar" method

Answer 32

**Specific price indexes may be used to restate financial statements items.

Answer 33

The functional currency of a company may be: 1. A foreign entity's local currency, , which is typically the one in which the entity keeps its books 2. The currency in which the financial statements will be presented, which is the currency of the parent company; or 3. A foreign currency other than the one in which the foreign entity maintains its books. **The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash unless there is a requirements by law to use another currency.

Answer 34

Translation adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until disposed of **However, gains or losses from remeasuring the foreign subsidiary's financial statements from the local currency to the functional currency should be included in "income from continuing operations" of the parent company.

Answer 35

Since the spot rate at year end is different from the spot rate at September 22, a foreign currency transaction gain or loss must be recognized.

Answer 36

1. If the subsidiary's functional currency is its local currency, the subsidiary's financial statements are simply "translated" to the reporting currency. The resulting adjustment is reported as other comprehensive income. 2. If the subsidiary's functional currency is not the same as its local currency (the functional currency may be the reporting currency or another currency), the subsidiary's financial statements must be "remeasured" into the functional currency. The resulting gain or loss on remeasurement is reported in the consolidated income statement.

Answer 37

under the translation method, the assets and liabilities on the balance sheet are translated using the current exchange rate and the income statement is translated using the average exchange rate.

Answer 38

When the translation method is used, all assets and liabilities are translated to the reporting currency using the current (year-end) exchange rate, while common stock and additional paid-in capital (APIC) are using historical exchange rates.

Answer 39

**On Personal financial statements, all items are reported at their fair market values (estimated current values)

Answer 40

A Statement of financial condition and a statement of changes in net worth.

Answer 41

1. Debit Securities - BONDS | 2. Equity Securities - COMMON STOCK

Answer 42

1. Held-to-maturity are reported at amortized cost (that is cost adjusted for amortization of premium or discount; approaches face value) 2. Debt securities classified as Available-for-sale are reported at fair value.

Answer 43

Trading securities are reported at fair value, with holding gains and losses included in earnings.

Answer 44

Unrealized gains and losses on available-for-sale securities should be reported as a separate component of "Other Comprehensive income"

Answer 45

1. Trading securities reported at fair value with unrealized gains and losses included in earnings (along with "realized" gains and losses, if any). 2. Available-for-sale reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income until realized.

Answer 46

Permanent impairment in vale results in a write-down and a charge to income as if the loss was realized. **Realized losses are reflected in current year income.

Answer 47

When marketable equity securities are transferred between trading and available-for-sale, the transfer is made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement. The new carrying amount becomes the basis for any future gain or loss.

Answer 48

When marketable equity securities are transferred between trading and available-for-sale, available-for-sale marketable equity securities are recorded at the fair value, and any temporary differences is reported as "Net unrealized loss on available-for-sale marketable equity securities" in other comprehensive income on the statement of stockholders' equity.

Answer 49

Both "Long" and "Short" term, are reported at carrying amount (amortized cost) unless there is a permanent decline in market value.

Answer 50

The asset must be written down to the lower fair value by recording a loss that is recognized on the income statement. **The impairment of an available-for-sale security must be recorded on the income statement. Only gains and temporary losses on available-for-sale securities are reported in other comprehensive income.

Answer 51

At its carrying value. **Both Trading securities and Available-for-sale securities are reported as fair value.

Answer 52

1. as "Other Comprehensive Income" | 2. on the "income statement".

Answer 53

"Income Statement"

Answer 54

"the bonds are held for the purpose of selling them in the near term." **Trading securities are reported at fair value on the balance sheet - ( as current asset).

Answer 55

"The subsidiary is in bankruptcy." * *Legal reorganization * *The subsidiary operates under severe foreign currency exchange restrictions, controls or other governmentally imposed uncertaintainties.

Answer 56

"Economic entity"

Answer 57

Consolidated financial statements are prepared when a parent-subsidiary relationship has been formed. **An investor is considered to have parent status when control over an investee is established or more than 50% of the voting stock of the investee has been acquired.

Answer 58

"The liabilities of any company which is greater than 50% owned by the company should be included as liabilities int he consolidated financial statements." e.g. Consolidated financial statement should reflect the full liabilities of the 70%, 80% and 100% owned subsidiary as (4m + 7m + 5m) total $16 liability in its consolidated balance sheet.

Answer 59

**It increases the number of shares held and decreases the cost basis per share.

Answer 60

"Income by investor." The cost basis investment account is reduced by if: 1. Shares of stock are sold or 2. Cumulative dividends exceed cumulative earnings (a return of capital) or 3. Subsidiary incurs losses that substantially reduced net worth.

Answer 61

"The portion of the dividends received this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment." **Part of the dividends will be recognized as income and part will be a return of capital.

Answer 62

"Consolidate"

Answer 63

1. Investment Purchase Price $200,000 Less: NBV ($ 150000x 30%) Total Excess = $50,000 ``` 2. Allocated to identifiable net assets: FV $600,000 Less: NBV (500,000) ---------------------------------------- $100,000 x 30% = (30,000) ``` Excess to goodwill = $20,000

Answer 64

1. Under the Cost Method, receipt of a dividend is recorded as income and does not affect the investment account. 2. Under the equity method, investor records as revenue its "share of the investee's earnings" (not "dividends received" **That's mean, dividends from an investee company are recorded by the investor as a reduction in the carrying amount of the "INVESTMENT" account on the balance sheet of the investor.

Answer 65

``` BASE: Beginning Balance (Cost) +Earnings -Dividends(withdrawals) = Ending Balance ``` **Stock dividend = MEMO entry

Answer 66

Therefore, investors do not record stock dividends at fair value. They simply reallocate the investment account balance (under cost or equity method) over more shares so that value per share decreases.

Answer 67

"The investment account will be increased by the investor's share of investee's net income (30% x $100,000) and decreased by any dividends declared (none)". Thus the investment in Pod, at December 32, yea 1 is equal to $280,000 ($250,000 + $30,000)

Answer 68

"The fair value of the net assets acquired must be determined and then compared with the purchase price." For Example: Stockholder's Equity: $500,000 Excess of FV, Land: $200,000 Total FV: $700,000 ``` % acquired: 30% FV of Net Assets acquired: $210,000 Purchase Price: $250,000 ----------------------------------------- GOODWILL: $40,000 ```

Answer 69

"Once a cost method investor becomes an equity method investor, the investment account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment. Thus 10% of lona's income from january 1 through July 31 and 40% of loan's income from August through December 31 must be reported as earnings by Point."

Answer 70

**Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account. **Under the equity method, receipt of a dividend is recorded as a decrease in the investment account.

Answer 71

**Under the equity method, the COMMON STOCK dividends are recorded as a reduction to the investment account. **PREFERRED STOCK ownership does not allow the investor to exercise influence, so the PREFERRED STOCK investment is accounted for using the Cost Method and the preferred stock dividends of $60,000 are recorded as dividend revenue on the income statement.

Answer 72

both the investment account (an asset) and the investment income account (a revenue), **while cash dividends affects the investment account but not the investment income account. For undervalued asset amortindation: DR - Equity revenue(I/S) CR - Investment Account(B/S) For Cash dividends: DR - Cash (B/S) CR - Investment Account (B/S)

Answer 73

"The equity method should be used and the periods during which the cost method was used are retroactively restated." For example: Year 2 investment income = 30% x $650,000 = $195,000 Year 2 adjustment to Year 1 investment income: 10% x $600,000 net income = $60,000 10% x $200,000 dividends paid = ($20,000) ---------------------------- Adjustment to Year 1 = $40,000

Answer 74

A stock dividend is not reported as dividend income.

Answer 75

liquidating dividends reduce the carrying amount of the investment account.

Answer 76

It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test. **Purchased goodwill is only tested for impairment in an acquisition of a controlling interest in another company. As Palmetto acquired only 305 of Royal, no consolidation will occur, therefore the investment will be correctly accounted for under the equity method.

Answer 77

**The company should use the equity method fro the first half of the year and the cost method for the second half which would result in $30,750 of investment revenue. For Example: $50,000 x 2 quarters (equity method) = $100,000 x 30% = $30,000 + Dividends second half of year (cost method) = 750 = 500 shares x $1.50/ share. Total: $30,750

Answer 78

**Significant influence cannot be exercised by holding "NON-VOTING" stock. The cost method must be used.

Answer 79

Fees of finders and consultants are expensed in the period incurred. **Registration fees for equity securities issued decrease Addition Paid-in Capital (Stockholders' equity)

Answer 80

C - Common stock - Sub A - A.P.I.C - Sub R - Retained Earnings - Sub [Old owner's equity/NBV] I - N- [Parent Paid FV - Total FV of Sub] Reconcile - [DIFFERENCE] B - Balance sheet FV Adjustment I - Identifiable intangible assets (patents/Trade Mark) G - Goodwill(DR) / Gain(CR)

Answer 81

"Nothing is capitalized to investment in sub." a. Direct out-of-pocket costs - e.g. finders fee or a legal fee are expensed (DR - expense) * **Notice, they are capitalized under equity method but not capitalized under consolidation method. b. Stock registration and issurance costs (DR - APIC of the parent) c. Indirect costs are expensed. d. Bond Issue costs are capitalized and Amortized. (DR - Bond issue cost)

Answer 82

The following steps re required: 1. The balance sheet is adjusted to fair value, which creates a negative balance int he acquisition account 2. Identifiable intangible assest are recognized at fair value, which increase the negative balance in the acquisition account. 3. The total negative balance in the acquisition account is recorded as a gain.

Answer 83

Direct costs are expensed in the period incurred.

Answer 84

The fair value of finished goods are merchandise inventory are based upon selling price less disposal costs are a reasonable profit allowance.

Answer 85

Good is the excess of the purchase price over the fair market value of the net assets acquired: For Example: 1. Purchase price: $300,000 2. Find FMV of the Acquired Net Asset: Current Assets: $40,000 PP&E: (380,000+60,000) = 440,000 Liabilities: (200,000) ----------------------------------------- FV of Net Assets: $280,000 3. Goodwill (Purchase price - FV of Net Assets Acquired): $20,000

Answer 86

``` 1. Subsidiary's Retained Earnings Statements: Beginning Bal(1/1/Y1) + Income - Dividend Paid out Ending Balance (12/31/Y1) ``` 2. Earnings from Subsidiary: Income x Percent of Ownership = Earnings from sub.

Answer 87

``` Dallas' consolidated stockholders' equity will be "the parent company stockholders' equity plus the non-controlling interest" on December 31, Year 1. For Example: 1. Common stock: $ 50,000 2. Additional paid-in capital 80,250 **3. Non-controlling interest: 33,000 Retained Earnings: $139,750 ------------------------------------------------------ Total Consolidated S/E: $303,000 ``` **How to calculate Non-controlling Interest: ---------------------------------------------------------------- Acquisition Cost = FV of the BU x % Ownership $120,000 acquisition cost = FV of Style X 80% FV of Style = $150,000 Non-controlling interest = $150,000 x 20% = $30,000 as of 1/1/Y1 ---------------------------------------- ***Non-controlling interest as of 12/31/Y1 Non-controlling interest, 1/1 $30,0000 +NCI share of net Income = 4,000 [$20,000 x 20%] -NCI share of dividends = (1000) [$5,000 X 20%] ----------------------------------------------------------------------- ***Non-controlling interest, 12/31/Y1 = $33,000 ****How to calculate NCI shareholders' share of Sub's Net Income: Sub R/E, 1/1 $36,000 + Net Income = 20,0000 (plug) -Dividends = (5,000) ------------------------------------ Sub R/E, 12/31 = $51,000 NCI share of Syle's net income = $20,000 x 20% = $4,000.

Answer 88

Acquisition method has two distinct accounting characteristics: 1. 100% of the net assets acquired are recorded at fair value with any unallocated balance remaining creating goodwill. 2. when the companies are consolidated, the subsidiary's entire equity (including its common stock, APIC and retained earnings) is eliminated (not reported).

Answer 89

When financial statements are consolidated under the acquisition method.

Answer 90

when the equity method is used.

Answer 91

**Goodwill, is the difference between the fair value of the subsidiary of $3,750,000 and fair market value of the net assets acquired ($3,400,000) which is $350,000

Answer 92

the investor must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value. The fair value adjustment is recognized as an additional gain or loss on the income statement. **In Year 1, Placid purchased 80,000 shares (80% x 100,000) for 1,600,000 for $20/share ($1,600,000/80,000 shares = $20/share) When Placid sells 50,000 shares on 1/1/Y5, the company will recognize a gain on the sale, which will be recorded as follows: Dr - Cash 1,,250,000* Cr - Investment in Serene $1,000,000** Cr - Gain $250,000 * ($1,250,000 = 50,000 shares x $25/share sale price) * *($1,000,000 = 50,000 shares x $20/share cost) The remaining 30,000 shares must be remeasured to fair value on 1/1/Y5 by recording a gain due to the increase in the price per share from $20 cost on 1/1/Y1 to the $25 fair value on 1/1/Y5: Dr - Investment in Serene $150,000 (30,000 shares x $5) Cr - Gain $150,000 **The total gain related to the sale and re-measurement is $400,000 ($250,000 gain on sale + $150,000 gain on re-measurement)

Answer 93

1. Acquisition price = Fair Value of Sub x % Ownership 2. Non-controlling Interest = Fair Value of Sub x % of Non-controlling interest. For Example: 1.. Calculating Noncontrolling interest on 1/1/Y1: Fair value of Saul x %80 = Acquisition Price Fair Value of Saul = 5,000,000/%80 = 6,250,000 2. Using the total fair value of saul, the non-controlling interest in Saul on the acquisition date can be calculated: Fair Value of Saul x 20% = Non controlling Interest $6,250,000 x %20 = $1,250,000 3. The noncontrolling interest in Saul on 12/31/Y1: Beginning non-controlling interest : $1,250,000 + %20 of Saul's Net Income = 110,000 - %20 of Sauls' Dividends = (33,000) Ending non-controlling Interest $1,327,000 reported in the Paul's consolidated balance sheet

Answer 94

The Acquisition price is calculated with the market price on the date the acquisition is finalized.

Answer 95

1st: The difference between the acquisition price ($12,500,000) and the book value ($10,750,000) of the net assets acquired must be allocated to adjusting 100% of the existing balance sheet from book value to fair value. 2nd: Recognizing 100% of the fair value of all identifiable assets. Finally: Recognizing any excess as goodwill. For Example: FV of Seed Inc. $12,500,000 -Balance sheet of seed at BV (10,750,000) - Adjust balance sheet to fair value (500,000) - Recognize identifiables at FV (590,000) ------------------------------------------------------------------------- Excess is goodwill: $660,000 The acquisition date eliminating JE would be: Dr - Equity - Seed (CAR) $10,750,000 Cr - Investment in Seed $12,500,000 Cr - Non-controlling Interest 0 Dr - Balance sheet adjusted to FV $500,000 Dr - Identifiable intangible asset at FV 590,000 Dr - Goodwill $660,000

Answer 96

The balance sheet, including any identifiable intangible assets must be adjusted to fair value. This creates a negative balance in the acquisition cost account which is recorded as a gain. ``` For Example: FV of subsidiary: $275,000 BV of Sub Net Assets: 250,000 ----------------------------------------------------- Difference: $25,000 ``` - Adjust B/S to FV (100,000) -Record intangible at FV (60,000) ------------------------------------------------------- Gain: ($135,000) The eliminating JE on the date of acquisition would be: ``` Dr - Equity - Sub (CAR) $250,000 Cr - Investment in Sub $275,000 Cr- Non-controlling Interest 0 Dr - B/S adjustment to FV 100,000 Dr - Intangible assets 60,000 Cr - Gain 135000 ```

Answer 97

the equity of sub, including sub's retrained earnings, will be eliminated. **The consolidated statement of retained earnings will include only the dividend ($15,000) paid by Parent during the current year.

Answer 98

**Registration and issuance costs are recorded as a direct reduction to the value of the stock issued by reducing APIC and direct out-of-pocket costs such as legal and consulting fees are expensed. **The Journal entry for the business combination will be recorded as follows: Dr - Legal & consulting expense $110,000 Dr - Investment in Sub 2,400,000 (200,000 share x $12) Cash - $145,000 (110,000+35,000) C/S - 1,000,000 (200,000 x $5) APIC - $1,365,000 (2,400,000 -1,000,000 - 35,000)

Answer 99

**Calculating Goodwill is 3 steps process: 1. Calculate The Fair Value of the Subsidiary is: FV of Subsidiary = Acquisition cost/% of ownership 2. Calculate the fair value of the subsidiary's net assets is: FV of subsidiary net asset = Current assets + PP&E + FV Adjustment - Liabilities 3. The goodwill = FV of Sub - FV of Sub's Net Assets = $400,000 - $280,000 = $120,000

Answer 100

**The previously held equity investment must be adjusted to fair value. The fair value adjustment us recognized as a gain or loss by the investor in the period of the addition acquisition. **FV of 30% interest = $2,250,000 x 30% = $675,000 **To compute the adjustment made on January 1, Year 2, Investment in Smith 1/1/Y1 $400,000 + 30% share of Smith's Y1 earnings: $30,000 - 30% share of smith's Y1, dividends (9000) ----------------------------------------- Investment in Smith 12/31/Y1 = $421,000 Beginning CV: $421,000 + Adjustment (Plug): 254,000 ------------------------------------------ New Carrying Amount: $675,000 **Total Fair Value = $2,250,000 30% Original Interest: 675,000 + 45% Acquired Interest 45%: 1,012,500 + 25% Non-controlling interest: 562,500

Answer 101

**Goodwill is calculated as follows: Goodwill = Acquisition cost - (FV of Sub's net assets x %of Ownership) * *2 steps process: 1. FV of Sub's Net Assets = $40,000 + $380,000 + $60,000 - $200,000 = $280,000 2. Goodwill = $300,000 - ($280,000 x 75%) = $6=90,000

Answer 102

**Under GAAP, NCI = Fair Value of Subsidiary x NCI% or NCI = FV of the Subsidiary - Acquisition cost For Example: NCI = $400,000 X 25% = $100,000 Or NCI = $400,000 - $300,000 = $100,000

Answer 103

NCI = FV of Subsidiary's Net Assets x NCI% For Example: FV of SUB's Net Assets = $40,000 + $380,000 + $60,000 - $200,000 = $280,000 NCI = $280,000 x 25% = $70,000

Answer 104

**100% of a purchased subsidiary's shareholders' equity (including common stock) as fo the date of acquisition is eliminated in consolidation.

Answer 105

**When using the acquisition method, 100% of the Subsidiary equity accounts (including prior year retained earnings/net income/dividends) will be eliminated in consolidation. **Only the parent company's Retained earnings/Net Income/Dividends paid counts.

Answer 106

**No effect on retained earnings and decrease in non-controlling interest (30%). **30% of the dividned would be paid to the non-controlling shareholders and would reduce noncontrolling interest on the consolidated balance sheet because under the equity methods, the ending non-controlling interest is calculated as follows: ``` **Beginning NCI + NCI share of sub's Net Income - NCI share of Sub's dividends ---------------------------------------------- Ending NCI ```

Answer 107

**The acquisition method requires that 100% of the FV of the subsidiary's assets be recognized. **Therefore, plant assets reported on the consolidated balance sheet would be the fair value of the Sub's plant assets plus the book value of the parent plant assets: For Example: FV of subs plant assets: $255,000 +BV of parent's plant asset: 1,700,000 --------------------------------- Total Plant Asset: $1,955,000 in the consolidated F/S.

Answer 108

**When acquiring a subsidiary with an acquisition cost that is less than the fair value of 100% of the underlying assets acquired, adjust all balance sheets to fair value and allocate remaining acquisition costs to the FV of 100% of identifiable intangible assets. This creates a negative balance in the acquisition cost account, which is allocated to gain. For example: Acquisition cost: $90,000 -BV of subs net asset: 305,000 --------------------------------------------- Discount: (215,000) -Adjust assets to FV (55,000) ($255,000 FV fixed assets - $200,000 BV fixed assets of sub) ----------------------------------------- Gain: ($270,000) **any bargain purchase is now created to gain, not to negative goodwill

Answer 109

Such costs are accounted for separately from the acquisition according to the requirements for exit or disposal costs in FASB ASC 420. **The investment would be valued at the fair value of the consideration given which is $800,000

Answer 110

**In the consolidated statement of retained earnings, dividends paid by sub is 100% eliminated. **However, the dividends paid to the non-controlling shareholders ($5000 x .25) would decrease their noncontrolling interest under the equity method. **For Example: Eliminating Entry Dr - Investment in Sub $3,750 (5000 x .75) Dr - Noncontrolling interest 1250 Cr - Dividends paid/Retained Earnings $5000

Answer 111

**Difference between combined sales and the consolidated sales or revenues.

Answer 112

A: Projected benefit obligation. **Service cost represents the increase in the projected benefit obligation resulting from employees' service rendered during the year.

Answer 113

A: Accumulated benefit obligation. **Under U.S. GAAP, the accumulated benefit obligation is the present value of future retirement payments attributed to the pension benefit formula to employee services rendered prior to a date, based on current and past compensation levels.

Answer 114

A: The Year 7 U.S. GAAP net periodic pension cost should be calculated as follows: s - Service cost: $220,000 I - Interest cost: $90,000 = 1,500,000 x 6% = Beg PBO x discount rate R - Expected return on plan assets (112,000) = 1,400,000 x 8% = Beg FV x expected rate A - Amortization of prior service cost = 10,000 = 200,000/20 years G - Amortization of (gains) /Losses: 0 E - Amortization of transition asset: (3000) = $60,000/20 year -------------------------------------------------------------------------------------- Net Periodic pension cost: $205,000 **Note: The difference between the expected and actual return on plan assets will be amortized starting in year 8. Amortization is based on the beginning balance in the unrecognized gain/loss account.

Answer 115

A; $16,100 Step 1: The expected return on plan assets is calculated as: Beginning fair value of plan assets x Expected rate of return = $1,100,000 x 7% = $77,000 Step 2: The actual return on plan assets is calculated as: Beg FV of Plan assets: $1,100,000 + Contributions: 275,000 - Benefits paid: (340,000) + Actual return on Plan assets(Plug): $100,000 ------------------------------------------------------------------- End FV of Plan Assets: $1,135,000 Step 3: Therefore, the difference between the actual return on plan assets and expected return on plan assets is $23,000 ($100,000 actual - $77,000 expected) Which on an after-tax basis is $16,100 [23,000x(1-30%)] Steps 4: The gain is recorded with the following JE: Dr. Pension benefit asset/liability $23,000 Cr. OCI - $23,000 Dr. Deferred tax expense - OCI $6,900 Cr. Deferred tax liability - $6,900 **Note: there is a net pension gain = the after-tax difference between actual and expected return on plan assets.

Answer 116

* *Accruals (estimated amounts): - Accruals indicate that a company has not yet recorded paperwork into the accounts, but a transaction did occur. Deferrals (actual amounts) -Deferrals indicate that a company has processed the paperwork but some of the amount belongs in a future period.

Answer 117

**1. Revenues are reported when goods or services are delivered to the customers. 2. We match expenses to the related revenues

Answer 118

1. The income statement will report all revenues we earned and expenses are incurred 2. the balance sheet will report all assets and liabilities. - --------------------------------------------------------------------------------- * *Adjusting entries always affect/involve: - an income statement account (revenue, expense) - a balance sheet account (asset, liability) **It is a common characteristics of adjusting entries.

Answer 119

Examples: 1. Adjusting entry for deferral of expense - supplies on hand (asset) and supplies expense (used up) - prepaid insurance (asset) and insurance expense(used up) - prepaid membership (asset) and membership expense` 2. Adjusting entry for deferral of revenue insurance company receiving premiums: -unearned insurance premiums (liability) earned insurance premiums (revenue) 3. Adjusting entry for an accrual of revenues - Revenues that have been earned and - Revenues that have been earned even though the sales invoices have not been prepared. - service revenues and related asset/receivable 4. Adjusting entry for an accrual of expense - electricity expense and related liability - repairs expense and related liability - wages expense and related liability - interest expense and related liability 5. Adjusting entry for depreciation

Answer 120

FOB Destination - Risks of ownership pass to the buyer upon receipt when goods are shipped FOB destination. FOB Shipping point - Risks of ownership pass to the buyer upon delivery to a common carrier under FOB shipping point.