FAR - Financial Statement Acct - Investments

Question 1

debt security
EX: bonds, notes, convertible bonds/notes, redeemable Preferred Stock (callable Preferred stock)

equity security
EX: Common stock, Preferred stock, stock warrants, call options

investor’s considerations in selecting the correct accounting for an investment.

three possible levels of influence over an investee for accounting purposes.

Answer 1

right of creditor to receive from debtor principal/interest as payment for using funds

security = ownership interest/right to acquire, voting rights.

1) nature of investment
2) extent of investment
3) management’s intent

1) no significant/nominal
2) significant
3) control

Question 2

no significant influence (Nominal)

1) ownership %
2) type of influence
3) valuation basis
4) reporting classification
5) Balance Sheet presentation

Answer 2

1) x

Question 3

required accounting treatment when an investor has control of an investee?

basis for general guidelines for determining the level of influence over an investee?

Answer 3

Treat as a subsidiary and consolidate investee with investor (consolidated statements)

nature and extent of ownership/mgmt. intent

Question 4

true/false

stock dividends are never income

Answer 4

true

Question 5

Significant influence

1) ownership %
2) type of influence
3) valuation basis
4) reporting classification
5) Balance Sheet presentation

Answer 5

1) 21% - 50%
2) Significant influence
3) Equity or FV
4) Equity Investment
5) Noncurrent investment

Question 6

Control

1) ownership %
2) type of influence
3) valuation basis
4) reporting classification
5) Balance Sheet presentation

Answer 6

1) X > 50%
2) Control influence
3) Equity or Cost
4) Subsidiary
5) Consolidated Financials

Question 7

Types of questions

Answer 7

1) at acquisition, determine classification/measurement
2) determine income amount reported
3) determine AOCI change in AFS securities
4) treatment of reclassification
5) change of rule of mgmt., usually FV
6) at sale, determine gain/loss

Question 8

X 20% ownership = dividends are NOT income

Answer 8

true

Question 9

true/false

A firm can be both an investor and an investee for the same security.

An investment in equity securities gives the investor the right to receive dividends.

An investment in between 20% and 50% of the voting common stock of an entity assures the investor of having significant influence over the investee.

An investor must account for (measure) most investments using fair value.

Answer 9

false

false

false

false

Question 10

investor

investee

Answer 10

companies acquires ownership of equity/debt securities of another entity

company issues debt/equity securities

Question 11

true/false

If the fair value option is elected, realized and unrealized gains and losses from available-for-sale securities are included in earnings of the period

Marketable equity securities that are not intended to be sold in the near future are classified as available-for-sale securities.

A company may elect to record an available-for-sale security at its fair value, and any unrealized gains or losses may be recognized as a component of income from continuing operations on the income statement.

Answer 11

true

true

true

Question 12

accounting for a bond investment that is purchased and carried as an asset is the mirror image of the accounting for a bond that is issued and carried as a liability. Recall that a bond is a contract to repay borrowing at specified maturity date; interest is to be paid at specified intervals until maturity. When the entity invests in a bond, the interest received is interest income.

stated rate on the bond is the nominal rate and the effective rate of the bond is the market rate or yield.

Answer 12

true

true

Question 13

bond purchased for less than face value

bond is purchased for more than face value

discount/premium amortized to interest income over the life of the bond

Discounts or premiums should be amortized using the effective interest method. The straight-line amortization method can be used if it yields a similar result.

Answer 13

effective rate > stated rate, bond purchased at a discount

effective rate

Question 14

Held to maturity

1) positive ability/intent to hold to maturity?
2) valuation basis?
3) balance sheet presentation?

Not held to maturity - AFS Security

1) positive ability/intent to hold to maturity?
2) valuation basis?
3) balance sheet presentation?

Not held to maturity - Trading Security

1) positive ability/intent to hold to maturity?
2) valuation basis?
3) balance sheet presentation?

Answer 14

1) yes
2) amortized cost
3) investment noncurrent

1) no
2) Fair Value
3) Investment current/noncurrent
FV adj. entry
DR. unrealized holding gain/loss–Equity
CR. fv adjustment (afs bond invest)

1) no
2) Fair Value
3) Investment current/noncurrent
FV adj. entry
DR. unrealized holding gain/loss–Income
CR. fv adjustment (afs bond invest)

Question 15

investor’s carrying value of a bond held as a long-term investment is equal to the par value of the bond, plus the amount of the unamortized premium, or less the amount of the unamortized discount.

high carrying value of bond at end of first year if…

Answer 15

true

purchased at premium and amortized using effective interest method

Question 16

criteria for held-for-trading securities.

Answer 16

A. Investments in Debt and Equity;
B. Selling in the near term.
C. Record at cost: 1) purchase price, 2) related costs
D. Carry/Report: 1) debt - recognize periodic interest income, 2) equity - recognize dividends as income, 3) adjust to FV on B/S
E. Disposition: 1) recognize interest income & amort of premium/discount, 2) determine CV, 3) recognize (Realized) gain/loss @ sale by difference between price & CV
F. Classified as current
G. unrealized holding gains/losses are reported in the Income Statement as part of Income from Continuing Operations.
H. operating activity on SCF

Question 17

criteria for AFS securities

Answer 17

A. Investments in Debt and Equity;
B. Securities not classified as trading/HTM
C. Record at cost: 1) purchase price, 2) related costs
D. Carry/Report: 1) debt - recognize periodic interest income, 2) equity - recognize dividends as income, 3) adjust to FV on B/S and determine CV, 4) if FV > CV = (unrealized) holding gain OCI-equity, 5) FV

Question 18

criteria for HTM

method is used to amortize a premium or discount on a security?

Answer 18

A. Investments in Debt
B. Positive intent/ability to hold until maturity (can be sold before maturity if 1) interest rate risk is substantially eliminated, 2) investor collected at least 85% of principal outstanding
C. Record at cost: 1) purchase price, 2) related costs
D. Carry/Report: 1) debt - recognize periodic interest income, 2) report at amortized cost, 3) interest income/revenue, 4) investment HTM net of premium/discount on B/S
F. Disposition: 1) recognize interest income & amort of premium/discount, 2) determine CV, 3) recognize (Realized) gain/loss @ sale by difference between price & CV, 4) recognize unrealized holding gain/losses sold in AOCI in income
G. Classified as noncurrent, year of maturity -> current
H. Investing activity on SCFs

Effective interest method or straight-line method if not materially different.

Question 19

account for transfer from HTM to trading security

account for transfer from HTM to AFS

account for transfer from trading to HTM or AFS

account for transfer from AFS to HTM

Answer 19

1) credit HTM at amortized cost
2) debit trading security value @ FV
3) recognize unrealized holding G/L in net income

1) credit HTM at amortized cost
2) debit AFS @ FV
3) unrealized holding G/L in OCI

1) credit trading @ FV
2) debit HTM or AFS @ FV
3) recognize unrealized holding G/L in net income

1) Credit AFS @ FV
2) Debit HTM @ FV
3) Unrealized holding G/L stays in AOCI in Shareholders’ Equity
4) Unrealized holding gain/loss at date of transfer amortized over remaining life of debt.

Question 20

causes transfers between classifications for investments which do not give the investor significant influence?

major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?

Answer 20

1) change in intent
2) change in ability to hold until maturity

carrying amount of the investment would change when:

1) subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made);
2) investor buys additional shares of the subsidiary or sells some of the share it already owns.

Question 21

cost method of accounting, ONLY for equity investment, if…

cost method requires..

Answer 21

1) investor can’t exercise significant influence
2) no readily determinable FV
3) privately held company

1) initial investment recorded at cost
2) not subsequently adjusted UNLESS, liquidation dividend or permanent decline in value

Question 22

true/false

Reclassifications between the two investment categories are always recorded at market value

Answer 22

true

Question 23

true/false

Amortization of a premium on an investment in bonds will increase interest income for the period.

It is not possible to recognize discount on an investment in debt securities

Bond prices and interest rate changes are inversely related. When bond prices increase, the market value of fixed income investments, such as bonds decreases, because now there are better opportunities on the market.

Securities classified as held-to-maturity are reported at amortized cost, which is the carrying amount of the securities. Further, securities classified as available-for-sale are reported at fair value.

Answer 23

false

false

true

true

Question 24

investor purchases a bond with a premium in between interest dates, the buyer paid more than face value b/c

A company may elect to value held-to-maturity securities at fair value. Any increase or decrease in value is reported as a gain or loss and included in earnings for the period.

Answer 24

paid face value, premium, and accrued interest

true

Question 25

under IFRS, what conditions may an investor be able to measure debt investments at FV opposed to amortized cost?

Under IFRS, what categories of investments exist?

Under (IFRS), what conditions permit an investor to elect to report G/L from changes in FV of equity investments in OCI, rather than through P/L (net income)?

Under IFRS, what conditions must exist for an investment in debt to be classified as debt instruments measured at amortized cost?

Answer 25

when use of FV would eliminate/significantly reduce a measurement/recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases.

1) Debt investments measured at amortized cost;
2) All other investments, including debt instruments not at amortized cost and all equity investments.

If investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.

conditions must meet:
1) Business model test - entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value;

2) Cash flow characteristic test - contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest.

Question 26

true/false

under IFRS, equity investments can’t be transferred between classifications

IFRS, all investments in equity measured/reported at FV, changes reported through net income EXCEPT for investments that elect to report through OCI

IFRS, accounting mismatch occurs when different elements of a transaction or event are measured on different bases

IFRS, all changes in the fair value of investments in equity securities must be reported through profit or loss.

IFRS, all investments in debt securities not measured at amortized cost are measured at fair value.

Answer 26

true

true

1) if not held for trading purposes, may elect to report changes in FV through OCI
* election must be made when investment is first recognized/irrevocable
* amounts recognized through OCI never reclassified to P/L, but will remain in equity
* dividends recognized in net income

true

False
* may be reported through OCI

true

Question 27

true/false

IFRS, investments in debt securities can be transferred from the amortized cost category to the FV category

IFRS, if equity security investments don’t have a ready FV, may use cost method as an estimate of FV

In order to classify an investment as debt at amortized cost under IFRS No. 9, an entity must hold the investment solely to collect cash flows.

Under IFRS No. 9, investments in debt securities all fall into a single category.

Under IFRS No. 9, there is no category of investments comparable to available-for-sale.

Answer 27

true

true

true

false
*may fall into other investments not measured at amortized cost

true

Question 28

true/false

Under IFRS, changes in fair value may be reported in profit/loss or in other comprehensive income, depending on whether or not the investment is held for trading purposes or not. If an investment in equity securities is held-for-trading purposes (i.e., to make a profit on price appreciation), changes in fair value will be reported through profit/loss. If an investment in equity securities is not held-for-trading purposes, the investor may elect to report changes in fair value through other comprehensive income.

1 category for equity reported @ FV
2 categories for debt -> 1) FV 2) amortized cost
buiness model test -> measure business intent

Answer 28

true

true

Question 29

true/false

debt securities may be transferred from cost -> FV and from FV -> cost

only debt securities may be transferred between categories and financials must be restated when investments have been transferred between categories

amortized cost

Answer 29

true
*reports at cost if meets business model test AND cash flow test, transfer to FV when fails, transfers back to cost method if subsequently meets tests

true

par value + premium - discount l

original cost - premium + discount

Question 30

Indicators of significant influence when ownership

Answer 30

1) representation on B.O.D.
2) investee policy making
3) material intercompany transaction
4) technologically interdependent
5) no other investor has material voting ownership

1) investor has significant voting stock ownership
2) guideline is 20% - 50% ownership

1) investee opposes investor
2) “standstill” agreement exists
3) other investors own more stock
4) no B.O.D. representation

Question 31

Equity method overview

recording initial investment

Equity initial investment recording JE

Answer 31

• significant influence/control must exist
• carry investment on its books
  1) record investment @ cost
  2) reflect changes in investee’s S.E. (net income/loss)
  3) recognize effects of differences between FV and BV

1) determine BV
2) determine FV
3) allocate difference between cost/BV to FV of identifiable assets and any excess to goodwill
- identifiable assets = FV > BV
- goodwill = Cost > FV

DR. Equity Investment
CR. Cash/consideration

Question 32

if prior ownership w/o significant influence followed by additional purchase resulting in significant influence, then…

Answer 32

1) switch from FV to equity
2) adjust investment/income prior period adjustment to equity what would have been if equity method used from initial purchase

Question 33

true/false

write-off of a portion of an excess payment (cost > book value) will reduce the amount of Investment (Equity) Revenue that would otherwise be recognized by the investor.

equity method of accounting for investments, the investor recognizes revenue when it is earned by the investee, whether or not it is distributed as dividends.

equity method of accounting for investments, the investor doesn’t recognize cash dividends from the investee as Dividend Income. If reporting at fair value (not equity), reporting dividends as dividend income.

if sell a portion of ownership and lose significant influence, may have to report at FV

if switch between equity method of accounting and reporting at FV, must make an adjustment on net income of a prior period

Answer 33

true

true

true

true

true

Question 34

investor pays more in the market for a portion of the stock of a company than the book value of shareholders’ equity acquired, the excess payment is included as part of the cost of investment

when selling the investment, determine gain/loss by comparing sale price to book value

if cost of investment > FMV net assets acquired, resulting figure is goodwill

Under the cost method, liquidating dividends are treated as a reduction in the investment account whereas normal dividends are treated as income. Liquidating dividends is when investee pays more out than what is earned

Answer 34

true

true

true

true

Question 35

when equity method is used, dividends received on preferred stock are recognized as dividend revenue whereas the dividend on common stock is a return of capital

JE to reduce investment when receive dividends under equity method:

dividend never increases the investment account under any accounting method. under cost, dividend = revenue, under equity, dividend = reduction in investment, trading = no increase in investment

Answer 35

true

DR. Cash
CR. Investment

true

Question 36

under equity method, if there is a switch to equity from FV, don’t neglect the earnings of the investor and stock ownership cost to be included into the investment account

use pro-rate share of income under equity method of accounting

Prior period adjustments affect retained earnings, if used in net income, must adjust net income by adding back

Even though the investor owns 40% of the voting stock of an investee, if a standstill agreement exists between the investor and the investee, the investor cannot exercise significant influence over the investee and likely would use fair value to carry and report the investment

Goodwill resulting from an investment in another entity is not amortized.

Answer 36

true

true

true

true

true

Question 37

if cost of investment FV

at time of investment under equity method, must determine the following:

an investor has significant influence over the operating and financial policies of an investee, what method must be used to account for the investment in the investee?

elements that enter into the determination of revenue recognized from an equity method investment?

Answer 37

Gain
Goodwill

1) BV of net assets/liab
2) FV of net assets/liab
3) allocation of difference between cost and FV of assets

carried on investor’s books and reported in financials under full equity method

Investor’s share of investee’s reported net income/loss - “depreciation/amortization” on excess of cost of investment over book value
(OR + “depreciation/amortization” on excess of book value over cost of investment) = net revenue recognized for equity method investment.

div received don’t account for income, instead they reduce investor’s investment in investee

Question 38

three major equity method items recognized each period by an investor.

Investments in non-voting equity securities (e.g., preferred stock) or in debt securities does not convey influence.

accounting treatment when equity method is switched to FV method of accounting due to loss of significant influence

When the equity method is used, the investor should amortize any portion of the excess of fair values over carrying amounts (differential) that relates to depreciable or amortizable assets held by the investee. Amortization of the differential results in a reduction of the investment account and a reduction in the equity of the investee’s earnings.

Answer 38

1. Recognize investor’s share of investee’s net income/loss;
2. Recognize investor’s share of investee’s dividends declared;
3. Recognize adjustment to share of investee’s net income/loss for “depreciation/amortization” of amount allocated to excess of fair value over book value.

true

The investment will be adjusted to fair value at the date significant influence is lost and any difference between fair value and the prior equity-based carrying amount will be recognized as a gain or loss in current income.

True

Question 39

journal entry for an Investor to recognize proportionate share of investee income using the Equity Method.

journal entry for an Investor to recognize proportionate share of investee dividends using Equity Method.

Answer 39

DR. Investment
CR. Investment (equity) revenue

DR. Dividends Receivable/Cash
CR. Investment

Question 40

GAAP requires that an investor and its investees accounted for using the equity method must use the same accounting policies.

Under IFRS, the fair value option can only be applied by certain investors such as venture capitalist, mutual funds or unit trusts.

IFRS, If the investor has obligations or commitments to make payments on behalf of the associate, it may continue to recognize its share of losses to the extent of those obligations.

IFRS, when investee losses exceed investor investment, investor discontinue recognizing share of losses even if associate’s future profitability appears imminent and assured

Answer 40

False

True

true

true

Question 41

Equity Method JEs

Answer 41

TBS

Question 42

Forms of business used for joint venture?

GAAP & IFRS Joint venture differences?

GAAP - accounting methods for JV?

Answer 42

1) corporation
2) partnership
3) agreement/contract
4) undivided interest entity

1) Contribution of nonmonetary asset
- GAAP @ carrying value
- IFRS @ FV, share not owned by contributing entity, w/ gain/loss recognized
2) Reporting methods
- GAAP @ primarily equity, partnership or full consolidation when appropriate
- IFRS @ equity or proportionate liquidation

equity method or consolidation basis for corporate JV. Partnership basis, certain equity-method like adjustments.

Question 43

true/false

IFRS, when a nonmonetary asset is contributed in the formation of a jointly controlled entity, only a portion of the difference between the carrying value of the asset and its fair value is recognize as a gain or loss

When nonmonetary assets are contributed in the formation of a corporate joint venture, a related gain or loss would be recognized.

joint venture may be established for a limited purpose.

Shared control is a central characteristic of a joint venture. None of the participating parties is likely to have unilateral control of the joint venture.

Under JV, fair value not used bc readily determinable trading quotes are not available

JV record at carrying value

Answer 43

True

False

True

True

True

Question 44

accounting treatment by an investor when a stock dividend is received?

accounting treatment by an investor when a stock split occurs?

adjusts per share cost; not total cost. Original cost is divided by new total number of share (after split) to get new per share cost.

stock rights are not exercised and lapse, what entry should the investor make?

entry is made by an investor who receives stock rights?

Answer 44

adjusts per share cost; Original cost is divided by new total number of shares (after stock dividend) to get new per share cost.

adjusts per share cost; Original cost is divided by new total number of share (after split) to get new per share cost.

carrying value of the investment at the time the rights are received is allocated between the shares of stock and the newly acquired rights based on the relative market value of each set (total share and total rights). The amount allocated to the total rights is then divided by the number of rights received to get the value of each right.

write-off the stock rights and recognizes a loss

DR: Loss on Expiration of Stock Rights
CR: Security Stock Rights

entry is made to transfer some of the cost of the investment in the stock that “earned “ the rights to an account for the rights

DR: Security Stock Rights
CR: Investment

Question 45

true/false

stock option (warrant) always has value.

stock rights can be sold

An investor firm which receives a stock dividend should recognize income equal to the market value of the shares received.

Stock rights can be classified as held-to-maturity
investments.

stock dividend will reduce the per share carrying value of the investment.

allocation of a portion of the cost of an investment between the original investment (shares) and the related stock rights should be based on relative market value of the shares and the stock rights.

Answer 45

false

true

false

false

true

true

Question 46

acceptable methods (models) for measuring and reporting investment property?

owner uses part of property, under what conditions may the other part be accounted for as investment property?

onditions can property already held be transferred into or out of the investment property category?

characteristics of investment property under IFRS?

Gains/losses recognized must be separately disclosed and included in the income statement.

Answer 46

Cost or Fair value (must use 1 for ALL investments)

part of the property used by the owner, part not used by the owner can be sold/leased separately and if the part not used otherwise meets the definition of investment property, it can be treated as investment property

only when it is clearly evident that there has been a change in the use of the property.

1. Investment property consists of building and/or land;
2. Held by the owner or a lessee under a capital lease;
3. For the purpose of earning rental income, recognizing capital appreciation, or both.

Question 47

IFRS - Investment property can only be 1) land, 2) building, 3) part of a building, or 4) both.

When the cost method is used to measure and report investment property, the fair value of the investment property must be disclosed.

Property leased to another party cannot be investment property

Only IFRS has a “investment property” section whereas GAAP treats this property as PPE

entity must provide a reconciliation showing the causes of changes in the carrying amounts of investment property between the beginning and end of a period, regardless if measured/reported at FV or CV

Answer 47

True

True

False, will be investment property if under capital lease.

True

True

Question 48

Transfer investment property to FV, recognize difference as gain/loss

Transfer investment property to CV, recognize NO gain/loss in difference, old cost carries over as new cost

Must disclose FV of property and if any 3rd party valuations made under FV method

Answer 48

True

True

True

Question 49

equity/debt securities must be tested annually for impairment

potential impairment = FV

Answer 49

True

True

True

Impairment charge taken on a security whose FV

Question 50

When are losses on equity securities classified as available-for-sale reclassified to earnings?

When can the losses associated with the impairment of a debt security can be reversed?

Can equity security impairment losses be recovered?

OTTI impairment are not permanent.

When the decline in fair value is considered to be other-than-temporary, the unrealized losses in OCI are reclassified to earnings.

When the entity has positive ability and intent to hold the impaired security and does not expect to recover the entire cost basis of the impaired security the credit losses are recognized in earnings.

Answer 50

equity security is sold or when the losses are other-than-temporary (the security is impaired).

Debt security impairment losses cannot be reversed

Yes

True

True

True