FAR (Marketable Securities )

Question 1

Classification fo Securities

Answer 1

Trading security- are those security (debt and equity) that are bought and held principally of the purpose of selling them in the near term. It is generally C/A

Available for sale securities / non current asset

Held to maturity securities (debt security only) - Non C/A general rule

Question 2

Under IFRS , Classification of marketable security

Answer 2

1) Financial assets at fair value through profit and loos 2) Available for sale 3) Held to maturity

Note: Financial asset at fair value through profit and loss is a financial asset that meets either of the following condition

a) It is classified as held for trading
b) The asset is designated as an investment at FV profit and loss using FV option

Question 3

Trading ,Available for sale securities & Held to maturity securites

Answer 3

They must be reported FV. Unrealized gain or loss trading security goes to income statement
J/E to record loss on I/S for trading security

Unrealized loss on trading security DR
valuation account CR

Held to maturity security are valued at amortized cost

Question 4

Trading and available for sale securities

Answer 4

Dr. Cash
Cr. Trading Security
Cr. Realized gain on trading security (IDEA)

Available for sale securities

Dr. Cash
Dr. Unrealized gain on available for sale security
Cr. Available for sale security
Cr. Realized gain on available for sale security

Question 5

Consolidation requirements in gap period

Answer 5

Under US GAAP, Significant transcations during the gap period require disclosure. Under IFRS, the subsidiary F/S must be adjusted for significant transactions during the gap period.

Question 6

Definition of consolidation

Answer 6

A combination of the F/S of two or more entities into a single set of F/S representing a single economic unit

Question 7

Impairment of Securities (US GAAP)

Answer 7

If the decline FV as other than temporary, the cost basis of the individual security is written to FV as the new cost and realized included earning - I/S

Subsequent changes in FV are not recognized if the security is classified as held to maturity

Question 8

Impairment of securities (IFRS)

Answer 8

impairment loss is recognized in earnings and individual security written down by directly reducing the cost basis or use the valuation allowance.

Question 9

Equity method

Answer 9

Investment originally recorded at the price paid to acquire and the investment account subsequently adjusted as the net assets of the investee change through the earning of income and payment of dividend.

The distribution of dividends by the investee reduces the investment balance.

Question 10

Equity method is not appropriate

Answer 10

Bankruptcy of subsidiary
Investment in subsidiary is temporary
A lawsuit or complaint is filed
A “standstill agreement” is signed
Another small group has majority ownership and they operate the company without regard to the investor
The investor cannot obtain the Financial information
The investor cannot obtain representation on the board of director

Question 11

Cost method cash dividend J/E

Answer 11

Cash – DR
Dividend income — Cr

Distribution that exceeds investor’s share of the investee’s R/E

Cash — DR
Investment in investee —-Cr

Question 12

Equity method J/E

Answer 12

B/S and I/S J/E to record increase by the investor/parent’s ownership percentage of earning of investee

Investment of investee –Dr
Equity in earnings/investee income – Cr

Question 13

J/E to record depreciation on undervalued equipment

Answer 13

Equity in investee income - Dr

Investment in Samll —CR

Question 14

Joint venture accounting

Answer 14

Two or more purchase of stock cause in an investee corporation to go from not having significant influence to have significant influence but less than 50%

The Equity method should be used and the period cost method (FV) was used are retrospectively adjusted

Question 15

IFRS Joint venture accounting

Answer 15

IFRS generally require entities to apply the equity method prospectively from the time at which investor obtains significant influence. Retroactive adjustment is not required

Question 16

Consolidated F/S

Answer 16

Under US GAAP, all majority -owned subsidiaries must be consolidated except when significant doubt exists regarding the parents ability to control the subsidiary such as

1. The subsidiary is in legal reorganization
2. Bankruptcy and/or the subsidiary operates under severe foreign restrictions

Question 17

An acquiring corporation should adjust the following

Answer 17

1. Common stock, A.P.I.C and R/E of subsidiary are eliminated
2. Investment in subsidiary is eliminated
3. Non-controlling interest is created
4. Balance sheet of subsidiary is adjusted to FV
5. Identifiable intangible assets of the subsidiary are recorded at their FV
6. Goodwill (or gain) is Required

Question 18

Consolidating workpaper Eliminating J/E

Answer 18

Dr- Common Stock
Dr- APIC- Subsidiary 
Dr- R/E -Sub
Cr Investment in subsidiary 
Cr- Non-controlling interest 

Dr Balance sheet adjustment to FV
Dr Identifiable intangible assets to FV
Dr Goodwill

Mnemonic ; CAR IN BIG

Question 19

J/E to record the retrospective adjustment to the investment and R/E account and write off the unrealized loss on available for sale securities

Answer 19

Dr Investment in Small Co.
Cr Retained Earning
Cr Unrealized loss on Available for sale securities

Question 20

The acquisition method has two distinct accounting characteristics

Answer 20

1. 100 % of the net assets acquired (regardless of % acquired ) are recorded at FV with any unallocated balance remaining creating goodwill and 2. When the companies are consolidated, the subsidiary’s entire equity ( including C/S , APIC and R/E earning ) is eliminated

FV= acquisition price = investment in subsidiary

Question 21

J/E Flow chart - Acquisition date calculation

Answer 21

Common Stock - Sub
APIC - Sub
Retained Earning - Beginning Sub
(Investment in Sub)
(non-controlling interest) 
Difference 
B/S FV adjustment 
Difference 
Identifiable intangible assets 
Difference

Question 22

IFRS non-controlling interest

Answer 22

Can be calculated using either the Partial goodwill method or the Full goodwill method . the partial goodwill method is the preferred method.

Full goodwill method (under us gaap) = NCI = FV of subsidiary X non controlling interest %

Partial goodwill method NCI = FV of subsidiary’s net identifiable assets X non controlling interest %

Question 23

Consolidation and de-consolidation

Answer 23

No control to Control - Re-measure previously held equity interest to FV. The I/S will reflect this adjustment

Control - More or less - Equity transactions (no gain or loss on the I/S , additional paid in capital adjusted)

Control to non control - Recognize the gain or loss of the sale of the stock. Remeasure the remaining non consolidating interest at FV. Recognize FV on I/S

Question 24

Under U.S. GAAP, noncontrolling interest (NCI) is calculated as

Under the IFRS partial goodwill method, noncontrolling interest (NCI) is calculated

Answer 24

NCI = Fair value of subsidiary × NCI %

NCI = FV of subsidiary net assets × NCI %

Question 25

Inter-company Inventory/Merchandise Transactions

Answer 25

Inter-compnay profit must be eliminated from the ending inventory and the cost of goods sold of the purchasing affiliate. 100% profit should should be eliminated even if the parent’s ownership interest is less than 100%

Question 26

Inter-company J/E Elimination -Merchandise Transaction

Answer 26

Dr Inter-company sales
Dr R/E (profit in beginning inventory)
CR Inter-Company COG sold
CR COG sold (inter company profit included in cogs of the purchasing affiliate)
CR Ending inventory ( inter company profit in the ending inventory)

Question 27

Inter company sale of land/ Depreciable fixed assets

Answer 27

The inter-comapny gain/loss on the sale of land remains unrealized until the land is sold to an outsider

The gain or loss on the inter company sale of a depreciable asset is unrealized from a consolidated F/S perspective until the assets is sold to an outsider