Far Module 5 Flashcards
Inventory on balance sheet
should be adjusted to faair value and increased or decreased as such
On consolidations adjust depreciation
to what the parents depreciation would have been had the sale not taken place
To calculate intercompany sales on a consolidation
Take both companys revenues add them together then subtract out the consoldiates sales that is your intercompany amount
When consolidating net income to cash provided by op activities net income from
ling the parent and subsidiary should be used in reconciling
In a consolidaation to report intercompany combined inventory
first add together the inventory aacquired from outside parties
Then take the inventory acquired from sub and add that to the total
Then get a ratio for gross profit by taking intercompany shipments to and from
(shipments from-shipments to)/shipments from
multiply this by the sub inventory acquired subtract this amount from the total of inventory acquired from outside + inventory acquired from sub
Wagner, a holder of a $1,000,000 Palmer, Inc. bond, collected the interest due on March 31, Year 1, and then sold the bond to Seal, Inc. for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal’s purchase of Palmer’s bond on the retained earnings and noncontrolling interest amounts reported in Palmer’s March 31, Year 1, consolidated balance sheet?
Retained earnings
Noncontrolling interest
A.
$75,000 increase
$25,000 increase
B. $100,000 increase
$0
C. $0
$100,000 increase
D. $0
$25,000 increase
Choice “B” is correct, $100,000 increase in consolidated earnings. $0 effect on noncontrolling interest. The purchase of the parent company bond by the subsidiary is treated as if the bond were retired when the financial statements are consolidated. Because the bond had a book value of $1,075,000, but was “retired” for $975,000, a gain is recorded upon consolidation.
Debit (Dr) Credit (Cr)
Bond premium
Bond premium (Palmer’s books)
75,000
Bond payable (Palmer’s books) 1,000,000
Bond investment (Seal’s books)
975,000
Retained earnings - consolidated 100,000
Noncontrolling interest 0
Journal entry on consolidated worksheet
Noncontrolling interest is only adjusted if the bonds were originally issued by the subsidiary and, as a result, a portion of the gain must be allocated to the noncontrolling interest. In this problem, the parent issued the bonds, so the elimination has no impact on noncontrolling interest.
16
MCQ-00427
Application
On January 1, Year 1, Dallas Inc. acquired 80 percent of Style Inc.’s outstanding common stock for $120,000. On that date, the carrying amounts of Style’s assets and liabilities approximated their fair values. During Year 1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies follows:
Dallas Style
12/31/Year 1 12/31/Year 1 1/1/Year 1
Investment in Style (equity method)
$132,000
Other assets
138,000
$115,000
$100,000
$270,000
$115,000
$100,000
Common stock
$50,000
$20,000
$20,000
Additional paid-in capital
80,250
44,000
44,000
Retained earnings
139,750
51,000
36,000
$270,000
$115,000
$100,000
What amount of total stockholders’ equity should be reported in Dallas’ December 31, Year 1, consolidated balance sheet?
Take the amount acquired then divide by percentage 1cquired 120,000/80%=150,000
Then multiply 150,00020%=non control interest of invest in sub
30,000
+NI 4,000
-=(20%5000 dividends)=-1,000
=33,000
Add this amount to the total equity of the parent company
Then you want to find out the net income that you don’t own
So take begin RE
36,0000
solving for NI
Less dividends(5000)
end RE =51000
Then work backwards 560000-36000=20,000 20% of 20,000=4000 NCI in NI
IN CONSOLIDATIONS IF WE SELL EXCLUSIVELY TO ONE PARTY AAND THEY BUY EXCLUSIVELY FROM US WHEN CONSOLIDATING AND CALCULATING GROSS PROFIT FOR ELIMINATIONS
THE PERCENTAGE AMAOUNT OF THEIR COST OF SALES DIVIDED BY THE TOTAL AMOUNT OF SALES NEEDS TO BE ELIMINATED TO CALACULTE ELIMINATION OF GROSS PROFIT
THEN ALSO CALCULATE AMOUNT OF ENDING INVENTORY TO ELIMINATE BASED ON PERCENTAGE OVER TOTAL SALES OF COMPANY THAT SOLDTO THEM ANAD THEIR ENDING INVENTORY
Use inventory to calculate intercompany profit
both companies inventory added together less the
During Year 1, Abaco Co., the 100% owned subsidiary of Walker Inc., sold merchandise to Walker at a 25% markup over its cost. Intercompany sales to Walker totaled $800,000 during Year 1. On December 31, Year 1, Walker held $200,000 of the inventory purchased from Abaco in its ending inventory. In Walker’s December 31, Year 1 elimination of the intercompany sales transaction, the intercompany profit that must be eliminated from ending inventory is:
The first step in this problem is to calculate the intercompany profit
Take 800000/1.25 for the markup and you get 640,000
then take 800-640=160 profit to be elminiates
State out by eliminiateong there salkes with debit to sales
Sales-800000
Intercompany Cogs -640,000 since that is the price of the goods to abaco
Inventory Walker-160*.25=40,000
Then credit cogs walker for 120,000 the 75% of 160 profit that mist have been sold
Consolidations balance sheet if you aacquire a company and their PPE balance has increased to calculate total ppe of both companuys and also goodwill
Take the PPE less the accumulated depreciation and then add to that the increase in fair value of whatever ppe item then add that to the total value of ppe of parent company this is your ppe total value adjust according;y
For goodwill take the book value of subs equity aka the car common stock apic and retained earnings add together and add any increases in fair value then take the purchase price if you paid over that then that is the amount of goodwill a
Income statement intercompeny transationswould be
dividends paid
Intercompany balance sheet transactions woukd be
receivables and payables
Subs dividends paid are
100% eliminated in consolidation
Additional information: During Year 1, Pard sold goods to Spin at the same markup on cost that Pard uses for all sales. At December 31, Year 1, Spin had not paid for all of these goods and still held 37.5% of them in inventory.
In Pard’s consolidated balance sheet, what was the carrying amount of the inventory that Spin purchased from Pard?
To calculate this take the revenues of both companies and add together and less the consolidated revenue once you have that divide cost of sales/total sales to get cogs percentage multiply this by the previous answer then multiply that amount by 37,5
If premium paid to retire bonds then the difference will be
a reduction to retained eearnings since higher amount paid to retire
Cash flows from financing if you purchase equipment for 30,000 and pay 3,000 cash and the rest is issued with a note what is the portion related to investing activities
Only the 3,000 is related to investing activities because the 3,000 represents ana outflow of cash for the equipment the remaining 27k would be aa noincash outflow from financing and investing specifically the principal repayment
If a vendor allows a company to buy on credit, it is a use of cash to the buying company.
Its a source of cash to the buying company
New England Co. had net cash provided by operating activities of $351,000; net cash used by investing activities of $420,000; and cash provided by financing activities of $250,000. New England’s cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000 and proceeds of $40,000 were received from the sale. What was New England’s cash balance at the end of the year?
Ignore the $25,000 aand 40,000 they would already be included in operating and investing
3
An interest payment of $85,000 is made on a new long-term debt issued at par.
operating activity aamount to net income aadjusted 0
Capital expenditures of $35,000 are made for equipment used in day to day operations.
Investing activity no amount reported
Dividends of $6,500 are received from a stock classified as available for sale.
Operating activity 0 reported
8
Drexon purchases a trading security which it classifies as non-current.
Investing activity with nothing reported no amount to NI
40,000 new shares of stock are issued near the close of the fiscal year.
Financing with no amount reported
Drexon purchases 60% of a subsidiary company
Investing with nothing reported
Dividends of $12,000 are paid on Drexon company stock.
Finaaancing with nothing reported
For depreciation and amortization on a cash flows statement for operaating
Take accumulated depreciation on any equipment that was sold take accumulated depreciation listed on the balance sheet and amortization listed on the balance sheet and add them all together
If you have a 40,000 increase in PPE but equipment with a cost of 360,000 was sold then you must have purchased
-400,000 investing outflow of equipment
To calc gain on sale to be subtracted from o[p activities
Take the cost of equipment less the accumulated depreciation from it then take that nbv and subtract from cost sold for this is gain or loss
The following information pertains to Ash Co., which prepares its statement of cash flows using the indirect method:
Interest payable at beginning of year
15,000
Interest expense during the year
20,000
Interest payable at end of year
5,000
What amount of interest should Ash report as a supplemental disclosure of cash flow information?
Make aa T account
credit baalance normal 15,000 begin
+20,000 expense to increase payable ending =5000
=35000-5000=30000 interest paud
Held to ,maturity and avaoilaable for saale securities
investing activities
Cash effects of transactions obtaining resources from owners and providing them with a return on their investment.
Fiunaancing aactivites
Goodwill impairment is aan aaddbaack in
operating cash flows
Decreaasen in trading secutieis
Add back to cash flow from operaations do not subtract gain associated with this
Decreaase in taxes payable
a subtraction from operating cash flows
Which of the following would be reported as an investing activity in a company’s statement of cash flows?
Choice “B” is correct. Loans to other entities and the consequent collection of the loans are reflected in the investing activity section of the cash flow statement.
Choice “A” is incorrect. Accounts receivable collections fall under operating activities in the statement of cash flows.
Choice “C” is incorrect. Notes payable fall under financing activities in the statement of cash flows.
Choice “D” is incorrect. Collecting a tax refund will fall under operating activities in the statement of cash flows.
2
On July 1, Year 2, the company sold a tract of land for $40,000 cash. The land was purchased in Year 1 for $33,000 and at the time of sale was assessed at $52,000.
operating deduction (7000)
investing inflow 40000 all other activities 0
On May 1, Year 2, the company granted 3,000 stock options to its president, vesting equally during the next three years. Each option entitles the president to purchase of share of the company’s no-par common stock at $8 per share. The fair value of the options was determined to be $27,000 on the date of grant.
27000/3=9,000 per year
9,000*(8/12)=6,000
Add back to operating 6,000 all other activities 0
4
The company sold merchandise to a significant customer in November of Year 1 and received cash of $5,000 and a note for $60,000, payable in 95 days. The note was paid when due.
Add 60,000 for operations for a reduction in assets since paid
all other sections nothing –0
5
In September, Year 2, the company purchased land and a building. The purchase price consisted of $20,000 cash and 6,000 shares of the company’s no-par common stock. The fair value of the stock on the closing date of this transaction was $5 per share.
(20,000) investing
30,000 supplmenetal discosure all others 0
6
On December 15, Year 2, the company entered into a $1,000,000, five-year, unsecured term and revolving credit agreement to support its working capital needs. The company borrowed $200,000 under this agreement and such amount was outstanding at December 31.
200,000 financing all others 0
7
On December 20, Year, 2, the company paid a cash dividend of $0.05 per share to its stockholders. On the record date of the dividend, there were 866,000 shares outstanding.
=0.05*866000=(43,300) reduction of financing activities
Incorrect
Unanswered
Row Event Cash Flow Section Required Adjustment to
Net Income
2 Accounts payable decreases from $400,000 to $385,000. Operating ($15,000)
3 An interest payment of $85,000 is made on a long-term debt issued at par. Operating $0
4 Capital expenditures of $35,000 are made for equipment used in day to day operations. Investing
5 Dividends of $6,500 are received from a stock classified as available for sale. Operating $0
6 A gain of $8,200 is booked on the sale of an asset. Operating ($8,200)
7 Depreciation and amortization expense totaling $50,000 is booked. Operating $50,000
8 Drexon purchases a trading security which it classifies as non-current. Investing
9 Accrued liabilities increase from $245,000 to $250,000. Operating $5,000
10 40,000 new shares of stock are issued near the close of the fiscal year. Financing
11 Drexon purchases 60% of a subsidiary company. Investing
12 Accounts receivable decreases from $620,000 to $610,000. Operating $10,000
13 Dividends of $12,000 are paid on Drexon company stock. Financing
For 2021 aand later NOL are limited to
80% of the taxable income for the year using the nol
The Year 1 tax rate for McReynolds Inc. is 25 percent, but the enacted tax rate going forward is 30 percent. McReynolds reports taxable income of $550,000 for Year 1, with financial statement income of $470,000. The $80,000 is a temporary difference, and as a result, McReynolds will record Year 1 income tax expense of:
Take the 550,000.25 to get the income tax payable of 137,500
Then take the 80,000.3=24,000 DTA
subtract the 137500-24000=113,500 ITE
If you have temporary differences for a deferred income tax expensetotal
Take the year the asset reverses to liabilities
or the years the liabilities become assets
Taket he first year its deductible then multiply the rate in which it reverses
For items that are deductible just take the deductible amount and the % for those years to calculate the asset then net them toegther
To calculate the deferred tax asset ata the end of a year when given the schedule of amounts
Add up all amounts at the end of the year calcukting then multiply by the tax rate attributable to that year
Crane Co. has a Year 1 deferred tax asset on its books of $1,900, which is net of a valuation allowance of $500. In Year 2, the company increased the valuation allowance by $300. If the tax rate in Year 1 was 40 percent, and in Year 2 and future years it is 35 percent, the impact of the changes on Year 2 income tax expense will be:
Take 1900+500=2400 divide 2400 by taaje rate 0.4=6,000 deferred asset
Then multiply this by 35%*6000
=2100-800=1300 800 calculated by the 500+300 valuation. allowance 130 to 1900 is 66 increase
Senlo Co., which uses a one-year operating cycle, recognized profits for both financial statement and tax purposes during its two years of operation. Depreciation for tax purposes exceeded depreciation for financial statement purposes in each year. These temporary differences are expected to reverse in Years 3, 4, and 5. At the end of Year 2, the deferred tax liability shown as a non-current liability is based on the:
Enacted tax rates for Years 3, 4, and 5.
Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?
Add incomes togeter then multiply by 25% then subtract out tax expense from prior quarter
