FAR3 Flashcards
Trading Securities
Securities (debt/equity) selling in the near term.
Current assets and valued at FV.
Included in earnings
Available-for-Sale Securities
Securities (debt/equity) not meeting the definitions of the other two classifications (trading and held-to-maturity). Usually classified as noncurrent assets - (doesn’t intend to sell in the near future) and valued at FV.
Included in OCI under PUFE.
Held-to-Maturity Securities (debt only)
Positive intent and ability to hold these securities to maturity.
Noncurrent assets
Valued at amortized cost
Consolidated Financial Statements
Consolidate with over 50% control. Ignore important legal relationships and “emphasize economic entity/substance over form” (can consolidate companies w/ different year-ends)
Cost Method
Do not consolidate = no significant influence (0-20%). The “investment in investee” is not adjusted for investee earnings and is adjust to FV. Affects investment for liquidating dividends
Equity Method
Do not consolidate = significant influence (20-50%) but can have significant control with less than 20% (largest shareholder or majority of board) NI and Dividends affect investment
Stock Dividend (Cost and Equity Method)
Memo entry only
Equity Method (GAAP)
Beginning balance
+: Share of investee’s earnings
-: Share of investee’s dividends
Ending balance
Consolidation F.S. Exceptions
Subsidiary is in legal reorganization, bankruptcy, or the subsidiary operates under severe foreign restrictions
Acquisition Method
100% of net assets (assets - liabilities at FV) acquired (regardless of percentage acquired)
*unallocated balance remaining creates goodwill and when consolidated, the subsidiary’s entire equity is eliminated
CAR IN BIG
Common stock, APIC, Retained Earnings of subsidiary are ELIMINATED
Investment in Subsidiary is ELIMINATED (parent's books) Noncontrolling Interest (NCI) is CREATED (>100%)
B/S of sub. is adj. to FV (100% assets and liabilities) - recalculate depreciation
Identifiable Intangible Assets of the sub. are recorded at FV - amortize finite life
Goodwill (or Gain = “credit”) is required
Consolidating workpaper Eliminating JE
DR: Common stock - sub. DR: APIC - sub. DR: Retained Earnings - sub. CR: Investment in sub. CR: NCI (if >100%) DR: Balance Sheet adjustments to FV DR: Identifiable Intangible assets to FV DR: Goodwill OR CR: Gain
Noncontrolling Interest (NCI)
Reported in consolidated equity when less than 100% ownership in equity section of B/S (include NCI share of goodwill)
FV of sub x NCI% = NCI interest
Full Goodwill Method (U.S. GAAP and IFRS)
Goodwill = FV of sub. - FV of sub’s net assets
Partial Goodwill Method (IFRS)
Goodwill = Acquisition cost - FV of sub.’s net assets acquired
I/C Payable JE
Eliminate 100% of intercompany transactions
DR: A/P
CR: A/R
I/C Inventory workpaper Elimination Entry
DR: I/C Sales - parent
CR: I/C COGS - parent
CR: COGS - sub.
CR: Inventory - sub.
I/C Bond workpaper Elimination Entry
DR: Bonds/payable DR: Premium CR: Investment in parent's bonds CR: Gain on extinguishment of bonds (considered retired and recognize G/L)
I/C Land workpaper Elimination Entry
DR: I/C gain on sale of land
CR: Land
I/C Fixed Asset workpaper Elimination Entry
DR: I/C gain on sale of machinery CR: Machinery CR: A/D (eliminate G/L on I/C sale and restore asset and A/D to current amounts) DR: A/D CR: Depreciation Expense (fix depreciation)
Combined F.S.
A group of related companies: under common control, under common management, or unconsolidated subsidiaries
AFS Securities (no longer temporary)
If not classified as temporary or classified as permanent then remove from OCI and write down from cost to FV in earnings section on the I/S
Only unrealized G/L recorded as OCI, realized G/L go to I/S
IFRS reversal of impairment loss
Allowed and the increase would be booked to the current year’s income statement.
Cost Method Dividend Revenue
Dividend income is reported for only the portion of dividends received this year that is not in excess of the investor’s share of investee’s undistributed earnings since the date of investment
Consolidation Vertical Chain
Parent owns more than 50% of sub and sub. owns more than 50% of third company, then parent consolidates both companies
Cost Method Investment Account reduced
The cost basis investment account is reduced only if:
Shares of stock are sold, or
Cumulative dividends exceed cumulative earnings (a return of capital), or
Subsidiary incurs losses that substantially reduced net worth.
Equity Method Investor’s reported investment income
NI = addition and Dividends = reduction
Investor records as revenue “share of the investee’s earnings” (not “dividends received”)
Changes in the market value of investee’s common stock are not considered income
*Under the cost method, receipt of a dividend = income (does not affect the investment account)
Cash Dividend
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.
Liquidating Dividends
Reduce carrying amount of the investment account under both cost and equity method
Preferred Stock
PS = Cost method because the investment in the preferred stock does not allow you to exercise significant influence so the income will be reported on the income statement.
Goodwill Impairment Test
Purchased goodwill is only tested for impairment in an acquisition of a controlling interest in another company
Goodwill - Recorded on B/S
Represents the excess of the price paid > fair value of the identifiable net assets acquired.
Gain in Acquisiton Method
When a subsidiary is acquired with an acquisition cost that is
Consolidated Books = Parent’s Book
Stockholder’s Equity, Net Income, Retained Earnings, Dividends, Common Stock
NCI IFRS partial method
FV of subsidiary net assets × NCI %
I/C Payable
(A/R:parent + A/R:sub.)
- A/R:consolidated = I/C payable
I/C unrealized profit eliminated
(Inventory:parent + Inventory:sub.)
- Inventory:consolidated
= unrealized I/C profit eliminated
I/C Sales
(Rev:parent + Rev:sub.)
- Rev:consolidated = I/C sales
I/C unrealized profit: Inventory
I/C profit on inventory
x % of inventory purchased on hand
I/C Sales under Cost/Equity Method
Receivables and payables to the investee are reported separately on the balance sheet.
