Final Exam Flashcards
What reporting method is used when investor relationship lack significant influence (less than 20%)
Varies on the type of security (AFS, HTM, Trading)
What reporting method is used when investor relationship is significant (20%-50%)
Equity Method
What reporting method is used when investor relationship is controlling (50% or more)
Consolidate
Describe Selling Held to Maturity (HTM) Investment
Dr Cash (sale price) & discount, Cr Investment (face amt) & Gain/loss
What is a Parent
investor who controls another entity through majority stock ownership
What is a subsidiary
company controlled by another entity
What is consolidated
parent issued financial statements that include the financial statements of subsidiary
Describe Available for Sale (AFS) Investments
Used for debt or equity that does not qualify as HTM or Trading, Unrealized gains/losses recorded in Other Comprehensive Income (OCI), Recorded at Fair Value in Balance Sheet, (determine investment revenue by amortized cost & effective interest rate), initially recorded at cost
Describe Selling a Trading Security
Dr Cash (sales price) & discount on bond, Cr investment (purchase price) & Cr/Dr Realized Gain/Loss (reverse all balance sheet accounts associated with investment)
If a bond is sold for more than its maturity value, then what is it called
a premium
If a bond is sold for less than its maturity value, then what is it called
discount
Describe Held to Maturity (HTM) Investments
Used for debt that is planned to be held for its entire life, unrealized gain/loss is not recognized, investment reported at amortized cost (outstanding balance x effective rate or market rate)
Describe Trading (TS) Investments
used for debt or equity that is held in an active trading account for immediate resale, unrealized gain/loss is recognized in net income (therefore retained earnings), investment reported at fair value. Initially recorded at cost
Identify critical events that a company experiences with respect to investments that must be recognized in the acctg system
purchase of investment, sale of investment, investment revenue earned, & change in fair value.
How do you recognize investment revenue for HTM Security
Use the market rate amortized by months in year to get effective rate times the outstanding balance of the bond
Explain Comprehensive income
Includes Net income & OCI, which accumulate in shareholder equity as retained earnings and accumulated OCI
Explain Accumulated OCI
net fair value adjustments to date less net holding gains or losses to date
If the interest rate paid on a bond is lower than the market rate, then the bond will sale for an amount that is?
less than its maturity value
Identify the information necessary to calculate cash interest each period
stated interest rate and par value of debt security
Investment revenue earned on an investment in trading debt securities is calculated based on what
amortized value times the market interest rate
what is the price of a bond equal to?
the present value of future cash receipts
Transfer AFS or HTM to trading
include in current net income
transfer trading to AFS or HTM
none are recognized because they already have been recognized in income
Transfer HTM to AFS
OCI
Transfer AFS to HTM
Amortize to net income over remaining life
Investment income is reported how with the equity method
based on investee’s income times ownership percentage
how do you calculate investment revenue for a trading security
based on amortized cost times the market interest rate
what is the difference between fair value and equity method approach
recognition of income and dividends & treatment of holding gains/losses
what are considered financial instruments
cash, AR, AP, Stock options, common stock of another company
As the investee distributes net assets as dividends how is it recorded
DO NOT recognize as revenue, rather reduce the investment
Explain Fair Value option
used for HTM & AFS - essentially reclassing as trading security. it is irrevocable & applied to select securities
How is cash interest calculated
face amount times stated interest rate
Double Declining Depreciation
Cost time 2x S/L Rate (1/useful life)
Sum of years depreciation
(cost - residual value) x [n/(n(n+1)/2)] next year will lower denominator also 2nd yr includes remaining depr’n from partial year
S/L depreciation
(cost - residual value) / useful life
how are patents recorded
at cost
change of estimate is recorded how
current period & future periods
Rearrangements
expenditures made to restructure an asset without addition, replacement, or improvement. (moving assets to become more efficient) and are capitalized
improvements
the replacement of a major component and is capitalized
additions
the addition of major component to an existing assets and is capitalized
repairs and maintenance
expenditures to maintain a given level of benefit and is expensed
when is an impairment loss required for P, P, & E or finite-life intangible assets
if undiscounted future cash flows is less than book value then calculate by using Book Value less fair value
what is the cost allocation for plant & equipment
depreciation
what is the cost allocation for natural resources
depletion
what is the cost allocation for intangibles with a finite useful life
amortization
what principle does depreciation, depletion, & amortization try to satisfy
matching principle
is depreciation, depletion, & amortization used in the cost of inventory
yes, if used to manufacture a product
Cost allocation needs 3 factors, what are they
service life, allocation base, allocation method
service life
estimated use that company expects to receive from assets (units of time or units of activity)
allocation base
value of usefulness that expected to be consumed (difference between initial value & residual value or salvage value)
allocation method
pattern in which the usefulness is expected to be consumed (timed based or activity based
time based cost allocation method
allocates cost over a period of time
activity based cost allocation method
allocation of an asset’s cost base using a measure of an asset’s output or input
straight-line depreciation
the equal amount of depreciable base is allocated to each year of service life
sum-of-the-years’-digit method
systematic acceleration of depreciation by multiplying the depreciable base by a fraction that declines each year
declining balance method
multiply beginning-of-year book value, not depreciable base, by an annual rate that is a multiple of the straight-line rate.
double declining balance method
is 2 times the straight-line rate of depreciation annually
unit-of-production method
computes depreciation rate per measure of activity and then multiplies this rate by actual activity to determine periodic depreciation.
is activity based methods better than time based for depreciation
yes, but impractical at times
group depreciation method
collection of assets defined as depreciable assets that share similar service lives and other attributes (no gain or loss determined at sale - included in accum depr’n)
composite depreciation method
physically dissimilar assets are aggregate to gain the convenience of group depreciation (no gain or loss determined at sale - included in accum depr’n)
depletion
base is cost less any anticipated residual value divided by estimated extractable tons
what are some intangibles assets not subject to amortization
anything with an indefinite useful life. trademarks, goodwill,
what is another option to partial year depreciation
half-year depreciation
half-year depreciation
record half of a full years depreciation in year acquired and another half in year disposed.
how is a change in depreciation, depletion, or amortization accounted for
same as an estimate (current period and future periods)
error correction - what is the treatment of material errors occurring in a previous year
- Previous years’ financial statements are retrospectively restated.
- Account balances are corrected.
- If retained earnings requires correction, the correction is reported as a prior period adjustment.
- A note describes the nature of the error and the impact of the correction on income.
When to Test for Impairment
only when events or changes in circumstances indicate book value may not be recoverable
- A significant decrease in market price.
- A significant adverse change in how the asset is being used or in its physical condition.
- A significant adverse change in legal factors or in the business climate.
- An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset.
- A current-period loss combined with a history of losses or a projection of continuing losses associated with the asset.
- A realization that the asset will be disposed of significantly before the end of its estimated useful life
when is an impairment loss required for indefinite-life intangible assets other than goodwill
tested annually, If book value exceeds fair value, an impairment loss is recognized for the difference
when is an impairment loss required for goodwill
when the fair value of the reporting unit is less than its book value. measured as the excess of the book value of the goodwill over its “implied” fair value - tested at least once a year, as well as in between annual test dates if something occurred that would indicate that the fair value of the reporting unit was below its book value
How is implied fair value calculated
residual amount measured by subtracting the fair value of all identifiable net assets from the unit’s fair value.
How are Costs of Defending Intangible Rights recorded
successfully defend an intangible right should be capitalized, but unsuccessfully defend an intangible right should be expensed.
what occurs when a trading security is sold
the unrealized gains/losses are removed from fair value adjustment and net income at end of acctg period
Cash flows from buying and selling trading securities are classified as
operating activities.
Cash flows from buying and selling AFS securities are classified as
Investing activities
“other-than-temporary” impairment loss is recognized in net income even though the security hasn’t been sold.
For equity investments, the question is whether the company has the intent and ability to hold the investment until fair value recovers. If it doesn’t, the company recognizes an OTT impairment loss in earnings and reduces the carrying value of the investment in the balance sheet by that amount
What is disclosed for investments
Investors should disclose the following in the disclosure notes for each year presented:
- Aggregate fair value.
- Gross realized and unrealized holding gains.
- Gross realized and unrealized holding losses.
- Change in net unrealized holding gains and losses.
- Amortized cost basis by major security type.
When is the equity method used for investments
when an investor can’t control, but can significantly influence, the investee.
Consolidated financial statements
combine the individual elements of the parent and subsidiary statements.
The acquired company’s assets are included in consolidated financial statements
at their fair values as of the date of the acquisition, and the difference between the acquisition price and the sum of the fair values of the acquired net assets is recorded as goodwill.
What is the single entity concept
The investor’s ownership interest in individual assets and liabilities of the investee is represented by a single investment account.
Initially, the investment is recorded at cost. The carrying amount of this investment subsequently is:
- Increased by the investor’s percentage share of the investee’s net income (or decreased by its share of a loss).
- Decreased by dividends paid.
As the investee prospers, the investor prospers proportionately.
what governs the acquisition of investment assets
cost principle
A CHANGE FROM THE EQUITY METHOD TO ANOTHER METHOD
Both the investment and retained earnings would be increased by the investor’s share of the undistributed earnings in years prior to a change to the equity method.
A CHANGE FROM ANOTHER METHOD TO THE EQUITY METHOD.
the investment account should be retroactively adjusted to the balance that would have existed if the equity method always had been used. As income also would have been different, retained earnings would be adjusted as well.
A concern with fair value accounting
management has much discretion over fair values, and may not be able to estimate fair values accurately
accrual accounting
recognize revenue in period in which it records an asset for the related AR rather than period in which the AR is collected in cash
the matching principle
recognize cost when related revenue is recognized
SEC
sets accounting standards
FASB’s conceptual framework qualitative characteristics of acctg info
relevance
qualitative characteristic of understandability
who have a reasonable understanding of business and economic activities
elements of financial statements do not include
monetary units
permanent accounts would not include
interest expense
What is disclosed in the summary of significant accounting policies disclosure note
Depreciation method
the principal concern with accounting for related party transactions
differences beween economic substance and legal form
lack of longterm solvency refers to
risk of nonpayment relative to liabilities in the capital structure
not reportable operating segment according to gaap
represents more than 20% of total company rev.
change in estimate
accounted for prospectively
nonoperating income
tangentially related to normal operations
extraordinary items
unusual, infrequent, and material gains and losses
comprehensive income
total nonowner change in equity
restructuring costs
costs generally associated with downsizing
earnings quality
ability of reported income to predict future earnings
earnings per share
required disclosure for publically traded corps
change in accounting principles
accounted for retrospectively by revising prior years’ statements
monetary asset
claim to a fixed amount of cash
multiple step income statement
reports a series of intermediate subtotals
expected cash flow statement
discount rate is the credit adjusted risk free rate
annuity due
first cash flow occurs on the first day of agreement
adjusted market assessment approach for estimating stand-alone selling prices
using competitors prices as base
expected cost plus margin approach for estimating stand-alone selling prices
using cost and profit margin
residual approach for estimating stand-alone selling prices
subtract sum of known stand-alone selling prices from total trans price of contract
