Marketable Securities and Business Combinations

Question 1

Investment in marketable equity securities in which the company does not intent to sell in the near-term?

Answer 1

Avail-for-sale,

Component of Other Comprehensive Income

Question 2

Where do unrealized G/Ls go for:

• Trading Securities?
• Avail-for-sale securities?

Answer 2

Trading: hits “earnings,” changes reported at Fair Val:
eg. FVY2-FVY1

Avail-for-sale: acc. OCI;

Cost - Y2FV

Question 3

A4S impairment rules

Answer 3

Unrealized holding G/Ls recognized in OCI

Y2: remove “Unrealized” loss from OCI and recognize in earnings as REALIZED loss, since loss believed to be permanent

Question 4

IFRS reversals of impairment loss?

Answer 4

recognize by booking in CY income statement

Question 5

Under the Cost method of accounting, only dividends (NOT earnings) are reflected as inc. from investor.

The cost-basis investment account is reduced ONLY if:

Answer 5

1) shares of stock are sold
2) Cumulative divs. exceed cumulative earnings
3) Subsidiary incurs losses that substantially reduce net worth

Question 6

How is dividend revenue recognized under cost method?

Answer 6

Recognized to the EXTENT of cumulative earnings since acquisition,
and is a return of capital beyond that point.

(ROC or liquidating dividends go beyond that extent)

Question 7

Stock dividends and stock splits are NOT considered “Income” to recipient.

How to treat stock divs. for cost and equity method?

Answer 7

Investors will not record these divs at FAIR VALUE (an income thing.)

Instead, they re-allocate the investment account balance
under either method (Cost or equ.) over MORE shares, so per-share value decreases.

Question 8

Prior period adjustments are reported where?

Answer 8

• Adjustment to Opening Balance of Retained earnings

- NOT In Net Inc for the year ended

Question 9

What do Dividends affect in equity method?

Answer 9

They hit INVESTMENT ACCOUNT but not INCOME

So they don’t affect INCOME stat.

But the divs hit balance sheet “Investment Account.”.

Question 10

Are stock dividends considered dividend revenue to the recipient?

Answer 10

NO.

Only a memo entry is made.

Question 11

What happens to carrying amount of Investment Bal. Sheet Account, with liquidating divs? (Cost and equity)

Answer 11

Cost - Decrease

Equity - Decrease

Question 12

Goodwill created in an investment accounted for under the equity method?

Answer 12

Ignored.

Not amortized
Not tested for impairment

Question 13

Rule of Consolidation?

Answer 13

In vertical chain, where parent co. owns more than 50% of sub. co, and sub co. earns more than 50% of other sub co., consolidate:

1) Third co into sub co
2) Sub Co into Parent Co

Question 14

IN business combinations, where do “Stock Registration Fees” hit

Answer 14

They decrease APiC (Stockholder’s equity)

Question 15

In a business combo, FV/appraised values of assets > acquisition price?

How to record?

Answer 15

Gain (after adjusting balance sheet, including identifiable intangible assets,) to Fair Val.

Question 16

Rule about consolidated S/E on date of acquisition?

Answer 16

Consolidated S/E =

Parent Co. Equity + noncontrolling int.

Subsidiary equity eliminated.

Question 17

How to calculate NCI, or non-controlling interest?

Answer 17

This is 100% - percent controlled.

EG if you control 100% that eliminates NCI completely. Also, NCI only really begins around 5-10% of total investment worth.

Question 18

Rule about Acquisition Price > FV of net assets?

Answer 18

According to acquisition accounting, assets and liabilities should be presented in fair vals.

Question 19

IFRS Partial Goodwill Formula?

Answer 19

GW = Acquisition Cost - FV Net Assets Acquired

EG

=2,850,000 - (3,650,000 x 75%) = 112,500

Question 20

What is true of Parent S/E under GAAP?

Answer 20

100% of Stockholder’s Equity of sub, including common stock and APIC and R/E, is eliminated in intercompany transactions.

Question 21

FV Assets under Consolidation Method?

Answer 21

Add Parent Total to Sub. amnt.

Question 22

Rule on intercompany receivable balances / intercompany billings in consolidated fin stats?

Answer 22

100% are eliminated.

Question 23

Is there elimination in equity method?

Answer 23

No, just in consolidation.

EG: interco. receivables under equity method should be disclosed separately.

Question 24

Rule on intercompany bond holdings?

Answer 24

When members of a consolidated group have intercompany bond holdings, the bonds are eliminated at consolidation and the diff (Gain or Loss) between disc and Premium must be incl. in retained earnings

(As a decrease)

Question 25

Interco. Dividend rules?

Answer 25

The only dividends that should remain are the ones paid to external parties.

Question 26

Should all intercompany transactions be eliminated in consolidation?

Answer 26

Yes.

Question 27

Rules about Combined Statements:

Answer 27

Used for Companies under Common Management OR Commonly controlled companies, OR unconsolidated subsidiaries

PROCEDURE:

1) All interco. transactions / balances eliminated
2) Treat minority interests as they are in consol. fin. stats
3) Equity accounts are added across, and NOT eliminated. (which means Asset and Liability accounts ARE eliminated.)
4) Income statement accounts are added across, and not eliminated.

Question 28

Temporary decline on Avail-for-Sale marketable securities?

Answer 28

temporary losses:

CR: Asset valuation account
DR: OCI

Subsequent recoveries are debited to Val. account and credited to OCI (SE account)

if PERM:
DR realized loss in income statement
CR cost of individual investment

Question 29

Consolidated RE Calculation

Answer 29

RE Y0 - 3.2 Mil
PLUS Net Inc - 800,000
Less divs paid (750000)

=3.25Mil Consolidated RE

(remember add equity accounts ACROSS)

Question 30

Recognizing Parent/sub plant assets?

Answer 30

Parent BV Net asset +
Sub FV net asset…

Think of it this way.. they JUST acquired said asset, hence why they will value at FV.

Question 31

Intercompany payables?

Answer 31

Parent A/R + Sub A/R
(LESS)
A/R, consolidated

Question 32

What do “inventory” questions in interco. sales relate to?

Answer 32

P + S Rev
(Less)
Consolidated Rev

Question 33

GAAP Goodwill equals?

Answer 33

= Dif between FV of subsidiary (EG, p.p.share * shares) {LESS} FMV of assets required