Select Transactions - Area 3 Flashcards
What is POETS?
Present Value equals 90% or exceeds fair value
Option to purchase
Economic Life - at least 75%
Transfer of Ownership
Specialized - No alternative use for lessor at termination
When calculating the leased asset, is the option to purchase included?
No, only include the present value of the lease payments.
In business combinations, if the appraised values of the identifiable assets acquired exceeded the acquisition price, where is this recognized?
In income from continuing operations.
In a business acquisition, how is net income of the subsidiary accounted for?
Net income is accounted for as the initial percentage attributable to the parent company prior to and up to the acquisition. After the acquisition, net income is attributable at the new percentage of ownership.
IE 20% prior to acquisition to be recognized and 80% after date of acquisition.
In a combination, how are acquisition costs treated?
They are expensed as incurred.
How are deconsolidations treated?
If it is nonreciprocal, it is treated as a nonmonetary transaction.
Nonreciprocal - Nonmonetary
If it is anything other than nonreciprocal the gain or loss is recognized in net income.
How is retail inventory calculated?
Total amount available for sale less sales and markdowns
Times that amount by the cost-to-retail ratio. Original cost of inventory divided by the amount available for sale before sales and markdowns.
How should a lessee recognize depreciation expense on a finance lease?
Present value of lease payments divided by the lease term. - If using straight-line method.
How do you determine the FV of the company being acquired in an acquisition?
In an acquisition, when determining the FV of the business, whether it’s for the acquiring shares or non-controlling interest, use the FV of the shares acquired.
Pizza paid $750,000 for 75% of Sausage, thus 25% is considered as noncontrolling interest. $750,000 ÷ .75 = $1,000,000; then $1,000,000 × .25 = $250,000 fair value for the noncontrolling interest.
How are are non-cash or contingent acquisitions accounted for?
The total consideration transferred is equal to the sum of the cash and stock given, plus the present value of the contingent-based consideration.
Which account is used when determining earning from a subsidiar?
Retained earnings.
Beg Retained Earnings + Net Income – Dividends = Ending Retained Earnings
Net Income = Ending Retained Earnings + Dividends – Beg Retained Earnings
Lease Payments Include all of the following except…
Fixed Lease Payments
Variable Lease Payments
Guarantee of the Lessor’s debt
Residual Value Guarantees
Per ASC 842, Lease Payments include:
Fixed Lease Payments
Variable Lease Payments
Renewal, Purchase, and Termination Option Payments
Fees Paid to Owners of Special-Purpose Entities
Residual Value Guarantees
Lease Payments don’t include:
Payments for variable leases not dependent on an index or rate
Guarantee of the Lessor’s debt
How are subsequent events treated after the balance sheet date, but prior to the issuing date?
Summary- If the event does not provide evidence about CONDITIONS that existed prior to the balance sheet date, than the event should be a disclosure only.
E.G. Natural disaster on a customer vs customer bankruptcy. The natural disaster does not affect the customer prior to the balance sheet date and therefore should only be disclosed. Bankruptcy effect the conditions of the customer prior to the balance sheet date and should be accrued and disclosed.
How are non-monetary exchanges treated?
If the transaction has commercial substance, treat the value of the new asset as the FMV of the asset given up. Recognize any gain as the FMV of the asset given up less the book value.
If the transaction lacks commercial substance. The value of the new asset is the BV of the old asset. There is no gain recorded.
If cash is given, the gain recorded is equal to the percentage of cash received over total value of consideration received.
Realized Gain of asset given up less book value of asset given up multiplied by the percentage of boot described above.
How should equipment purchased for R&D be treated?
If the equipment has no other future use, than the full amount should be expensed.
If the equipment has a future use, it should be capitalized and depreciated over its useful life with the depreciation being charged to R&D while it is being used for that purpose.
