stocks

Question 1

Liquidating dividend

Answer 1

Definition
Any dividend that is granted in excess of investee’s retained earnings
Take total investee RE x % owned by entity to see if any dividends are liquidating
Treated as return of capital for investor

Question 2

Valuation

Answer 2

Valuation
Common equity or preferred equity - no significant influence
Journal entry
DR: Unrealized Loss on Equity Security XXX
CR: Valuation Account (FV adj) XXX contra-asset

Question 3

ECL. Expected credit loss (ECL)
PV - Amortized cost. (max loss)

Answer 3

Accounting treatment
Change in FV = gain/loss
Max loss = Expected credit loss (ECL)
Goes in IS
Any excess loss (losses > expected credit loss)
Goes in OCI

Question 4

Accounting for asset FV differences
Excess of asset FV > BV is amortized over life of asset (other than land and goodwill, which are not amortized);
Additional amortization causes the investor’s share of the investee’s net income to decrease
Journal entry
DR: Equity in Investee Income XXX Reduce income
CR: Investment in Investee XXX Reduce asset

Answer 4

Accounting for equity method Goodwill “Premium”
FV excess attributable to goodwill is NOT amortized and is NOT subject to separate impairment test
However, the total equity method investment (including goodwill) must be analyzed at least annually for impairment

Question 5

For external reporting “CAR IN BIG”
Common stock (sub’s old equity eliminated)
APIC (sub’s old equity eliminated)
RE of subsidiary are eliminated (sub’s old equity eliminated)
Investment in subsidiary is eliminated (parent’s investment eliminated)
Noncontrolling interest (NCI) is created (if not 100% owned)
Balance sheet of subsidiary is adjusted to FV at acquisition date (100% assets; 100% liabilities)
Identifiable intangible assets of subsidiary are recorded at FV (premium paid)
Goodwill (or gain) is required (plug)

Answer 5

“CAR”: Subsidiary equity acquired
CAR Formula
Assets - Liabilities = Equity (or net assets)
Assets - Liabilities = NBV
Assets - Liabilities = CAR

Acquisition date calculation (of CAR)
Beginning RE
+ Income
- Dividends
= Ending RE

Question 6

Cost method or equity method to account for investment INTERNALLY (external must consolidate)
Cost method
Value of investment does NOT change after acquisition date
No adjustments are made
Dividends received from subsidiary are recorded by parent as dividend income

Answer 6

Equity method
Value of investment (internally) does change after acquisition date
Sub’s retained earnings Investment in sub.
x Beginning Balance x
+ Sub’s Income +
- Sub’s Dividends -
x Ending Balance x

Question 7

With acquisition accounting, the net assets acquired are based on FV. The FV of finished goods and merchandise inventory are based upon selling price less disposal costs and a reasonable profit allowance

Answer 7

With acquisition accounting, the net assets acquired are based on FV. The FV of finished goods and merchandise inventory are based upon selling price less disposal costs and a reasonable profit allowance

Question 8

NCI after the acquisition date
Accounted for using equity method
Beginning NCI
+ NCI share of Subsidiary’s Net Income
- NCI share of Subsidiary’s Dividends
= Ending NCI

Answer 8

Total consolidated equity
NCI
+ Parent’s Common stock
+ Parent’s APIC
+ Parent’s Retained earnings
= Total Consolidated Equity

Question 9

Income statement
Includes 100% of sub’s revenues & expenses (after the acquisition date)
Computation of NI attributable to NCI
Sub’s income
- Sub’s expenses
= Sub’s net income Equity Method
* NCI %____ Gets added to NCI
= NI attributable to NCI
Note: if “loss”, it is still allocated to NCI, even if it creates a negative balance

Answer 9

FV of subsidiary
Calculation
FV of subsidiary = Acquisition cost + NCI at FV
Balance sheet
Adjustment of sub’s assets & liabilities from BV to FV

Question 10

full goodwill

Answer 10

total fv-asset fv
full goodwill
60% for $75,000,000.00 (75 million/60%=total fv)

full fv $125,000,000.00
fv of net identiifable assets $60,000,000.00
full goodwill $65,000,000.00

Question 11

CAR=c/s, apic/RE

Answer 11

Net asset, bv,

Question 12

Notes from MCQs
When an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment must be adjusted to FV
The FV adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition
FV of sub x Previous ownership % = Theoretical price
Theoretical price - CV of equity method investment = Gain/loss
A subsidiary paying a dividend reduces NCI but has no impact on RE

Answer 12

Notes from MCQs
When an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment must be adjusted to FV
The FV adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition
FV of sub x Previous ownership % = Theoretical price
Theoretical price - CV of equity method investment = Gain/loss
A subsidiary paying a dividend reduces NCI but has no impact on RE

Question 13

Simple BS Eliminations
Eliminate 100% of all intercompany receivables and payables
DR: AP XXX
CR: AR XXX
DR: Bonds Payable XXX (intercompany portion only)
CR: Bonds Investment XXX (in affiliate)
DR: Accrued Bond Interest Payable XXX
CR: Accrued Bond Interest Receivable XXX
DR: Dividends Payable XXX (affiliate portion only)
CR: Dividends rcvbl XXX (fro

Answer 13

Simple IS Eliminations
Interest expense/interest income (bonds)

Gain on sale/depreciation expenses (intercompany fixed asset sales)

Sales/COGS (intercompany inventory transactions)

Question 14

DR-gain on sale 40
cr-AD 15
cr Dep exp 5
CR equipment 20

Answer 14

elimination of JE
Gain on sale $40,000.00
ad $15,000.00 Inc by CRDit back to orightal ad
dep exp $5,000.00 dec by crdit back oto orignal dep exp
equipment $20,000.00 dec by credit back to original

Question 15

debit sale 50
cr inventory on hand 8
cr cog plug 42

Answer 15

sale $50,000.00 dec the sale
inventoy $8,000.00 inc the invetory
cogs $42,000.00 inc the the cost of gs

Question 16

Sub’s book
inventory 1100000
AP. 11000000

sold to thrid party
ending invenotry $660,000.00 $440,000.00
ap $200,000.00

elimnate
AP $200,000.00 consoldated b/s fixed
AR $200,000.00

eliminame sale of inventory
sale $1,100,000.00
cogs for P $1,000,000.00
invenotry cogs for S $40,000.00 intercomany profit cogs(10040%)
inveotny of s on hand $60,000.00 intercomapny profit eI(10060%)

Answer 16

parent sold to sub
dr AR. 1100,000
cr sale. 1100,000
Dr. cogs 1000000
CR inventory. 1000000

We need to eliminate 100,000 profit on the parent’s worksheet
DR sale 11000,000
cr cogs for parent 1000,000
cr inventory on subs hand. 60,000
cr cogs for sub 40,000

Also 200,000 ap due to parent
Ap 200,0000
AR 200,000

Question 17

Bond acquired by sub.. eliminate the bond payable b/c sub got it….

Answer 17

mcq bond transaciton
parent issue bond
cash $300,000.00
bond payable $250,000.00
preim $50,000.00

Sub aquired the bod b/c the sub has the bond now
invest in parent’s bond $275,000.00
cash $275,000.00

Elimination of intercomany
bond payable $250,000.00
prium $50,000.00
investment in p bond $275,000.00
gain on extinguhment of bond $25,000.00

Question 18

iscellaneous Notes
Cash flows
The net cash spent or received in the acquisition must be reported in the investing section of the SCF
Reported net of cash acquired (cash that was already on the sub’s books)
In the reconciliation of net income to net cash provided by operations, total net income (including net income attributable to both the parent and the NCI), should be included
Dividends paid by the subsidiary
To non-controlling shareholders
Reported in the SCF
To the parent
Not reported

Answer 18

In an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income from the date of acquisition
The assets and liabilities of any company that is > 50% owned should be included as assets and liabilities in the consolidated FS
When additional shares are issued, the NCI % changes
Recalculate based on # shares owned / total # of shares
Value of NCI at end of year
Beginning NCI
+ NCI % of sub’s income
- NCI % of sub’s dividends
= Ending NCI

Question 19

Quantitative evaluation of goodwill impairment
If FV > CV
STOP. Asset is not impaired
If FV < CV
Asset is impaired. Must write down to FV
Journal entry
DR: Loss due to impairment XXX
CR: Goodwill XXX
Impairment charge cannot exceed value of goodwill that is allocated to that reporting unit

Answer 19

US GAAP Private Company Accounting Alternative
Amortize goodwill on a straight-line basis over 10 years or less
Test goodwill for impairment at entity level OR reporting unit level when a “triggering event” occurs that indicates FV may be below CV
Because goodwill is being amortized, impairment is less likely to occur