Unit 3: Long Term Assets Flashcards
Describe the impairment test for investments in equity securities.
First, a qualitative assessment of whether an investment is impaired must be performed at each reporting date. An investment is impaired if the fair value of the investment is lower than its carrying amount.
If the qualitative assessment indicates potential impairment, the entity must estimate the fair value of the investment and perform a quantitative impairment test. The carrying amount of the investment is compared with its fair value. An impairment loss is recognized in the income statement (net income) for the excess of the carrying amount over the fair value.
Impairment = Carrying amount – Fair value
What is an equity security?
An equity security is an ownership interest in an entity (e.g., common stock or preferred stock) or a right to acquire or dispose of such an interest (e.g., warrants or call options).
The accounting method for an investment in voting stock depends on the presumed influence that the investor has over the investee. What are the different levels of presumed influence and the associated accounting methods?
100% = Control = Consolidation
50% = Significant = Equity Method or FVO
20% = Little or none = Fair Value Measurement
How should an investment in voting stock that enables the investor to exercise significant influence over the investee be accounted for?
by the equity method or fair value option. Significant influence is presumed to exist when the investor holds between 20% and 50% of the investee’s voting interests.
Describe the application of the equity method.
An equity method investment is initially recognized at cost. Under the equity method, the investor recognizes in income its share of the investee’s earnings or losses in the periods for which they are reported by the investee. Dividends from the investee are treated as a return of an investment. They have no effect on the investor’s income.
Describe the criteria to be classified as a held-to-maturity, trading, or available-for-sale debt security.
Held-to-maturity: Debt securities that the reporting entity has the positive intent and ability to hold to maturity
Trading: Debt securities intended to be sold in the near term
Available-for-sale: Debt securities not classified as held-to-maturity or trading
Describe the presentation of held-to-maturity securities in the balance sheet and income statement.
Balance sheet: Held-to-maturity securities are presented net of any unamortized premium or discount (amortized cost). No valuation account is used.
Income statement: Realized gains and losses and interest income (including amortization of premium or discount) are included in earnings.
Describe the presentation of trading securities in the balance sheet and income statement.
Balance sheet: The balances of the securities and valuation allowances are netted. One amount is displayed for fair value.
Income statement: Unrealized and realized holding gains and losses, dividends, and interest income (including premium or discount amortization) are included in earnings (income statement).
Describe the presentation of available-for-sale securities in the balance sheet and income statement.
Balance sheet: The balances of the securities and valuation allowances are netted. One amount is displayed for fair value.
Income statement: Realized gains and losses, dividends, and interest income (including premium or discount amortization) are included in earnings.
Define property, plant, and equipment.
Property, plant, and equipment (PPE), also called fixed assets, are tangible property expected to benefit the entity for more than 1 year. They are held for the production or supply of goods or services, rental to others, or administrative purposes.
How is property, plant, and equipment (PPE) initially measured?
PPE is initially measured at historical cost, which consists of all the costs necessarily incurred to bring the asset to the condition and location necessary for its intended use.
Describe the carrying amount of property, plant, and equipment (PPE).
The carrying amount of an item of PPE is the amount at which it is presented in the balance sheet. This amount is equal to the historical cost minus accumulated depreciation and impairment losses.
Historical or initial cost
–
Accumulated depreciation
–
Impairment losses
=
Asset’s carrying amount
What is an intangible asset?
An intangible asset is an identifiable, nonmonetary asset that lacks physical substance. Examples of intangible assets include licenses, patents, copyrights, franchises, and trademarks.
How is an intangible asset with a finite useful life accounted for?
An intangible asset with a finite useful life (an amortized intangible asset) to the reporting entity is amortized over that useful life. The debit is to amortization expense, and the credit is to intangible asset.
Amortization expense
$XXX
Intangible asset
$XXX
How is an intangible asset with an indefinite useful life accounted for?
An intangible asset with an indefinite useful life is not amortized. The carrying amount of an intangible asset with an indefinite useful life equals its historical cost minus any impairment losses.
