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CPA FAR Review > F3 > Flashcards

F3 Flashcards

Marketable Securities and Business Combinations

1
Q

Marketable Securities: Trading securities

A

Generally reported as current assets. Both Debt & Equity.

Fair value reporting, unrealized gain/loss on I/S.

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2
Q

Market securities: Available-for-sale securities

A

Debt and Equity, GR non-current assets.

Not meeting the definition of trading or held-to maturity Securities.

Fair value reporting, unrealized gains/loss to OCI.

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3
Q

Marketable Securities: Held-to-maturity

A

Debt only, GR non-current assets. Equity never matures.

The firm has the intent and ability to hold the securities to maturity

Amortized cost reporting

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4
Q

Under IFRS Gains and Loss on Available for sale securities are reported in OCI, except for?

A

Available for sale Foreign Exchange Gains/losses on AFS DEBT securities. (They go directly to I/S)

Equity like common stock still go in OCI

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5
Q

Reclassify FROM a Trading Category? Unrealized hold gains/losses

A

Unrealized holding gains/losses already Recognized in earnings.

Do NOT need to** be reversed**.

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6
Q

How to Reclassify TO Trading category? Unrealized Gains/losses

A

Unrealized holding gain/loss at date of transfer should be recognized in earnings immediately.

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7
Q

How to classify Held to maturity Debt to Available for sale. Unrealized gains and losses

A

Reported in OCI.

**Remember: **this debt security was valued at amortized cost as held-to-maturity security and is being transferred to a category valued at FV.

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8
Q

Debt classified as AFS transferred to HTM?

A

Unrealized holding gains/losses are amortized over the remaining life of instrument. Added or subject to Premium or Discount.

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9
Q

What to do with impaired securities under US GAAP?

A

If fair value is below cost and not temporary (permanent):

Write down securities and realized in Earnings immediately.

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10
Q

What if Impaired securities appreciate in value Under US GAAP?

A

No recovery in value is allowed under GAAP.

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11
Q

What if Impaired securities appreciate in value under IFRS?

A

For AFS and HTM, the impairments may be reversed. Revesal is recognized on the Income statement.

However, Recoveries for HTM securities cannot exceed the amortized cost (pre-impairment)

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12
Q

Consolidated financial statements ignore?

A

Legal form. Use the economic entity argument

Substance over form

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13
Q

If ownership is 20% of less of a company and does not exercise significant influence?

A

Parent company uses Cost Method.

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14
Q

If ownership is between 20% and 50% of a company and parent exercises significant influence?

A

Parent company uses the equity method

Note: Even if ownership is less than 20% but the parent company exercises significant influence (majority of board/largest shareholder), use the equity method.

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15
Q

If ownership is 50% of more of a company?

A

Parent company uses Equity method and Consolidated financial statements.

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16
Q

How to record cash dividends under the Cost Method?

A

Only a cash Dividend

  • Debit: Cash
    • Credit: Dividend income.
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17
Q

Cost method: How does the parent record a Cash Dividend that is beyond its proportion of the distribution?

A

It’s treated as reduction in basis.

  • Debit: Cash
    • Credit: Investment in Sub.
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18
Q

Grandma & grandpa analogy

True or False: Cash Dividends are reported as income on the cost method?

A

True.

Dividends are NOT a reduction in investment under the cost method.

Grandma, grandpa sitting on porch waiting for checks.

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19
Q

True or False: The Investment in Sub account is not adjusted to Fair value using the Costs method.

A

False. The cost method adjusts the Investment in Sub account to Fair value

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20
Q

True or False: If ownership is below 20% and there is significant, influence the Cost Method is still appropriate.

A

False.

The Equity Method is appropriate when significant influence is observed.

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21
Q

Bank account withdrawal

How does the parent record Cash Dividends under the Equity Method?

A

Dividends are a Return on Investment and Reduce the Investment in Sub account.

  • Dr: Cash
    • Cr: Investment in Sub./Investee
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22
Q

How does the Parent record income from the Subsidiary on the Equity Method?

A

Earnings are recognized on the income statement, and ADD to the Investment in Sub. account.

  • Dr: Investment in Sub
    • Cr: Investee income/equity earnings
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23
Q

What is the BASE formula for the Equity Method?

A

Beginning Balance
Add: Parents share of Sub.Earnings.
Subtract: Declared Dividends
Ending Balance

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24
Q

The significant influence test is generally met with Common or Preferred stock?

A

Common stock, which usually means voting stock, is used for the test.

25
Q

How to account for Preferred stock Dividends under the Equity Method?

A

Preferred stock dividends reduce net income.

26
Q

Goodwill is a plug entry for any amount over?

A

Fair value of the net assets, and not the net book value.

27
Q

Goodwill is Amortized Annually. True or False?

A

False.

Goodwill has indefinite life and is annual tested for impairment!

28
Q

In step-by-step acquisition, what is the accounting treatment when significance is acquired?

A
  • Cost –> Equity handled like accounting principle change (Retroactively)
  • Go back retroactively with equity method but not with the new ownership percentage
  • Prior period FS are restated
29
Q

True or False: Joint ventures are generally accounted for used the Cost Method?

A

False. Use the Equity method for GAAP & IFRS.

30
Q

3 most commonly tested “Cost Method” Issues

A
  1. The “Investment in Investee” is not adjusted for investee earnings
  2. The “Investment in Investee” is adjusted to FV
  3. Cash dividends from the investee are reported as income by the investor (parent)
31
Q

When change cost to equity? Don’t apply what?

A

Do not apply the New percentage to the prior Period!

32
Q

Under US GAAP one must always consolidate for 50% ownership except when?

A

There is doubt in the significant influence of the Sub.

33
Q

Examples of the Exception to Consolidation?

A
  1. Legal reorganization
  2. Bankruptcy
  3. Foreign legal restrictions
34
Q

Acquisition Method: TAG announces that it will buy Sub Co. on April 1, year 1 for 1 million shares

  • Transaction closes on September 30, year 1–1 million Shares used. Price 4/1/y1= $10 Price 9/30/y2= $14

What is the the acquisition Price?

A

1,000,000 * 14$ = 14,000,000

35
Q

Acquisition Method TAG announces that it will buy Sub Co. on April 1, year 1 for 1 million shares

  • Transaction closes on September 30, year 1–1 million Shares used. Price 4/1/y1= $10 Price 9/30/y2= $7

What is the the acquisition Price?

A

1,000,000 * $7= 7,000,000

36
Q

What is the parent’s Basis for the Investment in Sub is the Acquisition method?

A

Acquisition price = investment in Sub

37
Q

What is CAR for the eliminating Journal Entry?

A
  • *Dr: C**ommon Stock-sub
  • *Dr: A**PIC-sub
  • *Dr: R**etained Earnings-sub
  • *Cr: I**nvestment in Sub (credit)
  • *Cr: N**oncontrolling Interest (credit)
  • *Dr: B**alance sheet adjustments to FV
  • *Dr: I**dentifiable Intangible assets to FV
  • *Dr: G**oodwill / Cr: Gain
38
Q

How to eliminate the RE-sub ? in the CAR?

A

Use the BASE formula.

  • *B**eginning RE-sub
  • *A**dd:income from sub
  • *S**ubtract Dividends
  • *E**nding RE (use for R in CAR)
39
Q

I in IN, what costs are excluded in the investment in Sub account?

A

Legal fees and Indirect costs

40
Q

What costs are included in the Investment in Sub account?

A

None!

SEC filing fees and Stock registration costs are a direct reduction in the APIC account.

41
Q

Non-controlling interests. NCI.

A

% of NCI of will be reported in the Equity section of the Balance Sheet.

42
Q

US GAAP, NCI in net assets?

A

The difference between acquisition cost and the cost/ Common stock ownership percentage.

43
Q

IFRS what is the NCI net assets?

A

The NCI percentage in fair value of net assets.

44
Q

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

A

Economic Entity

Reporting consolidated financial statements is consistent with the concept that the economic entity can be identified with a unit of accountability.

45
Q

If unrealized loss on available-for-sale marketable equity securities for temporary and “other than temporary” loss?

A

Rule: If unrealized loss on available-for-sale marketable equity securities:

If Temporary :

  1. Do not record loss in the income statement.
  2. Record (debit) difference in other comprehensive income.
  3. Record (credit) difference in a valuation (contra) account (a component of the noncurrent asset section of the balance sheet).
  4. Subsequent recoveries in market value are debited to the valuation account and credited to other comprehensive income.

If Other Than Temporary:

  1. Record realized loss (debit) in the income statement.
  2. Credit the cost of the individual security account.
46
Q

When the equity method is used to account for investments in common stock, what affects the investor’s reported investment income?

A

Undervalued assets related to amortization

(NOT CASH DIVIDENDS because only affect Balance sheet!)

47
Q

How to report Dividend Revenue?

A

Rules:

  1. Stock dividend (more shares of stock) is not reported as revenue, only a memo entry is made.
  2. Cash dividend (under the equity method) reduces the investment account but does not affect revenue.
48
Q

What amount should a company report as intercompany receivables?

A

$0

Rule: 100% of all intercompany balances among members of the consolidated group are eliminated.

49
Q

What happens when the subsidiary purchases the parent company’s bonds?

A

The purchase of the parent company bond by the subsidiary is treated as if the bond were retired when the financial statements are consolidated.

50
Q

In a business combination accounted for as a purchase, the appraised values of the identifiable assets acquired exceeded the acquisition price. How should the excess appraised value be reported?

A

**As a gain, after adjusting the balance sheet, including identifiable intangible assets, to fair value. **

When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, the following steps are required:

  1. The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account.
  2. Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account.
  3. The total negative balance in the acquisition account is recorded as a gain.
51
Q

Direct costs of business acquisition combination, other than registration and issuance costs of equity securities, should be…?

A

Deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

Direct costs are expensed in the period incurred.

52
Q

When the acquisition price exceeds the fair value of net assets acquired, how should they be reported?

A

Assets and liabilities should be presented at fair value.

53
Q

Combined financial statements may be prepared for:

A
  1. Many companies owned by one individual
  2. Many companies under common management
  3. Unconsolidated subsidiaries
54
Q

Difference between Full Goodwill (GAAP) and Partial Goodwill (IFRS)?

A

Full seesaw method

Goodwill = FV Sub - FV of Sub’s Net Assets

Partial

Goodwill = Acquisition Cost - FV of Sub’s Net Assets Acquired

55
Q

NCI under GAAP and IFRS?

A

Full (GAAP)

NCI = FV of Sub x NCI%

Partial (IFRS)

NCI = FV of Sub’s Net Assets (CAR + B + I) x NCI%

56
Q

3 conditions when losses on marketable securities classified as AFS are recognized in I/S.

A
  1. Sale of security
  2. Transfer of security to trading classification
  3. Other than temporary decline of individual security below cost (impairment)
57
Q

4

How are expenses relating to combination treated under acquisition method?

A
  • Direct out-of-pocket costs expensed
  • Stock-related costs are reduction in value of stock issued (normally a Dr: to APiC)
  • Indirect costs are expensed
  • Bond issue costs are capitalized & amortized
58
Q

IPR&D

How to reat In Process Research & Development?

A

Does it have probable future economic benefit?

  • Carry as an asset
  • Recognize as intangible asset separate from GW at acquisition date
  • Do not immediately write off

Project = success –> amortize IPR&D

Project = failure –> impair & write off R&D

CPA FAR Review (10 decks)

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