3 - Marketable securities

Question 1

And the balance sheet marketable securities classified as trading or available for sale are valued

Answer 1

At fair value

Question 2

On the balance sheet marketable securities classified as held to maturity are valued

Answer 2

At amortized cost

Question 3

How are unrealized gains and losses on trading securities recognized

Answer 3

Unrealized gains and losses on trading securities are recognized on the income statement

Question 4

How are unrealized gains and losses on available-for-sale securities recognized

Answer 4

Unrealized gains and losses on available-for-sale securities are reported in other comprehensive income

Note: under IFRS foreign exchange gaines and losses on available-for-sale debt securities are reported on the income statement

Question 5

List three conditions one losses on multiple securities classified as available-for-sale are recognized in income

Answer 5

Sale of the security

Transfer of the security to trading classification

other than temporary decline of individual security below cost (impairment)

Question 6

When a marketable equity security is transferred from trading to available-for-sale or vice versa at what cost is it transferred?

Answer 6

• Transferred at a fair value when which then becomes new basis
• for a security transferred into a trading category the difference is treated as a realized gain or loss and is recognized on the income statement
• for a security transferred from the trading category the unrealized holding gain or loss will already have been recognized in earnings
  note: transfers to and from the trading category should be rare

Question 7

How are gains and losses and financial instruments that hedge trading securities reported?

Answer 7

Reported earnings consistent with reporting unrealized gains and losses on trading securities

Question 8

How are gains and losses and financial instruments that hedge available for sale securities reported

Answer 8

Reported earnings together with the offsetting gains or losses on the available for sale securities attributable to the hedged risk

Question 9

What disclosures should be made for available for sale and held to maturity securities

Answer 9

• Aggregate fair value
• gross unrealized holding gains and losses
• amortized cost basis by type
• information about the contractual maturity of debt securities

Question 10

State the criteria to consolidate

Answer 10

• Consolidate when the parent is able to control the subsidiary usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary
• do not consolidate when control is not with the owners as in bankruptcy of subsidiary

Question 11

Identify the three levels of control and the appropriate accounting method for each

Answer 11

No significant influence
- cost method: trading or
available-for-sale securities
at fair value

significant influence but 50% or less ownership
- equity method

Control
- costs are equity method for (internal
accounting)
- consolidated financial statements
(external reporting)

Question 12

How is the year and investment in investee reported on the balance sheet calculated under the equity method

Answer 12

Beginning investment in investee + investors share of investing earnings 
- investor share of investee dividends 
- amortization of FV differences
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
ending investment in investee

Question 13

How is an investors equity method investment reported on the income statement

Answer 13

Investors share of investee earnings
- amortization of FV differences
________________________________. equity in earnings / investee income

Question 14

How are joint ventures accounted for under IFRS and US GAAP

Answer 14

Joint ventures are accounted for using the equity method under both US GAAP and IFRS

Question 15

In a step-by-step acquisition what is the accounting treatment when significant influence is acquired

Answer 15

• Going from the cost method to the equity method is handled like a change in accounting principle retroactively
• go back retroactively with the equity method but not with the new ownership percentage
• prior period financial statements are restated

Question 16

When are consolidated financial statements prepared

Answer 16

When the parent company has control over the subsidiary company.

Control is achieved with more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization)

Question 17

In acquisition accounting state the consolidating workpaper elimination entry.

CARINBIG

Answer 17

Dr. Common stock - subsidiary Dr. APIC - subsidiary
Dr. Retained earnings - subsidiary Cr. investment in subsidiary
Cr. noncontrolling interest
Dr. Balance sheet adjustments to fair value
Dr. Identifiable intangible assets to fair value Dr. Goodwill

Question 18

How are expenses relating to the combination treated under the acquisition method

Answer 18

• Direct out-of-pocket costs are expensed
• Stock related costs are a reduction in the value of the stock issued (normally a debit to additional paid in capital)
• Indirect costs are expensed
• Bond issue costs are capitalized and amortized

Question 19

In an acquisition how are acquired identifiable intangible assets amortized?

Answer 19

Finite useful life: amortized to residual value over expected useful life

Indefinite useful life: do not amortize

Question 20

How is goodwill calculated under the US GAAP acquisition method?

Answer 20

U.S. GAAP
Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus noncontrolling interest) over the fair value of the subsidiaries net assets, including identifiable intangible assets at FV.

Goodwill = fair value of subsidiary - fair value of subsidiaries net assets

Goodwill recorded in a business combination is not amortize the entire investment is subject to the impairment test.

Question 21

How is goodwill calculated under the IFRS acquisition method

Answer 21

IFRS

• Goodwill is recognized under the full goodwill method (same as US GAAP) for the partial goodwill method.
• under the partial goodwill method, goodwill is the excess of acquisition cost over the fair value of the subsidiaries net assets acquired
• Partial goodwill = acquisition cost - Fair value of subsidiaries net assets acquired

Question 22

How is noncontrolling interest (balance sheet) calculated under US gap

Answer 22

Noncontrolling interest (NCI) = FV of subsidiary x NCI %

Question 23

How is noncontrolling interest (balance sheet) calculated under IFRS?

Answer 23

IFRS permits the use of the fall Goodwill method

Full Goodwill Method (same as US GAAP)
NCI = FV of subsidiary x NCI %

Partial Goodwill Method
NCI = FV subsidiary’s net identifiable assets x NCI %

Question 24

How is noncontrolling interest on the income statement calculated

Answer 24

Subsidiary net income
x noncontrolling interest %
_____________________________
NCI in net income

Question 25

In a business combination what is the treatment of an acquisition in which the acquisition cost is less than the fair value of 100% of the net assets acquired

Answer 25

The acquisition cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. this creates a negative balance in the acquisition account which is recorded as a gain.

Question 26

Name several pro forma workpaper illumination entries when producing consolidated financial statements

Answer 26

Eliminate - the effects of intercompany dividends. - parents investment and subaccount - the entire stockholders equity section of the sub - the effects of the gain and loss and adjust the excess depreciation on the sale of property plant and equipment between affiliates - all intercompany sales and purchases - all other intercompany balance sheets and income statement accounts - intercompany profit in cost of goods sold and in beginning and ending inventories relating to an intercompany sale of merchandise between affiliates ``` Adjust - recognize noncontrolling interest - adjust the balance sheet of the sub to fair value - establish goodwill ```

Question 27

State the workpaper illumination entry for intercompany inventory transactions

Answer 27

Dr. Retained Earnings (Intercompany profit in beginning inventory) Dr. Intercompany sales Cr. Intercompany cost of good sold Cr. Cost of good sold intercompany profit in goods sold Cr. Ending inventory intercompany profit in ending inventory

Question 28

State the workpaper illumination entry for intercompany bond transactions

Answer 28

Dr. Bonds payable Dr. Premium (or credit discount) Cr. investment in affiliates bonds Cr. Gain on extinguishment of bonds or (debit loss on extinguished of bonds)

Question 29

State the workpaper illumination entry for intercompany land transactions

Answer 29

Dr. Intercompany gain on sale of land Cr. Land

Question 30

State the workpaper illumination entries for intercompany depreciable assets transactions

Answer 30

Elimination entry 1 Eliminate intercompany gain and adjust asset and accumulated depreciation to original amounts: Dr. Intercompany gain on sale of machinery Cr. machinery Cr. accumulated depreciation Elimination entry 2 Eliminate excess depreciation: Dr. Accumulated depreciation Cr. depreciation expense

Question 31

When are combined financial statements prepared

Answer 31

- Companies are under common control - companies are under common management - unconsolidated subsidiaries are combined

Question 32

When preparing combine financial statements identify the requirements

Answer 32

- Intercompany transactions and balances among these companies are eliminated. - Non controlling interest treated like consolidated financial statements - capital stock and retained earnings are added across not eliminated. - income statements are added across

Question 33

Describe push down accounting

Answer 33

Report assets and liabilities at fair value in separate financial statements of subsidiary. in effect, consolidation adjustments are pushed down into the records. - assets and liabilities are adjusted to fair market value at date of acquisition - retained earnings of a subsidiary are transferred to paid in capital - net income of each subsidiary include depreciation amortization and interest expense based on fair value rather than historical cost - the SEC requires pushed on the county for each substantially wholly owned "substantially wholly owned subsidiary"