ABC Flashcards
L1:
How do we account for share issues (cash)?
Dr. Cash (x)
Cr. Share Capital (x)
L1:
How do we account for cash dividends?
1: When dividend is declared
Dr. Dividends declared (x)
Cr. Dividends payable (x)
2: When paid Dr. Dividends payable (x) Cr. Cash Dr. Dividends Paid Cr. Dividends declared (x)
L1:
What is a bonus issue?
How do we account for share dividends / Bonus issues?
Bonus issue = an issue of shares to existing share holders out of retained earnings or reserves (no cash payment) (leaves total equity unchanged as it involves transfer from one equity account to another)
Dr. Retained Earnings / General reserve (x)
Cr. Share capital (x)
L1:
What is a reserve in accounting?
How do we account for transfers to and from reserves
Reserve = profits that have been appropriated for a particular purpose and can be created through transfers from retained earnings
To reserves:
Dr. Transfer to general reserve (RE) (x)
Cr. General reserve (x) (this account is closed to retained earnings at year end)
L1:
How do we determine the cost of PPE?
Cost = Purchase price (including taxes) and any costs
attributable to bringing the asset to its present
location and condition
L1:
How do we use the Cost model to record changes in asset value
- For the cost model what is the recoverable amount?
- When are impairment losses recognised?
- How do we account for impairment?
Cost model = Assets are carried at cost less accumulated depreciation less accumulated impairment
losses
Impairment losses are recognised if the recoverable
amount of an asset is less than its carrying
amount (carrying amount of asset is reduced to its recoverable amount)
recoverable amount = the higher of an assets
- Fair value less cost of sales = the amount obtainable from the sale of an asset in an arm’s length transaction
- Value in use = the present value of future cash
flows expected to be derived from an asset
Impairment loss
Dr. Impairment loss (x)
Cr. Accumulated Impairment (x)
Where x = difference between recoverable and carrying amount
L1:
How do we use the Revaluation model to record changes in asset value
For the revaluation model assets are recorded at fair value (the price that would be received to sell an
asset in orderly transaction)
When revaluing a depreciable asset, any balance of
accumulated depreciation is credited to the asset
account prior to the revaluation (zero accumulated depreciation and restate asset at carrying amount)
Dr. Accumulated depreciation (x)
Cr. Asset (x)
Where the carrying amount is increased, the increase
is recognised in other comprehensive income and
accumulated in equity under the heading revaluation
surplus
Dr. Asset (x)
Cr. Revaluation gain (OCI) (x)
Dr. Revaluation gain (OCI) (x)
Cr. Revaluation surplus (x)
L1:
How do we account for the disposal of a revalued asset?
Dr. Cash at bank (x) Dr. Accumulated depreciation (x) Cr. Revalued asset (revalued amount) (x) Dr. Loss on sale (x) OR Cr. Gain on sale (x)
L2:
How does the corporations act effect the reporting of financial statements for the parent when considering consolidated financial statements?
The parent company only needs to prepare consolidated financial statements and does not actually need to prepare financial statements solely for the parent company = the statements are required by accounting standards to present a true and fair view.
L2:
What is the criterion that determines whether or not an entity has control?
Control = a subsidiary is an entity CONTROLLED by another entity = An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the
ability to affect those returns through its
power over the investee
1: variable returns
2: ability to affect returns
3: power over investee
L2:
How exactly is power determined, utilise less than or greater than ownership of 50% of voting shares to demonstrate.
power can exist where the parent owns 50% of voting shares AND rights are substantive and not just protective
Control can also exist where the parent owns less than 50% of voting shares if:
1: Parent has power over more than 50% voting rights by virtue of agreement with other investors
2: remaining shares are widely dispersed
3: Due to apathy, the majority of other shareholders do
not vote at general meetings
In essence control is not determined by ownership.
L2:
What is the difference between active and passive control
What is the difference between substantive and protective rights?
Active = Overseeing operations directly Passive = passive management by appointing another company to oversee operations
Substantive = a right that the investor has the practical ability to exercise ( no boundaries in place, etc.)
Protective = protect interest of party holding rights without providing the entity power over other entity (right to seize assets from borrower if
the borrower breaches provisions of the loan
contract)
L2:
An investor who is an agent and has the ability to affect returns through execution of power exists. Does the agent control the the investee?
One of the criterion for determining control is that the investor has exposure or rights to variable returns. What does this mean? AND what type of returns?
No = needs to be principal and not agent
Variable returns = when the investor’s returns from its involvement vary as a result of the investee’s performance
Returns = not simply limited to dividends… also things like enjoying lower costs as a result of combining functions to achieve economies of scale OR obtaining scarce resources on a priority basis or at lower cost.
L3
What is a wholly owned subsidiary?
When consolidating, why are there entries to be eliminated or adjusted for?
What is the date of acquisition? and why is it important?
Wholly-owned = The parent owns 100% of the subsidiary
Adjusted for = the group cannot earn profit from itself, borrow or lend from or to itself
(Note: Cash account is the only account you will never need adjustments for)
Date of acquisition = date that control in subsidiary is transferred to the parent = this date is the date fair value is determined for assets etc.
L3: Wholly owned subsidiary acquisition:
Step 1: On the date of acquisition how do we record the initial investment of the parent in the subsidiary? and what does the total value of the investment amount represent?
Is this an entry for the Parents general ledger OR for the groups consolidation worksheet?
Step 2: Upon consolidation, the investment asset needs to be eliminated against the equity of the subsidiary at the date of the acquisition. What is the entry we make for this? Why do we actually have to do this elimination entry?
Step 3: Consideration paid may be greater than or less than the value of the identifiable assets acquired and liabilities assumed. So at the DOA how do we perform an acquisition analysis?
Are acquisition expenses (i.e. paying a third party to organise the acquisition) considered part of the consideration?
Do we have to complete steps 2 and 3 every year going forward when consolidating? and what do we need to consider?
Step 1: Initial entry Dr Investment in subsidiary (x) Cr Cash (x) = this is obviously an entry for the Parents general ledger!
Total value of (x) represents = the sum of the subsidiary’s Retained earnings and Share capital accounts i.e. their equity (we call this “pre-acquisition equity”)
Step 2: Elimination of parent’s investment asset
Dr Retained earnings (x)
Dr Share capital (y)
Cr Investment in Subsidiary (x+y)
Why = this is actually rather simple… Recal that E = A - L, also recall that when consolidating we are adding the A and L of the parent and subsidiary… therefore we must eliminate the parents investment asset or we will be double counting the assets in a sense…
Step 3: Acquisition analysis:
At DOA we measure the consideration transferred (at fair value) and the fair value of identifiable assets acquired and liabilities assumed (FVINA = fair value of identifiable net assets)
Record goodwill if “overpaid” OR record Bargain purchase if “underpaid” = only record on consolidation and not in the books of the parent
Note: Goodwill is not an identifiable asset
Acquisition expenses = not considered part of the consideration paid for the acquisition (as these costs are paid to an outside party) i.e. do not include acquisition expenses when determining goodwill or bargain purchase…
Step 2 and 3 repeat every year = yes we do have to when completing the consolidation each year.
Consider = any impairment of goodwill must be tested and recorded (AASB 136)
Dr Impairment loss - Goodwill (x)
Cr Accumulated impairment - Goodwill (x)
L3
When recording impairment losses for goodwill, for preparation of consolidated financials, what must we remember for further impairment losses in the second and subsequent years?
Say we recognise a Bargain Purchase, how will this affect our initial consolidation adjustment?
What must we remember about goodwill vs bargain purchase?
For additional impairment after the first year we need to utilise a debit in the Retained earnings opening balance with an equivalent value to the impairment loss we recorded in the prior year… this is because the prior years impairment loss will have been closed to the retained earnings account
Bargain purchase: Dr Retained earnings 250,000 Dr Share capital 700,000 Cr Bargain purchase gain 150,000 Cr Investment in subsidiary 800,000
In subsequent years when consolidating and repeating the initial entry... Dr Retained earnings 250,000 Dr Share capital 700,000 Cr Retained earnings 150,000 Cr Investment in subsidiary 800,000
Goodwill vs bargain purchase = Remember that goodwill is carried on and recorded in the elimination entry each year, whereas bargain purchase is not carried on in the elimination entry each year, but is rather carried on as a credit to retained earnings.
This also means that on the consolidation worksheet we DO carry the asset of goodwill, whereas bargain purchase will not be carried, but rather will serve as a credit to retained earnings (this is the matter of fact in the very first year too).
L3
When acquiring a company that has declared a dividend and has not yet paid the dividend, who receives the dividend? The previous shareholders or the parent company who has now bought the shares?
How do we account for these circumstances?
This depends on whether the shares acquired are ex-div (paid to previous shareholders) or cum-div (paid to parent company)
Ex-div = don’t need to do anything
Cum-div = dividend is deducted from the investment account in the books of the parent by recording a debit to dividend receivable (as the parent is now entitled to a dividend) e.g. lets say the dividend is $60,000 and the investment is $760,000
Dr Investment in subsidiary 760,000
Cr Cash 760,000
Dr Dividend receivable 60,000
Cr investment in subsidiary 60,000
When dividend paid out
Dr Cash 60,000
Cr dividend receivable 60,000
This also means we need a consolidation adjustment…
i.e. record all consolidation adjustments as per usual (including goodwill or bargain purchase) AND then also record
Dr Dividend payable 60,000
Cr Dividend receivable 60,000
This eliminates the accounts for the subsidiary and parent when consolidating. Note: in subsequent years you do not need to record this again as these accounts will have been closed off
L3
When a subsidiary undertakes actions that change the balances of its pre-acquisition equity what do we do?
Changes such as:
Transferring $60,000 from retained earnings to general reserve will be recorded by the subsidiary as
Dr Transfer to general reserve (RE) 60,000
Cr General reserve 60,000
This will have changed the pre-acquisition equity accounts. Hence, we need to reverse these changes when we are completing the consolidation adjustments
i.e.
Dr General reserve 60,000
Cr Transfer to general reserve (RE) 60,000
This must be done each year…
L4
Elaborate on what we mean by accounting AND tax profit?
What do we mean by temporary vs permanent differences when considering accounting vs tax profit?
Accounting profit vs Tax profit = accounting profit is the profit determined by applying accounting standards whereas tax profit is determined by applying tax legislation = tax profit does not equal accounting profit
Temporary difference = sometimes the difference between AP and TP is due to timing and such the difference will come to fix itself over time.
Permanent differences = Differences that do not correct over time
L4
What account do we use to record the tax expense difference for accounting vs tax profit?
How do we calculate the value of the DTL or DTA?
Account = Deferred Tax
Dr Tax expense 48,000 (accounting profit/loss x tax rate)
Cr Current tax payable 42,000 (taxable profit/loss x tax rate)
Cr Deffered tax 6,000
In essence the tax office recognises that there is a difference and they simply say “pay the difference not in this period but in a later period”
Note: can be a DTA or DTL (Deferred Tax Asset = get tax back) (Deferred Tax Liability = pay tax next period)
Calculation = simply calculate the difference between the carrying amount of the asset (accounting measure) and the tax base of the asset (tax measure) and then multiply this difference by the tax rate
Note: Tax base is essentially the tax profit measure for Carrying amount of an asset (think of it as Tax Carrying Amount)
CA > TB = DTL
CA < TB = DTA
L5
What makes an Asset “Identifiable”
Identifiable = An asset is identifiable if it arises from a legal right or is separable from the business
L7
What relevance do consolidated financial statements have for:
The parent entity
A non-controlling interest shareholder in the group
Parent entity = consolidated financials will show the net assets under control of the parent entities management and the ability of management to generate earnings from those assets. As these earnings will eventually flow the shareholders of the parent entity, in the form of dividends, they have keen interest.
NCI = NCI has minimal need for consolidated financials unless their needs have been bound with those of the parent entity i.e. if the performance of the subsidiary is impacted by performance of the group then the NCI has an interest. This may be the case where the parent entity has taken steps to bind the group together, for example by mutually guaranteeing each-others debt (i.e. the NCI may incur the need to pay-off some debt of the parent, this would be relevant information to the NCI)
