F4

Question 1

What is the threshold to have significant influence in an entity?

Answer 1

20% Common Ownership.

Question 2

Where should unrealized gains and losses on AFS securities go?

Answer 2

To OCI. (pUfer)

Question 3

Where should unrealized gains and losses on trading securities go?

Answer 3

To the Income Statement, as a component of net income.

Question 4

What value should each of the following be reported at?

1. ) Trading Securities
2. ) Available for Sale
3. ) Held-to-Maturity

Answer 4

1. ) Fair Value
2. ) Fair Value
3. ) Amortized Cost

Question 5

Which part of the Statement of Cash Flows should each of the following be reported on?

1. ) Trading Securities
2. ) Available for Sale
3. ) Held-to-Maturity

Answer 5

1. ) Cash flow from Operations
2. ) Cash flow from Investing
3. ) Cash flow from Investing

Question 6

How should an investor account for an investment in an investee if they own less than 20%?

Answer 6

Fair Value Method.

Question 7

What method is used if the investor owns 20%-50% of an investee?

Answer 7

Equity Method.

Question 8

When an investor received a dividend that is in excess of their share of undistributed earnings, how is the excess accounted for?

Answer 8

Liquidating dividend - as a decrease in the investor’s basis in the investment:

DR: Cash
CR: Investment in Investee (asset)

Question 9

What is the treatment of a permanent loss on an available for sale security?

Answer 9

Temporary losses are unrealized and go to OCI for AFS.

Permanent impairment is treated by having the asset written down to it’s FV and charged to income as if the loss is realized.

Question 10

When reclassifying from a trading security, what is the treatment for any unrealized G/L’s?

Answer 10

The unrealized G/L’s are already in earnings and cannot be reversed.

Question 11

When reclassifying to a trading security, what is the treatment for any unrealized G/L’s?

Answer 11

Shall be recognized in earnings immediately.

Question 12

When reclassifying a Held-to-Maturity debt security to AFS, what is the treatment of any unrealized G/L’s?

Answer 12

Shall now be reported in OCI.

Question 13

When reclassifying a AFS to Held-to-Maturity security, what is the treatment of any unrealized G/L’s?

Answer 13

Amortize out of OCI over remaining life of the security.

Question 14

Where would the loss of any permanent impairment go for the following security tpyes?

1. ) Trading
2. ) AFS
3. ) HTM

Answer 14

All go immediately to the income statement.

Question 15

If an entity owns 25% of an investee, what method should be used to account for the investment?

Answer 15

Equity method.

Question 16

If an entity owns 5% of an investee, what method should be used to account for the investment?

Answer 16

Fair value method.

Question 17

How much % of an investee does an entity need to hold in order to have “significant influence”?

Answer 17

20% - 50% (using equity method)

Question 18

What would the JE look like to record an investment in an investee in which an entity obtains 40% ownership?

Answer 18

DR: Investment in Investee (@FV)
CR: Cash

Question 19

What would the JE look like to record an your share of earnings in an investee of which you own 35% common ownership of?

Answer 19

DR: Investment in Investee (increase asset)
CR: Equity in Investee Income (% of earnings you own)

Question 20

How should you record receiving a dividend in an investee of which you own 40% common of?

Answer 20

DR: Cash
CR: Investment in Investee (lowering asset) (not recorded as div. revenue)

Question 21

When an investee’s assets FV are greater than their BV under the equity method (20%-50% ownership), how is the difference treated?

Answer 21

Amortized over the life of the asset (except land)

DR: Equity in Investee
CR: Investment in Investee

*reduction of income & asset

Question 22

How do you calculate goodwill using the equity method?

Answer 22

Purchase price of % of investee
(Less) FV of assets of investee @ %
Equals = Goodwill

Question 23

If an entity is accounting for it’s investment in an investee using the equity method, and the investee has earnings & equipment that the FV of exceeds it’s BV, do a conceptual calculation to find the ending value of the investment in the investee @ year end.

Answer 23

Beginning Investment in Investee
Plus: % of Earnings
(Less) Amortized portion of % of equipment
Ending Investment in Investee

Question 24

How much % does an entity have to own of an investee to consolidate?

Answer 24

50%

Question 25

A parent acquires a sub's 100% of common ownership and has stock issuance costs that are included in the acquisition, how are these accounted for in the acquisition JE?

Answer 25

As a reduction of APIC.

Question 26

What would be the JE to acquire a sub for cash under the acquisition method? (>50%)

Answer 26

DR: Investment in Sub CR: Cash

Question 27

What would be the JE to acquire a sub for stock under the acquisition method? (>50%)

Answer 27

DR: Investment in Sub CR: Common Stock (@ par) CR: APIC (@ FV)

Question 28

Explain the concept of "elimination" during the consolidation process.

Answer 28

When consolidating a parent and a sub, an entry needs to take place to account for the entire consolidation. This entry elminates: - The equity on the sub's balance sheet - The investment in the sub on the parents bs - Adjusts balance sheet items to FV ``` DR: Common Stock - sub DR: APIC - sub DR: Retained Earnings - sub CR: Investment in Sub CR: NCI (if not 100%) DR: Balance Sheet adjustments to FV DR: Identifiable Intangible assets to FV DR: Goodwill (if excess) ```

Question 29

What's the numanic to remember the consolidating JE?

Answer 29

CAR IN BIG ``` Common Stock APIC Retained Earnings Investment in Sub NCI Balance sheet adjustments Identifiable Intangible assets to FV Goodwill ```

Question 30

How should acquisition costs be treated? (Legal fees, consultant/accounting fees, etc.)

Answer 30

Expense as incurred. Stock issuance costs are the only costs that do not get expenses, and instead are treated as a reduction of APIC.

Question 31

If there is an excess of the FV of the assets of a sub over the BV, what is the treatment in the acquisition method in your consolidated JE?

Answer 31

First adjust the assets to FV. If there is still an excess, then recognize goodwill. BIG Step 1: Balance sheet adjusted to FV Step 2: Identify intangibles Step 3: Allocate remaining to goodwill (plug figure)

Question 32

What is a major difference between public and private companies when it comes to allocating to goodwill in the acquisition method for consolidations?

Answer 32

For private companies, intangibles are included in the Goodwill plug figure instead of being separately identified (non-competes, etc). Then, they must amortize goodwill over a 10 year period.

Question 33

If a parent paid less than the FV of the net assets of a sub, what is the treatment of the excess?

Answer 33

1. ) Balance sheet adjustment to FV 2. ) Identifiable intangibles 3. ) GAIN (not goodwill) You record goodwill if the parent paid more than the FV. In this case, the parent paid less than FV, so they can recognize a gain by crediting it in the consolidating entry. (pg F4-58)

Question 34

Conceptually, what is the difference between the full & partial goodwill methods?

Answer 34

Full goodwill assumes a portion of goodwill goes to NCI, partial goodwill only creates goodwill for the parent.

Question 35

Which method is used under U.S GAAP? Full or partial goodwill method?

Answer 35

Full goodwill method only for U.S GAAP.

Question 36

Which method is used under IFRS? Full or partial goodwill method?

Answer 36

Either is acceptable.

Question 37

Regarding the partial and full goodwill methods, in what situation would each result in the same consolidating entry?

Answer 37

When the parent owns 100%. They only differ when the parent owns less than 100%, and there is NCI involved.

Question 38

When determining goodwill amounts during consolidation, what is relevant? a. ) BV of the sub's assets b. ) FV of the sub's assets

Answer 38

b.) FV of the sub's assets FV of sub - FV of sub net assts = Goodwill

Question 39

What % of intercompany transactions must be eliminated for external reporting purposes?

Answer 39

100%

Question 40

Both a parent and a sub pay dividends during the year, does anything require elimination?

Answer 40

Yes, eliminate 100% of sub paid divs.

Question 41

If a parent sells inventory to a sub for a profit, and then that sub sells that inventory to an outsider, what needs to happen for consolidation purposes?

Answer 41

Fix COGS amount to eliminate profit parent recognized.

Question 42

If a parent sells inventory to a sub for a profit, and the inventory is still held by the sub @ YE, what needs to happen for consolidation purposes?

Answer 42

Fix ending inventory amount to eliminate profit parent recognized.

Question 43

Where is NCI (if at all) included in consolidated financial statements?

Answer 43

Equity section of consolidated balance sheet.

Question 44

When an entity attempts to maintain it's goodwill, what amount of those costs should be capitalized?

Answer 44

None - expense as incurred.

Question 45

Once goodwill is impaired, what are the rules for reversals of the initial impairment?

Answer 45

Reversals are prohibited.

Question 46

When conceptually trying to figure out goodwill and non-controlling interest for full goodwill and partial goodwill method, what is a key distinction between the two to keep in mind to figure out the calculations? In other words, what is the conceptual major difference between the two of them?

Answer 46

Full goodwill method assumes some goodwill is built into the NCI, partial goodwill gives no credit for goodwill to the NCI. There is an implied goodwill value in NCI for full goodwill. Where in the partial method, you're only concerned about the goodwill that YOU paid for.

Question 47

If interest rates go up, why do the value of bonds go down?

Answer 47

If interest rates increase, then the bond's interest rate would be less attractive to investors now than when the bonds were originally issues. This would most likely cause a decline in the bond's market value. Remember, bonds are held at amortized cost not FV

Question 48

Should you disclose the BV or FV for most financial instruments?

Answer 48

Both BV & FV must be disclosed

Question 49

When reducing an investment under the equity method because of fair values in excess of book values, which two items never get amortized and therefore never reduce the investment & income from investee?

Answer 49

1. ) Land 2. ) Goodwill *indefinite lives

Question 50

If an investor owns 50% of the preferred stock of an investee during the year and gets paid $60,000 in dividends from that ownership, what amount is included as dividend revenue?

Answer 50

$60,000 - bc its preferred stock you account for that investment with the FV method (no voting rights) *if it were common stock, the $60k would be a reduction in the investment

Question 51

What are a few major exceptions to consolidating a VIE?

Answer 51

1. ) NFP's 2. ) Employee benefit plans 3. ) Bankruptcy

Question 52

Direct costs in a business combo are generally treated how? Are there any exceptions to this rule?

Answer 52

Direct costs are expensed in the period incurred. However, registration and issuance costs of equity would be treated as a reduction of APIC

Question 53

What is the major conceptual difference between the full goodwill method and the partial (IFRS only) goodwill method?

Answer 53

Full = implied value to total sub acquired, some goes to portion acquired some goes to NCI Partial = no implied value to total. Find FV of what you acquired and find goodwill for portion acquired only. (FV of all * % acquired - consideration = Goodwill) (FV of all * NCI% = NCI)

Question 54

P company acquired 100% of S company by issuing 250,000 shares of stock. When they announced it, their stock was trading at $5 a share. When the deal was finalized, it was trading at $10 a share. What is the total consideration paid by P company?

Answer 54

$10 a share X 250,000 shares = $2.5M *Always use the price on the date it was finalized.