F4 - Financial Instruments Flashcards
On july 1, yr 1, York purchased a Held to Maturity investment of $1M of Parks 8% bonds for $946k, including accrued interest of $40k. The bonds were purchased to yield 10% interest. They mature on January 1, yr8 and pay interest annually. York uses the effective interest method of amortization. What amount should he report as an investment in his December 31st, yr1 balance sheet?
CV 946-40=906
interest rev 906.106/12=45.3
Int receivable 1M.086/12=40 45.3-40=5.3 disc amtz
906+5.3=911.3
The true discount is the 1M-946-40=94 discount
10% int rev 8% what they pay, the difference is the discount.
Cost Yr2 Yr1
Trading Securities 150k 155 100
AFS 150k 130k 120
How much G/L should they report on the income statement for year 2?
155-100=55 Unrealized holding Gain. Trading securities are always reported at FV
*AFS unrealized G/L are reported in OCI
Are disclosures required for the following two risks?
Concentration Consideration risk and Market risk
Concentration Consideration risk is required - it is a risk that the other party may not perform (disclosed in notes)
Market risk is the risk of loss from market changes. Disclosure is encouraged, but not required.
During Yr 3, Gilman purchased 5k out of 500k of outstanding stock for $35k. During Yr3, Gilman received $1,800 in dividend income. The FV of his investment in Meteor stock on 12/31/3 was $32k. Gilman elected the FV option for his investment. How much income/loss should he report in Yr3?
FV option would recognize $1,800 as income on the I/S and the change of $35k-$32k=$3k and an unrealized loss on the I/S
the total would be a loss of $2,100
Sage bought 40% of Adams outstanding stock on Jan 2nd Yr1 for $400k. the CV of Adams net assets on the purchase date was $900k. FV and CV were the same for all assets except Plant and inventory where the FV increased $90 and $10k. The plant has an 18yr life and all inventory was sold that year. In Yr1 Adams reported income of $120k and paid cash dividends of $20k. How much income should Sage report on his Investment?
Investment in Adams Income from Adams
CV $900k NI Yr1 $120k
Plant +90 % owned 40%
Inventory +10 = $48k
FV of Adams $1M - $2k ((90.4)/18)
% of ownership * 40% -$4k (10.4)
Total investment = $400k = $42k of income
An investor in C/S received dividends in excess of the investors share of the investees earnings subsequent to the date of the investment. How will the investors investment account be affect by the FV and Equity method?
Under both methods, liquidating dividends decrease the carrying amount of the investment account
A business combination is accounted for as an acquisition. How should direct costs of combination, other than registration and issuance cost of equity securities be accounted for?
They are expensed in the period incurred. They should be deducted from NI
A company incurred the following costs, what should they capitalize and what should they expense?
Issuing debt securities $30k
Registering Debt securities $25k
Legal fees $10k
Due Diligence $1k
Expense $11k
Capitalize $55k
A 70% owned Subsidiary declares and pays a cash dividend. What effect does that have on the parent company’s consolidated retained earnings and non-controlling interest balance?
No effect on retained earnings, since the parents balance sheet would already reflect 70% of the subs earnings. The NCI account would decrease
On Dec 31 Yr1, Starlight acquired 90% interest in Lunar by purchasing 90k of Lunar’s 100k voting CS for $900k. Under IFRS, how much good will would Starlight report?
NBV Assets $600k FV Assets$800k
900-(800*.9)= 180 Goodwill = Acquisition cost - FV of net assets acquired(X's ownership percentage)
On January 1 Yr 10, Poe sold a machine for $900k to Saxe, its wholly owned subsidiary. Poe paid $1.1M for this machine and it had A/D of $250k. Poe est. a $100k salvage value and depreciated it using the SL method over 20 years, a policy that Saxe continued. In Poe’s Dec 31, Yr 10 balance sheet, what should be included as cost and A/D?
1.1M-100k salvage = 1M/20yrs= 50k A/D
250k+50k=300k A/D
Cost A/D
$1.1M $300k
The following info pertains to shipments of merchandise from Home Office to branch store:
Home office Merchandise $160k
Interco billing $200k
Sales by Branch $250k
Unsold inventory at branch 12/31/1 $20k
What amount of the above transactions should be included in sales?
The entire $250k sales should be included. Outside sales are not eliminated
How should Goodwill be tested for impairment using GAAP & IFRS?
GAAP - reporting unit level
IFRS - Each cash generating unit
How do you test for impairment in IFRS
It is 1 step - the CV of the CGU is compared with the greater of, CGU’s FV less costs to sell and it’s value in use (PV of future cash flows)
The impairment loss is first allocated to Goodwill, than pro rata to other assets.
On Dec 31, a company had a reporting unit with a BV of 3,450,000 including goodwill of 225,000. The entity determined that the FV was 3,310,000. The company assigned 3,170,000 FV the assets and liabilities and the rest to goodwill. What is the goodwill impairment loss under GAAP?
GAAP is a two step process.
- compare the FV of the reporting unit to it’s CV. If the FV is less, Goodwill may be impaired.
- Compare the implied FV of the goodwill to the CV. If FV is less, Goodwill is impaired and the loss is the difference.
- 45M >3.310M 3310-3170=140 225-140=85 loss
