FAR 3

Question 1

On the balance sheet, marketable securities classified as trading or available for sale are valued at…

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/losses on trading securities recognized?

Answer 3

Unrealized gains and loses on trading securities are recognized on the income statement.

Question 4

How are unrealized gains/loses on available-for-sale securities recognized?

Answer 4

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

Note: Under IFRS, foreign exchange gains and losses on available for sale debt securities are reported on the income statement

Question 5

List three conditione when losses on marketable securities classified as available for sale are recognized in income

Answer 5

1) Sale of security
2) transfer of the security to trading classification
3) 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 fair value, which then becomes new basis.

For a security transferred into the trading category, the difference is treated as a realized gain or loss and is recognized on the income statement.

For 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 on the financial instrutments that hedge trading securities reported?

Answer 7

Reported in earnings, consistent with reporting unrealized gains and loses on trading securities

Question 8

How are gains and losses on financial instrutments that hedge available for sale securities reported?

Answer 8

Reported in earnings together with the offsetting gains and loses 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 subsidiaries

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

1) No significant influence- cost method: trading and available for sale securities, at fair value
2) significant influence but 50% or less ownership- equity method
3) Control- cost or equity method (internal accounting), consolidated financial statements (external reporting)

Question 12

How is the year-end “investment in investee” reported on the balance sheet calculated under the equity method?

Answer 12

Beginning investment in investee
\+ Investor's share of investee earnings 
-Investor's share or investee dividends
-Amortization of FV differences
=Ending investment in investee

Question 13

How is an investor’s equity method invesment reported on the income statement?

Answer 13

Investor’s 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 acquistion, 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-retroacitively.

go back retroactively with the equity method but not with the ownership percentage

prior period adjustments 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 when 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 Acquistion Accounting, state the consolidating workpaper elimination entry. (CARINBIG)

Answer 17

DR. Common Stock-Sub
DR. APIC- Sub
DR. Retained Earnings- Sub
CR.		Investment in sub. 
CR. 		Non-controlling 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 acquistion method

Answer 18

1) Direct out of pocket costs are expensed.
2) Stock related costs are a reduction in the value of the stock issued (normally a debit to APIC).
3) Indirect costs are expensed.
4) Bond issue costs are capitalized and amortized.

Question 19

In an acquisition, how are identifiable intangibles 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 calcluated under the US GAPP acquistion method?

Answer 20

US GAAP
1) goodwill is the excess of the fair value of the subsidiary (acquisition cost plus non-controlling interest) over the fair value of the subsidiary’s net assets, including identifiable intangible assets at FV.

2) Goodwill= fair value of subsidiary - fair value of subsidiary’s net assets.
3) goodwill recorded in a business combination is not amortized. The entire investment is subject to the impairment test.

Question 21

How is goodwill calculated under the IFRS acquisition method?

Answer 21

IFRS-
1) goodwill is recognized using the full goodwill method (same as US GAAP) or partial good will method.

2) Under the partial goodwill method, goodwill is the excess of the acquisition cost over the fair value of the subsidiary’s net assets acquired.
3) Partial goodwill method= acquisition cost- fair value of subsidiary’s net assets acquired.

Question 22

How is the noncontrolling interest (balance sheet) calculated under US GAAP?

Answer 22

Non-controlling interest (NCI)= FV of subsidiary x NCI %

Question 23

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

Answer 23

IFRS permits the use of the full goodwill method or the partial goodwill method.

FULL-GOODWILL METHOD (same as US GAAP)-
NCI= FV of subsidiary x NCI %

PARTIAL GOODWILL METHOD-
NCI= FV of subsidiary’s net identifiable assets x NCI%

Question 24

How is noncontrolling interest on the income statement calculated?

Answer 24

Subsidiary net income
x Non-controlling interest %
= NCI in net income

Question 25

In a business combination, what is the treatment of an acquistion 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 negative balance in the acquisition account which is recorded as a gain.

Question 26

Name the pro forma workpaper elimination entries when producing consolidated financial statments.

Answer 26

Eliminate:
The effects of intercompany dividends.
Parent’s invesment in sub account.
The entire stockholder’s equity section of the subsidiary.
The effects of gain or lass and adjust for the excess depreciation on the sale of property, plant, and equipment between affiliates.
All intercompany sales and purchases
All other intercompany balance sheet and income statement accounts.
Intercompany profit in costs of goods sold, and in beginning and ending inventories relating to an intercompany sale of merchandise between affiliates.

Adjust:
Recognize noncontorlling interest.
Adjust the balance sheet of the sub to fair value.
establish goodwill.

Question 27

State the workpaper elimination entry for intercompany inventory transactions.

Answer 27

DR. Retained Earnings (intercompany profit in beginning inventory)
DR. Intercompany Sales
CR. Intercompany Cost of Goods Sold
CR. Costs of Good Sold ( intercompany profit in goods sold)
CR. Ending Inventory (intercompany profit in ending inventory)

Question 28

State the workpaper elimination 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 debt loss on extinguishment of bonds)

Question 29

State the workpaper elimination entry for intercompany land transactions.

Answer 29

DR. Intercompany gain on sale of land

CR. Land

Question 30

State the workpaper elimination 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. Accumalted 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 comparing combined financial statements, identify the requirements.

Answer 32

Intercompany transactions and balances among these companies are eliminated

Noncontrolling interests 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

Reports 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 the date of acquisition.

Retained earnings of the subsidiary are transferred to paid-in-captial

Net income of the subsidiary includes depreciation, amortization, and interest expense based on the fair values rather than historical cost.

The SEC requires push down accounting for each “substantially wholly owned subsidiary”