FAR 46 - Intercompany Trans and Bal 2 - Fixed Asset/Bond/IFRS Flashcards Preview

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Flashcards in FAR 46 - Intercompany Trans and Bal 2 - Fixed Asset/Bond/IFRS Deck (29):
1

Which of the following can be overstated on consolidated financial statements if intercompany fixed asset balances on-hand at the end of a period are not eliminated?
Consolidated Income
Consolidated Loss

Both. Either consolidated income or consolidated loss could be overstated on consolidated statements as a result of failure to eliminate intercompany fixed asset balances. An overstatement of income would result if the assets were sold by the selling affiliate at a price greater than the carrying value to the selling affiliate. An overstatement of loss would result if the assets were sold by the selling affiliate at a price less than the carrying value to the selling affiliate.

2

An intercompany depreciable fixed asset transaction resulted in an intercompany gain. Which one of the following is least likely to be reflected in the consolidated financial statements prepared at the end of the period in which the intercompany transaction occurred?
A. Consolidated income will be less than the sum of the incomes of the separate companies being combined.
B. Consolidated assets will be less than the sum of the assets of the separate companies being combined.
C. Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined.
D. Consolidated accumulated depreciation will be more than the sum of accumulated depreciation of the separate companies being combined.

C. Consolidated depreciation expense will be less, not more, than the sum of depreciation expense of the separate companies being combined. Because the intercompany transaction resulted in a gain, the buying affiliate will have the asset on its books with the intercompany gain included in its carrying value and will depreciate that value on its books. For consolidated purposes, that depreciation on the intercompany gain will be eliminated, resulting in less depreciation expense than the sum of the depreciation expense of the separate companies.

3

Zest Co. owns 100% of Cinn, Inc. On January 2, 1999, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a five-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest's December 31, 1999, consolidating worksheet, by what amount should depreciation expense be decreased?

$8,000
There are two ways to approach this solution. First, take the difference in carrying values 72,000-48,000 = 24,000. The 24,000 is the incremental amount Cinn carries the equipment over the carrying amount of Zest. The 24,000/3 = 8,000
OR, compute the depreciation for each company:
Cinn is 72,000/3 = 24,000
Zest is 80,000/5 = 16,000

Since Cinn is 100% owned by Zest, the equipment cannot be depreciated by a greater amount through an intracompany sale. The difference is 24,000 - 16,000 = 8,000.

4

T/F: On a consolidated balance sheet, accumulated depreciation should be the amount based on original cost from a non-affiliate.

True

5

T/F: When a gain on the sale of a fixed asset by a less than 100% owned subsidiary to its parent is eliminated, a portion of the eliminated gain is allocated to reducing non-controlling interest.

True

6

T/F: For consolidated reporting purposes, a fixed asset must be shown at its original cost from a non-affiliate.

True

7

T/F: If an intercompany fixed asset remains in use beyond its life expectancy, for depreciation purposes an entry will be required on the consolidating worksheet until the asset is written off.

True

8

T/F: If the elimination of a gain or loss resulting from an intercompany fixed asset transaction is to be recorded on a balance sheet only (no income statement is provided), the elimination of the gain or loss will be recorded to retained earnings of the selling affiliate.

True

9

T/F: Following an intercompany fixed asset transaction, the accumulated depreciation related to the transferred asset will be understated.

True

10

T/F: For consolidated reporting purposes, accumulated depreciation on a fixed asset sold to an affiliate should be shown at the amount based on depreciation of the asset cost from a non-affiliate.

True

11

On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.

Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds?

$75,000
In the elimination of intercompany bonds, the intercompany bond liability at par will be eliminated against the intercompany bond investment at par. Therefore, the gain or loss recognized as a result of constructive retirement of intercompany bonds is the net of the premium or discount on the bond liability and the premium or discount on the bond investment. In this case, there is a total $100,000 premium on the bond liability, but because only one-fourth ($250,000/$1,000,000 = 1/4) of the bonds are intercompany, only one fourth of the premium is eliminated. Thus, $25,000 of premium on the bond liability (a credit) will be eliminated against the $50,000 discount on the bond investment (also a credit). As a result of eliminating the two credits ($25,000 + $50,000 = $75,000), a $75,000 gain on constructive retirement will be recognized.

12

On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.

Which one of the following is the net carrying value of Sico's total bond liability?

$1,100,000
A premium on a bond liability results from the sale of the bonds at a price in excess of par (face) value. Therefore, a premium would be added to par value to get net carrying value. Sico's premium on its bond liability ($100,000) should be added to the par (or face) value of its bond liability ($1,000,000) to determine the net carrying value of the liability. Thus, the answer should be $1,000,000 par value + $100,000 premium = $1,100,000 net carrying value.

13

On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. At that date, Sico had a $100,000 premium on its total bond liability.

Assume each company maintains its premium or discount in a separate account. What will be the intercompany bond elimination entry made on the December 31, 2008 consolidating worksheet?

DR: Bonds Payable
Premium on Bonds Payable
Discount on Bond Investment
CR: Investment in Bonds
Gain on Constructive Retirement
The Investment in Bonds (a debit balance, so it will be credited) and the Bonds Payable (a credit balance, so it will be debited) will be eliminated against each other at par value ($250,000). The Discount on Bond Investment $50,000 (a credit balance, so it will be debited) and the Premium on Bonds Payable $25,000 (a credit balance, so it will be debited) will be eliminated resulting in a Gain on Constructive Retirement of $75,000, a credit balance.

14

On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.

What is the amount of premium or discount on Pico's investment in Sico's bonds?

$50,000 discount
The premium or discount on a bond investment is the difference between the par value of the bonds and the price paid for the bonds in the market. If the price paid is more than par value, there is a premium on the bond investment. If the price paid is less than par value, there is a discount on the bond investment. In this case, the price paid for the investment ($200,000) is less than the par value of the bonds ($250,000) by $50,000. Therefore, there is a $50,000 discount on Pico's investment.

15

T/F: When making an intercompany bond elimination in periods subsequent to the period in which a gain or loss on constructive retirement was recognized, the amount of the gain or loss that is still not confirmed on the books of the separate companies will be recognized on the consolidating worksheet as an entry to the retained earnings of the issuing affiliate.

True

16

T/F: Intercompany bonds do not result if the parent buys the bonds of a subsidiary.

False.
They do and they stay on the books of both the parent and the sub, but are eliminated in consolidation.

17

T/F: Because premium(s) and/or discount(s) on intercompany bonds are treated for consolidated purposes as retired in the period in which they become intercompany, the separate companies will not amortize those premium(s) and/or discount(s) in subsequent periods.

False.
On their own books, they will amortize, but when consolidating, they will make adjustments to show the bonds as retired.

18

T/F: When intercompany bonds result from the parent purchasing the bonds of a 100% owned subsidiary, the full amount (100%) of the gain or loss on constructive retirement accrues to the net income available to parent shareholders.

True

19

T/F: The amortization of premium(s) and/or discount(s) on intercompany bonds recognized by the separate companies on their books will result in a double counting of the income effects of the premium(s) and/or discount(s) for consolidated purposes.

True

20

T/F: Intercompany bonds occur only when there is also intercompany stock ownership.

True.
Otherwise there wouldn't be the issue of IC.

21

T/F: When intercompany bonds result from the parent purchasing the bonds of a less than 100% owned subsidiary, the full amount (100%) of the gain or loss on constructive retirement accrues to the net income available to parent shareholders.

False.
The G/L on constructive retirement would be allocated between the parent and the NCI shareholders' in proportion to their respective ownership on the consolidated IS and BS.

22

Which of the following statements about the differences between U.S. GAAP and IFRS in determining whether or not to consolidate an entity is/are correct?

I. IFRS guidelines for determining the eligibility of an entity to be consolidated are more principles-based than are U.S. GAAP guidelines.
II. In assessing an investor's level of ownership of an investee, both U.S. GAAP and IFRS consider outstanding securities that are exercisable or convertible into voting shares.
III. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated.

I and III only. Under IFRS, the guidelines for determining whether or not to consolidate an entity are more principles-based than are U.S. GAAP (Statement I). Under IFRS, the basic guideline is that an entity must be consolidated when another entity has the ability to govern the financial and operating policies of the entity to obtain benefits from it. U.S. GAAP has a specific two-tiered assessment process that must be followed to determine whether or not an entity should be consolidated. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated (Statement III). U.S. GAAP does not require consolidation of a majority-owned subsidiary when the investor cannot exercise control of the subsidiary. IFRS does not require consolidation of a majority-owned subsidiary under certain conditions when the parent will be consolidated with a higher-level parent.

23

T/F: Under both U.S. GAAP and IFRS, any non-controlling interest must be recognized at full fair value.

False.
US GAAP requires NCI to be assigned their percentage of goodwill from the acquisition premium.
IFRS - the parent has a choice at acquisition whether or not to either assign goodwill to NCI or full FV.

24

T/F: Under IFRS, an investor will consolidate an investee entity (that is not a special-purpose entity) only if the investor owns more than 50% of the voting stock of the investee.

False.
IFRS - control can be obtained with > 50% ownership in certain circumstances i.e., potential rights, right to appoint key personnel, or decision making rights.

25

T/F: Under IFRS, the effects of outstanding instruments that are convertible into voting shares enter into the determination of the level of ownership when assessing control.

True

26

T/F: The major difference under IFRS between measuring non-controlling interest at full fair value or at proportional share of fair value is in the amount of goodwill recognized.

True

27

T/F: Assessing whether or not an entity should be consolidated is more principles-based under IFRS than under U.S. GAAP.

True

28

T/F: IFRS provides a parent options for measuring non-controlling interest that are not available under U.S. GAAP.

True
A parent can choose between measuring NCI at proportional share of FV vs the full FV measurement.

29

What are two objective differences between U.S. Generally Accepted Account Principles (GAAP) and International Financial Reporting Standards (IFRS) in determining control?

Under U.S. GAAP only outstanding voting rights are used to measure control; under IFRS securities currently exercisable or convertible into voting rights are used in assessing control.

Under U.S. GAAP only if an entity has more than 50% voting ownership can it have control. Under IFRS an entity may have control even when it does not have more than 50% voting control.

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