FAR -- Market Securities and Business Combinations Flashcards Preview

FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) > FAR -- Market Securities and Business Combinations > Flashcards

Flashcards in FAR -- Market Securities and Business Combinations Deck (12):
1

Trading Security

Planned to be sold in the near term (or under 1 year) Report all realized gains and losses (from selling trading securities) & report all unrealized gains and losses on Income Statement.


Trading Securities goes on Operating Cash Flow
 

Trading securities on Balance sheet is reported on the current fair market value.

Per "FASB ASC 320-10-25-1"

"a. Trading securities. If a security is acquired with the intent of selling it within hours or days, the security shall be classified as trading. However, at acquisition an entity is not precluded from classifying as trading a security it plans to hold for a longer period. Classification of a security as trading shall not be precluded simply because the entity does not intend to sell it in the near term."

2

Available-for-sale-securities

Hold security for more than one year or very long time or indefinitely and be sold at a very very later date.  This applies to Debt Securities (notes payables / loan-type securities) and Equity Securities (stocks).All temporary unrealized losses (it's only the temporary not permanent) and unrealized gain (usually non-temporary.

It's New Fair value is > old fair value (unrealized gain) GOES on the Other comprehensive income statement only (OCI goes to AOCI that is located in B/S's stockholder's equity section; and it gets included in statement of stockholder's equity). Any losses (realized loss) from selling a.f.s. gets reported right away on the income statement. AFS does not deal with realized gain/realized losses when still holding AFS. It's when AFS is sold is where to record either realized gain or realized loss.

AFS goes on Investing Cash Flow.


Per: FASB ASC 320-10-25-1

"b. Available-for-sale securities. Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities. "

3

Held-to-maturity

Only applies to debt securities like bonds where the company hold this HTM-type security (debt security) until it is matured. HTM does not deal with common stock and preferred stock securities

This goes on Investing Activities Cashflow

Per FASB ASC

"c. Held-to-maturity securities. Investments in debt securities shall be classified as held-to-maturity only if the reporting entity has the positive intent and ability to hold those securities to maturity." 

Note: on CPA exam, if a deb security like bonds or note payable that says "intent to hold for maturity" then it's a "held-to-maturity" debt security. There are other questions where it says when it matures at the same time saying it's going to be used for being sold to help pay down something else.

4

(1) Cost method

 

(2) Journal Entries to recognize
(a) investment in sub company using Cost method, (b) Unrealized losses,
(c) unrealized gains,
(d) Reduce Investment in Investee for Return of Capital Distributions,
(e) Dividends to the Investor/Parent (from Investee) are Income (Earnings) to the Investor/Parent, (f) Distribution that Exceeds Investor's Share of the Investee's Retained Earnings.

Between 0% to 20% ownership. Reports dividend income on company's income when the company receives a cash dividend from the investee (or investment in subsidiary)

How to report dividend income on Parent company's income statement:

Dr. Cash    (% own x Dividends paid out)
     Cr. Dividend income (% own x Dividends paid out)

Like: Sub company pays out $100 cash/property dividend. Parent company owns 17%.

Therefore, report:

Dr. Cash $17
       Cr.  Dividend Income $17   ($100 x 0.17)

Note: a stock dividend = NOT income only increase # of shares you own.

(2) Journal entries:

(a) Investment in sub company via cost method:

Dr.  Investment in Sub company
     Cr. Cash

(b) Unrealized Losses

Dr. Unrealized holding losses
     Cr. Investment in investee (or valuation account)

(c) Unrealized Gains

Dr. Investment in investee (or valuation account)
     Cr. Unrealized holding gains

 

(d) Reduce Investment in Investee for Return of Capital Distributions

Dr. Cash
      Cr. Investment in Sub Company

(e) Dividends to the Investor/parent company from Sub comany:

Dr. Cash
     Cr. Dividend Income

(f) Distribution that Exceeds Investor's Share of the Investee's Retained Earnings

Dr. Cash
      Cr. Investment in Sub Company

5

(1) Equity Method

 

(2) Journal entries for:
(a) "Investment in Investee" using Equity

(b) to record increase by the investor's/parent's ownership percentage of earnings of in vestee

(c) Receive cash dividends (this reduces invsetment in sub company)

(d) % of earnings in sub company

Between 20% to 49% ownership. Key here is that company must have significant influence (even with less than 20% ownership) to use equity method. All dividends (cash dividends; not stock dividends) reduce "Investment in investee company." Cash dividends are not reported as Dividend income on the income statement.

BASE >>
Beginning balance in first invsetment in investee
>> Add investee income (parent % ownership x invsetee net income)
>> Subtract cash dividends
= Ending balance investment in investee company

(2) Journal entries for:
(a) "Investment in Investee" using Equity

Dr. Investment in Sub company
     Cr. Cash

(b) to record increase by the investor's/parent's ownership percentage of earnings of in vestee

Dr. Invsetment in sub company
    Cr. Equity in earnings / investee income
           (increased % of sub company's earnings)

(c) Receive cash dividends (this reduces invsetment in sub company - like a bank withdrawal)

Dr. Cash
     Cr. Investment in Sub company


(d) % of earnings in sub company

Dr. Invsetment in sub company
    Cr. Equity in earnings / investee income 
           (% of sub company's earnings)

6

Consolidation method

Parent company owns more than 50% of subsidiary company.

 

When this occurs, do not use cost and equity method. Instead, consolidate financial statements by consolidating subsidiary company's financials with the parent company's financial numbers via eliminating journal entries on inter-company transactions and any subsidsiary equity accounts (subsidiary's common stock, perferred stock, APIC and retained earnings).

Combined (add together) Parent's companys assets with Sub company's assets

Combined (add together) Parent's companys liabilities with Sub company's liabilities

Only use parent's stockholder's equity account to answer CPA questions what is the SE $$ amounts on parent's consolidated balance sheet.

If asking like a total SE account for Parent's and NCI, then add together Parent's SE accounts with NCI SE accounts.

Parent's 80% SE (sub company accounts)
+ NCI's 20% SE (sub company accounts)

7

Acquisition method - CAR IN BIG Formula

Parent company acquires a company and performs he following:

CAR IN BIG
Common stock
+ APIC
+ Retained earnigns
- Investment in sub company
+ Non control interest (NCI)
+ Balance sheet FV adjustment
+ Intangible assets
= Goodwill or (Gain)

*Goodwill is a positive number
*Gain is negative number based on above formula

8

[From a NINJA CPA FAR SIM] Fair value method (available for sale) - used like the cost method for Big Company invest in small company have like less than 20% ownership like 10% or 12%.

When have investment in small company held like a Available for sale security, what Account Categories and Journal Entries to do you use to account for changes in fair value prices of this secruity type arrangement?

Journal entries AFS security - a Gain (New FV at later date > old FV )

Dr. Security Fair Value Adjustment
       Cr. Unrealized Holding Gain- OCI


AFS security - a loss (New FV at later date)

Dr. Unrealized Holding Loss - OCI
      Cr. Security Fair value Adjustment

*Note: Security fair value adjustment is (Valuation account)

9

IFRS:

What are the categories for Investments in equity (stocks) and Debt?

IFRS Category for investment in equity or debt:

1) Fair value through Profit or loss

2) held to maturity

3) Available for sale

 

FYI: IFRS does not use tradeable 

10

IFRS:  If use Fair value method (or Fair value through Profit and loss) to measure investment, where do the Gains and losses go?

IFRS: Gains and losses on measuring investments via Fair value method go to

Profit & Loss (income statement a.k.a. Statement of earnings)

11

US GAAP:

If use Fair value method to measure Available for Sale securities, the Unrealized gains or losses go on the income statement (earnings) under Continuing operations or Other comprehensive income?

Fair value method on Available for sale securities:

These Unrealized (holding) gains or losses go on Income statement of the period in Continuing operations.

No entry on the Other comprehensive income.

12

If available for securities not measured under Fair value method, where does the Unrealized Gains or losses go?

AFS: No use fair value method:

Unrealized (holding) gains or losses (only temporary unrealized (holding) losses) go to Other Comprehensive income.

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