FAR3

Question 1

Trading Securities

Answer 1

Securities (debt/equity) selling in the near term.
Current assets and valued at FV.
Included in earnings

Question 2

Available-for-Sale Securities

Answer 2

Securities (debt/equity) not meeting the definitions of the other two classifications (trading and held-to-maturity). Usually classified as noncurrent assets - (doesn’t intend to sell in the near future) and valued at FV.
Included in OCI under PUFE.

Question 3

Held-to-Maturity Securities (debt only)

Answer 3

Positive intent and ability to hold these securities to maturity.
Noncurrent assets
Valued at amortized cost

Question 4

Consolidated Financial Statements

Answer 4

Consolidate with over 50% control. Ignore important legal relationships and “emphasize economic entity/substance over form” (can consolidate companies w/ different year-ends)

Question 5

Cost Method

Answer 5

Do not consolidate = no significant influence (0-20%). The “investment in investee” is not adjusted for investee earnings and is adjust to FV. Affects investment for liquidating dividends

Question 6

Equity Method

Answer 6

Do not consolidate = significant influence (20-50%) but can have significant control with less than 20% (largest shareholder or majority of board) NI and Dividends affect investment

Question 7

Stock Dividend (Cost and Equity Method)

Answer 7

Memo entry only

Question 8

Equity Method (GAAP)

Answer 8

Beginning balance
+: Share of investee’s earnings
-: Share of investee’s dividends
Ending balance

Question 9

Consolidation F.S. Exceptions

Answer 9

Subsidiary is in legal reorganization, bankruptcy, or the subsidiary operates under severe foreign restrictions

Question 10

Acquisition Method

Answer 10

100% of net assets (assets - liabilities at FV) acquired (regardless of percentage acquired)
*unallocated balance remaining creates goodwill and when consolidated, the subsidiary’s entire equity is eliminated

Question 11

CAR IN BIG

Answer 11

Common stock, APIC, Retained Earnings of subsidiary are ELIMINATED

Investment in Subsidiary is ELIMINATED (parent's books)
Noncontrolling Interest (NCI) is CREATED (>100%)

B/S of sub. is adj. to FV (100% assets and liabilities) - recalculate depreciation
Identifiable Intangible Assets of the sub. are recorded at FV - amortize finite life
Goodwill (or Gain = “credit”) is required

Question 12

Consolidating workpaper Eliminating JE

Answer 12

DR: Common stock - sub.
DR: APIC - sub.
DR: Retained Earnings - sub.
CR:    Investment in sub.
CR:    NCI (if >100%)
DR: Balance Sheet adjustments to FV
DR: Identifiable Intangible assets to FV
DR: Goodwill OR CR: Gain

Question 13

Noncontrolling Interest (NCI)

Answer 13

Reported in consolidated equity when less than 100% ownership in equity section of B/S (include NCI share of goodwill)
FV of sub x NCI% = NCI interest

Question 14

Full Goodwill Method (U.S. GAAP and IFRS)

Answer 14

Goodwill = FV of sub. - FV of sub’s net assets

Question 15

Partial Goodwill Method (IFRS)

Answer 15

Goodwill = Acquisition cost - FV of sub.’s net assets acquired

Question 16

I/C Payable JE

Answer 16

Eliminate 100% of intercompany transactions
DR: A/P
CR: A/R

Question 17

I/C Inventory workpaper Elimination Entry

Answer 17

DR: I/C Sales - parent
CR: I/C COGS - parent
CR: COGS - sub.
CR: Inventory - sub.

Question 18

I/C Bond workpaper Elimination Entry

Answer 18

DR: Bonds/payable
DR: Premium
CR:   Investment in parent's bonds
CR:   Gain on extinguishment of bonds
(considered retired and recognize G/L)

Question 19

I/C Land workpaper Elimination Entry

Answer 19

DR: I/C gain on sale of land
CR: Land

Question 20

I/C Fixed Asset workpaper Elimination Entry

Answer 20

DR: I/C gain on sale of machinery
CR:   Machinery
CR:   A/D
(eliminate G/L on I/C sale and restore asset and A/D to current amounts)
DR: A/D
CR:   Depreciation Expense
(fix depreciation)

Question 21

Combined F.S.

Answer 21

A group of related companies: under common control, under common management, or unconsolidated subsidiaries

Question 22

AFS Securities (no longer temporary)

Answer 22

If not classified as temporary or classified as permanent then remove from OCI and write down from cost to FV in earnings section on the I/S

Only unrealized G/L recorded as OCI, realized G/L go to I/S

Question 23

IFRS reversal of impairment loss

Answer 23

Allowed and the increase would be booked to the current year’s income statement.

Question 24

Cost Method Dividend Revenue

Answer 24

Dividend income is reported for only the portion of dividends received this year that is not in excess of the investor’s share of investee’s undistributed earnings since the date of investment

Question 25

Consolidation Vertical Chain

Answer 25

Parent owns more than 50% of sub and sub. owns more than 50% of third company, then parent consolidates both companies

Question 26

Cost Method Investment Account reduced

Answer 26

The cost basis investment account is reduced only if: Shares of stock are sold, or Cumulative dividends exceed cumulative earnings (a return of capital), or Subsidiary incurs losses that substantially reduced net worth.

Question 27

Equity Method Investor's reported investment income

Answer 27

NI = addition and Dividends = reduction Investor records as revenue "share of the investee's earnings" (not "dividends received") Changes in the market value of investee's common stock are not considered income *Under the cost method, receipt of a dividend = income (does not affect the investment account)

Question 28

Cash Dividend

Answer 28

Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account. Under the equity method, receipt of a dividend is recorded as a decrease in the investment account.

Question 29

Liquidating Dividends

Answer 29

Reduce carrying amount of the investment account under both cost and equity method

Question 30

Preferred Stock

Answer 30

PS = Cost method because the investment in the preferred stock does not allow you to exercise significant influence so the income will be reported on the income statement.

Question 31

Goodwill Impairment Test

Answer 31

Purchased goodwill is only tested for impairment in an acquisition of a controlling interest in another company

Question 32

Goodwill - Recorded on B/S

Answer 32

Represents the excess of the price paid > fair value of the identifiable net assets acquired.

Question 33

Gain in Acquisiton Method

Answer 33

When a subsidiary is acquired with an acquisition cost that is

Question 34

Consolidated Books = Parent's Book

Answer 34

Stockholder's Equity, Net Income, Retained Earnings, Dividends, Common Stock

Question 35

NCI IFRS partial method

Answer 35

FV of subsidiary net assets × NCI %

Question 36

I/C Payable

Answer 36

(A/R:parent + A/R:sub.) | - A/R:consolidated = I/C payable

Question 37

I/C unrealized profit eliminated

Answer 37

(Inventory:parent + Inventory:sub.) - Inventory:consolidated = unrealized I/C profit eliminated

Question 38

I/C Sales

Answer 38

(Rev:parent + Rev:sub.) | - Rev:consolidated = I/C sales

Question 39

I/C unrealized profit: Inventory

Answer 39

I/C profit on inventory | x % of inventory purchased on hand

Question 40

I/C Sales under Cost/Equity Method

Answer 40

Receivables and payables to the investee are reported separately on the balance sheet.