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FAR updated > Lecture Three > Flashcards

Lecture Three Flashcards

1
Q

Available for sale securities

A

Investments in marketable equity securities which the company does not intend to sell in the near term should be classified as available-for-sale. Unrealized gains and losses on available-for-sale securities should be reported as a separate component of other comprehensive income.Available-for-sale securities-reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income UNTIL realized

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2
Q

Trading securities

A

Gain or loss from year to year

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3
Q

Available for sale

A

Net unrealized loss, start with cost

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4
Q

AFS

A

Rule: “Available-for-sale equity” securities are carried at fair value. Permanent impairment in value results in a writedown and a charge to income as if the loss was realized.

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5
Q

Cumulative loss on AFS

A

Stone must report a net cumulative loss on its Statement of Stockholders’ Equity (under “Accumulated Other Comprehensive Income”) of $22,000 ($148,000 FMV − $170,000 Cost). Stone has already reported a $1,500 loss as of 12/31/Y1; therefore, an unrealized loss of $20,500 ($22,000 − $1,500) should be reported in the Statement of Comprehensive Income (as part of other comprehensive income) for Year 2.

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6
Q

AFS - accrued interest does not affect gain loss calc

A

he security would be recorded at fair value on July 2, Year 1, or $910,000. Accrued interest is a receivable and does not affect cost. The $90,000 discount is not amortized on short-term investments. On December 31, Year 1, the investment would be adjusted to fair value, $945,000. The unrealized holding gain of $35,000 would be reported as a separate component of other comprehensive income.

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7
Q

transfer from trading to AFS

A

Rule: When marketable equity securities are transferred between trading and available-for-sale, the transfer is made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement. The new carrying amount becomes the basis for any future gain or loss.

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8
Q

AFS impairment

A

When an available-for-sale security is determined to be impaired because of an other than temporary decline in fair value below cost, the asset must be written down to the lower fair value by recording a loss that is recognized on the income statement.

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9
Q

HTM

A

No adjustment is recorded on held-to-maturity securities because HTM securities are reported at amortized cost.

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10
Q

IFRS impairment

A

Under IFRS, reversals of impairment losses are allowed and the increase would be booked to the current year’s income statement.

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11
Q

Unrealized loss on statement of comprehensive income vs unrealized loss in ACCUMULATED OCI in B?S

A

accumulated you include all previous cost

unrealized loss just include from py

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12
Q

From traddng to afs

A

at date of conversion unrealized loss/gain to income statement

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13
Q

Consolidation

A

he exceptions to not consolidating a majority-owned subsidiary are when the subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the subsidiary.

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14
Q

Consolidation

A

Reporting consolidated financial statements is consistent with the concept that the economic entity can be identified with a unit of accountability.

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15
Q

Consolidation

A

only the liabilities of greater than 50% owned subsidiaries should be included in the consolidated financial statements.

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16
Q

Cost method

A

Investment in investee
Cash

ADJUST TO FV@YE:
unrealized holding losses
Investment in investee

LIQUIDATING DIVIDEND: dividend in excess of investors share of RE:
Cash (%DIV)
Dividend income (%RE)
Investment in investee Plug

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17
Q

Equity method

A

Amortize Asset fair value different(Premium) over related asset life

Equity in investee income
Investment in investee

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18
Q

Rule

A

Rule: Investor records as revenue its “share of the investee’s earnings” (not “dividends received”) under the equity method.
Dividends from an investee company are recorded by the investor as a reduction in the carrying amount of the investment on the balance sheet of the investor.
Changes in the market value of investee’s common stock are not considered income to the parent under the equity method.
Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account.

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19
Q

carrying value

A

when selling a certain percentage of an investment. the carrying value is % sold*Carrying value.

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20
Q

Net income base to be used to apply %

A

Net income -preferred dividend = net income available to common. This is used as a base for investment income

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21
Q

land

A

land fair value diff not included

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22
Q

increase in ownership from cost to equity method

A

Once a cost method investor becomes an equity method investor, the investment account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment. Thus, 10% of Iona’s income from January 1 through July 31 and 40% of Iona’s income from August 1 through December 31 must be reported as earnings by Point.

23
Q

Dates with equity method.On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.’s 10,000 outstanding shares of common stock

A

Income from an investee is recognized only from date of purchase.

24
Q

Fair value exceeds book value

A

inventory excess of fair value is written off as a reduction to income

25
Q

Can own a % of common stock and a percent of preferred stock. can treat each ownership different;y. I.E one as equity method and one as cost method

A

Preferred stock ownership does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the cost method and the preferred stock dividends of $60,000 are recorded as dividend revenue on the income statement.

26
Q

undervalued amortization

A

Rule: Undervalued asset amortization affects both the investment account (an asset) and the investment income account (a revenue), while cash dividends affect the investment account but not the investment income account.

27
Q

when going from cost to equity

A

dont forget that dividend income previously recognized under cost method has to be reversed. This is a part of adjustment to investment income under equity method

28
Q

Cost method

A

The “investment in investee is not adjusted for investee earnings
The investment in investee os adjusted to FV

29
Q

sold half way through the year

A

assume half years income

30
Q

Goodwill under equity method

A

Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test.

31
Q

initial entry

A

Investment in sub
C/S
APIC

32
Q

the appraised values of the identifiable assets acquired exceeded the acquisition price. How should the excess appraised value be reported?

A

When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, the following steps are required:
The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account.
Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account.
The total negative balance in the acquisition account is recorded as a gain.

33
Q

Direct costs in a business combination

A

Direct costs are expensed in the period incurred.

34
Q

Acquisition

A

Rule: In an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income from the date of acquisition. Therefore, only 20% of Sago net income is included in consolidated earnings until June 30 and 95% thereafter.

35
Q

acquisiton

A

With acquisition accounting the net assets acquired are based on fair market value. The fair value of finished goods and merchandise inventory are based upon selling price less disposal costs and a reasonable profit allowance.

36
Q

Consolidated S.E =

A

Parent company SE plus the NCI

NCI(of investment) 1/1 (NCI%* acquisiton cost,at 100%)
+NCI Share of net income (subs NINCI%)
-NCI Share of dividends (%div paid by sub)
=NCI 12/31

37
Q

acquisiton

A

When the acquisition price exceeds the fair value of net assets acquired, assets and liabilities should be presented at fair value.

38
Q

Acquistion of sub

A

add assets of parent and sub and adjust for fair value

39
Q

Consolidation, cost or equity method

A

An investor should prepare consolidated financial statements with its investees when the investor has control of the sub. Internally the investor may use cost or equity method

40
Q

Consolidated net income

A

Consolidated net income is the same as parent company net income, when the equity method is used.

41
Q

control to non control

A

When an investor sells shares and goes from control to non-control, the investor must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value. The fair value adjustment is recognized as an additional gain or loss on the income statemen

42
Q

intangible assets and in process r&D are both assets to be included in ( BIG)

A

Seed also had unpatented technology with a fair value of $225,000 and in-process research and development with a fair value of $365,000

43
Q

“IN”

A

N = NCI = NCI% * 100% implied value of investment ( same as other NCI at 1/1)

44
Q

Gain

A

When acquiring a corporation with an acquisition cost that is less than the fair value of 100% of the underlying net assets acquired, the balance sheet, including any identifiable intangible assets, must be adjusted to fair value. This creates a negative balance in the acquisition cost account, which is recorded as a gain.

45
Q

REtained earnings

A

When the financial statements of Peace and Surge are consolidated, the equity of Surge, including Surge’s retained earnings, will be eliminated. The consolidated statement of retained earnings will include only the $15,000 dividend paid by Peace during the current year.

46
Q

non control to control

A

When an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment must be adjusted to fair value. The fair value adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition.

47
Q

Partial goodwill

A

Goodwill=acq cost-FV of subs net assets required
GW not a plug
NCI=FV of aquired assets(BVplusfvdiff)*NC%
make sure you appy ownership % to fv of asset acquired

48
Q

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent company’s consolidated balance sheet?

A

no effect on retained earnings and a decrease in noncontrolling interest (NCI). The parent’s balance sheet would reflect 70% of the sub’s earnings. Receipt of 70% of the dividends would simply transfer cash from one company to another. The dividend would be eliminated in consolidation. However, 30% of the dividend would be paid to the noncontrolling shareholders and would reduce noncont

49
Q

subs assetts

A

he acquisition method requires that 100% of the fair value of the subsidiary’s assets be recognized. Therefore, plant assets reported on the consolidated balance sheet would be the fair value of Solomon’s plant assets plus the book value of Passey’s plant assets:

50
Q

Contingeny consideration

A

Added to the I in in

51
Q

Bargain purchase

A

gain

52
Q

acquisition costs

A

Acquisition costs associated with a business transaction must be expensed as incurred in the current period.

53
Q

Capitalize vs expense

A

Legal fees and due diligence costs are expensed in the period incurred. Debt securities create liabilities, and debt security registration costs are capitalized and amortized.

54
Q

Combined statements may be used to present the results of operations of:

A

Combined statements may be used for companies under common management or commonly controlled companies (e.g., individual owns many companies).
Procedure:
All intercompany transactions and balances among the related companies are eliminated.
Minority interests are treated as in consolidated financial statements.
Equity accounts are added across, not eliminated.
Income statement accounts are added across.

FAR updated (10 decks)

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