Chap. 12 Part C-D

Front 1

A promissory note might be issued in exchange for a cash or noncash asset. What is this liability called?

Back 1

NOTES PAYABLE (borrower)

NOTES RECEIVABLE (lender)

Front 2

Why are notes issued for cash less likely to result in premiums or discounts than notes issued for noncash assets?

Back 2

Because notes issued for cash are usually negotiated at the time they are signed, so the stated rate is usually equal to the market rate.

Front 3

What is the correct accounting treatment for an investor that has significant influence over a company? (usually 20%-50%)

Back 3

Equity Method

Front 4

What is the correct accounting treatment for an investor that has control over a company? (at least 51%)

Back 4

Consolidation

Front 5

In the event an investor (parent) has controlling interest in the investee (subsidiary), do both companies issue consolidated financial statements?

Back 5

No, only the parent company reports consolidated financial statements. The subsidiary company continues to issue its own separate statements.

Front 6

For consolidated financial statements, how are assets of the acquired company valued on the date of acquisition?

Back 6

Fair Value

Front 7

What account is created when the fair values of assets acquired exceed the acquisition price of a company?

Back 7

Goodwill

Front 8

If an investor own 25% of the investee's company, will the investor always use the equity method?

Back 8

No, the equity method is only used when the investor has significant influence. For example, in a closely held company a single owner may have controlling interest of 75%. In this case, the investor would not have no influence over company decisions.

Front 9

Why is the equity method referred to as the "one line consolidation?"

Back 9

Because the equity method has the same type of effect on the financial statements as a consolidation. However, instead of listing the investment item by item, the investor simply records equity interest of the investment in a single account.

Front 10

Under the equity method, how does an investor report an increase in the investee's net income?

Back 10

Reported as investment revenue equal to the investor's share of the company (a percentage based on stock ownership)

Front 11

Under the equity method, how is the investment initially recorded?

Back 11

at cost

Front 12

What actions can cause a change in the carrying amount of an investment in the equity method?

Back 12

investee's net income or loss

(increase for income, decrease for loss)

dividends paid by investee

(decrease to investment)

Front 13

If an investee earns net income of $500,000, and the investor has 30% stock with significant influence, what is the amount the investor will record as investment revenue?

Back 13

$150,000

(.30 * $500,000)

Front 14

Why are dividend payments under the equity method treated as decreases to the investor's investment account?

Back 14

Because, income from these payments are already recorded when earned, as investment revenue.

Front 15

How are the purchase and sale of investments reported on the statement of cash flows?

Back 15

Investing activities (inflows and outflows)

Front 16

How are dividends received reported on the statement of cash flows?

Back 16

Operating activity (inflow)

Front 17

How is the investment account affected if the investment is purchased in the middle of the year?

Back 17

The account is adjusted for the time difference

($150,000 investment revenue * 3/12 = $37,500

to reflect investment bought in October)

Front 18

How is a change TO the equity method accounted for?

Back 18

Accounts are retroactively adjusted to represent what account balances would have been recorded under the equity method.

Front 19

Does recognized income of the investment differ under the fair value and equity methods?

Back 19

No, investment income recognized over the life of the investment is the same under both methods.

Front 20

How are AFS or HTM securities reclassified when the fair value option is chosen?

Back 20

the investments are reclassified as trading securities and accounted for as TS

Front 21

Can a company change the accounting treatment of an investment that elected the fair value option?

Back 21

No, the decision is irrevocable

Front 22

Can companies elect the fair value option for investments that fall under the equity method?

Back 22

yes, however these investments are NOT reclassified as Trading Securities, but the treatment is similar.