Corporate Accounting Iii

Front 1

What are the three GAAP recognized methods to report investments?

Back 1

1. Fair Value Method

2. Equity Method

3. Consolidation of Financial Statements

Front 2

What 3 factors indicate that a Fair Value Method of accounting for investments?

Back 2

1. the Investor holds a small percentage (usually less than 20%) of equity securities of the investee.

2. The investor cannot significantly affect the investee's operations

3. Investment is made in anticipation of dividends or market appreciation

Front 3

FVM

Back 3

Fair Value Method

Front 4

With the FVM what happens to unrealized holding gains and losses?

Back 4

Unrealized holding gains and losses are recorded

Front 5

what is the process timeline with investments recorded using the FVM?

Back 5

1st: investment is initially recorded at cost

2nd: unrealized holding gains and losses are recorded

3rd: at some future measurement date (end of period) the investment carrying amount is adjusted to fair value/market value

Front 6

Trading securities

Back 6

Actively traded securities held for sale in the short term

Front 7

With the FVM where are the unrealized holding gains and losses of Trading Securities recorded?

Back 7

They are recorded in earnings

Front 8

Available-for-sale securities

Back 8

securities that are not actively traded, or held for investment returns

Front 9

With the FVM where are the unrealized holding gains and losses of Available-for-sale securities recorded?

Back 9

They are recorded in Other Comprehensive Income under Shareholder's Equity (NOT Earnings).

Front 10

Using the FVM which securities show up on the Income statement?

Back 10

Trading Securities

Front 11

Using the FVM, which securities show up on the Balance Sheet?

Back 11

Available-for-sale securities

Front 12

Using the FVM which securities record REALIZED gains/losses on the Income Statement?

Back 12

Both Traing securities & Available-for-sale securities

Front 13

realized

Back 13

cash or claim on cash is received

Front 14

recognized

Back 14

recorded or booked

Front 15

What factors must be present in order to use the Equity Method for accounting for investments?

Back 15

1. Equity method is used when investor has the ability toexercise significant influence on investee’s operations(whether actual influence is applied or not). IASB and FASB define “significant influence” as the powerto participate in the financial and operating policydecisions of the investee.

2. Generally used when ownership is between 20% and 50%.

Front 16

General rule of thumb of for when NOT to use the Equity method to account for investments

Back 16

Should NOT be used when investors do not have ability toexercise significant influence or when investors can exercisecontrol over their investee, regardless of ownership level.

Front 17

The exception to the rule of using the Equity Method to account for investments

Back 17

Could be used when ownership < 20% when significantinfluence is present, or ownership > 50% when the majorityowner has restricted power.

Front 18

What are 6 conditions indicating an investor has significant influence in an investee (and thus would need to use the Equity Method of accounting for the investment)

Back 18

1.Representation on the investee’s board of directors.

2. Participation in the investee’s policy‐making process

3. Material intra‐entity transactions

4. Interchange of managerial personnel

5. Technological dependency

6. Extent of ownership in relation to the size andconcentration of other ownership interests.

Front 19

What factors must be present in order to use the Consolidation Method for accounting for investments?

Back 19

Consolidation is required when investors gain controlover an investee’s operation and can direct the entiredecision making process (not only influence decisions).

Consolidation is required when: Investor has control through voting stock interests(i.e., ownership > 50% of outstanding voting stocks).

Consolidation is required when: Investor has control through special contractualarrangements (i.e., special purpose or variableinterest entities), regardless of ownership level.

Front 20

In 2007 FASB allowed firms (investors) to irrevocably elect _____________

Back 20

Fair value for investments otherwise accounted for under the equity method.

Front 21

Timeline of recording investments using the Equity Method

Back 21

1. At the date of acquisition the investment is recorded at cost

2. Unrealized holding gains and losses are not recorded

3. At a future measurement date (end of period) the investment carrying amount is adjusted for dividends received, and a pecentage share of the investee's income (loss)

Front 22

Using the Equity Method, if an investment is sold, any gain or loss is reported where?

Back 22

The income statement as other income

Front 23

Under the Equity method explain how each of these scenarios will affect both the Investment account of the investor and the SE (stock holder's equity) of the investee.

1. Reported Income of Investee

2. Reported Loss of Investee

3. Dividend declared and paid

4. Appreciation/Depreciation of market value of investment

5. Amortization of excess value (excess value is FV in excess of BV)

Back 23

1. Effect on Investment (+) Effect on SE of Investee (+)

2. Effect on Investment (-) Effect on SE of Investee (-)

3. Effect on Investment (-) Effect on SE of Investee (n/a)

4. Effect on Investment (n/a) Effect on SE of Investee (n/a)

5. Effect on Investment (-) Effect on SE of Investee (-)

Front 24

Under the Equity Method, where is an investee's income reported for the investor, and under what line item?

Back 24

The investee's income is reported for the investor on their Income Statement as other revenue (or expense) (i.e. Equity Income in Investee).

Front 25

What are the three categories involved when an investment is acquired over its book value.

Give the definitions of these 3 categories as well

Back 25

1. Book value (recorded value of an asset on the books)

2. Fair value: excess over book value

3. Goodwill: the extra an investor pays because of future expected benefits from the investment.

Front 26

What happens when an investment is recorded at FVM and then an investor reaches a point of significant influence in an investee?

Back 26

All accounts are restated retroactively so the investors financial statements appear as if the Equity Method had been applied from the date of the first acquisition.

Front 27

OCI

Back 27

Other Comprehensive Income

Front 28

Other Comprehensive Income def.

Back 28

Revenues, expenses, gains, and losses that under GAAP are included in comprehensive income, but excluded from net income.

Front 29

True or False: OCI is included in net income

Back 29

False. OCI is only included in comprehensive income.

Front 30

OCI is accumulated and reported in __________________________________.

Back 30

Stockholders’ Equity as Accumulated Other Comprehensive Income (AOCI).

Front 31

AOCI

Back 31

Accumulated Other Comprehensive Income

Front 32

AOCI includes these 3 things.

Back 32

1. unrealized holding gains and losses on available‐for‐sale securities,

2. foreign currency translation adjustments,

3. certain pension adjustments.

Front 33

When an investee company’s activities require recognition of OCI, an investee share of OCI _________________________________________. (regarding investor)

Back 33

Should be recorded by the investor on the investor Balance Sheet as AOCI.

Journal Entry (when there is an increase of investee OCI)

Dr. Investment

Cr. AOCI (Investor)

Front 34

A permanent decline in the investee’s fair market value is recorded as an (1) ________________ and the investment account is (2) ________________. A temporary decline is (3)__________

Back 34

(1) impairment loss

(2) reduced to fair value

(3) ignored

Front 35

Investor discontinues using the equity method when an investment account is ______________

Back 35

reduced to zero

Front 36

when an investment account is reduced to zero, the investment retains a zero balance until ____________________

Back 36

subsequent profits eliminate all unrecognized losses.

Front 37

If part of an Equity Method investment is sold during a period, what are the three main things to consider?

Back 37

1. The equity method continues to be applied up to the date of the transaction.

2. At the transaction date, the Investment account balance is reduced by the percentage of shares sold.

3. If significant influence is lost, NO RETROACTIVE ADJUSTMENT is recorded, but the equity method is no longer applied. The shares still being held are reported according to the fair‐value method with the remaining book value becoming the new cost figure.

Front 38

Journal entry for Equity Method reporting the sale of an investment during a period

Back 38

Dr. Cash

Dr. Loss on Sale

Cr. Investment

or

Dr. Cash

Cr. Gain on Sale

Cr. Investment

Front 39

An investor selling inventory to an investee (or vice versa), is an example of:

Back 39

an arm's length transaction

Front 40

When an investor sells inventory to an investee the earning process is not considered ___________.

Back 40

complete

Front 41

When an investor sells inventory to an investee (or vice versa) the seller retains a partial stake in the inventory as long as ____________________

Back 41

the buyer holds it

Front 42

Reporting of the related profit on intra‐entity transfers is delayed until on e of two scenarios occurs. What are they?

Back 42

1. the inventory is consumed within operations

2. The inventory is resold to an unrelated party