F5: Investments, Statement of CFs, and Income Taxes

What are the three debt securities portfolio classifications?

• Trading Securities

• Available for Sale

• Held to Maturity

What are the details of Trading Securities?

• Reported at Fair Value

• Unrealized G/L reported on the I/S

• Operating Cash Flows

• Current Assets

How are realized gains and losses calculated for Trading Securities when sold?

SP - CV at the Time of Sale (OG Cost ± Unrealized G/L) = G/L on the I/S

How is interest income calculated for Trading Securities and Available for Sale Securities?

• Discounted = Stated Interest + Discount Amortized

• Premium = Stated Interest - Premium Amortized

What are the details of Available for Sale Securities?

• Reported at fair value

• Unrealized G/L reported in OCI

• Investing Cash Flow

• Non-Current Asset

How is a credit loss reported for AFS Securities?

For the amount that amortized cost > fair value

How are realized gains and losses calculated for Available for Sale Securities are sold?

SP - OG Cost = G/L on the I/S

What are the details of Held to Maturity Securities?

• Reported at amortized cost

• Investing Cash Flow

• Typically a non-current asset

• No realized or unrealized G/L

How is interest income calculated for Held to Maturity Securities?

Beginning Carrying Value x YTM

How should the investment be reported if it is probable that principal and interest will not be collected?

At PV of the Principal and Interest expected to be collected

What happens to impaired securities?

• Current Expected Credit Loss goes on the I/S. Excess goes to its respective category

• Expected Credit Loss = Amortized Cost - PV (Future Cash Flows)

What is the JE to record Unrealized G/L for Trading Securities?

Unrealized Loss on Trading Securities			xxx
	Valuation Account (FV Adj)			xxx

What is the JE to record Unrealized G/L for AFS Debt Securities?

Unrealized Loss on AFS Securities			xxx
	Valuation Account (FV adj)			xxx

How does reclassification work for debt securities?

Whatever category you’re transferring to you follow the rules for

What is the JE to record interest income from an investment in debt securities?

Cash		xxx
	Interest Income		xxx

What is the JE for a debt security impairment?

Credit Loss		xxx
	Allowance for Credit Losses			xxx

What is the JE for the sale of a Trading Security?

Cash		xxx
	Trading Security			xxx
	Realized Gain on Trading Security			xxx

What is the JE for the sale of an AFS Debt Security?

Cash			xxx
Unrealized Gain on AFS Security			xxx
	AFS Security			xxx
	Realized Gain on AFS Security			xxx

What are the details of equity securities with no significant influence (< 20%)?

• Carried at Fair Value through Net Income

• Unrealized G/L + Dividend income in earnings

When is dividend income not recognized in NI for equity securities?

• If it’s a liquid dividend (Dividend > RE)

• Stock Dividend

• Common Equity using equity method w/ significant influence

What do you do for investments that do not have a readily determinable fair value?

Cost ± Observable Price Changes of Identical or Similar Investments - Impairment

How are Realized G/L for equity securities with no significant influence recorded?

• G/L = SP - Adjusted Cost (OG Cost ± Unrealized G/L Previously Recognized)

• Booked on the I/S

What is disclosed in the notes for AFS and HTM Debt Securities?

• Aggregate fair value

• Gross unrealized G/L

• Amortized cost by major security

• Information about maturities

What is disclosed for equity securities?

Net G/L Recognized during the Period on Equity Securities

- Net G/L Recognized during the Period on Equity Securities Sold during the Period

= Unrealized G/L Recognized during the Reporting Period on Equity Securities still held at the reporting date

What is the JE to record equity securities at FVTNI?

Unrealized Loss on Equity Security			xxx
	Valuation Account (FV Adj)			xxx

What is the JE to record a Normal (Non-liquidating) Dividend?

Cash		xxx
	Dividend Income		xxx

What is the JE to record a Liquidating Dividend?

Cash		xxx
	Investment in Investee		xxx

What is the JE to record the sale of an equity security with no gain or loss?

Cash		xxx
	Equity Security		xxx

What is the JE to record the sale of an equity security with a gain?

Cash		xxx
	Equity Security		xxx
	Gain on Equity Security		xxx

What are the details of the Equity Method to account for investments?

• Used when there’s significant influence (20-50% of the voting stock)

• Recorded at cost

How are investments with significant influence recorded at cost?

Price Paid = Cash + Debt Issued + FMV Stock Issued (+ Legal Fees)

How is the investment account balance calculated under the Equity Method? (mnemonic)

B - Beginning balance

A - Add: investor’s share of investee’s earnings

S - Subtract: investor’s share of investee’s dividends

E - Ending balance

What do you do under the Equity Method if you own both C/S and P/S?

Significant influence is met by the amount of C/S owned

How do you calculate equity earnings under the Equity Method if you own both P/S and C/S?

1. Net Income - Preferred Dividends = Income Available to Common Stockholders’

2. Income Available to Common Stockholders x Ownership % = Equity Earnings

How are differences between the price paid for an investment and the book value of the investee’s net assets allocated?

1. FV of Equity Acquired - BV of Equity Acquired = Asset FV Differences

2. Purchase Price of Investment - FV of Equity Acquired = Goodwill

What happens to excess fixed asset FMV?

Depreciated

What 2 conditions need to exist to write down an asset and record an impairment?

1. FV < CV

2. Entity believes the decrease in value is NOT temporary

What happens when there’s a transition to the Equity Method?

On the date of change, use the equity method. Add the cost of acquiring the additional interest in the investee to the CV of the previously held investment

What is the JE to record investment at cost under the equity method?

Investment in Investee		xxx
	Cash		xxx

What is the JE to record an increase in the investment by the investor’s share of earnings of the investee?

Investment in Investee			xxx
	Equity in Earnings/Investee Income			xxx

What is the JE to record an decrease in the investment by the investor’s share of the cash dividends from the investee?

Cash		xxx
	Investment in Investee		xxx

What is the JE to account for Asset Fair Value differences?

Equity in Investee Income		xxx
	Investment in Investee		xxx

When is an investor considered to have a parent-subsidiary status?

When control over an investee is established or more than 50% of the voting stock of the investee has been acquired

What is the parent’s basis under the acquisition method equal to?

Fair Value = Acquisition Price = Investment in Subsidiary

Under the acquisition method, what does the acquiring corporation record during consolidation? (mnemonic)

CAR - the Common stock, Additional paid-in capital, and Retained earnings of the subsidiary are eliminated

I - the parent company’s Investment in the subsidiary is eliminated

N - Noncontrolling interest is created if the parent owns less than 100% of the subsidiary

B - Balance sheet of subsidiary is adjusted to fair value

I - Identifiable intangible assets of the subsidiary are recorded at fair value

G - If acquisition cost + noncontrolling interest > fair value of the subsidiary, then excess is recorded to Goodwill. If acquisition cost < fair value of 100% of the underlying assets acquired, then B/S and identifiable intangible assets are adjusted to fair value and the negative balance is recorded as a Gain.

What are the key accounting consequences of pushdown accounting?

• Goodwill is recorded on the subsidiary’s books (Goodwill = Purchase Price - FV of Identifiable Net Assets Acquired)

• Bargain purchase gain is recorded in APIC (consideration < FV assets, goodwill is opposite of this)

• Subsequent revaluation impacts recorded din pushdown capital

What do we eliminate when consolidating?

100% of intercompany transactions, regardless of whether there is noncontrolling interest

What does the Consolidated Balance Sheet include?

• 100% of parent’s and subsidiary’s assets and liabilities (after eliminating intercompany transactions)

• Does NOT include subsidiary’s equity

• Noncontrolling interest is presented as part of equity, separate from parent company equity

What does the Consolidated Income Statement include?

• 100% of the parent’s revenues and expenses and all of the subsidiary’s revenues and expenses after the date of acquisition

• Does NOT include the subsidiary’s pre-acquisition revenues/expenses

What does the Statement of Consolidated Comprehensive Income include?

Show (separately) consolidated comprehensive income, comprehensive income attributable to noncontrolling interest, and comprehensive income attributable to the parent company

What does the Consolidated Statement of Changes in Equity include?

Present a reconciliation of the beginning-of-period and end-of-period carrying amounts of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interest

What does the Consolidated Statement of CFs include?

• Net cash spent or received in the acquisition must be reported in the investing section

• Assets/liabilities of subsidiary on the acquisition date must be added to parent’s assets/liabilities at the beginning of the year in order to determine the change in cash due to Operating, Investing, and Financing activities during the period

What is the year-end consolidating journal entry (aka consolidating workpaper eliminating JE)?

Common Stock - Subsidiary			xxx
APIC - Subsidiary			xxx
Retained Earnings - Subsidiary			xxx
	Investment in Subsidiary			xxx
	Noncontrolling Interest			xxx
Balance Sheet Adjustment to FV			xxx
Identifiable Intangible Assets to FV			xxx
Goodwill			xxx

What is the initial pushdown accounting JE for subsidiary?

Identifiable Intangible and Intangible Assets				Asset FV
Goodwill				Acq Price - (Asset FV - Liab FV)
	Liabilities Assumed				Liab FV
	Pushdown Equity				Acq Price

What are the JE for simple balance sheet eliminations?

Accounts Payable				xxx
	Accounts Receivable				xxx
Bonds Payable (intercompany portion only)				xxx
	Bonds Investment (in affiliate)				xxx
Accrued Bond Interest Payable				xxx
	Accrued Bond Interest Receivable				xxx
Dividends Payable (affiliate portion only)				xxx
	Dividends Receivable (from affiliate)				xxx

What is the Workpaper Elimination JE for intercompany merchandise transactions?

Intercompany Sales
Retained Earnings (profit in beg inv)
	Intercompany COGS
	COGS (intercompany prodit included in COGS of the purchasing affiliate)
	Ending inventory (intercompany profit in the inventory remaining)

When inventory has been sold to outsiders in an intercompany transactions, what do you do?

• Reverse the original intercompany transacion

• Correct COGS

When inventory is still on hand in an intercompany transaction, what do you do?

• Reverse the original intercompany transaction

• Correct ending inventory

What is the GAAP Rule for partnerships?

• Use fair value of the asset contributed

• Liabilities are assumed based on NPV

• Capital account is the difference between them

What methods may be used to account for the admission of new partners?

• Exact Method: When price = BV, no adjustment needed

• Bonus Method: When Price < BV, adjusts the partner’ capital accounts for any diff

• Goodwill Method: When Price > BV, adjusts the assets (goodwill) and the existing partners’ capital accounts for the diff

How is income or loss distributed among the partners?

In accordance with their agreement. In the absence of their agreement, all partners share equally

When are all payments for interest on capital, salaries, and bonuses deducted?

Prior to any distribution in the P/L Ratio

What methods does the withdrawal of partners use?

• Bonus Method: The difference between the balance of the withdrawing partner’s capital account and the amount that person is paid.

• Goodwill Method: May elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. Amount of implied goodwill is allocated based on P/L ratio.

What happens when partnership is liquidated?

• Assets Sold

• G/L allocated to the partnership

• Liabilities paid

• Partners entitled to receive the balance in their capital accounts

• Those with overdrawn balances owe that deficiency to the partnership. If outstanding, it must be absorbed by remaining partners.

What are the steps under the Exact Method for partnerships?

1. Calculate the total new equity of the partnership (Ex: Total New Equity = $100k + $20k + 0.33 Total New Equity → $120k = 0.66 Total New Equity → $120k/0.66 = Total New Equity)

2. Find the new partner’s contribution for the % interest (0.33 * Total New Equity)

Under the bonus method, the bonus will be credited to the following partner when?

• Existing Partners = When new partner pays more than NBV

• New Partner = When new partner pays less than NBV

What are the steps under the Bonus Method?

1. Find the total capital as a result of the partnership (Ex: $30k + $10k + $35k new = $75k)

2. Calculate new partner’s capital based on purchases interest amount (Ex: $75k * interest purchased %)

3. Existing partner’s receive capital on excess of og contribution - new partner’s capital (Ex: New partner’s capital - OG contribution * P/L ratio)

What is the JE to recognize the bonus to existing partners?

Cash	xxx
	A, Capital	xxx
	B, Capital	xxx
	C, Capital	xxx

What is the JE to recognize the bonus to new partners?

Cash	xxx
A, Capital	xxx
B, Capital	xxx
	C, Capital	xxx

What are the steps under the Goodwill Method for Partnerships?

1. Find the Implied Value (Contribution Payment x Times Allocated)

2. Find the Total Partner’s Capital Accounts (Add up existing and new partner’s contributions)

3. Implied Value - Total Partner’s Capital Accounts = Goodwill

What is the JE to recognize goodwill in a partnership?

Cash	xxx
Goodwill	xxx
	A, Capital	xxx
	B, Capital	xxx
	C, Capital	xxx

What are the JEs under the Bonus Method for the withdrawal of a partner?

To revalue the assets to reflect fair value:
	Asset Adjustment		xxx
		A, Capital (%)		xxx
		B, Capital (%)		xxx
		X, Capital (%)		xxx
To pay off withdrawing partner:
	A, Capital (%)		xxx
	B, Capitaln (%)		xxx
	X, Capital (100%)		xxx
		Cash		xxx

What are the JEs under the Goodwill Method for the withdrawal of a partner?

To revalue the assets to reflect fair value:
	Asset Adjustment		xxx
		A, Capital (%)		xxx
		B, Capital (%)		xxx
		X, Capital (%)		xxx
To record goodwill to make withdrawing partner's capital account = payoff:
	Goodwill		xxx
		A, Capital (%)		xxx
		B, Capital (%)		xxx
		X, Capital (%)		xxx
To payoff withdrawing partner:
	X, Capital (100%)		xxx
		Cash		xxx