Advanced Exam 2

similarities of fixed asset transfers to inventory transfers

o In year of transfer, adjust the income statement to eliminate any gain/loss on asset transfer o Defer any unrealized profit on the parent's books using the equity method entries until it is realized o Adjust the asset on the balance sheet to its carrying value per the original own

downstream sale

sale from parent to subsidiary

upstream sale

sale from subsidiary to parent

assigned fund balance

there is cash that is not spent but we know how we're going to spend it

debt service fund

entity usually only has one service all of the long-term debt for the governmental entity; make principal payments on long-term debt but only has current assets and liabilities in it •Accounting: modified accrual basis and current economic resource focus •Unusual Features: interest is not accrued until due; principal payments paid out of debt service fund, but before majority date, long term liability does not stay in this fund, but in GCAGLTL

How much to eliminate: Downstream sales to a partially-owned subsidiary:

fully eliminate on consol

How much to eliminate: upstream sales to a partially-owned subsidiary:

fully eliminate on consol if NCI, adjusts for NCI

term bond

principal paid at maturity

markup

refers to gross profit (sales revenue - COGS)

governmental funds: financial reporting objective

stewardship of resources and liquidity (expendability of resources)

5 examples of general long-term debt obligations

•Serial bonds •Term bonds •Special assessment bonds •Notes and warrants •Capital leases

What basis will be used to adjust depreciation expense on depreciable assets?

"Actual" depreciation will be calculated using the intercompany sale price o"Should be" depreciation will be calculated based on the original purchase price to the consolidated entity oBoth calculations should use the same estimates, which means using the acquirer's estimated remaining useful life (if different from the original) and salvage value

differences of fixed asset transfers to inventory transfers

unrealized gain may be deferred for many periods the asset may need to be adjusted on the balance sheet for many periods (every period until it is sold) if the asset depreciates, the accumulated depreciation will also need to be adjusted each period

gross profit

Sales revenue - cost of sales

markup on cost

gross profit / COGS

Government-wide financial statements

•Undo governmental stuff to make it look more like a business financial statement •Statement of net position Reports all types of assets (including infrastructure) Reports all debt (including long term) Reports net position in three categories: invested in capital assets (LTA - LTL), restricted, and unrestricted Interfund balances eliminated (like intercompany transactions) •Statement of activities Fiduciary funds NOT included here; can't consolidate something that doesn't belong to you use accrual basis of account and include long-term assets and liabilities; more comprehensible to us

sale of capital assets

•cash inflow recorded as other financing source, not revenue

The Statement of Revenues, Expenditures, and Changes in Fund Balance shows:

•financial resources received and spent •change in net financial resources available for spending in the near future

The GCA-GLTL General Ledger

•keeps track of all long term assets at historical cost and liabilities because not recorded in governmental funds; ledger, not fund, so has no activities. Reason we have this is because this info is used when governmentwide financial statements are prepared

Liquidation of GLTL

•on maturity date of liability, transferred to debt service fund to pay liability; remains as long term liability until retired and paid off

is depreciation recorded for infrastructure assets?

•sometimes; either can be capitalized and depreciated OR upkeep and renewal costs recorded as an expense in period they're paid, never depreciated

The GASB

Governmental Accounting Standards Board; develops GAAP for state and local governments.

How much to eliminate: upstream sales

If there is an NCI, then part of the profit will be realized by the NCI, because to the NCI, the inventory has left the company. In consolidation, still eliminate the sale 100% In the equity method entry to defer the unrealized gross profit, only defer that portion which is attributable to the parent (not the NCI's portion

How much to eliminate: Downstream sales

Sales from a parent to the sub Entire profit will accrue to the parent and not be shared with any other parties, so adjust 100% of the deferred profit

notes and warrants

1-2 year bonds secured by future tax revenue; borrow money, give collateral that is tax assessed next year or in two years (spending a year or two ahead of time based on tax projected)

•Other funds must meet two criteria (both)

1. 10% criterion: look at total assets, liabilities, revenues, and expenditures/expenses as percentage of all funds of that category or type; if any of those 4 categories are at least 10% of governmental funds, passes this test NOTE: internal funds NOT included in this calculation, not enterprise funds are 2. 5% criterion: look at assets, liabilities, revenues, expenditures/expenses, combine governmental and enterprise funds together, if any of those 4 categories are at least 5% of governmental and enterprise funds, passes this test •If not major, then: aggregated with all other non-major funds reported in single column

2 proprietary funds

1. enterprise fund 2. internal service fund

Comprehensive Annual Financial Report (CAFR): 3 sets of financial statements

1. government-wide financial statements 2. fund-base financial statements 3. reconciliation provided

fidiciary funds: 2 types

1. trust funds 2. agency funds

GASB 34: two required financial statements for government funds.

1.Balance sheet 2.Statement of revenues, expenditures, and changes in fund balance •Prepared for each individual governmental fund. Used as foundation for governmentwide financial statements, along with adding in GCAGLTL •Only major government funds reported separately •General fund: always a major fund, always separately reported

proprietary funds financial statements

1.Statement of net position (balance sheet) 2.Statement of revenues, expenses, and changes in fund net position (income statement) 3.Statement of cash flows (4 sections: operating, investing, financing - capital, and financing - noncapital

consol entry in year after sale: upstream sale w/ NCI

DR investment in sub DR NCI in NA CR COGS

consol entry in year of sale: upstream sale

DR sales CR COGS CR Inventory

if subsidiary is partially owned in upstream sale...

NCI has own sphere of influence outside of parent's/subsidiary's transaction sale to NCI is a sale to an actual party, meaning some of the profit is realized

Nolan owns 100% of the capital stock of both Twill Corporation and Webb Corporation. Twill purchases merchandise inventory from Webb at 140 percent of Webb's cost. During 20X0, Webb sold merchandise that had cost it $40,000 to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 20X0. In preparing combined financial statements for 20X0, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. What amount should be eliminated from cost of goods sold in the combined income statement for 20X0? a. $56,000 b. $40,000 c. $24,000 d. $16,000

a $56,000 = ($40,000 *1.4)

Perez Inc. owns 80 percent of Senior Inc. During 20X2, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 20X2. For 20X2 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted? a. Sales and COGS should be reduced by the intercompany sales amount. b. Sales and COGS should be reduced by 80 percent of the intercompany sales amount. c. Net income should be reduced by 80 percent of the gross profit on intercompany sales amount. d. No adjustment is necessary.

a - All intercompany sales and cost of goods sold must be eliminated in consolidation to prevent double counting.

On January 1, 20X0, Poe Corporation sold a machine for $900,000 to Saxe Corporation, its wholly owned subsidiary. Poe paid $1,100,000 for this machine, which had accumulated depreciation of $250,000. Poe estimated a $100,000 salvage value and depreciated the machine using the straight-line method over 20 years, a policy that Saxe continued. In Poe's December 31, 20X0 consolidated balance sheet, this machine should be included in fixed-asset cost and accumulated depreciation as cost accumulated depreciation a. $1,100,000 $300,000 b. $1,100,000 $290,000 c. $900,000 $40,000 d. $850,000 $42,500

a - Poe's original cost of the machine would be the amount reported on the consolidated balance sheet. Additionally, an extra $50,000 in depreciation would be recorded for the year, bringing the total accumulated depreciation to $300,000.

special revenue fund

accounts for inflows of resources that are earmarked for a specific purpose ex. a fund set aside for an after school care program for children; HOPE scholarship entity can have multiple of these; accounting for this is exactly the same as the general fund

proprietary funds: basis of accounting

accrual

commercial enterprises: method of accounting

accual

commercial enterprises: balance sheet

all assets and liabilities and equity

commercial enterprises: measurement focus

all economic resources

Scroll Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, 20X1. The following information is from the condensed 20X1 income statements of Pirn and Scroll: (see E7-1 question 5 on page 354 for table) Scroll purchased equipment from Pirn for $36,000 on January 1, 20X1, that is depreciated using the straight-line method over four years. What amount should be reported as depreciation expense in Pirn's 20X1 consolidated income statement? a. $50,000 b. $47,000 c. $44,000 d. $41,000

b - Depreciation expense recorded by Pirn $40,000 Depreciation expense recorded by Scroll 10,000 Total depreciation reported $50,000 Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale ($12,000 / 4 years) (3,000) Depreciation for consolidated statements $47,000

Port Inc. owns 100 percent of Salem Inc. On January 1, 20X2, Port sold delivery equipment to Salem at a gain. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for 20X2 will be decreased by: a. 20 percent of the gain on the sale b. 33.3 percent of the gain on the sale c. 50 percent of the gain on the sale d. 100 percent of the gain on the sale

b - The gain should be recognized over the remaining useful life of the equipment, which in this case is three years. Thus, in each year, 1/3 or 33 1/3% would be recognized.

During 20X3, Park Corporation recorded sales of inventory for $500,000 to Small Company, its wholly owned subsidiary, on the sale terms as sales made to third parties. At December 31, 20X3, Small held one-fifth of these goods in its inventory. The following information pertains to Park's and Small's sales for 20X3: Park Small sales $2,000,000 $1,400,000 COGS (800,000) (700,000) gross profit $1,200,000 $700,000 in its 20X3 consolidated income statement, what amount should Park report as cost of sales? a. $1,000,000 b. $1,060,000 c. $1,260,000 d. $1,500,000

b. 1,060,000 see answer in eLC for solution

Parker Corporation owns 80 percent of Smith Inc.'s common stock. During 20X1, Parker sold inventory to Smith for $250,000 on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in 20X1. The following information pertains to Smith's and Parker's sales for 20X1: Parker Smith sales $1,000,000 $700,000 COGS (400,000) (350,000) Gross Profit $600,000 $350,000 What amount should Parker report as cost of sales in its 20X1 consolidated income statement? a. $750,000 b. $680,000 c. $500,000 d. $430,000

c $500,000= ($400,000 +$350,000 - $250,000)

Clark Company had the following transactions with affiliated parties during 20X2: -Sales of $60,000 to Dean Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year-end. Clark owns a 15 percent interest in Dean and does not exert significant influence. -Purchases of raw materials totaling $240,000 from Kent Corporation, a wholly owned subsidiary. Kent's gross profit on the sales was $48,000. Clark had $60,000 of this inventory remaining on December 31, 20X2. Before consolidation entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, 20X2 consolidated balance sheet for current assets? a. $320,000 b. $317,000 c. $308,000 d. $303,000

c - Net assets reported $320,000 Profit on intercompany sale $48,000 Proportion of inventory unsold at year end ($60,000 / $240,000) x 0.25 Unrealized profit at year end (12,000) Amount reported in consolidated statements $308,000

Nolan owns 100% of the capital stock of both Twill Corporation and Webb Corporation. Twill purchases merchandise inventory from Webb at 140 percent of Webb's cost. During 20X0, Webb sold merchandise that had cost it $40,000 to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 20X0. In preparing combined financial statements for 20X0, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. By what amount was unadjusted revenue overstated in the combined income statement for 20X0? a. $16,000 b. $40,000 c. $56,000 d. $81,200

c - $56,000. The revenue would be overstated by the amount of cost of goods sold that should have been eliminated.

Water Company owns 80 percent of Fire Company's outstanding common stock. On December 31, 20X9, Fire sold equipment to Water at a price in excess of Fire's carrying amount but less than its original cost. On a consolidated balance sheet at December 31, 20X9, the carrying amount of the equipment should be reported at a. Water's original cost b. Fire's original cost c. Water's original cost less Fire's recorded gain d. Water's original cost less 80 percent of Fire's recorded gain

c - After consolidation entries are made, the consolidated balance sheet should present the asset at Fire's carrying amount on the date of transfer (which is equal to Water's cost less the gain recorded by Fire).

commercial enterprises: financial reporting objective

capital maintenance and profit

fiduciary fund

captures activities where the government is managing and overseeing resources that are not the government's; doesn't have right to use resources in an unrestricted way, managing for someone else

spendable portion of funds (governmental funds)

cash; broken down into 4 categories: restricted, limited, assigned, and unassigned

governmental accounting: balance sheet

current assets and liabilities and fund balance

governmental funds: measurement focus

current resource measurement focus

Company J acquired all of Company K's outstanding common stock in exchange for cash. The acquisition price exceeds the fair value of net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K? plant and equipment long-term debt a. K's carrying amount K's carrying amount b. K's carrying amount fair value c. fair value K's carrying amount d. fair value fair value

d - Business combinations always use the acquisition date fair values of assets and liabilities that are acquired.

The goal of equity method entries for fixed asset transfers is to:

o Defer any unrecognized gain that the original owner has reported on its books until that unrecognized gain/loss is realized

The goal of worksheet entries for fixed asset transfers is to

o eliminate intercompany gains and losses o re-adjust the basis of the transferred asset

Why would a corporation and government have different financial reporting requirements?

different users of information; for-profit accounting users are investors; citizens, creditors, can be users are governmental accounting info

Inventory transfers: Not eliminating the transfer would cause:

double counts sales and COGS; incorrect inventory balance

proprietary funds: measurement focus

economic resources

The difference between a fund's assets and liabilities for governmental funds is called:

fund balance (basically equity for governmental) broken into spendable and non-spendable portions

capital projects fund

fund for something being built or renovated; entity can have many of these funds closed as soon as the activity is over ex. retiling of bathroom in business school, repaving a sidewalk •Cash outflows and inflows: related to expenditures for the capital project; outflows = charges incurred in construction or maintenance; inflows = whatever funding source is to pay for that capital project ex. Grants, taxes. Inflows typically not considered revenue; considered other revenue sources (ex. Debt from bonds) •Accounting: Modified accrual basis; only reports current assets/liabilities

governmental fund

funds specific to a government ex. building roads, running stoplights

trust fund

government acting as trustee for funds that are held; government managing and controlling the funds but has no right to spend funds on their own activities ex. pension (and other employee benefit) trust fund, investment trust fund, private-purpose trust fund •Accounting: accrual basis and all economic resources measurement focus (long term assets and liabilities included)

GAAFR (the Blue Book)

governmental accounting auditing and financial reporting book; comprehensive resource on all things governmental accounting; published by the governmental finance officers association (equivalent of AICPA for governmental accountants)

agency fund

governmental entity is purely a custodian of the funds; no management, no investment, no oversight, just holding onto the money for a period of time assets ALWAYS equal liabilities; no fund balance ex. taxes •Accounting: accrual basis and IF long term assets and liabilities, would be reported here (but is unlikely)

gross profit percentage, markup on sales, markup on transfer price

gross profit / sales

Inventory transfers: Consolidation worksheet entries ensure:

inventory is correctly valued on the balance sheet and sales revenue and COGs are not overstated

EX 6-1 problem 6 Selected data for two subsidiaries of Dunn Corporation taken from the December 31, 20X8 preclosing trial balances are as follows: Bank Co (DR) Lamm Co (CR) shipments to Banks $150,000 shipments from Lamm $200,000 intercompany inventory profit on total shipments $50,000 additional data relating to the December 31, 20X8 inventory are as follows: inventory acquired by Banks from outside parties: $175,000 inventory acquired by Lamm from outside parties: $250,000 inventory acquired by Banks from Lamm: $60,000 At December 31, 20X8, the inventory reported on the combined balance sheet of the two subsidiaries should be: a. $425,000 b. $435,000 c. $470,000 d. $485,000

inventory reported by Banks ($175,000 + $60,000) $235,000 Inventory reported by Lamm 250,000 Total inventory reported $485,000 Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] (15,000) Amount reported in consolidated statements $470,000

Special assessment bonds

issued for very specific reason (building/purchasing asset) usually made against only the taxpayers that directly benefit from the improvement (ex. You graduate, move into home, go for walk in neighborhood next door that has sidewalks and streetlights, want them in your neighborhood, go to city hall and petition for them, get them, included on property tax assessment as special assessment for these assets)

what to keep and eliminate in intercompany sales

keep parent's COGS and sub's sales eliminate parent's sales and sub's COGS

unassigned fund balance

like retained earnings; can be used for whatever we want

governmental funds: method of accounting

modified accrual

basis of accounting for governmental accounting

modified accrual; somewhere between cash and accrual (leans more towards cash) captures all resource inflows available to meet obligations this period

corpus

money put into a fund (principal), never spent; only earnings on this corpus spent

The difference between a fund's assets and liabilities for proprietary and fiduciary funds is called:

net assets; split into restricted and unrestricted funds

if subsidiary is wholly owned in upstream sale...

no difference in upstream and downstream sales

non-spendable portion of funds (governmental funds)

non-cash resources ex. rock salt

Inventory transfers: the consolidated perspective

not a bona-fide sale transaction, just the movement of inventory from one location to the other

Intercompany depreciable asset transfer Consolidation entries will be necessary to restate:

oThe asset's gross value/cost oThe associated accumulated depreciation oDepreciation expense oEliminate any gain/loss - only in the year of intercompany sale We do this by comparing the "actual" vs. the "should be" o"Actual" numbers are those that actually appear on either the parent or the sub's gl o"Should be" numbers are those that would appear if the intercompany transaction had never happened. oThe difference between the two gives the elimination entry/entries

equity method entries in upstream sale

only defer percentage of gross profit that accrues to the parent; other percent is realized to NCI in reversal, also only reverse portion attributable to parent

serial bonds

principal and interest repaid over time; principal paid in installments

enterprise fund

public is paying for good/service provided, even though its run by the government ex. community pool, buses, utilities, UGA parking and dining services •Accounting: accrual method, focuses on all economic resources (includes long term assets and liabilities)

proprietary fund

refer to activities that look like a business; funded by charging users who receive benefit of using it ex. golf club fees

measurement focus: governmental vs for-profit

refers to what is being reported economic resource measurement focus: for-profit current finance resource measurement focus: governmental; only report current assets and liabilities, not long-term b/c focused on meeting obligations in current period

internal service fund

runs like a business and charges its users, but users are always other governmental funds/entities ex. purchasing department, motor vehicle maintenance service center for buses/governmental cars/etc. •Accounting: accrual basis, focuses on all economic resources (includes long term assets and liabilities)

Transfer price

sales price between two related entities

what is a fund?

separate, unique chart of accounts each fund is a self-balancing set of accounts

general fund

the catch-all for everything that doesn't go somewhere else; entity only has one of these used for payroll, supplies, utilities, etc.

What is an "arm's length" transaction?

transactions between unrelated parties; objective transaction

permanent fund

used to account for resources that are held by the government where the principal cannot be spent but the earnings on the principal can be spent •Accounting: modified accrual basis and only reports current financial resources

when is revenue recorded for governmental accounting?

when it is measurable (amount can be objectively determined) and available (receivable in current period)

When is the inventory sale realized for consolidated reporting purposes?

when the subsidiary sells to an outside party

when are expenditures recorded for governmental accounting?

when they are measurable and incurred (payable in the current period)

What to do with transactions that are not arms-length transactions

•Eliminate 100% of intercompany transactions

5 types of governmental funds

•General fund •Special revenue fund •Capital projects fund •Debt service fund •Permanent fund

•Governmental operations are classified into three types of funds:

•Governmental •Proprietary •Fiduciary

fund-based financial statements

•Governmental funds •Proprietary funds •Fiduciary funds each fund has its own financial statement that is separately presented; only includes major funds

Income Tax Effects

•Income taxes play a major role in intercompany sales and transfer pricing decisions. •Income taxes on the selling entity's unrealized gross profit must also be eliminated.

General Capital Assets

•Land •Buildings •Improvements other than buildings •Equipment •Construction work in progress (being performed by Capital Projects Funds) •Infrastructure (ex. streets and sidewalks)