Global FSA Chapter 6
Calculate the amount of goodwill resulting from an acquisition when an acquirer buys 100% of a target firm and pays $110 for net identifiable assets valued at $80.
$30 goodwill
6. A firm (an investor) buys the stock of another company by paying $500 cash d. Assume that the investee pays a $10 cash dividend to the investor. Record the investor's receipt of the dividend, assuming a passive level of ownership.
Cash +10 Investment Income +10
Assume a firm buys the bonds of another firm. The buyer of the bonds is therefore an investor in the other firm's debt, as well as a lender to that firm. The bonds are purchased for $900. At the end of the first reporting period (year), the value of the bonds has increased to $980. C). Subsequent to the above entry for bonds classified as available-for-sale, assume the bonds were sold for $980. Give the entry to recognize the sale and the gain.
Cash +980 Investment +980 AOCI +80 Gain +80
A firm (an investor) buys the stock of another company by paying $500 cash. Repeat part d, but now assume that the investor has significant influence over the investee. Record the investor's receipt of the dividend.
Cash 10 Investment 10
Assume the firm decides to sell the above asset at the end of Year 3 for $20. A). Record the sale assuming the firm had used straight line method.
Cash 20 A/D 60 Loss 8 Asset 88
Assume the firm decides to sell the above asset at the end of Year 3 for $20. Record the sale assuming the firm had used the double declining balance method
Cash 20 A/D 77 Loss Gain 9 Asset 88
A firm buys equipment for $400. The salvage value is expected to be $20, and the expected useful life is ten years. E). If the firm sells the equipment after the first year for 350 cash, give the journal entry assuming that the firm had been using double declining balance depreciation for the year
Cash 350 A/D 80 Equipment 400 Gain 30
A firm buys equipment for $400. The salvage value is expected to be $20, and the expected useful life is ten years. D). If the firm sells the equipment after the first year for $350 cash, give the entry assuming that the firm had been using straight line depreciation for the year.
Cash 350 A/D 80 Loss 12 Equipment 400
At what level of ownership does one firm consolidate its investment in another firm?
Consolidation occurs at the level of control, which is usually over 50% ownership of the outstanding voting shares of stock
A firm buys equipment for $400. The salvage value is expected to be $20, and the expected useful life is ten years. B). Give the journal entry for a straight-line depreciation (for the first year), assuming that the depreciation is expensed immediately.
Depreciation Expense 38 A/D 38
Describe how discontinued operations affect the three main financial statements
Discontinued operations is the reclassifications of revenues, expenses, assets, liabilities, and cash flows. Revenues and expenses, net of tax effects, are combined into a single section on the income statement and renamed, "Income (Loss) from Discontinued Operations." Assets and liabilities that are related to the segment to be sold are also combined and named as "Assets held for Sale" and "Liabilities of Discontinued Operations." The cash flow related to the segment to be discontinued are re-classified and re-labeled in a similar manner.
What is the formula for double declining balance depreciation?
Double Declining Balance = (Cost - Accumulated Depreciation)*2* (1/Life)
A firm buys equipment from a manufacturer. The manufacturer also has a financing division that will finance the firm's purchase. The terms of the sale require the firm to pay the manufacturer for the equipment in one year. The amount to be paid is $220, which includes $20 of interest. (A) Journalize the purchase of the equipment. Use Equipment and Note Payable.
Equipment +200 Notes Payable +200
Assume the firm buys only 80% and therefore pays $88. Calculate the amount of goodwill and non-controlling interest.
Goodwill is still $30; NCI is 20%*110=$22
A firm buys equipment from a manufacturer. The manufacturer also has a financing division that will finance the firm's purchase. The terms of the sale require the firm to pay the manufacturer for the equipment in one year. The amount to be paid is $220, which includes $20 of interest. B). Journalize the firm's payment of the principal and interest to the manufacturer in one year.
Interest Expense 20 Note Payable 200 Cash 220
Assume that a firm spends $100 to build a buildings for its own use. This is a self-constructed asset, which, while under construction, is referred to as "Construction in Progress" (CIP). The firm also has debt of $500 that has an interest rate of 6%. Give the journal entry to recognize the amount of interest expensed and the amount of interest capitalized. The firm pays cash for the amount of interest it owes the bank.
Interest Expense 24 Construction-in-progress 6 Cash 30
A firm buys equipment for $400. The salvage value is expected to be $20, and the expected useful life is ten years. C. Give the journal entry for straight line depreciation assuming that the depreciation is capitalized as part of inventory.
Inventory-WIP 38 A/D 38
A firm (an investor) buys the stock of another company by paying $500 cash (A). Record the purchase of the stock.
Investment $500 Cash $500
A firm (an investor) buys the stock of another company by paying $500 cash. c. Assume that the investor has significant influence over the investee by owning 25% of the shares. Also assume that the investee has total income of $100. Record the investor's investment income.
Investment +25 Investment Income +25
A firm (an investor) buys the stock of another company by paying $500 cash b. Assume that the investor has only a passive interest and also uses fair value accounting. During the year after the acquisition, the stock price rises to $550. Record the increase in value.
Investment +50 Gain +50
Assume a firm buys the bonds of another firm. The buyer of the bonds is therefore an investor in the other firm's debt, as well as a lender to that firm. The bonds are purchased for $900. At the end of the first reporting period (year), the value of the bonds has increased to $980. B).Refer to the above data. Now assume that the bonds are classified as available-for-sale. Give the journal entry to record the change in the value of the bonds.
Investment +80 AOCI +80
Assume a firm buys the bonds of another firm. The buyer of the bonds is therefore an investor in the other firm's debt, as well as a lender to that firm. The bonds are purchased for $900. At the end of the first reporting period (year), the value of the bonds has increased to $980. A). If the bonds are classified as trading, give the journal entry to record the change in the value of the bonds.
Investment +80 Gain +80
What is a "cookie jar" reserve?
It is an over-accrued liability (possibly fraudulent) in an earlier period that is reserved in the current or later period to boost a firm's earnings. When the liability is established in the earlier period, the offset is to a loss or expense account. When the liability is reversed in the current or later period, the offset is to a gain (or a reversal of the loss or expense). The gain increases net income.
Assume that a firm has equipment that costs $400 and has a ten year useful life. After three years of straight line depreciation (and no salvage value), accumulated depreciation is $120. The firm estimates that the fair value of the equipment has fallen to $200 and is not likely to recover in value. Journalize the impairment of the equipment.
Loss 80 Equipment 80
What does NCI stand for?
Non-controlling interest, a component of owner's equity and which represents the minority shareholders' claim on the net assets of the combined (consolidated) entity.
A firm spends $1000 on ordinary repairs and maintenance B). Refer to the above. Assume the firm had instead deemed the repairs and maintenance to be extraordinary. Provide the entry:
PP&E 1000 Cash 1000
What are the three levels of ownership of equity securities for accounting purposes?
Passive (0-20%), Significant Ownership (20-50%), Control (over 50%)
Describe the accounting treatment for passive level of ownership for equity investments.
Passive equity = mark-to-market, with the adjustments (either gains or losses) recognized in the income statement. The accounting treatment is typically described as "Fair Value through Net Income," and abbreviated as FVTNI.
A firm spends $1000 on ordinary repairs and maintenance A).Provide the entry (use SG&A expense)
SG&A Expense 1000 Cash 1000
What is the name of the accounting method that is used when the level of ownership rises to significant influence?
Significant influence = equity method
What is the formula for straight-line depreciation?
Straight Line depreciation = (Cost - Residual Value)/Life
Why do firms sometimes choose accelerated depreciation over straight-line depreciation?
Taking more depreciation early in an asset's life (which would happen in an accelerated model) and therefore taking less depreciation later in the asset's life, would counterbalance ownership expenses, such as repairs expense, which is relatively small at the beginning of the asset's life, yet large towards the end.
What is the main attribute of a repair that determines whether or not it will be capitalized or expensed?
The main attribute is whether or not the repair extends the life of the asset (or increases its efficiency). If the repair does extend the life of the asset (or increase its efficiency), the repair is considered extraordinary and is capitalized.
What is the main attribute of an intangible asset that is used to determine whether or not it will be amortized?
The main attribute is whether the life of the asset is finite or non-finite. Intangibles with finite lives are amortized, and intangibles with non-finite lives are not.
What is impairment loss?
The reduction in the value of an asset below its cost (or carrying value). When deemed impaired, an asset is written down, with an offsetting loss to owner's equity. Impairments generally may not be reversed under U.S. GAAP, i.e., if the value of the asset were to recover. Many, but not all, assets are tested periodically for impairments.
Describe how equipment could become impaired for accounting purposes?
The value of the equipment could have fallen due to decreased demand for the product that the equipment produces.
What are the three categories of investment in debt, rather than stock?
Trading, Available-for-Sale, and Held-to-maturity
Assume a firm buys the bonds of another firm. The buyer of the bonds is therefore an investor in the other firm's debt, as well as a lender to that firm. The bonds are purchased for $900. At the end of the first reporting period (year), the value of the bonds has increased to $980. D). True/False: If the above bond investments were classified as held-to-maturity, the bonds would not be marked-to-market and no journal entry would be required to recognize the change in value?
True
Why is it important for firms to segregate discontinued operations on all three main financial statements?
Users of financial statements typically want to predict relevant aspects of a firm's future. By segregating the accounts that will be discontinued, users will understand that those three parts of the financial statement will become zero when the segment is actually sold.
What are restructuring expenses?
Various expenses incurred to reduce a firm's cost structure. One example is severance pay for employees who have been "let go" from their jobs. Although restructuring is undertaken to reduce the cost structure, it typically requires the firm to make payments upfront (such as severance) in order to save money in the long run.
When is the receipt of a dividend not considered investment income?
When the firm is using the equity method, the receipt of a dividend is offset (in the journal entree) with a reduction in the investment account, rather than recognition of investment income.
