Exam 1: Chapter 1 - 6

each company continues to retain its own records

how does consolidation affect the accounting records if separate incorporation is maintained?

prospective

if an increase in an investment now provides an investor with the ability to exercise significant influence over an investee, the change to the equity method of investment accounting is applied on a ____________ basis

the investment's total fair value as of the date the investment qualifies for the equity method

if an investment qualifies for the equity method following a series of purchases, what valuation basis should the investor employ in applying the equity method

it is easy to apply it often reflects cash flows from the subsidiary

initial value --> advantages

dividends declared recorded as dividend income

initial value --> income account

fair value-method

investor holds a small percentage of equity securities of investee investor cannot significantly affect investee's operations

a, b, d

the fair-value option for reporting investments that would otherwise be accounted for under the equity method requires a. the inclusion in net income of changes in the fair value of an equity investment b. the valuation of the equity method investment at fair value as of the investor's balance sheet date c. amortization for the excess of acquisition-date fair over book value d. an irrevocable election to elect fair value as the measurement attribute for an equity investment

dissolved company's records are closed out surviving company's accounts are adjusted to include appropriate balances of the dissolved company

how does consolidation affect accounting records when dissolution occurs?

the investor's percentage share of the investee

under the equity method, the amount of gross profit deferred from an intra-entity sale is limited to what?

market approach income approach cost approach

what are the three valuation techniques?

to provide the structure for generating financial reports for the single economic entity

within the consolidation process, what is the purpose of a worksheet?

increases

NI _______________ investment account when using the equity method

recognized

how is a loss in value of an investment treated when it is not a temporary decline?

reduced to the fair value

how is a permanent decline in the investee's fair market value recorded?

ignored

how is a temporary drop in the fair value of an investment treated?

it is ignored

how is preexisting goodwill recorded in the acquired company's accounts?

remains at acquisition-date value assigned

initial value --> investment account

equity method

investor has the ability to exercise significant influence on the investee operations ownership is between 20% - 50%

it usually gives balance approximating consolidation figures, but it is easier to apply than equity method

partial equity --> advantages

income accrued as earned no other adjustments recognized

partial equity --> income account

adjusted only for accrued income and dividends declared by the acquired company

partial equity --> investment account

entry e

recognizes excess amortization expense for the current period on the allocations from the original adjustments to fair value

entry a

recognizes the unamortized allocations as of the beginning of the current year associated with the original adjustments to fair value

consolidation

required when investor's ownership exceeds 50%

downstream sale

sale to investee from investor

upstream sale

sale to investor from investee

fair-value

the acquisition method embraces the ______________ measurement for measuring and assessing business activity

significant influence

the equity method of accounting for investments is appropriate when the investor has the ability to exercise _______________ ________________ over the investee

the degree of influence the investor has over the investee

the method selected to report investments in other companies depends on what?

true

true/false the reported balances for a business combination are the same regardless of whether the acquired firm is dissolved or not

true

true/false when an investor sells inventory to an outside party that had been purchased from its equity-method investee, the investor recognizes any related deferred gross profit

yes by their primary beneficiary

under current GAAP, are VIEs required to be consolidated?

as soon as the investee makes a profit

upward adjustments in the asset balance are recorded when?

fair

when an equity method suffers a permanent decline in value, the investor recognizes an impairment loss and writes down the investment account to _________ value

the sales account remains unaffected

when an investor sells inventory to its equity-method investee, how is the reported sales balance on the investor's income statement affected?

adjust to fair value if fair value is determinable. if not, the investment remains at cost

when can you adjust investments to fair value using the fair-value method? when can you not?

variable interest entity

when financial control occurs through contractual relationships rather than voting stock ownership

Periodic assessment for impairment to determine if the fair value of the investment is less than its carrying amount recognition of "observable price changes in orderly transactions for the identical or similar investment of the same issuer"

GAAP allows for two fair value assessments that may affect cost method amounts report on the financial statement when using the fair-value method. what are they?

fair-value method cost method for equity securities without readily determinable fair values consolidation of financial statements equity method

GAAP recognizes four method to report investments in other companies. What are they?

acquisition date

GAAP requires that fair value of assets acquired and liabilities assumed in a business combinations be determined when?

no change is recorded the equity method is used from the date of the new acquisition

Hawkins Company has owned 10 percent of Larkers, Inc for the past several years. This ownership did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an additional 30 percent of Larker and now will use the equity method. How will the investor report change?

c

which of the following are included in net income for an investment in equity shares accounted for under the fair-value method? a. excess acquisition-date fair over book value amortization b. recognition of intra-entity gross profits accompanied by sales to outside entities c. dividends from the investee d. investee other comprehensive income

no

when significant influence is lost, is there a retroactive adjustment?

excess purchase price over fair value allocate excess amount to assets and liabilities based on percent of ownership amortize based on useful lives

in a stock acquisition account for by the equity method, a portion of the purchase price often is attributed to goodwill or to specific assets or liabilities. how are these amounts determined at acquisition? How are these amounts accounted for in subsequent periods?

control without dissolution

when one company achieves legal control over another by acquiring a majority of voting stock, although control is present, no dissolution takes place

a

FASB ASC 805, "Business Combinations," provides principles for allocating the fair value of an acquired business. when the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be: a. recognized as an ordinary gain from a bargain purchase b. treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years c. treated as goodwill and tested for impairment on an annual basis d. applied pro rata to reduce, but not below zero, the amounts initially assigned to specific noncurrent assets of the acquired firm

goodwill

Morgan company acquires all of the outstanding shares of Jennings, Inc for cash. Morgan transfers consideration more than fair value of the company's net assets. How should the payment in excess of fair value be accounted for in the consolidation process?

no

can an entity recognize profits through activities within itself

income

changes in fair values are recognized as ________ when using the fair-value method.

emphasizing the 20-50 percent of voting in determining significant influence versus control allowing off-balance sheet financing potentially biasing performance ratios

criticism of the equity method

1. assets, liabilities --> cash, other assets, liabilities, stock 2. capital stock --> cash, other assets, liabilities, stock 3. assets, stock --> new formed corporation 4. majority of voting shares 5. VIE

describe the different types of legal arrangements that can take place to create a business combination

expense as incurred

direct combination costs -->

decreases

dividends ________________ investment account when using the equity method

income

dividends declared on the securities are recognized as ______________ when using the fair-value method.

no

does the direction of sale between investor and investee have any affect the on the final amounts reported on the financial statements?

yes

does the investor report its share of the investee's OCI?

no

does the selection of a particular method to account for an investment affect the totals ultimately reported for the combined companies?

goodwill

under the equity method, the excess of the investment cost over the proportionately-owned acquisition-date fair value of the investee's net identifiable assets is allocated to the asset ____________

c

under the equity method, the investment account increases when a. the owner's equity of the investee decreases b. the investee recognizes and reports a net loss c. the investee recognizes and reports net income d. the investee declares a dividend

variable interest entity (VIE)

vehicle for control exercised through contractual arrangements with a sponsoring firm that may not own the VIE but becomes its "primary beneficiary" with rights to its residual profits

equity in investee income

what account should an investor use to defer its proportional share of intra-entity gross profits remaining in ending inventory from sales to an investee?

measured at cost unless a demonstrable impairment has occurred or observable price changes in orderly transactions for the identical or similar investment of the same issuer

what accounting treatments are appropriate for investments in equity securities?

when accumulated losses incurred and dividends paid by the investee reduce the investment account to zero, no further loss can be accrued. once the original cost of the investment have been eliminate, no additional losses can accrue to the investor.

what happens when the investment is reduced to zero?

all appropriate account balances

what is consolidated when dissolution occurs?

only the financial statement information

what is consolidated when separate incorporation is maintained?

the excess of the cost of the investment that cannot be attributed to a specific investee asset or liability

what is goodwill associated with an equity method investment?

fair value

what is the accounting basis for consolidating assets and liabilities in a business combination?

investee's owner's equity decreases --> investor must mirror changes investor can influence timing avoid recording revenue twice

why does the equity method record dividends from an investee as a reduction in the investment account, not as dividend income?

no

are revenue, expense, dividend, and equity accounts transferred to the parent after combination?

fair market

as of the date the equity method becomes applicable for an investment, the investor allocates its purchase price to its share of the investee's asset and liabilities based on their individual ___________ ___________ values.

historical

asset and liability accounts on the balance sheet tend to measure ________ rather than current value

prospectively

because of the acquisition of additional investee shares, an investor will now change from the fair-value method to equity method. Which procedures are applied to accomplish this accounting change?

change must be made to the retained earnings in every subsequent year

because the initial value and partial equity method do not utilize the accrual method, what must be done to account for this?

control

consolidation = _____________

entry d

eliminates the impact of intra-entity dividends

entry i

eliminates the impact of intra-entity subsidiary income accrued by the parent

entry s

eliminates the subsidiary's stockholders' equity accounts as of the beginning of the current year along with the equivalent book value component within the parent's investment account

income accrued as earned amortization and other adjustments are recognized

equity method --> income account

continually adjusted to reflect current owner's equity of acquired company

equity method --> investment account

acquiring company totals give a true representation of consolidation figures

equity method advantages

accrual

equity method utilizes the ______________ method

cost

fair value method required to record investment at ____________.

equity method

full accrual accounting creates a total income figure reflective of the entire combined business entity

statutory merger

any business combination in which only one of the original companies continues to exist

do not affect the financial reporting of the investee transactions must be disclosed

how are intra-entity transfers reported in an investee's separate financial statements if the investor is using the equity method?

net income (loss) dividends intra-entity gross profits created by sales amortization

Smith Inc has maintained an ownership interest in Watts Corporation for a number of years. This investment has been accounted for using the equity method. What transactions or events create changes in the investment in Watts Corporation account as recorded by Smith?

recognize the entire $10,000 gross profit on its income statement

Zell company sells inventory at $10,000 gross profit to its equity method investee, Aaron Company. Before the end of the year, Aaron resells all of this inventory to an outside, unrelated entity. As a result of the activities, Zell company should

investment

_________________ balance will always be eliminated when preparing financial statements

statutory consolidation

a specific type of business combination that unites tow or more companies under the ownership of a newly created company

fair value

acquisition method utilizes ___________

reduce value assigned to the fair value of the securities issued

amounts incurred to register and issue securities -->

subsidiary equity accounts are excluded from the accounting for the business combination

what is the accounting treatment of the acquired subsidiary's equity accounts in a business combination

downstream: investor --> investee upstream: investee --> investor no difference in effect

what is the difference between downstream and upstream sales? how does this difference affect application of the equity method?

expense as incurred

indirect combination costs -->

recognizes loss immediately

During the current year, Davis Company's common stock suffers a permanent drop in market value. In the past, Davis has made a significant portion of its sales to one customer. this buyer recently announced its decision to make no further purchases from Davis Company, an action that led to the loss of market value. Hawkins, Inc owns 35% of the outstanding shares of Davis, an investment that is recorded according to the equity method. how would the loss in value affect this investor's financial reporting?

provide more meaningful information than separate statements more fairly present the activities of the consolidated companies

why consolidate financial information when two or more companies combine to create a single economic entity?

an unrealized gain is recognized despite the lack of any selling activity by the acquirer

why do some criticize the recognition of bargain purchase gains in business combinations?

reporting unit

goodwill impairment testing is performed at the _____________ ___________ level

accrual

initial value & partial equity method do not utilize the ___________ method

bargain purchase

the fair value of the consideration transferred by the acquirer is less than the fair value received in an acquisition which is considered more relevant for asset valuation than the consideration transferred