Quiz 1: Chapters 1 & 2
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?
accrual
equity method utilizes the ______________ method
cost
fair value method required to record investment at ____________.
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?
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?
each company continues to retain its own records
how does consolidation affect the accounting records if separate incorporation is maintained?
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?
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
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?
expense as incurred
indirect combination costs -->
equity method
investor has the ability to exercise significant influence on the investee operations ownership is between 20% - 50%
fair value-method
investor holds a small percentage of equity securities of investee investor cannot significantly affect investee's operations
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
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
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
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?
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?
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
as soon as the investee makes a profit
upward adjustments in the asset balance are recorded when?
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?
market approach income approach cost approach
what are the three valuation techniques?
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?
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?
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
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
no
when significant influence is lost, is there a retroactive adjustment?
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
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?
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?
to provide the structure for generating financial reports for the single economic entity
within the consolidation process, what is the purpose of a worksheet?
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?
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
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?
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
statutory consolidation
a specific type of business combination that unites tow or more companies under the ownership of a newly created company
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?
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?
increases
NI _______________ investment account when using the equity method
fair value
acquisition method utilizes ___________
reduce value assigned to the fair value of the securities issued
amounts incurred to register and issue securities -->
statutory merger
any business combination in which only one of the original companies continues to exist
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?
no
can an entity recognize profits through activities within itself
income
changes in fair values are recognized as ________ when using the fair-value method.
control
consolidation = _____________
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
