Advanced Financial Accounting & Reporting
Advanced Financial Accounting & Reporting ACCT 415
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This 10 page Class Notes was uploaded by Johnnie Little on Friday October 23, 2015. The Class Notes belongs to ACCT 415 at University of Idaho taught by Staff in Fall. Since its upload, it has received 38 views. For similar materials see /class/227953/acct-415-university-of-idaho in Accounting at University of Idaho.
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Date Created: 10/23/15
Acct 415515 Prof Teresa Gordon Accounting for Investments under FASB No 115 A Review Change in Fair Value For commercial enterprises Presentation on Other than nonpro t entities follow SFAS No124 Financial Statements Temporary Temporary Loss Does the investor have substantial in uence or control Investor owns 20 to 50 of stock and has on BS at hlsmncell COSt plus share of earnings Realized Sigm cant in uence but not control of the corporation Since acqu1s1t10n less NA loss on IS dividends received new basis Use Equity Method amortization may also on BS be required Investor owns over 50 of stock or otherwise controls the corporation Consolidated nancial N A N A statements Consolidation required Does a readily determinable fair value exist lizagjig On BS at hist01ical cost NA new basis If not use Cost Method on BS On BS at amortized cost For debt secuiities does the enterpiise have the Realized positive intent and ability to hold to matuiity IS includes loss on IS amortization of N A new cost ClaSSIfy as held to maturlty premiums amp discounts basis on BS Disclose fair value in notes Is the investment objective to generate pro ts on On B S at fair value Recognized N0 shortterm differences in price on IS and additional Classify as Trading Securities ISreports unrealized included in entries gainloss for period needed aAsll other debt and equity securities are class1 ed On BS at fair value Repo ed Realized on SCI and loss on IS SCI reports holding included in new cost Available forsale securmes gainloss for period OCI basis on BS BS balance sheet IS income statement SCI statement of comprehensive income AOCI accumulated other comprehensive income owners equity account FV fair value NA not applicable since investments are not carried at fair value andkCthddoc as of 71310 Page 1 Acct 415515 Prof Teresa Gordon Accounting for investment on parent s books Cost Method versus Eguitv Method Cost Method The original cost of the investment is recorded on the parent s books No adjustments are made to re ect subsequent changes in fair value unless serious doubt as to the realization of the investment exists in which case a permanent writedown is made When dividends are declared dividend income is recognized Undistiibuted earnings have no affect on parent s books Consolidation procedures Both the investment account and dividend income are eliminated when the subsidiary and parent financial statements are consolidated This and all other adjustments are made only on the consolidation workpapers andkCthddoc as of 71310 Page 2 Acct 415515 Prof Teresa Gordon Equity Method At acquisition the investment is recorded at cost Subsidiary earnings after acquisition increase the investment account and increase earnings on the income statement Subsidiary losses after acquisitions decrease the investment account and decrease earnings on the income statement Dividends received from the subsidiary reduce the investment account When the fair value of identifiable assets exceeds their carrying value on the subsidiary s books the excess is amortized over the remaining economic life of the assets This amortization reduces the investment account on the parent s books and reduces subsidiary earnings reported on the income statement Consolidation procedures The investment account and earnings of subsidiary accounts are eliminated in the consolidation process Check figures Consolidated net income will be the same as the parent company s net income Consolidated retained earnings will be the same as the parent company s retained earnings andkCthddoc as of 71310 Page 3 Acct 415515 Prof Teresa Gordon Equity Method on Parent s Books Investment in subsidiary balance sheet account Historical cost of investment Share of reported losses of subsidiary Share of reported earnings of Dividends received from subsidiary subsidiary Amortization of excess value of identi able assets of subsidiary Earnings of subsidiaries income statement account Share of reported losses of Share of reported earnings of subsidiary subsidiary Amortization of excess value of identi able assets of subsidiary andkCthddoc as of 71310 Page 4 Acct 415515 Prof Teresa Gordon Both methods are widely used but each has advantages and disadvantages Cost Method Equity Method Financial analysis complicated Facilitates financial analysis because amounts needed must such as return on investment for be tracked on working papers subsidiaries rather than through the general ledger Less bookkeeping is involved Parent company financial statements are more useful for internal management purposes No selfchecking feature Selfchecking feature useful when consolidated financial statements are prepared Note The consolidated financial statements will be identical regardless of which bookkeeping method is used internally by the parent company andkCthddoc as of 71310 Page 5 Acct 415515 Prof Teresa Gordon The COMPLETE EQUITY method gives rise to a ONE LINE CONSOLIDATION THEORY ALWAYS Consolidated Net Income Consolidated Retained Earnings Consolidated Stockholders Equity Consolidated Stockholders Equity andkCthddoc as of 71310 Parent s Net Income Parent s Retained Earnings Parent s Stockholders Equity if 100 Subsidiary Parent s Stockholders Equity minority interest if lt 100 Subsidiary Page 6 Acct 415515 Prof Teresa Gordon Tips for tackling consolidation problems 1 Identify the nature of the problem Parent accounting equity method vs cost method Noncontrolling Minority interest Intercompany transactions 2 Note important details Cost of investment Fair value of assets acquired Amortization of fair values Ownership interest of parent DATES 3 Identify specific requirements Journal entries Worksheet entries Completion of worksheet Explanation of items Tips for tackling consolidation problems It is helpful to start with a global analysis i Determine investment cost 2 Determine book value of net assets 3 Determine fair value of net assets 4 Investment cost Book value of net assets Differential 5 Investment cost Fair value of net assets Goodwill C Fair value of net assets Book value of net assets Excess value component andkCthddoc as of 71310 Page 7 Acct 415515 Prof Teresa Gordon Parent uses Eguity Method Consolidation worksheet entries needed assumes nonpushdown accounting 1 Basic elimination engy subsidiary net assets book value at beginning of year plus earnings and dividends for year Eliminate excess cost element at end of period values Amortization of the allocated differential Eliminate accumulated depreciation at acguisition 9759 Elimination of intercompany transactions Parent uses Cost Method Consolidation worksheet entries needed assumes nonpushdown accounting A Basic elimination en book value of net assets at acquisition this entry is always the same N Record excess cost elements amounts at acquisition this entry is always the same U Amortization of the differential prior periods affect on retained earnings current affect on income statement and balance sheet 4 Eliminate dividend income LII Eliminate accumulated depreciation at acquisition 9 Elimination of intercompany transactions andkCthddoc as of 71310 Page 8 Acct 415515 Prof Teresa Gordon Index to Consolidation Examples Poo creates Soo Created 100 oowned subsidiary At acquisition plus work papers for two years cost and equity methods Pebble amp Stone Created subsidiary with noncontrolling interest A Pebble sells 20 Work papers for cost and equity methods 3 years each B Stone issues more stock Work papers for cost and equity methods 3 years each Business Combinations PA and Sun Examples Illustrations ofacquisition of assets acquisition of stock statutory merger statutory consolidation etc Also short examples of parent company accounting under Parent Co and Economic Unit approaches Plate amp Saucer 100 o owned acquired subsidiary At acquisition plus three years cost and equity method work papers Play amp Swing Less than 10000 owned acquired subsidiary At acquisition plus three years cost and equity method work papers Uses GAAP Economic Unit approach Pound amp Sound Downstream sales to wholly owned created subsidiary Pup amp Sup Upstream sales from partially owned created subsidiary Other files available notes Cost vs Equity Methoddoc Created partially owned subdoc BusCombdoc Acquired Sub with NCIdoc andkCthddoc as of 71310 Page 9 Acct 415515 Prof Teresa Gordon andkCthddoc as of 71310 Page 10
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