...Lecture Notes Financial Accounting Theory III Prof. Alfred Liu Chapter 1: Reporting Equity Investments in Other Companies Example 1: The Cost/Equity Method and Increase of Investment Company A made an investment in one of its local competitors, Company B. For the following events, use the appropriate accounting method and record journal entries for Company A. 1/2/2012 – A purchased 10% of B’s shares for $20,000. 12/31/2012 - B reported net income of $100,000 and declared and paid dividends $10,000 to its shareholders. 1/2/2013 - A purchases an additional 20% of B’s common shares for $45,000. 12/31/2013 - B reports net income of $120,000 for 2013 and declared and paid $11,000 dividends to all shareholders. Analysis: The objective of retroactive adjustment – as if the equity method had been used from the first day of investment. Two accounts need to be adjusted: a) Investment account b) Retained earnings (historical equity income) or AOCI. Solution: In 2012, the cost method was appropriate because we didn’t know the market value of the investment. Record the investment on 1/2/2012 for A: Dr. Investment in B 20,000 Cr. Cash 20,000 Net income reported by B in 2012: No journal entry under the cost method. Record the dividends paid by B to A on 12/31/2012: Dr. Cash 1,000 Cr. Dividend income 1,000 Record the increase in investment on 1/2/2013: Dr. Investment in Ivanhoe Mines 45,000 Cr. Cash 45,000 Retroactive adjustments to investment and retained earnings on 1/2/2013:...
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...of business. * Are in process of production for such sales, or * Are to be currently consumed in the production of goods or services to be available for sale” (Schroeder, Clark, & Cathey, 2011, p. 264). Inventory physical count can be determined by using periodic or perpetual inventory system. The valuation of inventory is of significant importance for multiple reasons. First ending inventory constitutes major part in current assets and have substantial impact on working capital of the organization. Second, inventory value has direct impact on the net profits of the organization. There are several methods available in US Generally Accepted Accounting Principle (GAAP) for valuation of inventories, such as FIFO, LIFO, Average inventory and Lower of cost or market. Lower of cost or market (LCM) valuation method based on the accounting constraint of conservatism, which means that best choice among accounting alternative is the method that would least likely to overstate assets and net income. LCM defined as “As used in the phrase lower of cost or market, the term market means current replacement cost (by purchase or reproduction, as the case may be) except that: * Market should not exceed the net...
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...Chapter 5 Consolidation Subsequent to Acquisition Date A brief description of the major points covered in each case and problem. CASES Case 5-1 In this case, students must discuss how to value employees and patentable products and how these assets should be amortized or checked for impairment on an annual basis. Case 5-2 (prepared by Peter Secord, Saint Mary’s University) In this real life business combination, students are directed to identify all of the intangible assets acquired and to discuss the valuation problems associated with them. Case 5-3 In this case, adapted from a CA exam, students are asked to determine appropriate accounting policies relating to a restructuring of a real estate company. A special purpose balance sheet needs to be prepared that reports all assets and liabilities at fair value. Case 5-4 In this case, adapted from a CA exam, students are asked to provide advice in managing a new company providing warranties for new homes. Students must also recommend appropriate accounting policies relating to revenue recognition, warranty obligations and a business combination involving some unique factors in allocating the acquisition cost. Case 5-5 In this real life case, students are asked to provide advice in resolving a salary dispute for a hockey team. The owner of the hockey team states that he cannot afford the demands from the union. However, consolidated statements are not being...
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...that the fair value of a reporting unit is less than its carrying amount and proceeded with Step 1 of the quantitative two-step goodwill impairment test for all reporting units. On the basis of the valuation prepared by Management’s Expert, Gator estimated that the fair value of all of the reporting units exceeded their respective carrying values and no Step 2 analysis was required or prepared. Fair value, as defined by the Financial Accounting Standards Board (FASB), is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Although GAAP does not prescribe the methods for measuring the fair value of an item, it expresses a preference for the use of observable market prices to make that determination. In the absence of observable market prices, GAAP requires fair value to be based on the best information available in the circumstances, which is inherently imprecise due to the underlying assumptions about future conditions, transactions, or events whose outcome is uncertain and will, therefore, be subject to change over time. In planning an audit, auditors assess the risk of material misstatement in the entity’s financial statements. This assessment takes into consideration many aspects of the entity, and it ultimately results in the nature, timing, and extent of planned audit procedures for the entire engagement. Because of the wide range of possible fair value measurements...
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...copyrights, are among the most difficult to quantify in terams of their value. It becomes further complicated to ascertain value when contemplating more obscure intangible assets, such as trade dress, trade sectets or software code. While difficult, the value of these assests can be accurately calculated via a number of industry accepted methodologies. The key to a successful analysis is to develop a comprehensive plan of action. The initial point to determine when attempting to value intellectual propery or intangible assests is the rationale for undertaking the analysis in the first place. Why do you need to know the value of the assets? The most obvious situations are those in which a third party has an interest in the asset values. For example, the internal revenue service and othe tax authorities want a detailed understanding about the basis for any value determination used when allocating portions of the purchase price associated with ethe acquisition of other companies. This issue has become even more important with the recent issuance of Statement of Financial Accounting Standard 142, Goodwill and Other intangible Assets, which changed the accounting treatment of certain intangibles acquired through business combinations. Instead of a more-or-less blanket treatment of acquired intangibles that featured a stated amortization period, many of these assets will now be carried on the balance sheet at fair value and subjected to periodic impairment testing. Similarly, the tax authorities...
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...priority for both the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). However, the convergence process is designed to address only the most significant differences. While standards will be more similar, differences will continue to exist. In general, US GAAP tends to have more specific rules while IFRS rules are more flexible and requires more interpretation. The materiality of the reporting difference to a company’s financial statements depends on a variety of factors, including the nature of the company, the details of the transactions and interpretation of rules. Discussed below are some major aspects that would change if Colgate reports under IFRS. 1. Classification of deferred tax assets and liabilities on balance sheet Under US GAAP, for deferred tax asset, current or non-current classification is required. In the perspective of IFRS reporting rules, all deferred tax asset amounts should be classified as non-current in balance sheet. Referring to the footnote on Income Taxes (page 80 of 10k), Colgate included 284 of deferred tax asset in other current asset in compliance with US GAAP, while under IFRS, the 284 current deferred tax asset should be reclassified as non- current asset. 2. Costing method for inventory Referring to Colgate’s footnote on summary on significant accounting policies, the company accounts for inventories using both the first-in, first-out (FIFO) method (80% of inventories) and the last-in...
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...CHAPTER 4 CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES ACQUIRED AT MORE THAN BOOK VALUE ANSWERS TO QUESTIONS Q4-1 The carrying value of the investment is reduced under equity method reporting when (a) a dividend is received from the investee, (b) a differential is amortized, (c) an impairment of goodwill occurs, and (d) the market value of the investment declines and is less than the carrying value and it is concluded the decline is other than temporary. Q4-2 A differential occurs when an investor pays more than or less than underlying book value in acquiring ownership of an investee. (a) In the case of the cost method, no adjustments are made for amortization of the differential on the investor's books. (b) Under equity-method reporting the difference between the amount paid and book value must be assigned to appropriate asset and liability accounts of the acquired company. If any portion of the differential is assigned to an amortizable or depreciable asset, that amount must be charged against income from the investee over the remaining economic life of the asset. Q4-3 Amortization of a differential is the most common reason for investment income to be lower than a proportionate share of reported income of the investee. If Turner Company has paid more than book value for the shares of Straight Lace Company, the differential must be assigned to identifiable assets and liabilities of the investee, or to goodwill. Those amounts assigned to depreciable and...
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...Accounting for Leases Rae Girl ACC306 Intermediate Accounting II Professor Bill Wax August 21, 2015 Accounting for Leases Leasing is a commonly used financing vehicle in both personal and business arenas because the lease allows the parties to accomplish a sales-type transaction that benefits each without the commitment of an outright purchase on the part of the lessee. While the basic concept of a lease is simple, there are many complexities in theory and practice that have given rise to much discussion in the accounting profession. Still, leasing is a popular instrument and accountants must fully understand the methodology of decision-making and accounting for leases in order to properly reflect these transactions in a company’s financial statements. Simply defined, a lease is a contract between a lessor, the owner of an asset, and a lessee, the user of the asset. In other words, the lessor gives legal rights over the asset for a specified period of time to the lessee through a contractual agreement called a lease. The lessor retains legal ownership of the asset while the lessee has the right utilize the asset in business operations without having to purchase the asset outright. For this reason, in many instances, leases can be considered a financing vehicle. There are two basic lease classifications. The operating lease is a simple lease to account for because it is considered to be of the nature of a rental agreement. “The fundamental rights and responsibilities...
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...asset described differently amongst different professionals in history. Professor Dicksee, author of many different accounting manuals has defined goodwill as “When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts.” Lord Lindley has been quoted of saying “The term goodwill is generally used to denote benefit arising from connections and reputation.” Lord Macnaghten has been quoted of saying “Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start.” When a potential buyer is considering whether or not to acquire a company, that buyer may want to calculate the average future income when deciding what purchase price to offer. Goodwill is usually the payment that would be contributed above the future normal expected profits. Expected future income is further known as the normal income, the appropriate rate of return on assets times the fair value of the gross assets of the acquired company. There are six different methods used in the valuation of goodwill of a firm. 1. Average Profit Method calculates goodwill on the basis of the average profit previous years. The average profit is then multiplied by the...
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...used in determining goodwill: * The fair value of the consideration given by the acquirer * The fair value of any interest in the acquiree already held by the acquirer * The fair value of the noncontrolling interest in the acquiree, if any * The total of these three amounts, all measured at the acquisition date, and is compared with the acquisition-date fair value of the acquiree’s net identifiable assets, and the difference is goodwill. * Establishes A New Basis of Accounting * The new basis of accounting depends on the acquirer’s purchase price (FMV) + the NCI’s (FMV). * The depreciation cycle for fixed assets starts over based on current values and estimates. * If acquisition price > FMV, goodwill exists. * Recognize as an asset. * Do not amortize. * Evaluate periodically for possible impairment. * If acquisition price < FMV, a bargain purchase element (formerly called “negative goodwill”) exists. * Testing for goodwill impairment * When goodwill arises in a business combination, it must be assigned to individual reporting units. * To test for impairment, the fair value of the reporting unit is compared with its carrying amount. * If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired. * If the carrying amount of the reporting unit exceeds its fair value, an impairment of the reporting unit’s goodwill...
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...matter US financial reporting will continue to change over the next several years Although US companies will not when, and how IFRS might be be permitted to use International incorporated into the US financial Financial Reporting Standards (IFRS) reporting system. for US public filings in the foreseeable • In May 2011, the SEC’s Office of future, IFRS has been affecting US the Chief Accountant published a companies for some time, primarily Staff Paper exploring one possible through engaging in cross-border method to incorporate IFRS merger-and-acquisition (M&A) into the US financial reporting activity, meeting the reporting needs system, involving an active of non-US stakeholders, and assisting Financial Accounting Standards with or monitoring of the IFRS Board (FASB) incorporating IFRS requirements of non-US subsidiaries. into US GAAP over an extended US companies are also becoming period of time (the “endorsement” increasingly aware of IFRS, as key method). Under this method, the aspects of US generally accepted FASB would remain the US stanaccounting principles (US GAAP) dard setter and potentially endorse and IFRS continue to be the focus of new IFRS into the US financial ongoing joint projects. reporting system. Additionally, the FASB would also consider existing IFRS has also been a subject of focus IFRS during a multiple-year period, by the Securities and Exchange and consider how to...
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... we are assigned the topic “Carbon Accounting” by our course teacher for accomplishing our report. 1.2 Objectives of the report ➢ To attain the skill of report writing. ➢ To achieve deep knowledge about Carbon Accounting. ➢ To fulfill the partial requirement of our course of Accounting for Managers. 1.3 Methodology of the report This study was a descriptive research where we have been analyzed mainly secondary data to understand the Carbon Accounting and its application. All the data has gathered for report writing during term. Information collected to furnish this report is mainly from secondary in nature such as related books, journals, periodicals and Websites etc. 1.4 Limitations of the report We have tried our level best to find out the opportunity of work for overcoming the limitation but due to shortage of time, official compulsion and lack of availability of required data it was not possible to collect huge information about the topic. Other limitation is our report is mostly text based. 1.5 What is Carbon Accounting? Carbon accounting refers generally to processes undertaken to "measure" amounts of carbon dioxide equivalents emitted by an entity. It is used by nation states, corporations and individuals. It is the process of measuring, monitoring, benchmarking and reporting an organization Greenhouse Gas Emissions in a defined reporting period. Carbon Accounting is not is a greener form of financial accounting. 1.6 What is the Issue? The recognition...
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... Page 2 III. Tropical Pool Cleaning Income Statement Page 3 IV. Tropical Pool Cleaning Balance Sheet Page 4 V. Notes to Financial Statements Page 5 VI. Reference Page 9 Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Nature of Operations Tropical Pool Cleaning Corporation (henceforth refer to as the “Company,” “we” or “us”) provides pool cleaning, maintenance and repair services to individuals and corporations nationwide. Our headquarters are in New York City however we maintain a significant presence in Florida, California and Texas. 2. Accounting Principles and Presentation The Consolidated Financial Statements have been prepared in agreement with the United States of America GAAP regulations. 3. Use of Estimates In the preparation of financial statements estimates by managers are sometimes necessary. These assumptions are made using available data pertaining to the company’s assets, liabilities, revenue and expenses. Other areas where estimation may occur are future tax liability projections, fair value estimation and impairment calculation on investments. 4. Revenue Recognition Revenue is recognized when a service contract is signed, service is rendered, or evidence of an arrangement exists and collectability is probable. Revenues indicated are net of taxes collected for federal and state purposes and thus surrendered to the corresponding...
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...Empirical research on the impact of fair value measurements on earnings management analysis Contents Abstract 1. Introduction 2. Background and hypothesis 3. Literature review 4、Methodology 5. Sample selection and description 6. The test on the earnings management universality 7. The Impact of the Fair Value Application on Earnings Management 7.1 Correlation Analysis of the Main Variables 7.2 The Empirical Test of Linear Regression Equation 8. Limitation 9. Summary References Appendix I . Appendix II . Abstract The impact of fair value standard application towards enterprise is far-reaching and important, mainly in measurement methods of the changes on assets and liabilities way. This shift of fair value measurement method helps business executives for some sort of motive or target to conduct earnings management, thereby artificially adjusted profits. The authors focus on the study of earnings management in the listed Corporation under the fair value model during the financial crisis. We investigate the correlation between the application of fair value accounting and earnings management for providing the policy basis to improve fair value accounting and standardizing corporate earnings management behavior. We collect the sample data by selecting the Chinese A-share listed companies, and use the modified Jones model as a tool to prove the listed companies in the existence of widespread earnings management behavior. Descriptive analysis and...
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...FINANCIAL ACCOUNTING: CONSOLIDATIONS & ADVANCED ISSUES [FA4] EXAMINATION June 2014 Marks Notes: 1. 2. 3. 4. 5. 6. 7. All calculations must be shown in an orderly manner to obtain part marks. Round all calculations to the nearest dollar. Narratives for journal entries are not required unless specifically requested. Assume a December 31 fiscal year end unless specifically stated otherwise. Assume all amounts are material unless directed otherwise. Assume all companies are public companies unless otherwise noted. Assume all companies use the fair value enterprise method unless otherwise stated. Time: 4 Hours 30 Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note: 2 marks each a. The International Accounting Standards Board has issued more than 50 accounting standards. Which of the following statements is false with respect to these standards? 1) Member countries must comply with these standards. 2) Many countries, including Canada, have adopted these standards for use by companies listed on stock exchanges in their own countries. 3) Some of the standards allow a choice in accounting methods as long...
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