RIFT VALLEY UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
MSC IN ACCOUNTITIN AND FINANCE
ADVANCED FINANCIAL ACCOUNTING AND REPORTING INDIVIDUAL ASSIGNAMNT (15%)
- SFAS 133 allows the use of cash flow hedge accounting for foreign currency derivatives associated with a forecasted foreign currency transaction if some conditions are fulfilled what are they? Do you have any possible criticism on Hedge of a Forecasted Foreign Currency Denominated Transaction?
- When a parent controls a subsidiary which in turn controls other firms, a “pyramid” or “father-son-grandson” relationship exists, explain in detail the consolidation process and practical show the procedures to be followed to consolidate financial statements during mutual ownership happened
- Should investor-investee relations determine investor accounting for investee?
“As part of its Accounting for Financial Instruments joint project with the IASB, the FASB is considering changes to its requirements for equity method accounting. Although all board decisions are tentative prior to extensive due process and final approval, the FASB reported the following in 2010: The Board decided that an investor should apply the equity method of accounting if the investor has significant influence over the investee and the investment is considered related to the investor’s consolidated businesses. Otherwise, the investment would be measured at fair value with changes included in earnings. The Board directed the staff to develop the criteria for determining whether an investee is related to the investor’s consolidated businesses. The Board decided that an entity may not elect the fair value option for equity investments that would be accounted for under the equity method under the decision reached above. This tentative decision would add to the equity method a criterion that “the investment is considered related to the investor’s consolidated businesses.” Without such a relationship, the investment valuation for financial reporting would be fair value, even when ability to significantly influence the investee is present. How would the FASB’s decision affect firms’ future election of the fair-value option? Do you think the addition of a relationship criterion for equity method use would increase the relevance of financial reporting for investments?”
- 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 percent 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?
- Although the equity method is a generally accepted accounting principle (GAAP), recognition of equity income has been criticized. What theoretical problems can opponents of the equity method identify? What managerial incentives exist that could influence a firm’s percentage ownership interest in another firm?
- Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 2005, which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On July 1, 2008, Perth Company purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent of Dundee’s voting shares.
- What amount of gain or loss will be reported in Dundee’s 2008 income statement on the retirement of bonds?
- Will a gain or loss be reported in the 2008 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported?
- How much will Perth’s purchase of the bonds change consolidated net income for 2008?
- Prepare the work paper eliminating entry or entries needed to remove the effects of the inter-corporate bond ownership in preparing consolidated financial statements at December 31, 2008.
- Prepare the work paper eliminating entry or entries needed to remove the effects of the inter-corporate bond ownership in preparing consolidated financial statements at December 31, 2009.
- Work paper Entries for Three Years
On January 1, 2003, Piper Company acquired an 80% interest in Sand Company for $2,276,000. At that time the capital stock and retained earnings of Sand Company were $1,800,000 and $700,000, respectively. Differences between the fair value and the book value of the identifiable assets of Sand Company were as follows:
Fair Value In Excess of Book Value
Inventory $ 45,000
Equipment (net) 50,000
The book values of all other assets and liabilities of Sand Company were equal to their fair values on January 1, 2003. The equipment had a remaining useful life of eight years. Inventory is accounted for on a FIFO basis. Sand Company’s reported net income and declared dividends for 2003 through 2005 are shown here:
2003 2004 2005
Net Income $ 100,000 $ 150,000 $ 80,000
Dividends 20,000 30,000 15,000
- Prepare the eliminating/adjusting entries needed on the consolidated worksheet for the years ended 2003, 2004 and 2005. (It is not necessary to prepare the worksheet.)
- Assume the use of the cost method.
- Assume the use of the partial equity method.
- Assume the use of the complete equity method.
- On January 1, 2003, Pam Company purchased an 85% interest in Shaw Company for $540,000. On this date, Shaw Company had common stock of $400,000 and retained earnings of $140,000. An examination of Shaw Company’s assets and liabilities revealed that their book value was equal to their fair value except for marketable securities and equipment:
| ||Book Value||Fair Value|
|Marketable securities|| $ 20,000|| $ 45,000|
|Equipment (net)|| 120,000|| 140,000|
- Prepare a Computation and Allocation Schedule for the difference between cost and book value of equity acquired.
- Determine the amounts at which the above assets (plus goodwill, if any) will appear on the consolidated balance sheet on January 1, 2003.