Essentials of Advanced Financial Accounting

Title
Table of Contents
1 Intercorporate Acquisitions and Investments in Other Entities
	Kraft’s Acquisition of Cadbury
	A Brief Introduction
	The Development of Complex Business Structures
	Enterprise Expansion
	Organizational Structure and Business Objectives
	Organizational Structure, Acquisitions, and Ethical Considerations
	Business Expansion and Forms of Organizational Structure
	Internal Expansion
	External Expansion through Business Combinations
	Frequency of Business Combinations
	Complex Organizational Structures
	Organizational Structure and Financial Reporting
	Creating Business Entities
	Business Combinations
	Forms of Business Combinations
	Methods of Effecting Business Combinations
	Valuation of Business Entities
	Accounting for Business Combinations
	Acquisition Accounting
	Fair Value Measurements
	Applying the Acquisition Method
	Goodwill
	Combination Effected through the Acquisition of Net Assets
	Combination Effected through Acquisition of Stock
	Financial Reporting Subsequent to a Business Combination
	Disclosure Requirements
	Additional Considerations in Accounting for Business Combinations
	Uncertainty in Business Combinations
	In-Process Research and Development
	Noncontrolling Equity Held Prior to Combination
	Acquisitions by Contract Alone
	Summary of Key Concepts
	Key Terms
	APPENDIX 1A Methods of Accounting for Business Combinations
	Questions
	Cases
	Exercises
	Problems
2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
	Berkshire Hathaway’s Many Investments
	Accounting for Investments in Common Stock
	Reasons for Investing in Common Stock
	The Cost Method
	Accounting Procedures under the Cost Method
	Declaration of Dividends in Excess of Earnings since Acquisition
	Acquisition at Interim Date
	Changes in the Number of Shares Held
	The Equity Method
	Use of the Equity Method
	Investor’s Equity in the Investee
	Recognition of Income
	Recognition of Dividends
	Comparison of the Carrying Amount of the Investment under the Cost and Equity Methods
	Acquisition at Interim Date
	Changes in the Number of Shares Held
	Comparison of the Cost and Equity Methods
	The Fair Value Option
	Overview of the Consolidation Process
	Consolidation Procedures for Wholly Owned Subsidiaries That Are Created or Purchased at Book Value
	Consolidation Worksheets
	Worksheet Format
	Nature of Eliminating Entries
	Consolidated Balance Sheet with Wholly Owned Subsidiary
	100 Percent Ownership Acquired at Book Value
	Consolidation Subsequent to Acquisition
	Consolidated Net Income
	Consolidated Retained Earnings
	Consolidated Financial Statements—100 Percent Ownership, Created or Acquired at Book Value
	Initial Year of Ownership
	Second and Subsequent Years of Ownership
	Consolidated Net Income and Retained Earnings
	Summary of Key Concepts
	Key Terms
	APPENDIX 2A Additional Considerations Relating to the Equity Method
	APPENDIX 2B Consolidation and the Cost Method
	Questions
	Cases
	Exercises
	Problems
3 The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential
	The Collapse of Enron and the Birth of a New Paradigm
	The Usefulness of Consolidated Financial Statements
	Limitations of Consolidated Financial Statements
	Subsidiary Financial Statements
	Consolidated Financial Statements: Concepts and Standards
	Traditional View of Control
	Indirect Control
	Ability to Exercise Control
	Differences in Fiscal Periods
	Changing Concept of the Reporting Entity
	Special-Purpose and Variable Interest Entities
	Off-Balance Sheet Financing
	Variable Interest Entities
	IFRS Differences in Determining Control of VIEs and SPEs
	Noncontrolling Interest
	Computation of Noncontrolling Interest
	Presentation of Noncontrolling Interest
	Combined Financial Statements
	Additional Considerations—Different Approaches to Consolidation
	Theories of Consolidation
	Comparison of Alternative Theories
	Current Practice
	The Effect of a Noncontrolling Interest
	Consolidated Net Income
	Consolidated Retained Earnings
	Worksheet Format
	Consolidated Balance Sheet with a Less-than-Wholly- Owned Subsidiary
	80 Percent Ownership Acquired at Book Value
	Consolidation Subsequent to Acquisition—80 Percent Ownership Acquired at Book Value
	Initial Year of Ownership
	Second and Subsequent Years of Ownership
	Summary of Key Concepts
	Key Terms
	APPENDIX 3A Consolidation of Variable Interest Entities
	Questions
	Cases
	Exercises
	Problems
4 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
	How Much Work Does It Really Take to Consolidate? Ask the People Who Do It at Disney
	Dealing with the Differential
	The Difference between Acquisition Price and Underlying Book Value
	Consolidation Procedures for Wholly Owned Subsidiaries Acquired at More than Book Value
	Treatment of a Positive Differential
	Illustration of Treatment of a Complex Differential
	100 Percent Ownership Acquired at Less than Fair Value of Net Assets
	Illustration of Treatment of Bargain-Purchase Differential
	Consolidated Financial Statements—100 Percent Ownership Acquired at More than Book Value
	Initial Year of Ownership
	Second Year of Ownership
	Intercompany Receivables and Payables
	Push-Down Accounting
	Summary of Key Concepts
	Key Terms
	APPENDIX 4A Push-Down Accounting Illustrated
	Questions
	Cases
	Exercises
	Problems
5 Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value
	Cisco Acquires a Controlling Interest in Nuova
	A Noncontrolling Interest in Conjunction with a Differential
	Consolidated Balance Sheet with Majority-Owned Subsidiary
	Consolidated Financial Statements with a Majority-Owned Subsidiary
	Initial Year of Ownership
	Second Year of Ownership
	Discontinuance of Consolidation
	Treatment of Other Comprehensive Income
	Modification of the Consolidation Worksheet
	Adjusting Entry Recorded by Subsidiary
	Adjusting Entry Recorded by Parent Company
	Consolidation Worksheet—Second Year Following Combination
	Consolidation Procedures
	Consolidation Worksheet—Comprehensive Income in Subsequent Years
	Additional Considerations
	Subsidiary Valuation Accounts at Acquisition
	Negative Retained Earnings of Subsidiary at Acquisition
	Other Stockholders’ Equity Accounts
	Subsidiary’s Disposal of Differential-Related Assets
	Summary of Key Concepts
	Key Terms
	Questions
	Cases
	Exercises
	Problems
6 Intercompany Inventory Transactions
	Inventory Transfers at Toys R Us
	Overview of the Consolidated Entity and Intercompany Transactions
	Elimination of Intercompany Transfers
	Elimination of Unrealized Profits and Losses
	Inventory Transactions
	Transfers at Cost
	Transfers at a Profit or Loss
	Effect of Type of Inventory System
	Downstream Sale of Inventory
	Resale in Period of Intercorporate Transfer
	Resale in Period following Intercorporate Transfer
	Inventory Held for Two or More Periods
	Upstream Sale of Inventory
	Equity-Method Entries—20X1
	Consolidation Worksheet—20X1
	Consolidated Net Income—20X1
	Equity-Method Entries—20X2
	Consolidation Worksheet—20X2
	Consolidated Net Income—20X2
	Additional Considerations
	Sale from One Subsidiary to Another
	Costs Associated with Transfers
	Lower of Cost or Market
	Sales and Purchases before Affiliation
	Summary of Key Concepts
	Key Terms
	APPENDIX 6A Intercompany Inventory Transactions—Modified Equity Method and Cost Method
	Questions
	Cases
	Exercises
	Problems
7 Intercompany Transfers of Services and Noncurrent Assets
	Micron’s Intercompany Fixed Asset Sale
	Intercompany Long-Term Asset Transfers
	Intercompany Transfers of Services
	Intercompany Land Transfers
	Overview of the Profit Elimination Process
	Assignment of Unrealized Profit Elimination
	Downstream Sale of Land
	Upstream Sale of Land
	Eliminating the Unrealized Gain after the First Year
	Subsequent Disposition of the Asset
	Intercompany Transfers of Depreciable Assets
	Downstream Sale
	Change in Estimated Life of Asset upon Transfer
	Upstream Sale
	Asset Transfers before Year-End
	Intercompany Transfers of Amortizable Assets
	Summary of Key Concepts
	Key Terms
	APPENDIX 7A Intercompany Noncurrent Asset Transactions— Modified Equity Method and Cost Method
	Questions
	Cases
	Exercises
	Problems
8 Multinational Accounting: Foreign Currency Transactions and Financial Instruments
	Microsoft’s Multinational Business
	Doing Business in a Global Market
	The Accounting Issues
	Foreign Currency Exchange Rates
	The Determination of Exchange Rates
	Direct versus Indirect Exchange Rates
	Changes in Exchange Rates
	Spot Rates versus Current Rates
	Forward Exchange Rates
	Foreign Currency Transactions
	Foreign Currency Import and Export Transactions
	Managing International Currency Risk with Foreign Currency Forward Exchange Financial Instruments
	Derivatives Designated as Hedges
	Forward Exchange Contracts
	Case 1: Managing an Exposed Foreign Currency Net Asset or Liability Position: Not a Designated Hedging Instrument
	Case 2: Hedging an Unrecognized Foreign Currency Firm Commitment: A Foreign Currency Fair Value Hedge
	Case 3: Hedging a Forecasted Foreign Currency Transaction: A Foreign Currency Cash Flow Hedge
	Case 4: Speculation in Foreign Currency Markets
	Foreign Exchange Matrix
	Additional Considerations
	A Note on Measuring Hedge Effectiveness
	Interperiod Tax Allocation for Foreign Currency Gains (Losses)
	Hedges of a Net Investment in a Foreign Entity
	Summary of Key Concepts
	Key Terms
	APPENDIX 8A Illustration of Valuing Forward Exchange Contracts with Recognition for the Time Value of Money
	APPENDIX 8B Use of Other Financial Instruments by Multinational Companies
	Questions
	Cases
	Exercises
	Problems
9 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
	McDonald’s—The World’s Fast Food Favorite
	Differences in Accounting Principles
	Determining the Functional Currency
	Functional Currency Designation in Highly Inflationary Economies
	Translation versus Remeasurement of Foreign Financial Statements
	Translation of Functional Currency Statements into the Reporting Currency of the U.S. Company
	Financial Statement Presentation of Translation Adjustment
	Illustration of Translation and Consolidation of a Foreign Subsidiary
	Noncontrolling Interest of a Foreign Subsidiary
	Remeasurement of the Books of Record into the Functional Currency
	Statement Presentation of Remeasurement Gain or Loss
	Illustration of Remeasurement of a Foreign Subsidiary
	Proof of Remeasurement Exchange Gain
	Remeasurement Case: Subsequent Consolidation Worksheet
	Summary of Translation versus Remeasurement
	Additional Considerations in Accounting for Foreign Operations and Entities
	Foreign Investments and Unconsolidated Subsidiaries
	Liquidation of a Foreign Investment
	Hedge of a Net Investment in a Foreign Subsidiary
	Disclosure Requirements
	Statement of Cash Flows
	Lower-of-Cost-or-Market Inventory Valuation under Remeasurement
	Intercompany Transactions
	Income Taxes
	Translation When a Third Currency Is the Functional Currency
	Summary of Key Concepts
	Key Terms
	Questions
	Cases
	Exercises
	Problems
10 Partnerships: Formation, Operation, and Changes in Membership
	The Evolution of PricewaterhouseCoopers (PwC)
	The Nature of the Partnership Entity
	Legal Regulation of Partnerships
	Definition of a Partnership
	Formation of a Partnership
	Other Major Characteristics of Partnerships
	Accounting and Financial Reporting Requirements for Partnerships
	International Financial Reporting Standards for Small and Medium-Sized Entities and Joint Ventures
	Accounting for the Formation of a Partnership
	Illustration of Accounting for Partnership Formation
	Accounting for the Operations of a Partnership
	Partners’ Accounts
	Allocating Profit or Loss to Partners
	Illustrations of Profit Allocation
	Multiple Bases of Profit Allocation
	Special Profit Allocation Methods
	Partnership Financial Statements
	Changes in Membership
	General Concepts to Account for a Change in Membership in the Partnership
	New Partner Purchases an Interest
	New Partner Invests in Partnership
	Determining a New Partner’s Investment Cost
	Dissociation of a Partner from the Partnership
	Summary of Key Concepts
	Key Terms
	APPENDIX 10A Tax Aspects of a Partnership
	APPENDIX 10B Joint Ventures
	Questions
	Cases
	Exercises
	Problems
11 Partnerships: Liquidation
	The Demise of Laventhol & Horwath
	Overview of Partnership Liquidations
	Dissociation, Dissolution, Winding Up, and Liquidation of a Partnership
	Lump-Sum Liquidations
	Realization of Assets
	Expenses of Liquidation
	Illustration of Lump-Sum Liquidation
	Installment Liquidations
	Illustration of Installment Liquidation
	Cash Distribution Plan
	Additional Considerations
	Incorporation of a Partnership
	Summary of Key Concepts
	Key Terms
	APPENDIX 11A Partners’ Personal Financial Statements
	Questions
	Cases
	Exercises
	Problems
12 Governmental Entities: Introduction and General Fund Accounting
	Accounting for the Bustling City of San Diego
	Differences between Governmental and Private Sector Accounting
	History of Governmental Accounting
	Major Concepts of Governmental Accounting
	Elements of Financial Statements
	Expendability of Resources versus Capital Maintenance Objectives
	Definitions and Types of Funds
	Financial Reporting of Governmental Entities
	Fund-Based Financial Statements: Governmental Funds
	Measurement Focus and Basis of Accounting (MFBA)
	Basis of Accounting—Governmental Funds
	Basis of Accounting—Proprietary Funds
	Basis of Accounting—Fiduciary Funds
	Budgetary Aspects of Governmental Operations
	Recording the Operating Budget
	Accounting for Expenditures
	The Expenditure Process
	Classification of Expenditure Transactions and Accounts
	Outstanding Encumbrances at the End of the Fiscal Period
	Expenditures for Inventory
	Accounting for Fixed Assets
	Long-Term Debt and Capital Leases
	Investments
	Interfund Activities
	(1) Interfund Loans
	(2) Interfund Services Provided and Used
	(3) Interfund Transfers
	(4) Interfund Reimbursements
	Overview of Accounting and Financial Reporting for the General Fund
	Comprehensive Illustration of Accounting for the General Fund
	Adoption of the Budget
	Property Tax Levy and Collection
	Other Revenue
	Expenditures
	Acquisition of Capital Asset
	Interfund Activities
	Adjusting Entries
	Closing Entries
	General Fund Financial Statement Information
	Summary of Key Concepts
	Key Terms
	Questions
	Cases
	Exercises
	Problems
13 Governmental Entities: Special Funds and Government-wide Financial Statements
	Governmental Accounting in Maryland
	Summary of Governmental Fund Types
	Governmental Funds Worksheets
	Special Revenue Funds
	Capital Projects Funds
	Illustration of Transactions
	Financial Statement Information for the Capital Projects Fund
	Debt Service Funds
	Illustration of Transactions
	Financial Statement Information for the Debt Service Fund
	Permanent Funds
	Illustration of Transactions
	Governmental Funds Financial Statements
	Enterprise Funds
	Illustration of Transactions
	Financial Statements for the Proprietary Funds
	Internal Service Funds
	Illustration of Transactions
	Financial Statements for Internal Service Funds
	Trust Funds
	Illustration of Private-Purpose Trust Fund
	Agency Funds
	Illustration of Transactions in an Agency Fund
	The Government Reporting Model
	Four Major Issues
	Government Financial Reports
	Government-wide Financial Statements
	Reconciliation Schedules
	Budgetary Comparison Schedule
	Management’s Discussion and Analysis
	Notes to the Government-wide Financial Statements
	Other Financial Report Items
	Interim Reporting
	Auditing Governmental Entities
	Additional Considerations
	Special-Purpose Governmental Entities
	Financial Reporting for Pensions and OPEB Plans
	Summary of Key Concepts
	Key Terms
	APPENDIX 13A Other Governmental Entities—Public School Systems and the Federal Government
	Questions
	Cases
	Exercises
	Problems
INDEX