WELLEGA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
MSC IN ACCOUNTITIN AND FINANCE
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
INDIVIDUAL ASSIGNAMNT (25%)
1. 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?

Answer: A derivative instrument designated as hedging the foreign currency exposure to variability
in the functional-currency-equivalent cash flows associated with a forecasted transaction…, a
recognized asset or liability, an unrecognized firm commitment, or a forecasted intercompany
transaction…qualifies for hedge accounting if all of the following criteria are met:

For consolidated financial statements, either (1) the operating unit that has the foreign currency
exposure is a party to the hedging instrument or (2) another member of the consolidated group that
has the same functional currency as that operating unit (subject to the restrictions in this
subparagraph and related footnote) is a party to the hedging instrument. To qualify for applying the
guidance in (2) above, there may be no intervening subsidiary with a different functional currency.
(Refer to paragraphs 36, 40A, and 40B for conditions for which an intercompany foreign currency
derivative can be the hedging instrument in a cash flow hedge of foreign exchange risk.)

The hedged transaction is denominated in a currency other than the hedging unit's functional
currency.

All of the criteria in paragraphs 28 and 29 are met, except for the criterion in paragraph 29(c) that
requires that the forecasted transaction be with a party external to the reporting entity. If the hedged
transaction is a group of individual forecasted foreign-currency-denominated transactions, a
forecasted inflow of a foreign currency and a forecasted outflow of a foreign currency cannot both
be included in the same group.

Paragraph 540 of Statement 133 includes the following definitions:

Firm commitment
An agreement with an unrelated party, binding on both parties and usually legally enforceable, with
the following characteristics:

The agreement specifies all significant terms, including the quantity to be exchanged, the fixed
price, and the timing of the transaction. The fixed price may be expressed as a specified amount of
an entity's functional currency or of a foreign currency. It may also be expressed as a specified
interest rate or specified effective yield. The agreement includes a disincentive for nonperformance
that is sufficiently large to make performance probable.

Forecasted transaction

A transaction that is expected to occur for which there is no firm commitment. Because no
transaction or event has yet occurred and the transaction or event when it occurs will be at the
prevailing market price, a forecasted transaction does not give an entity any present rights to future
benefits or a present obligation for future sacrifices.

A company may not treat foreign-currency-denominated fixed-rate interest coupon payments arising
from an issuance of foreign-currency-denominated fixed-rate debt as an unrecognized firm
commitment that may be designated as a hedged item in a foreign currency fair value hedge. The
foreign-currency exposure of the future interest payments would not meet Statement 133's definition
of an unrecognized firm commitment because the obligation is recognized on the balance sheet-that
is, the carrying amount of the foreign-currency-denominated fixed-rate debt incorporates the entity's
obligation to make those future interest payments as well as the repayment of principal. However,
those fixed-rate interest payments could be designated as the hedged transaction in a cash flow
hedge.

The above guidance also applies to dual-currency bonds that provide for repayment of principal in
the functional currency and periodic fixed-rate interest payments denominated in a foreign currency.
FASB Statement No. 52, Foreign Currency Translation, applies to dual-currency bonds and requires
the present value of the interest payments denominated in a foreign currency to be remeasured and
the transaction gain or loss recognized in earnings. Thus, those fixed-rate interest payments on a
dual-currency bond could be designated as the hedged transaction in a cash flow hedge of foreign
exchange risk.

The above response has been authored by the FASB staff and represents the staff's views, although
the Board has discussed the above response at a public meeting and chosen not to object to
dissemination of that response. Official positions of the FASB are determined only after extensive
due process and deliberation.

2. 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

3. 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?”
4. 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?
5. 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?
Critics have discussed that the equity method does not present sufficient information
regarding the investor's resources and requirement arising from the JV (jointventure) investment,
mainly when the JV is incorporated with the investor's operations and isfirms to complete
efficiencies of scale or to share risks. In other occurrence, the equity methodof accounting can give
an chance to obtain off-balance-sheet financing since liabilities are netbeside assets to report a net
speculation in the joint venture.In addition, the equity method needed the Total of the
investor's share of income andexpenditure, in that way consequential in a line item on the
income statement referred to as netinvestment Revenue.Critics consider that when the JV is
considered to augment the operations of the investor, thetotal and reporting of net investment
income does not present a true picture of the
investor'soperationsReferencehttp://aaahq.org/abo/reporter/WINTER96/REITHER.HTM. Because
of the acquisition of additional investee shares, an investor can choose to changefrom the fair–value
method to the equity method. Which procedures are applied to effectthis accounting change?
Answers: The equity method has been criticized because it allows the investor to recognize income
that may not be received in any usable form during the foreseeable future. Income is being accrued
based on the investee’s reported earnings, not on the investor’s share of investee dividends.
Frequently, equity income will exceed the investors share of investee cash dividends with no
assurance that the difference will ever be forthcoming. There are some managerial incentives that
exist that could influence a firm’s percentage ownership interest in another firm. Many companies
have contractual provisions such as debt covenants and managerial compensation contracts based on
ratios in the main body of the financial statements. Relative to consolidation, a firm employing the
equity method will report smaller values for assets and liabilities. Consequently, higher rates of
return for its assets and sales, as well as lower debt-to-equity ratios may result. Meeting such
contractual provisions may provide managers incentives to maintain technical eligibility for the
equity method rather than full consolidation.

6. 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.
Required:
a. What amount of gain or loss will be reported in Dundee's 2008 income statement on the
retirement of bonds?
b. 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?
c. How much will Perth's purchase of the bonds change consolidated net income for 2008?
d. 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.
e. 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.

Answers:
a. No gain or loss will be reported.

b)
Book value of liability reported by Dundee:
Par value of bonds outstanding 500000
Unamortized premium [10000 - (10000 / 10 * 3.5)] 6500
Book value of debt 506500
Amount paid by parent 492200
Gain on bond retirement 14300

c).
Increase on bond retirement: 14300
Alteration for abundance of intrigue pay over intrigue cost
Intrigue pays: 23100
Intrigue cost: 22000 - 1100
Increment in united net gain: 13200.

d)
Account Debit Credit
Bonds payable 500000
Premium on bonds payable [(10000 / 10) * 6] 6000
Interest income 23100
Investment in Dundee bonds {492200 + [(7800 / 6.5)/2]} 492800
Interest expense 22000
Gain on bond retirement 14300
Interest payable 22500
Interest receivable 22500

e)
Account Debit Credit
Bond payable 500,000
Premium on bonds payable
= [(10000/10) * 5] 5000

Intrigue salary 46,200

= [45000 + (7800/6.5)] 46200

Interest in Dundee bonds 494,000

= [492800 + (7800/6.5)] 494000

Intrigue cost 44,000

= [45000 - (10000/10)] 44000

Interest in Dundee stock 8580

= [(14300 - 1100) * 65%] 8580

CI in NA of Dundee 4620
= [(14300 - 1100) * 35%] 4620

Interest payable 22500. 22,500

Interest receivable 22500. 22,500
 7. 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
Required:

 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.

Answers:
I. ASSUME THE USE OF COST METHOD

Non-
Parent Share Controlling Entire Value
Share
Purchase price and implied value $2,276,000 569,000 2,845,000 *
Less: Book value of equity acquired 2,000,000 500,000 2,500,000**
Difference between implied and book value 276,000 69,000 345,000
Inventory (36,000) (9,000) (45,000)
Equipment (40,000) (10,000)
(50,000) Balance 200,000 50,000
250,000
Goodwill (200,000) (50,000) (250,000)
Balance -0- -0- -0-

*$2,276,000/.80 = 2,845,000
**$1,800,000 + 700,000 = 2,500,000
$2,500,000 x .80 = 2,000,000 – 2,500,000 = 500,000

2003 Cost Method

Dividend Income 16,000
Dividends Declared ($20,000 x .80)
16,000
To eliminate intercompany dividends

Beginning Retained Earnings-Sand 700,000

Capital Stock-Sand Company 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company 2,276,000
Non-controlling Interest 569,000

Cost of Goods Sold (Beginning Inventory) 45,000

Equipment (net) ($50,000 – $6,250) 43,750
Depreciation Expense ($50,000/8 useful life of 8 yrs.) 6,250
Goodwill 250,000
Difference between Implied and Book Value
345,000
To allocate and depreciate the difference between implied and book value

2004 Cost Method

Investment in Sand Company 64,000
Beginning Retained Earnings - Piper Company
64,000
To convert to equity/reciprocity as of 1/1/2011($80,000 x 80%)
Dividend Income 24,000
Dividends Declared
24,000
To eliminate intercompany dividends ($30,000 x 80%)

Beginning Retained Earnings-Sand Company ($700,000 + $100,000 – $20,000) 780,000

Capital Stock-Sand Company 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company ($2,276,000 + $64,000) 2,340,000
Noncontrolling Interest ($569,000 + ($780,000 – $700,000) x 0.20) 585,000
To eliminate investment account and create noncontrolling interest account

Beginning Retained Earnings-Piper Company ($36,000 + $5,000) 41,000

Noncontrolling Interest ($9,000 + $1,250) 10,250
Depreciation Expense 6,250
Equipment (net) ($50,000 – $6,250 – $6,250) 37,500
Goodwill 250,000
Difference between Implied and Book Value
345,000
To allocate and depreciate the difference between implied and book value

2005 Cost Method

Investment in Sand Company 160,000
Beginning Retained Earnings-Piper Company
160,000
To establish reciprocity/convert to equity method as of 1/1/2012 ($200,000 x 80%)

Dividend Income 12,000

Dividends Declared
12,000
To eliminate intercompany dividends($15,000 x 80%)

Beginning Retained Earnings-Sand ($780,000 + $150,000 – $30,000) 900,000

Common Stock- Sand Company 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company ($2,276,000 + $160,000) 2,436,000
Noncontrolling Interest ($569,000 + ($900,000 – $700,000) x 0.20) 609,000
To eliminate investment account and create noncontrolling interest account

Beginning Retained Earnings-Piper Company ($41,000 + $5,000) 46,000

Noncontrolling Interest ($10,250 +$1,250) 11,500
Depreciation Expense 6,250
Equipment (net) 31,250
Goodwill 250,000
Difference between Implied and Book Value
To allocate and depreciate the difference between implied and book value

II. ASSUME THE USE OF THE PARTIAL EQUITY METHOD.

Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value $2,276,000 569,000 2,845,000
Less: Book value of equity acquired 2,000,000 500,000 2,500,000
Difference between implied and book value 276,000 69,000 345,000
Inventory (36,000) (9,000) (45,000)
Equipment (40,000) (10,000) (50,000)
Balance 200,000 50,000 250,000
Goodwill (200,000) (50,000) (250,000)
Balance -0- -0- -0-
 Investment in Sand Corporation
(Partial Equity)
$2,276,000
Cost of investment

Equity income 80,000 Dividends 16,000

2,340,0000
Balance 2003

Equity income 120,000 Dividends 24,000

2,436,0000
Balance 2004

Equity income 64,000 Dividends 12,000

2,488,0000
Balance 2005

2003 Partial Equity Method

Equity in Subsidiary Income ($100,000 x 80%) 80,000

Investment in Sand Company
64,000
Dividends Declared ($20,000 x 80%)
To eliminate intercompany dividends and income

Beginning Retained Earnings-Sand 700,000

Capital Stock-Sand 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company 2,276,000
Noncontrolling Interest 569,000

Cost of Goods Sold (Beginning Inventory) 45,000

Depreciation Expense ($50,000/8) 6,250
Equipment (net) ($50,000 – $6,250) 43,750
Goodwill 250,000
Difference between Implied and Book Value
345,000
To allocate and depreciate the difference between implied and book value

2004 Partial Equity Method

Equity in Subsidiary Income ($150,000 x 80%) 120,000
Dividends Declared ($30,000 x 80%)
24,000
 Investment in Sand Company
96,000
To eliminate intercompany dividends and income

Capital Stock- Sand Company 1,800,0

Difference between Implied and Book Value 345,0
Investment in Sand Company ($2,276,000 + $64,000) 2,
Noncontrolling Interest ($569,000 + ($780,000 – $700,000) 5
x 20%) 85,000

Noncontrolling Interest ($9,000 + $1,250) 10,2

Depreciation Expense 6,2
Equipment (net) ($50,000 – $6,250 – $6,250) 37,5
Goodwill 250,0
00
Difference between Implied and Book Value

345,000
2005– Partial Equity Method
Dividends Declared ($15,000 x 80%) 12,000
Investment in Sand Company
52,000
To eliminate intercompany dividends and income

Beginning Retained Earnings-Sand 900,000

Common Stock- Sand Company 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company ($2,276,000 + $160,000) 2,436,000
Noncontrolling Interest ($569,000 + ($900,000 – $700,000) x 20%) 609,000

Beginning Retained Earnings-Piper Company ($41,000 + $5,000) 46,000

Noncontrolling Interest ($10,250 + $1,250) 11,500
Depreciation Expense 6,250
Equipment (net) 31,250
Goodwill 250,000
Difference between Implied and Book Value
345,000
To allocate and depreciate the difference between implied and book value

III. ASSUME THE USE OF THE COMPLETE EQUITY METHOD

2003- Complete Equity
Method Parent Non- Entire
Share Controlling Value
Share
Purchase price and implied value $2,276,000 569,000 2,845,000
Less: Book value of equity acquired 2,000,000 500,000 2,500,000
Difference between implied and book value 276,000 69,000 345,000
Inventory (36,000) (9,000) (45,000)
Equipment (40,000) (10,000)
(50,000) Balance 200,000 50,000
250,000
Goodwill (200,000) (50,000) (250,000)
Balance -0- -0- -0-

Investment in Sand Corporation

(Complete Equity)
 Cost of investment 2,276,0000

Equity income 80,000 Dividends 16,000

Excess depreciation
and cost of goods sold 41,000
2,299,0000
Balance 2003

2004 Equity income 120,000 Dividends 24,000

Excess depreciation
and cost of goods sold 5,000
2,390,0000
Balance 2004

Equity income 64,000 Dividends 12,000

Excess depreciation
and cost of goods sold 5,000
2,437,000
Balance 2005

2003 Complete Equity Method

Equity in Subsidiary Income ((0.80 $100,000) – $51,000) 29,000

Dividends Declared (0.80 $20,000)
16,000
Investment in Sand Company
13,000
To eliminate intercompany dividends and income

Beginning Retained Earnings-Sand 700,000

Capital Stock- Sand 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company 2,276,000
Noncontrolling Interest 569,000

Cost of Goods Sold (Beginning Inventory) 45,000

Depreciation Expense ($50,000/8) 6,250
Equipment (net) ($50,000 – $6,250) 43,750
Goodwill 250,000
Difference between Implied and Book Value
345,000
 To allocate and depreciate the difference between implied and book value

2004 Complete Equity Method

Equity in Subsidiary Income ((0.80 $150,000) – $15,000) 105,000

Dividends Declared (0.80 $30,000)
24,000
Investment in Sand Company
81,000
To eliminate intercompany dividends and income

Beginning Retained Earnings-Sand Company 780,000

Capital Stock- Sand Company 1,800,000
Difference between Implied and Book Value 345,000
Investment in Sand Company ($2,276,000 + $64,000) 2,340,000
Noncontrolling Interest ($569,000 + ($780,000 – $700,000) x 0.20) 585,000

Investment in Sand Company ($36,000 + $5,000) 41,000

Noncontrolling interest ($9,000 + $1,250) 10,250
Depreciation expense 6,250
Equipment (net) ($50,000 – $6,250 – $6,250) 37,500
Goodwill 250,000
Difference between Implied and Book Value
345,000
To allocate and depreciate the difference between implied and book value

2005 Complete Equity Method

Equity in Subsidiary Income ((80% x $80,000) – $15,000) 49,000
Dividends Declared ($15,000 x 80%)
12,000
Investment in Sand Company
37,000
To eliminate intercompany dividends and income

Common Stock- Sand Company 1,800,000

Difference between Implied and Book Value 345,000
Investment in Sand Company ($2,276,000 + $160,000) 2,436,000
Noncontrolling Interest ($569,000 + ($900,000 – $700,000) x 0.20) 609,000

Investment in Sand Company ($41,000 + $5,000) 46,000

Noncontrolling Interest ($10,250 + $1,250) 11,500
Depreciation Expense 6,250
Equipment (net) 31,250
Goodwill 250,000
Difference between Implied and Book Value 345,000
To allocate and depreciate the difference between implied and book value

8. 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

Required:
A. Prepare a Computation and Allocation Schedule for the difference between cost and book
value of equity acquired.
B. Determine the amounts at which the above assets (plus goodwill, if any) will appear on the
consolidated balance sheet on January 1, 2003.

A. Computation and Allocation Schedule for the difference book value of equity aquired
and the value implied by the purchase price

85% 15% 100%

Parent share NCI share Equity value

Purchase Value and implied value(A) $541,800 $95,611 $637,411

Book Value of Equity acquired:

Commom Stock(B) 338,385 59,715 398,100

Retained earnings(C) 122,145 21,555 143,700

Total Book value(D)=B+C 460,530 81,270 541,800

Difference between implied and book value (E)=A-D 81,270 14,341 95,611

Marketable Securities (F) (21,080) (3,720) (24,800)

Equipment (G) (16,830) (2,970) (19,800)

Balance (E-F-G) 43,360 7,651 51,011

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Record New Goodwill (43,360) (7,651) (51,011)

Balance $0 $0 $0

B. Note: (i) Purchase value and implied value=15% NCI value= $541,800=
100/85*15/100=$95,611

(ii) Marketable Securties = 100% Equity Value=Fair Value - Book Value=$44,600-$19,800=$24800

(iii) Equipment = 100% Equity Value = Fair value- Book value = $140,000-$120,200=$19800

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