China Concepts Stocks

Intercompany Profit Transactions—Plant Assets 1. What is the objective of eliminating the effects of intercompany sales of plant assets in preparing consolidated financial statements? The objective of eliminating the effects of intercompany sales of plant assets is to reflect plant assets and related depreciation amounts in the consolidated financial statements at cost to the consolidated entity. 2. In accounting for unrealized profits and losses from intercompany sales of plant assets, does it make any difference if the parent is the purchaser or the seller? Would your answer be different if the subsidiary were 100 percent owned? Consolidation procedures for eliminating unrealized profit on plant assets are affected by the direction of the sale. The full amount of unrealized profit or loss on downstream sales (parent to subsidiary) is charged or credited to the controlling interest. In the case of upstream sales, however, unrealized profit or loss is allocated between controlling and ...

Consolidation Techniques and Procedures 1. If a parent in accounting for its subsidiary amortizes patents on its separate books, why do we include an adjustment for patents amortization in the consolidation workpaper? Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its subsidiary investment and income accounts. Since patents and patent amortization accounts are not recorded on the parent’s books, they are created for consolidated statement purposes through workpaper entries. 2. How is noncontrolling interest share entered in consolidation workpapers? Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper adjusting entry in which noncontrolling interest share is debited and noncontrolling interest is credited. The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest share is adde...

Intercompany Profit Transactions—Inventories 1. The effect of unrealized profits and losses on sales between affiliated companies is eliminated in preparing consolidated financial statements. When are profits and losses on such sales realized for consolidated statement purposes? Profits and losses on sales between affiliates are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements. 2. In eliminating unrealized profit on intercompany sales of inventory items, should gross profit or net profit be eliminated? Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to GAAP. 3. Is the amount of intercompany profit to be eliminated from consolidated ...

Partnerships—Formation, Operations, and Changes in Ownership Interests 1. Explain why the noncash investments of partners should be recorded at their fair values. Noncash investments of partners should be recorded at their fair values in order to provide equitable treatment to the individual partners. The recording of noncash assets at less than fair value will result in allocating the amount of understatement between the partners in their relative profit and loss sharing ratios as the undervalued assets are used for partnership business or when they are sold by the partnership. 2. Is there a conceptual difference between partner drawings and withdrawals? Is there a practical difference? Conceptually, there is no difference between the drawings and the withdrawals of partners since both represent disinvestments of resources from the partnership entity. From a practical viewpoint, the distinction between withdrawals and drawings may be important because allowable drawings are not usuall...

Partnership Liquidation 1. How does partnership liquidation differ from partnership dissolution? Dissolution of a partnership terminates the partnership as a legal entity, but the partnership business may continue under a new agreement. When a partnership is liquidated, however, the partnership is terminated both as a legal and as a business entity. Thus, a partnership may be dissolved without liquidation, but it may not be liquidated without dissolution. 2. What is simple partnership liquidation, and how are distributions to partners computed? A simple partnership liquidation is the liquidation of a solvent partnership in which all partners have equity capital and all gains and losses are realized and recognized before any distributions are made to the partners. In simple partnership liquidations, only one cash distribution is made and the amounts distributed to individual partners are equal to their predistribution capital account balances. 3. UPA specifies a priority ranking for dis...

Corporate Liquidations and Reorganizations 1. What is the distinction between equity insolvency and bankruptcy insolvency? Equity insolvency occurs when a debtor is unable to pay its debts as they come due. Bankruptcy insolvency occurs when a debtor’s liabilities exceed the fair value of all assets. 2. Bankruptcy proceedings may be designated as voluntary or involuntary. Distinguish between the two types, including the requirements for filing of an involuntary petition. A bankruptcy proceeding is designated voluntary if the debtor corporation files the petition to place itself under the protection of the bankruptcy court and involuntary if creditors file the petition to bring the debtor into bankruptcy court. An involuntary petition may be filed by a single creditor with an unsecured claim of $14,425 or more if there are fewer than twelve unsecured creditors. Otherwise, three or more entities with unsecured claims totaling at least $14,425 must file in order to commence an involuntary ...

Derivatives and Foreign Currency 1. Define the term derivative and provide examples of risks that derivative contracts are designed to reduce. Derivative is the name given to a broad range of financial securities. Their common characteristic is that the derivative contract’s value to the investor is directly related to fluctuations in price, rate, or some other variable that underlies it. Interest rate, foreign currency exchange rate, commodity prices and stock prices are common types of prices and rate risks that companies hedge. 2. Explain the differences between forward contracts and futures contracts and the potential benefits and potential costs of each type of contract. A forward is negotiated directly with a counterparty, while a future is a standard contract traded on an exchange. The exchange traded instrument has less risk of non-performance, and is commonly cheaper to transact. But standard contracts might not fit all companies’ needs. The forward carries the risk of coun...