Ebook Advanced accounting (11th edition): Part 2

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Ebook Advanced accounting (11th edition): Part 2 presents the following chapters: Chapter 13 accounting for derivatives and hedging activities; chapter 14 foreign currency financial statements; chapter 15 segment and interim financial reporting; chapter 16 partnerships - formation, operations, and changes in ownership interests; chapter 17 partnership liquidation; chapter 18 corporate liquidations and reorganizations; chapter 19 an introduction to accounting for state and local governmental units; chapter 20 accounting for state and local governmental units - governmental funds; chapter 21 accounting for state and local governmental units - proprietary and fiduciary funds; chapter 22 accounting for not-for-profit organizations; chapter 23 estates and trusts. 13 CHAPTER Accounting for Derivatives and Hedging Activities LEARNING OBJECTIVES T his chapter describes in detail the accounting for derivatives used as hedges There are three major types of hedge activity that we demonstrate the accounting for: cash-flow hedge, fair value hedge, and hedges of foreign currency–denominated transactions A CC OUN TI N G FOR DER IVATIVE INSTR UME NT S A ND H ED GI NG AC TI VITIES The FASB began to formally consider accounting for derivative instruments and hedges when it added the broad topic of accounting for financial instruments to its agenda in 1986 Financial accounting and reporting standards needed to address newly-created financial instruments The FASB also needed to develop a set of broad, forward-thinking standards that would be able to properly report the impact on financial position of rapidly advancing innovations in financial instruments Since then, the FASB has issued many statements addressing aspects of accounting for financial instruments, including the following: Understand the definition of a cash flow hedge and the circumstances in which a derivative is accounted for as a cash flow hedge Understand the definition of a fair value hedge and the circumstances in which a derivative is accounted for as a fair value hedge Account for a cashflow-hedge situation from inception through settlement and for a fairvalue-hedge situation from inception through settlement Understand the special derivative accounting related to hedges of existing foreign currency– denominated receivables and payables ■ FASB Statement No 105, “Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrated Credit Risk” (March 1990) ■ FASB Statement No 107, “Disclosures About Fair Value of Financial Instruments” (December 1991), which superseded and amended Statement No 105 ■ FASB Statement No 115, “Accounting for Certain Investments in Debt and Equity Securities” (May 1993) Comprehend the footnote disclosure requirements for derivatives ■ FASB Statement No 119, “Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments” (October 1994), which Statement No 133 supersedes Understand the International Accounting Standards Board accounting for derivatives Many deliberations, public comments, field studies, and revisions occurred between the initial deliberations regarding derivative instruments and hedging activities in January 1992 and June 1998, when the final version of FASB Statement No 133, “Accounting for Derivative Instruments and Hedging Activities,” was issued Corporations had many implementation questions about a standard addressing as complex a topic as derivative instrument accounting To address these concerns, the FASB formed the Derivatives Implementation Group (DIG) in 1998, which assists the FASB by advising them on how to resolve practical issues that arise when Statement 133 is applied The DIG functions in a similar way to the 429 430 CHAPTER 13 Emerging Issues Task Force (EITF) except that the DIG does not formally vote on issues to reach a consensus Instead, the resolution from the group’s deliberations is presented to the FASB for clearance The DIG members include high-level executives from companies such as Time Warner, Inc., General Electric, and J P Morgan Chase, Inc., and partners from international accounting firms More than 150 issues have been forwarded to the FASB, and many of them have been cleared by the FASB Once cleared, guidance is included in the FASB staff implementation guide (Q&A) Two major standards have amended parts of Statement No 133: In June 2000, FAS 138, “Accounting for Certain Derivative Instruments and Hedges,” was issued This standard addressed concerns about the accounting for foreign currency derivatives This topic is discussed later in the chapter In April 2003, FAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued This standard clarified the accounting and reporting for derivative instruments, including some types of derivative instruments embedded in other contracts The latter topic is beyond the scope of our discussion With the completion of the FASB ASC in 2009, all of the prior standards on derivatives and hedging are contained in Topic 815, “Derivatives and Hedging.” For the remainder of this chapter when we refer to GAAP [1], we will be referencing ASC Topic 815, unless otherwise noted Hedge Accounting GAAP’s objective is to account for derivative instruments used to hedge risks so that the financial statements reflect their effectiveness in reducing the company’s exposure to risk For the financial statements to reflect the derivative contract’s effectiveness, both changes in the hedged item’s fair value and the hedging instrument’s fair value resulting from the underlying change must be recorded in the same period The investor can then clearly assess the effectiveness of the strategy The term hedge accounting refers to accounting designed to record changes in the value of the hedged item, and in the value of the hedging instrument in the same accounting period ASC Topic 815 establishes three defining characteristics for a derivative: It has one or more underlyings and one or more notional amounts or payment provisions, or both It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors Its terms require or permit net settlement, so it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement The specific requirements of ASC Topic 815 are based on four fundamental or guiding decisions: ■ Derivative instruments represent rights or obligations that meet the definitions of assets or liabilities and should be reported in the financial statements At year-end, the derivative contract value is recorded on the books as an asset or liability ■ Fair value is the most relevant measure for financial instruments and the only relevant measure for derivative instruments Derivative instruments should be measured at fair value, and adjustments to the carrying amounts of the hedged items should reflect changes in their fair value (that is, gains or losses) that are attributable to the risk being hedged and that arise while the hedge is in effect ■ Only items that are assets or liabilities should be reported as such in financial statements ■ Special accounting for items designated as being hedged should be provided only for qualifying items One aspect of qualification should be an assessment of the expectation of effective offsetting changes in fair values or cash flows during the term of the hedge for the risk being hedged Accounting for Derivatives and Hedging Activities For hedged items and the derivative instruments designated to hedge them to qualify for hedge accounting, formal documentation must be prepared defining: ■ ■ The relationship between the hedged item and the derivative instrument The risk-management objective and the strategy that the company is achieving through this hedging relationship, including identification of: The hedging instrument The hedged item The nature of the risk being hedged For fair value hedges, how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value will be assessed For cash flow hedges, how the hedging instrument’s effectiveness in hedging the hedged transaction’s variability in cash flows attributable to the hedged risk will be assessed In order to qualify for hedge accounting, management must demonstrate that the derivative is considered highly effective in mitigating an identified risk Hedge Effectiveness Once a type of risk is identified that qualifies for hedge accounting, the effectiveness of the hedge to offset gains or losses in the item being hedged must be assessed This assessment is done when the hedge is first entered into and during the hedge’s existence In order for a hedge to qualify for hedge accounting, the derivative instrument must be considered highly effective in offsetting gains or losses in the item being hedged ASC Topic 815 requires statistical or other numerical tests to assess hedge effectiveness, unless a specific exception exists Companies must choose a methodology to be applied to assess hedge effectiveness Two common approaches are critical term analysis and statistical analysis Critical term analysis involves examining the nature of the underlying variable, the notional amount of the derivative and the item being hedged, the delivery date for the derivative, and the settlement date for the item being hedged If the critical terms of the derivative and the hedged item are identical, then an effective hedge is assumed For example, in the Gre Copper forward contract example used in chapter 12: Amount Underlying variable Hedge Copper Forward Contract Terms 100,000 pounds copper 100,000 pounds copper This situation would be considered a highly-effective hedge because the critical terms match exactly Hedge accounting could be used for this situation If the critical terms don’t match, a statistical approach can be used For example, AMR enters into jet fuel, heating oil, and crude oil swap and option contracts to hedge the effect of jet-fuel price fluctuations on its operations If AMR only used jet-fuel hedges, it might be able to use only critical term analysis to assess hedge effectiveness But it uses heating oil and crude oil swaps and options also Although we could assume that the prices of heating oil and crude oil might move in the same direction as jet fuel, the economics behind these prices are not exactly the same so we cannot conclude that their changes will be 100 percent correlated A statistical approach such as correlation analysis or regression analysis can be used to show the relationship of jet-fuel prices to heating oil and crude oil prices over time ASC Topic 815 does not define a specific benchmark correlation coefficient or an adjusted R 2; however, cash flow offsets of between 80 percent and 125 percent are considered to reflect highly-effective hedges In addition to an initial assessment of a hedge’s effectiveness, an ongoing assessment must occur to ensure that the hedge continues to be highly-effective Statistical methods again can be used to gauge ongoing effectiveness AMR has used a regression model to determine the correlation of percentage changes in the prices of West Texas Intermediate (WTI) crude oil and New York 431 432 CHAPTER 13 Mercantile Exchange (NYMEX) heating oil to the percentage change in jet fuel prices over 12 to 25 months to assess if its hedges continue to be highly effective.1 Another common method used to assess ongoing hedge effectiveness is called the cumulative dollar-offset method This method compares the cumulative changes in the derivative’s cash flow or fair value to cumulative changes in the hedged item’s fair value A ratio is computed by dividing the cumulative change in the derivative value by the cumulative change in the hedged item’s fair value Again, no benchmark ratio has been officially mandated, but a ratio in the range of 80 percent to 125 percent is generally considered to indicate a highly effective hedge If a derivative does not qualify as a highly-effective hedge, then the derivative is marked to market at the end of each year regardless of when the gain or loss on the item that management is attempting to hedge is recognized No offsetting changes in the fair value of the item being hedged are recorded until they are realized LEARNING OBJECTIVE 1, Types of Hedge Accounting One of three approaches must be used to account for the derivative and related hedged item that has qualified as a highly-effective hedge: Fair value hedge accounting The item being hedged is an existing asset or liability position or firm purchase or sale commitment In this case, both the item being hedged and the derivative are marked to fair value at the end of the quarter or year-end on the books The gain or loss on these items is reflected immediately in earnings The risk being hedged is the variability in the fair value of the asset or liability Cash flow hedge accounting The derivative hedges the exposure to the variability in expected future cash flows associated with a risk The exposure may be related to a recognized asset or liability (such as a variable-rate financial instrument) or to a forecasted transaction such as a forecasted purchase or sale The derivative is marked to fair value at year-end and is recorded as an asset or liability The effective portion of the related gain or loss’s recognition is deferred until the forecasted transaction affects income The gain or loss is included as a component of accumulated other comprehensive income (AOCI) in the balance sheet’s stockholders’ equity section Hedge of net investment in a foreign subsidiary This will be discussed in Chapter 14 LEARNING OBJECTIVE GAAP allows the use of cash flow hedge accounting for certain types of hedges of existing foreign currency–denominated receivables or payables We will discuss this accounting later We will begin exploring how to account for derivatives using the Gre copper forward contract that we began in Chapter 12 Recall that Gre anticipates producing and selling copper in one year The expected cost of the 100,000-pound production was $28,900,000 Gre enters into a forward contract with Bro that locks in a $300 per pound price for the copper Gre will sell the copper in the open market at the prevailing price and will then either receive or pay the difference between the market price and $300 so that Gre nets $300 per pound All of the variability in income resulting from the revenue side is eliminated by this contract This forward contract is a highly-effective hedge The forward contract is signed on October 1, 2011 The contract will be settled in one year, on September 30, 2012 Gre prepares quarterly financial reports Assume that the market price of copper is $300 on October 1, 2011 At this time, no entry would be recorded because the contract value is $0 On December 31, 2011, the company would need to record the estimated value of the contract Recall that the purpose of this contract is to mitigate the risk of revenue price fluctuations related to an anticipated or a forecasted transaction—the production and sale of copper The company has entered into a cash flow hedge because it is attempting to control the impact of price fluctuations on its future cash flows and its sales This is a hedge of an anticipated or a forecasted transaction In order to reflect this strategy in the financial statements, the gain or loss on the contract will be recognized when the copper is actually sold, which is on September 30, 2012 We must defer recognition of the gain or loss of the contract until that time, and we use the other comprehensive income account to so Cash flow hedge accounting always uses other comprehensive income to defer recognition of gains or losses until the item being hedged actually is recognized in income 1Source: AMR 2009 annual report Accounting for Derivatives and Hedging Activities Recall that other comprehensive income is a type of stockholders’ equity account While changes in it are reflected in the statement of comprehensive income, the income statement does not include those changes The entries to account for the forward contract are as follows: October 1, 2011 No Entry December 31, 2011 Assume that the market price of copper is $310 on this date If the market price stays the same, Gre would pay Bro $10 * 100,000 = $1,000,000 at the expiration of the contract in nine months We will use this information to estimate the value of the forward contract at December 31, 2011 Because the $1,000,000 is our estimate of a payment to be paid in nine months, we must use present value concepts to estimate its fair value on December 31, 2011 Assuming that a discount rate of percent per month is reasonable, the estimated fair value of this contract is: 1,000,000/(1.01)9 = $914,340 914,340 Other comprehensive income (-SE) Forward contract (+L) 914,340 March 31, 2012 Assume that the market price of copper is $295 If this price remains constant, then the company can anticipate receiving $5 * 100,000 = $500,000 in six months The estimated fair value of the forward contract is $500,000/(1.01)6 = $471,023 We have moved from a liability situation to an asset situation The entry to adjust the carrying value of the forward contract is: Forward contract (+A) Forward contract (-L) Other comprehensive income (+SE) 471,023 914,340 1,385,363 Notice that the balance for other comprehensive income has moved from a debit balance of $914,340 to a credit balance of $471,023 June 30, 2012 Assume that the market price of copper is $290 If this price remains constant, then the company can anticipate receiving $10 * 100,000 = $1,000,000 in three months The estimated fair value of the forward contract is $1,000,000/(1.01)3 = $970,590 We must increase the forward contract asset and other comprehensive income by $499,567 ($970,590 desired balance -$471,023 current balance) The entry to adjust the carrying value of the forward contract is: Forward contract (+A) Other comprehensive income (+SE) 499,567 499,567 September 30, 2012 Assume that the company produced the copper this quarter and sold it on September 30, 2012 The cost was as expected at $28,900,000 for 100,000 pounds of copper The market price of copper on this date is $310 Gre sells the copper in the market at $310 and will settle the forward contract by paying Bro $1,000,000 [($310 - $300) * 100,000] The journal entries to record the sale are: Cash (+A) Sales (+R, +SE) Cost of goods sold (+E, -SE) Inventory (-A) 31,000,000 31,000,000 28,900,000 28,900,000 The journal entries to record the settlement of the forward contract are: Sales (-R, -SE) Other comprehensive income (-SE) Cash (-A) Forward contract (-A) 1,000,000 970,590 1,000,000 970,590 The effect of this strategy is to report net income of $1,100,000 Sales are $30,000,000, and cost of goods sold is $28,900,000 Recall that this is the economic income with hedge for every market price realization and agrees with our earlier discussion of this contract On your own, prepare the journal entries for September 30, 2012 using different realizations of market price to prove to yourself that each realization will result in exactly the same income amount 433 434 CHAPTER 13 The preceding example was accounted as a cash flow hedge because the hedge was of an anticipated or forecasted transaction The unrealized gain or loss on the forward contract was deferred until the transaction being hedged (the copper sale) was reflected in the income statement Later, we will explore other types of situations in which cash flow hedge accounting is appropriate, but now we turn to an example of a fair value hedge F AIR V ALUE H EDGES Fair value hedge accounting is appropriate for highly-effective hedges of either existing assets or liabilities or firm sales/purchase commitments Wav Company refines oil Wav purchases raw crude from various producers and, after the refinement process, sells it to gasoline wholesalers The price that Wav receives from a gasoline wholesaler depends on the raw crude market price as well as other factors Typically, Wav refines the oil almost immediately after purchase; however, because of some factory breakdowns, it has about 100,000 barrels of oil that will not be processed for six months Wav is concerned about how to maintain the value of that oil While it would be nice if the oil was worth more in six months than it currently is worth, there are no guarantees, and it might be worth less As a result, Wav is considering entering into a derivative contract that will help it maintain its net investment value Wav enters into a forward contract to sell the crude for $90 per barrel in six months The contract will be settled net Wav won’t actually sell the crude because it intends to refine it, but this type of contract will allow it to maintain the fair value of the crude on its books How does the contract work? If the price of crude is $95 per barrel in six months, then Wav will pay the counterparty to the forward $5 per barrel However, Wav will also have crude that is worth $95 (and therefore will be able to sell it, processed, for more) If, on the other hand, the price of crude is $70 per barrel, Wav will receive $20 per barrel from the counterparty, which will help to compensate it for the lower value of its crude inventory (which will be sold for less when processed) The accounting for such a situation will reflect the offsetting movement of the derivative and its underlying crude oil price fluctuation Under fair value hedge accounting, Wav will write the derivative to market at each financial statement date and will be able to increase or decrease the value of the crude oil inventory by the change in its fair value from the date that the derivative contract is signed and the financial statement date This is a significant departure from historical cost accounting; both the value of the derivative and the item it is hedging—the crude oil— will change over time Before we look at the journal entries to record this situation, we need to discuss one more aspect of hedging existing assets The crude oil will not be marked to its fair value unless the fair value of the oil at the date the derivative contract is signed is equal to its original cost If the values are different, the inventory will be changed only by the difference between its fair value and the fair value at the derivative contract signing date This type of hybrid valuation is called a mixed-attribute model The balance sheet value of the oil contains both historical cost and fair value elements Again, let us assume that the forward contract price of $90 equals the spot price at the contract date Wav’s book value of the oil is $86, its historical cost Again, the present value model will be used to measure the forward value We will now also need a market value for the crude oil because under hedge accounting, we will change the carrying value by the difference between the market value at the date of the hedge contract and subsequent balance sheet dates until the date the forward contract settles We need to determine which spot crude oil price to use All crude oil prices, even for oil of the same quality, are not the same Oil is costly to transport and is produced in many places in the world As a result, crude oil (and many other commodities) has different spot prices, depending on where it is produced We will assume that Wav is located in West Texas and that it is located next door to a major West Texas producer The appropriate spot rate would be West Texas Crude On November 1, 2011, the forward contract is signed No entries are required on this date because no cash payment or receipt exists On December 31, 2011, the market price of crude oil is $92 We must record the value of the forward contract at this date and adjust the inventory value for changes in its spot price since the contract was signed Forward Contract If the market price of crude stays at $92, then Wav will pay $2 * 100,000 = $200,000 to settle the contract That payment will occur in four months, so the estimated value of Accounting for Derivatives and Hedging Activities the contract at December 31, 2011, assuming percent per month interest, is $200,0000/(1.01)4 = $192,196 The adjusting entry related to the forward is: Loss on Forward contract (+Lo, -SE) Forward contract (+L) 192,196 192,196 Inventory The change in the inventory value from November 1, 2011 is also $2 ($92 - $90) So the inventory would be increased by $200,000: Inventory (+A) Gain on Inventory (+Ga, +SE) 200,000 200,000 Notice that the inventory carrying value is now $8,600,000 + $200,000 = $8,800,000 compared to $9,200,000 for its market value This is the result of using a mixed-attribute model On March 31, 2012, the spot price is $89 If the market price of crude remains at $89, then Wav will receive $100,000 in one month The estimated value of the forward is $100,000/1.01 = $99,009 The entry to record the forward contract is: Forward contract (+A) Forward contract (-L) Gain on Forward contract (+Ga, +SE) 99,009 192,196 291,205 The inventory entry is ($92 - $89) * 100,000 = $300,000 Loss on Inventory (+Lo, -SE) Inventory (-A) 300,000 300,000 The book value of the inventory is now $8,900,000 ($9,000,000 + $200,000 - $300,000) On April 30, 2012 the contract settles The spot price is $87.50 Wav will receive $250,000 [($90 - $87.50) * 100,000] to settle the contract Forward Contract Cash (+A) Forward contract (-A) Gain on Forward contract (+Ga, +SE) Inventory Loss on Inventory (+Lo, -SE) Inventory (-A) 250,000 99,009 150,991 150,000 150,000 Summary of Effect on Earnings Date December 31, 2011 March 31, 2012 April 30, 2012 Total Inventory Adjustment Forward Contract Adjustment Net Effect +200,000 -300,000 -150,000 -250,000 -192,196 +291,205 +150,991 +250,000 +7,804 -8,795 +991 +0 This forward contract works for Wav Wav’s inventory value went down by $250,000 over the time of the production delay Wav received $250,000 cash on the forward contract, which compensated it for the decline in the value of its inventory Wav’s economic condition would have been worse if it had not entered into the contract 435 436 CHAPTER 13 Additional Cash Flow Hedge Examples OPTION CONTRACTS Assume that a company signs a contract on January 15, 2011, the contract costs $1,000, the option price on that date is $1 per gallon on 100,000 gallons of fuel, and the option expires on May 31, 2011 Further assume that the option is a European one, in which the company can elect to exercise it only on the expiration date The fuel option contract is a cash flow hedge because it is designed to limit the company’s exposure to price changes in forecasted purchases of fuel Because the purchase of the fuel will occur in the future and the company purchases the option contract now, it initially records the option contract price as an asset The company records the option as follows: January 15, 2011 Fuel contract option (+A) Cash (-A) 1,000 1,000 The company prepares its quarterly report on March 31, 2011 Assume that the market price of fuel on March 31, 2011, is $1.25 If the company could exercise the option on this date, it would save $0.25 per gallon on the fuel, or $25,000 in total The estimate of the option payment is $25,000 if it could be paid on March 31, 2011 But the actual payment will occur on May 31, 2011, two months later The fair value of the option at March 31 needs to be estimated by computing the present value of the option payment If we assume that the appropriate discount rate is percent per year, or 0.5 percent per month, then we can compute the present value: $25,000 , (1.005)2 = $24,752 The estimate of the value of the option to the company on March 31 is $24,752 The company needs to record an adjusting entry on March 31 because the option must be recorded at fair value according to Topic 815 The fuel contract option account already has a debit balance of $1,000, so the required adjustment is $23,752 to that account The purpose of the option contract is to control the cost that the company will pay when purchasing the fuel, so the increase in the option’s value should be recorded in income in the same period that the fuel is used The gain is deferred by including it as a component of other comprehensive income in the stockholders’ equity section of the balance sheet The gain bypasses that quarter’s income statement The entry is as follows: March 31, 2011 Fuel contract option (+A) Other comprehensive income— unrealized holding gain on fuel option contract (+SE) 23,752 23,752 On May 31, 2011, we assume that the fuel price is $1.30 per gallon The fuel’s market value is $130,000 The writer of the fuel price option must pay the company $0.30 per gallon, or $30,000 An additional gain of $5,248 occurs as a result of the change in market value The company makes the following entries: May 31, 2011 Fuel inventory (+A) Cash (-A) Cash (+A) Fuel contract option (-A) Other comprehensive income (+SE) 130,000 130,000 30,000 24,752 5,248 Notice that the gain on the contract is still not recognized in income, because the fuel remains in inventory Once the fuel is used, the gain on the contract will be recognized as a reduction in cost of goods sold, so the net impact on cost of goods sold is $100,000, not $130,000 Accounting for Derivatives and Hedging Activities Assume that the fuel inventory is used on June 15, 2011 The entry to record expense is as follows: June 15, 2011 Cost of goods sold (+E, -SE) Fuel inventory (-A) Other comprehensive income (-SE) Cost of goods sold (-E, +SE) 130,000 130,000 30,000 30,000 FUTURES CONTRACTS—CASH FLOW HEDGE OF FORECASTED TRANSACTION Companies can also hedge forecasted transactions using futures contracts Here is an illustration On December 1, 2011, a utility enters into a futures contract to purchase 100,000 barrels of heating oil for delivery on January 31, 2012, at $1.4007 per gallon Heating oil is traded on the New York Mercantile Exchange (NYMEX) exchange Each contract is for 1,000 barrels (42,000 gallons) The utility must enter into 100 contracts The exchange requires a margin of $100 per contract to be paid up front The utility enters into this contract so that it will have a supply of oil for delivery to customers in February and so it can lock in the $1.4007-per-gallon price This is a forecasted purchase and therefore is accounted for as a cash flow hedge The entries are: December 1, 2011 Futures contract (+A) Cash (-A) 10,000 10,000 At year-end, the company must mark the futures contract to market Unlike the option contract illustrated on page 436, which is not traded and which requires an estimate of its fair value, the futures contract has an observable market value at December 31, 2011 Assume that the NYMEX reported that the heating oil futures contract for delivery on January 31, 2012, is $1.4050 per gallon This price already is adjusted for the time value of money because the market would have adjusted for it in the pricing The contract’s estimated value is $18,060 ([$1.4050 - $1.4007] * 4,200,000 gallons) We can now write the contracts to market: December 31, 2011 Futures contract (+A) Other comprehensive income (+SE) 18,060 18,060 On January 31, 2012, the spot and futures rate are the same, $1.3995 per gallon The company settles the futures contract and buys 100,000 barrels (4,200,000 gallons) of oil on the open market for $5,877,900 ($1.3995 per gallon * 4,200,000 gallons) for delivery to the utility’s customers during the first week in February The entry to mark the contract to market is: January 31, 2012 23,100 Other comprehensive income (-SE) 23,100 Futures contract (-A) 100 contracts * 42,000 gallons per contract * ($1.3995 - $1.4050) = $23,100 — Accumulated other comprehensive income account The balance in the Futures Contract account is a $4,960 debit ($10,000 margin + $18,060 December 31 adjustment - $23,100 January 31, 2012 adjustment) The company lost $5,040 ($23,100 - $18,060) on the contract, which is included in other comprehensive income as a debit balance The entries to settle the futures contract and record the oil purchase are: Cash (+A) Futures contract (-A) Heating oil inventory (+A) Cash (-A) 4,960 4,960 5,877,900 5,877,900 437 438 CHAPTER 13 Assume that the company sells the oil for $2.00 per gallon to its customers during the first week in February The impact of the gain or loss on the futures contract on earnings is deferred until the hedged transaction actually affects income The entries at the date of sale are: Cash (+A) Sales (+R, +SE) Cost of goods sold (+E, -SE) Heating oil inventory (-A) Cost of goods sold (+E, -SE) Other comprehensive income (+SE) 8,400,000 8,400,000 5,877,900 5,877,900 5,040 5,040 The total cost of goods sold is $5,882,940 ($5,877,900 + $5,040), which is equal to 42,000 * 100 contracts * $1.4007(the contract rate) Additional Fair Value Hedge Examples A fair value hedge is a derivative contract that attempts to reduce the price risk of an existing asset or firm purchase commitment Fair value hedge accounting is used when a highly-effective hedge is used to reduce the price risk of an existing asset or liability or a firm sale or purchase commitment contract Both the item being hedged and the hedge contract are marked to market on an ongoing basis, and the gains and losses are recognized in income immediately Even though firm sale and purchase commitments are usually not included on the balance sheet until they are executed, GAAP [1] requires the recognition of them on the balance sheet if they are the object of a hedging contract Assume that on January 1, 2011, a company agrees to take delivery of 100,000 liters of scotch whiskey from a manufacturer in six months—on June 30, 2011—at $15 per liter, the price of scotch on January In order to take advantage of changes in the market price of whiskey over time, the company also enters into a pay variable/receive fixed forward contract with a speculator, with a fixed price of $15 per liter The company has in essence unlocked the fixed element of the firm purchase commitment The following illustrates a pay variable/receive fixed forward contract from the company’s perspective The terminology pay variable/receive fixed pertains to the forward contract and not to the contract between the company and the supplier The exposure being hedged is between the company and the supplier The hedge of that exposure is the contract between the company and the speculator If the market price is $14, the company receives $1 in net settlement ($100,000 in total) Then the company pays $14 ($1,400,000 in total) out of its own money and the $1 ($100,000 in total) received from the speculator to settle the fixed price contract with the supplier for $15 ($1,500,000) If the market price is $17 per liter, the company must pay the speculator $2 per liter and then pay the whiskey supplier $15 per liter In each case, the whiskey costs the company the market price after considering both the hedge settlement and any additional amounts that must be paid to the supplier out of the company’s pocket Notice that the company has a firm purchase commitment with the whiskey distiller that is noncancelable, and it has also entered into a forward contract with the speculator This transaction qualifies as a fair value hedge because it is aimed at controlling the cost of an existing commitment, not a forecasted transaction As discussed earlier, a forward contract is negotiated between the parties, not through an exchange This allows considerable flexibility in defining the quality, quantity, and delivery schedule On January 1, 2011, no entry would be required for either the firm purchase commitment or the forward contract On March 31, 2011, assume that the market price of scotch whiskey is $13 per liter The company has experienced an unrealized gain of $200,000 on the forward contract [($15 - $13) * 100,000] It has also experienced an unrealized loss on the purchase commitment because the market price of the whiskey is now below the fixed contract price The change in the firm purchase commitment fair value and the offsetting change in the forward GLOSSARY Negative Goodwill: the excess of the fair market value of assets acquired in a purchase business combination over the investment cost Under new FASB guidance, this is termed a bargain purchase, recognized as a gain to the acquirer Noncontrolling Interest: the stockholder interest in a subsidiary not owned by the parent company Nonexpendable Trust Funds: principal is maintained intact but income may or may not be expendable Nonmandatory Transfers (Colleges and Universities): funds transferred back to unrestricted current funds or transfers at the discretion of the governing board Nonmonetary Items: are items that would change with changes in market price or changes in the value of the currency Nonprofit or Not-for-Profit Entities: nonbusiness organizations that have neither individual ownership nor privateprofit objectives Nonspendable fund balance (governmental): represents amounts not in spendable form, such as inventories, or amounts that must be maintained, such as the principal of an endowment Offering Circular: similar to a prospectus, but with fewer disclosure requirements Official Exchange Rates: exchange rates set by a government and subject to change only by that government (Also fixed exchange rates.) One-Line Consolidation: another name for the equity method of accounting; under the equity method the investor’s income and the controlling interest share of consolidated net income are equal Operating Profit Test: a test to determine if an operating segment is a reportable segment of the enterprise Operating Segment: a component of an enterprise engaged in providing goods and services to unaffiliated or affiliated customers for a profit Operating Transfers (Governmental Accounting): legally authorized shifts of resources from one fund to another that are not revenues, expenditures or expenses, or residual equity transfers Parent-Company Theory: a theory under which consolidated financial statements are prepared from the view of parent-company stockholders Parent–Subsidiary Relationship: a relationship that gives one corporation the power to control another corporation through its majority common stock ownership Partnership: an association of two or more persons to carry on as co-owners in a business for profit Partnership Agreement: a contract between partners covering duties of partners, investments, withdrawals, profit sharing, and so on Without this agreement, these issues are settled by the Uniform Partnership Act Partnership Dissolution: the change in the relation of partners when any partner is no longer involved in carrying on the business The business may continue as an operating business despite the dissolution of the partnership Partnership Liquidation: the process of converting assets into cash, settling all liabilities, and distributing any remaining cash to partners G-5 Par Value Theory: a theory of intercompany bond holdings that allocates constructive gains or losses between the purchasing and issuing affiliates on the basis of the par value of the bonds Patient Service Revenue (Hospitals): revenue from board and room, nursing services, and other professional services, and recorded on an accrual basis Payments in Lieu of Taxes: payments by one governmental unit to another for revenues lost because governments cannot tax each other Also, similar payments from a government’s enterprise fund to its other tax-supported funds Performance Budget: a budget that emphasizes measurable performance of work programs and activities Permanently Restricted Net Assets (Not-for-Profit Accounting): the portion of a not-for-profit entity’s net assets whose use is limited by donor-imposed stipulations that not expire and cannot be removed by action of the entity Personal Representative: a person named by the probate court to take control of a decedent’s estate Piecemeal Acquisition: a corporation gains control of a subsidiary through a series of separate stock purchases Plant Funds: a college and university fund grouping to account for unexpended plant funds, renewal and replacement funds, retirement of indebtedness funds, and investment in plant funds Plant Replacement and Expansion Funds (Hospitals): a hospital fund group to account for donor-restricted resources for plant, property and equipment Pledge (Nonprofit Accounting): a written or oral promise to contribute cash or other assets to the organization Postpetition Liabilities: liabilities incurred after a Chapter 11 filing and not associated with prebankruptcy events Preacquisition Dividends: dividends paid on an equity investment prior to the date the investment was acquired during the year Preferences: certain transfers of property of a debtor or certain obligations incurred by a debtor prior to filing a bankruptcy petition Preliminary Prospectus: a preliminary communication about securities to be issued that also explains how to get a copy of the prospectus filed with the SEC Prepetition Liabilities: liabilities of the debtor corporation at the time of a bankruptcy filing Prepetition Liabilities Subject to Compromise: unsecured and undersecured liabilities incurred before a Chapter 11 bankruptcy filing Probate: to probate a will is to validate a will Program Budget: an expenditure budget of the total cost of programs to be carried out or functions to be performed Proportionate or Pro Rata Consolidation: a practice in accounting for joint ventures in which each investor-venturer accounts for its share of assets, equities, revenues, and expenses Proprietary Funds (Governmental Accounting): a category of funds to account for operations that are similar to those of private business enterprises; including enterprise funds and internal service funds G-6 GLOSSARY Prospectus: information about an SEC registrant firm that includes its type of business, company background, and financial statements; it is a part of the SEC registration statement Pure Endowments: endowments for which the principal is permanently restricted (Quasi-endowments can be changed by the governing board.) Push-Down Accounting: establishment of a new basis of subsidiary accounting based on the price paid by the parent company Quasi-Endowment Funds: a college and university fund type to account for resources designated by the governing board to be invested indefinitely, with income being expended as directed Quasi-External Transactions: those that would be revenues and expenses or expenditures for organizations external to the governmental unit Registration Statements: statements required to be filed with the SEC for firms that issue securities to the public, and for firms whose shares are traded on national stock exchanges Regulation S: a 1990 regulation to clarify the applicability of security laws across national boundaries Reimbursements: transactions between two funds of a government that constitute reimbursements of a fund for expenditures or expenses initially made from it that are properly applicable to another fund Reimbursements are recorded as expenditures or expenses in the reimbursing fund and as reductions of expenditures or expenses in the reimbursed fund Remeasurement: the conversion of a foreign entity’s financial statements from another currency into its own functional currency Renewal and Replacement Funds (Colleges and Universities): used to account for the resources held by colleges and universities for renewal and replacement of the physical plant Reorganization Items: income, expenses, realized gains and losses, and provisions for losses that result from restructuring a business under Chapter 11 of the Bankruptcy Act Reorganization Plan: a plan for rehabilitation of the debtor corporation in a Chapter 11 case; to be confirmed, the plan must be fair and equitable to all interests concerned Reorganization Value: an approximation of the amount a willing buyer would pay for the assets of the corporation at the time of restructuring Reportable Operating Segment: an operating segment for which information is required to be reported Reporting Currency: the currency in which consolidated financial statements are prepared Residual Beneficiaries: those entitled to the remainder of an estate after all other rightful claims have been satisfied Residual Equity Transfer (Governmental Accounting): nonrecurring or nonroutine transfers of equity between funds Restricted Current Funds (Colleges and Universities): encompasses resources expendable currently but restricted to expenditures for specified operating purposes Restricted Funds (Hospitals): a hospital fund grouping that includes specific purpose funds, plant replacement and expansion funds, and endowment funds Restricted fund balance (governmental): amounts can only be spent for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation Retirement of Indebtedness Fund: used in college and university accounting for liquid resources held for current debt service, and investments held for future debt retirement Safe Payments (Partnerships): distributions that can be made to partners with assurance that the amounts are not excessive Salary Allowances (Partnerships): partner salary allowances are drawings authorized in lieu of salaries because partner rewards come from sharing in partnership earnings Sales Agency: a business office established to display merchandise and take customer orders, but not to fill orders or grant credit Schedule of Assumed Loss Absorption: used in developing the cash distribution plan in a partnership liquidation Each partner’s equity is charged with a loss amount to eliminate the equity of the most vulnerable partner, and so on Shared Revenues (Governmental Accounting): specific revenue sources shared with other governmental units; sales taxes and gasoline taxes are examples Special Assessments: special tax levies against benefited property owners for improvements that benefit the owner’s property Special Revenue Funds (Governmental Accounting): used to account for proceeds from specific revenue sources that are legally restricted to specified purposes Specific Purpose Funds (Hospitals): a hospital fund group to account for resources restricted by donors for specific operating purposes Spot Rate: the exchange rate in effect for immediate delivery of the currencies exchanged Statement of Affairs: a financial statement that shows liquidation values of a bankrupt entity and provides estimates of possible recovery for unsecured creditors Statement of Functional Expenses (Voluntary Health and Welfare Organizations): a financial statement that shows the costs associated with the program services or other activities of the organization Statement of Realization and Liquidation: statement showing progress toward liquidation in a bankruptcy case Step-by-Step Acquisitions: acquiring an equity interest in a series of separate stock purchases Subsidiary: a corporation in which the controlling stockholders’ interest lies with a parent company that controls its decisions and operations Temporal Method: translation of items carried at past, current, and future prices in a manner that retains their measurement bases Temporarily Restricted Net Assets (Not-for-Profit Accounting): the portion of a not-for-profit entity’s net assets whose use is limited by donor-imposed stipulations that either expire or can be removed by fulfilling the stipulations GLOSSARY Temporary Differences: differences in taxable income and accounting income that originate in one accounting period and reverse in a later period Term Endowment Funds: a college and university fund type to account for resources received from donors or outside agencies with the stipulation that the principal may be expended after a period of time or the occurrence of some event Term Endowments: endowments for which the principal is temporarily restricted Testacy Proceeding: a hearing of a probate court to determine if the deceased died testate or intestate (that is, with or without a will) Testate: having died with a valid will in force Testamentary Trust: a trust that is created pursuant to a will Translation: expressing functional currency measurements in the reporting currency Translation Adjustment (also Equity Adjustment on Translation): an exchange gain or loss that is reported as an equity adjustment in other comprehensive income Treasury Stock Approach: accounting for parent-company stock held by a subsidiary as treasury stock in consolidated statements Troubled Debt Restructuring: occurs when a creditor grants a concession to a debtor because of the debtor’s financial difficulties Trust and Agency Funds: used to account for assets held in a trustee capacity or as agent for individuals, private organizations, and other governmental units Trustee: a lawyer appointed by the U.S trustee or by the bankruptcy court to assume control of the debtor’s estate and coordinate its administration with the court Unassigned fund balance (governmental): the residual classification for the government’s general fund and includes all spendable amounts not contained in the other classifications In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned Unconditional Promises to Give (Nonprofit Accounting): a pledge without conditions Undivided Interest (Joint Ventures): an ownership arrangement in which two or more parties own property and title is held individually to the extent of each party’s interest G-7 Unexpended Plant Funds: used by colleges and universities to account for resources held for additions and improvements to the physical plant Uniform Probate Code: a document prepared by the National Conference of Commissioners on Uniform State Laws that provides guidelines for estate and trust administration Unlimited Liability: each partner is liable for all partnership debts Limited partners in a limited partnership, which is allowed in some states, not have unlimited liability Unrestricted Current Funds (Colleges and Universities): encompasses resources received and expended for instruction, research, extension, and public services, as well as auxiliary enterprises Unrestricted Funds (Hospitals): used to account for all resources of a hospital not restricted by donors or grantors Unrestricted Net Assets (Not-for-Profit Accounting): the portion of net assets of a not-for-profit entity that carries no donor-imposed restrictions Upstream Sale: sales or other intercompany transactions from subsidiary to parent company U.S Trustee: an administrative officer of the bankruptcy court; appointed by the attorney general for five-year terms Venturers: the owner participants in a joint venture Vertical Integration: the combination of firms with operations in different but successive stages of production and/or distribution Voidable Preferences: preferences that can be voided by a trustee in a bankruptcy case Voluntary Bankruptcy Proceedings: the filing is voluntary if the debtor files the bankruptcy petition Voluntary Health and Welfare Organizations: a diverse group of nonprofit entities that is supported by donations and seeks to solve basic social problems of health and welfare Vulnerability Ranking (Partnerships): a ranking of partners on the basis of the amount of partnership losses they could absorb without reducing their capital accounts below zero Zero-Base Budgeting: making budgetary appropriations without direct reference to prior years’ programs or expenditure budgets This page intentionally left blank INDEX A Abbott Laboratories, 65 accountability, fiscal, 643 accounting, 723–724 for agency funds, 633 bases of, 634 for business combinations, 6–15 cash flow hedge, 432, 439–441 for corporate joint ventures for encubrances, 669–671 equity method of, 27–28 for estates, 777–781 for excess of invetment cost over book value, 31–33 fair value (cost) method of, 25–29 fair value hedge, 432, 434, 441–442 fiduciary, 775 fund, 628 hedge, 430–431 for internal service funds, 712–713 international, for goodwill, 13 for nongovernmental not-for-profit hospitals/health care organizations, 751–753 pension trust funds, 726 for private not-for-profit colleges/ universities, 756–760 for private-purpose trust funds, 725 for property taxes, 666–668 push-down, 79–81 for stock investments, 25–29 for trusts, 782–783 for variable interest entities, 391–393 voluntary health and welfare organizations, 743–748 Accounting Series Releases (ASRs), 181–182 acquisition method, for business combinations, acquisitions, during accounting period, 247–251 consolidated balance sheet after, 70–71 consolidated balance sheet at, 66–69 contingent consideration in, 9–10 equity investments at, 29–30 financing, 65 illustration, 11 piecemeal, 251–253 recording fair values in, 8–10 activities, statement of, 642–643 actual retirement, of bonds, 220 Adelphia, 592 administrator, 776 affiliates, 42, 62–63 affiliation structure, 62–64 affiliation structures, 279–281 agency funds, 633, 722–724, 760 accounting equation for, 633, 722 accounting for, 723–724 defined, 722 financial statements for, 724 agency theory, 221 agency transactions, 742 AH Robins, 592 AICPA Audit and Accounting Guide Not-for-Profit Organizations, 755 AICPA model, 760 allocation, income tax, 328–330 allotment, 638 amortization, versus nonamortization, 15 AMR, 431–432 Anheuser-Busch Companies, 63–64 Aon, Apple, 414 Apple, Inc., 498 appropriations, 638 private not-for-profit colleges/universities accounting for, 757 Archer Daniels Midland Company, 501–503 Arthur Andersen and Company, 17 ASC Topic 815, 430–431, 443 ASC Topic 830, 443 assets donated long-lived, 745 general fixed, 629 gifts of long-lived, 741 intangible, 8–14 intercompany profit transactions– plant, 185–203 net, 641–642 partnership, 540–542 permanently restricted net, 739 plant, 759–760 temporarily restricted net, 739 total, 1118 unrestricted net, 739 asset valuation, 371 assigned fund balance, 664 assumed loss absorption, schedule of, 574 AT&T, 2, 16, 27, 279 Audits of State and Local Governmental Units (AICPA), 626 Aventis SA, average capital balances, 533 B Baby Superstore, Bain Capital, 387 Bank of America, Bank Reform Act (1978), 591–594 bankruptcy See also liquidation bankruptcy judge, duties of, 594 chapters, 592–594 debtor corporation, duties of, 594 involuntary, 593 Office of U.S Trustee, 594 types of, 592 voluntary, 593 Bankruptcy Abuse Prevention and Consumer Protect Act (BAPCPA), 591–592 Bankruptcy Act (1898), 591 bankruptcy insolvency, 591 Bankruptcy Reform Act (1994), 605 bargain purchase, 34–35 bases of accounting, 634 Beatrice Foods, 387 Bell Atlantic Corporation, Black-Scholes option pricing model, 411 I-1 I-2 INDEX Boeing, 604 bonus on initial investments in partnerships, 527 to retiring partner, 543 bonus approach, 539 book value excess investment cost over underlying, 30–31 excess of, over cost, 33–34 excess of investment cost over, 31–33 Briggs & Stratton Corporation, budget, general fund (GF), 665–666 recording, 666 subsidiary ledgers, 666 budgets capital, 638 role of, 637–638 business combinations, 1, 341–346 accounting concept of, 4–6 accounting for, 6–15 antitrust considerations, consummated through stock acquisitions, 61–65 disclosure requirements, 15–17 foreign currency financial statements and, 468–469 income tax uncertainties, 345–346 legal form, purchase, 343–345 equity method of accounting for, 344–345 workpaper entries for, 345 reasons for, 2–3 business-type activities, 627 C call options, 411 Canadian GAAP, 13 capital, as factor in profit sharing agreements, 533–536 capital budgets, 638 capital lease, state and local government, 672–673 capital programs, 638 capital projects fund, 633 Caremark Rx, Inc., CARGOTEC, 220 cash distribution plans, 573–576 cash distribution schedule, 575–576 cash flow hedge, 432, 440 of anticipated foreign currency transaction, 451–453 cash flow hedge accounting, 432, 439–441 examples of, 436–437 Centennial, 17 Cerebrus Capital Management, 387 Chapter bankruptcy, 593 Chapter 11 reorganizations, 592–594, 603–605 operating under, 605–606 charge-discharge statement, 782 Chevron Corporation, 1, 42, 146 chief operating decision maker (CODM), 497 Chiquita Brands International, 593, 606 Chrysler, 387 Circuit City, 593 Citigroup Inc., 43 claims classification of, 777 against estates, 777 secured, 777 Clayton, Dubilier, & Rice, 387 Coca-Cola Company, 62, 146, 253, 414 Codification of Governmental Accounting and Financial Reporting Standards (GASB), 626 combinations See business combinations committed fund balance, 664 Compaq Computer Corporation, 65, 343 component units, 638–639 comprehensive annual financial report (CAFR), 639–655 auditor’s report, 641 budgetary comparisons, 646–649 combining and individual fund statements, 651–655 financial section, 639–655 fund financial statements, 643–646 general revenues, 643 government-wide financial statements, 641 introductory section, 639 management’s discussion and analysis (MD&A), 639–641 program revenues, 643 required supplementary information, 648 service efforts and accomplishment (SEA) reporting, 655 statistical section, 655 confirmation, 776 conglomeration, defined, connecting affiliates relationships, 281 consolidated balance sheet at acquisition, 66–69 noncontrolling interest, 68–69 parent acquires 90 percent of subsidiary—with goodwill, 67–68 parent acquires 100 percent of subsidiary at book value, 66 parent acquires 100 percent of subsidiary—with goodwill, 67 after acquisition, 70–71 consolidated balance sheet worksheets, preparing, 81–83 consolidated financial statements, 29 combinations consummated through stock acquisitions, 63–65 consolidated income statements, 78–79 consolidated statement of cash flows (SCF), 112–117 direct method, 115–117 income/dividends from investees under indirect and direct methods, 115 indirect method, 114 consolidated tax returns advantages of filing, 327–328 disadvantages of filing, 328 consolidated working papers entry sequence for, 103 locating errors in, 106 consolidation business combinations, 341–346 defined, 4, 341 effect of consolidated and separatecompany tax returns on procedures of, 334–341 allocation of consolidated income tax to affiliates, 334 background information for consolidated and separate tax return illustration, 334–341 equity method workpaper entry sequence, 103 year of acquisition, 99–103 year subsequent to acquisition, 104–106 income tax allocation, 328–330 accounting for distributed and undistributed income, 329 temporary differences from undistributed earnings of subsidiaries and equity investees, 328–329 unrealized gains and losses from intercompany transactions, 329–330 income taxes of consolidated entities, 326–328 one-line, 390–391 ownership interests sale, 253–262 INDEX parent-company theory, 369 at acquisition, 373–375 after acquisition, 375–381 equity method, 375 goodwill, 373 pooling of interest method, 5–6 procedures, 249–251 proportionate, 389–391 separate-company tax returns with intercompany gain, 330–334 consolidation workpaper, 332–333 income tax expense based on separate returns, 332 one-line consolidation, 331 workpaper entry for 2012, 334 consolidation policies, 63–65 consolidation theories, 369–372 asset valuation, 371 consolidated stockholders’ equity, 372 constructive gains and losses, 372 income reporting, 370–371 unrealized gains and losses, 371–372 consolidation worksheets, preparing, 117–121 constructive retirement, of bonds, 220 contemporary theory of consolidated statements, 369 contingent consideration, 9–10 contractual adjustments, 751 contributions not-for-profit organization, 740–741 accounting for, 757–758 conditional promise to give, 740 donor-imposed conditions or restrictions, 741 gifts of long-lived assets, 741 investments and investment income, 741 unconditonal promise to give, 740 voluntary health and welfare organization, 743–745 conventional approach, 289, 291–298 convertible bonds, subsidiaries with, 325 converting foreign, 464 Corning Incorporated, 43, 388 corporate joint ventures See also joint ventures accounting for, 388–389 defined, 388 corporate liquidations and reorganizations, 591–624 Bank Reform Act (1978), 591–594 financial reporting during reorganization, 607–608 financial reporting for emerging company, 608–616 illustration of liquidation case, 596–603 liquidation, 594–595 reorganization, 603–607 corporation liquidation and reorganization bankruptcy judge, duties of, 594 Bankruptcy Reform Act (1978), 591–594 office of U.S Trustee, 594 cost, fair value vs., 10 courtesy allowances, 751 Creditors’ committees, 604–605 cumulative dollar-offset method, 432 currency foreign (See foreign currency) local, 464 reporting, 464 current exchange rates, 416 current financial resources, 629 current operating funds, 760 current rate method, of converting foreign financial statements, 464, 470 CVS Corporation, D death, partnership dissociation due to excess payment to retiring partner, 543–544 overvalued assets written down, 544 payment to retiring partner less than capital balance, 544 debtor corporation, duties of, 594 debtor in possession, 604 debt service fund accounts, 633 decedent, defined, 775 Delta Air Lines, denominated receivables/payables, 414, 443 depreciation estates, 745 voluntary health and welfare organizations (VHWOs), 745 derivatives accounting summation for, 454 defined, 409–410 economics underlying, 411–413 footnote disclosure requirements, 454–455 hedge transactions, 410–411 Derivatives Implementation Group (DIG), 429–430 devise, 776 I-3 devisees, 776 Dillard’s, Inc., 43 direct holdings affiliated structures, 279–281 defined, 281 disclosures enterprise, 501–503 for equity investees, 40–42 footnote, for derivatives, 454–455 proprietary fund, 727 SEC, 510 segment, 500–501, 503–505 Disney See Walt Disney Company dissociation, partnership, 536 dissolution See liquidation donor-imposed conditions or restrictions, contributions, 741 Dow Chemical Company, 27, 40, 315, 388, 592 disclosure for equity investees, 40–41 Dow Corning Corporation, 388 downstream sales, 150–153 intercompany profits from equity method, 158–161 unrealized profits from deferral of intercompany profit in period of intercompany sale, 153–154 recognition of intercompany profit upon sale to outside entities, 154–155 drawing allowances, 528–529 drawings, 528–529 E economic resources, 629 EDGAR system (Electronic Data Gathering Analysis and Retrieval System), 184 E.I Du Pont De Nemours, 43 Emerging Issues Task Force (EITF), 430 encumbrances, accounting for, 669–671 ending inventory of purchasing affiliate, 147 endowments, private not-for-profit colleges/universities accounting for, 757–758 Enron Corporation, 17, 102, 179, 391, 592 enterprise disclosures, 501–503 enterprise funds (EFs), 631–632, 715–717 entity theory, 369–370 I-4 INDEX equitable subordination, doctrine of, 608 equity insolvency, 591 equity in subsidiary realized income, 324 equity interest, sale of, 37–38, 45 equity method, consolidation at acquisition, 375 equity method investments, fair value option for, 45 equity method of accounting, 25 accounting procedures under, 27–28 concepts underlying, 26–27 economic consequences of using, 28–29 illustration of translation and, 471–473 one-line consolidation, 29–37 estates accounting for, 777–778 illustration of, 778–781 administration of, 776–777 administrator, 776 charge-discharge statement, 782 claims against the estate, 777 classification of claims, 777 closing entries, 781–782 confirmation, 776 creation of, 755 divisees, 776 estate income, gains, and losses, 778 exempt property and allowances, 777 heirs, 776 homestead allowance, 777 income taxes on estate income, 785 intestate succession, 776 inventory of estate property, 776–777 principal and income, 778 probate proceedings, 776 residual beneficiaries, 778 secured claims, 777 taxes, 783–784 Uniform Probate Code, 776 excess, assigned to identifiable net assets, 106–111 excess, assigning, to identifiable net assets and goodwill, 72–78 excess of book value over cost, 33–34 excess of investment cost over book value, accounting for, 31–33 exchange rates See also foreign exchange current, 416 defined, 414 direct quotations of, 414–415 fixed, 415–416 floating, 415 free, 415 historical, 416 indirect quotations of, 415 multiple, 415–416 official, 415 spot, 416 exchange transactions, 634, 742 executory contracts, 605, 776 exempt property and allowances, 777 expenditures, 629 recording, 669 expenses, recognition of, 636–637 extraordinary items, stock investments, 39–40 Exxon Mobil Corporation, F fair value cost vs., 10 implied, of good will, 43–44 option, for equity method investments, 45 recording, 8–10 of reporting unit, determining, 44 fair value (cost) method of accounting, 25 accounting procedures under, 27–28 concepts underlying, 26–27 economic consequences of using, 28–29 fair value hedge, 441 of identifiable foreign currency commitment, 449–451 fair value hedge accounting, 432, 434, 441–442 examples of, 438–439 fair value hedges, 434 FASB See Financial Accounting Standards Board (FASB) FASB ASC 954, 750–751 father-son-grandson relationship, 281 computational approaches for consolidated net income, 282–283 consolidation workpaper—equity method, 283–284 equity method of accounting for, 282 indirect holdings, 281–282 Federated Department Stores, 607 fiduciary, defined, 775 fiduciary accounting, 775 fiduciary funds, 629 accounting for, 722 agency funds, 722–724 defined, 722 government-wide financial statements, preparing, 727 trust funds, 724–727 types, 632, 633 Financial Accounting and Reporting Manual, 756 Financial Accounting Standards Board (FASB), 13, 626 Accounting Standards Codification (FASB ASC), 738 foreign currency transaction requirements, 417–419 pooling, Statement No 105, 429 Statement No 107, 429 Statement No 115, 429 Statement No 116, 738 Statement No 117, 738 Statement No 119, 429 Statement No 133, 429–430 financial statements for agency funds, 724 comprehensive annual, 643–646 converting foreign, 470 foreign currency, 466, 468–469 government funds, 685–688 government-wide, 641, 727 methods for converting foreign, 464 nongovernmental not-for-profit hospitals/health care organizations, 754–755 not-for-profit organizations, 738–740 private not-for-profit colleges/universities, 760 proprietary funds, 718–722 reporting internal service funds in, 715 standardization of audited, 182–183 supplementary combined, 608 trust funds, 725 Finley Kumble, 605n4 First Reserve Corporation, 387 fiscal accountability, 643 fixed exchange rates, 415 FleetBoston Financial Corporation, floating exchange rates, 415 FMC Corporation, 389 footnote disclosures, 380 for derivatives, 454–455 Ford Motor Company, 185 foreign currency, 463–465 defined, 464 denominated receivables/payables, 414, 443 cash flow hedge accounting, 443–447 INDEX fair value hedge accounting, 447–449 FASB requirements, 417–419 footnote-disclosure requirements, 454–455 highly inflationary economies and, 468 intercompany transactions, 466–468 international accounting standards, 421, 455 local transactions, 416–417 methods for converting, 464 purchases denominated in, 419–420 remeasurement, 465–466 sales denominated in, 420–421 speculation, 453–454 transactions, 417 translation, 465 foreign currency commitment, defined, 449 foreign currency statements, defined, 464 foreign exchange quotations, 416 Form 8-K (SEC), 182–183 Form 10-K (SEC), 182 Form S-1 (SEC), 181 Form S-2 (SEC), 181 Form S-3 (SEC), 181 Form S-4 (SEC), 181 forward contracts, 410–411, 434–435 forward premium/discount, 443 free exchange rates, 415 Freeport-McMoRan Copper & Gold, fresh-start reporting, 609, 613–616 Fruit of the Loom, 593 functional currency, 417 application of, 465–469 defined, 463–464 intercompany foreign currency transactions, 466–467 remeasurement, 465–466 translation, 465–466 fund accounting government organizations, 628 not-for-profit organizations, 738 futures contracts, 410–411, 437–438 G GAAP, 13 GASB See Governmental Accounting Standards Board (GASB) general devise, 776 General Electric (GE), 106, 430, 593 segment reporting, general fixed asset account group, 630 general fixed assets, 629 general fund accounts, 633 general governmental activities, 628 general long-term debt, 629 general long-term debt account group, 630 generally accepted accounting principles (GAAP), pooling, 5–6 General Motors (GM), 1, 592 general partnerships, 388 general-purpose governments, 738 general revenues, 643 gifts and bequests, 752 gifts in kind, 742, 745–746 gifts of long-lived assets, contributions, 741 goodwill, 12–13 combinations to avoid recording, 387 current GAAP for, 13–14 impairment test, 14–15 on initial investments in partnerships, 528 international accounting for, 13 partnerships, equal to excess payment, recording, 543 stock investments determining fair value of reporting unit, 44 equity method investments, 45 fair value option for equity method investments, 45 implied fair value of, 43–44 potential problems, 45 recognizing and measuring impairment losses, 43 reporting and disclosures, 45 testing for impairment, 43–445 goodwill approach, 538 Goodyear, 62 Governmental Accounting, Auditing, and Financial Reporting (GAAFR), 626 Governmental Accounting and Financial Reporting Principles, Statement No (NCGA), 626 Governmental Accounting Standards Board (GASB), 625, 626 basic governmental accounting models and principles, 627–638 fund definition and categories, 628–629 hierarchy for state and local entities, 626–627 Statement No 1, 626 Statement No 3, 666 Statement No 13, 672 I-5 Statement No 14, 638 Statement No 27, 726 Statement No 33, 634–635 Statement No 34, 630, 636, 643, 650–651, 663, 677, 688, 712, 718–722, 738 Statement No 35, 738 Statement No 38, 673 Statement No 39, 639 Statement No 43, 726 Statement No 45, 726 Statement No 50, 726 Statement No 54, 664 Statement No 55, 627 governmental funds, 628 recent changes in accounting for, 663–664 types, 632–633 Government Finance Officers Association, 626n2 government funds capital projects funds (CPFs), 678 accounting for, 679–680 adjusting and closing entries, 681 entries for 2011 to 2012, 681–683 debt service funds (DSFs), 683 accounting for, 684–685 and modified accrual basis of accounting, 683 nonreciprocal routing transfers, 685 operations of, 685 financial statements, 685–688 general fund accounting for, 664–677 budget, 665–666 defined, 664 fund balance reclassification, 665 transactions and interfund activities for year, 666–674 general fund (GF) capital lease, 672–673 derived tax revenues, 668–669 encumbrances, accounting for, 669–671 expenditures, recording, 669 interfund transactions, 673 property taxes, 666–668 revenues from other sources, 669 supplies, 672 government-wide financial statements, preparing, 688–694 permanent funds (PFs), 677–678 special assessment activities, 683 special revenue funds (SRFs) defined, 676 I-6 INDEX grants, 676–677 year-end procedures adjusting entries, 674–675 closing entries, 675–676 grants, 676–677 Guidant, H Halliburton Company, 387 Handy & Harman, Harsco Corporation, 389 Hawaiian Airlines, 604, 608 hedge defined, 410 of net investment in a foreign subsidiary, 432 net investment in foreign entity, 479–482 hedge accounting, 430–431 cash flow hedge accounting, 432, 439–441 fair value hedge accounting, 424, 434, 441–442 types of, 432–435 hedge contracts, 409 hedge effectiveness, 431–432 hedge transactions, 410–411 heirs, 776 The Hershey Company, 322, 346 Hewitt Associates, Hewlett-Packard (HP), 343 Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GASB), 627 highly inflationary economies, defined, 468 historical exchange rates, 416 homestead allowance, 777 horizontal integration, 1–2 I IASB (iInternational Accounting Standards Board), 13 IASC (International Accounting Standards Committee), 13 IAS (International Accounting Standard) No 39, 455 IBM, IBP, 387 IFRS (International Financial Reporting Standards), 6, 13 impairment test, goodwill, 14–15 income statement, effects of Chapter 11 proceedings on, 607–608 income taxes, financial statement disclosures for, 346–348 indirect holdings, 281 connecting affiliates structure consolidation workpaper–equity method, 286–289 equity method of account for, 285–286 insolvent partnership, 576–577 installment liquidations, 567–573 cash distribution plans, 573–576 schedule of assumed loss absorption, 574 vulnerability ranking, 574 general principles, 567 illustration, 568–573 intangible assets current GAAP for, 13–14 identifiable, 10 recognition and measurement, 8–9 Intel Corporation, 43, 497–500, 501 intercompany bonds, 219–232 constructive gains and lessons on, 220–222 parent acquisition of subsidiary bonds by, 222 purchased by subsidiary, 22–227, 221 intercompany profit transactions–inventory, 145–164 elimination of intercompany purchases and sales, 146–147 elimination of unrealized profit in ending inventory, 147–149 equity method, 149 workpaper entries, 148–149 recognition of unrealized profit in beginning inventory, 149–150 intercompany profit transactions—plant assets, 185–203 depreciable, 190–198 downstream sales, 190–193 upstream sales, 193–198 example of upstream and downstream sales of, 199–202 inventory purchased for use as operating assets, 202–203 nondepreciable, 185–190 downstream sale of land, 186–188 upstream sale of land, 188–190 sold at other than fair value, 198–199 intercompany transactions of foreign currency, 466–468 illustration, 469–475 interfund loans, 637 interfund transactions, 673 interim acquisitions of investment interest, 35–37 interim financial reports, 504–511, 505 estimated annual effective tax rate, computing, 506 expenses other than product costs, 505 guidelines for preparing, 506–510 international accounting standards, 510–511 nature of, 504–505 product costs, 505 SEC disclosures, 510 internal service funds, 631, 712 accounting for, 712–715 reporting, in financial statements, 715 International Accounting standards Board (IASB), intestate, defined, 775 intestate succession, 776 inventory ending, of purchasing affiliate, 147 of estate property, 776–777 intercompany profit transactions, 145–165 purchased for use as operating assets, 202–203 recognition of unrealized profit in beginning, 149–150 investee corporation with preferred stock, 38–39 investments, not-for-profits recording of, 741 investment trust funds, 633 involuntary bankruptcy proceeding, 593 J Johns Manville, 592 Johnson & Johnson, joint ventures, 388–391, 545 corporate accounting for, 388–389 defined, 388 general partnerships, 388 limited partnerships, 388 nature of, 388 organizational structures of, 388 undivided interest, 388 J.P Morgan Chase, Inc., 430 K Kimberly-Clark, Kohlberg, Kravis, Roberts and Company (KKR), 387 INDEX Kraft Corporation, Krispy Kreme Doughnuts, Inc., 17, 180 L Laventhol and Horwath, 593 lease agreements, state and local government, 672–673 Lehman Brothers, 592 leveraged buyouts (LBOs), 383–387 limited partnerships, 388, 544–545 liquidation, 594–603 See also bankruptcy case illustration, 596–603 Chapter bankruptcy, 594–595 payment of claims, 595 statement of affairs, 596–598 trustee, duties of, 595 trustee accounting, 598–602 winding up the case, 603 loan funds, 760 local currency, 464 Loews Cineplex, 593 Lotus Development Corporation, LTV Steel, 592 Lufkin-Conroe Communications Company, Lyondell Chemical Company, 592 M major funds, 643 management approach, 497 Marathon Oil Corporation, 389–390 MBNA Corporation, MCI, Inc., 43 measured receivables/payables, 414 mergers consolidation vs., defined, 4, 341 rise in, Microsoft Corporation, 27 mixed-attribute model, 434 Mobile, Montgomery Ward, 592, 606 Moonitz, Maurice, 369 multiple exchange rates, 415–416 Municipal Accounting and Auditing (MFOA), 626 Municipal Finance Officers Association (MFOA), 626, 626n2 See also Government Finance Officers Association mutual agency, 526 mutual holdings, 279 parent stock held by subsidiary, 289–298 subsidiary stock mutually-held, 298–302 N National Association of College and University Business Officers (NACUBO), 756 National Council on Governmental Accounting (NCGA), 626 NCR, net assets, statement of, 641–642 net income, 118 net settlement, 410 Nike, 414 noncontrolling interest, 102 noncontrolling interest share, 102 nonexchange transactions, 635 nongovernmental not-for-profit hospitals/health care organizations, 750–755 accounting for, 751–753 contractual adjustments, 751 courtesy allowances, 751 donated assets, 752–753 gifts and bequests, 752 operating expenses, 753 other operating revenues, 752 patient service revenue, 751 premium fees, 752 statement of operations and other hospital financial statements, 754–755 nongovernmental not-for-profit organizations, 738 nonreciprocal transfers, 673 nonspendable fund balance, 663 North American Free Trade Agreement (NAFTA), 13 North American Van Lines, 387 Northwest Air Lines, not-for-profit (NFP) organization “other,” 749–750 voluntary health and welfare organizations (VHWOs), 743–749 accounting for, 743–748 closing entries, 748 contributions, 743–745 depreciation, 747 donated long-lived assets, 745 donated securities and investment income, 746–747 donated services and payment of salaries, 747 I-7 financial reporting, 748–749 fixed asset purchase with restricted resources, 747 gifts in kind, 745–746 membership fees, 746 special event fund-raisers, 745 supplies, 746–747 not-for-profit (NFP) organizations accounting principles, 738–743 collections, 743 contributions, 740–741 conditional promise to give, 740 donor-imposed conditions or restrictions, 741 gifts of long-lived assets, 741 investments and investment income, 741 unconditional promise to give, 740 financial statements, 738–740 permanently restricted net assets, 739 statement of activities, 739–740 statement of cash flows, 740 statement of financial position, 739 statement of functional expenses, 740 temporarily restricted net assets, 739 unrestricted net assets, 739 fund accounting, 743 measurement principles, 742–743 nature of, 737–738 program services, 739 supporting services, 739–740 transfers, 741–742 agency transactions, 742 exchange transactions, 742 gifts in kind, 742 Nynex Corporation, O Odyssey Investment Partners, 387 offering circular, 80 Office Depot, Office of U.S Trustee, 594 official exchange rates, 415 one-line consolidation, 29–37, 390–391 operating segments, 498 operational accountability, 641 option contracts, 436–437 options, 411 Oracle Corporation, order or relief, 593 I-8 INDEX other postemployment benefits (OPEB), 726 outside customers, 632 ownership interests sale of, 253–262 at beginning of the period, 254 noncontrolling interest computation, 258 resulting in deconsolidation, 258–259 sale of additional shares by a subsidiary, 259–261 subsidiary sells shares to outside entities, 260–261 subsidiary sells shares to parent, 259–260 summary of subsidiary stock sales concepts, 261 treasury stock transactions by a subsidiary, 261–262 P parent bonds purchased by subsidiary, 222–227 effect on consolidate statements in subsequently years, 227 equity method, 223–227 subsidiary acquisition of, 221 parent-company and consolidated earnings per share, 322–323 diluted securities of subsidiary convertible into parent shares, 324 dilutive securities of subsidiary convertible into subsidiary shares, 323–324 parent company theory, 369 parent-subsidiary relationship, 62–63 partnership agreements, 526 insolvent partners and partnerships, 576–577 partnership liquidation, 561–589 debt capital balances in solvent partnership, 562–565 installment liquidation, 567–573 interim statement of, example of, 569 process, 561–565 safe payment to partners, 565–567 simple, 561–562 partnership liquidations, cash distribution schedule, 575–576 partnerships, 525–560 additional investments and withdrawals, 528–529 admission of new partner, 537 articles of, 526 assignment of interest to third party, 536–537 defined, 526 dissociation, 536 dissociation of, through death or retirement, 542–544 excess payment to retiring partner, 543–544 overvalued assets written down, 544 payment to retiring partner less than capital balance, 544 financial reporting, 526 goodwill on, 528 initial investments in, 526–528 bonus on, 527 noncash investments, 527 investing in existing, 539–542 basis for revaluation, 538–539 at book value, 540 partnership assets not revalued (bonus to new partner), 542 partnership assets not revalued (bonus to old partners), 541 partnership assets revalued (goodwill to new partner), 541–542 partnership assets revalued (goodwill to old partners), 540–541 limited, 544–545 loans and advances, 529 nature of, 525–526 operations, 529–530 partnership agreements, 526 profit and loss sharing agreements, 530–536 purchase of interest from existing partner, 537–539, 539 goodwill approach, 538 par value theory, 220 patient service revenue, 751 pay-fixed, receive-variable interest swamp, 439 pay-variable, receive-fixed swamp, 441 Pennzoil, 605 Pension Benefit Guaranty Corporation (PBGC), 605 pension trust funds, 633, 724 accounting for, 726 PeopleSoft, Inc., PepsiCo, 62, 253, 279, 322 permanent funds (PFs), 632–633, 677–678 permanently restricted net assets, 739 personal representative, defined, 775, 776 Phelps Dodge, Phillip Morris Company, piecemeal acquisitions, 251–253 Pixelworks, Inc., 220 plant assets intercompany profit transactions, 185–203 purchase of, private not-for-profit colleges/universities accounting for, 759–760 plant funds, 760 pooling of interests method, 5–6 Pratt and Lambert, preacquisition dividends, 247, 249 preacquisition earnings, 247 preferred stock, investee corporation with, 38–39 preliminary prospectus, 180 primary beneficiary, 392 primary government, 638 private not-for-profit colleges/universities, 755–761 accounting for, 756–760 appropriations from federal, state, and local governments, 757 contributions, 757 endowments, 757–758 expenses, 759 purchases of plant assets, 759–760 sales and services of auxiliary enterprises, 758 sales and services of educational activities, 758 student financial aid, 757 tuition and fees, 756–757 agency funds, 760 AICPA model (fund structure), 760–761 current operating funds, 760 financial statements, 760 loan funds, 760 plant funds, 760 private-purpose trust funds, 633, 724 accounting for, 725 probated, 776 probate proceedings, 776 profit and loss sharing agreements, 530–536 program revenues, 643 program services, not-for-profit organizations, 739 INDEX promise to give, defined, 740 property taxes, accounting for, 666–668 proportionate consolidation, 389–390, 389–391 proprietary funds, 628, 711–712 accounting equation for, 629 enterprise funds, 631–632 enterprise funds (EFs), 715–717 financial statements, 718–722 government-wide financial statements, preparing, 727 internal service funds, 631, 712–715 required note disclosures, 727 statement of cash flows, 718–722 types, 631–632 pro rata, 389–390 prospectus, 180 Prudential Insurance Company of America, 607 purchase business combinations, 343–345 equity method of accounting for, 344–345 workpaper entries for, 344–345 push-down accounting, 79–81 defined, 381 leveraged buyouts (LBOs), 383–387 nature of, 381 in year after, 383 in year of acquisition, 381–383 put options, 411 R R H Macy & Company, 607 reacquisition earnings, 248–249 reciprocal transfers, 673 red herring prospectus, 180 registration statements, 180 Regulation A, Securities Act of 1933, 180 Regulation S-K (SEC), 181 Regulation S (SEC), 183 Regulation S-X (SEC), 181 related-party transactions, 42 remeasurement of foreign currency financial statements, 466 functional currency and, 465–466 illustration, 475–479 reorganization case illustration, 610–616 fresh-start reporting, 613–616 operations under Chapter 11, 612–613 reclassification of liabilities subject to compromise, 610–612 reorganization plan, 613 Chapter 11 bankruptcy, 603–605 committee representation, 604–605 defined, 341 doctrine of equitable subordination, 608 effects of Chapter 11 proceedings on balance sheet, 607 on income statement and statement of cash flows, 607–608 financial reporting during, 607–608 operating under Chapter 11, 605–606 reorganization value, 608–609 supplementary combined financial statements, 608 trustee or debtor in possession, 604 reorganization plan, 606–607, 613 reorganization value, 608–609 fresh-start reporting, 609 reportable segments aggregation criteria, 498 operating, illustration of asset test, 499 operating profit test, 499–500 revenue test, 499 quantitative thresholds, 498 reconciliation requirements, 501 reconsideration of, 498 reevaluation, 500 segment disclosures, 500–501 reporting currency, 464 reporting entity, 62 residual beneficiaries, 778 restricted fund balance, 663 retained earnings (ending), 118 revenue recognition, 634–636 revenues general, 643 program, 643 R.H Macy & Company, 387 RJR Nabisco, 387 S safe payments, to partners, 565–567 Safeway Stores, 387 salary allowances, 528–529 Sanofi-Synthelabo SA, Sarbanes-Oxley Act of 2002 (SOX), 17–18, 180–181 schedule of assumed loss absorption, 574 I-9 Scott Paper, Seagate, 387 Sealy Corporation, 387 Securities Act of 1933, 179–180 exempt securities issues, 180 issuance of securities in public offerings, 179–180 prospectus, 180 registering securities and, 181 Regulation A, 180 Securities Act of 1934, 17 Securities and Exchange Commission (SEC), 17 Accounting Series Releases (ASRs), 181–182 developments EDGAR system, 184 international registration and, 183 Regulation S, 183 small business, 183 Form 8-K, 182–183 Form 10-K, 182 Form S-1, 181 Form S-2, 181 Form S-3, 181 Form S-4, 181 influence on accounting, 179–184 integrated disclosure system, 181–182 codification of SABs and ASRs, 182 Form 10-1, 183 Form 8-K, 182 objective of, 182 standardization of audited financial statements, 182–183 national exchanges and, 180 Regulation S-K, 181 Regulation S-X, 181 responsibilities of, 181 and SOX violations, 17 Staff Accounting Bulletins (SABs), 181–182 Securities Exchange Act of 1934 creation of, 180 segment disclosures, 500–501, 503–504 segment reporting, 497–504 service efforts and accomplishment (SEA) reporting, 655 Service Merchandise, 606 Sherwin-Williams, Silver Lake Partners, 387 simple partnership liquidation, 561–562 I-10 INDEX Simplicity Manufacturing, Inc., Six Flags, Inc., 409, 411 Smithfield Foods, 387 SOP 90-7, 608 special assessment levies, 683 special purpose entities (SPEs), 102 special-purpose governments, 738 special revenue funds, 632 special revenue funds (SRFs) defined, 676 grants, 676–677 specific devise, 776 speculation, foreign currency, 453–454 spot exchange rates, 416 Staff Accounting Bulletin (SAB) No 101, Revenue Recognition in Financial Statements, 180–181 Staples, Starbucks, 409, 414 state and local governmental units, historical development of accounting principles for, 625–627 statement of activities, 642–643 statement of affairs, 596–598 statement of cash flows, effects of Chapter 11 proceedings on, 607–608 statement of net assets, 641–642 Statement of Position 80-2 (AICPA), 626 Statement on Auditing Standards No 69, 627 step-by-step acquisition, investment in, 37 stock dividends, by a subsidiary, 262–264 stock investments, accounting for, 25–29 stock splits, by a subsidiary, 262–264 strengthening currency, 415 student financial aid, private not-forprofit colleges/universities accounting for, 757 subsidiaries, with convertible preferred stock, 324–325 convertible into parent-company common stock, 325 convertible into subsidiary common stock, 325 with options and convertible bonds, 325 options and bonds convertible into subsidiary common stock, 326 options and convertible bonds with parent’s common stock, 326 subsidiary bonds acquisition of, 222 constructive gains and losses, 220–222 purchased by parent effect on consolidated statements in subsequent years, 231 equity method, 228–230 subsidiary ledgers, 666 subsidiary preferred stock, 315–322 held by parent, 319–322 comparison cost method and constructive retirement, 322 constructive retirement of, 319–322 preferred stock investment maintained on cost basis, 322 not held by parent, 316–319 supplies, accounting for, 672 supporting services, not-for-profit organizations, 739–740 swaps, 411 Symantec, T Telecommunications Act of 1996, temporal method, of converting foreign financial statements, 464 temporarily restricted net assets, 739 testacy proceeding, 776 testate, defined, 775 Texaco, 1, 605 Texas Utilities Company, Thornburg Mortgage, 592 Time Warner, Inc., 42, 430 total assets, 118 total equities, 118 Toys R Us, traditional theory of consolidation, 369 transaction analysis, 630–631 using specific funds, 633–634 transactions exchange, 635 nonexchange, 635 translation foreign currency, 465 of foreign currency financial statements, 466 illustration, 469–475 translation adjustment, 479 illustration, 480–482 limit on gain/loss from, 482 treasury stock approach, 289–291 trust and agency funds, 629 see also fiduciary funds trust funds, 724–727 defined, 724 financial statements for, 725 pension, 724 private-purpose, 724 trusts accounting for, 782–783 testamentary, 782 trustee, 782 tuition and fees/ private not-for-profit colleges/universities accounting for, 756–757 Tweedie, Sir David, U unassigned fund balance, 64 undivided interest, 388 Uniform Partnership Act (1914), 525 Uniform Partnership Act (1997) (UPA), 525 Uniform Probate Code (UPC), 776 United Defense, L.P., 389 unlimited liability, 526 unrestricted net assets, 739 upstream sales, 150–153 intercompany profits from equity method, 158–161, 161–164 unrealized profits from deferral of intercompany profit in period of intercompany sale, 156–157 recognition of intercompany profit upon sale to outside entities, 157–158 US Airways, 592 USX Corporation, 251 V variable interest entities (VIEs), 102 accounting for, 391–393 consolidation of, 393 defined, 391 identifying, 391–393 Venturers, 388 Veritas Software, 1, 387 voluntary bankruptcy proceeding, 593 INDEX voluntary health and welfare organizations (VHWOs), 743–749 accounting for, 743–748 closing entries, 748 contributions, 743–745 depreciation, 747 donated long-lived a ssets, 745 donated securities and investment income, 746–747 donated services and payment of salaries, 747 financial reporting, 748–749 fixed asset purchase with restricted resources, 747 gifts in kind, 745–746 membership fees, 746 special event fund-raisers, 745 supplies, 746–747 vulnerability rankings, 574 W Wachovia Corporation, Wal-Mart, 414 Walt Disney Company, 106, 146, 247–248 weakening currency, 415 Wells Fargo, Wheeling-Pittsburgh Steel, WHX, WorldCom, 17, 592 I-11 ... follows: January 1, 20 11 January 1, 20 12 January 1, 20 13 January 1, 20 14 Index Change in Index 120 150 21 0 25 0 30 60 40 Annual Rate of Inflation 30 , 120 (or 25 %) 60 , 150 (or 40%) 40 , 21 0 (or 19%)... December 31, 20 11, futures contract rate is $6.75 for delivery on February 2, 20 12, and the spot rate on February 2, 20 12, is $6.85 Assume that NGW sells all of the gas on February 3, 20 12, for $8.00... income $ 21 5,900 Retained Earnings Retained earnings—Pat $ 24 5,500 Retained earnings—Star c 15,000 (25 2,000) (3,300) (3,300) $1 02, 600 $ 21 5,900 $ 24 5,500 $ 75,000 b 75,000 Net income 21 5,900 1 02, 600
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