ADVANCED ACCOUNTING This page intentionally left blank ADVANCED ACCOUNTING 13TH EDITION Global Edition Floyd A Beams Virginia Polytechnic Institute and State University Joseph H Anthony Michigan State University Bruce Bettinghaus Grand Valley State University Kenneth A Smith Central Washington University Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Director, Courseware Portfolio Management: Ashley Dodge Senior Sponsoring Editor: Neeraj Bhalla Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Tricia Murphy Field Marketing Manager: Natalie Wagner Field Marketing Assistant: Kristen Compton Product Marketing Assistant: Jessica Quazza Vice President, Production and Digital Studio, Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Ashley Santora Operations Specialist: Carol Melville Managing Content Producer, Global Edition: Vamanan Namboodiri Associate Acquisitions Editor, Global Edition: Ananya Srivastava Associate Project Editor, Global Edition: Paromita Banerjee Assistant Project Editor, Global Edition: Arka Basu Senior Manufacturing Controller, Production, Global Edition: Trudy Kimber Creative Director: Blair Brown Manager, Learning Tools: Brian Surette Content Developer, Learning Tools: Sarah Peterson Managing Producer, Digital Studio, Arts and Business: Diane Lombardo Digital Studio Producer: Regina DaSilva Digital Studio Producer: Alana Coles Digital Content Team Lead: Noel Lotz Digital Content Project Lead: Martha Lachance Full-Service Project Management and Composition: SPi Global Interior Design: SPi Global Cover Design: Lumina Datamatics, Inc Cover Art: clivewa/Shutterstock Acknowledgments of third-party content appear on the appropriate page within the text Pearson Education Limited KAO Two KAO Park Harlow CM17 9NA United Kingdom and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2018 The rights of Floyd A Beams, Joseph H Anthony, Bruce Bettinghaus, and Kenneth A Smith to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Advanced Accounting, 13th edition, ISBN 978-0-13-447214-0, by Floyd A Beams, Joseph H Anthony, Bruce Bettinghaus, and Kenneth A Smith, published by Pearson Education © 2018 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-21459-7 ISBN 13: 978-1-292-21459-7 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 14 13 12 11 10 Typeset in Times Ten LT Std by SPi Global Printed and bound by Vivar in Malaysia To Beth JOE ANTHONY To Trish BRUCE BETTINGHAUS To Karen, Madelyn and AJ KENNETH A SMITH This page intentionally left blank ABOUT THE AUTHORS FLOYD A BEAMS, PH.D., authored the first edition of Advanced Accounting in 1979 and actively revised his text through the next six revisions and twenty-one years while maintaining an active professional and academic career at Virginia Tech where he rose to the rank of Professor, retiring in 1995 Beams earned his B.S and M.A degrees from the University of Nebraska, and a Ph.D from the University of Illinois He published actively in journals, including The Accounting Review, Journal of Accounting, Auditing and Finance, Journal of Accountancy, The Atlantic Economic Review, Management Accounting, and others He was a member of the American Accounting Association and the Institute of Management Accountants and served on committees for both organizations Beams was honored with the National Association of Accounts’ Lybrand Bronze Medal Award for outstanding contribution to accounting literature, the Distinguished Career in Accounting award from the Virginia Society of CPAs, and the Virginia Outstanding Accounting Educator award from the Carman G Blough student chapter of the Institute of Management Accountants Professor Beams passed away in 2004; however, we continue to honor his contribution to the field and salute the impact he had on this volume of articles in leading accounting and finance journals, including The Journal of Accounting & Economics, The Journal of Finance, Contemporary Accounting Research, The Journal of Accounting, Auditing, & Finance, and Accounting Horizons BRUCE BETTINGHAUS, PH.D., is an Associate Professor of Accounting in the School of Accounting in The Seidman College of Business at Grand Valley State University His teaching experience includes corporate governance and accounting ethics, as well as accounting theory and financial reporting for both undergraduates and graduate classes He earned his Ph.D at Penn State University and his B.B.A at Grand Valley State University Bruce has also served on the faculties of the University of Missouri and Michigan State University He has been recognized for high-quality teaching at both Penn State and Michigan State Universities His research interests focus on governance and financial reporting for public firms He has published articles in The International Journal of Accounting, Management Accounting Quarterly, Strategic Finance, and The Journal of Corporate Accounting and Finance KENNETH A SMITH, PH.D., is an Associate ProfesJOSEPH H ANTHONY, PH.D., joined the Michigan sor of Accounting and the Department Chair at Central WashState University faculty in 1983 and is an Associate Professor of Accounting at the Eli Broad College of Business He earned his B.A in 1971 and his M.S in 1974, both awarded by Pennsylvania State University, and he earned his Ph.D from The Ohio State University in 1984 He is a Certified Public Accountant, and is a member of the American Accounting Association, American Institute of Certified Public Accountants, American Finance Association, and Canadian Academic Accounting Association He has been recognized as a Lilly Foundation Faculty Teaching Fellow and as the MSU Accounting Department’s Outstanding Teacher in 1998–1999 and in 2010–2011 He is retiring in May 2016 Anthony teaches a variety of courses, including undergraduate introductory, intermediate, and advanced financial accounting He also teaches financial accounting theory and financial statement analysis at the master’s level, as well as financial accounting courses in Executive MBA programs, and a doctoral seminar in financial accounting and capital markets research He co-authored an introductory financial accounting textbook Anthony’s research interests include financial statement analysis, corporate reporting, and the impact of accounting information in the securities markets He has published a number ington University He earned his Ph.D from the University of Missouri, his M.B.A from Ball State University, and his B.A in Accounting from Anderson University (IN) He is a Certified Public Accountant Smith’s research interests include government accounting and budgeting, non-profit financial management, non-financial performance reporting, and information systems in government and non-profit organizations He has published articles in such journals as Accounting Horizons, Journal of Government Financial Management, Public Performance & Management Review, Nonprofit and Voluntary Sector Quarterly, International Public Management Journal, Government Finance Review, and Strategic Finance Smith’s professional activities include membership in the American Accounting Association, the Association of Government Accountants, the Government Finance Officers Association, the Institute of Internal Auditors, and the Institute of Management Accountants He is an elected public official, serving on the School Board for the 10th largest School District in the state of Washington He formerly served as the Executive Director for the Oregon Public Performance Measurement Association and the not-for-profit Wheels for Humanity This page intentionally left blank BRIEF CONTENTS 13 Accounting for Derivatives and Hedging Activities P r e f a c e 17 CHAPTER Business Combinations 23 CHAPTER 14 Foreign Currency Financial Statements 471 CHAPTER Stock Investments—Investor Accounting and Reporting 51 CHAPTER 15 Segment and Interim Financial Reporting CHAPTER An Introduction to Consolidated Financial Statements 85 CHAPTER Consolidation Techniques and Procedures 119 CHAPTER CHAPTER Intercompany Profit Transactions—Inventories 169 CHAPTER Intercompany Profit Transactions—Plant Assets 209 CHAPTER Intercompany Profit Transactions—Bonds 243 CHAPTER Consolidations—Changes in Ownership Interests 17 Partnership Liquidation 565 18 Corporate Liquidations and Reorganizations 593 CHAPTER 19 An Introduction to Accounting for State and Local Governmental Units 627 CHAPTER 20 Accounting for State and Local Governmental Units— Governmental Funds 665 CHAPTER CHAPTER 271 CHAPTER 301 10 Subsidiary Preferred Stock, Consolidated Earnings per Share, and Consolidated Income Taxation 335 CHAPTER 11 Consolidation Theories, Push-Down Accounting, and Corporate Joint Ventures 385 CHAPTER 12 Derivatives and Foreign Currency: Concepts and Common Transactions 421 CHAPTER 503 16 Partnerships—Formation, Operations, and Changes in Ownership Interests 529 CHAPTER Indirect and Mutual Holdings 441 21 Accounting for State and Local Governmental Units— Proprietary and Fiduciary Funds 713 CHAPTER 22 Accounting for Not-for-Profit Organizations CHAPTER 739 23 Estates and Trusts 775 CHAPTER Glossary Index 795 803 INDEX Sarbanes–Oxley Act, 38–39 stock acquisitions consolidation policy, 87–88 financing acquisition, 88 fiscal periods, parent and subsidiary, 88 parent-subsidiary relationship, 86–87 reporting entity, 86 business-type activities, 629 C CAFR See comprehensive annual financial report (CAFR) call options, 422 capital, as factor in profit sharing agreements, 537–540 capital budgets, 640 capital lease, state and local government, 674–675 capital programs, 640 capital projects fund, 634, 680–684 accounting for, 681–682 Caremark Rx, Inc, 24 cash distribution plans, 577–579 cash distribution schedule, 578 cash flow hedge, 451, 454 accounting, 443–444, 450–451 examples of, 447–449 of anticipated foreign currency transaction, 461–463 cash flows, statement of, 742 Chapter bankruptcy reform act, 595 Chapter 11 bankruptcy reform act, 595 Chapter 11 reorganizations, 593–595, 608–609 operating under, 607 charge-discharge statement, 782 Chevron Corporation, 23, 38–39 chief operating decision maker (CODM), 503 Circuit City, 608 claims classification of, 777 against estates, 777 secured, 777 Coca-Cola Company, 86, 342, 426 Codification of Governmental Accounting and Financial Reporting Standards (GASB), 628 CODM See chief operating decision maker (CODM) combinations See business combinations committed fund balance, 666 comparative consolidated balance sheets, 395 comparative consolidated income statements, 394–395 component units, 640–641 comprehensive annual financial report (CAFR), 641–657 auditor’s report, 643 budgetary comparisons, 652 combining and individual fund statements, 657 financial section, 641–657 fund financial statements, 644–652 general revenues, 644 government-wide financial statements, 643–644 introductory section, 641 805 management’s discussion and analysis (M D&A), 641–643 program revenues, 644 required supplementary information, 653 service efforts and accomplishment (SEA) reporting, 657 statistical section, 657 confirmation, 776 conglomeration, 24 connecting affiliates equity method for accounting, 307 consolidation workpaper, 307–310 ownership structure, 301 consolidated balance sheet at acquisition effect of assignment, 94–97 noncontrolling interest, 91 parent acquires 100 percent of subsidiary at book value, 88–89 parent acquires 90 percent of subsidiary-with goodwill, 90–92 parent acquires 100 percent of subsidiary-with goodwill, 89–91 after acquisition, 92–94 effect of amortization, 97–100 consolidated balance sheet worksheet, preparing, 103–105 consolidated earnings per share dilutive securities of subsidiary convertible into parent shares, 343 dilutive securities of subsidiary convertible into subsidiary shares, 342–343 consolidated entities definition, 347 description, 346–347 filing consolidated tax returns advantages, 347 disadvantages, 347 consolidated financial statements, 52–53 purpose of, 87 consolidated income statement, 100–101 consolidated net income, 254, 386, 387 consolidated statement(s) subsequent years parent bonds, 251 subsidiary bonds, 254–256 consolidated statement of cash flows description, 131–132 direct method, 134–136 income/dividends from investees, indirect and direct methods, 133–134 indirect method, 132–133 consolidated stockholders’ equity, 387–388 consolidated tax returns downstream sales, 355–356 filing, 347 upstream sales, 359 806 INDEX consolidation in accounting, 26 at acquisition, 389 acquisitions, accounting period, 273–274 after acquisition, 389–395 conventional procedure, mutual holdings, 315 equity method, 315–316 subsequent years, 316–318 cost method, 146–147 definition, 26 equity method intercompany profits, downstream sales, 182–184 intercompany profits, upstream sales, 184–187 sequence of workpaper entries, 123 trial balance format and, 142–144 year of acquisition, 119–123 year subsequent to acquisition, 123–126 error location, 126 identifiable net assets, 126–127 after acquisition, 128–131 incomplete equity method year of acquisition, 145–146 year subsequent to acquisition, 146 loss on intercompany sale, 222–223 parent-company theory, 385 plant assets, upstream and downstream sales, 223–226 in reorganization, 361 treasury stock approach subsequent years, 311–312 year of acquisition, 310–311 variable interest entities, 407 consolidation policy, 87–88 consolidation procedures separate-company tax returns consolidated and separate tax return illustrations, 354–361 income taxes allocation to affiliates, 354 consolidation theories, 386–388 asset valuation, 386 comparison of, 386–388 consolidated stockholders’ equity, 387–388 constructive gains and losses, 387 illustration, 388–395 income reporting, 386 unrealized gains and losses, 386–387 consolidation workpaper depreciable plant assets downstream sales, 215–216 upstream sales, 218–221 equity method connecting affiliates structure, 307–310 father-son-grandson relationship, 304–305 separate-company tax returns, 351 subsidiary bonds, purchased by parent, 254 consolidation worksheet, preparing, 137–142 constructive gain and loss, 387 consolidation theory, 387 intercompany bonds, 244–245 constructive retirement, 244 vs cost method, 341 subsidiary preferred stock, 338–341 contemporary theory asset valuation, 386 of consolidated statements, 385 consolidated stockholders’ equity, 387–388 constructive gain and losses, 387 definition, 385 income reporting, 387 unrealized gains and losses, 386–387 contingent considerations, acquisitions, 31 contractual adjustments, 753 contributions accounting for, 758–761 conditional promise to give, 742 donor-imposed conditions or restrictions, 742–743 gifts of long-lived assets, 743 investments and investment income, 743 not-for-profit organization, 753 unconditional promise to give, 742 voluntary health and welfare organization, 745–750 controlling share of net income, 138 convertible bonds, subsidiary options and bonds convertible into parent’s common stock, 346 options and bonds convertible into subsidiary common stock, 345–346 convertible preferred stock, subsidiary convertible into parent common stock, 344 convertible into subsidiary common stock, 344 converting foreign, 472 Corning Incorporated, 402 corporate joint ventures See also joint ventures accounting, 403 definition, 402, 403 corporate liquidations and reorganizations Bank Reform Act (1978), 593–596 bankruptcy judge, duties of, 596 Bankruptcy Reform Act (1978), 593–596 financial reporting during, 609–610 financial reporting during reorganization, 609–610 financial reporting for emerging company, 610–611 illustration of liquidation case, 604–605 liquidation, 595 office of U.S Trustee, 595–596 reorganization, 606–609 cost business combinations, 24 vs constructive retirement, 341 excess of book value, equity method, 58–59 vs fair value, 31 courtesy allowances, 753 INDEX Creditors’ committees, 606–607 currency See also foreign currency functional, 429 local, 472 reporting, 472 strengthening, 427 current exchange rates, 428 current financial resources, 631 current operating funds, 764 current rate method, of converting foreign financial statements, 472, 478 CVS Corporation, 24 D death, partnership dissociation due to excess payment to retiring partner, 547–548 overvalued assets written down, 548 payment to retiring partner less than capital balance, 548 debtor corporation, duties of, 596 debtor in possession, 606 debt service fund, 685 accounts, 634 decedent, defined, 775 deconsolidation, sale of ownership interest, 280–282 Deere & Company, 86 Dell, 507 denominated receivables/payables, 426, 453–454 depreciable plant assets downstream sales beginning of year, 215 consolidation workpaper, 215–216 end of year, 214–215 upstream sales affiliates’ separate books, 216–218 consolidation workpaper, 218–221 subsequent years, 221–222 depreciation estates, 747 voluntary health and welfare organizations (VHWOs), 747 derivatives accounting summation for, 463 defined, 421–422 footnote disclosure requirements, 464 hedge transactions, 422–423 use, examples of, 423–425 forward contract, 423–424 option contract, 425 derived tax revenues, 670–671 devise, 776 devisees, 776 dilutive securities, subsidiary convertible into parent shares, 343 convertible into subsidiary shares, 342–343 direct holdings, definition, 301 direct quotation, 426 807 disclosures of consolidation policies, 87–88 enterprise, 507–509 equity investees, 64–66 footnote, for derivatives, 464 proprietary fund, 729 requirements, business combinations, 35–37 SEC, 512–516 segment, 506–509 discontinued operations and other considerations, 64 dissociation, partnership, 540 dissolution See liquidation dividends preacquisition, 272–273 stock, subsidiaries, 285–287 donor-imposed conditions or restrictions, contributions, 743 Dow Chemical Company, 274, 402, 594 Dow Corning Corporation, 402 downstream sales consolidated tax return, 355–356 definition, 174 depreciable plant assets beginning of year, 215 consolidation workpaper, 215–216 end of year, 214–215 income computations consolidated net income computation, 176–177 noncontrolling interest share computation, 175 intercompany profits, equity method, 182–184 nondepreciable plant assets subsequent year to outside entity sale, 210–211 years subsequent to intercompany sale, 210 separate tax return, 356–358 unrealized profits deferral of intercompany profit, period of intercompany sale, 177–178 recognition of intercompany profit upon sale to outside entities, 178–179 drawing allowances, 532–533 drawings, 532–533 E earnings per share (EPS) parent and consolidated dilutive securities of subsidiary convertible into parent shares, 343 dilutive securities of subsidiary convertible into subsidiary shares, 342–343 economic resources, 631 EDGAR system, 207 effects of Chapter 33 proceedings on balance sheet, 609 financial reporting during, 609–610 on income statement and statement of cash flows, 609 encumbrances, accounting for, 671–673 808 INDEX endowments, private not-for-profit colleges/universities accounting for, 759–760 Enron Corporation, 38, 122, 203, 405, 594 enterprise disclosures, 507–509 enterprise funds (EFs), 633, 718–720 entity’s functional currency, 429 entity theory, 385 asset valuation, 386 consolidated stockholders’ equity, 387–388 consolidation after acquisition and consolidated balance sheets, 395 and consolidated income statements, 394–395 consolidation procedures, 390–394 equity method, 389–390 noncontrolling interest, 395 consolidation at acquisition, 389 constructive gain and losses, 387 definition, 385 good will, 388–389 income reporting, 387 push-down accounting, 399 unrealized gains and losses, 386–387 EPS See earnings per share (EPS) equitable subordination, doctrine of, 610 equity insolvency, 593 equity in subsidiary realized income, 342 equity interest, sale of, 62 equity investees, disclosures, 64–66 equity investments accounting, 70 acquisition, 55 equity interest sale, 62 equity method accounting illustration of translation and, 479–481 mutual income, 314–315 consolidation at acquisition, 389 sequence of workpaper entries, 123 year of acquisition, 119–123 year subsequent to acquisition, 123–126 entity theory, consolidation after acquisition, 389–390 income taxes, accounting for acquisitions, 364 indirect holdings, father-son-grandson relationship of accounting, 303–304 consolidation workpaper, 304–305 intercompany profits downstream sales, 182–184 upstream sales, 184–187 investments, 69 mutually held subsidiary, consolidation workpaper, 320–322 one-line consolidation bargain purchase, 59–60 equity investments, acquisition, 55 excess investment cost over book value, 56–58 excess investment cost underlying book value of equity, 55–56 excess of book value over cost, 58–59 interim acquisitions, investment interest, 60–61 parent bonds, purchased by subsidiary, 247–251 parent-company theory, consolidation after acquisition, 389–390 plant assets downstream sales, 223–226 upstream sales, 223–226 stock investments accounting procedures, 53–54 concepts underlying, 51–53 economic consequences, 54 subsidiary bonds, purchased by parent, 252–254 estates accounting for, 777–778 administration of, 776–778 administrator, 776 charge-discharge statement, 782 claims against estate, 777 classification of claims, 777 closing entries, 781–782 confirmation, 776 creation of, 757 divisees, 776 estate income, gains, and losses, 778 estimated annual effective tax rate, computation of, 510–511 exempt property and allowances, 777 heirs, 776 homestead allowance, 777 illustration of, 778–781 income taxes on estate income, 784–785 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 estimated annual effective tax rate, computation of, 510–511 European-style option, 423 excess, assigned to identifiable net assets, 126–131 excess investment cost over underlying, book value of equity, 55–56 excess of investment cost over book value, accounting for, 56–58 exchange rates See also foreign exchange current, 428 defined, 426 direct quotations of, 426–427 executory contracts, 607, 776 exempt property and allowances, 777 INDEX fixed, 427–428 floating, 427 free, 427 historical, 428 indirect quotations of, 427 multiple, 427–428 official, 427–428 spot, 428 exchange transactions, 637, 743–745 executory contracts, 607 expenditures, 631 recording, 671 expenses, recognition of, 638–639 ExxonMobil Corporation, 23 F fair value(s) in acquisitions, 30–32 and book value differential, 477 vs cost, 31 equity method investments, 69 goodwill, 68 plant assets, 222–223 fair value hedge, 443, 445–446, 452–453 accounting, 443, 445–446, 452–453 examples of, 449–450, 457–459 of identifiable foreign currency commitment, 459–461 fair value (cost) method accounting procedures, 53–54 concepts underlying, 51–53 economic consequences, 54 FASB See Financial Accounting Standards Board (FASB) FASB ASC 954, 752 FASB requirements, 429–431 balance sheet date adjustments, 431 translation at spot rate, 429–431 father-son-grandson relationship computational approaches, consolidated net income, 304 equity method of accounting, 303–304 consolidation workpaper, 304–305 ownership structure, 301–302 federal antitrust laws, 25–26 Federal Communications Commission (FCC), 25 Federal Trade Commission (FTC), 25 Federated Department Stores, 610 fiduciary accounting, 775 fiduciary, defined, 775 fiduciary funds, 630 accounting for, 724 agency funds, 724–725 defined, 724 government-wide financial statements, preparing, 728–729 trust funds, 725–726 types, 634 809 filing consolidated tax returns advantages, 347 disadvantages, 347 Financial Accounting and Reporting Manual, 757 Financial Accounting Standards Board (FASB), 27–28, 628 Accounting Standards Codification (FASB ASC), 740 financial position, statement of, 740–742 financial reporting, 750–752 financial statements, 740–742 foreign currency transaction requirements, 429–431 nature of, 739–740 nongovernmental not-for-profit hospitals/ health care organizations, 752–764 not-for-profit organizations, 740–745 permanently restricted net assets, 741 private not-for-profit colleges/universities, 762–763 program services, 741 Statement No 13, 674, 713 Statement No 116, 740 Statement No 117, 740 statement of activities, 741 statement of cash flows, 742 statement of financial position, 741 statement of functional expenses, 742 supporting services, 741 temporarily restricted net assets, 741 unrestricted net assets, 741 financial reporting for emerging company, 610–611 entity, 640–641 financial statement approach, 142 financial statement disclosures, income taxes, 366 financial statements for agency funds, 725 comprehensive annual, 645–647 converting foreign, 478 elements of, 636 foreign currency, 472–473, 476–477 government funds, 687–690 government-wide, 643–644, 690–696, 728–729 internal service funds in, 716–718 methods for converting foreign, 472 notes to, 653 proprietary funds, 718 reporting internal service funds in, 716–722 supplementary combined, 610 trust funds, 727 Finley Kumble, 607 fiscal accountability, 644 fiscal periods, parent and subsidiary, 88 fixed exchange rates, 427–428 floating exchange rates, 427 footnote disclosure(s), 395 for derivatives, 464 requirements, 464 810 INDEX foreign currency, 471–473 commitment, 459 defined, 472 denominated receivables/payables, 426, 453–454 cash flow hedge accounting, 454–457 fair value hedge accounting, 457–459 FASB requirements balance sheet date adjustments, 431 translation at spot rate, 429–431 highly inflationary economies and, 476 intercompany transactions, 474–476 international accounting standards, 464–465 local transactions, 428–429 measured receivables/payables, 426 methods for converting, 472 purchases denominated in, 431–432 remeasurement, 473 sales denominated in, 432–433 speculation, 463 statements, 472 transactions, 428–429 translation, 473 foreign entities, operating in highly inflationary economies, 476 foreign exchange See also exchange rates concepts and definitions, 426–428 foreign exchange quotations, 428 foreign transactions, 429 Form 8-K (SEC), 207 Form 10-Q (SEC), 207 Form S-1 (SEC), 205 Form S-2 (SEC), 205 Form S-3 (SEC), 205 Form S-4 (SEC), 205 forward contracts, 422, 446 forward premium/discount, 454 free exchange rates, 427 fresh-start reporting, 610–611, 615–617 functional currency, 429 application of, 473–477 concept, 471–473 intercompany foreign currency transactions, 474–476 remeasurement, 473 translation, 473 fund, 630 fund accounting, 745 government organizations, 630 not-for-profit organizations, 740 fund balance reclassification, 667 fund financial statements, 644–652 futures contracts, 422, 448–449 G GAAFR See Governmental Accounting, Auditing, and Financial Reporting (GAAFR) GAAP See generally accepted accounting principles (GAAP) GASB See Codification of Governmental Accounting and Financial Reporting Standards (GASB) general devise, 776 General Electric (GE), 24, 595 general fixed asset account group, 632 general fixed assets, 631 general fund (GF) accounting for, 666–667 accounts, 634 budget, 667–668 capital lease, 674–675 defined, 666 derived tax revenues, 670–671 encumbrances, accounting for, 671–673 expenditures, recording, 671 fund balance reclassification, 667 general governmental activities, 629–630 government-wide financial statements, preparing, 690–696 interfund transactions, 675 property taxes, 668–670 revenues from other sources, 671 supplies, 673–674 transactions and interfund activities for year, 668–675 general long-term debt, 631 general long-term debt account group, 632 generally accepted accounting principles (GAAP), 27–28, 85 hierarchy for state and local governmental entities, 629 general partnerships, 402 general-purpose governments, 740 general revenues, 644 gifts and bequests, 754 gifts in kind, 744, 747–748 gifts of long-lived assets, contributions, 743 goodwill, 542–543 combinations to avoid recording, 401 controversy, in acquisitions, 34 entity theory, 388–389 fair value, 68 GAAP definition, 34 impairment testing, 34–35, 66–69 on initial investments in partnerships, 532 and intangible assets, 34–35 parent-company theory, 388 partnerships, equal to excess payment, recording, 547–548 stock investments equity method investments, 69 fair value of reporting unit, 68–69 fair value option, equity method investments, 69 implied fair value, 68 potential problems, 69 recognizing and measuring, impairment losses, 67–68 reporting and disclosures, 69 Google Inc., 37 Governmental Accounting and Financial Reporting Principles, Statement No (NCGA), 628 INDEX Governmental Accounting, Auditing, and Financial Reporting (GAAFR), 628 Governmental Accounting Standards Board (GASB), 627, 628 basic governmental accounting models and principles, 629–640 fund definition and categories, 630 hierarchy for state and local entities, 629 Statement No 1, 628 Statement No 3, 668 Statement No 13, 674 Statement No 14, 640 Statement No 25, 728 Statement No 27, 728 Statement No 31, 638, 680 Statement No 33, 637–638, 668 Statement No 34, 629, 632, 638, 641, 656–657, 665, 696, 714, 716, 720, 722 Statement No 38, 675 Statement No 39, 640 Statement No 54, 665, 666 Statement No 62, 629, 714 Statement No 63, 636, 643 Statement No 65, 636, 643 Statement No 67, 728 Statement No 68, 728 Statement No 74, 728 Statement No 75, 728 Statement No 116, 740 Statement No 117, 740 governmental funds, 630 accounting model, 631–632 capital projects funds (CPFs), 680–684 accounting for, 681–682 adjusting and closing entries, 682–683 entries for 2014 to 2015, 683–684 debt service funds (DSFs), 685–687 accounting for, 685–687 and modified accrual basis of accounting, 685 nonreciprocal routing transfers, 687 operations of, 687 financial statements, 687–690 general fund accounting for, 666–667 accounting for, 666–667 budget, 667–668 defined, 666 fund balance reclassification, 667 transactions and interfund activities for year, 668–675 government-wide financial statements, preparing, 690–696 permanent funds (PFs), 679–680 recent changes in accounting for, 665–666 special assessment activities, 685–687 special revenue funds (SRFs) defined, 678 grants, 678–679 types, 634 811 year-end procedures adjusting entries, 676–677 closing entries, 677 Government Finance Officers Association, 628 government-wide financial statements, 643–644, 690–696, 728 grants, 678–679 gross profit method, of product costs, 509 H Handy & Harman, 25 Hawaiian Airlines, 606, 609 hedge, 441–442 contracts, 422–423 defined, 422 effectiveness, 442–443 of net investment in a foreign subsidiary, 444 net investment in foreign entity, 487–490 transactions, 422–423 types of, 443–447 hedge accounting, 441–442 cash flow hedge accounting, 444–445, 450–451 fair value hedge accounting, 445–446, 452–453 heirs, 776 The Hershey Company, 341 Hewlett-Packard, 507 Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GASB), 629 highly inflationary economies, defined, 476 historical exchange rates, 428 Home Depot, 347 homestead allowance, 777 horizontal integration, 23–24 I IAS (International Accounting Standard) No 61, 465 IASB See International Accounting Standards Board (IASB) IBM, 25 IFRS See International Financial Reporting Standards (IFRS) impairment testing, goodwill, 34–35, 66–69 income computations, downstream sales consolidated net income computation, 176–177 noncontrolling interest share computation, 175 income reporting, 386 income statement consolidated, 100–101 effects of Chapter 11 proceedings on, 609 income taxes allocation accounting, distributed and undistributed income, 348–349 undistributed earnings of subsidiaries and equity investees, 348 unrealized gains and losses, intercompany transactions, 349–350 812 INDEX income taxes (Continued ) business combination acquisitions, 363–364 equity method, accounting for acquisitions, 364 uncertainties, 365–366 workpaper entries, 364–365 consolidated entities definition, 347 description, 346–347 filing consolidated tax returns, 347 financial statement disclosures, 366 indirect holdings connecting affiliates for accounting, 307 consolidation workpaper, 307–310 ownership structure, 301 definition, 301 father-son-grandson relationship accounting, equity method, 303–304 computational approaches, consolidated net income, 304 consolidation workpaper, equity method, 304–305 ownership structure, 301–302 indirect quotation, 427 infrastructure assets, 656–657 inheritance taxes, 775 insolvent partnership, 579–580 installment liquidations, 571–577 cash distribution plans, 577–579 schedule of assumed loss absorption, 578 vulnerability ranking, 577 general principles, 571 illustration, 571–577 intangible assets acquisitions of, 25 amortization vs non-amortization, 35 GAAP definition of, 30–31 and goodwill, 34–35 identifiable, 32 recognition of, 30–31 integrated disclosure system codification of SABs and ASRs, 205–206 Form 8-K, 207 Form 10-K, 206 Form 10-Q, 207 objectives, 206 registering securities, 205 standardization, audited financial statements, 206–207 Intel Corporation, 503, 507 intercompany bond transactions accounting theories, 244–245 actual retirement, 244 constructive gains and losses, 244–245 constructive retirement, 244 parent bonds consolidated statements in subsequent years, 251 purchased by subsidiary, equity method, 247–251 subsidiary acquisition, 245 subsidiary bonds consolidated net income, 254 consolidated statements, subsequent years, 254–256 consolidation workpaper entries, 254 noncontrolling interest share, 254 parent acquisition, 246 purchased by parent, equity method, 252–254 intercompany inventory transactions intercompany sales and purchases, 170–171 unrealized profits beginning inventory, 173–174 ending inventory, 171–173 intercompany profits, consolidation equity method downstream sales, 182–184 upstream sales, 184–187 intercompany profits, nondepreciable plant assets downstream sale of land subsequent year to outside entity sale, 210–211 years subsequent to intercompany sale, 210 upstream sale of land noncontrolling interest share, 212 subsequent year to outside entity sale, 213–214 years subsequent to intercompany sale, 212–213 intercompany transactions, 474–476 of foreign currency, 474–476 illustration, 477–483 interfund loans, 639 interfund transactions, 675 interim acquisitions, investment interest, 60–61 interim financial reports, 509–511 estimated annual effective tax rate, computing, 510–511 expenses other than product costs, 510 guidelines for preparing, 511–516 international accounting standards, 516 nature of, 509 product costs, 509–510 SEC disclosures, 512–516 internal service funds, 633, 714–718 accounting for, 714–716 reporting, in financial statements, 716–718 international accounting business combinations, 28 International Accounting Standards Board (IASB), 28, 433, 464–465, 516 International Financial Reporting Standards (IFRS), 28, 433, 516 international registrants, 207 Interstate Bakeries Corporation, 609 intestate, defined, 775 intestate succession, 776 INDEX inventory of estate property, 776–777 intercompany transactions, 170–174 purchase, as operating assets, 226–227 inventory market, 510 investees corporation with preferred stock, 63–64 equity, disclosures, 64–66 stock purchases, 62–63 investing in existing profit and loss sharing agreements, 534–540 investment(s) equity, 69 accounting, 70 acquisition, 55 interest sale, 62 not-for-profits recording of, 743 step-by-step acquisitions, 61–62 stock, equity method accounting procedures, 53–54 concepts underlying, 51–53 economic consequences, 54 trust funds, 634 involuntary bankruptcy proceeding, 595 J Johns Manville, 594 joint ventures, 402–404, 549 accounting for unincorporated, 403–404 corporate accounting for, 403 defined, 403 definition, 402 general partnerships, 402 limited partnerships, 402 nature of, 402 one-line consolidation, 404 organizational structures of, 402 proportionate consolidation, 404 unincorporated, 403–404 K Kimberly-Clark, 24 Kraft Foods, 23 Krispy Kreme Doughnuts, Inc., 38 L LBO See leveraged buyouts (LBO) lease agreements, state and local government, 674–675 Lehman Brothers, 595 Lenovo, 507 leveraged buyouts (LBO), 401 LIFO inventory, 510 limited partnerships, 402, 548 liquidation, 596–605 See also bankruptcy case illustration, 597–605 illustration, 571–77 813 installment, 571–577 payment of claims, 597 process, 565–569 simple partnership, 565–566 statement of affairs, 598–600 trustee accounting, 600–604 trustee, duties of, 597 winding up the case, 604–605 loan funds, 764 loans, and advances, 533 local currency, 472 local transactions, 428 Lotus Development Corporation, 25 LTV Steel, 594 M Macy Acquisitions Corporation, 401 major funds, 647 management approach, 503 management’s discussion and analysis (M D&A), 641–643, 740 measured receivables/payables, 426 merger definition, 26 in reorganization, 361 MFOA See Municipal Finance Officers Association (MFOA) mixed-attribute model, 446 modified accrual basis of accounting, 636 monetary assets and liabilities, 473 Montgomery Ward, 594, 595 Moonitz, Maurice, 385 multiple exchange rates, 427–428 Municipal Accounting and Auditing, 628 Municipal Finance Officers Association (MFOA), 628 See also Government Finance Officers Association mutual agency, 530 mutual holding relationship, accounting for, 319 mutual holdings, 301 parent stock held by subsidiary conventional approach, 312–318 treasury stock approach, 310–312 mutual income accounting for, equity method, 314–315 allocation of, 314 mutually held subsidiary consolidation workpaper, equity method, 320–322 income allocation computations, 320 investment account balances, 320 N NACUBO See National Association of College and University Business Officers (NACUBO) National Association of College and University Business Officers (NACUBO), 758 National Council on Governmental Accounting (NCGA), 628 814 INDEX Nest Labs, Inc., 37 net assets, 126–127 consolidation at acquisition, 127 after acquisition, 128–131 statement of, 643 net position, 643 net settlement, 422 non-amortization, 35 noncash investments, 531 noncontrolling interest, 86, 91, 186, 477 computations, 280 other views of, 395 preferred stock, 337–338 noncontrolling interest share nondepreciable plant assets, 212 subsidiary bonds, purchased by parent, 254 nondepreciable plant assets, intercompany profits downstream sale of land subsequent year to outside entity sale, 210–211 years subsequent to intercompany sale, 210 upstream sale of land noncontrolling interest share, 212 subsequent year to outside entity sale, 213–214 years subsequent to intercompany sale, 212–213 nonexchange transactions, 637 nongovernmental not-for-profit hospitals/health care organizations, 752–764 accounting for, 753–755 contractual adjustments, 753 courtesy allowances, 753 donated assets, 754–755 gifts and bequests, 754 nongovernmental not-for-profit organizations, 757 operating expenses, 755 other operating revenues, 754 patient service revenue, 753 premium fees, 753–754 statement of operations and other hospital financial statements, 756–757 nonreciprocal transfers, 675, 687 nonspendable fund balance, 665 not-for-profit (NFP) organizations accounting principles, 740–745 collections, 745 conditional promise to give, 742 contributions, 742 donor-imposed conditions or restrictions, 743 financial statements permanently restricted net assets, 741 fund accounting, 745 gifts of long-lived assets, 743 investments and investment income, 743 measurement principles, 744–745 nature of, 739–740 “other,” 752 program services, 741 statement of activities, 741–742 statement of cash flows, 742 statement of financial position, 741 statement of functional expenses, 742 supporting services, 741–742 temporarily restricted net assets, 741 transfers, 743–744 agency transactions, 744 exchange transactions, 744 gifts in kind, 744 unconditional promise to give, 742 unrestricted net assets, 741 voluntary health and welfare organizations (VHWOs), 745–752 accounting for, 745–750 closing entries, 750 contributions, 745–747 depreciation, 749 donated long-lived assets, 747 donated securities and investment income, 748 donated services and payment of salaries, 749 financial reporting, 750–752 fixed asset purchase with restricted resources, 749 gifts in kind, 747–748 membership fees, 748 special event fund-raisers, 747 supplies, 748–749 Nynex Corporation, 25 O offering circular, 204 Office Depot, 25 OfficeMax, 25 Office of U.S Trustee, 595–596 official exchange rate, 427–428 one-line consolidation equity method, 54 bargain purchase, 59–60 equity investments, acquisition, 55 excess investment cost over book value, 56–58 excess investment cost underlying book value of equity, 55–56 excess of book value over cost, 58–59 interim acquisitions, investment interest, 60–61 joint venture, 404 separate-company tax returns, 351 OPEB See other post employment benefits (OPEB) operating assets, inventory purchased, 226–227 operating segments, 504 operational accountability, 643 option contracts, 447–448 options, hedge transactions, 422–423 options, subsidiary options and bonds convertible into parent’s common stock, 346 options and bonds convertible into subsidiary common stock, 345–346 INDEX order of relief, 595 other post employment benefits (OPEB), 713 outside customers, 633 ownership interest sale of accounting period, 279–280 beginning of period, 277–279 deconsolidation, 280–282 subsidiary stock transactions selling shares to outside entities, 283–284 selling shares to parent, 282–283 stock dividends and splits, 285–287 stock sales concepts, 284 treasury stock transactions, 284–285 P parent acquisition, subsidiary bonds, 246 parent bonds consolidated statements in subsequent years, 251 purchased by subsidiary, equity method, 247–251 subsidiary acquisition, 245 parent-company theory, 385 at acquisition, 389 after acquisition, 389 asset valuation, 386 consolidation after acquisition and consolidated balance sheets, 395 and consolidated income statements, 394–395 consolidation procedures, 390–394 equity method, 389–390 noncontrolling interest, 395 consolidation at acquisition, 389 constructive gain and losses, 387 definition, 385 equity method, 388 goodwill, 388–389 income reporting, 387 push-down accounting, 399 unrealized gains and losses, 386–387 parent earnings per share dilutive securities of subsidiary convertible into parent shares, 343 dilutive securities of subsidiary convertible into subsidiary shares, 342–343 parent-subsidiary relationship, 86–87 partnership agreements, 530 insolvent partners and partnerships, 579–580 partnership liquidations debt capital balances in solvent partnership, 566–569 installment liquidation, 571–577 interim statement of, example of, 573 process, 565–569 safe payment to partners, 569–571 simple, 565–566 partnerships additional investments and withdrawals, 532–533 admission of new partner, 541 815 articles of, 530 assignment of interest to third party, 540–541 characteristics, 530 defined, 530 dissociation, 540 dissociation of, through death or retirement, 546–548 excess payment to retiring partner, 547–548 overvalued assets written down, 548 payment to retiring partner less than capital balance, 548 financial reporting, 530 goodwill on, 532 initial investments in, 530–532 bonus on, 531–532 noncash investments, 531 investing in existing, 544–546 basis for revaluation, 542–543 at book value, 544 partnership assets not revalued (bonus to new partner), 546 partnership assets not revalued (bonus to old partners), 545 partnership assets revalued (goodwill to new partner), 545–546 partnership assets revalued (goodwill to old partners), 544–74 limited, 548 liquidation, 565–569 loans and advances, 533 nature of, 529–530 operations, 533–534 profit and loss sharing agreements, 534–540 purchase of interest from existing partner, 541–543 goodwill approach, 542–543 solvent, 566–569 par value theory, 244 patient service revenue, 753 pay-fixed, receive-variable interest swamp, 452 pay-variable, receive-fixed swamp, 452 Pennzoil, 607 pension trust funds, 635, 728 accounting for, 728 permanent funds (PFs), 634, 679–680 permanently restricted net assets, 740 personal representative, defined, 775, 776 Pfizer, 23 Phillip Morris Company, 24 piecemeal acquisitions, 274–276 plant assets See also assets depreciable downstream sales, 214–216 upstream sales, 216–222 equity method downstream sales, 223–226 upstream sales, 223–226 fair value, 222–223 nondepreciable downstream sales, 210–211 upstream sales, 212–214 816 INDEX plant funds, 762 preacquisition dividends, 272–273 preacquisition earnings, 271–272 preferred stock, investee corporation, 63–64 preferred stock investment, cost basis, 341 preferred stock, subsidiary acquired by parent constructive retirement, 338–341 cost method vs constructive retirement, 341 stock investment, cost basis, 341 convertible into parent common stock, 344 convertible into subsidiary common stock, 344 noncontrolling interest, 337–338 not held by parent, 336–338 preliminary prospectus, 204 premium fees, 753 prepetition liabilities, subject to compromise, 609 primary beneficiary, 406 primary government, 640 private not-for-profit colleges/ universities, 757–761 accounting for, 758 agency funds, 764 AICPA model (fund structure), 763–764 appropriations from federal, state, and local governments, 759 contributions, 759 current operating funds, 764 endowments, 759–760 financial statements, 762 loan funds, 764 plant funds, 764 purchases of plant assets, 761 sales and services of auxiliary enterprises, 760 sales and services of educational activities, 760–761 student financial aid, 759 tuition and fees, 758 private-purpose trust funds, 635, 726–727 accounting for, 726–727 probated, definition, 776 probate proceedings, 776 product costs, 509–510 profit and loss sharing agreements, 534–540 program revenues, 644 program services, not-for-profit organizations, 740 promise to give, 742 property taxes, accounting for, 668–670 proportionate, 404 proportionate consolidation definition, 404 joint venture, 404 proprietary funds, 630, 713–714 accounting equation for, 630–631 enterprise funds, 633–634, 718–721 financial statements, 722 government-wide financial statements, preparing, 728 internal service funds, 633, 714 required note disclosures, 729 statement of cash flows, 722–723 types, 633–634 pro rata See proportionate consolidation prospectus, 204 Prudential Insurance Company of America, 608 purchase of, private not-for-profit colleges/universities accounting for, 761 purchases denominated foreign currency, 431–432 push-down accounting, 101–103 accounting basis solution, 401–402 definition, 395 entity theory, 399 leveraged buyouts (LBOs), 401 parent-company theory, 399 parent-company vs entity approach, 398 in year after acquisition, 397–401 in year of acquisition, 396–397 put options, 422 Q Quicken Loans, 86 quotations direct, exchanges rates, 426–427 foreign exchange, 428 indirect, exchanges rates, 427 R reciprocal transfers, 675 recording expenditures, 681 red herring prospectus, 204 registering securities, 205 registration statements, 204 Regulation A, Securities Act of 1933, 204 Regulation S (SEC), 207 Regulation S-K (SEC), 205 Regulation S-X (SEC), 205 related-party transactions, 66 remeasurement of foreign currency financial statements, 474 functional currency and, 473 illustration, 483–487 reorganization, 605–609 case illustration, 611–617 fresh-start reporting, 615–617 committee representation, 606–607 definition, 361 doctrine of equitable subordination, 610 fresh-start reporting, 611 operations under Chapter 11, 607, 614 reclassification of liabilities subject to compromise, 612–614 reorganization plan, 608–609, 615 reorganization value, 610 supplementary combined financial statements, 610 trustee or debtor in possession, 606 types of transactions, 361 INDEX reportable segments aggregation criteria, 504 operating, illustration of asset test, 505 operating profit test, 505–506 revenue test, 505 quantitative thresholds, 504 reconciliation requirements, 507 reconsideration of, 504 reevaluation, 506 segment disclosures, 506–509 reporting currency, 472 reporting entity, 86 residual beneficiaries, 778 restricted fund balance, 665 retained earnings (ending), 138 revenue recognition, 637–638 Revenue Recognition Act of 1993, 363 revenues general, 643 from other sources, 671 program, 644 R H Macy & Company, 401, 608 RJR Nabisco, 401 routine transfers, 687 S SABs See Staff Accounting Bulletins (SABs) safe payments, to partners, 569–571 Safeway Stores, 401 salary allowances, 532–533 sales denominated foreign currency, 432–433 Sarbanes–Oxley Act (SOX), 38–39, 204–205 SCF See statement of cash flows (SCF) schedule of assumed loss absorption, 578 Scott Paper, 24 Securities Act of 1933 exempt security issues, 203–204 issuance of securities, public offerings, 203–204 prospectus, 204 registering securities, 205 Regulation A, 204 Securities and Exchange Commission (SEC) Accounting Series Releases (ASRs), 205–206 developments EDGAR system, 207 international registrants, 207 Regulation S, 207 small business, 208 Form S-1, 205 Form S-2, 205 Form S-3, 205 Form S-4, 205 integrated disclosure system codification of SABs and ASRs, 205–206 Form 8-K, 207 817 Form 10-K, 206 Form 10-Q, 207 objectives, 206 standardization, audited financial statements, 206–207 Regulation S-K, 205 Regulation S-X, 205 responsibilities, 205 security registration, 205 Staff Accounting Bulletins (SABs), 205–206 Securities Exchange Act of 1934, 204 segment disclosures, 506–509 for interim reports, 509 segment reporting, 503–509 separate-company tax returns consolidation procedures consolidated and separate tax return illustrations, 354–361 income taxes allocation to affiliates, 354 intercompany gain consolidation workpaper, 351 income tax expense, 351–352 one-line consolidation, 351 workpaper entry for 2017, 352–353 sequence of workpaper entries, 123 service efforts and accomplishment (SEA) reporting, 657 simple partnership liquidation, 565–566 special assessment levies, 684–685 special purpose entities (SPE), 122 special-purpose governments, 740 special revenue funds (SRF), 634 defined, 678 grants, 678–679 specific devise, 776 speculation, foreign currency, 463 spot exchange rates, 428 spot rate translation, 429–431 Staff Accounting Bulletins (SABs), 205–206 standard cost system, 510 Starbucks, 421 state and local governmental units, historical development of accounting principles for, 627–629 statement of activities, 644, 694–696, 741 statement of affairs, 598–600 statement of cash flows (SCF) consolidation direct method, 134–136 income/dividends from investees, indirect and direct methods, 133–134 indirect method, 132–133 effects of Chapter 33 proceedings on, 609 statement of net assets, 643 statement of net position, 644 Statement of Position 80-2 (AICPA), 628 Statement on Auditing Standards No 69, 629 step-by-step acquisitions, investments, 61–62 818 INDEX stock acquisitions, business combinations consolidation policy, 87–88 financing acquisition, 88 fiscal periods, parent and subsidiary, 88 parent-subsidiary relationship, 86–87 reporting entity, 86 stock dividends and splits, subsidiaries, 285–287 stock investments accounting for, 51–54 goodwill equity method investments, 69 fair value of reporting unit, 68–69 fair value option, equity method investments, 69 implied fair value, 68 potential problems, 69 recognizing and measuring, impairment losses, 67–68 reporting and disclosures, 69 strengthening currency, 427 student financial aid, private not-forprofit colleges/ universities accounting for, 758–761 subsidiary(ies), 27 convertible bonds options and bonds convertible into parent’s common stock, 346 options and bonds convertible into subsidiary common stock, 345–346 convertible preferred stock subsidiary preferred stock convertible into parent common stock, 344 subsidiary preferred stock convertible into subsidiary common stock, 344 dilutive securities convertible into parent shares, 343 convertible into subsidiary shares, 342–343 mutually held, for accounting consolidation workpaper, equity method, 320–322 income allocation computations, 320 investment account balances, 320 options options and bonds convertible into parent’s common stock, 346 options and bonds convertible into subsidiary common stock, 345–346 parent stock, mutual holdings conventional approach, 312–318 treasury stock approach, 310–312 sale of additional shares selling shares to outside entities, 283–284 selling shares to parent, 282–283 stock dividends and splits, 285–287 stock sales concepts, 284 treasury stock transactions, 284–285 subsidiary acquisition, parent bonds, 245 subsidiary bonds consolidated net income, 254 consolidated statements, subsequent years, 254–256 consolidation workpaper entries, 254 noncontrolling interest share, 254 parent acquisition, 246 purchased by parent, equity method, 252–254 subsidiary ledgers, 668 subsidiary preferred stock acquired by parent constructive retirement, 338–341 cost method vs constructive retirement, 341 stock investment, cost basis, 341 not held by parent, 336–338 supplies, accounting for, 674 supporting services, not-for-profit organizations, 741 swaps, 423 T Telecommunications Act (1996), 24 temporal method, of converting foreign financial statements, 472 temporarily restricted net assets, 740 testacy proceeding, 776 testamentary trust, 782 testate, defined, 775 Texaco, 23, 607 Time Warner, Inc., 66 total assets, 138 total equities, 138 traditional theory asset valuation, 386 constructive gains and losses, 387 definition, 385 unrealized gains and losses, 386–387 transaction analysis, 632–633 using specific funds, 635–636 transactions exchange, 637 foreign currency, 429 local, 428 nonexchange, 637 related-party, 66 translation foreign currency, 473 of foreign currency financial statements, 474 illustration, 477–483 spot rate, 429–431 translation adjustment, 487 illustration, 488–490 limit on gain/loss from, 490 treasury stock approach, consolidation subsequent years, 311–312 year of acquisition, 310–311 INDEX treasury stock transactions, subsidiaries, 284–285 trial balance workpaper format, 142 trust and agency funds, 630 See also fiduciary funds trustee, 782 trustee accounting, 600–604 trust funds, 630, 725–726 defined, 725 financial statements f or, 725 pension, 726 private-purpose, 726–727 trusts accounting for, 782–783 testamentary, 782 trustee, 782 Truth in Securities Act See Securities Act of 1933 tuition and fees/private not-for-profit colleges/universities accounting for, 758 U unassigned fund balance, 666 undivided interest, 402 Uniform Partnership Act (1914), 529 Uniform Partnership Act (1997) (UPA), 529 Uniform Probate Code (UPC), 776 unincorporated joint venture, 403–404 unlimited liability, 530 unrealized gains and losses, consolidation theory, 386–387 unrealized profits downstream sales deferral of intercompany profit, period of intercompany sale, 177–178 recognition of intercompany profit upon sale to outside entities, 178–179 intercompany inventory transactions beginning inventory, 173–174 ending inventory, 171–173 upstream sales deferral of intercompany profit, period of intercompany sale, 179–181 recognition of intercompany profit upon sale to outside entities, 178–179 unrestricted net assets, 741 UPC See Uniform Probate Code (UPC) upstream sales consolidated tax return, 359 definition, 174 depreciable plant assets affiliates’ separate books, 216–218 consolidation workpaper, 218–221 subsequent years, 221–222 income computations consolidated net income computation, 176–177 noncontrolling interest share computation, 175 819 intercompany profits, equity method, 185–187 nondepreciable plant assets noncontrolling interest share, 212 subsequent year to outside entity sale, 213–214 years subsequent to intercompany sale, 212–213 separate tax return, 359–361 unrealized profits deferral of intercompany profit, period of intercompany sale, 179–181 recognition of intercompany profit upon sale to outside entities, 178–179 US Airways, 24, 25, 594 USX Corporation, 274 V variable interest entities (VIE), 122 accounting for, 405–407 consolidation of, 405 description, 405 identifying, 405–407 venturers, 402 vertical integration, 24 VHWOs See voluntary health and welfare organizations (VHWOs) VIE See variable interest entities (VIE) voluntary bankruptcy proceeding, 595 voluntary health and welfare organizations (VHWOs), 745–752 accounting for, 745–750 closing entries, 750 contributions, 745–747 depreciation, 749 donated long-lived assets, 747 donated securities and investment income, 748 donated services and payment of salaries, 749 financial reporting, 750–752 fixed asset purchase with restricted resources, 749 gifts in kind, 747–748 membership fees, 748 special event fund-raisers, 747 vulnerability rankings, 577 W Wachovia Corporation, 23 weakening currency, 427 Wells Fargo & Company, 23 West Texas Intermediate (WTI), 443 Wheeling-Pittsburgh Steel, 25 WHX, 25 Wolverine Worldwide, 421 workpaper entries, sequence of, 123 WorldCom, 38, 203, 594 WTI See West Texas Intermediate (WTI) ... Producer, Global Edition: Vamanan Namboodiri Associate Acquisitions Editor, Global Edition: Ananya Srivastava Associate Project Editor, Global Edition: Paromita Banerjee Assistant Project Editor, Global. . .ADVANCED ACCOUNTING This page intentionally left blank ADVANCED ACCOUNTING 13TH EDITION Global Edition Floyd A Beams Virginia Polytechnic Institute... Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Advanced Accounting, 13th edition, ISBN 978-0-13-447214-0, by Floyd A Beams, Joseph H Anthony, Bruce