Chapter 14: Business Combinations and Consolidated FR

Question 1

When is consolidated financial reporting required?

Answer 1

When an entity owns 50% of the outstanding voting interests of another entity. The exception to this is when the control does not rest with the majority owner.

Question 2

What is the acquisition cost of a sub for a parent under a business combination?

Answer 2

The sum at the acquisition date the fair values of assets, liabilities, and equity of the acquiree.

Question 3

What is the difference between the initial recognition of net assets acquired under a business combination vs a non-business asset acquisition??

Answer 3

The net assets acquired under a business combination are recognized at the fair value at the acquisition date with goodwill recognized if
FV < Consideration Paid
Under a non-business asset acquisition, the assets are recorded at a allocation of cost based on relative fair values (with a gain/loss recognized when the asset is sold).

Question 4

How are direct equity issuance costs accounted for under business combinations?

Answer 4

By reducing APIC

Question 5

How are indirect equity issuance costs accounted for under business combinations?

Answer 5

They are expensed, just like acquisition-related costs

Question 6

How are debt issue costs accounted for under business combinations?

Answer 6

By reducing the debt carrying amount.

Question 7

How is percentage owed balanced out on the BS?

Answer 7

All liabilities of controlling interests will be reported on the BS, however, in the Equity section, there will be a split of Controlling Interest (CI) and Non-controlling interest (NCI)

Question 8

What are the methods a parent can use to account for acquisition?

Answer 8

The equity or cost method.

Question 9

What is the calculation of goodwill or gain from bargain purchase?

Answer 9

Fair Value of the consideration transferred (cash/stocks) (this purchase)
+ Fair value of any non-controlling interest in the acquiree (other’s interest)
+ Fair value of any previously-held equity interest in the acquiree (any previous ownership)
- Fair Value of identifiable net assets acquired
= Positive outcome = Goodwill; Negative outcome = Gain

Question 10

What needs to be identified for the calculation of Goodwill or Gain from Bargain on Purchase?

Answer 10

• Fair value of consideration
• Fair value of previous equity interests
• Fair value of NCI
• Fair value of identifiable net assets

Question 11

What account will need to be eliminated in consolidated noncurrent assets under the equity method?

Answer 11

Equity investment

Question 12

The consolidated balance sheet will be a combination of parent and subsidiary except for

Answer 12

the Equity section

Question 13

Are parents required to perform consolidated financial statements on the date of acquisition?

Answer 13

Yes, stop, drop and roll out those consolidated FS. Yesterday we were two, now we are one.

Question 14

How do you calculate consolidated retained earnings for the parent?

Answer 14

Parent’s retained earnings, beginning
+ Consolidated NI attributable to parent’s shareholders
- Parent’s dividends declared
= Consolidated retained earnings

Question 15

What are consolidated dividends?

Answer 15

Those paid outside the “consolidated group”

Question 16

How do you consolidated intraentity noncurrent assets transactions?

Answer 16

1. Eliminate the gain - > Recognize 1/nth of gain each remaining year in useful life
2. Bring the asset back to OG cost
3. Establish accumulated depreciation needed
4. Reverse excess depreciation expense

Question 17

What is the eliminating JE needed for consolidated intraentity noncurrent assets transactions when there was a gain?

Answer 17

(DB) Gain on sale (only in the year of the sale) or Equity Investment for future years
(DB) Equipment
(CR) Accumulated depreciation
(CR) Depreciation

Question 18

What is the calculation for de-consolidation gain or loss?

Answer 18

Fair value of proceeds received
+ Fair value of any investment retained
+ Carrying amount of NCI
- Carrying amount of subsidiary, including Goodwill
= Gain, if positive or Loss, if negative

Question 19

What is the variable interest model steps?

Answer 19

• Identify variable interest in entity
• Determine if entity is VIE
• Identify primary beneficiary - must consolidate

Question 20

What are examples of variable interest?

Answer 20

• Common stock stock ownership
• Debt guarantees
• Subordinated debt
• Leases
• Derivatives

Question 21

What are the 3 questions to ask yourself about VIEs?

Answer 21

1. Is it a variable interest?
2. Is it a variable interest entity?
3. If so, who is the primary beneficiary?

Question 22

When are combined statements used?

Answer 22

1) to combine the statements of several entities with related operations when one individual owns a controlling financial interest in them or (2) to combine the statements of entities under common management.