Consolidated Financial Statement

Question 1

Restating net assets to fair value

Answer 1

If the parent company paid fair value for the sub’s net assets, the net assets should be reported initially at the fair value on the consolidated worksheet.

Question 2

Double Counting

Answer 2

Basic consolidation theory states that the consolidated entity cannot count the same assets, liabilities, and stockholders’ equity accounts twice.

Question 3

Name the five steps in the consolidation procedure

Answer 3

1) Eliminate double counting2) Restate net assets to fair value3) Record goodwill4) Record minority interest at fair value on the acquisition date5) Eliminate inter-company transactions

Question 4

ASC 350R requires that in-process research and development acquired in a business combination be recognized as an?

Answer 4

Asset at its acquisition-date fair value

Question 5

“Gain on Bargain Purchase” in the acquisition method means?

Answer 5

Any excess of the net amount assigned to the individual assets acquired and liabilities assumed over the fair value of the consideration transferred in recognized by the acquirer as a “gain on bargain purchase.”

Question 6

In the acquisition method any excess of the fair value of the consideration transferred over the net amount assigned to the individual assets acquired and liabilities assumed in recognized by the acquirer as?

Answer 6

Any excess of the fair value of the consideration transferred over the net amount assigned to the individual assets acquired and liabilities assumed is recognized by the acquirer as goodwill.

Question 7

In the acquisition method, what is the good starting point for recording a business combination?

Answer 7

The fair value of the consideration transferred provides a starting point for valuing and recording a business combination.

Question 8

In the acquisition method, all assets acquired and liabilities assumed in the combination are recognized and measured according to their?

Answer 8

All assets acquired and liabilities assumed in the combination are recognized and measured at their individual fair value.

Question 9

If a parent has undetermined controlling interest in a subsidiary, what guideline should be used?

Answer 9

If the parent has controlling interest in subsidiary, it should normally be consolidated. If the controlling interest is difficult to be determined, the guideline is ownership of over 50% of the common stock.

Question 10

Of the three theoretical methods of accounting for business combination, which is the only acceptable method?

Answer 10

The Pooling of Interest method was prohibited by ASC 350 and ASC 350R eliminated use of the Purchase Method. So the Acquisition Method is the only acceptable method under GAAP for business combinations.

Question 11

What are Reporting Units?

Answer 11

To better assess potential declines in value for goodwill (in place of amortization), the most specific business level at which goodwill is evident was chosen as the appropriate level for impairment testing.

Question 12

Theoretically there are three methods of accounting for business combinations. These three methods are:

Answer 12

1) Pooling of Interest2) Purchase Method3) Acquisition Method

Question 13

What is the difference in IFRS for the calculation of Goodwill?

Answer 13

Difference is that the calculation of the impairment of goodwill is a two-step approach for US GAAP but a one-step approach for IFRS.

Question 14

The theory of the equity method

Answer 14

The investor should reflect on its books its share of changes occurring on the books of the investee.

Question 15

IFRS 3R “Proportionate Share Options”

Answer 15

The approach records the non-controlling interest at the proportionate share of the acquiree’s fair value of the identifiable net assets which excludes goodwill.

Question 16

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concepts of _______.

Answer 16

Economic entity.

Question 17

Variable Interest Entity (VIE)

Answer 17

A VIE is an off-balance sheet arrangement that may take any legal form.

Question 18

The best theoretical justification for consolidated financial statement?

Answer 18

In form the companies are separate; in substance they are one entity.

Question 19

How does ASC 350 change the accounting for purchases in research development?

Answer 19

ASC 350 does not change the accounting for puchased in process research and development. The criterion usually used in technological feasibility. If the R&D has not reached technological feasibility, it should be expensed.

Question 20

Name a reason when the equity method of accounting for investments should be used?

Answer 20

The equity method of accounting for investments in common stock should be used if the investor has significant influence over the operation and financial policies of the investee.

Question 21

What is the ASC 350 two-step approach for testing goodwill for impairment?

Answer 21

The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill.The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.

Question 22

Under the Equity Method the investor recognizes what?

Answer 22

Under the equity method the investor recognizes in income its share of the investee’s net income or loss subsequent to the date of acquisition.

Question 23

ASC 350 provides two major changes in financial reporting related to business combinations. What are these changes?

Answer 23

The first major change is goodwill will no longer be amortized systematically over time. Goodwill will be subject to an annual test for impairment.

Question 24

Receipt of a stock dividend effect (or lack of effect) on the investor.

Answer 24

Receipt of a stock dividend (usually) does not constitute dividend income to the investor, rather it reduces the cost basis per share of the investment.

Question 25

Name three examples of technology Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350)

Answer 25

Patented technologyTrade secrets including secret formulas, processes, and recipesUnpatented technology

Question 26

Parent vs. Subsidiary

Answer 26

In situations in which the investor has control, the investor is called the parent and the company invested in is called the subsidiary.

Question 27

Name three examples of Contract Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350)

Answer 27

Licensing, royalty, standstill agreementFranchise agreementsLease agreements

Question 28

Investor vs. Investee

Answer 28

Normally for investments in which the investor does not have control, the investor is called the investor and the company invested in is called the investee.

Question 29

Name three examples of Artistic Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350).

Answer 29

Books, magazines, newspapers and other literary worksPictures and photographsPlays, operas and ballets

Question 30

Name three examples of Customer Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350).

Answer 30

Customer listsOrder or production backlogCustomer contracts and the related customer relationships

Question 31

Name three examples of Marketing Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350).

Answer 31

TrademarksInternet domain namesTrade dress

Question 32

Name the two attributes ASC 350 descibes for recognition of an intangible asset.

Answer 32

1) Does the intangible asset arise from contractual or other legal rights?2) Is the intangible asset capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged?

Question 33

Intangible assets

Answer 33

Intangible assets include both current assets and non-current assets that lack physical substance.

Question 34

ASC 350 provides three major changes in financial reporting:

Answer 34

1) Eliminates the use of pooling interest and requires that all business combinations use the purchase method.2) Provides greater guidance in recognizing intangible assets.3) Requires disclosures of the primary reason for business combinations and expanded purchase price allocation information.

Question 35

What happens to intercompany dividends in a consolidation?

Answer 35

The intercompany dividends paid by the subsidiary to the parent are always eliminated in consolidation.

Question 36

Where should goodwill be recorded (or created)?

Answer 36

Notice that the goodwill does not appear on either the parent’s or the sub’s books, it is always created on the worksheet.

Question 37

Any difference between the price paid for the subsidiary and the fair value of the sub’s identifiable net assets is recorded as _______.

Answer 37

goodwill.