Business Combinations

Question 1

How much gain is recognized if the parent gives a subsidiary a dividned

Answer 1

You must not recognize a gain from a dividend in a parent/subsidiary relationship.

Question 2

How are expenses related to acquistion costs supposed to be treated?

Answer 2

Expenses are expensed as incurred. However, cost of Equity issuance is applied against APIC

Question 3

A private company may elect what 3 accounting alternatives?

Answer 3

A private company may elect any one of the following accounting alternatives:

(1. )Assessing the nature of the difference between the carrying amount of an investment and the amount of the underlying equity in net assets of an investee when applying the equity method;
(2. )Adopting fresh-start reporting
(3. ) Applying the acquisition method.

Question 4

How does IFRS differs from U.S. GAAP when accounting for a business combination

Answer 4

IFRS does not require goodwill to be recognized but allows it as an option. Under IFRS, a recognition of extraordinary gain as a “bargain purchase” is prohibited.

Question 5

IF sub R/E at beg year was $36,000 and end of year was $51,000 and dividend paid by sub was $5,000. The parent owns 80% of the sub. How much net income would the parent record?

Answer 5

Beg RE 36,000
Less: Dividend paid (5,000)
Income 20,000 (PLUG
Ending R/E 51,000

the parent, includes 100% of Style’s earnings: $20,000. The noncontrolling interest in the subsidiary net income $4,000 (20% of $20,000) is then subtracted from the combined entity’s consolidated net income to derive the parent’s interest in consolidated net income.

Note: Be careful even though the parent takes 100% of the income on a consolidate level the Non controlling interest portion is taken out to reflect 80% of income

Question 6

What is formula for Non Controlling interest

Answer 6

Noncontrolling interest = Noncontrolling holding % x Net assets/Sub S/E

Question 7

Which of the following items should be treated in the same manner in both combined financial statements and consolidated statements?

Answer 7

The only difference in combined financial statements and consolidated statements is that a parent is not included in combined statements. Therefore, different fiscal periods, foreign operations, and noncontrolling interest are all treated in the same manner.

Question 8

What is a statuory merger?

Answer 8

The statutory merger classification refers to the merging of the two entities into one. No third entity is established.
A+B=A

Question 9

What is consolidation?

Answer 9

The statutory consolidation classification refers to the merging of two enterprises into a newly established enterprise. A+B=C