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Flashcards in Consolidated Financial Information Deck (38):
1

A business combination must test for goodwill impairment, which is carried out by following 2 steps. Step 1: if the FV of a specific reporting unit is below its carrying value, a possible impairment exists and step 2 is required. If not, then the second step is not required. What second step must be carried out to determine whether there is an actual impairment loss to be recognized?

the FV of the individual assets and liabilities of that same reporting unit must be determined. The difference in these two values is the implied amount of goodwill at the current time. If the goodwill shown within the financial records of that reporting unit is grater than this implied amount, goodwill must be written down to the implied value with an impairment loss.

2

A owns Z and goodwill of $390,000 results from the takeover. Of this goodwill amount, $100,000 is assigned to Segment M, which has a FV of $600,000. A test of goodwill indicates a possible impairment to be recognized. Individually, the assets and liabilities of Segment M have a total FV of $530,000.

What reporting must the business combination make?

FV of M 600,000 less FV of M's assets and liabilities 530,000 = implied goodwill of 70,000

given goodwill 100,000 - implied goodwill 70,000 = 30,000 goodwill impairment loss

3

A and Z are joined together to form a single entity.

According to the acquisition method, what is the relationship of these two companies?

under the acquisition method one company is the parent and other is a subsidiary

4

A owns 100% of Z. During the year Z pays a $32,000 dividend to A. At the end of the year, A owes $14,000 to Z.

How are these two separate events reflected within the consolidated financial statements?

the dividend is an intra-entity transfer and will be eliminated for consolidation purposes. It has no effect on any outside party.

the payable is also a intra-entity transaction and will be eliminated in the preparation of the consolidated F/S.

5

A and Z are being consolidated. On Jan 1, year 1, on of these companies had a building with a book value of $300,000. At that time this building is transferred to the other entity for $400,000.

In the preparing consolidated F/S at year-end, how does this transaction affect the consolidation process?

we must report this asset at the historical cost of the original purchaser and not the transfer price.


the reported value of the building and subsequent depreciation must be computed on the $300,000 cost figure and the $100,000 gain created should be eliminated

6

A and Z are being consolidated. On Jan 1, year 1, on of these companies had a building with a book value of $300,000. At that time this building is transferred to the other entity for $400,000.

In the preparing consolidated F/S for year 2, how does this intra-entity transaction affect the consolidation of depreciation expense?

for consolidation purposes, this excess depreciation must be removed to get back to the historical cost figure. In this manner, the consolidated entity will show its depreciation based on the cost of the building, rather than the transfer price, Thus, actual depreciation expense is reduced each year for consolidation purposes.

7

A acquires 100% of the outstanding common stock of Z paying $300,000. The net assets of Z amounted to $340,000. On that date, all of the assets and liabilities of Z were fairly valued on the entities records.

How is this $40,00 bargain amount reported by A?

the bargain purchase is recorded as an ordinary gain after any goodwill on the sellers books.

8

A issues 12 shares of $10 par value common in exchange for all the o/s stock of Z. The issued shares were worth $30 each. On that date, Z has the following balances

C- stock 100
APIC 60
R/E 140

For an acquisition, what j/e by the parent records the issuance of these shares

Investment in Z 360
C-stock 120
APIC 240

9

When is consolation of financial information required?

consolidation is required when one entity gains control over another entity.

Control is assumed to occur generally whenever one entity owns any amount over 50% of the voting stock of the other entity.

10

An acquisition takes place on Jan 1, year 1. For year 1, the parent reports net income of $800 and the subsidiary reports net income of $100. Amortization expense based on the acquisition price was $20. In addition, an intra-entity unearned gain of $12 is present at year-end. On its separate financial records, the parent has already recorded $68 as its income from the subsidiary.

What is the consolidated net income?

Because the parent has already recorded $68 of income from the subsidiary, the parent has apparently picked up the subsidiary's net income ($100), the amortization expense ($20), and the elimination of the unearned gain ($12). The $68 is the $100 - $20 - $12.

All elements relating to the subsidiary have been included within the parent figures. Thus, its $800 income being reported is equal to consolidated net income.

11

A and Z are joined together to form a single entity.

What accounting method is used for the consolidation of the the two sets of F/S?

Consolidated F/S must be prepared by utilizing the acquisition method.

12

Goodwill is no longer amortized. Instead, each year, it is tested to see if there has been an impairment in its value and if a reduction is necessary. Assume that A buys Z and $540,000 is assigned to goodwill.

What step must be carried out at the date of this acquisition that will later be used to enable the testing of goodwill for impairment?

both the parent entity and the subsidiary must be divided into reporting units. Then the $540,000 in goodwill is allocated among the reporting units. This allocation process can include segments of the parent(if it is expected to benefit from the takeover), as well as those of the subsidiary. Thus $200,000 might be attributed to segment A, $300,000 to Segment B, and $40,000 to segment C.

13

A acquires 100% of the outstanding common stock of Z paying $300,000. The net assets of Z amounted to $340,000.The reduced payment indicates $40,000 in negative goodwill that is first assigned in the consolidation process to eliminate the subsidiary's goodwill. However after reducing goodwill to zero, $8,000 of this reduced payment remains to be reported.

What happens to this residual $8,000 of the bargain purchase price?

The amount is reported immediately as an ordinary gain.

14

A buys Z on December 1, year 1, in a merger that is to be reported as an acquisition.

In preparing a consolidated income statement for year 1, how are the figures from the two companies brought together?

the revenue and expenses of A are included in the consolidated figures for the entire year, but only the revenues and expenses of Z for the final month of the year are consolidated. In an acquisition, all revenues and expenses for the parent entity for the year are added to the revenues and expenses of the subsidiary, but only for the period after the takeover.

15

A and Z combined several years ago. In the current year, the two companies have a number of intra-entity transactions.

How does the reporting of a business combination through the acquisition method impact the handling of such intra-entity transactions?

intra-entity transactions should be eliminated within the consolidation process so that the single entity being reported is viewed from the perspective of an outside party.

16

A owns all of Z. During the current year, A bought merchandise for $70,000 and sold it to Z for $100,000. At the end of the year, all of these goods had been resold to outside parties.

What elimination must be made to consolidate F/S, and how does it change if the sale is from Z to A?

How does this change if A only owns 80% of Z?

There is an intra-entity transfer of $100,000. Thus in the consolidation process, sales must be reduced by $100,000 and COGS must also be decreased by $100,000.

This same elimination is required whether the sale went from A to Z or Z to A.

The same elimination is required if A owns 80% of Z.

17

A owns all of Z. During the current year, A bought merchandise for $70,000 and sold it to Z for $100,000. At the end of the year, 40% of these goods are still being held by Z.

What eliminations must be made in producing consolidated F/S?

Because some part of the merchandise is still held at year-end, two eliminations are required. First both consolidated sales and COGS are reduced by $100,000.

Second, an unrealized gain remains in ending inventory. The amount of this gain is found by multiplying the transfer gain by the inventory remaining. $30,000 was the gain and 40% of it is still remaining so the unrealized gain is $12,000. To defer recognition of this gain, ending inventory must be decreased by $12,000 and COGS must be increased by the same amount.

18

A owns Z and they have the following information

A Z
Sales 400,000 300,000
COGS 200,000 100,000
Inventory 100,000 60,000


During the current year, intra-entity sales of $70,000 were made, and the unrealized gain at the end of the year was $4,000.

What is the consolidated balance for each of the above accounts?

Consolidated sales - The $70,000 transfer is eliminated so 700,000 - 70,000 = $630,000

Consolidated COGS - the $70,000 is also eliminated which reduces COGS, the $4,000 unrealized gain is removed by increasing COGS. So
$300,000 - $70,000 + $4,000 = $234,000

Consolidated Inventory - The $4,000 unrealized gain is pulled out so the figure is $160,000 - $4,000 = $156,000

19

A is in the process of acquiring Z. A will issue some amount of its own stock to create the takeover. Direct consolidation costs total $60,000, while stock issuance costs are an additional $40,000.

For consolidation purposes, how are these costs handled?

all direct consolidation costs are expensed

however stock issuance costs are reported as a reduction to the parents APIC.

20

A bought Z several years ago. Consolidated F/S are created in the current year for these two companies. Separate F/S for A have the following balances

Investment in Z - $121,000
Income from Z - $19,000

For consolidation purposes, what is reported for these two balances?

In consolidation, any type of investment in subsidiary account and any type of income from subsidiary account must be eliminated entirely as intra-entity balances. Thus, neither of these two accounts will be found within the consolidated F/S.

21

A acquires Z for $240,000. On that date Z has a book value of $190,000. Z also owns a piece of land with a book value of $30,000 that is actually worth $42,000. The parent has paid $50,000 above the book value of the subsidiary. Of this excess, $12,000 is assigned to the land.

What accounting should be made of the remaining $38,000?

Any part of the $38,000 excess acquisition price that cannot be assigned to identifiable intangible assets should be reported as goodwill.

22

When one entity owns over 50% of another entity's voting stock, consolidation of the two sets of financial statements is normally required. What are the two exceptions where consolidation of the financial statements is not allowed, despite the parent holding that level of ownership?

ownership is temporary

the parent does not have actual control

23

A acquires Z in a combination being reported as an acquisition. A has equipment reported at $100,000 and Z has equipment reported at $60,000, which is really worth $70,000.

What is the consolidated figure for the equipment account? Assume that A paid more than FV to acquire Z. How is goodwill determined in an acquisition?

Goodwill is recognized in an acquisition for any amount of the acquisition price that is paid in excess of the FV of the subsidiary's assets and liabilities.

24

A acquires 100% of Z for a price of $200,000. On that date, Z has a book value of $120,000. Also on that date, Z owns a piece of land that has a book value of $50,000 but is actually worth $70,000.

How much goodwill should be recognized in the consolidation of A and Z?

the excess purchase price is $200,000 - $120,000 = $80,000

of that $20,000 can be assigned to the land account which leaves a residual of $60,000 to be goodwill

25

In an acquisition, a price is determined. Any portion of that acquisition price in excess of the of the underlying book value of the subsidiary is first allocated to any specific assets and liabilities 100% of their FV's even if less than 100% is acquired. Any remaining amount is assigned to goodwill.

What happens to these allocations and goodwill?

over time individual allocations must be depreciated/amortized based on remaining useful lives of the underlying asset

goodwill is not amortized but must be checked for impairment

26

An acquisition took place on Jan 1, year 1. Several years later, consolidated F/S are being produced.

For each asset, how is the consolidated balance determined?

include the book value of the asset reported by the parent

include the book value of the asset reported by the subsidiary

add any allocation made in connection with the original acquisition price

subtract all subsequent amortization of the allocations that were made based on the acquisition price

subtract out the impact of intra-entity transactions

27

A buys Z for $300,000 in excess of the underlying book value. At that time, A valued an R&D project being worked on by Z at $180,000. This project is estimated to be about 40% completed. The money spent to date on this project has no future alternative uses.

In consolidation, what happens to the extra $300,000 paid by A?

$180,000 of the R&D is capitalized


$120,000 allocated to goodwill

28

An acquisition takes place on Jan 1, year 1. On separate F/S, the parent reports net income of $400 for year 1, while the subsidiary reports $100 for the same period. Amortization expense based on the acquisition price was $20. In addition, an intra-entity unearned gain of $12 is present at year end.

On its own financial records, the parent has recorded no income from the subsidiary.

What is the consolidated net income?

parent net income 400
sub net income 100
amort exp (20)
eliminate unearned
gain (12)

cons. net income 468

29

An acquisition takes place on Jan 1, year 1. On separate F/S, the parent reports net income of $600 for year 1, while the subsidiary reports $100 for the same period. Amortization expense based on the acquisition price was $20. In addition, an intra-entity unearned gain of $12 is present at year end.

On its separate financial records, the parent has already recorded $100 as the income earned from the subsidiary.

What is the consolidated net income?

parent net income 600
amort exp (20)
eliminate unearned
gain (12)

cons. net income 568

30

A business combination test for goodwill impairment on an annual basis. The initial amount of goodwill is assigned to the individual reporting units of the combination. For each of these units, a separate 2-step goodwill impairment test is performed. What is the first step in this process?

estimation of the FV of the reporting unit and compare that to the book value

if

FV > BV = no impairment

FV

31

What are some of the most important attributes that are associated with consolidated F/S prepared according to the acquisition method?

all assets and liabilities are combined by taking the parent's and the subsidiaries book values and adding any acquisition price allocations less any subsequent amortization of those allocations. goodwill is also recognized but is not subject to amortization.

all consolidations costs are expensed except for stock or debt issuance costs, which reduce APIC or are amortized over the life of the underlying debt, respectively

the parent entity may issue common stock in the acquisition, which is recorded at FV on its books and then reflects the consolidated totals for common stock and APIC

in consolidation, subsidiary income figures are only included if earned/incurred after takeover

32

A acquires 80% of Z. Several years later consolidated F/S are being prepared.

How is the consolidation process carried out when less than 100% ownership is held?

despite only 80% ownership 100% of assets, liabilities and revenues and expenses are brought into the consolidation. a balancing account reduces the ownership called noncontrolling interest is recognzied for the 20% is shown at the bottom of the statement

33

A acquires 80% of Z. Several years later consolidated F/S are being prepared. A noncontrolling interest figure must appear on both the consolidated balance sheet and the consolidated income statement.

How are these two noncontrolling interest figures computed?

Balance Sheet- the noncontrolling interest will be equal to 20% of the subsidiaries fair value at the end of the year reported as part of stockholders' equity

Income statement - a noncontrolling interest figure appears equal to 20% of the subsidiary's net income

34

A acquires 80% of Z for $520,000. On that date, Z had a book value of $500,000. However, also on that date, Z owned a building with a 10-year lfie that was undervalued on its financial records by $100,000.

For consolidation purposes, how much goodwill should be recognized?

implied value of Z = 520,000/.8 or $650,000

the difference between the implied value and the book value 650,000 - 500,000 = 150,000 would be allocated first to the building (100,000) and the remainder to goodwill

35

On Jan 1, year 1, A acquires of Z. Z owns a building with a 10-year life that was undervalued on its financial records by $100,000. Goodwill attributed to the acquisition price is $40,000.

For consolidation purposes, what amount of amortization expense should be recognized each year?

$100,000 will be made to the building account. With a 10-year life, annual amortization is $10,000.

The goodwill of $40,000 is not to be amortized. Instead, it is subject each year to a test of impairment.

36

What are combined F/S?

combined F/S are prepared for companies that are commonly controlled or commonly managed

37

What is meant by push-down accounting?

In push-down accounting, any allocations from the acquisition of a subsidiary are physically recorded on the books of the subsidiary, along with subsequent amortization. Rather than entering the allocations through the periodic consolidation process, the allocations and amortization are actually recorded by the subsidiary entity. For SEC registrants, push-down accounting is permitted for entities with 80-95% ownership and required for ownership grater than or equal to 95%.

38

What are some advantages of using push-down accounting?

When push-down accounting is applied, the consolidation process is much simpler because there is no need t enter the acquisition price allocations or the resulting amortization each year. Those figures are already being reported on the records of the subsidiary with the one-time adjustment.

When push-down accounting is applied, the financial records of the subsidiary provide a better representation of the income impact that ownership of the subsidiary will have on the consolidated financial results. The subsidiary's financial statements would be reported at fair value at the date of the change in ownership rather than historical cost.