Consolidations

Question 1

Which methods are used at what ownership levels

Answer 1

Fair Value (<20%)

Equity Method (21-50%)

Consolidations (>50%) - Use eliminating entries to remove investment account and show the company as one entity

Question 2

How do you calculate purchase price

Answer 2

Purchase Price = Cash paid for assets.

% of shares purchased * total FMV = Purchase Price

Question 3

What is Goodwill

Answer 3

Goodwill is the difference between the Purchase Price and Net Assets or Par Value.

Net assets = Common Stock + Retained Earnings

Question 4

How do you treat net income when a firm owns 10% of shares in the first three months and acquires 30% more shares during the rest of the year

Answer 4

Do not recognize income in the first three months. Use the equity method to recognize income in the later months

Question 5

What happens when you change from Fair Value to Equity method

Answer 5

Recognize unrealized holdings gain/loss of shares in earnings and use equity treatment

Question 6

What is the fair value method

Answer 6

Fair Value (<20%) - Account for stock as a purchase and recognize at FMV. Dividends are considered income

Question 7

What is the equity method

Answer 7

Equity Method (21-50%) - Gives significant influence. Purchase Price - Par Value = Goodwill. Dividends received reduce investment account and are not considered income

Question 8

What are consolidations

Answer 8

Consolidations (>50%) - Use eliminating entries to remove investment account and show the company as one entity

Question 9

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb’s cost. During the current year, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during this year. In preparing combined financial statements for the year, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb. What amount should be eliminated from cost of goods sold in the combined income statement for the year?

Answer 9

56000. Webb recorded the 40k initially as COGS sold to Webb. Therefore any extra cost should be canceled out: (40,000x140%)=56,000 in COGS sold to unrelated customers