Consolidations Flashcards
(11 cards)
P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P’s wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be
Included as a decrease to retained earnings
To the consolidated entity, the acquisition of an affiliate’s debt from an outside party is the equivalent of retiring the obligation. Therefore, the consolidated entity must immediately recognize any difference between the price paid and the carrying amount of the bonds as a gain or loss. The consolidated entity would recognize a loss from the acquisition because the price paid for the bonds exceeded their carrying amount on the affiliate’s books (i.e., the bonds were originally issued at a discount and were purchased in the open market at a premium). The loss that the consolidated entity recognizes would be included in the consolidated balance sheet as a decrease to retained earnings.
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?
$56,000
In recording the sale of inventory to Twill, Webb recognized cost of goods sold of $40,000. In recording the later sale this inventory to an unrelated customer, Twill recognized cost of goods sold of $56,000 ($40,000 × 140%). However, from a combined perspective, the sale to Twill (the affiliated company) did not occur, and thus the cost of the goods sold to the unaffiliated company is $40,000. Therefore, $56,000 is eliminated from cost of goods sold in the combined income statement.
Historically, where separate incorporation is maintained, the subsidiary’s financial records are
Not affected by either the acquisition or the consolidation
A 70%-owned subsidiary company declares and pays a cash dividend. Under the acquisition method, what effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent company’s consolidated balance sheet?
No effect on retained earnings and a decrease in noncontrolling interest
Under the acquisition method, the amount of consolidated retained earnings is equal to the parent company’s retained earnings because the subsidiary’s stockholders’ equity accounts are eliminated in the consolidation process. Thus, the cash dividend declared by the subsidiary has no effect on consolidated retained earnings. The noncontrolling interest balance reported in the consolidated statements is based upon the balances of the subsidiary’s stockholders’ equity accounts. Since the cash dividend declared and paid by the subsidiary decreases the amount of the subsidiary’s retained earnings, the noncontrolling interest balance reported in the consolidated balance sheet decreases.
What are the effects of acquisition-related costs are costs the acquirer incurs to effect a business combination?
Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs; and costs of registering and issuing debt and equity securities.
The acquirer should account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception—the costs to register and issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
Direct, indirect or general costs are all expenses e.g., legal, accounting, consulting, finder’s fees, G&A are expense in the period incurred.
Costs associated with the issuance and registration of debt or equity securities, are treated as Bond Issue Costs and netted against the proceeds.
Parker Corp. owns 80% of Smith, Inc.’s common stock. During the current year, Parker sold Smith $250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in this year. The following information pertains to Smith and Parker’s sales for the year:
Parker Smith
Sales $1,000,000 $ 700,000
Cost of sales (400,000) (350,000)
$ 600,000 $ 350,000
What amount should Parker report as cost of sales in its year-end consolidated income statement?
$500,000
Simple, don’t over think it.
Total COS is 400+350 = 750
Now eliminate the inventory and profit.
750 - 250 = $500.
On December 31 of the current year, Penny Corp. purchased 80% of the outstanding common stock of Sutton, Inc. for $1,100,000. On the purchase date, the book value of Sutton’s net assets equaled $1,000,000 and the fair value equaled $1,200,000. This business combination was accounted for under the acquisition method. In the current year consolidated balance sheet, what amount should be reported as goodwill?
$175,000
1,100,000/.80 = 1,375,000 would be 100% of consideration
Subtract the 100% of consideration form the FV of net asset.
1,375,000-1,200,000 = 175,000
Mr. and Mrs. Gasson own 100% of the common stock of Able Corp. and 90% of the common stock of Baker Corp. Able previously paid $4,000 for the remaining 10% interest in Baker. The condensed December 31 balance sheets of Able and Baker are as follows:
Able Baker
Assets $600,000 $60,000
Liabilities 200,000 30,000
Common stock 100,000 20,000
Retained earnings 300,000 10,000
$600,000 $60,000
In a combined balance sheet of the two corporations at December 31, what amount should be reported as total stockholders’ equity?
$426,000
The amount to be reported as total stockholders’ equity in a combined balance sheet at December 31, is determined as follows:
Common stock ($100,000 + $20,000) $120,000
Retained earnings ($300,000 + $10,000) 310,000
Subtotal 430,000
Less Able’s cost of 10% interest in Baker (4,000)
Stockholders’ equity in combined balance sheet $426,000
On February 1, Pizza, Inc. acquired 75% of the outstanding common stock of Sausage Co. for $750,000 cash. At February 1, Sausage’s balance sheet showed a carrying amount of net assets of $1,100,000 and the fair value of Sausage’s assets and liabilities equaled their carrying amounts except for property, plant, and equipment which exceeded its carrying amount by $200,000. On February 1, what amount would be attributed as fair value for the noncontrolling interest?
$250,000
750,000/75% = 1,000,000*25% = 250,000
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. By what amount was unadjusted revenue overstated in the combined income statement for the year?
$56,000
Any sale of inventory made between two commonly controlled companies will trigger the individual accounting systems for both companies. Revenue is recorded by the seller while the purchase is simultaneously entered into the buyer’s accounts. However, from a combined perspective, neither sale nor purchase has occurred. Thus, all intercompany sales are eliminated from the combined financial statements. Since the intercompany sale was not eliminated in preparing the combined financial statements, unadjusted revenue is overstated by $56,000 ($40,000 × 140%).
