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Flashcards in Consolidations Deck (49):

When is the fair value method used for recording interest in a separate company?

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period


When is the equity method used when purchasing another company's stock? How is it recorded?

Ownership 21% to 50%

Gives significant influence

Purchase Price - Par Value : Goodwill

Dividends received from the investee reduce the investment account and are not income


When are companies required to file consolidated financials? How is it recorded?

Ownership of other company is greater than 50%

Investment account is eliminated

Only parent company prepares consolidated statements; not subsidiary.

Acquired assets/liabilities are recorded at Fair Value on acquisition date.

Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments


When is consolidation not required?

Ownership less than 50%


Majority owner does not control - i.e. bankruptcy or foreign bureaucracy


What occurs under a step acquisition?

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value

Results in a Gain or Loss in current period


What is the difference between an acquisition and a merger?

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent's financial statements

Merged companies cease to exist and only the parent remains


How are acquisition costs recorded in a merger?

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs


Treatment of existing goodwill before business combination

Do my include old goodwill in net assets when calculating new goodwill


Treatment of finders fees and general acquisition expenses

Expensed as incurred


Treatment of registration fees and issuing fees for securities in acquisition

Reduce issue price of securities
Reduces APIC


Calculate the consolidated APIC if stock is issued to finance acquisition

Parent APIC + APIC from shares issues


What is a bargain purchase

FV of NCI + FV previous purchases of CS less than FV of net identifiable assets


What is the acquisition date

Date acquirer obtains control of acquirer


How is acquisition cost determine in step acquisition

Previously held shares Remeasured at FV as of the date control is acquired
Gain recognized in period


Examples of intangible assets not included in goodwill

Lease agreements
Assets arising from contractual or legal rights
Assets identifiable and can be sold separately


How is the acquisition cost allocated

Allocated to acquired asset and liabilities based in relative FV


Calculate acquisition cost

Cost + FV of NCI


Calculate current liabilities for acquisition of entity via debt financing

Include current portion of LT debt in current liabilities


Calculate acquisition goodwill

Assets transferred + FV NCI - FV net identifiable assets


How are assets valued at acquisition date

At fair value


How are intercompany receivables and payables recorded on subsidiary subsequent to acquisition

Intercompany receivable and payables still recorded
Only eliminate on parents consolidated FS


Calculate NCI account balance

FV of NCI at acquisition date + share of net income - share of dividends


How is the excessive value over CV of equipment treated on consolidated FS

Capitalized and amortized over useful life


How are dividends declared recorded on consolidated FS when parent owns sub and sub owns parent

Eliminate dividends from parent to sub and sub to parent
Sub to NCI not included on consolidated FS because it does not represent dividend of consolidated entity


Rule for consolidating variable purpose entity

Equity less than 10 percent of total assets. Assumed entity does not have sufficient financing to fund operations


Who should consolidate variable purpose entity

Primary benefiticiary


When is the determination of consolidation of variable purpose entity made

Made at time entity gets involved with VIE
Reassessed on ongoing basis


Adjustments required when switching to consolidated FS

Consolidated FS is change in entity
Retroactively restate all FS


How are earnings of parent and sub reflected on consolidated FS

Consolidated FS reflect combined operations of parent and sub subsequent to acquisition. Earnings of sub prior to combo not included in parent income


What causes unrealized profit in ending inventory of consolidated FS

Intercompany sales made at prices greater than cost and merchandise not resold to 3rd party. Must be eliminated from consolidated FS


Calculate unrealized profit in ending inventory

Sales to sub - sub cost x parent GP %


Calculate Consolidated COGS when intercompany sales between parent as sub

Parent COGS + Sub COGS - sales from parent to sub


Calculate consolidated selling expenses with sales from parent to sub and freight out expenses

Selling expense parent + selling expense sub - freight out expense from parent to sub


How to record equipment from parent sold to sub at gain on consolidated FS

Equipment recorded at original cost less accumulated depreciation

As if equipment had never been sold


Calculate gain on subsidiary purchase of parent bonds and effect on NCI

Gain = cash paid - CV

Treated like retirement of bonds

No effect on NCI


Treatment of wholly owned subsidiary's purchase of parent stock

Treated as if consolidated entity is purchasing treasury stock

No gain recorded


Adjusted accounts on consolidate FS for intercompany sales

Adjust sales and COGS for intercompany sales

Net income needs no adjustment


How is NCI share of net income affected by intercompany sales

Not affected by unrealized gain
It is a downstream sales from parent to subsidiary


How are the parent investment account and subsidiary stockholder equity and NCI reported on consolidated FS

Parent investment account and subsidiary stockholder equity account eliminated

Portion of subsidiary stockholder equity not eliminated is NCI


Examples of consideration transferred on acquisition

FV of assets and liabilities
FV of contingent consideration
Equity interest issued by acquirer
Share based payments required to be replaced by acquirer where not further service is require by employee


How to treat incomplete information on acquisition date

Items recorded at provisional amount at acquisition date


What is the measurement period for incomplete information

Earlier of one year from acquisition date or date complete information is available


If a acquisition provisional amount is inaccurate how to adjust

Retroactively adjust goodwill


How is the voluntary payment of share based payments to employees at acquisition recorded

As compensation expense post acquisition date


When are contingent liabilities arising from acquisition derecognized

Only after contingency is resolved


What are combined financial statements

FS prepared or companies owned by same parent or individual

Eliminate intercompany transactions


When are combined FS used

Present financial position as results of:

Commonly controlled companies
Companies under common mgmt
Group of consolidated subsidiaries


When is goodwill recognized under IFRS

When acquired by purchase


When can a subsidiary be exclude from consolidation under IFRS

Wholly or partially owned and its owners do not object to nonconsolidation
No debt or equity is publicly traded
Parent prepares consolidated FS under IFRS