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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


what is the accounting standards codification for business combinations and consolidations

ASC 805/810


at what percentage are consolidations performed at



are consolidations done through journal entries or on a worksheet only

on a worksheet only


definition of goodwill

an asset representing the future economic benefits that arises from other assets acquired in a business combination that are not individually identified and separately recognized


what is the formula to calculate goodwill

fair value of consideration transferred (cost to the acquirer)
+ fair value of previously held equity interests in acquiree
+ fair value of noncontrolling interest
(-) fair value of net identifiable assets of acquiree
Good will or gain from bargain purchase


In an acquisition, are direct, indirect or general costs incurred during the acquisition capitalized or expensed



In an acquisition, if acquisition costs are related to the issuance and registration of debt or equity securities, what account is debited

additional paid in capital (APIC)


if a company is acquired in the middle of the year, do the end of year financials have income and expenses from the full year or since the date of acquisition

since the date of acquisition because at purchase date, income and expenses are already included in the purchase price.
Acquiror (parent) counts income for the full year


what are the 4 steps in applying the acquisition method

1. Identify the acquirer
2. Determine the acquisition date
3. Recognize and measure at fair value the identifiable assets acquired, liabilities assumed, and noncontrolling interest (minority interest) in the acquiree
4. Recognize and measure Goodwill, or a gain from a bargain purchase


is goodwill depreciated or tested for impairment

SFAS 142
tested for impairment on an annual basis


if the acquirer pays LESS than the fair market value of the acquiree, what is the result:
1) Negative goodwill
2) Additional paid in capital
3) Reduction of the values assigned to certain assets and an extraordinary gain for any unallocated portion
4) As a gain in net income for the period

4) As a gain in net income for the period


define noncontrolling interest

formerly called minority interest, it is a percentage ownership of a company less than 50%


what section is non-controlling interest classified under on consolidated balance sheets

the equity section
FASB 160


at what value is non-controlling interest valued at during acquisitions

fair value at date of acquisition


what are the 3 steps in handling acquisitions that are less than 100% of the acquiree company

1. The equity accounts of the acquiree are eliminated in consolidation, and a noncontrolling interest is established for the FAIR VALUE of the shares of stock held by the noncontrolling interest at the date of acquisition
2. The effects of intercompany transactions are eliminated
3. A portion of net income and dividends of the acquiree are allocated to the noncontrolling interest


what are 4 examples of intercompany transaction types that commonly appear on the CPA exam

- Dividends paid from the Acquiree to the Acquirer
- Sales of inventory from one of the companies to the other
- Sales of property, plant and equipment form one to the other
- Purchases by one of the bonds issued by the other


what is done with intercompany A/P and A/R when reporting on financials



what is done with gains/losses from intercompany sales when reporting on financials

1. eliminate the gain on sale
2. eliminate the additional depreciation or amortization resulting from the markup of the asset


what is done with bonds purchased in intercompany sales when reporting on financials

1. investment in bonds vs. bonds payable
2. Interest revenue vs. interest expense
3. accrued interest receivable vs accrued interest payable
then the plug is a gain or a loss


what is done with intercompany inventory sales when reporting on financials

eliminate the effects of:
1. Sale vs. purchase
2. Receivable vs. payable
3. Profit in ending inventory


Company acquisitions - cheat sheet for CPA exam

If any of these are available, eliminate them:
- Investment account = always zero at the end
- Eliminate 100% of acquiree's - C/S, APIC, R/E
- Set up noncontrolling interest (adjust for % of income and dividends)
- Dividend income if cost method or investment income if equity method
- Dividends paid by S
- Intercompany transactions (sales, COGS, unrealized inventory profits)
- Intercompany gains/losses on sale of PP&E
- Intercompany receivables/payables
- Bond investments
- Set up excess FMV of PP&E over BV
- Record goodwill
- Record depreciation on excess FMV of PP&E
- Record impairments of goodwill


IFRS - what are the 2 valuation method options for noncontrolling interest

1. market price for equity shares not held by the acquirer
(other valuation methods can be used if market value not available)
2. Calculate fair value of net assets acquired and multiply that by the % of shares owned by the noncontrolling interest


IFRS - what are the 3 conditions that must be met to exclude a subsidiary from consolidation

1. it is wholly or partially owned and its other owners do not object to nonconsolidation
2. It does not have any debt or equity instruments publicly traded
3. It's parent prepares consolidated financial statements that comply with IFRS