Flashcards in Consolidations Deck (16):
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 method must companies use for a business combination?
acquisition method is the only acceptable method now
In a consolidation, how is the beginning R/E balance for the subsidiary treated?
Becomes shareholder's equity acquired by the parents and is eliminated in the consolidating entry
When is income for a consolidated entity included in the parent's net income?
The income earned after the consolidation is FINALIZED is included
In which of the following legal forms of business combination are two or more entities combined into one new entity?
Acquisition, merger, consolidation
In a merger, one preexisting entity is combined into another preexisting entity; no new entity is formed.
In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities; no new entity is formed.
What is the proper treatment of property being transferred in an acquisition?
The transferor revalues the property to FMV (recognizes G/L) unless the transferor retains control
What type of item does an obligation to pay contingent consideration create?
Either equity or liability
What type of item does a right to return of consideration create?
If new info regarding facts and circumstances that DID exist at the time of acquisition comes to light, what is the proper treatment?
Make a measurement period adjustment to the cost of the combination