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Flashcards in Consolidations Deck (7):
1

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

2

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

3

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

4

When is consolidation not required?

Ownership less than 50%

OR

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

5

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

6

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

7

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