-Consolidations

Question 1

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

Answer 1

Fair value method is used when:

• Ownership is 20% or Less
• Accounted for as a purchase

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

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Question 2

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

Answer 2

Equity method is used when:

• Ownership is 21% to 50%
• It gives significant influence
• To record: Purchase Price - Par Value = Goodwill

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

Switching from the Fair Value Method to Equity Method is treated Prospectively on the Financial Statements.

Question 3

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

Answer 3

Companies are required to file consolidated financials when:

• Ownership of other company is greater than 50%.
• Investment account is eliminated.

How is it recorded?

• 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.

Question 4

When is consolidation not required?

Answer 4

Consolidation is not required when:

• Ownership is less than 50%; or
• Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Question 5

What occurs under a step acquisition?

Answer 5

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 the current period

Question 6

What is the difference between an acquisition and a merger?

Answer 6

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.

Question 7

How are acquisition costs recorded in a merger?

Answer 7

Expensed in period incurred - i.e. NOT capitalized:

• Accounting
• Legal
• Valuation
• Consulting
• Professional

Netted against stock proceeds:

• Stock registration
• issuance costs