FAR 3 - Acquisition Method

Question 1

What is the journal entry to record acquisition method for cash?

Parent company internal journal entries

Answer 1

Dr: Investment in subsidiary
Cr: Cash

Closing date not announcement date!

Question 2

What is the journal entry to record acquisition method for common stock?

Parent company internal journal entries

Answer 2

Dr: Investment in subsidiary
Cr: Common Stock @ Par
Cr: A.P.I.C. (FV of stock - Par Value)

Closing date not announcement date!

Question 3

What are the two distinct account characteristics of acquisition method?

Answer 3

1) 100% of the net assets acquired (even if the percentage acquired is less) are recorded at fair value with unallocated balance creating goodwill
2) The subsidiary’s entire equity (common stock, a.p.i.c., and retained earnings is eliminated

Question 4

Define CAR IN BIG

Answer 4

Common Stock, A.P.I.C. and Retained Earnings of subsidiary are eliminated

Investment in subsidiary is eliminated

Noncontrolling interest is created

Balance sheet of subsidiary is adjusted to FAIR VALUE

Identifiable Intangible Assets of subsidiary recorded at FAIR VALUE

Goodwill (or Gain) is required

Question 5

What is CAR IN BIG journal entry?

Answer 5

Dr: Common Stock - subsidiary
Dr: A.P.I.C. - subsidiary
Dr: Retained Earnings - subsidiary
Cr:    Investment in subsidiary 
Cr:    Noncontrolling interest
Dr: Balance sheet adjustments to FV
Dr: Identifiable intangible assets to FV
Dr: Goodwill

Question 6

What are other ways of saying CAR?

Answer 6

Common stock, A.P.I.C., Retained Earnings all mean

Assets - Liabilities = Equity
Assets - Liabilities = Net book value
Assets - Liabilities = CAR

Question 7

How to calculate retained earnings if they give you ending retained earnings?

Answer 7

B: Beginning retained earnings ( acquisition date)
A: Add income
S: Subtract dividends
E: Ending retained earnings

Go backwards to find Beginning retained earnings

Question 8

What is Investment in CAR IN BIG journal entry? The “I”

Answer 8

1) Original cost (fair value) on the date of acquisition is the consideration given
2) Business combination costs are expensed - legal fees, indirect costs
3) Bond issue costs are capitalized and amortized (Debit: Bond issue costs)
4) Stock registration and issuance costs are a direct reduction of the value of the stock issued (Debit: A.P.I.C.)

Question 9

How are legal fees and finders fees different between acquisition method and equity method?

Answer 9

Legal fees and finder’s fees are capitalized in equity method.

Legal fees and finder’s fees are expensed in acquisition method

Question 10

What is acquisition date noncontrolling interst computation? Balance sheet

Answer 10

Fair value of subsidiary
x Noncontrolling interest %
= Noncontrolling interest

Question 11

What is noncontrolling interest after the acquisition date? Balance sheet

Answer 11

Beginning noncontrolling interest
+ NCI share of subsidiary net income
- NCI share of subsidiary dividends
= Ending noncontrolling interest

Question 12

How is subsidiary net income computed? Income Statement

Answer 12

Subsidiary's income
- Subsidiary's expenses
= Subsidiary's net income
x Noncontrolling interest %
= Net income attributele to noncontrolling interest

Question 13

What are the computations of noncontrolling interest in IFRS?

Answer 13

1) Full Goodwill Method
NCI = FV of subsidiary x noncotrolling interest %

2) Partial Goodwill Method
NCI = FV of subsidiary net identifiable assets x noncontrolling interest %

Question 14

How is In Process Research and Development recorded?

Answer 14

• Recognize as an intangible asset separately from goodwill at the acquisition date
• It is an asset

1) Expense the “CONTINUING” R&D to complete project
2) If project success - amortize In Process R&D
3) If project is not success - impair/write off In Process R&D

Question 15

Define Goodwill?

Answer 15

Premium paid to buy corporation

• Parent paid more than NBV + FV of assets

Question 16

How to record new indefinte life and finite life assets?

Answer 16

1) Finite Life
Amortize over remaining life. Subject to two-step impairment test

2) Indefinite Life
Do not amortize. Subject to one-step impairment test

Question 17

What is private company accounting alternative for acquisition, equity, and joint ventures?

Answer 17

1) You can elect to amortize goodwill (max 10 years). YOU CANT AMORTIZE IN PUBLIC COMPANIES GOODWILL

2) A few identifiable assets get lumped into goodwill:
- intangible assets such as noncompete agreements
- customer lists, order backlogs, customer contracts

Question 18

What are the computations of goodwill in IFRS?

Answer 18

1) Full Goodwill Method
Goodwill = FV of subsidiary - FV of subsidary’s net assets

2) Partial Goodwill Method
Goodwill = Acquisition cost - FV of subsidary’s net assets acquired (x your percentage)

Question 19

Define Gain?

Answer 19

Parent acquired at discount

Parent paid less than NBV

Goes on credit side

Question 20

In period of acquisition how is net cash spent or received in acquisition reported in Statement of Cash Flows?

Answer 20

In investing section

Question 21

What are step acquisition accounting treatment?

Answer 21

1) Non-control to Control
- Previous Common Stock adjusted to FV
- Recognize in I/S

2) Control to more control/less control
- Treat like treasury stock transaction (no gain or loss)

3) Control to non-control
- Sale = G/L goes to Income Statement
- Adjust remaining C/S to FV - Recognize adjustment in Income statement