Test 2 Flashcards
Most parent companies have
100% control over their subsidiaries
Even if a parent company doesn’t have 100% control over their subsidiaries, they can establish control with
a lesser amount
if the parent doesn’t own 100%, outside owners are referred to as
non-controlling interest
The parent, with controlling interest, must consolidate 100 percent of its subsidiary’s financial info as a single economic unit, regardless of
The parents level of ownership
The acquisition method requires that the subsidiary be valued at
the acquisition date fair value
The sum of the two components for calculating total acquired fair value in a partial acquisition are
the fair value of the controlling interest
the fair value of the non-controlling interest at the acquisition date
Assume Parker Corporation wants to acquire 90 percent of Strong Company. Strong’s stock has been trading for around $60 per share.
Parker offered all of Strong’s shareholders a premium price of $70 per share for up to 90 percent of the outstanding shares, even though the shares are trading in the $59 to $61 range.
The fair value of Strong is measured as the sum of the respective fair values of the controlling and noncontrolling interest.
Parker purchased 9,000 shares at $70 per share. The fair value of their consideration transferred is $630,000.
The remaining 1,000 shares trade at $60 per share, indicating that the fair value of the noncontrolling interest is $60,000. The total acquisition-date fair value of the subsidiary is $690,000.
Fair value of controlling interest
($70 × 9,000 shares) . . . . . . . . . . . . . . . $630,000
Fair value of noncontrolling interest
($60 × 1,000 shares) . . . . . . . . . . . . . . . . . 60,000
Total fair value of subsidiary . . . . . . $690,000
Goodwill apportioned across controlling and non-controlling interests
Total acquisition-date fair value (amount paid) of Strong, $690,000, is greater than the fair value of the identifiable net assets acquired of $600,000 (10,000 shares × $60 per share). The difference, $90,000, is allocated to Goodwill.
If the total fair value of the acquired firm is less than the collective sum of its identifiable net assets
-A bargain purchase occurs.
-Parent recognizes the entire gain in current income.
-No gain is ever allocated to the noncontrolling interest.
Once consolidated net income is determined….
it is allocated to the parent company and the noncontrolling interests.
Non-controlling interests’ ownership pertains only to the subsidiary
its share of consolidated net income is limited to a share of the adjusted subsidiary’s net income.
The parent company must determine and enter each of these figures when constructing a worksheet:
- Noncontrolling interest in subsidiary at beginning of current year.
- Net income attributable to noncontrolling interest.
- Subsidiary dividends attributable to noncontrolling interest.
- Noncontrolling interest as of the end of the year (three balances above combined)
Consolidated net income is computed at the ________
and allocated to the ____________
combined entity level
noncontrolling and controlling interests
The statement of changes in owners’ equity provides
details of the ownership changes for the year for both the controlling and noncontrolling interest shareholders.
When control of a subsidiary is acquired at a midyear date:
-New parent must compute the subsidiary’s book value as of acquisition date
Companies that make up a business combination….
retain their legal identities as separate operating centers and maintain their own records
In producing consolidated financial statements…
transfers are eliminated
consolidated statements reflect only
transactions with outside parties
Accounts affected by intra entity transactions
Revenues
Cost of Goods Sold
Net Income Attributable to the Noncontrolling Interest
Retained Earnings at the Beginning of the Year
Inventory
Noncontrolling Interest in Subsidiary at End of Year
Financial Reporting objectives remain unchanged for intra-entity sales of depreciable assets:
-Defer intra-entity gains.
-Re-establish historical cost balances.
-Recognize appropriate income within the consolidated financial statements.
-Defer gains
The three tests used to determine if an operating segment is reportable
Revenue test
Profit or loss test
Asset test
Revenue test
revenues of all operating segments are 10 percent or more
Profit or loss test
if profit or loss is 10 percent or more of the combined profit or loss
asset test
its assets are 10 percent or more of the combined assets of all operating segments
