1.6 Consolidation Accounting Flashcards
In a business combination, the valuation of goodwill is a calculation
A. Of all of the unlimited life intangible assets
B. Of all of the increases in market valuation of the intangible assets acquired.
C. To offset the bargain purchase cost.
D. Of the residual paid above the fair value of the identifiable net assets
D. Of the residual paid above the fair value of the identifiable net assets
Pent Corp. acquired 100% of Subtle Corp.’s outstanding capital stock for $890,000 cash. Immediately before the acquisition, the balance sheets of both corporations reported the following:
Assets
* Pent $4,000,000
* Subtle: $1,500,000
Liabilities
* Pent: $1,400,000
* Subtle: $720,000
Common stock
* Pent: 2,000,000
* Subtle: 620,000
Retained earnings
* Pent: 500,000
* Subtle: 80,000
Accumulated other comprehensive income
* Pent: 100,000
* Subtle: 80,000
Liabilities and equity
* Pent: $4,000,000
* Subtle: $1,500,000
At the date of purchase, the fair value of Subtle’s assets was $100,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the purchase, the consolidated equity should equal
A. $2,600,000
B. $3,380,000
C. $3,490,000
D. $3,480,000
A. $2,600,000
A business combination is an acquisition of net assets, and the subsidiary’s equity balances are not included.
Thus, in the absence of a bargain purchase and NCIs, total equity of the consolidated entity immediately after acquisition is the same as the total equity of the parent. Consequently, equity reported in the consolidated balance sheet prepared immediately after the acquisition of Subtle and Pent is $2,600,000 ($2,000,000 common stock + 500,000 retained earnings + 100,000 accumulated OCI).
For purposes of consolidating financial interests, a majority voting interest is deemed to be
A. 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.
B. Greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
C. Greater than 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned nonvoting shares of another entity.
D. 50% of the directly or indirectly owned outstanding voting shares of another entity
B. Greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
When one entity controls another, consolidated financial statements must be issued regardless of the percentage of ownership. Control is the direct or indirect ability to determine the direction of management and policies of the investee. This usually means one entity’s direct or indirect ownership of more than 50% of the outstanding voting interest of another entity.
When one company purchases a majority voting interest in another company, the equity on the consolidated balance sheet at the acquisition date equals the
A. Parent’s equity just prior to acquisition plus the fair value of any noncontrolling interest
B. Sum of the parent’s equity and the subsidiary’s equity multiplied by the ownership percentage of the subsidiary’s stock.
C. Combination of the subsidiary’s equity and the parent’s equity
D. Fair value of the parent’s net assets plus the fair value of the subsidiary’s net assets.
A. Parent’s equity just prior to acquisition plus the fair value of any noncontrolling interest
Because a combination is an acquisition of net assets, the subsidiary’s equity is eliminated. In the absence of a bargain purchase, the equity of the consolidated entity immediately after acquisition is the equity of the parent just prior to acquisition plus the fair value of the noncontrolling interest.
Acquirer Corporation acquired for cash at $10 per share 100,000 shares of the outstanding common stock of Acquiree Company. The total fair value of the identifiable assets acquired minus liabilities assumed of Acquiree was $1.4 million on the acquisition date, including the fair value of its property, plant, and equipment (its only noncurrent asset) of $250,000. The consolidated financial statements of Acquirer Corporation and its wholly owned subsidiary must reflect
A. A gain of $150,000
B. Goodwill of $150,000
C. A gain of $400,000
D. A deferred credit of $150,000
C. A gain of $400,000
When (1) the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed exceeds (2) the sum of the acquisition-date fair values of (a) the consideration transferred, (b) any noncontrolling interest in the acquiree, and (c) the acquirer’s previously held equity interest in the acquiree, the acquirer recognizes the excess as a gain from bargain purchase.
Acquisition-date fair value of consideration transferred (100,000 shares x $10): $1,000,000
Acquisition-date fair value of identifiable net assets acquired: (1,400,000)
= gain from a bargain purchase (400,000)
How should the acquirer recognize a bargain purchase in a business acquisition?
A. As a deferred gain that is amortized into earnings over the estimated future periods benefited.
B. As a gain in earnings at the acquisition date
C. As goodwill in the statement of financial position
D. As negative goodwill in the statement of financial position
B. As a gain in earnings at the acquisition date
A bargain purchase is recognized in the consolidated financial statements as an ordinary gain at the acquisition date. A bargain purchase occurs when the net of the acquisition-date fair values of identifiable assets acquired and liabilities assumed exceeds the sum of the acquisition-date fair values of the consideration transferred, any noncontrolling interest recognized, and any previously held equity interest in the acquiree.
