Acquisition Method

Question 1

Under the acquisition method, how is a parent’s investment in a sub valued?

Answer 1

At the FV of the consideration given or the FV of the consideration received, whichever is more clearly evident

Question 2

What are the parent’s internal JE to record the acquisition?

Answer 2

Cash:
Dr. Investment in sub
Cr. Cash

Stock:
Dr. Investment in sub
Cr. C/S - P
Cr. APIC - P

Question 3

When recording an acquisition using parent C/S, how is it valued?

Answer 3

At fair value at date transaction closes

Question 4

What are the two distinct accounting characteristics of the acquisition method?

Answer 4

1. 100% of net assets acquired (regardless of percentage acquired) are recorded at FV with any unallocated balance reamining creating GW
2. Sub’s entire equity is eliminated (not reported)

Question 5

What is the parent’s basis in the investment under the acquisition method?

Answer 5

Fair value = acquisition price = investment in sub

Question 6

What items should be adjusted during consolidation?

(CAR-IN-BIG) [“The CAR I’m IN is BIG”]

Answer 6

1. Common stock, Apic, and Retained earnings of sub. are eliminated
2. Investment in sub is eliminated
3. Noncontrolling interest (NCI) is created (if not 100% owned)
4. Balance sheet of sub is adjusted to FV (100% FV; assets and liabilities)
5. Identifiable Intangible assets of sub are recorded at their FV
6. Goodwill (or Gain) is required

Question 7

What is the consolidating workpaper eliminating journal entry (EJE)?
(CAR-IN-BIG)

Answer 7

Dr. C/S
Dr. APIC
Dr. RE
Cr. Investment in sub
Cr. NCI
Dr. BS adjustments to FV
Dr. Identifiable intangible assets to FV
Dr. Goodwill (Cr. Gain)

Question 8

When the acquisition price exceeds the FV of net assets acquired, how should assets and liabilities be recognized?

Answer 8

At fair value

Question 9

CAR formula

Answer 9

Assets - Liabilities = CAR

Equity = NBV = CAR

Question 10

What is the carrying amount of the investment in subsidiary account on the parent’s books?

Answer 10

Original cost - measured by the FV (on date acquisition is completed) of consideration given

Question 11

How are the following costs/expenses treated in an acquisition:

1. Direct out-of-pocket costs (i.e. finder’s fee/legal fee)
2. Stock registration/issuance costs
3. Indirect costs
4. Bond issue costs

Answer 11

1. Expense
2. Direct reduction of APIC
3. Expense
4. Capitalized and amortized

Question 12

How is NCI reported?

Answer 12

At FV in the equity section of the consolidated BS, separately from parent’s equity

Includes NCI’s share of any goodwill

Question 13

How is NCI calculated at acquisition date?

Answer 13

FV of sub x NCI % = NCI

Question 14

After the acquisition date, how is the NCI accounted for/calculated?

Answer 14

Using the equity method

Beginning NCI + NCI share of sub NI - NCI share of sub dividends = Ending NCI

Question 15

How are sub. net losses accounted for when there is NCI?

Answer 15

They are allocated to NCI even if allocation exceed equity attributable to NCI (negative carrying balance)

Question 16

When there is NCI, how much of the sub.’s assets and liabilities are included in the consolidated BS and how much of the sub’s revenues and expenses are included in the consolidated IS?

Answer 16

100%

Question 17

How is the NI attributable to NCI calculated?

Answer 17

Sub’s income - Sub’s expenses = Sub’s NI

Sub’s NI x NCI % = NI attributable to NCI

Question 18

Under IFRS, how can NCI (and goodwill) be calculated?

Answer 18

1. Partial goodwill method
   - – NCI = FV of sub’s net identifiable assets x NCI %
   - – Goodwill = Acquisition cost - FV of sub’s net assets acquired

OR

2. Full goodwill method
   - – NCI = FV of sub x NCI %
   - – Goowill = FV of sub - FV of sub’s net assets

Question 19

Does GAAP require the use of the full goodwill method or the partial goodwill method?

Answer 19

Full goodwill method

Question 20

Under the acquisition method, what is the fair value of the sub. equal to?

Answer 20

The acquisition cost plus any NCI at FV

Question 21

If there is a difference between the FV of the sub. and the book value acquired, where must the adjustments be made?
(BIG)

Answer 21

1. Balance sheet adjustment of sub’s records from BV to FV
2. Identifiable intangible assets related to acquisition of sub recorded at FV
3. Goodwill is recognized for any excess of FV of sub over FV of sub’s net assets (or Gain if FV of sub is less than FV of sub’s net assets)

Question 22

How is In Process Research and Development (IP R&D) accounted for?

Answer 22

Carried as an asset

Recognized as an intangible asset separately from GW at acquisition date

Do not immediately write off

Expense “continuing” R&D to complete project

Later: If project is successful = amortized IP R&D / If project is failure = impair/write off IP R&D

Question 23

Under US GAAP, what intangible assets may private companies elect to not separately recognize when accounting for a business combination?

Answer 23

1. Intangibles that would otherwise arise from noncompete agreements; or
2. Customer-related intangibles that cannot be separately sold/licensed

Instead, value would be included in GW. They elect to amortize GW for a max of 10 years

Question 24

What steps are necessary in order to prepare a consolidated statement of cash flow in the period of acquisition?

Answer 24

1. Net cash spent/received in acquisition must be reported in the INVESTING section of statement of CF
2. Assets and liabilities of the sub on the acquisition date must be added to parent’s assets and liabilities at BoY in order to determine change in cash due to operating, investing, and financing activities during period

Question 25

How is the preparation of consolidated statement of cash flows different from the preparation of unconsolidated entity’s?

Answer 25

1. When reconciling NI to net cash provided by operating activities, total consolidated NI should be used
2. FINANCING section should report dividends paid by the sub to NCI shareholders (not those paid to parent)
3. INVESTING section may report the acquisition of additional sub shares by parent if acquisition was an open mkt purchase

Question 26

What is the accounting treatment for when the owner percentage changes from noncontrolling to controlling?

Answer 26

1. Remeasure previously held equity interests to FV

2. IS will reflect adjustment

Question 27

What is the accounting treatment for when the owner percentage changes from controlling to noncontrolling?

Answer 27

1. Recognize the gain or loss of the sale of stock
2. Remeasure remaining nonconsolidating interest to FV
3. Recognize adjustment to FV on IS

Question 28

What is the accounting treatment for when the owner percentage changes from control to more or less control?

Answer 28

Treated as equity transaction - No gain or loss recognized on IS / APIC adjusting

Question 29

What is the required consolidation disclosure?

Answer 29

Consolidated FS should disclose the consolidation policy that is being followed

Question 30

In an acquisition, from what date would the NI of a newly acquired sub be included in consolidated NI?

Answer 30

From the date of acquisition

Question 31

Under the acquisition method, how are finished goods and merchandise inventory of sub valued?

Answer 31

At FV, which is based upon selling price less disposal costs and reasonable profit allowance

Question 32

How should a bargain purchase be accounted for by the acquirer?

Answer 32

Gain in earnings at acquisition date