Business Combinations and Consolidations Flashcards
Business Combinations and Consolidations
Under the equity method, are dividends received from a subsidiary includes in income?
No
Under the equity method, are dividends received from a subsidiary is a reduction in investment from the parent company.
Business Combinations and Consolidations
What is the differences between the cost and the equity method when it comes to the receipt of a dividend?
Under the cost method the receipt of a cash dividend is recorded as income from investments. The investment account remains unchanged.
Under the equity method, cash dividends are treated as a reduction in the investment account.
Business Combinations and Consolidations
How is a receivable reported from a subsidiary using the cost method (
The total receivable should be reported separately. The equity method would be used at the 20% ownership level but would not change the requirement to report the receivable separately. At the 50%-plus level of ownership, consolidation would require elimination of the receivable as an intercompany item.
Business Combinations and Consolidations
Define Intercompany profits
Intercompany profits are financial statement amounts that arise from transactions between members of the same commonly controlled group of entities (parent-subsidiary, subsidiary-subsidiary), i.e., transactions between two entities that are related parties. They may be receivables/payables or profit/expense from the sale of merchandise, or loan receivable/payable. Intercompany profits must be eliminated from consolidated financial statements.
Business Combinations and Consolidations
True or False
Registration and issuance costs reduce Additional Paid-in Capital:
True
Registration and issuance costs reduce Additional Paid-in Capital:
Business Combinations and Consolidations
What are the general rules for expenses for business combinations accounted for as an acquisition?
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:
Out-of-pocket costs such as fees of finders and consultants are expensed.
Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
Business Combinations and Consolidations
How should Business Combinations accounted for as an acquisition treat expenses on the financial statements?
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:
Out-of-pocket costs such as fees of finders and consultants are expensed.
Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
Business Combinations and Consolidations
Describe the difference between an acquisition and a merger.
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 remain.
Business Combinations and Consolidations
True or False
When a company buys a significant percentage of another company’s voting stock (at least about 20%) but does not control the other company, then the equity method of accounting for the investment in the other company applies.
True
When a company buys a significant percentage of another company’s voting stock (at least about 20%) but does not control the other company, then the equity method of accounting for the investment in the other company applies.
Under the equity method, the investment (in the owned company) account is initially measured at the original investment, but it is increased by the percentage share of the owned company’s income earned on behalf of the investor, and lowered by the dividends received by the investor.
Business Combinations and Consolidations
Total stockholders’ equity accounts on the consolidated balance sheet equals the total stockholders’ equity of the parent less the noncontrolling interest.
False
Total stockholders’ equity accounts on the CONSOLIDATED balance sheet equals the total stockholders’ equity of the parent PLUS the noncontrolling interest.
Business Combinations and Consolidations
True or False
A dividend from an investment in preferred stock results in a reduction of the investment.
False
A dividend from an investment in PREFERRED STOCK results in dividend income (not a reduction of the investment, like dividends from common stock
Business Combinations and Consolidations
How should business combinations accounted for as an acquisition should treat expenses related to the combination?
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:
Out-of-pocket costs such as fees of finders and consultants are expensed.
Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
Business Combinations and Consolidations
True or False
Intercompany dividends are eliminated in consolidation, including dividends paid to noncontrolling shareholders
False
intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are DIVIDENDS PAID TO NONCONTROLLING SHAREHOLDERS.
