Business Combinations & Consolidations - 18

Question 1

A normal business consists of what?

Answer 1

Inputs & Processes (Outputs are not required)

Question 2

The Acquiree is who?

Answer 2

The entity that is being acquired

Question 3

The Acquirer is who?

Answer 3

The entity doing the acquiring

Question 4

What are the four steps in applying the acquisition process/

Answer 4

1. Identify the acquier
2. Determine the acquisition date
3. Recognize & measure identifiable assets, liabilities assumed, and noncontrolling (minority) interest in the acquiree
4. Recognize & measure goodwill, or recognize a gain from a bargain purchase

Question 5

When are consolidated financial statements required?

Answer 5

When more than 50% of the oustanding voting stock will be taken over

Question 6

After the date of impairment, when is Goodwill tested?

Answer 6

Annually

Question 7

Can you have intercompany accounts open with a consolidation?

Answer 7

No. Because the idea of a consolidation is one set of books. These accounts must be eliminated

Question 8

What types of Intercompany transactions are there?

Answer 8

1. Intercompany Sales Transactions
2. Transactions in fixed assets
3. Intercompany debt/equity trnasactions
4. Intercompany Inventory transactions

Question 9

How do Intercompany Bond Transactions work?

Answer 9

Acquiree issues bonds to the public.
Acquiree JE:
Cash                  120,000
     Bonds Payable           100,000
     Premium                       20,000

Acquiror JE (if 50% of Acquiree Bonds are bought):
Invest Bonds 50,000
Cash 50,000

When Consolidating (Acquiror must eliminate 50% of Debt - Eliminating Entry)
Bond Payable 50,000
Premium 10,000
Investment 50,000
Gain 10,000

Question 10

What is the worksheet used for?

Answer 10

To consolidate the Acquiror and Acquiree’s books

Question 11

What is done with a gain from a bargain purchase?

Answer 11

It is recognized as income immediately

Question 12

Is Goodwill listed with intangible assets?

Answer 12

No

Question 13

Noncontrolling interest is measured by using what prices on what date for share not held by the acquiror?

Answer 13

Active Market Prices on the Acquisition date

Question 14

The the fair values of the acquirer’s investment and the non-controlling interest have the be the same on a per-share basis?

Answer 14

No

Question 15

Acquisition related costs are treated as what kind of expense?

Answer 15

A period expense although costs of registering debt and equity securities are not included as they are recognized in accordance with GAAP (by Debiting APIC & Crediting cash for the amount of the expense)

Question 16

Can an acquiror & acquiree consolidate of the control is temporary?

Answer 16

No

Question 17

What is a Variable Interest Entity (also known as Special Purpose Entity)?

Answer 17

An instance where control is achieved through arrangements that do not involve ownership or voting interests

Question 18

Who is the Primary Beneficiary of a Variable Interest Entity? And does the Primary Beneficiary have to consolidate?

Answer 18

Any entity that has financial controlling interest.

Yes

Question 19

What two conditions must exist for an entity to have controlling financial interest in a variable interest entity?

Answer 19

1. The entity has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance
2. The entity has the obligation to absorb the losses of the VIE and recognize the gains

Question 20

Is a qualitative or quantitative approach used to determine if an entity has power to control a variable interest entity?

Answer 20

Qualitative

Question 21

If the acquiror issues stock to purchase the acquiree, what is the JE?

Answer 21

Investment DR
C/S CR
APIC CR

Question 22

What is the first step in calculating Goodwill?

Answer 22

Acquisition Cost
\+ FV of previously held shares
\+ FV of non-controlling interest
- Book Value of Acquiree
= Differential (Includes Increase/Decrease in Acquiree's assets + Goodwill)

Question 23

What is the second step in calculating Goodwill?

Answer 23

Compute the Fair Value of the Net Identifiable Assets

Book Value
+ Asset Write-Ups
+ Newly Identified Intangibles
= Fair Value of Net Identifiable Assets

Question 24

What is the third step in calculating Goodwill?

Answer 24

Compute Goodwill

Acquisition Cost
\+ FV of previously held shares
\+ FV of non-controlling interest
- FV of Net Identifiable Assets
= Goodwill or (Gain on Bargain Purchase)

Question 25

What is the Differential Account and what makes up this account?

Answer 25

A temporary account to record the difference between the cost of the investment in the Acquiree on the Acquiror’s books and the book value of the Acquiror’s interest in the Acquiree

The difference between the Book Value and FMV of Assets on the Acquiree’s books and Goodwill

Question 26

What is the first step to complete the Consolidated Trial Balance Worksheet?

Answer 26

Eliminating the acquiree’s equity account, the acquiror’s investment account, and establish the differential account

Ex: 
C/S (Acquiree)                DR
APIC (Acquiree)              DR
RE (Acquiree)                 DR
Differential                      DR
     Investment (Acquiror)       CR

Question 27

What is the second step to complete the Consolidated Trial Balance Worksheet?

Answer 27

Eliminate the differential account and record asset write-ups to fair value & Goodwill

Ex:
Inventories                     DR
Equipment                     DR
Patents                           DR
Goodwill                          DR
    Accum Depr                      CR
     Differential                        CR

Question 28

How would you find the Ending Balance of the non-controlling interest?

Answer 28

Beg Bal NCI
+ NCI Share of Acquiree’s NI
- NCI Share of Dividends Paid
= End Bal NCI

Question 29

Under IFRS, what are the two ways to report non-controlling interest?

Answer 29

1. Fair Value (like US GAAP)

2. Proportionate share of the value of the identifiable net assets of the acquiree

Question 30

Under IFRS, are acquiror’s required to consolidate?

Answer 30

Not if three conditions are met:

1. Owners do not object to non-consolidation
2. No debt or equity instruments publicly traded
3. The acquirer prepares consolidated financial statements that comply with IFRS

Question 31

How do you find Ending R/Es in a consolidation?

Answer 31

Beg R/E (Acquirer)
+ N/I (Acquirer)
- Div Paid (Acquirer)
= End R/E (Acquirer

Because R/E of the Acquiree was consolidated using the investment account

Question 32

Under IFRS, when is Goodwill recognized?

Answer 32

When it is acquired by purchase

Question 33

What should all assets and liabilities of the acquiree be recorded at when consolidating?

Answer 33

FMV

Question 34

Are there balances on intercompany accounts when consolidating to the acquirer’s balance sheet?

Answer 34

No. The purpose of consolidating is to put both companies on the same books there for no intercompany transactions would be reported in the FS

Note: The Acquiree still shows the intercompany amounts on their balance sheet, but the amounts are not shown on the Acquirer’s Balance sheet as they are removed when consolidating

Question 35

When preparing consolidated FS, what is the objective regarding intercompany transactions?

Answer 35

To create the FS with the idea that the intercompany transactions never existed