Business Combinations & Consolidations Flashcards

1
Q

The total consideration transferred in a business combination is:

A

Measured at its fair value at the time of the transaction

E.g. If a company acquires another company with cash and stock have a fair value of $2M and $8M, respectively, and there is “fair value” contingent consideration of $1,100,000, the total consideration transferred is $11,100,000

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2
Q

In a business combination accounted for as a purchase, consolidated net income will include:

A

100% of the parent’s net income for the entire period and a proportionate amount of the subsidiary’s net income from the date of acquisition.

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3
Q

Consolidated statements are required where the investment in the acquiree corporation is:

A

MORE than 50% except when the control is likely to be temporary or the control is not held by the majority owner (i.e. investee is in bankruptcy).

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4
Q

In a business combination accounted for under the acquisition method;

A

Consolidated Stockholders’ Equity will be equal to the stockholders’ equity of the parent.

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5
Q

When preparing consolidated financial statements;

A

THE stockholders’ equity accounts of the subsidiary are eliminated along with the investment account on the parent’s balance sheet.

I.e. The amount reported for retained earnings in the consolidated financial statements would be equal to the parent’s retained earnings balance

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6
Q

Under the acquisition method, direct costs associated with the acquisition;

A

ARE recognized as an expense in the period incurred.

I.e. Direct costs of a combination are deducted in determining the Net Income (N/I) of the combined corporation for the period in which the costs were incurred

E.g. Attorney fees, Appraiser fees, indirect costs, etc.

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7
Q

Combined selling expenses of a company and their 80%-owned subsidiary included $1,000,000 (Company) and $300,000 (owned subsidiary) for a total of $1,300,000. Selling expenses of $50,000 were incurred as freight-out costs for goods sold to the owned-subsidiary. WHAT is the “consolidated” selling expense?

A

$1,250,000

WHY? - Because the $50,000 included in company’s expense amount, which included goods sold to the owned subsidiary, would be eliminated from selling expenses.

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8
Q

True or False.

Additional paid-in capital on consolidated financial statements is always equal to the parent’s amount.

A

TRUE.

Additional paid-in capital on consolidated financial statements is always equal to the parent’s amount.

I.e. You would IGNORE the acquirees’ Additional Paid-in Capital (APIC)

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9
Q

WHEN is an asset recognized as goodwill under IFRS?

A

WHEN it is acquired by purchase.

I.e. Similar to US GAAP, IFRS only allows for the recognition of goodwill as a result of a business combination in which the total of the fair values of consideration, non-controlling interests, retained investments exceeds the fair value of the underlying net assets of the acquiree.

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10
Q

In a Business Consolidation, Total Current Liabilities will include;

A

THE parent’s amount plus the subsidiary’s amount, adjusted to fair value if appropriate, plus any new current liabilities incurred in the combination

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11
Q

True or False.

Corporations with some common individual owners will prepare consolidated financial statements.

A

FALSE.

Corporations with some common individual owners will prepare neither consolidated nor combined financial statements unless the common owners have control of each corporation.

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12
Q

True or False.

Dividends reported on consolidated financial statements will consist exclusively of the Acquirer’s dividends.

A

TRUE.

Dividends reported on consolidated financial statements will consist exclusively of the Acquirer’s dividends.

I.e. The Acquiree’s dividends are eliminated.

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13
Q

WHEN the Acquiree owns stock in the Acquirer, the portion of the dividends that are paid to the Acquiree

A

ARE eliminated as an intercompany transaction reducing dividends to be reported on the consolidated financial statements to the portion of the Acquirer’s dividends that are paid to others.

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14
Q

Intercompany transactions are eliminated;

A

WHEN preparing combined financial statements, as with consolidated financial statements.

E.g. An acquired subsidiary sold another acquired subsidiary inventory at 140% of cost of $30,000, for gross intercompany sales of $42,000.

This entire amount (i.e. $42,000) would be eliminated when preparing combined financial statements (Debit) - Sales and (Credit) - Cost of Sales

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15
Q

True or False.

Combined financial statements are appropriate when two or more companies are under common control or when they are operating under common management.

A

TRUE.

Combined financial statements are appropriate when two or more companies are under common control or when they are operating under common management.

I.e. They may be used for (1) Companies under common management or (2) Commonly controlled companies

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16
Q

WHAT is the question looking for when they want to know what the “carrying amount” of inventory was for the owed subsidiary at consolidation?

A

THEY are asking based on the intercompany profits, what is your:

  • Cost of Goods Sold (COGS)

NOTE: Look at what the Consolidated Inventory is and your Intercompany Profit/ Loss from that will be the difference

17
Q

Company A owns 80% of Company B’s outstanding capital stock. During the year Company A advanced Company B $100,000 in cash. Should the advance be reported on Company A’s consolidated balance sheet as of December 31?

A

NO.

WHY? - Because an entity cannot engage in business transactions with itself.

i.e. Adjustments have to be made on the consolidating worksheet in order to eliminate the effects of any intercompany transactions - Therefore eliminate that amount from the consolidation statements

18
Q

True or False

When a subsidiary pays dividends, the portion that is paid to the parent is eliminated and has no effect on retained earnings.

A

TRUE.

When a subsidiary pays dividends, the portion that is paid to the parent is eliminated and has no effect on retained earnings.

i.e. The remainder, which is paid to the minority shareholders, reduces the minority interest amount.

19
Q

True or False.

Intercompany transactions are eliminated when preparing combined financial statements.

A

TRUE.

Intercompany transactions are eliminated when preparing combined financial statements, as with consolidated financial statements.

i.e. The cost of Sales for subsidiaries especially when they are sold at an amount over 100% of their original value

20
Q

True or False.

Total stockholders’ equity in consolidated financial statements consists of the parent’s stockholders’ equity plus any noncontrolling interest.

A

TRUE.

Total stockholders’ equity in consolidated financial statements consists of the parent’s stockholders’ equity plus any noncontrolling interest.

E.g. Parent Stockholders’ Equity is $90,000 and they purchased 90% of the subsidiary’s outstanding common shares at beginning of the year; and the subsidiary’s Stockholders’ equity is $50,000. The $50,000 would be eliminated in the consolidation