Ch03: Consolidation Working Paper

Question 1

Consolidation Working Paper

Answer 1

A working paper is prepared when the parent and subsidiary remain separate entities. The buyer records the acquisition as an investment entry on its balance sheet.

The seller’s assets and liabilities are revalued at fair value at the acquisition date.
Intercompany account balances are removed.

Question 2

Consolidation Working Paper

3 Elements

Answer 2

Buyer’s accounts
Seller’s accounts
Eliminating entries

Question 3

Consolidation Working Paper: Cash acquisition

Answer 3

1. determine the acquisition cost (cash-paid)
2. determine the seller’s BVE
3. Excess cost over BVE = (Acquisition cost - BVE)
4. list the differences between the seller’s (FV - BVE) assets and liabilities
5. Sum the differences
6. Goodwill = (Excess cost over BVE - Sum of differences)
7. (E) and (R) entries
8. Compose the consolidation working paper

Question 4

Consolidation Working Paper, (E)

Answer 4

Eliminate the seller’s equity values; debit decreases equity and credit increases equity:

1. Debit the positive values; credit the negative values
2. Debit and credit balance should match

Question 5

Consolidation Working Paper, (R)

Answer 5

Recognize fair value differences:

1. Debit the assets with positive differences; credit assets with negative differences
2. Credit negative liabilities (from Goodwill or Bargain calc. step); debit positive liabilities
3. Credit the excess cost over BVE

Question 6

Working Paper Consolidated Assets

Answer 6

Buyer BV + Seller BV + Debits - Credits

Question 7

Working Paper Consolidated Liabilities and Equity

Answer 7

Buyer BV + Seller BV - (Debits) + (Credits)

Question 8

Differences between fair value and book value

Answer 8

1. the seller’s assets and liabilities whose book values differ from their fair values are listed on the debit side
2. for liabilities, if the BV debt is higher than the FV debt, (FV - BV) the difference is positive; if the BV debt is lower than the FV debt, the difference is negative

Question 9

Understated Asset and Liabilities

Answer 9

Assets:
When the BV asset is lower than its FV
Treat as a positive? (debit side) in Goodwill or Bargain calculation (step 3)

Liabilities:
When the BV liability is lower than its FV
Treat as a negative (debit side) in Goodwill or Bargain calculation (step 3)
Credit (as a positive) in the (R) calc. (step 5)
Increases assets and shareholder equity