Chapter 4: Intercorporate investments, wholley owned, differential

Question 1

Excess value differential reclassification entry

Answer 1

Moves the excess of fair value over book value to pertinent asset (and contra asset) accounts from the investment in sub account

barring sale or impairment, the values for the assets will likely remain the same year over year (accumulated depreciation will change with depreciation expense)

Question 2

Amortization excess value reclassification entry

Answer 2

Amortized excess value of the investment which was moved from investment in sub (cr) to income from sub (dr) during the year must be moved from income from sub (cr) to the pertinent expense or loss accounts via elimination entry

Question 3

Equity method goodwill

Answer 3

aka implicit goodwill

portion of the differential that represents goodwill (not part of the fair value of identifiable assets)

Question 4

Impairment loss on investment acquisition

Answer 4

Recognized if investment suffers decline in value that isn’t temporary

Question 5

Differential

Answer 5

Difference between acquisition price and the investor’s proportionate share of the investee’s net assets (due to FV of net assets being greater than bookvalue or due to goodwill)

frequently positive

implicit in the equity method recording in the parent’s books, not reported separately

Question 6

Treatment of differential under the equity method

Answer 6

• portion of the differential pertaining to limited life assets of the investee (including intangibles). Must then be amortized over the remaining economic life of those assets. (differential treated in the same way the associated asset is treated)
• portion of differential that represents goodwill is not amortized or separately tested for impairment

Question 7

Equity method accounting with differential

Answer 7

Differential assigned to pertinent identifiable assets and to goodwill (though no separate accounts are created)

portion of differential attached to limited-life assets must be amortized over the remaining life of those assets. amortization decreases investment account and income from sub

amortization entry
DR income from sub
CR investment in sub

Question 8

Disposal of differential related assets

Answer 8

If investee disposes of an asset to which differential is related, a portion of the differential must be removed from the investors books and the books adjusted for the share in the gain or loss.

Parent’s proportionate share of gain
less portion of unamortized differential related to asset
= gain to be recognized by parents (can be done via two sets of entries)

still showing only Income from sub and investment in sub (one income statement line, one balance sheet)

Question 9

Impairment of investment value

Answer 9

Equity method investments must be written down if value is impaired

market value < equity method carrying amount (if decline is known to be not temporary) then the investment must be written down and a loss recognized

New, lower value = starting point for continuing equity method.

cannot be written back up

Question 10

Handling the differential in consolidation

Answer 10

Full amount of consideration given by acquirer must be assigned to invidual assets and liabilties acquired or to goodwill

Question 11

Consolidation of balance sheet on acquisition with differential

Answer 11

1) basic consolidation entry (subsidiary equity accounts vs parent investment account - partial)
2) revalue excess acquisition price to asset and liability fair value on acquisition date
(dr asset, cr investment in subsidiary)
until the balance of the investment account is eliminated

may use “excess of acquisition consideration over acquisition book value” or “differential” accounts as worksheet clearing accounts (NOT accounts on the books)

Question 12

Reasons for a positive differential

Answer 12

• errors or omissions on the subsidiary’s books
• excess of value value over the book value of the subsidiary’s net identifiable assets
• existance of goodwill

Question 13

Accounting for errors or omissions on the books of a subsidiary being acquired

Answer 13

Corrections to errors or omissions should be made directly on the subsidiary’s books as of the date of acquisition (treated as a prior period adjustment).

this will eliminate any portion of the differential due to error

Question 14

Accounting for an excess of fair value over book value of a subsidiary’s net identifiable assets

Answer 14

either
1) resolve directly on the books of the subsidiary (“push down method”0

2) maintain accounting basis of subsidiary and make reevaluations each period on the consolidation worksheet as long as the assets are held

Question 15

Goodwill consolidation entry

Answer 15

for any excess of consideration over FV of net assets

reclassification entry done on the consolidation worksheet
Dr Goodwill
Cr investment in sub

goodwill does not appear on parent or subsidiary books, but does appear on consolidated books

Question 16

Consolidation entries with differential-

Answer 16

• basic consolidation entry remains the same
• excess value (differential) reclassification entry removes remaining investment in subsidiary account against assets and liabilities (balance sheet accounts) of subsidiary that require revaluing
• pre-acquisition accumulated depreciation removal entry

Question 17

Accounting for acquisition via bargain purchase

Answer 17

Dr Investment in subsidiary (FV of net assets)
CR cash
Cr gain on bargain purchase

does not change consolidation entries. simply must revalue consolidated net assets to FV)

Question 18

Consolidation entries for bargain purchase acquisition

Answer 18

1) basic entry. Subsidiary’s equity accounts removed against parent’s investment account

2) remove rest of investment account by bringing the subsidiary’s assets and liabilities to fair value at purchase

Question 19

Consolidated financial statements 100% ownership with positive differential

Answer 19

• records amount of differential viewed as expiring during the period as a reduction of the income recognized from investee

in consolidation:
- differential assigned to appropriate asset/ liability balance
- consolidated income adjusted for amounts expiring by assigning them to expense items

Question 20

amortization of excess acquisition price (differential) under equity method

Answer 20

parent must periodically write off any changes in differential

entry for decreasing (amortizing) differential
Dr income from sub
Cr investment in sub

may include
- goodwill impairment
- expiration of service potential (depreciation)
- differential amount connected to inventory sold or used

Question 21

Consolidation worksheet with differential reclassification

Answer 21

1) basic consolidation entry: balance sheet and retained earnings accounts
- subsidiary equity accounts vs income from sub/ investment in sub account
2) amortized excess value reclassification entry: income statement accounts
- reclassify decrease in come from subsidiary to specific expense/ loss accounts (depreciation expense to accumulated depreciation, addition of any goodwill impairment loss)
3) excess value remaining reclassification entry: balance sheet accounts
- reclassifies remaining amount in investment in subsidiary to appropriate accounts (including accumulated depreciation and addition of goodwill)
4) pre-acqusition accumulated depreciation consolidation entry

Question 22

Push-down accounting

Answer 22

revaluing the assets and liabilities to fair value directly on a subsidiary’s books

not appropriate if there is a significant non-controlling interest in the entity (as subsidiary is a continuing entity ergo their basis should not change)

eliminates any portion of the differential related to excess of FV over subsidiary book value

simplest approach- optional for all subsidiary’s who file reports with SEC separate from the parent

Question 23

Revaluation capital account

Answer 23

Used in push-down accounting

part of subsidiary’s stockholders equity and must be removed in basic consolidation entry

Question 24

Push-down accounting revaluation entry

Answer 24

Dr or Cr to pertinent assets and liabilities

balance to revaluation capital account (usual credit balance)

means no differential arises

Question 25

Consolidating inter-company payables and receivables

Answer 25

Must do a consolidation entry
DR accounts payable
CR accounts receivable
for any transactions between parent and subsidiary

if there is any interest involved those accounts must be eliminated as well as any accrued interest