Chapter 4: Intercorporate investments, wholley owned, differential Flashcards
Excess value differential reclassification entry
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)
Amortization excess value reclassification entry
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
Equity method goodwill
aka implicit goodwill
portion of the differential that represents goodwill (not part of the fair value of identifiable assets)
Impairment loss on investment acquisition
Recognized if investment suffers decline in value that isn’t temporary
Differential
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
Treatment of differential under the equity method
- 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
Equity method accounting with differential
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
Disposal of differential related assets
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)
Impairment of investment value
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
Handling the differential in consolidation
Full amount of consideration given by acquirer must be assigned to invidual assets and liabilties acquired or to goodwill
Consolidation of balance sheet on acquisition with differential
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)
Reasons for a positive differential
- 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
Accounting for errors or omissions on the books of a subsidiary being acquired
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
Accounting for an excess of fair value over book value of a subsidiary’s net identifiable assets
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
Goodwill consolidation entry
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
Consolidation entries with differential-
- 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
Accounting for acquisition via bargain purchase
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)
Consolidation entries for bargain purchase acquisition
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
Consolidated financial statements 100% ownership with positive differential
- 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
amortization of excess acquisition price (differential) under equity method
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
Consolidation worksheet with differential reclassification
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
Push-down accounting
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
Revaluation capital account
Used in push-down accounting
part of subsidiary’s stockholders equity and must be removed in basic consolidation entry
Push-down accounting revaluation entry
Dr or Cr to pertinent assets and liabilities
balance to revaluation capital account (usual credit balance)
means no differential arises
Consolidating inter-company payables and receivables
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
