Consolidations Flashcards
Consolidations
When is the fair value method used for recording interest in a separate company?
20% Ownership or Less
Accounted for as a purchase
If amount paid is less than fair value, results in a gain in current period
Consolidations
When is the equity method used when purchasing another company’s stock? How is it recorded?
Ownership 21% to 50%
Gives ‘significant influence’
Purchase Price - Par Value = Goodwill
Dividends received from the investee reduce the investment account and are not income
Consolidations
When are companies required to file consolidated financials? How is it recorded?
Ownership of other company is greater than 50%
Investment account is eliminated
Only parent company prepares consolidated statements, not subsidiary.
Acquired assets/liabilities are recorded at Fair Value on acquisition date.
Eliminating entries for intercompany sales of inventory & PPE, also intercompany investments
Consolidations
When is consolidation not required?
Ownership less than 50%
OR
Majority owner does not ‘control’ - i.e. bankruptcy or foreign bureaucracy
Consolidations
What occurs under a step acquisition?
Acquirer held previous shares accounted for under Fair Value Method or Equity Method and are now re-valued to Fair Value
Results in a Gain or Loss in current period
Consolidations
What is the difference between an acquisition and a merger?
Acquired companies continue to exist as a legal entity – their books are just consolidated with the parent company in the parent’s financial statements
Merged companies cease to exist and only the parent remains
Consolidations
How are acquisition costs recorded in a merger?
Expensed in period incurred – i.e. NOT capitalized:
Accounting, Legal, Valuation, Consulting, Professional
Netted against stock proceeds:
Stock registration and issuance costs
