Consolidations Flashcards
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
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
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 inter-company sales of inventory & PPE; also inter-company investments
When is consolidation not required?
Ownership less than 50%
OR
Majority owner does not control - i.e. bankruptcy or foreign bureaucracy
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
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
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
If you own… Pg. 31-1
a) 0-20%
b) 20-50%
c) 50%+
a) Cost method; intestor/investee
b) Equity method (one line cosolidation) => think investment journal entry; intestor/investee)
c) Consolidation (has “control”); acquirer/acquiree
What is goodwill for consolidation? Pg. 31-4
An asset representing the future economic benefits that arises from other assets acquired in a business combo that are not individually identified and separately recognized
What is the acquisition method? Pg. 31-1
Income of Acquirer: include income whole year
Income of Acquiree: included from date of acquisiton on (prospective: today and tomorrow)
*Eliminate intercompany transactions (receivables, payables, gains, losses, and dividends)
What are the four steps in applying the acquisition method Pg. 31-1
1) Identify the acquirer
2) Determine the acquisition date
3) Recognize and measure at fair valuee the identifiable asset acquired, liabilities assumed, and NONCONTROLLING interest in the acquiree
4) Recognize and measure Gooodwill, or a gain from a bargain purchase
How do you calculate goodwill? Pg. 31-4 Consolidation #36
FV of consideration transferred (cost to the acquiror; “what you paid”)
+ FV of previously held equity interests in acquiree
+ FV of noncontrolling interest
(-) FV of net identifiable assets of acquiree (stockholder’s equity of acquiree)
= Goodwill or gain from bargain purchase
How do you consolidate in the end? Pg. 31-7
Find investment ending balance and take it out of book via journal entry
What is a noncontrolling interest? Pg. 31-7
In a consolidation, when the acquirer acquires less than 100%, the percentage of stock not owned by the acquirer represents the noncontrolling interest’s share of the fair values of the acquiree
What is included in a statement of retained earnings?
Pg. 31-11
Beginning RE \+/- Prior Period Adjustment = Adjusted Beginning RE \+ Net Income (Acquirer: whole year; Acquiree's from date of acquisition) - Dividends = Ending Retained Earnings
