Consolidations

Question 1

When is the fair value method used for recording interest in a separate company?

Answer 1

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

Question 2

When is the equity method used when purchasing another company’s stock? How is it recorded?

Answer 2

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

Question 3

When are companies required to file consolidated financials? How is it recorded?

Answer 3

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

Question 4

When is consolidation not required?

Answer 4

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Question 5

What occurs under a step acquisition?

Answer 5

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

Question 6

What is the difference between an acquisition and a merger?

Answer 6

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

Question 7

How are acquisition costs recorded in a merger?

Answer 7

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

Question 8

Treatment of existing goodwill before business combination

Answer 8

Do my include old goodwill in net assets when calculating new goodwill

Question 9

Treatment of finders fees and general acquisition expenses

Answer 9

Expensed as incurred

Question 10

Treatment of registration fees and issuing fees for securities in acquisition

Answer 10

Reduce issue price of securities

Reduces APIC

Question 11

Calculate the consolidated APIC if stock is issued to finance acquisition

Answer 11

Parent APIC + APIC from shares issues

Question 12

What is a bargain purchase

Answer 12

FV of NCI + FV previous purchases of CS less than FV of net identifiable assets

Question 13

What is the acquisition date

Answer 13

Date acquirer obtains control of acquirer

Question 14

How is acquisition cost determine in step acquisition

Answer 14

Previously held shares Remeasured at FV as of the date control is acquired
Gain recognized in period

Question 15

Examples of intangible assets not included in goodwill

Answer 15

Trademarks
Lease agreements
Patents
Assets arising from contractual or legal rights
Assets identifiable and can be sold separately

Question 16

How is the acquisition cost allocated

Answer 16

Allocated to acquired asset and liabilities based in relative FV

Question 17

Calculate acquisition cost

Answer 17

Cost + FV of NCI

Question 18

Calculate current liabilities for acquisition of entity via debt financing

Answer 18

Include current portion of LT debt in current liabilities

Question 19

Calculate acquisition goodwill

Answer 19

Assets transferred + FV NCI - FV net identifiable assets

Question 20

How are assets valued at acquisition date

Answer 20

At fair value

Question 21

How are intercompany receivables and payables recorded on subsidiary subsequent to acquisition

Answer 21

Intercompany receivable and payables still recorded

Only eliminate on parents consolidated FS

Question 22

Calculate NCI account balance

Answer 22

FV of NCI at acquisition date + share of net income - share of dividends

Question 23

How is the excessive value over CV of equipment treated on consolidated FS

Answer 23

Capitalized and amortized over useful life

Question 24

How are dividends declared recorded on consolidated FS when parent owns sub and sub owns parent

Answer 24

Eliminate dividends from parent to sub and sub to parent

Sub to NCI not included on consolidated FS because it does not represent dividend of consolidated entity

Question 25

Rule for consolidating variable purpose entity

Answer 25

Equity less than 10 percent of total assets. Assumed entity does not have sufficient financing to fund operations

Question 26

Who should consolidate variable purpose entity

Answer 26

Primary benefiticiary

Question 27

When is the determination of consolidation of variable purpose entity made

Answer 27

Made at time entity gets involved with VIE | Reassessed on ongoing basis

Question 28

Adjustments required when switching to consolidated FS

Answer 28

Consolidated FS is change in entity | Retroactively restate all FS

Question 29

How are earnings of parent and sub reflected on consolidated FS

Answer 29

Consolidated FS reflect combined operations of parent and sub subsequent to acquisition. Earnings of sub prior to combo not included in parent income

Question 30

What causes unrealized profit in ending inventory of consolidated FS

Answer 30

Intercompany sales made at prices greater than cost and merchandise not resold to 3rd party. Must be eliminated from consolidated FS

Question 31

Calculate unrealized profit in ending inventory

Answer 31

Sales to sub - sub cost x parent GP %

Question 32

Calculate Consolidated COGS when intercompany sales between parent as sub

Answer 32

Parent COGS + Sub COGS - sales from parent to sub

Question 33

Calculate consolidated selling expenses with sales from parent to sub and freight out expenses

Answer 33

Selling expense parent + selling expense sub - freight out expense from parent to sub

Question 34

How to record equipment from parent sold to sub at gain on consolidated FS

Answer 34

Equipment recorded at original cost less accumulated depreciation As if equipment had never been sold

Question 35

Calculate gain on subsidiary purchase of parent bonds and effect on NCI

Answer 35

Gain = cash paid - CV Treated like retirement of bonds No effect on NCI

Question 36

Treatment of wholly owned subsidiary's purchase of parent stock

Answer 36

Treated as if consolidated entity is purchasing treasury stock No gain recorded

Question 37

Adjusted accounts on consolidate FS for intercompany sales

Answer 37

Adjust sales and COGS for intercompany sales Net income needs no adjustment

Question 38

How is NCI share of net income affected by intercompany sales

Answer 38

Not affected by unrealized gain | It is a downstream sales from parent to subsidiary

Question 39

How are the parent investment account and subsidiary stockholder equity and NCI reported on consolidated FS

Answer 39

Parent investment account and subsidiary stockholder equity account eliminated Portion of subsidiary stockholder equity not eliminated is NCI

Question 40

Examples of consideration transferred on acquisition

Answer 40

FV of assets and liabilities FV of contingent consideration Equity interest issued by acquirer Share based payments required to be replaced by acquirer where not further service is require by employee

Question 41

How to treat incomplete information on acquisition date

Answer 41

Items recorded at provisional amount at acquisition date

Question 42

What is the measurement period for incomplete information

Answer 42

Earlier of one year from acquisition date or date complete information is available

Question 43

If a acquisition provisional amount is inaccurate how to adjust

Answer 43

Retroactively adjust goodwill

Question 44

How is the voluntary payment of share based payments to employees at acquisition recorded

Answer 44

As compensation expense post acquisition date

Question 45

When are contingent liabilities arising from acquisition derecognized

Answer 45

Only after contingency is resolved

Question 46

What are combined financial statements

Answer 46

FS prepared or companies owned by same parent or individual Eliminate intercompany transactions

Question 47

When are combined FS used

Answer 47

Present financial position as results of: Commonly controlled companies Companies under common mgmt Group of consolidated subsidiaries

Question 48

When is goodwill recognized under IFRS

Answer 48

When acquired by purchase

Question 49

When can a subsidiary be exclude from consolidation under IFRS

Answer 49

Wholly or partially owned and its owners do not object to nonconsolidation No debt or equity is publicly traded Parent prepares consolidated FS under IFRS