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

what is the accounting standards codification for business combinations and consolidations

Answer 8

ASC 805/810

SFAS 141R

Question 9

at what percentage are consolidations performed at

Answer 9

50%+

Question 10

are consolidations done through journal entries or on a worksheet only

Answer 10

on a worksheet only

Question 11

definition of goodwill

Answer 11

an asset representing the future economic benefits that arises from other assets acquired in a business combination that are not individually identified and separately recognized

Question 12

what is the formula to calculate goodwill

Answer 12

fair value of consideration transferred (cost to the acquirer)
+ fair value of previously held equity interests in acquiree
+ fair value of noncontrolling interest
(-) fair value of net identifiable assets of acquiree
—————————————————————–
Good will or gain from bargain purchase

Question 13

In an acquisition, are direct, indirect or general costs incurred during the acquisition capitalized or expensed

Answer 13

ALL EXPENSED

Question 14

In an acquisition, if acquisition costs are related to the issuance and registration of debt or equity securities, what account is debited

Answer 14

additional paid in capital (APIC)

Question 15

if a company is acquired in the middle of the year, do the end of year financials have income and expenses from the full year or since the date of acquisition

Answer 15

since the date of acquisition because at purchase date, income and expenses are already included in the purchase price.
Acquiror (parent) counts income for the full year

Question 16

what are the 4 steps in applying the acquisition method

Answer 16

1. Identify the acquirer
2. Determine the acquisition date
3. Recognize and measure at fair value the identifiable assets acquired, liabilities assumed, and noncontrolling interest (minority interest) in the acquiree
4. Recognize and measure Goodwill, or a gain from a bargain purchase

Question 17

is goodwill depreciated or tested for impairment

Answer 17

SFAS 142

tested for impairment on an annual basis

Question 18

if the acquirer pays LESS than the fair market value of the acquiree, what is the result:

1) Negative goodwill
2) Additional paid in capital
3) Reduction of the values assigned to certain assets and an extraordinary gain for any unallocated portion
4) As a gain in net income for the period

Answer 18

4) As a gain in net income for the period

Question 19

define noncontrolling interest

Answer 19

formerly called minority interest, it is a percentage ownership of a company less than 50%

Question 20

what section is non-controlling interest classified under on consolidated balance sheets

Answer 20

the equity section

FASB 160

Question 21

at what value is non-controlling interest valued at during acquisitions

Answer 21

fair value at date of acquisition

Question 22

what are the 3 steps in handling acquisitions that are less than 100% of the acquiree company

Answer 22

1. The equity accounts of the acquiree are eliminated in consolidation, and a noncontrolling interest is established for the FAIR VALUE of the shares of stock held by the noncontrolling interest at the date of acquisition
2. The effects of intercompany transactions are eliminated
3. A portion of net income and dividends of the acquiree are allocated to the noncontrolling interest

Question 23

what are 4 examples of intercompany transaction types that commonly appear on the CPA exam

Answer 23

• Dividends paid from the Acquiree to the Acquirer
• Sales of inventory from one of the companies to the other
• Sales of property, plant and equipment form one to the other
• Purchases by one of the bonds issued by the other

Question 24

what is done with intercompany A/P and A/R when reporting on financials

Answer 24

eliminated

Question 25

what is done with gains/losses from intercompany sales when reporting on financials

Answer 25

1. eliminate the gain on sale

2. eliminate the additional depreciation or amortization resulting from the markup of the asset

Question 26

what is done with bonds purchased in intercompany sales when reporting on financials

Answer 26

Eliminate:
1. investment in bonds vs. bonds payable
2. Interest revenue vs. interest expense
3. accrued interest receivable vs accrued interest payable
then the plug is a gain or a loss

Question 27

what is done with intercompany inventory sales when reporting on financials

Answer 27

eliminate the effects of:

1. Sale vs. purchase
2. Receivable vs. payable
3. Profit in ending inventory

Question 28

Company acquisitions - cheat sheet for CPA exam

Answer 28

If any of these are available, eliminate them:

• Investment account = always zero at the end
• Eliminate 100% of acquiree’s - C/S, APIC, R/E
• Set up noncontrolling interest (adjust for % of income and dividends)
• Dividend income if cost method or investment income if equity method
• Dividends paid by S
• Intercompany transactions (sales, COGS, unrealized inventory profits)
• Intercompany gains/losses on sale of PP&E
• Intercompany receivables/payables
• Bond investments
• Set up excess FMV of PP&E over BV
• Record goodwill
• Record depreciation on excess FMV of PP&E
• Record impairments of goodwill

Question 29

IFRS - what are the 2 valuation method options for noncontrolling interest

Answer 29

1. market price for equity shares not held by the acquirer
   (other valuation methods can be used if market value not available)
2. Calculate fair value of net assets acquired and multiply that by the % of shares owned by the noncontrolling interest

Question 30

IFRS - what are the 3 conditions that must be met to exclude a subsidiary from consolidation

Answer 30

1. it is wholly or partially owned and its other owners do not object to nonconsolidation
2. It does not have any debt or equity instruments publicly traded
   AND
3. It’s parent prepares consolidated financial statements that comply with IFRS

Question 31

IFRS - is “push-down accounting” which is allowed by the SEC, allowed under IFRS

Answer 31

No