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

ASC 350 provides three major changes in financial reporting: (L)

Answer 8

1) Eliminates the use of pooling of interest and requires that all business combinations use the purchase method.
2) Provides greater guidance in recognizing intangible assets.
3) Requires disclosures of the primary reasons for business combinations and expanded purchase price allocation information.

Question 9

Name the two attributes ASC 350 describes for recognition of an intangible asset. (L)

Answer 9

1) Does the intangible asset arise from contractual or other legal rights?
2) Is the intangible asset capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged?

Question 10

Name three examples of Customer Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350). (L)

Answer 10

Customer lists
Order or production backlog
Customer contracts and the related customer relationships

Question 11

Name three examples of Contract Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350). (L)

Answer 11

Licensing, royalty, standstill agreements
Franchise agreements
Lease agreements

Question 12

ASC 350 provides two major changes in financial reporting related to business combinations. What are these changes? (L)

Answer 12

The first major change is goodwill will no longer be amortized systematically over time. Goodwill will be subject to an annual test for impairment.

Question 13

Parent vs. Subsidiary (L)

Answer 13

In situations in which the investor has control, the investor is called the parent and the company invested in is called the subsidiary.

Question 14

How does ASC 350 change the accounting for purchases in research development? (L)

Answer 14

ASC 350 does not change the accounting for purchased in process research and development. The criterion usually used is technological feasibility. If the R & D has not reached technological feasibility, it should be expensed.

Question 15

Under the Equity Method the investor recognizes what? (L)

Answer 15

Under the equity method the investor recognizes in income its share of the investee’s net income or loss subsequent to the date of acquisition.

Question 16

IFRS 3R “Proportionate Share Option” (L)

Answer 16

The approach records the non-controlling interest at the proportionate share of the acquiree’s fair value of the identifiable net assets which excludes goodwill.

Question 17

The best theoretical justification for consolidated financial statements? (L)

Answer 17

In form the companies are separate; in substance they are one entity.

Question 18

What are Reporting Units? (L)

Answer 18

To better assess potential declines in value for goodwill (in place of amortization), the most specific business level at which goodwill is evident was chosen as the appropriate level for impairment testing.

Question 19

The theory of the equity method (L)

Answer 19

The investor should reflect on its books its share of changes occurring on the books of the investee.

Question 20

Of the three theoretical methods of accounting for business combination, which is the only acceptable method? (L)

Answer 20

The Pooling of Interest method was prohibited by ASC 350 and ASC 350R eliminated use of the Purchase Method. So the Acquisition Method is the only acceptable method under GAAP for business combinations.

Question 21

In the acquisition method, all assets acquired and liabilities assumed in the combination are recognized and measured according to their? (L)

Answer 21

All assets acquired and liabilities assumed in the combination are recognized and measured at their individual fair values.

Question 22

In the acquisition method any excess of the fair value of the consideration transferred over the net amount assigned to the individual assets acquired and liabilities assumed is recognized by the acquirer as? (L)

Answer 22

Any excess of the fair value of the consideration transferred over the net amount assigned to the individual assets acquired and liabilities assumed is recognized by the acquirer as goodwill.

Question 23

ASC 350R requires that in-process research and development acquired in a business combination be recognized as an? (L)

Answer 23

Asset at its acquisition-date fair value.

Question 24

Double Counting (L)

Answer 24

Basic consolidation theory states that the consolidated entity cannot count the same assets, liabilities and stockholders’ equity accounts twice.

Question 25

Any difference between the price paid for the subsidiary and the fair value of the sub’s identifiable net assets is recorded as __________. (L)

Answer 25

goodwill

Question 26

What happens to intercompany dividends in a consolidation? (L)

Answer 26

The intercompany dividends paid by the subsidiary to the parent are always eliminated in consolidation.

Question 27

Intangible assets (L)

Answer 27

Intangible assets include both current assets and non-current assets that lack physical substance.

Question 28

Name three examples of Marketing Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350) (L)

Answer 28

Trademarks
Internet domain names
Trade dress

Question 29

Name three examples of Artistic Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350). (L)

Answer 29

Books, magazines, newspapers and other literary works
Pictures and photographs
Plays, operas and ballets

Question 30

Name three examples of technology Related Intangible Assets That Meet the Criteria for Recognition Separately from Goodwill (ASC 350) (L)

Answer 30

Patented technology
Trade secrets including secret formulas, processes, and recipes
Unpatented technology

Question 31

Investor vs. Investee (L)

Answer 31

Normally for investments in which the investor does not have control, the investor is called the investor and the company invested in is called the investee.

Question 32

What is the ASC 350 two-step approach for testing goodwill for impairment? (L)

Answer 32

The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill.

The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.

Question 33

Receipt of a stock dividend effect (or lack of effect) on the investor. (L)

Answer 33

Receipt of a stock dividend (usually) does not constitute dividend income to the investor, rather it reduces the cost basis per share of the investment.

Question 34

Variable Interest Entity (VIE) (L)

Answer 34

A VIE is an off-balance sheet arrangement that may take any legal form.

Question 35

Name a reason when the equity method of accounting for investments should be used? (L)

Answer 35

The equity method of accounting for investments in common stock should be used if the investor has significant influence over the operating and financial policies of the investee.

Question 36

What is the difference in IFRS for the calculation of Goodwill? (L)

Answer 36

Difference is that the calculation of the impairment of goodwill is a two-step approach for US GAAP but a one-step approach for IFRS.

Question 37

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of ___________. (L)

Answer 37

Economic entity

Question 38

Theoretically there are three methods of accounting for business combinations. These three methods are: (L)

Answer 38

1) Pooling of Interest 2) Purchase Method 3) Acquisition Method
But the first two are not acceptable to GAAP. Only the Acquisition method is GAAP

Question 39

If a parent has undetermined controlling interest in a subsidiary, what guideline should be used? (L)

Answer 39

If the parent has controlling interest in subsidiary, it should normally be consolidated. If the controlling interest is difficult to be determined, the guideline is ownership of over 50% of the common stock.

Question 40

In the acquisition method, what is a good starting point for recording a business combination? (L)

Answer 40

The fair value of the consideration transferred provides a starting point for valuing and recording a business combination.

Question 41

“Gain on Bargain Purchase” in the acquisition method means? (L)

Answer 41

Any excess of the net amount assigned to the individual assets acquired and liabilities assumed over the fair value of the consideration transferred is recognized by the acquirer as a “gain on bargain purchase.”

Question 42

Name the five steps in the consolidation procedure. (L)

Answer 42

1) Eliminate double counting
2) Restate net assets to fair value
3) Record goodwill
4) Record minority interest at fair value on the acquisition date
5) Eliminate intercompany transactions

Question 43

Restating net assets to fair value (L)

Answer 43

If the parent company paid fair value for the sub’s net assets, the net assets should be reported initially at the fair value on the consolidated worksheet.

Question 44

Where should goodwill be recorded (or created)? (L)

Answer 44

Notice that the goodwill does not appear on either the parent’s or the sub’s books, it is always created on the worksheet.