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 purchaseIf 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

Control to more control: Equity transaction. No g/l recognized on the income statement. APIC is adjusted. (treat like treasury transactions)

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, not capitalized.

Direct out-of-pocket costs (finder’s fee, legal fee) are expensed.

Stock registration and issuance costs comes out of parent’s APIC

Bond issue costs = capitalized & amortized

Question 8

CAR IN BIG (consolidation)

Answer 8

dr: Common stock dr: Apic dr: Retained earnings cr: Investment in subsidiary cr: Noncontrolling interest dr: Balance sheet adjusted to fv dr: Identifiable intangible assets of sub adjusted to fv dr: Goodwill

Question 9

How is goodwill calculated under GAAP? Under IFRS?

Answer 9

Full Goodwill Method:

Fair value of sub

- fair value of subsidiary’s net assets

= Goodwill

Partial Goodwill Method:

Acquisition cost

- Fair value of subsidiary’s net assets acquired

= Goodwill

Note: methods willl differ only when parent owns less than 100% of the subsidiary

Question 10

How is the year-end investment in investee account balance determined?

Answer 10

Beginning investment in investee (amount paid)

+ Investor’s share of investee earnings

• Investor’s share of investee dividends

- Amortization of excess FV over BV on acquisition date

= Year end investment in investee balance

Question 11

How is goodwill calculated under the full goodwill method (GAAP) and the partial goodwill method?

Answer 11

Full Goodwill:

Fair value of sub - Fair value of sub’s net assets

Partial Goodwill:

Acquisition cost - Fair value of sub’s net assets acquired (FV x % ownership)

Question 12

What does total stockholders’ equity consist of on a consolidated balance sheet?

Answer 12

• Common Stock
• Add’l Paid-in Capital
• Noncontrolling Interest
• Retained Earnings

Question 13

What happens when an investor goes from control to non-control?

Answer 13

The investor must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value.

The fair value adjustment is recognized as an additional gain or loss on the income statement