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
Calculation of Goodwill & Gain
+FV of consideration transferred (pmt)
+FV of previously held equity interest in acquiree
+FV of non-controlling interest
-FV of net identifiable assets of acquiree
=Goodwill or Gain
4 Common Intercompany Transactions
- Dividends paid - entity can’t pay itself dividends
DR: Dividend Income
CR: Dividends Paid (R/E)
Note: No effect on parent’s RE, but a decrease in subs RE
2. Sales of inventory
DR: Sales Revenue (to aquiree)
CR: Inventory (end inv of aquiree * % profit of acquiror)
CR: COGS - plug
3. Sale of PPE
DR: Gain
DR: PPE
CR: Accum Depr
DR: Accum Derp (To fix over depr)
CR: Depr Expense
4. Purchase of Bonds issued by the other
DR: Bonds Payable
CR: Investment in bonds (CV)
CR: Gain on retirment
Intercompany Inventory Sales (Worksheet Elimination Entry)
DR: Sales Revenue (intercompany transaction)
CR: Inventory (Subs Ending Inv * % of profit; parent’s)
CR: COGS - Plug
Goodwill vs. Gain
Goodwill - FV of net identifiable assets is less than the consideration transferred (pmt).
Gain - FV of net identifiable assets is more than the consideration transferred (pmt).
Consolidation J/E at YE with Non-controlling Interest
DR: C/S
DR: APIC
DR: Retained Earnings
DR: PPE (FMV adjustment if any)
DR: Goodwill (if any)
CR: Investment
CR: Non-controlling Interest
Intercompany sales of inventory (3 effects)
Three effects on the financial statements that may need to be eliminated. 1. Sale & Purchase 2. Receivables & Payables 3. Profit in Ending Inventory
Total Equity in Consolidated Financial Statement
Parent’s Equity + Noncontrolling’s % of Equity
