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?
Expensed in period incurred - NOT part of the cost to acquire the business…:Accounting; Legal; Advising; Valuation; Consulting;
Accounting for an Acquisition
Acquirer records its ownership of the stock of the acquiree as a long-term investment……. does NOT record on its books the assets and liabilities of the acquiree
Accounting for Merger / Consolidation
Acquirer records the group of assets or the assets and liabilities of teh acquirees onto its books… the acquirede entity will no longer exist
Types of Business Combinations
MERGER: only 1 entity survives…. CONSOLIDATION: new entity is created…. ACQUISITION: one entity acquires controlling interest of another; Exist & operate as separate legal entities
Steps in applying the Acquisition Method of Accounting
(1) Identify the Acquirer… (2)Determine acquisition date & measurement period… (3) Determine cost of acquisition… (4) Recognize & measure identifiable assets acquired, liabilities assumed & any non controlling interest… (5)Recognize & measure goodwill or a gain from a bargain purchase, if any
Accounting for an Acquisition
Acquirer records its ownership of the stock of the acquiree as a long-term investment……. does NOT record on its books the assets and liabilities of the acquiree
Accounting for Merger / Consolidation
Acquirer records the group of assets or the assets and liabilities of teh acquirees onto its books… the acquirede entity will no longer exist
Types of Business Combinations
MERGER: only 1 entity survives…. CONSOLIDATION: new entity is created…. ACQUISITION: one entity acquires controlling interest of another; Exist & operate as separate legal entities
Steps in applying the Acquisition Method of Accounting
(1) Identify the Acquirer… (2)Determine acquisition date & measurement period… (3) Determine cost of acquisition… (4) Recognize & measure identifiable assets acquired, liabilities assumed & any non controlling interest… (5)Recognize & measure goodwill or a gain from a bargain purchase, if any
