Consolidations

Question 1

When is the fair value (cost) method used for recording interest in a separate company?

Answer 1

20% Ownership or LessAccounted 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

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

Can companies consolidate financial statements if they have different year ends?

Answer 8

Yes, sub prepares financial statements to look closely like parents

If Year end is less than 3 months parent can continue using the subs regular financial statement

Question 9

UNDER GAAP if a parent and Sub have a year end that is 3 months apart how should they treat significant transactions during the gap period?

Answer 9

They require disclosure

Question 10

UNDER IFRS if a parent and Sub have a year end that is 3 months apart how should they treat significant transactions during the gap period?

Answer 10

the subs Financial statements must be adjusted for significant transactions during the gap period

Question 11

What is the Cost method also known as?

Answer 11

Fair value method, Available for sale method

Question 12

When is the cost method used?

Answer 12

When investor owns less than 20& of investee voting stock and noes not exercise significant influence

Question 13

If a company owns less than 20% of the stock of an investee company and exercises significant influence what method is used?

Answer 13

the equity method should be used

Question 14

under the cost method what is the carrying amount of the investment in the investee on the parents books?

Answer 14

is is original cost measured by the FV of the consideration given including legal fees

Question 15

Under the cost method when does the amount in the investment account change?

Answer 15

1. Shares of stock in investee are purchased or sold
2. accumulated dividends are above accumulated earnings resulting in a return of capital(AKA liquidating dividend)
   3 The basis is adjusted to FV as required for marketable equity securities
3. The investee incurs losses that substantially reduce net worth from the date of aquisition

Question 16

What is the JE to record all costs of acquisition on the the cost method?

Answer 16

Investment in investee
Cash

You must include legal costs

Question 17

under the cost method, What is the JE to record unrealized loss and adjust FV at year end under the cost method for marketable securities?

Answer 17

Unrealized Holding loss (OCI)

Investment in investee (valuation account)

Question 18

What is the JE to record unrealized gain and under the cost method, adjust FV at year end under the cost method for marketable securities?

Answer 18

Investment in Unrealized Holding loss

Investment in investee (valuation account)

Question 19

under the cost method, What is the JE to reduce investment in investee for return of capital distribution?

Answer 19

Cash
Investment in investee

this JE is used when dividend is above investors share of of RE

Question 20

under the cost method, When do you use a return of capital distribution or liquidating distribution?

Answer 20

When a dividend is above the amount of investors share of RE

Question 21

Under the cost method what do you record from the investees retained earnings?

Answer 21

Cash distributions

You do not recognizes stock ddividends

Question 22

under the cost method, how are dividends to the investor/parent entiy reported?

Answer 22

Dividends are reprted income or earnings to the parent

Question 23

under the cost method, What does the does the JE look like under the cost method when a parent receives distributions?

Answer 23

Cash

Dividend income

Question 24

under the cost method, if distribution exceeds investors share of the invesstes RE what happens?

Answer 24

the basis is reduces and it is a return of capital distribution

Cash
Investment in investee

Question 25

under the cost method, Investment in investee is not adjusted for?

Answer 25

investee earnings

Question 26

under the cost method, Investment in investee are adjusted to?

Answer 26

FV

Question 27

under the cost method, Cash dividend from the investee are reported as?

Answer 27

Income by the parent

Question 28

What do stock dividends do under the cost method?

Answer 28

Receipt of stock is not income

It increases the number of shares held and decreases the cost basis per share

Question 29

Dividend revenue, under the cost method, should be recognized

Answer 29

to the extent of cumulative earnings since acquisition

and refereed to as return of capital beyond that point.

Question 30

When is the equity method used?

Answer 30

if significant influence can be exercised by the investor over the invetee

They must have significant influence over operations and finacial policies of the investee

Question 31

What is considered significant influence if their is no evidence?

Answer 31

investor owns 20%-50% of investees voting stock

Question 32

under the equity method investment is orginally recorded at

Answer 32

the price paid to aquire the investmetn

Question 33

under the equity method when is the investment account adjusted?

Answer 33

it is adjusted when net assets of the investee change through the earnings of income and payment of dividends

Question 34

under the investment account when does it increase?

Answer 34

by the investors share of the investee net income and it credits the investors income statement account
credit to: equity in sub/investee income

Question 35

under the equity method what do distribution of dividends do to the investment balance?

Answer 35

Dividends from investee reduce investment balance

Question 36

under the equity method if the investee continues to experience losses the investment account could

Answer 36

the investment account could decrease to zero

Question 37

when must the equity method be used when presenting the investment in the investee

Answer 37

1. Consolidated financials that include other consolidated entities but not the invesstee
2. unconsolidated parent company statements

Question 38

When is the equity method not appropriate? even if they have significant influence and control ( 20%-50)

Answer 38

1. bankrupcy of sub
2. investment in sub is temporary
3. a lawsuit or complaint is filed
4. a standstill agreement is signed ( investor surrenders significant rights)
5. another small group has majority ownership and they operate w/o regards to the investor
6. The investor cant obtain financial information necessary to apply the equity method
7. the investo cant obtain representation on the board of directors

Question 39

UNDER both GAAP and IFRS : how do investors account for joint venture investment

Answer 39

using the equity method

Question 40

under the equity method what kind of entry is a stock dividend?

Answer 40

memo entry that reduces the unit cost of all stock owned

Question 41

under the equity method how are dividends from an investee recorded by the investor?

Answer 41

as a reduction in carrying amount of the investment on the balance sheet of the investor

UNDER cost method recieving dividends is seen as income and does not affect the investment account