Consolidations Flashcards
When is the fair value (cost) method used for recording interest in a separate company?
20% Ownership or LessAccounted for as a purchaseIf 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
Can companies consolidate financial statements if they have different year ends?
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
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?
They require disclosure
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?
the subs Financial statements must be adjusted for significant transactions during the gap period
What is the Cost method also known as?
Fair value method, Available for sale method
When is the cost method used?
When investor owns less than 20& of investee voting stock and noes not exercise significant influence
If a company owns less than 20% of the stock of an investee company and exercises significant influence what method is used?
the equity method should be used
under the cost method what is the carrying amount of the investment in the investee on the parents books?
is is original cost measured by the FV of the consideration given including legal fees
Under the cost method when does the amount in the investment account change?
- Shares of stock in investee are purchased or sold
- 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 - The investee incurs losses that substantially reduce net worth from the date of aquisition
What is the JE to record all costs of acquisition on the the cost method?
Investment in investee
Cash
You must include legal costs
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?
Unrealized Holding loss (OCI)
Investment in investee (valuation account)
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?
Investment in Unrealized Holding loss
Investment in investee (valuation account)
under the cost method, What is the JE to reduce investment in investee for return of capital distribution?
Cash
Investment in investee
this JE is used when dividend is above investors share of of RE
under the cost method, When do you use a return of capital distribution or liquidating distribution?
When a dividend is above the amount of investors share of RE
Under the cost method what do you record from the investees retained earnings?
Cash distributions
You do not recognizes stock ddividends
under the cost method, how are dividends to the investor/parent entiy reported?
Dividends are reprted income or earnings to the parent
under the cost method, What does the does the JE look like under the cost method when a parent receives distributions?
Cash
Dividend income
under the cost method, if distribution exceeds investors share of the invesstes RE what happens?
the basis is reduces and it is a return of capital distribution
Cash
Investment in investee
under the cost method, Investment in investee is not adjusted for?
investee earnings
under the cost method, Investment in investee are adjusted to?
FV
under the cost method, Cash dividend from the investee are reported as?
Income by the parent
What do stock dividends do under the cost method?
Receipt of stock is not income
It increases the number of shares held and decreases the cost basis per share
Dividend revenue, under the cost method, should be recognized
to the extent of cumulative earnings since acquisition
and refereed to as return of capital beyond that point.
When is the equity method used?
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
What is considered significant influence if their is no evidence?
investor owns 20%-50% of investees voting stock
under the equity method investment is orginally recorded at
the price paid to aquire the investmetn
under the equity method when is the investment account adjusted?
it is adjusted when net assets of the investee change through the earnings of income and payment of dividends
under the investment account when does it increase?
by the investors share of the investee net income and it credits the investors income statement account
credit to: equity in sub/investee income
under the equity method what do distribution of dividends do to the investment balance?
Dividends from investee reduce investment balance
under the equity method if the investee continues to experience losses the investment account could
the investment account could decrease to zero
when must the equity method be used when presenting the investment in the investee
- Consolidated financials that include other consolidated entities but not the invesstee
- unconsolidated parent company statements
When is the equity method not appropriate? even if they have significant influence and control ( 20%-50)
- bankrupcy of sub
- investment in sub is temporary
- a lawsuit or complaint is filed
- a standstill agreement is signed ( investor surrenders significant rights)
- another small group has majority ownership and they operate w/o regards to the investor
- The investor cant obtain financial information necessary to apply the equity method
- the investo cant obtain representation on the board of directors
UNDER both GAAP and IFRS : how do investors account for joint venture investment
using the equity method
under the equity method what kind of entry is a stock dividend?
memo entry that reduces the unit cost of all stock owned
under the equity method how are dividends from an investee recorded by the investor?
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
