Consolidations Flashcards

2
Q

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

A

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

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3
Q

When is the equity method used when purchasing another company’s stock? How is it recorded?

A

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

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4
Q

When are companies required to file consolidated financials? How is it recorded?

A

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

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5
Q

When is consolidation not required?

A

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

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6
Q

What occurs under a step acquisition?

A

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

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7
Q

What is the difference between an acquisition and a merger?

A

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

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8
Q

How are acquisition costs recorded in a merger?

A

Expensed in period incurred – i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

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9
Q

Items to be adjusted during consolidation (JE)

A

CAR IN BIG

CAR = eliminate sub's equity
I = eliminate parent investment acct
N = create NCI if not 100% owned
BIG = adjust "old" sub's BS to FV
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10
Q

Elements of CAR IN BIG

A

CS (sub)
APIC (sub)
RE (sub)

Invest in sub
NCI

BS of sub adj to FV
Identifiable intangible assets of sub are recorded at FV
Goodwill (or gain)

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11
Q

Acquisition date calculation

A
CS - sub
APIC - sub
RE - sub
(Invest in sub)
(NCI)
----------
Difference
(BS FV adj)
------------
Difference
(Identifiable intangible assets)
------------
Dr = goodwill
Cr = gain
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12
Q

Where is NCI reported?

A

OE

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