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Flashcards in -Consolidations Deck (7)
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1
Q

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

A

Fair value method is used when:

  • Ownership is 20% 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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2
Q

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

A

Equity method is used when:

  • Ownership is 21% to 50%
  • It gives significant influence
  • To record: Purchase Price - Par Value = Goodwill

Dividends received from the investee reduce the investment account and are not income.

Switching from the Fair Value Method to Equity Method is treated Prospectively on the Financial Statements.

3
Q

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

A

Companies are required to file consolidated financials when:

  • Ownership of other company is greater than 50%.
  • Investment account is eliminated.

How is it recorded?

  • 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.
4
Q

When is consolidation not required?

A

Consolidation is not required when:

  • Ownership is less than 50%; or
  • Majority owner does not control - i.e. bankruptcy or foreign bureaucracy
5
Q

What occurs under a step acquisition?

A

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 the current period
6
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.

7
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
  • issuance costs