F1 M4 & M5 Acquisition Method

Question 1

With acquisition accounting, the net assets are based on _____ value. So inventory would be based on _____ less ____.

Answer 1

Fair market value

Based on selling price less disposal costs and a reasonable profit allowance

Question 2

In an acquisition method business combination, registration and issuance costs are recorded as _____.

Answer 2

A direct reduction to the value of the stock issued by reducing APIC

Question 3

In an acquisition method business combination, legal and consulting fees are (capitalized/expensed).

Answer 3

Expensed

Question 4

In an acquisition, when the acquisition price exceeds the fair value of the net assets acquired, the assets and liabilities should be presented at ____.

Answer 4

Fair value

Question 5

In an acquisition method business combination, debt security registration costs are (capitalized/expensed).

Answer 5

Capitalized

Question 6

When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, what are the 3 things that must happen

Answer 6

1. The balance sheet is adjusted to fair value, this creates a negative balance in the acquisition account
2. The identifiable intangible assets are recognized at fair value, this increases the negative balance in the acquisition account
3. The total negative balance in the acquisition account is recorded as a gain

Question 7

Under US GAAP and an acquisition method, goodwill is the difference between the ___ value of the subsidiary purchased and the ___ value of the net assets acquired.

Answer 7

Fair value of the sub - Fair market value of the assets acquired

Question 8

When acquiring a subsidiary, the parent company issued common stock. Do you use the Fair Value of the common stock at the date of the announcement or the date that the transaction closes?

Answer 8

The transaction closes

Question 9

Journal Entry:

Recording the acquisition of a sub for cash

Answer 9

Dr Investment in subsidiary

Cr Cash

Question 10

Journal Entry:

Recording the acquisition of a sub for parent common stock

Answer 10

Dr Investment in subsidiary
Cr Common stock (parent at par)
Cr APIC (for any additional amount above par)

Question 11

What are the two distinct accounting characteristics of the acquisition method?

Answer 11

1. 100% of the net assets acquired are recorded at fair value with any unallocated balance remaining creating goodwill;
2. When the companies are consolidated the sub’s entire equity is eliminated

Question 12

When acquiring a sub, if you don’t acquire 100% of the sub then you’ll need to create a ___.

Answer 12

Noncontrolling interest account

Question 13

How do you calculate the noncontrolling interest?

Answer 13

Take the fair value of the subsidiary (at acquisition date) times the non controlling interest percentage

Question 14

Noncontrolling interest + parent’s common stock + parent’s APIC + parent’s retained earnings =

Answer 14

Total consolidated equity

Question 15

What does the mnemonic CARINBIG stand for?

Answer 15

Common stock
Additional paid in capital
Retained earnings
   Investment in sub
   Noncontrolling interest
Balance sheet adjustment to FV
Identifiable intangible assets at FV
Goodwill/Gain

Question 16

When an investor goes from non-control to control of a subsidiary (i.e. 30% ownership to 75% ownership) through an acquisition, the previously held equity investment must be adjusted to ____. This adjustment is recognized as a _____ by the investor.

Answer 16

Fair value

Gain or loss

Question 17

Penn Corp paid $300,000 for 75% of the outstanding common stock of Star Co. This is the first line of a question with a lot of distractors. What is the noncontrolling interest that Penn should report on its acquisition date consolidated balance sheet under US GAAP?

Answer 17

$100,000

Question 18

How do you calculate noncontrolling interest under the IFRS partial goodwill method?

Answer 18

NCI = Fair value of subsidiary net assets x NCI %

Question 19

How do you calculate goodwill under the IFRS partial goodwill method?

Answer 19

Acquisition - (Net Assets Fair Value x Parent’s % of control)

Question 20

What affect does a cash dividend by the sub have on our noncontrolling interest balance on our consolidated financial statements?

Answer 20

It causes a decrease

Question 21

What affect does a cash dividend by the sub have on our retained earnings balance on our consolidated financial statements?

Answer 21

No effect, the transfer of cash from once company to another would be eliminated in consolidation

Question 22

When acquiring a sub with an acquisition cost that is less than the fair value of 100% of the underlying assets acquired, adjust all balance sheet accounts to ____ and allocate remaining acquisition costs to the ____ of the 100% of identifiable intangible assets (goodwill).

Answer 22

Fair value

Fair value