F3 Acquisition Method

Question 1

Acquisition Method

Answer 1

• in a business combination for an acquisition, a subsidiary may be purchased for cash, stock, debt securities, etc.
• the investment is valued at the FV of the consideration given or the fair value of the consideration received , whichever is more clearly evident

Question 2

Journal Entry to record acquisition for cash- parent company internal entries

Answer 2

DR- investment in subsidiary

CR- cash

Question 3

Journal Entry to record acquisition for parent common stock ( use FV at date the transaction closes):

Answer 3

DR- investment in subsidiary
CR- common stock
CR- APIC (parent/FV-par)

Question 4

Investment in SUB

Answer 4

-always uses FV at the transaction closing date

Question 5

Application of Acquisition Method

Answer 5

2 characteristics;

1) 100% of the net assets acquired ( regardless of percentage acquired) are recorded at FV with any unallocated balance remaining creating goodwill
2) when the companies are consolidated, the sub entire equity ( including common stock, APIC and retained earnings) is eliminated

Question 6

The year-end consolidating journal entry known as the consolidation workpaper eliminating entry (EJE) is:

Answer 6

DR- common stock 
DR- A.P.I.C. 
DR- Retained earnings- subsidiary
CR- Investment in subsidiary 
CR- Noncontrolling interest
DR- Balance sheet adjustments to FV
DR- Identifiable intangible assets to FV
DR- Goodwill

Question 7

Acquisition date Calculation

Answer 7

• when the subsidiary’s financial statements are provided in subsequent periods , it is neccessary to reverse activity back into the book value at acquisition date

Question 8

Calculation for Retained Earnings @ Acquisition date

Answer 8

BASE -solve for B
B-beginning Retained Earnings 
A-Add income
S- Subtract dividends
E- Ending Retained Earnings

Question 9

Journal Entry Flow Chart - Acquisition date calculation

Answer 9

CAR- common stock, APIC and retained earnings ( of the sub)
MINUS: IN- investment in Sub and noncontrolling interest
( total paid FV of the sub)
- balance sheet FV adjustment
- indentifiable intangible assets 
difference is 
debit : Goodwill
credit : Gain

Question 10

Investment in Subsidiary

Answer 10

• the original amount of the investment in the subsidiary account on the parent’s books is:
  Original Cost: measured by the fair value ( on the date of acquisition is completed ) of the consideration given ( debit: investment in sub)
  Business combination costs and expenses in acquisition are treated as follows:
• direct out of pocket costs such as finder’s fee or legal fees are expensed- DR: expense
• stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of stock issued
  ( DR: additional paid-in capital account)
• Stock registration and issuance costs such as SEC filing are a direct reduction of the value of the stock issued
  ( debit: additional paid-in capital account) of the parent
• Indirect costs are expensed as incurred ( debit: expense)
• bond issue costs are capitalized and amortized ( debit: bond issue costs)

Question 11

Noncontrolling Interest - reported in consolidated equity

Answer 11

• noncontrolling interest must be reported at fair value in the equity section of the consolidated balance sheet , separately from the parent’s equity
• this will include noncontrolling interest’s share of any goodwill ( even though there is no cost basis)
• reported on the balance sheet
• is calculated by multiplying the total subsidiary fair value times the noncontrolling interest percentage

Question 12

Noncontrolling Interest after the Acquisition date

Answer 12

- after the acquisition date the noncontrolling interest is accounted for using the equity method
BASE
Beginning noncontrolling interest 
\+ NCI share of subsidiary net income 
- NCI share of subsidiary dividends 
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Ending noncontrolling interest

Loss gets carried here too even if it creates a negative carrying balance

Question 13

Acquisition accounting for Net Income

Answer 13

• net income will only be included in consolidated financial statements at the acquisition date

Question 14

Acquisition accounting

Answer 14

• with acquisition accounting , the measurement of net assets are based on fair market value
• the fair market value of finished goods and merchandise inventory is based upon selling price less disposal costs at a reasonable profit allowance

Question 15

to get to goodwill

Answer 15

• you compare what you paid to the FV of net assets

- if there is no identifiable intangible assets

Question 16

Parent Company’s Consolidated Stockholder’s Equity

Answer 16

• take parent company’s S/E plus fair value of noncontrolling interest of subsidiary

Question 17

Non controlling interest of Subsidiary

Answer 17

noncontrolling interest (beginning) ( this is acquisition price based)
+ non controlling share of income
- non controlling share of dividends
________________________________
noncontrolling interest ( ending balance)

Question 18

Parent share of net income

Answer 18

Retained Earnings of sub ( beginning balance)
+ Net Income
- dividends
________________________
Retained Earnings of sub ( ending balance)

Question 19

Consolidated Income

Answer 19

• consolidate income is the same as parent when the equity method is used

Question 20

Recognizing a gain

Investor- control to non control

Answer 20

• investor recognizes a gain or loss from the sale of stock
• then remeasures non-consolidating interest to FV, the FV adjustment is an additional gain or loss on the income statement

Question 21

goodwill for not 100%

Answer 21

recognize as if it is 100%

Question 22

Non control to Control

Answer 22

• you must make a FV adjustment
• they were using equity method you need to calculate the carrying value of the investment and then determine the fair value adjustment
• to calculate the fair value adjustment you need to use the prior ownership percentage
• then you calculate the gain or loss

Question 23

IFRS partial goodwill method

Answer 23

Goodwill= acquisition cost - fair value of net assets acquired ( only to the extent of percentage owned)
- US GAAP uses full goodwill method

Question 24

dividends

Answer 24

dividends affect noncontrolling interest but not retained earnings

Question 25

US GAAP- goodwill

Answer 25

(fair value of the entire subsidiary - subsidiary net assets fair value)