F5 M3

Question 1

when is an investor considered to have parent status?

Answer 1

when the investor acquires 50% or more of voting stock (common stock) control of the investee

Question 2

non-controlling interest

Answer 2

-portion of net assets of a subsidiary that the parent does not have voting stock in
-reported at fair value of equity section in consolidated B/S, separate from parent’s equity

Question 3

controlling interest

Answer 3

-parent owns 50% or more of voting stock of sub’s net assets

Question 4

acquisition method characteristics

Answer 4

1) 100% of net assets (regardless of ownership %) recorded at fair value and any unallocated balance creates goodwill
2) when companies consolidated, sub’s entire equity is eliminated (not reported)

Question 5

items to be eliminated upon consolidation (CAR IN BIG)

Answer 5

1) C/S, APIC, and RE of subsidiary
2) Investment in subsidiary
3) noncontrolling interest
4) B/S adjustments to FV
5) Identifiable intangible assets to FV
6) Excess of fair value of sub over fair value of net assets

Question 6

consolidated workpaper eliminating entry journal entry

Answer 6

Dr. C/S - subsidiary
Dr. APIC - subsidiary
Dr. RE - subsidiary
Cr. Investment in subsidiary
Cr. Noncontrolling interest
Dr. B/S adjustments to FV
Dr. Identifiable intangible assets to FV
Dr. Goodwill

Question 7

fair value of subsidiary

Answer 7

acquisition cost + noncontrolling interest

Question 8

what happens when the acquisition cost < fair value of subsidiary?

Answer 8

shortage/negative amt is recorded as a gain

Question 9

goodwill calculation

Answer 9

=fair value of subsidiary - fair value of subsidiary’s net assets

Question 10

asset fair value differences

Answer 10

=fair value of subsidiary’s net assets - book value of subsidiary’s net assets

Question 11

intercompany inventory/merchandise transactions

Answer 11

1) total amt of intercompany sale and COGS must be eliminated prior to consolidating
2) intercompany profit must be eliminated from ending inventory and COGS of purchasing related party
3) 100% of profit eliminated even if parent’s ownership is less than 100%
4) intercompany profit in PY recognized by selling related party is eliminated through a debit to RE

Question 12

intercompany sale and merchandise transactions journal entry

Answer 12

Dr. Intercompany sales
Dr. RE (profit in beg. inventory)
Cr. Intercompany COGS
Cr. COGS (intercompany profit in COGS of purchasing related party)
Cr. Ending inventory (intercompany profit in inventory remaining)

Question 13

inventory sold to outsiders
inventory still on hand

Answer 13

-correct COGS
-correct ending inventory

Question 14

intercompany profit on sale calculation

Answer 14

=intercompany sales - intercompany COGS

Question 15

COGS calculation

Answer 15

beginning inventory
+ purchases
- ending inventory
= COGS

Question 16

intercompany bonds transactions

Answer 16

1) debt considered retired and gain or loss recognized on consolidated I/S when one affiliated company takes on its third party’s debt
2) gain or loss not reported on either books, but eliminated

Question 17

gain or loss recognized on retired debt calc

Answer 17

= price paid to acquire debt - book value of debt

Question 18

journal entry when affiliate takes related party debt

Answer 18

Dr. Investment in affiliate bonds (amt paid)
Cr. Cash

Question 19

eliminating journal entry for bond and gain/loss recognized for extinguishment of bond

Answer 19

Dr. Bonds payable (face value or cost)
Dr. Premium
Cr. Discount
Cr. Investment in affiliate bonds
Cr. Gain on extinguishment
Dr. Loss on extinguishment

Question 20

elimination of intercompany bond transaction in subsequent yrs

Answer 20

-realized but unrecorded gains/losses on extinguishment of bond adjusted to RE
-noncontrolling interest would be adjusted if bonds were sold to subsidiary

Question 21

intercompany sale of land

Answer 21

-gain/loss on sale of land remains unrealized until sold to outsider

Question 22

journal entry to record sale of land to affiliate

Answer 22

Dr. Cash
Cr. Land
Cr. Intercompany gain on sale of land

Question 23

eliminating entry for sale of land to affiiliate

Answer 23

Dr. Intercompany gain on sale of land
Cr. Land (price paid for land - cost of land)

Question 24

non-controlling interest in relation to sale of bonds to affiliate

Answer 24

-non-controlling interest would be adjusted for the consolidating entry if bonds were sold by subsidiary
-gain would be allocated to non-
controlling interest
-if parent issued bonds, no impact on non-controlling interest

Question 25

sale of land in subsequent years

Answer 25

-until land is sold to outsider, RE debited and land credited to eliminate intercompany profit -gain would be closed to RE -no need to divide sale of land if sold by parent to sub

Question 26

when is the intercompany sale of fixed assets recognized?

Answer 26

-gain or loss on sale is unrealized until asset is sold to an outsider

Question 27

journal entry to record sale of fixed asset from sub to parent

Answer 27

Dr. Cash Dr. Accum depreciation Cr. Fixed Asset (original cost) Cr. Intercompany gain on sale Dr. Intercompany loss on sale (plug)

Question 28

eliminating entry to record sale of fixed asset from sub to parent

Answer 28

Dr. Intercompany gain on sale Cr. Intercompany loss on sale Cr. Fixed Asset (depreciation amt for parent) Cr. Accumulated depreciation (original amt from sub)

Question 29

how to calculate the depreciation to be eliminated

Answer 29

1) NBV of asset / remaining lives 2) new cost of asset (amt paid by affiliate) / remaining lives 3) take difference of steps 1 and 2

Question 30

journal entry to eliminate excess depreciation (also applicable for subsequent years)

Answer 30

Dr. Accumulated depreciation Cr. Depreciation expense

Question 31

subsequent year journal entries for fixed assets

Answer 31

-intercompany gain/loss and excess depreciation closed to RE -adjust RE, and noncontrolling interest for original gain/loss - excess depreciation previously recorded

Question 32

journal entry for subsequent year for fixed assets

Answer 32

Dr. RE (gain - excess depreciation) Cr. Fixed Asset (amt of depreciation) Cr. Accum depreciation (original accum - excess depreciation)

Question 33

consolidated statement of cash flows (period of acquisition)

Answer 33

1) net cash spent or received in acquisition must be reported in investing section of statement of cash flows 2) assets and liabilities of sub on acquisition date should be added to parent's assets and liabilities at beginning of yr to determine change in operating, financing, and investing activities

Question 34

consolidated statement of cash flows (subsequent periods)

Answer 34

1) in reconciling net income to net cash provided by operating activities, total consolidated net income (net income of parent and noncontrolling interest used 2) financing section reports dividends paid by sub to noncontrolling shareholders. Dividends to parent not reported 3) investing section reports acquisition of additional sub shares by parent if acquisition was open market purchase

Question 35

calculating portion of COGS and ending inventory related to intercompany profit

Answer 35

1) Intercompany profit = Sales - COGS 2) use COGS formula to determine COGS = (beg inv. + purchases = COGS available - ending inv.) 3) divide COGS and ending inventory from total COGS available sale for purchaser to determine ratios 4) multiple respective ratios to intercompany profit

Question 36

parent's stockholder's equity calculation

Answer 36

C/S + APIC +Non controlling interest + RE

Question 37

noncontrolling interest calculation

Answer 37

acquisition cost = FV of parent * ownership %

Question 38

noncontrolling share of net income

Answer 38

beginning RE + net income (plug) - dividends = ending retained earnings *take net income plug * noncontrolling %