FAR 3

Question 1

Degree of Control Regarding Consolidation

Answer 1

1. Cost Method/ Do Not Consolidate = No Significant Influence (typically < 20%)
2. Equity Method/ Do Not Consolidate = Significant Influence but 50% or Less Ownership (typically 20%-50%)
3. Consolidate = Control (> than 50% ownership)

Question 2

Other Names for Cost Method

Answer 2

Available for Sale Method

Fair Value Method

Question 3

If dividend is greater than investor’s share of retained earnings, what must investor do?

Answer 3

Reduce the excess as a return of capital distribution

Dr. Cash
Cr. Dividend income (portion of earnings)
Cr. Investment in investee (excess of dividend and portion of earnings)

Question 4

Frequently Test Cost Concepts

Answer 4

1. “Investment in investee” is not adjusted for investee earnings.
2. “Investment in investee” is adjusted to FV
3. Cash dividends from investee are reported as income by the investor (parent)

Question 5

Equity Method - Excercises Significant Influence

Answer 5

Usually 20%-50% however even if less than 20% and exercises significant influence, equity method utilized.

1. Investment account increases by investor’s share of investee’s net income with a credit to investor’s income statement; equity in subsidiary/investee income.
2. Dist of dividends by investee reduces investment balance.

Question 6

Conversion from Cost Method to Equity Method and Affect on Income

Answer 6

Once cost method investor becomes equity method investor, investment account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment.

Question 7

Receipt of Dividends Treatment under Cost Method and Equity Method

Answer 7

Cost Method - recorded as income and does not affect investment account.

Equity Method- not recorded as increase, decrease in investment account.

Question 8

Acquiring Corp Should Adjust Following Items During Consolidation:

C.A.R. I.N. B.I.G.

Answer 8

C.- Dr. Common Stock- subsidiary
A.- Dr. APIC - subsidiary
R.- Dr. Retained Earnings - subsidiary

I.- Cr. Investment in subsidiary
N.- Cr. Noncontrolling interest

B.- Dr. Balance sheet adjustments to FV
I.- Dr. Identifiable I/A to FV
G.- Dr. Goodwill

Question 9

Business Combination Costs/Expenses in Acquisition Treatment

Answer 9

Finder’s fees, legal fees, direct out of pocket - Expensed

Stock Registration and issues costs such as SEC filing fees are reduction of value of stock - Debit APIC

Indirect costs- expensed

Bond issue costs- capitalized and amortized - (debit bond issue costs)

Question 10

Gain in Acquisition

Answer 10

FV is less than FV of 100% of underlying assets acquired

Question 11

Consolidated stockholder’s equity of parent company

Answer 11

Stockholder’s equity plus noncontrolling interest is included

Question 12

Intercompany Transaction Eliminations

Answer 12

Eliminate 100% of B/S - payables & receivables

Eliminate 100% of intercompany gross profit in ending inventory and fixed assets of parent or subsidiary

Eliminate 100% of income statement items

Question 13

IFRS Partial Goodwill Calculation in Acquisition

Answer 13

GW= Acq cost - FV of net assets acquired (meaning FV of net assets as whole x % of interest owned)

Question 14

Acquisition Method Goodwill - including IFRS

Answer 14

Full Goodwill - IFRS or GAAP

FV of sub- purchase price/ % purchased

Partial Goodwill - IFRS

Acq cost
- multiply % by FV and use #

Question 15

NCI Formula & How to= calculate initial NCI

Answer 15

Beg NCI
+ NCI % of subsidiary NI
<NCI % of subsidiary Div
= Ending NCI

Initial NCI:

Purchase price / % purchased = FV and then subtract purchase price to determine beginning NCI

Question 16

Calculation of Goodwill in Acquisition

Answer 16

GW= FV of Subsidiary - FV of Net Assets

Question 17

NCI when using partial GW method under IFRS

Answer 17

NCI = FV of net assets x % of NCI