far 3-6 Acquisition Method

Question 1

Acquisition Method:

In a business combination accounted for as an acquisition, the subsidiary may be acquired for __________________, etc.

Answer 1

cash, stock, debt securities

Question 2

Journal entry to record the acquisition for cash:

Answer 2

Dr Investment in subsidiary

Cr Cash

Question 3

Journal entry to record the acquisition for parent common stock (USE FV AT DATE TRANSACTION CLOSES), not announcement date:

Answer 3

Dr Investment in subsidiary
Cr Common stock (parent at par)
Cr A.P.I.C. (parent / FV - par)

Question 4

Application of the Acquisition Method:

The acquisition method has two distinct accounting characteristics:

Answer 4

(1) 100% of the net assets acquired (regardless of percentage acquired) are recorded at FAIR VALUE with any unallocated balance remaining creating goodwill.
(2) when the companies are consolidated, the subsidiary’s entire equity (including its common stock, A.P,I.C., and retained earnings) is eliminated (not reported).

Question 5

Pass key

The parent’s basis is the acquisition price. The easy to remember formula is:

Answer 5

Fair Value = Acquisition price = Investment in subsidiary

Question 6

Application of the Acquisition Method

Answer 6

CAR IN BIG

CAR 1. Common Stock, A.P.I.C. and Retained Earnings of Subsidiary are Eliminated (SUB’S OLD BOOKS)

I 2. Investment in Subsidiary is eliminated (PARENT’S BOOKS)

N 3. Noncontrolling Interest (NCI) is Created (If not 100% owned)

B 4. Balance Sheet of Subsidiary is Adjusted to Fair Value (100% assets & liabilities)

I 5. Identifiable Intangible Assets of the Subsidiary are Recorded at their Fair Value

G 6. Goodwill (or Gain) is Required

Question 7

Consolidating Workpaper Eliminating Journal Entry [CAR IN BIG]

Answer 7

C Dr Common stock - subsidiary
A Dr A.P.I.C. - 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 Intangible assets to FV
G Dr Goodwill

Question 8

B. “CAR” - Subsidiary Equity Acquired [CAR in big]

1. CAR Formula

Answer 8

Assets - liabilities = Equity
Assets - Liabilities = Net book value
Assets - Liabilities = CAR

Question 9

2. Acquisition Date Calculation (of CAR):

The determination of the difference between book value and fair value is computed as of the _________________.

Answer 9

acquisition date

When the subsidiary’s financial statements are provided for a subsequent period, it is necessary to reverse the activity (income and dividends) in the subsidiary’s retained earnings in order to squeeze back into the book value (Assets - Liabilities = CAR) at the acquisition date (which is beginning RE).

Question 10

C. Investment in Subsidiary [car In big]:

1. Original cost is measured by the ____________ (on the date the acquisition is completed) of the consideration given (Debit: investment in sub).

Answer 10

fair value

Question 11

C. Investment in Subsidiary [car In big]:

2. Business combination costs/expenses in an acquisition are treated as follows:

Answer 11

NOTHING IS CAPITALIZED TO “INVESTMENT IN SUB.”

a. Direct out-of-pocket costs such as a finder’s fee or a legal fee are expensed (Debit: EXPENSE).
b. Stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of the stock issued (Debit: ADDITIONAL PAID-IN CAPITAL account of the parent).
c. Indirect costs are expensed as incurred (Debit: EXPENSE).
d. Bond issue costs are capitalized and amortized (Debit: BOND ISSUE COSTS).

Question 12

D. Noncontrolling Interest (NCI)　 [car iN big]
=　Ｒｅｐｏｒｔ　ｉｎ　ｃｏｎｓｏｌｉｄａｔｅｄ　ｅｑｕｉｔｙ

Noncontrolling interest must be reported at __________ in the equity section of the consolidated balance sheet, separately from the　parent’s equity.

Answer 12

fair value

This will include the noncontrolling interest’s share of any goodｗill (even though there is no cost basis).

Ｅｖｅｒｙｔｈｉｎｇ, ｅｖｅｎ ＮＣＩ ｉｓ ａｔ １００％ ＦＶ

Question 13

Noncontrolling Interest (NCI)：
Balance Sheet

The consolidated balance sheet will include 100% of the subsidiary’s _______ and ________ (not the sub’s equity/CAR). The noncontrolling interest’s share of the subsidiary’s _________ should be presented on the balance sheet as part of stockholders’ equity, separately from the equity of the parent company.

Answer 13

assets, liabilities, net assets

Question 14

Noncontrolling Interest (NCI)：
Balance Sheet
(1) Acquisition Date Computation

Answer 14

Fair value of subsidiary
x Noncontrolling interest %
——————————————
Noncontrolling interest ——> In consolidated equity

Question 15

Noncontrolling Interest (NCI)：
Balance Sheet
(2) Noncontrolling Interest after the Acquisition Date:

After the acquisition date, the noncontrolling interest reported on the
consolidated balance sheet is accounted for using the equity method. Formula?

Answer 15

Beginning noncontrolling interest B
+ NCI share of subsidiary net income A
– Nel share of subsidiary dividends S
——————————————————-
Ending noncontrolllng interest E

Question 16

Noncontrolling Interest (NCI)：
Income Statement:

The consolidated income statement will include 100% of the _________ revenues and expenses (AFTER THE DATE OF ACQUISITION).

Answer 16

subsidiary’s

The consolidated income statement should show, separately, consolidated net income, net income attributable to the noncontrolling interest, and net income attributable to the
parent.

Question 17

Noncontrolling Interest (NCI)：
Income Statement

(1) Computation of Net Income Attributable to the Noncontrolling Interest

Answer 17

Subsidiary’s income
< Subsidiary’s expenses>
—————————————-
Subsidiary’s net income
X Noncontrolling interest %
—————————————–
Net income attributable to the noncontrolling interest ———> GOES TO NCI - Retained Earnings (in general ledger)

Question 18

[car in BIG]
E. Balance Sheet Adjustment to Fair Value, Identifiable Intangible Asset Adjustment to Fair Value, and Goodwill (gain)

1. Fair Value of Subsidiary Reconciliation to Book Value of Subsidiary Net Assets:

Any difference between the FV of the subsidiary and the BV acquired will require an adjustment to the following three areas:

Answer 18

B a. Balance Sheet Adjustment of the subsidiary’s records from book value to FV.

I b. Identifiable Intangible Assets related to the acquisition of the subsidiary are recorded at FV.

G c. Goodwill is recognized for any excess of the FV of the subsidiary over the FV of the subsidiary’s net assets. If the FV of the subsidiary is less
than the FV of the subsidiary’s net assets, a gain is recognized.

Question 19

Pass key　（ＩＭＰＯＲＴＡＮＴ）

CARRY AS ASSET　=

Answer 19

In Process Research and Development

－Recognize as an intangible asset separately from goodwill at the acquisition date (need valuation).
－Ｄｏ not immediately write off.
－In process research and development meets the definition of an “asset”－it has probable future
economic benefit.
－－－－－－－－－－－－－－－－－－－－－－－－－－－
－ＥＸＰＥＮＳＥ　＂ＣＯＮＴＩＮＵＩＮＧ＂　Ｒ＆Ｄ　ＴＯ　ＣＯＭＰＬＥＴＥ　ＰＲＯＪＥＣＴ
－ＬＡＴＥＲ：
　　１．　ＰＲＯＪＥＣＴ　ＳＵＣＣＥＳＳ－＞ＡＭＯＲＴＩＺＥ　ＩＰ　Ｒ＆Ｄ
　　２．　ＰＲＯＪＥＣＴ　ＦＡＩＬＵＲＥ－＞ＩＭＰＡＩＲ／ＷＲＩＴＥ　ＯＦＦ　　　　　　ＩＰ　Ｒ＆Ｄ　

Question 20

２．Determining Acquisitions with Goodwill （ｃａｒ　ｉｎ BIG）

Answer 20

Ｂ　　ａ．Step 1/Balance Sheet Adjusted to Fair Value
Ｉ　　　ｂ．Step 2/ldentifiable Intangible Assets to Fair Value
　　　(1) Finite life
　　　AＭＯＲＴＩＺＥ over the remaining life. Subject to the 　　　　two-step impairment test.
　　　(2) Indefinite life
　　　Do not amortize. Subject to the one-step　　　　ＩＭＰＡＩＲＭＥＮＴ　ＴＥＳＴ． 　　
Ｇ　　c. Step 3/Goodwill
　　　－ｎｏｔ　ａｍｏｒｔｉｚｅｄ
　　　－ｔｅｓｔ　ｆｏｒ　ｉｍｐａｉｒｍｅｎｔ

Question 21

3. Determining Acquisition with Gain

Answer 21

a. Step 1-Balance Sheet Adjusted to Fair Value
b．Step 2-ldentifiable Intangible Assets to Fair Value
c. Step 3-Gain

Question 22

Ｐａｓｓ　ｋｅｙ

It is important to note that even if the parent acquired ＿＿＿＿　１００％ of the subsidiary, the adjustment of the subsidiary’s　assets to ＿＿＿ (purchase price） will always be the FV (100%).

Answer 22

less than，

FV

Question 23

G. Consolidated Statement of Cash Flows
1. Period of Acquisition
Ｔｈｅ　following steps are necessary：

Answer 23

a. The net cash spent or received in the acquisition must be reported in the　investing section of the statement of cash flows.

b. The assets and liabilities of the subsidiary on the acquisition date must be added　to the parent’s assets and liabilities at the beginning of the year in order to
determine the change in cash due to operating. investing. and financing activities　during the period.

Question 24

G. Consolidated Statement of Cash Flows

2. Subsequent Periods

Answer 24

a. When reconciling net income to net cash provided by operating activities, total　consolidated net income　should be used.
b. The financing section should report dividends paid by the subsidiary to　noncontrolling shareholders.Dividends paid by the subsidiary to the parent　company should not be reported.
c. The investing section may report the acquisition of additional ｓｕbsidiary shares　by the parent if the acquisition was an open market purchase.

Question 25

H. Step Acquisition-Consolidation and Deconsolidation

ａ．　Non-control －＞ Control (step transition)

Answer 25

Ａｃｃｏｕｎｔｉｎｇ　Ｔｒｅａｔｍｅｎｔ：
－Remeasure previously held equity　interests to fair value．（ＰＲＥＶＩＯＵＳ　Ｃ／Ｓ　ＡＤＪ．　ＴＯ　ＦＶ）
－The income statements will reflect　this adjustment．　（ＲＥＣＯＧＮＩＺＥ　ＩＮ　Ｉ／Ｓ）

Question 26

ｂ．　Control －＞ “More” or “less” control

Answer 26

－Equity transaction (no gaｉn or loss　recognized on the income statement－additional paid-in capital adjusted)　（ＴＲＥＡＴ　ＬＩＫＥ　ＴＲＥＡＳＵＲＹ　ＳＴＯＣＫ　ＴＲＡＮＳＡＣＴＩＯＮＳ）

Question 27

ｃ．Control －＞ Non-control

Answer 27

－Recognize the gain or loss of the sale　of the stock．　（ＳＡＬＥ=G/L–>I/S)
－Remeasure the remaining non-consolidating interest to fair value．(ADJ. REMAINING C/S TO FV)
－Recognize the adjustment to fair　value on the income statement．(RECOGNIZE IN I/S)

Question 28

Pass key

If the parent acquires the remaining 40% from the noncontrolling Interest shareholders,

Answer 28

it is an equity transaction (not an acquisition). No gain or loss is recognized on the Income statement. Additional paid-in capital Is adjusted.

Question 29

Under Acquisition Method Disclosures, in a business combination achieved in stages, the following:

Answer 29

a. The acquisition date fair value of the equity interest in the acquiree held before the acquisition date.
b. The amount of any gain or loss recognized as a result of remeasuring the equity interest held before the business combination to fair value.

c. The valuation techniques used to measure the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the
business combination and the inputs used to measure fair value.

Question 30

Under Acquisition Method Disclosures, if the acquirer is a public entity, the following:

Answer 30

a. The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.

b. The revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during
the year had been as of the beginning of the annual reporting period (supplemental pro forma information).

c. If comparative financial statements are presented, the revenue and earnings of the combined entity for the comparable prior reporting period as though the
acquisition date for all business combinations that occurred during the current year had occurred as of the beginning of the comparable prior reporting period.

Question 31

Consolidation Disclosures:

Consolidated financial statements should disclose the consolidation policy that is being followed.

Answer 31

1. Parent companies with one or more less-than-wholly-owned subsidiaries should disclose the following each reporting period:
   a. Separately, on the face of the consolidated financial statements:
   (1) The amounts of consolidated net income and consolidated comprehensive income.
   (2) The amounts attributable to the parent and noncontrolling interest.

b. In the notes or on the face of the consolidated income statement, amounts attributable to the parent for income from continuing operations. discontinued operations, and extraordinary items.
c. In the consolidated statement of changes in equity or the notes, a reconciliation at the beginning and end of the period of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interest. The reconciliation should separately disclose net income, transactions with owners, and each component of other comprehensive income.
d. In the notes, a schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent.

Question 32

Pass key

Acquired (purchased) goodwill is not amortized;

Answer 32

it is subject to the impairment test.

Question 33

In Acquisition Method, the investment is valued at the __________ of the consideration given or the __________ of the consideration received, whichever is the more clearly evident.

Answer 33

fair value, fair value

Question 34

In Acquisition Method, he accounting for an acquisition begins at ___________________.

Answer 34

the date of acquisition

Question 35

In Acquisition Method, 100% of the net assets acquired (regardless of percentage acquired) are recorded at ____________ .

Answer 35

FAIR VALUE

Question 36

Acquisition Method:

when the companies are consolidated, the subsidiary’s entire equity (including its common stock, A.P,I.C., and retained earnings) is _______________ (not reported).

Answer 36

eliminated

Question 37

If there is an excess of the fair value of the subsidiary (acquisition cost plus any noncontrolling interest) over the fair value of the subsidiary’s net assets, then the remaining/excess is debited to create _________.

Answer 37

Goodwill

Question 38

If there is a deficiency in the acquisition cost compared to the subsidiary’s fair value, then the shortage/negative amount is recorded as a ________.

Answer 38

gain

Question 39

C. Investment in Subsidiary [car In big]:

Direct out-of-pocket costs such as a finder’s fee or a legal fee are ____________.

Answer 39

expensed (Debit: EXPENSE).

Question 40

C. Investment in Subsidiary [car In big]:

Stock registration and issuance costs such as SEC filing fees are _________________________

Answer 40

a direct reduction of the value of the stock issued (Debit: ADDITIONAL PAID-IN CAPITAL account of the parent).

Question 41

C. Investment in Subsidiary [car In big]:

Indirect costs are __________________________

Answer 41

expensed as incurred (Debit: EXPENSE).

Question 42

C. Investment in Subsidiary [car In big]:

Bond issue costs are ______________________________

Answer 42

capitalized and amortized (Debit: BOND ISSUE COSTS).

Question 43

Noncontrolling Interest (NCI)：
Balance Sheet
(3) Allocation of Subsidiary Net Losses

Subsidiary ___________ are allocated to noncontrolling interest even if the allocation exceeds the equity attributable to the noncontrolling interest
(negative carrying balance).

Answer 43

net losses

Question 44

FV of Subsidiary (Noncontrolling Interest at FV)

- FV of Subsidiary Net Assets =

Answer 44

Goodwill

Question 45

Fair value of Subsidiary Net Assets - BV of Subsidiary Net Assets =

Answer 45

Asset FV difference

Question 46

Gearty Co. acquires 60% of Foxy, Inc. for $69,000,000. The fair value of Foxy Inc. is $115,000,000 ($115,000,000x 60% = $69,000,000) Noncontroll1ng interest is $46,000,000 ($115,000,000)x 40% = $46,000,000)

Fair value of Foxy, Inc. (includes goodwill) $115,000,000
Fair value of Foxy, Inc. identifiable net assets $100,000,000
Book value of Foxy, Inc. net assets $ 80,000,000

Answer 46

Goodwill : $15.000,000

Increase to the FV of assets : $20,000,000

Question 47

[car in BIG]
E. Balance Sheet Adjustment to Fair Value, Identifiable Intangible Asset Adjustment to Fair Value, and Goodwill (gain)

1. Fair Value of Subsidiary Reconciliation to Book Value of Subsidiary Net Assets

Under the acquisition method, what is the fair value of the subsidiary?

Answer 47

the acquisition cost + any noncontrolling interest at fair value

On the acquisition date, the FV of the subsidiary must be compared to the respective assets and liabilities of the subsidiary.

Question 48

Company J acquired all of the outstanding common stock of Company K in exchange for cash. The acquisition price exceeds the fair value of net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K?

Answer 48

Both are fair value.
When the acquisition price exceeds the fair value of net assets acquired, assets and liabilities should be
presented at fair value.