FAR - Business Combinations and Consolidations

Question 1

What is reported on the consolidated balance sheet under AR from investees?

a) 50k cash advance to A. Company owns 30% of voting stock and uses equity method.
b) 160k from B for admin services. B is 100% owned and included in company statements.
c) 100k from C. C is a 90% owned unconsolidated subsidiary of company.

Answer 1

Only include A and C (unconsolidated subsidiaries)

Question 2

What are consolidated retained earnings accounted for under the full equity method?

Answer 2

Consolidated RE will be the RE of the parent company. This is true because the NI reported on the parents income statement includes both the parent companys income and the parents share of the subsidiary’s income. Same applies for net income.

Question 3

A business combination is accounted for as an acquisition. Which should be deducted to find the combined NI for the current period? Direct costs of acquisition and General expenses related to acquisition

Answer 3

Both should be deducted. Business acquisition costs should be treated as an expense in the period in which costs are incurred. Finders and consultants fees should be expensed. SEC registration costs are netted against the additional paid in capital account (not capitalized).

Question 4

In an acquisition where the appraisal values of assets exceeds the acquisition price, how is the excess appraisal value reported?

Answer 4

Bargain purchase occurs when FV of net identifiable assets exceeds consideration paid and is treated as a gain in the current period. Negative goodwill is allocated only to noncurrent assets.

Question 5

Person owns 100% CS of A and 90% CS of B. A paid 4k for remaining 10% in B. In a combined BS of the two corporations, what should be reported as total SE?
A SE = 400
B SE = 30

Answer 5

400+30-4 = 426
Combined FS is used to describe FS prepared for companies which are owned by the same parent or person. They are prepared combining all of the subsidiaries FS. Intercompany transactions should be eliminated in the same way as consolidated statements.

Question 6

When ownership is 51% of outstanding voting stock of a company, what method is used?

Answer 6

Consolidation method when greater than 50%. Equity or even cost may be more appropriate under unusual circumstances.

FV or amortized cost (aka lower of cost or market) when <20% owned
Equity or fair value when 20-50%
Consolidated (or equity) when 51-100%