FAR - Consolidations

Question 1

When would consolidated financial statements not be included for a majority owned subsidiary?

Answer 1

1. if the subsidiary is in bankruptcy
2. if the subsidiary operates under severe foreign currency exchange restrictions
3. other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the subsidiary
4. If subsidiary is undergoing legal reorganization

Question 2

What liabilities would not be a VIE?

Answer 2

short term payables (i.e. accounts payable)

Question 3

If Greg Inc acquires 100% of Leigh Inc and pays more than the FV of net assets acquired, how are assets and liabilities for Leigh reported in financial statements?

Answer 3

When the acquisition price exceeds the fair value of the net assets acquired, the assets and liabilities are valued at fair value

Question 4

How is a bargain purchase recorded by the acquirer?

Answer 4

The acquirer records a gain in earnings at acquisition date

Question 5

If an acquirer pays more than the FV of the identifiable assets, how is this recorded?

Answer 5

Recorded as goodwill on the acquirer’s balance sheet.

The steps to determine:

1. The balance sheet is adjusted to FV
2. Identifiable intangible assets are recognized at fair value
3. the difference between the FV and the acquisition price is goodwill

Question 6

If a 70% owned subsidiary pays a cash dividend, what is the impact on the Parent’s retained earnings and noncontrolling interest balances?

Answer 6

There is no impact on retained earnings. the receipt of 70% of dividends is just a transfer from subsidiary to parent.

The noncontrolling interest balance gets reduced by 30% of the dividend payment

Question 7

If Greg Inc acquires 70% of Leigh Inc. How does Greg Inc record Leigh’s income and dividend payments?

Answer 7

Non Controlling Interest gets increased by 30% of Leigh’s Net Income and reduced by 30% of Leigh’s dividend payment.

Question 8

During a business combination, how are the following cost recorded?

1. Acquisition related costs
2. Direct issue costs of equity
3. Direct issue costs of debt

Answer 8

1. Acquisition-related costs, such as finders’ and consultants’ fees and general administrative costs, are expensed as incurred.
2. Direct issue costs of equity (underwriting, legal fees, etc.) are debited to additional paid-in capital. Does not impact Net Income
3. Issue costs of debt are reported as a direct deduction from the carrying amount of the debt and amortized. Does not impact Net Income.

Question 9

How is goodwill created?

Answer 9

1. Acquisition method - when the fair value is greater than the identity’s net assets
2. Equity Method - excess of the stock purchase price over the fair value of the net assets
3. Maintaining goodwill - costs associated with maintaining, developing, or restoring goodwill. THESE ARE NOT CAPITALIZED

Question 10

At what level is goodwill reported and tested?

Answer 10

at the reporting unit level – a reporting unit is an operating segment or one level below an operating segment

Question 11

How is goodwill tested for impairment?

Answer 11

it has to be tested at least annually. does not matter when as long as it is the same time every year. Also, if there is a triggering event (macroeconomics, financial performance, etc) then must perform goodwill test

the first step is the qualitative assessment. if this assessment indicated that there is a greater than 50 percent chance of impairment, then need perform the quantitative test (FV compared to BV)…

if qualitative assessment does not indicate impairment then NO impairment

Question 12

What of the following costs are expensed during a business combination?

Registering debt securities, legal fees, and due diligence costs

Answer 12

legal fees and due diligence costs are expenses. registration costs are capitalized then amortized.

Question 13

How is the following entry recorded for an 100% acquisition:

Greg Inc issued 250 shares of stock to acquire Leigh Inc. The par value was $1 and the FMV was $750 on that date. $10 in stock registration fees and $5 in legal fees were paid.

Answer 13

The entry would be:

Debit: Legal Expense $5
Debit: Investment $750
  Credit: C/S $250
  Credit: APIC $490
  Credit: Cash $15

Question 14

When a company acquires more than 50% of another company and the acquisition price is greater than the fair value of the net assets acquired, How does the acquiring company recored the acquirees assets and liabilities?

Answer 14

They are recorded at fair value

Question 15

Under acquisition accounting, how does inventory of the acquiree get recorded?

Answer 15

Finished goods and merchandise inventory are based on selling price less the disposal costs and a reasonable profit.

Raw materials are based on replacement costs

WIP are based on selling price less the disposal costs, costs to COMPLETE, and a reasonable profit

Question 16

If Greg own 70% of Leigh, what is the impact on RE and Noncontrolling Interest when a $100 dividend is paid?

Answer 16

no impact on RE but $30 reduction to NCI

Question 17

Greg paid $300 for 75% of Leigh, what is the NCI amount?

Answer 17

$100 for NCI