FAR - Consolidations

Question 1

What is a VIE

Answer 1

Variable Interest Entity

• this is when an entity has control over anoretic entity, but not through voting rights
• When a company is the primary beneficiary of the VIE the company will consolidate the VIE’s holding onto its balance sheet
• A VIE is usually set up by the controlling entity to perform a specific business purpose

Question 2

What is a Primary Beneficiary of a VIE and how “test”if you are the controlling interest

Answer 2

Need all Three:

1 - the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights

2 - The obligation to absorb losses of the entity if/when they occur

3 - The right to receive returns when they occur ( compensation for taking the risk to absorb the entity’s losses

In summary

1 - do you make decisions for the entity

2-do you absorb their losses if they happen

3 - do you get returns if they happen

Must have all three to be considered the primary beneficiary of a VIE

Question 3

On the date of consolidation what is included on the F/S of the parent

Answer 3

On the date of consolidation:

B/S: parent and sub are combined

I/S - parent only

statement of cashflow - parent only

this is because they were not combined until this point

Question 4

What is the difference between a downstream and an upstream transaction

Answer 4

Downstream - parent sells to sub

Upstream - sub sells to parent

Question 5

What needs to be eliminated when you consolidate

RIB FR

Answer 5

Intercompany:

Receivables and payables

Revenues and expenses

Inventory

Fixed assets

Bonds

RIB FR

Question 6

What is the difference between GAAP and IFRS in business combinations

Answer 6

GAAP - contingent assets and liabilities can be recognized if criteria are met

IFRS - Contingent assets are not recognized

Question 7

Disclosures - nonquantitative

Answer 7

• cane and description of sub
• date of acquisition
• %of voting equity acquired
• reason for the combo
• description of how acquirer gained control
• qualitative factors that make up the goodwill amount

Question 8

Disclosures - acquisition date value disclosures

Answer 8

• Fair value of each class of consideration transferred
• Total amount transferred
• Fair value of non-controlling interest
• Techniques/inputs used to determine fair value

Question 9

Goodwill disclosures

Answer 9

• amount allocated to each reportable segment

- amount expected to be tax deductible

Question 10

Bargain Purchase Disclosures

Answer 10

• amount of gain
• where ether gain shows on the F/S
• Description of basis for gain

Question 11

Publicly Traded Entity Disclosures

Answer 11

• Amount of post - combination revenue and earning of sub included in consolidated income
• Revenue and earning s for period as though combination occurred at beginning of period

Question 12

when do you prepare consolidated f/s

Answer 12

• when one company has controlling financial interest in another

can also do it when “ its useful to financial statement users”

• like when two or more companies are under common control
• or when two or more companies are und er common management

Question 13

What is considered a “ majority voting interest”

Answer 13

It is GREATER than 50% of the directly or indirectly owned outstanding VOTING shares of another entity

Question 14

When there is a combination, what expenses are considered expenses that would be included in net income as part of a business combination

Answer 14

Expense:
direct costs like finder’s fees and consulting fees are expensed in period they occur, attorney fees, appraiser fees, cost stop print new stationary, new training manuals

The exception:
The costs of issuing securities - registration fees -

These fees reduce the amount recognized as proceeds -

Costs of issuing equity securities - reduce APIC

Costs of issuing debt securities - are capitalized and amortized as debt issue costs

Question 15

Under the acquisition method what do you do with the direct costs of combination (not registration and issuance costs)

Answer 15

they are expensed in the period incurred as a deduction in determining net income

Question 16

If you have controlling interest over Co B and they have controlling interest over Co. C - how do you report?

Answer 16

You use consolidation accounting for both B and C

Question 17

What do you do when one company is a wholly owned subsidiary of another - at the end of the year

Answer 17

The books are kept separately, but the Parent will reported consolidated statements

Exception when control is temporary or control is not held bytes majority owner

Question 18

When you combine business what are the rules for valuing Inventory including Work in Process, and Finished Goods, and raw material s

Answer 18

• Raw Materials should be valued at Replacement Cost
• WIP - be valued at selling price less cost to complete, cost of disposal, and a reasonable profit
• Finished Goods - Selling price less costs of disposal and a reasonable profit

Question 19

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?

Answer 19

70,000 = gain

amount paid by parent =
shares + contingent consideration (200K +10K)= 210

Value of sub = fair value of assets (350) - Fair value of liabilities (70K) = 350-70 = 280

the gain is the difference between the two:

paid 210 for 280value is a 70K gain

JE at acquisition:

dr. Investment in sub 280,000
cr. C/S (par) 20K * $1 20,000
cr APIC 180,000
cr Cash (contingent consideration) 10,000
cr Gain on bargain purchase 70,000

the direct acquisition costs would just be expensed:

dr acquisition costs 15,000
cr cash 15,000

Question 20

what do do when you have intracompany receivable to each other in a consolidation or combination ( less than 100$):

Mr. & Mrs. Dart own a majority of the outstanding capital stock of Wall Corp., Black Co., and West, Inc. During 20X0, Wall advanced cash to Black and West in the amount of $50,000 and $80,000, respectively. West advanced $70,000 in cash to Black. At December 31, 20X0, none of the advances was repaid. In the combined December 31, 20X0, balance sheet of these companies, what amount would be reported as receivables from affiliates?

Answer 20

The answer is $0

Intercompany profits and losses and intercompany receivables and payables are eliminated, so there would be no balance in receivables from affiliates.

When preparing combined financial statements, principles similar to those used for consolidated financial statements apply.

Question 21

what do you do with dividends if you have 100% interest or 90% interest in a company and each pay 100,000 in dividends

Answer 21

Dividends paid will be eliminated in a consolidation because you can’t pay a dividend to yourself

-the 10% that is paid your non controlling interest (10,000 because you own 90%) is recorded as a reduction of the non-controlling interest

Question 22

How do you record a gain on a bargain purchase in a business acquisition

Answer 22

a gain will be recorded at the acquisition date to recognize the bargain purchase

dr Investment ( at fair value) X + Y
cr cash X
cr Gain on bargain purchase Y

Question 23

Under IFRS when must an impairment loss be recognized and how is it allocated

Answer 23

first recognized when CGU ( cash generating unit) is less than the carrying amount if the CGU

It is then first allocated to goodwill

Question 24

what do you do when you buy controlling interest in a company an d decide to move the head quarters

Answer 24

the cost of relcoating may be partially or fully capitalized when incurred, but does not go into the acquisition cost

acquisition cost = fair value of the consideration given in exchange for a controlling financial interest

Question 25

How do you calculate total assets on a consolidated balance sheet

Answer 25

Total Assets include:

Parents assets
- investment in sub
= parents assets
 \+ Sub assets adjusted for carrying value and fair value on acquisition date
\+ goodwill net of amortization

Question 26

What do you do if you owned 25% of a company and then later purchased another 75% so you now own 95%

Answer 26

In a business combo that is a purchase - it will include 100% of parent’s income for the period and the proportionate amount for the sub so

25% for the month up to the acquisition. and then 95% of net income from the time you buy it till the end of the year.

The remainder will be reported as a minority interest share of sub’s income

Question 27

How do you calculate current liabilities on a consolidated balance sheet

Answer 27

Total Current liabilities will include:

Parents amount: 30,000
+ sub’s amount adjusted to fair value: 10,000
+ any new current liabilities included in the combo

Example borrowed 60,000 to pay for acquisition due in 10 equal annual installments - so current portion is $6,000

Total Liabilites: 30,000 + 10,000 + 6,000 = 36,000 total current liabilities

Question 28

when doing consolidated statement show do you report RE

Answer 28

The stockholder equity accounts of the subsidiary are eliminated along with investment accounts on the parents balance sheet -

Therefore RE reported would only equal the parent’s Retained Earnings

Question 29

What do you do with Inventory in consolidations

Answer 29

The difference between inventory on a consolidation is the profit in intracompany sales

so you take the difference between the two - 3000

and must multiple by the gross profit margin to get the amount of inventory

profit = 1/3 of COGS so 3000/.3333 = 9000 = the carrying amount of inventory that the sub purchased from the parent

Question 30

what dividends are reported on the consolidated financial statements

Answer 30

only those of the aquirer

The aquirees are eliminated as an intracompany transaction

That means that if Prides owns 80% of Simba and Simba owns 10% of Pride

and both pay a dividend here is what happens

On consolidated statement - SImba’s dividends are totally eliminated

Prides dividends are reported on the consolidated f/s, but only the amount paid to others (not simba) so 90% (because simba owns 10% of the dividends)

Question 31

What do you do with advances between consolidated co

Answer 31

you eliminate then

Question 32

How is this item handled in a consolidation on the acquisition date:

In process research costs
$1,320,000

Answer 32

Inprocess research costs are “identifiable intangible assets”

Recorded at Fair Value with goodwill included

Total Assets
1,320,000

Question 33

How is this item handled in a consolidation on the acquisition date:

Legal Fees paid to reimburse shareholders

Answer 33

These are expensed ( not capitalized) - NOT part of acquisition costs

so will be expensed to profit and loss at time of aquisition

Profit and Loss 300,000

Question 34

How is this item handled in a consolidation on the acquisition date:
No compete agreement with former owners Fair Value 550,000

Answer 34

This is considered an identifiable intangible that is recognized at its fair value in total Assets

Total Assets:
550,000

Question 35

How is this item handles in a consolidation on the acquisition date: estimated post acquisition restructuring costs $265,000

Answer 35

Post restructuring posts are not recognized until they occur so they will Not be part of the business combination

$0

and will be expensed as they occur

Question 36

How is this item handles in a consolidation on the acquisition date: contingent consideration:

FV - 750,000

Answer 36

Contingent Consideration is liability because it is money you owe to former owners. It will be paid if certain conditions are met - it is a liability

So add at Fair Value to liabilities 750,000

Question 37

Goodwill - how do you calculate in a consolidation

Answer 37

Fair Value of $ transferred
+ previously owned amount
+ amount of non controlling interest
- Fair Value of net identifiable assets of acquired

= goodwill

Question 38

what kind of statement do a corporation with a majority-owned subsidiary prepare

Answer 38

consolidated F/S

Question 39

What kind of statements do corporations with common individual owners prepare

Answer 39

• neither consolidated nor combined F/S - because do not have control of each corporation

Question 40

what kind of f/s do several corporations with related operations owned by one individual prepare

Answer 40

combined f/s

Question 41

what kind of f/s do one individual owns several corporations

Answer 41

combined f/s

Question 42

Under IFRS - when is goodwill created - just like GAAP

Answer 42

as a result of a business combination where the total fair value of consideration, non controlling interest, retained investment exceed the fair value of the underlying her assets of the acquiree

Question 43

What are the guidelines for assigning amounts to inventory - raw materials, WIP, Finished goods

Answer 43

raw materials - replacement costs

WIP - selling price less costs to complete, cost of disposal, and a reasonable profit

Finished goods - selling price less costs to dispose and a reasonable profit

Question 44

How do you calculate goodwill

Answer 44

It is the total consideration compared to the identifiable net assets acquired

Total consideration given =
purchase price
- fees to reimburse shareholders for legal fees

Net assets Aquired=

Total Net Assets - Total Net Liabilities

Net assets acquired =
PPE
+ In process research costs
+Noncompete agreement with former owners

Net Liabilites =
bonds payable
+ contingent consideration
Total Assets - Total Liabilities = Net assets

Total consideration - net assets = goodwill