FAR-F4-M4-Acquisition Method Part 1 Flashcards
What is the journal entry the parent company records on its books when it acquires a subsidiary in exchange for parent common stock?
Journal entry to record the acquisition for parent common stock (use fair value of consideration given at closing date, not announcement date)
Dr. Investment in Subsidiary (fair value at closing date)
Cr. Common Stock (Parent’s at par)
Cr. Additional Paid in Capital (Parent @ FV less Par)
What is the parent’s basis in the acquisition?
The parent’s basis in the acquisition is the acquisition price paid for the subsidiary, which is what is recorded in the “Investment in Subsidiary” asset account
How are business combination costs / expenses in an acquisition treated?
Direct and indirect costs and expenses such as consulting fees and legal fees and finders fees and due diligence costs are expensed when incurred.
Example combined Journal Entry:
Dr. Legal and Consulting Expenses $110,000
Dr. Investment in Subsidiary (200,000 * $12 fair value) 2,400,000
Cr. Common Stock (200,000 * $5 par value) ($1,000,000)
Cr. APIC ($12-$5)*200,000 - $35,000 legal expenses) ($1,365,000)
Cr. Cash ($110,000+$35,000) ($145,000)
Example of JE separately:
Dr. Legal and Consulting Fees 110,000
Cr. Cash ($110,000)
How are stock registration and issuance costs treated?
Stock registration and issuance costs such as SEC filing fees are direct reduction of the value of the stock issued (Dr. Additional paid in capital account)
Example combined Journal Entry:
Dr. Legal and Consulting Expenses $110,000
Dr. Investment in Subsidiary (200,000 * $12 fair value) 2,400,000
Cr. Common Stock (200,000 * $5 par value) ($1,000,000)
Cr. APIC ($12-$5)*200,000 - $35,000 legal expenses) ($1,365,000)
Cr. Cash ($110,000+$35,000) ($145,000)
Example of JE separately:
Dr. APIC $35,000
Cr. Cash ($35,000)
When preparing consolidated financial statements, the parent company must perform consolidation adjustments. What is the acronym for the journal entry adjustments that must be made by the parent company?
The acronym is, the CAR im IN is BIG
Dr. Common Stock (Subsidiary) - Subsidiary’s Equity is eliminated
Dr. Additional Paid in Capital (Subsidiary) - Subsidiary’s Equity is eliminated
Dr. Retained Earnings (Subsidiary) - Subsidiary’s Equity is eliminated
Cr. Investment in Subsidiary (Parents) - Parent’s Investment account is eliminated
Cr. Noncontrolling interest (Parents) - if not 100% owned, then noncontrolling interest is created
Dr. Balance sheet adjustments to fair value (Subsidiary B/S items are adjusted to fair value)
Dr. Identifiable Intangible Assets to fair value (subsidiary’s intangible assets are adjusted to fair value)
Dr. Goodwill or (Cr. Gain) - plug
What is the test to determine if Goodwill exists and therefore should be recorded by the Parent company when acquiring a subsidiary?
If the fair value of the subsidiary, is greater than fair value of the subsidiary’s net assets , then the excess is debited to create Goodwill
How is gain recognized rather than goodwill?
If the fair value of the subsidiary is less than the fair value of the subsidiary’s net assets, then the parent company records a gain.
What is the journal entry for a parent company to record the acquisition of a company in exchange for parent common stock?
Dr. Investment in Subsidiary XXX
Cr. Common Stock (parent at par) (XXX)
Cr. APIC ( parent @ fair value less par) (XXX)
What is the parent’s basis in the acquisition?
The parent’s basis in the acquisition is the acquisition price paid for the subsidiary, which is what is recorded in the “Investment in Subsidiary” asset account
The investment in subsidiary asset account is recorded at fair value of the consideration given.
An acquiring corporation using the acquisition method will need to report consolidated financial statements. The acquisition method involves journal entries involving the CAR im IN is BIG. The CAR section is to eliminate the common stock, APIC and Retained Earnings of the subsidiary (essentially the subsidiary’s equity aka NBV) Therefore consolidated equity will be equal to what in the consolidated balance sheet?
Consolidated equity will be equal to the parents equity balance PLUS any noncontrolling interest.
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Is the following statement true or false? The fair value of any portion of the subsidiary that is not acquired by the parent must be reported as noncontrolling interest in the equity section of the consolidated financial statement, separate from parent’s equity.
True. The fair value of any portion of the subsidiary that is not acquired by the parent must be reported as noncontrolling interest in the equity section of the consolidated financial statement, separate from parent’s equity.
Is the following statement true or false. The equity method is preferred. The advantage is that changes in the subsidiary’s equity are reflected in the parent’s investment in subsidiary account, which simplifies the elimination of the investment in subsidiary when the consolidated financial statements are prepared.
True. The equity method is preferred. The advantage is that changes in the subsidiary’s equity are reflected in the parent’s investment in subsidiary account which simplifies the elimination of the investment in subsidiary when the consolidated financial statements are prepared.
