FAR-F4-M5-Acquisition Method Part 2

Question 1

What is noncontrolling interest and how is it reported by the parent company?

Answer 1

Business combinations that do not establish 100% ownership of a subsidiary by a parent will result in a portion of the subsidiary’s equity (net assets) being attributed to noncontrolling shareholders. Noncontrolling interest must be reporting at fair value in the equity section of the consolidated balance sheet, separately from the parent’s equity. This includes the noncontrolling interests share of any goodwill.

Question 2

How is noncontrolling interest calculated at the acquisition date?

Answer 2

Noncontrolling interest amount = Fair value of Subsidiary * noncontrolling interest ownership %

Question 3

How is noncontrolling interest calculated AFTER the acquisition date?

Answer 3

Beginning noncontrolling interest
ADD NCI share of Subsidiary’s net income
LESS NCI Share of subsidiary’s dividends
EQUALS Ending Noncontrolling interest

Question 4

For purposes of identifying intangible assets that require adjustments to fair value when calculating Goodwill, what are the types of intangible assets?

Answer 4

In process research and development is considered an intangible asset, so are noncompete agreements, customer lists and unpatented technology.

Question 5

Is the following statement true or false? Contingencies are included in the calculation of the fair value of the subsidiary.

Answer 5

True.

Question 6

What are the different ways that noncontrolling interest can be calculated at the acquisition date?

Answer 6

Noncontrolling interest amount = fair value of subsidiary * noncontrolling ownership %

Noncontrolling interest at fair value = Fair value of subsidiary - Acquisition Cost

Question 7

How is the purchase price of an acquired company calculated?

Answer 7

Purchase Price = Fair Value of Subsidiary * % acquired.

Question 8

How is fair value of an acquired company calculated?

Answer 8

If purchase price = fair value of subsidiary * % acquired, then

fair value of subsidiary = purchase price / % acquired.

Question 9

In relation to the journal entries the CAR im IN is BIG, where BIG involves adjusting the following items to fair value,

Dr. Balance Sheet Adjustments
Dr. Intangible Assets
Dr. Goodwill

How do you determine the amount of adjustments that need to be made?

Answer 9

On the acquisition date, the fair value of the subsidiary must be compared with the assets and liabilities of the subsidiary. Any difference between the fair value of the subsidiary and the book value will require an adjustment to fair value.

Step 1: Balance sheet items of subsidiary must be adjusted to fair value. (assets and liabilities)
Step 2: Identifiable intangible assets of the subsidiary are recorded at their fair value.
Step 3: If there is any excess of the fair value of the subsidiary (acquisition cost + NCI) over the fair value of the subsidiaries net assets, then the remaining excess is debited to Goodwill. Step 4:

Question 10

Is in process research and development an intangible asset that can be adjusted to fair value?

Answer 10

Yes, in process research and development meets the definition of an asset because it has probable future economic benefit.

Question 11

What are some examples of Identifiable intangible assets that can be adjusted to fair value?

Answer 11

Computer software and licenses
technical drawings and manuals
customer lists
unpatented technology
in process R and D
noncompete agreements.

Question 12

In relation to the journal entry the CAR im IN is BIG, The G in BIG could either be a Dr. to Goodwill or a Cr. to record a gain. What is the general approach to calculating the gain on the acquisition of a company?

Answer 12

When acquiring a corporation / subsidiary with a fair value that is less than the fair value of 100% of the underlying assets acquired, then:

Step 1:
Fair value of subsidiary (purchase price)
LESS book value of subsidiary’s net assets
EQUALS total excess

Step 2: Adjust the subsidiary’s assets and liabilities to fair value accounts. This will create a negative balance
Fair value of subsidiary’s net assets
LESS Book value of subsidiary’s net assets
EQUALS (Balance sheet adjustment to fair value)

Step 3:Allocate any remaining acquisition cost to the fair value of any identifiable intangible assets. This will create or increase the negative balance in the acquisition cost account.

Total excess
PLUS negative balance of balance sheet adjustments to fair value
PLUS negative balance of intangible assets adjusted to fair value
EQUALS Gain.

Question 13

Are contingencies included in the calculation of the fair value of the subsidiary?

Answer 13

Yes, contingencies are included in the calculation of the fair value of the subsidiary.