M4- Consolidations

Question 1

Equity Method

1. How is the year-end investment in investee reported on the balance sheet calculated under the equity method?

Answer 1

a. Beginning Investment in investee
b. + Investor’s share of investee earnings
c. – investor’s share of investee dividends
d. – Amortization of FV differences
e. = Ending investment in investee

Question 2

Equity Method

2. How is an investor’s equity method investment reported on the income statement?

Answer 2

a. Investor’s share of investee earnings
b. – amortization of FV differences
c. = equity in earnings / investee income

Question 3

Basic Consolidation Concepts

1. State the criteria to consolidate subsidiaries?

Answer 3

a. Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary
b. Do not consolidate when control is not with the owners (as in bankruptcy of subsidiary)

Question 4

Basic Consolidation Concepts

2. What is a variable interest entity (VIE)?

Answer 4

a. A corporation, partnership, trust, LLC, or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks sufficient financial resources to support its activities.

Question 5

Basic Consolidation Concepts

3. Who is the primary beneficiary of a VIE and how does the primary beneficiary account for it’s VIE investment?

Answer 5

a. The entity with the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and:
i. Absorbs the expected VIE losses
ii. Or receives the expected VIE residual returns
b. The primary beneficiary must consolidate the VIE

Question 6

Basic Consolidation Concepts
4. Who consolidates when one entity receives the expected returns from a VIE and another entity absorbs the expected losses?

Answer 6

a. The entity that absorbs the expected losses consolidates

Question 7

Acquisition method

1. In acquisition accounting, state the consolidating workpaper elimination entry?

Answer 7

a. CARINBIG
b. Dr: Common Stock- subsidiary
c. DR:APIC- sub
d. DR: Retained earnings- sub
i. CR: investment in sub
ii. CR:Noncontrolling interest
e. DR: balance sheet adjustments to fair value
f. DR: Identifiable intangible assets to fair value
g. DR: Goodwill

Question 8

Acquisition method

2. How are expenses relating to the combination treated under the acquisition method?

Answer 8

a. Direct out of pocket costs are expensed
b. Stock-related costs are a reduction in value of the stock issued (normally a debit to additional paid in capital)
c. Indirect costs are expensed

Question 9

Acquisition method

3. How is non-controlling interest (balance sheet) as of the acquisition date calculated under US GAAP?

Answer 9

a. Non-controlling interest (NCI)= FV of subsidiary x NCI%

Question 10

Acquisition method

4. How is non-controlling interest on the income statement calculated?

Answer 10

a. Subsidiary net income
b. X non-controlling interest %
c. = NCI in net income

Question 11

Acquisition method

5. How is non-controlling interest (balance sheet) as of the acquisition date calculated under IFRS?

Answer 11

a. IFRS permits the use of the full goodwill method or the partial goodwill method
b. Full goodwill method (same as US GAAP)
i. NCI= FV of subsidiary x NCI%
c. Partial goodwill method
i. NCI = FV of subsidiary’s net identifiable assets x NCI%

Question 12

Acquisition method

6. In an acquisition, how are acquired identifiable intangible assets amortized?

Answer 12

a. Finite useful life: Amortized to residual value over expected useful life. Subject to the two step impairment test
b. Indefinite useful life: Do not amortize. Subject to the one-step impairment test.

Question 13

Acquisition method

7. How is goodwill calculated under US GAAP/

Answer 13

a. Goodwill = fair value of subsidiary – fair value of subsidiary’s net assets

Question 14

Acquisition method

8. What are the two methods of determining goodwill under the IFRS acquisition method?

Answer 14

a. Goodwill is recognized using the full goodwill method (same as US GAAP) or the partial goodwill method.
b. Partial goodwill = acquisition cost – fair value of subsidiary’s net assets acquired

Question 15

Acquisition method
9. In a business combination, what is the treatment of an acquisition in which the acquisition cost is less than the fair value of 100% of the net assets acquired?

Answer 15

a. The acquisition cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. This creates a negative balance in the acquisition account, which is recorded as a gain.

Question 16

Consolidated Financials:
1. When a parent company owns less than 100% of the stock of a subsidiary company, what amount of the subsidiary’s assets, liabilities, and equity are included on the consolidated balance sheet?

Answer 16

a. The consolidated balance sheet includes 100% of the parent’s subsidiary’s assets and liabilities, but does not include the subsidiary’s equity. Non-controlling interest is presented as part of equity, separately form the equity of the parent company

Question 17

Consolidated Financials:
2. What three considerations must be taken into account when preparing consolidated statements of cash flow that are not present when preparing statements of cash flor for a nonconsolidated entity?

Answer 17

a. When reconciling net income to net cash provided by operating activities, total consolidated net income (including net income attributable to both the parent and the non-controlling interest) should be used
b. The financing section should report dividends paid by the subsidiary to non-controlling shareholders. Dividends paid by the subsidiary to the parent company should be reported.
c. The investing section may report the acquisition of additional subsidiary shares by the parent if the acquisition was an open-market purchase

Question 18

How does R/E of the subsidiary impact the parent company in the consolidated financial statements

Answer 18

The consolidated financial statements of the parent company only include R/E of the parent company

Question 19

Name several simple workpaper eliminations entries that are necessary to eliminate intercompany payables and receivables when producing consolidated financial statements?

Answer 19

Eliminate:

• Accounts payable/accounts rec
• bonds payable/bonds rec
• Accrued bond interest payable/ accrued bond interest rec

Question 20

State the workpaper elimination entry for intercompany inventory transactions

Answer 20

D: Retained earnings (intercompany profit in beg inventory)
D: Intercompany sales
Cr: Intercompany COGS
Cr: COGS (intercompany profit in goods sold)
Cr: Ending inventory (intercompany profit in ending inventory)

Question 21

State the workpaper elimination entry for intercompany bond transactions

Answer 21

D: Bonds payable
D: Premium (or credit discount)
Cr: Investment in affiliates bonds
Cr: gain on extinguishment of bonds

Question 22

State the workpaper elimination entry for intercompany land transactions

Answer 22

D: Intercompany gains on sale of land
Cr: land

Question 23

State the workpaper elimination entries for intercompany depreciable assets transactions

Answer 23

Elimination entry 1- eliminate intercompany gain an dadjust asset and accumulated depreciation to OG amount
D; Intercompany gain on sale of machinery
Cr: Machinery
Cr: Accumulated Depr

Elimination Entry 2- Eliminate excess depreciation
D: Accumulated Depreciation
Cr: Depreciation expense

Question 24

How is goodwill impairment analyzed under US GAAP?

Answer 24

Goodwill impairment is analyzed at the reporting unit using two step process

1. Compare FV of each reporting entity with CV
2. Measure the amount of goodwill impairement by comparing the implied fair value of the reporting units goodwill to its carrying amount