Test 2

Question 1

Acquisition Method

Answer 1

governs the initial recording of a business combination
- Fair values used at date of acquisition
-FV (purchase price) > BV = excess allocated to identifiable assets/liabilities, which is depreciated or amortized over a period of time; non-identifiable allocated to Goodwill
- FV (Purchase Price) < BV = “Gain on Bargain Purchase”

Question 2

Three acceptable methods to account for business combination after initial acquisition

Answer 2

1. Equity Method
2. Initial Value
3. Partial Equity method

Question 3

Equity Method

Answer 3

embraces full accrual accounting; investment account on parent’s books changes with the changes in the subsidiary’s equity account

Investment Account: continually adjusted to reflect current owner’s equity of acquired company; increased for % ownership in investee’s net income; decreased by % ownership in dividends declared/paid; decreased by excess depreciation/amortization of FV>BV

Question 4

Initial Value

Answer 4

investment balance remains on the parent’s financial records at the initial fair value assigned at the date of acquisition; no recognition is given to the income earned by the subsidiary; must “true-up” investment account during the consolidation process; recognizes only the subsidiary’s dividends as income; (most commonly used method

Question 5

Partial Equity Method

Answer 5

“hybrid” of the other two methods (Equity method and Initial Value)
- Note that the following account balances vary between the equity method and initial value method: Investment, Equity in Subsidiary Earnings, and Retained Earnings