Ch04: Post-Acquisition

Question 1

Complete Equity Method

Step 1.

Answer 1

identify the seller’s BV and differences in value between the seller’s FV and BV assets and liabilities

Question 2

Complete Equity Method

Step 2.

Answer 2

calculate goodwill:

1. need the acquisition cost
2. seller BV
3. cost in excess of BV = (acquisition cost - seller BV)
4. list the differences (FV - BV) on the debit side; assets and liabilities; if the FV of liability is higher than its BV (understated), it’s subtracted
5. find NIdA(credit) = sum the differences
6. goodwill = CEBV - (NIdA)
7. debit goodwill

Question 3

Complete Equity Method

Step 3.

Answer 3

find ENI - Equity in Net Income

1. identify the seller’s NI, and anything pertaining to making adjustments (useful-life, etc.)
2. list the assets and liabilities with differences between their FV and BV
3. make adjustments via those differences
   assets: positive differences are added (FV is higher than BV); negative differences (BV is higher than FV) are subtracted
   liabilities: positive adjustments (BV is higher than FV) are subtracted from ENI; negative adjustments (FV is higher than BV) are added to ENI
4. credit ENI (seller’s NI)

Question 4

Complete Equity Method

Step 4.

Answer 4

record ENI:

1. bottom and top, Investment in seller (credit), ENI, other equity balances - OCI, RtE, etc. (credit), cash (debit) via dividends
2. if dividends, debit cash, credit investment in seller (bottom)
3. Investment in seller (top): sum of credits for the equity balances
4. investment in seller (bottom): credited dividend amount