Consolidations

Question 1

When is the fair value method used for recording interest in a separate company?

Answer 1

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

Question 2

When is the equity method used when purchasing another company’s stock? How is it recorded?

Answer 2

Ownership 21% to 50%

Gives significant influence

Purchase Price - Par Value : Goodwill

Dividends received from the investee reduce the investment account and are not income

Question 3

When are companies required to file consolidated financials? How is it recorded?

Answer 3

Ownership of other company is greater than 50%

Investment account is eliminated

Only parent company prepares consolidated statements; not subsidiary.

Acquired assets/liabilities are recorded at Fair Value on acquisition date.

Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

Question 4

When is consolidation not required?

Answer 4

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Question 5

What occurs under a step acquisition?

Answer 5

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value

Results in a Gain or Loss in current period

Question 6

What is the difference between an acquisition and a merger?

Answer 6

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent’s financial statements

Merged companies cease to exist and only the parent remains

Question 7

How are acquisition costs recorded in a merger?

Answer 7

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

Question 8

Direct costs, indirect and general costs in business combination - accounting?

Answer 8

are expensed as incurred by the acquiror

Question 9

Accounting of registration and issuance of stocks expenses

Answer 9

Reduction of APIC

Question 10

Eliminating entries - with non controlling interest

Answer 10

CS
APIC
RE
PPE
Goodwill
Inventory
       Investment in S
       Non controlling interest

Question 11

Eliminating intercompany transactions

Answer 11

Sales(total sale)
Cost of sales - PLUG
Inventory (profit portion - end)

Gain on sale of equipment
Equipment
Accumulated depreciation

Accumulated depreciation
Depreciation expense
#AJE for current year depn

Bonds payable
Investment in bonds
Gain on retirement of bonds

Accrued interest payable
    Accrued interest receivable 
       #interest paid on purchase of bonds

ELIMINATE INCOME FROM S:

Income from S
Dividends - RE
Investment in S

ELIMINATE INVESTMENT:

Question 12

PANIC ATTACK FOR FS CONSOLIDATION

Answer 12

1. Adjusting entries - sales, ppe, bonds, depreciation
2. Journal entry for eliminations
3. Plot journal entries in the TB
4. total NI row
5. bring down this total to NI under RE
6. bring this down to RE in the BS
7. extend totals
8. do not add totals in assets
9. final totals in AJE columns in last row is
   total of A & L/SE only

Elimanating entries:

1. Intercompany sales

Sales - total sales
C/S
Inventory - GP portion of ending inv.

If all were sold:

Sales - total
C/S

2. Sale of PPE

Gain
PPE

Accumulated Depn
PPE

3. Bonds

Bond Payable
Investment in Bonds-cash paid at sale
Gain on retirement