FAR 3 Acquisition method

Question 1

Acquisition method

Answer 1

1. Acquisition

Investment in subsidiary

      Cash

OR

Investment in subsidiary

                  Common stock

                   APIC

Question 2

Application of the Acquisition method

Answer 2

1. 100% of the net assets acquired are recorded at FV and any balance to goodwill
2. When consolidated, the subsidiary’s equity is eliminated (CS, APIC, and Retained Earnings)
3. Noncontrolling Interest NCI is created
4. Balance sheet of subsidiary is adjusted to FV
5. Identifiable intangible assets of the subsidiary are recorded at their FV
6. Goodwill or gain is required

Question 3

Consolidating workpaper eliminating journal entry

Answer 3

Common stock - Subsidiary

APIC - subsidiary

Retained earnings - subsidiary

                         Investment in subsidiary

                          Noncontrolling interest

AND

                          Balance sheet adj to FV

                           Identifiable intangible assets to FV

                           Goodwill

Question 4

Investment in Subsidiary

Answer 4

• Original cost - FV
• Business combination costs/expenses in an acquisition

1. Direct out of packet costs - Debit expense
2. Stock registration and issuance costs - Debit APIC
3. Indirect costs - Debit expense
4. Bond issue costs - capitalized and amortized - Debit bond issue cost

Question 5

Identifiable intangible assets

Answer 5

1. Finite life

• amortize over the remaining life
• two step impairement test

    2. Indefinite life

• do not amoritze
• one step impairement test

Question 6

Goodwill - partial method

Answer 6

Goodwill = acquisition cost - FV of subsidiary’s net assets acquired

Question 7

Goodwill - full method

Answer 7

Goodwill = FV of subsidiary - FV of subsidiary’s net assets