...CHAPTER 3 CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION QUESTION SOLUTIONS 3-1. An 80 percent ownership requires the preparation of consolidated financial statements. Regardless of the method used to account for the investment on the parent’s financial records, the investment income or dividend income is replaced on the consolidated income statement by the subsidiary’s revenue and expense accounts. The equity method is required if the parent prepares separate financial statements. Search term “ownership” reveals 8 hits. The relevant item in this instance is paragraph 17, reproduced below: 17. The Board concludes that the equity method of accounting for an investment in common stock should also be followed by an investor whose investment in voting stock gives it the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50% or less of the voting stock. Ability to exercise that influence may be indicated in several ways, such as representation on the board of directors, participation in policy making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by an investor in relation to the concentration of other shareholdings, but substantial or majority ownership of the voting stock of an investee by another investor does not necessarily preclude the ability to exercise significant influence...
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...Chapter 2 – Consolidation of Financial Information FASB allows reporting for businesses combined using the acquisition method. The acquisition method embraces a fair value measurement attribute. * Adoption of this attribute reflects the FASB’s increasing emphasis on fair value for measuring and assessing business activity. * In the past, reporting standards embraced the cost principle to measure and report the financial effects of business combinations. Expansion Through Corporate Takeovers Reasons for firms to combine: 1. Vertical integration of one firm’s output and another firm’s distribution or further processing. 2. Cost savings through elimination of duplicate facilities and staff. 3. Quick entry for new and existing products into domestic and foreign markets. 4. Economies of scale allowing greater efficiency and negotiating power. 5. The ability to access financing at more attractive rates. As firm size increases, negotiating power with financial institutions can increase also. 6. Diversification of business risk. 7. Continuous expansion of the organization, often into diversified areas (creating conglomerates). The Consolidation Process The consolidation of financial information into a dingle set of statements become necessary when the business combination of two or more companies creates a single economic entity – FASB ASC (810-10-10-1) * “There is a presumption that consolidated financial statements are more meaningful...
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...On 1 July 2007, Neptune Ltd acquired all the shares of Venus Ltd on an ex-div basis. Acquisition related expenses were $5 000. On this date, the equity and liabilities of Venus Ltd included the following balances: Share Capital $200 000 General Reserve 25 000 Retained Earnings 45 000 Dividend payable 10 000 Provisions 204 400 At acquisition date, all the identifiable assets and liabilities of Venus Ltd were recorded at amounts equal to fair value except for: Carrying Fair Amount Value Equipment (cost $80 000) $50 000 $53 000 Inventory $70 000 $80 000 Plant (cost $300 000) 186 000 190 000 Machinery (cost $18 000) 15 000 16 000 Trademark 100 000 110 000 Land 50 000 70 000 Fittings (cost $15 000) 10 000 10 000 Goodwill 25 000 52 000 Goodwill was written down by $5 000 in the 2008 year by Neptune Ltd as a result of an annual impairment test. The plant had a further five year life at acquisition date and was expected to be used on a straight line basis over that time. The trademark was considered to have an indefinite life. The machinery, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2009. At 1 July 2007, Venus Ltd had not recorded a liability relating to a guarantee that was considered to have a fair value of $10 000. An amount of $6 000 was paid by Venus Ltd in June 2009 in part payment of this liability. The balance of this liability was still considered to be $4 000 at 30 June 2009. ...
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...|Presentation on Financial |Change in Fair Value | |(nonprofit entities follow SFAS No.124) |Statements | | | | |Temporary |Other than | | | | |Temporary Loss | |Does the investor have substantial influence or control? | | | | |Investor owns 20% to 50% of stock and has significant influence but |On BS at historical cost plus |N/A |Realized loss on | |not control of the corporation |share of earnings since | |IS, new basis on | | |acquisition less dividends | |BS | |Use Equity Method |received (amortization may also be| | | | |required) | | | |Investor owns over 50% of stock or otherwise controls the |Consolidated financial statements |N/A ...
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...Chapter 3 Consolidations – Subsequent to the Date of Acquisition Chapter Outline I. Consolidation — the Effects Created by the Passage of Time A. The present chapter examines the consolidation procedures that must be followed in subsequent periods whenever separate incorporation of the subsidiary is maintained. B. Purchase combinations will continue to require a different set of procedures than a pooling of interests because of allocations and amortization. C. A worksheet and consolidation entries continue to provide structure for the rendering of a single set of financial statements for the combined entity. D. When a time factor is included in the consolidation process, additional complications are encountered. 1. The parent must select and apply an accounting method to cover the relationship between the two companies. The investment balance recorded by the parent varies over time as a result of the method chosen, as does the income consequently recognized. 2. The parent’s investment balance is eliminated on the worksheet so that the subsidiary’s actual assets and liabilities can be consolidated. 3. Additionally, the income figure accrued by the parent is excluded each period so that the subsidiary’s revenues and expenses can be included can be included when creating an income statement for the combined entity. ...
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...CONSOLIDATED FINANCIAL STATEMENTS QUIZ QUESTIONS 1. What are separate financial statements? (1 Mark) 2. Identify two types of parent entities that are NOT required to prepare consolidated financial statements? (2 Marks) 3. What does control mean? (1 Mark) 4. What are consolidated financial statements? (1 Mark) 5. On 1 July 2010, Mint Ltd acquired all the shares of Marjoram Ltd for $355 000. At acquisition date the recorded equity of Marjoram Ltd consisted of: $150 000 share capital, $50 000 general reserve and $125 000 retained earnings. All assets were recorded at fair value except inventory (fair value $28 000; carrying amount $20 000) and machinery (fair value $75 000; cost $100 000 and carrying amount $70 000). The remaining useful life of the machinery is four years. The inventory was sold on 15 August 2010. In June 2013, the directors of Marjoram Ltd transferred the general reserve to retained earnings. Required Prepare the business combination valuation reserve entries for the consolidation worksheet at 30 June 2013. (4 Marks) 6. On 1 July 2012, Parsley Ltd acquired all the shares of Oregano Ltd for $275 000 (cum div). At that date, the equity of Oregano Ltd consisted of: $120 000 Share Capital, $40 000 General Reserve; and $75 000 Retained Earnings. The dividend payable was $25 000. All the assets of Oregano Ltd were carried at fair value except for inventory (fair value $26 000, carrying amount $17 000). Additionally...
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...STUDENT ACTIVITY SECTION 1. SUMMARY OF THE LEARNING OBJECTIVES The preparation of the consolidated financial statements is done using a consolidation worksheet, the left-hand columns of which contain the financial statements of the members of the group. The adjustment columns contain the consolidation worksheet entries that adjust the left-hand columns to form the consolidated financial statements. The adjustment entries have no effect on the actual financial records of the parent and its subsidiaries. At acquisition date, an acquisition analysis is undertaken. The key purposes of this analysis are to determine the fair values of the identifiable assets, liabilities and contingent liabilities of the subsidiary, and to calculate any goodwill or gain on bargain purchase arising from the business combination. From this analysis, the main consolidation worksheet adjustment entries at acquisition date are the business combination valuation entries, to adjust carrying amounts of the subsidiaries’ assets and liabilities to fair value, and the pre-acquisition entries. In preparing consolidated financial statements in periods subsequent to acquisition date, the consolidation worksheet will contain valuation entries and pre-acquisition entries. However, these entries are not necessarily the same as those used at acquisition date. If there are changes to the assets and liabilities of the subsidiaries since acquisition date, or there have been movements in pre-acquisition equity...
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...Equipment (cost $300 000) 186 000 190 000 Machinery (cost $18 000) 15 000 16 000 Trademark 100 000 110 000 Land 50 000 70 000 At the date of acquisition, Beans Ltd had recorded goodwill of $25 000. Goodwill was not impaired in any period. The plant and equipment had a further five year life at acquisition date and was expected to be used evenly over that time. The trademark was considered to have an indefinite life. The machinery, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2014. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. During the year ended 30 June 2013, all inventories on hand at acquisition date were sold, and the land was sold on 1 June 2013. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed. Additional information: a) On 1 July 2013, Beans Ltd has on hand inventory worth $12 000, being transferred from Jelly Ltd in June 2013. The inventory had previously cost Jelly Ltd $8 000. This entire inventory was sold to external parties in the year ending 30 June 2014. b) On 31 March 2014, Beans Ltd transferred an item of plant with a carrying amount of $10 000 to Jelly Ltd for $15 000. Jelly Ltd treated this item as inventory. The item was still on hand at the end of the year....
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...an investment in equity securities along with a fair value option. A. Fair value method: applied by an investor when only a small percentage of a company’s voting stock is held. 1. Income is recognized when dividends are declared. 2. Portfolios are reported at fair value. If fair values are unavailable, investment is reported at cost. A. Consolidation: when one firm controls another (e.g., when a parent has a majority interest in the voting stock of a subsidiary or control through variable interests, their financial statements are consolidated and reported for the combined entity. A. Equity method: applied when the investor has the ability to exercise significant influence over operating and financial policies of the investee. 1. Ability to significantly influence investee is indicated by several factors including representation on the board of directors, participation in policy-making, etc. 2. According to GAAP guidelines, the equity method is presumed to be applicable if 20 to 50 percent of the outstanding voting stock of the investee is held by the investor. Current financial reporting standards allow firms to elect to use fair value for any investment in equity shares including those where the equity method would otherwise apply. However, the option, once taken, is irrevocable. After 2008, an entity can make the election for fair value treatment only upon acquisition of the equity shares. Dividends received and changes in fair...
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...23 Consolidation: controlled entities ACCOUNTING STANDARDS IN FOCUS LEARNING OBJECTIVES IFRS 10 Consolidated Financial Statements After studying this chapter, you should be able to: 1 explain the meaning of consolidated financial statements 2 discuss the meaning and application of the criterion of control 3 discuss which entities should prepare consolidated financial statements 4 understand the relationship between a parent and an acquirer in a business combination 5 explain the differences in disclosure requirements between single entities and consolidated entities. CHAPTER 23 Consolidation: controlled entities Prepared for Rotterdam School of Management 429 813 INTRODUCTION The purpose of this chapter is to discuss the preparation of a single set of financial statements, referred to as the consolidated financial statements. The preparation of consolidated financial statements involves combining the financial statements of the individual entities in a group so that they show the financial position and financial performance of the group of entities, presented as if they were a single economic entity. The first issue covered in this chapter is the determination of which entities are required to prepare consolidated financial statements. This involves a discussion of the criterion for consolidation and its application to economic situations. The second issue in this chapter is the accounting procedures for preparing the consolidated financial...
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...Guidelines and Grading Guide Consolidation Model Click below link for Answer visit www.workbank247.com http://workbank247.com/q/acc-690-final-project-guidelines-and-grading-guide/11908 http://workbank247.com/q/acc-690-final-project-guidelines-and-grading-guide/11908 ACC 690: Final Project Guidelines and Grading Guide: Consolidation Model Overview The final project for this course is the creation of an Excel spreadsheet model that shows the consolidation worksheet, intercompany elimination entries, other consolidation entries, and the final income statement and balance sheet for a sample parent and subsidiary company. The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Five, Eight, and Ten. GuidelinesThe Model Assignment: Students will be given the description of a parent company and a subsidiary company along with the two firms’ trial balances at book value as of December 31, 2012, the end of the year for both firms. (See Company Information below.) The financial data will be presented in English pounds as local currency. Other data pertaining to the consolidation is also to be provided. The student will analyze the data for purpose of consolidation. The student will create a useful Excel model that shows the consolidation worksheet, intercompany elimination...
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...Consolidation work and financial statements subsequent to acquisition Background and Information Palus Corporation acquired 90 percent of Stalus Company’s voting stock on January 1, 2010. The price paid was $145,000. The excess of costs over book value was $10,000, which should be attributed to goodwill and must be amortized over 10 years. The fair value of the non-controlling (minority) interest was equal to 10 percent of the book value of Stalus at that date. Palus uses the equity method in accounting for its ownership of Stalus during the year 2010. Income during the year was $30,000 for Stalus and the company also declared dividends of $10,000. On December 31, 2010, the trial balances of the two companies are as follows: Palus Corporation Stalus Company Debit Credit Debit Credit Item Current Assets $173,000 $105,000 Depreciable Assets 500,000 300,000 Investment in Stalus Company 163,000 Dividends Declared 10,000 Accumulated Depreciation $ 175,000 $ 75,000 Current Liabilities 171,000 115,000 Long-Term Debt 100,000 45,000 Common Stock 200,000 100,000 Retained Earnings 123,000 50,000 Sales 100,000 80,000 Expenses 60,000 50,000 Income from Subsidiary 27,000 _____ $896,000 $896,000 ...
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...OL 501 Final Project worksheet Worksheet C Instructed by Dr. Alan Aylor Christian Martino Question and Answer Sheet Southern New Hampshire University 02/25/2017 ____________________________________________________________________________ 1. How can management information, such as financial statements, help management and investors make more informed decisions? Are there any risks associated with the compilation and analysis of information, for example, accuracy or relevance? How can such risks be minimized? • Financial statements help management by using balance sheets, income statements and cash flow statements. They are part of an accounting report that a company can communicate their financial information. These...
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...ch04 Student: ___________________________________________________________________________ On July 1, 20X9, Link Corporation paid $340,000 for all of Tinsel Company's outstanding common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities were as follows: 1. Based on the preceding information, the differential reflected in a consolidation worksheet to prepare a consolidated balance sheet immediately after the business combination is: A. $0. B. $25,000. C. $70,000. D. $45,000. Based on the preceding information, what amount should be allocated to goodwill in the consolidated balance sheet, prepared after this business combination? A. $0 B. $25,000 C. $70,000 D. $45,000 2. On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here: At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. 3. Based on the information provided, what amount of inventory will be included in the consolidated balance sheet immediately following the acquisition? A. $60,000 B. $75,000 C. $15,000 D. $45,000 4. Based on the information provided, what amount of goodwill will be included in the consolidated balance...
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...Possible Problem/Essay Topics Chapter 1 1) Determining amount of goodwill during an acquisition (problem that includes Figure 1-3 on page 19) * Components used in determining goodwill: * The fair value of the consideration given by the acquirer * The fair value of any interest in the acquiree already held by the acquirer * The fair value of the noncontrolling interest in the acquiree, if any * The total of these three amounts, all measured at the acquisition date, and is compared with the acquisition-date fair value of the acquiree’s net identifiable assets, and the difference is goodwill. * Establishes A New Basis of Accounting * The new basis of accounting depends on the acquirer’s purchase price (FMV) + the NCI’s (FMV). * The depreciation cycle for fixed assets starts over based on current values and estimates. * If acquisition price > FMV, goodwill exists. * Recognize as an asset. * Do not amortize. * Evaluate periodically for possible impairment. * If acquisition price < FMV, a bargain purchase element (formerly called “negative goodwill”) exists. * Testing for goodwill impairment * When goodwill arises in a business combination, it must be assigned to individual reporting units. * To test for impairment, the fair value of the reporting unit is compared with its carrying amount. * If the fair value of the reporting unit exceeds its carrying amount, the goodwill of...
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