...Unit III - Consolidation Subsequent to Acquisition Date Key Concepts: Recording on the cost basis requires additional calculations of Ps net income and consolidated retained earnings Under the equity method, the Parent’s net income and retained earnings equals consolidated net income and consolidated retained earnings Preparation of consolidated statements – cost and equity methods - Exhibit 5.16, page 205 Impairment testing for intangible assets with definite useful lives: two step process (page 176): o step 1: is the asset impaired? o step 2: if so, calculate impairment loss as the difference between the recoverable amount f the asset and its carrying value Impairment testing for intangible assets with indefinite useful lives (example: goodwill): as singlestep process; i.e., if the recoverable amount is less than carrying value, asset is impaired by the difference – note that goodwill is no longer amortized but tested for impairment. Key Objectives: Prepare consolidated financial statements for the first and subsequent year ends after acquisition for a parent and its wholly owned (or non-wholly owned) subsidiary when the parent uses the cost method or the equity method. Resources Text pages 170 - 206 Practice Exercises within the unit iStudy Website Unit Assignment Before you begin your reading, review the key points, learning objectives and unit overview/notes. It is useful to keep the learning objectives in mind as you proceed through the...
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...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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...03 Chapter - Consolidations--Subsequent to the Date of Acquisition 1 Answers to Discussion Questions How Does a Company Really Decide which Investment Method to Apply? Students can come up with literally dozens of factors that should be considered by Pilgrim in making the decision as to the method of accounting for its subsidiary, Crestwood Corporation. The following is simply a partial list of possible points to consider. Use of the information. If Pilgrim does not monitor its own income levels closely, applying the equity method would seem to be a waste of time and energy. A company must plan to use the additional data before the task of accumulation becomes worthwhile. Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important. Income levels would probably be significant. However, if the subsidiary is actually quite small in relation to the parent, the impact might not be material enough to warrant the extra effort. Size of dividend payments. If Crestwood pays out most of its earnings each period as dividends, that figure will approximate equity income. Little additional information would be accrued by applying the equity method. In contrast, if dividends are small or not paid on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination. Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of book value...
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...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 value over time are recognized as income. I. Accounting for an investment: the equity method A. The investment account is adjusted by the investor...
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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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...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, changes must be made to these entries. 2. DEMONSTRATION PROBLEMS ...
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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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...Advanced Accounting Third Edition Susan S. Hamlen University at Buffalo, The State University of New York Ronald J. Huefner University at Buffalo, The State University of New York James A. Largay III Lehigh University Cambridge BUSINESS PUBLISHERS Cambridge Business Publishers ADVANCED ACCOUNTING, Third Edition, by Susan S. Hamlen, Ronald J. Huefner, and James A. Largay III. COPYRIGHT © 2016 by Cambridge Business Publishers, LLC. Published by Cambridge Business Publishers, LLC. Exclusive rights by Cambridge Business Publishers, LLC for manufacture and export. ALL RIGHTS RESERVED. No part of this publication may be reproduced, distributed, or stored in a database or retrieval system in any form or by any means, without prior written consent of Cambridge Business Publishers, LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. STUDENT EDITION ISBN: 978-1-61853-151-3 Bookstores & Faculty: to order this book, call 800-619-6473 or email customerservice@cambridgepub.com. Students: to order this book, please visit the book’s Website and order directly online. Printed in Canada. 10 9 8 7 6 5 4 3 2 1 PREFACE W elcome to Advanced Accounting. We wrote this book with two major objectives in mind. First, we seek to reflect the changing topical emphases and content in the advanced accounting course; coverage is completely updated for new developments concerning...
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...Consolidation-Date of Acquisition Chapter 4 • Consolidated statements bring together the operating results and financial position of two or more separate legal entities into a single set of statements for the economic entity as a whole. • To accomplish this, the consolidation process includes procedures that eliminate all effects of intercorporate ownership and intercompany transactions. 4-2 Consolidation As Of The Date Of Acquisition McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Consolidation-Date of Acquisition • The procedures used in accounting for intercorporate investments were discussed in Chapter 2. • These procedures are important for the preparation of consolidated statements because the specific consolidation procedures depend on the way in which the parent accounts for its investment in a subsidiary. • The consolidated statements, however, are the same regardless of the method used by the parent company to account for the investment. 4-3 Consolidation-GAAP • Consolidated and unconsolidated financial statements are prepared using the same generally accepted accounting principles. 4-4 Roadmap—Chapter 4 Roadmap—Chapters 5 to 10 • After introducing the consolidation workpaper, this chapter provides the foundation for an understanding of the preparation of consolidated financial statements by discussing the preparation of a consolidated balance sheet immediately following the establishment of...
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...On 1 July 2008 Cortina Ltd acquired all the issued shares of Turin Ltd for $200 000. At acquisition date the recorded equity of Turin Ltd was: $ Share capital 150 000 Plant Maintenance Reserve 30 000 Retained earnings 87 500 At this date all identifiable net assets of Turin Ltd were recorded at fair value except for: Carrying Amount Fair Value $ $ Inventory 39 000 51 000 Machinery (cost $250 000) 195 000 210 000 On 12 March 2008, a lawsuit claiming damages of $50 000 was lodged against Turin Ltd by one of its customers. A court hearing is scheduled for January 2009. Turin Ltd has not recognised any liability for damages arising from the lawsuit. On 1 July 2008, Cortina Ltd assessed potential damages at a fair value of $35 000 Events occurring subsequent to acquisition date. Year ended 30 June 2009 • Inventory on hand at 1 July 2008 was all sold prior to 30 June 2009. • The manufacturing plant’s useful life was re-assessed on acquisition date to six years. • A bonus dividend of $50 000 was issued by the directors of Turin Ltd on 6 June 2009. The dividend was funded from retained earnings on hand at 1 July 2009. • On 15 January 2009, the court found Turin Ltd guilty of negligence and awarded damages of $35 000 payable in two installments - $15 000 on 31 March 2009 and $20 000 on 31 March 2010. The first installment was duly made. Year ended 30 June 2010 • The manufacturing plant owned at 1 July 2008 was sold by Turin Ltd on 31...
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...Exchange Commission voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014. Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission (Navigating). The transition from U.S. GAAP to IFRS reporting will have a huge impact for investors and businesses in the U.S. Although only a roadmap was issued and no conversion dates were announced, it is speculated that IFRS reporting will more than likely become mandatory (Navigating). This article will present an overview on some of the most...
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...ACCT 8530, ADVANCED ACCOUNTING PROBLEMS Fall 2015 Section 003, 12:30-2:00 PM, Tuesday and Thursday, Greenville ONE Room 603 Suzanne Pearse, CPA. Office: 836 Greenville ONE Office Hours: 9:30-11:00 AM, Tuesday and Thursday and by appointment Office Phone: 864 656-0131 Email: spearse@clemson.edu Required Materials: Text: Hoyle, J. B., Schaefer, T. F, and Doupnik, T. S. Advanced Accounting, 12th ed. (custom print with ConnectPlus access), McGraw-Hill Create, ISBN: 9781308536347. Software: McGraw-Hill Connect Plus Course Description Study of specialized aspects of financial reporting, including business combinations and emerging practices and developments in financial accounting. Prerequisite: Enrollment in the MPAcc program. Course Objectives and Learning Outcomes Students completing this course will demonstrate knowledge and understanding of the financial reporting framework used by business enterprises as it relates to partnerships, variable interest entities, and parent and subsidiary companies. Specifically, you will learn the accounting procedures and reporting requirements for: partnership formation, operation, cessation and liquidation; the treatment of variable interest entities, and combining corporate entities; and the preparation of consolidated financial statements for domestic parents with domestic and foreign subsidiaries...
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...Date: April 12, 2010 To: James Bluff From: Boat Cai Subject: key disclosure issues for financial statements [pic] Dear Mr. Bluff As requested, I’ve done a further research on the four items arisen and found out the disclosure requirements for each of them including errors correction, events after reporting date, recognition criteria of provision and classification of financial instruments. I also went through the financial statements and found out some omissions. Finally, due to changes in the operation in our company, I identify some challenges in financial reporting and disclosure. Four key items and their disclosure requirements 1. Correction of errors As you probably know the inaccurate calculation of actuarial loss on defined benefit assets in 2005 would led to overstate plan assets, this would finally affect the recognition of a liability or an asset for superannuation in our financial position in 2005. If the amount of this error is material, it needs to be corrected. The definition of “materiality” is defined in AASB 1031. Due to this error that happened prior to the comparative period, here is some information on changes in errors I would like to mention. With IAS 8, the error must be corrected by both: • Restating comparative amounts in the reporting period which discover the error; • Adjusting the opening amount of financial position in the last reporting period and stating as comparative information (para.42). There is a short list for...
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... | |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 |N/A | |corporation | | | | | |...
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...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 sheet immediately following the acquisition? A. $30,000 B. $15,000 C. $85,000 D. $45,000 Based on the information provided,...
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