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The investment is valued at

answer

the fair value of the consideration given or the fair value of the consideration received, whichever is the more clearly evident.

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Journal entry to record the acquisition for parent common stock: (Parent company internal journal entry)

answer

Debit : Investment in subsidiary Credit: Common stock Credit: APIC (parent/fv-part)

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Acquisition Price:

answer

Fair value x the amount of stocks acquired.

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The acquisition method has two distinct account characteristics:

answer

(1) 100% of the net assets acquired (regardless of percentage acquired) are recorded at fair value with any unallocated balance remaining creating goodwill, (2) when the companies are consolidated, the subsidiary's entity equity (including its common stock, A.P.I.C., and retained earnings) is eliminated (not reported).

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Fair value

answer

= acquisition price=investment in subsidiary

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An acquiring corporation should adjust the following items during consolidation:

answer

(CAR)1. Common stock, A.P.I.C. and Retained Earnings of Subsidiary are Eliminated. (I)2. Investment in Subsidiary is eliminated. (N)3. Noncontrolling interest (NCI) is created (B)4. Balance Sheet of Subsidiary is Adjusted to Fair Value. (I)5. Identified Intangible Assets of the Subsidiary are Recorded at their Fair value (G)6. Goodwill (or Gain) is Required.

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>> Common stock-subsidiary >> A.P.I.C-Subsidiary >>Retained earnings-Subsidiary

answer

Debit

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>> Investment in subsidiary >> Noncontrolling interest

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Credit

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>> Balance sheet adjustments to FV >> Identifiable intangible assets to FV >> Goodwill

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Debit

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Goodwill =

answer

Fair value of Subsidiary - Fair value of subsidiary net asset

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Fair value of Subsidiary =

answer

Acquisition price + noncontrolling interest at fair value

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Net book value=

answer

Assets - Liabilities

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Assets - Liabilities =

answer

CAR

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Acquisition Date Calculation (CAR): The determination of the difference between book value and fair value

answer

is computed as of the acquisition date.

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Retained Earnings-Sub =

answer

Beginning retained earnings + income- dividends

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Original cost

answer

is measured by the fair value (on the date the acquisition is completed) of the consideration given (Debit: investment in sub).

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Business combination costs/expenses in an acquisition are treated as follows: (nothing is capitalized to investment sub)

answer

a. Direct out-of-pocket costs such as a finder's fee or a legal fee are expensed (debit: expense) b. Indirect costs are expensed as incurred (debit: expense). c. Stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of the stock issued (Debit: additional paid-in capital account). d. Bond issue costs are capitalized and amortized (Debit: bond issue costs).

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When the acquisition price exceeds the fair value of net assets acquired, assets and liabilities should be presented at

answer

fair value.

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Fees of finders and consultants

answer

are expensed in the period incurred.

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BS FV Adjustment =

answer

FV Net Assets - BV Nets Assets

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FV Net Assets =

answer

Assets - Liabilities

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BV Nets Assets =

answer

Assets - Liabilities

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Goodwill=

answer

Investment in Subsidiary - Book Value (CAR-BV Nets Assets) - Balance Sheet FV Adjustment

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Noncontrolling interest must be reported

answer

at fair value in the equity section of the consolidated balance sheet, separately from the parent's equity.This will include the noncontrolling interest's share of any goodwill (even though there is no cost basis). (everything even NCI is at 100% FV)

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Balance sheet=

answer

Report NCI in consolidated equity.

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The non controlling interest is calculated by multiplying the total subsidiary fair value times the noncontrolling interest percentage:

answer

At acquisition date: Fair value of subsidiary x noncontrolling interest %

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After the acquisition date, the noncontrolling interest reported on the consolidated balance sheet is accounted for using the equity method:

answer

Balance noncontrolling interest +NCI share of subsidiary net income - NCI share of subsidiary dividends ______________________________________________ = Ending noncontrolling interest. (BASE)

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Subsidiary Net Losses (To NCI even if negative balance)

answer

are allocated to noncontrolling interest even if the allocation exceeds the equity attributable to the noncontrolling interest (negative carrying balance).

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The consolidated income statement

answer

will include 100% of the subsidiary's revenues and expenses (after the date of acquisition).

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Subsidiary's income - Subsidiary's expense

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Subsidiary's net income

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Subsidiary's net income * Noncontrolling interest %

answer

Net income attributable to the noncontrolling interest. (Goes to NCI retained earning in general ledger)

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Noncontrolling interest

answer

is the value that we did not buy

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Under IFRS, noncontrolling interest (and goodwill as discussed below))

answer

can be calculated using either "partial goodwill" method or the "full goodwill" method.

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Full Goodwill Method:

answer

The full goodwill method is used under U.S. GAAP (as described above), in which noncontrolling interest on the balance sheet is calculated as follows: NCI = Fair value of subsidiary x Noncontrolling interest %

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Partial Goodwill Method: Under the partial goodwill method, noncontrolling interest is calculated as follows:

answer

NCI = Fair value of subsidiary's net identifiable assets x Noncontrolling interest %

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Fair value of subsidiary (Acquisition Cost + Noncontrolling interest)

answer

Reconciliation to Book Value of Subsidiary Net Assets

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Any difference between the fair value of the subsidiary and the book value acquired will require an adjustment to the following three areas:

answer

a. Balance sheet adjustment of the subsidiary's records from book value to fair value b. Identifiable intangible assets related to the acquisition of the subsidiary are recorded at fair value

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Any difference between the fair value of the subsidiary and the book value acquired will require an adjustment to the following three areas:

answer

c. Goodwill is recognized for any excess of the fair value of the subsidiary over the fair value of the subsidiary's net assets. If the fair value of the subsidiary is less than the fair value of the subsidiary's net assets, a gain is recognized.

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In Process Research and Development (Carry as an asset)

answer

>>Expense continuing R to complete project. >> Late: 1. Project success->amortize IP R 2. Project failure -> impair/write off IP R >> Recognize as an intangible asset separately from goodwill at the acquisition date (need valuation). >> Do not immediately write off. >> In process research and development meets the definition of an "asset"-- it has probable future economic benefit.

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Determining Acquisitions with Goodwil (CAR In BIG)

answer

Premium paid to buy company. Parent paid more than : NBV + FV of assets

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When acquiring a corporation/subsidiary with a fair value (acquisition price + fair value of NCI) that is greater than the fair value of 100% of the underlying assets acquired, the following steps are required:

answer

a. Step 1--balance sheet adjusted to fair value: Recalculate depreciation b. Step 2--Identifiable intangible assets to fair value

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Partial Goodwill Method

answer

Goodwill = Acquisition cost - Fair value of subsidiary's net asset acquired

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Full Goodwill Method:

answer

Goodwill= Fair value of subsidiary - Fair value of subsidiary's net assets.

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Determining Acquisition with Gain

answer

Parent acquired at discount/ Parent paid less than NBV

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When acquiring a corporation/subsidiary with a fair value that is less than the fair value of 100% of the underlying assets acquired, the following steps are required:

answer

Step 1--Balance sheet adjusted to fair value Step 2-- Identifiable intangible assets to fair value Step 3--Gain

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As the sub earns money

answer

retained earnings goes up

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As the sub loses money

answer

retained earnings goes down

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Period of acquisition The following steps are necessary in order to prepare a consolidated statement of cash flows in the period of acquisition:

answer

a. The net cash spent or received in the acquisition must be reported in the investing section of the statement of cash flows. b. The assets and liabilities of the subsidiary on the acquisition date must be added to the parent's assets and liabilities at the beginning of the year in order to determine the change in cash due to operating, investing, and financing activities during the period.

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Subsequent periods

answer

a. When reconciling net income to net cash provided by operating activities, total consolidated net income (including net income attributable to both the parent and the noncontrolling assets) should be used. b. The financing section should report dividends paid by the subsidiary to noncontrolling shareholders. Dividends paid by the subsidiary to the parent company should not be reported. c. The investing section may report the acquisition of additional subsidiary shares by the parent if the acquisition was an open market purchase.

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Non control -> Control (step transition)

answer

>> Remeasure previously held equity interests to fair value >> The income statements will reflect this adjustment

question

Control -> "More" or "Less" control

answer

>>Equity transaction (no gain or loss recognized on the income statement--additional paid-in capital adjusted)

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Control-Non-control

answer

>> Recognize the gain or loss of the sale of the stock >> Remeasure the remaining non-consolidating interest to fair value >> Recognize the adjustment to fair value on the income statement.

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Gaining control/losing control

answer

is a remeasurement event because the parent exchanges a noncontrolling investment asset for a controlling financial interest in all of the underlying assets and liabilities of the target.

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If the parent acquires the remaining 40% from the noncontrolling interest shareholders, it is an equity transaction (not an acquisition).

answer

No gain or loss is recognized on the income statement. Additional paid-in capital is adjusted.

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Acquired (purchased) goodwill

answer

is not amortized; it is subject to the impairment test.

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Goodwill=

answer

Investment in sub- book value (CAR) - Balance sheet FV adjustment

question

Balance sheet FV adjustment

answer

=FV net asset - BV net asset

question

A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be:

answer

Deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

question

Before acquired 20% then another 70%->20% of Sago's net income to June 30 and 95% of Sago's net income from July 1 to December 31.

answer

in an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income from the date of acquisition. Therefore, only 20% of Sago net income is included in consolidated earnings until June 30 and 95% thereafter.

question

With acquisition accounting the net assets acquired are based on fair market value.

answer

The fair value of finished goods and merchandise inventory are based upon selling price less disposal costs and reasonable profit allowance.

question

The fair value of raw materials should be based upon replacement costs.

answer

The fair value of work in process should be based upon the estimated selling price of finished goods less the costs to complete and dispose and a reasonable profit allowance.

question

Replacement costs are an appropriate measure of fair market value for materials inventory,

answer

but not finished goods.

question

Goodwill (with NCI)

answer

Acquired cost of investment (Not FV)- CAR (@FV)- Difference of the cost of assets-dividend -the difference of acquired cost (FV-BV)+NCI

question

What amount of total stockholders' equity should be reported in Dallas' December 31, Year 1, consolidated balance sheet?

answer

Common stock (at year end) + Additional paid-in capital (at year end) +Noncontrolling interest (at year end =adding NCI share of net income and subtracting share of dividends )+ Retained earnings (at year end)

question

Noncontrolling interest at year end

answer

= NCI share of net income + Noncontrolling interest at the beginning of the year -share of dividends

question

In the consolidated balance sheet prepared immediately after the acquisition, the consolidated stockholders' equity should amount to:

answer

Common stock + Retained earnings

question

At date of acquisition, the consolidated equity will be equal to the parent company's equity plus the fair value of any noncontrolling interest.

answer

The subsidiary company's equity accounts are eliminated.

question

All of the subsidiary's balance sheet accounts are to be adjusted to fair value on the acquisition date.

answer

This is accomplished as part of the Eliminating Journal Entry (EJE) on the consolidating workpapers. This adjustment is for the full (100%) fair value of the subsidiary's assets and liabilities, even if the parent acquires less than 100% of the subsidiary.

question

when the acquisition price exceeds the fair value of net assets acquired, assets and liabilities

answer

should be presented at fair value.

question

Placid company acquired 80% of Serene company's 100,000 shares of common stock for $1,600,000.

answer

In Year 1, Placid purchased 80,000 shares (80% x 100,000) for $1,600,000 or $20 per share ($1,600,000 /80,000 shares = $20/share).

question

When an investor sells shares and goes from control to non control, the investor

answer

must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value.The fair value adjustment is recognized as an additional gain or loss on the income statement.

question

The acquisition was announced on March 31, Year 1, when Poppy's common stock was selling for $45 per share, and finalized on October 15, Year 1, when the market price of Poppy's common stock was $15 per share.

answer

The acquisition price paid by Poppy is calculated on the date the acquisition is finalized: Acquisition price on 10/15/Year 1= 250,000 shares x $50/share = $1,250,000

question

Seed also had unpatented technology with a fair value of $225,000 and in-process research and development with a fair value of $365,000.

answer

Recognize identifiable intangible at fair value = 590,000

question

Good will

answer

100% cost to acquired an investment (NCI + INV IN SUB) -fair value greater than value of land and equipment - non-complete agreement with fair value.

question

The carrying value of acquired company's assets and liabilities

answer

are not relevant in calculating gain of parent company in its year 1 consolidated income statement.

question

Goodwill is Debit

answer

Gain is credit

question

Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year.

answer

When the financial statements of Peace and Surge are consolidated, the equity of Surge, including Surge's retained earnings, will be eliminated.

question

The consolidated statement of retained earnings

answer

will include only the $15,000 dividend paid by Peace during the current year.

question

Sayon Co. Issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination. The market value of Sayon's common stock is $12.

answer

Investment in Trask (2.4M) -Common stock (1M) -Registration and issuance costs for the common stock.

question

In an acquisition method business combination, registration and issuance costs

answer

are recorded as a direct reduction to the value of the stock issued by reducing APIC and direct out-of-pocket costs such as legal and consulting fees are expensed.

question

when an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment

answer

must be adjusted to fair value.The fair value adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition.

question

Stockholder's equity

answer

is irrelevant in calculating goodwill.

question

What amount of gain from this transaction will Parker record in Year 2?

answer

The latest fair value of the acquired assets x percentage of ownership -Investment in smith 12/31/Year 1 (amount of investment NBV +percentage share of earnings - percentage share of dividends)

question

What amount of goodwill related to Star's acquisition should Penn report on its consolidated balance sheet under the IFRS partial goodwill method?

answer

Goodwill = Acquisition cost - Fair value of subsidiary's net assets acquired (acquired percentage x (Current asset + Plant and equipment, net - Liabilities + the different of the fair value of the asset))

question

NCI=

answer

FV of subsidiary net assets x NCI %

question

FV subsidiary net assets =

answer

Current assets + Plant and equipment, net - Liabilities +the difference of fair value of an asset+ identifiable intangible.

question

Under IFRS partial goodwill method, goodwill is calculated as follows:

answer

Goodwill = Acquisition - Fair value of net assets acquired.

question

Under U.S. GAAP, noncontrolling interest (NCI) is calculated as follows:

answer

NCI = Fair value of subsidiary x NCI %

question

100% of a purchased subsidiary's shareholders' equity (including common stock/retained earnings) as of the date of acquisition

answer

is eliminated in consolidation.

question

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and non controlling interest balances in the parent company's consolidated balance sheet?

answer

No effect on retained earnings and a decrease in noncontrolling interest (NCI). The parent's balance would reflect 70% of the sub's earnings. Receipt of 70% of the dividends would simply transfer cash from one company to another.

question

The dividend would be eliminated in consolidation. However, 30% of the dividends would be paid to the noncontrolling shareholders and would reduce noncontrolling interest on the consolidated balance sheet

answer

because under the equity method, the ending noncontrolling interest is calculated as follows: Beginning noncontrolling interest + NCI share of subsidiary net income - NCI share of subsidiary dividiends. = Ending noncontrolling interest.

question

Dividend affects noncontrolling interest but not retained earnings.

answer

Th dividend does not affect retained earnings.

question

The dividend

answer

reduces noncontrolling interest.

question

Under the IFRS partial goodwill method, goodwill is calculated as follows:

answer

Acquisition cost - Fair value of net assets acquired.

question

Passey's consolidated financial statements as of December 31, Year 1, would report plant assets at: The acquisition method requires that 100% of the fair value of the subsidiary's assets be recognized.

answer

Therefore, plant assets reported on the consolidated balance sheet would be the fair value of Solomon's plant assets plus the book value of Passey's plant assets: FV subsidiary plant assets + BV parent's plant assets.

question

Under U.S. GAAP, the consolidated balance sheet of Starlight Enterprises and subsidiary would report goodwill in the amount of

answer

acquired cost / % of ownership - Fair value of net assets.

question

CAR - Subsidiary equity

answer

= BV of assets - BV of liabilities

question

Gain =

answer

Investment in subsidiary +non-controlling interest- CAR-subsidiary equity - Balance sheet adjustment - Identifiable intangibles

question

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be: Expensed as incurred in the current period.

answer

Acquisition costs associated with a business transaction must be expensed as incurred in the current period.

question

Acquisition costs associated with a business transaction

answer

are not allocated on a pro rata basis to the nonmonetary assets but expensed as incurred in the current period.

question

The acquisition cost of the stock does not include any measure of the relocation costs associated with East's company headquarters. (such costs are accounted for separately from the acquisition according to the requirements for exit or disposal costs in FASB ASC 420.)

answer

The investment would be valued at the fair value of the consideration given which is $800,000.

question

Legal fees and due diligence costs

answer

are expensed in the period incurred. Debt securities create liabilities, and debt security registration costs are capitalized and amortized.

question

Assets and liabilities acquired in a business combination must be valued at their fair value. In a bargain purchase where the fair value of the net assets acquired is more than the consideration exchanged for the net assets,the difference is recognized as a gain by the acquirerat the time of

answer

the acquisition. The difference between the fair value of the net assets acquired and the amount paid for the business is recorded as a gain by the acquirer at the time of the acquisition and would not be recorded as negative goodwill in the statement of financial position by the acquirer.

question

Goodwill

answer

is not recognized in the statement of financial position in a bargain purchase but is recognized in the statement of financial position of the acquirer when the amount paid for the net assets exceeds the fair of the net asset acquired.

question

In a business combination accounted for as a purchase, the appraised values of the identifiable assets acquired exceeded the acquisition price. How should the excess appraised value be reported?

answer

As a gain, after adjusting the balance sheet, including identifiable intangible assets, to fair value.

question

When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, the following steps are required:

answer

1. The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account. 2. Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account. 3. The total negative balance in the acquisition account is recorded as a gain.

question

Consolidated net income

answer

is the same as parent company net income, when the equity method is used.

question

Consolidated retained earnings are the same as the parent company retained earnings,

answer

when financial statements are consolidated under the acquisition method.

question

The accounting for an acquisition begins at

answer

the date of acquisition.

question

When the subsidiary's financial statements are provided for a subsequent period, it is necessary to reverse

answer

the activity (income and dividends) in the subsidiary's retained earnings in order to squeeze back into the book value (Assets- Liabilities = CAR) at the acquisition date.

question

Registration fees for equity securities issued

answer

decrease additional-paid-in capital (stockholders' equity).

question

The partial goodwill method

answer

is the preferred method under IFRS, but entities can elect to use the full goodwill method on a transaction by-transaction basis.

question

At date of acquisition, the consolidated equity will be equal to

answer

the parent company's equity plus the fair value of any noncontrolling interest. The subsidiary company's equity accounts are eliminated.

question

Computation of net income attributable to the noncontrolling interest

answer

Subsidiary's Income ________________________________ Subsidiary's net income x Noncontrolling interest % _________________________________ Net income attributable to the NCI (Goes to NCI-R/E in GE)

question

With acquisition accounting the net assets acquired are based on fair market value. The fair value of finished goods and merchandise inventory

answer

are based upon selling price less disposal costs and a reasonable profit allowance.

question

. Dallas' consolidated stockholders' equity will be the parent company stockholders' equity plus the noncontrolling interest on December 31, Year 1:

answer

Common stock + Additional paid-in capital + Noncontrolling interest + Retained earnings

question

In the December 31, Year 1 consolidated financial statements of Purl and its subsidiary, total current assets should be:

answer

Purl $ 310,000 +Scott 135,000 +Inventory adjust to FV 10,000 ______________________________________ $ 455,000

question

Consolidated net income is the same as parent company net income

answer

, when the equity method is used.

question

Consolidated retained earnings are the same as

answer

the parent company retained earnings, when financial statements are consolidated under the acquisition method.

question

Identifiable intangibles=

answer

noncompete agreement with a fair value of $300,000

question

Under the IFRS partial goodwill method, noncontrolling interest (NCI) is calculated as follows:

answer

NCI = FV of subsidiary net assets × NCI %

question

The acquisition method requires that 100% of the fair value of the subsidiary's assets be recognized. Therefore, plant assets reported on the consolidated balance sheet would be

answer

the fair value of Solomon's plant assets plus the book value of Passey's plant assets: FV subsidiary plant assets + BV parent's plant assets

question

When acquiring a subsidiary with an acquisition cost that is less than the fair value of 100% of the underlying assets acquired, adjust all balance sheet accounts to

answer

fair value and allocate remaining acquisition costs to the fair value of 100% of identifiable intangible assets. This creates a negative balance in the acquisition cost account, which is allocated to gain.

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