Advanced Financial Accounting Essay Example

changes in value after acquisition depends on the type of asset or liability. During consolidation, the differential is removed from the investment account and distributed to the relevant asset and liability accounts. This process is repeated for each consolidated statement preparation. However, these eliminating entries do not remove the investment account balance from the parent's books, meaning the differential remains until fully amortized. The parent company's financial statements show its investment in the subsidiary as a single total, lacking information on the subsidiary's individual assets, liabilities, and their relative values. A significant differential suggests that the parent paid more than book value for ownership of the subsidiary. Assigning the differential to identifiable assets or liabilities of the subsidiary allows consolidated balance sheets and income statements to provide additional information not found in the individual companies' financial statements.Consolidated statements offer a more accurate depiction of the utilized assets and reported charges on the income statement. Consolidated net income comprises the parent company's own operational income, excluding any investment income from subsidiaries, along with each subsidiary's income, adjusted for any differential write-off. The worksheet typically requires an additional eliminating entry to expense a suitable portion of the assigned amount for buildings and equipment.

Normally, the depreciation expense is recorded as a debit and the accumulated depreciation is recorded as credit. If the differential arises due to a higher fair value of non-depreciable assets held by the subsidiary compared to their book value, the amount assigned to the differential remains constant as long as the subsidiary holds the assets. However, if the differential arises because the fair value of depreciable or amortizable assets is higher than their book value,

the amount debited to the differential account decreases each period as the parent company amortizes a portion of the differential against investment income. In push-down accounting, when the parent company purchases shares of the subsidiary, the subsidiary's assets and liabilities are revalued on its books. The parent company's basis of accountability for its investment in assets and liabilities is used to revalue the subsidiary's assets and liabilities, thus transferring the parent's basis of accountability to the subsidiary's books.

Push-down accounting is suitable when a parent company owns a substantial majority of a subsidiary. By revaluing the assets and liabilities of the subsidiary at the acquisition date, any differential is eliminated. The revised carrying value of the net assets on the subsidiary's books will match the balance in the parent's investment account. To find answers to this case, refer to the annual reports and 10-K filings with the SEC of the mentioned companies (available at www.ec.gov). a.

Harley-Davidson used to report its investment in Buell Motorcycle Company through the equity method before 1998. With a 49 percent stake since 1993, Harley had significant influence over Buell. However, in 2003, Harley acquired the remaining shares of Buell, leading to the full consolidation of Buell in Harley's financial statements. In 2009, Harley-Davidson made the decision to discontinue Buell in order to focus solely on the Harley-Davidson brand. On the other hand, Chevron fully consolidates its controlled subsidiaries that it primarily benefits from, which are majority-owned and variable interest entities.

Chevron utilizes pro-rata consolidation to report its undivided interests in oil and gas joint ventures. Additionally, the company applies the equity method to report investments in affiliates where Chevron has a significant

influence or ownership interest of 20 to 50 percent. When using the equity method, Chevron recognizes income gains and losses based on changes in its proportionate share of an affiliate's equity resulting from the issuance of additional stock. Chevron analyzes any disparity between the carrying value of an equity-method investment and its underlying book value, assigning that difference to specific assets and liabilities when possible. The company adjusts its equity-method income from affiliates quarterly to account for write-offs or amortization related to the disparity. Furthermore, Chevron evaluates its equity investments for potential impairment when events indicate a possible deterioration.

If a company's investment has decreased in value, it evaluates the situation to determine if this decrease is permanent. If it is confirmed as permanent, the investment is adjusted to its fair value and an income loss is recorded. Any future increases in value are not acknowledged. PepsiCo reports investments in unconsolidated affiliates where it holds significant influence using the equity method.

Before 1999, income or loss from affiliates using the equity method were categorized as selling, general and administrative expenses. However, this classification was incorrect as equity-method income from affiliates should not be considered in this expense category unless it is deemed insignificant. In 1999, PepsiCo began reporting its earnings from equity-method investments separately in the income statement. Currently, income from affiliates using the equity method is reported as bottling equity income in the consolidated income statement. Additionally, Sears utilizes the equity method to account for its investments in various companies' voting securities.

It is challenging to determine where these investments are reported in the financial statements and notes. The investments are apparently relatively small and are included

in other assets on the balance sheet, while the income is reported in other income on the income statement. Assigning an Acquisition Differential for the manufacturing facilities of Ball Corporation may also prove difficult. The equipment is older and may be in various states of repair or operating condition. Some units may be technologically outdated or of little value due to changing production needs. Therefore, documenting the estimated fair value of net assets of $600,000 may be challenging, and assigning it to specific assets and liabilities may be even more difficult.

To determine if Ball has excess balances on hand, inventories should be compared to sales. Additionally, factors like salability, physical condition, and expected sales prices should be considered in determining the portion of the differential to be assigned to inventory. LIFO inventory balances are expected to be below fair value, while FIFO balances may be relatively close to fair value. The rate of change in inventory costs since adopting the LIFO method and the relative magnitude of inventory on hand under each method will significantly affect the amount of differential assigned to inventory. However, no mention is made of patents or other intangible assets developed by Ball Corporation. It is important to note that Ball Corporation cannot record its research and development expenditures as assets, but the buyer should recognize all tangible and intangible assets at fair value before computing goodwill.

Goodwill is typically measured by subtracting the fair value of the identifiable net assets from the sum of the consideration given in the acquisition and the fair value of the noncontrolling interest. Timber needs to assess the fair value of Ball as a whole and

take into account the fair value of the equity interest in Ball that it is not acquiring. Negative retained earnings cause a decrease in net assets of the subsidiary when there are negative earnings results, while positive earnings results cause an increase. When the reported net assets of the subsidiary are exceeded by other stockholders' equity balances, a negative retained earnings balance is indicated.

a. The negative retained earnings balance of the subsidiary is eliminated in the consolidation process and has no impact on the dollar amounts stated in the consolidated stockholders' equity accounts.
b. The consolidation process remains unaffected and does not undergo any significant changes.

Instead of decreasing retained earnings in the consolidation worksheet to remove the subsidiary's stockholders' equity balances, it is necessary to augment this account. Goodwill is acknowledged when the fair value of the acquired company, assessed by considering both the acquisition's given consideration and the fair value of the noncontrolling interest, surpasses the fair value of the identifiable assets obtained. It remains uncertain whether in this instance, the fair value exceeds or falls below book value. Sloan Company has incurred losses in prior periods and potentially may have impaired all assets that have undergone depreciation.

On the other hand, management may have been reluctant to admit these losses in order to avoid further decreases in earnings. In the most extreme case, they may have chosen to sell all assets that had appreciated in value. Several factors, including the company's future earning capacity, will affect the purchase price, making it difficult to determine whether goodwill will be recorded in such a situation. C4-4 Balance Sheet Reporting Issues a. Both of the initial options would

result in Crumple's consolidated balance sheet containing the cars and associated liabilities.

The debt is directly recorded by Crumple in the first case. In the second case, the leasing subsidiary must be fully consolidated. While there may be little difference in economic substance between creating a leasing subsidiary and creating a trust to achieve the same goals, generally accepted accounting procedures did not previously require consolidation of a trust. However, with the recent issuance of FASB 160 (ASC 810), trusts are now included in the definition of a subsidiary. Although the FASB is still determining which entities to include in consolidation, it is unlikely that a trust with a controlling financial interest from another company will be exempt from being included in the consolidated financial statements.

If Crumple has the ability to name the trust directors and oversee its operations, the trust's activities could be conducted to benefit Crumple similarly to an operating corporate affiliate. This situation allows for reflection on the idea of control and the utilization of unconventional organizational structures for conducting a company's business activities. b. Crumple seems to have not explored the possibility of selling more common or preferred shares. Selling additional shares or utilizing convertible securities are options that should be considered.

If Crumple is open to leasing the vehicles, other leasing companies or automobile manufacturers may show interest in getting involved. If the presence of rental cars is deemed important for the economic growth of the states where Crumple plans to expand, the company might be able to negotiate affordable loans or partially forgivable loans to acquire the necessary facilities and vehicles for expansion. Additionally, some individuals may be concerned

about Crumple not receiving any residual amounts if the trust is dissolved. However, Crumple can control the balance left in the trust by managing charges and selecting lease rates accordingly.

When making recommendations, students can consider examining the financial statements of leasing companies. In terms of financial reporting, all three alternatives should now be reported in the consolidated financial statements in a similar manner. This means that the financial reporting aspects of the alternatives have become unimportant. However, even if different alternatives result in different reporting treatments, the decision on which alternative to choose should be based on economic factors rather than the effects on financial reporting.