Consolidated Financial Statements—Date of Acquisition Advanced Accounting, Fifth Edition 77.
-
Upload
rolf-patterson -
Category
Documents
-
view
247 -
download
5
Transcript of Consolidated Financial Statements—Date of Acquisition Advanced Accounting, Fifth Edition 77.
Consolidated Financial Consolidated Financial Statements—Date of AcquisitionStatements—Date of Acquisition
Advanced Accounting, Fifth Edition
7777
1. Understand the concept of control as used in reference to consolidations.
2. Explain the role of a non-controlling interest in business combinations.
3. Describe the reasons why a company acquires a subsidiary rather than its net assets.
4. Describe the valuation and classification of accounts in consolidated financial statements.
5. List the requirements for inclusion of a subsidiary in consolidated financial statements.
6. Discuss the limitations of consolidated financial statements.======================================================================
===============
7. Record the investment in the subsidiary on the parent’s books at the date of acquisition.
8. Prepare the consolidated work papers and eliminating entries at the date of acquisition.
9. Compute and allocate the difference (CAD) between implied value and book value of the acquired firm’s equity.
============================================================================
10. Discuss some of the similarities and differences between U.S. GAAP and IFRS with respect to the preparation of consolidated financial statements at the date of acquisition.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Chapter Focus - Accounting for Stock Acquisitions
When one company controls another company through direct or indirect ownership of its voting stock.
Stock AcquisitionStock AcquisitionStock AcquisitionStock Acquisition
Acquiring company referred to as the parent.
Acquired company referred to as the subsidiary.
Other shareholders considered non-controlling interest.
Parent records interest in subsidiary as an investment.
If a subsidiary owns a controlling interest in one or more other companies, a chain of ownership is forged by which the parent company controls other companies.LO 2 Noncontrolling interest (NCI).LO 2 Noncontrolling interest (NCI).
The Securities and Exchange Commission
defines a subsidiary as an affiliate controlled by
another entity, directly or indirectly, through one or
more intermediaries.
Control means the possession, direct or indirect,
of the power to direct management and
policies of another entity, whether through the
ownership of voting shares, by contract, or
otherwise.
Definitions of Subsidiary and ControlDefinitions of Subsidiary and ControlDefinitions of Subsidiary and ControlDefinitions of Subsidiary and Control
LO 1 Meaning of control.LO 1 Meaning of control.
Control using U.S. GAAP:
the direct or indirect ability to
determine the direction of management
and policies through ownership, contract, or
otherwise
FASB ASC paragraph 810-10-15-8 states:
the usual condition for a controlling
financial interest is ownership of a majority
voting interest
Definitions of Subsidiary and ControlDefinitions of Subsidiary and ControlDefinitions of Subsidiary and ControlDefinitions of Subsidiary and Control
LO 1 Meaning of control.LO 1 Meaning of control.
However, application of the majority voting interest
requirement may not identify the party with a
controlling financial interest because the
controlling financial interest may be achieved
through arrangements that do not involve
voting interests.
The first step in determining whether the financial
statements should be consolidated is to
determine if the reporting entity has a
variable interest in another entity, referred
to as a potential variable interest entity
(VIE).
Definitions of Subsidiary and ControlDefinitions of Subsidiary and ControlDefinitions of Subsidiary and ControlDefinitions of Subsidiary and Control
LO 1 Meaning of control.LO 1 Meaning of control.
Definitions of ControlDefinitions of ControlDefinitions of ControlDefinitions of Control
LO 1 Meaning of control.LO 1 Meaning of control.
Requirements for the Inclusion of Requirements for the Inclusion of Subsidiaries in the Consolidated Subsidiaries in the Consolidated Financial StatementsFinancial Statements
Requirements for the Inclusion of Requirements for the Inclusion of Subsidiaries in the Consolidated Subsidiaries in the Consolidated Financial StatementsFinancial Statements
LO 5 Requirements regarding consolidation of subsidiaries.LO 5 Requirements regarding consolidation of subsidiaries.
Purpose of consolidated statements - to present
the operating results and the financial position of
a parent and all its subsidiaries as if they are one
economic entity.
Circumstances when majority-owned subsidiaries should
be excluded from the consolidated statements:
1. Control does not rest with the majority owner.
2. Subsidiary operates under governmentally imposed
uncertainty so severe as to raise significant doubt about
the parent’s control.
Advantages to acquiring a controlling
interest in another company.
Reasons For Subsidiary CompaniesReasons For Subsidiary CompaniesReasons For Subsidiary CompaniesReasons For Subsidiary Companies
1. Stock acquisition is relatively simple.
2. Control of subsidiary can be accomplished with a smaller investment.
3. Separate legal existence of affiliates provides an element of protection of the parent’s assets.
LO 3 Acquiring assets or stock.LO 3 Acquiring assets or stock.
Statements prepared for a parent company and its subsidiaries are called consolidated financial statements.
Consolidated Financial StatementsConsolidated Financial StatementsConsolidated Financial StatementsConsolidated Financial Statements
Ignore legal aspects of separate entities, focus on economic entity under “control” of management.
Substance rather than form.
Not substitute for statements prepared by separate subsidiaries, which may be used by:
Creditors
Non-controlling stockholders
Regulatory agenciesLO 4 Valuation and classification of subsidiary assets and LO 4 Valuation and classification of subsidiary assets and
liabilities.liabilities.
Investments at the Date of AcquisitionInvestments at the Date of AcquisitionInvestments at the Date of AcquisitionInvestments at the Date of Acquisition
LO 7 Recording of investment at acquisition.LO 7 Recording of investment at acquisition.
Recording Investments at Cost (Parent’s Books)
Stock investment is recorded at cost as measured
by fair value of the consideration given or
consideration received, whichever is more clearly
evident.
Consideration given may include cash, other assets,
debt securities, stock of the acquiring company.
Assets and liabilities are summed, regardless of whether the parent owns 100% or a smaller controlling interest.
Consolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance Sheets
Non-controlling interests (NCI) are reflected
as a component of owners’ equity.
Eliminations must be made to cancel the effects
of transactions among the parent and its
subsidiaries.
A work-paper is frequently used to summarize the
effects of various additions and eliminations.
LO 8 Preparing consolidated statements using a workpaper.LO 8 Preparing consolidated statements using a workpaper.
Investment Elimination
It is necessary to eliminate the investment
account of the parent company against the
related stockholders’ equity of the subsidiary
to avoid double counting of these net assets.
When parent’s share of subsidiary’s equity is
eliminated against the investment account,
subsidiary’s net assets are substituted for the
investment account in the consolidated balance
sheet.
Consolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance Sheets
LO 8 Investment is eliminated for consolidated statements.LO 8 Investment is eliminated for consolidated statements.
Consolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance Sheets
LO 8 Preparing consolidated statements using a workpaper.LO 8 Preparing consolidated statements using a workpaper.
Intercompany receivable (payable) Intercompany payable (receivable)Against
Advances to subsidiary (from subsidiary)
Advances from parent (to parent)Against
Interest revenue (interest expense) Interest expense (interest revenue)Against
Dividend revenue (dividends declared) Dividends declared (dividend revenue)Against
Management fee received from subsidiary
Management fee paid to parentAgainst
Sales to subsidiary (purchases of inventory from subsidiary)
Purchases of inventory from parent (sales to parent)Against
Parent’s Accounts Subsidiary’s Accounts
Investment in subsidiary Equity accountsAgainst
Intercompany Accounts to Be Eliminated
Investment Elimination
Consolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance Sheets
“Computation and Allocation of Difference (CAD)” between Implied Value and Book Value
Step 1: Determine percentage of stock acquired.
Step 2: Divide purchase price by the percentage
acquired
to calculate the implied value of the
subsidiary.
Step 3: Difference between step 2 and book value
of
subsidiary’s equity must be allocated to adjust
the
underlying assets and liabilities of the
acquired
company.
E3-2: On January 1, 2011, Polo Company purchased 100% of the common stock of Save Company by issuing 40,000 shares of its (Polo’s) $10 par value common stock with a market price of $17.50 per share. Polo incurred cash expenses of $20,000 for registering and issuing the common stock. The stockholders’ equity section of the two company’s balance sheets on December 31, 2010, were:
Common stock, $10 par value $350,000 $320,000
Other contributed capital 590,000 175,000
Retained earnings 380,000 205,000
Polo Save
Investments at the Date of AcquisitionInvestments at the Date of AcquisitionInvestments at the Date of AcquisitionInvestments at the Date of Acquisition
Prepare: -Part A: Acquisition Entry-Part B: Elimination Entry
E3-2: Part A: Acquisition Entry
Investment in Save (40,000 x $17.50) 700,000
Common Stock 400,000 Other Contributed Capital 300,000
Other Contributed Capital 20,000Cash
20,000
Investments at the Date of AcquisitionInvestments at the Date of AcquisitionInvestments at the Date of AcquisitionInvestments at the Date of Acquisition
Part B: Elimination Entry:Common Stock – Save 320,000 Other Contributed Capital – Save 175,000 Retained Earnings –Save 205,000
Investment in Save 700,000
Exercise 3-1: Work paper Elimination Entries: 3 Cases
Prepare in general journal form the work-paper entries to eliminate Prancer Company’s investment in Saltez Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the following independent cases:
Saltez Company Equity Balances Percent of Investment Common Other Contributed Retained Stock Owned Cost Stock Capital Earningsa. 100% $351,000 $160,000 $92,000
$43,000b. 90 232,000 190,000 75,000 (29,000)c. 80 159,000 180,000 40,000
(4,000)Any difference between book value of net assets and the value implied by the purchase price relates to subsidiary property plant and equipment except for case (c).
In case (c) assume that all book values and fair values are the same.
What is the IMPLIED VALUE of "S“ in Cases a, b, and c?
Exercise 3-1 a. Common Stock – Saltez 160,000
Other Contributed Capital - Saltez 92,000 Retained Earnings - Saltez 43,000 Property, Plant, and Equipment 56,000
Investment in Saltez 351,000
b. Common Stock – Saltez 190,000 Other Contributed Capital – Saltez 75,000 Retained Earnings – Saltez 29,000
Property, Plant, and Equipment 21,778* Investment in Saltez 232,000
Non-controlling Interest 25,778**
*$232,000/0.9 = $257,778; $257,778 -[$190,000+$75,000-$29,000]) **($232,000/0.9 = $257,778 – 232,000 = 25,778
Exercise 3-1 (C)
This is a bargain acquisition because the investment cost of $159,000 (=80%)
implies a total value of $198,750 <= ($159,000 / 0.8);
Since this value of $198,750 is less than the book value of equity $216,000 = $180,000 +$40,000 - $4,000, the difference is a bargain of $17,250. This bargain is allocated between the parent (this portion is reflected as a gain)
and the NCI. c. Common Stock – Saltez 180,000
Other Contributed Capital – Saltez 40,000 Retained Earnings – Saltez 4,000 Investment in Saltez 159,000 Gain on Purchase of Business – Prancer ** 13,800
Non-controlling Interest (.2) ($198,750) + $3,450* 43,200 ** The ordinary gain to Prancer is = $159,000 – (.80)($216,000) = $13,800
* Non-controlling interest reflects the non-controlling share of implied value => (.20 x $198,750 = $39,750) plus the NCI portion of the bargain (.20 x $17,250= 3,450)
Investment Elimination
It is necessary to eliminate the investment
account of the parent company against the
related stockholders’ equity of the subsidiary to
avoid double counting of these net assets.
When parent’s share of subsidiary’s equity is
eliminated against the investment account,
subsidiary’s net assets are substituted for the
investment account in the consolidated balance
sheet.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 8 Investment is eliminated for consolidated statements.LO 8 Investment is eliminated for consolidated statements.
Investment Elimination
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
“Computation and Allocation of Difference (CAD)” between Implied Value and Book Value”
Step 1: Determine percentage of stock acquired.
Step 2: Divide purchase price by the percentage
acquired
to calculate the implied value of the
subsidiary.
Step 3: Difference between step 2 and book value
of
subsidiary’s equity must be allocated to adjust
the underlying assets and liabilities of the acquired
company.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
The prior steps lead to the following possible cases:
Case 1. The implied value (IV) of the subsidiary is equal to the book value of the subsidiary’s equity (IV = BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.
Case 2. The implied value of the subsidiary exceeds the book value of the subsidiary’s equity (IV > BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.
Case 3. The implied value of the subsidiary is less than the book value of the subsidiary’s equity (IV < BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.
Case 1(a): Implied Value of Subsidiary Is Equal to Book Value of Subsidiary Company’s Equity (IV = BV) and 100% of Stock Acquired.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
Illustration: Assume that on January 1, 2013, P Company acquired all the outstanding stock (10,000 shares) of S Company for cash of $160,000.
What journal entry would P Company make to record the shares of S Company acquired?
Investment in S Company $160,000
Cash $160,000
Balance Sheet P Company S CompanyCash 40,000$ 40,000$ Other current assets 280,000 100,000 Plant and equipment 240,000 80,000 Land 80,000 40,000 Investment in Sill 160,000
Total assets 800,000$ 260,000$
Liabilities 120,000$ 100,000$ Common stock 400,000 100,000 Other Contributed capital 80,000 20,000 Retained earnings 200,000 40,000
Total Liab. and Equity 800,000$ 260,000$
Case 1(a): The balance sheets of both companies immediately after the acquisition of shares is as follows:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Price paid $160,000
% acquired 100%
Implied value 160,000
Book value 160,000
Difference $0
Implied value = Book value
Case 1(a): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2013, date of acquisition, is presented below:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 40,000$ 40,000$ 80,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 120,000 Investment in Sill 160,000 160,000
Total assets 800,000$ 260,000$ 1,060,000$
Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 500,000 Other Contributed capital 80,000 20,000 100,000 Retained earnings 200,000 40,000 240,000
Total Liab. and Equity 800,000$ 260,000$ 1,060,000$
Eliminations
Adjusting and eliminating entries are made on the workpaper for the preparation of consolidated statements.
Case 1(a): The workpaper entry to eliminate S Company’s stockholders’ equity against the investment account is:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Common stock (S) 100,000
Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Investment in S Company 160,000
This is a workpaper-only entry.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 40,000$ 40,000$ 80,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 120,000 Investment in Sill 160,000 160,000 -
Total assets 800,000$ 260,000$ 900,000$
Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 100,000 400,000 Other Contributed capital 80,000 20,000 20,000 80,000 Retained earnings 200,000 40,000 40,000 200,000
Total Liab. and Equity 800,000$ 260,000$ 160,000$ 160,000$ 900,000$
Eliminations
Case 1(a): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2013, date of acquisition, is presented below:
Case 1(a): Note the following on the workpaper.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
1. The investment account and related subsidiary’s stockholders’ equity have been eliminated and the subsidiary’s net assets substituted for the investment account.
2. Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification.
3. Consolidated stockholders’ equity is the same as the parent company’s stockholders’ equity.
Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of Subsidiary’s Stock Acquired (IV=BV) and Partial Ownership.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Illustration: Assume that on January 1, 2013, P Company acquired 90% (9,000 shares) of the stock of S Company for $144,000. What journal entry would P Company make to record the shares of S Company acquired?
Investment in S Company $144,000
Cash $144,000
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Balance Sheet P Company S CompanyCash 56,000$ 40,000$ Other current assets 280,000 100,000 Plant and equipment 240,000 80,000 Land 80,000 40,000 Investment in Sill 144,000
Total assets 800,000$ 260,000$
Liabilities 120,000$ 100,000$ Common stock 400,000 100,000 Other Contributed capital 80,000 20,000 Retained earnings 200,000 40,000 Noncontrolling interest
Total Liab. and Equity 800,000$ 260,000$
Case 1(b): The balance sheets of both companies immediately after the acquisition of shares is as follows:
Price paid $144,000
% acquired 90%
Implied value 160,000
Book value 160,000
Difference $0
Implied value = Book value
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
90% 10%Parent Noncontrolling TotalShare Share Value
Purchase price and implied value 144,000$ 16,000$ 160,000$ Less: Book value of equity acquired:
Common stock 90,000 10,000 100,000 Other contributed capital 18,000 2,000 20,000 Retained earnings 36,000 4,000 40,000 Total book value 144,000$ 16,000$ 160,000$
Difference between implied and book value -$ -$ -$
Case 1(b): Computation and Allocation of Difference between Implied and Book Values:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 56,000$ 40,000$ 96,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 120,000 Investment in Sill 144,000 144,000
Total assets 800,000$ 260,000$ 1,060,000$
Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 500,000 Other Contributed capital 80,000 20,000 100,000 Retained earnings 200,000 40,000 240,000 Noncontrolling interest -
Total Liab. and Equity 800,000$ 260,000$ 1,060,000$
Eliminations
Case 1(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2013, date of acquisition, is presented below:
Solution on notes page
Case 1(b): The workpaper entry to eliminate S Company’s stockholders’ equity against the investment account is:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Common stock (S) 100,000
Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Investment in S Company 144,000Non-controlling interest in equity 16,000
(establish the NCI)
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 56,000$ 40,000$ 96,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 120,000 Investment in Sill 144,000 144,000 -
Total assets 800,000$ 260,000$ 916,000$
Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 100,000 400,000 Other Contributed capital 80,000 20,000 20,000 80,000 Retained earnings 200,000 40,000 40,000 200,000 Noncontrolling interest 16,000 16,000
Total Liab. and Equity 800,000$ 260,000$ 160,000$ 160,000$ 916,000$
Eliminations
Case 1(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2013, date of acquisition, is presented below:
Case 2(b): Implied Value Exceeds Book Value of Subsidiary Company’s Equity (IV>BV)—Partial Ownership.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Illustration: Assume that on January 1, 2013, P Company acquired 80% (8,000 shares) of the stock of S Company for $148,000. What journal entry would P Company make to record the shares of S Company acquired?
Investment in S Company $148,000
Cash $148,000
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Balance Sheet P Company S CompanyCash 52,000$ 40,000$ Other current assets 280,000 100,000 Plant and equipment 240,000 80,000 Land 80,000 40,000 Investment in Sill 148,000 Difference (IV>BV)
Total assets 800,000$ 260,000$
Liabilities 120,000$ 100,000$ Common stock 400,000 100,000 Other Contributed capital 80,000 20,000 Retained earnings 200,000 40,000 Noncontrolling interest
Total Liab. and Equity 800,000$ 260,000$
Case 2(b): The balance sheets of both companies immediately after the acquisition of shares is as follows:
Price paid $148,000
% acquired 80%
Implied value 185,000
Book value 160,000
Difference $25,000
Implied value = Book value
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
80% 20%Parent Noncontrolling TotalShare Share Value
Purchase price and implied value 148,000$ 37,000$ 185,000$ Less: Book value of equity acquired:
Common stock 80,000 20,000 100,000 Other contributed capital 16,000 4,000 20,000 Retained earnings 32,000 8,000 40,000 Total book value 128,000$ 32,000$ 160,000$
Difference between implied and book value 20,000$ 5,000$ 25,000$ Land revaluation (mark to market) (20,000) (5,000) (25,000) Balance -$ -$ -$
Case 2(b): Computation and Allocation of Difference between Implied and Book Values:
We assume the entire difference is attributable to land with a current value higher than historical
cost.
Case 2(b): The workpaper (elimination) entries are as follows:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Common stock (S) 100,000
Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Difference between IV and BV 25,000
Investment in S Company 148,000Noncontrolling interest in equity 37,000
#1
Land 25,000
Difference between IV and BV 25,000
#2
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 52,000$ 40,000$ 92,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 25,000 145,000 Investment in Sill 148,000 148,000 - Difference (IV>BV) 25,000 25,000 -
Total assets 800,000$ 260,000$ 937,000$
Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 100,000 400,000 Other Contributed capital 80,000 20,000 20,000 80,000 Retained earnings 200,000 40,000 40,000 200,000 Noncontrolling interest 37,000 37,000
Total Liab. and Equity 800,000$ 260,000$ 210,000$ 210,000$ 937,000$
Eliminations
Case 2(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2013, date of acquisition, is presented below:
Case 2(b): Reasons an Acquiring Company May Pay More Than Book Value.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
1. Fair value of specific tangible or intangible assets of the subsidiary may exceed its recorded value because of appreciation.
2. Excess payment may indicate existence of goodwill.
3. Liabilities, generally long-term, may be overvalued.
4. A variety of market factors may affect the price paid.
Case 3(b): Implied Value of Subsidiary is Less Than Book Value (IV<BV)—Partial Ownership.
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Illustration: Assume that on January 1, 2013, P Company acquired 80% (8,000 shares) of the stock of S Company for $120,000. What journal entry would P Company make to record the shares of S Company acquired?
Investment in S Company $120,000
Cash $120,000
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Balance Sheet P Company S CompanyCash 80,000$ 40,000$ Other current assets 280,000 100,000 Plant and equipment 240,000 80,000 Land 80,000 40,000 Investment in Sill 120,000 Difference (IV<BV)
Total assets 800,000$ 260,000$
Liabilities 120,000$ 100,000$ Common stock 400,000 100,000 Other Contributed capital 80,000 20,000 Retained earnings 200,000 40,000 Noncontrolling interest
Total Liab. and Equity 800,000$ 260,000$
Case 3(b): The balance sheets of both companies immediately after the acquisition of shares is as follows:
Price paid $120,000
% acquired 80%
Implied value 150,000
Book value 160,000
Difference $10,000
Implied value = Book value
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
80% 20%Parent Noncontrolling TotalShare Share Value
Purchase price and implied value 120,000$ 30,000$ 150,000$ Less: Book value of equity acquired:
Common stock 80,000 20,000 100,000 Other contributed capital 16,000 4,000 20,000 Retained earnings 32,000 8,000 40,000 Total book value 128,000$ 32,000$ 160,000$
Difference between implied and book value (8,000)$ (2,000)$ (10,000)$ Plant & equipment (mark to market) 8,000 2,000 10,000 Balance -$ -$ -$
Case 3(b): Computation and Allocation of Difference between Implied and Book Values:
Assume the difference is attributable to plant and equipment, in this case an overvaluation of
$10,000.
Case 3(b): The workpaper (elimination) entries are as follows:
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Common stock (S) 100,000
Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Difference between IV and BV 10,000Investment in S Company
120,000Noncontrolling interest in equity 30,000
#1
Difference between IV and BV 10,000
Plant and equipment 10,000
#2
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 80,000$ 40,000$ 120,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 10,000 110,000 Investment in Sill 120,000 120,000 - Difference (IV>BV) 10,000 10,000 -
Total assets 800,000$ 260,000$ 930,000$
Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 100,000 400,000 Other Contributed capital 80,000 20,000 20,000 80,000 Retained earnings 200,000 40,000 40,000 200,000 Noncontrolling interest 30,000 30,000
Total Liab. and Equity 800,000$ 260,000$ 170,000$ 170,000$ 930,000$
Eliminations
Case 3(b): The workpaper to consolidate the balance sheets for P and S on Jan. 1, 2013, date of acquisition, is presented below:
The noncontrolling interest in the subsidiary is reported as:
a. Asset
b. Liability
c. Equity
d. Expense
Review QuestionReview Question
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Subsidiary Treasury Stock Holdings
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
A subsidiary may hold some of its own shares as
treasury stock at the time the parent company
acquires its interest.
Because the treasury stock account represents a
contra stockholders’ equity account, it must be
eliminated by a credit when the investment
account and subsidiary company’s equity
accounts are eliminated on the workpaper.
Other Intercompany Balance Sheet Eliminations
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
Intercompany accounts receivable, notes
receivable, and interest receivable, for example,
must be eliminated against the reciprocal
accounts payable, notes payable, and interest
payable.
The full amount of all intercompany receivables
and payables is eliminated without regard to the
percentage of control held by the parent company.
Adjusting Entries Prior to Eliminating Entries
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
At times, workpaper adjustments to accounting
data may be needed before appropriate
eliminating entries can be accomplished.
Make on workpaper in eliminations columns
or
Adjust the subsidiary’s statements prior to
their entry on the workpaper.
Which of the following adjustments do notnot occur in the consolidating process?
a. Elimination of parent’s retained earnings
b. Elimination of intra-company balances
c. Allocations of difference between implied and book values
d. Elimination of the investment account
Review QuestionReview Question
Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers
LO 9 Computing and allocating the LO 9 Computing and allocating the difference between implied and difference between implied and book value (CAD).book value (CAD).
For Example:
Little information of value in consolidated
statements because they contain insufficient
detail about the individual subsidiaries.
Highly diversified companies operating across
several industries, often the result of mergers
and acquisitions, are difficult to analyze or
compare.
LO 6 Limitations of consolidated statements.LO 6 Limitations of consolidated statements.
Limitations of Consolidated Limitations of Consolidated StatementsStatementsLimitations of Consolidated Limitations of Consolidated StatementsStatements
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Similarities and differences between U.S. GAAP and IFRS. LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Similarities and differences between U.S. GAAP and IFRS. LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Similarities and differences between U.S. GAAP and IFRS. LO 10 Similarities and differences between U.S. GAAP and IFRS.
Deferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisitionDeferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisition
APPENDIX A
If a purchase acquisition is tax-free to the seller
Tax bases of the acquired assets and liabilities are carried forward at historical book values.
Assets and liabilities of the acquired company are recorded on the consolidated books at adjusted fair value.
Under current guidelines, the tax effects of the difference between consolidated book values and the tax bases must be recorded as deferred tax liabilities or assets.
Deferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisitionDeferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisition
Illustration: Suppose that Purchasing Company acquires
90% of Selling Company by issuing stock valued at
$800,000. The only difference between book value and fair
value relates to depreciable plant and equipment. Plant
and equipment has a market value of $400,000 and a book
value of $250,000. All other book values approximate
market values. Assume that the combination qualifies as a
nontaxable exchange. On the date of acquisition, Selling
Company’s book value of equity is $600,000, which
includes $150,000 of common stock and $450,000 of
retained earnings. Assume a 30% tax rate. Consider the
following Computation and Allocation Schedule with and
without considering deferred taxes.
Deferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisitionDeferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisition
Deferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisitionDeferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisition
The workpaper entry to eliminate the investment account is as follows:
Deferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisitionDeferred Taxes on the Date of Deferred Taxes on the Date of AcquisitionAcquisition
Entries for allocation with and without deferred taxes.
FASB has issued guidance for the consolidation of special-purpose entities (SPEs) through Interpretation No. 46(R) “Consolidation of Variable Interest Entities” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)[ASC 810–10–30].”
An enterprise shall consolidate a variable interest entity (VIE) when that enterprise has a variable interest (or combination of variable interests) that provides the enterprise with a controlling financial interest on the basis of the certain provisions (listed below).
FASB Statement No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.
Consolidation of Variable Interest Consolidation of Variable Interest EntitiesEntitiesConsolidation of Variable Interest Consolidation of Variable Interest EntitiesEntities
APPENDIX B
Copyright © 2012 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work beyond
that permitted in Section 117 of the 1976 United States
Copyright Act without the express written permission of
the copyright owner is unlawful. Request for further
information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by
the use of these programs or from the use of the
information contained herein.
CopyrightCopyrightCopyrightCopyright