Chapter 2 Consolidated Statements Date of Acquisition.
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Transcript of Chapter 2 Consolidated Statements Date of Acquisition.
Chapter 2
Consolidated Statements
Date of Acquisition
C2 2
Consolidated statements - date of acquisition The Consolidations Concept Comparing purchase and pooling Apply purchase rule with a Price and Zone
Analysis Guide the worksheet with a Determination and
Distribution of Excess Schedule (D&D) Presentation of the Noncontrolling Interest
(NCI)
C2 3
The consolidation concept Merge two legal entities into one
economic entity Generally required with over 50%
ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%).
Always ask - what should be left when you put on “one firm” eye glasses.
C2 4
The consolidation concept (continued) See WS (Worksheet) 2-1
– Investment gone, specific accounts of subsidiary in
– Subsidiary equity gone, no longer exists We start on acquisition date to avoid
complications of later transactions.
C2 5
Consolidating: purchase vs. pooling
Purchase Original investment is at fair
value of net assets received or consideration given
Adjust accounts to fair value as they come across the worksheet (WS 2-2)
Special procedures for bargains
Account adjustments are based on D&D schedule
Pooling (over 90%) before 7/1/01
Possible for some pre 7/1/01 acquisitions
Original investment was at book value of subsidiary equity, equity recorded using transfer rules
Accounts were across worksheet at book value (some adjustments may be needed)
C2 6
Returning to the basic example
Assets Liabilities & EquityInventory 120,000 Bond Payable 100,000Land 50,000 Com. stock, $5 par 10,000Building 250,000 Retained earnings 310,000Total 420,000 Total 420,000
Fair Values:Inventory (priority) 170,000 Bond Payable (priority) 105,000Land 100,000Building 300,000Patents 50,000
C2 7
Zone analysis
Accounts TotalCumulative
TotalInventoryBonds PayLandBuildingPatent
65,000Priority
Non Priority
65,000
450,000 515,000
C2 8
Using purchase rules: Goodwill above what price? $515,000
– at $550,000 Goodwill = $35,000 Bargain below what price? $515,000
– at $245,000, $180,000 ($245,000 - $65,000 to priority) is assigned non-priority accounts
Extraordinary gain below what price? $65,000– at $50,000, the extraordinary gain is 15,000
Zone analysis: do before the D&D schedule
C2 9
D&D for $550,000
Price 550,000
Equity (100% $320,000) 320,000
Excess cost 230,000
Adjustments:
Inventory (increase to 170,000) 50,000
Bonds payable (decrease liability) (5,000)
Land (Increase to 100,000) 50,000
Building (increase to 300,000) 50,000
Patents (record) 50,000 195,000
Goodwill (record) 35,000
C2 10
Eliminations for $550,000 price
Parent SubEliminations
Dr CrInvestment in Sub 550,000 EL 320,000
D 230,000Inventory 120,000 D 50,000
Land 50,000 D 50,000
Building 250,000 D 50,000
Patents D 50,000
Goodwill D 35,000
Bonds payable (100,000) D 5,000
Comm Stk - Sub (10,000) EL 10,000
R E - Sub (310,000) EL 310,000
C2 11
D&D for $245,000
Price 245,000
Equity (100% $320,000) 320,000
Excess cost (75,000)
Adjustments:
Inventory (increase to $170,000) 50,000
Bonds payable (decrease liability)) (5,000)
Land (allocation on next slide) (10,000)
Building (allocation on next slide) (130,000)
Patents (allocation on next slide) 20,000 (75,000)
0
C2 12
Allocation
AssetFair
Value
Shareof
TotalAssignTotal*
AllocatedValue
BookValue
Adjust-ment
Land 100,000 2/9 180,000 40,000 50,000 (10,000)
Building 300,000 6/9 180,000 120,000 250,000 (130,000)
Patent 50,000 1/9 180,000 20,000 0 20,000
Total 450,000 180,000 300,000 (120,000)*Amount to assign:
$245,000 purchase price less $65,000 to priority accounts.
C2 13
Eliminations for $245,000 price
Parent SubEliminations
Dr CrInvestment in Sub 245,000 D 75,000 EL 320,000
Inventory 120,000 D 50,000
Land 50,000 D 10,000
Building 250,000 D 130,000
Patents D 20,000
Bonds payable (100,000) D 5,000
Comm Stk - Sub (10,000) EL 10,000
R E - Sub (310,000) EL 310,000
C2 14
D&D for $50,000Price 50,000
Equity (100% $320,000) 320,000
Excess cost (270,000)
Adjustments:
Inventory (increase to $170,000) 50,000
Bonds payable (decrease liability) (5,000)
Land (eliminate book value) (50,000)
Building (eliminate book value) (250,000) (255,000)
Extraordinary gain (15,000)
C2 15
Eliminations for $50,000 price
Parent SubEliminations
Dr CrInvestment in Sub 50,000 D 270,000 EL 320,000
Inventory 120,000 D 50,000
Land 50,000 D 50,000
Building 250,000 D 250,000
Retained earnings(for ext. gain)
D 15,000
Bonds payable (100,000) D 5,000
Comm Stk - Sub (10,000) EL 10,000
R E - Sub (310,000) EL 310,000
C2 16
Zones for an 80% purchase
Use the same subsidiary information for 80% purchaseAll adjustments are for 80% of fair-book difference
Above what price will there be goodwill? $412,000$515,000 80% = $412,000We will use $430,000 so goodwill = $18,000
Below what price will there be a bargain? $412,000$515,000 80% = $412,000If price was $241,000, $189,000 ($241,000 - [$65,000 80%]) is available for P’s 80% share of non-priority accounts
Extraordinary gain below what price? $52,00080% $65,000 = $52,000
C2 17
Zone Analysis: 80% purchase
Accounts Fair value 80% FVCumulative
totalPriority Inventory
Bonds Pay. 65,000 52,000 52,000
Non-Priority
LandBuildingPatents
450,000 360,000 412,000
C2 18
D&D for 80% interest at 430,000
Price 430,000
Equity (80% $320,000) 256,000
Excess cost 174,000
Adjustments:
Inventory (80% 50,000) 40,000
Bonds payable (80% 5,000) (4,000)
Land (80% 50,000) 40,000
Building (80% 50,000) 40,000
Patents (80% 50,000) 40,000 156,000
Goodwill 18,000
C2 19
Eliminations for $430,000 price
Parent SubEliminations
Dr CrInvestment in Sub 430,000 EL 256,000
D 174,000Inventory 120,000 D 40,000
Land 50,000 D 40,000
Building 250,000 D 40,000
Patents D 40,000
Goodwill D 18,000
Bonds payable (100,000) D 4,000
Comm Stk - Sub (10,000) EL 8,000
R E - Sub (310,000) EL 248,000
C2 20
D&D for 80% interest at $241,000
Price 241,000
Equity (80% $320,000) 256,000
Excess cost (15,000)
Adjustments:
Inventory (80% 50,000) 40,000
Bonds payable (80% 5,000) (4,000)
Land (allocation next slide) 2,000
Building (allocation next slide) (74,000)
Patents (allocation next slide) 21,000 (15,000)
0
C2 21
Allocation
AssetFair
Value
Shareof
TotalAssignTotal*
AllocatedValue
80%BookValue
Adjust-ment
Land 100,000 2/9 189,000 42,000 40,000 2,000
Building 300,000 6/9 189,000 126,000 200,000 (74,000)
Patent 50,000 1/9 189,000 21,000 0 21,000
Total 450,000 189,000 240,000 (51,000)*Amount to assign:
$241,000 purchase price less $52,000 to priority accounts.
C2 22
Eliminations for $241,000 price
Parent SubEliminations
Dr CrInvestment in Sub 241,000 D 15,000 EL 256,000
Inventory 120,000 D 40,000
Land 50,000 D 2,000
Building 250,000 D 74,000
Patents D 21,000
Bonds payable (100,000) D 4,000
Comm Stk - Sub (10,000) EL 8,000
R E - Sub (310,000) EL 248,000
80% of subsidiary equity
C2 23
Purchase: subsidiary goodwill
No assets, including intangible assets, can be discounted until parent share of goodwill is eliminated
Ignore existing goodwill in “Zone analysis” Compare goodwill that results from “Zone analysis” to
parent share of existing goodwill and adjust for the difference
A free standing D&D (not connected to prior examples) follows for subsidiary with $50,000 goodwill
C2 24
D&D for 80% interest at $500,000Price 500,000
Equity (80% 450,000) 360,000
Excess cost 140,000
Adjustments:
Inventory (80% 40,000) 32,000
Land (80% 30,000) 24,000
Building (80% 120,000) 96,000 152,000
Reduce existing goodwill (12,000)
• On the worksheet, existing goodwill is reduced $12,000
• The maximum deduction would be $40,000 (80% 50,000)
C2 25
Presentation of NCI
Current Practice NCI share of income
deducted to get consolidated net income
NCI equity shown as liability, between liabilities and equity or as subdivision of equity
NCI shown only as aggregate amount within equity
FASB Proposal on Liabilities and Equity
NCI share of income is distribution of consolidated net income
NCI share of equity is aggregate amount within equity (text approach)
C2 26
Pooling of interests
Investment should was at book value and should observe equity transfer for equity (Chapter 1)
There could be up to 10% NCI; equity transfer applies only to parent ownership percentage (90% or more)
Investment always eliminated with no excess. If not, the investment account is wrong and needs correction.