Advanced accounting, 5th edition international student version ch03

The stockholders’ equity section of the two company’s balance sheets on December 31, 2010, were: Investments at the Date of Acquisition Investments at the Date of Acquisition LO 7 Reco

Trang 1

Slide

3-1

Consolidated Financial Statements—Date of Acquisition

Advanced Accounting, Fifth Edition3

Trang 2

Slide

3-2

1. Understand the concept of control as used in reference to consolidations.

2. Explain the role of a noncontrolling 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 workpapers and eliminating entries at the date of acquisition.

9. Compute and allocate the difference 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 Objectives

Trang 3

Slide

3-3

Chapter Focus - Accounting for Stock

Acquisitions

through direct or indirect ownership of its voting stock.

Stock Acquisition

Acquiring company referred to as the parent

Acquired company referred to as the subsidiary

Other shareholders considered noncontrolling 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).

Trang 4

Slide

3-4

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 Control

LO 1 Meaning of control.

Trang 5

Slide

3-5

Control using U.S GAAP:

the direct or indirect ability to determine the direction of management and policies

FASB ASC paragraph 810-10-15-8 states:

the usual condition for a controlling financial interest is ownership of a majority voting

interest

Trang 6

Slide

3-6

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).

Trang 8

Slide

3-8

Requirements for the Inclusion of

Subsidiaries in the Consolidated

Financial Statements

Requirements for the Inclusion of

Subsidiaries in the Consolidated

Financial Statements

LO 5 Requirements regarding consolidation of subsidiaries.

Purpose of consolidated statements - to present

the operating results and the financial position of a

economic entity

Circumstances when majority-owned subsidiaries

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.

Trang 9

Slide

3-9

Advantages to acquiring a controlling interest in

another company.

Reasons 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.

Trang 10

Slide

3-10

Statements prepared for a parent company and its

subsidiaries are called consolidated financial

statements.

Consolidated 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:

Trang 11

Slide

3-11

Investments at the Date of 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.

Trang 12

Slide

3-12

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:

Trang 13

Slide

3-13

E3-2: Prepare the journal entry on the books of Polo

Company to record the purchase of the common stock of Save Company and related expenses.

Investment in Save (40,000 x $17.50) 700,000

Trang 14

Slide

3-14

Assets and liabilities are summed, regardless of

whether the parent owns 100% or a smaller

Trang 15

LO 8 Preparing consolidated statements using a workpaper.

Advances to subsidiary (from

Interest revenue (interest expense) Against Interest expense (interest revenue)Dividend revenue (dividends

declared)

Dividends declared (dividend revenue)

Against

Management fee received from

Sales to subsidiary (purchases of

inventory from subsidiary)

Purchases of inventory from parent (sales to parent)

Against

Intercompany Accounts to Be Eliminated

Trang 16

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

Trang 17

LO 9 Computing and allocating the

difference between implied and book value (CAD).

“Computation and Allocation of Difference 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.

Trang 18

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

stock.

Case 3 The implied value of the subsidiary is less than the book value of

the subsidiary’s equity (IV < BV), and

stock.

Trang 19

Slide

3-19

Book Value of Subsidiary Company’s Equity (IV BV)— 100% of Stock Acquired.

Consolidated Balance Sheets: Use of

Workpapers

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

Trang 20

Slide

3-20

Other current assets 280,000 100,000

Plant and equipment 240,000 80,000

Total Liab and Equity $ 800,000 $ 260,000

immediately after the acquisition of shares is as follows:

Workpapers

Price paid $160,000

% acquired 100% Implied value

160,000 Book value 160,000

Implied value = Book value

Trang 21

Slide

3-21

sheets for P and S on Jan 1, 2013, date of acquisition, is presented below:

Workpapers

Consolidated

Trang 22

Consolidated

Eliminations

Solution on notes page

Trang 23

Slide

3-23

Case 1(a): The workpaper entry to eliminate S

Company’s stockholders’ equity against the investment account is:

Workpapers

Trang 24

Slide

3-24

Case 1(a): Note the following on the workpaper.

Workpapers

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.

Trang 25

Slide

3-25

Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of Subsidiary’s Stock Acquired (IV=BV) - Partial Ownership.

Workpapers

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?

Trang 26

Balance Sheet P Company S Company

Cash $ 56,000 $ 40,000

Other current assets 280,000 100,000

Plant and equipment 240,000 80,000

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

Implied value = Book value

Trang 27

90% 10%

Parent Noncontrolling Total Share 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:

Trang 28

Consolidated Balance Sheet P Company S Company Debit Credit Balances Cash $ 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

Solution on notes page

Trang 29

Consolidated Balance Sheet P Company S Company Debit Credit Balances Cash $ 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

Trang 30

Slide

3-30

Case 1(b): The workpaper entry to eliminate S

Company’s stockholders’ equity against the investment account is:

Workpapers

Common stock (S) 100,000

Other contributed capital (S) 20,000

Retained earnings (S) 40,000

Investment in S Company 144,000 Noncontrolling interest in equity 16,000 (establish the NCI)

Trang 31

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?

Định dạng
Số trang	57
Dung lượng	1,4 MB