Advanced Accounting Exam 1

Subchapter S Corporation

- legal characteristics of a corporation - ownership limited to 100 stockholders - owners limited to individuals, estates, and certain tax-exempt entities and trusts (no corporate owners allowed)

Acquisition Method

-If the consideration is MORE than the FV of the assets acquired, the difference is attributed to goodwill -If the consideration is LESS than the FV of the assets acquired, the difference is attributed to gain on bargain purchase

Additional Issues w/ Acquisition Date FVs

-Purchased IPR&D is capitalized as an intangible asset @ FV w/ an indefinite life that is reviewed for impairment -R&D after acquisition date is expensed

Reporting Investee Losses

-a permanent decline in the investee's FMV is recorded as an impairment loss and the investment account is reduced to the fair value -when accumulated losses incurred and dividends paid by the investee reduce the investment account to zero, no further loss can be accrued -investor discontinues using the equity method rather than record a negative balance; balance remains at zero until profits eliminate all unrecognized losses

Reasons Firms Combine (Tax Advantages)

-accept stock to create a tax free reorganization -transferable carry-forward feature of net operating losses -net taxable income reported for the consolidated company

Acquisition Method

-all assets and liabilities recorded at fair value regardless of the percentage interest -present information of both the parent and subsidiaries as if they were a single company

Limited Liability Company (LLC)

-classified as partnerships for tax purposes -number of owners is not usually restricted -owners only risk their own investments

Partnership Capital Accounts

-consists of capital balances for each partner -profits/losses allocated to each capital account -withdrawals reduce the capital accounts

Benefits of Consolidation

-consolidated financial statements provide more meaningful information than separate statements -consolidated financial statements more fairly present the activities of the consolidated companies -represent the only means of obtaining clear picture of the total resources of the combined entity that are under the control of the parent company -consolidated companies still retain their legal identities as separate corporations

Valuation of Identifiable Assets and Liabilities

-current assets @ FV -existing liabilities @ FV -PP&E @ FV (no accum depr) -intangible assets not separately recorded -R&D: FVs of tangible and intangible assets are recorded -contingent assets and liabilities: possessed by acquiree on the acquisition date -liabilities associated w/ restructuring or exit (existing liabilities to other entities)

Related Costs of Business Combinations (Acquisition Method)

-direct costs of the acquisition are NOT part of the FV received and are immediately expensed Dr. Acquisition Expense Cr. Cash -indirect or internal costs of acquisition are period costs expensed as incurred -costs to register and issue securities related to the acquisition reduced their FV (ex: reduction of APIC) Dr. APIC, Parent Cr. Cash

Summary of Accounting Methods-Equity Method

-level of ownership: 20-50% -initial recording: @ cost including brokers' fees -recording of income: ownership share of investee income; dividends reduce investment

Summary of Accounting Methods-Fair Value

-level of ownership: <20% -initial recording: @ cost including brokers' fees -recording of income: dividends as declared

Summary of Accounting Methods-Consolidated Financial Statements

-level of ownership: >50% -initial recording: @ cost -recording of income: ownership share of income; accomplished by consolidating subsidiary income statements with those of parent

Limited Partnership (LP)

-limited partners not allowed to participate in management -losses are restricted for limited partners to the amount invested -must have one or more general partners who assume responsibility for all obligations

Fair Value

-price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Business Combinations

-refers to a transaction or other event in which an acquirer obtains control over one or more businesses

Limitations of Consolidation

-results of individual companies included are not disclosed which hides poor performance -not all consolidated R/E balance is available for dividends of the parent -financial ratios are not necessarily representative of any single company -similar accounts of different companies may not be entirely comparable -additional info about companies may be needed for fair presentation, increasing footnotes -some information is lost any time data sets are aggregated

Acquisition Method

-the acquisition method embraces the far value in measuring the acquirer's interest in the acquired business -recognizes and measures the consideration transferred for the acquired business and any non-controlling interest, separately identified assets and liabilities, goodwill or gain from bargain purchase

Reasons Firms Combine (Economic Advantages)

-vertical integration -cost savings -quick entry into new markets -economies of scale -more attractive financing opportunities -diversification of business risk -business expansion -increasingly competitive environment

Pre-Distribution Plan Step 1

1) Determine the maximum loss that each partner can absorb by dividing each partner's capital balance by their respective income sharing percent

Three Ways to Report Investments in Other Companies

1) Fair-Value Method 2) Consolidation of Financial Statements 3) Equity Method these depend on the degree of influence the investor has over the investee

Equity Method Entries

1) Record % of investee net income Dr. Investment Cr. Equity Method Income 2) Record dividends received from investor Dr. Cash (Dividend Receivable) Cr. Investment 3) Record amortization of excess Dr. Equity Method Income Cr. Investment

Steps

1) Trial Balance Prior to Adjusting Entries 2) Adjusting Entries 3) Adjusted Trial Balance 4) Prepare Financial Statements 5) Closing Entries 6) Post-Closing Trial Balance

Individual partner's creditors can make a claim against the assets of the partnership under what two conditions?

1) all partnership creditors are satisfied first 2) the claim is only to the extent of the specific partner's positive capital balance

Two methods for admitting a new partner

1) bonus 2) goodwill

Two methods for withdrawal of a partner

1) bonus 2) goodwill

Two methods for accounting for transfer of ownership

1) book value 2) goodwill / revaluation

Under the Uniform Partnership Act, this is the priority of creditors having claims against individual partners

1) debts owned to partnership creditors 2) debts owed to the other partners 3) debts owed to personal creditors

Deficit capital balances can be resolved two ways:

1) deficit partner can make a contribution to cover deficit 2) remaining partners can absorb the deficit (deficit partner may pay later or can be sued for the amount)

Partnership Advantages

1) flexibility in defining relationships -profits and losses, and management operating decisions, shared independent of ownership percentages 2) ease of formation and dissolution 3) taxes "flow-through" to the partners

Articles of Partnership should always clearly describe the:

1) name and address of each partner 2) business location 3) nature of business 4) rights and responsibilities of each partner 5) initial contribution to be used by each partner and the method to be used for valuation 6) specific method by which P&L are to be allocated 7) periodic withdrawal of assets by each partner 8) procedure for admitting new partners 9) method for arbitrating partnership disputes 10) life insurance provisions enabling remaining partners to acquire the interest of any deceased partner 11) method for settling a partner's share in the business upon withdrawal, retirement, or death

Three steps of liquidation of a partnership:

1) non-cash assets are sold for cash; gains and loss on the sales are allocated to the capital accounts of individual partners by profit/loss ratios 2) liabilities and expenses incurred during the liquidation are paid out of the partnership's available cash (take directly out of capital accounts) 3) cash remaining after paying liabilities and liquidation expenses is distributed to the individual partners on the basis of their respective capital balances

Partnership Disadvantages

1) unlimited liability incurred by each partner (jointly and severally liable) 2) mutual agency (each partner has the right to incur liabilities in the name of the partnership 3) inability to participate in various corporate tax benefits

Reporting Investee OCI and Irregular Items

investor must report: -discontinued operations -extraordinary items -other comprehensive income

Limitations of the Equity Method

not appropriate if: -an agreement exists tween investor and investee by which the investor surrenders significant rights as as a shareholder -a concentration of ownership operates the investee without regard for the views of the investor -the investor attempts but fails to obtain representation on the investee's board of directors

Equity Method

use when: -investor has the ability to exercise significant influence on investee operations -under the equity method, investor's share of investee dividends declared are recorded as decreases in the investment account, not income

Fair Value Method

use when: -investor holds small % of equity securities of investee -investor cannot significantly affect investee's operations -investment is made in anticipation of dividends or market appreciation

What is to be consolidated?

Asset Acquisition (dissolution): all appropriate account balances are physically consolidated in the financial records of the survivor Stock Acquisition: only the financial statement information is consolidated

How does consolidation affect the accounting records?

Asset Acquisition (dissolution): dissolved company's records are closed out; surviving company's accounts are adjusted to include appropriate balances of the dissolved company Stock Acquisition: each company continues to retain its own records; worksheets facilitate the periodic consolidation process without disturbing individual accounting systems

When does consolidation occur?

Asset Acquisition (dissolution): permanent consolidation occurs at the date of acquisition Stock Acquisition: the consolidation process is carried out at regular intervals whenever financial statements are to be prepared

What are noncash assets valued at when contributed to form a partnership?

Fair Value

Allocation of Income

Interest +Additional Compensation +Allocation of Remaining Income/Loss =Total Allocation of Income/Loss

Upstream Sale

Investee to Investor

Downstream Sale

Investor to Investee

Acquisition Entries

NEED TO DO A D&D SCHEDULE Book Entry: Dr. Investment Cr. Cash S) Entry: Dr. Common Stock Dr. APIC Dr. Retained Earnings Cr. Investment A) Entry: Dr. Assets and Goodwill Cr. Investment or Dr. Assets Cr. Gain on Bargain Purchase and Investment Other Entry: Dr. Acquisition Expense Cr. Cash

Limited Liability Partnership (LLP)

Owners: -risk their own investments -are responsible for contractual debts of the business -are liable only for their own acts and omissions, and those of individuals they directly supervise

Asset Acquisition

acquires assets and often liabilities

Stock Acquisition

acquires stock that is recorded as an investment; controls decision making of acquired company

Consolidation Process

adjustments and eliminations related to intercompany transactions and holdings are made 1) intercorporate stockholdings 2) intercompany receivables/payables 3) intercompany sales and unrealized profits

Partnership

an association of two or more persons to carry on a business as co-owners for profit

Partners (are/are not) liable for all the debts of the partnership.

are

Partners (are/are not) liable for the personal debts of the other partners.

are not

Methods used for recording contributed intangible assets

bonus method or goodwill method

James and Joyce contribute 70K and 10k cash. Joyce also contributes a skill valuable to business and they decide to evenly split their capital balances. Capital account balances under bonus and goodwill method are?

bonus: James 40k and Joyce 40k goodwill: James 70k, Joyce 70k, Goodwill 60k

Deferral of Unrealized Profits in Inventory (Downstream)

Ending Inventory x Gross Profit % x Ownership % = Intraentity GP Deferral

Statement of Capital Balances

Beg Bal +Additional Compensation +Allocation of Income/Loss +Draws =End Bal

D&D Schedule

Purchase Price -BV of Investor*% =Excess Distribute Excess to get Goodwill

Statement of Liquidation

a report prepared to disclose the progress of liquidation to interested parties that includes: -transactions to date -property still held by the partnership -liabilities remaining to be paid -current cash and capital balances

Cost Approach (Fair Value)

estimates fair values by reference to the current cost of replacing an asset with another of comparable economic utility

Market Approach (Fair Value)

estimates fair values using other market transactions involving similar assets or liabilities

Consolidated Statements

generally when a parent firm owns over 50% of the voting common stock of another company they use these statements

Interim cash distributions

have to calculate safe-cash payments; assume: 1) noncash assets are a complete loss 2) liabilities must be paid 3) liquidation expenses must be paid 4) all deficit partners must be written off

Amortization

payment relating to each asset should be amortized over an appropriate time period

Purchase Method

recorded fair values for the portion of the net assets acquired in the purchase

Income Approach (Fair Value)

relies on multi-period estimates of future cash flows projected to be generated by an asset

Reporting a Change to the Equity Method

report a change if: -an investment that was recorded using the fair-value method reaches the point where significant influence is established

Consolidation of Financial Statements

required when: -investor's ownership exceeds 50% of an organization's outstanding voting stock -one set of financial statements prepared to consolidate all accounts of parent and subs as a single entity

Pre-Distribution Plan

this is produced to serve as a guide for all future payments