Advanced Accounting Exam #2 (Ch. 3 & 4)

Challenge associated with valuation of subsidiary assets with the presence of noncontrolling interest

-accounting emphasis (economic unit concept) is placed on entire entity that results from the business combination when control has been obtained; parent that controls its subsidiary must consolidate 100% of subsidiary assets, liab, rev, and expenses (EVEN when ownership is less than 100%) -consolidated valuation basis for a newly acquired subsidiary is the acquisition-date FV of the company (often determined by consideration transferred and the FV of noncontrolling interest); specific subsidiary assets and liab are measured @ their acquisition date FV -noncontrolling interest balance is reported in parent's consolidated FS as a component of SE

How is goodwill impairment recognized in financial statements?

-aggregate amount of goodwill impairment losses should be presented as A SEPARATE LINE ITEM IN THE OPERATING SECTION IN THE I/S (unless goodwill impairment loss is associated with a discontinued operation) -a goodwill loss associated with a discontinued operation should be included, on a net of tax basis, within the results of discontinued operations

Step Acquisitions

-an acquiring company may make several different purchases of a subsidiary's stock in order to gain control -upon attaining ctrl, all of the parent's previous investments in the subsidiary are adjusted to FV and a gain or loss is recognized as appropriate -upon attaining ctrl the valuation basis for the subsidiary is established at its total FV (sum of FVs of the controlling and noncontrolling interests) -post-ctrl subsidiary stock acquisitions by the parent are considered transactions with current owners of the consolidated entity; these will neither result in gains or losses nor provide a basis for subsidiary asset remeasurement @ FV -difference btn the sale proceeds and the carrying value of the shares sold (under equity method) is recorded as and adjustment to the parents APIC

Implied Value of Goodwill

-an entity allocates the FV of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination -the excess "acquisition date" FV over the amounts assigned to the assets and liabilities is the implied value of goodwill **allocation is performed only for the purpose of testing goodwill for impairment and does not require entities to record the "step-up" in net assets or any unrecognized intangibles

Qualitative Assessment

-entities are allowed the option of conducting this assessment of goodwill to determine whether the 2-step testing procedure is necessary -management evaluates relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount -if it is more likely than not, then the entity must perform the 2-step procedure, otherwise no further testing is necessary

ASU 2017-04 (elimination of Step 2 for measuring goodwill impairment)

-goodwill impairment should be measured as the excess of the carrying amount of a reporting unit over its fair value (not to exceed the carrying amount of goodwill) -the ASU simplifies goodwill impairment accounting and allows companies to avoid costly periodic determination of FVs of their reporting units' assets and liabilities **effective date is 2020, early adoption permitted

Time Periods After the Year of Acquisition: Initial Value

-initial value method does not recognize income in excess of dividend declarations or excess amortization expense -for all years prior to the current period both income in excess of dividend declarations and excess amortization expense must be entered directly into the consolidation using *C

INITIAL VALUE Combinations Subsequent to Acquisition Date: in year of acquisition

-intra-entity dividends eliminated in the I Entry will only consist of dividends transferred from the subsidiary (separate D entry not needed)

PARTIAL EQUITY Combinations Subsequent to Acquisition Date: in year of acquisition

-intra-entity income to be removed in the I Entry is the equity accrual ONLY, no amortization expense is included -intra-entity dividends eliminated through D entry

Bargain Purchases

-occur when the parent company transfers consideration less than net fair values of the subsidiary's assets acquired and liabilities assumed -parent recognizes an excess of net asset fair value over the consideration transferred as a gain

How is Goodwill tested for impairment?

-optional assessment followed by 2-step approach if necessary

Outside Ownership w/in Consolidated Entity

-outside ownership may be present within any consolidated entity -complete ownership of a subsidiary is NOT a prerequisite for consolidation (must only have enough voting shares to have the ability to ctrl the decision making process of the acquired entity) -any ownership interest in a subsidiary company by a party unrelated to the acquiring company is termed noncontrolling

EQUITY Combinations Subsequent to Acquisition Date: Acquisition in the CURRENT Fiscal Period

-parent adjusts its own investment acct to reflect subsidiary income, dividend declarations, amortization expense, and goodwill -wkst entries made and used to establish consolidated figures for reporting S A I D E (& P)

EQUITY Combinations Subsequent to Acquisition Date: Acquisition in a PRIOR Fiscal Period

-parent adjusts its own investment acct to reflect subsidiary income, dividend declarations, amortization expense, and goodwill -wkst entries made and used to establish consolidated figures for reporting S A I D E (& P) -amount of subsidiary SE to be removed in S entry will differ year to year, to reflect the balance as of the beginning of the yr -allocations established by A entry will also change each subsequent year, only unamortized balances remaining as of the beginning of the current period are recognized

Time Periods After the Year of Acquisition: Partial Equity

-partial equity method does not recognize excess amortization expense, *C used to convert the appropriate acct balances to the equity method by recognizing the expense that relates to all past years

Sales of Subsidiary Stock

-proper BV must be established w/in parent's investment acct so the sales transaction is correctly recorded -investment balance is adjusted as if the equity method had been applied during the entire period of ownership -if only a portion of the shares are being sold, the BV of the investment acct is reduced using FIFO or weighted-avg cost flow assumption -if the parent maintains ctrl any difference btn the proceeds of the sale and the equity adjusted BV of the share sold is recognized as an adjustment to APIC -if parent loses ctrl w/ the sale of subsidiary shares, the difference btn proceeds and equity adjusted BV is recognized as a gain or loss -any interest retained by the parent company should be accounted for by either consolidation, equity method, or FV method (dependant on influence remaining after the sale)

Amortization & Impairment of Other Intangibles

-subsequent to business combination, any newly recognized subsidiary identifiable intangible assets considered to possess indefinite lives (other than goodwill) are NOT amortized, but are assessed for impairment on an annual basis -an entity has the option to first perform qualitative assessments of its indefinite-lived intangibles to see if further quantitative tests are necessary -for intangible assets with finite lives, the amortization expense is recognized over the asset's useful life; amortization method should reflect the pattern of decline in the economic usefulness in the asset (if no such pattern exists, use straight-line)

When is Goodwill Impaired?

-when the fair value of its related reporting unit falls below its carrying value **goodwill should not be amortized, but tested for impairment @ reporting unit lvl -should be tested at least annually -interim testing necessary in the presence of negative indicators (i.e. adverse change in business climate/mkt, legal factors, regulatory action, introduction of competition, loss of key personnel)

2-Step Approach

1. compare the fair value amount of a reporting unit to its carrying amount, if the FV of the reporting unit exceeds its carrying amount goodwill is NOT considered impaired and no further analysis is necessary 2. compare goodwill to its carrying amount, if the implied value of a reporting unit's goodwill is less than its carrying value, goodwill is considered impaired and a loss must be recognized ** the loss is equal to the amount by which goodwill exceeds its implied value

B. operating results appearing on the parent's financial records reflect consolidated totals

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes the company has decided to apply the equity method. Why might the company have made this decision?

A. it is a relatively easy method to apply

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?

C. adjusted to the fair value at the date of the second acquisition, with a resulting gain or loss recorded

A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be

A. $60000 150000+360000+50000 =560000-500000= 60000 1st (100000*30%)*$5 =150000 2nd (100000*60%)*6 =360000 NCI (100000*10%)*5 =50000

Amie, Inc., has 100,000 shares of $2 par value stock outstanding. Prairie Corporation acquired 30,000 of Amie's shares on January 1, 2015, for $120,000 when Amie's net assets had a total fair value of $350,000. On July 1, 2018, Prairie bought an additional 60,000 shares of Amie from a single stockholder for $6 per share. Although Amie's shares were selling in the $5 range around July 1, 2018, Prairie forecasted that obtaining control of Amie would produce significant revenue synergies to justify the premium price paid. If Amie's net identifiable assets had a fair value of $500,000 at July 1, 2018, how much goodwill should Prairie report in its postcombination consolidated balance sheet?

C. $34400; 240800 ((400000-300000)-(60000/10)-(40000/5))*40% =34400 200000+((430000-400000)*40%)+34400-(14000*40%)=

Assuming Solar Company has declared no dividends, what are the noncontrolling interest's share of the subsidiary's income and the ending balance of the noncontrolling interest in the subsidiary?

A. $250000

Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings should Pride report on its 1/1/2018 consolidated b/s?

B. the FV of the expected contingent payment increases goodwill at the acquisition date

Dosmann Inc bought all outstanding shares of Lizzi on 1/1/2016 for 700000 in cash. This portion of the consideration transferred results in a FV allocation of 35000 to equipment and goodwill of 88000. At the acquisition date, Dosmann also agrees to pay Lizzi's previous owners an additional 110000 on 1/1/2018 if Lizzi earns a 10% return on the FV of its assets in 2016 and 2017. Lizzi's profits exceed this threshold in both years. Which of the following is true?

Consolidations Involving Noncontrolling Interest: subsequent to the date of acquisition

Four noncontrolling interest figures are determined for reporting purposes -Beg yr b/s amount -NI attributable to noncontrolling interest -Dividends declared by subsidiary during the period attributable to the noncontrolling interest -End yr b/s amount Noncontrolling interest balances are accumulated in a separate column in the consolidation wkst -beginning of the yr figure is entered on wkst as component of S & A entries -net income attributable to noncontrolling interest is established by a columnar entry that simultaneously reports the bal in both the consolidated i/s and the noncontrolling interest column -dividends declared to outside owners are reflected by extending the subsidiary's dividends declared balance (after eliminating intra-entity transfers) into the noncontrolling interest column as a reduction -the end of yr noncontrolling interest total is the summation of the three items above and is reported in SE

B. a goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value **under 2017 ASU, correct answer would be C. a goodwill impairment loss is recognized for the excess of a reporting unit's carrying amount over its FV, not to exceed the carrying amount of goodwill

Goodwill recognized in a business combination must be allocated among a firm's identified reporting units. If the FV of a particular reporting unit with recognized goodwill falls below its carrying amount what happens?

A. No effect: the method the parent uses is for internal reporting purposes only and has no impact on consolidated totals (i.e.can only use initial value for internal reporting)

How would the answer to the prior question have been affected if the parent had applied the initial value method, rather than the equity method?

D. Indefinitely (no amortization) with an annual impairment review until its life has become finite

If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset's assigned value is allocated to expense over...?

Alternative Methods to Account for Consolidation Subsequent to Date of Acquisition

Initial Value Method Equity Method Partial Equity Method -under each method the balance in the investment acct will vary (acct will still be reduced to 0 using consolidation worksheet) -the earnings recorded by the acquiring company from its ownership % in the subsidiary will depend on the method used (acct will be reduced to 0 on consolidation wkst, and be replaced by subsidiary revenue and expenses

B. Exclude 100% of the preacquisition revenues and 100% of the preacquisition expenses from their respective consolidated totals

James Company acquired 85 percent of Mark-Right Company on April 1. On its December 31 consolidated income statement, how should James account for Mark-Right's revenues and expenses that occurred before April 1?

D. $400000 In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes.

Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan $400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated?

B. The parent's APIC from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue at 1/1/2018

Kaplan Corporation acquired Star, Inc., on January 1, 2017, by issuing 13,000 shares of common stock with a $10 per share par value and a $23 market value. This transaction resulted in recognizing $62,000 of goodwill. Kaplan also agreed to compensate Star's former owners for any difference if Kaplan's stock is worth less than $23 on January 1, 2018. On January 1, 2018, Kaplan issues an additional 3,000 shares to Star's former owners to honor the contingent consideration agreement. Which of the following is true?

C. increase its APIC by $16000 80000-(192000*1/3)=16000

McKinley, Inc., owns 100 percent of Jackson Company's 45,000 voting shares. On June 30, McKinley's internal accounting records show a $192,000 equity method adjusted balance for its investment in Jackson. McKinley sells 15,000 of its Jackson shares on the open market for $80,000 on June 30. How should McKinley record the excess of the sale proceeds over its carrying amount for the shares?

A. $549000 At the date control is obtained, the parent consolidates subsidiary assets at FV regardless of the parent's ownership percentage

Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost $212,000 but had a fair value of $549,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover?

D. Interest Expense $9500; Long-Term Debt $267500 12000-(20000/8yrs)= 9500 250000+20000-(20000/8yrs)= 267500

On January 1, 2018 Jay Co acquired all the outstanding ownership shares of Zee Co. In assessing Zee's acquisition date FVs Jay concluded that the carrying value of Zee's long-term debt (8 yr remaining life) was less than its FV by $20000. At 12/31/2018 Zee Co's accts show interest expense of $12000 and long-term debt of $250000. What amounts of interest expense and long term debt should appear on the 12/31/2018 consolidated FS of Jay and its subsidiary?

B. $46000 30000+10000+(60000/10%) =46000

On a consolidated balance sheet as of January 2, what should be the amount for current liabilities?

D. $140000 90000+40000+10000 =140000 ((60000/80%)-50000) =25000 25000*40%=10000

On a consolidated balance sheet as of January 2, what should be the amount for noncurrent assets?

B. $104000 50000+54000= 104000 (60000/10)=6000 60000-6000=54000

On a consolidated balance sheet as of January 2, what should be the amount for noncurrent liabilities?

C. $95000 80000+((60000/80%)-60000) =95000

On a consolidated balance sheet as of January 2, what should be the amount for stockholders' equity?

A. 574000 294000+190400+(400000-272000)-((128000/10)*3)= 574000

Paar Corp. bought 100% of Kimmel Inc. on 1/1/2015. On that date, Parr's equipment (10 yr remaining life) has a book value of 420000 but a fair value of 520000. Kimmel has equipment (10 yr remaining life) with a book value of 272000 but a fair value of 400000. Paar uses the equity method to record its investment in Kimmel. On 12/31/2017 Parr has equipment of BV of 294000 but FV of 445200. Kimmel has equipment with BV of 190400 but FV of 357000. What is the consolidated balnce for the equipment acct as of 12/31/2017

C. Stockholder's equity

The noncontrolling interest represents an outside ownership in a subsidiary that is not attributable to the parent company. Where in the consolidated balance sheet is this outside ownership interest recognized?

A. $250000 because the equity method is used, only consider Phoenix in determining RE (Sedona's would be eliminated through consolidation wkst)

What is Phoenix's retained earnings balance at 12/31/2018?

A. a subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership

What is a basic premise of the acquisition method regarding accounting for a noncontrolling interest?

A. $508000 260000+200000+60000-((60000/10)*2)

What is the consolidated trademarks balance?

A. If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts **under 2017 ASU, correct answer would be C. if the FV of a reporting unit with goodwill falls below its carrying amount

When should a consolidated entity recognize a goodwill impairment loss?

P Entry

eliminates intra-entity payable/receivable balances

I Entry

eliminates the equity in investee income (investment income) balance accrued by parent

S Entry

offsets subsidiary's SE accounts against the BV component of the investment in subsidiary account (as of acquisition date)

A Entry

recognizes excess fair over book value allocations made to specific subsidiary accounts and/or goodwill (**remember to deduct amortization if consolidating in a year other than the one in which the subsidiary was acquired)

E Entry

recognizes the current excess amortization expenses on the excess fair over book value allocations

D Entry

removes intra-entity dividend declarations

*C Entry

(initial value) converts all prior amounts of income in excess of dividend declarations or excess amortization expense to equity method balances (partial equity) converts appropriate account balances to the equity method through the recognition of the excess amortization expense that relates to all of the past years

Contingent Consideration

-FV of any contingent consideration is included as part of the consideration transferred -if contingency results in a liability (i.e. cash payment) changes in the FV of the contingency are recognized in income as occur -if contingency calls for additional equity issue @ a later date, the acquisition date FV of the contingency is NOT adjusted over time (any subsequent shares issued as a consequence of the contingency are recorded @ original acquisition date FV)

A. $105000 70000+35000=105000 (60000/80%)-50000 =25000 25000*60%=15000 20000+15000=35000

Note: The same company information is used for five questions. On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows: Park: Current Assets $70,000 Noncurrent Assets $90,000 Total Assets $160,000 Current Liabilities $30,000 Long-Term Debt $50,000 Stockholders' Equity $80,000 Total Liabilities & SE $160,000 Strand: Current Assets $20,000 Noncurrent Assets $40,000 Total Assets $60,000 Current Liabilities $10,000 Long-Term Debt $- Stockholders' Equity $50,000 Total Liabilities & SE $60,000 On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand's total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for current assets?

B. $203000 498000-350000+55000= 203000

Note: The same company information is used for three questions. On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $80,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2016 and $80,000 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix: 2018 Revenues $498,000 2018 Expenses $350,000 2018 Income from Sedona $55,000 Retained earnings 12/31/18 $250,000 Sedona: 2018 Revenues $285,000 2018 Expenses $195,000 2018 Income from Sedona $- Retained earnings 12/31/18 $175,000 What is consolidated net income for Phoenix and Sedona for 2015?

B. $486000 (900000+400000)-(500000+300000)-(60000/10)-(40000/5) =486000

Note: The same company information is used for three questions. West Company acquired 60 percent of Solar Company for $300,000 when Solar's book value was $400,000. The newly comprised 40 percent noncontrolling interest had an assessed fair value of $200,000. Also at the acquisition date, Solar had a trademark (with a 10-year life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year life) was undervalued by $40,000. Two years later, the following figures are reported by these two companies (stockholders' equity accounts have been omitted): West Company Book Value Information Current Assets $620,000 Trademarks $260,000 Patented Technology $410,000 Liabilities ($390,000) Revenues ($900,000) Expenses $500,000 Investment Income: Not Given Solar Company Book Value Information Current Assets $300,000 Trademarks $200,000 Patented Technology $150,000 Liabilities ($120,000) Revenues ($400,000) Expenses $300,000 Investment Income $- Solar Company Fair Value Information Current Assets $320,000 Trademarks $280,000 Patented Technology $150,000 Liabilities ($120,000) Revenues $- Expenses $- Investment Income $- What is the consolidated net income before allocation to the controlling and noncontrolling interests?

C. $203000 498000+285000=783000-350000-195000=238000-(10000+25000)= 203000 540000+60000=600000 600000-420000=180000 80000/8 yrs=10000 per yr 180000-80000=100000/ 4yrs= 25000 per yr

Note: The same company information is used for two questions. On January 1, 2016 Pride Co. purchased 90 percent of the outstanding voting shares of Star Inc. for $540,000 cash. The acquisition-date fair value of the noncontrolling interest was $60,000. At January 1, 2016, Star's net assets had a total carrying amount of $420,000. Equipment (8-year remaining life) was undervalued on Star's financial records by $80,000. Any remaining excess fair value over book value was attributed to a customer list developed by Star (4-year remaining life), but not recorded on its books. Star recorded income of $70,000 in 2016 and $80,000 in 2017. Each year since the acquisition, Star has paid a $20,000 dividend. At January 1, 2018, Pride's retained earnings show a $250,000 balance. Selected account balances for the two companies from their separate operations were as follows: Pride: 2018 Revenues $498,000 2018 Expenses $350,000 Star: 2018 Revenues $285,000 2018 Expenses $195,000 What is consolidated net income for 2018?

C. $25000 600000-420000-80000=100000 100000/4 yrs=25000 (3 yrs of amortization have already been expensed, only one year remains)

On 12/31/2018 consolidated b/s, what amount should Phoenix report for Sedona's customer list?

B. $237000 165000+((600000-360000)*30%) =237000

On April 1, Pujols, Inc., exchanges $430,000 fair-value consideration for 70 percent of the outstanding stock of Ramirez Corporation. The remaining 30 percent of the outstanding shares continued to trade at a collective fair value of $165,000. Ramirez's identifiable assets and liabilities each had book values that equaled their fair values on April 1 for a net total of $500,000. During the remainder of the year, Ramirez generates revenues of $600,000 and expenses of $360,000 and declared no dividends. On a December 31 consolidated balance sheet, what amount should be reported as noncontrolling interest?

B. $351000 300000+85000=385000-(85000*40%)= 351000 400000-300000= 100000-15000=85000

On January 1, 2017, Chamberlain Corporation pays $388,000 for a 60 percent ownership in Neville. Annual excess fair-value amortization of $15,000 results from the acquisition. On December 31, 2018, Neville reports revenues of $400,000 and expenses of $300,000 and Chamberlain reports revenues of $700,000 and expenses of $400,000. The parent figures contain no income from the subsidiary. What is consolidated net income attributable to the Chamberlain Corporation?

B. $35000 45000/9=5000 per year 45000-(5000*2)= 35000

On January 1, 2017, Grand Haven Inc., reports net assets of $760,000 although equipment (with a four-year life) having a book value of $440,000 is worth $500,000 and an unrecorded patent is valued at $45,000. Van Buren Corporation pays $692,000 on that date for an 80 percent ownership in Grand Haven. If the patent has a remaining life of 9 years, at what amount should the patent be reported on Van Buren's consolidated statements at December 31, 2018?