ACC 712 Midterm

1.Does the asset or liability meet the definition of an element, as defined by FASB's Conceptual Framework? 2.Is the acquired asset or liability part of a business combination?

-ASSET: Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events. -LIABILITY: Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

According to ASC 805, a business....

-Has INPUTS ... and -PROCESSES applied to those INPUTS ... that have -ABILITY to contribute to creation of outputs

Required disclosures with regard to inputs to fair value measurement

-LEVEL 1: at quoted prices -LEVEL 2: not at quoted prices, but observable inputs -LEVEL 3: not at quoted prices, with unobservable inputs

AAP formula

AAP = invstment - (p% * NVNiA) or AAP = FV given up - BV gotten

An investor company owns 30% of the common stock of an investee company. The investor has significant influence over the investee, and acquired its equity interest in the investee on January 1, 2018 for $525,000. On the date of acquisition, the investee's stockholders equity was $1,500,000, and the fair values of the investee's individual net assets were equal to their reported book values. During the year ended December 31, 2018, the investee reported net income of $50,000 and dividends of $10,000. During the year ended December 31, 2019, the investee reported net income of $60,000 and dividends of $15,000. The investor routinely sells inventory to the investee at a 25% profit margin. At December 31, 2018 and 2019, the investee held inventories purchased from the investor for $30,000 and $40,000, respectively. (At the end of each period, all of these inventories are sold by the investee to unaffiliated companies in the next period.) What is the balance in the Equity Investment account on Dec 31, 2019? a. 525,000 b. 547,500 c. 550,500 d. 570,000

Beginning balance at January 1, 2018 $525,000 + 30% x NI of Investee during 2018 (30% x $50,000) 15,000 ‐ 30% of 2018 profit deferred to 2019 (30% x (25% x $30,000)) (2,250) ‐ 2018 dividends received (30% x $10,000) (3,000) + 30% x NI of Investee during 2019 (30% x $60,000) 18,000 ‐ 30% of 2019 profit deferred to 2020 (30% x (25% x $40,000)) (3,000) + 30% of profit from 2018 recognized in 2019 (30% x (25% x $30,000)) 2,250 ‐ 2019 dividends received (30% x $15,000) (4,500) Ending balance at December 31, 2019 $547,500

Intangible assets are considered "separately identifiable" (and, therefore, recognized separately) if they are either...

CONTRACTUAL or SEPARABLE

80-100%

Consolidation. Grossed up equity method.

How do we determine control?

Degree of influence

Net assets that do constitute a business

Each asset reported at FV. Find goodwill as consideration paid less FVNiA

Consider the following scenario: an investor owns 30% of an investee company. The remaining 70% is owned by the investee's founder who has managed the company since its inception and takes no direction from "outsiders." How should the investor account for its investment?

Even though the investor owns 30% of the investee, it should not use the equity method as it cannot exert significant influence over the investee. Further, since the investee is not a public company (all of the remaining stock is privately held), the investor should use the cost method to account for this investment as the fair value method presumes a publicly traded stock with sufficient liquidity to reasonably determine a fair value.

Add transaction costs to...

FMV of assets

Exit price

FV

Net assets that don't constitute a business

Find % FV is of FVNiA. Multiply by price. NO GOODWILL

Nontaxable vs taxable transactions

Generally speaking, in a nontaxable transaction, the pre‐acquisition tax bases of the subsidiary's net assets carry forward to the post‐acquisition tax books (tax x delta). This can result in deferred taxes if the recognized fair values have temporary differences from the carried forward tax base. IF taxable, goodwill same and all is well

How is the reporting of equity income in the investor's IS a consolidation (ie yielding the same NI for the parent company that would result from a consolidation)? How is it different?

If the investor owns 100% of the investee, the equity income that the investor reports is equal to the net income of the investee, thus implicitly including its revenues and expenses. Replacing the equity income with the revenues and expenses of the investee company in the consolidation process will yield the same net income.

Equity method

Income from Subsidiary = p% x NI(S) ‒ p% AAP for the period Investment in Subsidiary = p% x stockholders equity of S + unamortized p% AAP

What to do with CS and RE when consolidating?

Leave alone. No elim entries

There is managerial discretion with regard to method of fair value measurement

Market approach; Income approach; Cost approach

0-20%

Passive. Change in FV -> NI or cost method

The percentage thresholds are subject to...

Rebuttable presumptions

20-80%

Significant influence. Equity method.

Who is acquiring entity? what does B/S look like?

The entity that controls >50% after acq. Acquiring has BV on B/S, Target has FV

See #19

The income recognized by the investor must be reduced for a proportionate share of the gross profit for intercompany transactions that occurred during the current period, but that will not be part of a transaction with an unaffiliated party until a future period. 20,000 x 40% = 8,000 8,000 * 30% = 2,400 30% x $40,000) ‐ $2,400 = $9,600

Pushdown accounting

The pushdown process results in the subsidiary recording the effects of the AAP on its pre‐ consolidation books. This will result in a subsidiary's pre‐consolidation individual net assets being reported at fair value, consistent with FASB ASC 805. Entries for pushdown will INCLUDE GW. Debit RE. Account used: pushdown equity

Restructuring costs

Typical restructuring activities include the costs of a plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree's employees.

Cost method

Under the cost method, the pre‐consolidation investment at any point in time will equal the investment on the acquisition date. Income is dividends

An investor company uses the equity method to account for its investment in 25% of the outstanding common stock of an investee company. How should cash dividends received from the investee affect the financial statements of the investor? Select one: a. A decrease in the Equity Investment account b. An increase in the Equity Investment account c. A decrease in retained earnings d. Dividend income

a

An investor company owns 30% of the common stock of an investee company. The investor has significant influence over the investee, and acquired its equity interest in the investee on January 1, 2018 for $525,000. On the date of acquisition, the investee's stockholders equity was $1,500,000, and the fair values of the investee's individual net assets were equal to their reported book values. During the year ended December 31, 2018, the investee reported net income of $50,000 and dividends of $10,000. During the year ended December 31, 2019, the investee reported net income of $60,000 and dividends of $15,000. The investor routinely sells inventory to the investee at a 25% profit margin. At December 31, 2018 and 2019, the investee held inventories purchased from the investor for $30,000 and $40,000, respectively. (At the end of each period, all of these inventories are sold by the investee to unaffiliated companies in the next period.) What amount of investment income from the investee did the investor recognize during the year ended December 31, 2019? Select one: a. $17,250 b. $18,000 c. $18,750 d. $20,250

a. (30% x $60,000) ‐ $3,000 + $2,250 = $17,250

On January 1, 2018, an investor company acquired 30% of an investee company's common stock for $600,000. As a result of this transaction, the investor can exert significant influence over the investee. During each year ended December 31, 2018 and 2019 the investee reported $120,000 of net income and $50,000 of dividends. On January 1, 2018, the book value of the investee's net assets was $2,000,000 and all individual net assets had appraised fair values that equaled their reported book values. On December 31, 2019, what is the balance of the Equity Investment account on the Investor's balance sheet? Select one: a. $740,000 b. $642,000 c. $621,000 d. $600,000

b

On January 1, 2019, an investor purchases 18,000 common shares of an investee at $12 (cash) per share. The shares represent 20% ownership in the investee. The investee's common stock has a readily determinable fair value. On January 1, 2019, the book value of the investee's assets and liabilities equals $1,230,000 and $150,000, respectively. On that date, the appraised fair values of the investee's identifiable net assets approximated the recorded book values. During the year ended December 31, 2019, the investee company reported net income equal to $50,000 and dividends equal to $15,000. On December 31, 2019, the fair value of the investee's stock is $16 per share. Assume the investor can exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2019. a. $216,000 b. $223,000 c. $288,000 d. $295,000

b

On January 1, 2019, an investor purchases 32,000 common shares of an investee at $11 (cash) per share. The shares represent 24% ownership in the investee. The investee's common stock has a readily determinable fair value. On January 1, 2019, the book value of the investee's assets and liabilities equals $1,700,000 and $600,000, respectively. On that date, the appraised fair values of the investee's identifiable net assets approximated the recorded book values, except for a customer list. On January 1, 2019, the customer list had a recorded book value of $0, an estimated fair value equal to $90,000 and a 5 year remaining useful life. During the year ended December 31, 2019, the investee company reported net income equal to $120,000 and dividends equal to $40,000. On December 31, 2019, the fair value of the investee's stock is $15 per share. 2. Assume the investor can exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2019. a. 432,000 b. 366,880 c. 352,000 d. 480,000

b

An investor company acquired 20% of an investee company's voting common stock. The investee's common stock has a readily determinable fair value. The investor has representation on the investee's board of directors, participates in the investee's policy making process and has material business transactions with the investee. Which of the following alternatives best describes the investor's required accounting for its interest in the investee? a. The investor should recognize as income the dividends it receives from the investee. b. Because the investee's stock has a readily determinable fair value, the investor must use fair value method to account for its interest in the investee's common stock. c. The investee should recognize as income a proportionate share of the net income recognized by the investee. d. The investor must use the cost-based approach to account for its interest in the investee's common stock.

c

On January 1, 2019, an investor purchases 18,000 common shares of an investee at $12 (cash) per share. The shares represent 20% ownership in the investee. The investee's common stock has a readily determinable fair value. On January 1, 2019, the book value of the investee's assets and liabilities equals $1,230,000 and $150,000, respectively. On that date, the appraised fair values of the investee's identifiable net assets approximated the recorded book values. During the year ended December 31, 2019, the investee company reported net income equal to $50,000 and dividends equal to $15,000. On December 31, 2019, the fair value of the investee's stock is $16 per share. Assume the investor cannot exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2019. a. $216,000 b. $223,000 c. $288,000 d. $295,000

c

On January 1, 2019, an investor purchases 32,000 common shares of an investee at $11 (cash) per share. The shares represent 24% ownership in the investee. The investee's common stock has a readily determinable fair value. On January 1, 2019, the book value of the investee's assets and liabilities equals $1,700,000 and $600,000, respectively. On that date, the appraised fair values of the investee's identifiable net assets approximated the recorded book values, except for a customer list. On January 1, 2019, the customer list had a recorded book value of $0, an estimated fair value equal to $90,000 and a 5 year remaining useful life. During the year ended December 31, 2019, the investee company reported net income equal to $120,000 and dividends equal to $40,000. On December 31, 2019, the fair value of the investee's stock is $15 per share. 1. Assume the investor cannot exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2019. a. 432,000 b. 366,880 c. 352,000 d. 480,000

c. Cost. 11 x 32000 = 352,000

SEPARABLE

capable of being separated

Earn-outs

common form of contingent consideration. For example, consider the following: • Assume Company P acquires Company S in a business combination. Company P pays $1,000,000 in cash + an additional 20% to former Company S shareholders IF the 2-year ROA of Company S exceeds 8%.

Which of the following factors is an indicator that an investor company has significant influence over an investee company? a. The investor and investee sign an agreement under which the investor surrenders significant rights. b. Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor c. The investor tries and fails to obtain representation on the investee's board of directors. d. The investee has technological dependency on the investor.

d

If assets purchased, entries.... If stock purchased, entries...

list A+L list "equity investment"

How is the reporting of an equity investment like a consolidation (ie yielding the same SE for the parent company that would result from a consolidation)? How is it different?

the investor acquired 100% of the investee at book value, the Equity Investment account is equal to the Stockholders' Equity of the investee company. It, therefore, includes the assets and liabilities of the investee company in one account. The investor's balance sheet, therefore, includes the Stockholders' Equity of the investee company, and, implicitly, its assets and liabilities. In the consolidation process, the balance sheets of the investor and investee company are brought together. Consolidated Stockholders' Equity will be the same as that which the investor currently reports; only total assets and total liabilities will change.

CONTRACTUAL

•Contract-based •Marketing-related •Customer-related •Technology-based •Artistic-based

Is substantially all of the fair value of the gross assets acquired (or disposed of) concentrated in a single identifiable asset or a group of similar identifiable assets?

•If "yes", the set of net assets is not a business (it is an asset purchase) If no... -Does the set of net assets have outputs? •If "no", the set must have at least one input and at least one substantive process that, when applied to that input, has the ability to create outputs. • •If "yes", the set must have at least one input and at least one substantive process that, when applied to that input, has the ability to continue creating outputs.