advanced accounting chapter 3

initial value method

Accrual accounting without equity adjustments—usually gives balances approximating consolidation figures but easier to apply than equity method

partial equity method

Cash basis accounting—easy to apply and gives a good measurement of cash flows generated by the investment.

Record-keeping if parent can exert control over subsidiary:

External financial reporting: Consolidation is required. Internal record-keeping: Parent selects an investment accounting method to monitor activities of subsidiary.

equity method

Full accrual accounting—creates a total income figure reflective of the entire combined business entity

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

Indefinitely, (no amortization) with an annual impairment review until its life becomes finite.

Several years ago, Jenkins Company acquired a controlling interest in Lambert Company. Lambert recently borrowed $100,000 from Jenkins. In consolidating the financial records of these two companies, how will this debt be handled?

Lambert's loan payable and the receivable held by Jenkins are intra-entity accounts. The consolidation process offsets these reciprocal balances. The $100,000 is neither a debt to nor a receivable from an unrelated (or outside) party and is, therefore, NOT REPORTED in consolidated financial statements. Any interest income/expense recognized on this loan is also intra-entity in nature and must likewise be eliminated

one company acquired another in a transaction in which $100,000 of the acquisition price is assigned to goodwill. several years later, a worksheet is being produced to consolidate these two companies. how is the reported value of the goodwill determined at this date?

The $100,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.

how to record a contingency

The acquiring firm estimates the fair value of the contingency and records a liability equal to the present value of the future payment if appropriate The liability continues to be measured at fair value with corresponding recognition of gains or losses from the revaluation

Reimers Company acquires Rollins Corporation on January 1, 2017. As part of the agreement, the parent states that an additional $100,000 payment to the former owners of Rollins will be made in 2018, if Rollins achieves certain income thresholds during the first two years following the acquisition. How should Reimers account for this contingency in its 2017 consolidated financial statements?

The acquisition-date fair value of the contingent payment is part of the consideration transferred by Reimers to acquire Rollins --> is part of the overall fair value assigned to the acquisition. If the contingency is a liability (to be settled in cash or other assets) then the liability is adjusted to fair value through time. If the contingency is a component of equity (e.g., to be settled by the parent issuing equity shares), then the equity instrument is not adjusted to fair value over time

when a parent company uses the equity method to account for an investment in a subsidiary, why do both the parents net income and retained earnings account balances agree with the consolidated totals

The equity method parallels consolidation. Thus, the parent's net income and retained earnings each year will equal the consolidated totals

goodwill recognized in a business combination must be allocated among a firm's identified reporting units. if the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true?

a goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value

Intangible assets with indefinite lives are tested for impairment:

annually

when should a consolidated entity recognize a goodwill impairment loss?

if both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts

Dosmann, Inc. bought all outstanding shares of Lizzi Corp. on Jan. 1 2016, for 700,000 cash. This portion of the consideration transferred results in a fair-value allocation of 35,000 to equipment and goodwill of 88,000. At the acquisition date, Dosmann also agrees to pay Lizzi's previous owners an additional 110,000 on Jan. 1, 2018 if Lizzi earns a 10% return on the fair value of assets in 2011 and 2012. Lizzis profits exceed this threshold in both years. what does the contingent payment do?

increases goodwill at the acquisition date

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 would a company use this method?

it's relatively easy to apply

how would totals differ if the parent used equity, initial value, or partial equity methods?

no effect. the method the parent uses is for internal reporting purposes only and has no impact on consolidated totals

Goodwill impairment losses are reported as

operating items in the consolidated income statement

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 would a company make this decision?

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

when should a parent consider recognizing an impairment loss for goodwill associated with a subsidiary? how should the loss be reported in the financial statements?

recognize an impairment loss for goodwill when, at the reporting unit level, the fair value is less than its carrying amount. Goodwill is reduced when its carrying value is less than its fair value.

To compute fair value for goodwill its implied value is calculated by

total fair value less fair values of the reporting unit's ID NA The impairment is recognized as a loss from continuing operations