ACCT 503 midterm

Why does the RE/ investment in sub. accounts need to be adjusted for an indirect debt transfer gain/loss in years following the acquisition?

because the gain/loss was already recognized in a prior year and only interest income and interest expense were recognized by the two parties in the current year

When there are noncontrolling interests, where do you allocate goodwill?

between the controlling and noncontrolling interests

When there are noncontrolling interests, where do you allocate gain on a bargain purchase?

All goes to the parent

What should I remember about entry A?

only the unamortized balances remaining as of the beginning of the current period are recognized in this entry

What is entry E?

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

What is entry D?

removes intra-entity dividend declarations

What is entry TA?

removes intra-entity gains and returns equipment accounts to balances based on original historical cost

What accounts are affected by entry *GL?

retained earnings (beg balance of seller) land

What is the starting point for calculating diluted consolidated EPS?

the parent's share of consolidated NI

What form(s) do variable interest entities tend to take?

trust, partnership, join venture, or corporation

are consolidations done through journal entries or on a worksheet only

worksheet only

What is Entry A?

Allocates the excess payment in the investment in subsidiary account to specific accounts with any unidentified excess allocated to goodwill

Which accounts are affected by entry*G?

Buyer's COGS and seller's RE

Which balance sheet accounts are affected by entry G?

COGS (ending inventory) and inventory Removes gross profit in ending inventory created by intra-entity sale

What is the equation for basic consolidated EPS?

Consolidated NI - Income to NCI - Parent Preferred Dividends / Weighted Avg. Parent Common Shares outstanding

What type of accounting method is used for reporting when a company has 50-100% ownership of a corporate equity security?

Consolidation

What accounts are affected by entry ED?

Db accumulated depreciation Cr depreciation expense

What accounts are affected from entry TA?

Db gain on sale of equipment Db equipment Cr accumulated depreciation

How is dividends treated when a company has 50-100% of the ownership shares of a company?

Dividends are recorded as decreases in the investment account

How should an indirect debt transfer be handled in the year of acquisition?

Eliminate intra-entity accounts (liability, receivable, interest income, interest expense) while the gain or loss is recognized -all income effects resulting from the retirement go to the parent company

What is entry ED?

Eliminates overstatement of depreciation expense caused by inflated transfer price of assets

What is Entry TL?

Eliminates the effects of intra-entity transfer of land

What is consolidation entry *GL?

Eliminates the effects of intra-entity transfer of land made in a previous year

Which entries are adjusting the balances of assets and liabilities from the subsidiary book value to the unamortized acquisition-date fair value and adjusting current period amort/dep expense so it is based on the parent's "cost" rather than the sub's?

Entries A & E

Which worksheet entries are for beginning balances?

Entries S & A

Which three entries are simply removing amounts recorded on one of the entity's books, so there will be no "double counting" once consolidated?

Entries S, I, & D

What worksheet adjustment is needed to properly remove any unrealized gross profit from intra-entity sales from consolidated net income?

Entry G

Which entry offsets intra-entity payables/receivables so that amounts owed between entities are effectively netted out when consolidated?

Entry P

What type of accounting method is used for reporting when a company has 20-50% ownership of a corporate equity security?

Equity method or fair value option

Where is goodwill impairment losses presented?

In the operating section of the income statement as a separate line item UNLESS the impairment loss is associated with discontinued operation where it then should be included (net of tax) within the results of discontinued operations

How is initial investment recorded when a company secures 50-100% of an equity security?

Initial investment is recorded at cost under the equity method

What is Entry S?

It eliminates the subsidiary's stockholders' equity accounts and the component of the parent's investment in subsidiary account (which will equal the book value of the subsidiary's net assets)

Why is the equity method sometimes criticized?

It gives management the potential to report bias performance ratios (managerial compensation, cost and availability of capital, ability to meet debt covenants, executive reputations)

What do you do with existing goodwill of an acquired subsidiary?

It is ignored in allocating acquisition date fair value

What does entry *GL do when land is sold to an outside party?

It removes the intra-entity gain from the year of transfer so that total profit can be recognized in the current period when land is sold to an outside party. Debit RE CR gain on sale of land

If a company that uses the equity method decides to report using the fair value, can they switch back to using the equity method?

No, the option is irrevocable

What happens if the fair values of a subsidiary's assets and liabilities change post-acquisition-date?

Nothing, the fair values stay at the acquisition-date fair values

If a merger occurs, when would the first permanent consolidation records be produced?

On the date of acquisition

Describe post-control acquisition of subsidiary stock

Post-control acquisitions don't affect fair values recognized at date of acquisition No gains or losses result from post-control stock acquisitions. Any difference between sale proceeds and carrying value is recorded as an adjustment to the parent's APIC

Which balance sheet accounts are affected in entry TI?

Sales and COGS

When computing equity earnings of a 30% interest company in another company, if the subsidiary has an other comprehensive gain, is it included in computing the parent company's equity earnings for the year?

no

Do direct debt transfers pose any specific problems when consolidating financial statements?

no because everything can be directly offset in the consolidation process

What is recorded if the consideration transferred in an acquisition is less than the net fair value of the identified assets and liabilities?

A gain on bargain purchase

Define: acquisition method

A method that measures, at fair value, the consideration transferred in an acquisition, along with the assets acquired, liabilities assumed, and goodwill or gains on bargain purchases

What is the difference in consolidation procedures when using the initial cost method rather than the equity method?

-Intra-entity dividends eliminated in Entry I will consist of ONLY dividends transferred from the subsidiary -There is no separate Entry D -There is no accrual of Net income or Net loss, no adjustment for amortization -Dividends = dividend income -Entry*C is used to convert all prior income in excess of dividend declarations and excess amort expense into equity method balances

What items are classified in other comprehensive income?

-Unrealized holding gains or losses on investments that are classified as available for sale -foreign currency translation gains or losses -pension plan gains or losses -pension prior service costs or credits

What are three characteristics of the equity method of consolidation?

-amortization expense is adjusted for acquisition-date excess fair-value -unrealized gains on intra-entity transactions are deferred -dividends from the subsidiary reduce the parent's investment account

What is the difference in consolidation procedures when using the partial equity method rather than the equity method?

-parent recognizes reported income/loss accrued from subsidiary -investment in sub account decreases with dividends from subsidiary -Amortization and deferral of unrealized gains are not made -Entry*C is used to convert account balances to the equity method by recognizing the expenses

What accounts are affected by intra-entity transactions?

-revenues -COGS -NI attributable to noncontrolling interest -RE at beginning of year -inventory -noncontrolling interest in subsidiary at end of year

What four figures regarding the noncontrolling interest are determined for reporting purposes?

1. beg of year balance sheet amount 2. net income/loss attributable to noncontrolling interest 3. dividends declared by subsidiary during period attributable to noncontrolling interest 4. end of year balance sheet amount

What are the four steps to computing diluted consolidated EPS?

1. determine how many new shares are outstanding after the conversion of securities 2. check whether there are antidilutive securities (raise basic EPS). Exclude them. 3. Determine the parent ownership percentage related to diluted EPS and adjust for parent securities 4. apply the diluted consolidated EPS formula

What are the three internal accounting methods a parent company can use for their subsidiary investment?

1. equity method 2. initial value method (cost method) 3. partial equity method

What are some costs related to business combinations?

1. professional service fees (direct cost) 2. Acquiring firm's internal costs (indirect costs) 3. costs of registration and issuance of securities (debit to APIC)

What circumstances make entry *G different during consolidation?

1. the original transfer is downstream AND 2. the parent applies the equity method for internal accounting purposes THEN Investment of subsidiary account replaces the parent's beginning RE in consolidation entry *G

What characteristics indicate a controlling financial interest in a VIE?

1. the power, through voting rights or similar rights, to direct the financial activities of an entity 2. the obligation to absorb any expected losses 3. the right to receive any expected residual returns of an entity

What are the three events in an intra-entity land sale?

1. the seller reports a gain. the buyer capitalizes the inflated transfer price 2. the gain by the seller is closed to RE. The buyer's land account and the seller's RE account continue to both contain the intra-entity gain 3. the gain is recognized in consolidated NI when the land is disposed of to an outside party

inventory is bought for 50,000 and sold to an intra-entity place for 80,000. 25% of that inventory is left over at the end of the year. How much money do you include in consolidation entry G?

7,500

What is an indirect debt transfer?

The acquisition of an affiliate's debt instrument from an outside party

What happens to the consolidation process if an intra-entity transfer was sold for a profit to the other company?

The company that sold it will have too high of an ending inventory and COGS will be too low

Will consolidation be different if a company uses the initial value or partial equity method?

The consolidated amounts will be the same, but the mechanics and entries to prepare the statements will differ

How do you determine future excess fair value amortization balance from the acquisition price?

The fair value of the investment is compared to the investee's book value to determine excess fair value amort

When a gain on bargain purchase is recorded, what amount should be recorded as the consideration transferred?

The net asset fair value acquired will replace the consideration transferred amount

In the event of a business combination, who reports the consolidated financial statements?

The parent company

When a company uses the equity method, what account needs to be adjusted in the years after an indirect debt transfer with a resulting gain/loss?

The parent's investment in subsidiary

What happens to the entry *GL when the original intra-entity sale of land is downstream and the parent applies the equity method?

The reduction in RE changes to an increase in the Investment in Subsidiary account

What is not included in the acquisition date consolidated statement?

The subsidiary's revenues and expenses

What are the consolidation worksheet entries for?

To adjust and eliminate subsidiary company accounts

How long must sales between investor and investee be deferred in order to be recognized as revenue?

Until the items sold are consumed in operations or sold to an outside party

What is a statutory merger through asset acquisition?

When a company acquires assets and (often) liabilities of another company and the acquired company goes out of business

What is a statutory consolidation?

When a newly created company is created by receiving assets or capital stock of the original companies. The original companies than normally dissolve while becoming a division of the new company

What is a direct debt transfer?

When debt is transferred between members of a business combination

What is a statutory merger through capital stock acquisition?

When one company acquires all the stock of another company, transfers the assets and liabilities to its own books, and the acquired company dissolves but often remains as a division of the acquiring company

Do indirect debt transfers pose any specific problems when consolidating financial statements?

Yes, because the acquisition price will usually differ from the carrying amount

What is the diluted consolidated EPS formula?

[Parents share of consolidated NI + adj for parent securities] / [Wtd avg parent Common shares outstanding + Shares of parent due to dilution]

How should an indirect debt transfer be handled in years after the effective retirement?

all intra-entity accounts must be eliminated, however, the adjustment to retained earnings/investment in sub. account for the gain/loss will be adjusted for the subsequent amortization of discounts or premiums

When there is a control premium on an acquisition, where is it allocated?

all of it goes to the parent

Define: control premium

an amount a buyer is willing to pay over the current market price of a publicly traded company in order to acquire sufficient shares to obtain a controlling interest

Where is a noncontrolling interest reported in the parent's consolidated financial statements?

as a component of stockholder's equity

What is the calculation for the effective rate of amortization?

carrying value of bonds at beg of period - (face amount of bond X Contractual interest rate)

What is entry P?

eliminates any intra-entity payable/receivable balances

What is entry TI?

eliminates intra-entity sales regardless of whether it is a downstream or upstream sale

What is entry I?

eliminates the investment income or equity income balance accrued by the parent

In the subsequent year after recognition of intra-entity gross profits, what consolidation entry must be made?

entry*G to remove from retained earnings the gross profit in beginning inventory and to currently recognize the profit through a reduction of cost of goods sold

How do you compute cash interest?

face value X stated interest rate X time in terms of 1 year

What type of accounting method is used for reporting when a company has 0-20% ownership of a corporate equity security?

fair value method

How do you compute acquisition-date fair value of a subsidiary?

fair value transferred by parent + FV of the NCI + FV of any subsidiary preferred shares not acquired by the parent

In what section are dividends paid by the subsidiary to the noncontrolling interest reported in the statement of cash flows?

financing activity

What accounts are affected by entry TL?

gain on sale of land and land

If there is additional money from the acquisition price that does not relate to specific accounts (like inventory or equipment), where does it go?

goodwill

Describe a step acquisition

gradually gaining more stock until control is achieved. Previously owned (non-controlling) stock is then revalued to fair value on the date control is obtained any gain or loss is recognized in income

How do you calculate the gross profit rate?

gross profit (the amount over the price the inventory was originally bought for) / transfer price

When bonds are issued at a premium, is the interest expense/revenue higher or lower than cash interest paid/received?

less than

How do you calculate the book value of a company?

liabilities + stockholder's equity

When bonds are issued at a discount, is the interest expense/revenue higher or lower than cash interest paid/received?

lower