Advanced Accounting Exam 1 - Consolidation

On January 1, Ashton Company acquired all of the Holland Corporation's outstanding stock for $600,000 cash. On that date, the fair values of Holland's individual assets and liabilities equaled their book values. Holland had only one class of stock, Common, with a book value of $350,000. It also reported retained earnings of $250,000. If the balance of Common Stock reported by Ashton Company is $1,000,000, what is the balance reported for Common Stock on the consolidated balance sheet?

$1,000,000

Entity Theory

100% of all is included without distinguishing between controlling and non controlling

In which of the following cases would consolidation be inappropriate? a. the subsidiary is in bankruptcy b. sub operations are dissimilar from those of the parent c. the parent owns 90% of the subs common stock, but all of the subs nonvoting preferred stock is held by a single investor d. sub is foreign

A. the sub is in bankruptcy

There are separate sets of books for the consolidated entity

FALSE

A owns 90% of B and 80% of C. B owns 10% of D, while C owns 5% of D. A has indirect control of D.

False

Consolidation is optional when a corporation owns a majority of another corporation's outstanding common stock

False

Propriety Theory

Pro-rata consolidtion

Who is more interested in the sub's individual financial statements? why?

The sub's creditors and stockholders because they have no claim on the parent

Consolidated financial statements are the only means of obtaining ____

a clear picture of the total resources of the combines entity that are under the parent's control

Which of the following observations is NOT consistent with the use of push-down accounting? a. revaluation capital account is part of the sub's stockholders' equity b. no differential arises in the consolidation process c. revaluation capital account is eliminated in preparing consolidated statements d. eliminating entries related to the differential are needed in the workpapers

d. eliminating entries related to the differential are needed in the workpapers

Current practice is closest to the _____ theory

entity

VIE

legal structure used for business purposes that either -doesn't have equity investors that have voting rights and share in profits and losses of entity -Has equity investors that don't provide sufficient financial resources to support the entity's activities

Two companies are considered to be related when

one controls the other or both are under the common control of another entity

If intercorporate receivables and payables are not eliminated when a consolidated balance sheet is prepared, both consolidated assets and liabilities are:

overstated by an equal amount

Difference in fiscal period doesn't prevent consolidation, instead the fiscal period of the _____ is changed to coincide with the ____

sub, parent

Consolidated financial statements present...

the financial position and results of operations for a parent and one or more subs as if the individual entities actually were a single company

Combines financial statements

those that include a groupof related companies without including the parent company or other owner

Alma Corporation owns 75 percent of Johnson's common stock, which was acquired at book value. The fair value of the noncontrolling interest at the date of acquisition was equal to their proportionate share of the book value of Johnson Company. During the year, Johnson reports net income of $40,000, while Alma reports earnings of $200,000 from its own operations and $30,000 of investment income. Alma pays dividends during the year of $50,000, and Johnson pays dividends of $10,000. On January 1, Alma has a retained earnings balance of $500,000 while Johnson has retained earnings of $300,000. Alma accounts for its investment in Johnson using the equity method. Consolidated net income for the year is:

$240,000 (200,000+40,000)

B owns 80% of S common stock. For the current financial year, B and S reported sales of $500,000 and $320,000 and expenses of $280,000 and $240,000 respectively. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the entity theory approach?

$300,000 (500,000+320,000-280,000-240000)

V acquired all of voting common shares of S, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acq. V reported total assets of $500,000 and liabilities of $280,000 and stock. equity of $220,000. At that date, S reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Signature's liabilities was an account payable to Video in the amount of $20,000, which Video included in its accounts receivable. Based on the preceding information, what amount of total assets did Video report in its balance sheet immediately after the acquisition?

$650,000 ($500,000+inv in S of $150,000) *do not remove intercompany transaction, that is only for consolidated!!!

Alma Corporation owns 75 percent of Johnson's common stock, which was acquired at book value. The fair value of the noncontrolling interest at the date of acquisition was equal to their proportionate share of the book value of Johnson Company. During the year, Johnson reports net income of $40,000, while Alma reports earnings of $200,000 from its own operations and $30,000 of investment income. Alma pays dividends during the year of $50,000, and Johnson pays dividends of $10,000. On January 1, Alma has a retained earnings balance of $500,000 while Johnson has retained earnings of $300,000. Alma accounts for its investment in Johnson using the equity method. Consolidated retained earnings as of the end of the year is

$680,000 ($500,000+$230,000-$50,000)

Video Company acquired 100 percent of the voting common shares of Signature Corporation, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Video reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Signature reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Signature's liabilities was an account payable to Video in the amount of $20,000, which Video included in its accounts receivable. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

$880,000 ($500,000+$400,000- intercompany of $20,000)

When can control not be exercised by a parent?

1. bankruptcy 2. foreign restrictions (intercorporate investment)

Major difference between consolidation procedures prior to 2009

1. current standards place greater emphasis on FV than previous standards 2. Computation of the differential relates to the entire sub rather than just the parent's share of less-than-wholly owned subs

5 limitations of consolidated financial statements

1. individual company results can be hidden 2. consolidated r/e is not available for dividends of parent 3. financial ratios are not representative of any single company 4. similar accounts of different companies that are combined are not entirely comparable 5. Additional info requires voluminous footnotes

Consolidated net income in previous practice was

1. just the parent's share of the income without the presentation of the noncontrolling interest 2. used to report NCI as a mezzanine item between liab and stockholders' equity.

If parent loses control but maintains a noncontrolling equity interest, must recognize income as gain or loss for difference between

1. sum of any proceeds received by the parent and the F of its remaining equity interest in the former sub 2. carrying amount of the parent's total interest in the sub

Parent Theory

100% of all noncontrolling share disclosed

On January 1, Ashton Company acquired all of the Holland Corporation's outstanding stock for $600,000 cash. On that date, the fair values of Holland's individual assets and liabilities equaled their book values. Holland had only one class of stock, Common, with a book value of $350,000. It also reported retained earnings of $250,000. If a consolidated balance sheet is to be prepared immediately after the acquisition, the investment elimination entry would include:

Debit to C/S for $350,000. debit to R/E for $250,000 and credit to inv in sub for $600,000

Parent company owns 75% of the outstanding common stock of Sub Company. During the year Sub reports net income and declares and pays a dividend. An elimination entry required to be made to consolidate these two entities would include a credit to Income to Non-Controlling Interest.

False

The current standard for accounting for Consolidations is FAS141R which applies to all susidiaries purchased after December 15, 2008. Company A purchased 80% of the outstanding common stock of Company B in September of 2008 greater than book value. Any differential and goodwill created through this transaction would be based upon the entire subsidiary value on the date of purchase, not just the parents share.

False

Eliminating entries are recorded on the books of the separate companies.

False (appear only in consolidating workpapers)

The noncontrolling shareholders' claim on the net assets of a subsidiary must be reported with the liabilities on the consolidated balance sheet

False (equity section)

In the consolidated balance sheet, the book value of the noncontrollling shareholders' interest should be reported as a single amount between liabilities and stockholders' equity or as part of stockholders' equity.

False (only stockholders' equity section)

Consolidated net income is equal to the parent's income from its own operations, including investment income from consolidated subsidiaries, plus the net income from each of the consolidated subsidiaries, adjusted for any differential write-off.

False, excludes investment income from consolidated subs

A Subsidiary's other comprehensive income for the period must be recognized in consolidated other comprehensive income and allocated between the controlling and non-controlling interests.

True

Consolidated net income is equal to the parent's income from its own separate operations, excluding any investment income from consolidated subsidiaries, plus the net income of all subsidiaries, adjusted for any differential write-off.

True

GAAP indicates that control can be obtained without majority ownership of a company's common stock

True

Goodwill may be considered to be a payment for the excess earning power of the acquired company.

True

If a subsidiary sells land to which a differential relates, the differential is treated in the consolidation workpaper as an adjustment to the gain or loss on the sale of the land in the period of sale.

True

On the consolidated balance sheet, all assets and liabilities of the acquired company should be reported at their fair values on the date of acquisition.

True

Receivables, payables, and sales between a parent and subsidiary should be eliminated in preparing consolidated financial statements

True

Under the entity theory approach, all subsidiary assets and liabilities are included in the consolidated balance sheet

True

FASB 141R on assets and liabilities valuation

acquisition-date FV and no valuation accounts are to be carried over

An enterprise that will absorb a majority of the variable interest entity's expected losses or receive a majority of the entity's expected residual returns, or both is called a. contingent beneficiary b. secondary beneficiary c. primary beneficiary d. co-beneficiary

c. primary beneficiary

SPE

corporations, trusts, or partnerships created for a single specified purpose, usually financing

On January 1, Ashton Company acquired all of the Holland Corporation's outstanding stock for $600,000 cash. On that date, the fair values of Holland's individual assets and liabilities equaled their book values. Holland had only one class of stock, Common, with a book value of $350,000. It also reported retained earnings of $250,000. The entry made by Ashton to record the stock acquisition would include:

debit to Investment in Holland and credit to cash for $600,000

Income to NCI is a _____ account and represents _____

debit, the amount of income that belongs to the non controlling shareholders

Current practice

follows entity theory but shows difference between controlling and noncontrolling share

Previous practice

hybrid, different impacts if acquired at other than BV (leftover to goodwill)

Consolidated retained earnings is caluclated by

parent's retained earnings + parent's share of sub's net income since acquisition - parent's share of any differential write-off

Consolidated financial statements are primarily presented for those parties having a long-run interest in the _______ company including its ______

parent, management, shareholders, long-term creditors or other resource providers.

If a parent loses control of a sub and no longer holds an equity interest, then

recognize gain or loss for difference between proceeds received from event leading to loss of control an carrying amount of the parent's equity interest

Push-down accounting

revaluing the sub's assets and liabs to their fair values directly on that sub's books at the date of acquisition - required when sub become substantially wholly owned