Advanced Accounting Exam 1
Subchapter S Corporation
- legal characteristics of a corporation - ownership limited to 100 stockholders - owners limited to individuals, estates, and certain tax-exempt entities and trusts (no corporate owners allowed)
Acquisition Method
-If the consideration is MORE than the FV of the assets acquired, the difference is attributed to goodwill -If the consideration is LESS than the FV of the assets acquired, the difference is attributed to gain on bargain purchase
Additional Issues w/ Acquisition Date FVs
-Purchased IPR&D is capitalized as an intangible asset @ FV w/ an indefinite life that is reviewed for impairment -R&D after acquisition date is expensed
Reporting Investee Losses
-a permanent decline in the investee's FMV is recorded as an impairment loss and the investment account is reduced to the fair value -when accumulated losses incurred and dividends paid by the investee reduce the investment account to zero, no further loss can be accrued -investor discontinues using the equity method rather than record a negative balance; balance remains at zero until profits eliminate all unrecognized losses
Reasons Firms Combine (Tax Advantages)
-accept stock to create a tax free reorganization -transferable carry-forward feature of net operating losses -net taxable income reported for the consolidated company
Acquisition Method
-all assets and liabilities recorded at fair value regardless of the percentage interest -present information of both the parent and subsidiaries as if they were a single company
Limited Liability Company (LLC)
-classified as partnerships for tax purposes -number of owners is not usually restricted -owners only risk their own investments
Partnership Capital Accounts
-consists of capital balances for each partner -profits/losses allocated to each capital account -withdrawals reduce the capital accounts
Benefits of Consolidation
-consolidated financial statements provide more meaningful information than separate statements -consolidated financial statements more fairly present the activities of the consolidated companies -represent the only means of obtaining clear picture of the total resources of the combined entity that are under the control of the parent company -consolidated companies still retain their legal identities as separate corporations
Valuation of Identifiable Assets and Liabilities
-current assets @ FV -existing liabilities @ FV -PP&E @ FV (no accum depr) -intangible assets not separately recorded -R&D: FVs of tangible and intangible assets are recorded -contingent assets and liabilities: possessed by acquiree on the acquisition date -liabilities associated w/ restructuring or exit (existing liabilities to other entities)
Related Costs of Business Combinations (Acquisition Method)
-direct costs of the acquisition are NOT part of the FV received and are immediately expensed Dr. Acquisition Expense Cr. Cash -indirect or internal costs of acquisition are period costs expensed as incurred -costs to register and issue securities related to the acquisition reduced their FV (ex: reduction of APIC) Dr. APIC, Parent Cr. Cash
Summary of Accounting Methods-Equity Method
-level of ownership: 20-50% -initial recording: @ cost including brokers' fees -recording of income: ownership share of investee income; dividends reduce investment
Summary of Accounting Methods-Fair Value
-level of ownership: <20% -initial recording: @ cost including brokers' fees -recording of income: dividends as declared
Summary of Accounting Methods-Consolidated Financial Statements
-level of ownership: >50% -initial recording: @ cost -recording of income: ownership share of income; accomplished by consolidating subsidiary income statements with those of parent
Limited Partnership (LP)
-limited partners not allowed to participate in management -losses are restricted for limited partners to the amount invested -must have one or more general partners who assume responsibility for all obligations
Fair Value
-price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Business Combinations
-refers to a transaction or other event in which an acquirer obtains control over one or more businesses
Limitations of Consolidation
-results of individual companies included are not disclosed which hides poor performance -not all consolidated R/E balance is available for dividends of the parent -financial ratios are not necessarily representative of any single company -similar accounts of different companies may not be entirely comparable -additional info about companies may be needed for fair presentation, increasing footnotes -some information is lost any time data sets are aggregated
Acquisition Method
-the acquisition method embraces the far value in measuring the acquirer's interest in the acquired business -recognizes and measures the consideration transferred for the acquired business and any non-controlling interest, separately identified assets and liabilities, goodwill or gain from bargain purchase
Reasons Firms Combine (Economic Advantages)
-vertical integration -cost savings -quick entry into new markets -economies of scale -more attractive financing opportunities -diversification of business risk -business expansion -increasingly competitive environment
Pre-Distribution Plan Step 1
1) Determine the maximum loss that each partner can absorb by dividing each partner's capital balance by their respective income sharing percent
Three Ways to Report Investments in Other Companies
1) Fair-Value Method 2) Consolidation of Financial Statements 3) Equity Method these depend on the degree of influence the investor has over the investee
Equity Method Entries
1) Record % of investee net income Dr. Investment Cr. Equity Method Income 2) Record dividends received from investor Dr. Cash (Dividend Receivable) Cr. Investment 3) Record amortization of excess Dr. Equity Method Income Cr. Investment
Steps
1) Trial Balance Prior to Adjusting Entries 2) Adjusting Entries 3) Adjusted Trial Balance 4) Prepare Financial Statements 5) Closing Entries 6) Post-Closing Trial Balance
Individual partner's creditors can make a claim against the assets of the partnership under what two conditions?
1) all partnership creditors are satisfied first 2) the claim is only to the extent of the specific partner's positive capital balance
Two methods for admitting a new partner
1) bonus 2) goodwill
Two methods for withdrawal of a partner
1) bonus 2) goodwill
Two methods for accounting for transfer of ownership
1) book value 2) goodwill / revaluation
Under the Uniform Partnership Act, this is the priority of creditors having claims against individual partners
1) debts owned to partnership creditors 2) debts owed to the other partners 3) debts owed to personal creditors
Deficit capital balances can be resolved two ways:
1) deficit partner can make a contribution to cover deficit 2) remaining partners can absorb the deficit (deficit partner may pay later or can be sued for the amount)
Partnership Advantages
1) flexibility in defining relationships -profits and losses, and management operating decisions, shared independent of ownership percentages 2) ease of formation and dissolution 3) taxes "flow-through" to the partners
Articles of Partnership should always clearly describe the:
1) name and address of each partner 2) business location 3) nature of business 4) rights and responsibilities of each partner 5) initial contribution to be used by each partner and the method to be used for valuation 6) specific method by which P&L are to be allocated 7) periodic withdrawal of assets by each partner 8) procedure for admitting new partners 9) method for arbitrating partnership disputes 10) life insurance provisions enabling remaining partners to acquire the interest of any deceased partner 11) method for settling a partner's share in the business upon withdrawal, retirement, or death
Three steps of liquidation of a partnership:
1) non-cash assets are sold for cash; gains and loss on the sales are allocated to the capital accounts of individual partners by profit/loss ratios 2) liabilities and expenses incurred during the liquidation are paid out of the partnership's available cash (take directly out of capital accounts) 3) cash remaining after paying liabilities and liquidation expenses is distributed to the individual partners on the basis of their respective capital balances
Partnership Disadvantages
1) unlimited liability incurred by each partner (jointly and severally liable) 2) mutual agency (each partner has the right to incur liabilities in the name of the partnership 3) inability to participate in various corporate tax benefits
Reporting Investee OCI and Irregular Items
investor must report: -discontinued operations -extraordinary items -other comprehensive income
Limitations of the Equity Method
not appropriate if: -an agreement exists tween investor and investee by which the investor surrenders significant rights as as a shareholder -a concentration of ownership operates the investee without regard for the views of the investor -the investor attempts but fails to obtain representation on the investee's board of directors
Equity Method
use when: -investor has the ability to exercise significant influence on investee operations -under the equity method, investor's share of investee dividends declared are recorded as decreases in the investment account, not income
Fair Value Method
use when: -investor holds small % of equity securities of investee -investor cannot significantly affect investee's operations -investment is made in anticipation of dividends or market appreciation
What is to be consolidated?
Asset Acquisition (dissolution): all appropriate account balances are physically consolidated in the financial records of the survivor Stock Acquisition: only the financial statement information is consolidated
How does consolidation affect the accounting records?
Asset Acquisition (dissolution): dissolved company's records are closed out; surviving company's accounts are adjusted to include appropriate balances of the dissolved company Stock Acquisition: each company continues to retain its own records; worksheets facilitate the periodic consolidation process without disturbing individual accounting systems
When does consolidation occur?
Asset Acquisition (dissolution): permanent consolidation occurs at the date of acquisition Stock Acquisition: the consolidation process is carried out at regular intervals whenever financial statements are to be prepared
What are noncash assets valued at when contributed to form a partnership?
Fair Value
Allocation of Income
Interest +Additional Compensation +Allocation of Remaining Income/Loss =Total Allocation of Income/Loss
Upstream Sale
Investee to Investor
Downstream Sale
Investor to Investee
Acquisition Entries
NEED TO DO A D&D SCHEDULE Book Entry: Dr. Investment Cr. Cash S) Entry: Dr. Common Stock Dr. APIC Dr. Retained Earnings Cr. Investment A) Entry: Dr. Assets and Goodwill Cr. Investment or Dr. Assets Cr. Gain on Bargain Purchase and Investment Other Entry: Dr. Acquisition Expense Cr. Cash
Limited Liability Partnership (LLP)
Owners: -risk their own investments -are responsible for contractual debts of the business -are liable only for their own acts and omissions, and those of individuals they directly supervise
Asset Acquisition
acquires assets and often liabilities
Stock Acquisition
acquires stock that is recorded as an investment; controls decision making of acquired company
Consolidation Process
adjustments and eliminations related to intercompany transactions and holdings are made 1) intercorporate stockholdings 2) intercompany receivables/payables 3) intercompany sales and unrealized profits
Partnership
an association of two or more persons to carry on a business as co-owners for profit
Partners (are/are not) liable for all the debts of the partnership.
are
Partners (are/are not) liable for the personal debts of the other partners.
are not
Methods used for recording contributed intangible assets
bonus method or goodwill method
James and Joyce contribute 70K and 10k cash. Joyce also contributes a skill valuable to business and they decide to evenly split their capital balances. Capital account balances under bonus and goodwill method are?
bonus: James 40k and Joyce 40k goodwill: James 70k, Joyce 70k, Goodwill 60k
Deferral of Unrealized Profits in Inventory (Downstream)
Ending Inventory x Gross Profit % x Ownership % = Intraentity GP Deferral
Statement of Capital Balances
Beg Bal +Additional Compensation +Allocation of Income/Loss +Draws =End Bal
D&D Schedule
Purchase Price -BV of Investor*% =Excess Distribute Excess to get Goodwill
Statement of Liquidation
a report prepared to disclose the progress of liquidation to interested parties that includes: -transactions to date -property still held by the partnership -liabilities remaining to be paid -current cash and capital balances
Cost Approach (Fair Value)
estimates fair values by reference to the current cost of replacing an asset with another of comparable economic utility
Market Approach (Fair Value)
estimates fair values using other market transactions involving similar assets or liabilities
Consolidated Statements
generally when a parent firm owns over 50% of the voting common stock of another company they use these statements
Interim cash distributions
have to calculate safe-cash payments; assume: 1) noncash assets are a complete loss 2) liabilities must be paid 3) liquidation expenses must be paid 4) all deficit partners must be written off
Amortization
payment relating to each asset should be amortized over an appropriate time period
Purchase Method
recorded fair values for the portion of the net assets acquired in the purchase
Income Approach (Fair Value)
relies on multi-period estimates of future cash flows projected to be generated by an asset
Reporting a Change to the Equity Method
report a change if: -an investment that was recorded using the fair-value method reaches the point where significant influence is established
Consolidation of Financial Statements
required when: -investor's ownership exceeds 50% of an organization's outstanding voting stock -one set of financial statements prepared to consolidate all accounts of parent and subs as a single entity
Pre-Distribution Plan
this is produced to serve as a guide for all future payments