Consolidated Financial Statements Subsequent to the Date of Acquisition
PPE, net (S) @ BOY Patent (S) @ BOY Goodwill (S) @ BOY Equity Investment (P) @ BOY
"A" journal entry that assigns the remaining Equity Investment account (i.e. unamortized BOY AAP) to appropriate asset and liability accounts
Equity Income (P) Dividends(S) Equity investment (P) (when the parent uses the equity method of pre-consolidation investment bookkeeping, eliminates all changes in the Equity Investment account, leaving only the beginning balance in the account)
"C" journal entry to record (reverse) the changes made to Equity Investment account during the period?
Dividend income (P) Dividends (S)
"C" journal entry under Cost Method of accounting for Equity Investment consolidation
Operating expenses PPE, net (S) Patent (S) (depreciates/amortizes AAP so that income statement includes the activity and the balance sheet accounts include ending balances in appropriate accounts)
"D" journal entry
Common stock (S) @ BOY APIC (S) @ BOY Retained Earnings (S) @ BOY Equity Investment (P) BOY
"E" journal entry made to remove the beginning of the year (BOY) balance of the subsidiary's Stockholders' Equity
Purchase Price - Book value of subsidiary
AAP formula
Common control or pooling of interests method
Acquisition Method accounting does not apply to combinations between entities or businesses under what?
qualitative test (totality of events and circumstances must be considered)
Allows a lower cost means to determine whether it .is more likely than not that the fair value of a reporting unit is less than its carrying amount; Conducted to determine if quantitative test is needed;
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identifiable and separately recognized
$0
As a result of these consolidation entries, the Equity Investment account (on the parent's balance sheet) and the Equity Income account (on the parent's income statement) are both reduced to what balance on the consolidated financial statements?
No
Can Goodwill subsequently be increased after it is written down to fair value?
No, only if an event occurs that indicate fair value won't be recoverable
Do private company's test Goodwill for impairment annually if they elect the exception?
Equity income Equity investment
Equity method journal entry to record impairment of Goodwill.
two step quantitative impairment test
If qualitative test determines that the fair value is most likely less than the book value what happens?
"A" entry; Net assets (broken out into individual asset and liability accounts) Equity investment Bargain acquisition gain
Immediately upon purchase, the parent company will recognize the Bargain Acquisition Gain (amortization of AAP for amount of Bargain Acquisition Gain). What is the journal entry for this?
ordinary gain
In bargain acquisitions, the investor recognizes negative Goodwill as an _____ ______ in its income statement on the acquisition date.
The net cash paid for an acquisition (cash paid less cash on the investee's balance sheet) is recorded in the investing section.
In the year of acquisition, what is recorded in the investment section of the statement of cash flows?
No
Is AAP recorded in the subsidiary's books?
No, because they are not publicly traded
Is there usually a market price available for a subsidiary?
Equity Investment Retained Earnings
Journal entry for ADJ consolidation entry for the equity method.
Impairment
Loss of future benefits is known as what? i.e. carrying value of asset is less than fair value
Equity Method
Method where the parent adjusts its pre-consolidation acquisition-date investment account for its proportionate share of the subsidiary's post-acquisition income, dividends, amortization of the acquisition account premium (AAP) and elimination of inter-company transactions.
Cost Method
Method where the parent company does not adjust its pre-consolidation acquisition date investment account for the subsidiary's post-acquisition activities.
bargain acquisition
Occurs if the total fair value of the investee company is less than the acquisition date amounts of identifiable assets acquired and liabilities assumed (i.e. amount computed for Goodwill is negative)
pooling of interests method
Records the acquiree at its book value
The parent's net income and the consolidate net income will equal each other
So long as the parent uses the equity method of accounting to account for its Equity Investment, the net income of the consolidated statements will equal the net income of who?
False, they will look the same regardless of the pre-consolidation method of bookkeeping
T of F: The consolidated financial statements will look different with different methods of pre consolidation Equity Investment bookkeeping applied by the parent company.
of the consolidated entity
The Stockholder's Equity of a wholly owned subsidiary is not considered equity of what?
1. Beginning of year book value of subsidiary's Stockholder's Equity and 2. Beginning of year AAP
The beginning balance of the Equity Investment account is comprised of what two pieces?
1. net Equity Income recognized by parent (net income less AAP amortized) 2. Dividends received
The change to the Equity Investment account is comprised of what two pieces?
net income of parent + net income of subsidiary - amortization of AAP
The consolidate net income is = to what?
the Stockholder's Equity of the parent company (as long as the parent uses the Equity Method of pre-consolidation investment accounting)
The consolidated Stockholder's Equity equals which Stockholder's Equity?
Income from Subsidiary account
The post-acquisition consolidation process will need to replace which account with disaggregated revenues and expenses of the subsidiary to which it related.
C - to eliminate changes in the parent company's financial statements caused by investment related bookkeeping for the subsidiary (reverses all entries to the Equity Investment account during the consolidation period, leaving only the beginning balance) D - to recognize the current-period AAP depreciation and amortization of the AAP in the consolidated income statement I - to eliminate the intercompany transactions during the period and balances remaining at the end of the period
Three more entries required in post-acquisition consolidation:
True
True of False: Goodwill is a residual asset.
False: It is prepared from the consolidated income statement and a comparative consolidated balance sheet and is not the sum of the parent and subsidiary statement of cash flows.
True or False: The consolidated statement of cash flows is the sum of the statements of cash flows of the individual companies.
True
True or False: The parent company is free to use any pre-consolidation Equity Investment bookkeeping method it chooses for non GAAP financial statements.
1. Does the parent company control the Goodwill asset? (yes, in business combinations) 2. Will the Goodwill asset provide future benefits? (must be answered annually)
Two questions to determine if an asset i.e. goodwill exists? Which one must be answered annually?
1. Is reporting unit impaired 2. If it is, then is the impairment related to the Goodwill
Two steps of quantitative goodwill impairment testing:
trademarks, trade names, valuable renewable licenses
What are examples of other indefinite lived intangible assets?
1. Eliminate beginning balance of investment account 2. Eliminate the changes in the investment account
What are the first two steps of the post-acquisition consolidation process?
The cost method has the ADJ entry and a different C entry
What are the only differences between the cost method and equity method?
1. E entry eliminates the book value of Stockholders' Equity 2. A entry reclassifies the AAP from the Equity Investment account to individually identifiable net assets and unidentifiable Goodwill
What are the two entires needed to eliminate the Equity Investment account upon acquisition? (also, seen in post-acquisition consolidation)
Assigns the remaining Equity Investment account (i.e. unamortized beginning of period AAP) to appropriate asset and liability accounts as of the beginning of the period)
What does the "A" entry in post-acquisition consolidation represent?
Eliminates dividend income; i.e. eliminates all changes in the parent's books caused by investment bookkeeping during the year.
What does the "C" consolidation entry do under the Cost Method of Equity Investment accounting?
Eliminates the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity at the beginning of the accounting period (after this entry the investment account will equal the beginning of the period unamortized AAP)
What does the "E" entry in post-acquisition consolidation represent?
It must be written down
What happens if asset is impaired?
Depreciation expense Building
What is the "D" consolidation entry under the Equity Method
"seedy" C-E-A-D-I
What is the acronym used for post-acquisition consolidation entries?
Consolidated income does not imply that the parent company has received any of all of the subsidiaries' net income as cash. In general, the parent can only receive cash from subsidiaries via dividend payments.
What is the limitation of consolidated financial statements relating to income?
the non-cash expense relating to the amortization and depreciation of the AAP
What needs to be added back to the consolidated statement of cash flows?
the parent's pre consolidation return on equity
When the parent uses equity method, the consolidated return on equity (net income/owner's equity) will equal
The parent company's pre consolidated net income
When the parent uses the equity method, the consolidated net income will equal what?
The parent company's pre consolidation owners' equity
When the parent uses the equity method, the consolidated owner's equity will equal what?
E and A
Which entry ( CEADI) involves eliminating the beginning balance of the Equity Investment account?
A entry (it will decrease in amount each year as the assets are amortized or depreciated)
Which entry CEAD or I eliminates the beginning balance of AAP assets
the dividends paid from the subsidiary to the parent are eliminated. The only dividends reducing consolidated Retained Earnings are those declared by the parent for payment to its shareholders.
Whose dividends are eliminated from the consolidated Statement of Retained Earnings?
ADJ consolidation entry
Causes the parent's Equity Investment account and Retained Earnings account to equal their beginning of period balances as if the parent company always used the equity method (i.e. "as if" equity method
Industries
Consolidated balance sheets and income statements are a mix of the various subsidiaries often from different _____________, complicating comparisons across companies.
Cash Dividend Income
Cost method of accounting for Equity Investment: Journal entry for receipt of dividend
reporting unit level
For all public companies and all private companies that don't elect the amortization for Goodwill exception all Goodwill impairment tests are reported at the what level . (private companies electing the exception may base tests at either level)
No
For the cost method of pre consolidation Equity Investment reporting, is there a journal entry on pre consolidation books
∆RE(S) Since Acquisition - Cumulative AAP amortization from acquisition date to the date we want to calculate retained earnings
Formula to calculate the RE(P) Adjustment from Cost to Equity Method
implicity
Goodwill does not appear directly on the parent's pre consolidation balance sheet, but is instead included ________________ in the Equity Investment account
Total fair value of investee company - The acquisition date fair value of the identifiable assets acquired and liabilities assumed
Goodwill formula
Indefinite
Goodwill is considered to have what kind of life?
They are computed based off amounts excluding the effects of the acquisition.
How are changes in working capital accounts (current assets - current liabilities) computed in the statement of cash flows?
Straight-line over ten years; Retroactive restatement of financial statements when conversion to public company
How do private companies who elect to adopt the private company exception for Goodwill amortization amortize Goodwill.
Six steps
Under the equity method of pre-consolidation investment bookkeeping, the mechanics of the consolidation process subsequent to acquisition involves how many steps?
Any dividends received by the parent are recorded as dividend income.
Under the cost method of Equity Method accounting, dividends are recorded how?
unchanged
Under the cost method, the Equity Investment balance always remains ___________ at its original acquisition date amount.
