CPA FAR - Consolidated Financial Statements
For consolidated purposes, what accounts can be affected by intercompany bonds?
1. Bonds Payable; 2. Premium or Discount on Bonds Payable; 3. Investment in Bonds; 4. Premium or Discount on Investment in Bonds; 5. Interest Income/Interest Expense; 6. Interest Payable/Interest Receivable.
What steps should be followed to make adjusting entries to help derive the consolidated financial statements?
1. Determine if any transactions are in transit between the affiliated entities; 2. Record entry on consolidating worksheet to treat in transit transactions as though they were completed.
What are the kinds of information needed to prepare consolidated financial statements?
1. Financial statements/Adjusted trial balances of affiliated entities; 2. Data as of date of acquisition, including: 1. Book values of subsidiary's assets and liabilities; 2. Fair values of subsidiary's assets and liabilities; 3. Fair value of noncontrolling interest, if any; 4. Fair value of precombination equity interest, if any. 3. Intercompany transaction data and balances.
Identify the general kinds of eliminating entries made in the consolidating process.
1. Investment eliminating entry. (Always); 2. Intercompany Receivables/Payables elimination(s); 3. Intercompany Revenues/Expenses elimination(s); 4. Intercompany Profit elimination(s).
List the consolidation accounts affected by intercompany fixed asset transactions.
1. Net Income; 2. Fixed Asset; 3. Accumulated Depreciation; 4. Depreciation Expense/Accumulated Depreciation.
List some examples of intercompany amounts to be eliminated during a consolidation.
1. Receivables/payables; 2. Interest; 3. Dividends; 4. Bonds.
List the main types of intercompany transactions and intercompany balances.
1. Receivables/payables; 2. Revenues/expenses; 3. Inventory; 4. Fixed assets; 5. Bonds.
What is the basic sequence of steps in the consolidating process?
1. Record trial balances on consolidating worksheet; 2. Record adjusting entries, if any; 3. Record eliminating entries; 4. Complete consolidating worksheet; 5. Prepare consolidated financial statements.
What are the accounts (on a consolidating worksheet) that may be affected by an intercompany inventory transaction?
1. Sales/Purchases; 2. Net income/loss; 3. Ending Inventory; 4. Beginning Inventory.
What are the alternative circumstances that affect adjustments and eliminations made in the consolidating process? (Disregard pooling of interests consideration.)
1. Whether the parent carries its investment using the cost or equity method; 2. Whether the consolidation is carried out at the date of the business combination or at a subsequent date; 3. Whether the parent owns 100% (all) of the voting stock of a subsidiary or less than 100% of the stock; 4. Whether transactions between the affiliated companies originate with the parent or subsidiary.
What are the differences between when a 100%-owned subsidiary sells goods for a profit to a parent and when a less-than-100%-owned subsidiary sells goods for a profit to a parent?
In both cases, the full amounts of the intercompany sales and purchases have to be reversed and the full amount of profit in ending inventory has to be eliminated (by reducing profit and reducing inventory carrying value). When the subsidiary is 100% owned, the parent (and parent shareholders) absorb the entire effect of the reductions. When the subsidiary is less than 100% owned, the reductions (in profit and asset value) are allocated between the parent and the noncontrolling interest based on percentage ownership.
What is the entry to eliminate intercompany inventory sales and intercompany inventory purchases on the consolidating worksheet?
DR Intercompany Sales CR: Purchase (Inventory) The entry would be for the full amount of intercompany sales/purchases during the period.
What eliminating entry would be required for consolidating purposes immediately following an intercompany bond purchase that involved a discount on bonds payable and a premium on bond investment?
DR: Bonds Payableat face amount Loss on Constructive Retirement - sum of Premium on B/I + Discount on B/P CR: Investment in I/C Bonds at face amount CR: Premium on I/C Bond Investment - for full amount CR: Discount on I/C Bonds Payable - for I/C amount.
What is the entry on the consolidating worksheet to eliminate intercompany inventory profit that is in ending inventory?
DR: COGS (or Inventory) - I/S CR: Ending inventory - B/S The entry eliminates the profit brought on the worksheet by the selling affiliate and reduces the ending inventory brought on the worksheet by the buying affiliate to cost from an outsider.
What is the eliminating entry for consolidating purposes that would be necessary immediately following an intercompany sale of a fixed asset at a gain?
DR: Fixed Asset to reestablish original cost from non-affiliate. DR: Gain to eliminate intercompany gain on sale. CR: Accumulated Depreciation to reestablish accumulated depreciation written off by selling affiliate.
What is the treatment of intercompany transactions and balances on the consolidating worksheet?
Eliminate all Intercompany transactions and balances.
What is the amount at which any noncontrolling interest is recognized in eliminating entry at the date of business combination?
Fair value of Noncontrolling Interest percentage claim to consolidated net assets attributable to the subsidiary. This would include its claim to the Sub's net assets at fair value and any Goodwill recognized in the combination.
Under U.S. GAAP, what process must be followed to determine if an entity should be consolidated?
First, it must be determined if the entity is a variable-interest entity (VIE). If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE. Then, if the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
What effect does an intercompany sale of a fixed asset by a less than 100% owned subsidiary to a parent have on the consolidated financial statements that is different than the sale by a parent to a subsidiary or by a 100% owned subsidiary to a parent?
In all cases the full amount of any intercompany gain or loss will be eliminated; however, if the sale is from a less-than-100%-owned subsidiary, the gain or loss (and subsequent elimination adjustments of depreciation expense) will be allocated on the worksheet between the parent and the noncontrolling interest in proportion to their ownership percentages.
Since intercompany inventory sales and intercompany inventory purchases exactly offset each other, resulting in no net effect on consolidated income, why must they be eliminated?
Intercompany inventory sales and intercompany inventory purchases must be eliminated so that the absolute amount of sales and purchases will not be overstated on the consolidated income statement. Such overstatements would misrepresent the level of operating activity for the firms.
What does the investment eliminating entry on the consolidating worksheet accomplish?
It (1) eliminates the investment account (in the subsidiary) brought on to the worksheet by the parent against the shareholders equity accounts (of the subsidiary) brought on to the worksheet by the subsidiary, (2) in the process, it adjusts the subsidiary's identifiable assets and liabilities to fair value at the date of acquisition, and (3) recognizes Goodwill, if any.
How is an "in-transit" intercompany transaction handled?
Make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company.
How does the noncontrolling interests in a subsidiary's income/loss and assets/liabilities get reported in consolidated financial statements?
Noncontrolling interest in a subsidiary's net income or net loss gets reported as a separate line item in the consolidated income statement; the consolidated income/loss is allocated between the parent and the noncontrolling interest. Noncontrolling interest in a subsidiary's assets and liabilities gets reported as a separate line item in shareholders' equity in the consolidated balance sheet.
Where will a noncontrolling interest account show in consolidated financial statements?
On Consolidated Balance Sheet as a separate item within Shareholders' Equity.
Where is the consolidating process carried out?
On a consolidating worksheet; not on the books of any entity.
What is the effect on consolidated values when the fair values of a subsidiary's identifiable assets are less than the subsidiary's book values for those assets at the date of a business combination?
On the consolidating worksheet: 1. The identifiable assets are written down to fair value at the date of the business combination; 2. Any depreciation/amortization expense on those assets taken by the subsidiary will be reduced on the consolidating worksheet to an amount based on the lower fair values.
What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?
The carrying amount of the investment would change when: 1. The subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made); 2. The investor buys additional shares of the subsidiary or sells some of the share it already owns.
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the equity method?
The carrying amount of the investment would change with changes in the equity accounts of the subsidiary, including: 1. Increasing with reported subsidiary profits/decreasing with reported subsidiary losses; 2. Decreasing with the payment of dividends by the subsidiary; 3. Decreasing for "depreciation/amortization" of the excess of fair value over book value at the date of investment.
What amount of intercompany inventory sales and intercompany inventory purchases must be eliminated?
The full amount (100%) of intercompany inventory sales and intercompany inventory purchases must be eliminated (against each other) on the consolidating worksheet, even if the sale was at no profit to the selling affiliate.
What amount of intercompany receivables and payables must be eliminated on the consolidating worksheet?
The full amount (100%) of receivables and payables that resulted from intercompany transactions must be eliminated on the consolidating worksheet.
What amount of intercompany revenues and expenses must be eliminated on the consolidating worksheet?
The full amount (100%) of revenues and expenses that resulted from intercompany transactions must be eliminated, even if the transaction did not result in a profit to the "selling" affiliate.
How does the gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies?
The gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies through the amortization on their separate books of the premium(s) and/or discount(s) on the bond investment and/or the bonds payable.
What are the possible accounting methods a parent can use to carry on its books an investment in a subsidiary that will be consolidated?
The parent can use: 1. Cost method; 2. Equity method; 3. Any other method it chooses. Whatever method it uses, the investment account will be eliminated on the consolidating worksheet. (Only the cost and equity methods have been used on prior exams.)
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what is the purpose of the reciprocity entry made on the consolidating worksheet?
The reciprocity entry adjusts the parent's investment account for changes in the subsidiary's retained earnings since the business combination up to the beginning of the period being consolidated that have not been recognized in the parent's investment account because it is using the cost method of accounting.
What determines the amount of any net gain or loss resulting from bonds becoming intercompany?
The sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate). Gain would result from eliminating: 1. Premium on Bond Payable or 2. Discount on Investment. Loss would result from eliminating: 1. Discount on Bond Payable or 2. Premium on Investment.
What will be the difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?
There will be no difference in the final consolidated statements based on which method the parent uses to account for its investment in a subsidiary. The consolidated statements will be the same regardless of which method is used, only the consolidating process will be different.
What are the only types of transactions recognized for consolidation?
Transactions with non-affiliates.
What are two objective differences between U.S. Generally Accepted Account Principles (GAAP) and International Financial Reporting Standards (IFRS) in determining control?
Under U.S. GAAP only outstanding voting rights are used to measure control; under IFRS securities currently exercisable or convertible into voting rights are used in assessing control. Under U.S. GAAP only if an entity has more than 50% voting ownership can it have control. Under IFRS an entity may have control even when it does not have more than 50% voting control.
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?
Under normal circumstances, the carrying amount of the investment does not change under the cost method.
If not eliminated, what effect will the intercompany sale of a fixed asset at a gain have on the reported value of the fixed asset for consolidated statement purposes?
Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a gain will result in an overstatement of the value of the fixed asset on consolidated financial statements.
If not eliminated, what effect will the intercompany sale of a fixed asset at a loss have on the reported value of the fixed asset for consolidated statement purposes?
Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a loss will result in an understatement of the value of the fixed asset on consolidated financial statements.
When do intercompany bonds exist?
When one affiliate owns (as an investment) the bonds issued by another affiliate (a liability).
What is an intercompany inventory transaction?
When one affiliated entity sells goods to be resold (merchandise inventory) or used (raw materials inventory) by the buying affiliate an intercompany inventory transaction has occurred.
Under what conditions will a bargain purchase gain be recognized by a parent?
When, at acquisition, the fair value of subsidiary's identifiable net assets is greater than the investment value to acquire those net assets. Investment value is the parent's investment cost plus the fair value of any noncontrolling interest in the subsidiary.
Define "consolidated financial statements".
Consolidated financial statements present the financial information of two or more separate legal entities, usually a parent company and one or more of its subsidiaries, as though they were a single economic entity.
How is a gain or loss on an intercompany sale of a fixed asset confirmed (recognized) for consolidated statement purposes?
A gain or loss on an intercompany sale of a fixed asset is confirmed through the depreciation expense taken each period by the buying affiliate on the intercompany profit or loss. When the sale was at a gain (loss), the buying affiliate will take more (less) depreciation than the selling affiliate would have taken. That difference (each period) confirms a part of the gain or loss each period.
When a parent uses the equity method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
Adjusts on its books the carrying value of its investment in the subsidiary to reflect: 1. The parent's share of the subsidiary's income or loss; 2. The parent's share of dividends declared by the subsidiary; 3. The amortization/depreciation of the difference between the FMV of identifiable assets (but not Goodwill) and the book value of those assets.
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
After recording the investment in the subsidiary on its books, in normal circumstances the parent will only recognize its share of the subsidiary's dividends declared/paid as dividend income. It will NOT recognize on its books its share of the subsidiary's reported net income/loss, nor will it adjust its investment account for the subsidiary's income/loss or dividends.
What is the requirement and justification for the use of consolidated financial statements?
Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP requires that consolidated financial statements be the primary form of financial reporting for the affiliated entities. While in form the entities may be separate legal entities, because of the common control, in substance they are a single economic entity and their financial statements should be presented as a single economic entity.