hoyle advanced accounting powerpoint slides chapter 3
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Chapter Three
Consolidations -
Subsequent to
the Date of
Acquisition
McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies Inc! "ll rights reser#e$!
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Consolidation The Effectsof the Passage of Time
The passage of time creates complexities for
internal record keeping and the balance of the
inestment account aries due to the
accounting method used!
A "orksheet and consolidation entries are used
to eliminate the inestment account and record
the subsidiar#$s assets and liabilities to create asingle set of financial statements for the
combined business entit#!
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*nestment Accounting b#Acquiring Compan#
The acquiring compan# selects one of thesethree methods to account for its inestment+
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Equit# ,ethod *nitial alue ,ethod
Partial Equit# ,ethod
.or each subsidiar# o"ned/ there is an asset/ the
inestment account/ and an income account to
record the earnings on the inestment!
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*nestment Accounting b#Acquiring Compan#
Comparison of internal reporting of inestmentmethods!
,ethod *nestment *ncome Account
Equit# Continuall# ad0usted toreflect o"nership ofacquired compan#!
*ncome accrued asearned1 amorti2ationand other ad0ustmentsare recogni2ed!
*nitial alue 3emains at *nitiall#-3ecorded cost
Cash receied isrecorded as Diidend
*ncome
Partial Equit# Ad0usted onl# foraccrued income anddiidends receied fromacquired compan#!
*ncome accrued asearned1 no otherad0ustments recogni2ed!
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*nestment Accounting b#Acquiring Compan#
5hat is the adantage of each6
Equit# ,ethod+ The acquiring compan# totals gie a
true representation of consolidation figures!
*nitial alue 7or 8Cost9: ,ethod+ *t is eas# to appl# and
gies a good measurement of cash flo"s generated b#
the inestment!
Partial Equit# ,ethod+ ;suall# gies balances
approximating consolidation figures/ but is easier to
appl# than equit# method
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*nestment Accounting b#Acquiring Compan#
A parent$s choice of internal accounting method
for subsidiar# inestments has no effect on the
resulting consolidated financial statements!
The selection of a particular method does not
affect the totals ultimatel# reported for the
combined companies!
The internal accounting method used doesrequire distinct procedures for consolidation of
the financial information from the separate
organi2ations!
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During the #ear/ the parent "ill ad0ust its
inestment account for the Subsidiar# under
application of the equit# method! The original
inestment/ recorded at the date of acquisition/ isad0usted for+
Subsequent Consolidation Equit# ,ethod
'! ., ad0ustments and other intangible assets/
)! The parent$s share of the sub$s income 7loss:/
(! The receipt of diidends from the sub!
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Parrot Compan# obtains all of the outstanding common stock of Sun
Compan# on ?anuar# '/ )@')! Parrot acquires this stock for B@@/@@@ in
cash! Sun Compan#$s balances are sho"n belo"!
Subsequent Consolidation -Equit# ,ethod Example
ook alues .air alues ''') ''') Difference
Current assets ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ()@/@@@ ()@/@@@ @
Trademarks 7indefinite life: ! ! ! ! ! ! ! ! )@@/@@@ ))@/@@@ )@/@@@
Patented technolog# 7'@-#ear life: ! ! ! ()@/@@@ 4
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Subsequent Consolidation -Equit# ,ethod Example
. of consideration transferred b# Parrot Compan#! B@@/@@@et ook alue of Sun Compan#! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !7=@@/@@@:
Excess of fair alue oer book alue ! ! ! ! ! ! ! ! ! ! )@@/@@@
Allocation to specific accounts based on fair alues+
Trademarks ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! )@/@@@
Patented technolog# ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! '(@/@@@
Equipment 7oeralued: ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 7(@/@@@:
')@/@@@
Excess . not specificall# identifiedFgood"ill! ! ! ! ! ! B@/@@@
PA33&T C&,PAG'@@ Percent Acquisition of Sun Compan#
Allocation of Acquisition-Date Subsidiar# .air alue
?anuar# '/ )@')
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Subsequent Consolidation -Equit# ,ethod Example
Amorti2ation computation+
;seful Annual
Account Allocation %ife Amorti2ation
Trademarks )@/@@@ *ndefinite @
Patented technolog# '(@/@@@ '@ #ears '(/@@@Equipment 7(@/@@@: < #ears 7=/@@@:
Iood"ill B@/@@@ *ndefinite @
>/@@@
Amorti2ation "ill be >/@@@ annuall# for fie
#ears until the equipment fair alue reduction
is full# remoed!(-'@
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Subsequent Consolidation -Equit# ,ethod Example
''') *nestment in Sun Compan# ! ! ! ! ! B@@/@@@
Cash ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! B@@/@@@To record the acquisition of Sun Compan#!
B'') Cash ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 4@/@@@
*nestment in Sun Compan#! ! ! ! ! ! ! ! ! 4@/@@@
To record receipt of cash diidend from subsidiar#
under the equit# method!
')('') *nestment in Sun Compan#! ! ! ! '@@/@@@Equit# in Subsidiar# Earnings ! ! ! ! ! ! '@@/@@@
To accrue income earned b# '@@J o"ned subsidiar#!
')('') Equit# in Subsidiar# Earnings ! ! ! ! >/@@@
*nestment in Sun Compan# ! ! ! ! ! ! ! ! ! >/@@@
To recogni2e amorti2ations on allocations made in acquisition of sub!
Assume Sun Compan# earns income of '@@/@@@ in )@')and pa#s a 4@/@@@@ cash diidend on August '/ )@')!
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Subsequent Consolidation -5orksheet Entries
S: Eliminates the subsidiar#$s Stockholders$ equit# account
beginning balances and the book alue component "ithin the
parent$s inestment account!A: 3ecogni2es the unamorti2ed Allocations as of the beginning of
the current #ear associated "ith the ad0ustments to fair alue!
*: Eliminates the subsidiar# *ncome accrued b# the parent!
D: Eliminates the subsidiar# Diidends!
E: 3ecogni2es excess amorti2ation Expenses for the current period
on the allocations from the original ad0ustments to fair alue!
.or the first #ear/ the parent prepares fie entries on
the "orkpapers to consolidate the t"o companies!
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Subsequent ConsolidationEquit# ,ethod Example Entr# S
ote+ *f this is the first #ear of the inestment/
and the inestment "as made at a time
other than the beginning of the fiscal #ear/then pre-acquisition income of the sub
must be accounted for in the retained earnings
balance!
Common Stock 7Sun Compan#:! ! ! !)@@/@@@
AP*C 7Sun Compan#: ! ! ! ! ! ! ! ! ! ! ! ! )@/@@@
3E/ ''' 7Sun Compan#: ! ! ! ! ! ! ! ! (B@/@@@
*nestment in Sun Compan# ! ! ! ! ! ! ! ! =@@/@@@
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Subsequent ConsolidationEquit# ,ethod Example Entr# A
Trademarks ! ! ! ! ! ! ! ! ! ! ! ! ! ! !)@/@@@
Patented technolog# ! ! ! ! ! ! ! '(@/@@@
Iood"ill ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !B@/@@@
Equipment ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! (@/@@@
*nestment in Sun Compan# ! ! ! !)@@/@@@
ote+ *n the first #ear/ . ad0ustments are
calculated in the allocation computation! *nsubsequent #ears/ . ad0ustments must be
reduced b# an# depreciation taken in prior
consolidations!
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Subsequent Consolidation Equit#,ethod Example Entries * K D
Equit# in Subsidiar# Earnings ! ! !H(/@@@
*nestment in Sun Compan#! ! ! ! ! ! ! H(/@@@
*nestment in Sun Compan# ! ! ! ! 4@/@@@Diidends Paid ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 4@/@@@
ote+ Entr# * aboe remoes Sun$s income recogni2ed
b# Parrot during the #ear so Sun$s reenue andexpense accounts 7and current amorti2ation
expense: can be brought into the consolidated
totals!
ote+ Entr# D aboe remoes the intra-entit# transfer
of cash for the diidends distributed to Parrot
from Sun!(-'
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Iood"ill *mpairment T"o-Step Test
*mplied alue of the related good"ill can be
determined using quoted market prices/ similar
businesses/ or present alue of future cash flo"s!
Step )*s 8implied good"ill9 less than 8recorded good"ill96
An impairment loss is
recorded for the excess
carr#ing alue oer
implied fair alue!
Iood"ill is &T
impaired! o
further testing is
required!
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Iood"ill *mpairment Test Example
&n ?anuar# '/ )@'(/ e"call Corporation "as
formed to consolidate operations of three
companies in a deal alued at )!H billion!
Each of the three former firms is considered anoperating segment and "ill be maintained as a
subsidiar# of e"call!
&ne firm comprises t"o diisions/ and the other
t"o firms are treated as independent reportingunits!
e"call recogni2ed ))' million as good"ill at the
merger date and allocated this entireamount to its
reporting units! (-)H
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Iood"ill *mpairment Test Example
e"call$s Acquisition .air alue
3eporting ;nits Iood"ill ?anuar# '/ )@'(
DS, 5ired ))/@@@/@@@ H
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Iood"ill *mpairment Test Example
DS, 5ireless Dec! ('/ )@'(/ fair alue =@@/@@@/@@@
.air alues of DS, 5ireless net assets at Dec! ('/ )@'(+
Current asset
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Iood"ill *mpairment Test Example
Iood"ill is no" alued at 4/@@@/@@@!
e"call reports a '
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Comparison of ;!S! IAAP and*nternational Accounting Standards
;nder ;S IAAP+
Iood"ill is allocated toreporting units/ usuall#operating segments/ expectedto benefit from it!
A t"o-step process is used totest for impairment!
*f the carr#ing amount ofgood"ill is more than itsimplied alue/ an impairmentloss is recogni2ed!
*.3S ;nderI"% 3&+
Iood"ill is allocated to cash-generating units at a leel muchlo"er than an operating segment!
A one-step process is used to test
for impairment!Iood"ill is reduced for an#excess carr#ing alue/ do"n to2ero/ and then other assets arereduced pro-rata!
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&ther *ntangibles
All identified intangible assets should be amorti2edoer their economic useful life unless such life is
considered in$e'inite - that extends be#ond the
foreseeable future!
*ntangible assets "ith indefinite lies are not
amorti2ed! The# are tested for impairment on an
annual basis! The asset$s carr#ing alue is compared
to its fair alue! *f fair alue is less than carr#ingalue/ the intangible asset is considered impaired
and an impairment loss is recogni2ed! The asset$s
carr#ing alue is reduced accordingl#!
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Contingent Considerationin usiness Combinations
*f part of the consideration to be transferred inan acquisition is contingent on a future eent+
The acquiring firm estimates the fair alue of acash contingenc# and records a liabilit# equalto the present alue of the future pa#ment!
The liabilit# "ill continue to be measured atfair alue "ith ad0ustments recogni2ed in
income!Contingent stock pa#ments are reported as a
component of stockholders$ equit#/ and are notremeasured at fair alue!
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