chapter consolidated statements: date of acquisition fundamentals of advanced accounting 1st edition...

CHAPTER

Consolidated Statements:Date of Acquisition

Fundamentals of Advanced Accounting 1st Edition

Fischer, Taylor, and Cheng

22

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #2

• Consolidation procedures on the day the controlling interest is acquired.

• Levels of investment Investment Income

% Owned Recorded Recorded< 20% At cost Dividends Declared

20 – 50% At cost Share of Income/ (Loss)

> 50% At cost Share of Income/(Loss)Consolidation Process

Consolidated Statements – Date of Acquisition


• Merge two legal entities into one economic entity

• Combine financial statements of parent and subsidiary

• Presented as if they were one, single company

The Consolidation Concept


Control Through Stock Acquisition

• A parent purchases the stock of another company – the subsidiary.

• The subsidiary (sub) remains a separate legal entity.

• A 100% purchase of a sub’s stock– Different entry from purchase of net assets– Same combined balance sheet as if net

assets were purchased


Illustration 2-1: Asset Acquisition$500,000 Purchase Price

Cash 800,000 0Accounts receivable 300,000 200,000Inventory 100,000 100,000Equipment (net) 150,000 300,000 Total Assets 1,350,000 600,000

Current liabilities 150,000 100,000Bonds payable 500,000 0Common Stock 100,000 200,000Retained earnings 600,000 300,000 Total Liabilities and Equity 1,350,000 600,000

Account S CompanyP Company


Illustration 2-1: Asset AcquisitionEntry on P’s Books

Accounts receivable 200,000

Inventory 100,000

Equipment 300,000

Current liabilities100,000

Cash500,000


Illustration 2-1: Asset AcquisitionBalance Sheet After Acquisition

Cash 300,000Accounts receivable 500,000Inventory 200,000Equipment (net) 450,000 Total Assets 1,450,000

Current liabilities 250,000Bonds payable 500,000Common Stock 100,000Retained earnings 600,000 Total Liabilities and Equity 1,450,000

Account P Company


Stock Acquisition

• Acquiring company purchases stock of target company from shareholders.

• Entry recorded on parent’s books:

Investment in Sub S 500,000

Cash500,000

• Investment account represents controlling interest in sub.


Consolidation Concept - Duplication

• Parent company has an investment account recorded at $500,000.

• Sub has accounts:– Common Stock $200,000– Retained Earnings $300,000

• When combining the balance sheets, these accounts actually represent one another.


Elimination of Investment Account - EL

• Accounts are eliminated in consolidation.

EL Common Stock 200,000

Retained Earnings 300,000

Investment in Sub S500,000

• “EL” is a “key” for this entry.• Investment account is eliminated (a company

cannot own itself).• Sub’s equity accounts are eliminated - parent

is owner.


Consolidation Worksheet: 2-1

• Review Worksheet 2-1• Column 1 – Parent company’s Balance

Sheet• Column 2 – Sub’s Balance Sheet• Columns 3 & 4 – Consolidation

(elimination) entries• Column 5 – Consolidated Balance

Sheet


Consolidation Worksheet: 2-1(Continued)

• Parent’s investment account is reduced to zero.

• Sub’s equity accounts are reduced to zero.

• Consolidated balance sheet reported as if net assets were purchased.


Purchase Price Exceeds Book Value

• Common for purchase price to be more than equity (book value) of sub.

• Common for fair value to be higher than book value of sub.

• Change prior example:– Purchase price $700,000

Entry recorded on parent’s books:


Cash700,000


Asset Acquisition$700,000 Purchase Price

Accounts receivable 200,000 200,000Inventory 100,000 120,000Equipment (net) 300,000 400,000 Total Assets 600,000 720,000

Current liabilities 100,000 100,000

Value of Net Assets 500,000 620,000

Subsidiary S Fair ValueBook Value


Consolidation entries

• EL eliminates the parent’s investment account and the sub’s equity accounts.

• D reclassifies amount of purchase price to assets:– Increase sub’s assets to fair value– Record any goodwill (amount paid in

excess of fair value)

See Worksheet 2-2


Consolidation Entries

EL Common Stock 200,000

Retained Earnings 300,000


D1 Inventory 20,000

D2 Equipment 100,000

D3 Goodwill 80,000

D Investment in Sub S 200,000


Consolidation Entries

• D1 – increases sub’s inventory to fair value of $120,000.

• D2 – increases sub’s equipment to fair value of $400,000.

• D3 – records goodwill– $700,000 price less $620,000 fair value =

$80,000 Goodwill


Example – 100% of SharesComplex Purchase

• Acquisitions Inc. issues 7,000 shares of common stock– Par Value, $1– Market Value, $50

• $10,000 direct acquisition costs– Attorney & accountant fees

• $5,000 brokerage fees


100% Complex purchase – continuedAcquisitions Inc. Journal Entries:

Investment in Johnson Co. 360,000*Common Stock (7,000 x $1) 7,000Paid-in Capital in Excess of Par 343,000 ** Cash 10,000

Paid-in Capital in Excess of Par 5,000^Cash 5,000

*7,000 shares x $50 plus $10,000 direct costs** 7,000 shares x $50 less $7,000^Brokerage costs reduce parent’s Paid-in Capital


Assets Book Value Fair ValueAccounts receivable 28,000 28,000 *Inventory 40,000 45,000 *Land 10,000 50,000Buildings (net) 40,000 80,000Equipment (net) 20,000 50,000Patent 15,000 30,000Copyright - 40,000Total Assets 153,000 323,000

Liabilities & EquityCurrent liabilities 5,000 5,000 *Bonds payable 20,000 21,000 *Total liabilities 25,000 26,000

Net assets 128,000 297,000

* Priority accounts net to $47,000

100% Complex purchase – continuedJohnson, Inc. Net Asset Values


Accounts TotalCumulative

TotalAccounts receivable

Inventory

Current liabilities

Bonds payableLandBuildingEquipmentPatentsCopyright

47,000Priority

Nonpriority 250,000 297,000

47,000

100% Complex purchase – continued Zone Analysis


Using purchase rules:• Goodwill above what price? $297,000

at $360,000 Goodwill = $63,000

• Bargain below what price? $297,000Cost less $47,000 (priority) is assigned to non-priority accounts

• Extraordinary gain below what price? $47,000$47,000 less the price is the extraordinary gain

Zone Analysis


Determination & Distribution Schedule

• Compares price for acquisition vs. equity of sub

• Difference of price vs. equity represents– Book value vs. fair value of net assets– Fair value of net assets vs. price of

acquisition


Price 360,000Equity (100% $128,000) 128,000Excess cost 232,000Adjustments:

Inventory (increase to $45,000) 5,000Bonds payable (increase liability) (1,000)Land (increase to $50,000) 40,000Building (increase to $80,000) 40,000Equipment (increase to $50,000) 30,000Patent (increase to $30,000) 15,000Copyright (record) 40,000 169,000

Goodwill (record) 63,000

D&D for $360,000 – Goodwill


Consolidation Entries – 100% Ownership with Goodwill

EL Common Stock 1,000Paid-in Capital in Excess Par 59,000Retained Earnings 68,000


D1 Inventory 5,000D2 Premium on Bonds Payable 1,000D3 Land 40,000D4 Buildings (net) 40,000D5 Equipment (net) 30,000D6 Patent (net) 15,000D7 Copyright 40,000D8 Goodwill 63,000D Investment in Johnson Company 232,000


Price 210,000Equity (100% $128,000) 128,000Excess cost 82,000Adjustments:

Inventory (increase to $45,000) 5,000 Bonds payable (increase liability) (1,000)Land (allocation on next slide) 22,600Building (allocation on next slide) 12,160Equipment (allocation on next slide) 12,600Patent (allocation on next slide) 4,560Copyright (allocation on next slide) 26,080 82,000

0

D&D for $210,000 – Bargain Purchase


Asset Fair

Value % Assign Total*

Allocated Value

Book Value Adjustment

Land 50,000 20% 163,000 32,600 10,000 22,600

Building 80,000 32 163,000 52,160 40,000 12,160

Equipment 50,000 20 163,000 32,600 20,000 12,600

Patents 30,000 12 163,000 19,560 15,000 4,560

Copyright 40,000 16 163,000 26,080 0 26,080

Total 250,000 163,000 85,000 78,000 *Amount to assign:

$210,000 purchase price less $47,000 to priority accounts.

Allocation – Bargain purchase


Consolidation Entries – Bargain Purchase



D1 Inventory 5,000D2 Premium on Bonds Payable

1,000D3 Land 22,600D4 Buildings (net) 12,160D5 Equipment (net) 12,600D6 Patent (net) 4,560D7 Copyright 26,080D Investment in Johnson Company

82,000


Price 35,000Equity (100% $128,000) 128,000Excess cost (93,000)Adjustments:

Inventory (increase to $45,000) 5,000Bonds payable (increase liability) (1,000)Land (eliminate book value) (250,000)Building (eliminate book value) (250,000)Equipment (eliminate book value) (250,000)Patent (eliminate book value) (250,000)Copyright (eliminate book value)(250,000) 255,000)

Extraordinary gain (12,000)

D&D for $35,000 – Extraordinary Gain


Consolidation Entries – Extraordinary Gain



D1 Inventory 5,000D2 Premium on Bonds Payable 1,000D3 Land 10,000D4 Buildings (net) 40,000D5 Equipment (net) 20,000D6 Patent (net) 15,000D7 Extraordinary gain 12,000D Investment in Johnson Company 93,000


Less than 100% Ownership

• Investment account is eliminated only against it’s % ownership of equity accounts– Creates a Non-Controlling Interest (NCI) that

represents minority ownership of net assets

• All income statement accounts are combined– Creates a Non-Controlling Interest (NCI) that

represents minority ownership of net income/(loss)

• Adjust sub’s assets/liabilities to parent’s % of fair value


Zone Analysis: 80% Purchase

Accounts Total%

OwnedCumulative

TotalAccounts receivable

Inventory

Current liabilities

Bonds payableLandBuilding

Equipment

Patents

Copyright

37,600Priority

Nonpriority 250,000 237,600

47,000x 80% = 37,600

x 80% = 200,000


Use the same subsidiary information for 80% purchaseAll adjustments are for 80% of fair-book difference

• Goodwill above what price? $237,600$297,000 80% = $237,600We will use $290,000, so goodwill = $52,400

• Bargain below what price? $237,600$297,000 80% = $237,600If price was $210,000, $189,000 ($210,000 – [$47,000 80%]) is available for P’s 80% share of nonpriority accounts

• Extraordinary gain below what price? $37,60080% $47,000 = $37,600

Zones for an 80% Purchase


Price 290,000

Equity (80% $128,000) 102,400

Excess cost 187,600

Adjustments:

Inventory (80% 5,000) 4,000

Prem. Bonds payable (80% 1,000) (800)

Land (80% 40,000) 32,000

Building (80% 40,000) 32,000

Equipment (80% 30,000) 24,000

Patent (80% 15,000) 12,000

Copyright (80% 40,000) 32,000 135,200

Goodwill 52,400

D&D for 80% Interest at $290,000 – with Goodwill


Consolidation Entries – 80% with Goodwill

EL Common Stock 800Paid-in Capital in Excess Par 47,200Retained Earnings 54,400

Investment in Sub S 102,400(Eliminated at 80% of parent’s ownership)

D1 Inventory 4,000D2 Premium on Bonds Payable 800D3 Land 32,000D4 Buildings (net) 32,000D5 Equipment (net) 24,000D6 Patent (net) 12,000D7 Copyright 32,000D8 Goodwill 52,400D Investment in Johnson Company 187,600


Price 210,000

Equity (80% $128,000) 102,400

Excess cost 107,600

Adjustments:

Inventory (80% 5,000) 4,000

Bonds payable (80% 1,000) (800)

Land (allocation next slide) 26,480

Building (allocation next slide) 23,168

Equipment (allocation next slide) 18,480

Patent (allocation next slide) 8,688

Copyright (allocation next slide) 27,584 107,6000

D&D for 80% Interest at $210,000 Price – Bargain Purchase


Asset Fair

Value % Assign Total*

Allocated Value

Book Value 80% Adjustment

Land 50,000 20% 172,400 34,480 8,000 26,480

Building 80,000 32 172,400 55,168 32,000 23,168

Equipment 50,000 20 172,400 34,480 16,000 18,480

Patents 30,000 12 172,400 20,688 12,000 8,688

Copyright 40,000 16 172,400 27,584 0 27,584

Total 250,000 163,000 68,000 104,00 *Amount to assign:

$210,000 purchase price less $37,600 ($47,000 x 80%) to priority accounts.

Allocation for Bargain Purchase 80% Ownership – Price $210,000


Consolidation Entries 80% Ownership – Bargain Purchase



D1 Inventory 4,000D2 Premium on Bonds Payable

800D3 Land 26,480D4 Buildings (net) 23,168D5 Equipment (net) 18,480D6 Patent (net) 8,688D7 Copyright 27,584D Investment in Johnson Company

107,600


Price 30,000Equity (80% $128,000) 102,400Excess cost (72,400)Adjustments: Inventory (80% 5,000) 4,000 Prem. Bonds payable (80% 1,000) (800) Land (80% 10,000) (8,000) Building (80% 40,000) (32,000) Equipment (80% 20,000) (16,000) Patent (80% 15,000) (12,000) 64,800Extraordinary gain (7,600)

D&D for 80% Ownership – Price $30,000 Extraordinary Gain


Consolidation Entries 80% Ownership – Extraordinary Gain



D1 Inventory 4,000D2 Premium on Bonds Payable 800D3 Land 8,000D4 Buildings (net) 32,000D5 Equipment (net) 16,000D6 Patent (net) 12,000D7 Extraordinary gain 7,600D Investment in Johnson Company 72,400


Purchase: Subsidiary Goodwill

• No assets, including intangible assets, can be discounted until parent share of goodwill is eliminated

• Ignore existing goodwill in “zone and price analysis”– No priority

• D&D schedule adjusts goodwill– Does not create it


Price 290,000Equity (80% 168,000*) 134,400Excess cost 155,600Adjustments: Inventory (80% 5,000)

4,000 Prem. Bonds payable (80% 1,000) (800) Land (80% 40,000)

32,000 Building (80% 40,000)

32,000 Equipment (80% 30,000) 24,000 Patent (80% 15,000)

12,000 Copyright (80% 40,000) 32,000

135,200

Increase existing goodwill 20,400*Previously $128,000. This amount includes $40,000 existing

Goodwill

D&D for 80% Interest at $290,000 – Sub has existing Goodwill


Consolidation Entries – 80% with Existing Goodwill

EL Common Stock 800Paid-in Capital in Excess Par 47,200Retained Earnings ($108,000 x 80%) 86,400

Investment in Sub S 134,400(Eliminated at 80% of parent’s ownership)

D1 Inventory 4,000D2 Premium on Bonds Payable 800D3 Land 32,000D4 Buildings (net) 32,000D5 Equipment (net) 24,000D6 Patent (net) 12,000D7 Copyright 32,000D8 Goodwill 20,400D Investment in Johnson Company 155,600


Push-Down Accounting

Push-Down Accounting – Sub’s accounts are adjusted to fair value

• Advocates contend this is consistent with treatment at consolidation

• SEC requires push-down accounting for certain subs who issue separate financial statements.

• Consolidation is unaffected.

chapter consolidated statements: date of acquisition fundamentals of advanced accounting 1st edition...

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