ch3 Advanced Accounting

Slide
3-1
33
Consolidated Financial
StatementsDate of Acquisition
Advanced Accounting, Fifth Edition

Slide
3-2
Learning
Learning Objectives
Objectives
Slide
3-3
1.
Understand the concept of control as used in reference to consolidations.
2.
Explain the role of a noncontrolling interest in business combinations.
3.
Describe the reasons why a company acquires a subsidiary rather than its net
assets.
4.
Describe the valuation and classification of accounts in consolidated financial

statements.
5.
List the requirements for inclusion of a subsidiary in consolidated financial

statements.
6.
Discuss the limitations of consolidated financial statements.
7.
Record the investment in the subsidiary on the parents books at the date of
acquisition.
8.
Prepare the consolidated workpapers and eliminating entries at the date of

acquisition.
9.
Compute and allocate the difference between implied value and book value of the
acquired firms equity.
10.
Discuss some of the similarities and differences between U.S. GAAP and IFRS
with respect to the preparation of consolidated financial statements at the date
of acquisition.
Stock
Stock Acquisition
Acquisition
Chapter Focus - Accounting for Stock Acquisitions
When one company controls another company through
direct or indirect ownership of its voting stock.
Acquiring company referred to as the parent.
Acquired company referred to as the subsidiary.
Other shareholders considered noncontrolling interest.
Parent records interest in subsidiary as an investment.
If a subsidiary owns a controlling interest in one or more
other companies, a chain of ownership is forged by which the
parent company controls other companies.
Slide
3-4
LO 2 Noncontrolling interest (NCI).
Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
The Securities and Exchange Commission defines a
subsidiary as an affiliate controlled by another entity,
directly or indirectly, through one or more
intermediaries.
Control means the possession, direct or indirect, of the
power to direct management and policies of another
entity, whether through the ownership of voting
shares, by contract, or otherwise.
Slide
3-5
LO 1 Meaning of control.
Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
Control using U.S. GAAP:
the direct or indirect ability to determine the
direction of management and policies through
ownership, contract, or otherwise
FASB ASC paragraph 810-10-15-8 states:
the usual condition for a controlling financial
interest is ownership of a majority voting
interest
Slide
3-6
Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
However, application of the majority voting interest
requirement may not identify the party with a
controlling financial interest because the controlling
financial interest may be achieved through
arrangements that do not involve voting interests.
The first step in determining whether the financial
statements should be consolidated is to determine if
the reporting entity has a variable interest in another
entity, referred to as a potential variable interest
entity (VIE).
Slide
3-7
Definitions
Definitions of
of Control
Control
Slide
3-8
Requirements
Requirements for
for the
the Inclusion
Inclusion of
of Subsidiaries
Subsidiaries
in
in the
the Consolidated
Financial Statements
Statements
Purpose of consolidated statements - to present the
operating results and the financial position of a parent and
all its subsidiaries as if they are one economic entity.
Circumstances when majority-owned subsidiaries should be
excluded from the consolidated statements:
1.
Control does not rest with the majority owner.
2. Subsidiary operates under governmentally imposed

uncertainty so severe as to raise significant doubt about
the parents control.
Slide
3-9
LO 5 Requirements regarding consolidation of subsidiaries.
Reasons
Reasons For
For Subsidiary
Subsidiary Companies
Companies
Advantages to acquiring a controlling interest in
another company.
1. Stock acquisition is relatively simple.
2. Control of subsidiary can be accomplished with a smaller
investment.
3. Separate legal existence of affiliates provides an
element of protection of the parents assets.
Slide
3-10
LO 3 Acquiring assets or stock.
Consolidated
Financial Statements
Statements
Statements prepared for a parent company and its
subsidiaries are called consolidated financial
statements.
Ignore legal aspects of separate entities, focus on
economic entity under control of management.
Substance rather than form.
Not substitute for statements prepared by separate
subsidiaries, which may be used by:
Slide
3-11
Creditors
Noncontrolling stockholders
Regulatory agencies
LO 4 Valuation and classification of subsidiary assets and liabilities.
Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
Recording Investments at Cost (Parents Books)
Stock investment is recorded at cost as measured by
fair value of the consideration given or consideration
received, whichever is more clearly evident.
Consideration given may include cash, other assets, debt
securities, stock of the acquiring company.
Slide
3-12
LO 7 Recording of investment at acquisition.
Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
E3-2: On January 1, 2011, Polo Company purchased 100% of
the common stock of Save Company by issuing 40,000 shares
of its (Polos) $10 par value common stock with a market price
of $17.50 per share. Polo incurred cash expenses of $20,000
for registering and issuing the common stock. The
stockholders equity section of the two companys balance
sheets on December 31, 2010, were:
Polo
Common stock, $10 par value
Slide
3-13
Save
$350,000
$320,000
Other contributed capital
590,000
175,000
Retained earnings
380,000
205,000
Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
E3-2: Prepare the journal entry on the books of Polo
Company to record the purchase of the common stock of Save
Company and related expenses.
Investment in Save (40,000 x $17.50)
Common Stock
400,000
Other Contributed Capital
300,000
Other Contributed Capital

Cash
Slide
3-14
700,000
20,000
20,000
Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Assets and liabilities are summed, regardless of
whether the parent owns 100% or a smaller controlling
interest.
Noncontrolling interests (NCI) are reflected as a
component of owners equity.
Eliminations must be made to cancel the effects of
transactions among the parent and its subsidiaries.
A workpaper is frequently used to summarize the
effects of various additions and eliminations.
Slide
3-15
LO 8 Preparing consolidated statements using a workpaper.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Intercompany Accounts to Be Eliminated
Subsidiarys
Parents Accounts
Accounts
Investment in subsidiary
Against
Equity accounts
Intercompany receivable (payable)
Against
Intercompany payable (receivable)
Advances to subsidiary (from subsidiary) Against
Advances from parent (to parent)
Interest revenue (interest expense)
Against
Interest expense (interest revenue)
Dividend revenue (dividends declared)
Against
Dividends declared (dividend revenue)
Management fee received from

subsidiary
Against
Management fee paid to parent
Sales to subsidiary (purchases of

inventory from subsidiary)
Against
Purchases of inventory from parent

(sales to parent)
Slide
3-16
LO 8 Preparing consolidated statements using a workpaper.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Investment Elimination
It is necessary to eliminate the investment account of the
parent company against the related stockholders equity
of the subsidiary to avoid double counting of these net
assets.
When parents share of subsidiarys equity is eliminated
against the investment account, subsidiarys net assets
are substituted for the investment account in the
consolidated balance sheet.
Slide
3-17
LO 8 Investment is eliminated for consolidated statements.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Investment Elimination
Computation and Allocation of Difference between Implied
Value and Book Value
Step 1: Determine percentage of stock acquired.
Step 2: Divide purchase price by the percentage acquired
to calculate the implied value of the subsidiary.
Step 3: Difference between step 2 and book value of
subsidiarys equity must be allocated to adjust the
underlying assets and liabilities of the acquired company.
Slide
3-18
LO 9 Computing and allocating the difference

between implied and book value (CAD).
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
The prior steps lead to the following possible cases:
Case 1. The implied value (IV) of the subsidiary is equal to the book value of
the subsidiarys equity (IV = BV), and
a. The parent company acquires 100% of the subsidiarys stock; or
b. The parent company acquires less than 100% of the subsidiarys stock.
Case 2. The implied value of the subsidiary exceeds the book value of the
subsidiarys equity (IV > BV), and
Case 3. The implied value of the subsidiary is less than the book value of the
subsidiarys equity (IV < BV), and
Slide
3-19

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): Implied Value of Subsidiary Is Equal to Book Value
of Subsidiary Companys Equity (IV BV)100% of Stock
Acquired.
Illustration: Assume that on January 1, 2013, P Company

acquired all the outstanding stock (10,000 shares) of S
Company for cash of $160,000. What journal entry would P
Company make to record the shares of S Company acquired?
Investment in S Company
Cash
Slide
3-20
$160,000
$160,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The balance sheets of both companies immediately
after the acquisition of shares is as follows:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
Slide
3-21
$ 100,000
100,000
20,000
40,000
$ 260,000
Implied value =
Book value
Price paid
% acquired
$160,000
100%
Implied value 160,000

Book value
Difference
160,000
$0

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, date of acquisition, is presented below:
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 800,000
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
Consolidated
Balances
$
80,000
380,000
320,000
120,000
160,000
$ 1,060,000
$
220,000
500,000
100,000
240,000
1,060,000
Adjusting and eliminating entries are made on the workpaper for the
preparation of consolidated statements.
Slide
3-22

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 800,000
Slide
3-23
Solution on
notes page
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
160,000
Consolidated
Balances
$
80,000
380,000
320,000
120,000
$
900,000
$
100,000
20,000
40,000
$ 160,000
$ 160,000
220,000
400,000
80,000
200,000
900,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper entry to eliminate S Companys
stockholders equity against the investment account is:
Common stock (S)
100,000
Other contributed capital (S)
20,000
Retained earnings (S)
40,000
160,000
This is a workpaper-only entry.
Slide
3-24

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): Note the following on the workpaper.
1. The investment account and related subsidiarys
stockholders equity have been eliminated and the
subsidiarys net assets substituted for the investment
account.
2. Consolidated assets and liabilities consist of the sum
of the parent and subsidiary assets and liabilities in
each classification.
3. Consolidated stockholders equity is the same as the
parent companys stockholders equity.
Slide
3-25

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): Parents Cost of Investment Is Equal to Book Value of
Subsidiarys Stock Acquired (IV=BV) - Partial Ownership.

acquired 90% (9,000 shares) of the stock of S Company for
$144,000. What journal entry would P Company make to
record the shares of S Company acquired?
Cash
Slide
3-26
$144,000
$144,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The balance sheets of both companies immediately
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 56,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
144,000
$ 800,000 $ 260,000
Liabilities
Common stock
Retained earnings
Noncontrolling interest
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-27
Implied value =
Book value
Price paid
% acquired
$144,000
90%

Book value
Difference
160,000
$0

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): Computation and Allocation of Difference between
Implied and Book Values:
90%
Parent
Share
$ 144,000
Purchase price and implied value

Less: Book value of equity acquired:
Common stock
Retained earnings
Total book value
Difference between implied and book value
Slide
3-28
10%
Noncontrolling
Share
$
16,000
90,000
18,000
36,000
$ 144,000
10,000
2,000
4,000
16,000
Total
Value
$ 160,000
100,000
20,000
40,000
$ 160,000
$

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper to consolidate the balance sheets for
Eliminations
Debit
Credit
Consolidated
Balances
$
96,000
380,000
320,000
120,000
144,000
$ 1,060,000
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 56,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
144,000
$ 800,000 $ 260,000
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-29
Solution on
notes page
220,000
500,000
100,000
240,000
1,060,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 56,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
144,000
$ 800,000 $ 260,000
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
Slide
3-30
$ 800,000
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
144,000
Consolidated
Balances
$
96,000
380,000
320,000
120,000
$
916,000
$
100,000
20,000
40,000
$ 160,000
16,000
$ 160,000
220,000
400,000
80,000
200,000
16,000
916,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper entry to eliminate S Companys
stockholders equity against the investment account is:
Common stock (S)
100,000
20,000
40,000
Noncontrolling interest in equity
144,000
16,000
(establish the NCI)
Slide
3-31

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): Implied Value Exceeds Book Value of Subsidiary
Companys Equity (IV>BV)Partial Ownership.
Cash
Slide
3-32
$148,000
$148,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Difference (IV>BV)
Total assets
P Company S Company
$ 52,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
148,000
Price paid
$ 800,000
$ 260,000
% acquired
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-33
Implied value =
Book value
$148,000
80%

Book value
160,000
Difference
$25,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
80%
Parent
Share
$ 148,000

Common stock
Retained earnings
Total book value
Land revaluation (mark to market)
Balance
20%
Noncontrolling
Share
$
37,000
80,000
16,000
32,000
$ 128,000
20,000
(20,000)
-
Total
Value
$ 185,000
20,000
4,000
8,000
32,000
100,000
20,000
40,000
$ 160,000
5,000
(5,000)
-
$
$
25,000
(25,000)
-
We assume the entire difference is attributable to

land with a current value higher than historical cost.
Slide
3-34

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Difference (IV>BV)
Total assets
P Company S Company
$ 52,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
148,000
$ 800,000
$ 260,000
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
Slide
3-35
Eliminations
Debit
Credit
25,000
25,000
$ 800,000
$ 260,000
148,000
25,000
Consolidated
Balances
$
92,000
380,000
320,000
145,000
$
937,000
$
100,000
20,000
40,000
$ 210,000
37,000
$ 210,000
220,000
400,000
80,000
200,000
37,000
937,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): The workpaper (elimination) entries are as follows:
#1
Common stock (S)
100,000
20,000
40,000
Difference between IV and BV
25,000
148,000

#2
Land
25,000

Slide
3-36
37,000
25,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): Reasons an Acquiring Company May Pay More Than
Book Value.
1. Fair value of specific tangible or intangible assets of
the subsidiary may exceed its recorded value because
of appreciation.
2. Excess payment may indicate existence of goodwill.
3. Liabilities, generally long-term, may be overvalued.
4. A variety of market factors may affect the price paid.
Slide
3-37

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(b): Implied Value of Subsidiary is Less Than Book
Value (IV<BV)Partial Ownership.
Cash
Slide
3-38
$120,000
$120,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Difference (IV<BV)
Total assets
P Company S Company
$ 80,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
120,000
Price paid
$ 800,000
$ 260,000
% acquired
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-39
Implied value =
Book value
$120,000
80%

Book value
160,000
Difference
$10,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
80%
Parent
Share
$ 120,000

Common stock
Retained earnings
Total book value
Plant & equipment (mark to market)
Balance
20%
Noncontrolling
Share
$
30,000
80,000
16,000
32,000
$ 128,000
(8,000)
8,000
-
Total
Value
$ 150,000
20,000
4,000
8,000
32,000
100,000
20,000
40,000
$ 160,000
(2,000)
2,000
-
$
$
(10,000)
10,000
-
Assume the difference is attributable to plant and

equipment, in this case an overvaluation of $10,000.
Slide
3-40

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Balance Sheet
Cash
Plant and equipment
Land
Investment in Sill
Difference (IV>BV)
Total assets
P Company S Company
$ 80,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
120,000
$ 800,000
$ 260,000
Liabilities
Common stock
Retained earnings
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
Slide
3-41
Eliminations
Debit
Credit
10,000
$ 800,000
$ 260,000
10,000
120,000
10,000
Consolidated
Balances
$
120,000
380,000
320,000
110,000
$
930,000
$
100,000
20,000
40,000
$ 170,000
30,000
$ 170,000
220,000
400,000
80,000
200,000
30,000
930,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(b): The workpaper (elimination) entries are as follows:
#1
Common stock (S)
100,000
20,000
40,000
10,000
120,000

#2

Plant and equipment
Slide
3-42
30,000
10,000
10,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Review Question
The noncontrolling interest in the subsidiary is
reported as:
a. Asset
b. Liability
c. Equity
d. Expense
Slide
3-43

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Subsidiary Treasury Stock Holdings

A subsidiary may hold some of its own shares as
treasury stock at the time the parent company
acquires its interest.
Because the treasury stock account represents a
contra stockholders equity account, it must be
eliminated by a credit when the investment account
and subsidiary companys equity accounts are
eliminated on the workpaper.
Slide
3-44

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Other Intercompany Balance Sheet Eliminations

Intercompany accounts receivable, notes receivable,
and interest receivable, for example, must be
eliminated against the reciprocal accounts payable,
notes payable, and interest payable.
The full amount of all intercompany receivables and
payables is eliminated without regard to the
percentage of control held by the parent company.
Slide
3-45

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Adjusting Entries Prior to Eliminating Entries

At times, workpaper adjustments to accounting data
may be needed before appropriate eliminating entries
can be accomplished.
Make on workpaper in eliminations columns or
Adjust the subsidiarys statements prior to their
entry on the workpaper.
Slide
3-46

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Review Question
Which of the following adjustments do not occur in the
consolidating process?
a. Elimination of parents retained earnings
b. Elimination of intra-company balances
c. Allocations of difference between implied and book
values
d. Elimination of the investment account
Slide
3-47

Limitations
Limitations of
of Consolidated
Consolidated Statements
Statements
For Example:
Little information of value in consolidated
statements because they contain insufficient detail
about the individual subsidiaries.
Highly diversified companies operating across
several industries, often the result of mergers and
acquisitions, are difficult to analyze or compare.
Slide
3-48
LO 6 Limitations of consolidated statements.
IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP
Slide
3-49
LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP
Slide
3-50
IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP
Slide
3-51
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
APPENDIX A
If a purchase acquisition is tax-free to the seller
Tax bases of the acquired assets and liabilities are
carried forward at historical book values.
Assets and liabilities of the acquired company are
recorded on the consolidated books at adjusted fair
value.
Under current guidelines, the tax effects of the difference
between consolidated book values and the tax bases must be
recorded as deferred tax liabilities or assets.
Slide
3-52
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
Illustration: Suppose that Purchasing Company acquires
90% of Selling Company by issuing stock valued at $800,000.
The only difference between book value and fair value relates
to depreciable plant and equipment. Plant and equipment has a
market value of $400,000 and a book value of $250,000. All
other book values approximate market values. Assume that the
combination qualifies as a nontaxable exchange. On the date of
acquisition, Selling Companys book value of equity is $600,000,
which includes $150,000 of common stock and $450,000 of
retained earnings. Assume a 30% tax rate. Consider the
following Computation and Allocation Schedule with and without
considering deferred taxes.
Slide
3-53
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
Slide
3-54
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
Slide
3-55
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
The workpaper entry to eliminate the investment account is
as follows:
Entries for allocation with and without deferred taxes.
Slide
3-56
Consolidation
Consolidation of
of Variable
Variable Interest
Interest Entities
Entities
APPENDIX B
FASB has issued guidance for the consolidation of specialpurpose entities (SPEs) through Interpretation No. 46(R)
Consolidation of Variable Interest Entities and SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)[ASC 81010
30].
An enterprise shall consolidate a variable interest entity (VIE)
when that enterprise has a variable interest (or combination of
variable interests) that provides the enterprise with a
controlling financial interest on the basis of the certain
provisions (listed below).
FASB Statement No. 167 requires ongoing reassessments of

whether an enterprise is the primary beneficiary of a variable
interest entity.
Slide
3-57
Copyright
Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Slide
3-58

ch3 Advanced Accounting

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Advanced Accounting, Fifth Edition

Understand the concept of control as used in reference to consolidations.

Explain the role of a noncontrolling interest in business combinations.

Describe the valuation and classification of accounts in consolidated financial

List the requirements for inclusion of a subsidiary in consolidated financial

Discuss the limitations of consolidated financial statements.

Prepare the consolidated workpapers and eliminating entries at the date of

LO 2 Noncontrolling interest (NCI).

Control does not rest with the majority owner.

2. Subsidiary operates under governmentally imposed

LO 5 Requirements regarding consolidation of subsidiaries.

LO 3 Acquiring assets or stock.

LO 4 Valuation and classification of subsidiary assets and liabilities.

LO 7 Recording of investment at acquisition.

Other contributed capital

LO 7 Recording of investment at acquisition.

Other Contributed Capital

Other Contributed Capital

LO 7 Recording of investment at acquisition.

LO 8 Preparing consolidated statements using a workpaper.

Intercompany receivable (payable)

Intercompany payable (receivable)

Advances to subsidiary (from subsidiary) Against

Advances from parent (to parent)

Interest revenue (interest expense)

Interest expense (interest revenue)

Dividend revenue (dividends declared)

Dividends declared (dividend revenue)

Management fee received from

Management fee paid to parent

Sales to subsidiary (purchases of

Purchases of inventory from parent

LO 8 Preparing consolidated statements using a workpaper.

LO 8 Investment is eliminated for consolidated statements.

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

Illustration: Assume that on January 1, 2013, P Company

LO 9 Computing and allocating the difference

Implied value 160,000

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

Other contributed capital (S)

Retained earnings (S)

This is a workpaper-only entry.

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

Illustration: Assume that on January 1, 2013, P Company

LO 9 Computing and allocating the difference

Implied value 160,000

LO 9 Computing and allocating the difference

Purchase price and implied value

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

Other contributed capital (S)

Retained earnings (S)

(establish the NCI)

LO 9 Computing and allocating the difference

LO 9 Computing and allocating the difference

Implied value 185,000

LO 9 Computing and allocating the difference