ADV_SP08_MAR_17 - Olin Business School ACCOUNTING 4680 /...

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Olin Business School ACCOUNTING 4680 / 563 - SPRING 2008 ADVANCED ACCOUNTING LECTURE OUTLINE - March 17, 2008 THE CONSOLIDATION PROCESS (after acquisition) DIFFERENTIAL RELATED TO DISPOSED ASSETS Whenever an unamortized component of the differential relates to an asset that has been disposed or a liability that has been retired, an “eliminating entry” is made in the year of the disposal / liability to amortize the remaining component of the differential. This entry will have the effect of increasing / decreasing any gain / loss recorded on the disposal (retirement) of the asset (liability). EX . Parent purchases 75% of Sub, Inc. at a time when the book value is $ 1,600,000. expected to last 10 more years, at which point the salvage was expected to be $0. $ 950,000, and prepared the following entry to record the sale: Cash $ 950,000 PP&E (net) $ 840,000 [1] Gain on Sale of PP&E 110,000 [1] Equal to $1,200,000 less three years of depreciation at $120,000 per year. Q . What “eliminating entry” should be made to amortize the unamortized differential relating to the PP&E? A . Gain on Sale of PP&E $ 210,000 PP&E $ 210,000 This entry eliminates the unamortized component of the differential relating the PP&E. The net impact is that on 1
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the consolidated income statement the sale of the PP&E will result in a loss (i.e. negative gain) in the amount of $ 100,000. (Another way to calculate this loss is to note that at the time of acquisition, the consolidated balance sheet reports the PP&E at $1,500,000 { equal to $ 1,200,000 + .75 x ($1,600,000 - $ 1,200,000) }. After three years of depreciation, the consolidated carrying value would be $ 1,050,000, and thus if the PP&E were sold for $ 950,000 the consolidated entity would report a loss of $ 100,000.) DIFFERENTIAL RELATED TO BONDS PAYABLE The fair value of an acquired company’s bonds will differ from their carrying value if the market rate at the time of acquisition differs from the market rate at the time the bonds were issued. An implication of such a difference is that part of the purchase differential will be assigned to (a Discount or Premium on) Bonds Payable. In subsequent accounting periods an “elimination entry” must be made so that consolidated interest expense reflects the fair value of the bonds at the time the subsidiary was acquired. EX . On January 1, 2005, Short-Time Inc. issued $1,000,000 of 6 % coupon, eight-year bonds, with interest being paid once per year. At the time of the issue, the market rate for similar bonds was 9%. Accordingly, the bonds initially sold for $ 833,955 (equal to $ 60,000 x PVA 8, 9% + 1,000,000 x PVF 8, 9% ), and Short-Time prepared the following amortization schedule: CASH INTEREST DISCOUNT CARRYING DATE PAID EXPENSE AMORTIZED VALUE 833,955 12/31/05 60,000 75,056 15,056 849,011
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ADV_SP08_MAR_17 - Olin Business School ACCOUNTING 4680 /...

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