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accounting 406 chapter 3 - Chapter 3 1 SFAS-Goodwill and...

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Chapter 3\ 1. SFAS—Goodwill and Intangible Assets a. Goodwill is subject to impairment tests b. For consolidations of parent and subsidiary companies, goodwill amortization expense no longer appears on the combined income statement 2. Investment Accounting by the Acquiring Company a. For external reporting consolidation of a subsidiary becomes necessary whenever control exists b. For internal record-keeping the parent has the choice of three alternatives for monitoring the activities of its subsidiaries i. Cost method ii. Equity method iii. Partial equity method 1. the selection of the method does not ultimately affect the totals ultimately reported for the combined companies c. Cost Method i. Investment account remains at initially recorded cost ii. Cash received is recorded as Dividend income iii. Easy to apply d. Equity Method i. Acquiring company accrues income when earned by subsidiary ii. Amortization expense stemming from the original acquisition is recognized through periodic adjusting entries iii. Unrealized gains on intercompany transactions are deferred iv. Dividends paid by the subsidiary serve to reduce the investment balance v. Parents accounts reflect the income of the entire combined business entity e. Partial equity Method i. Parent recognizes the reported income accruing from the subsidiary ii. Dividends that are collected reduce the investment balance iii. No other equity adj. are recorded iv. Usually gives balances approximating consolidation figures but is easier to apply than equity method 3. Subsequent Consolidation—Investment Recorded by the Equity Method a. Acquisition Made During the Current Year i. The parent adjusts its own Investment account to reflect the subsidiary’s income and
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