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Chapter 4 Outline - Chapter 4 Consolidated Financial...

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Chapter 4 Consolidated Financial Statements and Outside Ownership Chapter Outline I. Outside ownership may be present within any business combination A. Complete ownership of a subsidiary is not a prerequisite for consolidation —only enough voting shares need be owned so that the acquiring company has the ability to control the decision-making process of the acquired company B . Any ownership retained in a subsidiary corporation by a party unrelated to the acquiring company is termed a noncontrolling interest II. Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling interest is present follows the acquisition method (Economic Unit Concept) SFAS 141Rand SFAS 160 1. The accounting emphasis is placed on the entire entity that results from the business combination as measured by the sum of the acquisition-date fair values of the controlling and noncontrolling interests. 2. Valuation of subsidiary accounts is based on the acquisition-date fair value of the company (frequently determined by the consideration transferred and the fair value of the noncontrolling interest); specific subsidiary assets and liabilities are consolidated at their fair values 3. The noncontrolling interest balance is reported as a component of stockholders' equity III. Consolidations involving a noncontrolling interest—subsequent to the date of acquisition A. According to the parent company concept, all noncontrolling interest amounts are calculated in reference to the book value of the subsidiary company B . Only four noncontrolling interest figures are determined for reporting purposes 1. Beginning of year balance 2. Interest in subsidiary’s current income 3. Dividends paid during the period 4. End of year balance C. Noncontrolling interest balances are accumulated in a separate column in the consolidation worksheet 1. The beginning of year figure is recorded on the worksheet as a component of Entries S and A
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2. The noncontrolling interest's share of the subsidiary's income is established by a columnar entry that simultaneously reports the balance in both the consolidated income statement and the noncontrolling interest column 3. Dividends paid to these outside owners are reflected by extending the subsidiary's Dividends Paid balance (after eliminating intercompany transfers) into the noncontrolling interest column as a reduction 4. The end of year noncontrolling interest total is the summation of the three items above and is reported (in this book) between consolidated liabilities and stockholders' equity IV. Step acquisitions A. An acquiring company may make several different purchases of a subsidiary's stock in order to gain control B . Upon attaining control, all of the parent’s previous investments in the subsidiary are adjusted to fair value and a gain or loss recognized as appropriate C. Upon attaining control, the valuation basis for the subsidiary is established at its total fair value (the sum of the fair values of the controlling and noncontrolling interests) Vl. Sales of subsidiary stock
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