ACT4491 CH02 Examples

ACT4491 CH02 Examples - 1 9/21/2009 07:01 AM ACT4491...

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Unformatted text preview: 1 9/21/2009 07:01 AM ACT4491 Advanced Accounting Subsequent to Acquisition Examples 2 9/21/2009 07:01 AM Date of Acquisition On the date of acquisition, stockholders equity in the acquired entity is equal to book value Eliminating stockholders equity is a matter of eliminating the balances at the date of acquisition against the investment account Example: Assume the acquiring entity pays 500,000 in exchange for 100% of the outstanding common stock of acquired company. There is no difference between book and fair value of the net identifiable assets at the date of acquisition. What is the eliminating entry ? Consolidation Workpaper Adjustments Income Balance Description Parent Sub Combined Debit Credit NCI Statement Sheet accounts Investment in Sub 500,000 500,000 Common stock (150,000) (150,000) Paid in capital (350,000) (350,000) accounts na na-- Trial Balances 3 9/21/2009 07:01 AM Date of Acquisition Example: Assume the acquiring entity pays 500,000 in exchange for 100% of the outstanding common stock of acquired company. There is no difference between book and fair value of the net identifiable assets at the date of acquisition Consolidation Workpaper Adjustments Income Balance Description Parent Sub Combined Debit Credit NCI Statement Sheet accounts Investment in Sub 500,000 500,000 500,000- Common stock (150,000) (150,000) 150,000- Paid in capital (350,000) (350,000) 350,000- accounts 500,000 500,000- Trial Balances Consideration given in exchange (note that offset accounts are not shown in this example Book value of subsidiary (acquired firm) at the date of acquisition Entry eliminates the book value against the investment account 4 9/21/2009 07:01 AM Date of Acquisition Any excess of fair value over book value must be accounted for as adjustments to account balances at the date of acquisition Excess of fair value over book value is determined by using investment analysis techniques Example Acquirer purchases 100% of the outstanding common stock of Sub for 500,000 when the book value of the sub is 400,000 (150,000 common stock and 250,000 paid in capital) and the fair value of net identifiable assets exceeds the book value by 150,000, making the fair value 550,000, as follows: Book value 400,000 Excess of fair value over book value 150,000 Fair value 550,000 5 9/21/2009 07:01 AM Date of Acquisition Example: Acquirer purchases 100% of the outstanding common stock of Sub for 600,000 when the book value of the sub is 400,000 and the fair value of net identifiable assets exceeds the book value by 150,000 NOTE: after the investment is recorded and BEFORE any adjusting/eliminating entries are made, the combined trial balance for the above example would be out of balance by 200,000 This 200,000 represents 1. Excess of fair value over book value (550,000 400,000), plus 2. Excess of consideration given over fair value, goodwill (600,000 550,000)...
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ACT4491 CH02 Examples - 1 9/21/2009 07:01 AM ACT4491...

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