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Unformatted text preview: CHAPTER 5 ANSWERS TO QUESTIONS 1. a. The difference between implied and book value is the total difference between the value of the subsidiary in total, as implied by the acquisition cost of an investment in that subsidiary, and the book value of the subsidiarys equity on the date of the acquisition (note that equity is the same as net assets). b. The excess of implied value over fair value, or Goodwill, is the excess of the value of the subsidiary, as implied by the amount paid by the parent, over the fair value of the identifiable net assets of that subsidiary on the date of acquisition. c. The excess of fair value over implied value is the excess of the fair value of the identifiable net assets of a subsidiary (all assets other than goodwill minus liabilities) on the acquisition date over the value of the subsidiary as implied by the amount paid by the parent. This may be referred to as a bargain acquisition. d. An excess of book value over fair value describes a situation where some (or all) of the subsidiarys assets need to be written down rather than up (or liabilities need to be increased, or both). It does not, however, tell us whether the acquisition results in the recording of goodwill or an ordinary gain (in a bargain acquisition). That determination depends on the comparison of fair value of identifiable net assets and the implied value (purchase price divided by percentage acquired), referred to in parts (b) and (c) above. 2. The difference between implied and book value and the Goodwill are a part of the cost of an investment and are included in the amount recorded in the investment account. Although not recorded separately in the records of the parent company, these amounts must be known in order to prepare the consolidated financial statements. 3. In allocating the difference between implied and book value to specific assets of a less than wholly owned subsidiary, the difference between the fair value and book value of each asset on the date of acquisition is reflected by adjusting each asset upward or downward to fair value (marked to market) in its entirety, regardless of the percentage acquired by the parent company. 4. If the parents share of the fair value exceeds the cost, then the entire fair value similarly exceeds the implied value of the subsidiary. This constitutes a bargain acquisition, and under proposed GAAP (ED No. 1204-001), the excess is recorded as an ordinary gain in the period of the acquisition. Past GAAP (APB Opinion No. 16) differed in that it provided that the excess of fair value over cost should be allocated to reduce proportionally the values assigned to noncurrent assets with certain exceptions. If such noncurrent assets were reduced to zero (or to the noncontrolling percentage, if there was one) by this allocation, any remaining excess was recorded as an extraordinary gain....
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This note was uploaded on 01/06/2012 for the course ACCT 501 taught by Professor Jerris during the Fall '11 term at S.F. State.
- Fall '11
- The Land