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Chap003 - Chapter 03 Consolidations-Subsequent to the Date...

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Chapter 03 - Consolidations—Subsequent to the Date of Acquisition CHAPTER 3 CONSOLIDATIONS—SUBSEQUENT TO THE DATE OF ACQUISITION I. Several factors serve to complicate the consolidation process when it occurs subsequent to the date of acquisition. In all combinations within its own internal records the acquiring company will utilize a specific method to account for the investment in the acquired company. 1. Three alternatives are available a. Initial value method (formerly called the cost method ) b. Equity method c. Partial equity method 2. Depending upon the method applied, the acquiring company will record earnings from its ownership of the acquired company. This total must be eliminated on the consolidation worksheet and be replaced by the subsidiary’s revenues and expenses. 3. Under each of these three methods, the balance in the Investment account will also vary. It too must be removed in producing consolidated statements and be replaced by the subsidiary’s assets and liabilities. II. For combinations subsequent to the acquisition date, certain procedures are required. If the parent applies the equity method, the following process is appropriate. A. Assuming that the acquisition was made during the current fiscal period 1. The parent adjusts its own Investment account to reflect the subsidiary’s income and dividend payments as well as any amortization expense relating to excess acquisition-date fair value over book value allocations and goodwill. 2. Worksheet entries are then used to establish consolidated figures for reporting purposes. a. Entry S offsets the subsidiary’s stockholders’ equity accounts against the book value component of the Investment account (as of the acquisition date). b. Entry A recognizes the excess fair over book value allocations made to specific subsidiary accounts and/or to goodwill. c. Entry I eliminates the investment income balance accrued by the parent. d. Entry D removes intercompany dividend payments e. Entry E records the current excess amortization expenses on the excess fair over book value allocations. f. Entry P eliminates any intercompany payable/receivable balances. B. Assuming that the acquisition was made during a previous fiscal period 1. Most of the consolidation entries described above remain applicable regardless of the time that has elapsed since the combination was formed. 2. The amount of the subsidiary’s stockholders’ equity to be removed in Entry S will differ each period to reflect the balance as of the beginning of the current year 3-1 1
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Chapter 03 - Consolidations—Subsequent to the Date of Acquisition
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