LN -Subsequent to the Date of Business Combination (Ch 3)

LN -Subsequent to the Date of Business Combination (Ch 3) -...

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Ch 3: Subsequent to the Date of Acquisition (100% ownership) ACCT 501, SP 12 Part I: Review of Accounting for Investment – Equity Method 1. The Effects of the Passage of Time: Passage of time affects revaluations of subsidiary assets and liabilities. 1) During the year, the Parent will adjust its investment account for the Subsidiary under application of the equity method. The original investment, recorded at the date of acquisition, is adjusted for: A. FMV adjustments and other intangible assets, B. The parent’s share of the sub’s income (loss), and C. The receipt of dividends from the sub. 2) Accounting for Investment – Equity Method A. Parent records initial investment in the sub at “acquisition cost” (except for bargain purchase). Dr: Investment in Sub Cr: Cash (or other Assets/Stock) B. The investment account is adjusted by the parent to reflect all changes in the equity of the subsidiary company. a. Its proportionate (pro rata) share of the income is accrued by the parent as soon as it is earned by the subsidiary. Dr: Investment in Sub Cr: Equity in Sub Income This will appear as a separate line-item on the parent’s income statement. b. Dividends declared by the subsidiary create a reduction in the carrying amount of the Investment account. Dr: Dividend Receivable Cr: Investment in Sub
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Ch 3: Subsequent to the Date of Acquisition ACCT 501, SP 12 2 3) Example 1: Accounting for Parent to record Investment - Equity Method Suppose Panda obtained 100% of Snail’s outstanding common stock on January 1, 2010, by issuing 1,000,000 shares of $15 par value common stock. Panda’s shares had a $75 per share fair value. Snail’s book value is $10 million. Book and fair values are the same except for equipment with fair value $15 million higher than book value. Snail has unreported identifiable intangibles valued at $2 million. Assume that Panda uses the equity method to account for its investment. Information for on the date of acquisition: Required: A). Is it goodwill or gain on bargain purchase recognized from this acquisition? What is the amount? Snail’s fair value (Consideration transferred by Panda) Book value of Snail Excess of fair value over Snail's book value Allocation of Differences between fair value and book value: Required: B). how should Panda record its acquisition of Snail’s common stock?
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Ch 3: Subsequent to the Date of Acquisition ACCT 501, SP 12 3 Information for one year after the acquisition: Snail reports net income of $5 million and declares and pays cash dividends of $1 million to Panda in 2010. Revalued equipment has a remaining life of 20 years. Identifiable intangibles have 4 years of remaining life. Straight-line depreciation and amortization is used. Goodwill is not impaired. Panda prepares its internal reporting for the year ending December 31, 2010. Required:
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This note was uploaded on 02/22/2012 for the course ACCT 501 taught by Professor Ma during the Spring '11 term at South Carolina.

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LN -Subsequent to the Date of Business Combination (Ch 3) -...

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