Notes Ch 2 - Consolidation of Financial Information

Notes Ch 2 - Consolidation of Financial Information - ACCT...

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Unformatted text preview: ACCT 456: C HAPTER 2 N OTES C ONSOLIDATION OF F INANCIAL I NFORMATION Consolidated Financial Statements represent the combining of the financial reports of more than one company. B USINESS C OMBINATIONS Types: 1. Statutory Merger a. One company purchases the assets and liabilities of another company by issuing assets (eg. Cash), liabilities or stock and the purchased company ceases to exist. b. One company acquires the stock of another company. 100% of the stock must be acquired before the acquired company can be dissolved. 2. Statutory Consolidation Two or more companies combine and form a new or 3rd company. The original companies are dissolved . 3. Legal Control one company acquires more than 50% of the outstanding voting stock of another company. Both companies continue to exist as separate entities. 4. Variable Interests one company controls another because of binding agreements, eg. SPEs. C ONSOLIDATION OF F INANCIAL I NFO Objective combine the assets, liabilities, equities, revenues and expenses of two or more entities in order to report the consolidated financial results as one single unit. For a statutory merger or statutory consolidation, there is one accounting consolidation on the date when the two companies combine into one. For a consolidation where both or all companies retain separate legal identities, the accounts are not consolidated . Using worksheets , the accounts of the separate legal companies are combined for external financial reporting purposes. This will occur every time financial reports are prepared for external use. A CQUISITION M ETHOD W HEN S UBSIDIARY IS D ISSOLVED The acquisition is valued at the FMV of the consideration given by the acquiring company. If there is any contingent consideration, the present value of its fair value must be determined and included as part of the consideration given. The acquirer records the identifiable net assets acquired at their fair value on the acquisition date. Goodwill or a gain on bargain purchase will be recorded if the fair value of the consideration given is different from the fair value of the identifiable net assets. o Goodwill : Fair value given > fair value of the identifiable net assets o Gain on bargain purchase: Fair value of the identifiable net assets > fair value given. E XAMPLE : Details of Head Co & Foot Co book and fair values is given on the following page. Assume that Head gave $200K cash and 75,000 shares of common stock with a market value of $8 per share. The subsidiary is dissolved. Prepare the journal entry to record the acquisition. Homework: P2-1 to 3; 5 to 10; 14 In 000s Head Co Foot Co Book Value Book Value Fair Value Current Assets $1,200 $400 $400 Equipment 500 200 300 Customer Contracts-0--0- 200 Liabilities (600) (100) (100) Net Assets $1,100 $500 $800 Common Stock ($1 par) $100 Common Stock ($5 par) $200 Additional paid in Capital 700 100 Retained Earnings (1/1/XX) 250 150 Revenues 1,500 650 Expenses (1,300) (500) Dividends (150) (100) Ret Earnings (12/31/XX) 300 ____200 Homework:...
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Notes Ch 2 - Consolidation of Financial Information - ACCT...

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