Notes Ch 3 - Consolidaitons - Subsequent to the Date of Acquisition

Notes Ch 3 - Consolidaitons - Subsequent to the Date of Acquisition

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ACCT 456: C HAPTER 3 N OTES C ONSOLIDATIONS – S UBSEQUENT TO THE D ATE OF A CQUISITION Objective of consolidations – combine asset, liability, revenue, expense and equity accounts of the consolidated group of companies. I MPORTANT E LEMENTS The parent’s “Investment in Subsidiary ” is eliminated or zero-ed out The assets & liabilities of the subsidiary are combined into the consolidated balance sheet. Income of subsidiary that is accrued by the parent is eliminated or removed The revenues and expenses of the subsidiary are combined into the consolidated income statement. I NTERNAL R ECORD -K EEPING FOR S UBSIDIARIES Three Accounting Alternatives: 1.The initial value method 2.The equity method 3.The partial equity method Note that regardless of the method used for internal record-keeping, the entry/ies to record the acquisition will be the same. The initial value method – easy to apply, measures cash flows 1.The investment account remains at the initial recorded cost 2.Uses the cash-basis
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a. Cash received is recorded as dividend income b. Income earned by the subsidiary is NOT recorded on the parent’s books The partial equity method – generally provides balances that approximate consolidation figures, but easier to apply than the equity method. 1.When earned, income of the subsidiary is accrued or recorded by the parent. 2.Dividends received from subsidiary reduce the investment account. 3.Amortization and unrealized gains are not recorded The equity method – the acquiring company totals give a true representation of consolidation figures, uses full accrual accounting 1.When earned, income of the subsidiary is accrued by the parent. 2. Amortization expense is recorded for excess fair-value allocations 3.Unrealized gains on intercompany transactions are deferred 4.Dividends received from subsidiary reduce the investment account. D O P3-27( A ) IN CLASS $100,000 Gain on Bargain Purchase: Consideration given 1,090K Less: Santiago BV 950K Excess 140K Allocations: Patent Technology 240K Gain on Bargain Purchase 100K
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$160,000 earnings from Santiago: Santiago Earnings (Equity) 200K Amortization of Patent Tech (240K /6) 40K Equity in the Earnings 160K 1,300,000 Investment in Santiago Investment in Santiago 1,190,000 160,000 50,000 1,300,000 T HE E QUITY M ETHOD C ONSOLIDATION E NTRIES When preparing the consolidated financial statements, the assets, liabilities, revenues and expenses of the subsidiary will be added to the parent’s balances. 1.The subsidiaries assets and liabilities are adjusted to reflect the allocations originating from the acquisition date fair values. 2.The amortizations of the allocated excess values must be recognized (recorded in the worksheet). 3.Any intercompany accounts (receivables-payable) or reciprocal accounts must be adjusted.
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Notes Ch 3 - Consolidaitons - Subsequent to the Date of Acquisition

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