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Users of financial information creditors equity

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Unformatted text preview: tions Corporation is common structure Equity comprised of equity (common and preferred shares) and retained earnings Equity section represents the book value of the entity CHAPTER 11: INVESTMENT IN OTHER COMPANIES Purpose of Investments Use of excess cash – Typically short term investment Reduce competition Expand market Vertical/horizontal integration Diversify risks Investment Relationships Accounting for Investments Control position - investor can make all important decisions Significant influence - investor can affect a number of important decisions Passive investment – investor has no influence over decisions Types of Investments Jessica Gahtan ACTG2011 Page 21 Final Notes Chapters 8- 12 Control: Accounting for subsidiaries “Parent” and “subsidiary” companies Parent has control – Generally more than 50% of votes Aggregate all assets and liabilities Consistent with entity concept Investment Relationships Fall 2013 Consolidated Financials Provide users information on the group of companies, i.e., “big picture” Consolidation is an accounting creation The entities are still separate legal entities and must file tax returns Consolidated Balance Sheet Jessica Gahtan ACTG2011 Page 22 Final Notes Chapters 8- 12 Fall 2013 Assets and liabilities valued differently – On subsidiary books at its cost – On parent consolidation at its cost Cost to parent must be allocated – Fair value of net assets acquired – Any excess purchase price is goodwill Consolidated Financials The first transaction is the investor (parent) acquires control of the investee (subsidiary) The investment is recorded in the books of the parent at its cost The price paid for the subsidiary will be different than the amount of the book values on the books of subsidiary Goodwill Why pay > fair value of net assets – Expectation of higher future profits – Management capability – Market position (geographic/strategic) – Synergies created from acquisition – Customer loyalty/reputation – Benefits from elimination of competitor Allocation of Purchase Price Purchase price $20,000,000 Book value of net assets $11,000,000 Fair value differential 7,000,000 Fair value of net assets $18,000,000 Excess purchase price $ 2,000,000 Goodwill $ 2,000,000 Consolidation Procedures On date of acquisition – Subsidiary assets and liabilities Reflected at fair value – Goodwill, if any, recorded – Subsidiary shareholders’ equity eliminated – Parent investment eliminated Consolidated Balance Sheet Jessica Gahtan ACTG2011 Page 23 Final Notes Chapters 8- 12 Fall 2013 Non- Controlling Interest If parent controls subsidiary but owns less than 100% of the equity – Consoli...
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