Under the direct approach we add the parents book

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Under the direct approach, we add the parent’s book value subsidiary’s book value acquisition differential for each asset and liability.
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CHAPTER 4 CONSOLIDATED STATEMENTS ON DATE OF ACQUISITION 129 identifiable net assets, and then the remaining balance goes to goodwill. In effect, the old goodwill is ignored and the purchase price determines the value, if any, of new goodwill at the date of acquisition. The following illustration will examine the consolidation process when the subsidiary has existing goodwill. Assume that on June 30, Year 1, P Ltd. purchased 100 percent of the outstanding shares of S Ltd. for a total cost of $75,000, paid in cash. Exhibit 4.8 shows the balance sheets of the two companies at this time. Notice that the goodwill (highlighted in boldface), in the amount of $11,000, was called a patent in Exhibit 4.1 on page 121. Notice also that the acquisition cost is the same as in Illustration 2, where the result turned out to be negative goodwill. When we calculate and allocate the acquisition differential in this illustration, the result is positive goodwill of $8,000, as shown in Exhibit 4.9. Exhibit 4.8 BALANCE SHEET At June 29, Year 1 P Ltd. S Ltd. Book value Book value Fair value Cash $100,000 $ 12,000 $12,000 Accounts receivable 90,000 7,000 7,000 Inventory 130,000 20,000 22,000 Plant 280,000 50,000 59,000 Goodwill 11,000 $600,000 $100,000 Current liabilities $ 60,000 $ 8,000 8,000 Long-term debt 180,000 22,000 25,000 Common shares 200,000 40,000 Retained earnings 160,000 30,000 $600,000 $100,000 The goodwill on the subsidiary’s books (its old goodwill) will be revalued on the date of acquisition. Exhibit 4.9 CALCULATION AND ALLOCATION OF ACQUISITION DIFFERENTIAL (subsidiary with goodwill) Cost of investment in S Ltd. $75,000 Book value of S Ltd.’s net assets Assets 100,000 Liabilities (30,000) 70,000 Deduct old goodwill of S Ltd. 11,000 Adjusted net assets 59,000 P Ltd.’s ownership 100% 59,000 Acquisition differential 16,000 Allocated: (FV BV) 100% Inventory 2,000 Plant 9,000 11,000 Long-term debt 3,000 8,000 Balance — goodwill $ 8,000 The subsidiary’s goodwill is currently worth $8,000 based on the price paid by the parent.
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130 CHAPTER 4 CONSOLIDATED STATEMENTS ON DATE OF ACQUISITION The working papers for the preparation of the June 30, Year 1, consolidated bal- ance sheet are presented in Exhibit 4.10. Three working paper entries are required. Entry (1) writes off the previous good- will (labelled “old” goodwill in the working paper) to S Ltd.’s retained earnings for purposes of consolidation. Entry (2) eliminates the parent’s share of the subsidiary’s common shares and adjusted retained earnings and the parent’s investment account, and establishes the difference as the acquisition differential. Entry (3) allocates the acquisition differential to revalue the net assets of the subsidiary and establishes the new goodwill from the business combination. The three working paper elimination entries are shown below: (1) Retained earnings — S Ltd. 11,000 Goodwill — old — S Ltd. 11,000 (2) Common shares — S Ltd. 40,000 Retained earnings — S Ltd. 19,000 Acquisition differential 16,000 Investment in S Ltd. 75,000 (3) Inventory — S Ltd. 2,000 Plant — S Ltd. 9,000 Goodwill 8,000 Long-term debt — S Ltd. 3,000 Acquisition differential 16,000 These worksheet entries
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  • Fall '12
  • Smith
  • Balance Sheet, consolidated balance sheet, S Ltd, acquisition differential, hiL01537_ch04_120-169.indd Page

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