hoyle advanced accounting powerpoint slides chapter 3

8/9/2019 Hoyle Advanced Accounting Powerpoint slides Chapter 3

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Chapter Three

Consolidations -

Subsequent to

the Date of

Acquisition

McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies Inc! "ll rights reser#e$!


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Consolidation The Effectsof the Passage of Time

The passage of time creates complexities for

internal record keeping and the balance of the

inestment account aries due to the

accounting method used!

A "orksheet and consolidation entries are used

to eliminate the inestment account and record

the subsidiar#$s assets and liabilities to create asingle set of financial statements for the

combined business entit#!

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*nestment Accounting b#Acquiring Compan#

The acquiring compan# selects one of thesethree methods to account for its inestment+

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Equit# ,ethod *nitial alue ,ethod

Partial Equit# ,ethod

.or each subsidiar# o"ned/ there is an asset/ the

inestment account/ and an income account to

record the earnings on the inestment!

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Comparison of internal reporting of inestmentmethods!

,ethod *nestment *ncome Account

Equit# Continuall# ad0usted toreflect o"nership ofacquired compan#!

*ncome accrued asearned1 amorti2ationand other ad0ustmentsare recogni2ed!

*nitial alue 3emains at *nitiall#-3ecorded cost

Cash receied isrecorded as Diidend

*ncome

Partial Equit# Ad0usted onl# foraccrued income anddiidends receied fromacquired compan#!

*ncome accrued asearned1 no otherad0ustments recogni2ed!

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5hat is the adantage of each6

Equit# ,ethod+ The acquiring compan# totals gie a

true representation of consolidation figures!

*nitial alue 7or 8Cost9: ,ethod+ *t is eas# to appl# and

gies a good measurement of cash flo"s generated b#

the inestment!

Partial Equit# ,ethod+ ;suall# gies balances

approximating consolidation figures/ but is easier to

appl# than equit# method

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A parent$s choice of internal accounting method

for subsidiar# inestments has no effect on the

resulting consolidated financial statements!

The selection of a particular method does not

affect the totals ultimatel# reported for the

combined companies!

The internal accounting method used doesrequire distinct procedures for consolidation of

the financial information from the separate

organi2ations!

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During the #ear/ the parent "ill ad0ust its

inestment account for the Subsidiar# under

application of the equit# method! The original

inestment/ recorded at the date of acquisition/ isad0usted for+

Subsequent Consolidation Equit# ,ethod

'! ., ad0ustments and other intangible assets/

)! The parent$s share of the sub$s income 7loss:/

(! The receipt of diidends from the sub!

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Parrot Compan# obtains all of the outstanding common stock of Sun

Compan# on ?anuar# '/ )@')! Parrot acquires this stock for B@@/@@@ in

cash! Sun Compan#$s balances are sho"n belo"!

Subsequent Consolidation -Equit# ,ethod Example

ook alues .air alues ''') ''') Difference

Current assets ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ()@/@@@ ()@/@@@ @

Trademarks 7indefinite life: ! ! ! ! ! ! ! ! )@@/@@@ ))@/@@@ )@/@@@

Patented technolog# 7'@-#ear life: ! ! ! ()@/@@@ 4


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. of consideration transferred b# Parrot Compan#! B@@/@@@et ook alue of Sun Compan#! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !7=@@/@@@:

Excess of fair alue oer book alue ! ! ! ! ! ! ! ! ! ! )@@/@@@

Allocation to specific accounts based on fair alues+

Trademarks ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! )@/@@@

Patented technolog# ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! '(@/@@@

Equipment 7oeralued: ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 7(@/@@@:

')@/@@@

Excess . not specificall# identifiedFgood"ill! ! ! ! ! ! B@/@@@

PA33&T C&,PAG'@@ Percent Acquisition of Sun Compan#

Allocation of Acquisition-Date Subsidiar# .air alue

?anuar# '/ )@')

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Amorti2ation computation+

;seful Annual

Account Allocation %ife Amorti2ation

Trademarks )@/@@@ *ndefinite @

Patented technolog# '(@/@@@ '@ #ears '(/@@@Equipment 7(@/@@@: < #ears 7=/@@@:

Iood"ill B@/@@@ *ndefinite @

>/@@@

Amorti2ation "ill be >/@@@ annuall# for fie

#ears until the equipment fair alue reduction

is full# remoed!(-'@


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''') *nestment in Sun Compan# ! ! ! ! ! B@@/@@@

Cash ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! B@@/@@@To record the acquisition of Sun Compan#!

B'') Cash ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 4@/@@@

*nestment in Sun Compan#! ! ! ! ! ! ! ! ! 4@/@@@

To record receipt of cash diidend from subsidiar#

under the equit# method!

')('') *nestment in Sun Compan#! ! ! ! '@@/@@@Equit# in Subsidiar# Earnings ! ! ! ! ! ! '@@/@@@

To accrue income earned b# '@@J o"ned subsidiar#!

')('') Equit# in Subsidiar# Earnings ! ! ! ! >/@@@

*nestment in Sun Compan# ! ! ! ! ! ! ! ! ! >/@@@

To recogni2e amorti2ations on allocations made in acquisition of sub!

Assume Sun Compan# earns income of '@@/@@@ in )@')and pa#s a 4@/@@@@ cash diidend on August '/ )@')!

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Subsequent Consolidation -5orksheet Entries

S: Eliminates the subsidiar#$s Stockholders$ equit# account

beginning balances and the book alue component "ithin the

parent$s inestment account!A: 3ecogni2es the unamorti2ed Allocations as of the beginning of

the current #ear associated "ith the ad0ustments to fair alue!

*: Eliminates the subsidiar# *ncome accrued b# the parent!

D: Eliminates the subsidiar# Diidends!

E: 3ecogni2es excess amorti2ation Expenses for the current period

on the allocations from the original ad0ustments to fair alue!

.or the first #ear/ the parent prepares fie entries on

the "orkpapers to consolidate the t"o companies!

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Subsequent ConsolidationEquit# ,ethod Example Entr# S

ote+ *f this is the first #ear of the inestment/

and the inestment "as made at a time

other than the beginning of the fiscal #ear/then pre-acquisition income of the sub

must be accounted for in the retained earnings

balance!

Common Stock 7Sun Compan#:! ! ! !)@@/@@@

AP*C 7Sun Compan#: ! ! ! ! ! ! ! ! ! ! ! ! )@/@@@

3E/ ''' 7Sun Compan#: ! ! ! ! ! ! ! ! (B@/@@@

*nestment in Sun Compan# ! ! ! ! ! ! ! ! =@@/@@@

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Subsequent ConsolidationEquit# ,ethod Example Entr# A

Trademarks ! ! ! ! ! ! ! ! ! ! ! ! ! ! !)@/@@@

Patented technolog# ! ! ! ! ! ! ! '(@/@@@

Iood"ill ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !B@/@@@

Equipment ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! (@/@@@

*nestment in Sun Compan# ! ! ! !)@@/@@@

ote+ *n the first #ear/ . ad0ustments are

calculated in the allocation computation! *nsubsequent #ears/ . ad0ustments must be

reduced b# an# depreciation taken in prior

consolidations!

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Subsequent Consolidation Equit#,ethod Example Entries * K D

Equit# in Subsidiar# Earnings ! ! !H(/@@@

*nestment in Sun Compan#! ! ! ! ! ! ! H(/@@@

*nestment in Sun Compan# ! ! ! ! 4@/@@@Diidends Paid ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! 4@/@@@

ote+ Entr# * aboe remoes Sun$s income recogni2ed

b# Parrot during the #ear so Sun$s reenue andexpense accounts 7and current amorti2ation

expense: can be brought into the consolidated

totals!

ote+ Entr# D aboe remoes the intra-entit# transfer

of cash for the diidends distributed to Parrot

from Sun!(-'


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Iood"ill *mpairment T"o-Step Test

*mplied alue of the related good"ill can be

determined using quoted market prices/ similar

businesses/ or present alue of future cash flo"s!

Step )*s 8implied good"ill9 less than 8recorded good"ill96

An impairment loss is

recorded for the excess

carr#ing alue oer

implied fair alue!

Iood"ill is &T

impaired! o

further testing is

required!

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Iood"ill *mpairment Test Example

&n ?anuar# '/ )@'(/ e"call Corporation "as

formed to consolidate operations of three

companies in a deal alued at )!H billion!

Each of the three former firms is considered anoperating segment and "ill be maintained as a

subsidiar# of e"call!

&ne firm comprises t"o diisions/ and the other

t"o firms are treated as independent reportingunits!

e"call recogni2ed ))' million as good"ill at the

merger date and allocated this entireamount to its

reporting units! (-)H


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e"call$s Acquisition .air alue

3eporting ;nits Iood"ill ?anuar# '/ )@'(

DS, 5ired ))/@@@/@@@ H


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DS, 5ireless Dec! ('/ )@'(/ fair alue =@@/@@@/@@@

.air alues of DS, 5ireless net assets at Dec! ('/ )@'(+

Current asset


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Iood"ill is no" alued at 4/@@@/@@@!

e"call reports a '


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Comparison of ;!S! IAAP and*nternational Accounting Standards

;nder ;S IAAP+

Iood"ill is allocated toreporting units/ usuall#operating segments/ expectedto benefit from it!

A t"o-step process is used totest for impairment!

*f the carr#ing amount ofgood"ill is more than itsimplied alue/ an impairmentloss is recogni2ed!

*.3S ;nderI"% 3&+

Iood"ill is allocated to cash-generating units at a leel muchlo"er than an operating segment!

A one-step process is used to test

for impairment!Iood"ill is reduced for an#excess carr#ing alue/ do"n to2ero/ and then other assets arereduced pro-rata!

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&ther *ntangibles

All identified intangible assets should be amorti2edoer their economic useful life unless such life is

considered in$e'inite - that extends be#ond the

foreseeable future!

*ntangible assets "ith indefinite lies are not

amorti2ed! The# are tested for impairment on an

annual basis! The asset$s carr#ing alue is compared

to its fair alue! *f fair alue is less than carr#ingalue/ the intangible asset is considered impaired

and an impairment loss is recogni2ed! The asset$s

carr#ing alue is reduced accordingl#!

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Contingent Considerationin usiness Combinations

*f part of the consideration to be transferred inan acquisition is contingent on a future eent+

The acquiring firm estimates the fair alue of acash contingenc# and records a liabilit# equalto the present alue of the future pa#ment!

The liabilit# "ill continue to be measured atfair alue "ith ad0ustments recogni2ed in

income!Contingent stock pa#ments are reported as a

component of stockholders$ equit#/ and are notremeasured at fair alue!

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hoyle advanced accounting powerpoint slides chapter 3

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