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Slide 5-1
Allocation and Depreciation of Allocation and Depreciation of Differences Between Implied and Differences Between Implied and Book Values AcquisitionBook Values Acquisition
Advanced Accounting, Fifth Edition
5555
Slide 5-2
1. Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.
2. Describe FASB’s position on accounting for bargain acquisitions.
3. Explain how goodwill is measured at the time of the acquisition.
4. Describe how the allocation process differs if less than 100% of the subsidiary is acquired.
5. Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.
6. Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment using the cost, the partial equity, and the complete equity methods.
7. Understand the allocation of the difference between implied and book values to long-term debt components.
8. Explain how to allocate the difference between implied and book values when some assets have fair values below book values.
9. Distinguish between recording the subsidiary depreciable assets at net versus gross fair values.
10. Understand the concept of push down accounting.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Slide 5-3
When consolidated financial statements are prepared,
asset and liability values must be adjusted by allocating
the difference between implied and book values to
specific recorded or unrecorded tangible and intangible
assets and liabilities.
In the case of a wholly owned subsidiary, the implied
value of the subsidiary equals the acquisition price.
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
LO 1 Computation and Allocation of Difference.LO 1 Computation and Allocation of Difference.
Slide 5-4
Allocation of difference between implied and book
values at date of acquisition - wholly owned subsidiary.
Step 1: Difference used first to adjust the individual assets
and liabilities to their fair values on the date of acquisition.
Step 2: Any residual amount:
Implied value > aggregate fair values = goodwill.
Implied value < aggregate fair values = bargain. Bargain
is recognized as an ordinary gain.
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
LO 1 Computation and Allocation of Difference.LO 1 Computation and Allocation of Difference.
Slide 5-5
Bargain Rules under prior GAAP (before 2007 standard):
1. Acquired assets, except investments accounted for by the
equity method, are recorded at fair market value.
2. Previously recorded goodwill is eliminated.
3. Long-lived assets (including in-process R&D and excluding
long-term investments) are recorded at fair market value
minus an adjustment for the bargain.
4. Extraordinary gain recorded if all long-lived assets are reduced
to zero.
• Current GAAP eliminates these rules and requires an
ordinary gain to be recognized instead.
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
LO 2 FASB’s position on accounting for bargain acquisitions.LO 2 FASB’s position on accounting for bargain acquisitions.
Slide 5-6
Bargain Rules: When a bargain acquisition occurs,
under FASB ASC paragraph 805-30-25-2, the negative
(or credit) balance should be recognized as an ordinary
gain in the year of acquisition. No assets should be
recorded below their fair values.
Note: A true bargain is not likely to occur except in
situations where nonquantitative factors play a role.
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
LO 2 FASB’s position on accounting for bargain acquisitions.LO 2 FASB’s position on accounting for bargain acquisitions.
Slide 5-7
In the event of a bargain acquisition (after carefully considering the fair valuation of all subsidiary assets and liabilities) the FASB requires the following accounting:
a. an ordinary gain is reported in the financial statements of the consolidated entity.
b. an ordinary loss is reported in the financial statements of the consolidated entity.
c. negative goodwill is reported on the balance sheet.
d. assets are written down to zero value, if needed.
Review QuestionReview Question
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
Allocation of Difference Between Allocation of Difference Between ImpliedImpliedand Book Values: Acquisition Dateand Book Values: Acquisition Date
LO 2 FASB’s position on accounting for bargain acquisitions.LO 2 FASB’s position on accounting for bargain acquisitions.
..
Slide 5-8
E5-1:E5-1: On January 1, 2010, Pam Company purchased an 85%
interest in Shaw Company for $540,000. On this date, Shaw
Company had common stock of $400,000 and retained
earnings of $140,000. An examination of Shaw Company’s
assets and liabilities revealed that their book value was equal
to their fair value except for marketable securities and
equipment:Book Value Fair Value Diff erence
Marketable securities 20,000$ 45,000$ 25,000$ Equipment 120,000 140,000 20,000
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Case 1: Implied Value “in Excess of” Fair Value
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Slide 5-9
E5-1:E5-1: A. Prepare a Computation and Allocation Schedule for
the difference between book value of equity acquired and the
value implied by the purchase price.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
85% 15% 100%Parent NCI TotalShare Share Value
Purchase price and implied value 540,000$ 95,294$ 635,294$ Book value of equity acquired:
Common stock 340,000 60,000 400,000 Retained earings 119,000 21,000 140,000 Total book value 459,000 81,000 540,000
Difference between implied and book value 81,000 14,294 95,294 Marketable securities (21,250) (3,750) (25,000) Equipment (17,000) (3,000) (20,000) Balance 42,750 7,544 50,294 Record new goodwill (42,750) (7,544) (50,294) Balance 0$ 0$ 0$
LO 4 CAD Schedule for less than wholly owned subsidiary.LO 4 CAD Schedule for less than wholly owned subsidiary.
Slide 5-10
E5-1 (variation):E5-1 (variation): Prepare the worksheet entries to eliminate
the investment, recognize the noncontrolling interest, and to
allocate the difference between implied and book.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Common stock 400,000
Retained earnings 140,000
Difference between Implied and Book 95,294
Investment in Shaw
540,000Noncontrolling interest in Equity
95,294Marketable securities 25,000
Equipment 20,000
Goodwill 50,294
Difference between Implied and Book
95,294LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Slide 5-11
E5-1 (variation):E5-1 (variation): On January 1, 2010, Pam Company
purchased an 85% interest in Shaw Company for $470,000. On
this date, Shaw Company had common stock of $400,000 and
retained earnings of $140,000. An examination of Shaw
Company’s assets and liabilities revealed that their book value
was equal to their fair value except for marketable securities
and equipment:Book Value Fair Value Diff erence
Marketable securities 20,000$ 45,000$ 25,000$ Equipment 120,000 140,000 20,000
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Case 2: Acquisition Cost “Less Than” Fair Value
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Slide 5-12
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
85% 15% 100%Parent NCI TotalShare Share Value
Purchase price and implied value 470,000$ 82,941$ 552,941$ Book value of equity acquired:
Common stock 340,000 60,000 400,000 Retained earings 119,000 21,000 140,000 Total book value 459,000 81,000 540,000
Difference between implied and book value 11,000 1,941 12,941 Marketable securities (21,250) (3,750) (25,000) Equipment (17,000) (3,000) (20,000) Balance (excess of FV over implied value) (27,250) (4,809) (32,059) Pam's gain 27,250 Increase noncontrolling interest to fair
value of assets 4,809 Total allocated gain 32,059 Balance 0 0 0
E5-1E5-1 (variation): (variation): Prepare a Computation and Allocation Schedule.
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Slide 5-13
E5-1E5-1 (variation):(variation): Prepare the worksheet entries.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Common stock 400,000
Retained earnings 140,000
Difference between Implied and Book 12,941
Investment in Shaw
470,000Noncontrolling interest in Equity
82,941Marketable securities 25,000
Equipment 20,000
Gain on acquisition
27,250 Noncontrolling interest in equity
4,809 Difference between Implied and Book
12,941LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Slide 5-14
When any portion of the difference between implied
and book values is allocated to depreciable and
amortizable assets, recorded income must be
adjusted in determining consolidated net income in
current and future periods.
Adjustment is needed to reflect the difference
between the amount of amortization and/or
depreciation recorded by the subsidiary and the
appropriate amount based on consolidated carrying
values.
Effect of Allocation and Depreciation of Differences Effect of Allocation and Depreciation of Differences on Consolidated Net Income: Year Subsequent To on Consolidated Net Income: Year Subsequent To AcquisitionAcquisition
Effect of Allocation and Depreciation of Differences Effect of Allocation and Depreciation of Differences on Consolidated Net Income: Year Subsequent To on Consolidated Net Income: Year Subsequent To AcquisitionAcquisition
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Slide 5-15
P5-4:P5-4: On January 1, 2010, Porter Company purchased an 80% interest in Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of $80,000. Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:
Fair Value in Excess of Book ValueEquipment 130,000$ Land 65,000 I nventory 40,000
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
The book values of all other assets and liabilities of Salem Company were equal to their fair values on January 1, 2010. The equipment had a remaining life of five years. The inventory was sold in 2010.
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.Year of
Acquisition
Slide 5-16
P5-4:P5-4: Salem Company’s net income and dividends declared in 2010 and 2011 were as follows: 2010 Net Income of $100,000; Dividends Declared of $25,000; 2011 Net Income of $110,000; Dividends Declared of $35,000.
Entries recorded on the books of Porter to reflect the acquisition of Salem and the receipt of dividends for 2010 are as follows:
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Investment in Salem 850,000
Cash850,000
Cash 20,000
Dividend income ($25,000 x 80%) 20,000
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.Year of
Acquisition
Slide 5-17
P5-4:P5-4: A. Prepare a Computation and Allocation Schedule
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
80% 20% 100%Parent NCI TotalShare Share Value
Purchase price and implied value 850,000$ 212,500$ 1,062,500$ Book value of equity acquired:
Common stock 440,000 110,000 550,000 Retained earings 64,000 16,000 80,000 Total book value 504,000 126,000 630,000
Difference between implied and book value 346,000 86,500 432,500 Equipment (104,000) (26,000) (130,000) Land (52,000) (13,000) (65,000) Inventory (32,000) (8,000) (40,000) Balance 158,000 39,500 197,500 Record new goodwill (158,000) (39,500) (197,500) Balance -$ -$ -$
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.Year of
Acquisition
Slide 5-18
P5-4:P5-4: B. 1. Prepare the worksheet entries for Dec. 31, 2010.
Dividend income ($25,000 x 80%) 20,000
Dividends declared20,000
Beg. retained earnings - Salem 80,000
Common stock - Salem 550,000
Difference between Cost and Book 432,500
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Investment in Salem850,000
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Noncontrolling interest in equity 212,500
Year of Acquisitio
n
Slide 5-19
Cost of goods sold 40,000
Land 65,000
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Plant and equipment 130,000
Goodwill 197,500
Difference between cost and book432,500
Depreciation expense ($130,000/5) 26,000
Plant and equipment26,000
Year of Acquisitio
n
P5-4:P5-4: B. 1. Prepare the worksheet entries for Dec. 31, 2010.
Slide 5-20
Investment in Salem 60,000
Beg. Retained Earnings ‑ Porter Co. 60,000
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Subsequent Year
Salem 2011 income $100,000
Salem 2011 dividends declared - 25,000
Total 75,000
Ownership percentage 80%
$ 60,000
To establish reciprocity/convert to equity as of 1/1/2011
P5-4:P5-4: C. 1. Prepare the worksheet entries for Dec. 31, 2011.
Slide 5-21
Dividend income ($35,000 x 80%) 28,000
Dividends declared28,000
Beg. retained earnings - Salem 155,000
Common stock - Salem 550,000
Difference between Cost and Book 432,500
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Investment in Salem910,000
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Noncontrolling interest in equity 227,500
Subsequent Year
P5-4:P5-4: C. 1. Prepare the worksheet entries for Dec. 31, 2011.
Slide 5-22
Noncontrolling interest 8,000
Land 65,000
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Plant and equipment 130,000
Goodwill 197,500
Difference between cost and book432,500
Depreciation expense ($130,000/5) 26,000
Plant and equipment52,000
1/1 Retained Earnings – Porter 32,000
Noncontrolling interest 5,200
1/1 Retained Earnings – Porter 20,800
Subsequent Year
P5-4:P5-4: C. 1. Prepare the worksheet entries for Dec. 31, 2011.
Slide 5-23
P5-4:P5-4: D. Prepare a consolidated financial statements
workpaper for the year ended December 31, 2012.
Although no goodwill impairment was reflected at the
end of 2010 or 2011, the goodwill impairment test
conducted at December 31, 2012 revealed implied
goodwill from Salem to be only $150,000. The
impairment has not been recorded in the books of the
parent. (Hint: You can infer the method being used by the
parent from the information in its trial balance.)
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.Subseque
nt Year
Slide 5-24
ConsolidatedIncome Statement Porter Salem Debit Credit NCI BalancesSales 1,100,000$ 450,000$ 1,550,000$ Dividend income 48,000 48,000
Total revenue 1,148,000 450,000 1,550,000 Cost of goods sold 900,000 200,000 1,100,000 Depreciation expense 40,000 30,000 26,000 96,000 Impairment loss 47,500 47,500 Other expenses 60,000 50,000 110,000
Total cost and expense 1,000,000 280,000 1,353,500 Net income 148,000 170,000 196,500 Noncontrolling interest 19,300 (19,300) Net income 148,000$ 170,000$ 121,500$ 19,300$ 177,200$
Retained Earnings StatementRetained earnings, 1/1/12 500,000 230,000 32,000 120,000 546,400
Porter 41,600 Salem 230,000
Net income 148,000 170,000 121,500 19,300 177,200 Dividends declared (90,000) (60,000) 48,000 (12,000) (90,000) Retained earnings, 12/31/12 558,000$ 340,000$ 425,100$ 168,000$ 7,300$ 633,600$
Eliminations
P5-4: D. 2012 Year Subsequent of Acquisition
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Subsequent Year
Slide 5-25
ConsolidatedIncome Statement Porter Salem Debit Credit NCI BalancesCash 70,000$ 65,000$ 135,000$ Accounts receivable 260,000 190,000 450,000 Inventory 240,000 175,000 415,000 Investment in Sid 850,000 120,000 970,000 Difference (IV & BV) 432,500 432,500 Land 320,000 65,000 385,000 Plant and equipment 360,000 280,000 130,000 78,000 692,000 Goodwill 197,500 47,500 150,000
Total assets 1,780,000$ 1,030,000$ 2,227,000$ -
Accounts payable 132,000$ 110,000$ 242,000$ Notes payable 90,000 30,000 120,000 Common stock 1,000,000 550,000 550,000 1,000,000 Retained earnings 558,000 340,000 425,100 168,000 7,300 633,600 1/1 NCI in net assets 8,000 242,500 224,100
10,400 12/31 NCI in net asset 231,400 231,400
Total liab. & equity 1,780,000$ 1,030,000$ 1,938,500$ 1,938,500$ 2,227,000$
Eliminations
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.Subseque
nt Year
P5-4: D. 2012 Year Subsequent of Acquisition
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Slide 5-26
Investment in Salem 120,000
Beg. Retained Earnings ‑ Porter Co. 120,000
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Subsequent Year
Acquisition date retained earnings - Salem $ 80,000
Retained earnings 1/1/12 - Salem 230,000
Increase 150,000
Ownership percentage 80%
$ 120,000
To establish reciprocity/convert to equity as of 1/1/2012
P5-4:P5-4: D. Explanations of worksheet entries for Dec. 31, 2012.
Slide 5-27
Dividend income ($60,000 x 80%) 48,000
Dividends declared48,000
Beg. retained earnings - Salem 230,000
Common stock - Salem 550,000
Difference between Cost and Book 432,500
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Investment in Salem970,000
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Noncontrolling interest in equity 242,500
Subsequent Year
P5-4P5-4 D. W Worksheet entries for Dec. 31, 2012.
Slide 5-28
Noncontrolling interest 8,000
Land 65,000
LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Plant and equipment 130,000
Goodwill 197,500
Difference between cost and book432,500
1/1 Retained Earnings – Porter 32,000
Subsequent Year
P5-4P5-4 D. W Worksheet entries for Dec. 31, 2012.
Slide 5-29 LO 4 Allocation of difference in a partially owned subsidiary.LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated Statements – Cost Consolidated Statements – Cost MethodMethodConsolidated Statements – Cost Consolidated Statements – Cost MethodMethod
Depreciation expense ($130,000/5) 26,000
Plant and equipment78,000
Noncontrolling interest (2 years) 10,400
1/1 Retained Earnings – Porter (2 years) 41,600
Subsequent Year
Impairment loss ($197,500 - $150,000) 47,500
Goodwill47,500To record goodwill impairment
P5-4P5-4 D. W Worksheet entries for Dec. 31, 2012.
Slide 5-30 LO 5 Recording investment by Parent, complete equity LO 5 Recording investment by Parent, complete equity
method.method.
Consolidated Statements – Partial and Consolidated Statements – Partial and Complete Equity MethodsComplete Equity MethodsConsolidated Statements – Partial and Consolidated Statements – Partial and Complete Equity MethodsComplete Equity Methods
The equity methods (partial and complete) reflect
the effects of certain transactions more fully than
the cost method on the books of the parent.
However consolidated totals are the same
regardless of which method is used by the Parent
company.
LO 5 Recording investment by Parent, partial equity method.LO 5 Recording investment by Parent, partial equity method.
Slide 5-31
Notes payable, long-term debt, and other obligations of an acquired company should be valued for consolidation purposes at their fair values.
Fair value is the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes:
The liability is transferred to a market participant and
The nonperformance risk relating to the liability is the same before and after its transfer.
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Allocation of Difference between Implied and Book Values to Long-Term Debt
LO 7 Allocating difference to long-term debt.LO 7 Allocating difference to long-term debt.
Slide 5-32
To measure fair value, use valuation techniques that are consistent with the market approach or income approach.
Quoted market prices are the best. If unavailable,
then management’s best estimate based on
debt with similar characteristics or
valuation techniques such as present value.
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Allocation of Difference between Implied and Book Values to Long-Term Debt
LO 7 Allocating difference to long-term debt.LO 7 Allocating difference to long-term debt.
Slide 5-33
On the date of acquisition, sometimes the
fair value of an asset is less than the amount
recorded on the books of the subsidiary.
fair value of long-term debt may be greater rather
than less than its recorded value on the books of the
subsidiary.
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Allocating the Difference to Assets (Liabilities) with Fair Values Less (Greater) Than Book Values
LO 8 Allocating when the fair value is below book value.LO 8 Allocating when the fair value is below book value.
Slide 5-34
E5-1E5-1 (Variation):(Variation): On January 1, 2010, Pam Company
purchased an 85% interest in Shaw Company for $540,000. On
this date, Shaw Company had common stock of $400,000 and
retained earnings of $140,000. An examination of Shaw
Company’s assets and liabilities revealed that their book value
was equal to their fair value except for marketable securities
and equipment: Book Value Fair Value Diff erenceMarketable securities 20,000$ 45,000$ 25,000$ Equipment (5 year life) 120,000 100,000 (20,000)
Allocating the Difference to Assets (Liabilities) with Fair Values Less (Greater) Than Book Values
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
Additional Considerations Relating to Treatment Additional Considerations Relating to Treatment ofofDifference Between Implied and Book ValuesDifference Between Implied and Book Values
LO 8 Allocating when the fair value is below book value.LO 8 Allocating when the fair value is below book value.
Slide 5-35
E5-1:E5-1: A. Prepare a Computation and Allocation Schedule for the difference between book value of equity acquired and the value implied by the purchase price.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
85% 15% 100%Parent NCI TotalShare Share Value
Purchase price and implied value 540,000$ 95,294$ 635,294$ Book value of equity acquired:
Common stock 340,000 60,000 400,000 Retained earings 119,000 21,000 140,000 Total book value 459,000 81,000 540,000
Difference between implied and book value 81,000 14,294 95,294 Marketable securities (21,250) (3,750) (25,000) Equipment 17,000 3,000 20,000 Balance 76,750 13,544 90,294 Record new goodwill (76,750) (13,544) (90,294) Balance -$ -$ -$
LO 8 Allocating when the fair value is below book value.LO 8 Allocating when the fair value is below book value.
Cost Method
Slide 5-36
E5-1 (variation):E5-1 (variation): At the end of the firstfirst year, the workpaper entries are:
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Marketable securities 25,000
Equipment20,000
Goodwill 90,294
Difference between Implied and Book
95,294
Equipment,net 4,000
Depreciation expense ($20,000 / 5 years)
4,000Note: the overvaluation of equipment will be amortized over the life of the asset as a reduction of depreciation expense.
LO 8 Allocating when the fair value is below book value.LO 8 Allocating when the fair value is below book value.
Cost Method
Slide 5-37
E5-1 (variation):E5-1 (variation): At the end of the secondsecond year, the workpaper entries are:
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Marketable securities 25,000
Equipment20,000
Goodwill 90,294
Difference between Implied and Book
95,294
Equipment, net 8,000
Beg. retained earnings - Pam
3,400
LO 8 Allocating when the fair value is below book value.LO 8 Allocating when the fair value is below book value.
Noncontrolling interest in equity
600Depreciation expense ($20,000 / 5 years)
4,000
Cost Method
Slide 5-38
E5-7:E5-7: On January 1, 2011, Packard Company purchased an
80% interest in Sage Company for $600,000. On this date Sage
Company had common stock of $150,000 and retained
earnings of $400,000. Sage Company’s equipment on the date
of Packard Company’s purchase had a book value of $400,000
and a fair value of $600,000. All equipment had an estimated
useful life of 10 years on January 2, 2006.
Required: Prepare the December 31 consolidated financial
statements workpaper entries for 2011 and 2012, recording
accumulated depreciation as a separate balance.
Reporting Accumulated Depreciation in Consolidated Financial Statements as a Separate Balance
LO 9 Depreciable assets at net and gross values.LO 9 Depreciable assets at net and gross values.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Slide 5-39
E5-7:E5-7: Prepare a Computation and Allocation Schedule.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
80% 20% 100%Parent NCI TotalShare Share Value
Purchase price and implied value 600,000$ 150,000$ 750,000$ Book value of equity acquired:
Common stock 120,000 30,000 150,000 Retained earings 320,000 80,000 400,000 Total book value 440,000 110,000 550,000
Difference between implied and book value 160,000 40,000 200,000 Equipment (160,000) (40,000) (200,000) Balance -$ -$ -$
LO 9 Depreciable assets at net and gross values.LO 9 Depreciable assets at net and gross values.
Slide 5-40
E5-7: E5-7: Prepare the December 31 consolidated financial statements workpaper entries for 2011 and 2012.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Equipment 400,000
Accumulated depreciation
200,000Difference between Implied and Book
200,000Depreciation Expense ($200,000/5) 40,000
Accumulated Depreciation
40,000
Cost & Partial Equity Method
LO 9 Depreciable assets at net and gross values.LO 9 Depreciable assets at net and gross values.
Slide 5-41
E5-7: E5-7: Prepare the December 31 consolidated financial statements workpaper entries for 2011 and 2012.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
Equipment 400,000
Accumulated depreciation
200,000Difference between Implied and Book
200,0001/1 Retained Earnings -Packard Co. 32,000
1/1 Noncontrolling interest 8,000
Depreciation Expense ($200,000/5) 40,000
Accumulated Depreciation
80,000
LO 9 Depreciable assets at net and gross values.LO 9 Depreciable assets at net and gross values.
* Complete equity method: debit to 1/1 Retained Earnings – Packard Co. would be replaced with a debit to Investment in Sage Company
Cost & Partial Equity Method
Slide 5-42
Disposal of Depreciable Assets by Subsidiary
LO 9 Depreciable assets at net and gross values.LO 9 Depreciable assets at net and gross values.
Allocation of DifferenceAllocation of DifferenceAllocation of DifferenceAllocation of Difference
In the year of sale, any gain or loss recognized by the subsidiary on the disposal of an asset to which any of the difference between implied and book value has been allocated must be adjusted in the consolidated statements workpaper.
Depreciable Assets Used in Manufacturing
When the difference between implied and book values is allocated to depreciable assets used in manufacturing, workpaper entries may be more complex because the current and previous years additional depreciation may need to be allocated among work in process, finished goods, and cost of goods sold.
Slide 5-43 LO 10 Push down of accounting to the subsidiary’s books.LO 10 Push down of accounting to the subsidiary’s books.
Push Down AccountingPush Down AccountingPush Down AccountingPush Down Accounting
Push down accounting is the establishment of a new
accounting and reporting basis for a subsidiary company
in its separate financial statements based on the
purchase price paid by the parent to acquire the
controlling interest.
The valuation implied by the price of the stock to the
parent company is “pushed down” to the subsidiary and
used to restate its assets (including goodwill) and
liabilities in its separate financial statements.
Slide 5-44 LO 10 Push down of accounting to the subsidiary’s books.LO 10 Push down of accounting to the subsidiary’s books.
Push Down AccountingPush Down AccountingPush Down AccountingPush Down Accounting
Arguments for and against Push Down AccountingThree important factors that should be considered in
determining the appropriateness of push down
accounting are:
1. Whether the subsidiary has outstanding debt held by the
public.
2. Whether the subsidiary has outstanding a senior class of
capital stock not acquired by the parent company.
3. The level at which a major change in ownership of an
entity should be deemed to have occurred, for example,
100%, 90%, 51%.
Slide 5-45 LO 10 Push down of accounting to the subsidiary’s books.LO 10 Push down of accounting to the subsidiary’s books.
Push Down AccountingPush Down AccountingPush Down AccountingPush Down Accounting
Status of Push Down Accounting
As a general rule, the SEC requires push down
accounting when the ownership change is greater than
95% and objects to push down accounting when the
ownership change is less than 80%.
In addition, the SEC staff expresses the view that the existence
of outstanding public debt, preferred stock, or a significant
noncontrolling interest in a subsidiary might impact the parent
company’s ability to control the form of ownership. In these
circumstances, push down accounting, though not required, is
an acceptable accounting method.
Slide 5-46
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