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Chapter 2

Chapter 2. Consolidated Statements Date of Acquisition. Consolidated statements - date of acquisition . The Consolidations Concept Comparing purchase and pooling Apply purchase rule with a Price and Zone Analysis

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Chapter 2

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  1. Chapter 2 Consolidated Statements Date of Acquisition

  2. Consolidated statements - date of acquisition • The Consolidations Concept • Comparing purchase and pooling • Apply purchase rule with a Price and Zone Analysis • Guide the worksheet with a Determination and Distribution of Excess Schedule (D&D) • Presentation of the Noncontrolling Interest (NCI) C2

  3. The consolidation concept • Merge two legal entities into oneeconomic entity • Generally required with over 50% ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%). • Always ask - what should be left when you put on “one firm” eye glasses. C2

  4. The consolidation concept (continued) • See WS (Worksheet) 2-1 • Investment gone, specific accounts of subsidiary in • Subsidiary equity gone, no longer exists • We start on acquisition date to avoid complications of later transactions. C2

  5. Purchase Original investment is at fair value of net assets received or consideration given Adjust accounts to fair value as they come across the worksheet (WS 2-2) Special procedures for bargains Account adjustments are based on D&D schedule Pooling (over 90%) before 7/1/01 Possible for some pre 7/1/01 acquisitions Original investment was at book value of subsidiary equity, equity recorded using transfer rules Accounts were across worksheet at book value (some adjustments may be needed) Consolidating: purchase vs. pooling C2

  6. Returning to the basic example Assets Liabilities & Equity Inventory 120,000 Bond Payable 100,000 Land 50,000 Com. stock, $5 par 10,000 Building 250,000 Retained earnings 310,000 Total 420,000 Total 420,000 Fair Values: Inventory (priority) 170,000 Bond Payable (priority) 105,000 Land 100,000 Building 300,000 Patents 50,000 C2

  7. Zone analysis C2

  8. Zone analysis: do before the D&D schedule Using purchase rules: • Goodwill above what price? $515,000 • at $550,000 Goodwill = $35,000 • Bargain below what price? $515,000 • at $245,000, $180,000 ($245,000 - $65,000 to priority) is assigned non-priority accounts • Extraordinary gain below what price? $65,000 • at $50,000, the extraordinary gain is 15,000 C2

  9. D&D for $550,000 Price 550,000 Equity (100%  $320,000) 320,000 Excess cost 230,000 Adjustments: Inventory (increase to 170,000) 50,000 Bonds payable (decrease liability) (5,000) Land (Increase to 100,000) 50,000 Building (increase to 300,000) 50,000 Patents (record) 50,000195,000 Goodwill (record) 35,000 C2

  10. Eliminations for $550,000 price C2

  11. D&D for $245,000 Price 245,000 Equity (100%  $320,000) 320,000 Excess cost (75,000) Adjustments: Inventory (increase to $170,000) 50,000 Bonds payable (decrease liability)) (5,000) Land (allocation on next slide) (10,000) Building (allocation on next slide) (130,000) Patents (allocation on next slide) 20,000(75,000) 0 C2

  12. Allocation C2

  13. Eliminations for $245,000 price C2

  14. D&D for $50,000 Price 50,000 Equity (100%  $320,000) 320,000 Excess cost (270,000) Adjustments: Inventory (increase to $170,000) 50,000 Bonds payable (decrease liability) (5,000) Land (eliminate book value) (50,000) Building (eliminate book value) (250,000)(255,000) Extraordinary gain (15,000) C2

  15. Eliminations for $50,000 price C2

  16. Zones for an 80% purchase Use the same subsidiary information for 80% purchase All adjustments are for 80% of fair-book difference • Above what price will there be goodwill? $412,000 $515,000  80% = $412,000 We will use $430,000 so goodwill = $18,000 • Below what price will there be a bargain? $412,000 $515,000  80% = $412,000 If price was $241,000, $189,000 ($241,000 - [$65,000  80%]) is available for P’s 80% share of non-priority accounts • Extraordinary gain below what price? $52,000 80%  $65,000 = $52,000 C2

  17. Zone Analysis: 80% purchase C2

  18. D&D for 80% interest at 430,000 Price 430,000 Equity (80%  $320,000) 256,000 Excess cost 174,000 Adjustments: Inventory (80%  50,000) 40,000 Bonds payable (80%  5,000) (4,000) Land (80%  50,000) 40,000 Building (80%  50,000) 40,000 Patents (80%  50,000) 40,000 156,000 Goodwill 18,000 C2

  19. Eliminations for $430,000 price C2

  20. D&D for 80% interest at $241,000 Price 241,000 Equity (80%  $320,000) 256,000 Excess cost (15,000) Adjustments: Inventory (80%  50,000) 40,000 Bonds payable (80%  5,000) (4,000) Land (allocation next slide) 2,000 Building (allocation next slide) (74,000) Patents (allocation next slide) 21,000 (15,000 ) 0 C2

  21. Allocation C2

  22. Eliminations for $241,000 price C2

  23. Purchase: subsidiary goodwill • No assets, including intangible assets, can be discounted until parent share of goodwill is eliminated • Ignore existing goodwill in “Zone analysis” • Compare goodwill that results from “Zone analysis” to parent share of existing goodwill and adjust for the difference • A free standing D&D (not connected to prior examples) follows for subsidiary with $50,000 goodwill C2

  24. D&D for 80% interest at $500,000 • Price 500,000 • Equity (80%  450,000) 360,000 • Excess cost 140,000 • Adjustments: • Inventory (80%  40,000) 32,000 • Land (80%  30,000) 24,000 • Building (80%  120,000) 96,000152,000 • Reduce existing goodwill (12,000) • On the worksheet, existing goodwill is reduced $12,000 • The maximum deduction would be $40,000 (80% 50,000) C2

  25. Current Practice NCI share of income deducted to get consolidated net income NCI equity shown as liability, between liabilities and equity or as subdivision of equity NCI shown only as aggregate amount within equity FASB Proposal on Liabilities and Equity NCI share of income is distribution ofconsolidated net income NCI share of equity is aggregate amount within equity (text approach) Presentation of NCI C2

  26. Pooling of interests • Investment should was at book value and should observe equity transfer for equity (Chapter 1) • There could be up to 10% NCI; equity transfer applies only to parent ownership percentage (90% or more) • Investment always eliminated with no excess. If not, the investment account is wrong and needs correction. C2

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