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Accounting 471/875. Chapter 1 Chapter 2. Transactions of Domestic Customers. Transactions of Domestic Suppliers. Transactions of Other Domestic Parties. Prepare Financial Statements. Domestic Corporation Financial Statements. Transactions of Foreign Suppliers.

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Accounting 471 875 l.jpg

Accounting 471/875

Chapter 1

Chapter 2


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Transactions

of

Domestic

Customers

Transactions

of

Domestic

Suppliers

Transactions

of Other

Domestic

Parties

Prepare

Financial

Statements

Domestic

Corporation

Financial

Statements

Transactions

of

Foreign

Suppliers

Transactions

of

Foreign

Customers

Translate

Foreign

Currency

Transactions

Transactions

of Other

Foreign

Parties

Domestic

Parent Corp.

Financial

Statements


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Domestic

Parent Corp.

Financial

Statements

Financial

Statements of

Domestic

Branches

Financial

Statements of

Domestic

Subsidiaries

Consolidate

Financial

Statements

Consolidated

Domestic Corp.

Financial

Statements


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Consolidated

Domestic Corp.

Financial

Statements

Financial

Statements of

Foreign

Branches

Adjust for

Differences in

Acctg Prin &

Report Practices

Financial

Statements of

Foreign

Subsidiaries

Translate

Foreign

Currency

Financial

Statements

Consolidate

Financial

Statements

Consolidated

Multinational

Corp.

Financial

Statements


Business combinations l.jpg
Business Combinations

  • transactions that bring together net assets (assets and liabilities) of two or more business entities into single accounting entity

  • one business entity called acquiring company gains control over another business entity called acquired company


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Legal Forms of Business Combinations

  • Merger

  • Consolidation

  • Acquisition


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Merger

  • one company acquires assets and liabilities of one or more other companies in exchange for cash, stock, or other consideration

  • acquiring company continues to exist as separate legal entity

  • acquired company ceases to exist as separate legal entity

    • stock is canceled

    • accounting records (books) closed

  • separate assets and liabilities recorded on acquiring company’s books

  • A Corp. + B. Corp. = A Corp.


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Consolidation

  • new firm formed to issue stock in exchange for stock of two or more combining or consolidating entities

  • acquired firms normally cease to continue as separate legal entities

  • new firm will record separate assets and liabilities of acquired firms

  • A Corp. + B Corp. = C Corp.


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Acquisition

  • company acquires majority (>50%) of common stock of another company

  • each company continues legal existence

  • acquiring company (parent) records “Investment in Acquired Company’s Stock” in combination entry

  • A Corp. + B Corp. = Consolidated Financial Statement of Corp. A and Corp. B



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Accounting for Standard Forms of Business Combinations

  • acquisition of net assets for

    • cash

    • stock

  • acquisition of stock for

    • cash

    • stock


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Examples of Types of Business Combinations

On August 31, 20X1, the balance sheets of the P Corporation and S Corporation appeared as follows:


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Acquisition of Net Assets for Cash

On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation for $700 cash. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300.

P Corporation Records

9/1/X1 Cash ………………………………. 400

Plant ……………………….……... 300

Land ……………………………… 100

Liabilities ………………………. 100

Cash .........................................…. 700


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Acquisition of Net Assets for Cash

On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation for $700 cash. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300.

S Corporation Records

9/1/X1 Cash ………………………………. 700

Liabilities …………………………. 100

Cash ……………………………. 400

Plant ……………………….…… 200

Land ……………………………. 100

Gain on sale of plant ..............…. 100



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Acquisition of Net Assets for Cash

On October 1, 20X1, the Board of Directors of S Corporation voted to liquidate S Corporation.

P Corporation Records

10/1/X1 No entry required

S Corporation Records

10/1/X1 Common stock …………………. 300

Retained earnings ……………… 400

Cash ………………………….. 700



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Acquisition of Net Assets for Cash

On October 1, 20X1, the Board of Directors of S Corporation voted not to liquidate S Corporation.

P Corporation Records

10/1/X1 No entry required

S Corporation Records

10/1/X1 No entry required



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Acquisition of Net Assets for Stock

On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation in exchange for 175 newly issued shares in P Corporation, which have an established market price of $4 per share. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300.

P Corporation Records

9/1/X1 Cash ………………………………. 400

Plant ……………………….……... 300

Land ……………………………… 100

Liabilities ………………………. 100

Common Stock (175 X 4) ......…. 700


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Acquisition of Net Assets for Stock

On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation in exchange for 175 newly issued shares in P Corporation, which have an established market price of $4 per share. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300.

S Corporation Records

9/1/X1 Investment in P Corp. Stock …….. 700

Liabilities …………………………. 100

Cash ……………………………. 400

Plant ……………………….…… 200

Land ……………………………. 100

Gain on sale of plant ..............…. 100



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Acquisition of Net Assets for Stock

On October 1, 20X1, the Board of Directors of S Corporation voted to liquidate S Corporation.

P Corporation Records

10/1/X1 No entry required

S Corporation Records

10/1/X1 Common stock …………………. 300

Retained earnings ……………… 400

Investment in P Corp. Stock 700



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Acquisition of Net Assets for Stock

On October 1, 20X1, the Board of Directors of S Corporation voted not to liquidate S Corporation.

P Corporation Records

10/1/X1 No entry required

S Corporation Records

10/1/X1 No entry required



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Acquisition of Stock for Cash

On September 1, 20X1, P Corporation acquired all of the outstanding shares of S Corporation for $700 cash. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300.

P Corporation Records

9/1/X1 Investment in S Corp. Stock ……... 700

Cash ..........................................…. 700

S Corporation Records

9/1/X1 No entry required



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Acquisition of Stock for Cash

On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation.

P Corporation Records

10/1/X1 Cash ……………………………. 400

Plant …………………………… 300

Land …………………………… 100

Liabilities ……………………. 100

Investment in S Corp. Stock 700


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Acquisition of Stock for Cash

On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation.

S Corporation Records

10/1/X1 Liabilities ..……………………. 100

Common Stock ……………...… 300

Retained Earnings ……………. 300

Cash ..………………………… 400

Plant …………………………. 200

Land …………………………. 100



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Acquisition of Stock for Cash

On October 1, 20X1, the Board of Directors of P Corporation voted not to liquidate S Corporation.

P Corporation Records

10/1/X1 No entry required

S Corporation Records

10/1/X1 No entry required



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Acquisition of Stock for Stock

On September 1, 20X1, P Corporation acquired all of the outstanding shares of S Corporation in exchange for 175 newly issued shares in P Corporation, which have an established market price of $4 per share. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300.

P Corporation Records

9/1/X1 Investment in S Corp. Stock ..…... 700

Common Stock .......................…. 700

S Corporation Records

9/1/X1 No entry required



Acquisition of stock for stock l.jpg
Acquisition of Stock for Stock

On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation.

P Corporation Records

10/1/X1 Cash ……………………………. 400

Plant …………………………… 300

Land …………………………… 100

Liabilities ……………………. 100

Investment in S Corp. Stock 700


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Acquisition of Stock for Stock

On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation.

S Corporation Records

10/1/X1 Liabilities ..……………………. 100

Common Stock ……………...… 300

Retained Earnings ……………. 300

Cash ..………………………… 400

Plant …………………………. 200

Land …………………………. 100



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Acquisition of Stock for Stock

On October 1, 20X1, the Board of Directors of P Corporation voted not to liquidate S Corporation.

P Corporation Records

10/1/X1 No entry required

S Corporation Records

10/1/X1 No entry required



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Business Combination Alternatives

A Corp.

Invests in

B Corp.

Acquires

Net

Assets

Acquires

Stock

Qualify as

Pooling?

Qualify as

Pooling?

Yes

No

No

Yes

Net Assets

Recorded at

Book Value

Net Assets

Recorded at

Fair Value

Investment

Recorded at

Book Value

Investment

Recorded at

Fair Value


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Acquisition of Stock Alternatives

A Corp.

Acquires Stock

of B Corp.

Qualify as

Pooling?

Yes

No

Report as

Investment

Using Equity

Method

Investment

Recorded at

Book Value

Investment

Recorded at

Fair Value

Yes

Qualifies for

Consolidation?

Qualifies for

Consolidation?

Significant

Influence?

Report as

Investment

Using Cost

Method

No

Yes

No

No

Consolidate

Using Equity

Method

Report as

Investment

Using Cost

Method


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Accounting for Business Combinations

  • Purchase Accounting (Fair Market Value)

  • vs.

  • Pooling-of-Interest Accounting (Book Value)

  • Cost/Fair Value Method (record only sub div)

  • vs.

  • Equity Method (record all changes in sub)

  • Separate Financial Statements (Inv. in Sub)

  • vs.

  • Consolidated Financial Statements


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Purchase Accounting

  • similar to accounting for acquisition of any asset group

  • fair market value (FMV) of consideration (cash, stock, debt securities, etc.) given by acquiring firm used as valuation basis of combination

  • assets and liabilities of acquired firm revalued to respective FMV at combination date

  • any difference between value of consideration given and FMV of net assets obtained recorded as goodwill

  • financial statements of acquiring company reflect combined operations from date of combination or acquisition


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Pooling-of-Interest Accounting

  • assumes combining of stockholders’ interests

  • basis of valuation is book value of assets and liabilities on books of acquired company

  • goodwill cannot be created at date of combination or acquisition

  • financial statements of acquiring company include restatement of all prior years’ operations and financial position of the pooled companies for all years presented


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Impact of SFAS 141 on Pooling of Interest Accounting

  • According to SFAS No. 141, the purchase method is not to be applied prospectively to past Poolings of Interest.

  • Past poolings of interests are left intact by SFAS No. 141

  • Therefore, it is important to understand how to account for PAST poolings.


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Purchase Accounting vs Pooling-of-Interest Accounting

Purchase Accounting

1. stockholders of acquired company give up their ownership interest in acquired company’s net assets

2. assets and liabilities of acquired company revalued and recorded by acquiring company at acquisition cost

3. usually gives rise to valuation differential subject to amortization

4. acquiring firm records stock issued as part of combo by credits to common stock account and excess over par account

5. net income of acquired company in year of acquisition is excluded from combined net income

6. incidental acquisition costs

a. registration costs reduce FMV of sec.

b. direct costs capitalized

  • Pooling-of-Interest

  • 1. stockholders of acquiring company and acquired company join without either giving up ownership interest

  • 2. assets and liabilities of the acquired company not revalued and recorded at book value

  • 3. does not give rise to a valuation differential

  • stockholders’ equity sections of combining companies merged, thus retained earnings accounts added together

  • 5. net income of acquired in year of acquisition is included in combined net income

  • 6. incidental acquisition costs

  • a. registration costs expensed

  • b. direct costs expensed



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Criteria for Valuation Basis and Consolidation

Percentage of Outstanding Voting Stock Acquired

0%

20%

50%

100%

1.Level of economic influence

“Significant Influence”

Nominal

Control

2.Valuation basis

Fair Value

Method

Equity Method

3.Financial statement presentation

Investment Account

Separate Financial Statements

Consolidated

Financial Statements