consolidated financial statement - at more than book value
TRANSCRIPT
Consolidated financial statement: Acquisition at more
than book value
Arthik Davianti
What’s coming:
Differential
Complex differential
Consolidation procedures
Illustrations
Basic Concepts: Parent and Subsidiary
Parent’s booksInvestment account initially contains the acquisition cost
• FMV of net assets,
• Plus goodwill, or
• Minus bargain purchase price
Parent can use the cost or equity method
Subsidiary’s booksBalance sheet: Assets and Liabilities are recorded at BOOK values.Income statement: Expenses calculated based on BOOK values
Basic Concepts: Parent and Subsidiary
What happens when you consolidate the parent’s and subsidiary’s books?
Remember:• The parent’s investment account is based on the actual
acquisition price.• The sub’s books contain only historical book values.
The parent needs to make adjustments for both• Balance Sheet, and• Income Statement accounts.
Why wasn’t this a problem with created subs?• No goodwill• No undervalued assets at the time of creation
Differential:Investment Cost over the Underlying Book
Value of Equity
Acquisition Price and Underlying Book Value Difference
The purchase price normally is based on the market value – different with the investee’s net assets: Book Value (BV) vs Fair Market Value (FMV) - DIFFERENTIAL
Differential is frequently positive
The differential pertaining each asset of the investee must be ascertained.
When the parent uses equity method – differential pertaining to limited life assets (including identifiable intangible) must be amortized (in the remaining economic life).
Basic Concepts: Income Statement Impacts
Big Picture: Essentially, we switch the sub’s books from BV to FMV in the consolidation process.
Income Statement effects
Asset
Related Expense (as the asset expires)
Equipment
Inventory
Patent
Goodwill
Depreciation Expense
Cost of Goods Sold
Amortization Expense
Impairment Loss
Basic Concepts: Income Statement Impacts
Income Statement EffectsWhen Acquisition Price > Book Value
Asset
Related Expense (as the asset expires)
Income Statement Effect
Equipment
Inventory
Patent
Goodwill
Depreciation Expense
Cost of Goods Sold
Amortization Expense
Impairment Loss
Too Low(understated)
If expenses are UNDERSTATED, then income is too high (OVERSTATED).
To fix the problem, Parent needs to INCREASE expenses (but how?)
Excess Investment Cost over Underlying Book Value of Equity: Assignment
Information on the individual assets and liabilities to account for any difference between the investment cost and the underlying book value of equity – DIFFERENTIAL
Book value and fair value information for Sloan Co at January 1 (this is from last week’s illustration)
Book
Value
Fair
Value
Cash 1,500 1,500
Receivable - net 2,200 2,200
Inventories 3,000 400
Other current assets 3,300 3,100
Equipment - net 5,000 8,000
Total assets 15,000 18,800
Account payeble 1,000 1,000
Note payable, due in five years 2,000 1,800
Common stock 10,000
Retained earnings 2,000Total liabilities and
stockholders' equity 15,000
Excess Investment Cost over Underlying Book Value of Equity: Assignment
5,000
(3,600)
1,400
Fair
Value
Book
ValueDifferential
% Interest
Acquired
Amount
Assigned
Inventories 4,000 3,000 1,000 30% 300
Other current assets 3,100 3,300 (200) 30% (60)
Equipment 8,000 5,000 3,000 30% 900
Note payable 1,800 2,000 200 30% 60
Total assigned to identifiable net assets 1,200
Remainder assigned to goodwill 200
Total excess of cost over book value acquired 1,400
Assignment to identifiable net assets and goodwill
Investment in Sloan
Book value of the interest acquired (30% X $12,000,000 equity of Sloan)
Total excess of cost over book value acquired
Excess Investment Cost over Underlying Book Value of Equity: Accounting
Sloan pay dividends $1,000,000 on July 1 and reports net income of $3,000,000. The excess cost over book value is amortized as follows:
Amortization Rates
Excess allocated to:
Inventories – sold in the current year 100%
Other current assets – disposed of in the current year 100%
Equipment – depreciated over 20 years 5%
Note payable – due in 5 years 20%
Excess Investment Cost over Underlying Book Value of Equity: Accounting
Payne’s entries:
July 1:Cash (+A) 300
Investment in Sloan (-A) 300To record dividends received from Sloan ($1,000,000 X 30%
December 31Investment in Sloan (+A) 900
Income from Sloan (+R, +SE) 900To record dividends received from Sloan ($1,000,000 X 30%)
December 31Income from Sloan (-R, -SE) 300
Investment in Sloan (-A) 300To record write-off of excess allocated to inventory items that were sold in the current year
1
2
Excess Investment Cost over Underlying Book Value of Equity: Accounting
December 31Investment in Sloan (+A) 60
Income from Sloan (R, +SE) 60To record income credit overvalued other current assets disposed of in the current year
December 31Income from Sloan (-R, -SE) 12
Investment in Sloan (-A) 12To amortize the excess allocated to the overvalued note payable over the remaining life of the note ($60,000 : 5 years)
December 31Income from Sloan (-R, -SE) 45
Investment in Sloan (-A) 45To record depreciation on excess allocated to undervalued equipment with a 20-year remaining useful life ($900,000 : 20)
5
4
3
Excess Investment Cost over Underlying Book Value of Equity: Accounting
December 31Investment in Sloan (+A) 603
Income from Sloan (R, +SE) 603To record equity income from 30% investment in Sloan
1-5
Equity in Sloan’s reporting income ($3,000,000 X 30%) 603Amortization of excess cost over book value:
Inventories sold in the current year ($300,000 X 100%) (300)Other current assets sold in the current year ($60,000 X 100%) 60Equipment ($900,000 X 5%) depreciation rateNote payable ($60,000 X 20%) amortization rate (12)
Total investment income from Sloan $603
Book value element Life remainingCommon Stock $130,000Retained Earnings 117,000
Under- or Over-valuationInventory (6,500) 2 monthsLand 39,000 IndefiniteEquipment 85,000 10 yearsCovenant-not-to-compete 52,000 4 yearsGoodwill element 26,000 Indefinite
Total Cost $442,500
Example: Acquisition Price > Book Value
Pepper Inc., a calendar-year reporting company, acquired 100% of Salt Inc.’s outstanding common stock at a cost of $442,500 on 12/31/X8. The analysis of the parent’s Investment account as of the acquisition date shows:
AcquisitionPrice = BV + Identifiable Excess + GW
Results for 20X9 (based on Book Values):
Reported Income $78,000Dividends Declared 45,500
What would the Sub’s income be based on Fair Values?
Lower COGS (because inventory is worth less) $ (6,500)Extra depreciation on equipment 8,500Extra amortization of contract 13,000Total increase in expenses / decrease in income $ 15,000
$63,000 ($78,000 - $15,000)
Example: Acquisition Price > Book Value
442,500 = 247,000 + 169,500 + 26,000
Consolidation inEquity Method for
Diffeential
Consolidation procedures differ when there is a differential.
Differential in Equity Method
The Parent’s initial investment in a sub is based on the FMV of the sub’s net assets (+/- GW).
Equity method entries:
• Recording share of sub’s income
• Recording share of sub’s dividends
They should be based on the same FMV basis.
Problem: Sub reports income based on BOOK VALUES
Solution: Parent has to record an adjustment to the income and investment “Equity Method” accounts.
Results for 20X9 (based on Book Values):
Reported Income $78,000Dividends Declared 45,500
Adjustment to Salt’s 20X9 income on Parent’s books:
Lower COGS (because inventory is worth less) $ (6,500)Extra depreciation on equipment 8,500Extra amortization of contract 13,000Total increase in expenses / decrease in income $ 15,000
What entries would Pepper record in its general ledger related to Salt’s income and dividends for 20X9 under the equity method?
Example: Differential in Equity Method
Example: Equity Method Journal Entries
1. To record 100% share of Salt’s reported income:
Investment in Salt 78,000Income from Salt 78,000
2. To record 100% of Salt’s dividends declared:
Dividend Receivable 45,500Investment in Salt 45,500
3. To record additional expenses (based on FMV):
Income from Salt 15,000Investment in Salt 15,000
Called “amortizationof excess value”
Example: Equity Method Investment Adjustment
Calculate the correct ending balance in Pepper’s Investment in Salt account using the equity method:
Investment in Salt
Beginning Balance 442,500Net Income 78,000
Ending Balance 460,000
Dividend 45,500Income Adjustment 15,000
Simple Example
P
S
Stock
SubShareholders
$
Book value of net assets = $800
Excess value of identifiable assets
= $200
Goodwill = $500
Assume the BV of Sub’s net assets is $800 and that the FMV of the net assets is $1,000. Finally, assume that the acquisition price was $1,500. The acquisition price consists of three parts:
Understanding Components of Acquisition Cost
Acquisition FMV ofPrice = Assets + Goodwill
Key: We need to keep track of each element of the purchase price separately! Why??
FMV of ExtraAssets = BV + Value
Acquisition ExtraPrice = BV + Value + Goodwill
The Consolidation Process
When a subsidiary is acquired (instead of created), the consolidation process is more complicated:• Must eliminate intercompany items (same)• Must update Sub’s assets and liabilities to FMV• Must recognize goodwill
Summary of Consolidation Entries
1. The basic elimination entry:
2. The excess value reclassification entry:
Asset 1 XXAsset 2 XXGoodwill XX
Investment in Sub Excess
Common Stock (S) XXAdditional Paid-in Capital (S) XXRetained Earnings, Beginning Balance (S) XXIncome from Sub XX
Investment in Sub BVDividends Declared XX
Summary of Consolidation Entries
3. The amortized excess value reclassification entry:
This entry reclassifies the equity method amortization of cost in excess of book from Income from Sub to the appropriate expense accounts where the costs would have been had the sub used FMV instead of BV.
4. The accumulated depreciation elimination entry:
Cost of Sales XXOther Expenses XX
Income from Sub XX
Accumulated Depreciation XXBuildings and Equipment XX
Understand and explain how consolidation process differ when
there is a differential
Wholly-owned Subsidiary (100 Percent) at More than Book Value (Baker p. 162)
Peerless Products acquires all of Special Foods common stock on January 1 20X1, for $340,000 cash, an amount equal to Special Foods’ fair value as a whole. This includes $40,000 in excess of Special Foods’ book value of $300,000.
Fair value consideration 340,000
Book value of Special Food's net assets
Common stock - Special Food 200,000
Retained earnings - Special Food 100,000
300,000
Difference between fair value and book value 40,000
Investment in Special Foods 340,000Cash 340,000
To record the initial investment in Special Food
Book value of net assetsCS + RE =300,000
Identifiable assets =40,000
$340,000Initial
InvestmentSpecialFoods
Goodwill =0
1/1/X1
Wholly-owned Subsidiary (100 Percent) at More than Book Value
Wholly-owned Subsidiary (100 Percent Ownership) at more than Book Value
Book Value calculation
Total Common RetainedBook Value Stock Earnings
Original Book Value 300,000 200,000 100,000
= +
Common Stock 200,000Retained Earnings 100,000
Investment in Special Foods 300,000
Excess value reclassification entry:
Land 40,000Investment in Special Foods 40,000
Wholly-owned Subsidiary (100 Percent Ownership) at more than Book Value
Excess value reclassification entry:
Land 40,000Investment in Special Foods 40,000
In this example, the differential is the additional $40,000 payment, because of Special Foods’ land was worth $40,000 more than its book value at acquisition date.
A second elimination entry is required to re-assign the $40,000 from the investment account to the land account.
Wholly-owned Subsidiary (100 Percent Ownership) at More than Book Value at Acquisition Date –Worksheet (Baker p. 164)
Peerless
Product
Special
FoodsConsolidated
Assets
Cash 10,000 50,000 60,000
Account receivable 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Investment in Special Food 340,000 300,000 0
40,000
Land 175,000 40,000 40,000 255,000
Buildings and equipment 800,000 600,000 1,400,000
Accumulated depreciation (400,000) (300,000) (700,000)
Total assets 1,100,000 500,000 40,000 340,000 1,300,000
Liabilities and stockholder's equity
Account payable 100,000 100,000 200,000
Bonds payable 200,000 100,000 300,000
Common stock 500,000 200,000 200,000 500,000
Retained earnings 300,000 100,000 100,000 300,000
Total liabilities and equity 1,100,000 500,000 300,000 0 1,300,000
Elimination Entries
Existence of Goodwill
Excess value reclassification entry:
Goodwill 40,000Investment in Special Foods 40,000
For example, assume in the Peerless Product and Special Foods illustration the acquisition-date fair value of Special Foods’ assets and liabilities equal to their book values, then the $40,000 difference between the $340,000 consideration exchanged and the $300,000 fair value of the subsidiary’s net identifiable assets should be attributed to goodwill
Treatment of a Complex Differential
Make calculation and prepare elimination entries for the consolidation of a wholly
owned subsidiary when there is a complex positive differential at the
acquisition date.
Wholly-owned Subsidiary (100 Percent) at More than Book Value (Baker p. 166)
Peerless Products acquires all of Special Foods common stock on January 1 20X1, for $400,000 on January 1, 20X1, by issuing $100,000 of 9% bonds, with fair value of $100,000, and paying cash of $300,000. The resulting ownership situation:
Fair value consideration 400,000
Book value of Special Food's net assets
Common stock - Special Food 200,000
Retained earnings - Special Food 100,000
300,000
Difference between fair value and book value 100,000
Wholly-owned Subsidiary (100 Percent) at More than Book Value (Baker p. 167)
Investment in Special Foods 400,000Bond Payable 100,000Cash 340,000
To record the initial investment in Special Food
Book
Value
Fair
ValueDifference
Cash 50,000 50,000
Account receivable 50,000 50,000
Inventory 60,000 75,000 15,000
Land 40,000 100,000 60,000
Buildings and equipment 600,000
Accumulated depreciation (300,000) 300,000 290,000 (10,000)
500,000 290,000
Account payable 10,000 100,000
Bonds payable 10,000 135,000 (35,000)
Common stock 20,000
Retained earnings 10,000
50,000 235,000 30,000
Book value of net assetsCS + RE =300,000
Identifiable assets =30,000
$400,000Initial
InvestmentSpecialFoods
Goodwill =70,000
1/1/X1
Wholly-owned Subsidiary (100 Percent) at More than Book Value
Wholly-owned Subsidiary (100 Percent Ownership) at more than Book Value (Baker p. 168)
Basic elimination entry
Total Common RetainedBook Value Stock Earnings
Original Book Value 300,000 200,000 100,000
= +
Common Stock 200,000Retained Earnings 100,000
Investment in Special Foods 300,000
Wholly-owned Subsidiary (100 Percent Ownership) at more than Book Value
Total = Inventory Land Building Goodwill Bonds Payable
100,000 15,000 60,000 (100,000) 70,000 (35,000)
Excess value (differential) reclassification entry:
Inventory 15,000Land 60,000Goodwill 9,500
Building 10,000Bonds Payable 35000Investment in Special Foods 100,000
Wholly-owned Subsidiary (100 Percent Ownership) at More than Book Value at Acquisition Date –Worksheet (Baker p. 169)
Peerless
Product
Special
FoodsConsolidated
Assets
Cash 50,000 50,000 100,000
Account receivable 75,000 50,000 125,000
Inventory 100,000 60,000 15,000 175,000
Investment in Special Food 400,000 300,000 0
100,000
Land 175,000 40,000 60,000 275,000
Buildings and equipment 800,000 600,000 10,000 1,390,000
Accumulated depreciation (400,000) (300,000) (700,000)
Goodwill 70,000
Total assets 1,200,000 500,000 75,000 410,000 1,435,000
Liabilities and stockholder's equity
Account payable 100,000 100,000 200,000
Bonds payable 300,000 100,000 400,000
Premium on Bonds Payable 35,000 35,000
Common stock 500,000 200,000 200,000 500,000
Retained earnings 300,000 100,000 100,000 300,000
Total liabilities and equity 1,200,000 500,000 300,000 35,000 1,435,000
Elimination Entries
Situation 2 Worksheet
at the Date of Acquisition(100% ownership)
Prepare equity method journal entries, elimination entries, and the consolidated worksheet for a wholly owned subsidiary
when there is a complex positive differential.
Wholly-owned Subsidiary (100 Percent) at More than Book Value – Initial Year
Peerless Products acquires all of Special Foods common stock on January 1 20X1, for $387,500, an amount $87,500 in excess of the book value. The acquisition price includes cash of $300,000 and a 60-day note for $87,500 (paid at maturity during 20X1).
Fair value consideration 387,500
Book value of Special Food's net assets
Common stock - Special Food 200,000
Retained earnings - Special Food 100,000
300,000
Difference between fair value and book value 87,500
Wholly-owned Subsidiary (100 Percent) at More than Book Value
Fair values of Special Foods’ assets and liabilities:
Book Value Fair Value Differential
Inventory 60,000 65,000 5,000
Land 40,000 50,000 10,000
Buildings and Equipment 300,000 360,000 60,000
400,000 475,000 75,000
• The remaining $12,500 is goodwill
• The entire amount of inventory is sold during 20X1
• The buildings and equipment have 10 years remaining economic life and depreciated using straight line depreciation
Wholly-owned Subsidiary (100 Percent Ownership) at More than Book Value – Initial Year of Ownership
Investment in Special Foods 50,000Income from Special Foods 50,000
To record Peerless 100% share of Special Food’s 20X1 income
During 20X1, Peerless records operating earnings of $140,000, excluding its income from investing in Special Foods, and declares dividends of $60,000. Special Foods reports 20X1 net income of $50,000 and declares dividends of $30,000.
Cash 30,000Investment in Special Foods 30,000
To record Peerless 100% share of Special Food’s 20X1 dividend
Investment in Special Foods 387,500Cash 300,000Notes Payable 87,500
To record the initial investment in Special Food
Wholly-owned Subsidiary (100 Percent Ownership) at Book Value – Initial Year of Ownership (Baker p.173)
Parent Company Entry
Income from Special Foods 14,000Investment in Special Foods 14,000
To record amortization of excess acquisition price
• A portion of the differential ($5,000) – Special Foods’ inventory sold during 20X1.
• $60,000 of the differential – Special Foods’ buildings and equipment – amortization $6,000 ($60,000 : 10 years)
• Impairment of goodwill by $3,000 is recognized.
• The total of differential written off = $5,000 inventory + $6,000 depreciation + $3,000 goodwill impairment = $14,000
Book value of net assetsCS + RE =300,000
Identifiable assets =75,000
$387,500Initial
InvestmentSpecialFoods
Goodwill =12,500
Wholly-owned Subsidiary (100 Percent Ownership) at Book Value – Initial Year of Ownership
Book value of net assetsCS + RE =320,000
Identifiable assets =64,000
$393,500Net
InvestmentSpecialFoods
Goodwill =9,500
1/1/X1 31/12/X1
Wholly-owned Subsidiary (100 Percent Ownership) at Book Value – Initial Year of Ownership
Basic Elimination Entry
Total Common RetainedInvestment Stock Earnings
Original Book Value 300,000 200,000 100,000+ Net Income 50,000 50,000 Dividends (30,000) (30,000)
Ending Book Value 320,000 200,000 120,000
= +
Common Stock 200,000Retained Earnings 100,000Income from Special Foods 50,000
Dividends Declared 30,000Investment in Special Foods 320,000
Book Value Calculation
Wholly-owned Subsidiary (100 Percent Ownership) at Book Value – Initial Year of Ownership
Amortized excess value reclassification entry:
Cost of goods sold 5,000Depreciation expense 6,000Goodwill impairment loss 3,000
Income from Special Foods 14,000
Total Inventory Land Building Acc. Dep. Goodwill
Beginning balance 87,500 5,000 10,000 60,000 0 12,500
(-) Changes (14,000) (5,000) 6,000 (3,000)
Ending balance 73,500 0 10,000 60,000 6,000 9,500
Excess value (differential) reclassification entry:
Land 10,000Building 60,000Goodwill 9,500
Accumulated depreciation 6,000Investment in Special Foods 73,500
Do…the Working Sheet for 20X1 and self-practice for 20X2
Consolidation Process on a More than Book
Value Acquisitions with(less than 100%
ownership)
Understand and explain how the consolidation process differs when the
subsidiary is less-than-wholly owned and there is a differential.
How Do the Elimination Entries Change?
1. The basic elimination entry:
2. The excess value reclassification entry:
Asset 1 XXXAsset 2 XXXGoodwill XXX
Investment in Sub % ExcessNCI in NA of Sub % Excess
Common Stock (S) XXXAdditional Paid-in Capital (S) XXXRetained Earnings, Beginning Balance (S) XXXIncome from Sub % NINCI in NI of Sub % NI
Dividends Declared XXXInvestment in Sub % BVNCI in NA of Sub % BV
3. The amortized excess value reclassification entry:
This entry reclassifies the equity method amortization of cost in excess of book from Income from Sub to the appropriate expense accounts where the costs would have been had the Sub used FMV instead of BV.
4. The accumulated depreciation elimination entry:
Accumulated Depreciation XXXBuilding & Equipment XXX
Cost of Sales XXXOther Expenses XXX
Income from Sub % Adj.NCI in NI of Sub % Adj.
Acquisition Date
How Do the Elimination Entries Change?
Issue
Should Parent revalue the land by the full
$39,000 in consolidation or only its
share of the excess value ($31,200)?
Partial Ownership Example
Assume Parent owns land with a book value of $400,000. Parent’s 80%-owned subsidiary also owns land. At the time of the acquisition, Sub’s land has a FMV of $100,000 and a book value of $61,000. Thus, the land has excess value of $39,000.
Parent
Sub
80%20%
NCI
Partial Ownerships: Partial or Full Valuation?
We learned earlier that full consolidation is required, as opposed to partial consolidation.•Thus, we consolidate 100% of the sub.
•This, however, refers to the BV of the subsidiary.
What about revaluation of assets to FMV?•The extent of revaluation of undervalued assets
and goodwill can vary.
• Parent Company Concept: Partial valuation
• Entity Concept: Full valuation
Partial Ownership Example
• Both were used in the past.
• SFAS 141R requires the Entity Concept.
Parent
Sub
80%20%
NCI
Parent Sub DR CR Consolidated
Land $400,000 $61,000 $31,200 $492,200
Parent Sub DR CR Consolidated
Land $400,000 $61,000 $39,000 $500,000
Parent CompanyConcept
EconomicUnit Concept
Partial Ownership: Undervalued Assets & GW
How much to revalue the Subsidiary’s undervalued assets and goodwill?
Parent company concept: < 100% of FMV
Revalued only to the extent of the parent’s percent ownership
Entity concept: 100% of FMV
The offsetting credit for the additional valuation increases the NCI in net assets
Situation 2 Worksheet
at the Initial Year(less than 100% ownership)
Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value
Peerless Products acquires 80% of Special Foods common stock on January 1 20X1, for $310,000. At that date, the fair value of the noncontrolling interest is estimated to be $77,500.
The ownership situation:
Fair value consideration 387,500
Book value of Special Food's net assets
Common stock - Special Food 200,000
Retained earnings - Special Food 100,000
300,000
Difference between fair value and book value 87,500
Parent
Sub
80%20%
NCI
Peerless Product and Special Foods balance sheets.
Peerless
Product
Special
Foods
Assets
Cash 350,000 50,000
Account receivable 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Buildings and equipment 800,000 600,000
Accumulated depreciation (400,000) (300,000)
Total assets 1,100,000 500,000
Liabilities and stockholder's equity
Account payable 100,000 100,000
Bonds payable 200,000 100,000
Common stock 500,000 200,000
Retained earnings 300,000 100,000
Total liabilities and equity 1,100,000 500,000
Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value
Investment in Special Foods 310,000Cash 310,000
To record purchase of Special Food stock
Peerless
Product
Special
Foods
Assets
Cash 40,000 50,000
Account receivable 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Buildings and equipment 800,000 600,000
Accumulated depreciation (400,000) (300,000)
Investment in Special Food 310,000
Total assets 1,100,000 500,000
Liabilities and stockholder's equity
Account payable 100,000 100,000
Bonds payable 200,000 100,000
Common stock 500,000 200,000
Retained earnings 300,000 100,000
Total liabilities and equity 1,100,000 500,000
The separate financial statements of Peerless
and Special Foods immediately after the
combination.
Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value
Fair values of Special Foods’ assets and liabilities:
Book Value Fair Value Differential
Inventory 60,000 65,000 5,000
Land 40,000 50,000 10,000
Buildings and Equipment 300,000 360,000 60,000
400,000 475,000 75,000
• The remaining $12,500 is goodwill
• The entire amount of inventory is sold during 20X1
• The buildings and equipment have 10 years remaining economic life and depreciated using straight line depreciation
Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value
80% Book value of
net assetsCS + RE =240,000
80% Identifiable assets =60,000
$310,000Initial
InvestmentSpecialFoods
80% Goodwill =10,000
1/1/X1
Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value
Less than wholly-owned Subsidiary (80 Percent Ownership) at Book Value –Investment Elimination Entry
Basic investment account elimination entry
Common Stock 200,000Retained Earnings 100000
Investment in Special Foods 240,000NCI in NA of Special Foods 60,000
Book Value Calculations
InvestmentAccount Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 60,000 240,000 200,000 100,000
=
NCI 20%Peerless
80%= Inventory Land Building Acc. Dep. Goodwill
Beginning
balance 17,500 70,000 5,000 10,000 60,000 0 12,500
Less than wholly-owned Subsidiary (80 Percent Ownership) at Book Value –Differential reclassification entry
Excess value (differential) reclassification entry:
Inventory 5,000Land 10,000Building 60,000Goodwill 12,500
Investment in Special Foods 70,000NCI in NA of Special Foods 17,500
Worksheet at date of acquisition, January 1, 20X1
Peerless
Product
Special
FoodsConsolidated
Assets
Cash 40,000 50,000 90,000
Account receivable 75,000 50,000 125,000
Inventory 100,000 60,000 5,000 165,000
Investment in Special Food 310,000 240,000 0
70,000
Land 175,000 40,000 10,000 225,000
Buildings and equipment 800,000 600,000 60,000 1,160,000
Accumulated depreciation (400,000) (300,000) 300,000 (400,000)
Goodwill 12,500 12,500
Total assets 1,100,000 500,000 387,500 240,000 1,377,500
Liabilities and stockholder's equity
Account payable 100,000 100,000 200,000
Bonds payable 200,000 100,000 300,000
Common stock 500,000 200,000 200,000 500,000
Retained earnings 300,000 100,000 100,000 300,000
NCI in NA of Special Foods 60,000 77,500
17,500
Total liabilities and equity 1,100,000 500,000 300,000 77,500 1,377,500
Elimination Entries
Peerless Products
SpecialFoods
20X1:Separate operating income, PeerlessNet income, Special FoodsDividends
140,000
60,00050,00030,000
20X2:Separate operating income, PeerlessNet income, Special FoodsDividends
160,000
60,00075,00040,000
Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Income and Dividend Information
Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Income and Dividend Recognition
Investment in Special Foods 40,000Income from Special Foods 40,000
To record Peerless 80% share of Special Food’s 20X1 income
Cash 24,000Investment in Special Foods 24,000
To record Peerless 80% share of Special Food’s 20X1 dividend
Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Income and Dividend Recognition
Income from Special Foods 11,300Investment in Special Foods 11,300
To record amortization of excess acquisition price
• A portion of the differential ($5,000) – Special Foods’ inventory sold during 20X1. Peerless’ $4,000 portion ($5,000 X 80%) must be written off
• Peerless portion of $60,000 of the differential on Special Foods’ buildings and equipment – amortization $4,800 ($48,000 : 10 years)
• Impairment of goodwill by $3,125 is recognized – $2,500 (80% X $3,125)
• The total of differential written off = $4,000 inventory + $4,800 depreciation + $2,500 goodwill impairment = $11,300
80% Book value of
net assetsCS + RE =240,000
80% Identifiable assets =60,000
$387,500Initial
InvestmentSpecialFoods
80% Goodwill =10,000
Goodwill =7,500
1/1/X1
Book value of net assetsCS + RE =256,000
Identifiable assets =51,200
$314,700Net
InvestmentSpecialFoods
31/12/X1
Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value
Book Value Calculations
InvestmentAccount Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 60,000 240,000 200,000 100,000+ Net income 10,000 40,000 50,000- Dividend (6,000) (24,000) (30,000)
Ending book value 64,000 256,000 200,000 120,000
=
Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Initial Year of Ownership
Basic investment account elimination entry:
Common Stock 200,000Retained Earnings 100,000Income from Special Foods 40,000NCI in NI of Special Foods 10,000
Dividends Declared 30,000Investment in Special Foods 256,000NCI in NA of Special Foods 64,000
Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Initial Year of Ownership
NCI 20%Peerless
80%= Inventory Land Building Acc. Dep. Goodwill
Beginning
balance 17,500 70,000 5,000 10,000 60,000 0 12,500
Amortization (2,825) (11,300) (5,000) (6,000) (3,125)
Ending
balance 14,675 58,700 0 10,000 60,000 (6,000) 9,375
Less than wholly-owned Subsidiary (80 Percent Ownership) at Book Value –Differential reclassification entry
Amortized excess value reclassification entry:
Cost of Goods Sold 5,000Depreciation expense 6,000Goodwill impairment loss 3,125
Income from Special Foods 11,300NCI in NA of Special Foods 2,825
Less than wholly-owned Subsidiary (80 Percent Ownership) at Book Value –Differential reclassification entry
Excess value (differential) reclassification entry:
Land 10,000Building 60,000Goodwill 9,375
Accumulated depreciation 6,000Investment in Special Foods 58,700NCI in NA of Special Foods 14,675
Do…the Working Sheet for 20X1 and self-practice for 20X2
Excess of Book Value over Cost
Acquired at Less than Fair Value of Net Assets
Bargain purchase• A business combination where the sum of • the acquisition-date fair values of the
consideration given, • any equity interest already held by the acquirer,
and • any noncontrolling interest is less than the amounts at which the identifiable net assets must be valued at the acquisition date as specified by FASB 141R.
• The acquirer recognizes a gain for the difference.
Basic Concepts
Income Statement Effects• When Acquisition Price < BV
Asset
Related Expense (as the asset expires)
Income Statement Effect
Equipment
Inventory
Patent
Goodwill
Depreciation Expense
Cost of Goods Sold
Amortization Expense
Impairment Loss
Too High(overstated)
If expenses are OVERSTATED, then income is too low (UNDERSTATED).
To fix the problem, Parent needs to DECREASE expenses.
God Blesses Us All