ugba 120b discussion section 7 10 12 12

7/30/2019 UGBA 120B Discussion Section 7 10 12 12

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UGBA-120B Discussion Section 7

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10/12/12


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CH 1. CPA practice problem 1On January 2, 1993, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for$400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea'sboard of directors. Rea reported net income of $500,000 for 1993, and paid dividends of $150,000. Inits December 31, 1993, balance sheet, what amount should Well report as investment in Rea?

a. $450,000

b. $435,000

c. $400,000

d. $385,000

Choice "b" is correct. Even though Well has only a 10% ownership, one can presume that Well hassignificant influence on Rea since it is the largest single shareholder and has a majority on Rea'sboard of directors. The equity method is the appropriate accounting method.

Beginning Investment $ 400,000

Add % Sub's Income (10% $500,000) + 50,000

Subtract % Sub's dividends (10% $150,000) 15,000

Ending Investment $435,000

Choice "a" is incorrect. The investment account must also be decreased for Well's share of thedividends paid by Rea.

Choice "c" is incorrect. The equity method is the correct accounting method for this investment.

Choice "d" is incorrect. The investment account must also be increased for equity in earnings of Rea.


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CH 1. CPA practice problem 2Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2,

2001 for $400,000. The carrying amount of Straw's net assets at the purchasedate totaled $900,000. Fair values equaled carrying amounts for all itemsexcept equipment, for which fair values exceeded carrying amounts by$100,000. The equipment has a five-year life. During 2001, Straw reported netincome of $150,000. What amount of income from this investment should Puffreport in its 2001 income statement?

a. $40,000

b. $52,000c. $56,000

d. $60,000

Choice "b" is correct.

Puff's share of Straw's income:$150,000 40% = $60,000

Less: Excess fair value amortization (8,000)

Equity method investment income $52,000

Undervalued Equipment $100,000 40% ownership = $40,000 / 5 years =

$8,000


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Three legal names of types of business

combinations

Statutory Merger

A buys B; only A survives

Statutory Consolidation

C is formed to buy A and B

Acquisition

A buys B; both A and B survive

Clarify multiple ways consolidation and acquisition can be used


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When to use acquisition method

/accounting for business combinations

Dissolution of the acquired company All account balances are actually consolidated into the

survivors financial statements

Permanent consolidation at the combination date

Survivor picks up all the A and L of the sub

Records are closed out

Separate existence All account balances are financially consolidated into the

survivors financial statements, periodically at year-ends and

quarter-ends, in order to prepare consolidated F/S Both companies continue to update own records

Use Eliminating journal entry at year-ends and quarter-ends


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When theres dissolution of sub = you

acquired 100% of itKey takeaways:

1. 100% of the net assets acquired (regardless of percentage acquired) are recorded at fair valuewith any unallocated balance remaining to Debit Goodwill or Cr. Bargain purchase.

2. Know the journal entries, (also in textbook pages 51-54 in green boxes)

Dr. Assets of Sub, at FV (list out the specific assets)Dr. Goodwill, if applicable

Cr. Liab of Sub, at FV (list out the specific liab)

Cr. Cash (paid by purchaser/survivor, if applicable)

Cr. Common stock (of purchaser/survivor), par

Cr. APIC (of purchaser/survivor)

Cr. Gain on bargain purchase, if applicable

Dr. Expenses/fees, if applicable

Cr. Cash, if applicable


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When theres separate existenceKey takeaways:

o Make a journal entry when Big Co. acquires Small Co. as an investment

o When companies are consolidated for F/S:

o Add the balance sheet of Big Co. and Small Co. together, THEN

o Make the consolidation entries

Consolidation entries include:

o Eliminate the subsidiarys entire Equity section, including: common stock, APIC, and retained earnings.

o Eliminate the BigsInvestment in Small account.

o Adjust Smalls assets up to FV, Dr.

o Adjust Smalls liabilities up to FV, Cr.

o Adjust Smalls intangible assets up to FV, Dr.

o If applicable, record goodwill = (FV ofBigs cost to acquire SmallSmalls Net Assets FV) Adjustment

of Smalls assets (incl intangible assets) minus liabilities to FV. ***DO AN EXAMPLE HERE.***

o If theres not 100% ownership, create noncontrolling interest account in the Equity section of the B/S, Cr.

Lecture slides 2-15 and 2-16 list the steps for consolidation worksheet


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To help you remember the consolidating

entry

e i ? eliminate

A&L FVs adjust

Intangibles, goodwill, non-controllingcreate


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2 sets of journal entries, when theres

separate existenceDR. Investment in sub

Dr. Expenses/fees, if applicableCR. Contingent performance liability, if applicable

CR. Common stock (of purchaser), par

CR. APIC (of purchaser)

CR. Cash, if applicable

Youre not permanently eliminating any accounts

Eliminating journal entries are for year-end only, as youre preparing the consolidated financialstatements

DR. Common stock, sub

DR. APIC, sub

DR. Retained Earnings, sub

CR. Investment in Sub

CR. Non-controlling interest (create), if applicable

DR. Balance sheet adjustments to FV

DR. Goodwill, if theres excess of acquisition cost (plus noncontrolling interest) over FV of subsidiarysnet assets


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Costs of Business Combinations

Whether theres dissolution or separate existence (doesnt matter which),

follow these rules for expenses and fees.

Immediately expense (Debit expense):

Finders fee

Legal/attorneys fee

Appraisers/accountant/investment banker fees

Reduce value of parents stock issued (Debit APIC):

Stock registration costStock issuance cost

SEC filing fees


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CH 2 CPA practice question 1When a parent-subsidiary relationship exists, consolidated financial statements

are prepared in recognition of the accounting concept ofa. Reliability.

b. Materiality.

c. Legal entity.

d. Economic entity.

Choice "d" is correct. Reporting consolidated financial statements is consistentwith the concept that the economic entity can be identified with a unit ofaccountability.

Choice "a" is incorrect. The concept of reliability requires that information isverifiable, neutral, and representationally faithful, but does not address theparent subsidiary relationship.

Choice "b" is incorrect. Materiality relates to the presentation and accountingtreatment of specific transactions, but does not address the parent subsidiaryrelationship.

Choice "c" is incorrect. Consolidated financial statements reflect the economicsubstance of the parent-subsidiary relationship not legal form.


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CH 2 CPA practice question 2Consolidated financial statements are typically prepared when one company

has a controlling financial interest in another unlessa. The subsidiary is a finance company.

b. The fiscal year-ends of the two companies are more than three monthsapart.

c. Such control is likely to be temporary.

d. The two companies are in unrelated industries, such as manufacturing and

real estate.

Choice "c" is correct. A majority-owned subsidiary shall not be consolidated ifcontrol is likely to be temporary or if it does not rest with the majority owner.The other exceptions to not consolidating a majority-owned subsidiary arewhen the subsidiary is in legal reorganization or bankruptcy and/or thesubsidiary operates under severe foreign restrictions.

Choice "a" is incorrect. Consolidation of finance companies is generallyrequired.

Choice "b" is incorrect. A difference in fiscal periods of a parent and asubsidiary does not of itself justify the exclusion of the subsidiary fromconsolidation.

Choice "d" is incorrect. There is no exception for nonhomogeneous operations.


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Real world example

If time permits: show example of a conglomerate: Proctor &Gamble

Non-homogeneous operations

Gillette, Ivory, Puma, Scope, Vicks, Pampers, Mr. Clean,Bounce, and many more

Have to consolidatePull up 10-K

http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=PG

Note that theres no Investment in account, which havebeen eliminated for consolidation reporting. Theres noEquity accounts from Subsidiaries, which have beeneliminated for consolidation reporting.
http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=PGhttp://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=PGhttp://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=PGhttp://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=PG


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CH. 2 CPA practice problem 3Company J acquired all of the outstanding common stock of

Company K in exchange for cash. The acquisition price exceedsthe fair value of net assets acquired. How should Company Jdetermine the amounts to be reported for the plant andequipment and long-term debt acquired from Company K?

Plant and equipment Long-term debta. K's carrying amount K's carrying amountb. K's carrying amount Fair valuec. Fair value K's carrying amountd. Fair value Fair value

Choice "d" is correct. When the acquisition price exceeds theFMV of net assets acquired, assets and liabilities should bepresented at fair value.


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Business Combination JE ExampleOn January 1 20X1, Big Company exchanged 10,000 shares of $10 par value

common stock with a fair value of $415,000 for 100% of the outstanding stock ofSub Company in a business combination properly accounted for as an acquisition.In addition, Big Co. paid $35,000 in legal fees. Registration fees were $20,000.

At the date of acquisition, the fair and book value of Sub Co.s net assets totaled$300,000. Sub Co.s Equity comprised of:

Common stock, par 10,000

APIC 90,000

Retained Earnings 200,000

1. What is the journal entry to record Big Co.s acquisition of Sub Co. and the feesincurred?

2. What is the journal entry when you need to consolidate?


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Business Combination JE ExampleBig Co.s journal entry for acquisition:

Dr. Investment in Sub

415,000, incl Subs 300k net assets and 115k GW

Dr. Legal Expense

35,000

Cr. Common stock (of Big Co.), par100,000*

Cr. APIC (of Big Co.)

295,000*

Cr. Cash

55,000

*100,000 + 295,000 = 415,000 = FV of Big Co.s stock issued and used aspayment for the acquisition of Sub Co.


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Business Combination JE Example

Big Co.s consolidating journal entry, for when it has to make consolidated

F/S:

Dr. Common stock of sub, par 10,000

Dr. APIC of sub 90,000

Dr. RE of sub 200,000Cr. Investment in Sub 415,000

Dr. Balance sheet asset adjustment to FV 0

Cr. Balance sheet liability adjustment to FV 0

Dr. Identifiable intangible assets 0Dr. Goodwill 115,000

Cr. Non controlling interest 0

ugba 120b discussion section 7 10 12 12

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