ACG 4803
Fall 2015
Altiero (Poziemski)
EXAM 3 STUDY GUIDE
Chapter 3: Consolidated Financial Statements Date of Acquisition
Asset vs. Stock Acquisition (which one have we been dealing with exclusively for the last
third of this class?)
Stock acquisition parties
o Parent
o Subsidiary
o Noncontrolling interest
Affiliated companies
Consolidated vs. Parent Only financial statements
Controlling interest
Definition of control
o Voting interest entities (Non-VIE) under US GAAP
o Variable interest entities (VIE) under US GAAP
o IFRS
Purpose of consolidated financial statements
Consolidated statements required at acquisition date
Intercompany eliminations
o Investment in subsidiary/subsidiary equity accounts
o Intercompany receivables and payables
o Intercompany advances
o Intercompany interest expense and revenue
o Intercompany dividends
o Intercompany management fees
o Intercompany sales
Computation and Allocation of Differences Schedule
o Implied Value = Book Value
o Implied Value > Book Value 1
Chapter 3 uses simplified cases. Remember that we added some special cases and complications in later chapters.
ACG 4803
Fall 2015
Altiero (Poziemski)
o Implied Value < Book Value1
o Minority interest vs. wholly owned subsidiary
Chapter 4: Consolidated Financial Statements After Acquisition
Rule of thumb for when to use each method
o Cost
o Partial Equity
o Complete Equity
Actual rule for when to use each method
o Cost
o Partial Equity
o Complete Equity
Why does it matter whether company issues parent-only financial statements when
determining appropriate accounting method?
Journal entries that adjust Investment in S on Parent books for the cost method
o Initial investment
o Shares of S purchased
o Shares of S sold
o Parent share of liquidating dividends
Journal entries that adjust Investment in S on Parent books for the partial equity method
o Initial investment
o Shares of S purchased
o Shares of S sold
o Parent share of dividends
o Parent share of income (loss)
Journal entries that adjust Investment in S on Parent books for the complete equity
method
o Initial investment
o Shares of S purchased
o Shares of S sold
o Parent share of dividends
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ACG 4803
Fall 2015
Altiero (Poziemski)
o Parent share of income (loss)
o Unrealized intercompany profits WILL NOT BE TESTED
o Impairment loss on goodwill
o Depreciation or amortization of differences between implied and book values
Consolidated financial statements required after date of acquisition
Eliminating entries on consolidation working papers for cost method
o Eliminate current year parent share of liquidating dividends
o Entry to convert cost to equity
o Eliminate Investment in S
o Allocate difference between implied and book
Eliminating entries on consolidation working papers for partial equity method
o Eliminate current year parent share of dividends
o Eliminate current year parent share of income (loss)
o Eliminate Investment in S
o Allocate difference between implied and book
Eliminating entries on consolidation working papers for complete equity method
o Eliminate current year parent share of dividends
o Eliminate current year parent share of income (loss)
o Eliminate current year parent share of allocated differences that affect income
statement
o Eliminate Investment in S
o Allocate difference between implied and book
Consolidated working papers with three sections
o Income statement
o Retained earnings statement
o Balance sheet
Calculation of net income attributable to noncontrolling interest
Interim acquisition of subsidiary
Consolidated statement of cash flows
ACG 4803
Fall 2015
Altiero (Poziemski)
Chapter 5: Allocation and Depreciation of Differences between Implied and Book Values
Allocation of difference between implied and book
o Allocation to assets and liabilities
o Allocation of residual amounts
The peculiar bargain purchase scenario
o Fair value > implied value > book value
Differences that affect net income
o Eliminating entry when difference hits income statement
o Eliminating entry when difference hit income statement in prior period
Cost
Partial equity
Complete equity
Types of differences that affect net income
o Equipment/Depreciation
o Inventory/COGS
o Goodwill/Impairment loss
Effect of differences on income attributable to noncontrolling interest
Analytical calculation of consolidated retained earnings
Special case allocations
o Allocations that decrease account balances
o Allocations to long term debt
o Allocation to accumulated depreciation
Disposal of depreciable assets
Push down accounting
o What is it?
o When do we use it?
ACG 4803
Fall 2015
Altiero (Poziemski)
SUGGESTED ADDITIONAL PRACTICE
Chapter 3: Consolidated Financial Statements Date of Acquisition
Match the terms in the list to the definitions below. Each term may be used only once.
A.
B.
C.
D.
E.
F.
Parent
Subsidiary
Majority owned
Wholly owned
Totally held
Elimination
G. Workpaper
H. Consolidated statements
I. Difference between
implied and book value
J. Goodwill
K.
L.
M.
N.
O.
Adjustment
Intercompany transaction
Investment in S
P-only statement
Noncontrolling interest
_____ 1.
Statements prepared for the parent company and its subsidiaries
_____ 2.
The excess of the value implied by the purchase price over the fair value of the subsidiary's
identifiable net assets
_____ 3.
A parent owns at least 50 percent of a subsidiary
_____ 4.
An entry made to remove P's investment account and P's share of Ss equity accounts
_____ 5.
The portion of equity in S not owned by P
_____ 6.
A company that is owned in whole or in part by another company
_____ 7.
P loans money to S
_____8.
The parent company owns 100 percent of the subsidiary
_____9.
A document used by the parent in the preparation of consolidated financial statements
_____10.
The account on P's books that reflects its interest in S
_____11.
The parent company owns and controls substantially all of the subsidiary
_____12.
A company which owns a majority of the stock of one or more companies
_____13.
Financial statements prepared primarily for the creditors of the parent company
_____14.
An entry made to assure reciprocity (convert to equity) between the parent and subsidiary
companies
_____15.
The amount which arises when the parent company's cost is not the same as its share of the
recorded value of the subsidiary company's net assets
ACG 4803
Fall 2015
Altiero (Poziemski)
Calculate the difference between the value implied by the purchase price and book value in each of the
separate cases below
S Company Equity Balances
Case
Percent of
Stock Owned
Investment
Cost
Other
Contributed
Capital
$350,000
Retained
Earnings
$200,000
a.
100%
$1,200,000
Common
Stock
$600,000
b.
85%
850,000
500,000
200,000
100,000
c.
90%
1,000,000
750,000
300,000
(250,000)
d.
60%
600,000
350,000
-0-
300,000
A parent-subsidiary relationship may be distinguished from a merger by:
a. the number of affiliates joining.
b. the resulting legal entity or entities.
c. the price paid for the subsidiary.
d. whether the affiliation was accomplished with a cash payment or stock transaction.
How does P record its investment in S?
a. At the fair market value of the assets received.
b. At the fair market value of the assets given up.
c. At the book value of the assets received.
d. At the book value of the assets given up.
Why does the parent company use a worksheet in the preparation of consolidated financial statements?
a. Because there are no consolidated journals and ledgers.
b. Because certain intercompany transactions must be eliminated.
c. Because there might be a difference between the value implied by the purchase price and the value
of the net assets.
d. All of these
ACG 4803
Fall 2015
Altiero (Poziemski)
The difference between value implied by the purchase price and book value results when the:
a. book value of the net assets acquired is different from the fair value of the identifiable assets
acquired.
b. fair value of the net assets acquired is different from the fair value of the net assets used .
c. book value of the net assets acquired is different from the fair value of the consideration paid.
d. book value of the net assets acquired is different from the book value of the assets used.
In whose books are elimination entries recorded?
a. Both Ps and Ss
b. Neither Ps nor Ss
c. Ps only
d. Ss only
From the book: E3-3; E3-4; E3-6
Chapter 4: Consolidated Financial Statements After Acquisition
Match the terms in the list to the definitions below. Each term may be used only once.
A.
B.
C.
D.
E.
Cost method
Partial equity method
Complete equity method
Intercompany revenue
Interim acquisition
F.
G.
H.
I.
J.
Investment elimination
Reciprocity
No significant influence
Significant influence
Effective control
K. Computation and
allocation schedule
L. Consolidated retained
earnings
M. Investment in associates
_____ 1.
An amount that reflects the consolidated entitys portion of Ss undistributed income since
acquisition
_____ 2.
The total of Ps retained earnings plus the portion of Ss retained earnings since acquisition
_____ 3.
The technique where only Ps share of Ss declared dividends is recorded
_____ 4.
The workpaper entry which offsets Ps asset account with Ss equity accounts
_____ 5.
Income given by one affiliate in a business combination to another affiliate
_____ 6.
One corporation has between 20 and 50 percent of the stock of another corporation
_____ 7.
A technique to determine how to divide up the difference between implied and book value
_____ 8.
A way of recording a business combination where Ps share of Ss income and dividends are
recorded
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ACG 4803
Fall 2015
Altiero (Poziemski)
_____ 9.
One corporation owns less than 20 percent of another corporation
_____10.
A technique of accounting for a combination where the effects of all intercompany transactions
are reflected in Ps books
_____11.
P buys a controlling interest in S at some time other than the end of Ss fiscal year
_____12.
P owns more than 50 percent of Ss outstanding stock
_____13.
IFRS term for equity method investments
If a corporation shows effective control over another corporation, the first corporation owns:
a. less than 20 percent of the second corporation.
b. between 20 and 50 percent of the second corporation.
c. over 50 percent of the second corporation.
d. 100 percent of the second corporation.
The primary difference between the partial equity and the complete equity methods of accounting for
business combinations is:
a. under the complete equity method, the combination assumes that the two businesses have always
been together.
b. under the complete equity method, the parent records amortization and/or depreciation to account
for the difference between implied and book value.
c. under the partial equity method the parent records its share of dividends as income.
d. there is no difference between the partial equity and full equity methods.
What is the purpose of the consolidated statements workpaper?
a. The workpaper allows for year-end adjustments of accruals and deferrals.
b. The workpaper takes the balances from the consolidated ledger to prepare the consolidated financial
statements.
c. The workpaper helps the accountant determine the amount of consolidated income taxes.
d. The workpaper accumulates, classifies, and arranges information from the trial balances of the
affiliated companies.
ACG 4803
Fall 2015
Altiero (Poziemski)
Under the cost method, to establish reciprocity (convert to equity), Ps share:
a. of the difference between Ss retained earnings at the beginning and the end of the year must be
added to Ps investment.
b. of the difference between Ss reported income and the noncontrolling interest income must be
added to Ps investment.
c. of the difference between Ss retained earnings at the beginning of the year and at acquisition must
be added to Ps investment.
d. of Ss dividends must be subtracted from Ps investment.
Under the equity methods, the elimination entry to establish reciprocity (convert to equity) between Ps
investment and Ss equity:
a. will add Ps share of Ss undistributed income to Ps investment.
b. does not have to be made.
c. will have S record its noncontrolling interest in income.
d. will have S decrease its retained earnings to reflect income not distributed.
In a consolidated statements workpaper, which items are carried forward from one section to another?
a. Ps retained earnings, but not Ss
b. The total of the income section to the retained earnings section and then the total of the retained
earnings section to the balance sheet section.
c. The eliminations must balance for each section in order to carry them forward.
d. Each section on the workpaper is separate, so no numbers are carried forward.
From the book: E4-3, E4-4, E4-5
ACG 4803
Fall 2015
Altiero (Poziemski)
Chapter 5: Allocation and Depreciation of Differences between Implied and Book Values
Match the terms in the list to the definitions below. Each term may be used only once.
A.
B.
C.
D.
E.
Difference between implied and book value
Excess of fair value over book value
Excess of fair value over implied value
Excess of implied value over fair value
Partial equity method
F.
G.
H.
I.
J.
Complete equity method
Allocation of difference
Push down accounting
Cost method
Goodwill
_____ 1.
A technique used to assign the difference between implied and book value to Ss assets and
liabilities
_____ 2.
What P pays for Ss net assets is more than the fair value of those assets
_____ 3.
P records its share of Ss income and dividends on its books
_____ 4.
S records the difference between implied and book value on its books
_____ 5.
[Ps purchase price divided by its share of S] minus book value of S equity
_____ 6.
There is a positive difference between what S has on its books for the value of its assets and
the market value of those assets
_____ 7.
P records only its share of Ss dividends
_____ 8.
P has paid less than fair value for Ss net assets
_____ 9.
An account used when the fair value of Ss net assets is less than the cost paid by P
_____10.
P records its share of Ss income and dividends, and also an entry to record the amortization
and depreciation of the difference between implied and book value.
The difference between implied and book value may be allocated to:
a. any assets or liabilities on Ss books.
b. any assets or liabilities on Ps books.
c. only to Ss land.
d. only to Ps land.
If there is an excess of fair value over cost:
a. P must allocate the difference to Ss assets as increases to their book values.
b. P must include goodwill in the elimination entry.
c. S must revalue its assets to their fair values.
d. P must recognize a gain.
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ACG 4803
Fall 2015
Altiero (Poziemski)
In the elimination entry for the partial equity method, the entry to eliminate Ps investment in S:
a. is the same as the cost method.
b. adjusts the difference between implied and book value.
c. is not necessary.
d. does not have a difference between implied and book value.
When S disposes of an asset prematurely and records a gain, how does that affect the consolidated
financial statements?
a. The workpaper must include an entry to adjust Ss gain or loss to reflect the gain or loss to the
consolidated entity.
b. S cannot record a gain on the sale of the asset.
c. P records on its books the gain on the sale.
d. The workpaper must include an entry to eliminate Ss gain against Ps reported income.
What is the SECs position on push down accounting?
a. The SEC requires that push down accounting be used for all business combinations.
b. The SEC requires that push down accounting be used for business combinations where P buys 80
percent or more of S.
c. The SEC requires that push down accounting be used for business combinations where P buys 95
percent or more of S.
d. The SEC is silent as to push down accounting.
From the book: E5-8, E5-12, E5-14, E5-15
DISCLAIMER
I have provided this guide to help direct your study toward the most important concepts covered
in class. While I have not intentionally omitted any topics or information, please note that all
material covered in class, the assigned reading, and on the homework is fair game for the exam.
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