FAR 4_04

  1. An entity buys another company in a business combination. What journal entry accts are used if (1) Cash is paid vs (2) Stock is issued? What price is used?
    • Purchased using cash
    • [DR] Investment in Subsidiary
    • … [CR] Cash (for the fair value of the sub)
    • Purchased using CoA’s stock
    • [DR] Investment in Subsidiary
    • … [CR] Common Stock (at par, but the total issue price is the current market price of the stock on the date of acquisition)
    • … [CR] APIC (the difference between current market price and par value of CS)
  2. How is goodwill calculated when CoA purchases CoB? What are the journal entry accts for the purchase?
    • Purchase Price
    • - Book Value of CoB (the net assets, or equity of CoB)
    • - Fair Value Adjustment for identifiable tangible and intangible assets
    • = Goodwill (any amount remaining)
  3. CoA has purchased a controlling interest in CoB. During the consolidation process, what journal entry accts are used to adjusted the combined financial statements immediately after purchase (do not include business transactions such as inventory purchases)?
    • C – A – R --- I – N --- B – I – G
    • These adjustments are valued as of the acquisition date
    • [DR] Common Stock (of CoB)
    • [DR] APIC (of CoB)
    • [DR] Retained Earnings (of CoB)
    • … [CR] Investment in Subsidiary (from CoA)
    • … [CR] Non-controlling interest (at fair value for their portion, put in the equity section)
    • [DR] Balance sheet adjustments to make the assets purchased from CoB at fair value
    • [DR] Identifiable intangible assets to make the assets purchased from CoB at fair value
    • [DR] Goodwill
  4. CoA purchases a controlling interest in CoB. CoA issues new stock for the purchase and incurs registration and issuance costs (SEC filing fees, etc). CoA also incurs legal fees for contract creation and review. How are these costs accounted?
    • The costs involved in the new stock issuance are taken out of APIC and reduce the total amount received.
    • All other fees not part of stock issuance, legal, accounting, commissions on brokering the sale, are considered expenses.
  5. What is a contingency consideration when part of the acquisition of a subsidiary? How is it accounted (1) during the acquisition, and (2) during consolidation of the financial statements?
    • An obligation of the parent company to transfer assets or equity to the former shareholders of the subsidiary of certain conditions are met (example = the sub meets revenue goals during the year).
    • The parent estimates the contingent liability and enters it on the acquisition date
    • [DR] Investment in Subsidiary
    • … [CR] Est. Liability for Contingent Consideration
    • During consolidation, the liability for contingent consideration is added to Goodwill and removed during consolidation
    • C – A – R --- I – N --- B – I – G
    • These adjustments are valued as of the acquisition date
    • [DR] Common Stock (of CoB)
    • [DR] APIC (of CoB)
    • [DR] Retained Earnings (of CoB)
    • … [CR] Investment in Subsidiary (from CoA) [this includes the contingent liability]
    • … [CR] Non-controlling interest (at fair value for their portion, put in the equity section)
    • [DR] Balance sheet adjustments to make the assets purchased from CoB at fair value
    • [DR] Identifiable intangible assets to make the assets purchased from CoB at fair value
    • [DR] Goodwill (this now includes the contingent liability)
Author
BethM
ID
338206
Card Set
FAR 4_04
Description
Becker Review 2018
Updated