Student Learning Outcomes

Transcription

1 Chapter 2 Topic 1 Consolidated Statements: Date of Acquisition Dr. Chula King Advanced Accounting The University of West Florida 1 Student Learning Outcomes Net asset acquisition versus stock acquisition Different levels of investment Criteria for consolidated financial statements The process of consolidation Recording the Investment Determination and Distribution of Excess Schedule Elimination entries Worksheet procedures Concluding comments 2 Topics of Presentation Topic 1 Overview Net asset acquisition versus stock acquisition Different levels of investment Criteria for consolidated financial statements Topic 2 100% acquisition: Price = FMV Topic 3 100% acquisition: Price > FMV Topic 4 100% acquisition: Price < FMV Topic 5 Less than 100% acquisition 3 1

2 Net Asset Acquisition versus Stock Acquisition Net asset acquisition Assets (at FMV) Goodwill Liabilities (at FMV) Cash or consideration given Stock acquisition Investment in Company Cash or consideration given 4 Let s Look at Exercise 2 Book value equals fair market value except for equipment which is understated by $20,000. Part 1 assume that the net assets are acquired for $530,000. Part 2 assume that 100% of the outstanding stock is purchased for $530, Entry to Record Net Asset Acquisition Cash 20,000 Accounts receivable 70,000 Inventory 100,000 Property, plant and equipment 290,000 Current liabilities 80,000 Bonds payable 100,000 Cash 530,

3 Glass Company s Balance Sheet Net Asset Acquisition Cash (540,000+20, ,000) $ 30,000 Accounts receivable (50,000+70,000) 120,000 Inventory (50, ,000) 150,000 PPE (230, ,000) 520,000 Current liabilities (140,000+80,000) $ 220,000 Bonds payable (250, ,000) 350,000 Common stock ($100 par) 200,000 Retained earnings 280,000 7 Entry to Record Stock Acquisition Investment in Plastic 530,000 Cash 530,000 8 Glass Company s Balance Sheet Stock Acquisition Cash (540, ,000) $ 10,000 Accounts receivable 50,000 Inventory 50,000 Investment in Plastic 530,000 PPE 230,000 Total $870,000 Current liabilities $140,000 Bonds payable 250,000 Common stock ($100 par) 200,000 Retained earnings 280,000 Total $870,

4 Balance Sheet Comparison Net Asset Stock Cash $ 30,000 $ 10,000 Accounts receivable 120,000 50,000 Inventory 150,000 50,000 Investment in Plastic 530,000 PPE 520, ,000 $870,000 Current liabilities $ 220,000 $140,000 Bonds payable 350, ,000 Common stock ($100 par) 200, ,000 Retained earnings 280, ,000 $870, Assets = Liabilities + Owners Equity Assets Liabilities = Owners Equity The Issue Net Asset Acquisition Stock Acquisition I control the company I control the company, assuming > 50% 11 The Solution Consolidation Assets Liabilities = Equity The investment account is eliminated against Plastic s stockholders equity and excess of FMV over BV. Investment in Plastic $530,000 Common stock 150,000 Retained earnings 130,000 Excess FMV over BV 250,000 PPE Undervaluation $20,000 Goodwill $230,

5 What is left are the net assets of Plastic, increased to their FMV The Result Investment in Plastic $530,000 Cash $ 20,000 Accounts receivable 70,000 Inventory 100,000 PPE 290,000 Current liabilities (80,000) Bonds payable (100,000) 13 Consolidated Balance Sheet Glass Plastic Cash $ 10,000 $ 20,000 A/R 50,000 70,000 Inventory 50, ,000 Invest. in Plastic 530,000 PPE 230, ,000 Goodwill Current Liab. (140,000) (80,000) Bonds Payable (250,000) (100,000) C/S-Glass (200,000) C/S-Plastic (150,000) R/E-Glass (280,000) R/E-Plastic (130,000) DR CR 280, ,000 20, , , , , ,000 Consol. B/S 30, , , , ,000 (220,000) (350,000) (200,000) (280,000) 14 Balance Sheet Net Asset Acquisition Cash (540,000+20, ,000) $ 30,000 Accounts receivable (50,000+70,000) 120,000 Inventory (50, ,000) 150,000 PPE (230, ,000) 520,000 Current liabilities (140,000+80,000) $ 220,000 Bonds payable (250, ,000) 350,000 Common stock ($100 par) 200,000 Retained earnings 280,

6 Different Levels of Investment <20% Passive Investment Investment recorded at cost and accounted for using cost method Dividends recorded as income Year end adjustment values investment at market Between 20% and 50% Influential Investment Investment recorded at cost and accounted for using equity method Dividends recorded as reduction in investment account Year end adjustment recognizes share of subsidiary income >50% Controlling Interest Investment recorded at cost, including direct acquisition costs Financial statements are consolidated 16 Criteria for Consolidated Statements Purpose to present information as though parent and subsidiary were one company Generally, when parent owns >50% voting stock Where control exists without controlling interest Parent can appoint or elect majority of Board Directly Through large controlling voting interest Exercisable or convertible securities Parent is only general partner in limited partnership Parent has unilateral ability to assume role of general partner in a limited partnership. 17 What s Next Topic 2 100% acquisition: Price = FMV Topic 3 100% acquisition: Price > FMV Topic 4 100% acquisition: Price < FMV Topic 5 Less than 100% acquisition 18 6