Allocation and Depreciation of Differences Between Implied and Book Values Acquisition
Allocation and Depreciation of Differences Between Implied and Book Values Acquisition
Slide
5-1
Learning
Learning Objectives
Objectives
1. Calculate the difference between implied and book values and allocate to the
subsidiary’s assets and liabilities.
2. Describe FASB’s position on accounting for bargain acquisitions.
3. Explain how goodwill is measured at the time of the acquisition.
4. Describe how the allocation process differs if less than 100% of the subsidiary is
acquired.
5. Record the entries needed on the parent’s books to account for the investment under
the three methods: the cost, the partial equity, and the complete equity methods.
6. Prepare workpapers for the year of acquisition and the year(s) subsequent to the
acquisition, assuming that the parent accounts for the investment using the cost, the
partial equity, and the complete equity methods.
7. Understand the allocation of the difference between implied and book values to long-
term debt components.
8. Explain how to allocate the difference between implied and book values when some
assets have fair values below book values.
9. Distinguish between recording the subsidiary depreciable assets at net versus gross
fair values.
10. Understand the concept of push down accounting.
Slide
5-2
Allocation
Allocation of
of Difference
Difference Between
Between Implied
Implied
and
and Book
Book Values:
Values: Acquisition
Acquisition Date
Date
Slide
5-3
LO 1 Computation and Allocation of Difference.
Allocation
Allocation of
of Difference
Difference Between
Between Implied
Implied
and
and Book
Book Values:
Values: Acquisition
Acquisition Date
Date
Slide
5-4
LO 1 Computation and Allocation of Difference.
Allocation
Allocation of
of Difference
Difference Between
Between Implied
Implied
and
and Book
Book Values:
Values: Acquisition
Acquisition Date
Date
Slide
5-6
LO 2 FASB’s position on accounting for bargain acquisitions.
Allocation
Allocation of
of Difference
Difference Between
Between Implied
Implied
and
and Book
Book Values:
Values: Acquisition
Acquisition Date
Date
Review Question
In the event of a bargain acquisition (after carefully
considering the fair valuation of all subsidiary assets and
liabilities) the FASB requires the following accounting:
a. an ordinary gain is reported in the financial
statements of the consolidated entity.
b. an ordinary loss is reported in the financial
statements of the consolidated entity.
c. negative goodwill is reported on the balance sheet.
d. assets are written down to zero value, if needed.
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5-8
LO 4 Allocation of difference in a partially owned subsidiary.
Allocation
Allocation of
of Difference
Difference
E5-1: A. Prepare a Computation and Allocation Schedule for the
difference between book value of equity acquired and the value
implied by the purchase price.
85% 15% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 540,000 $ 95,294 $ 635,294
Book value of equity acquired:
Common stock 340,000 60,000 400,000
Retained earings 119,000 21,000 140,000
Total book value 459,000 81,000 540,000
Difference between implied and book value 81,000 14,294 95,294
Marketable securities (21,250) (3,750) (25,000)
Equipment (17,000) (3,000) (20,000)
Balance 42,750 7,544 50,294
Record new goodwill (42,750) (7,544) (50,294)
Balance $ 0 $ 0 $ 0
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LO 4 CAD Schedule for less than wholly owned subsidiary.
Allocation
Allocation of
of Difference
Difference
E5-1 (variation): Prepare the worksheet entries to eliminate the
investment, recognize the noncontrolling interest, and to allocate
the difference between implied and book.
Slide
5-11
LO 4 Allocation of difference in a partially owned subsidiary.
Allocation
Allocation of
of Difference
Difference
E5-1 (variation): Prepare a
Computation and Allocation
85% 15% 100%
Schedule. Parent NCI Total
Share Share Value
Purchase price and implied value $ 470,000 $ 82,941 $ 552,941
Book value of equity acquired:
Common stock 340,000 60,000 400,000
Retained earings 119,000 21,000 140,000
Total book value 459,000 81,000 540,000
Difference between implied and book value 11,000 1,941 12,941
Marketable securities (21,250) (3,750) (25,000)
Equipment (17,000) (3,000) (20,000)
Balance (excess of FV over implied value) (27,250) (4,809) (32,059)
Pam's gain 27,250
Increase noncontrolling interest to fair
value of assets 4,809
Total allocated gain 32,059
Balance 0 0 0
Slide
5-12
LO 4 Allocation of difference in a partially owned subsidiary.
Allocation
Allocation of
of Difference
Difference
E5-1 (variation): Prepare the worksheet entries.
Slide
5-13
LO 4 Allocation of difference in a partially owned subsidiary.
Effect
Effect of
of Allocation
Allocation and
and Depreciation
Depreciation of
of Differences
Differences on
on
Consolidated
Consolidated Net
Net Income:
Income: Year
Year Subsequent
Subsequent To
To Acquisition
Acquisition
Slide
5-14
LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
P5-4: On January 1, 2010, Porter Company purchased an 80%
interest in Salem Company for $850,000. At that time, Salem
Company had capital stock of $550,000 and retained earnings of
$80,000. Differences between the fair value and the book value of
the identifiable assets of Salem Company were as follows:
The book values of all other assets and liabilities of Salem Company
were equal to their fair values on January 1, 2010. The equipment
had a remaining life of five years. The inventory was sold in 2010.
Year of
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5-15
Acquisition LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
P5-4: Salem Company’s net income and dividends declared in 2010
and 2011 were as follows: 2010 Net Income of $100,000; Dividends
Declared of $25,000; 2011 Net Income of $110,000; Dividends
Declared of $35,000.
Entries recorded on the books of Porter to reflect the acquisition of
Salem and the receipt of dividends for 2010 are as follows:
Cash 20,000
Dividend income ($25,000 x 80%) 20,000
Year of
Slide
5-16
Acquisition LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Year of
Slide
5-17
Acquisition LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Year of
Slide
5-18
Acquisition LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Year of
Slide
5-19
Acquisition LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-20
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-21
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-23
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
P5-4: D. 2012 Year Subsequent of Acquisition
Eliminations Consolidated
Income Statement Porter Salem Debit Credit NCI Balances
Sales $ 1,100,000 $ 450,000 $ 1,550,000
Dividend income 48,000 48,000
Total revenue 1,148,000 450,000 1,550,000
Cost of goods sold 900,000 200,000 1,100,000
Depreciation expense 40,000 30,000 26,000 96,000
Impairment loss 47,500 47,500
Other expenses 60,000 50,000 110,000
Total cost and expense 1,000,000 280,000 1,353,500
Net income 148,000 170,000 196,500
Noncontrolling interest 19,300 (19,300)
Net income $ 148,000 $ 170,000 $ 121,500 $ 19,300 $ 177,200
Retained Earnings Statement
Retained earnings, 1/1/12 500,000 230,000 32,000 120,000 546,400
Porter 41,600
Salem 230,000
Net income 148,000 170,000 121,500 19,300 177,200
Dividends declared (90,000) (60,000) 48,000 (12,000) (90,000)
Retained earnings, 12/31/12 $ 558,000 $ 340,000 $ 425,100 $ 168,000 $ 7,300 $ 633,600
Slide Subsequent
5-24 Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
P5-4: D. 2012 Year Subsequent of Acquisition
Eliminations Consolidated
Income Statement Porter Salem Debit Credit NCI Balances
Cash $ 70,000 $ 65,000 $ 135,000
Accounts receivable 260,000 190,000 450,000
Inventory 240,000 175,000 415,000
Investment in Sid 850,000 120,000 970,000
Difference (IV & BV) 432,500 432,500
Land 320,000 65,000 385,000
Plant and equipment 360,000 280,000 130,000 78,000 692,000
Goodwill 197,500 47,500 150,000
Total assets $ 1,780,000 $ 1,030,000 $ 2,227,000
-
Accounts payable $ 132,000 $ 110,000 $ 242,000
Notes payable 90,000 30,000 120,000
Common stock 1,000,000 550,000 550,000 1,000,000
Retained earnings 558,000 340,000 425,100 168,000 7,300 633,600
1/1 NCI in net assets 8,000 242,500 224,100
10,400
12/31 NCI in net asset 231,400 231,400
Total liab. & equity $ 1,780,000 $ 1,030,000 $ 1,938,500 $ 1,938,500 $ 2,227,000
Subsequent
Slide
5-25
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-26
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-27
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-28
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Cost
Cost Method
Method
Subsequent
Slide
5-29
Year LO 4 Allocation of difference in a partially owned subsidiary.
Consolidated
Consolidated Statements
Statements –– Partial
Partial and
and
Complete
Complete Equity
Equity Methods
Methods
Slide
5-31
LO 7 Allocating difference to long-term debt.
Additional
Additional Considerations
Considerations Relating
Relating to
to Treatment
Treatment of
of
Difference
Difference Between
Between Implied
Implied and
and Book
Book Values
Values
Slide
5-32
LO 7 Allocating difference to long-term debt.
Additional
Additional Considerations
Considerations Relating
Relating to
to Treatment
Treatment of
of
Difference
Difference Between
Between Implied
Implied and
and Book
Book Values
Values
Slide
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LO 8 Allocating when the fair value is below book value.
Additional
Additional Considerations
Considerations Relating
Relating to
to Treatment
Treatment of
of
Difference
Difference Between
Between Implied
Implied and
and Book
Book Values
Values
Slide
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LO 8 Allocating when the fair value is below book value.
Cost
Allocation
Allocation of
of Difference
Difference Method
Slide
5-35
LO 8 Allocating when the fair value is below book value.
Cost
Allocation
Allocation of
of Difference
Difference Method
Equipment,net 4,000
Depreciation expense ($20,000 / 5 years) 4,000
Slide
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LO 8 Allocating when the fair value is below book value.
Cost
Allocation
Allocation of
of Difference
Difference Method
Slide
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LO 8 Allocating when the fair value is below book value.
Allocation
Allocation of
of Difference
Difference
Reporting Accumulated Depreciation in Consolidated
Financial Statements as a Separate Balance
E5-7: On January 1, 2011, Packard Company purchased an 80%
interest in Sage Company for $600,000. On this date Sage Company
had common stock of $150,000 and retained earnings of $400,000.
Sage Company’s equipment on the date of Packard Company’s
purchase had a book value of $400,000 and a fair value of
$600,000. All equipment had an estimated useful life of 10 years on
January 2, 2006.
Required: Prepare the December 31 consolidated financial
statements workpaper entries for 2011 and 2012, recording
accumulated depreciation as a separate balance.
Slide
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LO 9 Depreciable assets at net and gross values.
Allocation
Allocation of
of Difference
Difference
Slide
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LO 9 Depreciable assets at net and gross values.
Cost & Partial
Allocation
Allocation of
of Difference
Difference Equity Method
Slide
5-40
LO 9 Depreciable assets at net and gross values.
Cost & Partial
Allocation
Allocation of
of Difference
Difference Equity Method
Slide
5-43
LO 10 Push down of accounting to the subsidiary’s books.
Push
Push Down
Down Accounting
Accounting
Slide
5-44
LO 10 Push down of accounting to the subsidiary’s books.
Push
Push Down
Down Accounting
Accounting
In addition, the SEC staff expresses the view that the existence of
outstanding public debt, preferred stock, or a significant
noncontrolling interest in a subsidiary might impact the parent
company’s ability to control the form of ownership. In these
circumstances, push down accounting, though not required, is an
acceptable accounting method.
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LO 10 Push down of accounting to the subsidiary’s books.
Copyright
Copyright
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