Sun’s January 1, 2012, stockhold­ers’ equity accounts are eliminated against the book value portion of the parent’s investment account. Because it applies the equity method, Parrot recognizes earnings of $160,000. For the definite lived assets acquired in the combination (patented technology and equipment), we assume that straight-line amortization with no salvage value is appropriate. the consolidation currency Package data entry Enter the purchase price in schedules PA2100 and PA2300 P Enter the date for the acquisition on schedules PA2350 if the parent¶s currency is different from the consolidation currency Consolidation scope Enter the new financial rate of the subsidiary P Manual journal entries: As an illustration, assume that Skeptical, Inc., acquires 100 percent of the voting stock of Rosy Pictures Company on January 1, 2009, for the following consideration: i. S is purchased on the reporting date, therefore there are no post-acquisition earnings to include in the group amount. However, the SFAS 141R acquisition method now requires a newly acquired subsidiary to be recorded using fair values, not costs. For external reporting, consolidation of a subsidiary becomes necessary whenever control exists. Liabilities = $1,428,000. This issue has become especially significant in recent years because of a rash of management- led buyouts as well as corporate reorganizations. Until the FASB takes action, though, application is required only when the subsidiary desires to issue securities (stock or debt) to the public as regulated by the SEC. A second worksheet entry (Entry A) eliminates the remaining $200,000 portion of the January 1,2009, Investment in Sun account, allowing the spe­cific allocations to be included along with any goodwill. As shown in Exhibit 3.13, the remainder of the worksheet entries follow the same basic pattern as that illustrated previously for the year of acquisition (Exhibit 3.10). If adjusted should the $700,000 increase be reported as a gain by the subsidiary or as an addition to contributed capital? Cash contingency = $80,000 × 30% × (1/[1 + .04]) = $23,077, ii. Sun’s oper­ations caused a $220,000 increase in retained earnings. The series of entries just described successfully brings together the separate financial statements of these two organi­zations. ii. Step 2: Determine the acquisition date. Sun’s $200,000 excess acquisition-date fair value over book value is allocated to Sun’s assets and liabilities based on their fair values at the date of acquisition. Currently, primary guidance concerning push-down accounting for external reporting pur­poses is provided by the Securities and Exchange Commission (SEC). an opposite journal entry to avoid double counting the net assets of a subsidiary’s pre-acquisition equity o Dr Share capital From group’s perspective, we should present consolidated entity as parent’s equity + change in post-acquisition equity of subsidiary (changes in subsidiary equity after acquisition date) Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date. The residual allocation shown in Exhibit 3.2. Thus, a question arises in this example as to why the parent company figures alone equal the consolidated balances of both operations. Excess amortization expenses relating to acquisition-date fair-value adjustments are individually recorded for the current period. Exhibit 3.6 analyzes these changes and shows the components of the Investment in Sun Com­pany account balance as of December 31, 2012. Stock contingency = $10,000 × 20% × (1/[1 + .04]) = $1,923. The Investment in Sun Company and the Equity in Subsidiary Earnings are both removed. Consolidated revenues less consolidated expenses. Apparently, this company believes that the information derived from using the equity method is useful in its evaluation of Sun. Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary by exchanging 120,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. Thus, elimination of the subsidiary’s entire Retained Earnings is necessary; a portion was earned prior to the acqui­sition and the remainder has already been recorded by the parent. v. Intercompany transactions such as dividend payments and the receivable/payable are offset. The initial value method figures reported by the parent effectively are converted into equity method balances. Note that Parrot separately reports net income of $693,000 as well as ending retained earnings of $1,413,000, figures that are identical to the totals generated for the consolidated entity. The $80,000 residual is attributed to goodwill. In the case of wholly owned subsidiary, the acquirer (parent) shall recognize goodwill as of the acquisition date in a business combination, measured as the excess of the consideration transferred (at fair value) over the net of the identifiable assets acquired and the liabilities assumed and the contingent liabilities, based on acquisition fair value (the equity of the subsidiary). Apparently, the SEC believes that a change in ownership of that degree justifies a new basis of reporting for the subsidiary’s assets and liabilities. Unlike the equity method, no adjustments are recorded in the parent’s investment account in connection with the current year operations, subsidiary div­idends, or amortization of any fair-value allocations. Furthermore, differences with the equity method (both on the parent company records and with the consolidation entries) are highlighted on each of the worksheets. These questions represent just a few of the difficult issues cur­rently being explored. Is the journal in the parent: Cr Cash 1m Dr Investments 100k Dr … Because the equity method amortization was eliminated within Entry I, “Entry E” (for Expense) now records the 2009 expense attributed to each of the specific account allocations (see Exhibit 3.3). Although the consolidated figures to be reported can be computed as just shown, accountants normally prefer to use a worksheet. The receipt of the dividend causes the cash balance of the investor to increase. Subsidiary equity balances generated prior to the acquisition are not relevant to the business combination and should be deleted. The parent’s Equity in Subsidiary Earnings account is, therefore, an accurate rep­resentation of Sun’s effect on consolidated net income. Conversion of the Parent’s Retained Earnings to a Full-Accrual (Equity) Basis: Consolidated financial statements require a full accrual-based measurement of both income and retained earnings. The fair value of Sun’s Equipment account was $30,000 less than book value. To help clarify the consolidation process required under each of the three accounting methods, Exhibit 3.14 describes the purpose of each worksheet entry first during the year of acquisition and second for any period following the year of acquisition. In actual practice, worksheet entries are usually identified numerically. Parrot’s application of the equity method, as shown in this series of entries, causes the Investment in Sun Company account balance to rise from $800,000 to $853,000 ($800,000 – $40,000 + $100,000 – $7,000). Acquisition Made during the Current Year: As a basis for this illustration, assume that Parrot Company obtains all of the outstanding com­mon stock of Sun Company on January 1, 2009. Lydia's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $690,000 and had a 10-year remaining life. The same $100,000 equity income figure appears within the parent’s income statement. The parent’s retained earnings (in periods after the initial year of the combination). o E.g. As with the previous Entry S in Exhibit 3.5, the $600,000 component of the investment account is eliminated against the beginning stockholders’ equity account of the subsidiary. Entry of P company on the date of Acquisition:Investment in S company 100,000 Cash 100,000 9. In this first illustration, Parrot has adopted the equity method. Worksheet entry offsets the $ 100,000 equity income recorded currently by Parrot ( $ 160,000 $... Non-Controlling interest represents the amount of goodwill that must recognised on the worksheet! To close the deal, agreements for the numerical changes created by the entity... 2,900 million parent makes to record the acquisition date are recognized but only after adjustment annual. 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