Business combination. No.3 PDF

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How often does the consolidation of a parent and a subsidiary occur? Annually When needed by the creditor When financial statements are prepared Monthly Which of the following is not correct with regard to a parent’s ownership of 100 percent of a subsidiary’s stock subsequent to a book value acquisi...

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How often does the consolidation of a parent and a subsidiary occur? Annually When needed by the creditor When financial statements are prepared Monthly Which of the following is not correct with regard to a parent’s ownership of 100 percent of a subsidiary’s stock subsequent to a book value acquisition? Consolidated net income equals the parent’s net income Consolidated Investment in Subsidiary balance equals the parent’s Investment in Subsidiary balance Consolidated dividends equal the parent’s dividends Consolidated Retained Earnings equals the parent’s Retained Earnings

Identify the incorrect statement/s: The consolidation worksheet will always completely eliminate the Investment Income account. The consolidation worksheet will only eliminate all of the Investment in Subsidiary account when the parent owns 100 percent of the subsidiary’s stock Subsequent to the date of acquisition worksheet elimination number 1 will not completely remove the Investment in Subsidiary account from the consolidated balance sheet. Worksheet elimination number 2 will completely remove the change in the Investment in Subsidiary account from the consolidated balance sheet only when the parent company has recorded three equity method journal entries with regard to the parent’s ownership interest in the subsidiary. None of the above. Answer: FALSE. The Investment in Subsidiary account is always completely eliminated from the consolidated balance sheet. F, Worksheet elimination 2 reverses the equity method journal entries recorded by the parent during the period regardless of their number.

Identify the correct statement/s: The dividends paid by the subsidiary are completely eliminated from the consolidated financial statements because only dividends paid to the parent company stockholders represent a distribution of consolidated net assets. The worksheet eliminations remove the recognition of the investment in the subsidiary from the parent’s financial records. Assuming the parent acquired 100 percent of the subsidiary’s stock and there are no purchase differentials, the investment income recorded by the parent in the current period will equal the subsidiary’s current net income recognized subsequent to the acquisition date. When the parent acquired 100 percent of the subsidiary’s stock for book value during the current period, consolidated net income is always the sum of the parent’s net income and the subsidiary’s net income for the entire reporting period. Answer:

F, Worksheet eliminations remove the recognition of the investment in the subsidiary from the consolidated balance sheet. They do not alter the parent’s financial records because worksheet eliminations are not posted to the parent’s accounts. F, When 100 percent of the subsidiary’s stock is acquired, consolidated net income is the sum of the parent’s current period net income and the subsidiary’s current period net income earned since the acquisition date.

In which of the following situations would an investor likely account for stock ownership in an investee using the equity method? The investor owns 15 percent of the investee’s stock The investor and the investee have many transactions with each other The investor has significant influence over the investee’s management policies The investor and investee reside in close proximity to each other

When the cost model/method is used to account for an investment, which of the following would not result in an adjustment to the amount recorded in the investment account? The investee declares a regular dividend The investor sells some of the stock The investee declares a liquidating dividend The stock’s market value decreases to a point where is it below the investor’s cost

Identify the incorrect statement/s: The worksheet eliminations prepared subsequent to acquisition remove the allocated excess/purchase differential amortizations from the consolidated financial statements. Allocated excess/purchase differential balances (worksheet elimination 1) in a given year can be determined by subtracting the allocated excess/purchase differential amortization (worksheet elimination 3) from the balance (worksheet elimination 1) in the preceding year. When a parent consolidates a 100 percent owned subsidiary acquired at an amount more than book value subsequent to acquisition, there will be no noncontrolling interest account on the balance sheet. Only when a parent acquires a 100 percent ownership in a subsidiary for more than book value will the allocated excess/purchase differential amortization included in the consolidated income statement be based on the entire difference between the book value and market value of the subsidiary’s assets and liabilities. None of the above.

Answer: F, The consolidation worksheet eliminations subsequent to acquisition assign the purchase differential amortizations to the income statement account appropriate for each particular purchase differential. T T F, The purchase differential amortization included in the consolidated income statement is always 100 percent of the purchase differential amortization because the economic unit concept requires 100 percent of the purchase differential be recognized on the consolidated balance sheet.

What method normally is used to account for the ownership of a subsidiary on the parent’s financial records? Cost model/method Equity method Consolidation Either cost model/method or equity method

What amount of allocated excess/purchase differential amortization is recognized in the parent’s financial records subsequent to the subsidiary’s acquisition? Allocated excess/purchase differentials are not amortized The noncontrolling interest percentage ownership in the subsidiary The parent percentage ownership in the subsidiary

100 percent of the purchase differential amortization

Which of the following is not needed to convert from the cost method of accounting for an investment to the equity method? Parent’s share of subsidiary income since investment date Parent’s share of subsidiary dividends since investment date Subsidiary’s book value at investment date Parent’s share of purchase differential amortization since investment date

Cost of Investment

Cost Model

Equity Method

Investment…………. xx

Investment…………..

Various credits…..

xx

xx

Various credits…..

xx

Results of Operati ons:

a. Net Income of

No entry

Investment…………..

Subsidiary

b. Cash dividend of

xx

Investment Income

Cash/Dividend receivable…………

xx

Cash/Dividend xx

receivable………. .... xx

Subsidiary Dividend Income/

Investment

xx

Investment Income xx

c. Amortization of

No entry

Allocated Excess

d. Impairment of

Investment Income... xx Investment…………

No entry

Investment Income... xx

xx

Goodwill

Investment…………

xx

Problems 1. Terry Corporation acquired 80 percent of Vegas Company’s stock on January 1, 20x5. At the acquisition date, Vegas had the following account balances.

Book Value Cash and Receivables

Market Value

Remaining Life

P 50,000

P 50,000

3 months

Inventory

160,000

200,000

5 months

Plant Assets (net)

450,000

550,000

10 years

Liabilities

300,000

280,000

5 years

Common Stock

20,000

Retained Earnings

340,000

Vegas has income of P150,000 and pays dividends of P60,000 during 20x6. Assuming there is no goodwill impairment, what is the amount of investment income (using cost method) on Terry Corporation’s financial records for 20x6? a.

P76,800

c.

P115,200

b.

P108,800

d.

P140,800

1. Undervalued Assets

-

Overvalued Assets

+

Undervalued Liabilities

+

Overvalued Liabilities

-

Vegas - Net Income

P150,000

Purchase Diff: Plant Assets: 550-450T= 100T/10

(10,000)

Liabilities: 300-280T= 20T/5

(4,000)

Adjusted NI

P136,000 80%

Investment Income - 80%

P 108,800

b {P150,000 - [(P550,000 - P450,000)/10] - [(P300,000 - P280,000)/5]}.8

2. Mary Corporation acquired 70 percent of Phoenix Company’s stock on October 1, 20x5. At the acquisition date, Phoenix had the following account balances. Book Value Cash and Receivables

Market Value

Remaining Life

P 40,000

P 40,000

3 months

Inventory

100,000

130,000

5 months

Plant Assets (net)

350,000

350,000

10 years

Cost of Goods Sold

160,000

Operating Expenses

50,000 215,000

5 years

Liabilities Common Stock

200,000 20,000

Retained Earnings Sales

230,000 250,000

Phoenix has net income of P110,000 and pays dividends of P10,000 during 20x5. Assuming there is no goodwill impairment, what is the amount of investment income (using equity model) on Mary Corporation’s financial records for 20x5? Phoenix

P110,000

Net Income- before acq.

40,000

250T-160T-50T = P40,000 P 70,000 Purchase Differential Inventory - 30,000/5 months x 3

(18,000)

Liabilities- 15,000 / 5= 3,000 x 3/12

750 P52,750

Parent - 70%

P36, 925

P36,925 {P110,000 - (P250,000 - P160,000 - P50,000) - [(P130,000 - P100,000) 3/5] + [(P215,000 P200,000)/5] (3/12)}.7

3. Hi Rise Enterprises acquired 70 percent of Low Rent Company on January 1, 20x5 for P500,000. At that date, Low Rent’s inventory and plant assets (net) had market values in excess of book values in the amounts of P55,000 and P200,000, respectively. The estimated remaining life of the inventory and plant assets were four months and eight years, respectively. Assume that Low Rent has 20x5 income and dividends of P110,000 and P30,000, respectively and 20x6 income and dividends of P130,000 and P40,000, respectively. What is the amount of the Investment in Low Rent account balance at December 31, 20x6 using equity method?

P545,500 P500,000 + [P110,000 + P130,000 - P30,000 - P40,000 - P55,000 - (P200,000/8)2].7

4. Metro Corporation acquired 80 percent of Local Company on January 1, 20x5 for P320,000. At that date Local had inventory and plant assets with market values greater than book values in the amount of P35,000 and P75,000 respectively. The inventory and plant assets were assigned a remaining life of six months and five years respectively. Assuming that Local has 20x5 income and dividends of P100,000 and P40,000, respectively and 20x6 income and dividends of P140,000 and P50,000, respectively, what is the Investment in Local account balance (using cost method) at December 31, 20x6?

P388,000 P320,000 + [P100,000 + P140,000 - P40,000 - P50,000 - P35,000 - (P75,000/5)2].8

5. Perry Corporation acquired 80 percent of Sammy Company’s stock on January 1, 20x5. At the acquisition date, Sammy had the following account balances. Book Value Cash and Receivables

P 30,000

Market Value P 30,000

Remaining Life 3 months

Inventory

100,000

120,000

Plant Assets (net)

250,000

290,000

8 years

Liabilities

150,000

160,000

5 years

Common Stock Retained Earnings

10,000 220,000

5 months

Sammy has income of P80,000 and pays dividends of P20,000 during 20x6. Assuming there is no goodwill impairment, what is the amount of income allocated to the non-controlling interest for 20x6? P15,400 {P80,000 - [(P290,000 - P250,000)/8] + [(P160,000 - P150,000)/5]}.2

6. Ace Corporation acquired 70 percent of Base Company’s stock on September 1, 20x5. At the acquisition date, Base had the following account balances.

Book Value Cash and Receivables

Market Value

Remaining Life

P 70,000

P 70,000

3 months

Inventory

160,000

190,000

5 months

Plant Assets (net)

400,000

520,000

10 years

Cost of Goods Sold

300,000

Operating Expenses

90,000 380,000

5 years

Liabilities Common Stock

350,000 20,000

Retained Earnings

180,000

Sales

470,000

Base has net income of P150,000 and pays dividends of P30,000 during 20x5. Assuming there is no goodwill impairment, what is the amount of income allocated to non-controlling interest for 20x5? P13,200 {P150,000 - (P470,000 - P300,000 - P90,000) - [(P190,000 - P160,000) 4/5] - [(P520,000 -P400,000)/10] (4/12) + [(P380,000 - P350,000)/5] (4/12)}.3

7. Powell Enterprises acquired 80 percent of Sullivan Company on January 1, 20x5 for P250,000. At that date, Sullivan’s inventory and plant assets (net) had market values in excess of book values in the amounts of P30,000 and P80,000, respectively. The estimated remaining life of the inventory and plant assets were four months and eight years, respectively. Assume that Sullivan has 20x5 income and dividends of P75,000 and P25,000, respectively and 20x6 income and dividends of P90,000 and P50,000, respectively. What is the balance in the non-controlling Interest account at December 31, 20x6? P70,500 {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 - (P80,000/8)2]}.2

Use the following information for questions 8 and 9: Ramana Corporation purchased 70 percent of the outstanding stock of Knapp Company on January 1, 20x5. The following information existed for Knapp at the date of acquisition. Book Value

Market Value

P 70,000

P 70,000

Inventory

240,000

300,000

Plant Assets (net)

560,000

700,000

80,000

80,000

(90,000)

(90,000)

Long-term Debt

(400,000)

(400,000)

Stockholders’ Equity

(460,000)

Cash and Receivables

Other Noncurrent Assets Current Liabilities

At the acquisition date, Ramana assigns a remaining estimated life of 4 month to the inventory and seven years the plant assets.

8. What is the amount of purchase differential amortization included in the calculation of Investment Income on Ramana’s books in 20x5 and 20x6?

9. What amounts appear on the income statement portion of the 20x5 consolidation worksheet with regard to the purchase differential amortizations?

8. 20x5: P56,000 20x6: P14,000 Purchase differential amortization to investment income Inventory (P300,000 - P240,000).7

20x5 P42,000

Plant Assets [(P700,000 - P560,000)/7].7

20x6 P

0

14,000

14,000

P56,000

P14,000

9. Consolidation worksheet: Cost of Goods Sold Depreciation Expense

P60,000 20,000

10. Sandpiper Inc. acquired a 75% interest in Shore Corporation for P27,000 cash on January 1, 20x5, when Shore’s stockholders’ equity consisted of P30,000 of capital stock and P20,000 of retained earnings. Shore Corporation reported net income of P18,000 for 20x5. The allocation of

the P12,000 excess of cost over book value acquired on January 1 is shown below, along with information relating to the useful lives of the items: Overvalued receivables (collected in 20x5) Undervalued inventories (sold in 20x5) Undervalued building (6 years’ useful life remaining at January 1, 20x5) Undervalued land Unrecorded patent (8 years’ economic life remaining at January 1, 20x5) Undervalued accounts payable (paid in 20x5) Total of excess allocated to identifiable assets and liabilities Goodwill Excess cost over book value acquired

P

600 2,400 3,600 900 3,200

300 7,200 ___2,800 P 12,000

Determine Sandpiper’s investment income from Shore for 20x5. 10. P2,900 (Author using 30%); 11,625 Sandpiper’s share of Shore net income (P18,000 )

P

18,000

Add: Overvalued accounts receivable collected in 20x5

600

Undervalued accounts payable paid in 20x5

300

Less: Undervalued inventories sold in 20x5

(

2,400)

Depreciation on building undervaluation P3,600/6

(

600)

Amortization on patent P3,200/8 years

(

400)

Income from Shore/Income from subsidiary

15,500 11,625

Use the following information for questions 11 to 13: On 4/1/x6, Parrco acquired 60% of Subbco’s outstanding common stock. Both entities have December 31 year-ends. Selected data for each company for 20x6 follow: Parrco

Subbco

P 200,000

P 180,000

700,000

200,000

P 900,000

P 380,000

Net income from own separate operations (Excludes equity in net income of subsidiary And amortization of cost in excess of book value): 3 months ended 3/31/x6 9 months ended 12/31/x6

20x6 Amortization of cost in excess of book value

(Recorded in the general ledger)

P 30,000

Dividends declared: 3 months ended 3/31/x6

P 100,000

9 months ended 12/31/x6

P

40,000

300,000

120,000

P 400,000

P 160,000

11. Determine the consolidated net income for 20x6 under the economic unit concept. 12. Determine the consolidated net income to be reported for 20x6 under the parent company concept. 13. Determine the amount of dividends to be reported in the consolidated statement of retained earnings for 20x6. 11. P1,050,000 Parrco’s income from its own separate operations for 20x6

P 900,000

Subbco’s net income for the nine months ended 12/31/x6

200,000

Less: Amortization of cost in excess of book value (P30,000 ÷ 60%)

___50,000)

Consolidated net income for 20x6 (economic unit concept)

P1,050,000

Division of consolidated net income: To controlling interest (Parrco’s stockholders)

P 990,000

To non-controlling interest (stockholders of Subbco)

___60,000 P1,050,000

12. P990,000 Parrco’s income from its own separate operations for 20x6

P 900,000

Parrco’s equity in net income of Subbco Company for nine months ended 12/31/x6 (P200,000  60%)

120,000

Less: Parrco’s amortization of cost in excess of book value Consolidated net income for 20x6 (parent company concept)

...

( 30,000) P 990,000

13. P400,000 (P100,000 + P300,000)

Use the following information for questions 14 to 16: On 10...