Consolidated Financial Statement - At More than Book Value

Consolidated financial statement: Acquisition at more

than book value

Arthik Davianti

What’s coming:

Differential

Complex differential

Consolidation procedures

Illustrations

Basic Concepts: Parent and Subsidiary

Parent’s booksInvestment account initially contains the acquisition cost

• FMV of net assets,

• Plus goodwill, or

• Minus bargain purchase price

Parent can use the cost or equity method

Subsidiary’s booksBalance sheet: Assets and Liabilities are recorded at BOOK values.Income statement: Expenses calculated based on BOOK values

Basic Concepts: Parent and Subsidiary

What happens when you consolidate the parent’s and subsidiary’s books?

Remember:• The parent’s investment account is based on the actual

acquisition price.• The sub’s books contain only historical book values.

The parent needs to make adjustments for both• Balance Sheet, and• Income Statement accounts.

Why wasn’t this a problem with created subs?• No goodwill• No undervalued assets at the time of creation

Differential:Investment Cost over the Underlying Book

Value of Equity

Acquisition Price and Underlying Book Value Difference

The purchase price normally is based on the market value – different with the investee’s net assets: Book Value (BV) vs Fair Market Value (FMV) - DIFFERENTIAL

Differential is frequently positive

The differential pertaining each asset of the investee must be ascertained.

When the parent uses equity method – differential pertaining to limited life assets (including identifiable intangible) must be amortized (in the remaining economic life).

Basic Concepts: Income Statement Impacts

Big Picture: Essentially, we switch the sub’s books from BV to FMV in the consolidation process.

Income Statement effects

Asset

Related Expense (as the asset expires)

Equipment

Inventory

Patent

Goodwill

Depreciation Expense

Cost of Goods Sold

Amortization Expense

Impairment Loss

Basic Concepts: Income Statement Impacts

Income Statement EffectsWhen Acquisition Price > Book Value

Asset


Income Statement Effect

Equipment

Inventory

Patent

Goodwill


Cost of Goods Sold


Impairment Loss

Too Low(understated)

If expenses are UNDERSTATED, then income is too high (OVERSTATED).

To fix the problem, Parent needs to INCREASE expenses (but how?)

Excess Investment Cost over Underlying Book Value of Equity: Assignment

Information on the individual assets and liabilities to account for any difference between the investment cost and the underlying book value of equity – DIFFERENTIAL

Book value and fair value information for Sloan Co at January 1 (this is from last week’s illustration)

Book

Value

Fair

Value

Cash 1,500 1,500

Receivable - net 2,200 2,200

Inventories 3,000 400

Other current assets 3,300 3,100

Equipment - net 5,000 8,000

Total assets 15,000 18,800

Account payeble 1,000 1,000

Note payable, due in five years 2,000 1,800

Common stock 10,000

Retained earnings 2,000Total liabilities and

stockholders' equity 15,000

Excess Investment Cost over Underlying Book Value of Equity: Assignment

5,000

(3,600)

1,400

Fair

Value

Book

ValueDifferential

% Interest

Acquired

Amount

Assigned

Inventories 4,000 3,000 1,000 30% 300

Other current assets 3,100 3,300 (200) 30% (60)

Equipment 8,000 5,000 3,000 30% 900

Note payable 1,800 2,000 200 30% 60

Total assigned to identifiable net assets 1,200

Remainder assigned to goodwill 200

Total excess of cost over book value acquired 1,400

Assignment to identifiable net assets and goodwill

Investment in Sloan

Book value of the interest acquired (30% X $12,000,000 equity of Sloan)

Total excess of cost over book value acquired

Excess Investment Cost over Underlying Book Value of Equity: Accounting

Sloan pay dividends $1,000,000 on July 1 and reports net income of $3,000,000. The excess cost over book value is amortized as follows:

Amortization Rates

Excess allocated to:

Inventories – sold in the current year 100%

Other current assets – disposed of in the current year 100%

Equipment – depreciated over 20 years 5%

Note payable – due in 5 years 20%


Payne’s entries:

July 1:Cash (+A) 300

Investment in Sloan (-A) 300To record dividends received from Sloan ($1,000,000 X 30%

December 31Investment in Sloan (+A) 900

Income from Sloan (+R, +SE) 900To record dividends received from Sloan ($1,000,000 X 30%)

December 31Income from Sloan (-R, -SE) 300

Investment in Sloan (-A) 300To record write-off of excess allocated to inventory items that were sold in the current year

1

2



Income from Sloan (R, +SE) 60To record income credit overvalued other current assets disposed of in the current year


Investment in Sloan (-A) 12To amortize the excess allocated to the overvalued note payable over the remaining life of the note ($60,000 : 5 years)


Investment in Sloan (-A) 45To record depreciation on excess allocated to undervalued equipment with a 20-year remaining useful life ($900,000 : 20)

5

4

3



Income from Sloan (R, +SE) 603To record equity income from 30% investment in Sloan

1-5

Equity in Sloan’s reporting income ($3,000,000 X 30%) 603Amortization of excess cost over book value:

Inventories sold in the current year ($300,000 X 100%) (300)Other current assets sold in the current year ($60,000 X 100%) 60Equipment ($900,000 X 5%) depreciation rateNote payable ($60,000 X 20%) amortization rate (12)

Total investment income from Sloan $603

Book value element Life remainingCommon Stock $130,000Retained Earnings 117,000

Under- or Over-valuationInventory (6,500) 2 monthsLand 39,000 IndefiniteEquipment 85,000 10 yearsCovenant-not-to-compete 52,000 4 yearsGoodwill element 26,000 Indefinite

Total Cost $442,500

Example: Acquisition Price > Book Value

Pepper Inc., a calendar-year reporting company, acquired 100% of Salt Inc.’s outstanding common stock at a cost of $442,500 on 12/31/X8. The analysis of the parent’s Investment account as of the acquisition date shows:

AcquisitionPrice = BV + Identifiable Excess + GW

Results for 20X9 (based on Book Values):

Reported Income $78,000Dividends Declared 45,500

What would the Sub’s income be based on Fair Values?

Lower COGS (because inventory is worth less) $ (6,500)Extra depreciation on equipment 8,500Extra amortization of contract 13,000Total increase in expenses / decrease in income $ 15,000

$63,000 ($78,000 - $15,000)

Example: Acquisition Price > Book Value

442,500 = 247,000 + 169,500 + 26,000

Consolidation inEquity Method for

Diffeential

Consolidation procedures differ when there is a differential.

Differential in Equity Method

The Parent’s initial investment in a sub is based on the FMV of the sub’s net assets (+/- GW).

Equity method entries:

• Recording share of sub’s income

• Recording share of sub’s dividends

They should be based on the same FMV basis.

Problem: Sub reports income based on BOOK VALUES

Solution: Parent has to record an adjustment to the income and investment “Equity Method” accounts.

Results for 20X9 (based on Book Values):

Reported Income $78,000Dividends Declared 45,500

Adjustment to Salt’s 20X9 income on Parent’s books:

Lower COGS (because inventory is worth less) $ (6,500)Extra depreciation on equipment 8,500Extra amortization of contract 13,000Total increase in expenses / decrease in income $ 15,000

What entries would Pepper record in its general ledger related to Salt’s income and dividends for 20X9 under the equity method?

Example: Differential in Equity Method

Example: Equity Method Journal Entries

1. To record 100% share of Salt’s reported income:

Investment in Salt 78,000Income from Salt 78,000

2. To record 100% of Salt’s dividends declared:

Dividend Receivable 45,500Investment in Salt 45,500

3. To record additional expenses (based on FMV):

Income from Salt 15,000Investment in Salt 15,000

Called “amortizationof excess value”

Example: Equity Method Investment Adjustment

Calculate the correct ending balance in Pepper’s Investment in Salt account using the equity method:

Investment in Salt

Beginning Balance 442,500Net Income 78,000

Ending Balance 460,000

Dividend 45,500Income Adjustment 15,000

Simple Example

P

S

Stock

SubShareholders

$

Book value of net assets = $800

Excess value of identifiable assets

= $200

Goodwill = $500

Assume the BV of Sub’s net assets is $800 and that the FMV of the net assets is $1,000. Finally, assume that the acquisition price was $1,500. The acquisition price consists of three parts:

Understanding Components of Acquisition Cost

Acquisition FMV ofPrice = Assets + Goodwill

Key: We need to keep track of each element of the purchase price separately! Why??

FMV of ExtraAssets = BV + Value

Acquisition ExtraPrice = BV + Value + Goodwill

The Consolidation Process

When a subsidiary is acquired (instead of created), the consolidation process is more complicated:• Must eliminate intercompany items (same)• Must update Sub’s assets and liabilities to FMV• Must recognize goodwill

Summary of Consolidation Entries

1. The basic elimination entry:

2. The excess value reclassification entry:

Asset 1 XXAsset 2 XXGoodwill XX

Investment in Sub Excess

Common Stock (S) XXAdditional Paid-in Capital (S) XXRetained Earnings, Beginning Balance (S) XXIncome from Sub XX

Investment in Sub BVDividends Declared XX

Summary of Consolidation Entries

3. The amortized excess value reclassification entry:

This entry reclassifies the equity method amortization of cost in excess of book from Income from Sub to the appropriate expense accounts where the costs would have been had the sub used FMV instead of BV.

4. The accumulated depreciation elimination entry:

Cost of Sales XXOther Expenses XX

Income from Sub XX

Accumulated Depreciation XXBuildings and Equipment XX

Understand and explain how consolidation process differ when

there is a differential

Wholly-owned Subsidiary (100 Percent) at More than Book Value (Baker p. 162)

Peerless Products acquires all of Special Foods common stock on January 1 20X1, for $340,000 cash, an amount equal to Special Foods’ fair value as a whole. This includes $40,000 in excess of Special Foods’ book value of $300,000.

Fair value consideration 340,000

Book value of Special Food's net assets

Common stock - Special Food 200,000

Retained earnings - Special Food 100,000

300,000

Difference between fair value and book value 40,000

Investment in Special Foods 340,000Cash 340,000

To record the initial investment in Special Food

Book value of net assetsCS + RE =300,000

Identifiable assets =40,000

$340,000Initial

InvestmentSpecialFoods

Goodwill =0

1/1/X1

Wholly-owned Subsidiary (100 Percent) at More than Book Value

Wholly-owned Subsidiary (100 Percent Ownership) at more than Book Value

Book Value calculation

Total Common RetainedBook Value Stock Earnings

Original Book Value 300,000 200,000 100,000

= +

Common Stock 200,000Retained Earnings 100,000

Investment in Special Foods 300,000

Excess value reclassification entry:

Land 40,000Investment in Special Foods 40,000



Land 40,000Investment in Special Foods 40,000

In this example, the differential is the additional $40,000 payment, because of Special Foods’ land was worth $40,000 more than its book value at acquisition date.

A second elimination entry is required to re-assign the $40,000 from the investment account to the land account.

Wholly-owned Subsidiary (100 Percent Ownership) at More than Book Value at Acquisition Date –Worksheet (Baker p. 164)

Peerless

Product

Special

FoodsConsolidated

Assets

Cash 10,000 50,000 60,000

Account receivable 75,000 50,000 125,000

Inventory 100,000 60,000 160,000

Investment in Special Food 340,000 300,000 0

40,000

Land 175,000 40,000 40,000 255,000

Buildings and equipment 800,000 600,000 1,400,000

Accumulated depreciation (400,000) (300,000) (700,000)

Total assets 1,100,000 500,000 40,000 340,000 1,300,000

Liabilities and stockholder's equity

Account payable 100,000 100,000 200,000

Bonds payable 200,000 100,000 300,000

Common stock 500,000 200,000 200,000 500,000

Retained earnings 300,000 100,000 100,000 300,000

Total liabilities and equity 1,100,000 500,000 300,000 0 1,300,000

Elimination Entries

Existence of Goodwill


Goodwill 40,000Investment in Special Foods 40,000

For example, assume in the Peerless Product and Special Foods illustration the acquisition-date fair value of Special Foods’ assets and liabilities equal to their book values, then the $40,000 difference between the $340,000 consideration exchanged and the $300,000 fair value of the subsidiary’s net identifiable assets should be attributed to goodwill

Treatment of a Complex Differential

Make calculation and prepare elimination entries for the consolidation of a wholly

owned subsidiary when there is a complex positive differential at the

acquisition date.


Peerless Products acquires all of Special Foods common stock on January 1 20X1, for $400,000 on January 1, 20X1, by issuing $100,000 of 9% bonds, with fair value of $100,000, and paying cash of $300,000. The resulting ownership situation:





300,000



Investment in Special Foods 400,000Bond Payable 100,000Cash 340,000


Book

Value

Fair

ValueDifference

Cash 50,000 50,000

Account receivable 50,000 50,000

Inventory 60,000 75,000 15,000

Land 40,000 100,000 60,000

Buildings and equipment 600,000

Accumulated depreciation (300,000) 300,000 290,000 (10,000)

500,000 290,000

Account payable 10,000 100,000

Bonds payable 10,000 135,000 (35,000)

Common stock 20,000

Retained earnings 10,000

50,000 235,000 30,000



$400,000Initial


Goodwill =70,000

1/1/X1


Wholly-owned Subsidiary (100 Percent Ownership) at more than Book Value (Baker p. 168)

Basic elimination entry

Total Common RetainedBook Value Stock Earnings

Original Book Value 300,000 200,000 100,000

= +

Common Stock 200,000Retained Earnings 100,000

Investment in Special Foods 300,000


Total = Inventory Land Building Goodwill Bonds Payable

100,000 15,000 60,000 (100,000) 70,000 (35,000)

Excess value (differential) reclassification entry:

Inventory 15,000Land 60,000Goodwill 9,500

Building 10,000Bonds Payable 35000Investment in Special Foods 100,000

Wholly-owned Subsidiary (100 Percent Ownership) at More than Book Value at Acquisition Date –Worksheet (Baker p. 169)

Peerless

Product

Special

FoodsConsolidated

Assets

Cash 50,000 50,000 100,000


Inventory 100,000 60,000 15,000 175,000


100,000

Land 175,000 40,000 60,000 275,000

Buildings and equipment 800,000 600,000 10,000 1,390,000

Accumulated depreciation (400,000) (300,000) (700,000)

Goodwill 70,000

Total assets 1,200,000 500,000 75,000 410,000 1,435,000


Account payable 100,000 100,000 200,000

Bonds payable 300,000 100,000 400,000

Premium on Bonds Payable 35,000 35,000

Common stock 500,000 200,000 200,000 500,000


Total liabilities and equity 1,200,000 500,000 300,000 35,000 1,435,000

Elimination Entries

Situation 2 Worksheet

at the Date of Acquisition(100% ownership)

Prepare equity method journal entries, elimination entries, and the consolidated worksheet for a wholly owned subsidiary

when there is a complex positive differential.

Wholly-owned Subsidiary (100 Percent) at More than Book Value – Initial Year

Peerless Products acquires all of Special Foods common stock on January 1 20X1, for $387,500, an amount $87,500 in excess of the book value. The acquisition price includes cash of $300,000 and a 60-day note for $87,500 (paid at maturity during 20X1).





300,000



Fair values of Special Foods’ assets and liabilities:

Book Value Fair Value Differential

Inventory 60,000 65,000 5,000

Land 40,000 50,000 10,000

Buildings and Equipment 300,000 360,000 60,000

400,000 475,000 75,000

• The remaining $12,500 is goodwill

• The entire amount of inventory is sold during 20X1

• The buildings and equipment have 10 years remaining economic life and depreciated using straight line depreciation

Wholly-owned Subsidiary (100 Percent Ownership) at More than Book Value – Initial Year of Ownership

Investment in Special Foods 50,000Income from Special Foods 50,000

To record Peerless 100% share of Special Food’s 20X1 income

During 20X1, Peerless records operating earnings of $140,000, excluding its income from investing in Special Foods, and declares dividends of $60,000. Special Foods reports 20X1 net income of $50,000 and declares dividends of $30,000.

Cash 30,000Investment in Special Foods 30,000

To record Peerless 100% share of Special Food’s 20X1 dividend

Investment in Special Foods 387,500Cash 300,000Notes Payable 87,500


Wholly-owned Subsidiary (100 Percent Ownership) at Book Value – Initial Year of Ownership (Baker p.173)

Parent Company Entry

Income from Special Foods 14,000Investment in Special Foods 14,000

To record amortization of excess acquisition price

• A portion of the differential ($5,000) – Special Foods’ inventory sold during 20X1.

• $60,000 of the differential – Special Foods’ buildings and equipment – amortization $6,000 ($60,000 : 10 years)

• Impairment of goodwill by $3,000 is recognized.

• The total of differential written off = $5,000 inventory + $6,000 depreciation + $3,000 goodwill impairment = $14,000



$387,500Initial


Goodwill =12,500

Wholly-owned Subsidiary (100 Percent Ownership) at Book Value – Initial Year of Ownership



$393,500Net


Goodwill =9,500

1/1/X1 31/12/X1


Basic Elimination Entry

Total Common RetainedInvestment Stock Earnings

Original Book Value 300,000 200,000 100,000+ Net Income 50,000 50,000 Dividends (30,000) (30,000)

Ending Book Value 320,000 200,000 120,000

= +

Common Stock 200,000Retained Earnings 100,000Income from Special Foods 50,000

Dividends Declared 30,000Investment in Special Foods 320,000

Book Value Calculation


Amortized excess value reclassification entry:

Cost of goods sold 5,000Depreciation expense 6,000Goodwill impairment loss 3,000

Income from Special Foods 14,000

Total Inventory Land Building Acc. Dep. Goodwill

Beginning balance 87,500 5,000 10,000 60,000 0 12,500

(-) Changes (14,000) (5,000) 6,000 (3,000)

Ending balance 73,500 0 10,000 60,000 6,000 9,500


Land 10,000Building 60,000Goodwill 9,500

Accumulated depreciation 6,000Investment in Special Foods 73,500

Do…the Working Sheet for 20X1 and self-practice for 20X2

Consolidation Process on a More than Book

Value Acquisitions with(less than 100%

ownership)

Understand and explain how the consolidation process differs when the

subsidiary is less-than-wholly owned and there is a differential.

How Do the Elimination Entries Change?

1. The basic elimination entry:

2. The excess value reclassification entry:

Asset 1 XXXAsset 2 XXXGoodwill XXX

Investment in Sub % ExcessNCI in NA of Sub % Excess

Common Stock (S) XXXAdditional Paid-in Capital (S) XXXRetained Earnings, Beginning Balance (S) XXXIncome from Sub % NINCI in NI of Sub % NI

Dividends Declared XXXInvestment in Sub % BVNCI in NA of Sub % BV

3. The amortized excess value reclassification entry:

This entry reclassifies the equity method amortization of cost in excess of book from Income from Sub to the appropriate expense accounts where the costs would have been had the Sub used FMV instead of BV.

4. The accumulated depreciation elimination entry:

Accumulated Depreciation XXXBuilding & Equipment XXX

Cost of Sales XXXOther Expenses XXX

Income from Sub % Adj.NCI in NI of Sub % Adj.

Acquisition Date

How Do the Elimination Entries Change?

Issue

Should Parent revalue the land by the full

$39,000 in consolidation or only its

share of the excess value ($31,200)?

Partial Ownership Example

Assume Parent owns land with a book value of $400,000. Parent’s 80%-owned subsidiary also owns land. At the time of the acquisition, Sub’s land has a FMV of $100,000 and a book value of $61,000. Thus, the land has excess value of $39,000.

Parent

Sub

80%20%

NCI

Partial Ownerships: Partial or Full Valuation?

We learned earlier that full consolidation is required, as opposed to partial consolidation.•Thus, we consolidate 100% of the sub.

•This, however, refers to the BV of the subsidiary.

What about revaluation of assets to FMV?•The extent of revaluation of undervalued assets

and goodwill can vary.

• Parent Company Concept: Partial valuation

• Entity Concept: Full valuation

Partial Ownership Example

• Both were used in the past.

• SFAS 141R requires the Entity Concept.

Parent

Sub

80%20%

NCI

Parent Sub DR CR Consolidated

Land $400,000 $61,000 $31,200 $492,200

Parent Sub DR CR Consolidated

Land $400,000 $61,000 $39,000 $500,000

Parent CompanyConcept

EconomicUnit Concept

Partial Ownership: Undervalued Assets & GW

How much to revalue the Subsidiary’s undervalued assets and goodwill?

Parent company concept: < 100% of FMV

Revalued only to the extent of the parent’s percent ownership

Entity concept: 100% of FMV

The offsetting credit for the additional valuation increases the NCI in net assets

Situation 2 Worksheet

at the Initial Year(less than 100% ownership)

Less than Wholly-owned Subsidiary (Less than 100 Percent) at More than Book Value

Peerless Products acquires 80% of Special Foods common stock on January 1 20X1, for $310,000. At that date, the fair value of the noncontrolling interest is estimated to be $77,500.

The ownership situation:





300,000


Parent

Sub

80%20%

NCI

Peerless Product and Special Foods balance sheets.

Peerless

Product

Special

Foods

Assets

Cash 350,000 50,000


Inventory 100,000 60,000

Land 175,000 40,000

Buildings and equipment 800,000 600,000

Accumulated depreciation (400,000) (300,000)

Total assets 1,100,000 500,000



Bonds payable 200,000 100,000

Common stock 500,000 200,000

Retained earnings 300,000 100,000

Total liabilities and equity 1,100,000 500,000


Investment in Special Foods 310,000Cash 310,000

To record purchase of Special Food stock

Peerless

Product

Special

Foods

Assets

Cash 40,000 50,000


Inventory 100,000 60,000

Land 175,000 40,000

Buildings and equipment 800,000 600,000

Accumulated depreciation (400,000) (300,000)

Investment in Special Food 310,000

Total assets 1,100,000 500,000



Bonds payable 200,000 100,000

Common stock 500,000 200,000

Retained earnings 300,000 100,000

Total liabilities and equity 1,100,000 500,000

The separate financial statements of Peerless

and Special Foods immediately after the

combination.


Fair values of Special Foods’ assets and liabilities:

Book Value Fair Value Differential

Inventory 60,000 65,000 5,000

Land 40,000 50,000 10,000

Buildings and Equipment 300,000 360,000 60,000

400,000 475,000 75,000

• The remaining $12,500 is goodwill

• The entire amount of inventory is sold during 20X1

• The buildings and equipment have 10 years remaining economic life and depreciated using straight line depreciation


80% Book value of

net assetsCS + RE =240,000

80% Identifiable assets =60,000

$310,000Initial


80% Goodwill =10,000

1/1/X1


Less than wholly-owned Subsidiary (80 Percent Ownership) at Book Value –Investment Elimination Entry

Basic investment account elimination entry

Common Stock 200,000Retained Earnings 100000

Investment in Special Foods 240,000NCI in NA of Special Foods 60,000

Book Value Calculations

InvestmentAccount Common Retained

NCI (20%) (80%) Stock Earnings

Original book value 60,000 240,000 200,000 100,000

=

NCI 20%Peerless

80%= Inventory Land Building Acc. Dep. Goodwill

Beginning

balance 17,500 70,000 5,000 10,000 60,000 0 12,500

Less than wholly-owned Subsidiary (80 Percent Ownership) at Book Value –Differential reclassification entry


Inventory 5,000Land 10,000Building 60,000Goodwill 12,500

Investment in Special Foods 70,000NCI in NA of Special Foods 17,500

Worksheet at date of acquisition, January 1, 20X1

Peerless

Product

Special

FoodsConsolidated

Assets

Cash 40,000 50,000 90,000


Inventory 100,000 60,000 5,000 165,000


70,000

Land 175,000 40,000 10,000 225,000

Buildings and equipment 800,000 600,000 60,000 1,160,000

Accumulated depreciation (400,000) (300,000) 300,000 (400,000)

Goodwill 12,500 12,500

Total assets 1,100,000 500,000 387,500 240,000 1,377,500


Account payable 100,000 100,000 200,000

Bonds payable 200,000 100,000 300,000

Common stock 500,000 200,000 200,000 500,000


NCI in NA of Special Foods 60,000 77,500

17,500

Total liabilities and equity 1,100,000 500,000 300,000 77,500 1,377,500

Elimination Entries

Peerless Products

SpecialFoods

20X1:Separate operating income, PeerlessNet income, Special FoodsDividends

140,000

60,00050,00030,000

20X2:Separate operating income, PeerlessNet income, Special FoodsDividends

160,000

60,00075,00040,000

Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Income and Dividend Information

Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Income and Dividend Recognition

Investment in Special Foods 40,000Income from Special Foods 40,000

To record Peerless 80% share of Special Food’s 20X1 income

Cash 24,000Investment in Special Foods 24,000

To record Peerless 80% share of Special Food’s 20X1 dividend

Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Income and Dividend Recognition

Income from Special Foods 11,300Investment in Special Foods 11,300

To record amortization of excess acquisition price

• A portion of the differential ($5,000) – Special Foods’ inventory sold during 20X1. Peerless’ $4,000 portion ($5,000 X 80%) must be written off

• Peerless portion of $60,000 of the differential on Special Foods’ buildings and equipment – amortization $4,800 ($48,000 : 10 years)

• Impairment of goodwill by $3,125 is recognized – $2,500 (80% X $3,125)

• The total of differential written off = $4,000 inventory + $4,800 depreciation + $2,500 goodwill impairment = $11,300

80% Book value of

net assetsCS + RE =240,000

80% Identifiable assets =60,000

$387,500Initial


80% Goodwill =10,000

Goodwill =7,500

1/1/X1



$314,700Net


31/12/X1


Book Value Calculations

InvestmentAccount Common Retained

NCI (20%) (80%) Stock Earnings

Original book value 60,000 240,000 200,000 100,000+ Net income 10,000 40,000 50,000- Dividend (6,000) (24,000) (30,000)

Ending book value 64,000 256,000 200,000 120,000

=

Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Initial Year of Ownership

Basic investment account elimination entry:

Common Stock 200,000Retained Earnings 100,000Income from Special Foods 40,000NCI in NI of Special Foods 10,000

Dividends Declared 30,000Investment in Special Foods 256,000NCI in NA of Special Foods 64,000

Less than wholly-owned Subsidiary (80 Percent Ownership) at More than Book Value –Initial Year of Ownership

NCI 20%Peerless

80%= Inventory Land Building Acc. Dep. Goodwill

Beginning

balance 17,500 70,000 5,000 10,000 60,000 0 12,500

Amortization (2,825) (11,300) (5,000) (6,000) (3,125)

Ending

balance 14,675 58,700 0 10,000 60,000 (6,000) 9,375


Amortized excess value reclassification entry:

Cost of Goods Sold 5,000Depreciation expense 6,000Goodwill impairment loss 3,125

Income from Special Foods 11,300NCI in NA of Special Foods 2,825



Land 10,000Building 60,000Goodwill 9,375

Accumulated depreciation 6,000Investment in Special Foods 58,700NCI in NA of Special Foods 14,675

Do…the Working Sheet for 20X1 and self-practice for 20X2

Excess of Book Value over Cost

Acquired at Less than Fair Value of Net Assets

Bargain purchase• A business combination where the sum of • the acquisition-date fair values of the

consideration given, • any equity interest already held by the acquirer,

and • any noncontrolling interest is less than the amounts at which the identifiable net assets must be valued at the acquisition date as specified by FASB 141R.

• The acquirer recognizes a gain for the difference.

Basic Concepts

Income Statement Effects• When Acquisition Price < BV

Asset


Income Statement Effect

Equipment

Inventory

Patent

Goodwill


Cost of Goods Sold


Impairment Loss

Too High(overstated)

If expenses are OVERSTATED, then income is too low (UNDERSTATED).

To fix the problem, Parent needs to DECREASE expenses.

God Blesses Us All

Business

Consolidated Financial Statement - At More than Book Value