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Accounting 471/875

Accounting 471/875. Chapter 1 Chapter 2. Transactions of Domestic Customers. Transactions of Domestic Suppliers. Transactions of Other Domestic Parties. Prepare Financial Statements. Domestic Corporation Financial Statements. Transactions of Foreign Suppliers.

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Accounting 471/875

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  1. Accounting 471/875 Chapter 1 Chapter 2

  2. Transactions of Domestic Customers Transactions of Domestic Suppliers Transactions of Other Domestic Parties Prepare Financial Statements Domestic Corporation Financial Statements Transactions of Foreign Suppliers Transactions of Foreign Customers Translate Foreign Currency Transactions Transactions of Other Foreign Parties Domestic Parent Corp. Financial Statements

  3. Domestic Parent Corp. Financial Statements Financial Statements of Domestic Branches Financial Statements of Domestic Subsidiaries Consolidate Financial Statements Consolidated Domestic Corp. Financial Statements

  4. Consolidated Domestic Corp. Financial Statements Financial Statements of Foreign Branches Adjust for Differences in Acctg Prin & Report Practices Financial Statements of Foreign Subsidiaries Translate Foreign Currency Financial Statements Consolidate Financial Statements Consolidated Multinational Corp. Financial Statements

  5. Business Combinations • transactions that bring together net assets (assets and liabilities) of two or more business entities into single accounting entity • one business entity called acquiring company gains control over another business entity called acquired company

  6. Legal Forms of Business Combinations • Merger • Consolidation • Acquisition

  7. Merger • one company acquires assets and liabilities of one or more other companies in exchange for cash, stock, or other consideration • acquiring company continues to exist as separate legal entity • acquired company ceases to exist as separate legal entity • stock is canceled • accounting records (books) closed • separate assets and liabilities recorded on acquiring company’s books • A Corp. + B. Corp. = A Corp.

  8. Consolidation • new firm formed to issue stock in exchange for stock of two or more combining or consolidating entities • acquired firms normally cease to continue as separate legal entities • new firm will record separate assets and liabilities of acquired firms • A Corp. + B Corp. = C Corp.

  9. Acquisition • company acquires majority (>50%) of common stock of another company • each company continues legal existence • acquiring company (parent) records “Investment in Acquired Company’s Stock” in combination entry • A Corp. + B Corp. = Consolidated Financial Statement of Corp. A and Corp. B

  10. Legal Forms of Business Combinations

  11. Accounting for Standard Forms of Business Combinations • acquisition of net assets for • cash • stock • acquisition of stock for • cash • stock

  12. Examples of Types of Business Combinations On August 31, 20X1, the balance sheets of the P Corporation and S Corporation appeared as follows:

  13. Acquisition of Net Assets for Cash On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation for $700 cash. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300. P Corporation Records 9/1/X1 Cash ………………………………. 400 Plant ……………………….……... 300 Land ……………………………… 100 Liabilities ………………………. 100 Cash .........................................…. 700

  14. Acquisition of Net Assets for Cash On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation for $700 cash. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300. S Corporation Records 9/1/X1 Cash ………………………………. 700 Liabilities …………………………. 100 Cash ……………………………. 400 Plant ……………………….…… 200 Land ……………………………. 100 Gain on sale of plant ..............…. 100

  15. Acquisition of Net Assets for Cash

  16. Acquisition of Net Assets for Cash On October 1, 20X1, the Board of Directors of S Corporation voted to liquidate S Corporation. P Corporation Records 10/1/X1 No entry required S Corporation Records 10/1/X1 Common stock …………………. 300 Retained earnings ……………… 400 Cash ………………………….. 700

  17. Acquisition of Net Assets for Cash

  18. Acquisition of Net Assets for Cash On October 1, 20X1, the Board of Directors of S Corporation voted not to liquidate S Corporation. P Corporation Records 10/1/X1 No entry required S Corporation Records 10/1/X1 No entry required

  19. Acquisition of Net Assets for Cash

  20. Acquisition of Net Assets for Stock On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation in exchange for 175 newly issued shares in P Corporation, which have an established market price of $4 per share. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300. P Corporation Records 9/1/X1 Cash ………………………………. 400 Plant ……………………….……... 300 Land ……………………………… 100 Liabilities ………………………. 100 Common Stock (175 X 4) ......…. 700

  21. Acquisition of Net Assets for Stock On September 1, 20X1, P Corporation acquired the assets and liabilities of S Corporation in exchange for 175 newly issued shares in P Corporation, which have an established market price of $4 per share. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300. S Corporation Records 9/1/X1 Investment in P Corp. Stock …….. 700 Liabilities …………………………. 100 Cash ……………………………. 400 Plant ……………………….…… 200 Land ……………………………. 100 Gain on sale of plant ..............…. 100

  22. Acquisition of Net Assets for Stock

  23. Acquisition of Net Assets for Stock On October 1, 20X1, the Board of Directors of S Corporation voted to liquidate S Corporation. P Corporation Records 10/1/X1 No entry required S Corporation Records 10/1/X1 Common stock …………………. 300 Retained earnings ……………… 400 Investment in P Corp. Stock 700

  24. Acquisition of Net Assets for Stock

  25. Acquisition of Net Assets for Stock On October 1, 20X1, the Board of Directors of S Corporation voted not to liquidate S Corporation. P Corporation Records 10/1/X1 No entry required S Corporation Records 10/1/X1 No entry required

  26. Acquisition of Net Assets for Stock

  27. Acquisition of Stock for Cash On September 1, 20X1, P Corporation acquired all of the outstanding shares of S Corporation for $700 cash. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300. P Corporation Records 9/1/X1 Investment in S Corp. Stock ……... 700 Cash ..........................................…. 700 S Corporation Records 9/1/X1 No entry required

  28. Acquisition of Stock for Cash

  29. Acquisition of Stock for Cash On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation. P Corporation Records 10/1/X1 Cash ……………………………. 400 Plant …………………………… 300 Land …………………………… 100 Liabilities ……………………. 100 Investment in S Corp. Stock 700

  30. Acquisition of Stock for Cash On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation. S Corporation Records 10/1/X1 Liabilities ..……………………. 100 Common Stock ……………...… 300 Retained Earnings ……………. 300 Cash ..………………………… 400 Plant …………………………. 200 Land …………………………. 100

  31. Acquisition of Stock for Cash

  32. Acquisition of Stock for Cash On October 1, 20X1, the Board of Directors of P Corporation voted not to liquidate S Corporation. P Corporation Records 10/1/X1 No entry required S Corporation Records 10/1/X1 No entry required

  33. Acquisition of Stock for Cash

  34. Acquisition of Stock for Stock On September 1, 20X1, P Corporation acquired all of the outstanding shares of S Corporation in exchange for 175 newly issued shares in P Corporation, which have an established market price of $4 per share. Both firms’ balance sheets reflect fair values except for S’s plant, which has a fair market value of $300. P Corporation Records 9/1/X1 Investment in S Corp. Stock ..…... 700 Common Stock .......................…. 700 S Corporation Records 9/1/X1 No entry required

  35. Acquisition of Stock for Stock

  36. Acquisition of Stock for Stock On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation. P Corporation Records 10/1/X1 Cash ……………………………. 400 Plant …………………………… 300 Land …………………………… 100 Liabilities ……………………. 100 Investment in S Corp. Stock 700

  37. Acquisition of Stock for Stock On October 1, 20X1, the Board of Directors of P Corporation voted to liquidate the S Corporation. S Corporation Records 10/1/X1 Liabilities ..……………………. 100 Common Stock ……………...… 300 Retained Earnings ……………. 300 Cash ..………………………… 400 Plant …………………………. 200 Land …………………………. 100

  38. Acquisition of Stock for Stock

  39. Acquisition of Stock for Stock On October 1, 20X1, the Board of Directors of P Corporation voted not to liquidate S Corporation. P Corporation Records 10/1/X1 No entry required S Corporation Records 10/1/X1 No entry required

  40. Acquisition of Stock for Stock

  41. Business Combination Alternatives A Corp. Invests in B Corp. Acquires Net Assets Acquires Stock Qualify as Pooling? Qualify as Pooling? Yes No No Yes Net Assets Recorded at Book Value Net Assets Recorded at Fair Value Investment Recorded at Book Value Investment Recorded at Fair Value

  42. Acquisition of Stock Alternatives A Corp. Acquires Stock of B Corp. Qualify as Pooling? Yes No Report as Investment Using Equity Method Investment Recorded at Book Value Investment Recorded at Fair Value Yes Qualifies for Consolidation? Qualifies for Consolidation? Significant Influence? Report as Investment Using Cost Method No Yes No No Consolidate Using Equity Method Report as Investment Using Cost Method

  43. Accounting for Business Combinations • Purchase Accounting (Fair Market Value) • vs. • Pooling-of-Interest Accounting (Book Value) • Cost/Fair Value Method (record only sub div) • vs. • Equity Method (record all changes in sub) • Separate Financial Statements (Inv. in Sub) • vs. • Consolidated Financial Statements

  44. Purchase Accounting • similar to accounting for acquisition of any asset group • fair market value (FMV) of consideration (cash, stock, debt securities, etc.) given by acquiring firm used as valuation basis of combination • assets and liabilities of acquired firm revalued to respective FMV at combination date • any difference between value of consideration given and FMV of net assets obtained recorded as goodwill • financial statements of acquiring company reflect combined operations from date of combination or acquisition

  45. Pooling-of-Interest Accounting • assumes combining of stockholders’ interests • basis of valuation is book value of assets and liabilities on books of acquired company • goodwill cannot be created at date of combination or acquisition • financial statements of acquiring company include restatement of all prior years’ operations and financial position of the pooled companies for all years presented

  46. Impact of SFAS 141 on Pooling of Interest Accounting • According to SFAS No. 141, the purchase method is not to be applied prospectively to past Poolings of Interest. • Past poolings of interests are left intact by SFAS No. 141 • Therefore, it is important to understand how to account for PAST poolings.

  47. Purchase Accounting vs Pooling-of-Interest Accounting Purchase Accounting 1. stockholders of acquired company give up their ownership interest in acquired company’s net assets 2. assets and liabilities of acquired company revalued and recorded by acquiring company at acquisition cost 3. usually gives rise to valuation differential subject to amortization 4. acquiring firm records stock issued as part of combo by credits to common stock account and excess over par account 5. net income of acquired company in year of acquisition is excluded from combined net income 6. incidental acquisition costs a. registration costs reduce FMV of sec. b. direct costs capitalized • Pooling-of-Interest • 1. stockholders of acquiring company and acquired company join without either giving up ownership interest • 2. assets and liabilities of the acquired company not revalued and recorded at book value • 3. does not give rise to a valuation differential • stockholders’ equity sections of combining companies merged, thus retained earnings accounts added together • 5. net income of acquired in year of acquisition is included in combined net income • 6. incidental acquisition costs • a. registration costs expensed • b. direct costs expensed

  48. Purchase-Pooling Matrix

  49. Criteria for Valuation Basis and Consolidation Percentage of Outstanding Voting Stock Acquired 0% 20% 50% 100% 1.Level of economic influence “Significant Influence” Nominal Control 2.Valuation basis Fair Value Method Equity Method 3.Financial statement presentation Investment Account Separate Financial Statements Consolidated Financial Statements

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