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Chapter 2

Chapter 2. Consolidated Statements Date of Acquisition. The consolidation concept. Merge two legal entities into one economic entity Generally required with over 50% ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%).

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Chapter 2

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  1. Chapter 2 Consolidated Statements Date of Acquisition

  2. The consolidation concept • Merge two legal entities into oneeconomic entity • Generally required with over 50% ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%). • Always ask - what should be left when you put on “one firm” eye glasses.

  3. Assets Liabilities & Equity Inventory 120,000 Bond Payable 100,000 Land 50,000 Com. stock, $5 par 10,000 Building 250,000 Retained earnings 310,000 Total 420,000 Total 420,000 Fair Values: Inventory (priority) 170,000 Bond Payable (priority) 105,000 Land 100,000 Building 300,000 Patents 50,000

  4. Using purchase rules: • Goodwill above what price? $515,000 • at $550,000 Goodwill = $35,000 • Bargain below what price? $515,000 • at $245,000, $180,000 ($245,000 - $65,000 to priority) is assigned non-priority accounts • Extraordinary gain below what price? $65,000 • at $50,000, the extraordinary gain is 15,000

  5. $550,000 Price 550,000 Equity (100%  $320,000) 320,000 Excess cost 230,000 Adjustments: Inventory (increase to 170,000) 50,000 Bonds payable (decrease liability) (5,000) Land (Increase to 100,000) 50,000 Building (increase to 300,000) 50,000 Patents (record) 50,000195,000 Goodwill (record) 35,000

  6. Eliminations for $550,000 price

  7. $245,000 Price 245,000 Equity (100%  $320,000) 320,000 Excess cost (75,000) Adjustments: Inventory (increase to $170,000) 50,000 Bonds payable (decrease liability)) (5,000) Land (allocation on next slide) (10,000) Building (allocation on next slide) (130,000) Patents (allocation on next slide) 20,000(75,000) 0

  8. Allocation

  9. Eliminations for $245,000 price

  10. $50,000 Price 50,000 Equity (100%  $320,000) 320,000 Excess cost (270,000) Adjustments: Inventory (increase to $170,000) 50,000 Bonds payable (decrease liability) (5,000) Land (eliminate book value) (50,000) Building (eliminate book value) (250,000)(255,000) Extraordinary gain (15,000)

  11. Eliminations for $50,000 price

  12. For an 80% purchase Use the same subsidiary information for 80% purchase All adjustments are for 80% of fair-book difference • Above what price will there be goodwill? $412,000 $515,000  80% = $412,000 We will use $430,000 so goodwill = $18,000 • Below what price will there be a bargain? $412,000 $515,000  80% = $412,000 If price was $241,000, $189,000 ($241,000 - [$65,000  80%]) is available for P’s 80% share of non-priority accounts • Extraordinary gain below what price? $52,000 80%  $65,000 = $52,000

  13. Analysis: 80% purchase

  14. For 80% interest at 430,000 Price 430,000 Equity (80%  $320,000) 256,000 Excess cost 174,000 Adjustments: Inventory (80%  50,000) 40,000 Bonds payable (80%  5,000) (4,000) Land (80%  50,000) 40,000 Building (80%  50,000) 40,000 Patents (80%  50,000) 40,000 156,000 Goodwill 18,000

  15. Eliminations for $430,000 price

  16. For 80% interest at $241,000 Price 241,000 Equity (80%  $320,000) 256,000 Excess cost (15,000) Adjustments: Inventory (80%  50,000) 40,000 Bonds payable (80%  5,000) (4,000) Land (allocation next slide) 2,000 Building (allocation next slide) (74,000) Patents (allocation next slide) 21,000 (15,000 ) 0

  17. Allocation

  18. Eliminations for $241,000 price

  19. For 80% interest at $500,000 • Price 500,000 • Equity (80%  450,000) 360,000 • Excess cost 140,000 • Adjustments: • Inventory (80%  40,000) 32,000 • Land (80%  30,000) 24,000 • Building (80%  120,000) 96,000152,000 • Reduce existing goodwill (12,000) • On the worksheet, existing goodwill is reduced $12,000 • The maximum deduction would be $40,000 (80% 50,000)

  20. Pooling of interests • Investment should was at book value • Equity transfer applies only to parent ownership percentage (90% or more) • Investment always eliminated with no excess.

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