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Session 2—100% Owned Subsidiary Formation

Session 2—100% Owned Subsidiary Formation. Codification Topics Combination Processes Acquisition Method Related Formation and Acquisition Costs Parent Company Investment Analysis Formation and Consolidation of 100% Owned Subsidiary. Codification Topics. Topic 805: Business Combinations

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Session 2—100% Owned Subsidiary Formation

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  1. Session 2—100% Owned Subsidiary Formation • Codification Topics • Combination Processes • Acquisition Method • Related Formation and Acquisition Costs • Parent Company Investment Analysis • Formation and Consolidation of 100% Owned Subsidiary Advanced Accounting-2010

  2. Codification Topics • Topic 805: Business Combinations • Topic 810: Consolidation Advanced Accounting-2010

  3. Motives for Combination • See list on page 39 • Notable combinations: • Bank of America and Merrill Lynch • InBev and Anheuser-Busch • Pfizer and Wyeth Advanced Accounting-2010

  4. Combination Processes • Creation of a single economic entity • Even if the subsidiary remains as a separate economic unit • Combinations we will cover • Formation – 100% • Formation – Less than 100% • Post Formation • Acquisition – 100% • Acquisition – Less than 100% • Post Acquisition Advanced Accounting-2010

  5. Acquisition Method • Applies to both formation and acquisition • Elements • Consideration transferred • Identified assets and liabilities (stockholders’ equity) • Identified non-controlling interests (NCI) • Goodwill or gain Advanced Accounting-2010

  6. Related Formation and Acquisition Costs • Professional service fees – expense • Other indirect expenditures – expense • Securities registration costs – deduct from P Co. APIC Advanced Accounting-2010

  7. Parent Company Investment Analysis • The standard consolidation equation: PC InvestmentCapitalOther Accounts BV + Excess = CS + APIC + RE + X + X + X … X Advanced Accounting-2010

  8. Formation and Consolidation Parent Co. • Investment XXX Cash XXX • Cash XXX Capital stock XXX APIC XXX Sub. Co. Advanced Accounting-2010

  9. Parma (P-Co) and Saraceno (S-Co) Case On December 31, 2010, the Parma Company, a Santa Barbara real estate development company, formed a 100% owned subsidiary, Saraceno Land and Recreation, by making a $600,000 investment. Saraceno issued 100,000 shares of $2 par value common stock to Parma. Saraceno’s only other transaction on December 31, 2010 was the purchase of land valued at $500,000. Required: a. Prepare P-Co’s analysis of this investment b. Record the investment on P-Co’s and S-Co’s books. b. Prepare the consolidation worksheet and consolidation entries at December 31, 2010. Advanced Accounting-2010

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