Chapter 2 Consolidated Statements Date of Acquisition

C22 Consolidated statements - date of acquisition uThe Consolidations Concept uComparing purchase and pooling uApply purchase rule with a Price and Zone Analysis uGuide the worksheet with a Determination and Distribution of Excess Schedule (D&D) uPresentation of the Noncontrolling Interest (NCI)

C23 The consolidation concept uMerge two legal entities into one economic entity uGenerally required with over 50% ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%). uAlways ask - what should be left when you put on “one firm” eye glasses.

C24 The consolidation concept (continued) uSee WS (Worksheet) 2-1 –Investment gone, specific accounts of subsidiary in –Subsidiary equity gone, no longer exists uWe start on acquisition date to avoid complications of later transactions.

C25 Consolidating: purchase vs. pooling Purchase uOriginal investment is at fair value of net assets received or consideration given uAdjust accounts to fair value as they come across the worksheet (WS 2-2) uSpecial procedures for bargains uAccount adjustments are based on D&D schedule Pooling (over 90%) before 7/1/01 uPossible for some pre 7/1/01 acquisitions uOriginal investment was at book value of subsidiary equity, equity recorded using transfer rules uAccounts were across worksheet at book value (some adjustments may be needed)

C26 Returning to the basic example AssetsLiabilities & Equity Inventory120,000Bond Payable100,000 Land50,000Com. stock, $5 par 10,000 Building250,000Retained earnings310,000 Total420,000Total420,000 Fair Values: Inventory (priority)170,000Bond Payable (priority) 105,000 Land100,000 Building300,000 Patents50,000

C27 Zone analysis

C28 Using purchase rules: uGoodwill above what price? $515,000 –at $550,000 Goodwill = $35,000 uBargain below what price? $515,000 –at $245,000, $180,000 ($245,000 - $65,000 to priority) is assigned non-priority accounts uExtraordinary gain below what price? $65,000 –at $50,000, the extraordinary gain is 15,000 Zone analysis: do before the D&D schedule

C29 D&D for $550,000 Price550,000 Equity (100%  $320,000) 320,000 Excess cost230,000 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

C210 Eliminations for $550,000 price

C211 D&D for $245,000 Price245,000 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

C212 Allocation

C213 Eliminations for $245,000 price

C214 D&D for $50,000 Price50,000 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)

C215 Eliminations for $50,000 price

C216 Zones for an 80% purchase Use the same subsidiary information for 80% purchase All adjustments are for 80% of fair-book difference uAbove what price will there be goodwill? $412,000 $515,000  80% = $412,000 We will use $430,000 so goodwill = $18,000 uBelow 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 uExtraordinary gain below what price? $52,000 80%  $65,000 = $52,000

C217 Zone Analysis: 80% purchase

C218 D&D for 80% interest at 430,000 Price430,000 Equity (80%  $320,000)256,000 Excess cost174,000 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 Goodwill 18,000

C219 Eliminations for $430,000 price

C220 D&D for 80% interest at $241,000 Price241,000 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

C221 Allocation

C222 Eliminations for $241,000 price

C223 Purchase: subsidiary goodwill uNo assets, including intangible assets, can be discounted until parent share of goodwill is eliminated uIgnore existing goodwill in “Zone analysis” uCompare goodwill that results from “Zone analysis” to parent share of existing goodwill and adjust for the difference uA free standing D&D (not connected to prior examples) follows for subsidiary with $50,000 goodwill

C224 D&D for 80% interest at $500,000 Price500,000 Equity (80%  450,000)360,000 Excess cost140,000 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)

C225 Presentation of NCI Current Practice uNCI share of income deducted to get consolidated net income uNCI equity shown as liability, between liabilities and equity or as subdivision of equity u NCI shown only as aggregate amount within equity FASB Proposal on Liabilities and Equity uNCI share of income is distribution of consolidated net income uNCI share of equity is aggregate amount within equity (text approach)

C226 Pooling of interests uInvestment should was at book value and should observe equity transfer for equity (Chapter 1) uThere could be up to 10% NCI; equity transfer applies only to parent ownership percentage (90% or more) uInvestment always eliminated with no excess. If not, the investment account is wrong and needs correction.