0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 5: Allocation, Depreciation, and Amortization of the Difference between Cost and Book Value
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Allocation of Purchase Differential
Book value of
net assets
acquired
Acquisition
cost
(MV-BV) of
identifiable
net assets
Purchase
differential
Goodwill
(if amount >0)
or bargain purchase (if amount <0)

2. Allocation of Purchase Differential: An Alternative View
Book value of
net assets
acquired
Market value of
net assets
acquired
Acquisition
cost
(MV-BV) of
identifiable
net assets
Goodwill
(if amount >0)
or bargain purchase (if amount <0)
Goodwill
(if amount >0)
or bargain purchase (if amount <0)

3. Valuation of Net Assets Acquired:
Bargain Purchase
Valuation of Net Assets Acquired:
Current assets, long-term investments in marketable securities, liabilities = fair value
Previously recorded goodwill = 0
Long-term assets = fair value - bargain allocation
(The bargain is allocated to long-term assets in proportion to their fair value.)
Any remaining bargain is recorded as negative goodwill and amortized over a maximum of 40 years.

4. Case 1: Positive Goodwill
Wholly Owned Subsidiary
Book value of
net assets
acquired
$2,000,000
Acquisition
cost
$2,750,000
Inventory $50,000
Equipment $300,000
Purchase
differential
$750,000
Land $150,000
Goodwill
$250,000

5. Case 1: Positive Goodwill
80% Owned Subsidiary
Book value of
net assets
acquired
$1,600,000
Note: identifiable net assets are written up only by :
P% x (MV-BV)
Acquisition
cost
$2,200,000
Inventory $40,000
Equipment $240,000
Purchase
differential
$600,000
Land $120,000
Goodwill
$200,000

6. Case 1: Positive Goodwill - EE’s
The Investment Entry
Retained earnings - S ,000
Capital stock - S ,200,000
Difference between cost and book value 600,000
Investment in S ,200,000
The Allocation Entry
Inventory ,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000

7. Case 2A: Bargain Purchase BV < Cost
80% Owned Subsidiary
Book value of
net assets
acquired
$1,600,000
Note: identifiable net assets are written up only by :
P% x (MV-BV)
Acquisition
cost
$1,900,000
Inventory $40,000
Equipment $240,000
Purchase
differential
$300,000
Land $120,000
Bargain purchase
$100,000

8. Case 2A: Bargain Purchase BV < Cost
Allocation of Bargain Purchase
Note: assets are reduced in proportion to their fair values, not book values
Reduction in asset amounts:
Equipment $30,000
Land $20,000
Bargain purchase
$100,000
Other noncurrent
assets $50,000

9. Case 2A: Bargain Purchase BV < Cost : EE’s
The Investment Entry
Retained earnings - S ,000
Capital stock - S ,200,000
Difference between cost and book value 300,000
Investment in S ,900,000
The Allocation Entry
Inventory ,000
Equipment (240,000-30,000) ,000
Land (120,000-20,000) ,000
Other noncurrent assets (0-50,000) ,000
Difference between cost and book value ,000

10. Case 2B: Bargain Purchase BV > Cost
80% Owned Subsidiary
Book value of
net assets
acquired
$1,600,000
Note: identifiable net assets are written up only by :
P% x (MV-BV)
Acquisition
cost
$1,500,000
Inventory $40,000
Equipment $240,000
Purchase
differential
-$100,000
Land $120,000
Bargain purchase
$500,000

11. Case 2B: Bargain Purchase BV > Cost
Allocation of Bargain Purchase
Note: assets are reduced in proportion to their fair values, not book values
Reduction in asset amounts:
Equipment $150,000
Bargain purchase
$500,000
Land $100,000
Other noncurrent
assets $250,000

12. Case 2B: Bargain Purchase BV > Cost : EE’s
The Investment Entry
Retained earnings - S ,000
Capital stock - S ,200,000
Difference between cost and book value ,000
Investment in S ,500,000
The Allocation Entry
Difference between cost and book value 100,000
Inventory ,000
Equipment (240, ,000) ,000
Land (120, ,000) ,000
Other noncurrent assets (0-250,000) ,000

13. Amortization of Purchase Differential
Case 1: Positive Goodwill, 80% Owned Subsidiary
Purchase differential
Annual adjustments to consolidated NI
2001
Inventory $40,000
Inventory $40,000
Inventory $40,000
Inventory $40,000
Inventory $40,000
COGS $40,000
Inventory $40,000
Inventory $40,000
Depreciation
expense
$24,000
Equipment
$240,000
Depreciation
expense
$24,000
Land
$120,000
Goodwill
$200,000
Amortization expense
$10,000
Amortization
expense
$10,000
Amortization
expense
$10,000

14. Amortization of Purchase Differential
Case 1: Positive Goodwill, 80% Owned Subsidiary
Annual adjustments to beginning consolidated R/E
2001
2001
2002
COGS $40,000
Depreciation
expense
$24,000
Depreciation
expense
$24,000
Consolidated NI
adjustments
Depreciation
expense
$24,000
Amortization
expense
$10,000
Amortization
expense
$10,000
Amortization expense
$10,000
Adjustments
to 1/1 R/E
= sum of NI adjustments in all previous years
74,000
108,000

15. The Allocation EE Cost Method
End of Year of Acquisition
Cost of goods sold ,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000
Add up to $74,000, becomes the 1/1 R/E adjustment in the next year
(see next slide)

16. The Allocation EE Cost Method
Year Subsequent to Acquisition
Beginning retained earnings ,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000
Add up to $108,000, becomes the 1/1 R/E adjustment in the next year
(see next slide)

17. The Allocation EE Cost Method
2 Years Subsequent to Acquisition
Beginning retained earnings 108,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000

18. The Allocation EE Partial Equity Method
End of Year of Acquisition
Cost of goods sold ,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000
Add up to $74,000, becomes the 1/1 R/E adjustment in the next year
(see next slide)

19. The Allocation EE Partial Equity Method
Year Subsequent to Acquisition
Beginning retained earnings ,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000
Add up to $108,000, becomes the 1/1 R/E adjustment in the next year
(see next slide)

20. The Allocation EE Complete Equity Method
End of Year of Acquisition
Cost of goods sold ,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000
Add up to $74,000, becomes the 1/1 R/E adjustment in the next year
(see next slide)

21. The Allocation EE Complete Equity Method
Year Subsequent to Acquisition
Investment in S ,000
Depreciation expense ,000
Amortization expense of goodwill 10,000
Equipment ,000
Land ,000
Goodwill ,000
Difference between cost and book value ,000
Add up to $108,000, becomes the 1/1 R/E adjustment in the next year
(see next slide)
Note: The investment account, instead of the beginning
R/E, is adjusted under the complete equity method

22. Push Down Accounting Definition
A subsidiary changes the accounting basis in its separate financial statements based on the purchase price paid by the parent for its stock.

23. Push Down Accounting Yes No Yes No Push down accounting should
not be used
Yes
S has outstanding
public debt? No
Yes
S has outstanding
senior class of capital stock?
Push down
accounting is
recommended No
<80%
What is P’s % of ownership?
80-95%
Push down
accounting is
required
<80%

24. Advanced Accounting by Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.