Professional Documents
Culture Documents
Rescue3 Asd
Rescue3 Asd
Page 1
Page 2
For each subsidiary acquisition, the parent must assign the acquired assets and
liabilities (including goodwill) to individual reporting units of its combined
operations. The reporting units should be at the level of operating segment or lower
and must provide the basis for future assessments of fair value. Any value assigned to
Advanced Financial Accounting (MSc.)
Page 3
goodwill is not amortized but instead is tested annually for impairment. This test
consists of two steps. First, if the fair values of any of the consolidated entitys
reporting units fall below their carrying values, then the implied value of the
associated goodwill must be recomputed. Second, the recomputed implied value of
goodwill is compared to its carrying value. An impairment(damaged) loss must then
be recognized if the carrying value of goodwill exceeds its implied value.
The acquisition-date fair value assigned to a subsidiary can be based, at least in part,
on the fair value of any contingent consideration. For contingent obligations that meet
the definition of a liability, the obligation is adjusted for changes in fair value over
time with corresponding recognition of gains or losses from the revaluation. For
contingent obligations classified as equity, no re-measurement to fair value takes
place. In either case the initial value recognized in the combination does not change
regardless of whether the contingency is eventually paid or not.
Push-down accounting is the adjustment of the subsidiarys account balances to
recognize allocations and goodwill stemming from the parents acquisition.
Subsequent amortization of these figures also is recorded by the subsidiary as an
expense. At this time, push-down accounting is required by the SEC for the separate
statements of the subsidiary only when no substantial outside ownership exists.
The FASB is currently studying push-down accounting and may issue more specific
rules on its application. However, for internal reporting purposes, push-down
accounting is gaining popularity because it aids company officials in evaluating the
impact that the subsidiary has on the business combination.
Problems
1. Following are the account balances of Miller Company and Richmond Company as of
December 31. The fair values of Richmond Companys assets and liabilities are also
listed.
Advanced Financial Accounting (MSc.)
Page 4
Miller
Richmond
Richmond
Company
Company
Company
Fair
12/31
12/31
12/31
$ 600,000
$ 200,000
$ 200,000
Values
Cash. . . . . . . . . . . . . . . . . . . . . . . .
Receivables. . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . .
900,000
300,000
290,000
1,100,000
600,000
820,000
800,000
900,000
Unpatented technology . . . . . . . . .
500,000
100,000
In-process research
and development . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . .
(400,000)
(200,000)
(200,000)
Notes payable. . . . . . . . . . . . . . . . .
(3,400,000)
(1,100,000)
(1,100,000)
____________________________________
Totals . . . . . . . . . . . . . . . . . . . . .
$ 7,800,000
$ 600,000
1,510,000
====================================
Common stock$20 par value . . . $ (2,000,000)
Common stock$5 par value . . . .
$ (220,000)
(100,000)
(130,000)
Revenues . . . . . . . . . . . . . . . . . . . .
(6,000,000)
Expenses . . . . . . . . . . . . . . . . . . . .
3,400,000
(900,000)
750,000
Page 5
As part of the acquisition agreement, Miller agrees to pay the former owners of
Richmond $250,000 if certain profit projections are realized over the next three years.
Miller calculates the acquisition date fair value of this contingency at $100,000.
In creating this combination, Miller pays $10,000 in stock issue costs and $20,000 in
accounting and legal fees.
Required
A. Millers stock has a fair value of $32.00 per share. Using the acquisition method:
1. Prepare the necessary journal entries if Miller dissolves Richmond so it is no longer
a separate legal entity.
2. Assume instead that Richmond will retain separate legal incorporation and maintain
its own accounting systems. Prepare a worksheet to consolidate the accounts of the
two companies.
B. If Millers stock has a fair value of $26.00 per share, describe how the consolidated
balances would differ from the results in requirement (a).
2. On January 1, 2011, Top Company acquired all of Bottom Companys outstanding
common stock for $842,000 in cash. As of that date, one of Bottoms buildings with a
12-year remaining life was undervalued on its financial records by $72,000.
Equipment with a 10-year life was undervalued, but only by $10,000. The book
values of all of Bottoms other assets and liabilities were equal to their fair values at
that time except for an unrecorded licensing agreement with an assessed value of
$40,000 and a 20-year remaining useful life. Bottoms book value at the acquisition
date was $720,000.
During 2011, Bottom reported net income of $100,000 and paid $30,000 in dividends.
Earnings were $120,000 in 2012 with $20,000 in dividends distributed by the
subsidiary. As of December 31, 2013, the companies reported the following selected
balances, which include all revenues and expenses for the year:
Top Company
Bottom Company
Credit
Credit
Page 6
_______________________________________________
Buildings . . . . . . . . . . . . . . . . $1,540,000
Cash and receivables . . . . . . .
$460,000
50,000
Common stock . . . . . . . . . . .
90,000
$ 900,000
$400,000
Dividends paid . . . . . . . . . . .
70,000
10,000
Equipment . . . . . . . . . . . . . .
280,000
200,000
500,000
120,000
Depreciation expense . . . . . .
100,000
60,000
Inventory . . . . . . . . . . . . . . . .
280,000
260,000
Land . . . . . . . . . . . . . . . . . . .
330,000
250,000
Liabilities . . . . . . . . . . . . . . . .
480,000
260,000
1,360,000
490,000
Revenues . . . . . . . . . . . . . . .
900,000
300,000
__________________________________________________________________________
Required
A. If Top applies the equity method, what is its investment account balance as of
December 31, 2013?
B. If Top applies the initial value method, what is its investment account balance as of
December 31, 2013?
C. Regardless of the accounting method in use by Top, what are the consolidated
totals as of December 31, 2013, for each of the following accounts?
Buildings
Revenues
Equipment
Net Income
Land
Investment in Bottom
Depreciation
Amortization
D. Prepare the worksheet entries required on December 31, 2013, to consolidate the
financial records of these two companies. Assume that Top applied the equity method
to its investment account.
E. How would the worksheet entries in requirement (d) be altered if Top has used the
initial value method?
Page 7