Advanced Accounting

Advanced Accounting

A company must plan to use the additional data before the task of accumulation becomes worthwhile. Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important. Income levels would probably be significant. However, if the subsidiary is actually quite small in relation to the parent, the impact might not be material enough to warrant the extra effort. Size of dividend payments. If Crossword pays out most of its earnings each period as dividends, that figure will approximate equity income.

Little additional information would be accrued by applying the equity method. In entrant, if dividends are small or not paid on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination. Amount of excess amortization. If Pilgrim has paid a significant amount in excess of book value so that annual amortization charges are quite high, use of the equity method might be preferred to show the effect of this expense each month (or whenever internal reporting is made).

In this easer waiting until the end of the year and recording all of the expense at one time through a worksheet entry might not be the best way to reflect the impact of the expense. Amount of interception transactions. As with amortization, the Volvo mum of transfers can be an important element in deciding which accounting method to use. If few interception sales are made, monitoring the subsidiary through the application of the equity method is less essential. Conversely, if the amount of these transactions IS significant, the added data can be helpful to company administrators evaluating operations.

Sophistication of accounting systems. If Pilgrim and Crossword both have advanced accounting systems, application of the equity method may be relatively simple. Unfortunately, if these systems are primitive, the cost and effort necessary to apply the equity method may outweigh any potential benefits. The timeliness and accuracy Of income figures generated by Crossword. If the subsidiary reports operating results on a regular basis (such as weekly or monthly) and these figures prove to be reliable, equity totals recorded by Pilgrim may serve as valuable information to the parent.

However, if Crossword’s reports are slow and often require later adjustment, Pilgrim’s use of the equity method will provide only questionable results. McGraw-Hill/ Irwin Hole, Schaefer, Dauphin, Advanced Accounting, 9/e O The McGraw-Hill companies, Inc. , 2009 3-1 Answers to Questions a. ACES Corp… , for its own reconsidering, may apply the equity method to the investment in Signaling. Under this approach, the parent’s records parallel the activities of the subsidiary. Income will be accrued by the parent as it is earned by the subsidiary.

Dividends paid by Signaling cause a reduction in book value; therefore, the investment account is reduced by ACES in a corresponding manner. In addition, any excess amortization expense associated with the allocation of Access purchase price is recognized through a periodic adjustment. By applying the equity method, both the income and investment balances maintained by the parent accurately reflect consolidated totals. The equity method is especially helpful in monitoring the income of the business combination. This method can be, however, rather difficult to apply and a time-consuming process. . The initial value method. The initial value method can also be utilized by ACES Corporation. Any dividends received will be accounted for as income but no other investment entries are recorded. Thus, the initial value method is quite easy to apply. However, the balances found within the parent’s uncial records may not provide a reasonable representation of the totals that will result from consolidating the companies. C. The partial equity method combines the advantages of the previous two techniques. Income is accrued as earned by the subsidiary in the same manner as the equity method.

Similarly, dividends are reported as a reduction in the investment account. However, no other entries are recorded; more specifically, amortization is not recognized by the parent. The method is, therefore, easier to apply than the equity method but the subsidiary’s individual totals will still frequently approximate consolidated balances. . A. The consolidated total for equipment is made up of the sum of Maguire’s book value, Williams’ book value, and any amortized excess acquisition- date fair value over book value attributable to Williams’ equipment. B.

Although an Investment in Williams account is appropriately maintained by the parent, from a consolidation perspective the balance is interception in nature. Thus, the entire amount will be eliminated in arriving at consolidated financial statements. C. Only dividends paid to outside parties are included in consolidated statements. Because Maguire owns 100 percent of Williams, all of the absurdity’s dividends are interception. Consequently, only the dividends paid by the parent company will be reported in the financial statements for this business combination. . Any goodwill recognized within Maguire’s original acquisition price must still be reported for consolidation purposes. Reductions to the goodwill balance are made if goodwill is determined to be impaired. E. Unless interception revenues have been recorded, consolidation is achieved in subsequent periods by adding the two book values together. McGraw-Hill/Larkin 3-2 Solutions Manual Consolidated expenses can be determined by adding the parent’s book value o that of the subsidiary and then including any amortization expense associated with the purchase price.

As will be discussed in detail in Chapter Five, interception expenses can also be present which require elimination in arriving at consolidated figures. G. Only the common stock outstanding for the parent company is included in consolidated totals. H. The net income for a business combination is calculated as the difference between consolidated revenues and consolidated expenses. 3. When using the equity method, subsidiary earnings are accrued and amortization expense (associated with the acquisition price in a purchase) is agonized in the same manner as in the consolidation process.

The equity method parallels consolidation. Thus, the net income and retained earnings reported by the parent company each year will equal the consolidated totals. 4. In the consolidation process, excess amortization must be recorded annually for any portion of the purchase price that is allocated to specific accounts (other than land or to goodwill). Although this expense can be simulated in total on the parent’s books by an equity method entry, the actual amortization of each allocated fair value adjustment is appropriate for installation.

Hence, the effect of the parent’s equity method amortization entry is removed as part of Entry I so that the amortization of specific accounts (e. G. , depreciation) can be recorded (in consolidation Entry E). 5. When the initial value method is applied by the parent company, no accrual is recorded to reflect the subsidiary’s change in book value during the years following acquisition. Furthermore, recognition of excess amortization relating to the acquisition price is also omitted by the parent. The partial equity method, in contrast, records the subsidiary’s book value increases and creases but not amortization.

Consequently, for both of these methods, a technique must be established within the consolidation process to record the omitted figures. Entry *C simply brings the parent’s records (more specifically, the beginning retained earnings balance and the investment account) up-to- date as of the first day of the current year. If the initial value method has been applied by the acquiring company, any changes in the subsidiary’s book value in previous years must be recorded on the worksheet along with the appropriate amount of amortization expense.

For the partial equity method, only the amortization relating to these prior years needs to be recognized. No similar entry is needed if the equity method has been applied; changes in the subsidiary’s book value as well as excess amortization expense will be recorded each year by the parent. Thus, under the equity method, the parent’s investment and beginning retained earnings balances are both correctly established without further adjustment. 6. Amber’s loan payable and the receivable held by Jenkins are interception accounts.

As such, the reciprocal balances should be offset in the consolidation process. The S 100,000 is not a debt to or a receivable from an unrelated (or outside) party and should, therefore, not be reported in consolidated financial statements. Additionally any interest income/expense recognized on this loan is also interception in nature and must likewise be eliminated. McGraw-Hill/Lenin Hole, Schaefer, Dauphin, Advanced Accounting, We @ The McGraw-Hill Companies, Inc. , 2009 3-3 7. Since the equity method has been applied by Beans, the $920,000 is composed of four balances: a.

The original consideration transferred by the parent; b. The annual accruals made by Beans to recognize income as it is earned by the subsidiary; c. The reductions that are created by the subsidiary’s payment of dividends; d. The periodic amortization recognized by Beans in connection with the allocations identified with its purchase price. 8. The $100,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold. 9.

A parent should consider recognizing an impairment loss for goodwill associated with a purchased subsidiary when, at the reporting unit level, the fair value IS less than its carrying amount. Goodwill is reduced when its carrying value is less than its fair value. To compute fair value for goodwill, its implied value is calculated by subtracting the fair values of the reporting unit’s identifiable net assets from its total fair value. The impairment is recognized as a loss from continuing operations. The additional consideration is merely an extra component of the price paid by Remote to purchase Albany.

Thus, any goodwill recognized at the original date of acquisition will be increased in 2009 by $100,000. However, if a bargain purchase occurred on January 1, 2009, this new payment reduces the allocations to nonoccurrence assets previously recognized for consolidation purposes. 0. 11. At present, the Securities and Exchange Commission requires the use of push-down accounting for the separate financial Statements Of a subsidiary where no substantial outside ownership exists. Thus, if Company A owns all of Company B, the push-down method of accounting would be appropriate for the separately issued statements of Company B.

The SEC normally requires push-down accounting where 95 percent of a subsidiary is acquired and the company has no outstanding public debt or preferred stock. Push-down accounting may be required if 80-95 percent of the outstanding voting stock is purchased. Push-down accounting is justified in that the consideration transferred by the present owners is reported. For example, if a piece of land costs Company 8 $10,000 but Company A pays $1 3,000 for the land when acquiring Company B, the land has a basis to the current owners of B of $13,000.

If Bi’s financial records had been united with A at the time of the acquisition, the land would have been reported at $13,000. Thus, leaving the $10,000 figure simply because separate incorporation is maintained is viewed, by proponents of push-down accounting, as unjustified. 12. When push-down accounting is applied, the subsidiary adjusts the book value Of its assets and liabilities based on the allocations made at the date of the acquisition. Periodic amortization expense is recon sized subsequently by the subsidiary on each of these allocations (except for land).

Therefore, the income recorded by the subsidiary is a fair representation of that company’s impact on consolidated earnings. The parent uses no special procedures when push-down accounting is being applied. However, if the equity method is in use, amortization need not be recognized by the parent since that expense is included in the figure reported by the subsidiary. 3-4 O The McGraw-Hill Companies, Inc. 2009 13. Push-down accounting has become popular for the parent’s internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year.

Please follow and like us:
Haven’t found the essay you want?