I have a quiz this Sunday at 7pm (Pacific Time) for advanced financial accounting. It will have around 9-10 questions multiple choice. I will need someone to help me answers these questions and send me a calculation page as well. I will send pictures of the questions at the time of the quiz. I have 2 hours to finish the quiz.
Microsoft PowerPoint - Chapter 04.pptx 4-1 Chapter Four Consolidated Financial Statements and Outside Ownership Learning Objective 4-1 Understand that business combinations can occur with less than complete ownership 4-2 4-2 Noncontrolling Interest in a Subsidiary Although most parent companies have 100 percent ownership of their subsidiaries, a significant number establish control with a lesser amount of stock. If the parent doesn’t own 100 percent of the company, outside owners are referred to as a noncontrolling interest. How should the ownership interests of the noncontrolling interest be reflected in the consolidated financial statements? 4-3 Learning Objective 4-2 Describe the concepts and valuation principles underlying the acquisition method of accounting for the noncontrolling interest. 4-4 4-3 Consolidated Financial Reporting in the Presence of a Noncontrolling Interest Economic unit concept: the parent, with controlling interest, must consolidate 100 percent of its subsidiary’s financial information as a single economic unit. 4-5 Parent's assets (100%) Parent's liabilities (100%) Subsidiary's assets (100%) Subsidiary's liabilities (100%) Parent company owner's equity 100% of parent's net assets 70% of subsidiary's net assets Noncontrolling owners' interest 30% of subsidiary net assets PARENT AND 70% OWNED SUBSIDIARY COMPANIES Date of Acquisition Consolidated Balance Sheet Consolidated Financial Reporting in the Presence of a Noncontrolling Interest Acquisition method’s fair value measurement attribute The acquisition method requires that the subsidiary be valued at the acquisition-date fair value. Parent company recognizes the noncontrolling interest at its acquisition-date fair value. Goodwill (or gain on bargain purchase) should be recognized based on the difference between the acquisition-date fair value and fair value of net identifiable assets Consolidated operating expense may need to be adjusted to reflect subsidiary’s acquisition-date fair value. 4-6 4-4 Subsidiary Acquisition-Date Fair Value in the Presence of a Noncontrolling Interest The total acquired firm fair value in a partial acquisition is the sum of two components at the acquisition date: The fair value of the controlling interest. The fair value of the noncontrolling interest at the acquisition date. In a case with control premium, the fair value of the noncontrolling interest can be obtained by applying for valuation model or referring to comparable investment. In a case without control premium, the fair value of the noncontrolling interest can be implied by the fair value of the controlling interest. 4-7 Fair Value of a Noncontrolling Interest—Case With Control Premium 4-8 Assume that Jumbo Company wished to acquire 9,000 of the 10,000 outstanding equity shares of Little Company and projected substantial synergies from the proposed acquisition. To induce a sufficient number of shareholders to sell, Jumbo Company needs to offer $67 per share, even though the shares had been trading in the $57 to $59 range. The noncontrolling interest shares continue to trade around $58 per share. The valuation of the noncontrolling interest is best evidenced by the traded fair value of Little’s shares ($58), not the price paid by Jumbo. Fair value of controlling interest ($67*9,000 shares) $603,000 Fair value of noncontrolling interest ($58*1,000 shares) 58,000 Acquisition‐date fair value of Little Company $661,000 4-5 Fair Value of a Noncontrolling Interest—Case Without Control Premium 4-9 Assume that Jumbo Company wished to acquire 9,000 of the 10,000 outstanding equity shares of Little Company and projected substantial synergies from the proposed acquisition. Jumbo Company pays $67 per share for 9,000 shares. Assume that the remaining 1,000 noncontrolling interest shares are not actively traded. There was no compelling evidence that the $67 acquisition price was not representative of all of Little’s 10,000 shares. Fair value of controlling interest ($67*9,000 shares) $603,000 Fair value of noncontrolling interest ($67*1,000 shares) 67,000 Acquisition‐date fair value of Little Company $670,000 Learning Objective 4-3 Allocate goodwill acquired in a business combination across the controlling and noncontrolling interests. 4-10 4-6 Allocating Acquired Goodwill to the Controlling and Noncontrolling Interests To report ownership equity in consolidated financial statements, acquisition-date goodwill is apportioned across controlling and noncontrolling interests. The parent first allocates goodwill to its controlling interest for the excess of the fair value of its equity interest over its share of the fair value of the identifiable net assets. Any remaining goodwill is then attributed to the noncontrolling interest. The allocated goodwill will not always be proportional to the percentage owned. 4-11 Allocating Acquired Goodwill Example— Case Without Control Premium 4-12 Acquisition‐date fair value of Little Company $670,000 Fair value of Little Company's identifiable net assets 580,000 Goodwill $90,000 Assume that Jumbo Company paid $67 per share for 9,000 of the 10,000 outstanding equity shares of Little Company. The 10 percent noncontrolling interest shares traded on a daily basis at a fair value of $67,000 both before and after Jumbo’s acquisition. At the acquisition date, Jumbo assessed the total fair value of Little’s identifiable net assets at $580,000. Controlling Interest Noncontrolling Interest Total Fair value at acquisition date $603,000 $67,000 $670,000 Relative fair value of Little's identifiable net assets 522,000 58,000 580,000 Goodwill $81,000 $9,000 $90,000 4-7 Allocating Acquired Goodwill Example— Case With Control Premium 4-13 Acquisition‐date fair value of Little Company $661,000 Fair value of Little Company's identifiable net assets 580,000 Goodwill $81,000 Assume that Jumbo Company paid $67 per share for 9,000 of the 10,000 outstanding equity shares of Little Company. The 10 percent noncontrolling interest shares traded on a daily basis at a fair value of $58,000 both before and after Jumbo’s acquisition. At the acquisition date, Jumbo assessed the total fair value of Little’s identifiable net assets at $580,000. Controlling Interest Noncontrolling Interest Total Fair value at acquisition date $603,000 $58,000 $661,000 Relative fair value of Little's identifiable net assets 522,000 58,000 580,000 Goodwill $81,000 $0 $81,000 Learning Objective 4-4 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest. 4-14 4-8 Consolidated Net Income To reflect the economic unit concept, consolidated net income includes 100 percent of both the parent’s and the subsidiary’s net income, adjusted for excess acquisition- date fair value over book value amortizations. Once consolidated net income is determined, it is allocated to the parent company and the noncontrolling interests. Noncontrolling interests’ ownership pertains only to the subsidiary; its share of consolidated net income is limited to a share of the adjusted subsidiary’s net income. 4-15 Noncontrolling Interest in Subsidiary Net Income 4-16 Assume that Jumbo Company acquires 90 percent of Little Company. Further assume that Jumbo computed annual excess fair-value amortization of $15,000 based on the difference between Little’s total fair value and its underlying book value. Current year Little reports net income of $120,000 (revenues of $280,000 and total expenses of $160,000) based on its internal book values. Current year Jumbo reports its own revenues of $940,000 and total expenses of $620,000. 4-9 Noncontrolling Interest in Subsidiary Net Income (Continued) 4-17 Little net income $120,000 Excess acquisition‐date fair‐value amortization (15,000) Little net income adjusted for excess amortization 105,000 Noncontrolling interest percentage 10% Noncontrolling interest share of adjusted subsidiary net incom $10,500 Noncontrolling Interest in Subsidiary Little Company Net Income Consolidated revenues $1,220,000 Consolidated expenses 795,000 Consolidated net income 425,000 Less: net income attributable to noncontrolling interest 10,500 Net income attributable to parent (controlling interest) $414,500 Accounting for Noncontrolling Interest in Subsidiary Net Income The $10,500 noncontrolling interest share of adjusted subsidiary net income is equivalent to the noncontrolling interest share of consolidated net income, which is then subtracted from consolidated net income to determine the parent’s interest in consolidated net income. The noncontrolling shareholders’ portion of consolidated net income is limited to their 10 percent share of adjusted subsidiary income. They own a 10 percent interest in the subsidiary company but no ownership in the parent firm. 4-18 4-10 Learning Objective 4-5 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest. 4-19 Partial Ownership Consolidations— Acquisition Method The acquisition method incorporates 100 percent of the subsidiary’s assets and liabilities at their acquisition-date fair values in the consolidated financial statements. Subsequent to acquisition, changes in current fair values for assets and liabilities are not recognized. Subsidiary assets acquired and liabilities assumed are reflected in future consolidated financial statements using acquisition-date fair values net of subsequent amortizations (or reduced for impairment). 4-20 4-11 Noncontrolling Interest and Consolidations The consolidation is substantially unchanged with the presence of a noncontrolling interest. The parent company must determine and enter each of these figures when constructing a worksheet: Noncontrolling interest in subsidiary at beginning of current year. Net income attributable to noncontrolling interest. Subsidiary dividends attributable to noncontrolling interest. Noncontrolling interest as of the end of the year (three balances above combined). 4-21 Partial Acquisition with No Control Premium Example 4-22 On January 1, 2021, Jumbo Company paid $67 per share for 9,000 of the 10,000 outstanding equity shares of Little Company. The 10 percent noncontrolling interest shares traded on a daily basis at a fair value of $67,000 both before and after Jumbo’s acquisition. On January 1, 2021, Little had the following account balances: Book Value Fair Value Current assets 160,000 160,000 Land 120,000 150,000 Building (10‐year remaining life) 220,000 200,000 Equipment (5‐year remaining life 160,000 200,000 Patents (10‐year remaining life) 0 50,000 Notes payable (due in 5 years) (200,000) (180,000) Common stock (180,000) Retained earnings, 1/1/2021 (280,000) 4-12 Recall What Was Discussed in Chapter 3… Assume instead of 90% of equity shares, Jumbo acquired 100% of Little Company and paid $670,000. 4-23 Little's acquisition‐date fair value $670,000 Little's acquisition‐date book value (460,000) Fair value in excess of book value 210,000 to land ($150,000 ‐ $120,000) $30,000 to building ($200,000 ‐ $220,000) (20,000) to equipment ($200,000 ‐ $160,000) 40,000 to patent ($50,000 ‐ $0) 50,000 to notes payable ($180,000 ‐ $200,000) 20,000 120,000 to goodwill $90,000 Recall What Was Discussed in Chapter 3… Assume instead of 90% of equity shares, Jumbo acquired 100% of Little Company and paid $670,000. 4-24 Account Allocation Remaining Useful Life Annual Excess Land $30,000 indefinite $0 Building (20,000) 10 years (2,000) Equipment 40,000 5 years 8,000 Patent 50,000 10 years 5,000 Notes payable 20,000 5 years 4,000 Goodwill 90,000 indefinite 0 Annual expense $15,000 4-13 December 31, 2022 Consolidation Worksheet Would be… 4-25 Jumbo Little Consolidated Totals Sales (940,000) (280,000) (1,220,000) Cost of goods sold 480,000 90,000 570,000 Interest expense 40,000 15,000 (E) 4,000 59,000 Depreciation expense 100,000 55,000 (E) 6,000 161,000 Amortization expense (E) 5,000 5,000 Equity in subsidiary earnings (105,000) (I) 105,000 0 Net income (425,000) (120,000) (425,000) Retained earnings, 1/1/2019 (1,418,000) (340,000) (S) 340,000 (1,418,000) Net income (425,000) (120,000) (425,000) Dividends declared 110,000 70,000 (D) 70,000 110,000 Retained earnings, 12/31/2019 (1,733,000) (390,000) (1,733,000) Current assets 610,000 250,000 860,000 Land 380,000 150,000 (A) 30,000 560,000 Buildings 490,000 250,000 (E) 2,000 (A) 18,000 724,000 Equipment 873,000 150,000 (A) 32,000 (E) 8,000 1,047,000 Investment in Little Company 750,000 (D) 70,000 (S) 520,000 0 (A) 195,000 (I) 105,000 Patent (A) 45,000 (E) 5