MBA 2ND Semester
Advanced Financial Accounting-5201
Chapter-05
Title: Consolidation of Wholly
Owned Subsidiaries Acquired at
More than Book Value
Aims:
Learning Outcomes: By the end of the session, the students will be able
to:
Learning Outcomes: By the end of the session, the students will be able
to:
Introduction Part
Welcome and Rapport, Bridging, Pre-assessment, Content outline.
Content Outline:
Introduction Part
Welcome and Rapport, Bridging, Pre-assessment, Content outline.
Content Outline:
Development Part
What is a differential? How is a
differential treated by an investor in
computing income from an investee
under (a) cost-method and (b) equity-
method reporting?
A differential occurs when an investor pays more than or less
than underlying book value in acquiring ownership of an
investee.
(a) In the case of the cost method, no adjustments are made for
amortization of the differential on the investor's books.
What is a differential? How is a
differential treated by an investor in
computing income from an investee
under (a) cost-method and (b) equity-
method reporting?
(b) Under equity-method reporting the difference between the
amounts paid and book value must be assigned to appropriate
asset and liability accounts of the acquired company. If any
portion of the differential is assigned to an amortizable or
depreciable asset, that amount must be charged against income
from the investee over the remaining economic life of the asset.
What is the term differential used
to indicate?
The differential represents the difference between the
acquisition -date fair value of the acquiree and its book value.
What conditions must exist for a
negative differential to occur?
A company must acquire a subsidiary at a price equal to the
subsidiary’s fair value, and that subsidiary must have a total
acquisition - date fair value less than its book value.
What portion of the book value of
the net assets held by a subsidiary
at acquisition is included in the
consolidated balance sheet?
Current consolidation standards require recognition of the fair
value of the subsidiary's individual assets and liabilities at the
date of acquisition. At least some portion of the book value
would not be included if the fair value of a particular asset or
liability was less than book value.
What portion of the fair value of a
subsidiary’s net assets normally is
included in the consolidated
balance sheet following a business
combination?
One hundred percent of the fair value of the subsidiary’s
assets and liabilities at the date
of acquisition should be included. The type of asset or liability will
determine whether a change in its value will be recognized
following the date of acquisition.
What happens to the differential in
the consolidation worksheet
prepared as of the date of
combination? How is it re
established so that the proper
balances can be reported the
following year?
During consolidation, the differential is eliminated from the
investment account and distributed to the appropriate asset and
liability accounts. This same process is followed each time
consolidated statements are prepared. The eliminating entries do not
actually remove the balance in the investment account from the
parent's books; thus, the differential continues to be a part of the
investment account balance until fully amortized.
Explain why consolidated financial
statements become increasingly
important when the differential is
very large.
The investment account in the financial statements of the parent company
shows its investment in the subsidiary as a single total and therefore does
not provide information on the individual assets and liabilities held by the
subsidiary, nor their relative values. The existence of a large differential
indicates the parent paid well over book value to acquire ownership of the
subsidiary. When the differential is assigned to identifiable assets or liabilities
of the subsidiary, both the consolidated balance sheet and consolidated
income statement are likely to provide information not available in the
financial statements of the individual companies. The consolidated
statements are likely to provide a better picture of the assets actually being
used and the resulting income statement charges that should be reported.
Give a definition of consolidated
net income.
Consolidated net income is equal to the parent’s income from
its own operations, excluding any investment income from
consolidated subsidiaries, plus the income of each of the
consolidated subsidiaries, adjusted for any differential write-
off.
What determines whether the
balance assigned to the differential
remains constant or decreases
each period?
If the differential arises because the fair value of land, or some
other non- depreciable asset, held by the subsidiary is greater than
book value, the amount assigned to the differential will remain
constant so long as the subsidiary continues to hold the land.
When the differential arises because the fair value of depreciable
or amortizable assets is greater than book value, the amount
debited to the differential account each period will decrease as the
parent amortizes an appropriate portion of the differential against
investment income.
What does the term push-down
accounting mean?
Push -down accounting occurs when the assets and liabilities
of the subsidiary are revalued on the subsidiary's books as a
result of the purchase of shares by the parent company. The
basis of accountability that the parent company would use in
accounting for its investment in the various assets and
liabilities is used to revalue the subsidiary's assets and
liabilities; thereby pushing down the parent's basis of
accountability onto the books of the subsidiary.
Under what conditions is push-
down accounting considered
appropriate?
Push-down accounting is considered appropriate when a
subsidiary is substantially wholly owned by the parent
What happens to the differential
when push-down accounting is
used following a business
combination?
When the assets and liabilities of the subsidiary are revalued
at the date of acquisition there will no longer be a
differential. The parent's portion of the revised carrying value
of the net assets on the books of the subsidiary will agree
with the balance in the investment account.
E4-15 Balance Sheet Worksheet
with Differential
Blank Corporation acquired 100 percent of Faith Corporation’s
common stock on December 31, 20X2, for $189,000. Data from the
balance sheets of the two companies included the following amounts
as of the date of acquisition:
Blank Corporation Faith Corporation
Cash $ 26,000 $ 18,000
Accounts Receivable 87,000 37,000
Inventory 110,000 60,000
Buildings & Equipment (net) 220,000 150,000
Investment in Faith Corporation Stock 189,000
Total Assets $632,000 $265,000
E4-15 Balance Sheet Worksheet
with Differential
Blank Corporation Faith Corporation
Accounts Payable $ 92,000 $ 35,000
Notes Payable 150,000 80,000
Common Stock 100,000 60,000
Retained Earnings 290,000 90,000
Total Liabilities & Stockholders’ Equity $632,000 $265,000
At the date of the business combination, Faith’s net assets and
liabilities approximated fair value except for inventory, which had a fair
value of $84,000, and buildings and equipment (net), which had a fair
value of $165,000.
E4-15 Balance Sheet Worksheet
with Differential
Required
a. Give the elimination entry or entries needed to prepare a
consolidated balance sheet immediately following the business
combination.
b. Prepare a consolidation balance sheet worksheet.
Required
For practices-E4-1, 12,15,16, 20, 21, and 22. P4-25, 28]
Conclusion
1.Quick recap
2.Post assessment
3.Feedback
4.Refernces
5. Forward Planning
