irwin/mcgraw-hill © the mcgraw-hill companies, inc., 1999 acquisitions and consolidated statements...
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Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Acquisitions and Consolidated Statements
© The McGraw-Hill Companies, Inc., 1999
12Part One: Financial Accounting
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Slide 12-1
If an investor company owns less than 20 percent of an investee company’s common stock, and the
stock’s fair value is readily determinable, the investment is reported using the fair value method.
If an investor company owns less than 20 percent of an investee company’s common stock, and the
stock’s fair value is readily determinable, the investment is reported using the fair value method.
Fair-Value Method
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Fair-Value Method Slide 12-2
When a dividend is received, the entire
amount is credited to Dividend Revenues.
When a dividend is received, the entire
amount is credited to Dividend Revenues.
Cash 50,000 Dividend Revenues 50,000
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Cost Method Slide 12-3
If an investor company owns less than 20 percent of an investee company’s common stock, and the stock’s fair value is not readily determinable, the
investment is reported at its cost.
If an investor company owns less than 20 percent of an investee company’s common stock, and the stock’s fair value is not readily determinable, the
investment is reported at its cost.
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Equity Method Slide 12-4
If the investing company owns less than 50 percent of the voting stock, but can
significantly influence the actions of the investee, the investment is accounted for
by the equity method.
If the investing company owns less than 50 percent of the voting stock, but can
significantly influence the actions of the investee, the investment is accounted for
by the equity method.
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Equity Method Slide 12-5
Merkle Company acquired 25 percent of the common stock of Pentel Company on January 2, 1998, for $250,000.
Merkle Company acquired 25 percent of the common stock of Pentel Company on January 2, 1998, for $250,000.
Investments 250,000Cash 250,000
Pentel’s net income for 1998 was $100,000.Pentel’s net income for 1998 was $100,000.
Investments 25,000Investment Revenue 25,000
25% of $100,00025% of $100,00025% of $100,00025% of $100,000
Assume thatAssume thatMerkle Company hasMerkle Company has significant influencesignificant influence
Assume thatAssume thatMerkle Company hasMerkle Company has significant influencesignificant influence
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Equity Method Slide 12-6
During 1998, Merkle Company received $10,000 in dividends from Pentel Company.
During 1998, Merkle Company received $10,000 in dividends from Pentel Company.
Cash 10,000Investments 10,000
Note that the dividend
reduces the Investments
account.
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Over 50% consolidated statements
20-50% equity method
Less than 20% fair-value method
Consolidated Basis Slide 12-7
Amount of Ownership Method of Reporting
Corporation B
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• The acquiring corporation issues only common stock with rights identical to the majority of its outstanding voting common stock in exchange for substantially all of the voting common stock of the acquired company.
• Each combining company is autonomous and has not been a subsidiary or division of another corporation within the previous two years.
• The combination is effected in a single transaction or is completed according to a specific plan within on year.
• The acquiring corporation issues only common stock with rights identical to the majority of its outstanding voting common stock in exchange for substantially all of the voting common stock of the acquired company.
• Each combining company is autonomous and has not been a subsidiary or division of another corporation within the previous two years.
• The combination is effected in a single transaction or is completed according to a specific plan within on year.
Pooling Slide 12-8
If all of the following are met, pooling is required:Keep going! There are
two more requirements.
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• Following the combination the acquiring corporation does not reacquire its voting common stock for a six-month period other than for normal business purposes, such as the issuance of shares under stock option programs.
• The combined corporation does not intend to dispose of a significant part of the assets of the combining companies within two years after the combination.
• Following the combination the acquiring corporation does not reacquire its voting common stock for a six-month period other than for normal business purposes, such as the issuance of shares under stock option programs.
• The combined corporation does not intend to dispose of a significant part of the assets of the combining companies within two years after the combination.
Pooling Slide 12-9
If all of the following are met, pooling is required:
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Pro-Forma Consolidated Balance Sheet Slide 12-10
Pooling Purchase
Assets
Cash and marketable securities $ 7,000 $ 7,000
Accounts receivable 6,400 6,400
Inventories 8,200 8,200
Total current assets 21,600 21,600
Goodwill --- 1,500
Plant and equipment, net 13,400 14,500
Total assets $35,000 $37,600
Assets
Cash and marketable securities $ 7,000 $ 7,000
Accounts receivable 6,400 6,400
Inventories 8,200 8,200
Total current assets 21,600 21,600
Goodwill --- 1,500
Plant and equipment, net 13,400 14,500
Total assets $35,000 $37,600
Assets SectionAssets Section
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Pro-Forma Consolidated Balance Sheet Slide 12-11
Pooling Purchase
Liabilities and Shareholders’ Equity
Accounts payable $ 7,700 $ 7,700
Other current liabilities 1,800 1,800
Total current liabilities 9,500 9,500
Long-term debt 9,800 9,800
Total liabilities 19,300 19,300
Common stock (par plus paid-in capital) 3,200 8,500
Retained earnings 12,500 9,800
Total shareholders’ equity 15,700 18,300
Total liabilities and shareholders’ equity $35,000 $37,600
Liabilities and Shareholders’ Equity SectionLiabilities and Shareholders’ Equity Section
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Accounting as a Pooling Slide 12-12
There is a “marriage” of the two entities. The
two balance sheets simply are added together at book
value to arrive at a consolidated
balance sheet for the surviving entity.
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Accounting as a Purchase Slide 12-13
First, B’s identifiable net assets are revalued to their fair value.
First, B’s identifiable net assets are revalued to their fair value.
Plant and equipment had a book value of $2.8 million, but a fair value of $3.9 million.
Plant and equipment had a book value of $2.8 million, but a fair value of $3.9 million.
The consolidated plant and equipment account shows
$14.5 million.
The consolidated plant and equipment account shows
$14.5 million.
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Accounting as a Purchase Slide 12-14
Second, any excess of the purchase price over the total amount of the revalued identifiable net assets is
shown on the consolidated balance sheet as an asset called goodwill.
Second, any excess of the purchase price over the total amount of the revalued identifiable net assets is
shown on the consolidated balance sheet as an asset called goodwill.
Purchase price $6,000,000Less: Book value of net assets acquired 3,400,000
2,600,000Less: Write-up of identifiable assets to fair value 1,100,000Goodwill $1,500,000
Purchase price $6,000,000Less: Book value of net assets acquired 3,400,000
2,600,000Less: Write-up of identifiable assets to fair value 1,100,000Goodwill $1,500,000
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Pro Forma Consolidated Income Statement Slide 12-15
Corporation A Corporation B
If independent corporation:Income before taxes $3,780 $945Income tax expense (40%) 1,512 378Net income $2,268 $567Number of outstanding shares 1,000,000 100,000Earnings per share $2.27 $5.67
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Pro Forma Consolidated Income Statement Slide 12-16
Combined A-B, pooling treatment:Income before taxes $4,725Income tax expense (40%) 1,890Net income $2,835Number of outstanding shares 1,200,000Earnings per share $2.36
Combined Corporations A-B
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Pro Forma Consolidated Income Statement Slide 12-17
Combined A-B, purchase treatment:Income before taxes $4,725Less: Additional depreciation expense 110Less: Amortization of goodwill 100 Income before taxes 4,515Income tax expense (40%) 1,806Net income $2,709Number of outstanding shares 1,200,000Earnings per share $2.26
Combined Corporations A-B
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AssetsCash 45,000 12,000 57,000Accounts receivable 40,000 11,000 (1) 5,000 46,000Inventory 30,000 15,000 (4) 2,000 43,000Fixed assets, net 245,000 45,000 290,000Investment in subsidiary 55,000 --- (2) 55,000 ---
415,000 83,000 436,000 Liabilities and SH EquityAccounts payable 20,000 13,000 (1) 5,000 28,000Other current liabilities 25,000 9,000 34,000Long-term liabilities 100,000 --- 100,000Capital stock 100,000 40,000 (2) 40,000 100,000Retained earnings 170,000 21,000 (2) 15,000
(4) 2,000 174,000415,000 83,000 436,000
Consolidated Worksheet Slide 12-18
Separate Intercompany Consolidated Statements Eliminations Balance Parent Subsidiary Dr. Cr. Sheet
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Asset Valuation Slide 12-19
Assume that the Parent purchased Subsidiary stock for $70,000 rather than $55,000. If
Subsidiary’s assets were found to be recorded at their fair value, there would be goodwill of
$15,000. The elimination entry would have been:
Assume that the Parent purchased Subsidiary stock for $70,000 rather than $55,000. If
Subsidiary’s assets were found to be recorded at their fair value, there would be goodwill of
$15,000. The elimination entry would have been:
Goodwill 15,000Capital Stock (Subsidiary) 40,000Retained Earnings (Subsidiary) 15,000
Investment in Subsidiary (Parent) 70,000
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20% of subsidiary capital stock $ 8,000
20% of subsidiary retained earnings at timeof acquisition 3,000
20% of the $6,000 increase in subsidiaryretained earnings since acquisition 1,200
Less 20% of the $2,000 intercompany profits (400)
Total minority interest $11,800
20% of subsidiary capital stock $ 8,000
20% of subsidiary retained earnings at timeof acquisition 3,000
20% of the $6,000 increase in subsidiaryretained earnings since acquisition 1,200
Less 20% of the $2,000 intercompany profits (400)
Total minority interest $11,800
Minority Interest Slide 12-20
If Parent had purchased less than 100 percent of Subsidiary’s stock, then there would have been
minority interest. The majority example shown in this chapter is $11,800. This is the net of four items: