Advanced Financial Accounting

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  • Topic: Balance sheet, Asset, Goodwill
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  • Published : February 25, 2012
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Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value


Q4-1   The carrying value of the investment is reduced under equity method reporting when (a) a dividend is received from the investee, (b) a differential is amortized, (c) an impairment of goodwill occurs, and (d) the market value of the investment declines and is less than the carrying value and it is concluded the decline is other than temporary.

Q4-2  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.

(b)  Under equity-method reporting the difference between the amount 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.

Q4-3  Amortization of a differential is the most common reason for investment income to be lower than a proportionate share of reported income of the investee. If Turner Company has paid more than book value for the shares of Straight Lace Company, the differential must be assigned to identifiable assets and liabilities of the investee, or to goodwill. Those amounts assigned to depreciable and identifiable intangible assets must be amortized and will reduce equity-method income over the remaining economic lives of the underlying assets. Amounts attributable to other items such as land or inventories must be treated as a reduction of income in the period in which Straight Lace disposes of the item. Income also will be lower if the investee has been involved in sales to related companies during the period and there are unrealized profits from those intercompany sales; the income of the selling affiliate must be reduced by the unrealized profits before equity-method income is computed. Finally, if Straight Lace has preferred stock outstanding, preferred dividends must be deducted before assigning earnings to common shareholders.

Q4-4   The differential represents the difference between the acquisition-date fair value of the acquiree and its book value.

Q4-5   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.

Q4-6   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.

Q4-7   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.

Q4-8   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....
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