stock acquisition homework help
Module1 – Enterprise Mixture and Consolidation .zero/msohtmlclip1/01/clip_image001.gif">Inventory Acquisition – Consolidated Monetary Statements – AFTERDateofAcquisition Teacher Remark:The followinglesson module was developed to help college students of their understandingofthe corresponding topic matterin the coursetextbook. The followingis nota replacementfor thedetailedpresentation providedby theauthors ofthe textual content, however as an alternative is an try to providestudents with a pragmaticdirect evaluate with heavyemphasis on course of. Myrecommendation is to method the coursematerial within the followingsequence. 1. Learn/studytheassignedcorrespondingsections of thetext. 2. Learn the “Chapter Review” (PowerPoint)posted in D2L. Three. Learn/completethe correspondinginstructordeveloped “InstructorSubject Matter Presentation” (THIS DOCUMENT)posted in D2L. four. Completethe assigned textual content questions, workout routines and issues (creator really useful options for assigned odd workout routines posted in D2L). 5. Reviewthe correspondinginstructordeveloped“InstructorProblemSolving Modules”posted in D2L. As mentioned inISMP #1(DateofAcquisition) forstock acquisitions wheresignificant affect and management exist, the acquirer (dad or mum)is required bytheSEC, for financialreportingpurposes, to consolidatethe acquired firm(subsidiary).Wediscussed a3-StepProcess(beneath)to be adopted within the creationof consolidated financialstatements. The same3-Step Course of is appliedin Inventory Acquisition –AfterDateofAcquisition however includes increasedcomplexitydueto the truth that timehas handed(ongoingoperations ofthe acquired companymust be consolidated). Unlikethe accountingforstock acquisitions as ofthedateofacquisition (which required the preparation of the consolidated balancesheet solely)the accounting for inventory acquisitionsafterthedateof acquisition requireconsolidation for all monetary statements (incomestatement, assertion of retainedearnings, balancesheet and assertion of money flows). The focus ofthisISMP will beon theincomestatement, assertion of retained earningsand the balancesheet. Three-Step Course of: .zero/msohtmlclip1/01/clip_image003.gif" alt="*"> Step 1 – Assess theBusiness Situation.zero/msohtmlclip1/01/clip_image003.gif" alt="*"> Step 2 – PreparetheCAD .zero/msohtmlclip1/01/clip_image003.gif" alt="*"> Step Three – Decide Workpaper Entries Notice:RefertoISMP#1forfurtherdetail. .zero/msohtmlclip1/01/clip_image004.gif">The primary two steps ofthethreestep course of arethesame forstockacquisitions on thedateof acquisition as theyareforstock acquisitions afterthedateofacquisition. The keychanges take placein Step Three. Step3- Decide theRequired Workpaper Entries •Full Workpaper •Full Monetary Assertion(s) .zero/msohtmlclip1/01/clip_image005.gif">To determinetherequired workpaper entriesforstock acquisitions afterthedateofacquisition themethod of accounting used bytheparent companyfortheInvestment in Subsidiarymust be decided. Thecompanyhas two accountingoptions formaintaining theinvestment in subsidiaryaccount, the “Value Method”orthe “Fairness Technique.”The accounting methodology used dictates the workpaper entries requiredfor consolidation.In eithercase, the ensuing consolidated monetary statements areidentical. Thekeyto correct consolidated monetary statements is thedevelopment and utility ofthe acceptable workpaper entries. RECORDING ANDMAINTAININGTHE INVESTMENT INSUBSIDIARY COST METHOD RecordingtheinitialInvestment in Subsidiaryis the similar whethertheCost Technique orthe EquityMethod is utilized. Account Debit Credit score Investmentin Subsidiary $1,000,000 *Money $1,000,000 * - Themethod ofpayment on this exampleis money, however othersources of funds may additionally beused to payfortheinvestment(i.e. issuanceofstock). MaintainingtheInvestment in Subsidiaryis wheresignificant differencesexist between the Value Technique and EquityMethod, creatingtheneed for completely different workpaperentries. Sustaining the“Funding in Subsidiary” account utilizing theCost Methodcould bedescribedas NOT maintainingthe“Funding in Subsidiary”account. UndertheCost Technique thereis no adjustment to the“Funding in Subsidiary”account steadiness(with the exception ofinstances wherealiquidatingdividend happens). Thus, theonlyinvestment associated entry,aftertheinitial funding (buy) entry, is therecordingofdividend earnings. When adividend is obtained theparent companymakes the followinginvestment associated entry: Account Debit Credit score Money $40,000 Dividend Revenue $40,000 Asyoucan see bythe entryabovetheinvestment in subsidiaryaccount isn't affected. Due to this fact, thebalanceoftheinvestment in subsidiaryremains at theinitial funding price recorded on the dateofacquisition. EQUITYMETHOD RecordingtheinitialInvestment in Subsidiaryis the similar whethertheCost Technique orthe EquityMethod is utilized. Account Debit Credit score Investmentin Subsidiary $1,000,000 *Money $1,000,000 * - Themethod ofpayment on this exampleis money, however othersources of funds may additionally beused to payfortheinvestment(i.e. issuanceofstock). Maintainingthe“Funding in Subsidiary”account usingtheEquity Technique of accounting may bedescribed as a steady effort to keep up an accuratevaluationfor reporting functions. The EquityMethod makes an attempt to account for all earnings and dividends (primarily based on the possession %)recorded by thesubsidiary. Basically, the changein theinvestment in subsidiary balancereflects the truevalueoftheinvestment assumingincomeless dividends is atrue reflection ofvalue change. Due to this fact, the funding associated entries,aftertheinitial funding (buy) entry, is the recordingofincome anddividends. The recording ofincomeis accounted for usingthe followingentry(assume thesubsidiaryis 80% owned and had incomeof$250,000): Account Debit Credit score Investmentin Subsidiary $200,000 Fairness in Subsidiary Revenue $200,000 Clearly, the aboveentryimpacts the funding in subsidiaryaccount steadiness (increasingthe account balanceby$200,000). The accounting fordividend declared and paid follows thesamelogic.Iftheparentcompanyis receivingdividends, the dad or mum is essentiallytakingvalueout of theinvestment. The recording ofdividendreceived is accounted forusing thefollowingentry(assume thesubsidiaryis 80% owned and declared adividend of$50,000): Account Debit Credit score Money $40,000 Investmentin Subsidiary $40,000 Clearly, the aboveentryimpacts the funding in subsidiaryaccount steadiness (decreasingthe account balanceby$40,000). Q1.– Calculation – What it the “Funding in Subsidiary”account steadiness on the finish ofthe yr (in theexample above)usingtheCost Technique and EquityMethod? WORKPAPERENTRIES – ELIMINATIONOFTHE INVESTMENTINSUBSIDIARY Theinvestment relatedentries (mentioned above)should betaken under consideration when creating workpaper entries. Theworkpaperentries essentiallyeliminatetheinvestment in subsidiary(key offset is the equityaccounts ofthesubsidiary)which upon elimination permits forthe consolidation of theparent and subsidiary,whichcombines the associated incomestatement, assertion of retained earnings, and balancesheetaccounts oftheparentand subsidiary. COST METHOD Workpaper entriesrequired fortheCost Methodmust account for all oftheinvestment entries made (ornot made)to theinvestment in subsidiaryaccount. Inaddition, fortheCost Technique, thetimingofthe consolidation impacts the applying ofthe workpaperentries. The two time intervals arethe Yearof Acquisition and After Yearof Acquisition. .zero/msohtmlclip1/01/clip_image006.gif">.zero/msohtmlclip1/01/clip_image007.gif">.zero/msohtmlclip1/01/clip_image008.gif"> Value Technique -YearofAcquisition–Is thefirstyearofownership of thesubsidiary. Thus, ifthe subsidiarywas purchasedon January1, 2010 andwe are reporting fortheyear endingDecember31, 2010, we might bereportingYearof Acquisition. Assumethefollowing baseinformation: COST METHOD USEDBYPARENT REALEntry Debit Credit score Jan.1,2010 InvestmentinSubsidiary $ 500,000 Money $ 500,000 Bought80%ofsubsidiary. SubsidiaryEquityPositionasof1/1/2010: CommonStock $ 10,000 APIC $ 300,000 RetainedEarnings $ 240,000 $ 550,000 CAD 80% Possession 80% 20% 100% Mother or father NCI TotalImplied FairValueGiven Up $ 500,000 $ 125,000 $ 625,000 BookValueReceived $ 440,000 $ 110,000 $ 550,000 Distinction $ 60,000 $ 15,000 $ 75,000 Land $ 60,000 $ 15,000 $ 75,000 Steadiness $ - $ - $ - 100% 80% Throughout2010,Subsidiarydeclareddividendsintheamountof $ 50,000 $ 40,000 Throughout2010,Subsidiaryhadnetincomeinthe amountof $ 250,000 $ 200,000 SubsidiaryRetainedEarningsasof12/31/2009was $ 240,000 .zero/msohtmlclip1/01/clip_image009.gif"> .zero/msohtmlclip1/01/clip_image010.gif">For theYearof Acquisition–COSTMETHOD-thefollowingthree workpaperentries arerequired: 1 Remove(parentsshare)ofcurrentyearsubsidiarydividendincome. REALEntry Debit Credit score Money $ 40,000 DividendIncome $ 40,000 WorkpaperEntry(1) Debit DividendIncome $ 40,000 DividendDeclared-Subsidiary $ Credit score 40,000 2 EliminatetheInvestmentinSubsidiaryaccountagainst(offsetby)thesubsidiary equityaccounts. WorkpaperEntry(2) Debit Credit score A CommonStock-Subsidiary $ 10,000 A APIC-Subsidiary $ 300,000 B RetainedEarnings-Subsidiary $ 240,000 C Distinction $ 75,000 D InvestmentinSubsidiary $ 500,000 E NCI $ 125,000 Notes: Bear in mind,100%ofthesub's equityaccount balancesneed tobeeliminated. A No changefromthedateofacquisition. B Weneedto eliminateREbalanceas ofthebeginnngofthecurrentyear. C Neverchanges. D Funding inSubsidiary(Funding AccountValueattheBeg.OftheCurrent Yr) E NCI(NCIAccountValueat theBeg.OftheCurrentYear) .zero/msohtmlclip1/01/clip_image011.gif">.zero/msohtmlclip1/01/clip_image011.gif">.zero/msohtmlclip1/01/clip_image011.gif">.zero/msohtmlclip1/01/clip_image009.gif">Q2. –Quick Reply- The adjustment to the“Funding in Subsidiary” account is as ofthe beginningoftheyear. What's the logicorreasonthe adjustment is as ofthebeginningofthe yr?