Acquisition Method (Part 1)

In a business combination accounted for as an acquisition, the subsidiary may be acquired for:

cash, stock, debt securities, etc.

In an acquisition, what is the investment valued at?

FV of the consideration given or the FV of the consideration received

When does accounting for an acquisition occur?

at the date of the acquisition

JE to record acquisition for cash

D- investment in subsidiary
C- Cash

JE to record acquisition for parent CS (made by parent company)

D- Investment in subsidiary
C- CS (parent at par)
C- APIC (parent/FV-par)
**use FV at date transaction closes, NOT announcement date

2 Distinct Accounting Characteristics of Acquisition Method

1. 100 percent of new assets acquired are recorded at FV, any unallocated balance creates goodwill
2. when companies are consolidated, subsidiary's entire equity is eliminated

Formula for Acquisition Price

FV = Acquisition price = Investment in subsidiary

To arrive at Subsidiary Total Fair Value what are the necessary debits and credits?

Debits -
Goodwill
Identifiable intangible assets
BS FV adjustment
Book value (CAR)
Credits -
Noncontrolling Interest
Investment in sub (acquisition price)

What is the original CA of the investment in subsidiary account?

original cost: FV on the date of the acquisition

How are direct out of pocket business combination costs/expenses treated?

expensed

How are stock registration and issuance costs for business combinations treated?

direct reduction of the value of the stock issued
-debit: APIC of the parent

Contingent Consideration

an obligation of the parent company to transfer additional assets or equity interests to the former shareholders of the subsidiary if specified conditions are met

How is contingent consideration recorded by the parent on the acquisition date by?

-adding an estimate of the probable settlement cost to the investment in subsidiary
-crediting the liability expected value of contingent consideration

Where is an adjustment to the contingent consideration included?

in earnings in the period of adjustment

What method is used to account for the investment in subsidiary in the accounting records?

cost method or equity method

The equity method and the cost method are used by the parent company for ___ purposes only.

internal