Questions and Answers
What are the three new consolidation journal entries subsequent to the date of acquisition?
What does the entry related to changes in the Equity Investment account signify?
It relates to the elimination of the changes in the Equity Investment account during the accounting period.
What does the depreciation entry recognize?
It recognizes the current-period AAP depreciation and amortization in the consolidated income statement.
What is the purpose of the intercompany entry?
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What does C-E-A-D-I stand for?
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How is the consolidated statement of cash flows prepared?
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What adjustments should be made to create the consolidated statement of cash flows?
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What information is required in footnote disclosures?
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What happens to consolidated net income when the parent company uses the equity method?
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When is a bargain purchase observed?
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What is the classification of the net cash paid for an acquisition on the statement of cash flows?
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Which of the following describes a limitation of consolidated financial statements?
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What is the result if an accountant fails to record amortization related to an undervalued truck?
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What does the amount debited to Retained Earnings in consolidation entries equal when using the equity method?
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How does consolidated net income relate to combined revenues and expenses?
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What is the effect of the parent's bookkeeping method using the cost method on consolidated financial statements?
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Under the cost method, how does the equity investment balance behave?
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How are dividends received by the parent recorded under the cost method?
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What does the consolidation process subsequent to the acquisition look like under the cost method?
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What values will the parent's equity investment account and Retained Earnings account equal?
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Study Notes
Consolidation Journal Entries
- Three new journal entries are created post-acquisition: Changes, Depreciation, and Intercompany.
Changes
- Reflects the elimination of changes in the Equity Investment account during the accounting period.
Depreciation
- Accounts for current-period AAP depreciation and amortization reflected in the consolidated income statement.
Intercompany
- Eliminates intercompany transactions and balances remaining at the period's end during consolidations.
Post-Acquisition Entries
- Refers to the entries acronym as C-E-A-D-I.
Consolidated Statement of Cash Flows Preparation
- Derived from the consolidated income statement and comparative consolidated balance sheet.
Creating Consolidated Statement of Cash Flows
- Noncash expenses such as AAP depreciation and amortization are added back.
- In the acquisition year, net cash paid is recorded in investing activities, changes in working capital are calculated excluding acquisition effects.
Required Footnote Disclosures
- Must include the acquiree's name, description, acquisition date, percentage of voting equity interests acquired, and reasons for the business combination.
Summary of Post-Acquisition Consolidation with Equity Method
- Consolidated net income matches the parent company's pre-consolidation net income, and consolidated owners' equity equals pre-consolidation owners' equity.
Return on Equity
- When using the equity method, consolidated return on equity matches the parent company's pre-consolidation return.
Bargain Purchase Definition
- Occurs when the purchase price of a subsidiary is less than the fair value of its net assets.
Consolidated Statement of Cash Flows
- Prepared using the consolidated comparative balance sheets and income statement.
Classifying Net Cash Paid for Acquisition
- Classified as an investing activity on the statement of cash flows.
Limitations of Consolidated Financial Statements
- May obscure performance of subsidiaries, difficulties in comparing different industries, and segment disclosures are often insufficient for analysis.
Amortization Recording Failures
- Failure to record amortization for undervalued assets like trucks results in overstated consolidated net income.
Retained Earnings in Subsequent Years
- If using the equity method, the amount debited to Retained Earnings during consolidation is equal to the subsidiary's retained earnings balance at that time.
Consolidated Net Income Calculation
- Always equals combined revenues of parent and subsidiary minus combined expenses.
Post-Acquisition Consolidation under the Cost Method
- Consolidated financial statements will remain consistent regardless of the pre-consolidation equity investment method, though consolidation entries may differ.
Cost Method Equity Investment Balance
- Maintains its original acquisition-date amount and does not change.
Dividends under Cost Method
- Dividends received by the parent are recorded as dividend income.
Cost Method Consolidation Process
- The consolidation process (EADI) is identical to those for the equity method following the acquisition.
Parent's Equity Investment and Retained Earnings
- Both balance accounts will align with their beginning of period balances, reflecting consistency in accounting practices.
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Description
This quiz explores the key concepts related to consolidated financial statements subsequent to the acquisition date. It includes definitions and examples of terms like changes, depreciation, and intercompany entries. Perfect for students looking to deepen their understanding of advanced accounting topics.
