Adv Ch 3: Consolidated Financial Statements

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Questions and Answers

What are the three new consolidation journal entries subsequent to the date of acquisition?

Changes (correct)

Depreciation (correct)

Intercompany (correct)

None of the above

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?

To eliminate intercompany transactions during the period and balances remaining at the end of the period. Signup and view all the answers

What does C-E-A-D-I stand for?

Post Acquisition Entries Signup and view all the answers

How is the consolidated statement of cash flows prepared?

From the consolidated income statement and a comparative consolidated balance sheet. Signup and view all the answers

What adjustments should be made to create the consolidated statement of cash flows?

Add back the noncash expense relating to the depreciation and amortization of the AAP and account for the cash paid for acquisitions. Signup and view all the answers

What information is required in footnote disclosures?

The name and description of the acquiree, the acquisition date, the percentage of voting equity interests acquired, and the primary reasons for the business combination. Signup and view all the answers

What happens to consolidated net income when the parent company uses the equity method?

It will equal the parent company's pre-consolidation net income. Signup and view all the answers

When is a bargain purchase observed?

When the purchase price of a subsidiary is less than the fair value of the investee's net assets. Signup and view all the answers

What is the classification of the net cash paid for an acquisition on the statement of cash flows?

Investing activity. Signup and view all the answers

Which of the following describes a limitation of consolidated financial statements?

All of the above Signup and view all the answers

What is the result if an accountant fails to record amortization related to an undervalued truck?

Consolidated Net Income will be overstated. Signup and view all the answers

What does the amount debited to Retained Earnings in consolidation entries equal when using the equity method?

The subsidiary's Retained Earnings balance. Signup and view all the answers

How does consolidated net income relate to combined revenues and expenses?

Consolidated net income equals the combined revenues of the parent and subsidiary minus the combined expenses. Signup and view all the answers

What is the effect of the parent's bookkeeping method using the cost method on consolidated financial statements?

Consolidated financial statements will appear the same regardless of the pre-consolidation method. Signup and view all the answers

Under the cost method, how does the equity investment balance behave?

It remains unchanged at its original acquisition-date amount. Signup and view all the answers

How are dividends received by the parent recorded under the cost method?

As dividend income. Signup and view all the answers

What does the consolidation process subsequent to the acquisition look like under the cost method?

Identical to the equity method consolidation entries. Signup and view all the answers

What values will the parent's equity investment account and Retained Earnings account equal?

Their beginning of period balances as if the parent company always used the equity method. Signup and view all the answers

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.