Corporate Reporting & Group Accounting Year 1
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Questions and Answers

What is the value of the acquiree's PPEs in the subsidiary books (B) at the start of year 2?

  • 560
  • 400 (correct)
  • 480
  • 500

What is the total amount of amortization expense recognized in the consolidated income statement for year 1?

  • 220
  • 200 (correct)
  • 120
  • 100

What is the value of the PPEs in the parent company’s (A) books at the start of year 2?

  • 1080 (correct)
  • 900
  • 980
  • 1000

What is the value of the deferred tax asset related to the fair value adjustment in the parent’s books at the start of year 2?

<p>66 (D)</p> Signup and view all the answers

What is the value of the equity in the subsidiary (B) at the start of year 2?

<p>411.2 (C)</p> Signup and view all the answers

What is the value of the non-controlling interest (NCI) in the subsidiary (B) at the start of year 2?

<p>28 (A)</p> Signup and view all the answers

What is the value of the parent company’s (A) investment in the subsidiary (B) at the start of year 2?

<p>980 (D)</p> Signup and view all the answers

What is the value of the non-controlling interest (NCI) in the subsidiary (B) based on the fair value at the acquisition date?

<p>20 (C)</p> Signup and view all the answers

What is the fair value (FV) of the PPEs at the acquisition date for Entity B?

<p>600 (B)</p> Signup and view all the answers

What is the total amortization rate for Entity B's PPEs over five years?

<p>10% (B)</p> Signup and view all the answers

At the end of Year 1, how much would the carrying amount of Entity B's PPEs be after accounting for fair value adjustments?

<p>580 (C)</p> Signup and view all the answers

The increase in the fair value of Entity B's PPEs at acquisition compared to its book value is:

<p>$100 (D)</p> Signup and view all the answers

What is the impact of a 30% tax rate on the revaluation of PPEs?

<p>Increases taxable income (C)</p> Signup and view all the answers

What is the value of the acquiree’s PPEs at book value from the subsidiary's perspective?

<p>300 (D)</p> Signup and view all the answers

What is the amortization rate for the subsidiary's balance sheet?

<p>100 per year (D)</p> Signup and view all the answers

What is the residual value of PPEs in the subsidiary's balance sheet?

<p>200 (B)</p> Signup and view all the answers

What is the value of the acquiree’s PPEs at book value from the parent's perspective?

<p>360 (B)</p> Signup and view all the answers

What is the amortization rate in the parent’s balance sheet?

<p>120 per year (B)</p> Signup and view all the answers

What is the tax effect due to amortization in the subsidiary's balance sheet?

<p>30 (C)</p> Signup and view all the answers

What is the residual value of PPEs in the parent's balance sheet?

<p>240 (D)</p> Signup and view all the answers

What would be the tax effect due to amortization in the parent's balance sheet?

<p>12 (C)</p> Signup and view all the answers

What is the annual amortization expense for the PPE in the balance sheet of Subsidiary B?

<p>100 (C)</p> Signup and view all the answers

What is the value of Subsidiary B's PPE at book value?

<p>500 (C)</p> Signup and view all the answers

What is the calculated effect of the fair value amortization in the consolidated financial statements for one year?

<p>20 (C)</p> Signup and view all the answers

What is the total PPE value in the consolidated financial statements (CFS) after considering the changes?

<p>1,380 (B)</p> Signup and view all the answers

What is the residual value of the PPE in Subsidiary B’s balance sheet?

<p>400 (C)</p> Signup and view all the answers

Which of the following statements is true regarding the amortization rates of A and B?

<p>A and B have different amortization rates. (B)</p> Signup and view all the answers

How is the fair value of PPE accounted for after the initial recognition in consolidated financial statements?

<p>It must be amortized. (D)</p> Signup and view all the answers

What was the initial fair value adjustment of PPE on the acquisition date?

<p>100 (C)</p> Signup and view all the answers

What is the total amount of PPE at the end of Year 3 after considering amortization?

<p>240 (C)</p> Signup and view all the answers

Which entry represents the annual amortization related to the PPE acquired by Parent A?

<p>20 (C)</p> Signup and view all the answers

What impact does the differential tax have on Parent A's financial reporting?

<p>It disadvantages Parent A (A)</p> Signup and view all the answers

How is the value of Deferred Tax recorded for Year 3?

<p>6 (D)</p> Signup and view all the answers

What process does the parent and subsidiary undertake at the beginning of each year regarding their accounts?

<p>Re-open all accounts (A)</p> Signup and view all the answers

What is the balance of Equity NCI after three years as noted?

<p>2.8 (C)</p> Signup and view all the answers

At the end of Year 3, what is the calculated value of PPE after all amortizations have been deducted?

<p>240 (B)</p> Signup and view all the answers

After the initial recognition, what is the significance of the adjustments to re-estimate the opening CBS?

<p>They adjust the fair value of assets (B)</p> Signup and view all the answers

What is the value of the acquiree’s Property, Plant, and Equipment (PPE) at book value?

<p>600 (B)</p> Signup and view all the answers

What is the annual amortization rate for the subsidiary's balance sheet?

<p>20% (A)</p> Signup and view all the answers

What is the total yearly excess amortization amount that affects the consolidated income statement?

<p>20 (B)</p> Signup and view all the answers

How does the excess amortization affect the earnings for both controlling interest (CI) and non-controlling interest (NCI)?

<p>Decreases earnings for both (A)</p> Signup and view all the answers

How do deferred tax liabilities change as a result of the excess amortization?

<p>They decrease (A)</p> Signup and view all the answers

What would be the impact on consolidated equity as a result of higher costs from excess amortization?

<p>Lower consolidated equity (A)</p> Signup and view all the answers

What is the impact of the amortization on taxes?

<p>Decreases taxes (A)</p> Signup and view all the answers

What amount represents the tax effect due to amortization?

<p>36 (A)</p> Signup and view all the answers

What percentage of the differential taxes disadvantages the parent?

<p>36% (D)</p> Signup and view all the answers

Flashcards

Book Value (BV) of Acquiree's PPE

The value of the subsidiary's (B) assets (in this case PPE) as recorded in its own books at the time of acquisition.

Amortization Rate in Subsidiary's BS

The annual reduction in the value of PPE recorded in the subsidiary's (B) financial statements.

Residual Value of PPE in Subsidiary's BS

The estimated value of the subsidiary's (B) PPE at the end of its useful life.

Tax Effect due to Amortization

The tax impact of the amortization expense recorded by the subsidiary (B).

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Initial Acquisition of Subsidiary

The initial accounting entry at the acquisition date when a company acquires a subsidiary with a fair value higher than its book value, resulting in an increase in the carrying value of the subsidiary's assets.

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End-of-Year 1 Revaluation

A revaluation adjustment made at the end of the first year after an acquisition that reflects the recognition of the difference between the fair value (FV) and book value (BV) of the subsidiary's assets. Amortization is included in this adjustment.

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FV Changes in Income Statement

The change in fair value (FV) from the initial acquisition date to the end of the first year is recognized in the parent company's income statement. This change is related to the change in fair value of the subsidiary's assets.

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Annual FV Changes

The accounting entry made at the end of each year after the initial acquisition. The change in fair value (FV) is recognized in the parent company's equity (controlling interest) and non-controlling interest (NCI).

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Controlling Interest

The value assigned to the portion of the subsidiary's shares owned by the parent company.

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Fair Value Adjustment

The difference between the fair value of an asset and its book value.

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Excess Amortization

The excess amortization recognized in the consolidated income statement compared to the subsidiary's individual income statement.

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Amortization Adjustment

The adjustment to the consolidated income statement to reflect the excess amortization.

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NCI Amortization

The portion of the excess amortization allocated to the non-controlling interest (NCI).

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Deferred Tax Liability

The difference between the tax rate applied to the excess amortization and the actual tax rate paid.

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NCI Deferred Tax Liability

The portion of the deferred tax liability allocated to the non-controlling interest (NCI).

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Equity Impact of Excess Amortization

The effects of excess amortization on a parent company's equity.

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Reporting Excess Amortization After Acquisition

Recognizing the excess amortization in the consolidated income statement after the initial consolidation.

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Subsidiary Earnings Impact

The impact of excess amortization on a subsidiary's earnings.

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Consolidated Financial Statement Impact

The impact of excess amortization on a parent company's consolidated financial statements.

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Amortization of Fair Value Adjustment

The portion of the fair value adjustment that is allocated to the asset's useful life, reflected as an expense in the subsidiary's income statement.

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Tax Impact of Amortization

The tax expense or benefit associated with the amortization of the fair value adjustment.

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Adjusted Book Value

The book value of the subsidiary's assets, determined by adjusting the subsidiary's carrying value for the fair value adjustment.

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Non-Controlling Interest (NCI) Share of Adjusted Book Value

The portion of the adjusted book value that belongs to the non-controlling interest.

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Non-Controlling Interest (NCI) Share in Subsidiary Income

The difference between the consolidated income statement and the parent's income statement. It reflects the portion of the subsidiary's income earned by the non-controlling interest.

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Acquisition Method of Consolidation

A method used to account for the differences between the subsidiary's book value and the fair value of its assets at acquisition. This method is preferred because it provides more transparent information about the parent company's ownership in the subsidiary.

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Differential Taxes in Consolidation

The difference between the tax effect of amortization in the parent's consolidated financial statements and the subsidiary's financial statements. It arises due to the non-controlling interest's share of the subsidiary's profits.

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BV of Acquired PPE (Sub)

The initial value of the acquired PPE from the subsidiary's perspective, which remains constant throughout the consolidation process. It reflects the subsidiary's own accounting records.

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Amortization Rate (Sub)

The annual decrease in the value of PPE recorded in the subsidiary's financial statements, determined by the subsidiary's accounting policies.

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Residual Value (Sub)

The estimated value of the subsidiary's PPE at the end of its useful life, as recorded in its financial statements.

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Tax Effect (Sub)

The tax liability resulting from the amortization expense recorded by the subsidiary. It reflects the portion of the amortization that is deductible for tax purposes.

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BV of Acquired PPE (Parent)

The value of the acquired PPE from the parent company's perspective, incorporating any adjustments for fair value and amortization. It reflects the consolidation process.

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Amortization Rate (Parent)

The annual decrease in the value of PPE recorded in the consolidated financial statements, taking into account the amortization policy of the subsidiary and any adjustments for fair value.

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Residual Value (Parent)

The estimated value of the acquired PPE at the end of its useful life, as seen from the parent company's perspective, incorporating any adjustments for fair value and amortization.

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Tax Effect (Parent)

The tax liability resulting from the amortization expense recorded in the consolidated financial statements. It considers the tax impact of adjustments made for fair value and amortization.

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Closing Accounts

At the end of each reporting period, the parent and subsidiary close all accounts to the Balance Sheet (BS) and Income Statement (IS), effectively resetting their financial positions for the next period.

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Re-opening Accounts

At the beginning of each reporting period, the parent and subsidiary re-open all accounts, allowing them to track values consistently over time.

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CFS: Separate Starting Point

The parent and subsidiary's Balance Sheets (BS) are re-opened each year, but the cash flow statement (CFS) is not. This means we must start tracking cash flows from separate BS of the parent and subsidiary.

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PPE Fair Value Changes

Changes in the fair value of PPE are recognized in the parent's (A) balance sheet by adjusting the equity and deferred tax.

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Amortization Expense

The parent (A) recognizes the difference between the purchase price and the book value of the subsidiary's (B) PPE as amortization expense.

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Tax Effect of Amortization

The amortization expense recognized by the parent (A) triggers a tax impact, which is recorded in the deferred tax account.

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Parent and Subsidiary: Separate Entities

The parent (A) and subsidiary (B) are treated as separate entities, although the parent holds a controlling interest in the subsidiary.

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Consolidated Accounting: Accuracy

The accounting system for consolidated financial statements ensures that the parent (A) accurately reflects the subsidiary's (B) performance and financial position.

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Study Notes

Corporate Reporting & Group Accounting

  • Course is for 2024-2025
  • Instructors are Amedeo Pugliese (University of Padua) and Marco Ghitti (University of Padua)
  • Email addresses are provided for the instructors

Consolidation at the End of Year 1

  • Focuses on consolidation procedures at the end of the first year.

Accounting Entries for PPEs (Year 1)

  • Shows how changes in fair value (FV) of Property, Plant, and Equipment (PP&E) between book value (BV) and FV affect accounting entries.
  • Example: A company (A) buys another company (B), and the FV of B's PPE increases from 500 to 600.
  • Amortization is calculated straight-line over 5 years for both entities.

Reporting Effects of FV Changes for Controlling Interests and Non-Controlling Interests (Year 1)

  • Explains the impact of FV changes on controlling interests (CI) and non-controlling interests (NCI).
  • Example: At the time of acquisition, one company (B) has a book value of 500 for its PPE; at the time of acquisition (1/1/200X), the fair value changes to 600, creating a difference of 100.
  • Charts show the impact of these changes on the income statement (IS) and balance sheets (BS) of the subsidiaries and consolidated financials.

Reporting Controlling and NCIs (Year 1)

  • Includes a table summarizing the consolidated data on acquisition date (1-1-200x) and 31-12-200x for PPE and amortization.
  • Shows how fair value (FV) adjustments for PPEs are not directly recorded in the accounting system for the parent and subsidiary companies, but FV must be amortized as part of the consolidated financial statements (CFS).

Reporting Controlling and NCIs at the Purchase (Year 1)

  • Demonstrates a scenario where a parent company (A) acquires 80% of a subsidiary (B).
  • A table shows the adjustments made at the purchase date and the income statement entries including the amortization rate calculated on the acquired subsidiary's portion (80%).
  • Table shows deferred taxes and earnings for controlling and non-controlling interests (CI/NCI).

Reporting Controlling and NCIs after the Initial Recognition (Year 1)

  • Covers Parent (A) buying 80% of Subsidiary (B).
  • Provides specifics on the adjustments and impact at the end of year 1 and includes tables on PPE, deferred taxes, equity, and income statement(IS) related to the acquisition.

Reporting Controlling and NCIs in Year 2

  • A summary of procedures and effects related to the revaluation of assets held by the subsidiary (B) after a 1/1/ acquisition.

Reporting Controlling and NCIs after the Initial Recognition (Year 3)

  • A review of reporting procedures and impact at the end of year 3 after an initial acquisition

Reporting Procedures after Initial Recognition

  • The accounting system permits tracking PPE (Property, Plant, and Equipment) values for a parent and subsidiary company.
  • At the end of a reporting period, processes are done to close accounting periods for both balance sheet (BS) and income statements(IS) for all entities involved.
  • At the beginning of a new reporting period, data is re-opened according to each company's rules.
  • Consolidated financial statements(CFS) processes differ from other statements (BS & IS), so adjustments are needed to ensure consistent tracking over time for the CFS.
  • Re-evaluation of opening balance sheet (CBS) and adjusting for changes during the period are required.

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Corporate Reporting & Group Accounting PDF 2024-2025

Description

This quiz focuses on consolidation procedures, accounting entries for Property, Plant, and Equipment (PP&E), and the reporting effects of fair value changes for controlling and non-controlling interests at the end of the first year. Ideal for students in the Corporate Reporting and Group Accounting course for 2024-2025.

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