ACC 4100 / STAN CHU / CLASS NOTES

8/29/2015 (4) To record amortization or deferral of unrealized gross profit:

CHAPTER 1: EQUITY METHOD FOR ACCOUNTING FOR Equity Income xx
Investment xx
INVESTMENTS Excess cost over book value = Cost BV of net assets
Ex. Cost 700
3 ways to account for investments in corporate equity securities: BV (500)
1) Fair value method: 0% - 19% Excess 200
2) Equity method (significant influence): 20% - 50%
3) Consolidated financial statements (control): 51% - 100% Undervalued asset 50
Unrecorded asset 50
A company may exercise a fair value option instead of using equity method Goodwill (any unexplained diff) 100
decision must be made at the time of investment purchase
Investment equity Equity income
E QUITY METHOD Cost (1) Dividends (3) Amortization or Income accrual (3)
Significant influence deferral of GP (4)
- Representation on the investees Board of Directors Income accrual (2) Amortization or Realized GP
- Investee consults with investor on major policy decisions deferral of GP (4)
- Investee depends on investors knowledge / technology
Investment moves in the same direction as investees Stockholders Equity
Journal Entries NI RE SE
Dividends RE SE
(1) To record purchase of investment:
#6
Investment in Puckett 1,600,000
Investment xxx
Cash 1,600,000
Cash xxx Investment (560,000x40%) 224,000
Equity income 224,000
To record purchase of investment by issuing common stock: Cash ($2 x 50,000 shares) 100,000
Investment 100,000
Investment xxx
Common stock (par value) xxx Investment equity
Additional PIC xxx 1,600,000 100,000
{at fair value of stock investor gives up) 224,000
1,724,000
(2) To record proportionate share of investee net income:
#7
Investment xxx Cost 700,000
Equity Income xxx BV [(3,900,000-90,000) x 20%] 600,000
Excess 100,000
Undervalued patent: 100,000 / 10 years = 10,000 amortization per year
(3) To record dividends received:
(2012)
Cash xxx Investment 700,000
Investment xxx Cash 700,000
Investment (170,000 x 20%) 34,000
 Equity income Investor sells to investee downstream sale
34,000 Investee sells to investor upstream sale
Cash (70,000 x 20%) 14,000
Investment If only goods were sold of GP is realized, is
14,000 unrealized GP (deferred)
Equity income 10,000
Investment Formulas to calculate Unrealized GP
10,000

Unrealized GP =Total Profit Unsold Ownersh ip

(2013)
Investment (210,000 x 20%) 42,000 Unrealized GP =Ending Inventory GP Owners h ip
Equity income
42,000
Cash (70,000 x 20%) 14,000 #11
Investment Sales price 90,000
14,000 Cost 54,000
Equity income 10,000 GP 36,000
Investment
10,000 GP % = 36,000 / 90,000 = 40%

Investment equity (1)

700,000 14,000 20,000
34,000 10,000 Unrealized GP =36,000 30 =2,400
42,000 14,000 90,000
10,000 (2)
728,000 Unrealized GP =20,000 40 30 =2,400
#8
Cost 500,000 #12
BV [(1,400,000-500,000) x 40%] 360,000 (2012)
Excess 140,000 (2013)
Sales price 100,000
Undervalued building (140,000 x 40%) / 7 = 150,000
8,000 Cost 70,000
Undervalued trademark (210,000 x 40%) / 10 = 96,000
8,400 GP 30,000
Amortization = 54,000
16,400 / year GP % 30%
36%
Investment 500,000
Cash (2012)
500,000
Investment (90,000 x 40%) 36,000 25,000
Unrealized GP =30,000 40 =3,000
Equity income 100,000
36,000
Cash (30,000 x 40%) 12,000
Investment
Unrealized GP =25,000 30 40 =3,000
12,000 (2013)
Equity income 16,400 45,000
Investment
Unrealized GP =54,000 40 =6,480
150,000
16,400

Investment equity Unrealized GP =45,000 36 40 =6,480

500,000 12,000
36,000 16,400 Cost 530,000
507,600 BV (1,200,000 x 40%) 480,000
Excess 50,000
Undervalued trademark = 50,000 / 20 = 2,500 per year
Deferral of unrealized gross profit in inventory (2012)
Investment 530,000
Intercompany (intra-entity) transactions are NOT Cash
completely earned (real) until goods are resold to unrelated 530,000
party. Investment (80,000 x 40%) 32,000
 Investment equity Undervalued patent [(20,000 5,000) x 40%] 6,000
32,000 Goodwill 4,000
Cash (30,000 x 40%) 12,000
Investment Additional amortization per year (6,000 / 6) 1,000
12,000
Equity income 2,500 EQUITY METHOD VAIR VALUE METHOD
Investment 2012 2012
2,500 Investment 60,000 Investment 60,000
Equity income 3,000 Cash 60,000 Cash
Investment Investment 12,000
3,000 No income accrual
Equity Income 12,000
Cash 4,000 Cash 4,000
Investment 4,000 Dividend Income
(2013) Equity Income 1,000
Investment (2012 ending inventory sold) 3,000 No amortization
Investment 1,000
Equity income Investment (FV adj) 8,000
3,000 No Fair Value Adjustment
Unreal gain income
Investment (110,000 x 40%) 44,000
Equity income Investment 2012 = 67,000 Investment 2012 = 68,000
44,000 Equity Income 2012 = 11,000 Income 2012 = 12,000
Cash 12,000
Investment 2013 2013
12,000 Investment 20,000
Equity income 2,500 No income accrual
Equity Income 20,000
Investment Cash 6,000 Cash 6,000
2,500 Investment 6,000 Dividend Income
Equity income 6,480 Equity Income 1,000
Investment No amortization
Investment 1,000
6,480 Investment (FV adj) 7,000
No Fair Value Adjustment
Unreal gain income
Equity income
2,500 3,000 Investment 2013 = 80,000 Investment 2013 = 68,000+7,000
6,480 44,000 Equity Income 2013 = 19,000 Income 2013 = 6,000 + 7,000 = 13
38,020

9/12/15 Balance sheet 2012

2013
#25 EXAM!!!! Investment at cost 60,000
(2012) 60,000
GP = Sales price Cost = 40,000 24,000 = 16,000 FV Adjustment 8,000
GP % = 16,000 / 40,000 = 40% 15,000
Unrealized GP =16,000 25 30 =1,200 Investment at FV 68,000
75,000
Unrealized GP =40,000 25 40 30 =1,200
Unrealized 2012 GP was sold in 2013
(2013) !!! If FV decreases loss, subtract loss from income
GP = Sales price Cost = 50,000 28,000 = 22,000
GP % = 22,000 / 50,000 = 44%
Unrealized GP =22,000 40 30 =2,640
Unrealized GP =50,000 40 44 30 =2,640
Investment equity Equity income
335,000 9,000 9,000 1,200
27,000 9,000 2,640 27,000
(Real GP) 2,640
1,200
342,560 16,560

#16 EXAM!!!!

Cost 600,000
BV [(200,000 75,000) x 40%] 50,000
Excess 10,000
8/29/15 Professional Services expense 42,000
Cash
CHAPTER 2: BUSINESS COMBINATIONS 42,000
APIC (stock issue costs) 25,000
Business combination: transaction or event when one Cash
company gains control over another company. 25,000

Types of business combinations: #21

1) Statutory merger (A + B = A) A buys B, but only B
FV of consideration transferred (cash)
survives
4,200,000
2) Statutory consolidation (A + B = new C) both
FV of identifiable assets
companies dissolve, new company created 4,310,000
3) Acquisition (A + B = A + B): both companies remain in Gain on Bargain Purchase
existence 110,000

Economic substance over legal form Inventory 600,000

Land 990,000
9/12/15 Buildings 2,000,000
Customer Relationships 800,000
Acquisition method A/P
80,000
All assets & liabilities are measured at fair value
Cash
Consideration transferred: 4,200,000
Cash Gain on Bargain Purchase
Securities 110,000
Contingent performance obligation at estimated
present value Professional Services expense 42,000
Goodwill = Total FV of consideration transferred FV of Cash
identifiable net assets 42,000
Business combination costs:
- Direct combination costs (accounting, legal, inv bank A CQUISITION M ETHOD S UBSIDIARY I S N OT
fees) are expensed as incurred (Professional Services D ISSOLVED
Expense)
- Indirect costs (e.g. overtime) are expensed as 1. Prior to constructing a worksheet, the parent prepares
incurred a formal allocation of the acquisition value similar to
- Stock issuance costs result in reduction in Additional the equity method procedures
Paid-in Capital 2. Financial information for Parent and Sub is recorded in
In-process R&D is recognized as intangible assets at FV the first two columns of the worksheet (with Subs
prior revenue and expense already closed)
3. Remove the Subs equity account balances - S
Merger = permanent consolidation 4. Remove the Investment in Sub balance
5. Allocate Subs Fair Values, including any excess of cost
#20
over Book Value to identifiable assets or goodwill A
FV of consideration transferred:
Cash 4,000,000
6. Combine all account balances and extend into the
Stock (20,000 x $50) 1,000,000 Consolidated totals column
Total FV 5,000,000 7. Subtract consolidated expenses from revenues to arrive
FV of identifiable assets at net income
=600,000+990,000+2,000,000+800,00080,000=4,310,000
Goodwill = 5,000,000 4,310,000 = 690,000 #22

Inventory 600,000
Land 990,000
Buildings 2,000,000
Customer Relationships 800,000
Goodwill 690,000
A/P
80,000
Cash Investment in Strata 3,200,000
4,000,000 Cash
Common Stock (par value) 3,200,000
40,000
APIC Journal entries that appear on worksheet ONLY!!!
960,000 (S)
Common Stock 1,000,000
APIC 500,000 Total FV
Retained Earnings 1,100,000 760,000
Investment FV of identifiable net assets
2,600,000 680,000
(A) Goodwill
Buildings 300,000 80,000
Goodwill 400,000
Licensing agreements Investment in Sol
100,000 760,000
Investment Cash
600,000 360,000
Common Stock (10,000x$20[parent])
200,000
APIC
PARENT BV 200,000
SUB FV Professional Services Expense
20,000
Cash
20,000
#27
APIC
Consideration transferred at FV 5,000
495,000 Cash
Book Value 5,000
265,000
Excess FV over BV Inventory = 410,000 + 260,000 = 670,000
230,000 Land = 600,000 + 130,000 = 270,000
Allocation: Buildings = 600,000 + 110,000 = 710,000
Computer Software (undervalued) 50,000 Franchise agreements = 220,000 + 220,000 = 440,000
Equipment (overvalued) (10,000) Goodwill = 80,000
Client contracts (unrecorded) 100,000 Revenues = 960,000 (ONLY PARENTS)
In-process R&D (unrecorded) 40,000 APIC = 70,000 + 200,000 5,000 = 265,000
Notes Payable (undervalued) (5,000) Expenses = 920,000 + 20,000 = 940,000
175,000 R/E 1/1 = 390,000
Goodwill R/E 12/31 = 390,000 + 960,000 920,000 20,000 = 410,000
55,000

9/19/15
WORKSHEET JOURNAL ENTRIES #2-23 b)
(S) FV of consideration transferred: Cash 800,000
Common Stock 100,000 CPO 35,000
APIC 25,000 Total 835,000
Retained Earnings 140,000 FV of identifiable net assets (+R&D) 750,000
Investment Goodwill 85,000
265,000
A/R 90,000
(A) Inventory 75,000
Computer Software 50,000 Copyrights 480,000
Goodwill 55,000 Patent 700,000
Client contracts 100,000 Goodwill 85,000
Intangible asset (In-process R&D) 40,000 R&D intangible asset 200,000
Equipment Current liabilities
10,000 160,000
Notes Payable LT liabilities
5,000 635,000
Investment Contingent performance obligation
230,000 35,000
Cash
800,000
#22 EXAM!!!!
Professional services expense 100,000
FV of consideration transferred Cash
Cash 100,000
360,000
Stock (10,000 x $40) #2-23 a)
400,000 FV of consideration transferred: Cash 700,000
CPO 35,000
 Total 735,000
FV of identifiable net assets (+R&D) 750,000
CHAPTER 3: C ONSOLIDATIONS SUBSEQUENT
Gain on bargain purchase (15,000) TO THE D ATE OF A CQUISITION

A/R 90,000
Method Investment Income Account
Inventory 75,000
Copyrights 480,000 EQUITY Continually Income accrued as
Patent 700,000 adjusted to reflect earned;
R&D intangible asset 200,000 ownership of amortization and
Current liabilities
acquired company. other adjustments
160,000
are recognized.
LT liabilities
635,000
INITIAL Remains at Dividends
Contingent performance obligation VALUE Initially-Recorded declared recorded
35,000 cost as Dividend
Cash Income
700,000 PARTIAL Adjusted only for Income accrued as
Gain on bargain purchase EQUITY accrued income earned; no other
15,000 and dividends adjustments
declared by recognized.
Professional services expense 100,000 acquired company.
Cash
100,000 Example from ppt:
Cost = 800,000; NI = 100,000, Dividends = 40,000, Amortization
= 7,000
Own 100%
EI = equity from subsidiary earnings

EQUITY PARTIAL EQUITY INITIAL V

Purchase Investment 800,000
Same Same
Cash 800,000
Net Income Investment 100,000
accrual Same No Ent
EI 100,000
Dividend Cash 40,000 Cash 4
Received Same
Investment 40,000 Div income
Amortizatio EI 7,000
n No Entry No ent
Investment 7,000
Inv = 853,000 Inv = 860,000 Inv = 800,000
EI = 93,000 EI = 100,000 EI = 40,000

Worksheet entries

S Eliminates the subsidiarys Stockholders equity account beginning bal

and the book value component within the parents investment account
A Recognizes the unamortized Allocations as of the beginning of the curr
associated with the adjustments to fair value.
I Eliminates the subsidiary Income accrued by the parent.
D Eliminates the subsidiary Dividends
E Recognizes excess amortization Expenses for the current period on the
allocations from the original adjustments to fair value.
#3-28 Equipment 3,000
FV of consideration transferred: Cash Depreciation expense
550,000 3,000
BV of net identifiable assets:
350,000
Excess
200,000

Trademarks 100,000 indefinite

0
Customer Relationships 75,000 5 years
15,000
Equipment (30,000) 10 years
(3,000)
Goodwill 55,000 indefinite
0

12,000

FULL EQUITY METHOD

Investment 550,000
Cash
550,000
Investment 222,000
Equity income
222,000
Cash 80,000
Investment
80,000
Equity income 12,000
Investment
12,000

Investment = 680,000
EI = 210,000

(S)
Common Stock 100,000
RE beg 250,000
Investment in OBrien
350,000

(A) Allocation of adjustments to FV

Trademarks 100,000
Customer Relationships 75,000
Goodwill 55,000
Equipment
30,0000
Investment in OBrien
200,000

(I)
Income from OBrien 210,000
Investment in OBrien
210,00

(D)
Investment 80,000
Dividends declared
80,000

(E)
Amortization expense 15,000
Customer Relationships
15,000
#3-20 Depreciation Expense
4,000
Cost 490,000
BV of identifiable net assets 400,000
Excess 90,000

Land 10,000 indefinite

0
Buildings 40,000 4 years
10,000
Equipment (20,000) 5 years
(4,000)
Goodwill 60,000 indefinite
0

6,000

EQUITY METHOD ENTRIES

2014
Investment 490,000
No entry
Cash 490,000
Investment 80,000 110,000
Equity Income 80,000 110,000
Cash 10,000 30,000
Investment 10,000 30,000
Equity Income 6,000 6,000
Investment 6,000 6,000

Equity income $74,000 $104,000

2014 2015
( Common Stock 250,000
S 250,000 50,000
) APIC 170,000
50,000
RE beg 470,000
100,000
Investment
400,000
( Land 10,000
A 10,000 30,000
) Buildings 60,000
40,000
Goodwill 16,000
60,000
Equipment 84,000
20,000
Investment
90,000
( Equity Income 104,000
I 74,000
) Investment 104,000
74,000
( Investment 30,000
D 10,000
) Dividends declared 30,000
10,000
( Depreciation expense Same as in
E 10,000 previous year
) Buildings
10,000
Equipment
4,000