CHAPTER 1

Business Combinations 1

Reasons for Business Combinations

Antitrust Considerations

Legal Form of Business Combinations

Accounting Concept of Business Combinations

Accounting for Combinations as Acquisitions 6

Disclosure Requirements

15

The Sarbanes-Oxley Act

17

Electronic Supplement to Chapter 1 ES1

CHAPTER 2

Stock Investments—Investor Accounting and Reporting

27

Accounting for Stock Investments

27

Equity Method—a One-Line Consolidation

31

Investment in a Step-by-Step Acquisition

39

Sale of an Equity Interest

39

Stock Purchases Directly from the Investee

40

Investee Corporation with Preferred Stock

40

Extraordinary Items and other Considerations

41

Disclosures for Equity Investees

42

Testing Goodwill for Impairment

44

CHAPTER 3

An Introduction to Consolidated Financial Statements

63

Business Combinations Consummated through Stock Acquisitions 63

Consolidated Balance Sheet at Date of Acquisition

68

Consolidated Balance Sheets after Acquisition

72
Assigning Excess to Identifiable Net Assets and Goodwill 74

Consolidated Income Statement

80

Push-Down Accounting

81

Preparing a Consolidated Balance Sheet Worksheet

83

Electronic Supplement to Chapter 3 ES3

xi

CONTENTS

CHAPTER 4

Consolidation Techniques and Procedures

99

Consolidation under the Equity Method

99

Locating Errors 106

Excess Assigned to Identifiable Net Assets

106

Consolidated Statement of Cash Flows

112

Preparing a Consolidation Worksheet

117
Electronic Supplement to Chapter 4 ES4

CHAPTER 5

Intercompany Profit Transactions—Inventories

145

Intercompany Inventory Transactions 146

Downstream and Upstream Sales 150

Unrealized Profits from Downstream Sales

153

Unrealized Profits from Upstream Sales

156

Consolidation Example—Intercompany Profits from Downstream Sales 158

Consolidation Example—Intercompany Profits from Upstream Sales

161

Electronic Supplement to Chapter 5 ES5

CHAPTER 6

Intercompany Profit Transactions—Plant Assets

185

Intercompany Profits on Nondepreciable Plant Assets 185

Intercompany Profits on Depreciable Plant Assets

190

Plant Assets Sold at Other than Fair Value

198

Consolidation Example—Upstream and Downstream Sales of Plant Assets 199

Inventory Purchased for Use as Operating Assets

202

Electronic Supplement to Chapter 6 ES6

CHAPTER 7

Intercompany Profit Transactions—Bonds

219

Intercompany Bond Transactions 219

Constructive Gains and Losses on Intercompany Bonds 220

Parent Bonds Purchased by Subsidiary

222

Subsidiary Bonds Purchased by Parent

228

Electronic Supplement to Chapter 7 ES7

CHAPTER 8

Consolidations—Changes in Ownership Interests

247

Acquisitions During an Accounting Period

247

Piecemeal Acquisitions 251

Sale of Ownership Interests

253

Changes in Ownership Interests from Subsidiary Stock Transactions

258

Stock Dividends and Stock Splits by a Subsidiary

262

CHAPTER 9

Indirect and Mutual Holdings

279

Affiliation Structures 279

Indirect Holdings—Father-Son-Grandson Structure

281

CONTENTS xiii

Indirect Holdings—Connecting Affiliates Structure

285

Mutual Holdings—Parent Stock Held by Subsidiary

289

Subsidiary Stock Mutually-Held 298

C H A P T E R 10

Subsidiary Preferred Stock, Consolidated Earnings per Share, and Consolidated Income Taxation
315

Subsidiaries with Preferred Stock Outstanding

315

Parent and Consolidated Earnings Per Share

322

Subsidiary with Convertible Preferred Stock

324

Subsidiary with Options and Convertible Bonds

325

Income Taxes of Consolidated Entities

326

Income Tax Allocation

328

Separate-Company Tax Returns with Intercompany Gain

330

Effect of Consolidated and Separate-Company Tax Returns on

Consolidation Procedures 334

Business Combinations

341

Financial Statement Disclosures for Income Taxes

346

Electronic Supplement to Chapter 10 ES10

C H A P T E R 11

Consolidation Theories, Push-Down Accounting, and Corporate Joint Ventures

369

Comparison of Consolidation Theories

370

Illustration—Consolidation Under Parent-Company and Entity Theories

372

Push-Down Accounting and Other Basis Considerations

381

Joint Ventures 388

Accounting for Variable Interest Entities

391

C H A P T E R 12

Derivatives and Foreign Currency: Concepts and Common Transactions 409

Derivatives 409

Foreign Exchange Concepts and Definitions

414

Foreign Currency Transactions Other than Forward Contracts

416

C H A P T E R 13

Accounting for Derivatives and Hedging Activities

429

Accounting for Derivative Instruments and Hedging Activities

429

Accounting for Hedge Contracts: Illustrations of Cash Flow and

Fair Value Hedge Accounting Using Interest Rate Swaps 439

Foreign Currency Derivatives and Hedging Activities

443

C H A P T E R 14

Foreign Currency Financial Statements

463

Objectives of Translation and the Functional Currency Concept

463

Application of the Functional Currency Concept

465

Illustration: Translation

469

CONTENTS

Illustration: Remeasurement

475

Hedging a Net Investment in a Foreign Entity

479

C H A P T E R 15
Segment and Interim Financial Reporting

497

Segment Reporting

497

Interim Financial Reporting

504

Guidelines for Preparing Interim Statements

506

C H A P T E R 16

Partnerships—Formation, Operations, and Changes in Ownership Interests

525

Nature of Partnerships

525

Initial Investments in a Partnership

526

Additional Investments and Withdrawals

528

Partnership Operations

529

Profit and Loss Sharing Agreements

530

Changes in Partnership Interests

536
Purchase of an Interest from Existing Partners

537

Investing in an Existing Partnership

539

Dissociation of a Continuing Partnership Through Death or Retirement

542

Limited Partnerships

544

C H A P T E R 17

Partnership Liquidation

561

The Liquidation Process

561

Safe Payments to Partners

565

Installment Liquidations

567

Cash Distribution Plans

573

Insolvent Partners and Partnerships

576

C H A P T E R 18
Corporate Liquidations and Reorganizations

591

Bankruptcy Reform Act of 1978

591

Liquidation 594

Illustration of a Liquidation Case

596

Reorganization 603

Financial Reporting During Reorganization

607

Financial Reporting for the Emerging Company

608

Illustration of Reorganization Case

610

C H A P T E R 19

An Introduction to Accounting for State and Local Governmental Units

625

Historical Development of Accounting Principles for State and

Local Governmental Units

625
Overview of Basic Governmental Accounting Models and Principles

627

CONTENTS xv

The Financial Reporting Entity

638

Comprehensive Annual Financial Report

639

C H A P T E R 20

Accounting for State and Local Governmental Units—Governmental Funds 663

Recent Changes to Governmental Fund Accounting 663

The General Fund

664

Accounting for the General Fund 664

Permanent Funds

677

Capital Projects Funds

678

Special Assessment Activities

683

Debt Service Funds 683

Governmental Fund Financial Statements

685

Preparing the Government-Wide Financial Statements

688

C H A P T E R 21

Accounting for State and Local Governmental Units—Proprietary and Fiduciary Funds

711

Proprietary Funds

711

Internal Service Funds

712

Enterprise Funds

715

Proprietary Fund Financial Statements 718

Fiduciary Funds

722

Preparing the Government-Wide Financial Statements

727

Required Proprietary Fund Note Disclosures

727

C H A P T E R 22

Accounting for Not-for-Profit Organizations

737

The Nature of Not-for-Profit Organizations

737

Not-for-Profit Accounting Principles

738

Voluntary Health and Welfare Organizations

743

“Other” Not-for-Profit Organizations

749

Nongovernmental Not-for-Profit Hospitals and Other Health Care Organizations

750

Private Not-for-Profit Colleges and Universities 755

C H A P T E R 23

Estates and Trusts

775

Creation of an Estate

775

Probate Proceedings

776

Administration of the Estate 776

Accounting for the Estate 777

Illustration of Estate Accounting

778

Accounting for Trusts

782

Estate Taxation 783