Chapter 2, Topic 1

Chapter 2 – Topic 1

Student Learning Outcomes

Net asset acquisition versus stock acquisition
Different levels of investment

The process of consolidation

Recording the Investment

Elimination entries
Worksheet procedures
Concluding comments

Topics of Presentation

Different levels of investment

Topic 2 100% acquisition: Price = FMV

Topic 3 100% acquisition: Price > FMV
Topic 4 100% acquisition: Price < FMV
Topic 5 Less than 100% acquisition

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Chapter 2, Topic 1

Net Asset Acquisition versus Stock Acquisition

Assets (at FMV)

Goodwill
Liabilities (at FMV)

Stock acquisition
Investment in Company

Let’s Look at Exercise 2

equipment which is understated by $20,000.

Part 1 assume that the net assets are
acquired for $530,000.
Part 2 assume that 100% of the outstanding
stock is purchased for $530,000.

Cash 20,000
Accounts receivable 70,000
Inventory 100,000
Property, plant and equipment 290,000
Goodwill 230,000
Current liabilities 80,000
Bonds payable 100,000
Cash 530,000

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Chapter 2, Topic 1

Glass Company’s Balance Sheet‐Net Asset

Acquisition

Cash (540,000+20,000-530,000) $ 30,000

Accounts receivable (50,000+70,000) 120,000
Inventory (50,000+100,000) 150,000
PPE (230,000+290,000) 520,000
Goodwill 230,000
Total $1,050,000
Current liabilities (140,000+80,000) $ 220,000
Bonds payable (250,000+100,000) 350,000
Common stock ($100 par) 200,000
Retained earnings 280,000
Total $1,050,000

Entry to Record Stock Acquisition

• Investment in Plastic 530,000

Cash 530,000

Glass Company’s Balance Sheet‐Stock

Acquisition
Cash (540,000-530,000) $ 10,000
Accounts receivable 50,000
Inventory 50,000
Investment in Plastic 530,000
PPE 230,000
Total $870,000
Current liabilities $140,000
Bonds payable 250,000
Common stock ($100 par) 200,000
Retained earnings 280,000
Total $870,000
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Chapter 2, Topic 1

Balance Sheet Comparison

Net Asset Stock
Cash $ 30,000 $ 10,000
Accounts receivable 120,000 50,000
Inventory 150,000 50,000
Investment in Plastic 530,000
PPE 520,000 230,000
Goodwill 230,000
Total $1,050,000 $870,000
Current liabilities $ 220,000 $140,000
Bonds payable 350,000 250,000
Common stock ($100 par) 200,000 200,000
Retained earnings 280,000 280,000
Total $1,050,000 $870,000
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Net Asset Acquisition Stock Acquisition

I control the company I control the company,

assuming > 50%

The Solution ‐ Consolidation

Assets Liabilities = Equity
The investment account is eliminated against

over BV.

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Chapter 2, Topic 1

What is left are the net assets of Plastic,

increased to their FMV
Cash $ 20,000
Accounts receivable 70,000
Inventory 100,000
PPE 290,000
Goodwill 230,000
Current liabilities (80,000)

Consolidated Balance Sheet

Glass Plastic DR CR Consol. B/S
Cash $ 10,000 $ 20,000 30,000
A/R 50,000 70,000 120,000
Inventory 50,000 100,000 150,000
Invest. in Plastic 530,000 280,000 -0-
250,000
PPE 230,000 270,000 20,000 520,000
Goodwill 230,000 230,000
Current Liab. (140,000) (80,000) (220,000)
Bonds Payable (250,000) (100,000) (350,000)
C/S-Glass (200,000) (200,000)
C/S-Plastic (150,000) 150,000 -0-
R/E-Glass (280,000) (280,000)
R/E-Plastic (130,000) 130,000 -0-
-0- -0- 530,000 530,000 -0-
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Balance Sheet‐Net Asset Acquisition

Cash (540,000+20,000-530,000) $ 30,000

Accounts receivable (50,000+70,000) 120,000
Inventory (50,000+100,000) 150,000
PPE (230,000+290,000) 520,000
Goodwill 230,000
Total $1,050,000
Current liabilities (140,000+80,000) $ 220,000
Bonds payable (250,000+100,000) 350,000
Common stock ($100 par) 200,000
Retained earnings 280,000
Total $1,050,000

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Chapter 2, Topic 1

Different Levels of Investment

• <20% ‐ Passive Investment

Dividends recorded as income

Year‐end adjustment values investment at market
• Between 20% and 50% ‐ Influential Investment

method
Dividends recorded as reduction in investment account
Year‐end adjustment recognizes share of subsidiary income
• >50% ‐ Controlling Interest
Investmentrecorded at cost, including direct acquisition costs
Financial statements are consolidated

and subsidiary were one company

Generally, when parent owns >50% voting stock
Where control exists without controlling interest
Parent can appoint or elect majority of Board
Directly
Through large controlling voting interest
Exercisable or convertible securities
Parent is only general partner in limited partnership

in a limited partnership.

What’s Next
Topic 2 100% acquisition: Price = FMV
Topic 3 100% acquisition: Price > FMV
Topic 4 100% acquisition: Price < FMV
Topic 5 Less than 100% acquisition