CHAPTER TWO

Group Financial Statement

2.1. Business combination

A business combination is defined as a

transaction or other event in which an
acquirer (an investor entity) obtains
control of one or more businesses
 Acquisition date: The date on which the
acquirer obtains control of the acquiree
 Acquirer: The entity that obtains control of
the acquiree
 Acquiree: The business or businesses that
the acquirer obtains control of in a business
combination
 Combined Enterprise: The accounting
entity that results from a business
combination.
 Constituent Companies: The business
enterprises that enter into a business
combination.
 Combinor: A constituent company entering
into a purchase-type business combination
whose owners as a group end up with
control of the ownership interests in the
combined enterprises.
 Combinee: A constituent company other
than the combinor in a business
combination

Business Combinations

Friendly Takeover Hostile Takeover

 1. Friendly Takeovers
 Board of Directors of all constituent
companies cordially determine the terms of
the business combination.
 Proposal is submitted to share holders of all
constituent companies for approval.
2. Hostile Takeovers
 Target combinee typically resists the
proposed business combination.
 Target combinee uses one or more of the
several defensive tactics
2.2. Reasons for Business
Combination
 Growth

 Obtaining new management or better use

of existing management
 Achieving economies of scale .

 Tax advantages.

 Cost savings

 Quick entry for new and existing products

into domestic and foreign markets
 Diversification of business risk.

 Integration
2.3.Types of Business Combinations

 Horizontal: A combination involving

enterprises in the same industry.
 Vertical: A Combination involving an
enterprise and its customers or suppliers.
 Conglomerate: A combination between
enterprises in unrelated industries or
markets
 2.4 Methods for Arranging
Business Combination

 Statutory Merger
 Statutory Consolidation,

 Acquisition of Common Stock,

and
 Acquisition of Assets
 Statutory Merger
 A statutory merger- one of the combining entities
continues in existence as a legal entity.
 statutory merger is the same as an acquisition,
where one of the entities survives the transaction
 Company “A” acquires Company “B” then “B”
dissolves and liquidates
 Company “B” cease to exist as separate legal
entities
 Company “B” (dissolved) often continues as a
division of the survivor (“A”)
 Which now owns the net assets, rather than the
outstanding common stock, of the liquidated
corporations
 Statutory Consolidation
 When businesses are combined to form a
new entity, the original companies cease to
exist.
 A new corporation is formed to issue its
common stock for the outstanding common
stock of two or more existing corporations,
which then go out of existence.
 The new corporation thus acquires the net
assets of the defunct corporations, whose
activities may be continued as divisions of the
new corporation.
Acquisition of Common Stock
 One corporation (the investor) may issue
preferred or common stock, cash, debt or a
combination thereof to acquire from present
stockholders a controlling interest in the
voting common stock of another corporation
(the investee).
Stock acquisition program may be accomplished
through
 Direct acquisition in the stock market

 Negotiations with the principal stockholders of

a closely held corporation

 Tender offer to stockholders of a publicly owned

corporation.
 Corporation becomes affiliated with the
combinor parent company as a subsidiary
but is not dissolved and liquidated and
remains a separate legal entity.
 Most hostile takeovers are accomplished by
this means
 Acquisition of Assets
 Business enterprise may acquire from
another enterprise all or most of the gross
assets or net assets of the other enterprise
for cash, debt, preferred or common
stock, or a combination thereof.
 The selling enterprise may continue its
existence as a separate entity or it may be
dissolved and liquidated, it does not
become an affiliate of the combinor.
2.5 Methods of Accounting for Business
Combinations: Acquisition Method

 Regardless of whether the acquired firm maintains

its separate incorporation or dissolution takes
place, current standards require the acquisition
method to account for business combinations (IFRS
3)
 Applying the acquisition method involves recognizing and
measuring
 The consideration transferred for the acquired
business and any non controlling interest.
 The separately identified assets acquired and
liabilities assumed.
 Goodwill, or a gain from a bargain purchase

 Fair value is the measurement attribute used to

recognize the above aspects of a business combination.
 Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date.
Steps
 Identification of the 'acquirer'
 Determination of the 'acquisition date'
 Recognition and measurement of the
identifiable assets acquired, the liabilities
assumed and any non-controlling interest
(NCI, formerly called minority interest) in the
acquiree
 Recognition and measurement of goodwill or
a gain from a bargain purchase
 Consideration Transferred for the Acquired
Business
 The fair value of the consideration transferred to acquire a
business from its former owners is the starting point in valuing
and recording a business combination.
 The consideration transferred shall be measured at fair value,
which shall be calculated as the sum of the acquisition-date fair
values of
 the assets transferred by the acquirer
 the liabilities incurred by the acquirer to former owners of the
acquiree, and
 the equity interests issued by the acquirer
 Contingent consideration.
 Regardless of the elements that constitute the consideration
transferred, the parent’s financial statements must now
incorporate its newly acquired ownership interest in a
controlled entity
Assets Acquired and Liabilities Assumed
 an acquirer must identify the assets acquired and the
liabilities assumed in the business combination and measures
them at their acquisition-date fair values,
 Three sets of valuation techniques typically employed
 Market Approach: estimates fair values using market
transactions involving similar assets or liabilities.
 Income Approach: estimates of future cash flows projected to be
generated by an asset
 Cost Approach: estimates fair values by reference to the current
cost of replacing an asset with another of comparable economic
utility
 The parent must account for both the consideration
transferred and the individual amounts of the identified
assets acquired and liabilities assumed at their acquisition-
date fair values.
Goodwill and Gains on Bargain Purchases
o Goodwill is defined as an asset representing the future
economic benefits arising in a business combination
that are not individually identified and separately
recognized
o The acquirer recognizes the asset goodwill as the
excess of the consideration transferred over the
collective fair values of the net identified assets
acquired and liabilities assumed.
o The acquirer recognizes a “gain on bargain
purchase if the collective fair value of the net
identified assets exceeds the consideration
transferred,
Procedures for Consolidating Financial Information

1. Acquisition method when dissolution takes

place.
2. Acquisition method when separate incorporation is
maintained.
Acquisition method when dissolution takes place
When the acquired firm’s legal status is dissolved in a business
combination, the continuing firm takes direct ownership of the
former firm’s assets and liabilities. Thus, the continuing firm
will prepare journal entries to record:
 The fair value of the consideration transferred to the former
owners of the acquiree and
 The identified assets acquired and liabilities assumed at
their individual fair values.
 Acquisition method when dissolution takes place

Solution (A):
Case 1: Consideration = FV of net identifiable assets
Assume BigNet agrees to pay $2,550,000 (cash of $550,000 and 20,000 unissued
shares of its $10 par value common stock that is currently selling for $100 per
share) for all of Smallport’s assets and liabilities. Smallport then dissolves itself
as a legal entity.
Current Assets . . . . . . . .. . . ….. . 300,000
Computers and Equipment. . . . . 600,000
Capitalized Software . . . .. . . . . 1,200,000
Customer Contracts. ………... . 700,000
Notes Payable. . . . . . . . . . .. . . . . . . . . . ………..250,000
Cash …………………... . . . . . . . . . . . …............550,000
Common Stock (20,000 shares at $10 par value) ……200,000
Additional Paid-In Capital. . . . . ………………1,800,000
To record acquisition of Smallport Company Assets acquired and liabilities assumed at fair value.
 Acquisition method when dissolution takes place
Case 2: Consideration > FV of net identifiable assets = excess will be Good
will
BigNet agrees to pay $3,000,000 in exchange for all of Smallport’s assets and
liabilities. BigNet transfers to the former owners of Smallport consideration of
$1,000,000 in cash plus 20,000 shares of common stock with par value $10 and a
fair value of $100 per share.
Current Assets . . . . . . . .. . ……..300,000
Computers and Equipment. . . . .600,000
Capitalized Software . . . .. . . . . .1,200,000
Customer Contracts. ………... . 700,000
Goodwill ………………………...450,000
Notes Payable. . . . . . . . . . .. . . . . . . . . . ………..250,000
Cash …………………... . . . . . . . . . . . …............1,000,000
Common Stock (20,000 shares at $10 par value) ……200,000
Additional Paid-In Capital. . . . . ………………1,800,000
To record acquisition of Smallport Company. Assets acquired and liabilities
assumed are recorded at fair value with the excess of fair value attributed to
Good will.
 Acquisition method when dissolution takes place
Case 3: Consideration < FV of net identifiable assets = Gain on bargain
purchase
BigNet transferring consideration of $2,000,000 to the owners of Smallport in
exchange for their business. BigNet conveys no cash and issues 20,000 shares of
common stock with $10 par value and a $100 per share fair value.
Current Assets . . . . . . . .. . ……..300,000
Computers and Equipment. . . . .600,000
Capitalized Software . . . .. . . . . 1,200,000
Customer Contracts. ………... . 700,000
Notes Payable. . . . . . . . . . .. . . . . . . . . . ………..250,000
Cash …………………... . . . . . . . . . . . …............1,000,000
Common Stock (20,000 shares at $10 par value) ……200,000
Additional Paid-In Capital. . . . . ………………1,800,000
Gain on bargain purchases …………………….550,000
To record acquisition of Smallport Company. Assets acquired and liabilities
assumed are at fair value. Excess net asset fair value is attributed to a gain on
bargain purchase.
Notes:
 The acquisition method records the identified assets acquired and
liabilities assumed at their individual fair values.
 The acquirer recognizes this gain on bargain purchase on its income
statement in the period the acquisition takes place.
 A consequence of implementing a fair-value concept to acquisition
accounting is the recognition of an unrealized gain on the bargain
purchase.
 A criticism of the gain recognition is that the acquirer recognizes profit
from a buying activity that occurs prior to traditional accrual measures
of earned income (i.e., selling activity)
 The fair values of the assets received and all liabilities assumed in a
business combination are considered more relevant for asset valuation
than the consideration transferred.
 Related Costs of Business Combinations
Three additional categories of cost
 Firms often engage attorneys, accountants, investment bankers,
and other professionals for combination-related services. The
acquisition method does not consider such expenditures as
part of the fair value received by the acquirer. Therefore,
professional service fees are expensed in the period incurred.
 an acquiring firm’s internal costs. Examples include secretarial
and management time allocated to the acquisition activity. Such
indirect costs are reported as current year expenses.
 amounts incurred to register and issue securities in connection
with a business combination simply reduce determinable fair
value those securities
Example: assume the following in connection with BigNet’s acquisition of
Smallport.
 BigNet pays an additional $100,000 in accounting and attorney fees.

 Internal secretarial and administrative costs of $75,000

 Costs to register and issue BigNet’s securities issued in the combination

total $20,000.
Under the acquisition method, regardless of whether dissolution occurs or separate
incorporation is maintained, BigNet would record these transactions as follows:
1. Professional Services Expense. .. . . . . . . . . . 100,000
Cash. . . . . . .. ……………….. 100,000
To record as expenses of the current period any direct combination costs.
2. Salaries and Administrative Expenses . . . .. . .. 75,000
Accounts Payable (or Cash). . . . .75,000
To record as expenses of the current period any indirect combination costs.
3. Additional Paid-In Capital. . . . .. . . . . . . . . . . . 20,000
Cash. . . . . . . . . . . .. . . . . . . . 20,000
To record costs to register and issue stock in connection with the Smallport acquisition.
 The Acquisition Method When Separate Incorporation Is Maintained
 Fair value remains the basis for initially consolidating the
subsidiary’s assets and liabilities.
 Differences
1. The consolidation of the financial information is only simulated; the
acquiring company does not physically record the acquired assets and
liabilities.
 Because dissolution does not occur, each company maintains independent
record-keeping
2. To facilitate the preparation of consolidated financial statements, a
worksheet and consolidation entries are employed using data gathered from
the separate companies.
 A worksheet provides the structure for generating financial reports for
the single economic entity.
 An integral part of this process involves consolidation worksheet entries
 The adjustments and eliminations are entered on the worksheet and represent
alterations that would be required if the financial records were physically united.

 Because no actual union occurs, neither company ever records consolidation

entries in its journals. Instead, they appear solely on the worksheet to derive
consolidated balances for financial reporting purposes

Example: Assume that BigNet acquires Smallport Company on December 31,2006

by issuing 26,000 shares of $10 par value common stock valued at $100 per share
(or $2,600,000 in total). BigNet pays fees of $40,000 to a third party for its
assistance in arranging the transaction.

Then to settle a difference of opinion regarding Smallport’s fair value, BigNet

promises to pay an additional $83,200 to the former owners if Smallport’s earnings
exceed $300,000 during the next annual period. BigNet estimates a 25 percent
probability that the $83,200 contingent payment will be required. A discount rate of
4 percent (to represent the time value of money) yields an expected present value of
$20,000 for the contingent liability ($83,200 x 25% x 0.961538).
Therefore, the fair value of the consideration transferred consists of
the following two elements:
 Fair value of securities issued by BigNet $2,600,000
 Fair value of contingent performance liability 20,000

Total fair value of consideration transferred $2,620,000

 BigNet maintains Smallport as a separate corporation with its
independent accounting information system intact.

Solution Illustrative Example (B):

Investment in Smallport Company (consideration transferred) ….2,620,000
Contingent Performance Liability . .. . . . . . . . . . . . ….20,000
Common Stock (26,000 shares at $10 par value)….....260,000
Additional Paid-In Capital…………… ... . . . . . 2,340,000
To record acquisition of Smallport Company, which maintains its
separate legal identity.
Professional Services Expense. . . . . . .. . . 40,000
Cash (paid for third-party fees) . . . . . . . . . . . . 40,000
To record combination costs.
 A worksheet can be prepared on the date of acquisition
to arrive at consolidated totals in the following seven steps
1. The parent can prepare Acquisition-Date Fair-Value Allocation
Schedule
Acquisition-Date Fair-Value Allocation Schedule
Fair value of consideration transferred by BigNet. . ………..$2,620,000
Book value of Smallport ……… . . . . . . . . . . . . . . . . . . . . 600,000
Excess of fair value over book value . . . . . . . . . . …………$2,020,000
Allocations made to specific accounts based on acquisition-date fair and book
value difference
Computers and equipment ($600,000 - $400,000). . . . . . . . $ 200,000
Capitalized software ($1,200,000 - $100,000) . . . . . . . . . . . 1,100,000
Customer contracts ($700,000 - 0). . . . . . . . . . . . . . . . . . . . 700,000
Notes payable ($250,000 - $200,000). . . . . . . (50,000 ) $1,950,000
Excess fair value not identified with specific items—Goodwill. . . ..$ 70,000
2. The parent adjust for the journal entries recorded earlier for the
investment and the combination costs
 Subsidiary operations prior to combination are not considered in
the consolidation
3. Eliminates aquirees’ stockholders’ equity accounts (S is a reference to
beginning subsidiary stockholders’ equity)
Consolidation Entry S
Common Stock (Smallport Company) . . . . . . . . . . . 100,000
Additional Paid-In Capital (Smallport Company). . . 20,000
Retained Earnings (Smallport Company). . . . . . . . . . .480,000
Investment in Smallport Company . . . . . . . . . . . . 600,000
4. BV of net assets portion of the Investment in subsidiary Company
account is deleted and replaced by the specific assets and liabilities that it
represents
5. Removes the excess payment in the Investment in subsidiary Company and
assigns it to the specific accounts
Consolidation Entry A
Computers and Equipment . . . . . . . . . . . . . . . . . .. . . . . . 200,000
Capitalized Software . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 1,100,000
Customer Contracts . . . . . . . . . . . . . . . .. . . . . . . . . . . ….. 700,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 70,000
Note Payable . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . ………….. 50,000
Investment in Smallport Company .. . . . . . . . . . . . . . . …………2,020,000
NB: Complete the Investment in Subsidiary Company account balance
elimination.
6. All accounts are extended into the Consolidated Totals column
7. We subtract consolidated expenses from revenues to arrive at net income
 Consolidated revenues, expenses, and net income are identical to parent
balances.
Notes:
1. whenever financial statements for the combined entity are
prepared, acquirer utilizes a worksheet in simulating the
consolidation of these two companies
2. Although the assets and liabilities are not transferred, aquirer
must still record the payment made to aquiree’s owner
3. the parent establishes an investment account that initially reflects
the acquired firm’s acquisition-date fair value.
4. Only subsidiary’s assets and liabilities remain to be combined
with the parent company figures
5. The parent records a bargain purchase gain on its books as part
of the investment journal entry. The bargain purchase gain then
appears on the acquisition date consolidated income statement.
 Acquisition-Date Fair-Value Allocations—Additional
Issues
 In determining whether to recognize an intangible asset in a
business combination, two specific criteria are essential.
 Does the intangible asset arise from contractual or other legal
rights? trademarks, patents, copyrights, franchise agreements
 Most intangible assets recognized in business combinations
meet the contractual-legal criterion.
 Is the intangible asset capable of being sold or otherwise
separated from the acquired enterprise?
 An acquired intangible asset is recognized if it is capable of
being separated or divided from the acquiree and sold,
transferred, licensed, rented, or exchanged individually or
together with a related contract, identifiable asset, or
liability
 Consolidations-Subsequent to the Date of Acquisition
 At the acquisition date, each investment accounting method (equity, initial value
(cost method), and partial equity) begins with an identical value recorded in an
investment account.
 Subsequent to the acquisition date, the three methods produce different account
balances for the parent’s investment in subsidiary, income recognized from the
subsidiary’s activities, and retained earnings accounts.
 Importantly, the selection of a particular method does not affect the totals
ultimately reported for the combined companies.
 the parent’s choice of an internal accounting method does lead to distinct
procedures for consolidating the financial information from the separate
organizations
Internal Investment Accounting Alternatives
 The internal reporting philosophy of the acquiring company often determines
the accounting method choice for its subsidiary investment.
 Depending on the measures a company uses to assess the ongoing performances
of its subsidiaries, parent companies may choose its own preferred internal
reporting method
 Regardless of this choice, however, the investment balance will be eliminated in
preparing consolidated financial statements for external reporting.
 The basic objective of all consolidation remains:
 to combine asset, liability, revenue, expense, and equity accounts of
a parent and its subsidiaries
 a worksheet and consolidation entries provides the structure for the
production of a single set of financial statements for the combined
business entity.
 the parent company must report consolidated net income
 Consolidated income determination involves first combining the
separately recorded revenues and expenses of the parent with those of
the subsidiary on a consolidated worksheet.
 adjustments are made to reflect the amortization of the excess of the
parent’s consideration transferred over the subsidiary book value
 the effects of any intra entity transactions are removed
 the parent’s investment account is eliminated on the worksheet so that
the subsidiary’s actual assets and liabilities can be consolidated
 The income figure accrued by the parent is removed each period
so that the subsidiary’s revenues and expenses can be included
when preparing an income statement for the combined business
entity.
Investment Accounting by the Acquiring Company
 three methods:
 the equity method,
 the initial value (Cost Method)method, and
 the partially equity method
 A. The Equity Method
 It embraces full accrual accounting in maintaining the investment account and
related income over time
 the acquiring company accrues income when the subsidiary earns it
 To match the additional fair value recorded in the combination against income,
amortization expense stemming from the original excess fair-value allocations
is recognized through periodic adjusting entries
 Unrealized gains on intra-entity transactions are deferred; subsidiary dividends
serve to reduce the investment balance.
 The equity method creates a parallel between the parent’s investment accounts
and changes in the underlying equity of the acquired company
 When the parent has complete ownership, equity method earnings from the
subsidiary combined with the parent’s other income sources, create a total
income figure reflective of the entire combined business entity.
 Consequently, the equity method often is referred to as a single-line
consolidation
 The equity method is especially popular in companies where management
periodically measures each subsidiary’s profitability using accrual-based
income figures
Subsequent Consolidation—Investment Recorded by the
Equity Method
 Acquisition Made during the Current Year
 Assume that Parrot Company obtains all of the outstanding
common stock of Sun Company on January 1, 2014. Parrot
acquires this stock for $800,000 in cash.
 The book values as well as the appraised fair values of Sun’s
accounts follow:
Book value 1/1/14 Fair value 1/1/14 Difference
Current assets . . . . . . . .. . . $320,000 $320,000 $ –0–
Trademarks (indefinite life) . . . . 200,000 220,000 20,000
Patented technology (10-yr remaining life) .320,000 450,000 130,000
Equipment (5-year remaining life). 180,000 150,000 (30,000)
Liabilities . . .. . . . . (420,000 ) (420,000 ) –0–
Net book value . . . . . . . . $ 600,000 $720,000 $120,000
Common stock—$40 par value . . . $(200,000)
Additional paid-in capital . . . . . . . . (20,000)
Retained earnings, 1/1/14 . . . . . . . (380,000)
Parrot considers the economic life of Sun’s trademarks as extending beyond the foreseeable
future and thus having an indefinite life. Such assets are not amortized but are subject to
periodic impairment testing. For the definite lived assets acquired in the combination
(patented technology and equipment), we assume that straight-line amortization with no
salvage value is appropriate
PARROT COMPANY
100 Percent Acquisition of Sun Company
Allocation of Acquisition-Date Subsidiary Fair Value
January 1, 2014
Sun Company fair value (consideration transferred by Parrot Company) . . ................... $800,000
Book value of Sun Company:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings, 1/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . ……..380,000 (600,000)
Excess of fair value over book value . . . . . . . . . . . . . . . . . . . . . . . ……………………… 200,000
Allocation to specific accounts based on fair values:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000
Patented technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000
Equipment (overvalued) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,000 ) 120,000
42
Excess fair value not identified with specific accounts—goodwill . . $80,000
Assume that Sun earns income of $100,000 during the year, declares a
$40,000 cash dividend on August 1,2014 and pays the dividend on
August 8,2014.
Annual Excess Amortization
PARROT COMPANY
100 Percent Acquisition of Sun Company
Excess Amortization Schedule—Allocation of Acquisition-Date Fair Values
Account Allocation Remaining Useful Life Annual Excess Amortizations
Trademarks $ 20,000 Indefinite $–0–
Patented technology 130,000 10 years 13,000
Equipment (30,000) 5 years (6,000)
Goodwill 80,000 Indefinite –0–

$ 7,000 *

43
 1/1/14: Investment in Sun Company . .. . . 800,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,0
To record the acquisition of Sun Company.
 Assume that Sun earns income of $100,000 during the year, declares a
$40,000 cash dividend on August 1, and pays the dividend on August 8.
 8/1/14: Dividend Receivable. . . . . . . . . . . . . . . . . . . 40,000

Investment in Sun Company. . . . . . . . . . . . . . . . . 40,000

To record cash dividend declaration from subsidiary.
 8/8/14: Cash . . . . . . . . . . . . . . . . . . .. . . . . . . 40,000
Dividend Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
To record receipt of the subsidiary cash dividend.
 12/31/14: Investment in Sun Company . . . . . . . . . 100,000
Equity in Subsidiary Earnings . . . . . . . . . . . . . . . . . . . . 100,000
To accrue income earned by 100 percent owned subsidiary.
 12/31/14 Equity in Subsidiary Earnings . . . . . . . . . . . . . . . . . . . . . . . . 7,000

Investment in Sun Company. . . . . . . . . . . . ……………….7000

To recognize amortizations on allocations made in acquisition of subsidiary 44
 Five consolidation entries are needed:
a. Consolidation Entry S
Common Stock (Sun Company) . . . . . . . . . . . . . . . . 200,000
Additional Paid-In Capital (Sun Company) . . .. . . . ..20,000
Retained Earnings, 1/1/14 (Sun Company) . . . . . . . . 380,000
Investment in Sun Company. . . . . . .. . . . . . . . . . . . . . . . . . . . . 600,000
 Entry S also removes Sun’s stockholders’ equity accounts as of the
beginning of the year.
b. Consolidation Entry A
Trademarks . . . . . . . . . . . . . . . . . ……. . 20,000
Patented Technology. . . . . . . . .. . . . . . . . 130,000
Goodwill . . . . . . . . . . . . . . . .. . . . . . . . .. 80,000
Equipment . . . . . . . . . . ... . . . . . . . ... . . . 30,000
Investment in Sun Company.. . . . . . . . . . .200,000
 Adjusts the subsidiary balances from their book values to acquisition-date
fair values and includes goodwill created by the acquisition 45
 Business Combinations, Control, and Consolidated
Financial Reporting
c. Consolidation Entry I
Equity in Subsidiary Earnings . . . . . . . .. . . . . . . . . . . 93,000
Investment in Sun Company. .. . . . . . . . . . . …………………… 93,000
Removes the subsidiary income recognized by Parrot during the year
d. Consolidation Entry D
Investment in Sun Company . . . . .. . . . . . . . . . . . . . . . . . 40,000
Dividends Declared. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 40,000
The elimination of dividends declared by the subsidiary during the year
e. Consolidation Entry E
Amortization Expense . . . . . . . . . . . . .. . . . . . . . . . . . . . 13,000
Equipment. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . 6,000
Patented Technology . . . . . . . . . . . . . . . . . . . . . . . . . . …….13,000
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6,000
Recognizes the current year’s excess amortization expenses relating to the
adjustments of Sun’s assets to acquisition-date fair values
 Financial Reporting for Business Combinations
 Entry S —Eliminates the subsidiary’s stockholders’ equity
accounts as of the beginning of the current year along with the
equivalent book value component within the parent’s investment
account.
 Entry A —Recognizes the unamortized allocations as of the
beginning of the current year associated with the original
adjustments to fair value.
 Entry I —Eliminates the impact of intra-entity subsidiary
income accrued by the parent.
 Entry D —Eliminates the impact of intra-entity subsidiary
dividends.
 Entry E —Recognizes excess amortization expenses for the
current period on the allocations from the original adjustments
to fair value.
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