(F5) Equity Method, Consolidations, Partnerships

equity method

used to account for investment if significant influence (20-50% ownership) can be exercised by the investor over the investee

• dividends on CS aren’t income

• don’t mark to FMV

preferred dividends

are income under the equity method

goodwill in equity method transaction

unidentifiable excess of purchase price over FMV

equity method impairment

if FV < CV temporarily & the entity believes the decline in value is other than temporary, impairment is recorded

*reduce CV to FMV and report the lower FMV.

consolidation

• “parent” status, investor owns more than 50% of the voting stock

acquisition method

• accounts for business combinations in which the investor/parent establishes control over the investee/subsidiary

1. 100% of net assets acquired (regardless of ownership percentage) are recorded at FV

2. when the companies are consolidated the subsidiary’s entire equity is eliminated & not reported

consolidation adjustment JE

Common stock

APIC

Retained Earnings

(debits)

Investment in subsidiary eliminated

Noncontrolling interest cleared

(credits)

Balance sheet of subsidiary adjusted to FV

Identifiable intangible assets recorded at FV

Goodwill if applicable

(debits → if goodwill is gain then a credit)

intercompany transactions

when consolidating, 100% of intercompany transactions must be eliminated, regardless of ownership %.

common eliminations/reversals:

• interest exp/interest income (bonds)

• gain on sale/dep. exp (intercompany fixed asset sales)

• sales/COGS (intercompany inventory transactions)

admission of a partner

a new partner can be admitted by:

1. the purchase of an existing partnership interest or:

2. investing additional capital into the partnership

bonus method (entering partnership)

• bonuses adjusted between the old & new partners’ capital accounts & do not affect partnership assets.

1. determine total capital & interest to the new partner

2. if interest < amt contributed, bonus to old partner

3. if interest > amt contributed, bonus to new partner.

B = Bonus = Balance in total capital accounts controls the computation & incoming partner’s capital account is their % of the partnership total NBV

exact method (entering partnership)

when the purchase price = book value of the capital account purchased

• no goodwill or bonus

goodwill method (entering partnership)

goodwill is recognized upon the total value of the partnership implied by new partner’s contribution

1. compute new “net assets before goodwill” after admitting new partner

2. compute new “capitalized” net assets & compare with “net assets before goodwill”

3. the difference is goodwill to be allocated to the old partners based on their profit sharing ratios.

*G = Goodwill = Going in investment (dollars) controls the computation

bonus method (withdrawing from partnership)

balance of withdrawing partner’s capital account - amount partner is paid = bonus

*bonus is allocated among the remaining partners’ capital accounts based on their sharing ratios

goodwill method (withdrawing from partnership)

amount of implied goodwill is allocated to all partners in accordance with profit sharing ratios

*after allocation of goodwill, balance in the withdrawing partner’s capital account should = the amount that person is to receive in the final settlement of their interest

liquidation of a partnership

involves the realization of cash from the disposal of partnership assets

1. creditors paid first

2. partners’ capital paid second

losses in liquidation

charged to the partners in accordance with the partnership agreement