Ch. 5: Allocation and Depreciation of Differences Between Implied and Book Values

Wholly owned subsidiary

The implied value of the subsidiary equals the acquisition price and there is Non-controlling interest 

Implied value exceeds FV of Identifiable Net Assets

Residual amount will be positive (a debit balance) and is evidence of an unspecified intangible and is accounted for as goodwill

Implied value is below the FV of Identifiable Net Assets

The residual amount will be negative (a credit balance) and is evidence of a bargain purchase

• Should be recognized as an ordinary gain in the year of acquisition

• FV (of identifiable Net Assets) > Implied Value > BV

Allocation Adjustments

When any portion of the difference between implied and book values is allocated to assets, recorded income must be adjusted in determining consolidated net income in current and future periods.

• Needed to reflect the difference between the amount of amortization and/or depreciation recorded by the subsidiary and the appropriate amount based on consolidated carrying values.

Goodwill Adjustment

Remains in the consolidated balance sheet indefinitely, and it is adjusted only in the event of impairment.

Complete Equity Method

Method where beginning retained earnings of the parent is the same as beginning consolidated retained earnings and therefore needs no adjustment (the noncontrolling interest in equity still requires adjustment).

Workpaper Entries

In the preparation of consolidated financial statements, the recorded balances of individual assets, liabilities, and expense accounts must be adjusted to reflect the allocation, amortization, and depreciation of the differences between implied and book values, as well as any impairment of goodwill.

Consolidated Net Income

Parent company’s income from its independent operations plus (minus) the reported subsidiary income (loss) plus or minus adjustments for the period relating to the depreciation/amortization/impairment of the difference between implied and book values

Consolidated Retained Earnings (Cost Method)

The parent company’s cost basis retained earnings plus (minus) the parent company’s share of the increase (decrease) in reported subsidiary retained earnings from the date of acquisition to the current date plus or minus the cumulative effect of adjustments to date relating to the depreciation/amortization/impairment of the difference between implied and book values

Consolidated Retained Earnings (Equity Method)

The parent company’s income from its independent operations plus (minus) the subsidiary income (loss) plus or minus adjustments for the period relating to the depreciation/amortization/impairment of the difference between implied and book values of depreciable or amortizable assets (and liabilities).

Sound Value

The Fair Value of the used Equipment

Replacement Cost New

Replacement cost of the equipment if purchased new

Allocation of Difference

A technique used to assign the difference between implied and book value to S’s assets and
liabilities

Excess of Implied Value Over Fair Value

What P pays for S’s net assets is more than the fair value of those assets

Pushdown Accounting

S company records the difference between implied and book value on its books

Excess of Fair Value over book value

There is a positive difference between what S has on its books for the value of its assets and
the market value of those assets

Excess of Fair Value over Implied Value

P has paid less than fair value for S’s net asset