ACC 440 Advanced Financial Accounting 1 Exam 1 Review

Vocabulary practice flashcards covering Equity Method accounting, types of business combinations, and consolidation entries for Chapters 1, 2, and 3.

Fair Value / Cost Method

Accounting method used when an investor holds a small percentage of equity securities (typically less than $20\%$) and cannot significantly affect investee operations; the investment is recorded at original cost or fair value.

Equity Method

Accounting method required when an investor has the ability to exercise significant influence, typically with ownership between $20\%$ and $50\%$; dividends are recorded as decreases in the investment account, not income.

Consolidation of Financial Statements

Accounting treatment required when an investor’s ownership exceeds $50\%$ of an organization’s outstanding voting stock, viewing the parent and subsidiary as a single entity.

Significant Influence

The ability of an investor to affect the operations of an investee, usually associated with $20\%$ to $50\%$ ownership, although it may be achieved at a much lower percentage.

Variable Interest Entity (VIE)

An entity where control is established through governance documents, risks, and rewards, or contracts rather than voting interests; the primary beneficiary must consolidate.

Statutory merger through asset acquisition

A business combination where the acquiring company acquires assets and often liabilities, and the acquired company dissolves and goes out of business.

Statutory merger through capital stock acquisition

A business combination where the acquiring company acquires all stock and then transfers assets and liabilities to its own books, causing the acquired company to dissolve as a separate corporation.

Statutory consolidation

A business combination where a newly created entity receives assets or capital stock of original companies, which may then dissolve.

Acquisition of more than $50\%$ of the voting stock

A business combination where the acquired company remains in existence as a legal corporation and a subsidiary, while the parent records the stock as an investment and controls decision making.

Acquisition Method

The required GAAP method for business combinations which focuses on Fair Value of consideration transferred, assets assumed, and liabilities assumed.

Goodwill

The excess of the consideration transferred over the fair value of the net identifiable assets acquired in a business combination.

Entry S

A consolidation entry used to eliminate the Investment in Sub Equity accounts.

Entry A

A consolidation entry used to adjust subsidiary assets from book value to Fair Value and record Goodwill if created.

Entry I

A consolidation entry used to eliminate the Subsidiary Income recognized by the Parent.

Entry D

A consolidation entry used to eliminate the Subsidiary Dividends recognized by the Parent.

Entry E

A consolidation entry used to recognize excess amortization expense related to the adjustment of subsidiary assets.