Market value = cost of acquisition



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The following summarizes the acquisition and elimination portions of the consolidation entries in the absence of intracompany transactions.


Definitions

Market value = cost of acquisition

Fair value = current estimated value of acquired assets and liabilities

Book value = current accounting values (book values) of assetsa, liabilitiesl and owners’ equityo (net assets)

% = percent of subsidiary acquired by parent

FV = Fair value of acquired asseta or liabilityl

BV = Book value of asseta or liabilityl or owners’ equityo of subsidiary

Premium = Cost of acquisition – %BVo

Goodwill (1) = Cost of acquisition – %FVo or %(FVa–FVl) (Can be negative)

Goodwill (2) = Max(0,Goodwill(1))




Acquisition

Investment Entry


Investment in subsidiary Cost of acquisition (Market value)

Miscellaneous debits Day to day expenses assigned to acquisition

Miscellaneous credits Reflects structure of the acquisition

Consolidation process





  1. Add up the parent and the subsidiary

    1. This puts the book values of the subsidiary into the parent’s statements as the consolidation begins

    2. Eliminations will be required

      1. Remove double counting of the investment and the subsidiary’s equity (Chapter 3)

      2. Adjust acquired assets and liabilities from book value to “fair value” where fair value is used for the acquired portion of the subsidiary and book value for any remaining minority interest

      3. Remove any intracompany transactions (Chapter 4 and 5)

  2. Versions of the elimination entries for i and ii



Elimination entry

Comprehensive entry


Owners’ equity of subsidiary BVo (net book value of subsidiary)

Fair value adjustment for assets %(FVa – BVa)

Fair value adj for nonmarketable

Long-term assets Max (0,%( FVa – BVa) – Min(0,Goodwill(1)))

Goodwill (2) Maximum (0, Goodwill(1))

Investment in subsidiary Cost of acquisition

Minority interest BVo(1–%)

Fair value adjustment for liabilities %(FVl – BVl)

Extraordinary gain Max (0, Goodwill(1) –%FVa (nonmarketable))

Series of entries


1)

Owners’ equity of subsidiary BVo (net book value of subsidiary)

Investment in subsidiary %BVo

Minority interest BVo(1–%)


2)

Premium Cost of acquisition – %BVo

Investment in subsidiary Cost of acquisition – %BVo
3)

Fair value adjustment for assets %(FVa – BVa)

Fair value adj for nonmarketable

Long-term assets Max (0,%( FVa – BVa) – Min(0,Goodwill(1)))

Goodwill (2) Maximum (0, Goodwill(1))

Premium Cost of acquisition – %BVo



Fair value adjustment for liabilities %(FVl – BVl)

Extraordinary gain Max (0, Goodwill(1) –%FVa (nonmarketable))

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