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5 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 5: Allocation, Depreciation, and Amortization of the Difference between Cost and Book.

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Presentation on theme: "5 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 5: Allocation, Depreciation, and Amortization of the Difference between Cost and Book."— Presentation transcript:

1 5 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 5: Allocation, Depreciation, and Amortization of the Difference between Cost and Book Value Slides Authored by Hannah Wong, Ph.D. Rutgers University

2 5 - 1 Allocation of Purchase Differential Book value of net assets acquired Purchase differential Acquisition cost (MV-BV) of identifiable net assets Goodwill (if amount >0) or bargain purchase (if amount <0)

3 5 - 2 Allocation of Purchase Differential: An Alternative View Book value of net assets acquired Acquisition cost (MV-BV) of identifiable net assets Goodwill (if amount >0) or bargain purchase (if amount <0) Market value of net assets acquired Goodwill (if amount >0) or bargain purchase (if amount <0)

4 5 - 3 Bargain Purchase Valuation of Net Assets Acquired: l Current assets, long-term investments in marketable securities, liabilities = fair value l Previously recorded goodwill = 0 l Long-term assets = fair value - bargain allocation (The bargain is allocated to long-term assets in proportion to their fair value.) l Any remaining bargain is recorded as negative goodwill and amortized over a maximum of 40 years.

5 5 - 4 Case 1: Positive Goodwill Book value of net assets acquired $2,000,000 Purchase differential $750,000 Acquisition cost $2,750,000 Goodwill $250,000 Inventory $50,000 Equipment $300,000 Land $150,000 Wholly Owned Subsidiary

6 5 - 5 Case 1: Positive Goodwill Book value of net assets acquired $1,600,000 Purchase differential $600,000 Acquisition cost $2,200,000 80% Owned Subsidiary Goodwill $200,000 Inventory $40,000 Equipment $240,000 Land $120,000 Note: identifiable net assets are written up only by : P% x (MV-BV)

7 5 - 6 Case 1: Positive Goodwill - EE’s Retained earnings - S400,000 Capital stock - S 1,200,000 Difference between cost and book value600,000 Investment in S 2,200,000 The Investment Entry The Allocation Entry Inventory 40,000 Equipment 240,000 Land 120,000 Goodwill200,000 Difference between cost and book value 600,000

8 5 - 7 Case 2A: Bargain Purchase BV < Cost Book value of net assets acquired $1,600,000 Purchase differential $300,000 Acquisition cost $1,900,000 80% Owned Subsidiary Inventory $40,000 Equipment $240,000 Land $120,000 Note: identifiable net assets are written up only by : P% x (MV-BV) Bargain purchase $100,000

9 5 - 8 Case 2A: Bargain Purchase BV < Cost Bargain purchase $100,000 Allocation of Bargain Purchase Note: assets are reduced in proportion to their fair values, not book values Equipment $30,000 Land $20,000 Other noncurrent assets $50,000 Reduction in asset amounts:

10 5 - 9 Case 2A: Bargain Purchase BV < Cost : EE’s Retained earnings - S400,000 Capital stock - S 1,200,000 Difference between cost and book value300,000 Investment in S 1,900,000 The Investment Entry The Allocation Entry Inventory 40,000 Equipment(240,000-30,000) 210,000 Land (120,000-20,000)100,000 Other noncurrent assets (0-50,000) 50,000 Difference between cost and book value 300,000

11 Case 2B: Bargain Purchase BV > Cost Book value of net assets acquired $1,600,000 Purchase differential -$100,000 Acquisition cost $1,500,000 80% Owned Subsidiary Bargain purchase $500,000 Inventory $40,000 Equipment $240,000 Land $120,000 Note: identifiable net assets are written up only by : P% x (MV-BV)

12 Case 2B: Bargain Purchase BV > Cost Bargain purchase $500,000 Allocation of Bargain Purchase Note: assets are reduced in proportion to their fair values, not book values Equipment $150,000 Land $100,000 Other noncurrent assets $250,000 Reduction in asset amounts:

13 Case 2B: Bargain Purchase BV > Cost : EE’s Retained earnings - S400,000 Capital stock - S 1,200,000 Difference between cost and book value 100,000 Investment in S 1,500,000 The Investment Entry The Allocation Entry Difference between cost and book value100,000 Inventory 40,000 Equipment(240, ,000) 90,000 Land (120, ,000) 20,000 Other noncurrent assets (0-250,000) 250,000

14 Amortization of Purchase Differential Case 1: Positive Goodwill, 80% Owned Subsidiary Goodwill $200,000 Equipment $240,000 Land $120,000 Inventory $40,000 COGS $40,000 Depreciation expense $24,000 Depreciation expense $24,000 Amortization expense $10,000 Amortization expense $10,000 Amortization expense $10,000 Purchase differential Annual adjustments to consolidated NI

15 Amortization of Purchase Differential Case 1: Positive Goodwill, 80% Owned Subsidiary COGS $40,000 Depreciation expense $24,000 Depreciation expense $24,000 Amortization expense $10,000 Amortization expense $10,000 Annual adjustments to beginning consolidated R/E 2001 Consolidated NI adjustments Depreciation expense $24,000 Amortization expense $10, Adjustments to 1/1 R/E = sum of NI adjustments in all previous years 74, ,000

16 The Allocation EE Cost Method Cost of goods sold 40,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 216,000 Land 120,000 Goodwill190,000 Difference between cost and book value 600,000 Add up to $74,000, becomes the 1/1 R/E adjustment in the next year (see next slide) End of Year of Acquisition

17 The Allocation EE Cost Method Year Subsequent to Acquisition Beginning retained earnings 74,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 192,000 Land 120,000 Goodwill180,000 Difference between cost and book value 600,000 Add up to $108,000, becomes the 1/1 R/E adjustment in the next year (see next slide)

18 The Allocation EE Cost Method 2 Years Subsequent to Acquisition Beginning retained earnings108,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 168,000 Land 120,000 Goodwill170,000 Difference between cost and book value 600,000

19 The Allocation EE Partial Equity Method Cost of goods sold 40,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 216,000 Land 120,000 Goodwill190,000 Difference between cost and book value 600,000 Add up to $74,000, becomes the 1/1 R/E adjustment in the next year (see next slide) End of Year of Acquisition

20 The Allocation EE Partial Equity Method Year Subsequent to Acquisition Beginning retained earnings 74,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 192,000 Land 120,000 Goodwill180,000 Difference between cost and book value 600,000 Add up to $108,000, becomes the 1/1 R/E adjustment in the next year (see next slide)

21 The Allocation EE Complete Equity Method Cost of goods sold 40,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 216,000 Land 120,000 Goodwill190,000 Difference between cost and book value 600,000 Add up to $74,000, becomes the 1/1 R/E adjustment in the next year (see next slide) End of Year of Acquisition

22 The Allocation EE Complete Equity Method Year Subsequent to Acquisition Investment in S 74,000 Depreciation expense 24,000 Amortization expense of goodwill 10,000 Equipment 192,000 Land 120,000 Goodwill180,000 Difference between cost and book value 600,000 Add up to $108,000, becomes the 1/1 R/E adjustment in the next year (see next slide) Note: The investment account, instead of the beginning R/E, is adjusted under the complete equity method

23 Push Down Accounting lDefinition n A subsidiary changes the accounting basis in its separate financial statements based on the purchase price paid by the parent for its stock.

24 Push Down Accounting S has outstanding public debt? Push down accounting should not be used Yes No S has outstanding senior class of capital stock? What is P’s % of ownership? <80% Yes No 80-95% <80% Push down accounting is recommended Push down accounting is required

25 Advanced Accounting by Debra Jeter and Paul Chaney Copyright © 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.


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