Accounting Problem Chapter 5

Chapter 5

Consolidation Subsequent to

Acquisition Date

A brief description of the major points covered in each case and problem.

CASES

Case 5-1 In this case, students must discuss how to value employees and patentable products and how these assets should be amortized or checked for impairment on an annual basis.

Case 5-2

In this case, adapted from a CPA exam, students are asked to determine appropriate accounting policies relating to a restructuring of a real estate company. A special purpose balance sheet needs to be prepared that reports all assets and liabilities at fair value.

Case 5-3

In this case, adapted from a CPA exam, students are asked to provide advice in managing a new company providing warranties for new homes. Students must also recommend appropriate accounting policies relating to revenue recognition, warranty obligations and a business combination involving some unique factors in allocating the acquisition cost.

Case 5-4

In this real life case, students are asked to provide advice in resolving a salary dispute for a hockey team. The owner of the hockey team states that he cannot afford the demands from the union. However, consolidated statements are not being prepared for the combined operations of the hockey team and Stadium, which is a subsidiary of the hockey team.  

Case 5-5

In this case, adapted from a CPA exam, management appears to be manipulating income to minimize the payment required under a share-redemption agreement. Students are required to apply special accounting policies when analyzing controversial accounting issues including the valuation of inventory, capitalization policies, goodwill, and related party transactions.

Case 5-6

In this case, adapted from a CPA exam, management appears to be manipulating income to maximize its bonus. Students must recommend appropriate accounting policies relating to revenue recognition, research and development costs and identifiable assets in a business combination.

PROBLEMS

Problem 5-1 (20 min.)

This problem involves a calculation of goodwill impairment loss and a comparison of the calculation of goodwill at the date of acquisition compared to goodwill after an impairment loss.

Problem 5-2 (30 min.)

This problem requires the preparation of journal entries under the cost method and equity method, calculation of various amounts for the consolidated financial statements for the third year after acquisition and calculation of the equity method balance in the investment account.

Problem 5-3 (25 min.)

This problem requires the calculation of various consolidated amounts for the income statement and balance sheet for the fifth year after acquisition and an indication of the impact of goodwill impairment on key financial statement items.

Problem 5-4 (15 min.)

The consolidated balance sheet as well as the balance sheet of a parent and its less than 100%- owned subsidiary are presented. Students are required to answer four questions about the parent and its subsidiary.

Problem 5-5 (25 min.)

Selected information from the financial statements of a parent and its 85%-owned subsidiary for a two-year period is given and the student is required to calculate the amounts for various items that would appear in the consolidated statements during this period.

Problem 5-6 (40 min.)

This is a tricky problem in which details of changes in the parent’s investment account over a three-year period are given. The student is asked to calculate amounts from the subsidiary's financial statements as well as amounts for certain items on the consolidated statements.

Problem 5-7 (30 min)

Consolidated financial statements and a calculation of consolidated retained earnings are required for a parent and its 80%-owned subsidiary for the third year after acquisition. Non-controlling interest is measured using the trading price of the subsidiary at the date of acquisition.

Problem 5-8 (25 min.)

This problem involves the calculation of goodwill and equipment for the consolidated statements and a series of questions comparing the cost and equity methods and the affects, if any, of these methods on the preparation of consolidated financial statements.

Problem 5-9 (40 min.)

A relatively straightforward question requiring the preparation of consolidated financial statements one year after acquisition date.

Problem 5-10 (60 min.)

This problem requires the preparation of consolidated financial statements four years after a parent acquired 80% control in a subsidiary. Part of the acquisition cost is allocated to unrecognised trademarks. Students must also assess the impact on two ratios of not allocating any of the acquisition cost to the trademarks.

Problem 5-11 (50 min.)

This problem requires the preparation of consolidated financial statements two and one-half years after a parent acquired 80% control in a subsidiary. Also required are calculations of goodwill, goodwill impairment and non-controlling interest under the parent company extension theory. The parent uses the equity method for internal reporting.  

Problem 5-12 (55 min.)

Consolidated financial statements of a 75%-owned subsidiary, four years after acquisition is required after impairment tests for goodwill and software have been performed. Also required are calculations of goodwill impairment loss and non-controlling interest under the parent company extension theory and an explanation of how the use of the parent company extension theory would affect the debt to equity ratio.

Problem 5-13 (55 min.)

The preparation of consolidated financial statements is required four and one-half years after the acquisition of an 80%-owned subsidiary. Also required are calculations of goodwill, goodwill impairment and non-controlling interest under the parent company extension theory.

Problem 5-14 (55 min.)

Consolidated financial statements of a parent and its 80%-owned subsidiary four years after acquisition are required.

Problem 5-15 (50 min.)  

This question requires the preparation of consolidated financial statements three years after acquisition. The parent uses the equity method for internal reporting. Also required are calculations of the investment account had the parent used the cost method and calculation and interpretation of 3 key ratios under the three different reporting methods.