1 Introduction to Business Combinations and the Conceptual Framework 1

Learning Objectives 1

1.1 Growth Through Mergers 1

1.2 Nature of The Combination 4

1.3 Business Combinations: Why? Why Not? 5

1.4 Business Combinations: Historical Perspective 8

1.5 Terminology and Types of Combinations 11

1.6 Takeover Premiums 13

1.7 Avoiding the Pitfalls Before (and After) the Deal 15

1.8 Determining Price and Method of Payment in Business Combinations 17

1.9 Alternative Concepts of Consolidated Financial Statements 21

1.10 FASB’S Conceptual Framework 26

Summary 32

Questions 33

Analyzing Financial Statements 33

Exercises 36

ASC Exercises 38

2 Accounting for Business Combinations 39

Learning Objectives 39

2.1 Accounting Standards on Business Combinations: Current Status and Background 39

2.2 Illustration of Acquisition Accounting 45

2.3 Bargain Purchase Accounting Illustration (Purchase Price Below Fair Value of Identifiable Net Assets) 49

2.4 Measurement Period and Measurement Period Adjustments 50

2.5 Goodwill Impairment Test 51

2.6 Contingent Consideration (Earnouts) 56

2.7 Pro Forma Statements and Disclosure Requirement 61

2.8 Leveraged Buyouts 63

Summary 63

Questions 65

Analyzing Financial Statements 65

Exercises 70

Problems 77

3 Consolidated Financial Statements—Date of Acquisition 82

Learning Objectives 82

3.1 Definitions of Subsidiary and Control 84

3.2 Requirements for the Inclusion of Subsidiaries in the Consolidated Financial Statements 87

3.3 Reasons for Subsidiary Companies 88

3.4 Consolidated Financial Statements 89

3.5 Investments at the Date of Acquisition 90

3.6 Consolidated Balance Sheets: The Use of Workpapers 92

3.7 A Comprehensive Illustration—More ThanOne Subsidiary Company 109

3.8 Limitations of Consolidated Statements 112

Summary 113

Questions 114

Analyzing Financial Statements 115

Exercises 116

Problems 121

4 Consolidated Financial Statements After Acquisition 127

Learning Objectives 127

4.1 Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods 128

4.2 Consolidated Statements After Acquisition—Cost Method 137

4.3 Recording Investments in Subsidiaries—Equity Method (Partial or Complete) 149

4.4 Elimination of Intercompany Revenue and Expense Items 160

4.5 Interim Acquisitions of Subsidiary Stock 161

4.6 Consolidated Statement of Cash Flows 167

4.7 Illustration of Preparation of a Consolidated Statement of Cash Flows—Year of Acquisition 171

Summary 174

Questions 175

Analyzing Financial Statements 176

Exercises 178

Problems 184

5 Allocation and Depreciation of Differences Between Implied And Book Values 198

Learning Objectives 198

5.1 Computation and Allocation of the Difference Between Implied and Book Values to Assets and Liabilities of Subsidiary—Acquisition Date 201

5.2 Effect of Differences Between Implied and Book Values on Consolidated Net Income—Year Subsequent to Acquisition 207

5.3 Consolidated Statements Workpaper—Using the Cost Method 209

5.4 Controlling and Noncontrolling Interests in Consolidated Net Income and Retained Earnings—Using the Cost Method 221

5.5 Consolidated Statements Workpaper—Using Partial Equity Method 223

5.6 Controlling and Noncontrolling Interests in Consolidated Net Income and Retained

Earnings—Using Partial Equity Method 230

5.7 Consolidated Statements Workpaper—Using Complete Equity Method 232

5.8 Controlling Interest in Consolidated Net Income and Retained Earnings—Using Complete Equity Method 240

5.9 Additional Considerations Relating to Treatment of Difference Between Implied and Book Values 241

5.10 Push Down Accounting 250

Summary 255

Questions 256

Analyzing Financial Statements 257

Exercises 259

Problems 265

6 Elimination of Unrealized Profit on Intercompany Sales of Inventory 286

Learning Objectives 286

6.1 Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances 287

6.2 Cost Method: Consolidated Statements Workpaper—Upstream Sales 297

6.3 Cost Method—Analysis of Consolidated

Net Income and Consolidated Retained Earnings 302

6.4 Consolidated Statements Workpaper—Partial Equity Method 305

6.5 Partial Equity Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings 310

6.6 Consolidated Statements Workpaper—Complete Equity Method 311

6.7 Complete Equity Method—Analysis of Consolidated Net Income and Consolidated

Retained Earnings 316

6.8 Summary of Workpaper Entries Relating to Intercompany Sales of Inventory 317

6.9 Intercompany Profit Prior to Parent-Subsidiary Affiliation 317

Summary 318

Questions 319

Analyzing Financial Statements 319

Exercises 321

Problems 324

7 Elimination of Unrealized Gains Or Losses on Intercompany Sales of Property and Equipment 337

Learning Objectives 337

7.1 Intercompany Sales of Land (Nondepreciable Property) 338

7.2 Intercompany Sales of Depreciable Property (Machinery, Equipment, and Buildings) 341

7.3 Consolidated Statements Workpaper—Cost and Partial Equity Methods 348

7.4 Calculation of Consolidated Net Income and Consolidated Retained Earnings 358

7.5 Consolidated Statements Workpaper—Complete Equity Method 361

7.6 Calculation and Allocation of Consolidated Net Income; Consolidated Retained Earnings:

Complete Equity Method 367

7.7 Summary of Workpaper Entries Relating to Intercompany Sales of Equipment 368

7.8 Intercompany Interest, Rents, and Service Fees 368

Summary 371

Questions 372

Analyzing Financial Statements 373

Exercises 373

Problems 376

8 Changes in Ownership Interest 388

Learning Objectives 388

8.1 Changes in Ownership 388

8.2 Parent Acquires Subsidiary Stock Through Several Open-Market Purchases—Cost Method 391

8.3 Parent Sells Subsidiary Stock Investment on the Open Market—Cost Method 394

8.4 Equity Method—Purchases and Sales of Subsidiary Stock by the Parent 398

8.5 Parent Sells Subsidiary Stock Investment on the Open Market 403

8.6 Subsidiary Issues Stock 405

Summary 411

Questions 412

Analyzing Financial Statements 412

Exercises 413

Problems 416

9 Insolvency—Liquidation And Reorganization 426

Learning Objectives 426

9.1 Contractual Agreements 428

9.2 Bankruptcy 430

9.3 Liquidation (Chapter 7) 434

9.4 Reorganization Under the Reform Act (chapter 11) 435

9.5 Trustee Accounting and Reporting 447

9.6 Bankruptcy Prediction Models 453

Summary 456

Questions 457

Analyzing Financial Statements 458

Exercises 460

Problems 466

10 International Financial Reporting Standards 473

Learning Objectives 473

10.1 The Increasing Importance of International Accounting Standards 473

10.2 Historical Perspective 475

10.3 GAAP Hierarchy—U.S. Versus IFRS 477

10.4 Similarities and Differences Between U.S. GAAP and IFRS 478

10.5 Business Combination and Consolidation—U.S. GAAP Versus IFRS 488

10.6 International Convergence Issues 507

Summary 512

Questions 512

Analyzing Financial Statements 513

Exercises 516

Problems 519

11 Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk 525

Learning Objectives 525

11.1 Exchange Rates—Means of Translation 526

11.2 Measured Versus Denominated 529

11.3 Foreign Currency Transactions 530

11.4 Using Forward Contracts as a Hedge 539

Summary 560

Questions 561

Analyzing Financial Statements 561

Exercises 562

Problems 570

12 Translation of Financial Statements of Foreign Affiliates 577

Learning Objectives 577

12.1 Accounting for Operations in Foreign Countries 578

12.2 Translating Financial Statements of Foreign Affiliates 579

12.3 Objectives of Translation 580

12.4 Translation Methods 583

12.5 Identifying the Functional Currency 583

12.6 Translation of Foreign Currency Financial Statements 584

12.7 Translation of Foreign Financial Statements Illustrated 589

12.8 Financial Statement Disclosure 598

12.9 Constant Currency Non-GAAP Adjustments 600

Summary 602

Appendix 12A: Accounting for a Foreign Affiliate and Preparation of Consolidated Statements

Workpaper Illustrated 603

Appendix 12B: Preparing the Consolidated Statement of Cash Flows When the Consolidated Entity Includes a Foreign Subsidiary 610

Questions 616

Analyzing Financial Statements 617

Exercises 619

Problems 627

13 Reporting for Segments and for Interim Financial Periods 636

Learning Objectives 636

13.1 Need for Disaggregated Financial Data 637

13.2 Standards of Financial Accounting and Reporting 637

13.3 Interim Financial Reporting 652

Summary 661

Appendix: The Difference Between Reportable Segments and Reporting Units 662

Questions 663

Analyzing Financial Statements 664

Exercises 667

Problems 671

14 Partnerships: Formation, Operation, And Ownership Changes 675

Learning Objectives 675

14.1 Partnership Defined 677

14.2 Reasons for Forming a Partnership 677

14.3 Characteristics of a Partnership 678

14.4 Partnership Agreement 680

14.5 Accounting for a Partnership 682

14.6 Special Problems in Allocation of Income and Loss 690

14.7 Financial Statement Presentation 692

14.8 Changes in the Ownership of the Partnership 693

14.9 Section A: Admission of a New Partner (Not a Business Combination) 695

14.10 Section B: Admission of a New Partner that Qualifies as a Business Combination: GAAP Requires Goodwill Method 703

14.11 Section C: Withdrawal of a Partner 706

Summary 709

Questions 711

Exercises 711

Problems 718

15 Partnership Liquidation 725

Learning Objectives 725

15.1 Steps in the Liquidation Process 726

15.2 Priorities of Partnership and Personal Creditors 727

15.3 Simple Liquidation Illustrated 730

15.4 Installment Liquidation 732

15.5 Incorporation of a Partnership 740

Summary 742

Questions 743

Exercises 743

Problems 749

16 Introduction to Fund Accounting 755

Learning Objectives 755

16.1 Classifications of Nonbusiness Organizations 756

16.2 Distinctions Between Nonbusiness Organizations and Profit-Oriented Enterprises 757

16.3 Financial Accounting and Reporting Standards for Nonbusiness Organizations 758

16.4 Fund Accounting 762

16.5 Comprehensive Illustration—General Fund 780

16.6 Reporting Inventory and Prepayments in the Financial Statements 789

16.7 Recent Proposal by the GASB 791

Summary 792

Appendix 16A: City of Atlanta Partial Financial Statements 793

Questions 795

Analyzing Financial Statements 795

Exercises 796

Problems 801

17 Introduction to Accounting For State and Local Governmental Units 809

Learning Objectives 809

17.1 The History of Generally Accepted Governmental Accounting Standards 812

17.2 The Structure of Governmental Accounting 814

17.3 Governmental Fund Entities 816

17.4 Proprietary Funds 835

17.5 Fiduciary Funds 840

17.6 Capital Assets and Long-Term Debt 841

17.7 External Reporting Requirements (GASB Statement No. 34) 846

17.8 Government Fund-Based Reporting 847

17.9 Government-Wide Reporting 850

Summary 855

Appendix 17A: Government-Wide Financial Statements—City of Atlanta 857

Questions 861

Analyzing Financial Statements 861

Exercises 863

Problems 870

18 Accounting for Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals and other Health Care Organizations 883

Learning Objectives 883

18.1 Sources of Generally Accepted Accounting Standards for Nongovernment Nonbusiness Organizations 885

18.2 Financial Reporting for Not-For-Profit Entities 887

18.3 Fund Accounting and Accrual Accounting 891

18.4 Contributions 894

18.5 Accounting for Current Funds 899

18.6 Accounting for Plant Funds 902

18.7 Accounting for Endowment Funds 907

18.8 Accounting for Investments 908

18.9 Accounting for Loan Funds 910

18.10 Accounting for Agency (Custodial) Funds 911

18.11 Accounting for Annuity and Life Income Funds 911

18.12 Issues Relating to Colleges and Universities 912

Summary 913

Appendix 18A 914

Questions 917

Analyzing Financial Statements 917

Exercises 918

Problems 926

Glossary G-1

Appendix PV: Tables of Present Values A-1

Index I-1

Appendix 2A: Deferred Taxes in Business Combinations (Available Online)

Appendix 3A: Deferred Taxes on the Date of Acquisition (Available Online)

Appendix 3B: Consolidation of Variable Interest Entities (Available Online)

Appendix 4A: Deferred Tax Consequences When Affiliates File Separate Income Tax Returns—

Undistributed Income (Available Online)

Appendix 6A: Deferred Taxes and Intercompany Sales of Inventory (Available Online)

Appendix 7A: Deferred Taxes Consequences Related to Intercompany Sales of Equipment (Available

Online)

Chapter 19: Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial

Statements (Available Online)

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