Week 1 – DQ 1

What is the significance of goodwill in the consolidation process? Why is it necessary

to determine goodwill impairment? Do you agree with the change in accounting for

goodwill? Why or why not?

Response #1

When a company acquires another company's net assets in a business combination, the amount

of the acquisition price in excess of the fair value of the identifiable assets and liabilities of the

company acquired is recorded as goodwill. Goodwill is theoretically equal to the present value

of future excess earnings of a company over other companies in the industry and practically, is

the premium paid by the acquiring company to gain control. Goodwill is recorded by the

acquiring company at the time the net assets of the company acquired are transferred, unless

the acquired company is a separate entity and in this situation, goodwill is not recorded by any

of the companies, but is part of the total purchase price, included in the investment account.

Goodwill is an asset and it is valuated based on the original cost.

Week 1 – DQ 2

Define the cost and equity methods or accounting for an investment. Under what

circumstances would you use the cost or equity method of accounting for an

investment? Why are the percentages of ownership only a guideline when

accounting for an investment?

Response #1

The equity method is used for external reporting when the investor exercises significant

influence over the operating and financial policies of the investee and consolidation is

not appropriate. The equity method may not be used in place of consolidation when

consolidation is appropriate, and therefore its primary use is in reporting nonsubsidiary

investments.

PROBLEM C2-1 & E2-1

C2-1

a) One of the factors to consider is percentage of holding Slanted Building Supplies

has in Flat Floor Company. The company, Slanted 32% of the voting rights,

justifying the use of equity-method. Another factor is if there will be consolidation

of the two companies. There is a problem that does not indicate this. The amount

of control or significant influence is the last area that should be taken into

consideration. Even though, Slanted owns 32% of the voting stock it must

determine if it has significant influence over Flat. If it does then the equity-method

can be used.

b) IASB Deliberations Report1

c)

d)

e)

f)

g)

h)

i)

j)

k)

l)

m)

n)

o)

p) IASB Deliberations Report

q) Name

r) ACC 440

s) Date

t)

u)

v)

w)

x)

y)

z)

aa) IASB Deliberations Report2

bb) The international Accounting standard board (IASB) was created in 2001 by the

International Financial Reporting Standards (IFRS). The IASB developed

financial reporting standards and organized a six step method. The IASB works

with the Financial Accounting Standard Board (FASB) on the entire project to that

aids many organizations, in the United States, and other companies that have

companies in other countries. I will explain and discuss leases, revenue

recognition, replacement of IASB39, and the status of the conceptual framework.

cc) Leases are one of the projects that are working toward the standard the FASB and

IFRS have agreed on. Assets and liabilities are involved with the agreements

between the organization‘s that are operating in different countries, so they can

report the same in each organization’s balance sheet. To make this happen a

contraction on lease must occur.

ACC 440

LEARNING TEAM ASSIGNMENT

Name

Date

Instructor Name

E1-2

1. Goodwill represents the excess of the sum of the consideration given over the :

a. Sum of the fair values assigned to identifiable assets acquired less liabilities

assumed.

2. In a business combination, costs of registering equity securities to be issued by the

acquiring company are a(n):

c. Reduction of the otherwise determinable fair value of the securities.

3. Which of the following is the appropriate basis for valuing fixed assets acquired in a

business combination carried out by exchanging cash for common stock?

4. Week 2 – DQ 1

5. How are foreign exchange gains and losses reported?

6.

7. Response #1

8. The foreign currency transaction loss is the result of a foreign currency

transaction and is included in this period’s income statement, usually as a

separate item under “Other Income or Loss.” Some accountants use the account

title Exchange Loss instead of the longer title Foreign Currency Transaction Loss.

9. Reference:

10. Baker, R. E., Lembke, V. C., King, T. E., & Jeffrey, C. G. (2009). Advanced financial

accounting (8th ed.). Boston, MA: McGraw-Hill Irwin.

11.

12. Week 2 – DQ 2

13. Why do companies hedge? Why would some companies choose not to hedge?

14.

15. Response #1

16. Hedge accounting offsets the gain (loss) on the hedged item with the loss (gain)

on the hedging instrument. Hedges are applicable to (1) foreign currency

exchange risk in which currency exchange rates change over time, (2) interest

rate risks, particularly for companies owing variable rate debt instruments, and

(3) commodity risks whose future commodity prices may be quite different from

spot prices. That’s why some companies choose to hedge but some companies

would not choose to do so.

17. Reference:

18. Baker, R. E., Lembke, V. C., King, T. E., & Jeffrey, C. G. (2009). Advanced financial

accounting (8th ed.). Boston, MA: McGraw-Hill Irwin.

Week 3 – DQ 1

What are some of the issues we may run into when consolidating financial statements at

period end? What types of transactions need to be addressed in a consolidation?

Response #1

Some of the more important limitations of consolidated financial statements are as

follows:

1. Because the operating results and financial position of individual companies included

in the consolidation are not disclosed, the poor performance or position of one or more

companies may be hidden by the good performance and position of others.

2. Not all the consolidated retained earnings balance is necessarily available for

dividends of the parent because a portion may represent the parent’s share of

undistributed subsidiary earnings. Similarly, because the consolidated statements

include the subsidiary’s assets, not all assets shown are available for dividend

distributions of the parent company.

Week 3 - DQ 2

Why do most parent companies acquire 100 percent ownership of the subsidiary when

51 percent would grant them economic control?

What are the economic reasons supporting more than a 51 percent ownership level?

Response #1

Under the economic unit concept, if controlling interest in a subsidiary is acquired in a

single transaction, 100% of identifiable assets and liabilities - both the parent's and the

non-controlling interest's shares - are included in consolidation at their fair values at

the acquisition date. Goodwill is recognized under either a full or purchased goodwill

interpretation. For tax purposes, the parent company must own at least 80 percent of

the voting stock in another company in order to be able to file a consolidated tax return.

The tax advantage here is that losses from one subsidiary can be used to offset profits

from another subsidiary and reduce the overall taxable corporate income on the

consolidated tax return. A significant disadvantage occurs when a company holds less

than 80 percent of the subsidiary's voting stock; in that case separate tax returns must

be filed for the parent and the subsidiary, and inter-corporate dividends are subject to

an additional tax.

ACC/440

Learning Team Assignment

Name

Instructor Name

Date

Chapter 11 Q11-1 through Q11-10

1. Explain the difference between indirect and direct exchange rates.

The indirect and direct exchange rates are reciprocals of one another. The

direct exchange rate shows how many local currency units it will take to acquire one

foreign currency unit. Using the U.S. dollar as the LCU, the direct exchange rate can

reveal how many dollars it will take to purchase one Columbian peso. In the

calculation for the direct exchange rate, the LCU is a part of the numerator and 1 FCU

is the denominator.

The indirect exchange rate shows how many foreign currency units can be

acquired for one local currency unit. In other words, the indirect exchange rate can

reveal how many Columbian pesos can be purchased for one U.S. dollar. In the

calculation for the indirect exchange rate, the FCU is the numerator and one LCU is

the denominator.

Week 4 – DQ 1

What are some issues to consider before investing in another company?

Response #1

Some issues to consider before investing in another company are evaluating current

financial roadmap, evaluate comfort zone in taking on risk, consider an appropriate mix

of investments, create and maintain an emergency fund, consider rebalancing portfolio

occasionally and avoid circumstances that can lead to fraud.

Reference:

US securities and exchange commission (2012) retrieved from

http://www.sec.gov/investor/pubs/financialnavigating.htmS

Week 4 – DQ 2

What effect does a negative retained earnings balance on the subsidiary’s books

have on consolidation procedures?

Response #1

In most cases, companies retain their earnings in order to invest them into areas where

the company can create growth opportunities, such as buying new machinery or

spending the money on more research and development. If there is a negative retained

earnings balance, it means a net loss be greater than beginning retained earnings,

retained earnings can become negative, creating a deficit. The retained earnings general

ledger account is adjusted every time a journal entry is made to an income or expense

account.

ACC/440

Learning Team Assignment

Name

Date

Instructor Name

Chapter 3 & 4 E3-8 and C4-1

C4-1 Prepare an appropriate response to help the controller answer the marketing vice

president’s question.

At a recent staff meeting, the vice president of marketing appeared confused. The controller

had assured him that the parent company and each of the subsidiary companies had properly

accounted for all transactions during the year. After several other questions, he finally asked,

“If it has been done properly, then why must you spend so much time and make so many

changes to the amounts reported by the individual companies when you prepare the

consolidated financial statements each

month? You should be able to just add the reported balances together.

Week 5 – DQ 1

When are profits on inter-corporate sales considered to be realized? Explain.

Response #1

Profits on inter corporate sales are considered realized the time of the sale from an item

to another party. The profit s not considered to be realized for consolidation purposes

until it is confirmed.

Week 4 – DQ 2

What dollar amounts in the consolidated financial statements will be incorrect if

intercompany services are not eliminated?

Response #1

Related companies frequently purchase services from one another. These services may

be of many different types, but intercompany purchases of consulting, engineering,

marketing, and maintenance services are common. When one company purchases

services from a related company, the purchaser typically records an expense and the

seller records revenue. When consolidated financial statements are prepared, both the

expense and revenue must be eliminated.

USE THIS AS A REFRENCE -

E5-13 Consolidation after One Year of Ownership

a. Eliminating entries, January 1, 20X2:

E(1) Common Stock — Lowe Corporation 120,000 

Retained Earnings, January 1 80,000 

Differential 37,500 

Investment in Lowe Corporation Stock 190,000

Noncontrolling Interest 47,500

Eliminate investment balance.

Computation of differential

Fair value of consideration given by Pioneer $190,000 

Fair value of noncontrolling interest 47,500  

Total fair value 237,500 

Underlying book value   (200,000 )

Differential $   37,500  

E(2) Buildings 32,000 

Goodwill 5,500 

Differential 37,500

Assign differential:

$5,500 = $37,500 - $32,000

USE THIS AS A REFRENCE -

Learning Team Solutions

E10-5 Preparation of Statement of Cash Flows

Consolidated Enterprises Inc. and Subsidiary

Consolidated Statement of Cash Flows

For the Year Ended December 31, 20X3

Cash Flows from Operating Activities:

Consolidated Net Income $ 464,000 

Noncash Expenses, Revenue, and Gains

Included in Income:

Depreciation Expense 73,000 

Goodwill Impairment Loss 3,000 

Gain on Sale of Equipment (8,000)

Decrease in Accounts Receivable 23,000 

Increase in Accounts Payable 5,000 

Increase in Inventory     (15,000 )

Net Cash Provided by Operating Activities $545,000