Advanced Accounting, 7th Edition [Rental Edition]

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 7

1.5 Terminology and Types of Combinations 10

1.6 Takeover Premiums 13

1.7 Avoiding the Pitfalls Before the Deal 14

1.8 Determining Price and Method of Payment in Business Combinations 16

1.9 Alternative Concepts of Consolidated Financial Statements 20

1.10 FASB’S Conceptual Framework 25

1.11 FASB Codification (Source of GAAP) (Available to Instructors)

Summary 31

Appendix 1A: Evaluating Firm Performance (Available to Instructors)

Questions 32

Analyzing Financial Statements 32

Exercises 35

ASC Exercises 37

2 Accounting for Business Combinations 38

Learning Objectives 38

2.1 Accounting Standards on Business Combinations: Background 38

2.2 Illustration of Acquisition Accounting 42

2.3 Bargain Purchase Accounting Illustration (Purchase Price Below Fair Value of Identifiable Net Assets) 46

2.4 Measurement Period and Measurement Period Adjustments 47

2.5 Goodwill Impairment Test 48

2.6 Contingent Consideration (Earnouts) 52

2.7 Pro Forma Statements and Disclosure Requirement 57

2.8 Leveraged Buyouts 59

Summary 59

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

Appendix 2B: Illustration 2-1 (Available to Instructors)

Questions 61

Analyzing Financial Statements 61

Exercises 66

ASC Exercises (Available to Instructors)

Problems 73

3 Consolidated Financial Statements—Date of Acquisition 77

Learning Objectives 77

3.1 Definitions of Subsidiary and Control 79

3.2 Requirements for the Inclusion of Subsidiaries in the Consolidated Financial Statements 82

3.3 Reasons for Subsidiary Companies 83

3.4 Consolidated Financial Statements 83

3.5 Investments at the Date of Acquisition 84

3.6 Consolidated Balance Sheets: The Use of Workpapers 86

3.7 A Comprehensive Illustration—More Than One Subsidiary Company 103

3.8 Limitations of Consolidated Statements 106

Summary 107

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

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

Questions 108

Analyzing Financial Statements 109

Exercises 110

ASC Exercises (Available to Instructors)

Problems 114

4 Consolidated Financial Statements After Acquisition 122

Learning Objectives 122

4.1 Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods 123

4.2 Consolidated Statements After Acquisition—Cost Method 132

4.3 Recording Investments in Subsidiaries—Equity Method (Partial or Complete) 144

4.4 Elimination of Intercompany Revenue and Expense Items 155

4.5 Interim Acquisitions of Subsidiary Stock 156

4.6 Consolidated Statement of Cash Flows 162

4.7 Illustration of Preparation of a Consolidated Statement of Cash Flows—Year of Acquisition 166

Summary 169

Appendix 4A: Alternative Workpaper Format (Available to Instructors)

Appendix 4B: Deferred Tax Consequences When Affiliates File Separate Income Tax Returns—Undistributed Income (Available to Instructors)

Questions 170

Analyzing Financial Statements 171

Exercises 172

ASC Exercises (Available to Instructors)

Problems 178

5 Allocation and Depreciation of Differences Between Implied and Book Values 191

Learning Objectives 191

5.1 Computation and Allocation of the Difference Between Implied and Book Values to Assets and Liabilities of Subsidiary—Acquisition Date 193

5.2 Effect of Differences Between Implied and Book Values on Consolidated Net Income—Year Subsequent to Acquisition 199

5.3 Consolidated Statements Workpaper—Using the Cost Method 202

5.4 Controlling and Noncontrolling Interests in Consolidated Net Income and Retained Earnings—Using the Cost Method 213

5.5 Consolidated Statements Workpaper—Using Partial Equity Method 215

5.6 Controlling and Noncontrolling Interests in Consolidated Net Income and Retained Earnings—Using Partial Equity Method 222

5.7 Consolidated Statements Workpaper—Using Complete Equity Method 224

5.8 Controlling Interest in Consolidated Net Income and Retained Earnings—Using Complete Equity Method 232

5.9 Additional Considerations Relating to Treatment of Difference Between Implied and Book Values 233

5.10 Push down accounting (Available to Instructors)

Summary 242

Questions 243

Analyzing Financial Statements 244

Exercises 247

ASC Exercises (Available to Instructors)

Problems 252

6 Elimination of Unrealized Profit on Intercompany Sales of Inventory 270

Learning Objectives 270

6.1 Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances 271

6.2 Cost Method: Consolidated Statements Workpaper—Upstream Sales 281

6.3 Cost Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings 286

6.4 Consolidated Statements Workpaper—Partial Equity Method 289

6.5 Partial Equity Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings 294

6.6 Consolidated Statements Workpaper—Complete Equity Method 295

6.7 Complete Equity Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings 300

6.8 Summary of Workpaper Entries Relating to Intercompany Sales of Inventory 301

6.9 Intercompany Profit Prior to Parent-Subsidiary Affiliation 301

Summary 302

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

Questions 303

Analyzing Financial Statements 303

Exercises 305

ASC Exercises 308

Problems 308

7 Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 321

Learning Objectives 321

7.1 Intercompany Sales of Land (Nondepreciable Property) 322

7.2 Intercompany Sales of Depreciable Property (Machinery, Equipment, and Buildings) 325

7.3 Consolidated Statements Workpaper—Cost and Partial Equity Methods 332

7.4 Calculation of Consolidated Net Income and Consolidated Retained Earnings 342

7.5 Consolidated Statements Workpaper—Complete Equity Method 345

7.6 Calculation and Allocation of Consolidated Net Income; Consolidated Retained Earnings: Complete Equity Method 351

7.7 Summary of Workpaper Entries Relating to Intercompany Sales of Equipment 352

7.8 Intercompany Interest, Rents, and Service Fees 352

Summary 355

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

Questions 356

Analyzing Financial Statements 357

Exercises 357

ASC Exercises (Available to Instructors)

Problems 360

8 Changes in Ownership Interest 372

Learning Objectives 372

8.1 Changes in Ownership 372

9 Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial Statements 375

Learning Objectives 375

9.1 Intercompany Bond Holdings 376

10 Insolvency—Liquidation and Reorganization 378

Learning Objectives 378

11 International Financial Reporting Standards 380

Learning Objectives 380

11.1 The Increasing Importance of International Accounting Standards 380

11.2 Historical Perspective 382

11.3 GAAP Hierarchy—U.S. versus IFRS 385

11.4 Similarities and Differences Between U.S. GAAP and IFRS 387

11.5 Business Combination and Consolidation—U.S. GAAP versus IFRS 396

11.6 International Convergence Issues 414

11.7 American Depository Receipts (Available to Instructors)

Summary 418

Questions 419

Analyzing Financial Statements 419

Exercises 423

ASC Exercises 426

Problems 426

12 Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk 432

Learning Objectives 432

12.1 Exchange Rates—Means of Translation 433

12.2 Measured versus Denominated 436

12.3 Foreign Currency Transactions 437

12.4 Using Forward Contracts as a Hedge 446

Summary 464

Questions 465

Analyzing Financial Statements 465

Exercises 466

Problems 474

13 Translation of Financial Statements of Foreign Affiliates 481

Learning Objectives 481

13.1 Accounting for Operations in Foreign Countries 482

13.2 Translating Financial Statements of Foreign Affiliates 483

13.3 Objectives of Translation 484

13.4 Translation Methods 486

13.5 Identifying the Functional Currency 486

13.6 Translation of Foreign Currency Financial Statements 487

13.7 Translation of Foreign Financial Statements Illustrated 492

13.8 Financial Statement Disclosure 502

Summary 503

Appendix 13A: Accounting for a Foreign Affiliate and Preparation of Consolidated Statements Workpaper Illustrated (Available to Instructors)

Appendix 13B: Preparing the Statement of Cash Flows with International Subsidiaries (Available to Instructors)

Questions 504

Analyzing Financial Statements 505

Exercises 506

ASC Exercises 512

Problems 513

14 Reporting for Segments and for Interim Financial Periods 520

Learning Objectives 520

14.1 Need for Disaggregated Financial Data 521

14.2 Standards of Financial Accounting and Reporting 521

14.3 Interim Financial Reporting 533

Summary 539

Appendix 14A: GE Segmental Disclosures, 2013 Annual Report (Available to Instructors)

Questions 540

Analyzing Financial Statements 541

Exercises 543

Problems 547

15 Partnerships: Formation, Operation, and Ownership Changes 551

Learning Objectives 551

15.1 Partnership Defined 553

15.2 Reasons for Forming a Partnership 553

15.3 Characteristics of a Partnership 554

15.4 Partnership Agreement 556

15.5 Accounting for a Partnership 558

15.6 Special Problems in Allocation of Income and Loss 566

15.7 Financial Statement Presentation 568

15.8 Changes in the Ownership of the Partnership 569

15.9 Section A: Admission of a New Partner (Not a Business Combination) 571

15.10 Section B: Admission of a New Partner that Qualifies as a Business Combination: GAAP Requires Goodwill Method 579

15.11 Section C: Withdrawal of a Partner 582

Summary 585

Questions 587

Exercises 587

Problems 594

16 Partnership Liquidation 601

Learning Objectives 601

16.1 Steps in the Liquidation Process 602

16.2 Priorities of Partnership and Personal Creditors 604

16.3 Simple Liquidation Illustrated 606

16.4 Installment Liquidation 608

16.5 Incorporation of a Partnership 616

Summary 618

Questions 619

Exercises 619

Problems 625

17 Introduction to Fund Accounting 632

Learning Objectives 632

17.1 Classifications of Nonbusiness Organizations 633

17.2 Distinctions Between Nonbusiness Organizations and Profit-Oriented Enterprises 633

17.3 Financial Accounting and Reporting Standards for Nonbusiness Organizations 634

17.4 Fund Accounting 638

17.5 Comprehensive Illustration—General Fund 656

17.6 Reporting Inventory and Prepayments in the Financial Statements 665

Summary 667

Appendix 17A: City of Atlanta Partial Financial Statements (Available to Instructors)

Questions 668

Analyzing Financial Statements 668

Exercises 669

Problems 674

18 Introduction to Accounting for State and Local Governmental Units 682

Learning Objectives 682

18.1 The History of Generally Accepted Governmental Accounting Standards 684

18.2 The Structure of Governmental Accounting 686

18.3 Governmental Fund Entities 688

18.4 Proprietary Funds 707

18.5 Fiduciary Funds 711

18.6 Capital Assets and Long-Term Debt 711

18.7 External Reporting Requirements (GASB Statement No. 34) 716

18.8 Government Fund-Based Reporting 717

18.9 Government-Wide Reporting 721

18.10 Management’s Discussion and Analysis (MD&A) (Available to Instructors)

18.11 Interfund Activity (Available to Instructors)

Summary 725

Appendix 18A: Government-wide Financial Statements—City of Atlanta (Available to Instructors)

Questions 727

Analyzing Financial Statements 728

Exercises 729

Problems 737

19 Accounting for Nongovernment Nonbusiness Organizations: Colleges and Universities, Hospitals and Other Health Care Organizations 749

Learning Objectives 749

19.1 Sources of Generally Accepted Accounting Standards for Nongovernment Nonbusiness Organizations 750

19.2 Financial Reporting for Not-for-Profit Entities 752

19.3 Fund Accounting and Accrual Accounting 756

19.4 Contributions 757

19.5 Accounting for Current Funds 763

19.6 Accounting for Plant Funds 766

19.7 Accounting for Endowment Funds 771

19.8 Accounting for Investments 772

19.9 Accounting for Loan Funds 774

19.10 Accounting for Agency (Custodial) Funds 774

19.11 Accounting for Annuity and Life Income Funds 775

19.12 Issues Relating to Colleges and Universities 776

Summary 777

Questions 778

Appendix 19A: Sample Financial Statements for Private Educational Institutions (Available to Instructors)

Analyzing Financial Statements 779

Exercises 779

Problems 787

Glossary 796

Appendix PV: Tables of Present Values (Available to Instructors)

Index 803

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