ch05

Advanced
Accounting
Jeter Chaney
Allocation and
Depreciation of
Differences Between
Implied and Book
Values
1
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
Calculate the difference between implied and book values
and allocate to the subsidiarys assets and liabilities.
Describe FASBs position on accounting for bargain
acquisitions.
Explain how goodwill is measured at the time of the
acquisition.
Describe how the allocation process differs if less than
100% of the subsidiary is acquired.
Record the entries needed on the parents books to account
for the investment under the three methods: the cost, the
partial equity, and the complete equity methods.
2
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Learning Objectives (continued)
Prepare workpapers for the year of acquisition and the
year(s) subsequent to the acquisition, assuming that the
parent accounts for the investment alternatively using the
cost, the partial equity, and the complete equity methods.
Understand the allocation of the difference between implied
and book values to long-term debt components.
Explain how to allocate the difference between implied and
book values when some assets have fair values below book
values.
Distinguish between recording the subsidiary depreciable
assets at net versus gross fair values.
Understand the concept of push down accounting.
3
Allocation of Difference Between Implied
and Book Values: Acquisition Date
When consolidated financial statements are prepared,
asset and liability values must be adjusted by allocating
the difference between implied and book values to
specific recorded or unrecorded tangible and intangible
assets and liabilities.
In the case of a wholly owned subsidiary, the implied
value of the subsidiary equals the acquisition price.
LO 1 Computation and Allocation of Difference (CAD).

4
Allocation of difference between implied and book
values at date of acquisition - wholly owned subsidiary
(implied value equals acquisition price).
Step 1: Difference used first to adjust the individual
assets and liabilities to their fair values on the date of
acquisition.
Step 2: Any residual amount:
Implied value > aggregate fair values = goodwill.
Implied value < aggregate fair values = bargain.
Bargain is recognized as an ordinary gain.

5
Bargain Rules under prior GAAP (before 2007 standard):
Acquired assets, except investments accounted for by the
equity method, are recorded at fair market value.
Previously recorded goodwill is eliminated.
Long-lived assets (including in-process R&D and
excluding long-term investments) are recorded at fair
market value minus an adjustment for the bargain.
Extraordinary gain recorded if all long-lived assets are
reduced to zero.
Current GAAP eliminates these rules and requires
an ordinary gain to be recognized instead.
LO 2 Current and past treatment of bargain acquisitions.

6
Bargain Rules: When a bargain acquisition occurs,
under FASB ASC paragraph 805-30-25-2, the negative
(or credit) balance should be recognized as an ordinary
gain in the year of acquisition. No assets should be
recorded below their fair values.
Note: A true bargain is not likely to occur except in
situations where nonquantitative factors play a role.
For example, a closely held company wishes to
sell quickly because of the health of a family
member.

7
Review Question
In the event of a bargain acquisition (after carefully
considering the fair valuation of all subsidiary assets and
liabilities) the FASB requires the following accounting:
a) an ordinary gain is reported in the financial
statements of the consolidated entity.
b) an ordinary loss is reported in the financial
statements of the consolidated entity.
c) negative goodwill is reported on the balance sheet.
d) assets are written down to zero value, if needed.
8
Allocation of Difference
Case 1: Implied Value in Excess of Fair Value
E5-1: On January 1, 2013, Pam Company purchased an 85% interest in Shaw
Company for $540,000. On this date, Shaw Company had common stock of
$400,000 and retained earnings of $140,000. An examination of Shaw
Companys assets and liabilities revealed that their book value was equal to
their fair value except for marketable securities and equipment:
Book Value Fair Value Difference

Marketable securities $ 20,000 $ 45,000 $ 25,000
Equipment 120,000 140,000 20,000

LO 4 Allocation of difference in a partially owned subsidiary.
9
E5-1: A. Prepare a Computation and Allocation Schedule for the difference
between book value of equity acquired and the value implied by the purchase
price. 85% 15% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 540,000 $ 95,294 $ 635,294
Book value of equity acquired:
Common stock 340,000 60,000 400,000
Retained earings 119,000 21,000 140,000
Total book value 459,000 81,000 540,000
Difference between implied and book value 81,000 14,294 95,294
Marketable securities (21,250) (3,750) (25,000)
Equipment (17,000) (3,000) (20,000)
Balance 42,750 7,544 50,294
Record new goodwill (42,750) (7,544) (50,294)
Balance $ 0 $ 0 $ 0
LO 4 CAD Schedule for less than wholly owned subsidiary.

10
E5-1 (variation): Prepare the worksheet entries to eliminate the investment,
recognize the noncontrolling interest, and to allocate the difference between
implied and book.
Common Stock 400,000
Retained Earnings 140,000
Difference between Implied and Book Value 95,294
Investment in Shaw 540,000
Noncontrolling Interest in Equity 95,294
Marketable Securities 25,000

Equipment 20,000
Goodwill 50,294
11
Case 2: Acquisition Cost Less Than Fair Value
E5-1 (variation): On January 1, 2013, Pam Company purchased an 85%
interest in Shaw Company for $470,000. On this date, Shaw Company had
common stock of $400,000 and retained earnings of $140,000. An examination
of Shaw Companys assets and liabilities revealed that their book value was
equal to their fair value except for marketable securities and equipment:

Equipment 120,000 140,000 20,000

12
E5-1 (variation): Prepare a
85% 15% 100%
Computation and Allocation Schedule. Parent NCI Total
Share Share Value
Common stock 340,000 60,000 400,000
Total book value 459,000 81,000 540,000
Equipment (17,000) (3,000) (20,000)
Balance (excess of FV over implied value) (27,250) (4,809) (32,059)
Pam's gain 27,250
Increase noncontrolling interest to fair
value of assets 4,809
Total allocated gain 32,059
Balance 0 0 0
LO 4 CAD Schedule for less than wholly owned subsidiary.
13
E5-1 (variation): Prepare the worksheet entries.
Common Stock 400,000
Retained Earnings 140,000
Investment in Shaw 470,000

Equipment 20,000
Gain on Acquisition 27,250

14
Effect of Differences Between Implied and Book
Values on Consolidated Net Income: Year
Subsequent To Acquisition
When any portion of the difference between implied
and book values is allocated to depreciable and
amortizable assets, recorded income must be adjusted
in determining consolidated net income in current and
future periods.
Adjustment is needed to reflect the difference between
the amount of amortization and/or depreciation
recorded by the subsidiary and the appropriate amount
based on consolidated carrying values.

15
Consolidated Statements Cost Method
P5-4: On January 1, 2013, Porter Company purchased an 80% interest in
Salem Company for $850,000. At that time, Salem Company had capital stock
of $550,000 and retained earnings of $80,000. Differences between the fair
value and the book value of the identifiable assets of Salem Company were as
follows:
Fair Value in Excess of Book Value
Equipment $ 130,000
Land 65,000
Inventory 40,000
The book values of all other assets and liabilities of Salem Company were
equal to their fair values on January 1, 2013. The equipment had a remaining
life of five years (on January 1, 2013). The inventory was sold in 2013.
Year of LO6 Workpaper entries (cost method).
Acquisition 16
Consolidated Statements Cost
Method
P5-4: Salem Companys net income and dividends declared in 2013 and 2014
were as follows: 2013 Net Income of $100,000; Dividends Declared of $25,000;
2014 Net Income of $110,000; Dividends Declared of $35,000.
Entries recorded on the books of Porter to reflect the acquisition of Salem and
the receipt of dividends for 2013 are as follows:
Investment in Salem 850,000

Cash 850,000
Cash 20,000
Dividend Income ($25,000 x 80%) 20,000
Year of
Acquisition LO 5 Recording investment on books of Parent.
17
Method
P5-4: A. Prepare a Computation and Allocation Schedule
80% 20% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 850,000 $ 212,500 $ 1,062,500
Common stock 440,000 110,000 550,000
Total book value 504,000 126,000 630,000
Equipment (104,000) (26,000) (130,000)
Land (52,000) (13,000) (65,000)
Inventory (32,000) (8,000) (40,000)
Balance 158,000 39,500 197,500
Balance $ - $ - $ -
Year of
Acquisition LO 4 CAD Schedule for less than wholly owned subsidiary.
18
Method
P5-4: B. 1. Prepare the worksheet entries for Dec. 31, 2013.
Dividends Declared 20,000
Beg. Retained Earnings - Salem 80,000

Common Stock - Salem 550,000
Difference between Cost and Book Value 432,500
Year of
Acquisition LO 6 Workpaper entries (cost method).
19
Method
P5-4: B. 1. Prepare the worksheet entries for Dec. 31, 2013.
Cost of Goods Sold 40,000
Land 65,000
Plant and Equipment 130,000
Goodwill 197,500
Depreciation Expense ($130,000/5) 26,000

Year of
Acquisition LO 6 Workpaper entries (cost method).
20
Method
P5-4: C. 1. Prepare the worksheet entries for Dec. 31, 2014.
Salem 2014 income $100,000
Salem 2014 dividends declared - 25,000
Total 75,000
Ownership percentage 80%
$ 60,000

Beg. Retained Earnings - Porter Co. 60,000
To establish reciprocity/convert to equity as of 1/1/2014
Subsequent
Year LO 6 Workpaper entries (cost method).
21
Method

Subsequent
22
Method
1/1 Retained Earnings Porter 32,000
Noncontrolling interest 8,000
Land 65,000
Goodwill 197,500

Noncontrolling Interest 5,200
Subsequent
23
Method
P5-4: D. Prepare a consolidated financial statements
workpaper for the year ended December 31, 2015.
Although no goodwill impairment was reflected at the
end of 2013 or 2014, the goodwill impairment test
conducted at December 31, 2015 revealed implied
goodwill from Salem to be only $150,000. The
impairment has not been recorded in the books of the
parent. (Hint: You can infer the method being used by
the parent from the information in its trial balance.)
LO 6 Workpaper entries (cost method).
Subsequent
Year 24
P5-4: D. 2015 Year Subsequent of Acquisition
Eliminations
Income Statement Porter Salem Debit Credit NCI
Sales $ 1,100,000 $ 450,000
Dividend income 48,000 48,000
Total revenue 1,148,000 450,000
Cost of goods sold 900,000 200,000
Depreciation expense 40,000 30,000 26,000
Impairment loss 47,500
Other expenses 60,000 50,000
Total cost and expense 1,000,000 280,000
Net income 148,000 170,000
Noncontrolling interest 19,300
Net income $ 148,000 $ 170,000 $ 121,500 $ 19,300
Retained Earnings Statement
Retained Earnings, 1/1/15 500,000 230,000 32,000 120,000
Porter 41,600
Salem 230,000
Net income 148,000 170,000 121,500 19,300
Dividends declared (90,000) (60,000) 48,000 (12,000)
Retained earnings, 12/31/15 $ 558,000 $ 340,000 $ 425,100 $ 168,000 $ 7,300
Subsequent LO 6 Workpaper entries (cost method).
25
Year Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
P5-4: D. 2015 Year Subsequent of Acquisition
Eliminations Consolidated
Income Statement Porter Salem Debit Credit NCI Balances
Cash $ 70,000 $ 65,000 $ 135,000
Accounts receivable 260,000 190,000 450,000
Inventory 240,000 175,000 415,000
Investment in Salem 850,000 120,000 970,000
Difference (IV & BV) 432,500 432,500
Land 320,000 65,000 385,000
Plant and equipment 360,000 280,000 130,000 78,000 692,000
Goodwill 197,500 47,500 150,000
Total assets $ 1,780,000 $ 1,030,000 $ 2,227,000
-
Accounts payable $ 132,000 $ 110,000 $ 242,000
Notes payable 90,000 30,000 120,000
Common stock 1,000,000 550,000 550,000 1,000,000
Retained earnings 558,000 340,000 425,100 168,000 7,300 633,600
1/1 NCI in net assets 8,000 242,500 224,100
10,400
12/31 NCI in net asset 231,400 231,400
Total liab. & equity $ 1,780,000 $ 1,030,000 $ 1,938,500 $ 1,938,500 $ 2,227,000
Subsequent
26
Method
P5-4: D. Explanations of worksheet entries for Dec. 31, 2015.
Acquisition date retained earnings - Salem $ 80,000
Retained earnings 1/1/15 - Salem 230,000
Increase 150,000
Ownership percentage 80%
$ 120,000

Beg. Retained Earnings - Porter Co. 120,000
To establish reciprocity/convert to equity as of 1/1/2015
Subsequent
27
Method
P5-4 D. Worksheet entries for Dec. 31, 2015.

Subsequent
28
Method
Noncontrolling Interest 8,000
Land 65,000
Goodwill 197,500
Subsequent
29
Method
1/1 Retained Earnings Porter (2 years) 41,600
Noncontrolling Interest (2 years) 10,400
Impairment Loss ($197,500 - $150,000) 47,500

Goodwill 47,500
To record goodwill impairment
Subsequent
30
Consolidated Statements Partial and
Complete Equity Methods
The equity methods (partial and complete) reflect the
effects of certain transactions more fully than the cost
method on the books of the parent.
However consolidated totals are the same regardless of
which method is used by the Parent company.
LO 5 Recording investment by Parent, partial equity method.

LO 5 Recording investment by Parent, complete equity method.
31
Additional Considerations Relating to Treatment
of Difference Between Implied and Book Values
Allocation of Difference between Implied and Book Values to
Long-Term Debt
Notes payable, long-term debt, and other obligations of an acquired
company should be valued for consolidation purposes at their fair
values.
Fair value is the price that would be paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. A fair value measurement assumes:
The liability is transferred to a market participant at the
measurement date and
The nonperformance risk relating to the liability is the
same before and after its transfer.
LO 7 Allocating difference to long-term32debt.

Allocation of Difference between Implied and Book
Values to Long-Term Debt
To measure fair value, use valuation techniques that
are consistent with the market approach or income
approach.
Quoted prices in active markets for identical
liabilities are the best. If unavailable, then
managements best estimate based on
debt with comparable characteristics or
valuation techniques such as present value.
LO 7 Allocating difference to long-term33debt.

Allocating the Difference to Assets (Liabilities) with
Fair Values Less (Greater) Than Book Values
On the date of acquisition, sometimes the
fair value of an asset is less than the amount recorded
on the books of the subsidiary.
fair value of long-term debt may be greater rather
than less than its recorded value on the books of the
subsidiary.
LO 8 Allocating when the fair value is below book value.

34
Allocating the Difference to Assets (Liabilities) with Fair
Values Less (Greater) Than Book Values
E5-1 (Variation): On January 1, 2013, Pam Company purchased an 85%
interest in Shaw Company for $540,000. On this date, Shaw Company had
common stock of $400,000 and retained earnings of $140,000. An examination
of Shaw Companys assets and liabilities revealed that their book value was
equal to their fair value except for marketable securities and equipment:

Equipment (5 year life) 120,000 100,000 (20,000)

35
Cost
Method
E5-1: A. Prepare a Computation and Allocation Schedule for the
difference between book value of equity acquired and the value implied by
the purchase price.
85% 15% 100%
Parent NCI Total
Share Share Value
Common stock 340,000 60,000 400,000
Total book value 459,000 81,000 540,000
Equipment 17,000 3,000 20,000
Balance 76,750 13,544 90,294
Balance $ - $ - $ -

36
Cost
Method
E5-1 (variation): At the end of the first year, the workpaper entries are:

Goodwill 90,294
Equipment 20,000
Equipment, net 4,000

Depreciation Expense ($20,000 / 5 years) 4,000
Note: The overvaluation of equipment will be amortized over the life

of the asset as a reduction of depreciation expense.

37
Cost
Method
E5-1 (variation): At the end of the second year, the workpaper entries are:

Goodwill 90,294
Equipment 20,000
Equipment, net 8,000

Beg. Retained Earnings - Pam 3,400
Noncontrolling Interest in Equity 600
Depreciation Expense ($20,000 / 5 years) 4,000

38
Reporting Accumulated Depreciation in Consolidated
Financial Statements as a Separate Balance
E5-7: On January 1, 2014, Packard Company purchased an
80% interest in Sage Company for $600,000. On this date
Sage Company had common stock of $150,000 and retained
earnings of $400,000. Sage Companys equipment on the
date of Packard Companys purchase had a book value of
$400,000 and a fair value of $600,000. All equipment had
an estimated useful life of 10 years on January 2, 2009.
Required: Prepare the December 31 consolidated financial

statements workpaper entries for 2014 and 2015, recording
accumulated depreciation as a separate balance.
LO 9 Depreciable assets at net and gross values.

39
E5-7: Prepare a Computation and Allocation Schedule.
80% 20% 100%
Parent NCI Total
Share Share Value
Common stock 120,000 30,000 150,000
Total book value 440,000 110,000 550,000
Equipment (160,000) (40,000) (200,000)
Balance $ - $ - $ -

40
E5-7: Prepare the December 31 consolidated financial statements
workpaper entries for 2014 and 2015.
Equipment 400,000*
Accumulated Depreciation 200,000**
Diff Between
Fair Value Book Value FV & BV Cost & Partial
Equipment (gross) $ 1,200,000 $ 800,000 $ 400,000 * Equity Method
Acc Depr 600,000 400,000 200,000 **
Equipment (net) $ 600,000 $ 400,000 $ 200,000
Annual Depr
(original life 10 yrs,
remaining life 5 yrs) $ 80,000 $ 40,000
41

Accumulated Depreciation 40,000
Cost & Partial

Equity Method
42
Equipment 400,000
1/1 Retained Earnings -Packard Co. 32,000

Cost & Partial
1/1 Noncontrolling Interest 8,000 Equity Method
* Complete equity method: debit to 1/1 Retained Earnings Packard Co. would be
replaced with a debit to Investment in Sage Company

43
Disposal of Depreciable Assets by Subsidiary
In the year of sale, any gain or loss recognized by the
subsidiary on the disposal of an asset to which any of the
difference between implied and book value has been
allocated must be adjusted in the consolidated statements
workpaper.
Depreciable Assets Used in Manufacturing
When the difference between implied and book values is
allocated to depreciable assets used in manufacturing,
workpaper entries may be more complex because the
current and previous years additional depreciation may need
to be allocated among work in process, finished goods, and
cost of goods sold.
44
Push Down Accounting
Push down accounting is the establishment of a new
accounting and reporting basis for a subsidiary
company in its separate financial statements based on
the purchase price paid by the parent to acquire the
controlling interest.
The valuation implied by the price of the stock to the
parent company is pushed down to the subsidiary and
used to restate its assets (including goodwill) and
liabilities in its separate financial statements.
LO 10 Push down of accounting to the subsidiarys books.

45
Push down accounting is based on the notion that the basis of
accounting for purchased assets and liabilities should be the same
regardless of whether the acquired company continues as a separate
subsidiary or is merged into the parent companys operations.
The parents cost of acquiring a subsidiary is used to establish a

new accounting basis for the assets and liabilities of the
subsidiary in the subsidiarys separate financial statements.
Because push down accounting has not been addressed in

authoritative pronouncements of the FASB or its predecessors,
practice has been inconsistent.

46
Arguments For and Against Push Down Accounting
Three important factors that should be considered in determining
the appropriateness of push down accounting are:
1) Whether the subsidiary has outstanding debt held by the
public.
2) Whether the subsidiary has outstanding a senior class of
capital stock not acquired by the parent company.
3) The level at which a major change in ownership of an entity
should be deemed to have occurred, for example, 100%,
90%, 51%.

47
Status of Push Down Accounting
On January 17, 2013, FASBs Emerging Issues Task Force
Decided:
To consider at a future meeting whether push down
accounting should be mandatory.
That push down accounting would be required for public
business entities under specified circumstances.
Tentatively Decided:
To allow public business entities and non-public entities to
have an option to apply push down accounting upon
occurrence of a change-in-control event.
48
Status of Push Down Accounting
As a general rule, the SEC requires push down accounting
when the ownership change is greater than 95% and
objects to push down accounting when the ownership
change is less than 80%.
In addition, the SEC staff expresses the view that the
existence of outstanding public debt, preferred stock, or a
significant noncontrolling interest in a subsidiary might
impact the parent companys ability to control the form of
ownership. In these circumstances, push down accounting,
though not required, is an acceptable accounting method.

49

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LO 1 Computation and Allocation of Difference (CAD).

LO 1 Computation and Allocation of Difference (CAD).

LO 2 Current and past treatment of bargain acquisitions.

LO 2 Current and past treatment of bargain acquisitions.

Book Value Fair Value Difference

LO 1 Computation and Allocation of Difference (CAD).

LO 4 CAD Schedule for less than wholly owned subsidiary.

Marketable Securities 25,000

Book Value Fair Value Difference

LO 4 Allocation of difference in a partially owned subsidiary.

Marketable Securities 25,000

LO 4 Allocation of difference in a partially owned subsidiary.

LO 4 Allocation of difference in a partially owned subsidiary.

Investment in Salem 850,000

Beg. Retained Earnings - Salem 80,000

Depreciation Expense ($130,000/5) 26,000

Investment in Salem 60,000

Beg. Retained Earnings - Salem 155,000

1/1 Retained Earnings Porter 20,800

Investment in Salem 120,000

Beg. Retained Earnings - Salem 230,000

Impairment Loss ($197,500 - $150,000) 47,500

LO 5 Recording investment by Parent, partial equity method.

LO 7 Allocating difference to long-term32debt.

LO 7 Allocating difference to long-term33debt.

LO 8 Allocating when the fair value is below book value.

Book Value Fair Value Difference

LO 8 Allocating when the fair value is below book value.

LO 8 Allocating when the fair value is below book value.

Marketable Securities 25,000

Equipment, net 4,000

Note: The overvaluation of equipment will be amortized over the life

LO 8 Allocating when the fair value is below book value.

Marketable Securities 25,000

Equipment, net 8,000

LO 8 Allocating when the fair value is below book value.

Required: Prepare the December 31 consolidated financial

LO 9 Depreciable assets at net and gross values.

LO 9 Depreciable assets at net and gross values.

Depreciation Expense ($200,000/5) 40,000

Cost & Partial

1/1 Retained Earnings -Packard Co. 32,000

LO 9 Depreciable assets at net and gross values.

LO 10 Push down of accounting to the subsidiarys books.

The parents cost of acquiring a subsidiary is used to establish a

Because push down accounting has not been addressed in

LO 10 Push down of accounting to the subsidiarys books.

LO 10 Push down of accounting to the subsidiarys books.

LO 10 Push down of accounting to the subsidiarys books.

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