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of accounting. Under the purchase method of accounting, the acquisition is recorded in the same manner as the acquisition of any single asset-that is , at its fair market value. To account for a combination by the purchase method, it is necessary first to determine the total cost of theacquisition. If the purchase consideration consist solely of cash the total amount of cash will be the cost acquired enterprise. If the enterprise issues its own stock as part of the cost in an acquisition, determination of the total price may prove to be more difficult. If the stock is actively traded, the market price of the stock is probably the most reliable indicator of value. If the buyer places restrictions on the subsequent resale of the stock by the seller, however, that might indicate a different value for the issued stock from the value obtained from the current market price. For private enterprises and enterprises that have limited stock trading, placing a value on the shares can be difficult. The buyer and seller must agree on the share price as it affects both their tax positions. Having determined the total cost of the acquired enterprise, the purchaser must mark the assets and liabilities acquired at their fair value. Application of the purchase method of accounting involves:
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Identifying the acquiring company Determining the date used to report the acquisition Determining the cost of the acquired entity. This includes: Valuing the consideration paid or in some cases, the net assets acquired Accounting for the direct costs of the business combination Accounting for contingent consideration Identifying the assets acquired and liabilities assumed Allocating the purchase price that is, allocating the cost of the acquired entity to the assets acquired and the liabilities assumed
Accounting subsequent to the business combination Questionnaire: What Is Consolidation in Accounting? Business consolidations are an advanced accounting concept.
Business combinations are when a company takes another company's financial statement and brings it together with its own. Consolidations allow companies to disclose all of their financial information from all of their properties to their investors. This gives a more accurate description of a company and the company's results for the year. Other People Are Reading Consolidation Accounting Tutorial How to Consolidate Accounts 1.
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Methods There are three different methods of consolidation in accounting: cost, equity and acquisition method. Accountants use the cost method when a parent owns between zero percent and 20 percent of a company. Accountants use the equity method when a parent owns between 20 percent and 50 percent of a company. Accountants use the acquisition method when a parent owns more than 50 percent of a company. Cost Method
The cost method will record the acquisition of the subsidiary at the amount it cost the parent to purchase ownership in the subsidiary. At the end of each year, the accountant must adjust the investment in the subsidiary account to fair value. This creates an unrealized gain or loss. Dividends from the subsidiary are reported as income on the income statement. Sponsored Links Download Free Software Download Free PC Manager Software. Easy File Transfer. Download Now ! mobogenie.com/download-software Equity Method
The equity method records the acquisition of a subsidiary at the cost to purchase ownership in the subsidiary. Earnings from the subsidiary increase the ownership account of the subsidiary by the parent company's percent of ownership in the subsidiary. For example, if a subsidiary had $100,000 in income and a parent owns 40 percent, then the ownership account will increase by $40,000 on the parent's financial statements. Dividends decrease the ownership account. Acquisition Method
Value the investment at the fair value of the amount given. For example, if a company pays $100,000 and provides a $25,000, the ownership is valued at $125,000. When consolidating, the accountant must eliminate the stockholder's equity section of the subsidiary, revalue assets to fair value, eliminate the ownership in the subsidiary account, create a non-controlling interest account and record goodwill or gain. Inter-company Transactions
Only eliminate inter-company transactions when the accountant consolidates the two financial statements. Generally, the financial statements will only be consolidated under the acquisition method. Sponsored Links