Purchase Method of Accounting The more frequently encountered method of accounting for a business combination is the purchase method

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 ta positions. !aving 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:
o

Identifying the acquiring company "etermining the date used to report the acquisition "etermining the cost of the acquired entity. This includes# $aluing the consideration paid or in some cases, the net assets acquired
o o

%ccounting for the direct costs of the business combination %ccounting for contingent consideration Identifying the assets acquired and liabilities assumed %llocating the purchase price &that is, allocating the cost of the acquired entity to the assets acquired and the liabilities assumed

%ccounting subsequent to the business combination Questionnaire:

What Is Consolidation in Accounting 'usiness 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. (ther )eople %re *eading +onsolidation %ccounting Tutorial !ow to +onsolidate %ccounts ,.
o

-ethods There are three different methods of consolidation in accounting# cost, equity and acquisition method. %ccountants use the cost method when a parent owns between .ero percent and /0 percent of a company. %ccountants use the equity method when a parent owns between /0 percent and 10 percent of a company. %ccountants use the acquisition method when a parent owns more than 10 percent of a company. +ost -ethod

The cost method will record the acquisition of the subsidiary at the amount it cost the parent to purchase ownership in the subsidiary. %t the end of each year, the accountant must ad2ust the investment in the subsidiary account to fair value. This creates an unreali.ed gain or loss. "ividends from the subsidiary are reported as income on the income statement. !ponsored "inks "ownload Free 3oftware "ownload Free )+ -anager 3oftware. 4asy File Transfer. "ownload 5ow 6 mobogenie.com7download-software 4quity -ethod

The equity method records the acquisition of a subsidiary at the cost to purchase ownership in the subsidiary. 4arnings from the subsidiary increase the ownership account of the subsidiary by the parent company8s percent of ownership in the subsidiary. For e ample, if a subsidiary had 9,00,000 in income and a parent owns :0 percent, then the ownership account will increase by 9:0,000 on the parent8s financial statements. "ividends decrease the ownership account. %cquisition -ethod

$alue the investment at the fair value of the amount given. For e ample, if a company pays 9,00,000 and provides a 9/1,000, the ownership is valued at 9,/1,000. ;hen consolidating, the accountant must eliminate the stockholder8s 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
o

(nly eliminate inter-company transactions when the accountant consolidates the two financial statements. <enerally, the financial statements will only be consolidated under the acquisition method. 3ponsored =inks

*ead more# http#77www.ehow.com7about>?1@A/0@>consolidationaccounting>.htmlBi ../2n1/k*gC

!ow the 4quity -ethod *elates to +onsolidated Financial 3tatements

If a company acquires more than 10D of the voting stock of another company, it8s said to have a controlling interest, because by voting those shares, the investor actually can control the company acquired. The investor is referred to as the parent; the investee is termed the subsidiary. For reporting purposes Ealthough not legallyF, the parent and subsidiary are considered to be a single reporting entity, and their financial statements are consolidated. 'oth companies continue to operate as separate legal entities and the subsidiary reports separate financial statements. !owever, because of the controlling interest, the parent company reports consolidated financial statements. p. ?:1 Consolidated Consolidated financial statementscombination of financial the separate fi nancial statements of the parent and statements co subsidiary each period into a single aggregate set of fi mbine the nancial statements as if there were only one individual company. combine the separate financial statements of elements of the parent and the subsidiary each period into a single the parent and aggregate set of financial statements as if there were subsidiary only one company. This entails an item-by-item statements# combination of the parent and subsidiary statements Eafter first eliminating any amounts that are shared by the separate financial statementsF./@ For instance, if the parent has 9@ million cash and the subsidiary has 9G million cash, the consolidated balance sheet would report 9,, million cash. Two aspects of the consolidation process are of particular interest to us in understanding the equity method. First, in consolidated financial statements, the acquired company8s assets are included in the financial statements at their fair values as of the date of the acquisition, rather than

their book values on that date. 3econd, if the acquisition price is more than the sum of the separate fair values of the acquired net assets Eassets less liabilitiesF, that difference is recorded as an intangible assetH goodwill./I ;e8ll return to the discussion of these two aspects when we reach the point in our discussion of the equity method where their influence is felt. %s we8ll see, the equity method is in many ways a partial consolidation. ;e use the equity method when the investor can8t control the investee but can e ercise significant influence over the operating and financial policies of an investee.