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 8
1.5 Terminology and Types of Combinations 11
1.6 Takeover Premiums 13
1.7 Avoiding the Pitfalls Before (and After) the Deal 15
1.8 Determining Price and Method of Payment in Business Combinations 17
1.9 Alternative Concepts of Consolidated Financial Statements 21
1.10 FASB’S Conceptual Framework 26
Summary 32
Questions 33
Analyzing Financial Statements 33
Exercises 36
ASC Exercises 38
2 Accounting for Business Combinations 39
Learning Objectives 39
2.1 Accounting Standards on Business Combinations: Current Status and Background 39
2.2 Illustration of Acquisition Accounting 45
2.3 Bargain Purchase Accounting Illustration (Purchase Price Below Fair Value of Identifiable Net Assets) 49
2.4 Measurement Period and Measurement Period Adjustments 50
2.5 Goodwill Impairment Test 51
2.6 Contingent Consideration (Earnouts) 56
2.7 Pro Forma Statements and Disclosure Requirement 61
2.8 Leveraged Buyouts 63
Summary 63
Questions 65
Analyzing Financial Statements 65
Exercises 70
Problems 77
3 Consolidated Financial Statements—Date of Acquisition 82
Learning Objectives 82
3.1 Definitions of Subsidiary and Control 84
3.2 Requirements for the Inclusion of Subsidiaries in the Consolidated Financial Statements 87
3.3 Reasons for Subsidiary Companies 88
3.4 Consolidated Financial Statements 89
3.5 Investments at the Date of Acquisition 90
3.6 Consolidated Balance Sheets: The Use of Workpapers 92
3.7 A Comprehensive Illustration—More ThanOne Subsidiary Company 109
3.8 Limitations of Consolidated Statements 112
Summary 113
Questions 114
Analyzing Financial Statements 115
Exercises 116
Problems 121
4 Consolidated Financial Statements After Acquisition 127
Learning Objectives 127
4.1 Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods 128
4.2 Consolidated Statements After Acquisition—Cost Method 137
4.3 Recording Investments in Subsidiaries—Equity Method (Partial or Complete) 149
4.4 Elimination of Intercompany Revenue and Expense Items 160
4.5 Interim Acquisitions of Subsidiary Stock 161
4.6 Consolidated Statement of Cash Flows 167
4.7 Illustration of Preparation of a Consolidated Statement of Cash Flows—Year of Acquisition 171
Summary 174
Questions 175
Analyzing Financial Statements 176
Exercises 178
Problems 184
5 Allocation and Depreciation of Differences Between Implied And Book Values 198
Learning Objectives 198
5.1 Computation and Allocation of the Difference Between Implied and Book Values to Assets and Liabilities of Subsidiary—Acquisition Date 201
5.2 Effect of Differences Between Implied and Book Values on Consolidated Net Income—Year Subsequent to Acquisition 207
5.3 Consolidated Statements Workpaper—Using the Cost Method 209
5.4 Controlling and Noncontrolling Interests in Consolidated Net Income and Retained Earnings—Using the Cost Method 221
5.5 Consolidated Statements Workpaper—Using Partial Equity Method 223
5.6 Controlling and Noncontrolling Interests in Consolidated Net Income and Retained
Earnings—Using Partial Equity Method 230
5.7 Consolidated Statements Workpaper—Using Complete Equity Method 232
5.8 Controlling Interest in Consolidated Net Income and Retained Earnings—Using Complete Equity Method 240
5.9 Additional Considerations Relating to Treatment of Difference Between Implied and Book Values 241
5.10 Push Down Accounting 250
Summary 255
Questions 256
Analyzing Financial Statements 257
Exercises 259
Problems 265
6 Elimination of Unrealized Profit on Intercompany Sales of Inventory 286
Learning Objectives 286
6.1 Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances 287
6.2 Cost Method: Consolidated Statements Workpaper—Upstream Sales 297
6.3 Cost Method—Analysis of Consolidated
Net Income and Consolidated Retained Earnings 302
6.4 Consolidated Statements Workpaper—Partial Equity Method 305
6.5 Partial Equity Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings 310
6.6 Consolidated Statements Workpaper—Complete Equity Method 311
6.7 Complete Equity Method—Analysis of Consolidated Net Income and Consolidated
Retained Earnings 316
6.8 Summary of Workpaper Entries Relating to Intercompany Sales of Inventory 317
6.9 Intercompany Profit Prior to Parent-Subsidiary Affiliation 317
Summary 318
Questions 319
Analyzing Financial Statements 319
Exercises 321
Problems 324
7 Elimination of Unrealized Gains Or Losses on Intercompany Sales of Property and Equipment 337
Learning Objectives 337
7.1 Intercompany Sales of Land (Nondepreciable Property) 338
7.2 Intercompany Sales of Depreciable Property (Machinery, Equipment, and Buildings) 341
7.3 Consolidated Statements Workpaper—Cost and Partial Equity Methods 348
7.4 Calculation of Consolidated Net Income and Consolidated Retained Earnings 358
7.5 Consolidated Statements Workpaper—Complete Equity Method 361
7.6 Calculation and Allocation of Consolidated Net Income; Consolidated Retained Earnings:
Complete Equity Method 367
7.7 Summary of Workpaper Entries Relating to Intercompany Sales of Equipment 368
7.8 Intercompany Interest, Rents, and Service Fees 368
Summary 371
Questions 372
Analyzing Financial Statements 373
Exercises 373
Problems 376
8 Changes in Ownership Interest 388
Learning Objectives 388
8.1 Changes in Ownership 388
8.2 Parent Acquires Subsidiary Stock Through Several Open-Market Purchases—Cost Method 391
8.3 Parent Sells Subsidiary Stock Investment on the Open Market—Cost Method 394
8.4 Equity Method—Purchases and Sales of Subsidiary Stock by the Parent 398
8.5 Parent Sells Subsidiary Stock Investment on the Open Market 403
8.6 Subsidiary Issues Stock 405
Summary 411
Questions 412
Analyzing Financial Statements 412
Exercises 413
Problems 416
9 Insolvency—Liquidation And Reorganization 426
Learning Objectives 426
9.1 Contractual Agreements 428
9.2 Bankruptcy 430
9.3 Liquidation (Chapter 7) 434
9.4 Reorganization Under the Reform Act (chapter 11) 435
9.5 Trustee Accounting and Reporting 447
9.6 Bankruptcy Prediction Models 453
Summary 456
Questions 457
Analyzing Financial Statements 458
Exercises 460
Problems 466
10 International Financial Reporting Standards 473
Learning Objectives 473
10.1 The Increasing Importance of International Accounting Standards 473
10.2 Historical Perspective 475
10.3 GAAP Hierarchy—U.S. Versus IFRS 477
10.4 Similarities and Differences Between U.S. GAAP and IFRS 478
10.5 Business Combination and Consolidation—U.S. GAAP Versus IFRS 488
10.6 International Convergence Issues 507
Summary 512
Questions 512
Analyzing Financial Statements 513
Exercises 516
Problems 519
11 Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk 525
Learning Objectives 525
11.1 Exchange Rates—Means of Translation 526
11.2 Measured Versus Denominated 529
11.3 Foreign Currency Transactions 530
11.4 Using Forward Contracts as a Hedge 539
Summary 560
Questions 561
Analyzing Financial Statements 561
Exercises 562
Problems 570
12 Translation of Financial Statements of Foreign Affiliates 577
Learning Objectives 577
12.1 Accounting for Operations in Foreign Countries 578
12.2 Translating Financial Statements of Foreign Affiliates 579
12.3 Objectives of Translation 580
12.4 Translation Methods 583
12.5 Identifying the Functional Currency 583
12.6 Translation of Foreign Currency Financial Statements 584
12.7 Translation of Foreign Financial Statements Illustrated 589
12.8 Financial Statement Disclosure 598
12.9 Constant Currency Non-GAAP Adjustments 600
Summary 602
Appendix 12A: Accounting for a Foreign Affiliate and Preparation of Consolidated Statements
Workpaper Illustrated 603
Appendix 12B: Preparing the Consolidated Statement of Cash Flows When the Consolidated Entity Includes a Foreign Subsidiary 610
Questions 616
Analyzing Financial Statements 617
Exercises 619
Problems 627
13 Reporting for Segments and for Interim Financial Periods 636
Learning Objectives 636
13.1 Need for Disaggregated Financial Data 637
13.2 Standards of Financial Accounting and Reporting 637
13.3 Interim Financial Reporting 652
Summary 661
Appendix: The Difference Between Reportable Segments and Reporting Units 662
Questions 663
Analyzing Financial Statements 664
Exercises 667
Problems 671
14 Partnerships: Formation, Operation, And Ownership Changes 675
Learning Objectives 675
14.1 Partnership Defined 677
14.2 Reasons for Forming a Partnership 677
14.3 Characteristics of a Partnership 678
14.4 Partnership Agreement 680
14.5 Accounting for a Partnership 682
14.6 Special Problems in Allocation of Income and Loss 690
14.7 Financial Statement Presentation 692
14.8 Changes in the Ownership of the Partnership 693
14.9 Section A: Admission of a New Partner (Not a Business Combination) 695
14.10 Section B: Admission of a New Partner that Qualifies as a Business Combination: GAAP Requires Goodwill Method 703
14.11 Section C: Withdrawal of a Partner 706
Summary 709
Questions 711
Exercises 711
Problems 718
15 Partnership Liquidation 725
Learning Objectives 725
15.1 Steps in the Liquidation Process 726
15.2 Priorities of Partnership and Personal Creditors 727
15.3 Simple Liquidation Illustrated 730
15.4 Installment Liquidation 732
15.5 Incorporation of a Partnership 740
Summary 742
Questions 743
Exercises 743
Problems 749
16 Introduction to Fund Accounting 755
Learning Objectives 755
16.1 Classifications of Nonbusiness Organizations 756
16.2 Distinctions Between Nonbusiness Organizations and Profit-Oriented Enterprises 757
16.3 Financial Accounting and Reporting Standards for Nonbusiness Organizations 758
16.4 Fund Accounting 762
16.5 Comprehensive Illustration—General Fund 780
16.6 Reporting Inventory and Prepayments in the Financial Statements 789
16.7 Recent Proposal by the GASB 791
Summary 792
Appendix 16A: City of Atlanta Partial Financial Statements 793
Questions 795
Analyzing Financial Statements 795
Exercises 796
Problems 801
17 Introduction to Accounting For State and Local Governmental Units 809
Learning Objectives 809
17.1 The History of Generally Accepted Governmental Accounting Standards 812
17.2 The Structure of Governmental Accounting 814
17.3 Governmental Fund Entities 816
17.4 Proprietary Funds 835
17.5 Fiduciary Funds 840
17.6 Capital Assets and Long-Term Debt 841
17.7 External Reporting Requirements (GASB Statement No. 34) 846
17.8 Government Fund-Based Reporting 847
17.9 Government-Wide Reporting 850
Summary 855
Appendix 17A: Government-Wide Financial Statements—City of Atlanta 857
Questions 861
Analyzing Financial Statements 861
Exercises 863
Problems 870
18 Accounting for Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals and other Health Care Organizations 883
Learning Objectives 883
18.1 Sources of Generally Accepted Accounting Standards for Nongovernment Nonbusiness Organizations 885
18.2 Financial Reporting for Not-For-Profit Entities 887
18.3 Fund Accounting and Accrual Accounting 891
18.4 Contributions 894
18.5 Accounting for Current Funds 899
18.6 Accounting for Plant Funds 902
18.7 Accounting for Endowment Funds 907
18.8 Accounting for Investments 908
18.9 Accounting for Loan Funds 910
18.10 Accounting for Agency (Custodial) Funds 911
18.11 Accounting for Annuity and Life Income Funds 911
18.12 Issues Relating to Colleges and Universities 912
Summary 913
Appendix 18A 914
Questions 917
Analyzing Financial Statements 917
Exercises 918
Problems 926
Glossary G-1
Appendix PV: Tables of Present Values A-1
Index I-1
Appendix 2A: Deferred Taxes in Business Combinations (Available Online)
Appendix 3A: Deferred Taxes on the Date of Acquisition (Available Online)
Appendix 3B: Consolidation of Variable Interest Entities (Available Online)
Appendix 4A: Deferred Tax Consequences When Affiliates File Separate Income Tax Returns—
Undistributed Income (Available Online)
Appendix 6A: Deferred Taxes and Intercompany Sales of Inventory (Available Online)
Appendix 7A: Deferred Taxes Consequences Related to Intercompany Sales of Equipment (Available
Online)
Chapter 19: Intercompany Bond Holdings and Miscellaneous Topics—Consolidated Financial
Statements (Available Online)
