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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
