Debra C Jeter Paul K Chaney A D VANC E D ACC O U NTIN G 5th Edition This page intentionally left blank ADVANCED ACCOUNTING Fifth Edition Debra C Jeter Paul K Chaney John Wiley & Sons, Inc VICE PRESIDENT & EXECUTIVE PUBLISHER SENIOR ACQUISITIONS EDITOR ASSOCIATE EDITOR CONTENT EDITOR SENIOR EDITORIAL ASSISTANT MARKETING MANAGER PRODUCT DESIGNER CREATIVE DIRECTOR PHOTO EDITOR CONTENT MANAGER SENIOR PRODUCTION EDITOR PRODUCTION MANAGEMENT SERVICES COVER DESIGN COVER PHOTO George Hoffman Michael McDonald Sarah Vernon Brian Kamins Jacqueline Kepping Karolina Zarychta Greg Chaput Harold Nolan Sheena Goldstein Dorothy Sinclair Trish McFadden Ingrao Associates Wendy Lai © Nikada/iStockphoto This book was set in 10/12 New Baskerville by Prepare, Inc and printed and bound by RR Donnelley The cover was printed by RR Donnelley This book is printed on acid free paper q Copyright © 2012, 2010, 2008, 2004, 2001 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978)750-8400, fax (978)750-4470 or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, or online at http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at HYPERLINK “http://www.wiley.com/go/return” www.wiley.com/go/returnlabel Outside of the United States, please contact your local representative ISBN-13 9781118022290 ISBN-10 118022297 Printed in the United States of America 10 ABOUT THE AUTHORS Debra Jeter is an Associate Professor of Management in the Owen Graduate School of Management at Vanderbilt University She received her Ph.D in accounting from Vanderbilt University Dr Jeter has published articles in The Accounting Review, the Journal of Accounting and Economics, Auditing: A Journal of Practice & Theory, Contemporary Accounting Research, and Accounting Horizons, as well as in popular magazines including Working Woman and Savvy She has co-authored one previous book, “Managerial Cost Accounting: Planning and Control,” and chapters in others She has taught at both the graduate and undergraduate levels and is currently teaching financial reporting to MBA students and Masters students in accounting and finance Dr Jeter has also taught financial accounting in the Executive International MBA program for the Vlerick School of Management in Ghent and is a regular Visiting Research Professor at the University of Auckland Debra Jeter has served as an associate editor for Auditing: A Journal of Practice & Theory and Issues in Accounting Education and on a number of editorial boards She has won three teaching awards as well as an Outstanding Alumnus Award from her undergraduate university, Murray State University Her research interests extend to financial accounting and auditing, including earnings management, components of earnings, audit opinions, and the market for audit services She practiced as a CPA in Columbus, Ohio, before entering academia This last year, professor Jeter was a screenwriter of the film Jess & Moss, which premiered in the New Frontier Films category at the 2011 Sundance Film Festival Paul Chaney is the E Bronson Ingram Professor of Accounting in the Owen Graduate School of Management at Vanderbilt University He has been at the Owen Graduate School since obtaining his Ph.D from Indiana University in 1983 He has taught both undergraduate and graduate students, and currently teaches the core financial accounting class for both the MBA, Executive MBA, and Masters of Management in Healthcare programs He has taught extensively in executive programs, including courses in Accounting and Finance for the Non-Financial Executive and specialized courses for specific businesses Dr Chaney has published articles in The Accounting Review, the Journal of Accounting Research, the Journal of Public Economics, the Journal of Business, Contemporary Accounting Research, the Journal of Accounting and Economics, and Accounting Horizons He has won three teaching awards and serves on the editorial board for The Accounting Review, Auditing: A Journal of Practice & Theory, and the International Journal of Accounting iii PREFACE Convergence with international accounting standards has played an important role in virtually every project entered into by the Financial Accounting Standards Board (FASB) in recent years Accounting for business combinations is no exception In the 5th edition of Advanced Accounting, we compare and contrast U.S standards and international principles throughout the book, drawing the readers’ attention to remaining differences with an IFRS icon The reader is made aware of important changes, both present and expected future ones We also incorporate the FASB’s codification system for referencing standards This book is designed for advanced courses dealing with financial accounting and reporting in the following topical areas: business combinations, consolidated financial statements, international accounting, foreign currency transactions, accounting for derivative instruments, translation of financial statements of foreign affiliates, segment reporting and interim reporting, partnerships, fund accounting and accounting for governmental units, and accounting for nongovernment–nonbusiness organizations The primary objective of this book is to provide a comprehensive treatment of selected topics in a clear and understandable manner The changes related to FASB ASC Topics 805 and 810 (SFAS No 141R and 160) are integrated throughout the edition As in previous editions, we strive to maintain maximum flexibility to the instructor in the selection and breadth of coverage for topics dealing with consolidated financial statements and other advanced topics We have expanded the number and variety of exercises and problem materials at the end of each chapter We now include codification exercises that require the student to research the FASB’s Codification to determine the appropriate GAAP for a variety of issues In addition, we include financial statement analysis exercises that relate to real companies and practical applications in virtually every chapter Two new appendices (Appendix ASC at the back of the book and Appendix A to Chapter 1) are presented to assist the student in solving these exercises All chapters have been updated where appropriate to reflect the most recent pronouncements of the Financial Accounting Standards Board and the Governmental Accounting Standards Board In teaching consolidation concepts, a decision must be made about the recording method that should be emphasized in presenting consolidated workpaper procedures The three major alternatives for recording investments in subsidiaries are the (1) cost method, (2) partial equity (or simple equity) method, and (3) complete equity (or sophisticated equity) method A brief description of each method follows iv v Preface Cost method The investment in subsidiary is carried at its cost, with no adjustments made to the investment account for subsidiary income or dividends Dividends received by the parent company are recorded as an increase in cash and as dividend income Partial equity method The investment account is adjusted for the parent company’s share of the subsidiary’s reported earnings or losses, and dividends received from the subsidiary are deducted from the investment account Generally, no other adjustments are made to the investment in subsidiary account Complete equity method This method is the same as the partial equity method except that additional adjustments are made to the investment in subsidiary account to reflect the effects of (a) the elimination of unrealized intercompany profits, (b) the amortization (depreciation) of the difference between cost and book value, (c) the additional stockholders’ equity transactions undertaken by the subsidiary that change the parent company’s share of the subsidiary’s stockholders’ equity We have elected to present all three methods, using generic icons to distinguish among the three The instructor has the flexibility to teach all three methods, or to instruct the students to ignore one or two If the student is interested in learning all three methods, he can, even if the instructor only focuses on one or two Also, we believe this feature makes the book an excellent reference for the student to keep after graduation, so that he or she can adapt to any method needed Our decision to include all three methods was influenced in part by surveys of practitioners and professors In a survey of corporate controllers of Fortune 500 companies who were asked to indicate the method used on their books for investments in subsidiaries that are consolidated, more than 71 percent indicated that they used the cost method In contrast, in surveys of professors teaching advanced accounting courses, the most popular method was either the partial or complete equity method Also, in reviewing the responses of users and reviewers to our previous editions (which took the same approach), we found that while one user recommended reducing the attention to the complete equity method and a few others recommended expanding it and reducing the other two, most seemed pleased with the balance Important Features of This Edition We introduce a new feature that requires the student to research the FASB Codification to locate the current standard that applies to various issues We added an appendix at the back of the book (Appendix ASC) to illustrate a strategy for tackling these exercises The exercises appear right before the problems at the end of each chapter and often, but not always, relate to topics addressed in that chapter (Similar questions appear on the CPA exam.) We added an appendix to Chapter to illustrate a strategy or technique for analyzing a given company, such as a potential acquisition target This strategy may be applied in some of the end-of-the-chapter problem materials in the Analyzing Financial Statements (AFS) category We include a discussion of international accounting standards on each topic where such standards exist, and compare and contrast U.S GAAP and IFRS An IFRS icon is presented in the margins of these pages vi Preface We incorporate a discussion of the joint projects of the FASB and the IASB throughout the textbook where appropriate, with an expanded discussion in Chapter 11 In Chapter 11, we pay particular attention to the three major joint projects of the two Boards: revenue recognition, accounting for leases, and financial statement presentation We expand our discussion of the FASB’s conceptual framework as it relates to Advanced Accounting in Chapter 1, and we include marginal references to Related Concepts throughout the book The GASB’s conceptual framework is discussed in Chapters 17 and 18 We include questions or problems related to Business Ethics in the end-ofchapter materials for every chapter We include a real-company annual report (or excerpts) with related questions (Analyzing Financial Statements) in the end-of-chapter materials for most chapters, excluding Chapters 15 and 16 In Chapter of the 5th edition, we expand the homework material to include the effective interest, in addition to the straight-line method for amortization of bond premiums and discounts In Chapters and 7, the 5th edition includes appendices on deferred taxes related to the topics in those chapters (These changes were made at the request of users of the book, something we try to whenever feasible.) We update many of our in-the-news boxes that appear in each chapter to reflect recent business and economic events that are relevant to the subject matter 10 We integrate goodwill impairment into some illustrations in the body of Chapter 5, as well as in several homework problems 11 We have made some materials available for users online, including an expanded discussion of the accounting for investments (an expansion of the summary in Chapter 4) 12 Learning objectives are included in the page margins of the chapters, and relevant learning objective numbers are provided with the end-of-chapter materials 13 We expand the use of graphical illustrations, which was introduced in the prior edition 14 We illustrate the goodwill impairment test described in FASB ASC topic 350 (SFAS No 142), discussing its frequency, the steps laid out in the new standard, and some of the likely implementation problems We include exercises on this test in Chapters and 15 We include a few short-answer questions (and solutions) periodically throughout each chapter to enable the student to test his or her knowledge of the content covered up to that point in the chapter before moving on 16 The organization of the worksheets applies a format that separates accounts to the income statement, the statement of retained earnings, and the balance sheet in distinct sections Also, the placement of the worksheets near the relevant text is important to readers 17 All illustrations are printed upright on the page and labeled clearly for convenient study and reference 18 Entries made on consolidated statements workpapers are also presented in general journal form and are shaded in blue to distinguish them from book entries, to facilitate exposition and study vii Preface 19 We include a thorough discussion at the beginning of Chapter on the three methods of accounting for investments, and the importance of the complete equity method for certain investments that are not consolidated, or in the parent only statements 20 We include learning objectives and end-of-chapter summaries in each chapter and a glossary of terms at the end of the book 21 To distinguish among parent company entries and workpaper entries, we present parent entries in gray and workpaper entries in blue 22 Chapters 17 through 19 reflect the latest GASB and FASB pronouncements related to fund accounting Clearly there are more topics in this text than can be covered adequately in a onesemester or one-quarter course We believe that it is generally better for both students and instructors to cover a selected number of topics in depth rather than to undertake a superficial coverage of a larger number of topics Modules of material that an instructor may consider for exclusion in any one semester or quarter include the following: • Chapters 7–9 An expanded analysis of problems in the preparation of consolidated financial statements • Chapter 10 Insolvency—liquidation and reorganization • Chapters 11–14 International accounting, foreign currency transactions and translation, and segment and interim reporting • Chapters 15 and 16 Partnership accounting • Chapters 17 through 19 Fund accounting, accounting for governmental units, and accounting for nongovernment–nonbusiness organizations (NNOs) Supplements Study Guide; Excel Templates; PowerPoint Slides; Instructors’ Manual; Solutions Manual; and Test Bank Acknowledgments We wish to thank the following individuals for their suggestions and assistance in the preparation of this edition Thank you goes to Bruce Wampler (University of Tennessee at Chattanooga), James Mraz (University of Maryland University College), Gerald Lander (University of Southern Florida), Lari Jimerson (Columbia College), Gerald Miller (College of New Jersey), Steve Anderson, Matthew Baker, Douglas Barney (Indiana University Southeast), Gene Bryson (University of Alabama in Huntsville), Cordy Cates, Cindy Chaney, Lori Holder-Webb (University of Wisconsin), Suzanne Ingrao, Marianne James (California State University—Los Angeles), Nicole Jenkins, Norman Jeter, Betsy Johnson, Eldon Kuhns (Lycoming College), Daniel P Mahoney (University of Scranton), Ron Mano (Weber State University), Norman Meonske (Kent State University), Bruce Michelson (University of Maryland), Anahit (Anya) Mkrtchyan, Sarah Opfer (Portland University), David Pearson (Case Western Reserve University), Joe Pollaro, Jerry Purtell (Linfield College), Kathleen Sobieralski (University of Maryland University College), Kris Stratten, Leslie Turner (Northern Kentucky University), Kelly Ulto (Fordham University), viii Preface Zhemin Wang (University of Wisconsin—Parkside), and Matthew White Thank you also goes Sheila Ammons (Austin Community College) for preparing the PowerPoint slides, to Lynn Stallworth (Appalachian State University) for preparing the Study Guide, to Mark Gleason (Metropolitan State University) for preparing the Test Bank, and to Larry Falcetto (Emporia State University), Dick Wasson (San Diego State University), and Jim Emig (Villanova University) for their helpful textbook, solutions manual, and test bank accuracy review comments Finally we would like to acknowledge a few individuals at Wiley who helped all this come together: Sarah Vernon, Brian Kamins, Michael McDonald, Chris DeJohn, and Jacqueline Kepping APPENDIX PV: TABLES OF PRESENT VALUES TABLE Present Value of pn = (n) PERIODS 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 1040 (1 + i )n = (1 + i ) −n 2% 2.5% 3% 4% 5% 6% 8% 9% 10% 12% 15% 98039 96117 94232 92385 90573 88797 87056 85349 83676 82035 80426 78849 77303 75788 74301 72845 71416 70016 68643 67297 65978 64684 63416 62172 60953 59758 58586 57437 56311 55207 54125 53063 52023 51003 50003 49022 48061 47119 46195 45289 97561 95181 92860 90595 88385 86230 84127 82075 80073 78120 76214 74356 72542 70773 69047 67362 65720 64117 62553 61027 59539 58086 56670 55288 53939 52623 51340 50088 48866 47674 46511 45377 44270 43191 42137 41109 40107 39128 38174 37243 97087 94260 91514 88849 86261 83748 81309 78941 76642 74409 72242 70138 68095 66112 64186 62317 60502 58739 57029 55368 53755 52189 50669 49193 47761 46369 45019 43708 42435 41199 39999 38834 37703 36604 35538 34503 33498 32523 31575 30656 96154 92456 88900 85480 82193 79031 75992 73069 70259 67556 64958 62460 60057 57748 55526 53391 51337 49363 47464 45639 43883 42196 40573 39012 37512 36069 34682 33348 32065 30832 29646 28506 27409 26355 25342 24367 23430 22529 21662 20829 95238 90703 86384 82270 78353 74622 71068 67684 64461 61391 58468 55684 53032 50507 48102 45811 43630 41552 39573 37689 35894 34185 32557 31007 29530 28124 26785 25509 24295 23138 22036 20987 19987 19035 18129 17266 16444 15661 14915 14205 94340 89000 83962 79209 74726 70496 66506 62741 59190 55839 52679 49697 46884 44230 41727 39365 37136 35034 33051 31180 29416 27751 26180 24698 23300 21981 20737 19563 18456 17411 16425 15496 14619 13791 13011 12274 11579 10924 10306 09722 92593 85734 79383 73503 68058 63017 58349 54027 50025 46319 42888 39711 36770 34046 31524 29189 27027 25025 23171 21455 19866 18394 17032 15770 14602 13520 12519 11591 10733 09938 09202 08520 07889 07305 06763 06262 05799 05369 04971 04603 91743 84168 77218 70843 64993 59627 54703 50187 46043 42241 38753 35554 32618 29925 27454 25187 23107 21199 19449 17843 16370 15018 13778 12641 11597 10639 09761 08955 08216 07537 06915 06344 05820 05340 04899 04494 04123 03783 03470 03184 90909 82645 75132 68301 62092 56447 51316 46651 42410 38554 35049 31863 28966 26333 23939 21763 19785 17986 16351 14864 13513 12285 11168 10153 09230 08391 07628 06934 06304 05731 05210 04736 04306 03914 03558 03235 02941 02674 02430 02210 89286 79719 71178 63552 56743 50663 45235 40388 36061 32197 28748 25668 22917 20462 18270 16312 14564 13004 11611 10367 09256 08264 07379 06588 05882 05252 04689 04187 03738 03338 02980 02661 02376 02121 01894 01691 01510 01348 01204 01075 86957 75614 65752 57175 49718 43233 37594 32690 28426 24719 21494 18691 16253 14133 12289 10687 09293 08081 07027 06110 05313 04620 04017 03493 03038 02642 02297 01997 01737 01510 01313 01142 00993 00864 00751 00653 00568 00494 00429 00373 Present Value of an Ordinary Annuity of 1− Pni = (n) PERIODS 98039 1.94156 2.88388 3.80773 4.71346 5.60143 6.47199 7.32548 8.16224 8.98259 9.78685 10.57534 11.34837 12.10625 12.84926 13.57771 14.29187 14.99203 15.67846 16.35143 17.01121 17.65805 18.29220 18.91393 19.52346 20.12104 20.70690 21.28127 21.84438 22.39646 22.93770 23.46833 23.98856 24.49859 24.99862 25.48884 25.96945 26.44064 26.90259 27.35548 2.5% 97561 1.92742 2.85602 3.76197 4.64583 5.50813 6.34939 7.17014 7.97087 8.75206 9.51421 10.25776 10.98319 11.69091 12.38138 13.05500 13.71220 14.35336 14.97889 15.58916 16.18455 16.76541 17.33211 17.88499 18.42438 18.95061 19.46401 19.96489 20.45355 20.93029 21.39541 21.84918 22.29188 22.72379 23.14516 23.55625 23.95732 24.34860 24.73034 25.10278 3% 97087 1.91347 2.82861 3.71710 4.57971 5.41719 6.23028 7.01969 7.78611 8.53020 9.25262 9.95400 10.63496 11.29607 11.93794 12.56110 13.16612 13.75351 14.32380 14.87747 15.41502 15.93692 16.44361 16.93554 17.41315 17.87684 18.32703 18.76411 19.18845 19.60044 20.00043 20.38877 20.76579 21.13184 21.48722 21.83225 22.16724 22.49246 22.80822 23.11477 4% 96154 1.88609 2.77509 3.62990 4.45182 5.24214 6.00205 6.73274 7.43533 8.11090 8.76048 9.38507 9.98565 10.56312 11.11839 11.65230 12.16567 12.65930 13.13394 13.59033 14.02916 14.45112 14.85684 15.24696 15.62208 15.98277 16.32959 16.66306 16.98371 17.29203 17.58849 17.87355 18.14765 18.41120 18.66461 18.90828 19.14258 19.36786 19.58448 19.79277 5% 95238 1.85941 2.72325 3.54595 4.32948 5.07569 5.78637 6.46321 7.10782 7.72173 8.30641 8.86325 9.39357 9.89864 10.37966 10.83777 11.27407 11.68959 12.08532 12.46221 12.82115 13.16300 13.48857 13.79864 14.09394 14.37519 14.64303 14.89813 15.14107 15.37245 15.59281 15.80268 16.00255 16.19290 16.37419 16.54685 16.71129 16.86789 17.01704 17.15909 6% 94340 1.83339 2.67301 3.46511 4.21236 4.91732 5.58238 6.20979 6.80169 7.36009 7.88687 8.38384 8.85268 9.29498 9.71225 10.10590 10.47726 10.82760 11.15812 11.46992 11.76408 12.04158 12.30338 12.55036 12.78336 13.00317 13.21053 13.40616 13.59072 13.76483 13.92909 14.08404 14.23023 14.36814 14.49825 14.62099 14.73678 14.84602 14.94907 15.04630 8% 92593 1.78326 2.57710 3.31213 3.99271 4.62288 5.20637 5.74664 6.24689 6.71008 7.13896 7.53608 7.90378 8.24424 8.55948 8.85137 9.12164 9.37189 9.60360 9.81815 10.01680 10.20074 10.37106 10.52876 10.67478 10.80998 10.93516 11.05108 11.15841 11.25778 11.34980 11.43500 11.51389 11.58693 11.65457 11.71719 11.77518 11.82887 11.87858 11.92461 9% 91743 1.75911 2.53130 3.23972 3.88965 4.48592 5.03295 5.53482 5.99525 6.41766 6.80519 7.16073 7.48690 7.78615 8.06069 8.31256 8.54363 8.75563 8.95012 9.12855 9.29224 9.44243 9.58021 9.70661 9.82258 9.92897 10.02658 10.11613 10.19828 10.27365 10.34280 10.40624 10.46444 10.51784 10.56682 10.61176 10.65299 10.69082 10.72552 10.75736 10% 90909 1.73554 2.48685 3.16986 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457 6.49506 6.81369 7.10336 7.36669 7.60608 7.82371 8.02155 8.20141 8.36492 8.51356 8.64869 8.77154 8.88322 8.98474 9.07704 9.16095 9.23722 9.30657 9.36961 9.42691 9.47901 9.52638 9.56943 9.60858 9.64416 9.67651 9.70592 9.73265 9.75697 9.77905 12% 89286 1.69005 2.40183 3.03735 3.60478 4.11141 4.56376 4.96764 5.32825 5.65022 5.93770 6.19437 6.42355 6.62817 6.81086 6.97399 7.11963 7.24967 7.36578 7.46944 7.56200 7.64465 7.71843 7.78432 7.84314 7.89566 7.94255 7.98442 8.02181 8.05518 8.08499 8.11159 8.13535 8.15656 8.17550 8.19241 8.20751 8.22099 8.23303 8.24378 15% 86957 1.62571 2.28323 2.85498 3.35216 3.78448 4.16042 4.48732 4.77158 5.01877 5.23371 5.42062 5.58315 5.72448 5.84737 5.95424 6.04716 6.12797 6.19823 6.25933 6.31246 6.35866 6.39884 6.43377 6.46415 6.49056 6.51353 6.53351 6.55088 6.56598 6.57911 6.59053 6.60046 6.60910 6.61661 6.62314 6.62882 6.63375 6.63805 6.64178 1041 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 2% 1−vn (1 + i )n = i i Appendix ASC TABLE INDEX A Accounting Principles Board (APB) Opinions: No 16, 57 No 17, 57 No 18, 778 No 23, 207 Accounting Research Bulletin (ARB) No 51, 56 Accounting Series Release No 242 (SEC), 703 Accounting standards, international, see International accounting Accounting Standards Codification (ASC), 37–40 See also under Financial Accounting Standards Board (FASB) Accounting Standards for Business Enterprises (ASBEs), 614–615 Accounting Standard Updates (ASUs), 37 Accretion concept, 24 Accretive acquisitions, 24 Accrual accounting: modified accrual accounting, 861 nongovernmental organizations and, 982 Accumulated depreciation, 284–286 Acquisition (purchase) accounting See also Business combinations; Consolidated financial statements acquisition date, 439–440, 707 See also Ownership interest acquisition of interest, 793–800 contingent considerations, 70–75 cost methods and, 158–169 equity methods and, 171–178 explanation and illustration of, 65–70 interim acquisitions, 182–193 treatment of expenses, 62–63 Activity classifications, fund accounting and, 865 Adelphia Communications Corp., 556 Adjusting entries, 111 ADR, see American Depository Receipts Affiliated companies See also Business combinations; Consolidated financial statements consolidated tax returns and, 206 definition of, 97 separate tax returns and, 205–210 Agency (custodial) fund accounting, 999 Agency funds, governmental, 908, 930 Aggregation criteria, operating segments, 737 AICPA, see American Institute of Certified Public Accountants Allocation and depreciation of differences between implied and book values: accumulated depreciation and, 284–287 acquisition cost less than fair value, 241–243 assets and liabilities of subsidiary and, 236–243 consolidated net income and, 243–247, 257–278 consolidated retained earnings and, 257–278 debt and, 278–281 depreciable assets used in manufacturing, 287 fair values less than book value, 281–283 implied value in excess of fair value, 238–241 push down accounting, 287–292 using complete equity method, 269–278 using cost method, 248–257 using partial equity method, 259–269 Allocation of constructive gain or loss, 481 Allocation problems, partnerships and, 787–790 Allstate Corp., 1042 Altman Z-score model of bankruptcy, 569–571 American Depository Receipts (ADR), 617–620 Level I, 618–619 Level II, 618–619 Level III, 618, 619 program types, 618–620 role of, 617–618 Rule 144A and, 618, 619 sponsored, 618–619 unsponsored, 618 American Institute of Certified Public Accountants (AICPA), 553, 570, 905–906, 977–979 American International Group, Inc., 437 Amortization: of goodwill, 79–80 intangible assets and, 62, 238 schedules for bonds, 934 AMR Corp., 562 Annuity fund accounting, 999–1000 AOL Time Warner, 321 APB Opinions, see Accounting Principles Board Opinions Appropriations, 860 fund accounting and, 866 lapsing of, 873 ASBEs (Accounting Standards for Business Enterprises), 614–615 ASC, see Accounting Standards Codification Ashikaga Bank, “As if” statements, see Pro forma statements Assets: acquisition of, 14–15, 97, 103 contingent assets, 19 definition of, 34 marshaling of, 823 transfers in reorganization, 555 valuation of, 65–67 voluntary assignment of, 545 Asset turnover ratio, 46 Assumed liabilities, 18–19 ASUs (Accounting Standard Updates), 37 AT&T, 1–2, 5, 14, 438 Australian dollar, 631, 636 Avaya, 478 B BAE Systems PLC, 235 Bally Total Fitness Holding Corp., Bankruptcy, 545–550 See also Bankruptcy Reform Act; Insolvency Altman Z-score model of, 569–571 dividends and, 548–549 federal laws and, 545–546 involuntary petitions and, 548 and mergers, 3, prediction models for, 568–569 secured and unsecured creditors and, 548–549 ten largest, 549 and voluntary assignment of assets, 545 voluntary petitions and, 547 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 547 Bankruptcy Reform Act (1978), 543 See also Insolvency 1043 Index involuntary petitions and, 548 liquidation (Chapter 7) and, 550 provisions of, 545–546 reorganization (Chapter 11) and, 551–562 secured and unsecured creditors and, 548–550 Statement of Affairs and, 560–562 voluntary petitions and, 546 Bargain acquisitions, 67, 69–70, 116, 237–238 BASF AG, Bayer AG, BellSouth Corporation, Beresford, Dennis, 32 Best Buy, 572 Bid rates, 633 BlackRock, 155 Blackstone Group, 238 Board designated funds, 984 Bonds, intercompany, see Intercompany bonds Bond holdings, intercompany, see Intercompany bonds Bonuses, partnerships and, 787 Bonus method, 783, 792–793, 797–799, 802 Book values, 28, 108–109, 457–461 See also Allocation and depreciation of differences between implied and book values; Consolidated financial statements Brazilian real, 636 Budgetary fund entities, 860–861 Build-A-Bear Workshop, 24 Bunge Ltd, 328 Business combinations See also Consolidated financial statements accretive acquisitions, 24 allocation of expenses and, 19 assumed liabilities and, 18–19 avoiding pitfalls, 18–20 book value and, 28 CEO egos and, 20 conglomerate mergers, 11 consolidated balance sheet values and, 28–29 consolidated financial statements and, 25–29 consolidated net income and, 27–28 contingent considerations in acquisitions, 70–75 defense tactics and, 6–7 deferred taxes in, 79–80 definition of, deregulation and, 13 dilutive acquisitions, 24 diversification and, divestitures and, 9–10 due diligence and, 18–20 earnings accretion and, 24 earnings dilution and, 24 economic entity concept and, 25–27 fair value and, 28 financial synergy and, friendly combinations, 5–6 goodwill and, 22–24 goodwill impairment test, 58–60 historical perspective on, 10–14, 54–63 horizontal integration, 10–11 income tax consequences in, 68–69 income tax laws and, intercompany profit and, 29 international marketplace and, 8–9 interpreting percentages, 18 leveraged buyouts, 75–76 merger mania, 11 most active industries, 13 nature of, 5–7 negotiated price and, 21 net asset and future earnings contributions, 21–24 new disclosure requirements, 61–62 noncontrolling interest and, 27 nonrecurring items and, 20 operating synergies and, 7, 11 parent company concept and, 25–27 price and method of payment, 20–24 pro forma statements, 63–64 reasons for, 7–10 statutory consolidations, 15 statutory mergers, 15 stock acquisitions, 16 stock exchange ratio and, 21 stock vs asset acquisitions, 14–15 strategic acquisitions, 11 takeover premiums, 17–18 treatment of acquisition expenses, 62–63 unfriendly (hostile) combinations, vertical integration, 11 C Cadbury, 2, 14, 49–51, 464–465 CAD Schedule, see Computation and Allocation Difference Schedule Call options, 660–661 Call price, 508 Capital assets, governmental accounting and, 930–932 Capital balances, partnerships and, 785–786 Capital expenditures, fund accounting and, 868–869 Capital interest, partnership agreements and, 780 Capital investment, partnerships and, 785–786 Capital One Financial Corporation, 17 Capital project funds, 907, 909–914 Capital transactions, partnerships and, 781–782 Capitation revenues, hospital, 1000–1001 Carilion Health Systems, 977 Carlyle Group, 238 Carrying value, 455–457, 555 Cash distributions, partnership liquidation and, 831–836 Cash dividends, versus stock dividends, 503 Cash flow: consolidated statement of, 194–201 in evaluation of firm performance, 46–47 hedges, 653–656, 658–659, 661–663 year after acquisitions, 195–197 year of acquisition, 197–201 Cash interest coverage ratio, 48 CBS Corp., 61 Center for Audit Quality (CAQ), 592, 691 Chapter (of Bankruptcy Reform Act), 546–548 Chapter 11 (of Bankruptcy Reform Act), 548, 551–562 Chapter 13 (of Bankruptcy Reform Act), 546 Charity care, 1000 Chavez, Hugo, 632–633 Chief operating decision maker, 736 China, 614–615 Chinese Yuan Renminbi, 697 Chiron Corp., Chrysler Corp., 6, 15, 542, 545, 549 Circuit City, 572 CIT, 549 COGS, see Cost of Goods Sold Colleges and university accounting: current fund accounting and, 985 expenditure and expense classifications, 983 issues relating to, 1000 mandatory transfers and, 986 nonmandatory transfers and, 986 operating vs nonoperating income and, 1000 plant funds and, 990–993 service fee revenue and, 1000 Comparability, 33, 738 Complete equity method: on books of investor, 155–157 constructive retirement of subsidiary bonds, 486–491, 494–496 downstream sales and, 326–328 implied and book values and, 277 intercompany sales and, 345–350 property and equipment disposal by purchasing affiliate and, 409–411 1044 Complete equity method (continued) purchase and sale of subsidiary stock by parent, 447–451 recording investments in subsidiaries and, 170–180 separate tax returns and, 209–210 significant influence and, 150–153 subsidiary perferred stock outstanding, 515–517, 520 unrealized intercompany profit, 357–359 upstream sales and, 405–409 Component units, governmental, 941 Composition agreements, 544 Comprehensive income: currency translations and, 697–698 distinguishing between earnings and, 33–35 statement of, 35 Computation and Allocation Difference (CAD) Schedule, 108, 113–115, 119–120, 160, 184, 190, 281, 282 Comsat Corp., 18 “Condorsement,” 593–594 Conglomerate mergers, 11 Conseco, 549 Consistency, 33 Consolidated balances, intercompany sales and, 321–331 Consolidated balance sheets, 28–29 Consolidated financial statements, 25–29 accounting for investments, 150–158 accumulated depreciation as separate balance, 284–286 adjusting entries, 111, 122 allocation and depreciation of differences, 236–243 balance sheet values and, 28–29 cash flows, 194–201 consolidated net income, see Consolidated net income controlling and noncontrolling interests, 257–259 cost and book value differences, 115–118 cost method after acquisition, 158–169 deferred taxes, 129–130, 205–210 discounted notes receivable, 501–502 economic entity concept and, 25–27 equity method recording investments in subsidiaries, 170–180 expense item elimination, 180–181 implied and book value differences, 108, 110–112 intercompany bonds, 479–483 intercompany interest, rent, service fees, 411–414 intercompany profit, 29 intercompany revenue elimination, 180–181 intercompany sale of depreciable property, 384–392 intercompany sales and consolidated balances, 321–331 intercompany sales of land, 381–384 interim acquisition of subsidiary stock, 182–193 investment elimination and, 107–110 investment recorded using complete equity method, 269–277 investment recorded using cost method, 248–257 investment recorded using partial equity method, 259–266 letter notation, 111 limitations of, 125–126 more than one subsidiary, 123–125 noncontrolling interest and, 27, 112–114 number notation, 111 parent acquisition of subsidiary stock and, 439–443 parent company concept and, 25–28 parent sale of subsidiary stock and, 438–439 paying more than book value, 117–118 preaffiliation profit, 351–352 purchase price below book value, 118–120 purpose of, 103–104 requirements regarding subsidiaries, 102–103 retained earnings analysis, 338 revenue recognition principle and, 107 separate tax returns, 205–210 stock dividends issued by subsidiary, 503–508 subsidiary treasury stock holdings, 120–121 subsidiary with preferred stock outstanding, 511–522 upstream sales, 331–339 workpapers and, 106–112 Index Consolidated net income: calculations of, 419–420 cash flows and, 194 implied and book values and, 257–259, 267–269, 277 intercompany sale of inventory and, 337, 350 intercompany sale of property and equipment and, 401–404, 411 under parent company and economic entity concepts, 27–28 recording investments in subsidiaries and, 164, 175–176 subsidiary revenue and expense items and, 183 workpapers and, 161 Consolidated retained earnings: calculations of, 419–420 implied and book values and, 243, 257–259, 267–269, 277 intercompany sale of inventory and, 338, 350 intercompany sale of property and equipment and, 401–404, 411 of parent, 245 Consolidation See also Consolidated financial statements consolidated sales, 322–325, 344 statutory, 15 when temporal method used, 709–711 Constructive gain or loss, 480–483 Consumption method, expendable fund entities and, 882–884 Consumption of benefit, 36 Contingent assets, 19, 76 Contingent considerations in acquisitions, 70–76 Contingent liabilities, 76 Contractual agreements composition agreements, 544 extension of payment periods, 544 formation of creditor’s committee, 544 insolvency and, 544 voluntary assignment of assets, 545 Contractual allowances, hospitals, 1000 Contributions, 978–990 donated collection items, 989 donated services, 988–989 donor-imposed restricted contributions, 989–990 pledges, 978–988 Control, definitions of, 98–102 Controlling interest See also Noncontrolling interest complete equity method analysis and, 277 in consolidated net income, 161, 175–176, 183 cost method analysis and, 257–259 partial equity method analysis and, 267–268 Convergence (of standards), 593 Convergys Corp., COR&FJA Group, 404 Cost method: conservative view and, 163 consolidated statements after acquisition and, 158–169 constructive retirement of subsidiary bonds, 485–486, 492–493 downstream sales and, 325–326 historical cost principle and, 160 implied and book values and, 252–259 intercompany sale of inventory and, 337–338 interim acquisitions and, 183–189 investments and, 150–154, 248–257 parent acquires subsidiary stock through several purchases, 439–443 parent sells subsidiary stock to third parties, 438 preferred stock outstanding, 518 property/equipment disposal by purchasing affiliate, 400–401 separate tax returns and, 207–208 subsidiary preferred stock outstanding, 516–518 unrealized intercompany profit, 356–357 upstream sales and, 331–339, 392–400 workpaper format and, 159–165 Cost of Goods Sold (COGS), 251, 261, 271, 390 Cost of sales assuming downstream sales, 322–325 Creditor’s committee formation, 544 Crooch, F Michael, Cumulative undistributed income, 171 1045 Index Current exchange rate, 684 Current fund accounting: board designed funds, 984 colleges and universities, 985 current restricted funds, 982, 984 current unrestricted funds, 982, 984 mandatory and nonmandatory transfers, 986 nongovernmental nonbusiness organizations and, 982–987 other nonbusiness nongovernmental organizations, 985 revenue and support from fund-raising events, 987 Current method, functional currency is local currency, 694–698 Current rate conversion method, 686 Current restricted funds, 982, 984 Current unrestricted funds, 982, 984 Customer consideration model, 608–609 CVS Inc., 13 D Daimler-Benz, 15 DaimlerChrysler, 15 Dean Witter Discover & Co., 2, Debt See also Restructuring allocating difference between implied and book value to, 278–281 bad debt expense, presentation on Statement of Operations, 1001 constructive retirement of, 478–479 Debt issue proceeds, fund accounting and, 862–863 Debtor-in-possession lending, 556, 562 Debt service funds, 907 Defensive tactics, business combinations and, 6–7 Deferred taxes: in business combinations, 79–80 consequences when affiliates file separate returns, 205–210 on date of acquisition, 129–130 and intercompany profit, 353, 356–359, 418 and intercompany sales of equipment, 416–418 Deficiency account, 560 Definitions of financial statement elements, 34 Dell Inc., 331 Depository Bank (DR bank), 617–618 Depository Receipt (DR), 617–620 Depreciable assets: disposal by subsidiary, 286–287 at net and gross values, 284–286 used in manufacturing, 287 Depreciable property: financial reporting objectives, 385 intercompany sale of, 384–392 realization through usage and, 384–385 Depreciation: accumulated, 284–286 of differences, see Allocation and depreciation of differences intangible assets and, 238 Derivative instruments, 640–641 Deutsche Telekom, 1, 438 Dilution, earnings, 24 DIP financing, 556, 562 Direct acquisition expenses, 63, 76 Direct exchange quotations, 633 Disaggregated financial data, 734 See also Segment reporting Disbursements, fund accounting and, 868 Disclosure requirements: for business combinations, 61–62 for fair value measurements, 659–660 Disney, 278 Dissolution, partnerships, 791 Distributions to owners, 34 Diversification, Divestitures, 9–10 Dividends, liquidating, 152, 154 Donated collection items, 989 Donated services, 988–989 Donor-imposed restricted contributions, 989–990 Downstream sales, 320 consolidated sales and, 322–325 cost method and, 338–339 cost of sales and, 322–325 DR, see Depository Receipt Due diligence, business combinations and, 18–20 Due diligence reports, 18 E Earnings See also Consolidated retained earnings dilution and accretion, 24 distinguishing from comprehensive income, 33–35 in establishing goodwill, 22 expense allocations and, 19 nonrecurring items boosting, 20 stock dividends and, 506–508 Eastman Kodak Company, 24 eBay, 213, 296 Economic entity concept, 25–27 consolidated balance sheet values and, 28–29 consolidated net income and, 27–28 noncontrolling interest and, 27 parent concept vs., 31 Edison Electric Institute, 130 Eliminating entries: after acquisition (equity method), 177 basic workpaper eliminating entries, 181 downstream sales and, 322–328 expense items, 180–181 intercompany dividends, 178 intercompany revenue, 180–181 investment carried at equity and, 172–174 reasons for, 111 summary for intercompany sales, 351 year of acquisition (cost method), 161–163 Emerging Issue Task Force (EITF), 595 Encumbrances, fund accounting and, 867 Endorsement (of standards), 593 Endowment fund accounting, 995–996 Enron Corp., 62, 549 Enterprise funds, 907, 927 Enterprisewide disclosures, segment reporting and, 742 Equipment: cost method and, 400–401 disposal by purchasing affiliate, 400–401, 409–411 intercompany sale of, 401–404, 411, 416–418 Equity: definition of, 34 investments carried at, 171–178 Equity method, 201 See also Complete equity method; Partial equity method Ernst & Young, 14 Esmark, 11 EToys Inc., 774 Euro, 634, 705 European Commission, 615 Excess earnings approach, to estimating goodwill, 22 Exchange rates See also Foreign currency transactions current exchange rate, 684 definitions regarding, 632–633 direct exchange rate, 635 historical exchange rate, 684 means of translation, 632–634 table, 634 Expendable fund entities, 858–859 Expenditures, fund accounting and, 864–872 Expenses: definition of, 34 direct acquisitions and, 63 impact of earnings on allocation of, 19 interim financial reporting and, 751 item elimination, 180–181 matching to revenues, 36 Expense classification, nongovernment nonbusiness, 982–983 1046 Exporting of goods and services, 636–638 Exporting transactions, 636–638 Exposed liability, forward contracts and, 645–649 eXtensible Business Reporting Language (XBRL), 592–593 External expansion, 7–8 See also Business combinations Extraordinary gains, 70 Exxon, 14 ExxonMobil, 614 F F-1 statement, 617 Facebook, 238 FAF, see Financial Accounting Foundation Fair value, 77 acquisition costs less than, 241–243 disclosure requirements, 659–660 hedges, 650–653, 658 of net assets, 28 reorganizations and, 555–556 Fair value accounting, 32, 55 FASB, see Financial Accounting Standards Board FCC (Federal Trade Commission), 2, 13 FCPA (Foreign Corrupt Practices Act), 703 Federal Deposit Insurance Corporation (FDIC), 545 Federal-Mogul, Federal Trade Commission (FCC), 2, 13 Fiduciary funds, 860, 907–908, 929–930 FIFO (first in, first-out), 251, 261, 326, 614 Financial Accounting Foundation (FAF), 592, 905 Financial Accounting Standards Board (FASB): advanced accounting issues and, 32–33 ASC topic 105 (General Principles), 37 ASC topic 220 (Statement of Comprehensive Income), 35 ASC paragraph 250-10-45-13, 753 ASC paragraph 250-10-45-17, 753 ASC topic 260 (Earnings per Share), 754 ASC topic 280 (Interim Reporting), 733, 734, 749–753 ASC section 280-10-50, 746 ASC paragraph 280-10-50-21, 739 ASC paragraph 280-10-50-41, 742 ASC paragraph 280-10-50-42, 742 ASC subtopic 310-40 (Debt Restructuring by Creditors), 554 ASC topic 350 (Intangibles—Goodwill and Other), 57, 278 ASC paragraph 350-20-35-18, 58 ASC paragraph 350-20-45-1, 61 ASC paragraph 350-20-45-2, 61 ASC section 350-30-35, 62 ASC paragraph 350-30-35-17, 60 ASC paragraph 350-30-35-18, 60 ASC paragraph 420-10-15-2, 19 ASC paragraph 420-10-25-2, 19 ASC paragraph 450-20-25-2, 19 ASC paragraph 470-50-40-6, 544 ASC subtopic 470-60 (Debt Restructuring by Debtors), 554 ASC topic 740 (Income Taxes), 80, 353 ASC section 740-10-30, 131 ASC section 740-10-45, 131 ASC subtopic 740-270 (Income Taxes—Interim Reporting), 752 ASC topic 805 (Business Combinations), 3, 25, 29, 55, 57, 80 ASC paragraph 805-10-25-23, 62 ASC paragraph 805-10-29-9, 440 ASC subparagraph 805-10-50-2(h), 64 ASC section 805-20-25 (Recognition), 19 ASC paragraph 805-20-30-7, 108, 241 ASC paragraph 805-20-30-8, 108, 241 ASC paragraph 805-30-25-5, 19 ASC paragraph 805-30-50-1, 61 ASC paragraph 805-30-50-2, 61 ASC paragraph 805-740-45-20, 80 ASC topic 810 (Consolidations), 3, 25, 29, 40, 56 ASC paragraph 810-10-05-9, 99 ASC paragraph 810-10-15-8, 98–99 ASC paragraph 810-10-15-10, 683–684 Index ASC paragraph 810-10-15-14, 99 ASC paragraph 810-10-45-1, 329 ASC paragraph 810-10-45-8, 353 ASC paragraph 810-10-45-22, 443, 451–452 ASC paragraph 810-10-45-24, 443, 451–452 ASC paragraph 810-10-55-16, 114 ASC paragraph 810-10-55-17, 99 ASC paragraph 810-20-25-4, 40 ASC section 815-20-50, 658 ASC paragraph 815-30-35-9, 662 ASC topic 820 (Fair Value Measurement), 279 ASC paragraph 820-10-50-1, 659–660 ASC paragraph 820-10-50-2, 659–660 ASC paragraph 825-10-25-2, 151 ASC paragraph 825-10-25-4, 150 ASC paragraph 830-10-15-3, 644 ASC subtopic 830-30, 685 ASC paragraph 830-30-45-6, 688 ASC paragraph 830-30-45-12, 685 ASC topic 840 (Leases), 605 ASC paragraph 852-10-45-19, 543, 553–554 ASC paragraph 852-10-45-20, 553 ASC subtopic 852-20, 553 ASC paragraph 860-40-15-3, 102 ASC topic 958 (Not-for-profit Entities), 978 ASC paragraph 958-360-35-1, 978 business combinations and, codification project of, 36–41 comprehensive income and, 697–698 Concepts Statement No 2, 978 Concepts Statement No 4, 32, 856, 978, 979 Concepts Statement No 5, 33–36, 266 Concepts Statement No 6, 33, 131, 978 Concepts Statement No 7, 32–33 conceptual framework of, 29–36 on contingent assets, 19 earnings vs comprehensive income, 33–35 economic entity vs parent concept, 31 Interpretation No 18, 752 Interpretation No 48, 130–132 long-term convergence issues with IASB, 605 standards for business combinations, 56 Statement No 8, 704–705 Statement No 14, 734, 735 Statement No 21, 734 Statement No 52, 656, 684, 685–686, 705 Statement No 60, Statement No 93, 978 Statement No 109, 80, 130, 207 Statement No 131, 733, 734 Statement No 133, 640 Statement No 141, 55, 57 Statement No 141R, 3, 28–29, 55, 80 Statement No 142, 57 Statement No 144, 60 Statement No 160, 28–29 Statement No 162, 32 Statement No 167, 132–133 Statement No 168, 36, 595 Financial affiliates See also Consolidated financial statements accounting for investment after acquisition, 708–711 consolidated statements workpaper illustrated, 707–713 consolidation when temporal method of translation used, 709–711 date of acquisition and, 707 elimination of intercompany profit, 712–713 liquidation of foreign investment, 713 remeasurement and translation of foreign currency transactions, 711–712 Financial crisis of late 2000s, 437–438 Financial synergy, Fines and forfeits, fund accounting and, 864 Firm performance, evaluation of, 42–48 First Data, 477 1047 Index First-in, first-out (FIFO), 251, 261, 326, 614 Fixed ratio, in partnerships, 784 Flextronics Software Systems, 75 Floating rates, 633 Flow of current financial resources concept, 904 Flow of economic resources approach, 904 Ford Motor Company, 11, 542 Forecasted transactions, hedging of, 653–656 Foreign affiliates See also Translation of foreign financial statements accounting for operations of, 683–684 financial statement disclosure, 702–704 functional currency identification, 687–688 high inflationary economies and, 690–691 objectives of translation (SFAS No 52), 685–686 operating in economies not highly inflationary, 691–693 translating financial statements of, 684–665 translation adjustment, 685 translation gain or loss, 685 translation methods, 686–687 translation of foreign currency financial statements, 689–702 Foreign company exposed liability, 645–649 Foreign Corrupt Practices Act (FCPA), 703 Foreign currency exposed asset, 649 Foreign currency movements, forward contracts and, 657–658 Foreign currency transactions, 635–645 See also Exchange rates Foreign currency translation of financial statements, 689–693 Foreign exchange rates, see Exchange rates Form 10-K, 616 Form 10-Q, 748 Form 20-F, 616 Formation, partnership, 782–784 Forward-based derivatives, 641 Forward contracts See also Hedging foreign exchange risk cash flow hedges, 653–656 discounting fair value of, 652–653 economic hedges of net investment in foreign entities, 656–657 fair value hedge, 650–653 hedge of foreign company exposed liability, 645–649 hedge of foreign currency exposed asset, 649 speculation in foreign currency movement and, 657–658 Forward exchange contracts, 633, 642–645 Forward rates, 633, 644 Freescale Semiconductor, 238 Fresh start accounting, 553–554 Friendly combinations, 5–6 Full-year reporting alternative: cost method, 183–187 equity method, 189–190 Functional currency: concept of, 685–686 economies not highly inflationary, 691–693 highly inflationary economies, 690–691 identification of, 687–688 indicators, 687 local currency as, 694–698 U.S dollar as, 698–702 Function classifications, fund accounting and, 865 Fund accounting See also Nonbusiness organizations analysis of financial statements, 881–882 appropriations and, 867 basis for accounting, 861–862 budgetary fund entities (governmental funds), 860–861 capital expenditures and, 868–869 comprehensive illustration of, 873–879 debt issue proceeds and, 862–863 disbursements and, 868 encumbrances and, 867 expendable fund entities, 858–859 expenditure classification, 864–866 expenditures and, 867 fiduciary fund entities, 860 financial statements and, 879–883 fines and forfeits and, 864 function and activity classifications and, 865–866 income taxes and, 864 inventory and, 882–884 lapsing of appropriations and, 873 nongovernment nonbusiness organizations, 981–987 object class classifications and, 865–866 organizational unit classifications and, 865–866 pledges and grants and, 864 prepayments and, 884 property taxes and, 863 proprietary fund entities, 859–860 recognition of expenditures, 866–869 recognition of revenue, 863 recording revenues and expenditures, 869–872 resource outflows, 864–866 restricted and unrestricted fund entities, 859 revenue classifications, 862 role of, 857–858 sales of property and, 864 sales taxes and, 864 transfer of resources from other funds, 863 transfers to other funds, 866 Fund-raising events, 987 Future earnings contributions, 21–24 Future rates, 633 G GAAP, see Generally Accepted Accounting Principles Gains, definition of, 34 GDR (Global Depository Receipt), 617 General Electric (GE), 126, 614, 758–761 General funds, governmental, 907–908 Generally Accepted Accounting Principles (GAAP) See also U.S GAAP changes in ownership interest and, 438–439 and FASB codification project, 36–41 minimum information required for fair presentation, 904 General Motors (GM), 542–543, 549, 553–554 General partnerships, 777 See also Partnerships limited or uncertain life, 777 mutual agency and, 777 right to dispose and, 777 unlimited liability and, 777 General revenues, governmental, 943 Geographic area disclosures, segment reporting and, 742, 744–745 Global Depository Receipt (GDR), 617 Globalization, see International accounting Golden West Financial Corp., 118 Goodwill, 76 amortization of, 79–80, 235 book vs implied value and, 163 disclosures mandated by FASB, 61–62 estimation of value of, 22–24 excess earnings approach to estimating, 22 impairment of, 266 impairment tests, 58–60 measurement of, 233–234 recording in consolidated statements, 116 Goodwill method, partnerships and, 783, 793, 798–799, 802 Government Accounting Standards Board (GASB), 856–857, 862, 978 Concepts Statement No 1, 854 Concepts Statement No 2, 854 Concepts Statement No 3, 854 Concepts Statement No 4, 854, 942 Concepts Statement No 5, 854 establishment of, 905 Statement No 15, 979 Statement No 34, 859, 860, 869, 877, 882, 903–904, 909, 926–927, 930–932, 935–936, 942, 978, 980–981 Statement No 35, 980–981 Statement No 45, 877, 908 Statement No 56, 884 1048 Governmental accounting, see State and local government Governmental fund entities, 860–861, 906–926 capital project funds, 909–914 debt services funds, 915–923 general funds, 908 interfund activity, 945–947 interfund loans, 945–946 interfund reimbursements, 947 interfund services provided and used, 946 interfund transfers, 946–947 permanent funds, 923–925 special revenue funds, 908–909 Government Finance Officer’s Association (GFOA), 903 Government fund balances, net assets and, 938–939 Government fund-based reporting, 936–939 Government-wide financial statements, 861–862 See also Fund accounting Government-wide reporting: infrastructure asset reporting issues, 942 statement of activities, 942–943 statement of net assets, 861–862, 939–942 Grant of equity interest, 555 Greenmail, Green Mountain Coffee Roasters, 362 Gross margin percentage, 48 Gross profit rate, intercompany sales and, 328 GSM technology, 1, 2, 14 Guidant Corp., 69 H Harris, Trevor, 58 Health care providers, 977 See also Nongovernment nonbusiness organizations Hedging foreign exchange risk, 636, 640–641 cash flow hedge, 653–656 disclosure requirements of, 658–659 economic hedge of net investment in foreign entity, 656–657 fair value hedge, 650–653 fair value vs cash flow hedges, 653 foreign currency exposed asset, 649 foreign currency exposed liability, 645–649 forward contracts and, 644–645 options and foreign currency changes, 660–663 split accounting and, 663 Hewlett-Packard, Historical costs, 33, 160, 324, 550 Historical development of accounting standards, 704–705 Historical exchange rate, 684 Historical perspective on business combinations, 10–14 Horizontal integration, 10–11 Horizontal mergers, 7–8 Horizontal sales, 320, 329–330 Hospitals, 977 See also Nongovernment nonbusiness organizations capitation revenues, 1000–1001 charity care and, 1000 contractual allowances and, 1000 current fund accounting and, 984–985 expenditure and expense classifications, 983 issues relating to, 1000–1001 malpractice and, 1001 plant funds and, 993–994 House Ways and Means Committee, 614 HTC, 14 I IAS, see International Accounting Standards IASB, see International Accounting Standards Board IASC, see International Accounting Standards Committee IFRS, see International Financial Reporting Standard(s) Implied values, see Allocation and depreciation of differences between implied and book values; Consolidated financial statements Importing of goods and services, 636–638 Importing transactions, 636–638 Index Inco Ltd., Income adjustment of prior years, partnerships and, 790 Income tax See also Deferred taxes; Tax returns fund accounting and, 864 interim financial reporting and, 751–753 Incorporation of partnership, 836–837 Indirect acquisition costs, 63 Indirect exchange quotations, 633 Inflationary economy, affiliates operating in, 690–691 Infrastructure assets, 931 Insolvency See also Reorganizations accounting accounting for reorganizations, 554–556 bankruptcy, 545–550 composition agreements and, 544 contractual agreements and, 543–545 creditor’s committee formation, 544 definition of, 543 extension of payment periods and, 544 fresh start accounting, 553 liquidation, 550 quasi reorganization, 553 realization and liquidation account, 565–571 reorganization under Reform Act, 551–562 Statement of Affairs and, 560–562 trustee accounting and reporting, 562–565 voluntary assignment of, 545 Installment liquidation, partnership, 827–836 Intangible assets, amortization of, 62 Intel, 149 Intercompany bonds: accounting for bonds, 479–480, 482–483 book entry related to bond investment, 484–500 constructive gain or loss on, 480–483 constructive retirement of debt, 478–479 interim purchase of, 500–501 three-year comparison, 498–499 Intercompany dividends, elimination of, 163 Intercompany interest, 411–414 Intercompany pricing adjustments, 328–329 Intercompany profit: deferred tax consequences of, 353, 356–359, 418 elimination of with foreign subsidiary, 712–713 intercompany sales and, 328–329 prior to affiliation, 351–352 Intercompany receivables and payables, international, 712 Intercompany rent, 411–414 Intercompany revenue elimination, 29, 180–181 Intercompany sales See also Upstream sales complete equity method and, 345–350 consolidated balances determination and, 321–331 cost method and, 331–339 deferred tax consequences of, 416–418 of depreciable property, 384–392 determination of intercompany profit and, 328 determination of noncontrolling interest and, 389–392 eliminating intercompany profit and, 329 financial reporting objectives and, 321–322 of inventories, 354–356 inventory pricing adjustments, 328–329 of land, 381–384 noncontrolling interest and, 329–330 of nondepreciable property, 381–384 partial equity method and, 340–344 property/equipment disposal by purchasing affiliate, 400–401 realization through usage and, 384–385 subsidiary stock and, see Subsidiary company(-ies) summary of workpaper elimination entries, 351 Intercompany service fees, 411–414 Interest: intercompany, 411–414 noncontrolling, 28–29 partnerships and, 786–790 Interfund activity, governmental, 945–947 interfund loans, 945–946 1049 Index interfund reimbursements, 947 interfund services provided and used, 946 interfund transfers, 946–947 Interim acquisitions: cost method full-year reporting, 183–187 cost method partial-year reporting, 187–189 equity method full-year reporting, 189–190 equity method partial-year reporting, 190–192 Interim disclosures, segment reporting and, 741–742 Interim financial reporting, 747–756 accounting changes in interim periods, 753–754 costs and expenses and, 751 costs associated with revenues and, 749–751 current requirements, 748 income tax provisions, 751–753 interim operating losses and, 753 international issues in, 754–755 minimum disclosures in interim reports, 754 problems in, 748–749 revenues and, 749 Internal expansion, 7–8 Internal service funds, 907, 927–929 International accounting See also Foreign affiliates; Foreign currency transactions; Forward contracts American depository receipts, 617–620 exchange rate translation, 632–634 financial statement disclosure, 702–704 foreign affiliate and preparation of consolidated workpaper, 707–713 foreign currency transactions, 635–645 functional currency is local currency, 694–698 functional currency is U.S dollar, 698–702 hedging foreign exchange risk, 645–663 historical developments of accounting standards, 704–705 and increased focus on standards, 588–589 interim reporting and, 754–755 measured vs denominated transactions, 635 objectives of translation, 685–686 operations of foreign affiliates, 683–684 segment reporting and, 746 translating financial statements of foreign affiliates, 684–665 translation of foreign currency financial statements, 689–693 International Accounting Standards (IAS), 570, 589, 621–622 No 1, 755 No 17, 605 No 34, 754–755 International Accounting Standards Board (IASB), 571, 589, 614–615 and FASB, 30–31, 55, 606–607, 703–704 positions on segment reporting, 746 International Accounting Standards Committee (IASC), 589 International Business Machines Corp (IBM), 234–235 International Financial Reporting Standard(s) (IFRS), 55, 76–77, 127, 201, 461–462, 570, 589–594, 755, 756 adoption approaches for, 593–594 list, 621–622 Intrinsic value of forward contracts, 643 Inventory(-ies): downstream sales and, 322–325 fund accounting and, 882–884 intercompany sales of, 354–356 reserve for, 883–884 Inventory turnover, 48 Investment accounting, nongovernment nonbusiness organizations, 997–998 Investment elimination in consolidated financial statements, 107–110 Investments in subsidiaries, 103, 150–158 carried at complete equity, 178–180 carried at equity year after acquisition, 176–178 carried at equity year of acquisition, 171–176 complete equity method for, 155–157, 170–180, 269–277 cost method for, 153–154, 248–257 partial equity method for, 154–155, 170–180, 259–266 Investment pools, 997–998 Investment trust funds, 908 Involuntary petitions, 550 Irvine Biomedical, Inc., 66 J Japan, 639 Johnson & Johnson, 116 Joint ventures, 778–779 J.P Morgan Chase & Co., 97 Junk bond market, merger financing and, 10 K Kerschner, Edward, 17 Kmart Corp., 556 Kohlberg Kravis Roberts & Co., 75 KPMG Peat Marwick, 14, 18 Kraft Foods, 2, 14, 49–51, 464–465 L Land, intercompany sale of, 381–384 Lands' End, 653 Last-in, first-out (LIFO), 614 Lawsuit contingencies, 72–74 LBO, see Leveraged buyouts Lease contracts, 606 Lehman Brothers, 9, 437, 542, 549 Leiner Health Products, Letter notation of adjusting entries, 111 Level I ADR, 618–619 Level II ADR, 618–619 Level III ADR, 618, 619 Leveraged buyouts (LBO), 7, 75–76 Leverage ratio, decomposition of, 45–46 Liabilities, assumed, 18–19, 65–67 Liability, in general partnerships, 777 Life insurance fund accounting, 999–1000 LIFO (last-in, first-out), 614 Limited liability partnerships (LLP), 778 Limited life, in general partnerships, 777 Limited partnerships, see General partnerships; Partnerships Liquidation, 550 of dividends, 152, 154 of foreign investment, 713 involuntary petitions and, 550 of partnerships, see Partnership liquidation trustee duties and, 550 LLP (limited liability partnerships), 778 Loan fund accounting, for nongovernment nonbusiness organizations, 998 Local governmental units, see Fund accounting; State and local government Lockheed Martin Corp., 18 LoJack, 296–297 Long-term debt, governmental accounting and, 932–934 Long-term debt to assets ratio, 48 Losses, definition of, 34 Loss or lack of benefit, 36 LTE technology, 1, 14 Lucent Technologies Inc., M M&A, see Mergers and acquisitions McAfee, 149 Major customer disclosures, segment reporting and, 742, 745 Malpactice, hospital, 1001 Management's discussion and analysis (MD&A), 944–945 Mandatory transfers, 986 Manufacturing, depreciable assets used in, 287 Market value accounting, 31 Mattel, 666 MCI, 2, 13 Measured vs denominated transactions, 635 Measurement period, adjustments during, 72, 77 1050 Medianet Group, 360–361 Mendecino Redwood, Merger mania, 11 Mergers and acquisitions (M&A), 1–3 See also Business combinations from 1972 through 2008, 11–12 and bankruptcies, 3, conglomerate mergers, 11 earning dilution and accretion and, 24 and financial crisis of late 2000s, 437–438 horizontal mergers, 7–8 junk bond market and, 10 merger mania, 11 mode of payment in, 20 planning for, 4–5 statutory merger, 15 stock prices and, 20–21 vertical mergers, 7–8 Merrill Lynch, 155 Method of payment in business combinations, 20–24 MFOA (Municipal Finance Officers Association), 905 Microsoft, 14 Minimum disclosures, in interim reports, 754 Minority interest, 114 Modified accrual accounting, 861 Morgan Stanley, Morgan Stanley Dean Witter, 58 Motorola, 2, 14 Municipal Finance Officers Association (MFOA), 905 Mutual agency, in general partnerships, 777 Myanmar, 691 N National City Corp., 97 National Council on Government Accounting (NCGA), 905 NBTY, NCGA (National Council on Government Accounting), 905 Negative goodwill, 77 Negotiated price, in business combinations, 21 Net assets: government fund balances and, 938–939 in price determination in business combinations, 21–24 Net income, see Consolidated net income Net income or loss, allocation in partnerships, 784–787 Net investment hedges, 656–657, 659 News Corp., 13 NNO, see Nongovernment nonbusiness organizations Nonbusiness organizations See also Fund accounting classifications of, 853 distinctions from profit-oriented enterprises, 853–855 financial accounting for, 855–857 reporting standards for, 855–857 Noncontrolling interest, 76 See also Controlling interest cash flows and, 194 consolidated net income and, 164–165, 175–176 cost method analysis and, 257–259 definition of, 97 determination in intercompany sales, 389–392 partial equity method analysis and, 267–268 subsidiary as intercompany seller and, 397 for upstream sales, 329–330 Nondepreciable property, intercompany sale of, 381–384 Nonexhausitble assets, 995 Nongovernment nonbusiness organizations (NNO): accrual basis of accounting for, 982 agency (custodial) fund accounting, 999 annuity and life income fund accounting, 999–1000 classifications of, 977 college and university issues, 1000 contributions and, 978–990 current funds accounting, 982–987 endowment fund accounting, 995–996 financial reporting for not-for-profit organizations, 980 financial reporting for public colleges and universities, 980–981 Index fund accounting for, 981–982 generally accepted accounting standards for, 977–979 hospital issues, 1000–1001 investment accounting, 997–998 loan fund accounting, 998 plant fund accounting, 990–995 revenue and expense classification, 982–983 Nonmandatory transfers, 986 Nonoperating income, colleges and universities and, 1000 Nonprofit institutions of higher learning, 977 See also Nongovernment nonbusiness organizations Nonrecurring items boosting earnings, 20 Nortel, 478 North Fork Bancorporation, 17 Northrop Grumman Corp., Norton-Simon, 11 Notes receivable, discounted, 501–502 Not-for-profit organizations, 980 See also Nonbusiness organizations Novartis AG, Number notation, eliminating entries and, 111 O Object class classifications, 865–866 Offer rates, 633 ONNOs, see Other nongovernment nonbusiness organizations OPEB (other post-employment benefits), 908 Operating income, colleges and universities and, 1000 Operating losses, interim, 753 Operating segments, 736–737 See also Segment reporting Operating synergies, 8, 11 Option-based derivatives, 641 Options, in hedging foreign currency changes, 660–663 Oracle, 14 Order for relief, 547 Organizational unit classifications, 865–866 Other nongovernment nonbusiness organizations (ONNOs), 977 current fund accounting and, 985 expenditure and expense classifications, 983 nonexhaustible assets of, 995 plant funds and, 994–995 Other post-employment benefits (OPEB), 908 Ownership changes, partnerships and, 791–793 Ownership interest: acquisition date determination and, 439–440 and carrying value per share, 455–457 and existing book value per share, 457–461 parent acquires in stages, 438–439 parent sells shares to third parties, 438 parent sells subsidiary stock investment on open market, 443–447, 451–453 subsidiary issuance of additional shares, 439 P Pacific Gas and Electric Co., 549 Pacific Lumber, Pac-man defense, Parent company concept, 25–29, 31, 97 Partial elimination, intercompany profit and, 29 Partial equity method: accounting for investments by, 150–155 downstream sales and, 325–326 implied and book values and, 267–269 intercompany sale of inventory and, 344–345 property/equipment disposal by purchasing affiliate and, 400–401 purchase and sale of subsidiary stock by parent, 447–451 recording investments in subsidiaries and, 170–180, 259–266 separate tax returns and, 209–210 unrealized intercompany profit, 356–357 upstream sales and, 392–400 Partial year reporting alternatives: cost method, 187–189 equity method, 190–192 1051 Index Partnerships See also Partnership liquidation accounting for, 780–788 acquisition of interest by investing assets, 796–800 acquisition of interest by payment to one partner, 793–794 adjustment of income of prior years and, 790 admission of new partner, 793–796 allocation of net income or loss, 784–787 bonuses and, 787 bonus method and, 783, 792–793, 797–799, 802 capital balances and, 785–786 capital interest and, 780 characteristics of, 776–779 death of partner, 803 definition of, 774 dissolution and, 791 drawing and capital accounts, 781–782 financial statement presentation, 790–791 fixed ratio and, 784 general partnerships, 777 goodwill implied by purchase price and, 794–795 goodwill method and, 783, 793, 797–799, 802 incorporation of, 836–837 insufficient income to cover allocation, 787–788 interest allowances and, 786–787 interest on capital investment and, 786–787 joint ventures, 778–779 limited partnerships, 778 ownership changes and, 791–793 partnership agreements, 779–780 partnership equity vs shareholders equity, 780–781 payment to retiring partner, 801–803 profit interest and, 780 reasons for forming, 776 recording changes in, 792–793 recording formation of, 782–784 salaries and interest as an expense and, 788–790 salary allowances and, 786–787 statistics for partnerships in U.S., 774–775 steps for successful, 776 Uniform Partnership Act (UPA), 822 valuation and changes in ownership, 791–792 withdrawal of partner, 800–803 Partnership agreements, 779–780 Partnership equity, 780 Partnership liquidation See also Partnerships advance plan for cash distributions, 831–836 installment liquidation, 827–836 marshaling of assets, 823 preparing a schedule of, 826–827 priorities of partnership and personal creditors, 823–825 safe payment approach and, 828–831 simple liquidation illustrated, 825–827 steps in, 821–823 Payment methods in business combinations, 20–24 Payment period extensions, 544 Pension trust funds, 907–908 Permanent funds, 907, 923–925 Permira Advisors, 238 Personal creditors, partnership liquidation and, 823–825 Phelps Dodge, Pitfalls, avoiding, before deal, 18–20 Plant funds, 990–995 colleges and universities, 990–993 hospitals, 993–994 other nongovernment nonbusiness organizations, 994–995 voluntary health and welfare organizations, 994–995 Pledges and grants, 864, 978–988 PNC Financial Services Group Inc., 97 Poison pills, Pooling of interests, 33, 57 PPE (property, plant, and equipment), 600–601 Preaffiliation profit, 351–352 Premiums, takeover, 17–18 Prepayments, fund accounting and, 884 Presentation methods: IASB vs FASB, 609–610 in segment reporting, 742–743 Present value measurements, 640 Present value tables, 1033–1035 Present value techniques, 479 Price, determining in business combinations, 20–24 Primestar, 13 Private equity firms, 238 Private-purpose trust funds, 908 Product of service disclosures, 742 Profit, intercompany: about, 29 deferred tax consequences of, 353, 356–359, 418 Profit interest, partnership agreements and, 780 Profit margin, 46 Pro forma statements, 63–64 Program revenues, governmental, 942–943 Property: depreciable, 384–392 disposal by purchasing affiliate, 400–401, 409–411 fund accounting and, 863–864 intercompany sale of, 384–392, 401–404, 411 nondepreciable, 381–384 taxes, 863–864 Property, plant, and equipment (PPE), 600–601 Proportional consolidation, 26–27 Proprietary funds, 859–860, 926–929 enterprise funds, 927 governmental, 907 internal service funds, 927–929 Public colleges and universities, financial reporting for, 980–981 Public Company Accounting Oversight Board (PCAOB), 570 Public nonprofit organizations, accounting for, 996 Purchase in-process R&D, 77 Purchases method, expendable fund entities and, 883–884 Purchasing affiliate, 353 Pure endowment funds, 995–996 Push down accounting, 287–292 Put option, 661 Q QIB firms, 620 Quantitative thresholds, operating segments, 737–738 Quasi-reorganization, 553 R R&D, see Research and development Realization and liquidation account, 565–571 Realization through usage, 384–385 Receivables turnover, 48 Recession of 2008, Reciprocity, 186 Reconciliation, segmental data, 745–746 Redemption price, 508 Reform Act, see Bankruptcy Reform Act Remeasurement, foreign currency transactions, 689, 711–712 Rent, intercompany, 411–414 Rent.com, 296 Reorganizations accounting, 554–559 carrying value and, 555 DIP financing and, 556, 562 fair value and, 555–556 grant of equity interest, 555 modification of terms, 554–556 restructuring illustration, 555–559 transfer of assets, 555 Reorganization under Reform Act, 551–562 Replacement cost new, 284 Reportable segments, 736 Reported book value, 28 Reporting currency, 635 Reporting dates, 77 Required supplementary information (RSI), 879 1052 Research and development (R&D): capitalization of, 65–67, 235 expensing of, 238 international differences, 600 purchased in-process, 77 Reserve for inventory, 883–884 Resource outflows, fund accounting and, 864–866 Restricted fund entities, 859 Restructuring: example, 556–559 fresh start accounting, 553–554 troubled debt restructurings, 554–556 Restructuring plans, 77 Retained earnings, see Consolidated retained earnings Return on asset (ROA), 25 Return on equity (ROE), 25 Revco D.S Inc., 13 Revenues: definition of, 34 fund accounting and, 862, 869–872 interim financial reporting and, 749–751 matching expenses to, 36 nongovernment nonbusiness organizations and, 982–983 recognition, 107, 381, 607–609, 863–864 Revenue bonds, 927 Right to dispose, in general partnerships, 777 Rite Aid Corp., 13 Roanoke, Virginia, 977 ROA ratio, 44–45 RSI (required supplementary information), 879 Rule 144A, 620 S Safe payment approach, partnership liquidation and, 828–831 St Jude Medical, 66 Salaries, partnerships and, 786–790 Sales taxes, fund accounting and, 864 SAS, see Statements on Auditing Standards Schedule of partnership realization and liquidation, 826–827 Schering AG, SEC, see Securities and Exchange Commission Secured creditors, bankruptcy and, 548–549 Securities Act of 1934, 616 Securities and Exchange Commission (SEC), 36, 588–594, 614, 616, 703 Security issuance costs, 63 Segment reporting: aggregation criteria and, 737 bases for measurement information and, 741 basic disclosure requirements, 735 determining operating segments, 736–737 enterprisewide disclosures, 742 and future prospects, 737 General Electric example, 758–761 general information and, 739 geographic area disclosures, 742 geographic area reporting, 744–745 interim disclosures, 741–742 International Accounting Standards Board positions on, 746 major customer disclosures, 742, 745 operating profit or loss, 736 presentation methods, 742–743 product or service disclosures, 742 quantitative thresholds and, 737–738 reconciliation of segmental data, 741, 745–746 reportable information to be presented, 739–743 revenue, 736 segment assets information and, 741 segment profit or loss information, 739, 741 seventy-five percent combined revenue test, 739–744 standards of financial accounting for, 734–746 terminology regarding, 736 Selling affiliate, in intercompany sales, 330 Index Separate tax returns: cost method and, 207–208 partial and complete equity methods and, 209–210 tax consequences of, 205–210 undistributed subsidiary income and, 206–209 Serial bonds, 915–917, 934 Service fees, intercompany, 411–414 Service fee revenue, 1000 Settlement rate spot date, 643 Seventy-five percent combined revenue test, 739–744 SFAS, see Statement of Financial Accounting Standards Shareholders equity, 780–781 Sherwin-WIlliams Company, 685 SIC (Standing Interpretation Committee), 589 Significance tests, 738 Silver Lake Partners, 478 Skype Technologies S.A., 213 Sound value, 284 Special purpose entities (SPE), 76 Special revenue funds, 907, 908–909 Speculation, forward contracts and, 645 Spin-offs, Split accounting, intrinsic and time value elements, 663 Sponsored ADRs, 618–619 Spot rates, 633, 644, 705 Sprint, 14 Standing Interpretation Committee (SIC), 589 State and local government See also Fund accounting capital assets and, 930–932 external reporting requirements, 935–936 fiduciary funds, 907–908, 929–930 fund entities, 906–908 generally accepted governmental accounting standards, 905–906 governmental funds, 906–926 government fund balances and government-wide net assets and, 938–939 government fund-based reporting, 936–939 government-wide reporting, 939–944 interfund activity, 945–947 long-term debt and, 932–934 management’s discussion and analysis, 944–945 proprietary funds, 907, 926–929 standards, 906–908 structure of governmental accounting, 906–908 Statement of activities, 942–943 Statement of Affairs, 547, 560–562 Statement of cash flows, 612 Statement of comprehensive income, 35, 610–611 Statements of Financial Accounting Concepts (SFAC), 32 No 2, 978 No 4, 32, 856, 978, 979 No 5, 33–36, 266 No 6, 33, 131, 978 No 7, 32–33 Statements of Financial Accounting Standards (SFAS): No 8, 704–705 No 14, 734, 735 No 21, 734 No 52, 656, 684, 685–686, 705 No 60, No 93, 978 No 109, 80, 130, 207 No 131, 733, 734 No 133, 640 No 141, 55, 57 No 141R, 3, 28–29, 55, 80 No 142, 57 No 144, 60 No 160, 28–29 No 162, 32 No 167, 132–133 No 168, 36, 595 1053 Index Statement of financial position, 612, 613 Statement of net assets, 939–942 Statement of Operations, presentation of bad debt on, 1001 Statement of Position (SOP) 90-7 (AICPA), 553 Statement of Shareholders’ Equity, 697–698 Statements on Auditing Standards (SAS): No 31, 568 No 59, 568 Statutory consolidations, 15 Statutory mergers, 15 Step acquisitions, 77 Stock acquisitions, 16 advantages of, 103 asset acquisitions vs., 14–15 consolidated financial statements and, 103–104 firm valuation and, 21 interim acquisitions, 182–193 investments at date of acquisition, 105 by parent, 439–443 purchasing additional shares, 195 push down accounting and, 287–292 reasons for, 103 recording investments in, 170–180 requirements regarding consolidation of, 102–103 stock exchange ratios, 21 stock-for-stock swaps, 21 subsidiaries and control, 98–102 terminology regarding, 97 treasury stock holdings, 120–121 use of workpapers and, 106–112 Stock dividends: both preferred and common stock outstanding, 508–522 cash dividends vs., 503 consolidating subsidiary with preferred stock outstanding, 511–522 determining equity interest by class, 508–510 difference between cost of investment and book value of interest, 510 issued by subsidiary, 503–508 issued from postacquisition earnings, 506–507 issued from preaquisition earnings, 507–508 Strategic acquisitions, 11 Subsidiary company(-ies), 25 See also Consolidated financial statements; Ownership interest; Stock acquisitions; Stock dividends asset valuation and classification, 104 book value of, 108–109 definition of, 97–98 disposal of depreciable assets, 286–287 implied value of, 108–109 initial investment in, 103–104 as intercompany seller, 329–330, 389–400 issuance of stock by, 453–461 more then one subsidiary company and, 123–125 Subsidiary dividends paid, 194 Sun, 14 Symantec, 380 Synergies: financial, operating, 7–8 T Tables of present values, 1033–1035 Takeover premiums, 17–18 Tax Reform Act of 1986, Tax returns See also Deferred taxes; Income tax consolidated for affiliated companies, 206 filing separate, 205–210 undistributed subsidiary income and, 206–207 Temporal conversion method, 686, 690–692, 698–702, 709–711 Tender offers, Term bonds, 917–918, 934 Term endowment funds, 995–996 Term modification, reorganizations and, 554–556 Texas Commerce Banc-shares Inc., 97 Texas Department of Public Safety, 903 Thomson Reuters, Thornburg Mortgage, 549 Thornwood Associates, Thrifty PayLess Holdings Inc., 13 Time elements, in forward contracts, 643 T-Mobile, 1–2, 14, 438 Total elimination, 29 TPG Capital, 238, 478 Transfer pricing, 736 Translation: exchange rate, 632–634 foreign currency transactions, 711–712 Translation of foreign financial statements: adjustment, 685 analysis of gain or loss, 701–702 current rate method, 686 economies not highly inflationary, 691–693 of financial statements, 684–665 functional currency concept, 685–686 functional currency is local currency, 694–698 functional currency is U.S dollar, 698–702 gain or loss, 685 high inflationary economies, 690–691 methods of, 686–687 objectives of, 685–686 process of, 689–693 temporal method, 686 TransWorld Airlines, 562 Troubled debt restructurings, 554–559 See also Insolvency; Reorganizations accounting Trustees: accounting and reporting, 562–565 liquidations and, 550 Trust funds, 923–925, 929–930 TRW Inc., Two-transaction approach, 639 U Uncertain tax positions, accounting for, 130–132 Underlying value, in hedge accounting, 640 Undistributed subsidiary income: and separate tax returns, 206–209 and unrealized intercompany profit, 418–419 Unfriendly (hostile) combinations, Unica Corp., 234 Uniform CPA Exam, 594 Uniform Partnership Act (UPA), 822 United Kingdom, 486 United States: format differences with United Kingdom, 486 partnerships in (2002 and 2003), 774–775 U.S Department of Justice, 2, 438, 977 U.S dollar, 631, 636, 698–702 U.S GAAP: and FASB codification project, 36–41 IFRS vs., 76–77, 127, 201, 461–462, 589–594, 756 United Technologies Corp., 170 Unlimited liability, in general partnerships, 777 Unrealized intercompany profit, 321, 353, 356–359 Unrecognized foreign currency commitment, 650–653 Unrestricted fund entities, 859 Unsecured creditors, bankruptcy and, 548–549 Unsponsored ADRs, 618 UPA (Uniform Partnership Act), 822 Upstream sales, 320 See also Intercompany sales cost method and, 331–339 noncontrolling interest and, 329–330, 389–392 subsidiary as intercompany seller, 392–400 V Valuation, changes in partnership ownership and, 791–792 Value of the forward contracts, 643 Variable interest entities (VIE), 132–133 1054 Venezuela, 632–633, 691 Verizon Communications, 2, 10 Vertical integration, 11 Vertical mergers, 7–8 VF Corporation, 682 VisionAire Corp., 550 Viva Group, Inc., 296 Vivendi Universal, Voluntary health and welfare organizations, 977 See also Nongovernment nonbusiness organizations expenditure and expense classifications, 983 plant funds and, 994–995 W Wachovia Corp., 97 Wal-Mart Stores, 747 Washington Mutual, 97, 549 Wells Fargo & Co., 97 White knight, White squire, WorIdCom, 2–3, 547, 549 Workpapers: accounting for foreign affiliates and, 707–713 alternate workpaper formats, 203–205 basic eliminating entries, 181 bond investment and, 484–500 cost method and, 161–169 disposal of property and equipment by purchasing affiliate, 409–411 downstream sales, 322–325 Index entry adjustment prior to eliminating, 122 equity method and, 170–180 functional currency is local currency, 694–698 functional currency is U.S dollar, 700 implied value and, 110–120 intercompany balance sheet eliminations, 121 intercompany sales, 340–350, 381–389 interim acquisitions of subsidiary stock, 172–192 investment costs and, 107–114, 248–266, 269–277 more than one subsidiary company, 123–125 preparing consolidated statements using, 106–126 put down basis, 290–292 separate tax returns and, 207–208 stock dividends issued by subsidiary, 504–506 subsidiary as intercompany seller, 392–400 subsidiary with preferred stock outstanding, 511–522 upstream sales, 331–337, 405–409 workpaper-only entries, 110 Workpaper-only entries, 111 X XBRL (eXtensible Business Reporting Language), 592–593 XTO Energy, 14 Y Yahoo, 14 Z Zimbabwe, 691 Z-score model of bankruptcy, 569–571 ... project entered into by the Financial Accounting Standards Board (FASB) in recent years Accounting for business combinations is no exception In the 5th edition of Advanced Accounting, we compare... courses in Accounting and Finance for the Non-Financial Executive and specialized courses for specific businesses Dr Chaney has published articles in The Accounting Review, the Journal of Accounting... Research, the Journal of Public Economics, the Journal of Business, Contemporary Accounting Research, the Journal of Accounting and Economics, and Accounting Horizons He has won three teaching