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TABLE OF CONTENTSPART 1 BUSINESS COMBINATIONS 1

1 Business Combinations Involving the Merger or Consolidation of Net Assets 2

The Business and Economic Incentives for Business Combinations 3

Types of Business Combinations 4

Merger/Consolidation 5

Acquisitions of stock 6

Consolidated financial statements 6

Accounting for Business Combinations 7

The conceptual differences between pooling and purchase 8

The purchase method of accounting for a merger—book and fair market value equal 10

Incidental costs associated with purchase method acquisitions 12

The purchase method of accounting for a merger—purchase price exceeds fair value of net assets acquired 13

Financial Statements in Purchase Combinations 16

Comprehensive Illustration 18

Summary 21

Appendix 1:Accounting for Goodwill 22

Appendix 2:Bargain Purchase Acquisitions 23

The purchase metbod of accounting for a merger—purchase price is less than the book value of net assets acquired 26

Summary 28

Questions 28

Exercises 29

Problems 34

2 Accounting in for Investments in the Common Stock of Affiliates 42

Accounting for Acquisitions of Common Stock 43

Passive investments in common stock 43

Substantial influence investments in common stock 44

Controlled investments in common stock 46

A Comparison of the Cost Method and the Equity Method 47

Equity Method Investments where Cost Exceeds Fair Market Value of Investee's Identifiable Net Assets 49

Changes in ownership percentage of common stock investments 51

Interim acquisitions 52

Summary 54

Appendix:Bargain Purchase Situations 55

Case 1:Investment cost falls between book and fair market value of underlying investee net assets 55

Case 2:Investment cost is less than underlying book ualue 57

Summary 59

Questions 59

Exercises 60

Problems 65

3 Consolidated Balance Sheet on the Date of Acquisition 72

The Concept of Consolidation 73

Consolidation policv—the Criteria for Consolidation 74

Consolidation Theory 77

Proportional consolidation—a bybrid approach to investment reporting 78

Consolidated Balance Sheet at the Date of Acquisition 79

100%-owned subsidiaries—cost and book value are equal 79

Less-than-100%-owned subsidiaries—cost and book value are equal 81

100%-owned subsidiaries—cost is greater than book value 82

Less-than-100%-owned subsidiaries—cost is greater tban book value 85

Financial statement disclosure of noncontrolling interest 86

Comprehensive illustration 87

Summary 90

Appendix 92

Bargain purchase acquisitions of a 100%interest 92

Bargain purchase acquisitions of less than a 100%interest 94

Summary 97

Questions 98

Exercises 98

Problems 103

4 Consolidated Financial Statements Subsequent to Acquisition 112

Effects of Method of Accounting on the Investment in Subsidiary Account 113

Choice of accounting method for subsidiary investments 113

Relationship between the investment account and the subsidiary stockholders'equity under the equity method 114

Formats for Consolidated Financial Statements Worksheets 116

Purchase Method Subsidiaries Accounted for by the Equity Method—Year 1 116

Adjustments for errors and omissions 116

Elimination of intercompany profit and elimination of reciprocal assets and liabilities 117

Elimination of current year equity earnings and intercompany dividends 118

Establisbment of the noncontrolling interest share of consolidated net income 118

Elimination of beginning of year balances of subsidiary stockholders'equity and investment in subsidiary 119

Allocation and amortization of unamortized differential 119

Completion of the Consolidated Statements Worksheet 120

Purchase Method Subsidiaries Accounted for by the Equity Method—Subsequent Years 120

Purchase Method Subsidiaries Accounted for by the Cost Method—Year 1 123

Purchase Method Subsidiaries Accounted for by the Cost Method—Subsequent Years 124

Comprehensive Illustration 127

The allocation schedule 128

The noncontrolling interest adjustment 129

Consolidated statements worksheet—equity method 130

Elimination entries—equity method 130

Consolidated statements worksheet—cost method 133

Summary 135

Questions 137

Exercises 137

Problems 143

5 Intercompany Transactions in Inventories 152

Conceptual Basis for Elimination of Intercompany Accounts 153

Intercompany Transactions in Inventory 153

Cost and Equity Method Issues 154

Sales by parent to subsidiary—the downstream case 155

Sales by subsidiary to parent—the upstream case 156

Elimination Entries 157

Modified equity and cost method situations—downstream sales 158

Modified equity and cost method situations—upstream sales 161

Full equity situations—downstream sales 162

Full equity situations—upstream sales 164

Summary—elimination entries for intercompany profit in inventory 165

Calculating the noncontrolling interest sbare of consolidated net income 167

Comprehensive Illustration 168

Summary 177

Appendix:Estimating the Amount of Intercompany Profit in Inventory 179

Questions 180

Exercises 181

Problems 185

6 Intercompany Transactions in Plant Assets 196

Conceptual Issues Underlying Intercompany Transactions in Plant Assets 197

Cost and Equity Method Issues 197

Downstream sale of land 198

Upstream sale of land with a noncontrolling interest 198

Downstream sale of equipment 199

Upstream sale of equipment with a noncontrolling interest 200

Elimination Entries 200

Modified equity and cost method situations—downstream sales 201

Modified equity and cost method situations—upstream sales with a noncontrolling interest 204

Full equity situations—downstream sales 207

Full equity situations—upstream sales with a noncontrolling interest 210

Calculating the noncontrolling interest share of consolidated net income 213

Comprehensive Illustration 215

Summary 224

Questions 225

Exercises 225

Problems 229

7 Business Combinations Using the Pooling of Interests Method 238

The Conceptual Basis for a Pooling of Interests 239

The Criteria for Use of the Pooling of Interests Method 241

Recording a Pooling Acquisition 242

Incidental costs associated with acquisitions accounted for by the pooling method 246

Less than 100%acquisitions 246

Postacquisition accounting 247

Asset Mergers under the Pooling Method 248

Consolidated Financial Statements under the Pooling Method 249

Consolidated balance sheet at the date of acquisition（100%acquisition） 250

Consolidated balance sheet at the date of acquisition （<100%acquisition） 251

Consolidated financial statements subsequent to the date of acquisition—100%ownership 251

Consolidated financial statements subsequent to the date of acquisition（<100%ownership） 253

Summary 255

Questions 256

Exercises 257

Problems 262

PART 2 FOREIGN EXCHANGE AND TRANSLATION 269

8 International Accounting-Foreign Currency Concepts and Transactions 270

Accounting Problems in International Business 271

Translation of foreign currency financial statements 271

Foreign currency transactions 272

Risk management of foreign exchange assets and liabilities 272

Economic Issues in Import and Export Transactions 273

Foreign exchange assets and liabilities 273

Foreign exchange rates for foreign currency transactions 275

Foreign exchange rates for translation of foreign currency financial statements 276

Accounting for Import and Export Transactions 277

Accountiing for a purchase of inventory 277

Illustration of the sale of inventory 278

Other foreign exchange transactions 279

Managing Foreign Exchange Risk with Forward Exchange Contracts 280

Accounting for hedges on foreign currency assets 281

Accounting for hedges on foreign currency liabilities 284

Accounting for hedges on foreign currency commitments 284

Speculating in Foreign Exchange 289

Hedging Investments in Foreign Currency 291

Summary 292

Questions 292

Exercises 293

Problems 297

9 Translation of Foreign Currency Financial Statements 304

The Need for Translated Financial Statements 305

Translation of the language 305

Translation of the accounting principles 306

Translation of the currency 306

Translation Terminology 307

Functional currency 307

Exchange rates used in translation 308

Translating the Currency in Foreign Financial Statements 309

Historical issues in foreign currency translation 309

Example of translation 311

Example of remeasurement 312

Accounting for an Investment in a Foreign Subsidiary 314

Applying the equity method to a translated financial statement 316

Applying the equity method to a remeasured financial statement 317

Comprehensive Illustration—Consolidation of a Foreign Subsidiary 318

Case of functional currency=local currency 319

Managing foreign exchange risk associated with foreign investments 324

Summary 326

Questions 327

Exercises 327

Problems 331

Index 341