 Hello and welcome to the session in which you would look at CPA questions that deals with consolidation. Consolidation is an important topic on the CPA exam. So if you don't know consolidation, don't sit for the exam yet. So if you're a CPA candidate and you are not comfortable with consolidation, most likely you have a CPA review course. That's great. But farhatlectures.com can help you understand this topic a little bit more in depth. I'll explain the material as this is the first time you are looking at it. In contrast to a CPA review course where they assume you already know the material, you would learn the material with me, you will add your knowledge, then you would use your CPA review course, then you will pass the CPA exam. So this is how you would use my material, especially for consolidation. Many schools don't teach consolidation and if they do teach it, they may not do a good job and if they do a good job, you may not have paid attention. So that's why farhatlectures can compensate all those gaps in your education. The risk with me is one month of subscription. The potential return is passing the exam. Are you willing to take one month of subscription risk to find out whether I can help you understand the material better? And if not for anything, take a look at my website to find out how well your university doing on the CPA exam. Now also connect with me on LinkedIn, if you haven't done so, YouTube, Instagram, Facebook, Twitter and Reddit. Let's take a look at this exercise to see how we will approach something like this on the exam day. On January 1st, parent company acquired 30% of subcompany, outstanding stock for 800,000. So they paid 800,000. Year one, the subsidiary had an income of 200,000 and paid dividend of 60,000. So far so good. So 30% means we're using the equity method. On January 1st, year two, parent company acquired an additional 45% of the subcompany for 2,025,000. So be careful, you are at 30%, then it's an additional 45%. So now we already purchased 75% of this company. We are in control. So what happened is we moved from non-controlling to a controlling interest. The fair value of the sub on January 1st, year two was 4.5 million. What is the amount of gain that the parent company should record in year two? So that's the question. That's the question. They could ask us what's the value of the investment at the end of year one. They can ask us different questions here, but they're asking us what should be recorded in year two. So again, the key is if you read the problem carefully, you will notice we went from a 30% interest in the sub to 75. So we went from non-controlling from 30% to 75. Remember, 50% plus will have a control over the company, which we will have control over the company. So this is what we have. We had an equity investment and now we have control. Now we have to make a fair value adjustment. What is the fair value adjustment? It means we have to record the investment at fair value, recording again or a loss in comparison to the prior period. Okay, let's go through the steps. So first, what happened in year one? Well, we purchased the company. We purchased the company for 800,000. This is the original cost of our investment. The company made a profit. The subsidiary made a profit of 200,000. Well, what happened is if they made a profit, now income of 200,000, we're going to take 200,000 times 30%. And that's going to give us, we're going to add $60,000 to our investment. This is for year one. Then the subsidiary paid $200,000 in dividend. We're going to get $60,000 in dividend, $60,000 in dividend. We're going to get 30% of that, which is 18,000. Well, that's, we're going to reduce our investment by 18,000. So by the end of the year, our investment is worth $242,000. They could ask you this question. What's the value of your investment at the end of year one? Okay, so this is the balance end of year one. They're asking you what amount of the gain should we record in year two? That's the question. So what happened from year one to year two? The nature of the investment have changed, went from non-controlling to a controlling interest. Now we have to use the fair value. What does that mean? It means we have to take the fair value of the subsidiary company, $4.5 million. This is what they tell us the fair value multiplied by 30%. Now our investment would be recorded at 30%. And let's do so. Whoops, let's go back here. Let's get the calculator and take $4.5 million times 0.3. That's $1,350,000. Let's keep this calculator. We might need it. $1,350,000. So this is the value of the investment. When we purchase the investment, now we have a controlling interest. Our interest, it should be basically the value is $1,350,000. The question is what do we need to do to go from $842,000 to $1,350,000. There's a difference here. And obviously we have a gain. Obviously we have a gain. So we have to adjust our investment to that gain. And what's the amount of the gain? It's the difference between them. And if we take $1,350,000 minus $842,000, we'll give us $508,000. This gain could be a gain, could be a loss. This gain will have to be adjusted as a fair value adjustment. So basically what amount of the gain should record $508,000, and the answer is $D as in David. So this is how we come up with $508,000. So they could ask you, what is the amount of the balance at the end of the year? What's the balance of January 1st? So you have to be careful how you approach these problems. And this is why forhatlectures.com, I can help you understand consolidation. If I can help you on any topic, consolidation governmental accounting is my specialty, as well as other things. But consolidation is many students use me for consolidation, if not for anything, if you don't benefit anything from my subscription, except consolidation, it's worth it. Good luck, study hard, consider subscribing, and stay safe.