 Hello and welcome to this session in which we would look at CPA exam questions that deals with consolidation, post date of acquisition. This topic is very important on the CPA exam consolidation in general, so you want to be very comfortable with this topic before sitting for the CPA exam. Here's why. Because on the exam day, they might give you what I would consider a simple question and we're going to get to this question in a moment. Let's assume you get this question wrong. From the AI CPA perspective, this question is easy because they have data that shows 80 to 90% of the students get this question right and you got it wrong. What does that mean? It means you as a candidate don't understand basic consolidation. Then they might start to ask you additional questions to make sure that you don't understand consolidation and as a result, you will be heading toward a grade below 75. Simply put, every topic on the exam is important, so you cannot skip a topic or know it halfway through or almost know it, so you want to be very confident. Therefore, if you are preparing for the CPA exam or if you are an accounting student for that matter, you could visit my website, farhatlectures.com, for additional resources, lectures, exercises, true, false, multiple choice CPA questions, whether you are taken backer, Roger, Glyme, or Wiley. I don't replace your CPA courses. You keep those. What I can be, I can be a useful addition to those courses by helping you add 10 to 15 points on your exam. How so? I can help you understand the material better. The CPA review course reviewed the material with you. I will teach you the material from scratch. I don't assume anything. And here's my offer to you. Here's what I'm offering you and here's your risk. If you subscribe for one month for $30, you may not like the system. You know, this is really useless. You regret it. Guess what? You lost $30. That's your max loss. What is your max gain? Passing the CPA exam. Are you willing to take a chance? Give it a shot. See if I can understand the material better. Maybe Wiley, Roger, Glyme, they're moving a little bit fast. I need some more information. I need to know the theory behind the concept. Check for hot lectures.com. And if not for anything, check out my website to find out how well is your university doing on the CPA exam in terms of grade average. Also I have resources for other courses, accounting, finance, tax audit. Please connect with me only then if you haven't done so and review my student recommendation. When the student write me a recommendation, you can see it under recommendation. See how they used my system to pass the exam. Please like this recording on YouTube and share it. Connect with me on Instagram and Facebook. Let's take a look at the first question. Basically because when there's a lot of numbers, read the question first. The 2020 total access amortization of fair value allocation is calculated as what? So they're looking for access amortization. So that's what you are looking for. Do you understand what access amortization is? Access amortization occurs when one company buys another company and they pay more for that company for various reasons, maybe because their assets are undervalued because they had an intangible asset that did not exist on the books. As a result, what's going to happen once we buy this company, we're going to have what we called access amortization. That's the basic idea. But let's go ahead and review the question to see how it works. On January 1st, Becker paid $1,160,000 to acquire Roger. Roger maintained separate incorporation. Becker used the equity method to account for the investment. The following information is available for Roger's asset liabilities and stockholders equity. So we have the book value and we have the fair value. So now we're going to compare each. Now I'm going to go through this problem, the long method, then at the end I will show you what you should do on the exam day. But I'm going to go through it through the long method. Current assets, $130,000, fair value, $130,000. Land is $75,000. Book value, fair value is $193,000. Usually, usually, for example, land, just kind of so you understand the idea why. Usually land, it will be reported on the books for less than its fair value because usually, if they usually land goes up, usually it's not always true. And what happened when you buy a land, it's always reported at historical cost. Therefore, when you come up with fair value, usually it will be valued at more. Therefore, notice it has more value. Building 20 years, same thing with building. Usually building increase in value. The fair value is $276,000. Equipment, a 10-year equipment, $540,000. The value is $580,000. Usually equipment, it will go down in value. Think about it. If you have a piece of equipment and you are using this piece of equipment, as you use it, it actually lose fair market value. In contrast to a building and land, they usually maintain their value or they increase in value. So this is what we have. Then we have current liabilities equal to each other. Long-term liabilities equal to each other. Now, in the real world, liabilities could differ. Not in the real world. Also, on the exam, they could differ. But here, they're not differ. Common stock, additional retained, additional paid in capital and retained earning. So what are we looking for? Well, we are also giving that net income is $134,000. Dividend is $51,000. Really, this is, I don't need any of this. All what I'm being asked is the access amortization. So I have to hone. I have to zoom in real quick if I understand my problem. If I understand what I'm being asked, real quick, you just zoom in to what you need to know. Okay. Let's start. You're looking for the accounts that differ. Why? Because somehow you paid more because of these account differ. We have three accounts that differ. Let's look at them. We have land. We have building and we have equipment. Those are the accounts that are going to result in access amortization. Since you identify the big idea, you always take land out because land, okay, I understand we're going to pay more for the land. Now the land is $193,000, but land is not depreciable. Land is not amortized. Land, we don't expense land. Therefore, really, we don't account for land. Again, why? Because land, we don't, although it's higher, let's think about it. We bought the land. We bought the land from them separately. We paid $193,000. We don't do anything with this land. We keep it at $193,000. However, when we bought the building and the equipment, and these are the accounts that deal with this question, building and equipment. Notice what happened. For the building, there is an access of $26,000. In other words, if we purchase the building from them, we would have, if we purchase the building separately, think about it, if we purchase the building separately, we would have paid $276,000, which is $26,000 more than what they have on the books. If we purchase the equipment from them, we would have paid $518,000. We would pay the fair value, and on their books is $540,000. Therefore, we would have paid $12,000 less. So what does that mean? Why am I breaking this into a separate asset? Because if you think about this problem as a separate asset, it's easier for you to understand the big picture. Because you're buying the building and you're paying more for the building, $26,000 more, what's going to happen is now you are going to increase your depreciation, increase your depreciation. What do I mean by that? Well, $26,000. Now, this additional $26,000, I'm going to amortize it over 20 years. So if I take $26,000 divided by 20 years, that's going to give me the excess amortization. So I'm going to divide this by 20, and this is a negative. I'm going to divide this by 10. So let's see. Let me just, my calculator is not working. Give me one moment, please. Let's use the computer calculator this way. You can see what I'm doing simultaneously. So if I look at $26,000 divided by 20 years, that's the remaining life. And that's going to give me $1,300. So I'm going to have for the next 20 years an additional depreciation of $1,300. And let's take a look at the building. The building is 540 minus 518. That's not 12. That's 22, actually. 22 divided by 10, that's going to give me negative $2,200. What does that mean? What does negative mean? Well, because I purchased this equipment. On their books, they have it at 540. I purchased the company. When I purchased the company, think of it as I purchased that equipment separately. On my books, it becomes recorded at 518. And as a result, it has a lower value. As a result, it's going to have a lower depreciation. Therefore, overall, the net, because of the building, I'm going to increase my depreciation because of the equipment. I'm going to reduce my depreciation. Therefore, I'm going to have a net savings. Net savings, I'm going to put that in quote, net savings. There is no savings here. Simply put, my depreciation overall, so at the end of the every year, I'm going to have to reduce my depreciation at least for the first 10 years by 900. Then eventually year 1112, I will have only the 1,300 imply. But for now, they're asking us, what's the total access amortization? It's 900 and it's negative 900. Notice it's negative. Simply put, my depreciation, it's going to go down for at least the first 10 years by $900 as a result of this purchase. Why? Because I purchase assets that are less than their book value. Less than their book value means when I depreciate them, I'm going to have less depreciation than the original company. But when I consolidate, I consolidate everything. So when I consolidate, I consolidate this asset at 540, but I will make the adjustment when I book the depreciation to reduce it. So this is the idea. So simply put, on the exam, if you are being asked, those are the two accounts that deal with access amortization. And you will perform this computation real quick. OK, I went through all of this to explain the big idea. To simply put, you're going to have a reduction or a savings and depreciation for the next 10 years. Why do I say the next 10 years? Because the equipment after 10 years, it will go away. The effect of the equipment will go away. And year 11 through year 20, the building will stay there. And I will start to increase every year to my depreciation 1,300. This is beyond the scope of this question, but it's good to know. Let's take a look at this question, which is related to the prior question. Same information, except what's the balance in Becker's investment in the subsidiary account at the end of 2021? Simply put, what is the balance of the investment? That's basically what we are asking for. What's the balance of the investment in Becker's account? So what's Roger's balance? Well, when we purchased the company initially, we paid $1,160,000. We paid $1,160,000. Sorry. So this is investment and Roger. And we paid $1,160,000. Excellent. Then Roger earned $134,000 of income. That's going to increase our income by $134,000, because we consolidate. Roger paid dividend of $51,000. We're going to reduce the dividend by $51,000. So let's take a look at this and see what we are at this point. We have $1,160,000 plus $134,000 minus $51,000. And the answer here is $1,243,000. And one of the answers is $1,243,000. And I hope you're saying, Professor Farhad, hold on. Don't keep going. Yes, I'm going to keep going, of course. Now, if this is all we are giving, but notice this information here. Remember what we did in the prior problem? In the prior problem, in the prior problem, we noticed that we had access amortization. Actually, it was negative access amortization. Remember in the prior problem, we said every year what we have to do, we have to reduce, we have. This is what Roger reported in their income. That's fine. That's what Roger reported in that income. That's fine. But really, when we consolidate, we have to reduce depreciation. The reason I say depreciation, because both of these accounts are depreciable, we have to reduce depreciation by how much? By $900. So if we reduce our depreciation by $900, our net income will go up by $900. Therefore, we're going to have to add $900. Now the balance, now we have the right balance. It's $1,243,900, and the answer is D. So notice answer C is there to confuse you. Of course, it's there. Now I doubt it, not I doubt it. It's, remember it this way. It's not likely that you will get a multiple choice on the exam like this. Not likely as a multiple choice. But you might get this in the form of a simulation. But multiple, because it takes a lot, there's a lot of, quite a bit of computation. Simply put, we have, we already computed this $900 already. But if you have to do this $900 here separately then add income, deduct dividend, it may take a little bit of time. It's not likely. I'm not saying it doesn't happen, not likely. The CPA exam questions are presented more like something like this. I mean, they do come with numbers, but they are cleaner, cleaner, not like what we looked earlier. So this will be like maybe one of the first question you'll be asked about consolidation. Which one of the following account would not appear in the consolidated, would not appear in the consolidated at the first physical period of the combinations? When you combine the two companies, which account would not appear? So if you don't know this question, I would say you're not ready to take your exam yet. What does that mean? Go to farhatlectures.com and start with your advanced accounting course lectures, right? Of course. So which account will not appear when you combine the two financial statements? Would good will appear? Sure. If you did consolidation, good will might arise and it might appear on the financial statements. Of course it will. Equipment, of course. If you either have equipment or they have equipment and if there is equipment, it will appear on the financial statements. Investment in subsidiary. Investment in subsidiary. Would that appear? No, here's why. When you combine the financial statements, when you combine, when you think about the concept of combining, what am I combining? I'm combining my cash with their cash. I'm combining my supplies with their supplies, my equipment with their equipment, my liabilities with their libraries. And for all these assets and liabilities that I'm combining, I paid the price. I made an investment to buy those assets. Now, once I combine those assets, I cannot keep the assets and the liabilities, the new assets and liabilities, and keep the investment account. Then I'm accounting for the same thing twice. Therefore, when I combine, I take out the investment in subsidiary. So when I combine, the investment in subsidiary account is eliminated. Therefore, this account will not appear. Would common stock appear? Sure, the common stock will appear. And to be more specific, only the common stock of the, so just wanna make sure of the parent company. The common stock of the subsidiary will be gone as well because I purchased their common stock when I purchased my investment, okay? So when I purchased my investment, so when I purchased their assets and liabilities, simply put, assets minus liabilities equal to their common stock. So if I purchased their assets and I purchased their liabilities, I technically purchased their common stock and paid in capital and all that other stuff in the equity section. This is another question or you might see a question like this. Now this question, if you look at it, oh my God, too many years, too many numbers. Let's read it and see how easy this question is on the consolidated financial statement. And you will, like a question like this, you might see it on the exam. And let me tell you something. If you see a lot of numbers in the question, it means the question is easy. They're trying to test your basic knowledge. They're trying to test your basic knowledge. On the consolidated financial statement, what amount should be shown for the consolidated dividend? That's what they're saying. So you're consolidating two companies. What amount should be shown in the consolidated dividend? Well, immediately, immediately, immediately, you should know this before sitting for the exam. The only dividend will show on the consolidated financial statement is the parent company dividend. This is what I just told you right here. I told you here then, when you consolidate, all the equity is gone and simply put, in a sense, the dividend is part of equity. It's a reduction in equity, part of equity. So all the equity and equity-related account are gone on the consolidated. Okay, let's, now knowing this, even I don't have to read the question, I can tell you the answer is A. But let's read the question. While you paid 2.8 million to acquire all the common stock of Glym on January 1st, the reported earning, Glym reported earning of 512 and paid dividend of 160. The amortization of allocation related to the investment, the amortization amount was 280. While the net income that included in the investment was 3,310,000, and it paid dividend of 950. I apologize, now I'm glad I read the question. What amount that should have been shown for consolidated dividend? And the answer is only the parent company. What I meant to say zero, it means we don't show anything from the subsidiary. So the answer is 950, only parent. So simply put, only parent. This is what I meant to say, but I selected zero. Zero means no sub-dividend. Sub-dividend will not show on the consolidated financial statement. Only the parent companies. When you consolidate, the only dividend you would report on the consolidated financial statement is the parent company. Only common stock for that matter. Only equity, only equity. Like common stock, APIC, those are all the only the parent, just like dividend. So I made a small mistake here, but that's fine. You really learn from my mistakes so this way you don't make those mistakes. Only the parent company. As always, at the end of this recording, I'm gonna ask you to like it, share it, and remind you again to visit my website, farhatlectures.com for additional resources. Whether you are taking any of these review courses or not, it's irrelevant. I can be an addition. I can be a useful addition to your CPA course. Check me out. Your risk is limited, $30 canceled. If you don't like, if you like, of course you can keep. And I like if you keep, it will benefit you. It will benefit me. It will benefit everyone. We have more CPAs in the real world. Study hard, good luck, and most importantly, stay safe.