The Bond FairValue Method is appropriate if one of the following occurs:
1. The firm does not intend to hold the bond until maturity.
2. The firm cannot afford to hold the bond until maturity.
Note: this model assumes the bonds purchased were issued on the first of the month.
7.9. BOND FAIRVALUE METHOD 117
7.9.1 Bond Available For Sale
securityBond Available For Salesecurityis a set of Asset accounts. It is easiest to use a new account for each bond purchased, then sum them to calculate Bond Securities Available For Sale.
Let n = the number of bonds available for sale.
Bond Securities Available For Sale =Pn
i=1Bond Available For Salei
7.9.2 Bond Valuation Allowance
securityBond Valuation Allowancesecurity is a set of contra/adjunct-Bond Available For Salesecurity(7.9.1) accounts. Each account is used to either increase or decrease the bond’s book value to equal the market value.
Let n = the number of bond valuation allowances with a debit balance.
Bond Valuation Allowance Total Debit Amount =Pn
i=1Bond Valuation Allowancei Debit Balance Let n = the number of bonds valuation allowances with a credit balance.
Bond Valuation Allowance Total Credit Amount =Pn
i=1Bond Valuation Allowancei Credit Balance
7.9.3 Bonds Available For Sale at Market Value
Report Bonds Available For Sale at Market Value as an Asset on the Balance Sheet.
Bonds Available For Sale at Market Value = Bond Securities Available For Sale (7.9.1) +
Bond Valuation Allowance Total Debit Amount (7.9.2) – Bond Valuation Allowance Total Credit Amount (7.9.2)
7.9.4 Bond Available For Sale: Purchase
Debit Credit
XX/XX/XXXX Bond Available For Salesecurity (7.9.1) Bond Purchase Cost (7.7.1)
Cash Bond Purchase Cost (7.7.1)
7.9.5 Bond Available For Sale: Interest and Amortization Journal Entry
Calculate the Bond Interest Receivable (7.7.10), Bond Interest Revenue Amount (7.7.11), and the Bond Amortization Amount (7.7.12).
Journal Entry, If Premium/(Discount) (7.7.9) < 0
Debit Credit
XX/XX/XXXX Interest Receivable Receivable Amount (7.7.10) Bond Available For Salesecurity (7.8.1) Amortization Amount (7.7.12)
Interest Revenue Revenue Amount (7.7.11)
Journal Entry, If Premium/(Discount) (7.7.9) > 0
Debit Credit
XX/XX/XXXX Interest Receivable Receivable Amount (7.7.10)
Interest Revenue Revenue Amount (7.7.11)
Bond Available For Salesecurity (7.8.1) Amortization Amount (7.7.12)
7.9.6 Interest Cash Received
Debit Credit XX/XX/XXXX Cash Semi-Annual Interest Receivable Amount (7.7.7)
Interest Receivable (7.7.7)
7.9.7 Bond Available For Sale: Marked-To-Market Adjustment
Bonds available for sale must be reported at market value. The Bond Valuation Allowancesecurity (7.9.2) account is used to either increase or decrease the bond’s book value to equal market value.
7.9.8 Bond Available For Sale: Book Value
If Bond Valuation Allowancesecurity (7.9.2) has a zero balance:
Bond Book Value = Bond Available For Salesecurity (7.9.1) Balance If Bond Valuation Allowancesecurity (7.9.2) has a debit balance:
Bond Book Value = Bond Available For Salesecurity (7.9.1) Balance + Bond Valuation Allowancesecurity Debit Balance If Bond Valuation Allowancesecurity (7.9.2) has a credit balance:
Bond Book Value = Bond Available For Salesecurity (7.9.1) Balance – Bond Valuation Allowancesecurity Credit Balance
7.9.9 Bond Available For Sale: Adjustment
Bond Available For Sale Adjustment = Bond Fair Valuesecurity – Bond Book Value (7.9.8) If Bond Available For Sale Adjustment > 0 then:
Debit Credit 12/31/XXXX Bond Valuation Allowancesecurity (7.9.2) (7.9.9)
Unrealized Holding Gain/Loss—Equitysecurity (7.4.2) (7.9.9) If Bond Available For Sale Adjustment < 0 then:
Debit Credit 12/31/XXXX Unrealized Holding Gain/Loss—Equitysecurity (7.4.2) (7.9.9)
Bond Valulation Allowancesecurity (7.9.2) (7.9.9)
7.9.10 Bond Available For Sale: Gain or (Loss) on Sale or Redemption
Gain or (Loss) on Sale = Proceeds – Bond Book Value (7.9.8)
If Gain or (Loss) on Sale > 0 and Unrealized Holding Gain/Loss—Equitysecurity has a debit balance:
Debit Credit
XX/XX/XXXX Cash Proceeds
Bond Valution Allowancesecurity (7.9.2) Balance
Gain On Sale of Securities (7.9.10)
Bond Available For Salesecurity (7.9.1) Balance
Unrealized Holding Gain/Loss—Equitysecurity (7.4.2) Balance
If Gain or (Loss) on Sale > 0 and Unrealized Holding Gain/Loss—Equitysecurity has a credit balance:
Debit Credit
XX/XX/XXXX Cash Proceeds
Unrealized Holding Gain/Loss—Equitysecurity (7.4.2) Balance
Bond Available For Salesecurity (7.9.1) Balance
Bond Valution Allowancesecurity (7.9.2) Balance
Gain On Sale of Securities (7.9.10)
If Gain or (Loss) on Sale < 0 and Unrealized Holding Gain/Loss—Equitysecurity has a debit balance:
Debit Credit
XX/XX/XXXX Cash Proceeds
Loss On Sale of Securities (7.9.10)
Bond Valution Allowancesecurity (7.9.2) Balance
Bond Available For Salesecurity (7.9.1) Balance
Unrealized Holding Gain/Loss—Equitysecurity (7.4.2) Balance
If Gain or (Loss) on Sale < 0 and Unrealized Holding Gain/Loss—Equitysecurity has a credit balance:
Debit Credit
XX/XX/XXXX Cash Proceeds
Loss On Sale of Securities (7.9.10)
Unrealized Holding Gain/Loss—Equitysecurity (7.4.2) Balance
Bond Available For Salesecurity (7.9.1) Balance
Bond Valution Allowancesecurity (7.9.2) Balance
Chapter 8
Consolidation Method
The Consolidation Method is used when a Parent/Subsidiary Consolidation (8.1.9) is formed as a result of the acquirer gaining more than 50% of the acquiree’s voting shares or more than 50% participation in the acquiree’s Board of Directors.
8.1 Consolidation Overview
8.1.1 Business Combination
A Business Combination is when two (or more) firms join together and operate as either one entity or related entities.
If the acquiree retains its own identity, then a Parent/Subsidiary Consolidation (8.1.9) relationship is formed, with the acquirer gaining control of the acquiree’s direction and/or management.
8.1.2 Statutory Combination
A Statutory Combination is a Business Combination (8.1.1) in which either the acquiree or both firms disappear. These combinations are called statutory because state statutes control the creation or dissolution of corporations.
8.1.3 Statutory Merger
A Statutory Merger is a Statutory Combination (8.1.2) in which the acquiree disappears.
8.1.4 Statutory Merger Shares to Issue
If a Statutory Merger (8.1.3) occurs and the acquirer’s consideration is Unissued Shares (5.1.1), then how many acquirer’s shares should be issued to the owners of the acquiree?
Acquiree Ownership Percent = Acquiree Market Capitalization
Acquiree Market Capitalization + Acquirer Market Capitalization Acquiree Common Shares Received = Acquiree Ownership Percent ×
(Acquirer Common Shares Outstanding + Acquiree Common Shares Received) Acquiree Common Shares Received = (Acquiree Ownership Percent × Acquirer Common Shares Outstanding) +
(Acquiree Ownership Percent × Acquiree Common Shares Received) Acquiree Common Shares Received – (Acquiree Ownership Percent × Acquiree Common Shares Received) =
(Acquiree Ownership Percent × Acquirer Common Shares Outstanding) Acquiree Common Shares Received × (1 – Acquiree Ownership Percent) =
(Acquiree Ownership Percent × Acquirer Common Shares Outstanding)
Acquiree Common Shares Received = Acquiree Ownership Percent × Acquirer Common Shares Outstanding 1 - Acquiree Ownership Percent
8.1.5 Statutory Consolidation
A Statutory Consolidation is a Statutory Combination (8.1.2) in which both firms disappear and a new firm appears.
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8.1.6 Per Share Market Value of Consolidated
If a Business Combination (8.1.1) is a Statutory Consolidation (8.1.5), then the Per Share Market Value of the Consolidated Entity can be estimated to be:
Per Share Market Value of Consolidated = Acquiree Market Capitalization + Acquirer Market Capitalization Consolidated Shares Issued
8.1.7 Acquiree Consolidated Shared
If a Business Combination (8.1.1) is a Statutory Consolidation (8.1.5), then the number of shares the acquiree stockholders’
can expect is:
Acquiree Consolidated Shares = Acquiree Market Capitalization
Per Share Market Value of Consolidated (8.1.6)
8.1.8 Acquirer Consolidated Shared
If a Business Combination (8.1.1) is a Statutory Consolidation (8.1.5), then the number of shares the acquirer stockholders’
can expect is:
Acquirer Consolidated Shares = Acquirer Market Capitalization
Per Share Market Value of Consolidated (8.1.6)
8.1.9 Parent/Subsidiary Consolidation
If a Business Combination (8.1.1) results in the acquirer purchasing the acquiree and the acquiree remains a viable entity, then a Parent/Subsidiary Consolidation has formed. In a Parent/Subsidiary Consolidation, the Consolidation Method (8) of accounting is required. Note: a Parent/Subsidiary Consolidation differs from a Statutory Combination (8.1.2).
8.1.10 Exchange Ratio
Exchange Ratio = Shares Acquirer Forfeits
One Share Acquiree = Per Share Market Value of Acquiree Per Share Market Value of Acquirer
8.1.11 Stock Consideration Shares Acquirer Issues
If the consideration the acquirer is providing in a Business Combination (8.1.1) is common stock, then the number of new shares to issue is calculated as follows:
Stock Consideration Shares Acquirer Issues = Acquiree Shares Outstanding × Exchange Ratio (8.1.10)
8.1.12 Stock Consideration Stock Cost
If the consideration the acquirer is providing in a Business Combination (8.1.1) is common stock, then the Stock Cost is calculated as follows:
Stock Consideration Stock Cost = Stock Consideration Shares Acquirer Issues (8.1.11) × Per Share Market Value of Acquirer