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What is the journal entry to record an acquisition?

When a company acquires more than 50% of another company, US GAAP requires the acquirer to consolidate the acquired company under the consolidation method. The visual below illustrates the 6-step process that can be used to record a journal entry on the acquisition date:

For example, let’s say that Universal acquired 70% of Mustang Education for $280,000. The fair value of Mustang Education at the time of the sale was $400,000. Mustang’s net identifiable assets had a fair market value and a book value of $350,000 and $310,000, respectively. What amount should Universal Inc. apply to goodwill for this transaction?

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  • What is the consolidation method for an equity investment?

    When a company purchases equity securities or invests in another company, there are three ways the investment can be reported: 1) Fair value option, equity method, and consolidation method. If the company purchases more than 50% of the outstanding shares, then the company will be required to “consolidate” the investment. Basically, this means that the investment will become a subsidiary that must be consolidated.

  • How is noncontrolling interest included in equity for the consolidated financial statements?

    Take the book value of the subsidiary and multiply by the noncontrolling interest. Noncontrolling interest is calculating as 100% less the percentage of the acquired entity that is owned by the parent. For example, if the book value of the subsidiary is $100,000 and the noncontrolling interest is 25%, then noncontrolling interest on the balance sheet is $25,000. This would be recorded in stockholders’ equity but separate from the parent’s equity.