Prunty Corp. owns all of the outstanding common stock of Shelly, Inc. On January 1, Year 2, Prunty sells a machine with a carrying value of $30,000 to Shelly for $40,000. Shelly uses straight line depreciation and intends to use the machine for five years. The net adjustments required to compute consolidation net income for Year 2 and Year 3 are:

In the Financial Accounting and Reporting (FAR) section of the CPA exam, Business Combinations and Consolidations are critical topics that focus on how a parent company reports its financial interest in another entity.  1. Business Combinations (ASC 805) A business combination occurs when an acquirer obtains control of one or more businesses.  The Acquisition Method: All business combinations are accounted for using the acquisition method. Key steps include: Identify the Acquirer: The entity that obtains control. Determine the Acquisition Date: The date control is transferred. Recognize... Show more

In the Financial Accounting and Reporting (FAR) section of the CPA exam, Business Combinations and Consolidations are critical topics that focus on how a parent company reports its financial interest in another entity. 

1. Business Combinations (ASC 805)
A business combination occurs when an acquirer obtains control of one or more businesses. 

The Acquisition Method: All business combinations are accounted for using the acquisition method. Key steps include:
Identify the Acquirer: The entity that obtains control.
Determine the Acquisition Date: The date control is transferred.
Recognize and Measure Assets/Liabilities: Acquired assets and liabilities are recorded at Fair Value on the acquisition date.

Calculate Goodwill or Gain:
Goodwill: Excess of the purchase price over the fair value of net identifiable assets.
Bargain Purchase Gain: Occurs when the fair value of net assets exceeds the purchase price. 

2. Consolidations (ASC 810)
Consolidation is the process of combining the financial statements of a parent and its subsidiaries as if they were a single economic entity. 

The "CAR IN BIG" Mnemonic: A common tool for remembers the primary elimination entry at the date of acquisition:
Common Stock (Subsidiary)
Additional Paid-in Capital (Subsidiary)
Retained Earnings (Subsidiary)
Investment in Subsidiary (Parent's book)
Non-controlling Interest (if <100% owned)
Balance Sheet Adjustments (to Fair Value)
Intangible Assets (Identifiable)
Goodwill (Plug)

Consolidation Models:
Voting Interest Entity (VOE): Control is generally based on owning >50% of voting shares.
Variable Interest Entity (VIE): Control is determined by who is the "primary beneficiary" (absorbing most losses or receiving most gains), even without majority voting power. 

3. Key Consolidation Concepts
Intercompany Eliminations: All transactions between the parent and subsidiary (e.g., sales, interest, dividends, inventory profits) must be 100% eliminated to avoid double-counting.
Non-controlling Interest (NCI): The portion of equity in a subsidiary not attributable to the parent. It is reported as a separate component of equity on the consolidated balance sheet.
Consolidated Net Income: Includes 100% of the parent's income and 100% of the subsidiary's income since the date of acquisition. The NCI's share is then subtracted to find the income attributable to the parent. 

4. Comparison of Methods
Feature     Business Combination (Acquisition)    Consolidation
When it occurs    At the point control is acquired.    Ongoing reporting period.
Focus    Recording assets/liabilities at Fair Value.    Eliminating intercompany transactions.
Key Output    Updated balance sheet and Goodwill.    Unified financial statements for the group.

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