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    Consolidated Financial Statements - expenditures

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    • Case 16-1 Consolidated Financial Statements: Various Issues

    Because of irreconcilable differences of opinion, a dissenting group within the management and board of directors of the Algo Company resigned and formed the Bevo Corporation to purchase a manufacturing division of the Algo Company. After negotiation of the agreement, but just before closing and actual transfer of the property, a minority stockholder of Algo notified Bevo that a prior stockholder's agreement with Algo empowered him to prevent the sale. The minority stockholder's claim was acknowledged by Bevo's board of directors. Bevo's board then organized Casco. Inc. to acquire the minority stockholder's interest in Algo for $75,00O, and Bevo advanced the cash to Casco. Bevo exercised control over Casco as a sub-sidiary corporation with common officers and directors. Casco paid the minority stockholder $75,000 (about twice- the market value of the Algo stock) for his interest in Algo. Bevo then purchased the manufacturing division from Algo.

    a. What expenditures are usually included in the cost of property, plant, and equipment acquired in a purchase?
    i. What are the criteria for determining whether to consolidate the financial statements of Bevo Corporation and Casco, Inc.?
    ii Should the financial statements of Bevo and Casco be consolidated? Discuss.

    b. Assume that unconsolidated financial statements are prepared. Discuss the propriety of treating the $75,000 expenditure in the financial statements of the Bevo as:
    i. An account receivable from Casco.
    ii An investment in Casco.
    iii. Part of the cost of the property, plant, and equipment.
    iv. A loss.

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    Solution Preview

    (a) PPE should initially be measured at cost [IAS16R.15]. Cost is the fair value of consideration given for the asset [IAS16R.6]. This applies equally to assets purchased from a third party and to assets constructed by the entity itself.
    All directly attributable costs necessary to bring the asset to its required working condition should be capitalized [IAS16R.16]. These include external costs such as delivery and installation costs, architects' fees and import duties [IAS16R.16-17]. All costs incurred in identifying specification requirements and in the selection process should be expensed because these costs do not meet the definition of an asset. Where relevant, these costs should include borrowing costs [IAS16R.23].
    Internal costs capitalized should include directly attributable overhead costs where applicable [IAS16R.22] ...

    Solution Summary

    The solution analyzes consolidated financial statements.