CH 3 - Intro To Consolidated Fin Stat

9/12/2018
Advanced Accounting
Thirteenth Edition, Global Edition
Chapter 3
An Introduction to
Consolidated Financial
Statements
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
Intro to Consolidations: Objectives

3.1 Recognize the benefits and limitations of
consolidated financial statements.
3.2 Understand requirements for including a subsidiary
in consolidated financial statements.
3.3 Apply consolidation concepts to parent company
recording of an investment in a subsidiary company
at the date of acquisition.
3.4 Record the fair value of a subsidiary at the date of
acquisition
3.5 Learn the concept of noncontrolling interest when a
parent company acquires less than 100 percent of a
subsidiary's outstanding common stock.
Intro to Consolidations: Objectives (continued)

3.6 Prepare consolidated balance sheets subsequent to
the acquisition date, including preparation of
eliminating entries.
3.7 Amortize the excess of the fair value over the book
value in periods subsequent to the acquisition.
3.8 Apply the concepts underlying preparation of a
consolidated income statement.
3.9 Introduce the concept of push-down accounting.
3.10For the Students: Create an electronic spreadsheet
to prepare a consolidated balance sheet.
1
9/12/2018
3.1: Benefits and Limitations

An Introduction to Consolidated Financial Statements
Business Acquisitions
Business combinations through stock acquisitions
– Acquire controlling interest in voting stock
– More than 50%
– May have control through indirect ownership
Business combination occurs once

– Acquisition of additional subsidiary stock is
simply additional investment.
Consolidated Statements
– Primarily benefit the owners and creditors of the
parent
– Not primarily intended for the noncontrolling
owners nor the subsidiary’s creditors
– Subsidiaries issue separate statements for the
benefit of their owners and creditors.
2
9/12/2018
3.2: Subsidiaries
What is a Subsidiary?
– A corporation becomes a subsidiary when
another corporation acquires controlling interest
in its outstanding voting stock.
– In a 100 percent acquisition, the investee
continues to operate as a separate legal entity.
– Subsidiaries, or affiliates, continue as separate
legal entities and prepare their own financial
reports.
Subsidiaries Are Consolidated

Cases where a subsidiary may be excluded from
consolidation:
– Control doesn’t rest with majority owner
– Joint ventures
– Acquisitions of groups of assets that do not
constitute a business
– Combination between entities under common
control
– Combination of not-for-profit entities or
acquisition of a for-profit company by a not-for-
profit entity
3
9/12/2018
Consolidated Statements (continued)

Prepared by the parent company
Parent discloses
– Consolidation policy [SEC Reg. S-X, Rule 3A-03]
– Any exceptions to consolidation
Fiscal year-end for consolidated entity:
– Use parent's FYE, but
– May include subsidiary statements with FYE
within 3 months of parent's FYE.
● Disclose intervening material events
3.3: Consolidated Balance Sheet at Date

of Acquisition
Pop Example:
Acquisition Cost = Fair Value = Book Value
Son’s Balance Sheet: Pop acquires 100% of Son for $80,
blank
BV=FV which equals the book value and fair
Cash $20 value of the net assets acquired.
Other current assets 30
Cost of acquisition $80
Plant assets, net 80
Total $130 Less 100% book value 80
Accounts payable $30
Excess of cost over book value $0
Other current liabilities 20
Capital stock 60
To consolidate, eliminate Pop's
Retained earnings 20
Investment account and Son’s capital
Total $130 stock and retained earnings.
4
9/12/2018
Balance Sheets
Balance Sheets Separate blank Consolidated
blank Pop Son Pop & Son
Cash $40 $20 $60
Other curr. assets 90 30 120
Plant assets, net 120 80 200
Investment in Son 80 0 0
Total $330 $130 $380
Accounts payable $40 $30 $70
Other curr. liabilities 50 20 70
Capital stock 200 60 200
Retained earnings 40 20 40
Total $330 $130 $380
3.4: Fair Value at Acquisition Date

Cost, Fair Value, and Book Value

Acquisition cost, fair values of identifiable net assets
and book values may differ.
– Allocate excess or deficiency of cost over book
value and determine goodwill, if any.
– When BV = FV
● Cost > BV, excess is goodwill
● Cost < BV, excess is a gain on the bargain
purchase
5
9/12/2018
BV ≠ FV ≠ Cost
Difference between the book value of net assets (BV)
and the fair value of identifiable net assets (FV) is
assigned to the specific assets or liabilities.
– E.g., undervalued or overvalued inventories,
plant assets
– Unrecorded assets (patents) or liabilities
(existing contingencies)
Difference between FV and Cost is goodwill or a gain
on the bargain purchase.
Example: BV ≠ FV but Cost = FV

Phebe acquires 100% of Stone for $310.
Stone BV FV BV = 100 + 145
Cash $40 $40 = $245
Receivables 30 30
FV = 385 – 75
Inventory 50 75
Plant, net 200 240 = $310
Total $320 $385 Cost – FV = $0 goodwill
Liabilities $75 $75
Capital stock 100 blank Cost $310
Retained earnings 145 blank 100% Book value 245
Total $320 blank Excess of cost over BV $65
Phebe and Stone

Allocate to: Amt Amort.
Inventory 100%(+25) 25 1st yr
Plant 100%(+40) 40 10 yrs
Total $65
Phebe's elimination worksheet entry blank blank
Capital stock (-SE) 100 blank

Retained earnings (-SE) 145 blank
Inventory (+A) 25 blank
Plant (+A) 40 blank
Investment in Stone (-A) blank 310
6
9/12/2018
Example: BV ≠ FV and Cost ≠ FV

Petra acquires 100% of Sammy for $530.
Sammy BV FV
Cash $100 $100 BV = 250 + 190 = $440
Receivables 40 40
FV = 580 – 85 = $495
Inventory 250 250
Plant, net 130 190 Cost – FV = $35 goodwill
Total $520 $580
Liabilities $80 $85
Cost $530
Capital stock 250 blank
100% Book value 440
Retained earnings 190 blank
Excess of cost over BV $90
Total $520 blank
Petra and Sammy

Allocate to: Amount Amort.
Plant 60 4 yrs
Liabilities -5 5 yrs
Goodwill 35
Total $90
Petra's elimination worksheet entry Blank Blank

Capital stock (-SE) 250 Blank
Retained earnings (-SE) 190 Blank
Plant (+A) 60 Blank
Goodwill (+A) 35 Blank
Liabilities (+L) Blank 5
Investment in Sammy (-A) Blank 530
Example: BV ≠ FV and Cost ≠ FV (continued)
Prime acquires 100% of Sun for $185.
Sun BV FV BV = 75 + 105 = $180

Cash $10 $10
FV = 250 - 40 = $210
Receivables 30 30
Inventory 80 90 Cost – FV = -$25:
Plant, net 100 120
Gain on bargain purchase
Total $220 $250
Liabilities $40 $40 Cost $185
Capital stock 75 blank 100% BV 180
Retained earnings 105 blank
Excess of cost over
Total $220 blank BV $5
7
9/12/2018
Prime and Sun

Inventory 10 1st yr
Plant, land 20 -
Bargain purchase (25) Gain
Total $5
Prime records the acquisition of Sun assuming a cash

purchase as follows. Note that the investment account is
recorded at its fair value and the bargain purchase is
treated immediately as a gain.
Investment in Sun (+A) 210 blank
Gain on bargain purchase (R, +SE) blank 25
Cash (-A) blank 185
Worksheet Elimination Entry

Unamortized excess equals $30
● $10 for undervalued inventory
● $20 for undervalued land included in plant
assets
Prime’s elimination worksheet entry Blank blank
Unamortized excess (+A) 30 blank
Investment in Sun (-A) blank 210
Inventory (+A) 10 blank
Plant (+A) 20 blank
Unamortized excess (-A) blank 30
Worksheet
blank Prime Sun Adjustments blank Consolidated
blank BV BV DR CR blank
Cash $30 $10 blank blank $40
Receivables 50 30 blank blank 80
Inventory 100 80 10 blank 190
Plant, net 450 100 20 blank 570
Investment in Sun 210 blank blank 210 0
Unamortized excess blank blank 30 30 blank
Total $840 $220 blank blank $880
Liabilities $270 $40 blank blank $310
Capital stock 200 75 75 blank 200
Retained earnings 370 105 105 blank 370
Total $840 $220 blank blank $880
blank blank blank 240 240 blank
8
9/12/2018
3.5: Noncontrolling Interests

Noncontrolling Interest
Parent owns less than 100%
– Noncontrolling interest represents the minority
shareholders.
– Part of stockholders' equity
– Measured at fair value, based on parent's
acquisition price
Parent pays $40,000 for an 85% interest.

– Implied value of the full investee is
$40,000/85% = $47,059.
– Minority share = 15%(47,059) = $7,059
Example: Noncontrolling Interests

Pop acquires 90% of Son for $90 when Son had
capital stock of $200 and retained earnings of $175.
Son's assets and liabilities equaled their fair values.
Cost of 90% of Son $90

Implied value of Son
$100
(90/90%) Allocate to:
Book value of net
identifiable assets- 80
liabilities Goodwill $20
Excess over book value $20
9
9/12/2018
Elimination Entry
Pop's elimination worksheet entry Blank Blank
Capital Stock (-SE) 60 blank
Retained Earnings (-SE) 20 blank
Goodwill (+A) 20 blank
Investment in Son (-A) blank 90
Noncontrolling interest (+SE) blank 10
POP Corporation and Subsidiary Consolidated

Balance Sheet Workpapers January 1, 2016
(In Thousands) (1 of 2)
Adjustments and
blank Eliminations Consolidated Balance
Pop 100% Son Sheet
blank blank blank Debits Credits blank
Assets
Cash $ 20 $ 20 blank blank $ 40
Other current assets 90 30 blank blank 120
Plant assets 150 90 blank blank 240
Accumulated depreciation (30) (10) blank blank (40)
Investment in Son 100 blank blank a 100
Goodwill ____ ____ a 20 Blank 20
Total assets $330 $130 Blank Blank $380

̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿
POP Corporation and Subsidiary Consolidated

Balance Sheet Workpapers January 1, 2016
(In Thousands) (2 of 2)
Adjustments and Consolidated Balance
blank Pop 100% Son Eliminations Sheet
blank blank blank Debits Credits blank
Liabilities and Equity
Accounts payable $ 40 $ 30 blank blank $ 70
Other current liabilities 50 20 blank blank 70
Capital stock―Pop 200 blank blank blank 200

Retained blank
40 blank blank 40
earnings―Pop
Capital stock―Son blank 60 a 60 blank blank
Retained
____ 20 a 20 ____ ____
earnings―Son
Total liabilities and

$330 $130 100 100 $380
stockholders’ equity
̿̿̿̿̿̿̿ ̿̿̿̿̿̿ ̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿
a. To eliminate reciprocal investment and equity accounts and to assign the excess of investment cost (fair value) over book value to
goodwill.
10
9/12/2018
3.6: Consolidated Balance Sheets After

Acquisition
Balance Sheets After Acquisition

In preparing a consolidated balance sheet
– Eliminate the parent's Investment in Subsidiary
– Eliminate the subsidiary's equity accounts
(common stock, retained earnings, etc.)
– Adjust asset and liability accounts for any
unamortized excess balance
– Record goodwill, if any
– Record Noncontrolling Interest, if any
Table: After 1 Year

After 1 year Pop Son blank Pop Son
Cash $54.8 $30 Liabilities $100 $50
Dividends Receivable 18 blank Capital stock 200 90
Other Current Assets 82 56 Retained earnings 72.8 40
Plant Assets, net 110 74 blank blank blank
Investment in Son 108 blank blank blank blank
Total $372.8 $160 Total $372.8 $160
Pop’s elimination worksheet entry blank blank

Goodwill (+A) 20 blank
Investment in Son (90%) (-A) blank 108
Noncontrolling interest (10%) (+SE) blank 12
Dividends Payable (-L) 18 blank
Dividends receivable (-A) blank 18
Accounts Payable (-L) 10 blank
Other current assets (-A) blank 10
11
9/12/2018
Table: After 1 Year (continued)

After 1 year Pop Son Adjustments Consolidated
blank BV BV DR CR blank
Cash $54.8 $30 blank blank $84.8
Dividends Receivable 18 blank blank 18 0
Other Current Assets 82 56 blank 10 128
Plant Assets, Net 110 74 blank blank 184
Investment in Son 108 blank blank 108 0
Goodwill blank blank 20 blank 20
Unamortized excess blank blank 120 120 blank
Total $372.8 $160 blank blank $416.8
Accounts Payable $60 $30 10 blank $80
Dividends Payable blank 20 18 blank 2
Other current liabilities 40 10 blank blank 50
Capital stock 200 60 60 blank 200
Retained earnings 72.8 40 40 blank 72.8
Noncontrolling interest blank blank blank 12 12
Total $372.8 $160 blank blank $416.8
blank blank blank 148 148 blank
Key Balance Sheet Items

– Investment in Subsidiary does not exist on the
consolidated balance sheet.
– Equity on the consolidated balance sheet
consists of the parent's equity plus the
noncontrolling interest.
– Noncontrolling interest is proportional to the
Investment in Subsidiary account when the
equity method is used.
– $12 = $108 x .10/.90
3.7: Amortizations After Acquisition

12
9/12/2018
Unamortized Excess
Excess assigned to assets and liabilities are amortized
according to the account.
Balance sheet Amortization Income statement

account period account
Inventories and Cost of sales and
Generally, 1st year
other current assets other expense
Remaining life at Depreciation and
Buildings,
business amortization
equipment, patents combination expense
Land, copyrights Not amortized blank
Long-term debt Time to maturity Interest expense
Phebe and Stone (continued)

Cost $310 Inventory 25 1st yr
100% BV 245 Plant 40 10 yrs
Excess $65 Total $65
blank Beginning Ending

Current year's
unamortized unamortized
amortization
excess excess
Inventory 25 (25) 0
Plant 40 (4) 36
Total 65 (29) 36
Petra and Sammy (continued)

Cost $530 Plant 60 4 yrs
100% BV 440 Liabilities -5 5 yrs
Excess $90 Goodwill 35 -
Total $90
Beginning Ending
Current year's
blank unamortized unamortized
amortization
excess excess
Plant 60 (15) 45
Liabilities (5) 1 (4)
Goodwill 35 0 35
Total 90 (14) 76
13
9/12/2018
Prime and Sun (continued)

Cost $185 Inventory 10 1st yr
100% BV 180 Plant, land 20 -
Excess $5 Bargain purchase (25) Gain
Total $5
Beginning Ending
Current year's
blank unamortized
amortization
unamortized
excess excess
Inventory 10 (10) 0
Land 20 0 20
Total 30 (10) 20
3.8: Consolidated Income Statements

Comprehensive Example, Data (1 of 3)

Pam acquires 90% of Son on 12/31/2016 for
$10,200 when Son's equity consists of $4,000
common stock, $1,000 other paid in capital, and
$900 retained earnings. On that date Son's
inventories, land, and buildings are understated by
$100, $200, and $1,000, respectively, and its
equipment and notes payable are overstated by
$300 and $100.
14
9/12/2018

Allocate to:
Cost of 90% of Sam $10,200 Inventory $100 1st yr
Land 200 -
Implied value of Sam
10,200/.90 $11,333 Building 1,000 40 yrs
Equipment (300) 5 yrs
Book value
(4000+1000+900) 5,900 Note payable 100 1st yr
Goodwill 4,333 -
Excess over book value $5,433
Total $5,433
blank Unamortized Current Unamortized

excess 1/1/12 amortization excess 12/31/12
Inventory 100 (100) 0
Land 200 0 200
Building 1,000 (25) 975
Equipment (300) 60 (240)
Note payable 100 (100) 0
Goodwill 4,333 0 4,333
Total 5,433 (165) 5,268

blank Pam Son Consol.*
Sales $9,523.50 $2,200.00 $11,723.50
Income from Son 571.50 blank $0.00
Cost of sales (4,000.00) (700.00) (4,800.00)
Depreciation exp - bldg (200.00) (80.00) (305.00)
Depreciation exp - equip (700.00) (360.00) (1,000.00)
Other expense (1,800.00) (120.00) (1,920.00)
Interest expense (300.00) (140.00) (540.00)
Net income $3,095.00 $800.00 blank
Total consolidated income blank blank $3,158.50
Noncontrolling interest share blank blank 63.50
Controlling interest share blank blank $3,095.00
* Cost of sales, building depreciation, and interest expense are
increased by $100, $25, and $100, and equipment depreciation
is $60 lower than the sum of Pam and Son.
Key Income Statement Items

– The Income from Subsidiary account is
eliminated.
– Current period amortizations are included in the
appropriate expense accounts.
– Noncontrolling interest share of net income is
proportional to the Income from Subsidiary
under the equity method.
$571.50 x .10/.90
= $63.50
15
9/12/2018
3.9: Push-Down Accounting

Push-Down Accounting
SEC requirement
– Subsidiary is substantially wholly-owned
(approx. 90%).
– No publicly held debt or preferred stock
Books of the subsidiary are adjusted.

– Assets, including goodwill, and liabilities are
revalued based on acquisition price.
– Retained earnings is replaced by Push-Down
Capital which includes retained earnings and the
valuation adjustments.
16

CH 3 - Intro To Consolidated Fin Stat

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 3 - Intro To Consolidated Fin Stat

Uploaded by

Copyright:

Available Formats

9/12/2018

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Intro to Consolidations: Objectives

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Intro to Consolidations: Objectives (continued)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

3.1: Benefits and Limitations

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Business combination occurs once

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Subsidiaries Are Consolidated

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Consolidated Statements (continued)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

3.3: Consolidated Balance Sheet at Date

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

3.4: Fair Value at Acquisition Date

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Cost, Fair Value, and Book Value

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Example: BV ≠ FV but Cost = FV

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Phebe and Stone

Phebe's elimination worksheet entry blank blank

Capital stock (-SE) 100 blank

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Example: BV ≠ FV and Cost ≠ FV

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Petra and Sammy

Petra's elimination worksheet entry Blank Blank

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Example: BV ≠ FV and Cost ≠ FV (continued)

Prime acquires 100% of Sun for $185.

Sun BV FV BV = 75 + 105 = $180

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Prime and Sun

Prime records the acquisition of Sun assuming a cash

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Worksheet Elimination Entry

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

3.5: Noncontrolling Interests

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Parent pays $40,000 for an 85% interest.

Example: Noncontrolling Interests

Cost of 90% of Son $90

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

POP Corporation and Subsidiary Consolidated

blank blank blank Debits Credits blank

Other current assets 90 30 blank blank 120

Plant assets 150 90 blank blank 240

Accumulated depreciation (30) (10) blank blank (40)

Investment in Son 100 blank blank a 100

Goodwill ____ ____ a 20 Blank 20

Total assets $330 $130 Blank Blank $380

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Goodwill a 20 Blank 20