Nama: Alya Sufi Ikrima

NIM: 041911333248
Kelas: A1-SP
Tugas Pertemuan Keempat - Consolidation Techniques and Procedures

Questions 1-5
1. If a parent in accounting for its subsidiary amortizes patents on its separate books, why
do we include an adjustment for patents amortization in the consolidation workpaper?
➔ A parent amortizes patents from sub investments by adjusting its sub investment
and income accounts. Since patents and patent amortization accounts are not
recorded on parent's books, they are created for cons statement purposes thru
workpaper entries.

2. What is the sequence of workpaper adjustments and eliminations while preparing a

consolidated financial statement?
➔ 1. Adjustments for errors and omissions in the separate parent and subsidiary
statements
2. Adjustments to eliminate intercompany profits and losses
3. Adjustment to eliminate income and dividends from subsidiary and adjust the
investment in subsidiary to its beginning-of-the-period balance
4. Adjustment to record the noncontrolling interest in subsidiary's earnings and
dividends
5. Eliminate reciprocal investment in subsidiary and subsidiary equity balances
6. Record and amortize fair-value differentials (from step 5)
7. Eliminate other reciprocal balances (intercompany receivables and payables,
revenues and expenses, and so on)

3. How are the workpaper procedures for the investment in subsidiary, income from
subsidiary, and subsidiary’s stockholders’ equity accounts alike?
➔ Regardless of the configuration of the workpaper entries, the final result of
adjustments for these items is to eliminate them through workpaper entries. In other
words, the investment in subsidiary, income from subsidiary, and the capital stock,
additional PIC, retained earnings, and other stockholders' equity accounts of the
subsidiary never appear in consolidated financial statements.

4. If a parent uses the equity method but does not amortize the difference between fair
value and book value on its separate books, its net income and retained earnings will
not equal its share of consolidated net income and consolidated retained earnings. How
does this affect consolidation workpaper procedures?
➔ When the parent company does not amortize cost-book value differentials on its
separate books, the parent company's income from subsidiary and investment in
subsidiary accounts are overstated in the year of acquisition. In subsequent years,
the income from the subsidiary, investment in subsidiary, and parent's beginning
 retained earnings will be overstated. The error may be corrected in the working
papers with the following entries:

Year of acquisition:
Income from subsidiary XXX
Investment in subsidiary XXX

Subsequent year:
Income from subsidiary XXX
Retained earnings — parent XXX
Investment in subsidiary XXX

By entering a correcting entry, all other working paper entries are the same as if the
parent provided for amortization on its separate books.
If the errors are not corrected through the working paper entries suggested above,
the entry to eliminate the income from subsidiary in the year of acquisition is
prepared in the usual manner without further complications because neither the
beginning investment nor retained earnings accounts are affected by the omission.
In subsequent years the entry to eliminate income from subsidiary and dividends
from subsidiary will have to be changed to correct the beginning-of-the-period
retained earnings as follows:
Income from subsidiary XXX
Retained earnings — parent XXX
Dividends (subsidiary) XXX
Investment in subsidiary XXX

5. What represents the change in an investment account for a particular period?

➔ Represented by the income of subsidiaries and dividends.

Ex 4-1 General questions

1. A 6. A
2. B 7. D
3. D 8. A
4. B 9. A
5. D 10. B

Ex 4-3 Consolidation with dividends

Anele PLC became a 75 percent-owned subsidiary of Folake PLC in January 2014. In April
and September 2014, Anele PLC declared dividends of $200,000 each. However, the
September dividend has not been paid.
Required: Assume that Folake PLC did not declare any dividend and did not have any
dividends payable in its separate balance sheet during 2014.
 1. What is the amount of dividend that should be reported in the consolidated financial
statement?
2. What is the amount of dividend payable that should appear in the consolidated balance
sheet at December 31, 2014?
Answer:
1. Dividends from subsidiaries in the consolidated financial statements are omitted to
return the investment account of the parent company back to its initial balance and
include NCI accounts on the balance sheet of the consolidated financial statements.
Therefore, the amount of dividends in the consolidated financial statements is only from
the parent company. Since Folake PLC did not declare dividends for the current year,
the amount of dividends reported in the consolidated financial statements is zero.
2. Anele PLC dividends that have not been paid $200,000
75%
Unpaid dividends to Folake PLC $150,000

Annele PLC – Dividend Payable $200,000

Less: Unpaid dividends to Folake PLC $150,000
Dividend Payable in the Consolidated financial statements $50,000

P 4-1 Calculations five years after acquisition

Pam Corporation purchased 75 percent of the outstanding voting stock of Sun Corporation for
$4,800,000 on January 1, 2016. Sun’s stockholders’ equity on this date consisted of the
following (in thousands):
Capital stock, $10 par $2,000
Additional paid-in capital 1,200
Retained earnings December 31, 2015 1,600
Total stockholders’ equity $4,800
The excess fair value of the net assets acquired was assigned 10 percent to undervalued
inventory (sold in 2016), 40 percent to undervalued plant assets with a remaining useful life of
eight years, and 50 percent to goodwill.
Comparative trial balances of Pam Corporation and Sun at December 31, 2020, are as follows
(in thousands):
Pam Sun
Other assets—net $7,530 $5,200
Investment in Sun—75% 4,680 —
Expenses (including cost of sales) 6,370 1,200
Dividends 1,00 400
$19,580 $6,800
 Pam Sun
Capital stock, $10 par $6,000 $2,000
Additional paid-in capital 1,700 1,200
Retained earnings 3,340 1,600
Sales 8,000 2,000
Income from Sun 540 —
$19,580 $6,800
Required: Determine the amounts that would appear in the consolidated financial statements
of Pam Corporation and Subsidiary for each of the following items:
1. Goodwill at December 31, 2020
2. Noncontrolling interest share for 2020
3. Consolidated retained earnings at December 31, 2019
4. Consolidated retained earnings at December 31, 2020
5. Consolidated net income for 2020
6. Noncontrolling interest at December 31, 2019
7. Noncontrolling interest at December 31, 2020
Answer:
1. Goodwill = Excess fair value* x Rate of goodwill
= $1,600,000 x 50%
= $800,000
*Excess fair value = Amount invested/Share in S Corp. - Total Equity of S Corp.
= $4,800,000/75% - $4,800,000
= $6,400,000 - $4,800,000
= $1,600,000
2. Non-controlling interest share = Adjusted income* x S Corporation share
= $720,000*25%
=180,000
*Adjusted Income = (Sales - Expenses) - Excess FV x FA rate/estimated life
= ($2,000,000 - $1,200,000) - $1,600,000 x 40%/8 years
= $800,000 - $640,000/8 years
= $800,000 - $80,000
= $720,000
3. The consolidated retained earnings at December 31, 2019 equal to the operating
retained earnings of P Corporation for the year ending in December 31, 2020.
Therefore, the consolidated retained earnings for December 31, 2019 are $3,340,000.
4. Consolidated retained earnings = R/E + Net income - Dividends paid
December 31, 2020 = $3,340,000 + $2,170,000 - $1,000,000
= $4,510,000
5. Consolidated Net Income
P Corporation sales $8,000,000
S Corporation sales $2,000,000
P Corporation expense ($6,370,000)
S Corporation expense ($1,200,000)
NCI share ($180,000)
Depreciation* ($80,000)
Consolidated Net Income $2,170,000
*Depreciation = Excess fair value x Fixed asset rate
= $1,600,000 x 40%/8 years
= $640,000/8 years
= $80,000
6. Noncontrolling interest at December 31, 2019.
Sun’s stockholders’ equity at book value $4,800,000
Unamortized excess after five years:
Inventory 0
Plant assets ($640,000 - $320,000) $320,000
Goodwill $800,000
Sun’s stockholder’s equity at fair value $5,920,000
25% Sun’s stockholder’s equity at fair value $1,480,000
7. Noncontrolling interest at December 31, 2020.
Sun’s stockholders’ equity at book value $4,800,000
Unamortized excess after five years:
Inventory 0
Plant assets ($640,000 - $400,000) $240,000
Goodwill $800,000
Sun’s stockholder’s equity at fair value $5,840,000