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44
Consolidated Financial
Statements After Acquisition

Advanced Accounting, Fifth Edition


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Learning
Learning Objectives
Objectives

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1.

Describe the accounting treatment required under current GAAP for varying levels of
influence or control by investors.

2.

Prepare journal entries on the parents books to account for an investment using the
cost method, the partial equity method, and the complete equity method.

3.

Understand the use of the workpaper in preparing consolidated financial statements.

4.

Prepare a schedule for the computation and allocation of the difference between
implied and book values.

5.

Prepare the workpaper eliminating entries for the year of acquisition (and subsequent
years) for the cost and equity methods.

6.

Describe two alternative methods to account for interim acquisitions of subsidiary


stock at the end of the first year.

7.

Explain how the consolidated statement of cash flows differs from a single firms
statement of cash flows.

8.

Understand how the reporting of an acquisition on the consolidated statement of cash


flows differs when stock is issued rather than cash.

9.

Describe some of the differences between U.S. GAAP and IFRS in accounting for
equity investments.

Investments
Investments in
in Stock
Stock
Investments in voting stock may be consolidated, or
separately reported at
cost,
fair value, or
equity.

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4-4

Accounting
Accounting for
for Investments
Investments by
by the
the Cost,
Cost,
Partial
Partial Equity,
Equity, and
and Complete
Complete Equity
Equity Methods
Methods
Ownership Percentages

0 --------------20% ------------ 50% -------------- 100%

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4-5

No significant
influence

Significant
influence
(no control)

Effective
control

Investment
valued using
the cost
method but
with
adjustments
to fair value.

Investment
valued using
Equity
Method

Investment
valued using Cost
Method or Equity
Method
(investment
eliminated in
Consolidation)

LO 1 Varying levels of ownership are accounted for differently.

Accounting
Accounting for
for Investments
Investments by
by the
the Cost,
Cost,
Partial
Partial Equity,
Equity, and
and Complete
Complete Equity
Equity Methods
Methods
Consolidated financial statements will be identical,
regardless of method used.
However, if the parent issues parent-only financial
statements, the complete equity method should be
used for investees over which the parent has either
significant influence or effective control.

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4-6

LO 1 Varying levels of ownership are accounted for differently.

Accounting
Accounting for
for Investments
Investments by
by the
the Cost
Cost Method
Method
E4-1: Percy Company purchased 80% of the outstanding
voting shares of Song Company at the beginning of 2009 for
$387,000. At the time of purchase, Song Companys total
stockholders equity amounted to $475,000. Income and
dividend distributions for Song Company from 2009 through
2010 are as follows:

Required: Prepare journal entries for Percy Company from


the date of purchase through 2011 to account for its
investment in Song Company under each of the following
assumptions:
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4-7

LO 2 Journal entries for Parent using cost method.

Accounting
Accounting for
for Investments
Investments by
by the
the Cost
Cost Method
Method
E4-1: A. Percy Company uses the cost method to record its
investment.

2009

Investment in Song

387,000

Cash

387,000

Cash

20,000

Dividend income (.8 x $25,000)

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4-8

20,000

LO 2 Journal entries for Parent using cost method.

Accounting
Accounting for
for Investments
Investments by
by the
the Cost
Cost Method
Method
E4-1: A. Percy Company uses the cost method to record its
investment.

2010

Cash

40,000

Dividend income (.8 x $50,000)


2011

Cash

40,000

28,000

Investment in Song (.8 x $35,000)

28,000

(Liquidating dividend)
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4-9

LO 2 Journal entries for Parent using cost method.

Accounting
Accounting for
for Investments
Investments by
by Partial
Partial Equity
Equity
E4-1: B. Percy Company uses the partial equity method to
record its investment.

2009

Investment in Song

387,000

Cash

387,000

Investment in Song

50,800

Equity income (.8 x $63,500)


Cash

50,800
20,000

Investment in Song (.8 x $25,000)


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4-10

20,000

LO 2 Journal entries for Parent using partial equity method.

Accounting
Accounting for
for Investments
Investments by
by Partial
Partial Equity
Equity
E4-1: B. Percy Company uses the partial equity method to
record its investment.

2010

Investment in Song

42,000

Equity income (.8 x $52,500)


Cash

42,000
40,000

Investment in Song (.8 x $50,000)

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4-11

40,000

LO 2 Journal entries for Parent using partial equity method.

Accounting
Accounting for
for Investments
Investments by
by Partial
Partial Equity
Equity
E4-1: B. Percy Company uses the partial equity method to
record its investment.

2011

Equity loss (.8 x $55,000)

44,000

Investment in Song
Cash

44,000
28,000

Investment in Song (.8 x $35,000)

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4-12

28,000

LO 2 Journal entries for Parent using partial equity method.

Accounting
Accounting for
for Investments
Investments by
by Complete
Complete Equity
Equity
E4-1: C. Percy Company uses the complete equity method
to record its investment. The difference between book value
of equity acquired and the value implied by the purchase price
was attributed solely to an excess of market over book values
of depreciable assets, with a remaining life of 10 years.

The complete equity method is usually required to report


common stock investments in the 20% to 50% range, assuming
the investor has the ability to exercise significant influence
and does not have effective control over the investee.
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4-13

LO 2 Journal entries for Parent using complete equity method.

Accounting
Accounting for
for Investments
Investments by
by Complete
Complete Equity
Equity
E4-1: C. Percy Company uses the complete equity method
to record its investment.

2009

Investment in Song

387,000

Cash
Investment in Song

387,000
50,800

Equity income (.8 x $63,500)


Cash

50,800
20,000

Investment in Song (.8 x $25,000)


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4-14

20,000

LO 2 Journal entries for Parent using complete equity method.

Accounting
Accounting for
for Investments
Investments by
by Complete
Complete Equity
Equity
E4-1: C. Percy Company uses the complete equity method
to record its investment.
A journal entry is required to adjust for depreciation related
to the excess of market over book values of depreciable
assets.
Cost of investment
Book value acquired ($475,000 x 80%)
Difference between Cost and Book value

2009

Equity income ($7,000 / 10 yrs.)


Investment in Song

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4-15

$387,000
380,000
$ 7,000

700
700

LO 2 Journal entries for Parent using complete equity method.

Accounting
Accounting for
for Investments
Investments by
by Complete
Complete Equity
Equity
E4-1: C. Percy Company uses the complete equity method
to record its investment.

2010

Investment in Song

42,000

Equity income (.8 x $52,500)


Cash

42,000
40,000

Investment in Song (.8 x $50,000)


Equity income ($7,000 / 10 yrs.)
Investment in Song
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4-16

40,000
700
700

LO 2 Journal entries for Parent using complete equity method.

Accounting
Accounting for
for Investments
Investments by
by Complete
Complete Equity
Equity
E4-1: C. Percy Company uses the complete equity method
to record its investment.

2011

Equity Loss (.8 x $55,000)

44,000

Investment in Song
Cash

44,000
28,000

Investment in Song (.8 x $35,000)


Equity income ($7,000 / 10)
Investment in Song
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4-17

28,000
700
700

LO 2 Journal entries for Parent using complete equity method.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
On the date of acquisition, the only relevant financial
statement is the consolidated balance sheet.
After acquisition, a complete set of consolidated financial
statements must be prepared for the affiliated group:

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4-18

Income statement,

Retained earnings statement,

Balance sheet, and

Statement of cash flows

LO 3 Use of workpapers.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Year of AcquisitionCost Method
P4-8: On January 1, 2010, Parker Company purchased 95% of the
outstanding common stock of Sid Company for $160,000. At that
time, Sids stockholders equity consisted of common stock,
$120,000; other contributed capital, $10,000; and retained
earnings, $23,000.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2010.
B. Prepare a consolidated statements workpaper on Dec. 31, 2011.

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4-19

LO 3 Use of workpapers.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: Begin the consolidating process by preparing a Computation
and Allocation Schedule, as follows:
95%
5%
100%
Parent
Share
$ 160,000

NCI
Share
$
8,421

Total
Value
$ 168,421

Less: Book value of equity acquired:


Common stock
Other contributed capital
Retained earings
Total book value

114,000
9,500
21,850
145,350

6,000
500
1,150
7,650

120,000
10,000
23,000
153,000

Difference between implied and book value


Record new goodwill
Balance

14,650
(14,650)
-

Purchase price and implied value

771
(771)
-

15,421
(15,421)
-

Difference between implied and book values is


established only at the date of acquisition.
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4-20

LO 4 Preparing Computation and Allocation (CAD) Schedule.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: A. 2010

Year of Acquisition

On December 31, 2010,


the two companies trial
balances were as follows
at right:
Required A. Prepare a
consolidated statements
workpaper on December
31, 2010.

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4-21

Cash
Accounts receivable
Inventory
Investment in Sid
Plant and equipment
Land
Dividends declared
Cost of goods sold
Operating expenses
Total debits
Accounts payable
Other liabilities
Common stock
Other contributed capital
Retained earnings
Sales
Dividend income
Total credits

Parker
$ 62,000
32,000
30,000
160,000
105,000
29,000
20,000
130,000
20,000
$ 588,000

Sid
$ 30,000
29,000
16,000
82,000
34,000
20,000
40,000
14,000
$ 265,000

19,000
10,000
180,000
60,000
40,000
260,000
19,000
$ 588,000

12,000
20,000
120,000
10,000
23,000
80,000
$ 265,000

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: A. 2010

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Year of Acquisition

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: A. 2010
Balance Sheet
Cash
Accounts receivable
Inventory
Investment in Sid
Difference (cost & book)
Plant and equipment
Land
Goodwill
Total assets

Year of Acquisition
Parker
$ 62,000
32,000
30,000
160,000

15,421
105,000
29,000

NCI

160,000
15,421

82,000
34,000
15,421

$ 418,000

Accounts payable
$
Other liabilities
Common stock
Other contributed capital
Retained earnings
Noncontrolling interest 1/1
Noncontrolling interest 12/31
Total liabilities & equity $
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4-23

Sid
$ 30,000
29,000
16,000
-

Eliminations
Debit
Credit

19,000
10,000
180,000
60,000
149,000

$ 191,000
$ 12,000
20,000
120,000
10,000
29,000

$
120,000
10,000
42,000

19,000
8,421
$

418,000

$ 191,000

Consolidated
Balances
$
92,000
61,000
46,000
187,000
63,000
15,421
$
464,421

$ 202,842

$ 202,842

300
8,421
8,721
$

31,000
30,000
180,000
60,000
154,700
8,721
464,421

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations
1.

Each section of the workpaper represents one of


three consolidated financial statements.

2.

Elimination of the investment account.


Common stock

120,000

Other contributed capital

10,000

Retained earnings, 1/1

23,000

Difference between Implied and Book


Noncontrolling interest in equity
Investment in Sid
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4-24

15,421
8,421
160,000

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations (continued)
3.

Allocation of the difference between implied and book


value:
Goodwill

15,421

Difference between Implied and Book


4.

Elimination of intercompany dividends


Dividend income

19,000

Dividends declared Sid Company

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4-25

15,421

19,000

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations (continued)
5.

Noncontrolling interest in consolidated net income:


Internally generated income of Sid Company

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4-26

$26,000

Noncontrolling percentage owned

5%

Noncontrolling interest in income

$ 1,300

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations (continued)
6.

Consolidated retained earnings:


Parker Companys retained earnings, 1/1
+ Parkers income

129,000

- Dividends from Sid Company

- 19,000

+ Parkers percentage of Sid income (95%)

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4-27

$ 40,000

24,700

- Parkers dividends declared

- 20,000

Parker Companys retained earnings, 12/31

$154,700

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations (continued)
7.

Total eliminations for all three sections are in balance.

8.

To calculate the noncontrolling interest in net assets


or equity at year-end, compute the following:
NCI at Acquisition Date

+ NCI share of Sid income ($26,000 x 5%)


- NCI share of Sid dividends ($20,000 x 5%)
Noncontrolling Interest in Equity

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4-28

8,421
1,300
-1,000

$ 8,721

LO 5 Workpapers eliminating entries.

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
After Year of Acquisition Cost Method
P4-8: B. 2011
On December 31, 2011,
the two companies trial
balances were as follows
at right:
Required B. Prepare a
consolidated statements
workpaper on December
31, 2011.

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4-29

Cash
Accounts receivable
Inventory
Investment in Sid
Plant and equipment
Land
Dividends declared
Cost of goods sold
Operating expenses
Total debits
Accounts payable
Other liabilities
Common stock
Other contributed capital
Retained earnings
Sales
Dividend income
Total credits

Parker
$ 67,000
56,000
38,000
160,000
124,000
29,000
20,000
155,000
30,000
$ 679,000

Sid
$ 16,000
32,000
48,500
80,000
34,000
20,000
52,000
18,000
$ 300,500

16,000
15,000
180,000
60,000
149,000
240,000
19,000
$ 679,000

7,000
14,500
120,000
10,000
29,000
120,000
$ 300,500

LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: B. 2011

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4-30

After Year of Acquisition

LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: B. 2011
Balance Sheet
Cash
Accounts receivable
Inventory
Investment in Sid
Difference (cost & book)
Plant and equipment
Land
Goodwill
Total assets

After Year of Acquisition

Sid
$ 16,000
32,000
48,500
-

124,000
29,000

80,000
34,000

5,700
15,421

NCI

165,700
15,421

15,421
$ 474,000

Accounts payable
$
Other liabilities
Common stock
Other contributed capital
Retained earnings
Noncontrolling interest 1/1
Noncontrolling interest 12/31
Total liabilities & equity $
Slide
4-31

$ 210,500

Consolidated
Balances
$
83,000
88,000
86,500
204,000
63,000
15,421
$
539,921

Parker
$ 67,000
56,000
38,000
160,000

Eliminations
Debit
Credit

16,000
15,000
180,000
60,000
203,000

474,000

7,000
14,500
120,000
10,000
59,000

$ 210,500

120,000
10,000
48,000

$ 214,542

24,700
8,721
$ 214,542

1,500
8,721
$ 10,221
$

23,000
29,500
180,000
60,000
237,200
10,221
539,921

LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations
1. Before elimination of the investment account, a workpaper

entry is made to the investment account and Parker


Companys beginning retained earnings to recognize
Parkers share of the cumulative undistributed income or
loss of Sid Company from the date of acquisition to the
beginning of the current year as follows:
Investment in Sid Company
Retained earnings, 1/1
($29,000 $23,000 )

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4-32

.95 = $5,700

5,700
5,700
Entry to establish
Reciprocity

LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
Workpaper Observations
The following workpaper entries are also made:
2. Eliminate investment in Sid Company.
3. Eliminate intercompany dividends.
4. Allocate difference between cost and book value.
5. All (100%) of Sids revenues, expenses, assets, and

liabilities are included in the consolidated totals. The


noncontrolling interests share of income and net assets
are shown as separate line items.

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4-33

LO 5 Workpapers eliminating entries after acquisition (cost method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
Equity Method
Record the investment at cost and subsequently
adjust the amount each period for
the investors proportionate share of the

earnings (losses) and

dividends received by the investor.


If investors share of investees losses exceeds the
carrying amount of the investment, the investor ordinarily
should discontinue applying the equity method.
Slide
4-34

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
Example: (Equity Method) On January 1, 2010,
Pennington Corporation purchased 30% of the common
shares of Edwards Company for $180,000. During the
year, Edwards earned net income of $80,000 and paid
dividends of $20,000.
Instructions
Prepare the journal entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2010.

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4-35

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
Example: Prepare the entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2010.
Investment in Stock

180,000

Cash

180,000

Investment in Stock

24,000

Equity in subsidiary income ($80,000 x 30%)


Cash

6,000

Investment in Stock ($20,000 x 30%)


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4-36

24,000

6,000

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
Investment Carried at EquityYear of Acquisition
P4-12: On January 1, 2010, Parker Company purchased 90% of
the outstanding common stock of Sid Company for $180,000. At
that time, Sids stockholders equity consisted of common stock,
$120,000; other contributed capital, $20,000; and retained
earnings, $25,000. Assume that any difference between book
value of equity and the value implied by the purchase price is
attributable to land.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2010.
B. Prepare a consolidated statements workpaper on Dec. 31, 2011.
Slide
4-37

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
P4-12: Begin the consolidating process by preparing a Computation
and Allocation Schedule, as follows:
90%
10%
100%
Parent
Share
$ 180,000

NCI
Share
$ 20,000

Total
Value
$ 200,000

Less: Book value of equity acquired:


Common stock
Other contributed capital
Retained earings
Total book value

108,000
18,000
22,500
148,500

12,000
2,000
2,500
16,500

120,000
20,000
25,000
165,000

Difference between implied and book value


Allocated to land
Balance

31,500
(31,500)
-

3,500
(3,500)
-

35,000
(35,000)
-

Purchase price and implied value

Difference between implied and book values is


established only at the date of acquisition.
Slide
4-38

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
P4-12: A. 2010

Year of Acquisition

On December 31, 2010,


the two companies trial
balances were as follows:
Required A. Prepare a
consolidated statements
workpaper on December
31, 2010.

Cash
Accounts receivable
Inventory
Investment in Sid
Plant and equipment
Land
Dividends declared
Cost of goods sold
Operating expenses
Total debits
Accounts payable
Other liabilities
Common stock
Other contributed capital
Retained earnings
Sales
Equity in subsidiary income
Total credits

Slide
4-39

Parker
$ 65,000
40,000
25,000
184,500
110,000
48,500
20,000
150,000
35,000
$ 678,000

Sid
$ 35,000
30,000
15,000
85,000
45,000
15,000
60,000
15,000
$ 300,000

20,000
15,000
200,000
70,000
55,000
300,000
18,000
$ 678,000

15,000
25,000
120,000
20,000
25,000
95,000
$ 300,000

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
P4-12: A. 2010

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4-40

Year of Acquisition

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
P4-12: A. 2010
Balance Sheet
Cash
Accounts receivable
Inventory
Investment in Sid
Difference (cost & book)
Plant and equipment
Land
Total assets

Year of Acquisition
Parker
$ 65,000
40,000
25,000
184,500

35,000
110,000
48,500
$ 473,000

Accounts payable
$ 20,000
Other liabilities
15,000
Common stock
200,000
Other contributed capital
70,000
Retained earnings
168,000
Noncontrolling interest 1/1
Noncontrolling interest 12/31
Total liabilities & equity $ 473,000
Slide
4-41

Sid
35,000
30,000
15,000
-

Eliminations
Debit
Credit

85,000
45,000
$ 210,000
$

15,000
25,000
120,000
20,000
30,000

NCI

4,500
180,000
35,000

35,000
$
$
120,000
20,000
43,000

13,500
20,000
$

$ 210,000

Consolidated
Balances
$
100,000
70,000
40,000
-

$ 253,000

$ 253,000

500
20,000
20,500
$

195,000
128,500
533,500
35,000
40,000
200,000
70,000
168,000
20,500
533,500

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
Workpaper Observations
The following workpaper entries were made:
To eliminate the account equity in subsidiary income
and intercompany dividends.
To eliminate the Investment account against subsidiary
equity.
To distribute the difference between implied and book
value of equity acquired.

Slide
4-42

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
Investment Carried at EquityAfter Year of Acquisition
P4-12: B. 2011
On December 31, 2011,
the two companies trial
balances were as follows
at right:
Required B. Prepare a
consolidated statements
workpaper on December
31, 2011.

Slide
4-43

Cash
Accounts receivable
Inventory
Investment in Sid
Plant and equipment
Land
Dividends declared
Cost of goods sold
Operating expenses
Total debits
Accounts payable
Other liabilities
Common stock
Other contributed capital
Retained earnings
Sales
Equity in subsidiary income
Total credits

Parker
$ 70,000
60,000
40,000
193,500
125,000
48,500
20,000
160,000
35,000
$ 752,000

Sid
$ 20,000
35,000
30,000
90,000
45,000
15,000
65,000
20,000
$ 320,000

16,500
15,000
200,000
70,000
168,000
260,000
22,500
$ 752,000

16,000
24,000
120,000
20,000
30,000
110,000
$ 320,000

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
P4-12: B. 2011

Slide
4-44

After Year of Acquisition

LO 5 Workpaper eliminating entries (equity method).

Recording
Recording Investments
Investments Equity
Equity Method
Method
P4-12: B. 2011
Balance Sheet
Cash
Accounts receivable
Inventory
Investment in Sid
Difference (cost & book)
Plant and equipment
Land
Total assets

After Year of Acquisition


Parker
$ 70,000
60,000
40,000
193,500

35,000
125,000
48,500
$ 537,000

Accounts payable
$
Other liabilities
Common stock
Other contributed capital
Retained earnings
Noncontrolling interest 1/1
Noncontrolling interest 12/31
Total liabilities & equity $
Slide
4-45

Sid
$ 20,000
35,000
30,000
-

Eliminations
Debit
Credit

16,500
15,000
200,000
70,000
235,500

537,000

90,000
45,000
$ 220,000
$ 16,000
24,000
120,000
20,000
40,000

$ 220,000

NCI

9,000
184,500
35,000

Consolidated
Balances
$
90,000
95,000
70,000
-

35,000
$
$
120,000
20,000
52,500

$ 262,500

13,500
20,500
$ 262,500

1,000
20,500
$ 21,500
$

215,000
128,500
598,500
32,500
39,000
200,000
70,000
235,500
21,500
598,500

LO 5 Workpaper eliminating entries (equity method).

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
Revenues and expenses of the acquired company are included
with those of the acquiring company only from the date of
acquisition forward.
Two acceptable alternatives for presenting the subsidiarys
revenue and expense items in the consolidated income
statement in the year of acquisition:
Full-year reporting alternative.
Partial-year reporting alternative.

Slide
4-46

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
Equity MethodFull-Year Reporting Alternative
P4-16:
Pillow Company purchased
90% of the common stock
of Satin Company on May
1, 2009, for a cash
payment of $474,000.
December 31, 2009, trial
balances for Pillow and
Satin were:

Slide
4-47

Cash
Treasury stock at cost
Investment in Satin
Plant and equipment
Cost of goods sold
Operating expenses
Dividends declares
Total debits
Accounts and notes payable
Dividends payable
Common stock
Other contributed capital
Retained earnings
Sales
Equity in subsidiary income
Total credits

Pillow
$ 390,600
510,000
1,334,000
1,261,000
484,000
$ 3,979,600

Satin
$ 179,200
32,000
562,000
584,000
242,000
60,000
$ 1,659,200

270,240
1,000,000
364,000
315,360
1,940,000
90,000
$ 3,979,600

124,000
60,000
200,000
90,000
209,200
976,000
$ 1,659,200

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-16:
Satin Company declared a $60,000 cash dividend on December 20,
2009, payable on January 10, 2010, to stockholders of record on
December 31, 2009. Pillow Company recognized the dividend on its
declaration date. Any difference between book value and the value
implied by the purchase price relates to subsidiary land, included
in property and equipment.
Required: Prepare a consolidated statements workpaper at
December 31, 2009, assuming that Satin Company uses the fullyear reporting alternative.

Slide
4-48

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-16: Computation and Allocation of Difference between Cost
90%
10%
100%
and Book Value Acquired:
Parent
Share
$ 474,000

Purchase price and implied value


Less: Book value of equity acquired:
Common stock
Other contributed capital
Retained earings
Treasury stock
Subsidiary income 1/1 to 5/1
Total book value
Difference between implied and book value
Allocated to land
Balance

Slide
4-49

NCI
Share
$ 52,667

Total
Value
$ 526,667

180,000
81,000
188,280
(28,800)
45,000
465,480

20,000
9,000
20,920
(3,200)
5,000
51,720

200,000
90,000
209,200
(32,000)
50,000
517,200

8,520
(8,520)
-

947
(947)
-

9,467
(9,467)
-

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-16: Full-Year Reporting Alternative
Income Statement
Sales
Equity in subsidiary income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Net income purchased
Noncontrolling interest
Net income

Pillow
$ 1,940,000
90,000
2,030,000
1,261,000
484,000
1,745,000
285,000

Satin
$ 976,000

Eliminations
Debit
Credit
90,000

976,000
584,000
242,000
826,000
150,000
45,000

285,000

$ 150,000

Retained Earnings Statement


Retained earnings, 1/1
Net income
Dividends declared
Retained earnings, 12/31
$

315,360
285,000
600,360

209,200
209,200
150,000
135,000
(60,000)
$ 299,200 $ 344,200

Slide
4-50

NCI

$ 135,000

54,000
$ 54,000

15,000
$ 15,000

Consolidated
Balances
$
2,916,000
2,916,000
1,845,000
726,000
2,571,000
345,000
(45,000)
(15,000)
$
285,000

15,000
(6,000)
$
9,000 $

315,360
285,000
600,360

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-16: Full-Year Reporting Alternative

Slide
4-51

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-17: (Data from P4-16) Partial-Year Reporting Alternative
Income Statement
Sales
Equity in subsidiary income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income

Pillow
$ 1,940,000
90,000
2,030,000
1,261,000
484,000
1,745,000
285,000

Eliminations
Debit
Credit

Satin
$ 650,666

90,000
650,666
389,333
161,333
550,666
100,000

285,000

$ 100,000

Retained Earnings Statement


Retained earnings, 1/1
Net income
Dividends declared
Retained earnings, 12/31
$

315,360
285,000
600,360

259,200
259,200
100,000
90,000
(60,000)
$ 299,200 $ 349,200

Slide
4-52

NCI

90,000

54,000
$ 54,000

10,000
$ 10,000

Consolidated
Balances
$
2,590,666
2,590,666
1,650,333
645,333
2,295,666
295,000
(10,000)
$
285,000

10,000
(6,000)
$ 4,000 $

315,360
285,000
600,360

LO 6 Two approaches for interim acquisitions.

Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-17: (Data from P4-16) Partial-Year Reporting Alternative
Balance Sheet
Current assets
Investment in Satin
Difference (cost & book)
Plant and equipment
Total assets

Pillow
$ 390,600
510,000

1,334,000
$ 2,234,600

Accounts and notes payable $ 270,240


Dividends payable
Common stock
1,000,000
Other contributed capital
364,000
Treasury stock
Retained earnings
600,360
Noncontrolling interest 1/1
Noncontrolling interest 12/31
Total liabilities & equity
$ 2,234,600

Slide
4-53

Satin
$ 179,200

562,000
$ 741,200
$ 124,000
60,000
200,000
90,000
(32,000)
299,200

$ 741,200

Eliminations
Debit
Credit
54,000
474,000
36,000
9,467
9,467
9,467

NCI

Consolidated
Balances
$
515,800
-

$
$
54,000
200,000
90,000
349,200

$ 712,134

32,000
54,000
52,667
$ 712,134

4,000
52,667
$ 56,667
$

1,905,467
2,421,267
394,240
6,000
1,000,000
364,000
600,360
56,667
2,421,267

LO 6 Two approaches for interim acquisitions.

Consolidated
Consolidated Statement
Statement of
of Cash
Cash Flows
Flows
Peculiarities:
1.

If the statement of cash flows starts with consolidated


net income, then the noncontrolling interest is already
included and need not be added back.

2. Subsidiary dividends paid to the noncontrolling


stockholders must be included with dividends paid by the
parent company when calculating cash outflow from
financing activities.
3. Subsidiary stock acquired directly from the subsidiary
represents an intercompany cash transfer that does not
affect the total cash balance of the consolidated group.
Slide
4-54

LO 7 Peculiarities of Consolidated Statement of Cash Flows.

Consolidated
Consolidated Statement
Statement of
of Cash
Cash Flows
Flows
The preparation of the consolidated statement of cash
flows in the year of acquisition is complicated slightly
because the comparative balance sheets at the beginning
and end of the current year are dissimilar.
1. Any cash spent or received in the acquisition itself
should be reflected in the Investing activities
section.
2. Assets and liabilities of the subsidiary at the date of
acquisition must be added to those of the parent at
the beginning of the current year.
Slide
4-55

LO 8 Stock issued as Consideration in Statement of Cash Flows.

Compare
Compare U.S.
U.S. GAAP
GAAP and
and IFRS
IFRS
Application of the Equity Method

Slide
4-56

LO 9 Differences between U.S. GAAP and IFRS.

Compare
Compare U.S.
U.S. GAAP
GAAP and
and IFRS
IFRS
Application of the Equity Method

Slide
4-57

LO 9 Differences between U.S. GAAP and IFRS.

Compare
Compare U.S.
U.S. GAAP
GAAP and
and IFRS
IFRS
Application of the Equity Method

Slide
4-58

LO 9 Differences between U.S. GAAP and IFRS.

Two categories:
Three-division workpaper format used in this text.
Trial balance format.
Columns are provided for the trial balances, the
elimination entries, and normally, each financial
statement to be prepared, except for the
statement of cash flows.

Slide
4-59

Note: The consolidated balances derived in a


workpaper are the same regardless of the
format selected.

Two major topics require attention in addressing the


treatment of deferred income tax consequences when
the affiliates each file separate income tax returns:
1. Undistributed subsidiary income (Appendix B of
Chapter 4).
2. Elimination of unrealized intercompany profit
(discussed in the appendices to Chapters 6 and 7).

Slide
4-60

When affiliated companies elect to file one consolidated


return, the tax expense amount is computed on the
consolidated workpapers rather than on the individual
books of the parent and subsidiary.
The amount of tax expense attributed to each company is
computed from combined income and allocated back to each
companys books.

Slide
4-61

When separate tax returns are filed, the parent company


will include dividends received from the subsidiary in its
taxable income, while the subsidiarys reported income is
included in consolidated net income.
Thus the difference between the subsidiarys income and
dividends paid represents a temporary difference because
eventually this undistributed amount will be realized
through future dividends or upon sale of the subsidiary.

Slide
4-62

Assume that the parent uses the cost method to account


for the investment and that both the parent and the
subsidiary file separate tax returns. This means each
company records a tax provision based on the items
reported on its individual books.
Tax consequences relating to undistributed income are not
recorded on the books of the parent company when the
investment in the subsidiary is recorded using the cost
method.

Slide
4-63

If the undistributed income is not expected to be received


as a future dividend but is expected to be realized when
the investment is sold, the undistributed income is taxed at
the capital gains rate

Slide
4-64

If the equity method is used to account for the investment,


there is a timing difference between books and tax on the
books of the parent. Equity income is reported on the
parents income statement while dividends are included on
the tax return.
Therefore, deferred taxes on the parents books must
reflect the amount of undistributed income in the
subsidiary.

Slide
4-65

Copyright
Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Slide
4-66