Beams11 ppt04

Chapter 4:
Consolidation
Techniques and
Procedures
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright ©2012 Pearson Education,

4-1
Inc. Publishing as Prentice Hall
Consolidation Techniques: Objectives
1. Prepare consolidation workpaper for the
year of acquisition when the parent uses the
complete equity method to account for its
investment in a subsidiary.
2. Prepare consolidation workpaper for the
years subsequent to acquisition.
3. Locate errors in consolidation workpaper.
4. Assign fair value to identifiable net assets.

4-2
Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
6. Appendix: Understand the alternative trial
balance consolidation workpaper format.

4-3
Consolidation Techniques and Procedures
1: ACQUISITION-YEAR
WORKPAPERS

4-4
Preparing the Worksheet
Statements are entered onto the worksheet:
 Income statement
 Statement of retained earnings
 Balance sheet
Columns needed:
 Parent
 Subsidiary
 DR and CR columns for elimination entries
 Consolidated

4-5
Completing the Worksheet (1 of 2)
1. Enter Parent and Sub. amounts at 100% of
book value. (Even if parent owns less)
2. Enter elimination entries into the DR and CR
columns. (Check totals)
3. For consolidated revenues, liabilities, and
equity (other than ending retained
earnings):
 Add parent, subsidiary, less DR, plus CR
4. For consolidated assets:
 Add parent, subsidiary, plus DR, less CR

4-6
Completing the Worksheet (2 of 2)
5. For income, ending retained earnings and
all subtotals and totals:
 Compute directly in consolidated column.
Note:
 The total consolidated assets should equal the
total consolidated liabilities and equity.
 Expenses on the income statement and dividends
on the statement of retained earnings are generally
shown as negative numbers. So compute the
consolidated amounts as you would for revenues.
4-7
Workpaper Entries
1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
4. Record noncontrolling interest in sub.'s
earnings & dividends
5. Eliminate reciprocal Investment & sub.'s
equity balances
6. Amortize fair value differentials
7. Eliminate other reciprocal balances
4-8
Example: Pep & Sap Data
Pep pays $88 for 80% of Sap on 1/1/2011 when
Sap's equity consisted of $60 capital stock
and $30 retained earnings. All excess was due
to unrecorded patents with a 10-year life.
Sap's income and dividends follow:

2011 2012
Net income $25 $30
Dividends $15 $15

4-9
Analysis
Cost of 80% of Sap $88

Implied value of Sap ($88/.80) $110 Allocated to: Amt Amort.
Book value (60+30) 90 Patents $20 10 yrs
Excess $20
Unamort. Amortizatio
Unamort. Bal. Amortization Bal. n Unamort. Bal.
on 1/1/2011 in 2011 on 12/31/2011 in 2012 on 12/31/2012
Patents $20 $2 $18 $2 $16
Use these amounts in Use these amounts in

2011 worksheet for 2012 worksheet for
amortization expense amortization expense
and patents. and patents.
4-10
Income & Dividend Calculations
2011:
Sap's net income $25 Pep's 80% share
Amortization (2) $18.4
Adjusted income $23 $12.0 NCI 20% share
$4.6
Dividends $15 $3.0
2012: Pep's 80% share

Sap's net income $30 $22.4
Adjusted income $28 NCI 20% share
$5.6
Dividends $15 $3.0

4-11
Pep's 2011 Worksheet Entries (1 of 3)
 none
 none
balance
Income from Sap (-R, -SE) 18.4
Dividends (+SE) 12.0
Investment in Sap (-A) 6.4
4-12
Pep 2011: Entries (2 of 3)
Noncontrolling interest share (-SE) 4.6
Dividends (+SE) 3.0
Noncontrolling interest (+SE) 1.6
equity balances
Capital stock, Sap (-SE) 60
Retained earnings, Sap (beginning) (-SE) 30
Patents (+A) 20
Investment in Sap (-A) 88
Noncontrolling interest (+SE) 22
4-13
6. Amortize fair value/book value differentials
Amortization Expense (E, -SE) 2
Patents (-A) 2
 none
Note that in the last chapter, all worksheet
entries were prepared for the balance sheet.
Here worksheet entries are prepared for the
income statement, statement of retained
earnings, and balance sheet.

4-14
Pep's 2011 Worksheet
Year ended 12/31/2011c Pep Sap DR CR Consol
Income statement:
Revenues 250.0 65.0 315.0
Income from Sap 18.4 18.4 0.0
Expenses (200.0) (40.0) 2.0 (242.0)
Noncontrolling interest share 4.6 (4.6)
Net income/ Controlling share 68.4 25.0 68.4
Statement of retained earnings:
Beginning retained earnings 5.0 30.0 30.0 5.0
Add net income 68.4 25.0 68.4
Deduct dividends (30.0) (15.0) 12.0 (30.0)
3.0
Ending retained earnings 43.4 40.0 43.4

4-15
Balance sheet, 12/31/2011: Pep Sap DR CR Consol
Cash 39.0 10.0 49.0
Other current assets 90.0 50.0 140.0
Investment in Sap 94.4 6.4 0.0
88.0
Plant & equipment, net 250.0 70.0 320.0
Patents 20.0 2.0 18.0
Total 473.4 130.0 527.0
Liabilities 80.0 30.0 110.0
Capital stock 350.0 60.0 60.0 350.0
Retained earnings 43.4 40.0 43.4
Noncontrolling interest, Jan.1 22.0
Noncontrolling interest, Dec. 31 1.6 23.6
Total 473.4 130.0 527.0

4-16
A Look at the Income Statement
Income statement:
Revenues 250.0 65.0 315.0
Expenses (200.0) (40.0) 2.0 (242.0)
 Income from Sap is eliminated.
 Expenses are adjusted for 2011 amortization, - $2 on patents
 Noncontrolling interest is proportional to Pep's Income from
Sap since Pep uses the equity method.
 $18.4 x .20/.80 = $4.6

4-17
A Look at Retained Earnings
3.0
 Beginning retained earnings of Sap is eliminated.
 All of Sap's dividends are eliminated.
 Net income is not calculated across the line, but taken from
the consolidated income statement.
 Ending retained earnings is calculated in the consolidated
column.
4-18
A Look at Assets
 Investment in Sap is eliminated.
 Patents at the start of 2011 were $20, and current
amortization is $2; they are $18 at the end of 2011.
 The total is calculated in the consolidated column.
Cash 39.0 10.0 49.0
88.0
Patents 20.0 2.0 18.0
Total 473.4 130.0 527.0

4-19
A Look at Liabilities & Equity
 Sap's capital stock is eliminated.
 Retained earnings are not calculated across the row;
they are taken from the statement of retained earnings.
 Noncontrolling interest at year-end is proportional to
Pep's Investment in Sap account.
 $94.4 x .20/.80 = $23.6
Capital stock 350.0 60.0 60.0 350.0
Total 473.4 130.0 527.0
4-20
2: WORKPAPERS IN
SUBSEQUENT YEARS

4-21
Analysis, for 2012
Cost of 80% of Sap $88

Implied value of Sap ($88/.80) $110 Allocated to: Amt Amort.
Book value (60+30) 90 Patents $20 10 yrs
Excess $20
Unamort. Amortization Unamort. Bal. Amortization Unamort.
Bal. Bal.
on 1/1/2011 in 2011 on 12/31/2011 in 2012 on 12/31/2012
Patents $20 $2 $18 $2 $16
Use these amounts in Use these amounts in

2011 worksheet for 2012 worksheet for
amortization expense amortization expense
and patents. and patents.
4-22
Income & Dividend Calculations
2011:
Sap's net income $25 Pep's 80% share
Adjusted income $23 $12.0 NCI 20% share
$4.6
Dividends $15 $3.0
2012: Pep's 80% share
Sap's net income $30 $22.4
Adjusted income $28 NCI 20% share
$5.6
Dividends $15 $3.0

4-23
Pep's Worksheet Entries for 2012 (1 of 3)
 none
 none
balance
Income from Sap (-R, -SE) 22.4
4-24
Dividends (+SE) 3.0
equity balances
Capital stock, Sap (-SE) 60
Retained earnings, Sap (beginning) (-SE) 40
Patents (+A) 18
4-25
Eliminating Investment in Sap
Entry 5 eliminates the Investment in Sap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
Implied value of Sap at acquisition $88/.80 $110
Add the increase in retained earnings from 10
acquisition to the beginning of the current year
$40 at 1/1/2012 minus $30 at 1/1/2011
Less amortization for all prior periods (2)
$2 patent amortization for 2011
Adjusted value of Sap at 1/1/2012 $118
 Investment in Sap (80% x $118) = $94.4
 Noncontrolling interest (20% x $118) = $23.6
 Verify the $118 from the debits in Entry 5 (60 + 40 + 18).
4-26
6. Amortize fair value differentials
Amortization Expense (E, -SE) 2
Patents (-A) 2

Note payable – Pep (-L) 10
Note receivable – Sap (-A) 10

4-27
Pep's 2011 Worksheet
Year ended 12/31/2011 Pep Sap DR CR Consol
Income statement:
Revenues 300.0 75.0 375.0
Expenses (244.0) (45.0) 2.0 (291.0)
3.0

4-28
Cash 45.0 20.0 65.0
Note receivable – Sap 10.0 10.0 0.0
94.4
Patents 18.0 2.0 16.0
Total 496.8 150.0 548.0
Note payable – Pep 10.0 10.0
Capital stock 350.0 60.0 60.0 350.0
Total 496.8 150.0 548.0
4-29
3: ERRORS IN THE
WORKPAPERS

4-30
Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
 Noncontrolling interest share (income)
 Goodwill
 Noncontrolling interest (equity)
 Check equality of DR and CR adjustments.
 Verify totals for parent and subsidiary
statements.
 Re-calculate the consolidated amounts.

4-31
4: ASSIGNING FAIR VALUE

4-32
Example with Excess Allocated
Pat pays $360 for 90% of Sol on 12/31/2011 when
Sol's equity consisted of $200 capital stock and
$50 retained earnings. Inventory (sold in 2011),
land, and buildings (20 years) were undervalued
by $10, $30, and $80, respectively. Equipment (10
years) was overvalued by $20.
Sol's income and dividends for 2012 were $60 and
$20.
At year-end, Sol has dividends payable of $10
which Pat has not yet recorded. There is $20 cash
in transit from Sol to Pat for the note.

4-33
Analysis at Acquisition
Cost of 90% of Sol $360 Allocated to: Amt Amort
Implied value of Sap ($360/.90) $400 Inventories $10 1st yr
Book value (200+50) 250 Land 30 -
Excess $150 Building 80 20 yrs
Equipment (20) 10 yrs
Noncontrolling interest, 10%(400) $40 Goodwill 50 -
150
Unamort. Bal. Amortization Unamort. Bal.
12/31/2011 * in 2012 * on 12/31/2012 * Use the
Inventories $10 ($10) $0 12/31/2011
Land 30 0 30 and 2012
amortization
Building 80 (4) 76 in worksheet
Equipment (20) 2 (18) entries for
Goodwill 50 0 50 2012.
$150 ($12) $138
4-34
Sol's Income & Dividend
2012
Pat's 90% share
Sol's net income $60 $43.2
Amortization ($12) $18.0
Adjusted income $48
Sol's dividends $20

NCI 10% share
$4.8
$2.0

4-35
Pat's Worksheet Entries (1 of 4)
Dividends receivable (+A) 9.0
Investment in Sol (-A) 9.0
Cash (+A) 20.0
Note receivable, Sol (-A) 20.0
 none
bring Investment account to its beginning balance
Income from Sol (-R, -SE) 43.2
Investment in Sol (-A) 25.2
4-36
Pat: Entries (2 of 4)
Dividends (+SE) 2.0
5a. Eliminate reciprocal Investment & sub.'s
equity balances (with unamortized excess)
Capital stock (-SE) 200
Retained earnings, Sol (beginning) (-SE) 50
Unamortized excess (+A) 150
Investment in Sol (-A) 360
Noncontrolling interest (+SE) 40
4-37
5b. Allocate the unamortized excess according
to beginning-of-year balances.
Inventory (+A) 10
Land (+A) 30
Building, net (+A) 80
Goodwill (+A) 50
Equipment, net (-A) 20
Unamortized excess (-A) 150

4-38
6. Amortize fair value/book value differentials
Cost of sales (E, -SE) 10
Inventory (-A) 10
Operating (depreciation) expense (E, -SE) 4
Buildings, net (-A) 4
Equipment, net (-A) 2
Operating (depreciation) expense (-E, SE) 2

Dividends payable (-L) 9.0
Dividends receivable (-A) 9.0

4-39
Pat's 2012 Worksheet
Year ended 12/31/2012 Pat Sol DR CR Consol

Income statement:
Revenues 900.0 300.0 1,200.0
Income from Sol 43.2 43.2 0.0
Cost of goods sold (600.0) (150.0) 10.0 (760.0)
Operating expenses (190.0) (90.0) 4.0 2.0 (282.0)
Add net income 153.2 60.0 153.2
2.0

4-40
Balance sheet, 12/31/2012: Pat Sol DR CR Consol
Cash 13.0 15.0 20.0 48.0
Accounts receivable, net 76.0 25.0 101.0
Note receivable – Sol 20.0 20.0 0.0
Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0 120.0
Building, net 190.0 110.0 80.0 4.0 376.0
Equipment, net 150.0 120.0 2.0 20.0 252.0
Investment in Sol 394.2 9.0 0.0
25.2
360.0
Dividends receivable 9.0 9.0 0.0
Goodwill 50.0 50.0
Unamortized excess 150.0 150.0 0.0
Total 993.2 360.0 1,097.0
Accounts payable 120.0 60.0 180.0
Dividends payable 10.0 9.0 1.0
Capital stock 700.0 200.0 200.0 700.0
Total 993.2 360.0 1,097.0
4-41
5: CONSOLIDATED
STATEMENT OF CASH
FLOWS

4-42
Consolidated Cash Flows
The consolidated statement of cash flows is
prepared from:
 Consolidated balance sheets, beginning & ending
 Consolidated income statement
 Other information
Procedure similar to an "unconsolidated"
statement of cash flows
Look at items specific to companies with:
 Subsidiaries
 Equity investments

4-43
Investing & Financing Cash Flows
Investing cash flows:
 Include cash acquisition and/or disposition of
subsidiaries
 Include cash acquisition and/or disposition of
equity investees
Financing cash flows:
 Include cash dividends paid to noncontrolling
interests

4-44
Operating Cash Flows
Direct method:
 Include cash dividends received from equity
investees (not equity method income)
Indirect method:
 Start with controlling share of net income
 Add the noncontrolling interest share
 Deduct the excess of equity method income over
cash dividends received from equity investees

4-45
6: APPENDIX – TRIAL
BALANCE FORMAT

4-46
Alternative Worksheet Format
Worksheet format presented earlier used the
basic financial statements
Alternative uses the ADJUSTED trial balances
of the parent and subsidiary.
Columns on worksheet:
 Parent and subsidiary adjusted trial balances,
 DR and CR adjustments,
 Income statement,
 Statement of retained earnings, and
 Balance sheet columns

4-47
Completing the Worksheet
1. Enter worksheet elimination entries into the
DR and CR columns.
2. Add accounts as needed (e.g., noncontrolling
interest, goodwill, noncontrolling interest
share).
3. Carry consolidated balances to income
statement, retained earnings, or balance
sheet columns, as appropriate.
4. Move controlling share of income to the
retained earnings column.
5. Move ending retained earnings to the balance
sheet column.
4-48
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Chapter 4:

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Sap's income and dividends follow:

Copyright ©2012 Pearson Education,

Cost of 80% of Sap $88

Use these amounts in Use these amounts in

2012: Pep's 80% share

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Cost of 80% of Sap $88

Use these amounts in Use these amounts in

Copyright ©2012 Pearson Education,

7. Eliminate other reciprocal balances

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

4: ASSIGNING FAIR VALUE

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Sol's dividends $20

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

7. Eliminate other reciprocal balances

Copyright ©2012 Pearson Education,

Year ended 12/31/2012 Pat Sol DR CR Consol

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

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