Advanced Accounting: Consolidation Techniques and Procedures

Advanced Accounting
Thirteenth Edition, Global Edition
Chapter 4
Consolidation
Techniques and
Procedures
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Consolidation Techniques: Objectives
4.1 Prepare consolidation workpaper for the year of
acquisition when the parent uses the complete equity
method to account for its investment in a subsidiary.
4.2 Prepare a consolidation workpaper for the years
subsequent to an acquisition.
4.3 Locate errors in a consolidation workpaper.
4.4 Record fair values of identifiable net assets acquired.
4.5 Prepare a consolidated statement of cash flows.

Consolidation Techniques:
Objectives (continued)
4.6 For the Students: Create an electronic spreadsheet
to prepare a consolidation workpaper.
4.7 Appendix A: Understand the alternative trial balance
workpaper format.
4.8 Appendix B: Prepare a consolidation workpaper when
parent company uses either the cost method or
incomplete equity method.

4.1: Acquisition-Year Workpaper
Consolidation Techniques and Procedures

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

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.

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

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

Example: Pop & Son Data
Pop paid $176 for 80% of Son on 1/1/2016 when
Son's equity consisted of $120 capital stock and $60
retained earnings. All excess was due to unrecorded
patents with a 10-year life
Son’s income and dividends follow:
blank 2016 2017

Net income $50 $60
Dividends $30 $30

Analysis
Cost of 80% of Son $176 Allocated to: Amt Amort.
Implied value of Son Patents $40 10 yrs
($176/.80) $220
Book value (120+60) 180
Excess $40
Unamort. Unamort.
Blank Unamort. Bal. Amortization Bal. Amortization Bal.
on on on
Blank 1/1/2016 in 2016 12/31/2016 in 2017 12/31/2017
Patents $40 $4 $36 $4 $32
Use these amounts Use these amounts in

in 2016 worksheet 2017 worksheet for
for amortization amortization expense
expense and and patents.
patents.

Income & Dividend Calculations (1 of 2)
blank
2016:
Son's net income $50 Pop's 80% share
Amortization (4) $36.8
Adjusted income $46 $24.0 NCI 20% share
Blank blank $9.2
Dividends $30 $6.0
Blank blank
2017: blank

Adjusted income $56 $24.0
Blank blank NCI 20% share
Dividends $30 $11.2
$6.0

Pop's 2016 Worksheet Entries (1 of 3)
● none
● none
Income from Son (-R, -SE) 36.8 Blank

Dividends (+SE) Blank 24.0
Investment in Son (-A) blank 12.8

dividends
Noncontrolling interest share (-SE) 9.2 blank
Dividends (+SE) blank 6.0
Noncontrolling interest (+SE) blank 3.2

balances
Capital stock, Son (-SE) 120 blank
Retained earnings, Son (beginning) (-SE) 60 blank
Patents (+A) 40 blank
Investment in Son (-A) blank 176
Noncontrolling interest (+SE) blank 44

6. Amortize fair value/book value differentials
Amortization Expense (E, -SE) 4 blank
Patents (-A) blank 4

● 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.

Pop's 2016 Worksheet (1 of 2)
Year ended 12/31/2016c Pop Son DR CR Consol
Income statement blank blank blank blank blank
Revenues 500.0 130.0 blank blank 630.0
Income from Son 36.8 blank 36.8 blank 0.0
Expenses (400.0) (80.0) 4.0 blank (484.0)
Noncontrolling interest share blank blank 9.2 blank (9.2)
Net income/Controlling share 136.8 50.0 blank blank 136.8
Statement of retained earnings blank blank blank blank blank

Beginning retained earnings 10.0 60.0 60.0 blank 10.0
Add net income 136.8 50.0 blank blank 136.8
Deduct dividends (60.0) (30.0) blank 24.0 (60.0)
Blank blank blank blank 6.0 blank
Ending retained earnings 86.8 80.0 blank blank 86.8

Balance Sheet 12/31/2016
Balance sheet, 12/31/2016 Pop Son DR CR Consol
Cash 78.0 20.0 blank blank 98.0
Other current assets 180.0 100.0 blank blank 280.0
Investment in Son 188.8 blank blank 12.8 0.0
Plant & equipment, net 500.0 140.0 blank blank 680.0
Patents blank blank 40.0 4.0 36.0
Total 946.8 260.0 blank blank 1,054.0
Liabilities 160.0 60.0 blank blank 220.0
Capital stock 700.0 120.0 120.0 blank 700.0
Retained earnings 86.8 80.0 blank blank 86.8
Noncontrolling interest, Jan.1 blank blank blank 44.0 blank
Noncontrolling interest, Dec. 31 blank blank blank 3.2 47.2

A Look at the Income Statement
Income from Son 36.8 36.8 blank 0.0
Expenses (400.0) (80.0) 4.0 blank (484.0)
● Income from Son is eliminated.

● Expenses are adjusted for 2016 amortization, - $4
on patents.
● Noncontrolling interest is proportional to Pop's
Income from Son since Pop uses the equity method.
● $36.8 x .20/.80 = $9.2

A Look at Retained Earnings

● Beginning retained earnings of Son is eliminated.

● All of Son'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.

A Look at Assets
– Investment in Son is eliminated.
– Patents at the start of 2016 were $20, and current
amortization is $2. They are $18 at the end of 2016.
– The total is calculated in the consolidated column.
Investment in Son 188.8 blank blank 12.8 0.0

A Look at Liabilities & Equity
– Son'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
Pop's Investment in Son account.
● $94.4 x .20/.80 = $23.6


4.2: Workpapers in Subsequent Years

Analysis, for 2017
Cost of 80% of Son $176 Allocated to: Amt Amor.
Implied value of Son ($88/.80) $220 Patents $40 10 yrs
Book value (120+60) 180
Excess $40
Unamort. Unamort. Unamort.

Blank Bal. Amortization Bal. Amortization Bal.
on on on
Blank 1/1/2016 in 2016 12/31/2016 in 2017 12/31/2017
Patents $40 $4 $36 $24 $32
Use these amounts in Use these amounts in

2016 worksheet for 2017 worksheet for
amortization expense amortization expense
and patents and patents.

Income & Dividend Calculations (2 of 2)
2016: blank
Son's net income $50

Pop's 80% share
Adjusted income $46 $24.0 NCI 20% share
Blank blank $9.2
Dividends $30 $6.0
2017: Blank
Adjusted income $56 $24.0
Blank blank NCI 20% share
Dividends $30 $11.2
$6.0

Pop's Worksheet Entries for 2017 (1 of 3)
● none
● none
Income from Son (-R, -SE) 44.8 blank

dividends

balances
Capital stock, Son (-SE) 120 blank
Retained earnings, Son (beginning) (-SE) 80 blank
Patents (+A) 36 blank

Eliminating Investment in Son
Entry 5 eliminates the Investment in Son and establishes the
Noncontrolling Interest as of the beginning of the current year.
Implied value of Son at acquisition $176/.80 $220

Add the increase in retained earnings from acquisition
to the beginning of the current year
$80 at 1/1/2017 minus $60 at 1/1/2016 20
Less amortization for all prior periods
$4 patent amortization for 2016 (4)
Adjusted value of Son at 1/1/2017 $236
– Investment in Son (80% x $236) = $188.8

– Noncontrolling interest (20% x $236) = $47.2
– Verify the $236 from the debits in Entry 5 (120 + 80 + 36).

6. Amortize fair value differentials
Amortization Expense (E, -SE) 4 blank
Patents (-A) blank 4
Note payable – Pop (-L) 20 blank
Note receivable – Son (-A) blank 20

Pop's 2016 Worksheet (2 of 2)
Year ended 12/31/2016 Pop Son DR CR Consol
Income from Son 44.8 blank 44.8 blank 0.0
Expenses (488.0) (90.0) 4.0 blank (582.0)

Pop’s Balance Sheet 12/31/2017
Note receivable – Son 20.0 blank blank 20.0 0.0
Investment in Son 209.6 blank Blank 20.8 0.0
Blank blank blank Blank 188.8 blank
Note payable – Pop blank 20.0 20.0 blank blank

4.3: Errors in the Workpapers

Errors
Most errors show up when the consolidated balance
sheet does not balance.
● Check for 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.

4.4: Assigning Fair Value

Example with Excess Allocated
● Pam paid $360 for 90% of Sun on 12/31/2016
when Sun's equity consisted of $200 capital stock
and $50 retained earnings.
● Inventory (sold in 2016), land, and buildings (20
years) were undervalued by $10, $30, and $80,
respectively. Equipment (10 years) was overvalued
by $20.
● Sun's income and dividends for 2017 were $60 and
$20.
● At year-end, Sun has dividends payable of $10,
which Pam has not yet recorded. There is $20 cash
in transit from Sun to Pam for the note.
Analysis at Acquisition
Cost of 90% of Sun $360 Allocated to: Amt Amort
Implied value of Son ($360/.90) $400 Inventories $10 1st yr
Book value (200+50) 250 Land 30 -
Excess $150 Building 80 20 yrs
Blank blank Equipment (20) 10 yrs
Noncontrolling interest, Goodwill 50 -
10%(400) $40 blank 150 blank
blank Unamort. Bal. Amortization Unamort. Bal.

blank 12/31/2016 * in 2017 * on 12/31/2017
* Use the
Inventories $10 ($10) $0 12/31/2016
Land 30 0 30 and 2017
Building 80 (4) 76 amortization
Equipment (20) 2 (18) in worksheet
Goodwill 50 0 50 entries for
blank $150 ($12) $138 2017.

Sun's Income & Dividends
blank 2017
Pam's 90% share
Sun's net income $60 $43.2
Amortization ($12) $18.0
Adjusted income $48
blank blank
Sun's dividends $20
NCI 10% share

$4.8
$2.0

Pam's Worksheet Entries (1 of 4)
Dividends receivable (+A) 9.0 blank
Investment in Sun (-A) blank 9.0
Cash (+A) 20.0 blank
Note receivable, Sun (-A) blank 20.0

● none
Income from Sun (-R, -SE) 43.2 blank
Investment in Sun (-A) blank 25.2

dividends
5a. Eliminate reciprocal Investment & sub.'s equity

balances (with unamortized excess)
Capital stock (-SE) 200 blank
Retained earnings, Sun (beginning) (-SE) 50 blank
Unamortized excess (+A) 150 blank
Investment in Sun (-A) blank 360
Noncontrolling interest (+SE) blank 40

5b. Allocate the unamortized excess according to
beginning-of-year balances.
Cost of Goods Sold (-SE) 10 blank
Land (+A) 30 blank
Building, net (+A) 80 blank
Goodwill (+A) 50 blank
Equipment, net (-A) blank 20
Unamortized excess (-A) blank 150

6. Amortize fair value/book value differentials
Operating (depreciation) expense (E, -SE) 4 blank
Buildings, net (-A) blank 4
Equipment, net (-A) 2 blank
Operating (depreciation) expense (-E, SE) blank 2

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

Pam's 2017 Worksheet
Year ended 12/31/2017 Pam Sun DR CR Consol
Revenues 900.0 300.0 blank blank 1,200.0

Income from Sun 43.2 blank 43.2 blank 0.0
Cost of goods sold (600.0) (150.0) 10.0 blank (760.0)
Operating expenses (190.0) (90.0) 4.0 2.0 (282.0)

Pam’s Balance sheet 12/31/2017
Balance sheet, 12/31/2017 Pam Sun DR CR Consol
Cash 13.0 15.0 20.0 blank 48.0
Accounts receivable, net 76.0 25.0 blank blank 101.0
Note receivable – Sun 20.0 blank blank 20.0 0.0
Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0 blank 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 Sun 394.2 blank blank 9.0 0.0
blank blank blank blank 25.2 blank
blank blank blank blank 360.0 blank
Dividends receivable blank blank 9.0 9.0 0.0
Goodwill blank blank 50.0 blank 50.0
Unamortized excess blank blank 150.0 150.0 0.0
Accounts payable 120.0 60.0 blank blank 180.0
Dividends payable blank 10.0 9.0 blank 1.0
Noncontrolling interest, Jan.1 blank blank blank 40.0

4.5: Consolidated Statement of Cash
Flows

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
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

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

4.7: Appendix A – Trial Balance Format

Alternative (Trial Balance) 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
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.

4.8: Appendix B – Consolidation
Worksheet

Worksheet: Incomplete Equity Method (1 of 2)
Under the complete equity method, the parent
company’s net income equals the controlling share of
consolidated net income, and the parent company’s
retained earnings equal consolidated retained
earnings.
If these equalities are not present, then the

incomplete equity method is used.

Worksheet: Incomplete Equity Method (2 of 2)
1. Results from an incorrect application of the equity
method or use of the cost method of subsidiary
accounting.
2. This is not considered a violation of GAAP as long
as the consolidated financial statements prepared
for stockholders are correct.
3. An approach to preparing consolidation working
papers under an incomplete equity method is to
convert the parent company’s accounts to the
equity method as the first working paper entry.

Worksheet: Cost Method
Subsidiary income only recognized when dividends
are declared.
1. Conversion to equity approach
2. Use traditional working paper entries to
consolidate parent and subsidiary under the cost
method.
3. This is easier in year of acquisition, but becomes
more complicated in years after, especially if
there are intercompany activities.

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Advanced Accounting

Thirteenth Edition, Global Edition

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.

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.

Son’s income and dividends follow:

blank 2016 2017

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Use these amounts Use these amounts in

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Son's net income $60 Pop's 80% share

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Income from Son (-R, -SE) 36.8 Blank

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5. Eliminate reciprocal Investment & sub.'s equity

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7. Eliminate other reciprocal balances

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Statement of retained earnings blank blank blank blank blank

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● Income from Son is eliminated.

● $36.8 x .20/.80 = $9.2

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Beginning retained earnings 10.0 60.0 60.0 blank 10.0

● Beginning retained earnings of Son is eliminated.

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Balance sheet, 12/31/2016 Pop Son DR CR Consol

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Unamort. Unamort. Unamort.

Patents $40 $4 $36 $24 $32

Use these amounts in Use these amounts in

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Son's net income $50

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Income from Son (-R, -SE) 44.8 blank

Dividends (+SE) blank 24.0

Investment in Son (-A) blank 20.8

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5. Eliminate reciprocal Investment & sub.'s equity

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Implied value of Son at acquisition $176/.80 $220

– Investment in Son (80% x $236) = $188.8

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Amortization Expense (E, -SE) 4 blank

Patents (-A) blank 4

7. Eliminate other reciprocal balances

Note payable – Pop (-L) 20 blank

Note receivable – Son (-A) blank 20

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blank Unamort. Bal. Amortization Unamort. Bal.