44

Consolidated Financial
Statements After Acquisition

Advanced Accounting, Fifth Edition

Slide
4-1
 Learning
Learning Objectives
Objectives
1. Describe the accounting treatment required under current GAAP for varying levels of
influence or control by investors.
2. Prepare journal entries on the parent’s 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 firm’s
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.
Slide
4-2
 Investments
Investments in
in Stock
Stock

Investments in voting stock may be consolidated, or

separately reported at

cost,

fair value, or

equity.

Slide
4-3
 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%

No significant Significant Effective
influence influence control
(no control)

Investment Investment Investment

valued using valued using valued using Cost
the “cost” Equity Method or Equity
method but Method Method
with (investment
adjustments eliminated in
to fair value. Consolidation)
Slide
4-4
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.

Slide
4-5
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 Company’s total
stockholders’ equity amounted to $475,000. Income and
dividend distributions for Song Company from 2009 through
2010 are as follows:
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

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:
Slide
4-6
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 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2009 Investment in Song 387,000

Cash 387,000

Cash 20,000
Dividend income (.8 x $25,000) 20,000

Slide
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 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2010 Cash 40,000

Dividend income (.8 x $50,000) 40,000

2011 Cash 28,000

Investment in Song (.8 x $35,000) 28,000
(Liquidating dividend)

Slide
4-8
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 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2009 Investment in Song 387,000

Cash 387,000

Investment in Song 50,800

Equity income (.8 x $63,500) 50,800

Cash 20,000
Investment in Song (.8 x $25,000) 20,000
Slide
4-9
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.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2010 Investment in Song 42,000

Equity income (.8 x $52,500) 42,000

Cash 40,000
Investment in Song (.8 x $50,000) 40,000

Slide
4-10
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.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2011 Equity loss (.8 x $55,000) 44,000

Investment in Song 44,000

Cash 28,000
Investment in Song (.8 x $35,000) 28,000

Slide
4-11
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.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

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.
Slide
4-12
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 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2009 Investment in Song 387,000

Cash 387,000

Investment in Song 50,800

Equity income (.8 x $63,500) 50,800

Cash 20,000
Investment in Song (.8 x $25,000) 20,000
Slide
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.

A journal entry is required to adjust for depreciation related

to the excess of market over book values of depreciable
assets.
Cost of investment $387,000
Book value acquired ($475,000 x 80%) 380,000
Difference between Cost and Book value $ 7,000

2009 Equity income ($7,000 / 10 yrs.) 700

Investment in Song 700

Slide
4-14
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 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2010 Investment in Song 42,000

Equity income (.8 x $52,500) 42,000

Cash 40,000
Investment in Song (.8 x $50,000) 40,000

Equity income ($7,000 / 10 yrs.) 700

Investment in Song 700
Slide
4-15
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 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000

2011 Equity Loss (.8 x $55,000) 44,000

Investment in Song 44,000

Cash 28,000
Investment in Song (.8 x $35,000) 28,000

Equity income ($7,000 / 10) 700

Investment in Song 700
Slide
4-16
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:
 Income statement,
 Retained earnings statement,
 Balance sheet, and
 Statement of cash flows

Slide
4-17
LO 3 Use of workpapers.
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition

Year of Acquisition—Cost 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, Sid’s 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.

Slide
4-18
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 NCI Total
Share Share Value
Purchase price and implied value $ 160,000 $ 8,421 $ 168,421

Less: Book value of equity acquired:

Common stock 114,000 6,000 120,000
Other contributed capital 9,500 500 10,000
Retained earings 21,850 1,150 23,000
Total book value 145,350 7,650 153,000

Difference between implied and book value 14,650 771 15,421

Record new goodwill (14,650) (771) (15,421)
Balance $ - $ - $ -

Difference between implied and book values is

established only at the date of acquisition.
Slide
4-19
LO 4 Preparing Computation and Allocation (CAD) Schedule.
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: A. 2010 Year of Acquisition
Parker Sid
Cash $ 62,000 $ 30,000
On December 31, 2010, Accounts receivable 32,000 29,000
the two companies’ trial Inventory 30,000 16,000
Investment in Sid 160,000 -
balances were as follows Plant and equipment 105,000 82,000
at right: Land 29,000 34,000
Dividends declared 20,000 20,000
Required A. Prepare a Cost of goods sold 130,000 40,000
Operating expenses 20,000 14,000
consolidated statements Total debits $ 588,000 $ 265,000
workpaper on December
Accounts payable $ 19,000 $ 12,000
31, 2010. Other liabilities 10,000 20,000
Common stock 180,000 120,000
Other contributed capital 60,000 10,000
Retained earnings 40,000 23,000
Sales 260,000 80,000
Dividend income 19,000 -
Total credits $ 588,000 $ 265,000

Slide
4-20
LO 5 Workpapers eliminating entries.
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: A. 2010 Year of Acquisition
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 260,000 $ 80,000 $ 340,000
Dividend income 19,000 19,000 -
Total revenue 279,000 80,000 340,000
Cost of goods sold 130,000 40,000 170,000
Other expenses 20,000 14,000 34,000
Total cost and expense 150,000 54,000 204,000
Net income 129,000 26,000 136,000
Noncontrolling interest 1,300 (1,300)
Net income $ 129,000 $ 26,000 $ 19,000 $ - $ 1,300 $ 134,700

Retained Earnings Statement

Retained earnings, 1/1/10 40,000 23,000 23,000 40,000
Net income 129,000 26,000 19,000 1,300 134,700
Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000)
Retained earnings, 12/31/10 $ 149,000 $ 29,000 $ 42,000 $ 19,000 $ 300 $ 154,700

Slide
4-21
LO 5 Workpapers eliminating entries.
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: A. 2010 Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 62,000 $ 30,000 $ 92,000
Accounts receivable 32,000 29,000 61,000
Inventory 30,000 16,000 46,000
Investment in Sid 160,000 - 160,000 -
Difference (cost & book) 15,421 15,421 -
Plant and equipment 105,000 82,000 187,000
Land 29,000 34,000 63,000
Goodwill 15,421 15,421
Total assets $ 418,000 $ 191,000 $ 464,421

Accounts payable $ 19,000 $ 12,000 $ 31,000

Other liabilities 10,000 20,000 30,000
Common stock 180,000 120,000 120,000 180,000
Other contributed capital 60,000 10,000 10,000 60,000
Retained earnings 149,000 29,000 42,000 19,000 300 154,700
Noncontrolling interest 1/1 8,421 8,421 -
Noncontrolling interest 12/31 $ 8,721 8,721
Total liabilities & equity $ 418,000 $ 191,000 $ 202,842 $ 202,842 $ 464,421

Slide
4-22
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 15,421
Noncontrolling interest in equity 8,421
Investment in Sid 160,000
Slide
4-23
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 15,421

4. Elimination of intercompany dividends

Dividend income 19,000

Dividends declared – Sid Company 19,000

Slide
4-24
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 $26,000

Noncontrolling percentage owned 5%
Noncontrolling interest in income $ 1,300

Slide
4-25
LO 5 Workpapers eliminating entries.
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition

Workpaper Observations (continued)

6. Consolidated retained earnings:

Parker Company’s retained earnings, 1/1 $ 40,000

+ Parker’s income 129,000
- Dividends from Sid Company - 19,000
+ Parker’s percentage of Sid income (95%) 24,700
- Parker’s dividends declared - 20,000
Parker Company’s retained earnings, 12/31 $154,700

Slide
4-26
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 $ 8,421

+ NCI share of Sid income ($26,000 x 5%) 1,300

- NCI share of Sid dividends ($20,000 x 5%) -1,000
Noncontrolling Interest in Equity $ 8,721

Slide
4-27
LO 5 Workpapers eliminating entries.
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
After Year of Acquisition – Cost Method
Parker Sid
P4-8: B. 2011 Cash $ 67,000 $ 16,000
Accounts receivable 56,000 32,000
On December 31, 2011, Inventory 38,000 48,500
the two companies’ trial Investment in Sid 160,000 -
Plant and equipment 124,000 80,000
balances were as follows Land 29,000 34,000
at right: Dividends declared 20,000 20,000
Cost of goods sold 155,000 52,000
Required B. Prepare a Operating expenses 30,000 18,000
Total debits $ 679,000 $ 300,500
consolidated statements
workpaper on December Accounts payable $ 16,000 $ 7,000
Other liabilities 15,000 14,500
31, 2011. Common stock 180,000 120,000
Other contributed capital 60,000 10,000
Retained earnings 149,000 29,000
Sales 240,000 120,000
Dividend income 19,000 -
Total credits $ 679,000 $ 300,500
Slide
4-28
LO 5 Workpapers eliminating entries after acquisition (cost method).
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: B. 2011 After Year of Acquisition
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 240,000 $ 120,000 $ 360,000
Dividend income 19,000 19,000 -
Total revenue 259,000 120,000 360,000
Cost of goods sold 155,000 52,000 207,000
Other expenses 30,000 18,000 48,000
Total cost and expense 185,000 70,000 255,000
Net income 74,000 50,000 105,000
Noncontrolling interest 2,500 (2,500)
Net income $ 74,000 $ 50,000 $ 19,000 $ - $ 2,500 $ 102,500

Retained Earnings Statement

Retained earnings, 1/1/11 149,000 29,000 29,000 5,700 154,700
Net income 74,000 50,000 19,000 2,500 102,500
Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000)
Retained earnings, 12/31/11 $ 203,000 $ 59,000 $ 48,000 $ 24,700 $ 1,500 $ 237,200

Slide
4-29
LO 5 Workpapers eliminating entries after acquisition (cost method).
 Consolidated
Consolidated Statements
Statements After
After Acquisition
Acquisition
P4-8: B. 2011 After Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 67,000 $ 16,000 $ 83,000
Accounts receivable 56,000 32,000 88,000
Inventory 38,000 48,500 86,500
Investment in Sid 160,000 - 5,700 165,700 -
Difference (cost & book) 15,421 15,421 -
Plant and equipment 124,000 80,000 204,000
Land 29,000 34,000 63,000
Goodwill 15,421 15,421
Total assets $ 474,000 $ 210,500 $ 539,921

Accounts payable $ 16,000 $ 7,000 $ 23,000

Other liabilities 15,000 14,500 29,500
Common stock 180,000 120,000 120,000 180,000
Other contributed capital 60,000 10,000 10,000 60,000
Retained earnings 203,000 59,000 48,000 24,700 1,500 237,200
Noncontrolling interest 1/1 8,721 8,721
Noncontrolling interest 12/31 $ 10,221 10,221
Total liabilities & equity $ 474,000 $ 210,500 $ 214,542 $ 214,542 $ 539,921

Slide
4-30
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
Company’s beginning retained earnings to recognize
Parker’s 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 5,700

Retained earnings, 1/1 5,700
($29,000 – $23,000 ) X .95 = $5,700 Entry to establish
Reciprocity
Slide
4-31
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 Sid’s revenues, expenses, assets, and

liabilities are included in the consolidated totals. The
noncontrolling interest’s share of income and net assets
are shown as separate line items.

Slide
4-32
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 investor’s proportionate share of the
earnings (losses) and
 dividends received by the investor.

If investor’s share of investee’s losses exceeds the

carrying amount of the investment, the investor ordinarily
should discontinue applying the equity method.

Slide
4-33
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.

Slide
4-34
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%) 24,000

Cash 6,000
Investment in Stock ($20,000 x 30%) 6,000

Slide
4-35
LO 5 Workpaper eliminating entries (equity method).
 Recording
Recording Investments
Investments –– Equity
Equity Method
Method
Investment Carried at Equity—Year 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, Sid’s 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
4-36
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 NCI Total
Share Share Value
Purchase price and implied value $ 180,000 $ 20,000 $ 200,000

Less: Book value of equity acquired:

Common stock 108,000 12,000 120,000
Other contributed capital 18,000 2,000 20,000
Retained earings 22,500 2,500 25,000
Total book value 148,500 16,500 165,000

Difference between implied and book value 31,500 3,500 35,000

Allocated to land (31,500) (3,500) (35,000)
Balance $ - $ - $ -

Difference between implied and book values is

established only at the date of acquisition.
Slide
4-37
LO 5 Workpaper eliminating entries (equity method).
 Recording
Recording Investments
Investments –– Equity
Equity Method
Method
P4-12: A. 2010 Year of Acquisition
Parker Sid
On December 31, 2010, Cash $ 65,000 $ 35,000
Accounts receivable 40,000 30,000
the two companies’ trial Inventory 25,000 15,000
balances were as follows: Investment in Sid 184,500 -
Plant and equipment 110,000 85,000
Required A. Prepare a Land 48,500 45,000
Dividends declared 20,000 15,000
consolidated statements Cost of goods sold 150,000 60,000
workpaper on December Operating expenses 35,000 15,000
Total debits $ 678,000 $ 300,000
31, 2010.
Accounts payable $ 20,000 $ 15,000
Other liabilities 15,000 25,000
Common stock 200,000 120,000
Other contributed capital 70,000 20,000
Retained earnings 55,000 25,000
Sales 300,000 95,000
Equity in subsidiary income 18,000 -
Total credits $ 678,000 $ 300,000
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
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 300,000 $ 95,000 $ 395,000
Equity in subsidiary income 18,000 18,000 -
Total revenue 318,000 95,000 395,000
Cost of goods sold 150,000 60,000 210,000
Other expenses 35,000 15,000 50,000
Total cost and expense 185,000 75,000 260,000
Net income 133,000 20,000 135,000
Noncontrolling interest 2,000 (2,000)
Net income $ 133,000 $ 20,000 $ 18,000 $ - $ 2,000 $ 133,000

Retained Earnings Statement

Retained earnings, 1/1/10 55,000 25,000 25,000 55,000
Net income 133,000 20,000 18,000 2,000 133,000
Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000)
Retained earnings, 12/31/10 $ 168,000 $ 30,000 $ 43,000 $ 13,500 $ 500 $ 168,000

Slide
4-39
LO 5 Workpaper eliminating entries (equity method).
 Recording
Recording Investments
Investments –– Equity
Equity Method
Method
P4-12: A. 2010 Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 65,000 $ 35,000 $ 100,000
Accounts receivable 40,000 30,000 70,000
Inventory 25,000 15,000 40,000
Investment in Sid 184,500 - 4,500 -
180,000
Difference (cost & book) 35,000 35,000 -
Plant and equipment 110,000 85,000 195,000
Land 48,500 45,000 35,000 128,500
Total assets $ 473,000 $ 210,000 $ 533,500

Accounts payable $ 20,000 $ 15,000 $ 35,000

Other liabilities 15,000 25,000 40,000
Common stock 200,000 120,000 120,000 200,000
Other contributed capital 70,000 20,000 20,000 70,000
Retained earnings 168,000 30,000 43,000 13,500 500 168,000
Noncontrolling interest 1/1 20,000 20,000
Noncontrolling interest 12/31 $ 20,500 20,500
Total liabilities & equity $ 473,000 $ 210,000 $ 253,000 $ 253,000 $ 533,500

Slide
4-40
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
4-41
LO 5 Workpaper eliminating entries (equity method).
 Recording
Recording Investments
Investments –– Equity
Equity Method
Method
Investment Carried at Equity—After Year of Acquisition
Parker Sid
P4-12: B. 2011 Cash $ 70,000 $ 20,000
Accounts receivable 60,000 35,000
On December 31, 2011, Inventory 40,000 30,000
the two companies’ trial Investment in Sid 193,500 -
Plant and equipment 125,000 90,000
balances were as follows Land 48,500 45,000
at right: Dividends declared 20,000 15,000
Cost of goods sold 160,000 65,000
Required B. Prepare a Operating expenses 35,000 20,000
Total debits $ 752,000 $ 320,000
consolidated statements
workpaper on December Accounts payable $ 16,500 $ 16,000
Other liabilities 15,000 24,000
31, 2011. Common stock 200,000 120,000
Other contributed capital 70,000 20,000
Retained earnings 168,000 30,000
Sales 260,000 110,000
Equity in subsidiary income 22,500 -
Total credits $ 752,000 $ 320,000
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4-42
LO 5 Workpaper eliminating entries (equity method).
 Recording
Recording Investments
Investments –– Equity
Equity Method
Method
P4-12: B. 2011 After Year of Acquisition
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 260,000 $ 110,000 $ 370,000
Equity in subsidiary income 22,500 22,500 -
Total revenue 282,500 110,000 370,000
Cost of goods sold 160,000 65,000 225,000
Other expenses 35,000 20,000 55,000
Total cost and expense 195,000 85,000 280,000
Net income 87,500 25,000 90,000
Noncontrolling interest 2,500 (2,500)
Net income $ 87,500 $ 25,000 $ 22,500 $ - $ 2,500 $ 87,500

Retained Earnings Statement

Retained earnings, 1/1/11 168,000 30,000 30,000 168,000
Net income 87,500 25,000 22,500 2,500 87,500
Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000)
Retained earnings, 12/31/11 $ 235,500 $ 40,000 $ 52,500 $ 13,500 $ 1,000 $ 235,500

Slide
4-43
LO 5 Workpaper eliminating entries (equity method).
 Recording
Recording Investments
Investments –– Equity
Equity Method
Method
P4-12: B. 2011 After Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 70,000 $ 20,000 $ 90,000
Accounts receivable 60,000 35,000 95,000
Inventory 40,000 30,000 70,000
Investment in Sid 193,500 - 9,000 -
184,500
Difference (cost & book) 35,000 35,000 -
Plant and equipment 125,000 90,000 215,000
Land 48,500 45,000 35,000 128,500
Total assets $ 537,000 $ 220,000 $ 598,500

Accounts payable $ 16,500 $ 16,000 $ 32,500

Other liabilities 15,000 24,000 39,000
Common stock 200,000 120,000 120,000 200,000
Other contributed capital 70,000 20,000 20,000 70,000
Retained earnings 235,500 40,000 52,500 13,500 1,000 235,500
Noncontrolling interest 1/1 20,500 20,500
Noncontrolling interest 12/31 $ 21,500 21,500
Total liabilities & equity $ 537,000 $ 220,000 $ 262,500 $ 262,500 $ 598,500

Slide
4-44
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 subsidiary’s

revenue and expense items in the consolidated income
statement in the year of acquisition:
Full-year reporting alternative.
Partial-year reporting alternative.

Slide
4-45
LO 6 Two approaches for interim acquisitions.
 Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
Equity Method—Full-Year Reporting Alternative
P4-16: Pillow Satin
Cash $ 390,600 $ 179,200
Pillow Company purchased Treasury stock at cost 32,000
Investment in Satin 510,000 -
90% of the common stock Plant and equipment 1,334,000 562,000
of Satin Company on May Cost of goods sold 1,261,000 584,000
Operating expenses 484,000 242,000
1, 2009, for a cash Dividends declares - 60,000
payment of $474,000. Total debits $ 3,979,600 $ 1,659,200
December 31, 2009, trial
Accounts and notes payable $ 270,240 $ 124,000
balances for Pillow and Dividends payable - 60,000
Satin were: Common stock 1,000,000 200,000
Other contributed capital 364,000 90,000
Retained earnings 315,360 209,200
Sales 1,940,000 976,000
Equity in subsidiary income 90,000 -
Total credits $ 3,979,600 $ 1,659,200

Slide
4-46
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 full-
year reporting alternative.

Slide
4-47
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
and Book Value Acquired: 90% 10% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 474,000 $ 52,667 $ 526,667

Less: Book value of equity acquired:

Common stock 180,000 20,000 200,000
Other contributed capital 81,000 9,000 90,000
Retained earings 188,280 20,920 209,200
Treasury stock (28,800) (3,200) (32,000)
Subsidiary income 1/1 to 5/1 45,000 5,000 50,000
Total book value 465,480 51,720 517,200

Difference between implied and book value 8,520 947 9,467

Allocated to land (8,520) (947) (9,467)
Balance $ - $ - $ -

Slide
4-48
LO 6 Two approaches for interim acquisitions.
 Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-16: Full-Year Reporting Alternative
Eliminations Consolidated
Income Statement Pillow Satin Debit Credit NCI Balances
Sales $ 1,940,000 $ 976,000 $ 2,916,000
Equity in subsidiary income 90,000 90,000 -
Total revenue 2,030,000 976,000 2,916,000
Cost of goods sold 1,261,000 584,000 1,845,000
Other expenses 484,000 242,000 726,000
Total cost and expense 1,745,000 826,000 2,571,000
Net income 285,000 150,000 345,000
Net income purchased 45,000 (45,000)
Noncontrolling interest 15,000 (15,000)
Net income $ 285,000 $ 150,000 $ 135,000 $ - $ 15,000 $ 285,000

Retained Earnings Statement

Retained earnings, 1/1 315,360 209,200 209,200 315,360
Net income 285,000 150,000 135,000 15,000 285,000
Dividends declared - (60,000) 54,000 (6,000) -
Retained earnings, 12/31 $ 600,360 $ 299,200 $ 344,200 $ 54,000 $ 9,000 $ 600,360

Slide
4-49
LO 6 Two approaches for interim acquisitions.
 Interim
Interim Acquisitions
Acquisitions of
of Subsidiary
Subsidiary Stock
Stock
P4-16: Full-Year Reporting Alternative
Eliminations Consolidated
Balance Sheet Pillow Satin Debit Credit NCI Balances
Current assets $ 390,600 $ 179,200 54,000 $ 515,800
Investment in Satin 510,000 474,000 -
36,000
Difference (cost & book) 9,467 9,467 -
Plant and equipment 1,334,000 562,000 9,467 1,905,467
Total assets $ 2,234,600 $ 741,200 $ 2,421,267

Accounts and notes payable $ 270,240 $ 124,000 $ 394,240

Dividends payable 60,000 54,000 6,000
Common stock 1,000,000 200,000 200,000 1,000,000
Other contributed capital 364,000 90,000 90,000 364,000
Treasury stock (32,000) 32,000 -
Retained earnings 600,360 299,200 344,200 54,000 9,000 600,360
Noncontrolling interest 1/1 47,667 47,667
Noncontrolling interest 12/31 $ 56,667 56,667
Total liabilities & equity $ 2,234,600 $ 741,200 $ 707,134 $ 707,134 $ 2,421,267

Slide
4-50
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
Eliminations Consolidated
Income Statement Pillow Satin Debit Credit NCI Balances
Sales $ 1,940,000 $ 650,666 $ 2,590,666
Equity in subsidiary income 90,000 90,000 -
Total revenue 2,030,000 650,666 2,590,666
Cost of goods sold 1,261,000 389,333 1,650,333
Other expenses 484,000 161,333 645,333
Total cost and expense 1,745,000 550,666 2,295,666
Net income 285,000 100,000 295,000
Noncontrolling interest 10,000 (10,000)
Net income $ 285,000 $ 100,000 $ 90,000 $ - $ 10,000 $ 285,000

Retained Earnings Statement

Retained earnings, 1/1 315,360 259,200 259,200 315,360
Net income 285,000 100,000 90,000 10,000 285,000
Dividends declared - (60,000) 54,000 (6,000) -
Retained earnings, 12/31 $ 600,360 $ 299,200 $ 349,200 $ 54,000 $ 4,000 $ 600,360

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
Eliminations Consolidated
Balance Sheet Pillow Satin Debit Credit NCI Balances
Current assets $ 390,600 $ 179,200 54,000 $ 515,800
Investment in Satin 510,000 474,000 -
36,000
Difference (cost & book) 9,467 9,467 -
Plant and equipment 1,334,000 562,000 9,467 1,905,467
Total assets $ 2,234,600 $ 741,200 $ 2,421,267

Accounts and notes payable $ 270,240 $ 124,000 $ 394,240

Dividends payable 60,000 54,000 6,000
Common stock 1,000,000 200,000 200,000 1,000,000
Other contributed capital 364,000 90,000 90,000 364,000
Treasury stock (32,000) 32,000 -
Retained earnings 600,360 299,200 349,200 54,000 4,000 600,360
Noncontrolling interest 1/1 52,667 52,667
Noncontrolling interest 12/31 $ 56,667 56,667
Total liabilities & equity $ 2,234,600 $ 741,200 $ 712,134 $ 712,134 $ 2,421,267

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4-52
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.

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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.

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4-54
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
4-55 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
4-56 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.
 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.
 Note: The consolidated balances derived in a
workpaper are the same regardless of the
format selected.
Slide
4-58
 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).

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4-59
 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
company’s books.

Slide
4-60
 When separate tax returns are filed, the parent company
will include dividends received from the subsidiary in its
taxable income, while the subsidiary’s reported income is
included in consolidated net income.

Thus the difference between the subsidiary’s 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
4-61
 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.

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4-62
 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

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 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
parent’s income statement while dividends are included on
the tax return.

Therefore, deferred taxes on the parent’s books must

reflect the amount of undistributed income in the
subsidiary.

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 Copyright
Copyright

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
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in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
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caused by the use of these programs or from the use of the
information contained herein.

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