Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 11: Alternative
Concepts of Consolidated
Financial Statements
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
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Pooling of Interests Method
Recent developments
 Upsurge
in pooling activity in 1998
 FASB
voted to eliminate the pooling method in
4/1999
 exposure
draft eliminating the pooling method
issued in 9/1999
 final
standard expected late 2000
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Pooling of Interests Method
Why is the FASB considering elimination
of the pooling method?
 The
purchase method provides better
information on the profitability
of an investment
 International
compatibility
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Pooling of Interests Method
Stock Acquisition
Main Requirement
a
stock acquisition
through an exchange
of voting stock for at
least 90% of the
voting stock of the
acquired company
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Wholly Owned Subsidiary
Equity Allocation
Case A: P issued shares with par value of $60,000
Other Contributed
Capital - S
$10,000
Common stock -S
$50,000
$50,000
Common Stock
-P
$200,000
$10,000
Retained Earnings
-S
$20,000
$20,000
Other Contributed
Capital - P
$40,000
Retained Earnings
-P
$100,000
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Wholly Owned Subsidiary
Journal Entry
Case A: P issued shares with par value of $60,000
net assets acquired are recorded
at their book value
Investment in S
Common Stock
Retained Earnings
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
80,000
60,000
20,000
Par value of common stock issued
is recorded
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Wholly Owned Subsidiary
Eliminating Entry
Case A: P issued shares with par value of $60,000
Common stock - S
Other contributed capital - S
Retained earnings - S
Investment in S
50,000
10,000
20,000
80,000
There is no purchase differential under pooling method
because the investment account carries the book value of S
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Wholly Owned Subsidiary
Equity Allocation
Case B: P issued shares with par value of $90,000
Other Contributed
Capital - S
$10,000
Common stock -S
$50,000
$50,000
Common Stock
-P
$200,000
$10,000
$30,000
Retained Earnings
-S
$20,000
$20,000
Other Contributed
Capital - P
$40,000
Retained Earnings
-P
$100,000
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Wholly Owned Subsidiary
Journal Entry
Case B: P issued shares with par value of $90,000
net assets acquired are recorded
at their book value
Investment in S
Other contributed capital
Common Stock
Retained Earnings
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
80,000
30,000
90,000
20,000
Par value of common stock issued
is recorded
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Wholly Owned Subsidiary
Equity Allocation
Case C: P issued shares with par value of $110,000
Other Contributed
Capital - S
$10,000
Common stock -S
$50,000
$50,000
Common Stock
-P
$200,000
$10,000
$40,000
$10,000
Other Contributed
Capital - P
$40,000
Retained Earnings
-S
$20,000
$10,000
Retained Earnings
-P
$100,000
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Wholly Owned Subsidiary
Journal Entry
Case C: P issued shares with par value of $110,000
net assets acquired are recorded
at their book value
Investment in S
Other contributed capital
Common Stock
Retained Earnings
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
80,000
40,000
110,000
10,000
Par value of common stock issued
is recorded
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95% Owned Subsidiary
Equity Allocation
Case D: P issued shares with par value of $50,000
Other Contributed
Capital - S
$9,500
Common stock -S
$47,500
$47,500
Common Stock
-P
$200,000
$2,500
Retained Earnings
-S
$19,000
$7,500
$19,000
Other Contributed
Capital - P
$40,000
Retained Earnings
-P
$100,000
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95% Owned Subsidiary
Journal Entry
Case D: P issued shares with par value of $50,000
net assets acquired are recorded
at their book value
Investment in S
Common Stock
Other contributed capital
Retained Earnings
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
76,000
50,000
7,000
19,000
Par value of common stock issued
is recorded
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95% Owned Subsidiary
Eliminating Entry
Case D: P issued shares with par value of $50,000
Common stock - S
Other contributed capital - S
Retained earnings - S
Investment in S
47,500
9,000
19,000
76,000
There is no purchase differential under pooling method
because the investment account carries the book value of S
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Accounting for a Pooled Subsidiary
After Acquisition
Book value method
 equivalent
to cost method in a purchase
Partial equity method
Complete equity
method
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Accounting After Acquisition
Book Value Method
Journal entries of parent:
 investment
account remains unchanged
unless the parent buys or sells shares of
the subsidiary
 parent
records dividend
income from subsidiary
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Accounting After Acquisition
Book Value Method
Eliminating entries:
 reciprocity
 dividend
EE
EE
 investment
EE
 The eliminating entries are similar to those
under purchase method, without allocation
and amortization of purchase differential
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Accounting After Acquisition
Partial or Complete Equity Method
Journal entries of parent:
 investment
account is increased for the parent’s
share of reported net income of subsidiary
 investment
account is decreased for dividends
received from the subsidiary
 complete
equity method: investment account is
adjusted for unrealized profit from
intercompany sale of inventory or equipment
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Accounting After Acquisition
Partial or Complete Equity Method
Eliminating entries:
 dividend
EE
 investment
EE
 The eliminating entries are similar to those
under purchase method, without allocation
and amortization of purchase differential
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Interim Acquisition
 Revenues and expenses of the subsidiary are
included in the consolidated income statement
for the entire year
 The investment account is recorded as if the
pooling took place at the beginning of the year
 No “net income purchased”
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Intercompany Sale of Assets
 All unrealized profit from intercompany sale
of inventory or property is excluded from
consolidated financial statements
 The eliminating entries
are similar to those
under purchase method
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Alternative Concepts of Consolidation
Parent
Company
Concept
Economic
Unit
Concept
Current practice is a
compromise between the two
general concepts
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Parent Company Concept
 Focus: the interests of the parent’s shareholders
 consolidated balance sheet = parent’s balance
sheet + assets and liabilities of subsidiary
substituted for the Investment in S account
 consolidated income statement = parent’s
income statement + revenues, expenses, gains
and losses of subsidiary substituted for the
parent’s income from investment
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Economic Unit Concept
 Focus: control of the whole by a single
management
 the parent and the subsidiary as a single
economic unit
 consolidated balance sheet = assets and
liabilities of all affiliated companies
 consolidated income statement = revenues,
expenses, gains and losses of all affiliated
companies
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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