Consolidated Theories, Push-Down
Accounting, and Corporate
Joint Ventures
Chapter 11
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 1
Learning Objective 1
Compare and contrast the elements
of consolidation approaches under
contemporary theory, parent
company theory, and entity theory.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 2
Comparison of
Consolidation Theories
Parent company theory adopts the
viewpoint of parent company stockholders.
Entity theory focuses on the
total consolidated entity.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 3
Comparison of
Consolidation Theories
Contemporary theory identifies the primary
users of consolidated financial statements as
the stockholders and creditors of the parent
company with the objective of reporting the
operations as a single business entity.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 4
Comparison of
Consolidation Theories
Following are areas in which the three
theories have differences:
Basic purpose and users of consolidated
financial statements
Consolidated net income
Minority interest expense
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 5
Comparison of
Consolidation Theories
Equity of minority interests
Consolidation of subsidiary net assets
Unrealized gains and losses
Constructive gains and losses on
debt retirement
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 6
Illustration: Consolidation Under
Parent Company and Entity Theories
Pedrich acquires a 90% interest in Sandy
on January 1, 2003, for $198,000.
Sandy’s net book value was
$120,000 on this date.
$198,000 – ($120,000 × 90%) = $90,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 7
Illustration: Consolidation Under
Parent Company and Entity Theories
Pedrich 12/31/02 (000)
Cash
Net receivables
Inventories
Other current assets
Plant assets, net
Total assets
Liabilities
Capital stock, $10 par
Retained earnings
Total liabilities and stockholders’ equities
Book
Value
$220
80
90
20
220
$630
$ 80
400
150
$630
Fair
Value
$220
80
100
20
300
$720
$ 80
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 8
Illustration: Consolidation Under
Parent Company and Entity Theories
Sandy 12/31/02 (000)
Cash
Net receivables
Inventories
Other current assets
Plant assets, net
Total assets
Liabilities
Capital stock, $10 par
Retained earnings
Total liabilities and stockholders’ equities
Book
Value
$ 5
30
40
10
60
$145
$ 25
100
20
$145
Fair
Value
$ 5
35
50
10
80
$180
$ 25
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 9
Entity Theory
Fair
Book
Value – Value
Accounts receivable, net $35
$30
Inventories
50
40
Plant assets, net
80
60
Remainder to goodwill
Total implied value
over book value
=
Excess
Fair Value
$ 5
10
20
65
$100
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 10
Parent Company Theory
Fair
Book ×
Excess
–
Value
Value 90% = Fair Value
Accounts receivable, net $35
$30
$ 4.5
Inventories
50
40
9.0
Plant assets, net
80
60
18.0
Remainder to goodwill
58.5
Total implied value
over book value
$90.0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 11
Consolidation Working Papers
January 1, 2003 (Parent Company)
Account Title
Assets
Cash
Receivables, net
Inventories
Other current assets
Plant assets, net
Investment in Sandy
Goodwill
Unamortized excess
Total assets
Adjustments and
Eliminations
Pedrich Sandy
Dr.
Cr.
$ 22
80
90
20
220
198
$ 5
30
40
10
60
b
b
b
$630
$ 27
114.5
139
30
298
4.5
9
18
a
b
a
$145
58.5
90
Consolidated
Balance
Sheet
198
58.5
b
90
$667
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 12
Consolidation Working Papers
January 1, 2003 (Parent Company)
Adjustments and
Eliminations
Dr.
Cr.
Account Title
Pedrich Sandy
Liabilities and Equity
Liabilities
$ 80
$ 25
Capital stock
400
100 a
Retained earnings
150
20 a
Minority interest
Total equities
$105
400
150
100
20
a
$630
$145
Consolidated
Balance
Sheet
12
12
$667
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 13
Consolidation Working Papers
January 1, 2003 (Entity Theory)
Account Title
Assets
Cash
Receivables, net
Inventories
Other current assets
Plant assets, net
Investment in Sandy
Goodwill
Unamortized excess
Total assets
Adjustments and
Eliminations
Pedrich Sandy
Dr.
Cr.
$ 22
80
90
20
220
198
$ 5
30
40
10
60
b
b
5
10
b
20
$630
$ 27
115
140
30
300
a
b 65
a 100
$145
Consolidated
Balance
Sheet
198
65
b
100
$677
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 14
Consolidation Working Papers
January 1, 2003 (Entity Theory)
Adjustments and
Eliminations
Dr.
Cr.
Account Title
Pedrich Sandy
Liabilities and Equity
Liabilities
$ 80
$ 25
Capital stock
400
100 a
Retained earnings
150
20 a
Minority interest
Total equities
$105
400
150
100
20
a
$630
$145
Consolidated
Balance
Sheet
22
22
$677
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 15
Consolidation After Acquisition
Sandy’s net income and dividends for 2003
are $35,000 and $10,000, respectively.
The excess of fair value over book value of
Sandy’s accounts receivable and inventories
at January 1, 2003, is realized during 2003.
Sandy’s plant assets are being
depreciated at a 5% annual rate.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 16
Consolidation After Acquisition:
Equity Method
Share of Sandy’s net income
($35,000 × 90%)
Realization of excess allocated to:
Receivables ($5,000 × 90%)
Inventories ($10,000 × 90%)
Depreciation
($20,000 × 90%) ÷ 20 years
Income from Sandy for 2003
$31,500
– 4,500
– 9,000
– 900
$17,100
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 17
Consolidation Working Papers
December 31, 2003 (Parent Company)
Income Statement
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Net income
Retained earnings
Dividends
Add: Net income
Retained earnings
December 31, 2003
Adjustments/ ConsolPedrich Sandy Eliminations idated
$600
$200
$800
17.1
a 17.1
(300)
(120) c 9
(429)
(211.25) (45) c 4.5
d .9
(261.65)
e 3.5
(3.5)
$105.85 $ 35
$105.85
$150
$20
b 20
$150
(80)
(10)
a9
e1
(80)
105.85
35
105.85
$175.85
$ 45
$175.85
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 18
Consolidation Working Papers
December 31, 2003 (Parent Company)
Balance Sheet
Cash
Receivables, net
Inventories
Other current assets
Plant assets, net
Investment in Sandy
Adjustments/
Eliminations
Pedrich Sandy
$ 29.75 $ 13
90
32
100
48
30
17
200
57 c 18
206.1
Goodwill
Unamortized excess
Total assets
c 58.5
b 90
$655.85
$167
d 9
a 8.1
b 198
Consolidated
$ 42.75
122
148
47
274.1
58.5
c 90
$692.35
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 19
Consolidation Working Papers
December 31, 2003 (Parent Company)
Balance Sheet
Liabilities
Capital stock
Retained earnings
Adjustments/
Eliminations
Pedrich Sandy
$ 80
$ 22
400
100 b 100
175.85
45
Minority interest
Total equities
b 12
e 2.5
$655.85
$167
Consolidated
$102
400
175.85
14.5
$692.35
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 20
Consolidation Working Papers
December 31, 2003 (Entity Theory)
Income Statement
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Net income
Retained earnings
Dividends
Add: Net income
Retained earnings
December 31, 2003
Adjustments/ ConsolPedrich Sandy Eliminations idated
$600
$200
$800
17.1
a 17.1
(300)
(120) c 10
(430)
(211.25) (45) c 5
d 1
(262.25)
e 1.9
(1.9)
$105.85 $ 35
$105.85
$150
$20
b 20
$150
(80)
(10)
a9
e1
(80)
105.85
35
105.85
$175.85
$ 45
$175.85
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 21
Consolidation Working Papers
December 31, 2003 (Entity Theory)
Balance Sheet
Cash
Receivables, net
Inventories
Other current assets
Plant assets, net
Investment in Sandy
Adjustments/
Eliminations
Pedrich Sandy
$ 29.75 $ 13
90
32
100
48
30
17
200
57 c 20
206.1
Goodwill
Unamortized excess
Total assets
c 65
b 100
$655.85
$167
d 1
a 8.1
b 198
Consolidated
$ 42.75
122
148
47
276
65
c 100
$700.75
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 22
Consolidation Working Papers
December 31, 2003 (Entity Theory)
Balance Sheet
Liabilities
Capital stock
Retained earnings
Adjustments/
Eliminations
Pedrich Sandy
$ 80
$ 22
400
100 b 100
175.85
45
Minority interest
Total equities
b 22
e .9
$655.85
$167
Consolidated
$102
400
175.85
22.9
$700.75
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 23
Consolidated Income Statements
at December 31, 2003
Parent Co.
(000)
Theory
Sales
$ 800.00
Cost of sales
– 429.00
Operating expenses
– 261.65
Minority interest expense
– 3.50
Consolidated net income
$ 105.85
Distributions to:
Minority stockholders
Majority stockholders
Total consolidated net income
Minority interest expense
Consolidated net income
Entity
Theory
$ 800.00
– 430.00
– 262.25
–
$ 107.75
Contemp.
Theory
$ 800.00
– 429.00
– 261.65
–
$ 1.90
$ 105.85
$ 109.35
– 3.50
$ 105.85
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 24
Consolidated Balance Sheets
at December 31, 2003
Parent Co. Entity
Contemp.
Assets
Theory
Theory
Theory
Cash
$ 42.75 $ 42.75 $ 42.75
Net A/R
122.00
122.00
122.00
Inventories
148.00
148.00
148.00
Other current assets
47.00
47.00
47.00
Total current assets
$359.75 $359.75 $359.75
Plant assets, net
274.10
276.00
274.10
Goodwill
58.50
65.00
58.50
Total noncurrent assets $332.60 $341.00 $332.60
Total assets
$692.35 $700.75 $692.35
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 25
Consolidated Balance Sheets
at December 31, 2003
Liabilities
Parent Co.
and Equity
Theory
Liabilities
$102.00
Minority interest
14.50
Total liabilities
$116.50
Capital stock
400.00
Retained earnings
175.85
Minority interest
–
Total stockholders’ equity $575.85
Total equities
$692.35
Entity Contemp.
Theory
Theory
$102.00 $102.00
–
–
$102.00 $102.00
400.00
400.00
175.85
175.85
22.90
14.50
$598.75 $590.35
$700.75 $692.35
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 26
Learning Objective 2
Adjust subsidiary assets and
liabilities to fair values using
push-down accounting.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 27
Push-Down Accounting
In certain situations, the SEC requires that
the fair values of the acquired subsidiary’s
assets and liabilities, which represent the
parent company’s cost basis, be recorded
in the separate financial statements of
the purchased subsidiary.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 28
Push-Down Accounting:
Parent Company Theory
Book
Value
Cash
$ 5.0
Accounts receivable, net
30.0
Inventory
40.0
Other current assets
10.0
Plant assets, net
60.0
Goodwill
–
$145.0
Push-Down
Adjustment
$ –
4.5
9.0
–
18.0
58.5
$90.0
BV Value
after P-D
$ 5.0
34.5
49.0
10.0
78.0
58.5
$235.0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 29
Push-Down Accounting:
Parent Company Theory
Liabilities
Capital stock
Retained earnings
Push-down capital
Book
Value
$ 25.0
100.0
20.0
–
$145.0
Push-Down
Adjustment
$
–
–
(20.0)
110.0
$ 90.0
BV Value
after P-D
$ 25.0
100.0
–
110.0
$235.0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 30
Push-Down Accounting:
Parent Company Theory
Accounts Receivable
Inventory
Plant Assets
Goodwill
Retained Earnings
Push-down Capital
4,500
9,000
18,000
58,500
20,000
110,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 31
Push-Down Accounting:
Entity Theory
$198,000 cost ÷ 90% = $220,000 implied value
$220,000 – $120,000 book value = $100,000 excess
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 32
Push-Down Accounting:
Entity Theory
Book
Value
Cash
$ 5.0
Accounts receivable, net
30.0
Inventory
40.0
Other current assets
10.0
Plant assets, net
60.0
Goodwill
–
$145.0
Push-Down
Adjustment
$
–
5.0
10.0
–
20.0
65.0
$100.0
BV Value
after P-D
$ 5.0
35.0
50.0
10.0
80.0
65.0
$245.0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 33
Push-Down Accounting:
Entity Theory
Liabilities
Capital stock
Retained earnings
Push-down capital
Book
Value
$ 25.0
100.0
20.0
–
$145.0
Push-Down
Adjustment
$
–
–
– 20.0
120.0
$100.0
BV Value
after P-D
$ 25.0
100.0
–
120.0
$245.0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 34
Push-Down Accounting:
Entity Theory
Accounts Receivable
Inventory
Plant Assets
Goodwill
Retained Earnings
Push-down Capital
5,000
10,000
20,000
65,000
20,000
120,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 35
Consolidation Working Papers
December 31, 2003 (Parent Company)
Add: Net income
Adjustments/ ConsolPedrich Sandy Eliminations idated
$600
$200
$800
17.1
a 17.1
(300)
(129)
(429)
(211.25) (50.4)
(261.65)
c 3.5
(3.5)
$105.85 $ 20.6
$105.85
$150
$ 0
$150
(80)
(10)
a9
c1
(80)
105.85
20.6
105.85
Retained earnings
December 31, 2003
$175.85
Income Statement
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Net income
Retained earnings
Dividends
$ 10.6
$175.85
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 36
Consolidation Working Papers
December 31, 2003 (Parent Company)
Balance Sheet
Cash
Receivables, net
Inventories
Other current assets
Plant assets, net
Investment in Sandy
Goodwill
Total assets
Pedrich Sandy
$ 29.75 $ 13
90
32
100
48
30
17
200
74.1
206.1
58.5
$655.85 $242.6
Adjustments/
Eliminations
Consolidated
$ 42.75
122
148
47
274.1
a 8.1
b 198
58.5
$692.35
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 37
Consolidation Working Papers
December 31, 2003 (Parent Company)
Balance Sheet
Liabilities
Capital stock
Retained earnings
Push-down capital,
Sandy
Adjustments/
Eliminations
Pedrich Sandy
$ 80
$ 22
400
100 b 100
175.85
10.6
110
Minority interest
Total equities
b 110
b 12
c 2.5
$655.85 $242.6
Consolidated
$102
400
175.85
14.5
$692.35
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 38
Consolidation Working Papers
December 31, 2003 (Entity Theory)
Income Statement
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Adjustments/ ConsolPedrich Sandy Eliminations idated
$600
$200
$800
17.1
a 17.1
(300)
(130)
(430)
(211.25) (51)
(262.25)
c 1.9
(1.9)
Net income
Retained earnings
Dividends
$105.85
$150
(80)
Add: Net income
Retained earnings
December 31, 2003
$ 19
$ 0
(10)
$105.85
$150
a9
e1
105.85
19
(80)
105.85
$175.85
$ 9
$175.85
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 39
Consolidation Working Papers
December 31, 2003 (Entity Theory)
Balance Sheet
Cash
Receivables, net
Inventories
Other current assets
Plant assets, net
Investment in Sandy
Pedrich Sandy
$ 29.75 $ 13
90
32
100
48
30
17
200
76
206.1
Goodwill
Total assets
65
$655.85
$251
Adjustments/
Eliminations
Consolidated
$ 42.75
122
148
47
276
a 8.1
b 198
65
$700.75
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 40
Consolidation Working Papers
December 31, 2003 (Entity Theory)
Balance Sheet
Liabilities
Capital stock
Retained earnings
Push-down capital,
Sandy
Adjustments/
Eliminations
Pedrich Sandy
$ 80
$ 22
400
100 b 100
175.85
9
120 b 120
Minority interest
Total equities
Consolidated
$102
400
175.85
b 22
c .9
$655.85
$251
22.9
$700.75
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 41
Learning Objective 3
Account for corporate and
unincorporated joint ventures.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 42
Nature of Joint Ventures
A joint venture is a business entity that
is owned, operated, and jointly controlled
by a small group of investors (venturers)
for their mutual benefit.
Each venturer usually has the ability to
exercise significant influence over the
joint venture investee.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 43
Organizational Structures
of Joint Ventures
Corporate joint venture
General partnership
Limited partnership
Undivided interest
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 44
Accounting for Investment
Corporate
joint venture
Equity method
Equity method
Unincorporated
joint ventures
Proportionate consolidation
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 45
End of Chapter 11
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 46