Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun : 2010
Consolidation Techniques and Procedure
Pertemuan 3-4

Consolidation Techniques and Procedures
1: Acquisition-Year Working Papers

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
• Enter Parent and Sub. amounts at 100% of book value.
(Even if parent owns less)
• Enter elimination entries into the DR and CR columns.
(Check totals)
• Consolidated expenses, dividends and assets:
– Add parent, subsidiary, plus DR, less CR
• Consolidated revenues, liabilities and equity (other than ending retained earnings):
– Add parent, subsidiary, less DR, plus CR
• Income, ending retained earnings and all subtotals and totals:
– Compute directly in consolidated column.

Working Paper 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/book value differentials
7. Eliminate other reciprocal balances

Example: Prep & Snap Data
Prep pays $88 for 80% of Snap on 1/1/2009 when Snap's equity consisted of $60 capital stock and $30 retained earnings. All excess was due to unrecorded patents with a 10year life.
Snap's income and dividends follow:
Net income
Dividends
2009
$25
$15
2010
$30
$15

Analysis
Cost of 80% of Snap
Implied value of Snap ($88/.80)
Book value (60+30)
Excess
Patents
$88
$110
90
$20
Allocated to:
Patents
Amt Amort.
$20 10 yrs
Unamort. Bal.
Amortization Unamort. Bal.
Amortization Unamort. Bal.
on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010
$20 $2 $18 $2 $16
Use these amounts in
2009 worksheet for amortization expense and patents.
Use these amounts in
2010 worksheet for amortization expense and patents.

Income & Dividend Calculations
2009:
Snap's net income $25
Amortization (2)
Adjusted income $23
Dividends $15
Prep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
2010:
Snap's net income $30
Amortization (2)
Adjusted income $28
Dividends $15
Prep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0

Prep's 2009 Worksheet Entries
1. Adjust for errors & omissions none
2. Eliminate intercompany profits and losses none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Snap (I.S.)
Dividends (St. RE)
Investment in Snap (B.S.)
18.4
12.0
6.4

Prep 2009: Entries (2 of 3)
4.
Record non-controlling interest in sub's earnings & dividends
Non-controlling interest share (I.S.)
Dividends (St. RE)
Non-controlling interest (B.S.)
4.6
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock (B.S.)
Retained earnings (St. RE, beg.)
Patents (B.S.)
Investment in Snap (B.S.)
Non-controlling interest (B.S.)
60
30
20
3.0
1.6
88
22

Prep 2009: Entries (3 of 3)
6. Amortize fair value/book value differentials
Amortization Expense (I.S.)
Patents (B.S.)
2
7. Eliminate other reciprocal balances none
Note that in 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.
2

Prep's 2009 Worksheet
Year ended 12/31/2009
Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Prep Snap DR CR Consol
250.0 65.0
18.4 18.4
(200.0) (40.0) 2.0
4.6
68.4 25.0
315.0
0.0
(242.0)
(4.6)
68.4
5.0 30.0 30.0
68.4 25.0
(30.0) (15.0)
43.4 40.0
5.0
68.4
12.0 (30.0)
3.0
43.4

Balance sheet, 12/31/2009:
Cash
Other current assets
Investment in Snap
Plant & equipment, net
Patents
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep Snap DR CR Consol
39.0 10.0
90.0 50.0
94.4 6.4
88.0
49.0
140.0
0.0
250.0 70.0 320.0
473.4 130.0
80.0 30.0
20.0
350.0 60.0 60.0
43.4 40.0
2.0 18.0
527.0
110.0
350.0
43.4
473.4 130.0
22.0
1.6
23.6
527.0

A Look at the Income Statement
Year ended 12/31/2009
Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Prep Snap DR CR Consol
250.0 65.0
18.4 18.4
(200.0) (40.0) 2.0
4.6
68.4 25.0
315.0
0.0
(242.0)
(4.6)
68.4
•
Income from Snap is eliminated.
•
Expenses are adjusted for 2009 amortization - $2 on patents
• Non-controlling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6

A Look at Retained Earnings
Year ended 12/31/2009
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Prep Snap DR CR Consol
5.0 30.0 30.0
68.4 25.0
(30.0) (15.0)
43.4 40.0
5.0
68.4
12.0 (30.0)
3.0
43.4 Ending retained earnings
• Beginning retained earnings of Snap is eliminated.
• All of Snap'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
Balance sheet:
Cash
Other current assets
Investment in Snap
Plant & equipment, net
Patents
Total
Prep Snap DR CR Consol
39.0 10.0
90.0 50.0
94.4 6.4
88.0
49.0
140.0
0.0
250.0 70.0
473.4 130.0
20.0 2.0
320.0
18.0
527.0
• Investment in Snap is eliminated.
• Patents at the start of 2009 were $20, and current amortization is $2; they are $18 at the end of 2009.
• The total is calculated in the consolidated column.

A Look at Liabilities & Equity
Balance sheet:
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep Snap DR CR Consol
80.0 30.0 110.0
350.0 60.0 60.0
43.4 40.0
350.0
43.4
473.4 130.0
22.0
1.6
23.6
527.0
• Snap's capital stock is eliminated.
• Retained earnings are not calculated across the row; they are taken from the statement of retained earnings.
• Non-controlling interest at year-end is proportional to Prep's Investment in Snap account.
$94.4 x .20/.80 = $23.6

Consolidation Techniques and Procedures
2: Working Papers in Subsequent Years

Analysis, for 2010
Cost of 80% of Snap $88
Implied value of Snap ($88/.80) $110
Book value (60+30)
Excess
90
$20
Patents
Unamort. Bal.
Amortization Unamort. Bal.
on 1/1/2009 in 2009 on 12/31/2009
$20 $2 $18
Allocated to:
Patents
Amortization in 2010
$2
Amt Amort.
$20 10 yrs
Unamort. Bal.
on 12/31/2010
$16
Use these amounts in
2009 worksheet for amortization expense and patents.
Use these amounts in
2010 worksheet for amortization expense and patents.

Income & Dividend Calculations
2009:
Snap's net income $25
Amortization (2)
Adjusted income $23
Dividends $15
Prep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
2010:
Snap's net income $30
Amortization (2)
Adjusted income $28
Dividends $15
Prep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0

Prep's Worksheet Entries for 2010
1. Adjust for errors & omissions none
2. Eliminate intercompany profits and losses none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Snap (I.S.)
Dividends (St. RE)
Investment in Snap (B.S.)
22.4
12.0
10.4

Prep 2010: Entries (2 of 3)
4.
Record non-controlling interest in sub's earnings & dividends
Non-controlling interest share (I.S.)
Dividends (St. RE)
Non-controlling interest (B.S.)
5.6
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock (B.S.)
Retained earnings (St. RE, beg.)
Patents (B.S.)
Investment in Snap (B.S.)
Non-controlling interest (B.S.)
60
40
18
3.0
2.6
94.4
23.6

Eliminating Investment in Snap
• Entry 5 eliminates the Investment in Snap and establishes the Non-controlling Interest as of the beginning of the current year.
Implied value of Snap at acquisition $88/.80
Add the increase in retained earnings from acquisition to to the beginning of the current year
$40 at 1/1/2010 minus $30 at 1/1/2009
$110
10
Less amortization for all prior periods
$2 patent amortization for 2009
Adjusted value of Snap at 1/1/2010
• Investment in Snap (80% x $118) = $94.4
• Non-controlling interest (20% x $118) = $23.6
Verify the $118 from the entry (60 + 40 + 18).
(2)
$118

Prep 2010: Entries (3 of 3)
6. Amortize fair value/book value differentials
Amortization Expense (I.S.)
Patents (B.S.)
2
7. Eliminate other reciprocal balances
Note payable – Prep (B.S.)
Note receivable – Snap (B.S.)
10
2
10

Prep's 2010 Worksheet
Prep Snap DR CR Consol Year ended 12/31/2010
Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
300.0
75.0
22.4
22.4
(244.0) (45.0) 2.0
5.6
78.4
30.0
375.0
0.0
(291.0)
(5.6)
78.4
43.4
40.0 40.0
78.4
30.0
(45.0) (15.0)
76.8
55.0
43.4
78.4
12.0 (45.0)
3.0
76.8

Balance sheet, 12/31/2010:
Cash
Note receivable – Snap
Other current assets
Investment in Snap
Plant & equipment, net
Patents
Total
Note payable – Prep
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep Snap DR CR Consol
45.0
20.0
10.0
10.0
65.0
0.0
97.0
104.8
240.0
70.0
60.0
300.0
18.0
2.0 16.0
496.8 150.0
10.0 10.0
70.0
25.0
10.4
94.4
167.0
0.0
548.0
95.0
350.0 60.0 60.0
76.8
55.0
350.0
76.8
496.8 150.0
23.6
2.6
26.2
548.0

Consolidation Techniques and Procedures
3: Locating Errors in Working Papers

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

Consolidation Techniques and Procedures
4: Allocating Excess of Fair Value over Book
Value

Example with Excess Allocated
Pate pays $360 for 90% of Solo on 12/31/2009 when Solo's equity consisted of $200 capital stock and $50 retained earnings. Inventory (sold in 2010), land and buildings (20 years) were undervalued by $10, $30, and $80, respectively.
Equipment (10 years) was overvalued by $20.
Solo's income and dividends for 2010 were $60 and $20.
At year-end, Solo has dividends payable of $10 which Pate has not yet recorded. There is $20 cash in transit from Solo to
Pate for the note.

Analysis at Acquisition
Cost of 90% of Solo
Implied value of Snap ($360/.90) $400
Book value (200+50)
Excess
Noncontrolling interest,
10%(400)
Inventorie
Land
Building
Equipment
Goodwill
$360
250
$150
$40
Allocated to: Amt Amort
Inventories $10 1st yr
Land 30 -
Building 80 20 yrs
Equipment (20) 10 yrs
Goodwill 50 -
150
Unamort. Bal.
Amortization Unamort. Bal.
on 12/31/2010
12/31/2009 * in 2010 *
$10 ($10) $0
30
80
(20)
50
$150
0
(4)
2
0
($12)
30
76
(18)
50
$138
* Use the
12/31/2009 and 2010 amortization in worksheet entries for
2010.

Solo's Income & Dividend
Solo's net income
Amortization
Adjusted
2010
$60
($12)
$48
Pate's 90% share
$43.2
$18.0
Solo's dividends $20
NCI 10% share
$4.8
$2.0

Pate's Worksheet Entries
1.
Adjust for errors & omissions
Dividends receivable (B.S.)
Investment in Solo (B.S.)
Cash (B.S.)
9.0
20.0
9.0
Note receivable (B.S.) 20.0
2.
Eliminate intercompany profits and losses none
3.
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
43.2
Income from Solo (I.S.)
Dividends (St. RE)
Investment in Solo (B.S.)
18.0
25.2

Pate: Entries (2 of 4)
4.
Record non-controlling interest in sub's earnings & dividends
Noncontrolling interest share (I.S.)
Dividends (St. RE)
Noncontrolling interest (B.S.)
4.8
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock (B.S.)
Retained earnings (St. RE, beg.)
Unamortized excess
Investment in Solo (B.S.)
Noncontrolling interest (B.S.)
200
50
150
2.0
2.8
360
40

Pate: Entries (3 of 4)
Allocate the unamortized excess according to beginning of year balances.
Inventory
Land
Building, net
Goodwill
Equipment, net
Unamortized excess
10
30
80
50
20
150

Pate: Entries (4 of 4)
6. Amortize fair value/book value differentials
Cost of sales
Inventory
Operating (depreciation) expense
Buildings, net
Equipment, net
Operating (depreciation) expense
10
4
2
7. Eliminate other reciprocal balances
Dividends payable (B.S.)
Dividends receivable (B.S.)
9.0
9.0
10
4
2

Pate's 2010 Worksheet
Pate Solo DR Year ended 12/31/2010
Income statement:
Revenues
Income from Snap
Cost of goods sold
Operating expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
900.0 300.0
43.2 43.2
(600.0) (150.0) 10.0
(190.0) (90.0) 4.0
4.8
153.2 60.0
CR Consol
1,200.0
0.0
(760.0)
2.0 (282.0)
(4.8)
153.2
120.0
153.2
50.0
60.0
(100.0) (20.0)
50.0
173.2 90.0
120.0
153.2
18.0 (100.0)
2.0
173.2

Balance sheet, 12/31/2010:
Cash
Accounts receivable, net
Note receivable - solo
Inventories
Land
Building, net
Equipment, net
Investment in Solo
Dividends receivable
Goodwill
Unamortized excess
Total
Accounts payable
Dividends payable
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep
13.0
76.0
20.0
90.0
Snap DR
15.0 20.0
CR
25.0
20.0
60.0 10.0 10.0
60.0 30.0 30.0
190.0 110.0 80.0
150.0 120.0
394.2
2.0
4.0
20.0
9.0
25.2
360.0
9.0 9.0
50.0
150.0 150.0
993.2 360.0
120.0 60.0
10.0 9.0
700.0 200.0 200.0
173.2 90.0
40.0
2.8
993.2 360.0
0.0
50.0
0.0
1,097.0
180.0
1.0
700.0
173.2
42.8
1,097.0
Consol
48.0
101.0
0.0
150.0
120.0
376.0
252.0
0.0

Consolidation Techniques and Procedures
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 non-controlling interests

Operating Cash Flows
• Direct method:
– Include cash dividends received from equity investees
(not equity method income)
• Indirect method:
– Starting with consolidated net income to the controlling interest share, ADD the noncontrolling interest share
– Deduct the excess of equity method income over cash dividends received from equity investees

Consolidation Techniques and Procedures
6: Appendix – Trial Balance Format

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.

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