CHAPTER-FIVE
CONSOLIDATIONS
5.1. Consolidation on Date of Purchase-Type Business Combination
Parent Company- Subsidiary Relationships
If the investor acquires a controlling interest in the investee, a parent- subsidiary relationship is established.
The investee becomes a subsidiary of the acquiring parent company but remains a separate legal entity.
Strict adherence to legal aspect requires issuance of separate financial statements for the parent company and
subsidiary but disregards the substance of the relationship. A parent company and its subsidiary are a single
economic entity. In recognition of this fact, consolidated financial statements are issued to report their
financial and operating results as though they comprised a single accounting entity.
Consolidated financial statements are similar to combined financial statements of home office and its branches:

Assets, liabilities, revenue, and expenses of the parent and its subsidiaries are totaled

Intercompany transactions and balances are eliminated

And the final consolidated amounts are reported
The Financial Accounting Standards Board requires consolidation of nearly all subsidiaries except those not
actually controlled.
The Meaning of Controlling Interest
Traditionally, direct or indirect ownership of more than 50% of an investee’s outstanding common stock is
required to evidence controlling interest. But some circumstances may negate actual control despite existence
of stock ownership:

A subsidiary in liquidation or reorganization in court supervised bankruptcy proceedings

A foreign subsidiary in a country having severe production, monetary, or income tax restrictions

Right of minority shareholders to effectively participate in the financial and operating activities of the
subsidiary
Control of a subsidiary might also be achieved indirectly. The traditional definition of control is criticized for
emphasizing the legal form over the economic substance.
Consolidation of Wholly Owned Subsidiary on Date of Purchase- Type Business Combination
There is no question of control of a wholly owned subsidiary. To illustrate, assume that on December 31, 2013,
Palm Corporation issued 10,000 shares of its $10 par common stock (current fair value $45 a share) to
stockholders of Star Company for all outstanding $5 par common stock. There was no contingent consideration.
Out of pocket costs consist of:
Finder’s and legal fee relating to business combination
50,000
Costs associated with SEC registration
35,000
Total
85,000
1
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Assume also that the business combination qualified for purchase accounting because required conditions for
pooling accounting were not met. Star Company continues its corporate existence. Both constituent companies
had a December 31 fiscal year and used the same accounting policies.
Financial statements of the constituent companies prior to consummation of the business combination follow:
PALM CORPORATION AND STAR COMPANY
Separate Financial Statements (prior to purchase-type business combination)
For Year Ended December 31, 2013
Palm
Star
990,000
10,000
1,000,000
600,000
Income Statement
Revenue
Net sales
Interest revenue
Total
Costs and expenses
Cost of goods sold
Operating expenses
Interest expense
Income taxes expense
Total
Net income
Retained earnings, beginning
Add: Net income
Less: Dividends
Retained earnings, ending
635,000
158,333
50,000
62,667
906,000
94,000
Statement of Retained Earnings
65,000
94,000
159,000
25,000
134,000
600,000
410,000
73,333
30,000
34,667
548,000
52,000
100,000
52,000
152,000
20,000
132,000
Balance Sheet
Assets
Cash
Inventories
Other current assets
Receivable from Star
Plant assets (net)
Patent (net)
Total assets
Liabilities and Stockholders’ Equity
Payable to Palm
Income taxes payable
Other liabilities
Common stock, $10 par
Common stock, $5 par
Additional paid in capital
Retained earnings
Total liab & stockholders’ equity
100,000
150,000
110,000
25,000
450,000
835,000
26,000
325,000
300,000
365,000
134,000
835,000
40,000
110,000
70,000
300,000
20,000
540,000
25,000
10,000
115,000
200,000
58,000
132,000
540,000
2
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
The December 31, 2013, current fair values of Star Company’s identifiable assets were the same as their
carrying amounts except the following:
Inventories
135,000
Plant assets (net)
365,000
Patent (net)
25,000
Palm Corporation recorded the combination as a purchase with the following entries:
Investment in Star Co common stock
450,000
Common Stock (10,000*10)
100,000
Paid in Capital in Excess of Par
350,000
Investment in Star Co common stock
50,000
Paid in Capital in Excess of Par
35,000
Cash
85,000
The foregoing journal entries do not include any debits or credits to record individual assets and liabilities of
Star Company in the accounts of Palm Corporation because Star is not liquidated as in merger but remains a
separate legal entity.
Preparation of Consolidated Balance Sheet without a Working Paper
The operating results of Palm and Star prior to the date of their business combination those of two separate
economic as well as legal entities. A consolidated balance sheet is the only consolidated financial statement
issued by Palm and Star.
The preparation of a consolidated balance sheet may be accomplished without the use of a supporting working
paper. The parent company’s investment account and the subsidiary’s stockholder’s equity accounts do not
appear in the consolidated balance sheet because they are essentially reciprocal (intercompany) accounts.
Under purchase accounting theory:

The parent company (combiner) assets and liabilities (other than intercompany ones) are reflected at
carrying amounts

The subsidiary (combine) assets and liabilities (other than intercompany ones) are reflected at
current fair values in the consolidated balance sheet

Goodwill is recognized to the extent the cost of the parent’s investment exceeds the current fair
value of the subsidiary’s identifiable net assets
Applying the foregoing principles to the Palm Corporation Star Company relationship, the following consolidated
balance sheet is produced:
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 2013
Assets
Current assets:
Cash (15,000+40,000)
Inventories (150,000+135,000)
Other (110,000+70,000)
Total current assets
Plant assets (net) (450,000+365,000)
Intangible assets
Patent (net) (0+25,000)
Goodwill (net)
Total assets
Liabilities and Stockholders’ Equity
55,000
285,000
180,000
520,000
815,000
25,000
15,000
40,000
1,375,000
3
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Liabilities:
Income taxes payable (26,000+10,000)
Other (325,000+115,000)
Total liabilities
Stockholders’ equity
Common stock, $10 par
Additional paid in capital
Retained earnings
Total stockholders’ equity
36,000
440,000
476,000
400,000
365,000
134,000
809,000
1,375,000
Working paper for consolidated balance sheet
Working paper is usually required even for a parent company and a wholly owned subsidiary.
Developing the elimination
The parent company’s investment account is similar to the home office’s investment in branch account. However,
the subsidiary is a separate corporation not a branch and has three conventional stockholders’ equity accounts
rather than a single home office reciprocal account used by a branch. Accordingly, the elimination of the
intercompany accounts must decrease the investment account of the parent company and the three
stockholders’ equity accounts of the subsidiary to zero.
The completed elimination for Palm Corporation and subsidiary (in journal entry format) and the related working
paper for consolidated balance sheet are as follows:
a) Common Stock-Star
200,000
Additional Paid in Capital-Star
58,000
Retained Earnings- Star
132,000
Inventories- Star (135,000-110,000)
25,000
Plant Assets (net)-Star (365,000-300,000)
65,000
Patent (net)-Star (25,000-20,000)
5,000
Goodwill (net)-Star (500,000-485,000)
15,000
Investment in Star Co. Common Stock
500,000
To eliminate intercompany investment and equity accounts of subsidiary
4
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Palm Corporation and Subsidiary
Working Paper for Consolidated Balance Sheet
December 31, 2013
Assets
Cash
Inventories
Other current assets
Intercompany receivable/payable
Investment in Star Co
Plant assets (net)
Patent (net)
Goodwill (net)
Total assets
Liabilities & Stockholders’ Equity
Income taxes payable
Other liabilities
Common stock, $10 par
Common stock, $5 par
Additional paid in capital
Retained earnings
Total
Palm
Star
15,000
150,000
110,000
25,000
500,000
450,000
40,000
110,000
70,000
a 25,000
300,000
20,000
(25,000)
a (500,000)
a 65,000
a 5,000
a 15,000
(390,000)
1,250,000
26,000
325,000
400,000
200,000
365,000
134,000
1,250,000
515,000
Elimination
10,000
115,000
58,000
132,000
515,000
Consolidated
55,000
285,000
180,000
815,000
25,000
15,000
1,375,000
36,000
440,000
400,000
a (200,000)
a (58,000)
a (132,000)
(390,000)
365,000
134,000
1,375,000
The following features of the above working paper should be noted:
 The elimination is only a part of the working paper and not entered into the books of the parent or
subsidiary
 The elimination is used to reflect the difference between current fair values and carrying amounts of the
subsidiary’s identifiable net assets as the subsidiary did not write up its assets to current fair value
 The elimination column reflects increases and decreases rather than debits and credits
 Intercompany receivables and payables are placed on the same line of the working paper for consolidated
balance sheet and combined to produce a consolidated amount of zero
 The consolidated paid in capital amounts are those of the parent company only. Subsidiaries’ paid in capital
amounts are always eliminated in the process of consolidation.
 Consolidated retained earnings are those of the parent company only in line with the theory that states
purchase accounting reflects a fresh start in an acquisition of net assets.
 The consolidated amounts reflect the financial position of a single economic entity comprising two legal
entities with all intercompany balances eliminated
The consolidated balance sheet is exactly the same as the one presented on page 4.
5
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
2.3 Consolidation of Partially Owned Subsidiary on Date of Purchase Type Business Combination
The consolidation of a parent company with its partially owned subsidiary differs from a consolidation of
wholly owned subsidiary in one major respect- the recognition of minority interest.
Minority interest is a term applied to the claims of stockholders other than the parent company to the net
income or losses and net assets of the subsidiary. The minority interest in the subsidiary’s net income or loss
is displayed in the consolidated income statement, and the minority interest in the subsidiary’s net assets is
displayed in the consolidated balance sheet.
To illustrate, assume that on December 31, 2013, Post Corporation issued 57,000 of its $1 par common stock
(current fair value $20 a share)to stockholders of Sage Company in exchange for 38,000 of the 40,000
outstanding shares of $10 par common stock in a purchase type business combination. Thus, Post acquired
95% (38,000/40,000) interest in Sage, which became its subsidiary. There was no contingent consideration.
Out of pocket costs are:
Finder’s and legal fees
52,250
Costs associated with SEC registration
72,750
Total
125,000
Financial statements of Post and Sage just prior to combination were as follows:
POST CORPORATION AND SAGE COMPANY
Separate Financial Statements (prior to purchase-type business combination)
For Year Ended December 31, 2013
Post
Sage
Income Statement
Net sales
5,500,000
1,000,000
Costs and expenses
Cost of goods sold
3,850,000
650,000
Operating expenses
925,000
170,000
Interest expense
75,000
40,000
Income taxes expense
260,000
56,000
Total
5,110,000
916,000
Net income
390,000
84,000
Retained earnings, beginning
Add: Net income
Less: Dividends
Retained earnings, ending
Statement of Retained Earnings
810,000
390,000
1,200,000
150,000
1,050,000
290,000
84,000
374,000
40,000
334,000
Balance Sheet
Assets
Cash
Inventories
Other current assets
Plant assets (net)
200,000
800,000
550,000
3,500,000
100,000
500,000
215,000
1,100,000
6
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Goodwill (net)
100,000
Total assets
5,150,000
1,915,000
Liabilities and Stockholders’ Equity
Income taxes payable
100,000
16,000
Other liabilities
2,450,000
930,000
Common stock, $1 par
1,000,000
Common stock, $10 par
400,000
Additional paid in capital
550,000
235,000
Retained earnings
1,050,000
334,000
Total liab & stockholders’ equity
5,150,000
1,915,000
The December 31, 2013, current fair values of Sage Company’s identifiable assets and liabilities were the
same as their carrying amounts except for the following:
Inventories
526,000
Plant assets (net)
1,290,000
Leasehold
30,000
Sage Company does not prepare journal entries related to the business as it is continuing as a separate legal
entity. But Post Corporation prepares the following entries:
Investment in Sage Common Stock
(57,000*20)
1,140,000
Common Stock (57,000*1)
57,000
Paid in Capital in Excess of Par
1,083,000
To record issuance of 57,000 shares of common to acquire 38,000 of Sage Company’s outstanding 40,000
shares
Investment in Sage Common Stock
52,250
Paid in Capital in Excess of Par
72,750
Cash
125,000
To record payment of out of pocket expenses associated with business combination
Working Paper for Consolidated Balance Sheet
It is advisable to use a working paper for preparation of a consolidated balance sheet for a parent company
and its partially owned subsidiary due to complexities caused by the minority interest.
The differences between the carrying amounts of identifiable assets and liabilities of the subsidiary with
the current fair values must be reflected by means of elimination.
Common stock-Sage
400,000
Additional Paid in Capital-Sage
235,000
Retained earnings-Sage
334,000
Inventories-Sage (526,000-500,000)
26,000
Plant Assets (net) (1,290,000-1,100,000)
190,000
Leasehold
30,000
Investment in Sage Common Stock-Post
1,192,250
The debit side of the above entry represents the current fair values of Sage Company’s identifiable tangible
and intangible assets (1,215,000) while the credit side represents Post’s total investment 1,192,250. Two
items should be recorded to complete the elimination: minority interest and goodwill.
7
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Computation of Minority Interest
Current fair value of Sage’s identifiable net assets
1,215,000
Minority interest (100-95)
0.05
Minority interest (1,215,000*.05)
60,750
This is recorded as credit as it represents claim on the net assets.
Computation of goodwill
Cost of Post Corporation’s 95% interest
1,192,250
Less: Current fair value of identifiable net assets acquired
(1,215,000*.95)
1,154,250
Goodwill
38,000
The completed elimination in journal entry format would be:
Common stock-Sage
400,000
Additional Paid in Capital-Sage
235,000
Retained earnings-Sage
334,000
Inventories-Sage (526,000-500,000)
26,000
Plant Assets (net) (1,290,000-1,100,000)
190,000
Leasehold
30,000
Goodwill
38,000
Investment in Sage Common Stock-Post
1,192,250
Minority Interest
60,750
Working Paper for Consolidated Balance Sheet
The following is the working paper for consolidated balance sheet for Post Corporation and subsidiary
Post Corporation and Subsidiary
Working Paper for Consolidated Balance Sheet
December 31, 2013
Assets
Cash
Inventories
Other current assets
Investment in Sage Co
Plant assets (net)
Leasehold
Goodwill (net)
Total assets
Post
Sage
75,000
800,000
550,000
1,192,250
3,500,000
100,000
500,000
215,000
6,217,250
Elimination
1,100,000
1,915,000
a 26,000
a (1,192,250)
a 190,000
a 30,000
a 38,000
(908,250)
Consolidated
175,000
1,326,000
765,000
4,790,000
30,000
138,000
7,224,000
8
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Liabilities & Stockholders’ Equity
Income taxes payable
100,000
Other liabilities
2,450,000
Minority interest
Common stock, $1 par
1,057,000
Common stock, $5 par
Additional paid in capital
1,560,250
Retained earnings
1,050,000
Total
6,217,250
16,000
930,000
a 60,750
400,000
235,000
334,000
1,915,000
a (400,000)
a (235,000)
a (334,000)
(908,250)
116,000
3,380,000
60,750
1,057,000
1,560,250
1,050,000
7,224,000
Nature of Minority Interest
Two concepts for consolidated financial statements have been developed to account for minority
interest: the parent company concept and the economic unit concept.
The parent company concept apparently treats the minority interest in net assets of a subsidiary as
a liability. This liability is increased by an expense representing the minority’s share of the
subsidiaries net income (or decreased by the minority’s share of net loss). Dividends declared to
minority shareholders decrease the liability to them.
The economic unit concept displays the minority interest in the subsidiary’s net assets
stockholders’ equity section of the consolidated balance sheet. The consolidated income statement
displays the minority interest in the subsidiary’s net income as a subdivision of total consolidated
net income.
Note that there is no ledger account for minority interest in net assets of subsidiary, in either
parent company’s or the subsidiary’s accounting records.
Advantages and Shortcomings of Consolidated Financial Statements
Advantages

Enable stockholders and prospective investors to view comprehensive financial information
for the economic unit without regard for legal separateness of the individual companies.
Shortcomings

Less useful to creditors of each company and minority stockholders as they do not give
information about operating results and financial position of the individual companies.

Consolidated financial statements of diversified companies (conglomerates) are impossible
to classify into a single industry and thus cannot be used for comparative purposes by
financial analysts
9
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
CHAPTER SIX-READING ASSIGNMENT
CONSOLIDATION: SUBSEQUENT TO DATE OF PURCHASE-TYPE BUSINESS
COMBINATION
Subsequent to the date of business combination, the parent company must account for the
operating results of the subsidiary: the net income or net loss and dividends declared and paid by
the subsidiary. Intercompany transactions must also be recorded.
Accounting for Operating Results of Wholly Owned Purchased Subsidiaries
There are two alternative methods for this purpose: the equity method and the cost method of
accounting.
Equity Method
Under this method, the parent company recognizes its share of the subsidiary’s net income or net
loss, adjusted for depreciation and amortization of differences between current fair values and
carrying amounts of purchased subsidiary’s net assets on the date of the business combination, as
well as its share of dividend declared by the subsidiary.
The equity method is said to be consistent with the accrual basis of accounting as it recognizes
increases or decreases in the carrying amount of parent company’s investment in the subsidiary as
net income or net loss, not when they are paid as dividends. Thus, proponents claim, the equity
method stresses the economic substance of the parent subsidiary relationship. Dividends declared
by the subsidiary do not constitute revenue the parent company but are a liquidation of a portion of
the parent company’s investment in the subsidiary.
Cost Method
Under this method, the parent company accounts for the operation of a subsidiary only to the
extent that dividends are declared by the subsidiary. Dividends declared by the subsidiary from
net income subsequent to the business combination are recognized as revenue by the parent
company; dividends declared by the subsidiary in excess of post-combination net income constitute
a reduction of the carrying amount of the parent company’s investment in the subsidiary. Net
income or net loss of the subsidiary is not recognized by the parent company.
Supporters claim that this method appropriately recognizes the legal form of parent subsidiary
relationship. Thus, a parent company realizes revenue when the subsidiary declares dividend, not
when it reports net income.
Illustration of Equity Method for Wholly Owned Purchased Subsidiary for First Year after
Business Combination
Assume that Palm Corporation had used purchase accounting for business combination with its
wholly owned subsidiary, Star Company, and the Star had a net income of 60,000 for the year
ended December 31, 2000. On December 20, 2000, Star’s BODs declared a cash dividend of $0.60
a share on the 40,000 outstanding shares.
Dec. 20: Star’s journal entry to record dividend declaration is:
Dividends Declared
24,000
Intercompany Dividends Payable
24,000
10
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
To record declaration of dividend
Under the equity method of accounting, Palm Corporation prepares the following journal entries to
record the dividend and net income of Star.
1) Intercompany Dividend Receivable
24,000
Investment in Star Common Stock
24,000
To record dividend declared by Star Company
2) Investment in Star Company Common Stock
60,000
Intercompany Investment Income
60,000
To record 100% of Star Company’s net income
The credit to investment in subsidiary account in the first entry reflects an underlying premise of
the equity method of accounting: dividends declared by a subsidiary represent a return of a
portion of the parent company’s investment in the subsidiary.
The second entry records the parents 100% share of the subsidiary’s net income. The subsidiary’s
net income accrues to the parent company under the equity method of accounting.
Adjustment of Purchased Subsidiary’s Net Income
Continuing with the Palm Corporation Star Company business combination, Palm must prepare a third
journal entry to adjust Star’s net income for depreciation and amortization attributable to the
difference between the current fair values and carrying amounts of Star’s net assets on the date of the
business combination-December 31,1999. Because such differences were not recorded by the
subsidiary, its net income is overstated from the point of view of the consolidated entity.
On the date of the business combination, differences between current fair values and carrying
amounts of Star Company’s net assets were as follows:
Inventories (FIFO)
25,000
Plant assets (net)
Land
15,000
Building (economic life 15 years)
30,000
Machinery (economic life 10 years)
20,000
65,000
Patent (economic life 15 years)
5,000
Goodwill (economic life 30 years)
15,000
Total
110,000
Palm Corporation prepares the following journal entry to reflect the effects of depreciation and
amortization on the above differences on the net income of Star Company for the year ended
December 31, 2000:
Intercompany Investment Income
30,500
Investment in Star Co Common Stock
30,500
To amortize differences between current fair value and carrying amounts
Inventories- to cost of goods sold
25,000
Building- depreciation (30,000/15)
2,000
Machinery-depreciation (20,000/10)
2,000
Patent-Amortization (5,000/5)
1,000
Goodwill-amortization (15,000/30)
500
11
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Total
30,500
Developing the Elimination
Palm Corporation’s use of equity method of accounting for its investment in Star Company results in
a balance in investment account that is a mixture of two components:

The carrying amount of Star’s net assets

The excess of current fair values over the carrying amount of Star’s identifiable net
assets, including goodwill, on the date of business combination
All three basic financial statements must be consolidated for accounting periods subsequent to the
date of purchase type business combination and hence the elimination working paper must include
accounts that appear in the constituent companies’ income statement, statement of retained
earnings and balance sheets.
The items that must be included in elimination are:
1. The subsidiary’s beginning of year stockholder’s equity and its dividends, and the
parent’s investment
2. The parent’s intercompany investment income
3. Unamortized current fair value excess of the subsidiary
4. Certain operating expenses of the subsidiary
Assume that Star Company allocates:

Machinery depreciation and patent amortization to cost of goods sold

Goodwill amortization to operating expenses

Building depreciation 50% each to cost of goods sold and operating expenses
The working paper elimination in working paper format is as follows with the component items
numbered in accordance with the foregoing breakdown:
Common stock-Star
200,000 (1)
Additional Paid in Capital-Star
58,000 (1)
Retained Earnings-Star
132,000 (1)
Intercompany Investment Income-Palm
29,500 (2)
Plant Assets (net)-Star (65,000-4,000)
61,000 (3)
Patent-Star (net) (5,000-1,000)
4,000 (3)
Goodwill-Star (net) (15,000-500)
14,500 (3)
Cost of Goods Sold-Star
29,000 (4)
Operating Expenses-Star
1,500 (4)
Investment in Star Co Common Stock-Palm
Dividend Declared-Star

505,500 (1)
24,000 (1)
To carry out the following:
a) Eliminate intercompany investment and equity accounts of subsidiary at beginning of
year and subsidiary dividend
b)
Provide for depreciation and amortization on difference between current fair
values and carrying amounts
c) Allocate unamortized differences to proper accounts
12
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Working Paper for Consolidated Financial Statements
The following aspects of the working paper should be emphasized:

The intercompany receivable and payable are placed on the same line and offset without
formal elimination

The elimination cancels the subsidiary’s retained earnings balance at the date of business
combination, so that each of the three basic financial statements may be consolidated in
turn.

The FIFO method is used to account for inventories by Star Company. Thus, the difference
of 25,000 attributable to beginning inventories is allocated to cost of goods sold.

One effect of the elimination is to reduce the difference between the carrying amounts and
current fair values by the amount of amortization. (110,000-30,500=79,500)
The parent company’s use of the equity method of accounting results in the equalities
described below: Parent company net income = consolidated net income
Parent company retained earnings = consolidated retained earnings
Closing Entries
To complete the accounting cycle closing entries are prepared in the usual fashion by both the
parent company and the subsidiary. State corporate laws generally require separate accounting for
retained earnings available for dividends to stockholders. Accordingly, net income legally available
for Palm’s stockholders as dividends and adjusted net income of the subsidiary not distributed as
dividend by the subsidiary are segregated. Hence, the entry to close income summary is:
Income Summary
109,500
Retained Earnings of Subsidiary (29,500-24,000)
5,500
Retained Earnings (109,500-5,500)
104,000
Palm Corporation And Subsidiary
Working Paper For Consolidated Financial Statements
For Year Ended December 31, 2000
Palm
Corporation
Star
Company
Elimination
Increase
(Decrease)
Consolidated
Income Statement
Revenue:
Net Sales
1,100,000
Intercompany investment income
Total revenue
680,000
29,500
1,129,500
1,780,000
a) (29,500)
680,000
(29,500)
1,780,000
Costs and expenses:
cost of goods sold
700,000
450,000
a)
29,000
1,179,000
Operating expenses
217,667
130,000
a)
1,500
349,167
Interest expense
49,000
Income taxes expense
53,333
40,000
1,020,000
620,000
Total costs and expenses
49,000
93,333
30,500
1,670,500
13
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Net income
109,500
60,000
Retained earnings, beginning
134,000
132,000
Net income
109,500
60,000
Sub total
243,500
Dividends declared
(60,000)
109,500
a) (132,000)
134,000
Statement of Retained Earnings
Retained earnings, ending
(60,000)
109,500
192,000
(192,000)
243,500
30,000
24,000
a) (24,000)
30,000
213,500
168,000
(168,000)
213,500
Balance Sheet
Assets
Cash
15,900
Intercompany receivable(payable)
24,000
Inventories
72,100
(24,000)
136,000
115,000
251,000
88,000
131,000
219,000
Other current assets
Investment in Star Co common stock
505,000
Plant assets (net)
440,000
a) (505,000)
340,000
a)
16,000
a)
4,000
20,000
a)
14,500
14,500
Patents (net)
Goodwill (net)
Total assets
88,000
1,208,900
650,100
61,000
841,000
(426,000)
1,433,500
Liabilities & Stockholders' Equity
Income taxes payable
40,000
20,000
60,000
Other liabilities
190,900
204,100
395,000
Common stock, $10 par
400,000
Common stock, $5 par
400,000
200,000
Additional paid in capital
365,000
58,000
Retained earnings
213,500
168,000
1,209,400
650,100
Total liab & stockholders' equity
a) (200,000)
a) (58,000)
365,000
a) (168,000)
213,500
(168,000)
1,433,500
Accounting for Operating Results of Partially Owned Purchased Subsidiaries

Requires computation of minority interest in net income or net loss of the subsidiary

Under the parent company concept, the minority interest in net income or net loss of a
subsidiary is included as expense in the consolidated income statement
Illustration:
The Post Corporation- Sage Company consolidated entity is used to illustrate. Post owns 95% of the
outstanding common stock of Sage and minority stockholders own the remaining 5%.
Assume that Sage Company declared and paid dividend of 1 a share and had a net income of 90,000
for the year ended 31 December 2000. Sage prepares the following entries for the declaration and
payment of the dividend:
Dividends Declared (40,000*$1)
40,000
Dividends Payable (40,000*.05)
2,000
14
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Intercompany Dividends Payable (40,000*.95)

38,000
To record declaration of dividend
Dividends Payable
2,000
Intercompany Dividends Payable
38,000
Cash

40,000
To record payment of dividend declared
Post’s journal entries with regards to Sage’s operating results include the following:
Intercompany Dividends Receivable
38,000
Investment in Sage Co Common Stock

38,000
To record dividend declared by Sage Company
Cash
38,000
Intercompany Dividends Receivable

38,000
To record receipt of dividend from Sage Company
Investment in Sage Co Common Stock
(90,000*.95)
85,500
Intercompany Investment Income

85,500
To record 95% of net income of Sage Company for the year ended Dec 31, 2000
As noted earlier, a purchase-type business combination involves a restatement of net asset values
of the subsidiary. However, the net income reported by Sage Company does not reflect cost
expiration attributable to the restated net asset values as the restatements were not entered in
the company’s accounting records. Assume that the difference was allocated to Sage’s identifiable
assets as follows:
Inventories (FIFO)
26,000
Plant assets:
Land
60,000
Building (economic life 20 yrs)
80,000
Machinery (economic life 5 yrs)
50,000
Leasehold (economic life 6 yrs)
190,000
30,000
Total
246,000
Post Corporation prepares the following journal entry on December 31, 2000 to reflect the effect
of the differences between the current fair values and carrying amounts of partially owned
subsidiary’s identifiable net assets:
Intercompany Investment Income
42,750
Investment in Sage Co Common Stock

42,750
To amortize differences between current fair values and carrying amounts of Sage
Company’s identifiable net assets on Dec 31,1999
Inventories to cost of goods sold
26,000
Building – Dep. (80,000/20)
4,000
Machinery – Dep. (50,000/5)
10.000
Leasehold – Amrt. (30,000/6)
5,000
Total difference applicable to 2000
45,000
15
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Amortization for 2000 (45,000*.95)
42,750
Assume that Sage Company allocates:

Machinery depreciation and leasehold amortization entirely to cost of goods sold

Building depreciation 50% each to cost of goods sold and operating expenses
Next, the following entry is prepared to amortize the goodwill acquired by Post in the business
combination with Sage:
Amortization Expense (38,000/40)
950
Investment in Sage Co Common Stock

950
To amortize goodwill acquired in business combination with partially owned subsidiary
Goodwill in a business combination involving a partially owned subsidiary is attributed to the parent
rather than the subsidiary as per FASB recommendation. Consequently the amortization of the
goodwill is debited to Amortization Expense account of the parent company, with an offsetting
credit to the investment account thereby avoiding charging any goodwill amortization to the
minority interest, which did not acquire any goodwill.
Developing the Elimination
Post Corporation’s use of equity method of accounting for its investment in Star Company results in
a balance in investment account that is a mixture of two components:

The carrying amount of Sage’s net assets

The excess of current fair values over the carrying amount of Sage’s identifiable net
assets, including goodwill, on the date of business combination
The following is the working paper elimination in journal entry format
Common Stock-Sage
400,000
Additional Paid in Capital-Sage
235,000
Retained Earnings-Sage
334,000
Intercompany Investment Income-Post
42,750
Plant Assets-Sage (190,000-14,000)
176,000
Leasehold (net) (30,000-5,000)
25,000
Goodwill (net)(38,000-950)
37,050
Cost of Goods Sold-Sage
43,000
Operating Expenses-Sage
2,000
Investment in Sage Co Common Stock-Post
Dividends Declared-Sage
Minority Interest in Net Assets of Sub(60,750-2,000)
 To carry out the following:
a)
1,196,050
40,000
58,750
Eliminate intercompany investment and amortization on differences combination date
current fair values and carrying amounts to appropriate assets
b)
Provide for year 2000 depreciation and amortization on differences between current
fair values and carrying amounts of Sage’s identifiable net assets:
CGS
Inventories sold
Building Dep.
Machinery Dep.
Leasehold Amort
26,000
2,000
10,000
5,000
Op. Exp
2,000
16
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
c)
Total
43,000
2,000
Allocate unamortized differences between combination date current fair values and
carrying amounts to appropriate assets
d)
Establish minority interest of subsidiary at beginning of year (60,750), less minority
interest
share
of
dividends
declared
by
subsidiary
during
the
year
(40,000*.05=2,000)
b) Minority Interest in Net income of Sub
2,250
Minority interest in net assets of sub
2,250
To establish minority interest in subsidiary’s adjusted net income

Net income of subsidiary
90,000
Net reduction (43,000+2,000)
45,000
Adjusted Net Income
45,000
Minority interest (45,000*.05)
2,250
The minority interest is:
Sage Company’s total Stockholders’ Equity
Add: Unamortized Difference
1,019,000
201,000
Sage’s Adjusted Stockholders’ Equity
1,220,000
Minority Interest 5%
61,000
Palm Corporation And Subsidiary
Working Paper For Consolidated Financial Statements
For Year Ended December 31, 2000
Income Statement
Post
Corporation
Sage
Company
5,611,000
1,089,000
Elimination
Increase
(Decrease)
Consolidated
Revenue:
Net Sales
Intercompany investment income
Total revenue
42,750
6,700,000
a) (42,750)
5,653,750
1,089,000
(42,750)
6,700,000
Costs and expenses:
cost of goods sold
3,925,000
700,000
a) 43,000
4,668,000
Operating expenses
556,950
129,000
a) 2,000
687,950
Interest & tax expense
710,000
170,000
Minority interest in net income of sub
Total costs and expenses
Net income
5,191,950
461,800
999,000
90,000
880,000
b) 2,250
2,250
47,250
6,238,200
(90,000)
461,800
17
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
Statement of Retained Earnings
Retained earnings, beginning
1,050,000
Net income
461,800
Sub total
1,511,800
Dividends declared
158,550
Retained earnings, ending
1,353,250
334,000
a) (334,000)
1,050,000
(90,000)
461,800
(424,000)
1,511,800
90,000
424,000
40,000
a) (40,000)
384,000
158,550
(384,000)
1,353,250
PALM CORPORATION AND SUBSIDIARY
WORKING PAPER FOR CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED DECEMBER 31, 2000
Balance Sheet
Assets
Inventories
861,000
439,000
1,300,000
Other current assets
639,000
371,000
1,010,000
Investment in Sage Co common stock
Plant assets (net)
1,196,050
3,600,000
a) (1,196,050)
1,150,000
Leasehold (net)
Goodwill (net)
Total assets
95,000
6,391,050
1,960,000
2,420,550
941,000
a)
176,000
4,926,000
a)
25,000
25,000
a)
37,050
(958,000)
132,050
7,393,050
Liabilities & Stockholders' Equity
Liabilities
Minority interest in net assets of sub
3,361,550
a) 58,750
61,000
b) 2,250
Common stock, $1 par
1,057,000
Common stock, $10 par
1,057,000
400,000
a) (400,000)
Additional paid in capital
1,560,250
235,000
a) (235,000)
1,560,250
Retained earnings
1,353,250
384,000
(384,000)
1,353,250
6,391,050
1,960,000
(958,000)
7,393,050
Total liab & stockholders' equity
18
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.
19
Collage of Business & Economics
Department of Accounting & Finance
Instructor: Ifa A.