Mergers-Notes – 3/12/03
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A. Consolidation in following years
1. Same entry sequence
a. Start off with new beginning balance sheet
i) Purchase premium has changed
ii) Adjust for previous allocation of premium and impairments
(1) PPn+1 = PPn – adjusted expensesn
(2) PPn+1 = PP0 – adjusted exp for periods 1 through n
b. Use new events
2. Straight line amortization of premium associated with long-term assets
3. Retest goodwill for impairment
B. Intercompany transactions
1. Companies transfer assets & financing back and forth
2. As separate companies
a. These are assets & liabilities
b. There are revenues & gains and expenses & losses
c. There are cash flows
3. As consolidated company this disappears
a. Transactions are internal to consolidation
i) Profits and losses can be transferred anywhere in firm
ii) Reflects transfers of capital within firm
iii) Basically, non events to outsiders
iv) All eliminations in working papers (WPE) designed to
remove internal activities
(1) Remove profits that are unconfirmed
(2) Remove double counting of assets, liabilities and equity
(3) P’s net income & RE will equal consolidated numbers
b. Examples
i) Downstream sales ( P to S) at a markup
ii) Upstream sales (S to P) at a markup
iii) May be ‘sold’ at market prices to assign profit for decision
making
iv) May be ‘sold’ at non-market prices
v) Prices called transfer prices
c. Profits and gains not verified by market
d. Gains remain unrealized as long as good is not resold externally
e. Gains (or as part of RE) in Unconsolidated books after the sale
i) Must be removed in consolidation in year of sale
ii) Must be removed in later years until resale
C. Transfers of assets
1. Transfers of land
a. Downstream sale - Initial entries
Cash
Land – P
Gain – P (Income obtained from S)
& Land - S
Cash
Mergers-Notes – 3/12/03
b. Net entry for transaction
Land – S
Land – P
Gain – P
c.
P’s entry at year end BEFORE consolidation
Investment in S
(Equity) Income from S
d. BEFORE consolidation
(1) Remove overstatement of income from S
(2) Gain on sale of land is unrealized
(3) Reduction in investment is like a dividend declaration
(Equity) Income from S
Investment in S
e. Reversal of gain
i) On worksheet only
ii) Land remains on S’s books at higher value
Gain
Land
f.
Subsequent years
i) Understated investment account remains on P’s books
ii) Reverse understated investment every year
iii) Converts land to original cost
iv) Profit has never been confirmed
Investment in S
Land
g. Sale to outside party
Investment in S
Gain on S
(Not reversed on consolidated books)
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Mergers-Notes – 3/12/03
2. Upstream sale – Net initial entry
Land – P
Land - S
Gain - S
i)
P’s entry at year end BEFORE consolidation
Investment in S
(Equity) Income from S
ii)
BEFORE consolidation
(1) Remove overstatement of income from S
(2) Amount is n% of gain reported by S
(3) Gain on sale of land is unrealized
(Equity) Income from S
Investment in S
b. Reversal of gain
i) On worksheet only
ii) Remains on P’s books
Gain
Land
c.
iii) Loss of gain is proportional to P & MI
iv) The gain (if not removed) would go ownership % to P
v) The gain (if not removed) would go Minority % to minority
Subsequent years
i) Remove gain every year
ii) Gain went to retained earnings
iii) Removed through beginning retained earnings
iv) Converts land to original cost
RE - S
Land
d. Sale to outside party
RE - S
Gain on S
(Transfers old RE into this year’s inc)
Elimination at end of year will distribute earnings to parent and MI
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Mergers-Notes – 3/12/03
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D. Intercompany transfers of Depreciable Assets
1. Asset is sold internally
a. Value of asset is changed
b. Gain (loss) results in the segment
c. Depreciation of the asset is changed
d. Profit on sale is unconfirmed
2. Realization occurs during depreciation
a. Confirmation of profit occurs during use of the asset
b. WPE entries recognize the realization year by year
3. Sale
a. Entry
Cash
Acc Dep
Asset
Gain
b. If a downstream sale – adjust investment account
Equity in income – S
Investment in S
4. First year WPE
a. Eliminate gain and reduce asset value to original cost
Gain on sale
Asset (reduces asset back to original net book
value)
b. Eliminate difference between old & new depreciation expense
Acc Dep
Depreciation Exp (excess depreciation)
c.
Revert asset & acc dep accounts to base them on original asset
values adjusted for another year of depreciation
Asset
Acc Dep (to include extra year of original
depreciation)
Mergers-Notes – 3/12/03
5. Subsequent years
a. Downstream sales
Inv in S*
Prev Xtra Acc Dep
(Remaining unconfirmed gain)
(Conformed gain)
Dep Asset (original gain)
Acc Dep (Period adjustment)
Extra Dep Exp
Dep Asset (Restate to original
cost)
Acc Dep
b. Upstream sales
RE*
Prev Xtra Acc Dep
(Remaining unconfirmed gain)
(Confirmed gain)
Dep Asset (original gain)
Acc Dep (Period adjustment)
Extra Dep Exp
Dep Asset (Restate to original
cost)
Acc Dep
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