Slide
4-1
Chapter Four
Consolidated
Financial
Statements
and Outside
Ownership
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-2
Noncontrolling Interest

Noncontrolling Interest is
the amount of the
acquired company’s
stock that is not acquired
by the parent.
 The interests of the
noncontrolling (nonparent) stockholders
must be reflected in the
consolidated financial
statements.
McGraw-Hill/Irwin
?
© The McGraw-Hill Companies, Inc., 2004
Slide
4-3
Noncontrolling Interest
The existence of
noncontrolling investors
requires the establishment
of two new accounts:
 Noncontrolling Interest
 Noncontrolling Interest in
Subsidiary Net Income
McGraw-Hill/Irwin
?
© The McGraw-Hill Companies, Inc., 2004
Slide
4-4
Noncontrolling Interest
Assume that Expo,Inc. acquires 70%
of Nent Co. for $10 million cash.
How do we account for the 30% of
Nent Co. that Expo does not own?
3 approaches are defined for defining
noncontrolling interest:
Economic Unit Concept
Proportionate Consolidation Concept
Parent Company Concept
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-5
Economic Unit Concept
Recommended by the FASB.
Noncontrolling Interest is a % of the
sub’s implied value.
Noncontrolling Interest in Sub Net
Income is a % of the sub’s net income
less amortization of purchase price
allocations.
The sub is viewed as an indivisible unit
within the business combination.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-6
Proportionate Consolidation
Concept
Little evidence exists to suggest
widespread use of this method.
Only the portion of the sub’s assets that
are acquired by the parent are
consolidated.
Noncontrolling Interest is not reported
under this method.
This method has been used where
control exists, but less than 50% of the
sub has been acquired.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-7
Parent Company Concept
Considered to be the most common
method in practice.
Noncontrolling Interest is a % of the
sub’s book value at the balance sheet
date.
Noncontrolling Interest in Sub Net
Income is a % of the sub’s net income.
#1 practice
in use.
McGraw-Hill/Irwin
Noncontrolling Interest may appear in the
equity section or between the equity
section and the liability section.
© The McGraw-Hill Companies, Inc., 2004
Slide
4-8
Parent Company Concept
•This concept includes the entire book
value of each of the subsidiary’s
accounts within the consolidated
statements. (Consistent with Economic Unit
Concept)
#1 practice
in use.
McGraw-Hill/Irwin
• However, only the parent’s share of the
difference between FMV and book value
in included in the consolidated
statements. (Consistent with Proportionate
Consolidation Concept)
© The McGraw-Hill Companies, Inc., 2004
Slide
4-9
Accounting for
Noncontrolling Interest


McGraw-Hill/Irwin
On the Balance Sheet:
A credit balance account
called Noncontrolling
Interest is set up to
recognize the noncontrolling
stockholders’ investment in
the subsidiary.
The account usually appears
in the equity section of the
Consolidated Balance Sheet.
Or it may be placed in a
separate section between
equity and non-current
liabilities
© The McGraw-Hill Companies, Inc., 2004
Slide
4-10
Accounting for
Noncontrolling Interest
On the Income Statement:
 An account called
Noncontolling Interest in
Subsidiary Net Income is
set up to recognize the
noncontrolling
shareholders’ share of the
sub’s net income.
 The account appears on
the Income Statement.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-11
Noncontrolling Interest
Example
Let’s look at an
example using
the Parent
Company
Concept.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-12
Noncontrolling Interest
Example
On 1/1/05,
Jumbo
purchases
80% of Li’l
Bit for
$800,000
cash.
all amounts in thousands
Li'l Bit
Account
BV
Current Assets
$ 250,000 $
Land
150,000
Building (net)
200,000
Equipment (net)
180,000
L-T Liabilities
(130,000)
Common Stock
R/E - 1/1/05
Li'l Bit
FMV
250,000
210,000
290,000
160,000
(130,000)
(500,000)
(150,000)
Note, that Li’l Bit owns an internally developed patent
valued at $220,000, with an expected useful life of 10 years.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-13
Noncontrolling Interest
Example
Record the initial investment on
Jumbo’s books.
Giant's General Journal
Date
1-Jan
Description
Investment in Li'l Bit
Cash
McGraw-Hill/Irwin
Page
Debit
230
Credit
800,000
800,000
© The McGraw-Hill Companies, Inc., 2004
Slide
4-14
Noncontrolling Interest
Example
Goodwill computation:
Jumbo's
Li'l Bit's
Jumbo's
%
Amounts Amounts
Jumbo's Cost
$
800
Li'l Bit's BV
80%
650
520
Difference
280
FMV Adjustments:
Land
80%
Building
80%
Equip.
80%
Patent
80%
Goodwill
60
90
(20)
220
48
72
(16)
176
$
-
This computation
Amortize
will be needed
again when the
consolidation is
done in years
÷subsequent
10
= $ to the
7.2
÷
4
=
(4.0)
year
of
÷
10
=
17.6
acquisition.
÷
0
=
Total
McGraw-Hill/Irwin
$
24.8
© The McGraw-Hill Companies, Inc., 2004
Slide
4-15
Consolidation Worksheet at 1/1/05
Account
Jumbo
BV
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
L-T
Liabilities
Li'l Bit
BV
400
250
600
150
1,100
200
670
180
(130)
(2,000)
(500)
R/E (Beg.)
(910)
(150)
Revenues
(3,500) -
Expenses
Total
McGraw-Hill/Irwin
CR
800
(320)
Common Stk
DR
all numbers in thousands
Noncontrolling
Cons.
Interest
Bal.
3,160
-
-
© The McGraw-Hill Companies, Inc., 2004
Slide
4-16
Consolidation Worksheet at 1/1/05
Account
Jumbo
BV
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
L-T
Liabilities
Common Stk
R/E (Beg.)
Revenues
Expenses
Total
McGraw-Hill/Irwin
Li'l Bit
BV
400
250
600
150
1,100
200
670
180
800
(320)
(130)
(2,000)
(500)
(910)
(150)
(3,500) 3,160
-
-
DR
CR
all numbers in thousands
Noncontrolling
Cons.
Interest
Bal.
As of the date
of acquisition,
the balances
for each
company are
entered into the
worksheet.
Next, enter the
consolidation
entries on the
worksheet.
© The McGraw-Hill Companies, Inc., 2004
Slide
4-17
Consolidation Worksheet at 1/1/05
Account
Jumbo
BV
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
L-T
Liabilities
Common Stk
R/E (Beg.)
Li'l Bit
BV
400
250
600
150
1,100
200
670
180
800
Expenses
Total
McGraw-Hill/Irwin
CR
520.00
(320)
(130)
(2,000)
(500)
500.00
(910)
(150)
150.00
130.00
NC Interest
Revenues
DR
all numbers in thousands
Noncontrolling
Cons.
Interest
Bal.
(3,500) 3,160
-
-
© The McGraw-Hill Companies, Inc., 2004
Slide
4-18
CONSOLIDATION JOURNAL
Page
Date
Description
Consolidation
Worksheet
at 1/1/05
ENTRYLi'l
S Bit
Jumbo
CommonBV
Stock (Li'l
Bit)
Account1-Jan BV
DR
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
L-T
Liabilities
Common Stk
R/E (Beg.)
R/E - Li'l Bit
400
250 in Li'l Bit
Investment
600
150
Noncontrolling
Interest
1,100
200
670
180
800
Expenses
Total
McGraw-Hill/Irwin
Debit
Credit
all numbers in thousands
Noncontrolling
Cons.
500.00
Interest
Bal.
150.00
520.00
130.00
520.00
(320)
(130)
(2,000)
(500)
500.00
(910)
(150)
150.00
130.00
NC Interest
Revenues
CR
1
This is 20% of
Li’l Bit’s BV at
date of
acquisition.
(3,500) 3,160
-
-
© The McGraw-Hill Companies, Inc., 2004
Slide
4-19
Consolidation Worksheet at 1/1/05
Account
Jumbo
BV
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
Patent
L-T
Liabilities
Common Stk
R/E (Beg.)
Li'l Bit
BV
400
250
600
150
48.00
1,100
200
72.00
670
180
Expenses
Total
McGraw-Hill/Irwin
CR
16.00
800
800.00
176.00
(320)
(130)
(2,000)
(500)
500.00
(910)
(150)
150.00
130.00
NC Interest
Revenues
DR
all numbers in thousands
Noncontrolling
Cons.
Interest
Bal.
(3,500) 3,160
-
-
© The McGraw-Hill Companies, Inc., 2004
Slide
4-20
Consolidation Worksheet at 1/1/05
Account
Jumbo
BV
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
Li'l Bit
BV
DR
400
250
600
150
48.00
1,100
200
72.00
670
180
CR
16.00
800
800.00
176.00
Patent
L-T
Liabilities
(320)
(130)
CONSOLIDATION
JOURNAL
(2,000)
(500)
500.00
Page
Common Stk
R/E (Beg.)
NC Interest
Revenues
Expenses
Total
all numbers in thousands
Noncontrolling
Cons.
Interest
Bal.
Date
(910)
Description
(150)
150.00
ENTRY A
31-Dec Land
(3,500) Building
3,160 Patent
Equipment
Investment in Li'l Bit
McGraw-Hill/Irwin
Debit
130.00
1
Credit
48.00
72.00
176.00
16.00
280.00
© The McGraw-Hill Companies, Inc., 2004
Slide
4-21
Consolidation Worksheet at 1/1/05
Account
Jumbo
BV
Current
Assets
Land
Buildings
(net)
Equip. (net)
Investment
in Li'l Bit
Patent
L-T
Liabilities
Common Stk
R/E (Beg.)
Li'l Bit
BV
DR
CR
all numbers in thousands
Noncontrolling
Cons.
Interest
Bal.
400
250
650.00
600
150
48.00be the
This will
of all the
200sum72.00
180
16.00
amounts in the
Noncontrolling
800.00
176.00
Interest
column.
798.00
1,100
670
800
1,372.00
834.00
176.00
(320)
(130)
(450.00)
(2,000)
(500)
500.00
(2,000.00)
(910)
(150)
150.00
(910.00)
130.00
NC Interest
130.00
(130.00)
Revenues
(3,500)
(3,500.00)
Expenses
3,160
3,160.00
-
Total
McGraw-Hill/Irwin
-
-
© The McGraw-Hill Companies, Inc., 2004
Slide
4-22
Noncontrolling Interest
Example
Let’s do the
consolidation
at the end of
2005.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-23
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
420
Li'l Bit
BV
220
600
990
150
180
620
140
CR
800
Common Stk
(430)
(2,000)
(85)
(500)
R/E (Beg.)
(1,250)
(150)
L-T Liabilities
DR
all numbers in thousands
NC
Cons.
Interest
Bal.
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
500
75
(3,200)
(830)
2,950
800
© The McGraw-Hill Companies, Inc., 2004
Slide
4-24
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
420
Li'l Bit
BV
220
600
990
150
180
620
140
800
Common Stk
(430)
(2,000)
(85)
(500)
R/E (Beg.)
(1,250)
(150)
L-T Liabilities
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
500
DR
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
First, update Jumbo’s
numbers for the
equity method entries.
75
(3,200)
(830)
2,950
800
© The McGraw-Hill Companies, Inc., 2004
Slide
4-25
Noncontrolling Interest
Example
Date
Description
31-Dec Investment in Li'l Bit
Equity in Li'l Bit NI
Debit
24
24
31-Dec Cash
Investment in Li'l Bit
60
31-Dec Equity in Li'l Bit NI
Investment in Li'l Bit
20.8
Li'l Bit's Net Income for 2000
% of Li'l Bit owned by Jumbo
Equity Adjustment
McGraw-Hill/Irwin
Credit
60
20.8
$ 30.00
80%
$ 24.00
© The McGraw-Hill Companies, Inc., 2004
Slide
4-26
Noncontrolling Interest
Example
Date
Description
31-Dec Investment in Li'l Bit
Equity in Li'l Bit NI
Debit
24
Credit
24
31-Dec Cash
Investment in Li'l Bit
60
31-Dec Equity in Li'l Bit NI
Investment in Li'l Bit
20.8
60
20.8
$60,000 dividends were paid
to Jumbo by Li’l Bit during
the year.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-27
Noncontrolling Interest
Example
Date
Description
31-Dec Investment in Li'l Bit
Equity in Li'l Bit NI
Debit
24
Credit
24
31-Dec Cash
Investment in Li'l Bit
60
31-Dec Equity in Li'l Bit NI
Investment in Li'l Bit
20.8
60
20.8
FMV adjustment and intangible
amortization is computed as follows:
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-28
Noncontrolling Interest
Example
Amortization computation:
Jumbo's Li'l Bit's Jumbo's
%
Amounts Amounts
Jumbo's Cost
$
800
Li'l Bit's BV
80%
650
520
Difference
280
FMV Adjustments:
Land
80%
Building
80%
Equip.
80%
Patent
80%
Goodwill
McGraw-Hill/Irwin
60
90
(20)
220
48
72
(16)
176
$
-
Assume that the
building
has a
Depreciate
remaining useful
life of 10 years,
the equipment
has a remaining
10
= $
7.2
useful
life
of 4
4
=
(4.0)
10 years,
=
17.6
and
the
=
patent
has a
Total
$
20.8
remaining
useful
life of 10 years.
© The McGraw-Hill Companies, Inc., 2004
Slide
4-29
Noncontrolling Interest
Example
Amortization computation:
Jumbo's Li'l Bit's Jumbo's
%
Amounts Amounts
Jumbo's Cost
$
800
Li'l Bit's BV
80%
650
520
Difference
280
FMV Adjustments:
Land
80%
Building
80%
Equip.
80%
Patent
80%
Goodwill
60
90
(20)
220
48
72 ÷
(16) ÷
176 ÷
$
Amortize
10
4
10
-
$
7.2
(4.0)
17.6
$
20.8
=
Total
McGraw-Hill/Irwin
=
=
=
© The McGraw-Hill Companies, Inc., 2004
Slide
4-30
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
620
140
743.2
Common Stk
(430)
(2,000)
(85)
(500)
R/E (Beg.)
(1,250)
(150)
L-T Liabilities
DR
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
Note Jumbo’s
updated
numbers.
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
500
75
(3,200)
(830)
2,950
800
(3.2)
This is based on
80% of Li’l Bit’s
income less $20.8
in Amortization
Expense
© The McGraw-Hill Companies, Inc., 2004
Slide
4-31
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
620
140
DR
743.2
520.0
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
500
75
(3,200)
(830)
2,950
800
(3.2)
© The McGraw-Hill Companies, Inc., 2004
Slide
4-32
CONSOLIDATION JOURNAL
Consolidation
Worksheet
at 12/31/05
Date
Description
Jumbo
ENTRY S Li'l Bit
Account
BV
BV (Sub) DR
31-Dec Common
Stock
Current Assets
480
220
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
620
Common Stk
500.0
R/E (Beg.)
(1,250)
(150)
150.0
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
500
500Interest
150
520
130
130.0
NC Interest
Revenues
CR
520.0
(85)
(500)
Dividends
Cons.
Bal.
NC
140
743.2
1
all numbers
in thousands
Debit
Credit
R/E - Beg (Sub)
600
150
Investment
in Sub
990
180
Noncontrolling Interest
(430)
(2,000)
L-T Liabilities
Page
75
(3,200)
(830)
2,950
800
This is 20% of
Li’l Bit’s BV at
date of
acquisition.
(3.2)
© The McGraw-Hill Companies, Inc., 2004
Slide
4-33
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
620
140
DR
48.0
72.0
16.0
743.2
800.0
176.0
Patent
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
500
75
(3,200)
(830)
2,950
800
(3.2)
© The McGraw-Hill Companies, Inc., 2004
Slide
4-34
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Patent
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
620
140
DR
all numbers in thousands
NC
Cons.
Interest
Bal.
CR
48.0
72.0
16.0
743.2
800.0
176.0
(430)
(85)
CONSOLIDATION
JOURNAL
Common Stk
(2,000)
(500)
500.0
Date
Description
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
ENTRY A
31-Dec Land
Dividends
500
75
Building
Revenues
(3,200)
(830)
Patent
Expenses
2,950
800
Equipment
Equity-Li'l Bit
NI
Investment
in Li'l Bit
(3.2)
NC Interest
Page
Debit
130.0
1
Credit
48.0
72.0
176.0
16.0
280.0
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-35
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
620
140
DR
48.0
72.0
16.0
743.2
803.2
176.0
Patent
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
500
75
(3,200)
(830)
2,950
800
(3.2)
3.2
© The McGraw-Hill Companies, Inc., 2004
Slide
4-36
CONSOLIDATION
JOURNAL
Consolidation
Worksheet
at 12/31/05
Jumbo Description
Li'l Bit
ENTRY
I
Account
BV
BV
31-Dec Equity
in Sub NI
Current Assets
480
220
Page
1 in thousands
all numbers
Date
Land
Investment
in Sub
600
150
Buildings (net)
990
180
Equip. (net)
Investment in
Li'l Bit
620
140
Debit
DR
16.0
803.2
176.0
Common Stk
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
130.0
NC Interest
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
3.2
48.0
72.0
(430)
(2,000)
Dividends
Interest
Cons.
Bal.
3.2
743.2
Patent
L-T Liabilities
CR
NC Credit
500
75
(3,200)
(830)
2,950
800
(3.2)
3.2
© The McGraw-Hill Companies, Inc., 2004
Slide
4-37
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
620
140
743.2
DR
48.0
72.0
16.0
60.0
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
803.2
176.0
Patent
L-T Liabilities
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
500
75
(3,200)
(830)
2,950
800
(3.2)
60.0
3.2
© The McGraw-Hill Companies, Inc., 2004
Slide
4-38
Consolidation
Worksheet at 12/31/05
CONSOLIDATION JOURNAL
Date
Account
Current Assets
Land
Jumbo Description
Li'l Bit
BV
BV
ENTRY
D
480
220
31-Dec Investment in Sub
600
150
Dividends
(Sub)
Buildings (net)
990
180
Equip. (net)
Investment in
Li'l Bit
620
140
743.2
DR
60.0
48.0
72.0
Common Stk
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
130.0
NC Interest
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
803.2
176.0
(430)
(2,000)
Dividends
60.0
16.0
60.0
Patent
L-T Liabilities
all numbers in thousands
1
NC
Cons.
Debit
Credit
CR
Interest
Bal.
Page
500
75
(3,200)
(830)
2,950
800
(3.2)
60.0
3.2
This is the
80% of Li’l
Bit’s dividends
that went to
Jumbo.
© The McGraw-Hill Companies, Inc., 2004
Slide
4-39
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
48.0
72.0
7.2
620
140
4.0
16.0
60.0
803.2
176.0
17.6
743.2
Patent
DR
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
CR
all numbers in thousands
NC
Cons.
Interest
Bal.
500
75
(3,200)
(830)
2,950
800
(3.2)
60.0
20.8
3.2
© The McGraw-Hill Companies, Inc., 2004
Slide
4-40
Consolidation Worksheet at 12/31/05
Account
Current Assets
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
48.0
72.0
7.2
620
140
4.0
16.0
60.0
803.2
176.0
17.6
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
743.2
Patent
DR
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
CR
130.0
NC Interest
500
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
all numbers in thousands
NC
Cons.
Interest
Bal.
75
(3,200)
(830)
2,950
800
CONSOLIDATION
JOURNAL
(3.2)
Date
Description
ENTRY E
31-Dec Amortization Expense
Equipment
Building
Patent
McGraw-Hill/Irwin
60.0
20.8
3.2
Page
Debit
1
Credit
20.8
4.0
7.2
17.6
© The McGraw-Hill Companies, Inc., 2004
Slide
4-41
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
48.0
72.0
7.2
620
140
4.0
16.0
60.0
803.2
176.0
17.6
743.2
Patent
DR
Common Stk
(430)
(2,000)
(85)
(500)
500.0
R/E (Beg.)
(1,250)
(150)
150.0
L-T Liabilities
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
CR
500
75
(3,200)
(830)
2,950
800
(3.2)
60.0
all numbers in thousands
NC
Cons.
Interest
Bal.
These numbers are
computed and
entered into the
Noncontrolling
Interest column.
(130.0)
15.0
20.8
3.2
(6.0)
© The McGraw-Hill Companies, Inc., 2004
Slide
4-42
Consolidation Worksheet at 12/31/05
Account
Current Assets
Land
Buildings (net)
Equip. (net)
Investment in
Li'l Bit
all numbers in thousands
NC
Cons.
Interest
Bal.
700.0
Jumbo
BV
480
Li'l Bit
BV
220
600
990
150
180
48.0
72.0
7.2
798.0
1,234.8
620
140
4.0
16.0
748.0
60.0
803.2
176.0
17.6
743.2
DR
CR
-
Common Stk
(430)
(2,000)
(85)
(500)
500.0
158.4
(515.0)
(2,000.0)
R/E (Beg.)
(1,250)
(150)
150.0
(1,250.0)
Patent
L-T Liabilities
130.0
NC Interest
Dividends
Revenues
Expenses
Equity-Li'l Bit
NI
NC Equity in
Li'l Bit NI
McGraw-Hill/Irwin
500
75
(3,200)
(830)
2,950
800
(3.2)
60.0
(130.0)
15.0
(121.0)
500.0
(4,030.0)
20.8
3,770.8
3.2
0.0
(6.0)
6.0
© The McGraw-Hill Companies, Inc., 2004
Slide
4-43
Effects Created by Using the Cost
Method
Prepare Entry *C to convert
from the Cost Method to
the Equity Method
Combine:
1. The increase in the sub’s BV
since acquisition x the
parent’s ownership %
2. Total amortization for the
same period.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-44
Effects Created by Using the Cost
Method
 Change Entry I to
eliminate the Dividend
Income
 DO NOT use Entry D
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-45
Effects Created by Using the
Partial Equity Method
Perform Entry *C.
Only the
adjustment for
the amortization
expense is
necessary.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-46
Step Acquisitions


McGraw-Hill/Irwin
Companies often acquire
controlling interest in other
companies a piece at a
time; i.e. “in steps”.
Under the Parent Company
Concept, each investment
is viewed as a separate
purchase, with its own cost
allocations and
amortization.
© The McGraw-Hill Companies, Inc., 2004
Slide
4-47
1.
2.
3.
Preacquisition Income
When control of a sub is acquired at a time subsequent
to the beginning of the sub’s fiscal year, the income
statement accounts are consolidated as if the
acquisition was made at the beginning of the period.
A line-item is included (as a deduction) in the income
statement for the parent’s share of the sub’s current
year income prior to the date of acquisition. (which
effectively belongs to the former shareholders)
The dividends paid to these former shareholders are
then eliminated.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-48
Preacquisition Income
Steps 2 & 3 are done via the following “S” in
SAIDE entry:
Dr. Pre Acquisition Income
Cr. Dividends paid (of subsidiary)
Cr. Investment in Subsidiary
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-49
Preacquisition Income (Cont’d)
The determination of goodwill and the
computation of excess FMV over BV is
based on the subsidiary’s BV at the time of
acquisition.
5. The current year’s amortization is based
only on the period for which the parent had
its ownership in the subsidiary. E.g. the last
3 months of the year.
4.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
4-50
End of Chapter 4
Ten cups of
this stuff
and I still
don’t get it!
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004