Chapter
Consolidated Financial Statements:
Subsequent to Date of PurchaseType Business Combination
ACCT 501
by Professor Hsieh
Objectives of this Chapter

Prepare the consolidated financial
statements for the parent company
and its subsidiaries for the years
following business combination for
purchase-type business combination
For wholly owned purchased
subsidiaries
For partially owned purchased
subsidiaries
Consolidated FS-Subsequent to date of purchase type
2
Accounting for Operating Results of
wholly Owned Purchased Subsidiaries

In accounting for the operating results
of purchased subsidiaries, a parent
company may choose the equity
method or the cost method of
accounting.
Consolidated FS-Subsequent to date of purchase type
3
Equity Method

The parent company recognizes its
share of the subsidiary’s net income or
loss and adjusted for the depreciation
and amortization of the step up of a
purchased subsidiary’s net assets on
the date of business combination. The
parent company also recognizes its
share of dividends declared by the
subsidiary.
Consolidated FS-Subsequent to date of purchase type
4
Equity Method (contd.)

Thus, the equity method is consistent
with the accrual basis accounting.
Equity method emphasizes the
economic substance of the parentsubsidiary. Dividends declared by
subsidiaries are not revenue to the
parent company, rather, they are a
liquidation of a portion of the parent
company’s investment in the
subsidiary.
Consolidated FS-Subsequent to date of purchase type
5
Cost Method

Under this method, the parent
company accounts for the operations
of a subsidiary only to the extend that
dividends are declared by the
subsidiary. This method emphasizes
the legal form of the parent-subsidiary
relationship.
Consolidated FS-Subsequent to date of purchase type
6
Choosing Between Equity Method
and Cost Method

Consolidated financial statement
amounts are the same regardless of
whether a parent company uses the
equity method or the cost method to
account for a subsidiary’s operations.
The differences are in the working
paper elimination.
Consolidated FS-Subsequent to date of purchase type
7
Choosing Between Equity Method
and Cost Method (contd.)

Equity method is appropriate for both
pooled subsidiaries and purchased
subsidiaries. The cost method is only
appropriate for purchased
subsidiaries.
Consolidated FS-Subsequent to date of purchase type
8
Example of Equity Method for wholly Owned
Purchased Subsidiary for First Year after
Business Combination (textbook p286-296)

Assumed that Palm Corporation had
used purchase accounting for the
December 31, 1999, business
combination with its wholly owned
subsidiary- Starr Company. Starr had
a net income of $60,000 (income
statement is on p293 of the textbook)
for the year ended December 31,
2000.
Consolidated FS-Subsequent to date of purchase type
9
Example of Equity Method for wholly Owned
Purchased Subsidiary for First Year after
Business Combination (contd.)

On December 20, 2000, Starr’s board
of directors declared a cash dividend
of $0.60 a share on the 40,000
outstanding shares of common stock
owned by Palm The divided was
payable January8, 2001, to
stockholders recorded December 29,
2000.
Consolidated FS-Subsequent to date of purchase type
10
Example of Equity Method for wholly Owned
Purchased Subsidiary for First Year after
Business Combination (contd.)


Starr’s December 20, 2000, journal entry to
record the dividend declaration is as follows:
12/20
Dividends Declared
24,000
Intercompany Dividend payable
24,000
The intercompany dividend payable account
must be eliminated in the preparation of
consolidated financial statements for the
year 2000.
Consolidated FS-Subsequent to date of purchase type
11
Example of Equity Method for wholly Owned
Purchased Subsidiary for First Year after
Business Combination (contd.)

Under the equity method, Palm Corp.
prepares the following journal entries to
record the dividend and net income of
Starr for the year ended 12/31/2000:
12/20/00
Intercompany
Dividend Receivable
24,000
Investment in Starr Company Stock 24,000
To record the dividends declared by Starr.
Consolidated FS-Subsequent to date of purchase type
12
Example of Equity Method for wholly Owned
Purchased Subsidiary for First Year after
Business Combination (contd.)
12/31/00
Investment in
Starr Company Stock
60,000
Intercompany Investment Income
60,000
To record the Palm’s share (100%) of net income on
Starr under equity method
Consolidated FS-Subsequent to date of purchase type
13
Adjustment of Purchased
subsidiary’s Net Income

Since Palm’s acquisition of Starr is
accounted for using the purchase
method, adjustments are needed to
adjust Starr’s net income for
depreciation and amortization
attributable to the step up of Starr’s
net assets on 12/31/99.
Consolidated FS-Subsequent to date of purchase type
14
Adjustment of Purchased
subsidiary’s Net Income (contd.)

Assumed that on 12/31/99,
differences between the current fair
values and carrying amounts of
Starr’s net assets were as follows
(also see p236 and p241 of chapter 6
of the textbook):
Consolidated FS-Subsequent to date of purchase type
15
Adjustment of Purchased
subsidiary’s Net Income (contd.)
Inventories (FIFO)
Plant assets (net)
Land
Building(eco. life 10 yrs.)
Machinery(eco. life 10yrs.)
Patent (eco. life 5 yrs.)
Goodwill (eco. life 30 yrs.)
Total
$ 25,000
$15,000
30,000
20,000
65,000
5,000
15,000
$110,000
Consolidated FS-Subsequent to date of purchase type
16
Adjustment of Purchased
subsidiary’s Net Income (contd.)

Palm prepares the following journal entry to
account for the depreciation and
amortization of the step up on Starr’s net
assets:
12/31/2000
Intercompany
Investment Income
30,500
Investment in
Starr Company Stock
Consolidated FS-Subsequent to date of purchase type
30,500
17
Adjustment of Purchased
subsidiary’s Net Income (contd.)

The annual depreciation and amortization of
the step up are as follows:
Inventory (to cost of goods sold)
Building (30,000/15)
Machinery (20,000/10)
Patent (5,000/5)
Goodwill (15,000/30)
Total depr. And amort. For year 2000
$25,000
2,000
2,000
1,000
500
$30,500
(income tax effects are disregarded)
Consolidated FS-Subsequent to date of purchase type
18
Adjustment of Purchased
subsidiary’s Net Income (contd.)
After the three foregoing journal entries,
Palm Corp.’s Investment in Starr Company’s
Common Stock and intercompany
Investment Income accounts are as follows:
Investment in Starr’s
Common Stock
12/31/99
450,000 a
12/31/99
50,000 b
12/31/00
60,000 d
24,000 c
12/20/00
30,500 e
12/31/00
12/31/00
505,000

Consolidated FS-Subsequent to date of purchase type
19
Adjustment of Purchased
subsidiary’s Net Income (contd.)
a. Issuance of common stock (by Palm) in
the acquisition of Starr.
b. Direct out-of-pocket costs of business
combination.
c. Recognition of dividend declared by the
subsidiary-Starr.
d. Recognition of wholly owned subsidiary’s
(Starr) net income.
e. Recognition of depre. and amor. on the
step-up of Starr’s net assets.
Consolidated FS-Subsequent to date of purchase type
20
Adjustment of Purchased
subsidiary’s Net Income (contd.)
12/31/00
Intercompany
Investment Income
60,000 a
30,500 b
29,500
12/20/00
Consolidated FS-Subsequent to date of purchase type
21
Development of the Elimination

Analysis of Investment in Starr Stock
account (for the year ended 12/31/2000)
Carrying Step-up
Total
Amount.
Beginning Balances $390,000 $110,000 $500,000
(on 12/31/99)
Net Income(Starr)
60,000
60,000
Amort. On Step-up
(30,500) (30,500)
Dividends Declared (24,000)
(24,000)
by Starr
Ending Balance
$426,000 $79,500 $505,000
Consolidated FS-Subsequent to date of purchase type
22
Development of the Elimination
(contd.)

Note:
1. The ending balance on the carrying
amount (book value),$426,000,
equals the balance the total
stockholder’s equity of Starr on
12/31/2000 as follows (see
balance sheet section of Starr on
p293 of textbook):
Consolidated FS-Subsequent to date of purchase type
23
Development of the Elimination
(contd.)
Common Stock,$5 par
Additional Paid-in Capital
Retained Earnings
(132,000+60,000-24,000)
Total Stockholder’s Equity
$200,000
58,000
168,000
$426,000
Consolidated FS-Subsequent to date of purchase type
24
Development of the Elimination
(contd.)

The $79,500 balance on the Step-up
column represents the unamortized
excess amount (the difference
between the current fair value of net
assets and the carrying amount). The
details are in the following table:
Consolidated FS-Subsequent to date of purchase type
25
Development of the Elimination
(contd.)
Inventories
Plant assets(net):
Land
Building
Machinery
Total plant
assets
Patent
Goodwill
Totals
Balances,
Dec.31,1999
$ 25,000
Amort. for
Balances,
Year 2000 Dec. 31,2000
$(25,000)
$ 15,000
30,000
20,000
$ (2,000)
(2,000)
$15,000
28,000
18,000
$ 65,000
$ 5,000
15,000
$110,000
$ (4,000)
$ (1,000)
(500)
$(30,500)
$61,000
$ 4,000
14,500
$79,500
Consolidated FS-Subsequent to date of purchase type
26
Palm Corp. and subsidiary Working Paper
Elimination (on 12/31/2000)

All three basic financial statements (the
income statement, the statement of
retained earnings and the balance
sheet) must be consolidated for
accounting period following the date of
a purchase-type business
combination.The items that must be
included in the elimination are:
Consolidated FS-Subsequent to date of purchase type
27
Palm Corp. and subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
1)The subsidiary’s beginning balance of
stockholder’s equity accounts and its
dividends and parent’s investment account;
2)the parent’s intercompany investment
income ;
3)unamortized current fair value excess of the
subsidiary;
4)certain operating expense o the subsidiary.
Consolidated FS-Subsequent to date of purchase type
28
Palm Corp. and subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)

Assuming that Starr allocates machinery
depreciation and patent amortization entirely
to cost of goods sold, goodwill amortization
entirely to operating expense and building
depreciation 50% each to cost of goods sold
and operating expenses, the working paper
elimination (in journal entry format) for Palm
and subsidiary on 12/31/2000 is as follows:
Consolidated FS-Subsequent to date of purchase type
29
Palm Corp. and subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
Common Stock-Starr
Additional Paid-in Capital-Starr
Retained Earnings-Starr
Investment Income-Palm
Plant Assets (net)-Starr
($65,000-4,000)
Patent (net)-Starr ($5,000-1,000)
Goodwill (net)-Starr ($15,000-500)
Cost of Goods Sold-Starr
Operating Expenses-Starr
Investment in Starr
Common Stock
Dividends Declared-Starr
200,000
58,000
132,000
29,500
61,000
4,000
14,500
29,000
1,500
505,000
24,000
Consolidated FS-Subsequent to date of purchase type
30
Palm Corp. and subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)

Note:
1. Income tax effects are disregarded
2. the computation of cost of goods
sold and operating expense are as
follows:
Consolidated FS-Subsequent to date of purchase type
31
Palm Corp. and subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
Inventories sold
Building depreciation
Machinery depreciation
Patent amortization
Goodwill amortization
Totals
Cost of
Operating
Goods Sold Expenses
$25,000
1,000
$1,000
2,000
1,000
500
$29,000
$1,500
Consolidated FS-Subsequent to date of purchase type
32
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (on p293 of textbook)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Income Statement
Revenue:
Net Sales
Intercompany investment
income
Total revenue
Costs and expenses:
Cost of good sold
Operating expenses
Interest expenses
Income taxes expense
Total costs and
expenses
Net income
Palm
Corporation
1,100,000
29,500
1,129,500
Starr
Company
Eliminations Consolidated
Increase
680,000
1,780,000
680,000
(a)(29,500)
(29,500)
700,000
217,667
49,000
53,333
450,000
130,000
(a) 29,000
(a) 1,500
1,179,000
349,167
49,000
93,333
1,020,000
109,500
620,000
60,000
30,500*
(60,000)
1,670,500
109,500
40,000
Consolidated FS-Subsequent to date of purchase type
1,780,000
33
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Statement of
Palm
Starr
Eliminations Consolidated
Retained Earnings Corporation Company Increase
Retained earnings,
134,000
132,000 (a) (132,000)
134,000
beginning of year
109,500
60,000
(60,000)
109,500
Net income
243,500
192,000
(192,000)
243,500
Subtotal
Dividends
30,000
24,000 (a) (24,000)+
30,000
declared
Retained earnings,
213,500
168,000
(168,000)
213,500
end of year
(Continued)
Consolidated FS-Subsequent to date of purchase type
34
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Balance/Assets
Cash
Intercomapny receivable
(payable)
Inventories
Other current assets
Investment in Starr
Company common stock
Plant assets (net)
Patent (net)
Goodwill (net)
Total assets
Palm
Corporation
15,900
24,000
136,000
88,000
Starr
Eliminations Consolidated
Company
Increase
72,100
88,000
(24,000)
115,000
131,000
505,500
3,500,000
440,000
340,000
16,000
1,209,400
650,100
251,000
219,000
(a) (505,500)
(a) 61,000
(a)
4,000
(a) 14,500
(426,000)
Consolidated FS-Subsequent to date of purchase type
841,000
20,000
14,500
1,433,,500
35
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Liabilities
Palm
Starr
Eliminations Consolidated
&Stockholders’ Equity Corporation Company
Increase
40,000
20,000
60,000
Income taxes payable
190,900
204,100
395,000
Other liabilities
400,000
400,000
Common stock,$10par
200,000 (a) (200,000)
Common stock, $5 par
Additional paid-in
capital
365,000
58,000 (a) (58,000)
365,000
213,500
168,000
(168,000)
213,500
Retained earnings
Total liabilities
& stockholders’
1,209,400
650,000
(426,000)
1,433,500
equity
Consolidated FS-Subsequent to date of purchase type
36
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)

Note:
1. The intercompany receivable and
payable, placed in adjacent columns on
the same line, are offset without a formal
elimination.
2. The FIFO method s used by Starr; thus,
the $25,000 difference attributable to the
beginning inventories of Starr is allocated
to the cost of goods sold for year 2000.
Consolidated FS-Subsequent to date of purchase type
37
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
3. The step up (current fair value excess on
Starr’s net assets) is only included in the
consolidated balance sheet for the
unamortized balance. Step- up on land is
not subject to amortization.
Consolidated FS-Subsequent to date of purchase type
38
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
4. The use of equity method results in:
Parent company net income =
consolidated net income
Parent company retained earnings =
consolidated retained earnings
These equalities exist when the equity
method is used and no intercompany
profits accounted for in the determination
of consolidated net assets.
Consolidated FS-Subsequent to date of purchase type
39
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
5. Consolidated financial statements provide
more information than those of the parent
company despite the equalities in the net
income and retained earnings.
6. The retained earnings of Palm on
12/31/2000 includes only $29,500 share
of the subsidiary’s adjusted net income
for the year ended 12/31/2000.
Consolidated FS-Subsequent to date of purchase type
40
Consolidated Financial Statements

The consolidated income statement,
statement of retained earnings and
balance sheet of Palm corp. and
subsidiary for the year ended
December 31, 2000 are as follows: (on
p294 and 295 of textbook)
Consolidated FS-Subsequent to date of purchase type
41
Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Income Statement
For Year Ended December 31,2000
Net Sales
Costs and expenses:
Costs and goods sold
Operating expenses
Interest expense
Income taxes expense
Total costs and
expenses
Net income
Basic earnings per share
of common stock (40,000
shares outstanding)
$1,780,000
$1,179,000
349,167
49,000
93,333
1,670,000
$109,500
Consolidated FS-Subsequent to date of purchase type
$ 2.74
42
Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Statement of Retained Earnings
For Year Ended December 31,2000
Retained earnings,
beginning of year:
Add: Net income
Subtotals
Less: Dividends($0.75 a share)
Retained earnings,
end of year
$ 134,000
109,500
$ 243,500
30,000
$ 213,500
Consolidated FS-Subsequent to date of purchase type
43
Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Assets
Current assets:
Cash
Inventories
Other
Total current assets
Plant assets (net)
Intangible assets:
Patent(net)
Goodwill (net)
Total assets
$
88,000
251,000
219,000
$ 558,000
841,000
$20,000
14,500
34,500
$1,433,500
Consolidated FS-Subsequent to date of purchase type
44
Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Liabilities $ Stockholders’ Equity
Liabilities:
Income taxes payable
Other
Total liabilities
Stockholders’ equity:
Common stock, $10 par
Additional paid-in capital
Retained earnings
Total Liabilities&
stockholders’ equity
$
60,000
395,000
$ 455,000
$ 400,000
365,000
213,500
978,500
$1,433,500
Consolidated FS-Subsequent to date of purchase type
45
Closing Entries

Closing entries should be prepared for both
the parent company and the subsidiary at
the end of the fiscal year after the financial
statements[1] being prepared. The closing
entries for the subsidiary are prepared in the
usual fashion. The closing entries for the
parent company are prepared in the usual
fashion except for the closing of the income
summary to the retained earnings. Palm
Corporation prepares the closing entries on
12/31/2000, after the consolidated financial
statements have been prepared, as follows:
Consolidated FS-Subsequent to date of purchase type
46
Closing Entries (contd.)
[1] Consolidated financial statements for the
parent company and the regular F/S for the
subsidiary.
The parent and subsidiary are two separate
legal entities. When consolidated F/S are
prepared using the equity method, the
economic substance of the parent-subsidiary
relationship is being emphasized rather than
their legal form.
Consolidated FS-Subsequent to date of purchase type
47
Closing Entries (contd.)
Net Sales
Intercompany Investment
Income
1,100,000
Income Summary
Income Summary
1,020,000
Cost of Goods Sold
Operating Expense
Interest Expense
Income Taxes Expense
29,500
700,000
217,667
49,000
53,333
Consolidated FS-Subsequent to date of purchase type
48
Closing Entries (contd.)
Income Summary
Retained Earnings of
Subsidiary
Retained Earnings b
Retained Earnings
Dividends Declared
109,500
5,500
104,000
30,000
30,000
Consolidated FS-Subsequent to date of purchase type
49
Closing Entries (contd.)
a.The portion of retained earnings which is
contributed by the subsidiary. The
computation is $29,500 (adjusted net
income of subsidiary) – 24,000 (dividends
declared by the subsidiary). This amount of
retained earnings is NOT available for
dividends to Palm’s stockholders.
b.The portion of retained earnings which is
contributed by the operation of the parent
company.
Consolidated FS-Subsequent to date of purchase type
50
Closing Entries (contd.)

After the foregoing closing entries, the
balances of Palm Corp.’s Retained Earnings
and Retained Earnings of subsidiary ledger
accounts are as follows:
Close dividends
declared
Retained Earnings
134,000 Beg.Balance
104,500 Close net income
available for dividends
to stockholders of Palm
30,000
208,000
Consolidated FS-Subsequent to date of purchase type
51
Closing Entries (contd.)
Retained Earnings of Subsidiary
5,500
Close net income not
available for dividends
to
Consolidated FS-Subsequent to date of purchase type
52
Closing Entries (contd.)

The balance of the retained earnings of
subsidiary is equal to the net increase in the
balance of Palm’s investment in Starr
Company Stock account as shown below:
$505,500 ( the balance of the Investment
account on 12/31/2000)
- 500,000 ( the balance of the Investment
account on 12/31/99)
$5,500
Consolidated FS-Subsequent to date of purchase type
53
Example of Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (textbook p297-300)

The Palm-Starr example is continued to be
used to illustrate the application of the equity
method for a wholly owned purchased
subsidiary for the second year after a
business combination. On December 17,
2001, Starr declared a dividend of $40,000,
payable January 6, 2002, to Palm Corp., the
stockholder of record on December 28,2001.
For the year ended 12/31/2001, Starr had a
net income of $90,000.
Consolidated FS-Subsequent to date of purchase type
54
Example of Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (contd.)

After the posting of appropriate journal
entries for 2001 under the equity method,
selected ledger accounts for Palm Corp. are
as follows:
Investment in Starr’s Common Stock
12/31/99
450,000 a
12/31/99
50,000 b
12/31/00
60,000 d
24,000 c
12/20/00
30,500 e
12/31/00
12/31/01
90,000 f
40,000 g
12/17/01
5,500 h
12/31/01
12/31/00
505,000
Consolidated FS-Subsequent to date of purchase type
55
Example of Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (contd.)
a.Issuance of common stock (by Palm) in the
acquisition of Starr.
b.Direct out-of-pocket costs of business
combination.
c.Recognition of dividend declared by the
subsidiary-Starr for year 2000.
d.Recognition of wholly owned subsidiary’s
(Starr) net income for 2000.
e.Recog. of depre. and amor. on the step-up
of Starr’s net assets for 2000.
Consolidated FS-Subsequent to date of purchase type
56
Example of Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (contd.)
Intercompany Investment Income
60,000 a
12/31/00
30,500 b
12/31/00
29,500 d
29,500 c
0
90,000 e
12/31/00
5,500 f
84,500
12/20/00
12/21/00
12/31/00
12/31/01
12/31/01
Consolidated FS-Subsequent to date of purchase type
57
Example of Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (contd.)
a. Palm Corp.’s share in the net income of Starr for
the year ended 12/31/00
b. The adjustment for the amort. and depre. of stepup in net assets of Starr for year 2000.
c. Palm Corp.’s share in the adjusted net income of
Starr.
d. Closing entry prepared on 12/31/00 to close the
intercompany Investment income balance to zero.
e. Plam Corp’s share in the net income of Starr for
the year ended 12/31/01.
f. The adjustment for the amort. and derp. of step-up
in net assets of Starr for the year of 2001.
Consolidated FS-Subsequent to date of purchase type
58
Developing the Elimination for the
Second Year Subsequent to the
Business Combination

The working paper elimination for December
31, 2001, is similar to that for December 31,
2000, as follows:
Common Stock-Starr
200,000
Additional Paid-in Capital –
Starr
58,000
Retained Earnings-Starr
162,000 a
Retained Earnings of
Subsidiary-Palm
5,500
Investment Income-Palm
84,500
Plant Assets (net)-Starr
($61,000-4,000)
57,000
Consolidated FS-Subsequent to date of purchase type
59
Developing the Elimination for the
Second Year Subsequent to the
Business Combination (contd.)
Patent (net)- Starr
($4,000-1,000)
Goodwill (net)- Starr
($14,500-500)
Cost of Goods Sold-Starr
Operating Expense-Starr
Investment in Starr
Common Stock
Dividends Declared-Starr
3,000
14,000
4,000 b
1,500 b
550,000
24,000
a. 168,000-5,500
Consolidated FS-Subsequent to date of purchase type
60
Developing the Elimination for the
Second Year Subsequent to the
Business Combination (contd.)
b.The depre. and amor. on differences
between current fair value and carrying
amount of Starr’s net assets for year 2001
are as follows:
Building Depre.
Machinery Depre.
Patent Amort.
Goodwill Amort.
Totals
Cost of
Operating
Goods Sold
Exp.
$1,000
$1,000
2,000
1,000
500
$4,000
$1,500
Consolidated FS-Subsequent to date of purchase type
61
Working Paper for Consolidated Financial Statement for
the Second Year following the Business Combination
(Equity Method: Wholly Owned Purchase-Type Business
Combination)

The following is a partial working paper
for consolidated financial statement.
The net income and dividends for Palm
Corp. are assumed.(on textbook p299)
Consolidated FS-Subsequent to date of purchase type
62
Working Paper for Consolidated Financial Statement for
the Second Year following the Business Combination
(Equity Method: Wholly Owned Purchase-Type Business
Combination)
PALM CORPORATION AND SUBSIDIARY
Partial Working paper for Consolidated Financial Statements
For Year Ended December 31,2001
Statement of
Palm
Starr
Eliminations Consolidated
Retained Earnings Corporation Company Increase
Retained earnings,
208,000
168,000 (a) (162,500)
213,500
beginning of year
244,500
90,000
(90,000)*
244,500
Net income
452,500
258,000
(252,500)
458,000
Subtotal
Dividends
60,000
40,000 (a) (40,000)+
60,000
declared
Retained earnings,
392,500
218,000
(212,500)
398,000
end of year
* Decrease in intercompany investment income($84,500), plus total increase
in costs and expenses ($4,000 +$1,500), equals $90,000.
+ A decrease in dividends and an increase in retained earnings. (Continued)
Consolidated FS-Subsequent to date of purchase type
63
Working Paper for Consolidated Financial Statement for
the Second Year following the Business Combination
(Equity Method: Wholly Owned Purchase-Type Business
Combination)
PALM CORPORATION AND SUBSIDIARY
Partial Working paper for Consolidated Financial Statements
For Year Ended December 31,2001
Balance Sheet
Common Stock,
$10 par
Common Stock, $5 par
Additional paid-in
capital
Retained earnings
Retained earnings
of subsidiary
Total stockholders’
equity
Total liabilities &
stockholders’
equity
Palm
Corporation
Starr
Company
Eliminations
Increase
Consolidated
400,000
400,000
200,000
(a)(200,000)
58,000
208,000
(a) (58,000)
(212,500)
5,500 1,163,000
(a) (5,500)
365,000
392,500
365,000
398,000
1,163,000
476,000
(476,000)
1,163,000
x,xxx,xxx
xxx,xxx
(476,000)
x,xxx,xxx
Consolidated FS-Subsequent to date of purchase type
64
Closing Entries

The closing entries for Palm is prepared in
the usual way except for the closing of the
income summary to retained earnings. As in
the first year, the portion of retained
earnings contributed by Starr should be
reported separated from other retained
earnings contributed by Plam. The closing
entries pertaining the income summary are
as follows:
Income Summary
Retained Earnings of
Subsidiaries a
Retained Earnings b
244,500
44,500
200,000
Consolidated FS-Subsequent to date of purchase type
65
Closing Entries (contd.)
a.The portion of retained earnings contributed
by the subsidiary and is not available for
dividends to Palm’s stockholders. The
computation is as follows:
$ 84,500…the adjusted net income of Starr
- 40,000…declared dividend by Starr
$ 44,500
b.the portion of retained earnings contributed
by Palm ($244,500 – 44,500)
Consolidated FS-Subsequent to date of purchase type
66
Closing Entries (contd.)

Thus, the parent company’s ledger accounts
for retained earnings are as follows after the
closing entries:
Retained Earnings
134,000 Bal. On 12/31/99
104,000 R/E contributed by
Palm in Year 2002
Div. of 2000
30,000
200,000 R/E contributed by
Palm in Year 2001
Div. of 2001
60,000
348,000 Bal. On 12/31/2001
Consolidated FS-Subsequent to date of purchase type
67
Closing Entries (contd.)
Retained Earnings of Subsidiary
5,500 R/E contributed by Starr
in year 2000, not
available for dividends.
44,500 R/E contributed by Starr
in year 2001, not
available for dividends.
50,000 Bal. On 12/31/2001
Consolidated FS-Subsequent to date of purchase type
68
Accounting for Operating Results of
Partially Owned Purchased Subsidiaries

The minority interest in net income (or
net losses) needs to be computed and
reported in the consolidated income
statement (of a parent company and its
partially owned purchased subsidiary)
as an expense: minority interest in
income (or loss) of subsidiary. In the
balance sheet statement, the minority
interest in net assets of subsidiary is
reported as a liability.
Consolidated FS-Subsequent to date of purchase type
69
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination

Continued with the Post CorporationSage Company consolidated equity
example of Chapter 6 (Example 6.2 in
the PowerPoint notes and pages 244 to
245 of the textbook), assume that Sage
Company declared a $1 a share
dividend on 11/24/2000, payable
12/16/2000 to stockholders of record
12/1/2000. Also, Sage had a net
income of $90,000 for the year-ended
12/31/2000 (note: Post owns 95% of
the outstanding shares).
Consolidated FS-Subsequent to date of purchase type
70
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)


Sage’s journal entries pertaining the
declaration and payment of the dividend are
as follows:
Journal Entries for Sage (Year 2000)
11/24 Dividends Declared (40,000 x $1)
Dividends Payable
40,000
($40,000 x 0.05)
2,000
Intercompany
Dividends Payable
($40,000 x 0.95)
38,000
To record declaration of dividend
payable Dec. 16,2000, to
stockholders of record Dec. 1,2000
Consolidated FS-Subsequent to date of purchase type
71
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

Journal Entries for Sage(Year 2000) (contd.)
12/16 Dividends Payable
Intercompany Dividends
Payable
2,000
38,000
Cash
40,000
To record payment of dividend
declared Nov. 24,2000, to
stockholders of record Dec. 1,2000
Consolidated FS-Subsequent to date of purchase type
72
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)


Following the equity method, Post’s journal
entries for year 2000 include the following:
Journal Entries for Post (Year 2000)
11/24 Intercompany Dividends
Receivable
Investment in Sage
Company Common
Stock
38,000
38,000
To record dividend declared by
Sage Company, payable Dec. 16,
2000, to stockholders of record
Dec. 1,2000.
Consolidated FS-Subsequent to date of purchase type
73
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

Journal Entries for Post(Year 2000) (contd.)
12/16 Cash
2,000
Intercompany
Dividends Receivable
38,000
To record receipt of dividend from
Sage Company
12/31 Investment in Sage Company
Common Stock ($90,000 x 0.95)
85,500
Intercompany Investment
Income
85,500
To record 95% of net income of
Sage Company for the year ended
Dec. 31,2000(Income tax effects are
disregarded.)
Consolidated FS-Subsequent to date of purchase type
74
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

Similar to the adjustment on the wholly
owned subsidiary’s net income, the net
income of the partially owned
subsidiary also needs to be adjusted for
the depreciation of the assets step-up
($246,000, see p64 of chapter 6 notes)
and the amortization of goodwill
($38,000, see p68 of chapter 6 notes).
The assets step-up for Sage on
12/31/99 is as follows:
Consolidated FS-Subsequent to date of purchase type
75
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)
Inventories(FIFO cost)
Plant assets (net):
Land
Building (economic
life 20 years)
Machinery (economic
life 5 years)
Leasehold (economic
life 6 years)
Total
$ 26,000
$ 60,000
80,000
50,000
190,000
30,000
$246,000
Consolidated FS-Subsequent to date of purchase type
76
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

The goodwill of for the purchase of 95%
of Sage is calculated as follows:
Cost of Post Corporation’s 95%
interest in Sage Company
Less:95% of $1,215,000
aggregate current fair values of
Sage’s identifiable net assets
Goodwill acquired by Post (to be
amortized over 40 years)
$1,192,250
1,154,250
$
38,000
Consolidated FS-Subsequent to date of purchase type
77
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)
Therefore, Post Corp. prepares the following
journal entry on 12/31/2000 to reflect the
effects of the depreciation on the assets
step-up under the equity method:
 Journal Entry for Post (12/31/2000)
Intercompany Investment
Income
42,750
Investment in Sage
Company Common
Stock
42,750

Consolidated FS-Subsequent to date of purchase type
78
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

To amortize differences between current fair
values and carrying amounts of Sage
Company’s identifiable net assets on Dec.
31,1999, as follows:
Inventories– to cost of goods sold
Building—depreciation ($80,000/20)
Machinery—depreciation ($50,000/5)
Leasehold—amortization ($30,000/6)
Total difference applicable to 2000
Amortization for 2000($45,000 x 0.95)
(Income tax effects are disregarded.)
$26,000
4,000
10,000
5,000
$45,000
$42,750
Consolidated FS-Subsequent to date of purchase type
79
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)
In addition, Post also prepares the following
entry to recognize the amortization of
goodwill:
 Journal Entry for Post (12/31/2000)
Amortization Expense ($38,000/40)
950
Investment in Sage
Company Common Stock
950

To amortize goodwill acquired in
business combination with partially
owned purchased subsidiary over an
economic life of 40 years.
Consolidated FS-Subsequent to date of purchase type
80
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

Note: goodwill in a business
combination involving partially owned
subsidiary is attributed to the parent
company rather than the subsidiary
under the FASB recommended
treatment. This technique avoids
charging any portion of the goodwill
amortization to the minority interest,
which did not acquire any goodwill.
Consolidated FS-Subsequent to date of purchase type
81
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)
 After posing the foregoing entries,
Post Corporation’s Investment in
Sage Company Common Stock and
Intercompany Investment Income
ledger accounts are as follows:
Consolidated FS-Subsequent to date of purchase type
82
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)
Investment in Sage Company Common Stock
Date
Explanation
Debit
Credit
Balance
1999
12/31 Issuance of common stock
in business combination
1,140,000
1,140,000 dr
31 Direct out-of-pocket costs of
business combination
52,250
1,192,250 dr
2000
11/24 Dividend declared by Sage
38,000 1,154,250 dr
12/31 Net income of Sage
85,500
1,239,750 dr
31 Amortization of differences
between current fair values
and carrying amounts of
Sage’s identifiable net
assets
42,750 1,197,000 dr
31 Amortization of goodwill
500 1,196,050 dr
Consolidated FS-Subsequent to date of purchase type
83
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)
Intercompany Investment Income
Explanation
Debit Credit Balance
Date
2000
12/31 Net Income of Sage
85,500 85,500 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sage’s identifiable net
assets
42,750
42,750 cr
Consolidated FS-Subsequent to date of purchase type
84
Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination (contd.)

The $42,750 balance of Post
corporation’s Intercompany Investment
Income account represents 95% of the
$45,000 adjusted net income ($90,000$45,000) of Sage Company for the year
ended 12/31/2000.
Consolidated FS-Subsequent to date of purchase type
85
Developing the elimination for
Example 7.3

Using the equity method to account for
the investment in Sage results in a
balance in the Investment ledger account
with three components:
(1) the carrying amount of Sage’s
identifiable net assets;(2)the “current fair
value excess” , which is attributable to
Sage’s identifiable net assets; and (3) the
goodwill acquired by Post in the business
combination with Sage. These
components are analyzed as follows:
Consolidated FS-Subsequent to date of purchase type
86
Developing the elimination for
Example 7.3 (contd.)
Post Corporation
Analysis of Investment in Sage Company Common Stock
Ledger Account (For Year Ended December 31,2000)
Beginning balances
Net income of Sage
($90,000 x 0.95)
Amortization of
differences between
current fair values
and carrying
amounts of Sage’s
identifiable net
assets ($45,000 x 0.95)
Carrying Current Goodwill
Total
Amount Fair Value
Excess
$920,550 $233,700 $38,000 $1,192,250
85,500
85,500
(42,750)
Consolidated FS-Subsequent to date of purchase type
(42,750)
87
Developing the elimination for
Example 7.3 (contd.)

Contd.
Carrying Current Goodwill
Amount Fair Value
Excess
Total
Amortization of
goodwill
(950)
(950)
Dividend declared by
Sage ($40,000 x 0.95)
(38,000)
(38,000)
Ending balances
$968,050 $190,950 $37,050 $1,196,050
Consolidated FS-Subsequent to date of purchase type
88
Developing the elimination for
Example 7.3 (contd.)

The minority interest in Sage’s net
assets (which is not recorded in a
ledger account) is analyzed similarly,
except that there is not goodwill
attributable to the minority interest:
Consolidated FS-Subsequent to date of purchase type
89
Developing the elimination for
Example 7.3 (contd.)
Post Corporation
Analysis of Minority Interest in Net Assets of Sage Company
For Year Ended December 31,2000
Beginning balances
Net income of Sage($90,000 x 0.05)
Amortization of differences
between current fair values
and carrying amounts of
Sage’s identifiable net assets
Carrying Current
Amount Fair Value
Excess
$48,450 $12,300
4,500
($45,000 x 0.05)
Dividend declared by Sage
($40,000 x 0.05)
Ending balances
(2,000)
$50,950
Total
$60,750
4,500
(2,250)
(2,250)
$10,050
(2,000)
$61,000
Consolidated FS-Subsequent to date of purchase type
90
Developing the elimination for
Example 7.3 (contd.)

Contd.
Carrying Current Goodwill
Amount Fair Value
Excess
Total
Amortization of
goodwill
(950)
(950)
Dividend declared by
Sage ($40,000 x 0.95)
(38,000)
(38,000)
Ending balances
$968,050 $190,950 $37,050 $1,196,050
Consolidated FS-Subsequent to date of purchase type
91
Developing the elimination for
Example 7.3 (contd.)

The sum of the ending balances of the
carrying amount columns of the above two
tables equals $1,019,000 ($968,050
+$50,950).This amount agrees with the total
stockholders’ equity of Sage Company on
12/31/2000 as follows:
Common stock,$10 par
Additional paid-in capital
Retained earnings
Total stockholders’ equity
$ 400,000
235,000
384,000
$1,019,000
Consolidated FS-Subsequent to date of purchase type
92
Developing the elimination for
Example 7.3 (contd.)

Also, the sum of the ending balances of
the carrying fair value excess columns
of the above two tables equals
$201,000 ($190,950 +$10,050). This
amount represents the unamortized
identifiable assets step-up as follows:
Consolidated FS-Subsequent to date of purchase type
93
Developing the elimination for
Example 7.3 (contd.)
Inventories
Plant assets(net):
Land
Building
Machinery
Total plant
assets
Leasehold
Totals
Balances, Amortization Balances,
Dec.31,1999 for Year 2000 Dec.31,2000
(p.302)
(p.302)
$ 26,000
$ (26,000)
$ 60,000
80,000
50,000
$ (4,000)
(10,000)
$ 60,000
76,000
40,000
$190,000
$ 30,000
$246,000
$ (14,000)
$ (5,000)
$ (45,000)
$176,000
$ 25,000
$201,000
Consolidated FS-Subsequent to date of purchase type
94
Developing the elimination for
Example 7.3 (contd.)

Assuming that Sage Company
allocates machinery depreciation and
leasehold amortization entirely to cost
of goods sold and building depreciation
50% each to cost of goods sold and
operating expense, the working paper
eliminations for Post Corp. and
subsidiary on 12/31/200 are as follows:
Consolidated FS-Subsequent to date of purchase type
95
Developing the elimination for
Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Working Paper Eliminations
December 31,2000
(a)Common Stock–Sage
Additional Paid-in Capital–Sage
Retained Earnings-Sage
Intercompany Investment Income-Psot
Plant Assets(net)-Sage($190,000-$14,000)
Leasehold(net)-Sage ($30,000-$5,000)
Goodwill (net)-Post($38,000-$950)
Cost of Goods Sold-Sage
Operating Expenses-Sage
400,000(1)
235,000(1)
334,000(1)
42,750(2)
176,000(3)
25,000(3)
37,050(3)
43,000(4)
2,000(4)
Consolidated FS-Subsequent to date of purchase type
96
Developing the elimination for
Example 7.3 (contd.)

Contd.
Investment in Sage Company
Common Stock-Post
Dividends Declared-Sage
Minority Interest in Net Assets of
Subsidiary ($60,750 - $2,000)[See(d)]
1,196,050(1)
40,000(1)
58,750(1)
Consolidated FS-Subsequent to date of purchase type
97
Developing the elimination for
Example 7.3 (contd.)

To carry out the following:
(a) Eliminate intercompany investment and
equity accounts of subsidiary at the
beginning of year, and subsidiary
dividends.
(b) Provide for Year 2000 depreciation and
amortization on differences between
current fair values and carrying amounts
of Sage’s identifiable net assets as
follows:
Consolidated FS-Subsequent to date of purchase type
98
Developing the elimination for
Example 7.3 (contd.)
Cost of
Operating
Goods Sold Expenses
$ 26,000
Inventories sold
Building depreciation
2,000
Machinery depreciation
10,000
Leasehold amortization
5,000
Totals
$ 43,000
$ 2,000
$ 2,000
Consolidated FS-Subsequent to date of purchase type
99
Developing the elimination for
Example 7.3 (contd.)
(c) Allocate unamortized differences
between combination date current fair
values and carrying amounts to
appropriate assets.
(d) Establish minority interest in net assets of
subsidiary at beginning of year ($60,750),
less minority interest share of dividends
declared by subsidiary during year
($40,000 x 0.05=$2,000).
(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type
100
Developing the elimination for
Example 7.3 (contd.)
(b)Minority Interest in Net
Income of Subsidiary
Minority Interest in
Net Assets of
Subsidiary
2,250
2,250
Consolidated FS-Subsequent to date of purchase type
101
Developing the elimination for
Example 7.3 (contd.)

To establish minority interest in subsidiary’s
adjusted net income for Year 2000 as
follows:
Net income of subsidiary
Net reduction of
elimination (a) ($43,000 +$2,000)
Adjuste net income of
subsidiary
Minority interest share
(45,000)
$45,000
$
($45,000 x 0.05)

$ 90,000
2,250
Notes: (on textbook p305)
Consolidated FS-Subsequent to date of purchase type
102
Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000
POST CORPORATION AND SUBSIDIARY
Working Paper for Consolidated Financial Statements
For Year Ended Dec. 31,2000
Income Statement
Revenue:
Net Sales
Intercompany investment income
Total revenue
Costs and expenses:
Costs of goods sold
Operating expenses
Interest and income taxes
expense
Minority interest in net income of
subsidiary
Total costs and expenses
Net Income
Post
Corp.
Sage
Eliminations Consolidated
Company Inc. (Dec.)
5,611,000 1,089,000
42,750
5,653,750 1,089,000
(a) (42,750)
(42,750)
6,700,000
3,925,000
556,950*
700,000
129,000
(a) 43,000
(a) 2,000
4,668,000
687,950
710,000
170,000
5,191,950
461,800
999,000
90,000
6,700,000
880,000
(b) 2,250
47,250 †
(90,000)
Consolidated FS-Subsequent to date of purchase type
2,250
6,238,200
461,800
103
Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000 (contd.)

Contd.
Statement of
Retained Earnings
Retained earnings,
beginning of year
Net income
Subtotal
Dividends declared
Retained earnings,
end of year
Post
Corp.
Sage
Eliminations Consolidated
Company Inc. (Dec.)
1,050,000
461,800
1,511,800
158,550
334,000 (a) (334,000)
90,000
(90,000)
424,000
(424,000)
40,000 (a) (40,000)‡
1,050,000
461,800
1,511,800
158,550
1,353,250
384,000
1,353,250
(384,000)
Consolidated FS-Subsequent to date of purchase type
104
Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000 (contd.)
Contd.
Balance Sheet/
Assets

Inventories
Other current
assets
Investment in Sage
Company common
stock
Plant assets (net)
Leasehold (net)
Goodwill (net)
Total assets
Post
Sage
Eliminations Consolidated
Corp.
Company Inc. (Dec.)
861,000
439,000
1,300,000
639,000
371,000
1,196,050
(a)(1,196,050)
3,600,000 1,150,000 (a) 176,000
(a)
25,000
95,000
(a)
37,050
6,391,050 1,960,000
(958,000)
Consolidated FS-Subsequent to date of purchase type
1,010,000
4,926,000
25,000
132,050
7,393,050
105
Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000 (contd.)

Contd.
Liabilities
&Stockholders’ Equity
Liabilities
Minority interest in
net assets of
subsidiary
Common stock,$1 par
Common stock, $10 par
Additional paid-in
capital
Retained earnings
Total liabilities
& stockholders’
equity
Post
Sage
Eliminations
Corp.
Company
Inc. (Dec.)
2,420,550
941,000
(a)
(b)
Consolidated
58,750
2,250
1,057,000
3,361,550
61,000
1,057,000
400,000
(a) (400,000)
1,560,250
1,353,250
235,000
384,000
(a) (235,000)
(384,000)
1,560,250
1,353,250
6,391,050
1,960,000
(958,000)
7,393,050
Consolidated FS-Subsequent to date of purchase type
106
Consolidated Financial Statements
for Example 7.3

The consolidated income statement,
statement of retained earnings, and
balance sheet of Post Corporation and
subsidiary for the year ended
December 31, 2000, are as follows (the
amounts are from the consolidated
column in the previous working paper):
Consolidated FS-Subsequent to date of purchase type
107
Consolidated Financial Statements
for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Income Statement
For Year Ended December 31,2000
Net Sales
$ 6,700,000
Costs and expenses:
Costs and goods sold
$4,668,000
Operating expenses
687,950
Interest and income taxes
880,000
expense
Minority interest in net income of
subsidiary
2,250
Total costs and expenses
6,238,200
Net income
$ 461,800
Basic earnings per share of common
stock(1,057,000 shares outstanding)
$
0.44
Consolidated FS-Subsequent to date of purchase type
108
Consolidated Financial Statements
for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Statement of Retained Earnings
For Year Ended December 31,2000
Retained earnings,
beginning of year:
Add: Net income
Subtotals
Less: Dividends ($0.15 a share)
Retained earnings,
end of year
$ 1,050,000
461,800
$1,511,800
158,550
$ 1,353,250
Consolidated FS-Subsequent to date of purchase type
109
Consolidated Financial Statements
for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Assets
Current assets:
Inventories
Other
Total current assets
Plant assets (net)
Intangible assets:
Leasehold (net)
Goodwill (net)
Total assets
$ 1,300,000
1,010,000
$ 2,310,000
4,926,000
$
25,000
132,050
157,050
$7,393,050
Consolidated FS-Subsequent to date of purchase type
110
Consolidated Financial Statements
for Example 7.3 (contd.)

Contd.
Liabilities & Stockholders’ Equity
Liabilities
Other than minority
interest
Minority interest in net
assets of subsidiary
Total liabilities
Stockholder’s equity:
Common stock, $1 par
Additional paid-in capital
Retained earnings
Total liabilities &
stockholders’ equity
$3,361,550
61,000
$3,422,550
$1,057,000
1,560,250
1,353,250
3,970,500
$7,393,050
Consolidated FS-Subsequent to date of purchase type
111
Closing Entries for Example 7.3

Post Corporation Closing Entries on 12/31/2000
Net Sales
5,611,000
Intercompany Investment
Income
42,750
Income Summary
5,653,750
To close revenue accounts.
Income Summary
5,191,950
Cost of Goods Sold
3,925,000
Operating Expenses
556,950
Interest and Income
Taxes Expense
710,000
To close expense accounts.
Consolidated FS-Subsequent to date of purchase type
112
Closing Entries for Example 7.3 (contd.)
Contd.
Income Summary
Retained Earnings of
Subsidiary ($42,750-$38,000)
Retained Earnings

461,800
4,750
457,050
($461,800-$4,750)
To close Income Summary account; to
transfer net income legally available for
dividends to retained earnings; and to
segregate 95% share of adjusted net
income of subsidiary not distributed as
dividends.
Retained Earnings
Dividends Declared
158,550
158,550
To close Dividends Declared account.
Consolidated FS-Subsequent to date of purchase type
113
Closing Entries for Example 7.3 (contd.)

After posting the above closing entries,
Post’s Retained Earnings and Retained
Earnings of Subsidiary ledger accounts
are as follows:
Consolidated FS-Subsequent to date of purchase type
114
Closing Entries for Example 7.3 (contd.)
Retained Earnings
Date
Explanation
1999
12/31 Balance
2000
12/31 Close net income
available for dividends
31 Close Dividends
Declared account
Debit
Credit
Balance
1,105,000 cr
457,050 1,507,050 cr
158,550
1,348,500 cr
Consolidated FS-Subsequent to date of purchase type
115
Closing Entries for Example 7.3 (contd.)
Retained Earnings of Subsidiary
Date
Explanation
2000
12/31 Close net income not
available for dividends
Debit
Credit
Balance
4,750
Consolidated FS-Subsequent to date of purchase type
4,750 cr
116