Chapter 6 consolidated
financial statements after
acquisition
Accounting methods to record
investments of investors
Investments in voting stock of other companies may
be consolidated ,or they may be separately reported in
the financial statements at cost ,at fair value ,or at
equity .the methods of reporting adopted depends on a
number of factors including the size of the
investment ,the extent to which the investor exercise
control over the activities of the invest, and the
marketability of securities. most of all ,the extend to
which the investor exercise control is the main
considered factor to chose the reporting method.
Summary of relationship between the level of
control and accounting treatment
level
Guidelines
percentage
Usual accounting
treatment
No significant
influence
Less than20%
Investment carried at fair
value at current yearend ,cost method with an
adjustment for market
changes
No significant
influence (no
control)
20 to 50%
Investment measured under
the complete equity method
Effective control
Greater than 50%
Consolidated statements
required ; investment
recorded under cost ,partial
equity or complete equity
method
Three methods to account
investment for parent company

Under all three methods ,the investment
account is initially recorded at its cost (assuming
purchase accounting ).the difference among the
three methods then lie in subsequent entries
Cost method
Investment is adjusted only when additional
shares of stock in the investee are purchases or
sold ;
 Fair value may be made periodically , generally
through investment impairment account
 Liquidating dividend often occurs

Equity method



More frequent entries appear in the investment account ;
Under the partial equity method ,the investor adjusts the
investment account upward for its share of the investee’
earnings and downward for its share of the investee’
dividends declared;
Under the complete equity method , additional
adjustments are made to the investment account for the
effects of unrealized intercompany profits ,the
amortization of any difference between cost and book
value ,and stockholders’ equity transactions undertaken
by subsidiary .
Note

The cost method and various forms of equity
method are methods to record investments after
acquisition ,in contrast to the purchase and
pooling of interest methods ,which are methods
used to record the initial acquisition of an
investment .
Illustration for Cost method
year
Income
(loss)
Dividends
declared
Cumulative income
over dividends
1
$90,000
$30,000
$60,000
2
(20,000)
30,000
10,000
3
10,000
30,000
(10,000)
Illustration for complete equity
method

Y1,
investment in S company
800,000
cash
800,000
investment in S company
81,000
equity in S income
81,000
equity in S income
5,000
investment in S company 5,000
cash
27,000
investment in S company 27,000


Y2,
equity in S loss
18,000
investment in S company 18,000
equity in S loss
5,000
investment in S company
5,000
cash
27,000
investment in S company
27,000
Y3,
investment in S company
9,000
equity in S income
9,000
equity in S income
5,000
investment in S company
5,000
cash
27,000
investment in S company
27,000
Consolidated statements after
acquisition
Not materially different from those at the
acquisition date but more complex
 In addition ,a full set of consolidated financial
statements should be prepared

Year of acquisition –cost method
1.Each section represents one of three consolidated
financial statements
2.Elimination of the investment amount
it is the same as before except the retained
earning .
Summary
The structure of work paper
 The items belong to different financial
statements
 The meaning of different account and its change
 The procedure to prepare eliminating entries

Interim acquisition of subsidiary
stock




All the acquisitions we have discussed took place at the
very beginning of the subsidiary’s fiscal period.
Unfortunately ,this condition id unrealistic because
many stock acquisitions are made during the
subsidiary’s fiscal period
What does it matter?
We have to properly treat the subsidiary’ revenue and
expense items for the partial period before acquisition
As far the revenue and expenses in
the year of acquisition
Two acceptable alternatives
 Full year reporting alternative
 The partial-year reporting alternatives
