Consolidated Statements:
Subsequent to Acquisition
Chapter 3
Accounting for the Investment in a
Subsidiary
Simple Equity
Method
Cost Method
Recognize
parent share of Invest in Sub xx
N/A
Invest Rev
xx
sub’s net
income
Cash
xx
Cash
xx
Receipt of
Invest in Sub
xx
Dividend Rev xx
dividends
Simple Equity Method
Every change in sub’s Retained Earnings in recorded on a prorata basis in the Investment account
Cost Method
Investment account remains at its original cost-of-acquisition
balance
2
Accounting for the Investment in the
Subsidiary
Simple Equity
Method
Sophisticated
Equity Method
Recognize
parent share of Invest in Sub xx
Invest in Sub xx
Invest Rev
xx
Invest Rev
xx
sub’s net
income
Cash
xx
Cash
xx
Receipt of
Invest in Sub
xx
Invest in Sub
xx
dividends
Amortize
excess
N/A
Invest Rev
xx
Invest In Sub
xx
Sophisticated Equity Method
Parent records controlling interest in the subsidiary’s income
Parent also records the amortization adjustment for the
excess
3
Elimination Procedures
Consolidation process is performed independently
each year
All elimination entries are Workpaper Only --- not
posted to the general ledger of parent or subsidiary
Steps for dates subsequent to acquisition:
Date Alignment (varies by method)
Eliminate parent’s share of sub equity
Distribute excess purchase price
Amortize/Depreciate the excess
4
Date Alignment for Simple Equity Method
Investment in Sub carries information through the end of
the fiscal year
Subsidiary’s Retained Earnings is at its beginning-of-year
balance
Must align the content of the two accounts before
eliminating sub equity against the investment account
– Eliminate the effects of the current year’s recognition of income
and dividends
5
Date Alignment: Simple Equity
Eliminate Parent’s recognition of Sub income:
Investment Revenue
Investment in Sub
XX
XX
Eliminate Parent’s share of Sub’s dividends:
Investment in Sub
Dividends Declared-Sub
XX
XX
Investment in Sub account has been returned to its
beginning-of-year balance; it has been aligned with
the Sub’s Retained Earnings account
6
Income Distribution Schedules
Subsidiary
Internally generated net income
- Full amortization of excess + Other adjustments, if any
= Adjusted income
× NIC interest
= Distribute to NCI
Parent
Internally generated net income
+ Parent share Sub adj income
= Controlling interest
7
Date Alignment for Cost Method
Investment account carries information as of the
date of acquisition
Subsidiary’s Retained Earnings is at its beginningof-year balance
Must align the content of the two accounts before
eliminating sub equity against the investment
account
– Convert the Investment account to its simple equity
balance as of the beginning of the period
– Required at end of second and subsequent years
8
Date Alignment: Cost Method
End of First Year
No date alignment required
Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc
Dividends Declared-Sub
XX
XX
End of Second and Subsequent Years
Bring Investment account to its simple equity balance as of the
beginning of the year:
Investment in Sub
XX
RE-Parent
XX
Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc
Dividends Declared-Sub
XX
XX
9
Further Consolidation Procedures
After date alignment is completed
– The cost method investment is converted to its simple
equity balance at the beginning of the year
– Same procedure regardless of method (simple equity
or cost) to account for investment in subsidiary
Next steps
Eliminate P% of Sub’s beginning of year equity
Distribute excess to controlling interest and NCI
Amortize/Depreciate the excess
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D&D Schedule for Example
Fair value of subsidiary
Less book value:
C Stk
APIC
R/E
Total S/E
Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Inventory
Land
Buildings
Equipment
Patent
Discount on Bonds Pay
Goodwill
Total
Company
Implied Fair
Value
$
900,000
$
$
$
$
$
Parent Price
$ 720,000
NCI Value
$ 180,000
100,000
150,000
250,000
500,000
$
400,000
$
$
$ 500,000
20%
$ 100,000
$ 80,000
5,000
50,000
200,000
(20,000)
25,000
13,240
126,760
400,000
500,000
80%
400,000
320,000
Life
Amort/Year
[assume FIFO; sold in Yr 1]
20
5
10
4
10,000
(4,000)
2,500
3,310
DR
CR
DR
DR
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Elimination Procedures
Eliminate Parent’s share of Sub’s Equity
C Stk-Sub (P%)
Addn’l Pd-In Capt-Sub (P%)
Retained Earnings-Sub (P%)
Investment in Sub
80,000
120,000
NOTE
XX
NOTE: Controlling interest in the Sub’s
Beginning of Current Year R/E is
eliminated.
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Elimination Procedures
Distribute excess per D&D schedule
Cost of Goods Sold* 5,000
Land
50,000
Buildings
200,000
Patent
25,000
Discount on B Pay
13,240
Goodwill
126,770
Equipment
20,000
Investment in Sub
320,000
RE-Sub
80,000
*Inventory valuations are distributed:
• On date of acquisition: to Inventory
• End of first year: to Cost of Goods Sold
• End of subsequent years: split between RE-P
& RE-S
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Elimination Procedures
Amortize/Depreciate the excess per the
D&D Schedule
Dep Exp-Bldgs
10,000
A/D-Bldgs
10,000
A/D-Equipment
4,000
Dep Exp-Equipment
4,000
Other expenses
2,500
Patent
2,500
Interest Exp
3,310
Disc on Bond Pay
3,310
First year:
• Current year amortization is
recorded as an adjustment
to expense
• Balance sheet account
changed accordingly
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Elimination Procedures
Amortize/Depreciate the excess per the
D&D Schedule
Dep Exp-Bldgs
A/D-Bldgs (2 yr)
A/D-Equipment (2 yr)
Dep Exp-Equipment
Other expenses
Patent (2 yr)
Interest Exp
Disc on Bond Pay (2 yr)
RE-Par
RE-Sub
10,000
8,000
2,500
3,310
9,448
2,362
20,000
4,000
5,000
6,620
Subsequent years:
• Current year amortization is
recorded as an adjustment
to expense
• Balance sheet account
changed for all years’
amortization
• Prior years’ amortization
allocated to RE-P and RE-S
Adjustments to be Amortized/Depreciated:
Annual Amount
Current Year Prior Years
Buildings
10,000
10,000
10,000
Equipment
(4,000)
(4,000)
(4,000)
Patent
2,500
2,500
2,500
Disc B Pay
3,310
3,310
3,310
11,810
Controlling interest adjustment $
9,448
NCI (RE-Sub) adjustment $
2,362
Total
20,000
(8,000)
5,000
6,620
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Effect of the Sophisticated Equity Method
• Ramifications:
– Current year’s equity adjustment is net of excess amortizations
– The investment account contains only the remaining
unamortized excess applicable to the investment
• Distribution and amortization of excess procedures are
altered:
– Distribute the remaining unamortized excess applicable to the
controlling interest to the balance sheet account; adjust the NCI
for the remaining excess attributable to its share
– Amortize the excess for the current year only
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Determination of the Method Being Used
Investment account
balance is original
acquisition cost?
Yes
Parent records
Yes
subsidiary income that is
Sub’s Net Income × P%
Parent records
subsidiary income that is Yes
less than
Sub’s Net Income × P%
Cost Method
Equity Method
Sophisticated
Equity Method
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Intraperiod Purchase
• Simple Equity Method
– D&D schedule developed as of the date of purchase
– Sub closes nominal accounts on purchase date
– Consolidated income includes Sub income from date
of purchase
– Only subsidiary income earned after the purchase
date is distributed to the NCI and controlling interest
• Cost Method same as above except
– Eliminate intercompany dividends only
– Cost-to-Equity conversion is from date of purchase
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Goodwill Impairment Losses
Impairment loss is
– reported in the consolidated income statement for the period in
which it occurs
– presented on a before-tax basis as part of continuing operations
Recognizing and recording the impairment
– Parent records its share of the impairment loss on its books and
credits the investment in subsidiary account; NCI share of the
loss is recorded on the worksheet or
– Impairment loss could be recorded only on the consolidated
worksheet
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Goodwill Impairment Losses
Impairment calculation:
Estimated fair value of 80% sub
$900,000
Estimated fair value of identifiable net assets 850,000
Estimated goodwill
50,000
Existing goodwill
165,000
Impairment loss
115,000
Parent’s Journal Entry:
Goodwill Impairment Loss
Investment in Sub
Consolidating worksheet:
Record the remaining $23,000 loss
92,000
92,000
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Tax-Related Adjustments
• Occurs when seller is not taxed; buyer gets book value
for future depreciation
• Adjustment from market to book accompanied by
DTL = tax % × market adjustment
• DTL is amortized over same period as asset adjustment;
increases tax liability in future years
• Tax loss carryover is asset recorded in purchase
– Limitations on its use in year of purchase and later years
• All amortizations and tax adjustments are carried to
Sub’s Income Distribution Schedule
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