Chapter 3
Consolidated
Statements
Subsequent to
Acquisition
Consolidated statements subsequent to
acquisition
Worksheet procedures; Purchase Method
•Using the Income Distribution Schedule
•Reporting income for the consolidated
company
Maintaining the investment account
Add parent %
of subsidiary
income
Adjust for
amortizations
of excess
Recording of
dividends
Incomplete
Equity
Complete
Equity
Cost
Yes
Yes
No
No
Yes
No
Reduce
investment
account
Reduce
investment
account
Parent %
reported as
income
Price paid:
Interest acquired:
Common stock
$ 200,000
Retained earnings 400,000
Total Equity
600,000
Ownership interest
80%
Excess cost
Inventory (80%  50,000)
Building (80%  100,000)
Goodwill
$ 800,000
480,000
320,000 Life Ann Amort
40,000 1
40,000
80,000 20
4,000
200,000 n/a
Subsidiary income
and
dividends
Income
Dividends
Year 1
Year 2
100,000
150,000
10,000
20,000
• Parent reports only 80% of above amounts
Parent recording of subsidiary
income (year 1)
Incomplete
Equity
800,000
Complete
Equity
Cost
Investment balance
800,000
800,000
Year 1 income:
(44,000 amort)
Investment in Sub
80,000
36,000
no entry
Investment income
80,000
36,000
Year 1 dividends:
Cash
8,000
8,000
8,000
Investment in Sub
8,000
8,000
Dividend income
8,000
Investment balance
872,000
828,000
800,000
Parent recording of subsidiary
income (year 2)
Investment balance
Year 2 income:
Investment in Sub
Investment income
Year 2 dividends:
Cash
Investment in Sub
Dividend income
Investment balance
Incomplete
Equity
872,000
Complete
Equity
Cost
828,000
800,000
(4,000 amort)
120,000
116,000
no entry
120,000
116,000
16,000
16,000
16,000
16,000
16,000
976,000
928,000
16,000
800,000
Worksheet procedures
• The RE of the Sub and the Investment
account must be at the same point in time
• The account adjustments made require
amortization for current and prior periods
– No entries are made on either firm’s books for
worksheet eliminations
Cost Method: Year 1
Selected accounts
Investment in Sub
Building
Accumulated depr.
Goodwill
Dividend income
Dividends declared
Com Stock - Sub
RE - Sub
RE - Parent
Cost of goods sold
Expenses
Trial Balances
Parent
Sub
800,000
500,000
(200,000)
(8,000)
10,000
(200,000)
(400,000)
(700,000)
400,000
250,000
300.000
180,000
Eliminations
Dr
Cr
EL 480.000
D 320,000
D2 80,000
A2 4,000
D3 200,000
CY2 8,000
CY2 8,000
EL 160,000
EL 320,000
D1 40,000
A2 4,000
Cost Method: Year 2
Selected accounts
Investment in Sub
Building
Accumulated depr.
Goodwill
Dividend income
Dividends declared
Com Stock - Sub
RE - Sub
RE - Parent
Cost of goods sold
Expenses
Trial Balances
Parent
Sub
800,000
500,000
(200,000)
Dr
CV
72,000
D2
D3
CY2
(16,000)
20,000
(200,000)
(490,000)
(828,000)
500,000
350,000
Eliminations
400.000
280,000
Cr
EL
552.000
D
320,000
80,000
A2
8,000
CY2
16,000
CV
72,000
200,000
16,000
EL
EL
D1
A2
160,000
392,000
40,000
4,000
A2
4000
Consolidation procedures for a pooling
• Recall that investment was recorded at amount
equal to book value. If this was not the case,
correct the investment account.
• Cost or equity method may be used (sophisticated
equity has no application - no excess)
• There should not be any excess to distribute or
amortize - it was just like a purchase at a price
equal to underlying subsidiary book value!