CHAPTER
3
Consolidated Statements:
Subsequent to Acquisition
Fundamentals of Advanced Accounting
1th Edition
Fischer, Taylor, and Cheng
Consolidated Statements Subsequent to
Acquisition
Two basic methods to maintain the
parent’s investment account:
• Equity Method (Simple &
Sophisticated)
• Cost Method
Chapter 3, Slide #2
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Equity Method of Accounting for Investments
• Equity Method: Parent records income when
subsidiary reports income
– Parent used percent of ownership time sub’s net
income to record investment income
– Dividends treated as return of investment –
investment account is reduced
– Sophisticated Equity Method recognizes
amortization on the parent’s ledger for the
difference from book value to fair value.
Chapter 3, Slide #3
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cost Method of Accounting for Investments
Cost Method: Parent records income
when subsidiary declares dividends
• Most commonly used method
• No adjustments to investment account
Chapter 3, Slide #4
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Example –
Company P and Subsidiary Company S
• Parent purchases 90% of Sub’s stock for
$145,000.
• Sub has equity accounts:
Common Stock $100,000
Retained Earnings 50,000
• 20X1 – Sub:
Net Income = $30,000, Dividends = $10,000
• 20X2 – Sub:
Net Loss = ($10,000), Dividends = $5,000
Chapter 3, Slide #5
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
D&D Schedule Example –
Company P and Subsidiary Company S
Price paid:
$ 145,000
Interest acquired:
Common stock
$ 100,000
Retained earnings
50,000
Total equity
150,000
Ownership interest
× 90% 135,000
Excess cost
10,000
Patent ……………………………
Annual
Life Amort.
$10,000
10 $1,000
Chapter 3, Slide #6
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Parent Recording of Subsidiary Income
(Year 1)
Investment balance
Year 1 income (90%):
Investment in Sub
Investment income
Equity
145,000
Sophisticated
Equity
Cost
145,000
145,000
27,000
26,000
no entry
27,000
26,000
(1,000 amort.)
Year 1 dividends(90%):
9,000
9,000
Dividend receivable
9000
Investment in Sub
Dividend income
Investment balance
163,000
162,000
Chapter 3, Slide #7
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
9,000
9,000
9,000
145,000
Parent Recording of Subsidiary Income
(Year 2)
Investment balance
Year 2 income (90%):
Investment Loss
Investment in Sub
Year 2 dividends (90%):
Dividend receivable
Investment in Sub
Dividend income
Investment balance
Equity
163,000
Sophisticated
Equity
Cost
162,000
145,000
9,000
10,000
9,000
4,500
no entry
10,000
(1,000 amort.)
4,500
4,500
149,500
4,500
4,500
147,500
Chapter 3, Slide #8
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
4,500
145,000
Worksheet Procedures
•
The RE of the Sub and the Investment account must
be at the same point in time
–
•
When adjusted to the same point in time, the excess
upon elimination will agree with the D&D on
purchase date
–
•
Eliminate entries during the year to complete alignment
Sophisticated Equity results in only the amortized balance
of the excess
The account adjustments made require amortization
for current and prior periods
–
No entries are made on either firm’s books for worksheet
eliminations
Chapter 3, Slide #9
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Worksheet Elimination Procedures
Key Description
CV Convert to Equity
Simple
Equity
Soph.
Equity
Cost

CY1 Eliminate Sub Income


CY2 Eliminate intercompany dividends



EL
Eliminate parent’s % of sub equity
Distribute excess per D&D
schedule
Amortize excess



D


A

Chapter 3, Slide #10
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Worksheet Elimination Entries –
Simple Equity
CY1 Sub Income - Par
Invest. In Sub - Par
27,000
27,000
(Eliminates current year income and creates date alignment)
CY2 Invest. In Sub - Par
9,000
Dividends Declared - Sub
9,000
(Eliminates intercompany dividends)
EL
Common Stock - Sub
Retained Earnings - Sub
Invest. In Sub - Par
90,000
45,000
(Eliminates investment account against 90% of equity)
Chapter 3, Slide #11
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
135,000
Worksheet Elimination Entries –
Simple Equity Continued
D
Patent
10,000
Invest. In Sub - Par
10,000
(Eliminates balance of investment account and distributes to
proper accounts)
A
Patent Amort. Expense 1,000
Patent
1,000
(Amortized excess cost of the patent over its 10 year life)
Chapter 3, Slide #12
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Simple Equity: Worksheet 3-1 Year 1
Selected Accounts
Investment in Sub
Patent
Other net assets
Com. Stock – Par
RE – Parent
Com. stock – Sub
RE – Sub
Revenue
Expenses
Patent Amort.
Subsidiary Income
Dividends declared
Trial Balances
Parent
Sub
163,000
227,000
(200,000)
(123,000)
(100,000)
60,000
Eliminations
Dr
Cr
CY2 9,000
CY1 27,000
EL 135,000
D 10,000
D 10,000
A
1,000
170,000
(100,000)
(50,000)
(80,000)
50,000
EL 90,000
EL 45,000
A
1,000
CY1 27,000
(27,000)
10,000
Chapter 3, Slide #13
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
CY2
9,000
Review of Worksheet Procedures
• Elimination of equity income and
intercompany dividends returns investment
to Jan. 1 for date alignment
• Excess is distributed per D&D; amortized for
current and prior years
• IDS (income distribution schedule) is used to
allocate income to P & S
– All excess amortizations go to P; only P’s share
is recorded initially
Chapter 3, Slide #14
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Features of Consolidated Statements
• Consolidated net income is total income
earned by the entity.
– Consolidated net income is distributed to:
• Parent
• Non-Controlling interest
• Retained Earnings statement
– Shows only controlling interest
• Consolidated Balance Sheet reports
NCI as subdivision of equity
Chapter 3, Slide #15
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Worksheet Elimination Entries –
Cost Method
CY2
Dividend Income - Par
Dividends Declared - Sub
9,000
9,000
(Eliminates intercompany dividends)
EL
Common Stock - Sub
Retained Earnings - Sub
Invest. In Sub - Par
90,000
45,000
135,000
(Eliminates investment account against 90% of equity)
D
Patent
Invest. In Sub - Par
10,000
10,000
(Eliminates balance of investment account and distributes to proper accounts)
A
Patent Amort. Expense
Patent
1,000
(Amortized excess cost of the patent over its 10 year life)
Chapter 3, Slide #16
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
1,000
Cost Method: Worksheet 3-3 Year 1
Selected Accounts
Investment in Sub
Patent
Other net assets
Com. Stock – Par
RE – Parent
Com. stock – Sub
RE – Sub
Revenue
Expenses
Patent Amort.
Subsidiary Income
Dividends declared
Trial Balances
Parent
Sub
145,000
227,000
(200,000)
(123,000)
(100,000)
60,000
Eliminations
Dr
Cr
EL 135,000
D 10,000
D 10,000
A
1,000
170,000
(100,000)
(50,000)
(80,000)
50,000
EL 90,000
EL 45,000
A
CY2
(9,000)
10,000
Chapter 3, Slide #17
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
1,000
9,000
CY2
9,000
Subsequent years – Cost Method
• For periods after the first year, date
alignment will not exist.
– Balance of parents investment account ≠ sub’s
retained earnings.
• Calculate simple equity balance for
investment account.
• Record entry to adjust investment
account.
DR Investment in Sub – Par
CR RE 1/1/20X2 - Par
Chapter 3, Slide #18
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Effect of Sophisticated Equity Method on
Consolidation
• Parent amortizes excess costs of net
assets
• Investment account includes only
unamortized costs
Chapter 3, Slide #19
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Worksheet Elimination Entries –
Sophisticated Equity Method
CY1
Sub Income - Par
Invest. In Sub - Par
(Eliminates current year income and
CY2
26,000
26,000
creates date alignment)
Invest. In Sub - Par
Dividends Declared - Sub
9,000
9,000
(Eliminates intercompany dividends)
EL
Common Stock - Sub
Retained Earnings - Sub
Invest. In Sub - Par
90,000
45,000
135,000
(Eliminates investment account against 90% of equity)
D
Patent
Invest. In Sub - Par
10,000
10,000
(Eliminates balance of investment account and distributes to proper accounts –
includes only UNAMORTIZED excess cost)
Chapter 3, Slide #20
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Sophisticated Equity Method: Year 1
Selected Accounts
Investment in Sub
Patent
Other net assets
Com. Stock – Par
RE – Parent
Com. stock – Sub
RE – Sub
Revenue
Expenses
Patent Amort.
Subsidiary Income
Dividends declared
Trial Balances
Parent
Sub
162,000
227,000
(200,000)
(123,000)
(100,000)
60,000
Eliminations
Dr
Cr
CY2 9,000
CY1 26,000
EL 135,000
D 10,000
D 10,000
A 1,000
170,000
(100,000)
(50,000)
(80,000)
50,000
EL 90,000
EL 45,000
A
1,000
CY1 26,000
(26,000)
10,000
Chapter 3, Slide #21
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
CY2
9,000
Disclosure Concerns
•
Consolidated net income – The net income of the
consolidated entity
•
NCI share of income – This is the NCI share of
consolidated net income; it has often (incorrectly)
been treated as an expense.
•
Controlling share of net income – This is the
controlling share of consolidated net income; it has
often (incorrectly) been treated as consolidated net
income (the NCI share having been deducted)
•
Total NCI – Best theory is to show as aggregated
part of total equity
– Some have shown it as liability or put it between liabilities
and equity
Chapter 3, Slide #22
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
During-the-Year Purchases
Option 1 - Close Books
(WS 3-7)
• D&D includes Sub RE
on purchase date
• WS includes Sub
operations for only later
part of year
Option 2 - Books Open
(WS 3-8)
• D&D has Beginning of
year RE and
“Purchased Income”
• WS includes Sub
operations for entire
year
• Purchased income is
used to remove income
prior to purchase
Chapter 3, Slide #23
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Goodwill Impairment Losses
• If remaining goodwill is estimated to be less
book value of goodwill, record a goodwill
impairment loss.
• Impairment loss is reported on consolidated
income statement for period in which it
occurs.
• Presented before-tax basis.
Two options for impairment losses:
• Record loss on parent’s books
• Record loss on consolidated worksheet.
Chapter 3, Slide #24
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Goodwill Impairment Losses - Calculation
Company P purchased 80% interest in
Company S in 20X2 resulting in $165,000
of Goodwill.
20X4 information is as follows:
Invest in Sub (Soph. Equity)
Estimated fair value of S. Co.
Est. fair value of net assets
$800,000
900,000
850,000
Chapter 3, Slide #25
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Goodwill Impairment Losses - Calculation
• Step one – determine if Goodwill is impaired:
Investment in Sub
Fair value of investment
$800,000
720,000*
*($900,000 total fair value x 80% ownership)
If investment account exceeds fair value,
calculate impairment.
• Impairment calculation:
Est. fair value of company
Est. fair value of net assets
Est. goodwill
$900,000
850,000
50,000
Parent’s % of goodwill = $50,000 x 80% =
$40,000
Original goodwill calculation
165,000
Goodwill Impairment
(125,000)
Chapter 3, Slide #26
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Tax Issues: Tax-Free Exchange
•
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 has same priority as the related asset.
•
DTL is amortized over same period as asset
adjustment; increases tax liability in future years
•
Tax loss carryover is asset recorded in purchase;
there are limits on its use in year of purchase and
later years
Chapter 3, Slide #27
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.