Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 4: Consolidated Financial
Statements after Acquisition
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
4-0
Accounting for Investments
Influence
Ownership Accounting Treatment
No significant
influence
<20%
Cost method
Significant
influence
20 - 50%
Partial equity method
Control
>50%
Cost, partial equity, or
complete equity
method; Consolidation
4-1
Accounting Methods for Investments
 Cost Method
 The
investment account is adjusted only when
additional shares are purchased or sold
 Partial Equity Method
 The
investment account is adjusted for the
investor’s share of investee income and dividends
 Complete Equity Method
 Additional
adjustments are made for unrealized
intercompany profit and amortization of purchase
differential
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Cost Method
Investment Related Accounts of Parent
Investment in S
Acquisition
Cost
Liquidating
dividend
Dividend Income
Share of
dividends
declared
of S
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Partial Equity Method
Investment Related Accounts of Parent
Investment in S
Acquisition
Cost
Equity in
subsidiary
income
Share of
dividends
declared
Equity in subsidiary income
Equity in
subsidiary
loss
Equity in
subsidiary
income
Equity in
subsidiary
loss
4-4
Complete Equity Method
Investment Related Accounts of Parent
Investment in S
Acquisition
Cost
Equity in
subsidiary
income
Share of
dividends
declared
Equity in subsidiary income
Equity in
subsidiary
loss
Equity in
subsidiary
income
Equity in
subsidiary
loss
Amortization
of goodwill
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Cost Method - Eliminating Entries (EE)
Year of Acquisition
The Investment Entry
Common Stock - S Company
Other Contributed Capital - S Company
1/1 Retained Earnings - S Company
Difference between cost and book value
Investment in S Company
Note: eliminate beginning
retained earnings of the
subsidiary
80,000
40,000
32,000
13,000
165,000
This entry is the same as the
investment entry on the acquisition
date (true for the first year only)
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Cost Method - Eliminating Entries (EE)
Year of Acquisition
The Differential Entry
Land
Difference between cost and book value
To allocate the differential
between cost and book value
to the appropriate account(s)
13,000
13,000
This entry is the same as the
differential entry on the
acquisition date
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Cost Method - Eliminating Entries (EE)
Year of Acquisition
The Dividend Entry
Dividend income - P
Dividends declared - S
To avoid double counting
of income
8,000
8,000
To eliminate the contra-equity
account of the subsidiary
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Noncontrolling Interest in Income
Noncontrolling Interest in Income
Reported income of S
+
-
Adjustments
Adjusted NI of S
x Noncontrolling %
Noncontrolling interest in income
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Controlling Interest in Income
Controlling Interest in Income
Reported income of P
+
+
Adjustments
(Adjusted NI of S) x (P %)
Controlling interest in income
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Consolidated Retained Earnings
Consolidated Retained Earnings
Reported R/E of P
+
-
Consolidated NI
Dividends declared of P
Consolidated R/E
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Cost Method EE’s
After Year of Acquisition
The Reciprocal Entry
Investment in S Company
1/1 Retained Earnings - P Company
Adjust the investment account
to equal the amount it would
have under equity method
16,000
16,000
Adjust P’s reported beginning R/E
to equal beginning
consolidated R/E
Other Entries
(similar to the first year EE)
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Equity Method EE’s
Year of Acquisition
The Income Entry
Equity in subsidiary income
Investment in S Company
24,000
24,000
(To eliminate equity in net income included in reported NI of P)
The Dividend Entry
Investment in S Company
Dividends declared
8,000
8,000
(To eliminate intercompany dividend)
These two entries return the investment account to its beginning balance,
to be matched against the subsidiary’s beginning R/E in the next EE.
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Equity Method EE’s
Year of Acquisition
The Investment Entry
Common Stock - S Company
Other Contributed Capital - S Company
1/1 Retained Earnings - S Company
Difference between cost and book value
Investment in S Company
Note:
eliminate
beginning
R/E of the
subsidiary
80,000
40,000
32,000
13,000
165,000
The Differential Entry
Land
Difference between cost and book value
13,000
13,000
To allocate the differential between cost and BV to the appropriate account(s)
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More on Eliminating Entries
 Equity Method EE’s After Year of Acquisition

Similar to entries in the year of acquisition
 Intercompany revenue and expenses
Interest revenue
Interest expense
8,000
8,000
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Interim Acquisitions
Accounting under the purchase method
 Revenues
and expenses of the subsidiary
are included with those of parent only from
the date of acquisition forward
Beginning
Acquisition
End
of S fiscal yr.
date
of S fiscal yr.
Not included
in consolidated NI
Included in consolidated NI
Net income of S
4 - 16
Interim Acquisitions
Full Year Reporting
Consolidated Income Statement
Pre-
Revenues
and expenses
of P
+
plus
Post-
acquisitionPost-acquisition
revenues
acquisition
revenues
and expenses
revenues
and expenses
of and
S expensesof S
of S
minus
Pre-acquisition NI amount of S
minus
Noncontrolling interest in income
Consolidated Net Income
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Interim Acquisitions
Partial Year Reporting
Consolidated Income Statement
Post-
Revenues
and expenses
of P
+
acquisition
plus
revenues
and expenses
of S
minus
Noncontrolling interest in income
Consolidated Net Income
4 - 18
Consolidated Statement of Cash Flows
Purpose
 to
reflect all cash outlays and inflows of the
consolidated entity except those between
parent and subsidiary
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Consolidated Statement of Cash Flows
Procedure
 derived
from
consolidated income statement
beginning and ending consolidated balance sheets
 similar
to unconsolidated firm, except:
noncontrolling interests in combined income
subsidiary dividends
parent acquisition of additional subsidiary shares
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Consolidated Statement of Cash Flows
 Cash
inflow from operating activities
indirect method: add back noncontrolling interest in
combined income
 Cash
outflow from financing activities
includes subsidiary dividends to noncontrolling
shareholders
 Cash
outflow from investing activities
excludes parent’s acquisition of additional subsidiary
shares directly from subsidiary
includes parent’s acquisition of additional subsidiary
shares in open market
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Consolidated Statement of Cash Flows
 Effect
of method of payment in an acquisition
cash acquisition:
cash spent or
received is included
in the investing
activity section of
the cash flow
statement
stock acquisition:
issuance of stock
or debt is
reported in the
notes to the
financial
statements
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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