Consolidated Techniques
and Procedures
Chapter 4
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-1
Learning Objective 1
Prepare consolidated working papers
for the year of acquisition when the
parent company uses the full equity
method to account for its
investment in a subsidiary.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-2
Equity Method –
Year of Acquisition
1. Prep pays $87,000 for 80% interest in Snap
on January 1, when Snap stockholders’ equity
consists of $60,000 capital stock and $30,000
retained earnings.
2. The $15,000 excess of investment cost is
allocated to patents.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-3
Equity Method –
Year of Acquisition
Snap’s net income and dividends are as follows:
2003
Net income $25,000
Dividends $15,000
2004
Net income $30,000
Dividends $15,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-4
Working Paper Entries
Adjusting and eliminating entries on the working
papers do not affect the general ledger accounts.
a Income from Snap
18,500
Dividends
12,000
Investment in Snap
6,500
To eliminate income and dividend from Snap
and return the investment account to its
beginning balance
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-5
Working Paper Entries
b Minority Interest Expense
5,000
Dividends Snap
3,000
Minority Interest
2,000
To enter minority interest share of subsidiary
income and dividends
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-6
Working Paper Entries
c Retained Earnings, Snap 30,000
Capital Stock, Snap
60,000
Patents
15,000
Investment in Snap
87,000
Minority Interest
18,000
To eliminate reciprocal equity and investment
balances, establish beginning minority interest,
and enter unamortized patents
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-7
Working Paper Entries
d Expenses
1,500
Patents
1,500
To enter current amortization
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-8
Working Papers for
Year of Acquisition
Income Statement
Revenue
Income from Snap
Expenses
Minority interest
Net income
Retained earnings P
Retained earnings S
Add net income
Deduct dividends
Retained
earnings Dec 31
Prep
250
18.5
(200)
68.5
5
68.5
(30)
43.5
Snap
65
Adjustments and
Eliminations
Dr.
Cr.
a
(40) d
b
25
18.5
1.5
5
30 c
25
(15)
30
40
Consolidated
Statements
315
(241.5)
(5)
68.5
5
68.5
a
b
12
3
(30)
43.5
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4-9
Working Papers for
Year of Acquisition
Balance Sheet
Cash
Other current assets
Investment in Snap
Plant and equipment
Accum. depreciation
Patents
Total assets
Liabilities
Capital stock
Retained earnings
Total
Minority
1/1
interest
12/31
Prep
40
90
93.5
300
(50)
Snap
10
50
Adjustments and
Eliminations
Dr.
Cr.
a 6.5 c 87
100
(30)
c
473.5
80
350
43.5
473.5
Consolidated
Statements
50
140
130
30
60
40
130
15
d
1.5
400
(80)
13.5
523.5
c
110
350
43.5
60
c
b
18
2
20
523.5
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 10
Sequence of Working Paper Entries
1. Adjustments for errors and omissions in the
separate parent company and subsidiary statements
2. Adjustments to eliminate intercompany profits
and losses
3. Adjustments to eliminate income and dividends
from subsidiary and adjust the investment in
subsidiary to its beginning-of-the-period balance
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 11
Sequence of Working Paper Entries
4. Adjustment to record the minority interest in
subsidiary’s earnings and dividends
5. Elimination of reciprocal investment in
subsidiary and subsidiary equity balances
6. Allocation and amortization of cost/book value
differentials
7. Elimination of other reciprocal balances
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 12
Learning Objective 2
Prepare consolidated working
papers for the year
subsequent to acquisition.
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4 - 13
Equity Method –
Year Subsequent to Acquisition
Prep maintains its 80% interest in
Snap throughout 2004.
The only intercompany transaction
during 2004 was a $10,000, noninterest-bearing loan to Snap.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 14
Equity Method –
Year Subsequent to Acquisition
What is Prep’s income from Snap?
($30,000 × 80%) – $1,500* = $22,500
What is Prep’s investment in Snap
account at December 31, 2004?
*Patent amortization
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 15
Equity Method –
Year Subsequent to Acquisition
Investment cost January 1, 2003
Income from Snap, 2003
Dividends from Snap, 2003
Investment in Snap December 31, 2003
Income from Snap, 2004
Dividends from Snap, 2004
Investment in Snap December 31, 2004
$ 87,000
18,500
– 12,000
$ 93,500
22,500
– 12,000
$104,000
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4 - 16
Consolidation –
Year Subsequent to Acquisition
Income from Snap
22,500
Dividends
12,000
Investment in Snap
10,500
To eliminate income and dividends from Snap
and return the investment account to its
beginning-of-the-period balance
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 17
Consolidation–
Year Subsequent to Acquisition
Retained Earnings, Snap 40,000
Capital Stock, Snap
60,000
Patents
13,500
Investment in Snap
93,500
Minority Interest
20,000
To eliminate reciprocal equity and investment
balances, establish beginning minority interest,
and enter unamortized patents
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 18
Consolidation–
Year Subsequent to Acquisition
Expenses
1,500
Patents
1,500
To enter current amortization
Notes Payable, Prep
10,000
Note Receivable, Snap
10,000
To eliminate reciprocal receivable and
payable balances
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4 - 19
Learning Objective 3
Locate errors in preparing
consolidation working papers.
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4 - 20
Locating Errors
Most errors made in consolidating the financial
statements will show up when the consolidated
balance sheet does not balance.
Totals are
recomputed.
Check
individual
items.
Omissions
involving
minority interest
occur frequently.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 21
Learning Objective 4
Allocate excess of purchase price
over book value to include
identifiable net assets.
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4 - 22
Excess Allocated
to Identifiable Assets
Both FASB Statements No. 141 and 142 require
firms to provide at least summary disclosures
regarding the allocation of the purchase price
of an acquired subsidiary.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 23
Excess Allocated to Identifiable
Assets (FASB No. 141)
Disclose in the year of acquisition:
– the cost of the acquired enterprise
– a condensed balance sheet (assets and liabilities)
– amounts of purchased R&D in process
– total amounts assigned to major asset categories
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4 - 24
Excess Allocated to Identifiable
Assets (FASB No. 142)
The amount of goodwill is to be shown as a separate
balance sheet line item (assuming it is material).
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 25
Additional Disclosures
Firms must
disclose material
noncontrolling
interests (minority
interest) on the
balance sheet.
Firms must report
noncontrolling
interests’ share of
subsidiary income
(minority interest
expense).
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 26
Excess Allocation Example
Pate acquired its 90% equity interest in Solo
on December 31, 2003, for $365,000 cash, when
Solo’s stockholders’ equity consisted of $200,000
capital stock and $50,000 retained earnings.
During 2004, Solo borrows $20,000 from Pate
on a non-interest-bearing note.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 27
Excess Allocation Example
What is the excess of cost over book value?
90% × $250,000 = $225,000
$365,000 – $225,000 = $140,000
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4 - 28
Excess Allocation Example
Solo (000)
Assets
Inventories
Land
Buildings
Equipment
Total
Fair
Value
Book
Value
Undervaluation
(Overvaluation)
$ 60
60
180
70
$370
$ 50
30
100
90
$270
$ 10
30
80
(20)
$100
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4 - 29
Excess Allocation Example
Undervaluation Interest
(Overvaluation) Acquired
Assets
Inventories
Land
Buildings, net
Equipment, net
Goodwill, remainder
Total
$10
30
80
(20)
×
×
×
×
90%
90%
90%
90%
Excess Amortization
Allocation
Period
= $ 9
=
27
=
72
= (18)
50
$140
Sold in 2004
None
36 years
9 years
None
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4 - 30
Consolidation After Acquisition
Solo reports $60,000 net income for 2004.
Solo declares dividends of $10,000
on June 1 which is paid on July 1.
Solo declares dividends of
$10,000 on December 1.
The December dividend has not
been paid at year end.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 31
Consolidation After Acquisition
July 1, 2004
Cash
9,000
Investment in Solo
To record dividends from Solo
9,000
December 31, 2004
Investment in Solo
45,000
Income from Solo
45,000
To record dividends from Solo
How was this determined?
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 32
Consolidation After Acquisition
Share of Solo’s net income
($60,000 × 90%)
Amortization of excess allocated to:
Inventories ($9,000 × 100%)
Buildings ($72,000 ÷ 36)
Equipment ($18,000 ÷ 9 years)
Income from Solo for 2004
$54,000
– 9,000
– 2,000
+ 2,000
$45,000
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4 - 33
Working Paper Entries
a Dividends Receivable
9,000
Investment in Solo
9,000
To correct investment balance for unrecorded
dividends receivable
b Cash
20,000
Note Receivable, Solo
20,000
To enter receipt of intercompany note receivable
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4 - 34
Working Paper Entries
c Income from Solo
45,000
Dividends
18,000
Investment in Solo
27,000
To eliminate income and dividend from Pate
and return the investment account to the
beginning of the period balance
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 35
Working Paper Entries
d Minority Interest Expense
6,000
Dividends, Solo
2,000
Minority Interest
4,000
To enter minority interest share of subsidiary
income and dividends
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4 - 36
Working Paper Entries
e Retained Earnings, Solo
50,000
Capital Stock, Solo
200,000
Unamortized Excess
140,000
Investment in Solo
365,000
Minority Interest, Jan 1
25,000
To eliminate reciprocal investment and equity
amounts, establish beginning minority interest,
and enter unamortized excess
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
4 - 37
Working Paper Entries
f Cost of Goods Sold
9,000
Land
27,000
Buildings (net)
72,000
Goodwill
50,000
Equipment (net)
18,000
Unamortized Excess
140,000
To allocate unamortized excess to identifiable
assets and goodwill
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4 - 38
Working Paper Entries
g Operating Expenses
2,000
Buildings (net)
2,000
To enter current depreciation on excess
allocated to buildings
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4 - 39
Working Paper Entries
h Equipment (net)
2,000
Operating Expenses
2,000
To adjust current depreciation for excess
allocated to reduce equipment
i Dividends Payable
9,000
Dividends Receivable
9,000
To eliminate reciprocal receivables and payables
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4 - 40
Learning Objective 5
Apply concepts to prepare a
consolidated statement
of cash flows.
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4 - 41
Consolidated Statement of Cash Flows
Consolidated
balance
sheets
Consolidated
income
statements
Consolidated
statement of
cash flows
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Consolidated Statement of Cash Flows
1. During 2004, Seed sold land that cost
$20,000 to outside entities for $10,000 cash.
2. Polski issued a $300,000, two-year note on
January 8 for new equipment.
3. Patents amortization from the Polski-Seed
business combination is $10,000 per year.
4. Polski received $10,000 dividends from its
investments in equity investees.
5. Changes in plant assets not explained are
due to provisions for depreciation.
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4 - 43
Polski and Seed Comparative
Balance Sheets at December 31
Assets (000)
2004
Cash
$ 255
Accts. receivable, net
375
Inventories
250
Equity investments
100
Land
80
Buildings, net
200
Equipment, net
800
Patents
90
Total assets
$2,150
2003 Changes
$ 180
$ 75
270
105
205
45
95
5
100
(20)
220
(20)
600
200
100
(10)
$1,770
$380
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4 - 44
Polski and Seed Comparative
Balance Sheets at December 31
Liabilities (000)
2004
Accounts payable
$ 250
Dividends payable
20
Notes payable
300
Common stock
500
Other paid-in capital
300
Retained earnings
670
Minority interest – 20%
110
Total liabilities and
stockholders’ equity $2,150
2003 Changes
$ 270
$(20)
20
–
–
300
500
–
300
–
600
70
80
30
$1,770
$380
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4 - 45
Consolidated Income Statement
Year Ended December 31, 2004
Sales
Income from equity investees
Total revenue
Less expenses:
Cost of goods sold
Depreciation expense
Patents amortization
Wages and salaries
Other operating expenses
Interest expense
Loss on sale of land
Total consolidated income
$750
15
765
300
120
10
54
47
24
10
(565)
$200
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4 - 46
Consolidated Income Statement
Year Ended December 31, 2004
Total consolidated income
Less: Minority interest
Consolidated net income
Consolidated retained earnings 1/1/2004
Less: Cash dividends paid
Consolidated retained earnings 12/31/2004
$200
(50)
150
600
(80)
$670
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4 - 47
Consolidated Statement of Cash Flows
Year Ended December 31, 2004
Cash flows from operating activities
Consolidated net income
Adjustments to reconcile net income to
cash provided by operating activities
Minority interest
Undistributed income–equity investees
Loss on sale of land
Depreciation on equipment
Depreciation on buildings
Amortization of patents
Increase in accounts receivable
Increase in inventories
Decrease in accounts payable
Net cash flows from operating activities
$150
$ 50
(5)
(10)
100
20
10
(105)
(45)
(20)
15
$165
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4 - 48
Consolidated Statement of Cash Flows
Year Ended December 31, 2004
Net cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Payment of cash dividends–majority
$(80)
Payment of cash dividends–minority
(20)
Increase in cash for 2004
Cash on January 1, 2004
Cash on December 31, 2004
$165
10
(100)
75
180
$255
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4 - 49
End of Chapter 4
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4 - 50