CH 11

Consolidated Theories, Push-Down
Accounting, and Corporate

Joint Ventures
Chapter 11
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
11 - 1
Learning Objective 1
Compare and contrast the elements
of consolidation approaches under
contemporary theory, parent
company theory, and entity theory.
11 - 2
Comparison of
Consolidation Theories
Parent company theory adopts the
viewpoint of parent company stockholders.
Entity theory focuses on the
total consolidated entity.
11 - 3
Comparison of
Contemporary theory identifies the primary

users of consolidated financial statements as
the stockholders and creditors of the parent
company with the objective of reporting the
operations as a single business entity.
11 - 4
Comparison of
Following are areas in which the three
theories have differences:
Basic purpose and users of consolidated
financial statements
Consolidated net income
Minority interest expense
11 - 5
Comparison of
Equity of minority interests
Consolidation of subsidiary net assets
Unrealized gains and losses
Constructive gains and losses on
debt retirement
11 - 6
Illustration: Consolidation Under

Parent Company and Entity
Theories
Pedrich acquires a 90% interest in Sandy
on January 1, 2003, for $198,000.
Sandys net book value was
$120,000 on this date.
$198,000 ($120,000 90%) = $90,000
11 - 7

Book
Fair
Pedrich 12/31/02 (000)Theories
Value
Value
Cash
Net receivables
Inventories
Other current assets
Plant assets, net
Total assets
Liabilities
Capital stock, $10 par
Retained earnings
Total liabilities and stockholders equities
$220
80
90
20
220
$630
$ 80
400
150
$630
$220
80
100
20
300
$720
$ 80
11 - 8

Book
Fair
Sandy 12/31/02 (000) Theories
Value
Value
Cash
Net receivables
Inventories
Plant assets, net
Total assets
Liabilities
Capital stock, $10 par
Retained earnings
Total liabilities and stockholders equities
$ 5
30
40
10
60
$145
$ 25
100
20
$145
$ 5
35
50
10
80
$180
$ 25
11 - 9
Entity Theory
Fair
Book
Value Value
Accounts receivable, net $35
$30
Inventories
50
40
Plant assets, net
80
60
Remainder to goodwill
Total implied value
over book value
Excess
Fair Value
$ 5
10
20
65
$100
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 10
Parent Company Theory

Fair
Book
Excess
=
Value
Value 90% Fair Value
Accounts receivable, net $35
$30
$ 4.5
Inventories
50
40
9.0
Plant assets, net
80
60
18.0
Remainder to goodwill
58.5
Total implied value
over book value
$90.0
Consolidation Working Papers

January 1, 2003 (Parent Company)
Account Title
Pedrich
Assets
Cash
$ 22
Receivables, net
80
Inventories
90
20
Plant assets, net
220
Investment in Sandy
198
Goodwill
Unamortized excess
Sandy
Total assets
$145
$630
5
30
40
10
60
Adjustments and
Eliminations
Dr.
Cr.
b
b
4.5
9
18
b
a
58.5
90
Consolidated
Balance
Sheet
198
90
27
114.5
139
30
298
58.5
$667

January 1, 2003 (Parent Company)
Adjustments and
Eliminations
Dr.
Cr.
Account Title
Pedrich Sandy
Liabilities and Equity
Liabilities
$ 80
$ 25
Capital stock
400
100 a
Retained earnings
150
20 a
Minority interest
Total equities
$105
400
150
100
20
$630
$145
Consolidated
Balance
Sheet
12
12
$667

January 1, 2003 (Entity Theory)
Account Title
Pedrich
Assets
Cash
$ 22
Receivables, net
80
Inventories
90
20
Plant assets, net
220
Investment in Sandy
198
Goodwill
Unamortized excess
Sandy
Total assets
$145
$630
5
30
40
10
60
Adjustments and
Eliminations
Dr.
Cr.
b
b
5
10
20
b 65
a 100
198
100
Consolidated
Balance
Sheet
$ 27
115
140
30
300
65
$677

January 1, 2003 (Entity Theory)
Adjustments and
Eliminations
Dr.
Cr.
Account Title
Pedrich Sandy
Liabilities and Equity
Liabilities
$ 80
$ 25
Capital stock
400
100 a
Retained earnings
150
20 a
Minority interest
Total equities
$105
400
150
100
20
$630
$145
Consolidated
Balance
Sheet
22
22
$677
Consolidation After Acquisition

Sandys net income and dividends for 2003
are $35,000 and $10,000, respectively.
The excess of fair value over book value of
Sandys accounts receivable and inventories
at January 1, 2003, is realized during 2003.
Sandys plant assets are being
depreciated at a 5% annual rate.
Consolidation After Acquisition:

Equity Method
Share of Sandys net income
($35,000 90%)
Realization of excess allocated to:
Receivables ($5,000 90%)
Inventories ($10,000 90%)
Depreciation
($20,000 90%) 20 years
Income from Sandy for 2003
$31,500
4,500
9,000
900
$17,100

December 31, 2003 (Parent
Adjustments/ ConsolIncome Statement Company)
Pedrich Sandy Eliminations idated
Sales
Income from Sandy
Cost of sales
Operating expenses
$600
$200
17.1
(300)
(120)
(211.25) (45)
Minority interest
Net income
Retained earnings
Dividends
$105.85
$150
(80)
$ 35
$20
(10)
105.85
35
$175.85
$ 45
Add: Net income

Retained earnings
December 31, 2003
$800
a 17.1
c 9
c 4.5
d .9
e 3.5
b 20
(429)
a9
e1
(261.65)
(3.5)
$105.85
$150
(80)
105.85
$175.85

Adjustments/ ConsolCompany)
Balance Sheet
Pedrich Sandy
Eliminations
idated
Cash
Receivables, net
Inventories
Plant assets, net
Investment in Sandy
$ 29.75
90
100
30
200
206.1
$ 13
32
48
17
57 c 18
Goodwill
Unamortized excess
Total assets
c 58.5
b 90
$655.85
$167
d 9
a 8.1
b 198
c 90
$ 42.75
122
148
47
274.1
58.5
$692.35

Balance Sheet
Pedrich Sandy
Eliminations
idated
Liabilities
Capital stock
Retained earnings
$ 80
400
175.85
$ 22
100 b 100
45
Minority interest
Total equities
$102
400
175.85
b 12
e 2.5
$655.85
$167
14.5
$692.35

December 31, 2003 (Entity Theory)
Income Statement
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Net income
Retained earnings
Dividends
Add: Net income
Retained earnings
December 31, 2003
Adjustments/ ConsolPedrich Sandy Eliminations idated

$600
$200
$800
17.1
a 17.1
(300)
(120) c 10
(430)
(211.25) (45) c 5
d 1
(262.25)
e 1.9
(1.9)
$105.85 $ 35
$105.85
$150
$20
b 20
$150
(80)
(10)
a9
e1
(80)
105.85
35
105.85
$175.85
$ 45
$175.85

Balance Sheet
Cash
Receivables, net
Inventories
Plant assets, net
Investment in Sandy
Adjustments/
Eliminations
Pedrich Sandy
$ 29.75 $ 13
90
32
100
48
30
17
200
57 c 20
206.1
Goodwill
Unamortized excess
Total assets
c 65
b 100
$655.85
$167
d 1
a 8.1
b 198
c 100
Consolidated
$ 42.75
122
148
47
276
65
$700.75

Balance Sheet
Liabilities
Capital stock
Retained earnings
Adjustments/
Eliminations
Pedrich Sandy
$ 80
$ 22
400
100 b 100
175.85
45
Minority interest
Total equities
b 22
e .9
$655.85
$167
Consolidated
$102
400
175.85
22.9
$700.75
Consolidated Income Statements

at December 31, 2003
Parent Co.
(000)
Theory
Sales
$ 800.00
Cost of sales
429.00
Operating expenses
261.65
3.50
$ 105.85
Distributions to:
Minority stockholders
Majority stockholders
Total consolidated net income
Entity
Theory
$ 800.00
430.00
262.25
$ 107.75
Contemp.
Theory
$ 800.00
429.00
261.65
$ 1.90
$ 105.85
$ 109.35
3.50
$ 105.85
Consolidated Balance Sheets

Parent Co. Entity

Contem
Assets
Theory
Theory
Theory
Cash
$ 42.75 $ 42.75
$ 42.75
Net A/R
122.00
122.00
122.00
Inventories
148.00
148.00
148.00
47.00
47.00
47.00
Total current assets
$359.75 $359.75 $359.75
Plant assets, net
274.10
276.00
274.10
Goodwill
58.50
65.00
58.50
Total noncurrent assets $332.60 $341.00
$332.60
Total assets
$692.35 $700.75
$692.35
Consolidated Balance Sheets

Liabilities
Parent Co.
and Equity
Theory
Liabilities
$102.00
Minority interest
14.50
Total liabilities
$116.50
Capital stock
400.00
Retained earnings
175.85
Minority interest
Total stockholders equity $575.85

Total equities
$692.35
Entity Contemp.
Theory
Theory
$102.00 $102.00
$102.00 $102.00
400.00
400.00
175.85
175.85
22.90
14.50
$598.75 $590.35
$700.75 $692.35
Adjust subsidiary assets and
liabilities to fair values using
push-down accounting.
Push-Down Accounting
In
In certain
certain situations,
situations, the
the SEC
SEC requires
requires that
that
the
the fair
fair values
values of
of the
the acquired
acquired subsidiarys
subsidiarys
assets
assets and
and liabilities,
liabilities, which
which represent
represent the
the
parent
parent companys
companys cost
cost basis,
basis, be
be recorded
recorded
in
in the
the separate
separate financial
financial statements
statements of
of
the
the purchased
purchased subsidiary.
subsidiary.
Push-Down Accounting:
Book
Value
Cash
$ 5.0
Accounts receivable, net
30.0
Inventory
40.0
10.0
Plant assets, net
60.0
Goodwill
$145.0
Push-Down
Adjustment
$
4.5
9.0
18.0
58.5
$90.0
BV Value
after P-D
$ 5.0
34.5
49.0
10.0
78.0
58.5
$235.0
Liabilities
Capital stock
Retained earnings
Push-down capital
Book
Value
$ 25.0
100.0
20.0
$145.0
Push-Down
Adjustment
$
(20.0)
110.0
$ 90.0
BV Value
after P-D
$ 25.0
100.0
110.0
$235.0
Accounts
Accounts Receivable
Receivable
Inventory
Inventory
Plant
Plant Assets
Assets
Goodwill
Goodwill
Retained
Retained Earnings
Earnings
Push-down
Push-down Capital
Capital
4,500
4,500
9,000
9,000
18,000
18,000
58,500
58,500
20,000
20,000
110,000
110,000
Entity Theory
$198,000
$198,000 cost
cost 90%
90% == $220,000
$220,000 implied
implied value
value
$220,000
$220,000 $120,000
$120,000 book
book value
value == $100,000
$100,000 excess
excess
Entity Theory
Book
Value
Cash
$ 5.0
Accounts receivable, net
30.0
Inventory
40.0
10.0
Plant assets, net
60.0
Goodwill
$145.0
Push-Down
Adjustment
$
5.0
10.0
20.0
65.0
$100.0
BV Value
after P-D
$ 5.0
35.0
50.0
10.0
80.0
65.0
$245.0
Entity Theory
Liabilities
Capital stock
Retained earnings
Push-down capital
Book
Value
$ 25.0
100.0
20.0
$145.0
Push-Down
Adjustment
$
20.0
120.0
$100.0
BV Value
after P-D
$ 25.0
100.0
120.0
$245.0
Entity Theory
Accounts
Accounts Receivable
Receivable
Inventory
Inventory
Plant
Plant Assets
Assets
Goodwill
Goodwill
Retained
Retained Earnings
Earnings
Push-down
Push-down Capital
Capital
5,000
5,000
10,000
10,000
20,000
20,000
65,000
65,000
20,000
20,000
120,000
120,000

Adjustments/ ConsolIncome Statement Company)
Pedrich Sandy Eliminations idated
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Net income
Retained earnings
Dividends
Add: Net income
Retained earnings
December 31, 2003
$600
$200
17.1
a 17.1
(300)
(129)
(211.25) (50.4)
c 3.5
$105.85 $ 20.6
$150
$ 0
(80)
(10)
105.85
20.6
$175.85
$ 10.6
$800
a9
c1
(429)
(261.65)
(3.5)
$105.85
$150
(80)
105.85
$175.85

Balance Sheet
Pedrich Sandy
Eliminations
idated
Cash
Receivables, net
Inventories
Plant assets, net
Investment in Sandy
Goodwill
Total assets
$ 29.75 $ 13
90
32
100
48
30
17
200
74.1
206.1
58.5
$655.85 $242.6
a 8.1
b 198
$ 42.75
122
148
47
274.1
58.5
$692.35

Balance Sheet
Pedrich Sandy
Eliminations
idated
Liabilities
Capital stock
Retained earnings
Push-down capital,
Sandy
$ 80
$ 22
400
100 b 100
175.85
10.6
110
Minority interest
Total equities
$102
400
175.85
b 110
b 12
c 2.5
$655.85 $242.6
14.5
$692.35

Income Statement
Sales
Income from Sandy
Cost of sales
Operating expenses
Minority interest
Adjustments/ ConsolPedrich Sandy Eliminations idated

$600
$200
$800
17.1
a 17.1
(300)
(130)
(430)
(211.25) (51)
(262.25)
c 1.9
(1.9)
Net income
Retained earnings
Dividends
$105.85
$150
(80)
$ 19
$ 0
(10)
Add: Net income

Retained earnings
December 31, 2003
105.85
19
$175.85
$ 9
a9
e1
$105.85
$150
(80)
105.85
$175.85

Balance Sheet
Cash
Receivables, net
Inventories
Plant assets, net
Investment in Sandy
Pedrich Sandy
$ 29.75 $ 13
90
32
100
48
30
17
200
76
206.1
Goodwill
Total assets
65
$655.85
$251
Adjustments/
Eliminations
a 8.1
b 198
Consolidated
$ 42.75
122
148
47
276
65
$700.75

Balance Sheet
Liabilities
Capital stock
Retained earnings
Push-down capital,
Sandy
Adjustments/
Eliminations
Pedrich Sandy
$ 80
$ 22
400
100 b 100
175.85
9
120 b 120
Minority interest
Total equities
Consolidated
$102
400
175.85
b 22
c .9
$655.85
$251
22.9
$700.75
Account for corporate and
unincorporated joint ventures.
Nature of Joint Ventures

A
Ajoint
joint venture
venture isis aa business
business entity
entity that
that
isis owned,
owned, operated,
operated, and
and jointly
jointly controlled
controlled
by
by aa small
small group
group of
of investors
investors (venturers)
(venturers)
for
for their
their mutual
mutual benefit.
benefit.
Each
Each venturer
venturer usually
usually has
has the
the ability
ability to
to
exercise
exercise significant
significant influence
influence over
over the
the
joint
joint venture
venture investee.
investee.
Organizational Structures
of Joint Ventures
Corporate joint venture
General partnership
Limited partnership
Undivided interest
Accounting for Investment

Corporate
Corporate
joint
joint venture
venture
Unincorporated
Unincorporated
joint
joint ventures
ventures
Equity
Equity method
method
Equity
Equity method
method
Proportionate
Proportionate consolidation
consolidation
End of Chapter 11

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CH 11

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Consolidated Theories, Push-Down

Accounting, and Corporate

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Contemporary theory identifies the primary

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Illustration: Consolidation Under

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Illustration: Consolidation Under

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Illustration: Consolidation Under

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 10

Parent Company Theory

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 12

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 13

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 14

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 15

Consolidation After Acquisition

Consolidation After Acquisition:

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 17

Consolidation Working Papers

Add: Net income

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 18

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 19

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 20

Consolidation Working Papers

Adjustments/ ConsolPedrich Sandy Eliminations idated

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 21

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 22

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 23

Consolidated Income Statements

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 24

Consolidated Balance Sheets

Parent Co. Entity

Consolidated Balance Sheets

Total stockholders equity $575.85

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 26

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 27

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 28

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 29

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 30

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 31

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2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 34

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 35

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 36

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 37

Consolidation Working Papers

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 11 - 38