Consolidated Financial Statements

Consolidated Financial Statements A.
Types of Business Combinations--a business combination occurs when the operations of two or more companies are brought under common control by exchanging cash, stock, debt, or some combination of the three as consideration 1. Asset Acquisition--an asset acquisition is a business combination where the acquiring company acquires all of the net assets of the acquired company and the acquired company ceases to exist as a separate legal entity a. Merger--a merger is an asset acquisition where an existing company acquires all the net assets of one or more other companies b. Consolidation--a consolidation is an asset acquisition where a newly formed company acquires all of the net assets of two or more other companies 2. Stock Acquisition--a stock acquisition is a business combination where the acquiring company acquires a controlling interest in the voting stock of the acquired company and the acquired company continues to exist as a separate legal entity Date of Acquisition 1. Accounting a. Asset Acquisition--the acquiring company records the identifiable net assets of the acquired company at fair market value with any difference between the amount paid for the acquired company and the fair market value of the identifiable nets assets of the acquired company recognized as goodwill b. Stock Acquisition 1) Parent Company--the parent company records an investment in common stock equal to the amount paid for the subsidiary company 2) Worksheet--a worksheet is prepared to consolidate the balance sheets of the parent company and the subsidiary company a) Investment Elimination--an entry is prepared to eliminate the investment in common stock against the percentage of the owners' equity of the subsidiary company that is owned by the parent company I) Net Asset Adjustment--the identifiable net assets of the subsidiary are adjusted for any difference between their fair market value and their book value multiplied by the percentage of the subsidiary company that is owned by the parent company with any remaining difference between the amount paid for the subsidiary company and the book value of the identifiable net assets of the subsidiary company multiplied by the percentage of the subsidiary company that is owned by 1
B.
2.
the parent company recognized as goodwill Minority Interest--an entry is prepared to reclassify the percentage of the owners' equity of the subsidiary that is not owned by the parent company as a separate element of owners' equity called noncontrolling interest or minority interest I) Net Asset Adjustment--the identifiable net assets of the subsidiary are adjusted for any difference between their fair market value and their book value multiplied by the percentage of the subsidiary company that is not owned by the parent company with any remaining difference between the fair market value of the minority interest (the amount paid for the subsidiary company by the parent company divided by the percentage of the subsidiary company that is owned by the parent company multiplied by the percentage of the subsidiary company that is not owned by the parent company) and the book value of the identifiable net assets of the subsidiary company multiplied by the percentage of the subsidiary company that is not owned by the parent company recognized as goodwill A) Purchase Premium--if the parent company pays a premium to the stockholders of the subsidiary to entice them to sell, the fair market value of the minority interest should be determined by looking to the fair market value of the stock or some other measure Illustrations--all of the illustrations will use the following balance sheets for Company P and Company S as a common starting point b) Company P 70,000 85,000 45,000 315,000 60,000 575,000 75,000 350,000 55,000 _95,000 575,000 Company S _ 25,000 75,000 30,000 80,000 40,000 250,000 50,000 100,000 35,000 _65,000 250,000
Cash Receivables Inventory Plant and Equipment Land Liabilities Common Stock Paid-in Capital Retained Earnings
a.
Company P acquired 100% of Company S in a merger by issuing 4,000 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 4,000 x 50 (250,000 50,000) = 0 Company P's Books: Cash Receivables Inventory Plant and Equipment Land Liabilities Common Stock (4,000 x 35) Paid-in Capital (4,000 x 15) 25,000 75,000 30,000 80,000 40,000 50,000 140,000 60,000
b.
Company P acquired 100% of Company S in a stock acquisition by issuing 4,000 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 4,000 x 50 (250,000 50,000) = 0 Company P's Books: Investment in Company S Common Stock (4,000 x 35) Paid-in Capital (4,000 x 15) Eliminations: Common Stock--S (100% x 100,000) Paid-in Capital--S (100% x 35,000) Retained Earnings--S (100% x 65,000) Investment in Company S 200,000 140,000 60,000
100,000 35,000 65,000 200,000
Date of Acquisition 100% Investment At Book Value Company P 70,000 85,000 45,000 200,000 315,000 60,000 775,000 75,000 490,000 100,000 115,000 35,000 95,000 _ _ 775,000 _65,000 250,000 (1) (1) 35,000 65,000 200,000 _ 200,000 95,000 _ 825,000 (1) 100,000 115,000 Company S 25,000 75,000 30,000 80,000 40,000 250,000 50,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 95,000 160,000 75,000 395,000 100,000 825,000 125,000 490,000
Cash Receivables Inventory Investment in S Plant and Equipment Land Liabilities Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings Company P Company S
(1) 200,000 _ _ 200,000
c.
Company P acquired 80% of Company S in a stock acquisition by issuing 3,200 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 3,200 x 50 / 80% - (250,000 50,000) = 0 Company P's Books: Investment in Company S Common Stock (3,200 x 35) Paid-in Capital (3,200 x 15) Eliminations: Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Minority Interest 160,000 112,000 48,000
80,000 28,000 52,000 160,000 20,000 7,000 13,000 40,000
Date of Acquisition 80% Investment At Book Value Company P 70,000 85,000 45,000 160,000 315,000 60,000 735,000 75,000 462,000 100,000 103,000 35,000 95,000 _ _ 735,000 65,000 _ 250,000 (1) (2) 52,000 13,000 200,000 _ 200,000 (1) (2) 28,000 7,000 95,000 _ 825,000 (1) (2) 80,000 20,000 103,000 Company S 25,000 75,000 30,000 80,000 40,000 250,000 50,000 (2) 40,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 95,000 160,000 75,000 395,000 100,000 825,000 125,000 40,000 462,000
Cash Receivables Inventory Investment in S Plant and Equipment Land Liabilities Minority Interest Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings Company P Company S
(1) 160,000 _ _ 160,000
d.
Company P acquired 100% of Company S in a merger by issuing 4,800 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 4,800 x 50 (250,000 50,000) = 40,000 Goodwill Company P's Books: Cash Receivables Inventory Plant and Equipment Land Goodwill Liabilities Common Stock (4,800 x 35) Paid-in Capital (4,800 x 15) 25,000 75,000 30,000 80,000 40,000 40,000 50,000 168,000 72,000
e.
Company P acquired 100% of Company S in a stock acquisition by issuing 4,800 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 4,800 x 50 (250,000 50,000) = 40,000 Goodwill Company P's Books: Investment in Company S Common Stock (4,800 x 35) Paid-in Capital (4,800 x 15) Eliminations: Common Stock--S (100% x 100,000) Paid-in Capital--S (100% x 35,000) Retained Earnings--S (100% x 65,000) Goodwill Investment in Company S 240,000 168,000 72,000
100,000 35,000 65,000 40,000 240,000
Date of Acquisition 100% Investment Above Book Value Company P 70,000 85,000 45,000 240,000 315,000 60,000 815,000 Liabilities Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings Company P Company S 75,000 518,000 100,000 127,000 35,000 95,000 _ _ 815,000 _65,000 250,000 (1) (1) 35,000 65,000 240,000 _ 240,000 95,000 _ 865,000 (1) 100,000 127,000 Company S 25,000 75,000 30,000 80,000 40,000 250,000 50,000 (1) 40,000_ 40,000 _ 240,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 95,000 160,000 75,000 395,000 100,000 40,000 865,000 125,000 518,000
Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill
(1) 240,000
f.
Company P acquired 100% of Company S in a merger by issuing 4,800 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values except for plant and equipment which has a fair market value of $105,000 Net Asset Adjustment = 4,800 x 50 (250,000 50,000) = 40,000 (25,000) Plant and Equipment (105,000 80,000) 15,000 Goodwill Company P's Books: Cash Receivables Inventory Plant and Equipment Land Goodwill Liabilities Common Stock (4,800 x 35) Paid-in Capital (4,800 x 15) 25,000 75,000 30,000 105,000 40,000 15,000 50,000 168,000 72,000
g.
Company P acquired 100% of Company S in a stock acquisition by issuing 4,800 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values except for plant and equipment which has a fair market value of $105,000 Net Asset Adjustment = 4,800 x 50 (250,000 50,000) = 40,000 (25,000) Plant and Equipment (105,000 80,000) 15,000 Goodwill Company P's Books: Investment in Company S Common Stock (4,800 x 35) Paid-in Capital (4,800 x 15) 240,000 168,000 72,000
Eliminations: Common Stock--S (100% x 100,000) Paid-in Capital--S (100% x 35,000) Retained Earnings--S (100% x 65,000) Plant and Equipment Goodwill Investment in Company S
100,000 35,000 65,000 25,000 15,000 240,000
10
Date of Acquisition 100% Investment Above Book Value Company P 70,000 85,000 45,000 240,000 315,000 60,000 815,000 Liabilities Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings Company P Company S 75,000 518,000 100,000 127,000 35,000 95,000 _ _ 815,000 _65,000 250,000 (1) (1) 35,000 65,000 240,000 _ 240,000 95,000 _ 865,000 (1) 100,000 127,000 Company S 25,000 75,000 30,000 80,000 40,000 250,000 50,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 95,000 160,000 75,000 420,000 100,000 15,000 865,000 125,000 518,000
(1) 240,000 (1) 25,000 (1) 15,000_ 40,000 _ 240,000
11
h.
Company P acquired 80% of Company S in a stock acquisition by issuing 3,840 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 3,840 x 50 / 80% - (250,000 50,000) = 40,000 Goodwill Company P's Books: Investment in Company S Common Stock (3,840 x 35) Paid-in Capital (3,840 x 15) Eliminations: Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Goodwill (80% x 40,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Goodwill (20% x 40,000) Minority Interest 192,000 134,400 57,600
80,000 28,000 52,000 32,000 192,000 20,000 7,000 13,000 8,000 48,000
12
Date of Acquisition 80% Investment Above Book Value Company P 70,000 85,000 45,000 192,000 315,000 60,000 767,000 Liabilities Minority Interest Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings Company P Company S 75,000 484,400 100,000 112,600 35,000 95,000 _ _ 767,000 65,000 _ 250,000 (1) (2) 52,000 13,000 240,000 _ 240,000 (1) (2) 28,000 7,000 95,000 _ 865,000 (1) (2) 80,000 20,000 112,600 Company S 25,000 75,000 30,000 80,000 40,000 (1) (2) 250,000 50,000 (2) 48,000 32,000 8,000 40,000 _ _ 192,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 95,000 160,000 75,000 395,000 100,000 40,000 865,000 125,000 48,000 484,400
(1) 192,000
13
i.
Company P acquired 80% of Company S in a stock acquisition by issuing 3,840 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values except for plant and equipment which has a fair market value of $105,000 Net Asset Adjustment = 3,840 x 50 / 80% - (250,000 50,000) = 40,000 (25,000) Plant and Equipment (105,000 80,000) 15,000 Goodwill Company P's Books: Investment in Company S Common Stock (3,840 x 35) Paid-in Capital (3,840 x 15) Eliminations: Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest 192,000 134,400 57,600
80,000 28,000 52,000 20,000 12,000 192,000 20,000 7,000 13,000 5,000 3,000 48,000
14
Date of Acquisition 80% Investment Above Book Value Company P 70,000 85,000 45,000 192,000 315,000 60,000 767,000 Liabilities Minority Interest Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings Company P Company S 75,000 484,400 100,000 112,600 35,000 95,000 _ _ 767,000 65,000 _ 250,000 (1) (2) 52,000 13,000 240,000 _ 240,000 (1) (2) 28,000 7,000 95,000 _ 865,000 (1) (2) 80,000 20,000 112,600 Company S 25,000 75,000 30,000 80,000 40,000 (1) (2) 250,000 50,000 (2) 48,000 12,000 3,000 40,000 _ 192,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 95,000 160,000 75,000 420,000 100,000 15,000 865,000 125,000 48,000 484,400
(1) 192,000 (1) (2) 20,000 5,000
15
3.
Special Considerations a. Negative Goodwill 1) Accounting--if the fair market value of the identifiable net assets of the acquired company exceeds the amount paid for the acquired company, the excess is reported as an extraordinary gain 2) Illustration--the illustration will use the balance sheets for Company P and Company S at the date of acquisition as a starting point; Company P acquired 100% of Company S by issuing 3,800 shares of common stock with a par value of $35 and a market value of $50; the market values of the identifiable net assets of Company S are equal to their book values Net Asset Adjustment = 3,800 x 50 (250,000 50,000) = (10,000) Extraordinary Gain = 10,000 b. Nonacquisition Costs--costs incurred that are not part of the acquisition cost of the acquired company 1) Accounting a) Direct Costs--costs that are paid to individuals outside the acquiring company, in addition to the acquisition cost of the acquired company, are treated in one of the following ways I) Negotiation Costs--costs of negotiating the business combination (such as accounting, legal, consulting, and finders fees) are expensed II) Stock Issue Costs--registration and issue costs of equity securities issued in a business combination reduce the fair market value of the securities issued b) Indirect Costs--costs that are paid to individuals within the acquiring company (such as management salaries, salaries of accountants and lawyers employed by the acquiring company, etc.) are expensed 2) Illustration--Company P acquired 100% of Company S in a stock acquisition by issuing 4,000 shares of common stock with a par value of $35 and a market value of $50; Company P paid $10,000 to a law firm to negotiate the acquisition; Company P paid $3,000 to register and issue the shares of common stock; Company P allocated $5,000 of managerial salaries to the cost of the acquisition
16
Company Ps Books: Investment in Company S (4,000 x 50) Common Stock (4,000 x 35) Paid-in Capital (4,000 x 15) Expense Cash Paid-in Capital Cash Expense Cash C.
200,000 140,000 60,000 10,000 10,000 3,000 3,000 5,000 5,000
Subsequent Periods 1. Accounting--there are no accounting problems for the asset acquisition form of business combination since there is only one set of accounting records for the combining companies a. Parent Company 1) Subsidiary Income--the parent company increases the investment in common stock by the percentage of the subsidiary company that is owned by the parent company multiplied by the net income of the subsidiary company a) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized 2) Subsidiary Dividend--the parent company decreases the investment in common stock by the percentage of the subsidiary company that is owned by the parent company multiplied by the dividends declared of the subsidiary company b. Worksheet--a worksheet is prepared to consolidate the income statements, retained earnings statements, and balance sheets of the parent company and the subsidiary company 1) Eliminations a) Equity Method Elimination--an entry is prepared to eliminate the subsidiary income and the intercompany dividend declaration with the difference taken as an adjustment to the investment in common stock b) Investment Elimination--an entry is prepared to eliminate the investment in common stock at the beginning of the year against the percentage of the owners' equity of the subsidiary company at the beginning of the year that is owned by the parent company
17
2)
3)
Net Asset Adjustment--any net asset adjustment at the date of acquisition that has not previously been amortized is recognized c) Minority Interest--an entry is prepared to reclassify the percentage of the owners' equity of the subsidiary company at the beginning of the year that is not owned by the parent company as a separate element of owners' equity called minority interest I) Net Asset Adjustment--any net asset adjustment at the date of acquisition that has not previously been amortized is recognized d) Net Asset Adjustment Amortization--an entry is prepared to amortize any net asset adjustment at the date of acquisition that has not previously been amortized e) Minority Interest in Net Income--an entry is prepared to reclassify the percentage of the net income and the dividends declared of the subsidiary company that is not owned by the parent company as the change in minority interest during the year I) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized Consolidated Net Income--consolidated net income is equal to the net income of the parent company plus the net income of the subsidiary company a) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized Income Allocation--when the parent company owns less than 100% of the subsidiary company, the consolidated net income must be allocated to the two stockholder groups a) Controlling Interest in Net Income--the controlling interest in net income is equal to the net income of the parent company plus the percentage of the net income of the subsidiary company that is owned by the parent company I) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized b) Minority Interest in Net Income--the minority interest in net income is equal to the percentage of the net income of the subsidiary company that is not owned by the parent company I) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset
I)
18
2.
adjustment at the date of acquisition that has not previously been amortized 4) Reconciliation--the ending balances of the investment in common stock account and the minority interest can be reconciled with the ending owners equity of the subsidiary company a) Investment in Common Stock--the investment in common stock account is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is owned by the parent company I) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized b) Minority Interest--the minority interest is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is not owned by the parent company I) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized Illustrations--both of the illustrations will use illustration i. at the date of acquisition as a common starting point a. During year 1 Company S reported earnings of $15,000 and declared dividends of $6,000; the plant and equipment has an estimated useful life of 10 years Company P's Books: Investment in Company S 10,000 (80% x (15,000 - 25,000 / 10)) Subsidiary Income 10,000 Cash (80% x 6,000) Investment in Company S Eliminations: Subsidiary Income Dividends Declared--S Investment in Company S 4,800 4,800 10,000 4,800 5,200
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Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x 12,500) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Net Asset Adjustment Amortization Consolidated Net Income
80,000 28,000 52,000 20,000 12,000 192,000 20,000 7,000 13,000 5,000 3,000 48,000 2,500 2,500 2,500 1,200 1,300 60,000 15,000 ( 2,500) 72,500
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Income Allocation: Net Income Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 12,500) Controlling Interest in Net Income Minority Interest in Net Income (20% x 12,500) Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Asset Adjustment: Plant and Equipment (25,000 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 246,500) Minority Interest (20% x 246,500) Company S 100,000 35,000 74,000 209,000 22,500 15,000 197,200 37,500 246,500 49,300 Company P 60,000 60,000 10,000 70,000 2,500 Company S 15,000 ( 2,500) 12,500
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First Subsequent Period Company P Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Consolidated Net Income Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill 450,000 270,000 180,000 120,000 60,000 10,000 _ _ _70,000 Company S 100,000 _60,000 40,000 _25,000 15,000 _ _ _15,000 _ Eliminations _ _ _Debit __ Credit _ _ (4) (1) (5) _ _ 2,500 2,000 10,000 2,500 15,000 _ _ _ _ _ _ _ _ Consolidated 550,000 330,000 220,000 147,500 72,500 _ 2,500 _70,000
95,000 _70,000 165,000 45,000 _ _
65,000 _15,000 80,000 6,000 _ _ _74,000 30,000 80,000 35,000 85,000 40,000 270,000 61,000
(2) (3) _
52,000 13,000 15,000 80,000
95,000 _ _ _70,000 165,000 45,000 _ _
_ _
_ 80,000
(1) (5) _
4,800 1,200 6,000
120,000 77,800 87,000 55,000 197,200 330,000 60,000 807,000
120,000 107,800 167,000 90,000
(2) (3) (2) (3)
20,000 5,000 12,000 3,000 40,000
(1) 5,200 (2) 192,000 (4) 2,500
437,500 100,000 15,000 917,300 151,000
_ 199,700 (3) (5) 48,000 1,300
Liabilities Minority Interest Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings--Brought Forward
90,000
49,300 484,400
484,400 100,000 112,600 35,000 120,000 807,000 _74,000 270,000 (2) (3) 28,000 7,000 80,000 255,000 6,000 255,000 (2) (3) 80,000 20,000
112,600 120,000 917,300
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b.
During year 2 Company S reported earnings of $20,000 and declared dividends of $8,000 Company P's Books: Investment in Company S 14,000 (80% x (20,000 - 25,000 / 10)) Subsidiary Income 14,000 Cash (80% x 8,000) Investment in Company S Eliminations: Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 74,000) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 74,000) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment 6,400 6,400 14,000 6,400 7,600 80,000 28,000 59,200 18,000 12,000 197,200 20,000 7,000 14,800 4,500 3,000 49,300 2,500 2,500
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Minority Interest in Net Income (20% x 17,500) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 12,500) Controlling Interest in Net Income Minority Interest in Net Income (20% x 12,500) Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Asset Adjustment: Plant and Equipment (25,000 2 x 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 256,000) Minority Interest (20% x 256,000)
3,500 1,600 1,900 70,000 20,000 ( 2,500) 87,500 Company P 70,000 70,000 14,000 84,000 3,500 Company S 20,000 ( 2,500) 17,500
Company S 100,000 35,000 86,000 221,000 20,000 15,000 204,800 35,000 256,000 51,300
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Second Subsequent Period Company P Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Consolidated Net Income Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill 500,000 275,000 225,000 155,000 70,000 14,000 _ _ _84,000 Company S 140,000 _77,000 63,000 _43,000 20,000 _ _ _20,000 _ Eliminations _ _ _Debit __ Credit _ _ (4) (1) (5) _ _ 2,500 2,500 14,000 3,500 20,000 _ _ _ _ _ _ _ _ Consolidated 640,000 352,000 288,000 202,500 87,500 _ 3,500 _84,000
120,000 _84,000 204,000 64,000 _ _
74,000 _20,000 94,000 8,000 _ _ _86,000 31,000 81,000 38,000 90,000 40,000 280,000 59,000
(2) (3) _
59,200 14,800 20,000 94,000
120,000 _ _ _84,000 204,000 64,000 _ _
_ _
_ 94,000
(1) (5) _
6,400 1,600 8,000
140,000 75,200 90,000 60,000 204,800 340,000 60,000 830,000
140,000 106,200 171,000 98,000
(2) (3) (2) (3)
18,000 4,500 12,000 3,000 37,500
(1) 7,600 (2) 197,200 (4) 2,500
450,000 100,000 15,000 940,200 152,000
_ 207,300 (3) (5) 49,300 1,900
93,000
51,200 484,400
484,400 100,000 112,600 35,000 140,000 830,000 _86,000 280,000 (2) (3) 28,000 7,000 94,000 266,500 8,000 266,500 (2) (3) 80,000 20,000
112,600 140,000 940,200
25
D.
Intercompany Transactions 1. Intercompany Sales of Inventory a. Accounting 1) Parent Company--in computing subsidiary income the following adjustments are made a) Upstream Sales--the net income of the subsidiary company is increased for the gross profit from any intercompany sales of inventory from the subsidiary company to the parent company that had not been realized by a sale to outsiders at the end of last year and is decreased for the gross profit from any intercompany sales of inventory from the subsidiary company to the parent company that has not been realized by a sale to outsiders at the end of this year b) Downstream Sales--the subsidiary income is increased for the gross profit from any intercompany sales of inventory from the parent company to the subsidiary company that had not been realized by a sale to outsiders at the end of last year and is decreased for the gross profit from any intercompany sales of inventory from the parent company to the subsidiary company that has not been realized by a sale to outsiders at the end of this year 2) Worksheet a) Eliminations--in addition to the five basic elimination entries for subsequent periods, the following elimination entries are necessary to adjust for the intercompany sales of inventory I) Current Year Sales--sales and cost of goods sold are decreased for any intercompany sales of inventory made during the year II) Ending Inventory Adjustment--ending inventory is decreased and cost of goods sold is increased to remove the gross profit from any intercompany sales of inventory that have not been realized by a sale to outsiders at the end of this year III) Beginning Inventory Adjustment--cost of goods sold is decreased to remove the gross profit from any intercompany sales of inventory that have not been realized by a sale to outsiders at the end of last year A) Upstream Sales--the beginning retained earnings of the subsidiary is decreased 1) Investment Elimination--the entries to eliminate the investment in common stock at the beginning of the year and to reclassify the minority interest at the beginning of the year use the corrected beginning retained earnings of the subsidiary B) Downstream Sales--the beginning investment in
26
common stock is increased 1) Investment Elimination--the entry to eliminate the investment in common stock at the beginning of the year uses the corrected beginning investment in common stock b) Consolidated Net Income--consolidated net income is equal to the net income of the parent company plus the net income of the subsidiary company I) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized II) Inventory Adjustment--consolidated net income is increased for the gross profit from any intercompany sales of inventory that had not been realized by a sale to outsiders at the end of last year and is decreased for the gross profit from any intercompany sales of inventory that has not been realized by a sale to outsiders at the end of this year c) Income Allocation--when the parent company owns less than 100% of the subsidiary company, the consolidated net income must be allocated to the two stockholder groups I) Controlling Interest in Net Income--the controlling interest in net income is equal to the net income of the parent company plus the percentage of the net income of the subsidiary company that is owned by the parent company A) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized B) Inventory Adjustment--the net income of the selling company is increased for the gross profit from any intercompany sales of inventory that had not been realized by a sale to outsiders at the end of last year and is decreased for the gross profit from any intercompany sales of inventory that has not been realized by a sale to outsiders at the end of this year
27
Minority Interest in Net Income--the minority interest in net income is equal to the percentage of the net income of the subsidiary company that is not owned by the parent company A) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized B) Inventory Adjustment--the net income of the selling company is increased for the gross profit from any intercompany sales of inventory that had not been realized by a sale to outsiders at the end of last year and is decreased for the gross profit from any intercompany sales of inventory that has not been realized by a sale to outsiders at the end of this year d) Reconciliation--the ending balances of the investment in common stock account and the minority interest can be reconciled with the ending owners equity of the subsidiary company I) Investment in Common Stock--the investment in common stock account is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is owned by the parent company A) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized B) Inventory Adjustment--the owners equity of the subsidiary company is decreased for the gross profit from any intercompany sales of inventory from the subsidiary company to the parent company that has not been realized by a sale to outsiders at the end of this year II) Minority Interest--the minority interest is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is not owned by the parent company A) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized B) Inventory Adjustment--the owners equity of the subsidiary company is decreased for the gross profit from any intercompany sales of inventory from the subsidiary company to the parent company that has not been realized by a sale to outsiders
II)
28
b.
at the end of this year Illustrations--all of the illustrations will use the illustrations for subsequent periods as a common starting point 1) During year 1 Company S made sales of $20,000 to Company P at a gross profit rate of 40%; the ending inventory of Company P contains goods purchased from Company S at a cost of $2,000 Company P's Books: Investment in Company S 9,360 (80% x (15,000 - 25,000 / 10 40% x 2,000)) Subsidiary Income 9,360 Cash (80% x 6,000) Investment in Company S Eliminations: Sales Cost of Goods Sold Cost of Goods Sold Inventory (40% x 2,000) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S 4,800 4,800 20,000 20,000 800 800 9,360 4,800 4,560 80,000 28,000 52,000 20,000 12,000 192,000
29
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x (12,500 800)) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Ending Inventory Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Ending Inventory Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 11,700) Controlling Interest in Net Income Minority Interest in Net Income (20% x 11,700)
20,000 7,000 13,000 5,000 3,000 48,000 2,500 2,500 2,340 1,200 1,140 60,000 15,000 ( 800) ( 2,500) 71,700 Company P 60,000 60,000 9,360 69,360 2,340 Company S 15,000 ( 800) ( 2,500) 11,700
30
Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Ending Inventory Adjustment Net Asset Adjustment: Plant and Equipment (25,000 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 245,700) Minority Interest (20% x 245,700) Company S 100,000 35,000 74,000 209,000 ( 800) 22,500 15,000 196,560 37,500 245,700 49,140
31
First Subsequent Period Upstream Sales of Inventory Company P 450,000 270,000 180,000 120,000 60,000 9,360 _ _ _69,360 Company S 100,000 _60,000 40,000 _25,000 15,000 _ _ _15,000 _ Eliminations _ _ _Debit __ Credit _ (1) (2) (6) (3) (7) _ 20,000 800 20,800 2,500 23,300 9,360 2,340 35,000 (1) _ _ _ 20,000 20,000 _ 20,000 _ 20,000 Consolidated 530,000 310,800 219,200 147,500 71,700 _ 2,340 _69,360
Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Consolidated Net Income Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill
95,000 65,000 _69,360 164,360 45,000 _ _ 6,000 _ _ _74,000 30,000 80,000 35,000 85,000 40,000 270,000 61,000 (4) (5) (4) (5) 806,360 90,000 20,000 5,000 12,000 3,000 40,000 (5) (7) (4) (5) (4) (5) 80,000 20,000 28,000 7,000 100,000 275,000 _ _ _ 100,000 (3) (7) _ 4,800 1,200 26,000 _ _15,000 80,000 (4) (5) _ 52,000 13,000 35,000 100,000 _ 20,000 20,000
95,000 _69,360 164,360 45,000 _
119,360 77,800 87,000 55,000 196,560 330,000 60,000
119,360 107,800 167,000 89,200
(2) 800 (3) 4,560 (4) 192,000 (6) 2,500
437,500 100,000 _ 199,860 48,000 1,140 15,000 916,500 151,000 49,140 484,400
484,400
100,000
112,600 119,360 806,360
35,000 _74,000 270,000
112,600 26,000 275,000 119,360 916,500
32
2) During year 2 Company S made sales of $25,000 to Company P at a gross profit rate of 45%; the ending inventory of Company P contains goods purchased from Company S at a cost of $3,000 Company P's Books: Investment in Company S 13,560 (80% x (20,000 - 25,000 / 10 + 40% x 2,000 - 45% x 3,000)) Subsidiary Income 13,560 Cash (80% x 8,000) Investment in Company S Eliminations: Retained Earnings--S (40% x 2,000) Cost of Goods Sold Sales Cost of Goods Sold Cost of Goods Sold Inventory (45% x 3,000) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x (74,000 - 800)) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S 6,400 6,400 800 800 25,000 25,000 1,350 1,350 13,560 6,400 7,160 80,000 28,000 58,560 18,000 12,000 196,560
33
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 73,200) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x (17,500 + 800 - 1,350)) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Beginning Inventory Adjustment Ending Inventory Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Beginning Inventory Adjustment Ending Inventory Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 16,950) Controlling Interest in Net Income Minority Interest in Net Income (20% x 16,950)
20,000 7,000 14,640 4,500 3,000 49,140 2,500 2,500 3,390 1,600 1,790 70,000 20,000 800 ( 1,350) ( 2,500) 86,950 Company P 70,000 Company S 20,000 800 ( 1,350) ( 2,500) 16,950
70,000 13,560 83,560
3,390
34
Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Ending Inventory Adjustment Net Asset Adjustment: Plant and Equipment (22,500 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 254,650) Minority Interest (20% x 254,650) Company S 100,000 35,000 86,000 221,000 ( 1,350) 20,000 15,000 203,720 35,000 254,650 50,930
35
Second Subsequent Period Upstream Sales of Inventory Company P 500,000 275,000 _ _ 225,000 155,000 70,000 13,560 _ _ _83,560 Company S 140,000 77,000 _ _ 63,000 _43,000 20,000 _ _ _20,000 _ Eliminations _ _ _Debit __ Credit _ (2) (3) _ (7) (4) (8) _ 25,000 1,350 _ 26,350 2,500 28,850 13,560 3,390 45,800 (1) (2) _ _ _ 800 25,000 25,800 _ 25,800 _ 25,800 Consolidated 615,000 327,550 287,450 200,500 86,950 _ 3,390 _83,560
119,360
74,000 _20,000 94,000 8,000 _ _ _86,000 31,000 81,000 38,000 90,000 40,000 280,000 59,000
_83,560 202,920 64,000 _ _
(1) (5) (6) _
800 58,560 14,640 45,800 119,800
119,360
25,800 25,800 6,400 1,600 33,800
_83,560 202,920 64,000
_ _
_ 119,800
(4) (8) _
138,920 75,200 90,000 60,000 203,720 340,000 60,000 828,920
138,920 106,200 171,000 96,650
(5) (6) (5) (6)
18,000 4,500 12,000 12,000 37,500
(3) 1,350 (4) 7,160 (5) 196,560 (7) 2,500
450,000 100,000 _ 207,570 (6) (8) 49,140 1,790 15,000 938,850 152,000 50,930 484,400
93,000
484,400
100,000
(5) (6) (5) (6)
80,000 20,000 28,000 7,000 119,800 292,300
112,600 138,920 828,920
35,000 _86,000 280,000
112,600 33,800 292,300 138,920 938,850
36
3)
During year 1 Company P made sales of $20,000 to Company S at a gross profit rate of 40%; the ending inventory of Company S contains goods purchased from Company P at a cost of $2,000 Company P's Books: Investment in Company S 9,200 (80% x (15,000 - 25,000 / 10) 40% x 2,000) Subsidiary Income 9,200 Cash (80% x 6,000) Investment in Company S Eliminations: Sales Cost of Goods Sold Cost of Goods Sold Inventory (40% x 2,000) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S 4,800 4,800 20,000 20,000 800 800 9,200 4,800 4,400 80,000 28,000 52,000 20,000 12,000 192,000
37
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x 12,500) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Ending Inventory Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation:
20,000 7,000 13,000 5,000 3,000 40,000 2,500 2,500 2,500 1,200 1,300 60,000 15,000 ( 800) ( 2,500) 71,700
Company P Company S Net Income 60,000 15,000 Ending Inventory Adjustment ( 800) Net Asset Adjustment Amortization ( 2,500) Adjusted Net Income 59,200 12,500 Subsidiary Income 10,000 (80% x 12,500) Controlling Interest in Net Income 69,200 Minority Interest in Net Income (20% x 12,500) 2,500
38
Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Asset Adjustment: Plant and Equipment (25,000 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 246,500) Minority Interest (20% x 246,500) Company S 100,000 35,000 74,000 209,000 22,500 15,000 197,2000 37,500 246,500 49,300
39
First Subsequent Period Downstream Sales of Inventory Company P 450,000 270,000 180,000 120,000 60,000 9,200 _ _ 69,200 Company S 100,000 _60,000 40,000 _25,000 15,000 _ _ _15,000 _ Eliminations _ _ _Debit __ Credit _ (1) (2) (6) (3) (7) _ 20,000 800 20,800 2,500 23,300 9,200 2,500 35,000 (1) _ _ _ 20,000 20,000 _ 20,000 _ 20,000 Consolidated 530,000 310,800 219,200 147,500 71,700 _ 2,500 _69,200
95,000 65,000 _69,200 164,200 45,000 _ _ 6,000 _ _ _74,000 30,000 80,000 35,000 85,000 40,000 270,000 61,000 (4) (5) (4) (5) 806,200 90,000 20,000 5,000 12,000 3,000 40,000 (5) (7) (4) (5) (4) (5) 80,000 20,000 28,000 7,000 100,000 275,000 _ _ _ 100,000 (3) (7) _ 4,800 1,200 26,000 _ _15,000 80,000 (4) (5) _ 52,000 13,000 35,000 100,000 _ 20,000 20,000
95,000 _69,200 164,200 45,000 _
119,200 77,800 87,000 55,000 196,400 330,000 60,000
119,200 107,800 167,000 89,200
(2) 800 (3) 4,400 (4) 192,000 (6) 2,500
437,500 100,000 _ 199,700 48,000 1,300 15,000 916,500 151,000 49,300 484,400
484,400
100,000
112,600 119,200 806,200
35,000 _74,000 270,000
112,600 26,000 275,000 119,200 916,500
40
4)
During year 2 Company P made sales of $25,000 to Company S at a gross profit rate of 45%; the ending inventory of Company S contains goods purchased from Company P at a cost of $3,000 Company P's Books: Investment in Company S 13,450 (80% x (20,000 - 25,000 / 10) + 40% x 2,000 - 45% x 3,000) Subsidiary Income 13,450 Cash (80% x 8,000) Investment in Company S Eliminations: Investment in Company S (40% x 2,000) Cost of Goods Sold Sales Cost of Goods Sold Cost of Goods Sold Inventory (45% x 3,000) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 74,000) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S 6,400 6,400 800 800 25,000 25,000 1,350 1,350 13,450 6,400 7,050 80,000 28,000 59,200 18,000 12,000 197,200
41
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 74,000) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x 17,500) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Beginning Inventory Adjustment Ending Inventory Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation:
20,000 7,000 14,800 4,500 3,000 41,800 2,500 2,500 3,500 1,600 1,900 70,000 20,000 800 ( 1,350) ( 2,500) 86,950
Company P Company S Net Income 70,000 20,000 Beginning Inventory Adjustment 800 Ending Inventory Adjustment ( 1,350) Net Asset Adjustment Amortization ( 2,500) Adjusted Net Income 69,450 17,500 Subsidiary Income 14,000 (80% x 17,500) Controlling Interest in Net Income 83,450 Minority Interest in Net Income (20% x 17,500) 3,500
42
43
Second Subsequent Period Downstream Sales of Inventory Company P 500,000 275,000 _ _ 225,000 155,000 70,000 13,450 _ _ _83,450 Company S 140,000 77,000 _ _ 63,000 _43,000 20,000 _ _ _20,000 _ Eliminations _ _ _Debit __ Credit _ (2) (3) _ (7) (4) (8) _ 25,000 1,350 _ 26,350 2,500 28,850 13,450 3,500 45,800 (1) (2) _ _ _ 800 25,000 25,800 _ 25,800 _ 25,800 Consolidated 615,000 327,550 287,450 200,500 86,950 _ 3,500 _83,450
119,200 _83,450 202,650 64,000 _ _
74,000 _20,000 94,000 8,000 _ _ _86,000 31,000 81,000 38,000
(5) (6) _
59,200 14,800 45,800 119,800
119,200 _ 25,800 25,800 6,400 1,600 33,800 _83,450 202,650 64,000 _ _
_ _
_ 119,800
(4) (8) _
138,650 75,200 90,000 60,000 203,450 340,000 60,000 828,650
138,650 106,200 171,000 96,650
(1) 90,000 40,000 280,000 59,000 (5) (6) (5) (6)
800 18,000 4,500 12,000 3,000 38,300
(3) 1,350 (4) 7,050 (5) 197,200 (7) 2,500
450,000 100,000 3,000 938,850 152,000
_ 208,100 (6) (8) 49,300 1,900
93,000
51,200 484,400
484,400 100,000 112,600 35,000 138,650 828,650 _86,000 280,000 (5) (6) 28,000 7,000 119,800 293,`00 33,800 293,100 (5) (6) 80,000 20,000
112,600 138,650 938,850
44
2.
Intercompany Sales of Fixed Assets a. Accounting 1) Parent Company--in computing subsidiary income the following adjustments are made a) Upstream Sales--the net income of the subsidiary company is decreased/increased for any gain/loss from the intercompany sale of fixed assets from the subsidiary company to the parent company during the current year and is increased/decreased, if the fixed asset is depreciable, for any gain/loss divided by the useful life of the fixed asset until the fixed asset is either fully depreciated or sold b) Downstream Sales--the subsidiary income is decreased/increased for any gain/loss from the intercompany sale of fixed assets from the parent company to the subsidiary company during the current year and is increased/decreased, if the fixed asset is depreciable, for any gain/loss divided by the useful life of the fixed asset until the fixed asset is either fully depreciated or sold 2) Worksheet a) Eliminations--in addition to the five basic elimination entries for subsequent periods, the following elimination entries are necessary to adjust for the intercompany sale of fixed assets I) Gain/Loss Adjustment--any gain/loss on the intercompany sale of fixed assets during the current year is eliminated A) Upstream Sale--for years after the year of sale the beginning retained earnings of the subsidiary is decreased/increased for the gain/loss less the depreciation adjustments for the prior years until the fixed asset is either fully depreciated or sold 1) Investment Elimination--the entries to eliminate the investment in common stock at the beginning of the year and to reclassify the minority interest at the beginning of the year use the corrected beginning retained earnings of the subsidiary B) Downstream Sales-- for years after the year of sale the beginning investment in common stock is decreased/increased for the gain/loss less the depreciation adjustments for the prior years until the fixed asset is either fully depreciated or sold 1) Investment Elimination--the entry to eliminate the investment in common stock at the beginning of the year uses the corrected beginning investment in common stock II) Depreciation Adjustment--depreciation expense is
45
adjusted, if the fixed is depreciable, for the gain/loss divided by the useful life of the fixed asset until the fixed asset is either fully depreciated or sold III) Fixed Asset Adjustment--the fixed asset is adjusted for the gain/loss less the depreciation adjustments for the current year and the prior years until the fixed asset is either fully depreciated or sold b) Consolidated Net Income--consolidated net income is equal to the net income of the parent company plus the net income of the subsidiary company I) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized II) Fixed Asset Adjustment--consolidated net income is decreased/increased for any gain/loss from the intercompany sale of fixed assets during the current year and is increased/decreased, if the fixed asset is depreciable, for any gain/loss divided by the useful life of the fixed asset until the fixed asset is either fully depreciated or sold c) Income Allocation--when the parent company owns less than 100% of the subsidiary company, the consolidated net income must be allocated to the two stockholder groups I) Controlling Interest in Net Income--the controlling interest in net income is equal to the net income of the parent company plus the percentage of the net income of the subsidiary company that is owned by the parent company A) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized B) Fixed Asset Adjustment--the net income of the selling company is decreased/increased for any gain/loss from the intercompany sale of fixed assets during the current year and is increased/decreased, if the fixed asset is depreciable, for any gain/loss divided by the useful life of the fixed asset until the fixed asset is either fully depreciated or sold II) Minority Interest in Net Income--the minority interest in net income is equal to the percentage of the net income of the subsidiary company that is not owned by the parent company A) Net Asset Adjustment--the net income of the
46
b.
subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized B) Fixed Asset Adjustment--the net income of the selling company is decreased/increased for any gain/loss from the intercompany sale of fixed assets during the current year and is increased/decreased, if the fixed asset is depreciable, for any gain/loss divided by the useful life of the fixed asset until the fixed asset is either fully depreciated or sold d) Reconciliation--the ending balances of the investment in common stock account and the minority interest can be reconciled with the ending owners equity of the subsidiary company I) Investment in Common Stock--the investment in common stock account is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is owned by the parent company A) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized B) Fixed Asset Adjustment--the owners equity of the subsidiary company is decreased/increased for any gain/loss from any intercompany sale of fixed assets from the subsidiary company to the parent company less the depreciation adjustments that have been recognized by the end of this year II) Minority Interest--the minority interest is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is not owned by the parent company A) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized B) Fixed Asset Adjustment--the owners equity of the subsidiary company is decreased/increased for any gain/loss from any intercompany sale of fixed assets from the subsidiary company to the parent company less the depreciation adjustments that have been recognized by the end of this year Illustrations--all of the illustrations will use illustration i. at the acquisition date as a common starting point 1) During year 1 Company S sold plant and equipment with a book value of $30,000 to Company P for $34,500; the plant and
47
equipment has an estimated useful life of 3 years Company P's Books: Investment in Company S 11,200 (80% x (19,500 - 25,000 / 10 (34,500 - 30,000) + 4,500 / 3)) Subsidiary Income Cash (80% x 6,000) Investment in Company S Eliminations: Gain on Sale of Fixed Assets Depreciation Expense Plant and Equipment (4,500 - 1,500) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment 4,800
11,200
4,800 4,500 1,500 3,000 11,200 4,800 6,400 80,000 28,000 52,000 20,000 12,000 192,000 20,000 7,000 13,000 5,000 3,000 48,000 2,500 2,500
48
Minority Interest in Net Income (20% x (17,000 - 4,500 + 1,500) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Gain Adjustment Depreciation Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Gain Adjustment Depreciation Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 14,000) Controlling Interest in Net Income Minority Interest in Net Income (20% x 14,000) Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Gain Adjustment (4,500 1,500) Net Asset Adjustment: Plant and Equipment (25,000 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 248,000) Minority Interest (20% x 248,000)
2,800 1,200 1,600 60,000 19,500 ( 4,500) 1,500 ( 2,500) 74,000 Company P 60,000 Company S 19,500 ( 4,500) 1,500 ( 2,500) 14,000
60,000 11,200 71,200
2,800
Company S 100,000 35,000 78,500 213,500 ( 3,000) 22,500 15,000 198,400 37,500 248,000 49,600
49
First Subsequent Period Upstream Sales of Fixed Assets Company P 450,000 270,000 180,000 120,000 60,000 11,200 _ _ _71,200 Company S 100,000 _60,000 40,000 _25,000 15,000 4,500 _ _ _19,500 _ Eliminations _ _ _Debit __ Credit _ Consolidated 550,000 330,000 220,000 146,000 74,000 _ 2,800 _71,200
Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Consolidated Net Income Gain on Sale of Fixed Assets Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill
(5) (1) (2) (6) _
2,500 2,500 4,500 11,200 2,800 21,000
(1)
1,500 1,500 _ 1,500
_ _
95,000 _71,200 166,200 45,000 _ _
65,000 _19,500 84,500 6,000 _ _ _78,500 34,500 80,000 35,000 85,000 40,000 274,500 61,000
(3) (4) _
52,000 13,000 21,000 86,000
95,000 _ 1,500 1,500 4,800 1,200 7,500 _71,200 166,200 45,000 _ _
_ _
_ 86,000
(2) (6) _
121,200 77,800 87,000 55,000 198,400 330,000 60,000 808,200
121,200 112,300 167,000 90,000
(3) (4) (3) (4)
20,000 5,000 12,000 3,000 40,000
(2) 6,400 (3) 192,000 (1) 3,000 (5) 2,500 _ 203,900 (4) (6) 48,000 1,600
434,500 100,000 15,000 918,800 151,000 49,600 484,400
90,000
484,400 100,000 112,600 35,000 121,200 808,200 _78,500 274,500 (3) (4) 28,000 7,000 86,000 261,000 7,500 261,000 (3) (4) 80,000 20,000
112,600 121,200 918,800
50
2)
During year 2 no other intercompany sales of fixed assets took place Company P's Books: Investment in Company S 15,200 (80% x (20,000 - 25,000 / 10 + 4,500 / 3)) Subsidiary Income 15,200 Cash (80% x 8,000) Investment in Company S Eliminations: Retained Earnings--S (4,500 - 1,500) Depreciation Expense Plant and Equipment (4,500 - 2 x 1,500) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x (78,500 - 3,000)) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 75,500) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest 6,400 6,400 3,000 1,500 1,500 15,200 6,400 8,800 80,000 28,000 60,400 18,000 12,000 198,400 20,000 7,000 15,100 4,500 3,000 49,600
51
Expense Plant and Equipment Minority Interest in Net Income (20% x (17,500 + 1,500)) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Depreciation Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Depreciation Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 19,000) Controlling Interest in Net Income Minority Interest in Net Income (20% x 19,000) Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Gain Adjustment (4,500 2 x 1,500) Net Asset Adjustment: Plant and Equipment (22,500 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 259,000) Minority Interest (20% x 259,000)
2,500 2,500 3,800 1,600 2,200 70,000 20,000 1,500 ( 2,500) 89,000 Company P 70,000 70,000 15,200 71,200 3,800 Company S 20,000 1,500 ( 2,500) 19,000
Company S 100,000 35,000 90,500 225,500 ( 1,500) 20,000 15,000 207,200 35,000 259,000 51,800
52
Second Subsequent Period Upstream Sales of Fixed Assets Company P 500,000 275,000 225,000 155,000 70,000 15,200 _ _ _85,200 Company S 140,000 _77,000 63,000 _43,000 20,000 _ _ _20,000 _ Eliminations _ _ _Debit __ Credit _ _ (5) (2) (6) _ _ 2,500 2,500 15,200 3,800 21,500 (1) _ _ 1,500 1,500 _ 1,500 Consolidated 640,000 352,000 288,000 199,000 89,000 _ 3,800 _85,200
121,200 78,500 _85,200 206,400 64,000 _ _ _20,000 98,500 8,000 _ _ _90,500 35,500 81,000 38,000 90,000 40,000 284,500 59,000 (4) (6) 484,400 100,000 112,600 35,000 142,400 832,400 _90,500 284,500 (3) (4) 28,000 7,000 100,000 272,500 9,500 272,500 (3) (4) 80,000 20,000 49,600 2,200 (3) (4) (3) (4) 18,000 4,500 12,000 3,000 37,500 (2) 8,800 (3) 198,400 (1) 1,500 (5) 2,500 _ 211,200 (1) (3) (4) _ 3,000 60,400 15,100 21,500 100,000
121,200
1,500 1,500 6,400 1,600 9,500
_85,200 206,400 64,000 _ _
_ _
_ 100,000
(2) (6) _
142,400 75,200 90,000 60,000 207,200 340,000 60,000 832,400
142,400 110,700 171,000 98,000
448,500 100,000 15,000 943,200 152,000 51,800 484,400
93,000
112,600 142,400 943,200
53
3)
During year 1 Company P sold plant and equipment with a book value of $30,000 to Company S for $34,500; the plant and equipment has an estimated useful life of 3 years Company P's Books: Investment in Company S 7,000 (80% x (15,000 - 25,000 / 10) (34,500 - 30,000) + 4,500 / 3) Subsidiary Income 7,000 Cash (80% x 6,000) Investment in Company S Eliminations: Gain on Sale of Fixed Assets Depreciation Expense Plant and Equipment (4,500 - 1,500) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest 4,800 4,800 4,500 1,500 3,000 7,000 4,800 2,200 80,000 28,000 52,000 20,000 12,000 192,000 20,000 7,000 13,000 5,000 3,000 48,000
54
Expense Plant and Equipment Minority Interest in Net Income (20% x 12,500) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Gain Adjustment Depreciation Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Gain Adjustment Depreciation Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 12,500) Controlling Interest in Net Income Minority Interest in Net Income (20% x 12,500) Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Asset Adjustment: Plant and Equipment (25,000 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 246,500) Minority Interest (20% x 246,500)
2,500 2,500 2,500 1,200 1,300 64,500 15,000 ( 4,500) 1,500 ( 2,500) 74,000 Company P 64,500 ( 4,500) 1,500 61,500 10,000 71,500 2,500 Company S 15,000 ( 2,500) 12,500
Company S 100,000 35,000 74,000 209,000 22,500 15,000 197,200 37,500 246,500 49,300
55
First Subsequent Period Downstream Sales of Fixed Assets Company P 450,000 270,000 180,000 120,000 60,000 4,500 7,000 _ _ 71,500 Company S 100,000 _60,000 40,000 _25,000 15,000 _ _ _15,000 _ Eliminations _ _ _Debit __ Credit _ Consolidated 550,000 330,000 220,000 146,000 74,000 _ 2,500 _71,500
Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Consolidated Net Income Gain on Sale of Fixed Assets Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill
(5) (1) (2) (6) _
2,500 2,500 4,500 7,000 2,500 16,500
(1)
1,500 1,500 _ 1,500
_ _
95,000 _71,500 166,500 45,000 _ _
65,000 _15,000 80,000 6,000 _ _ _74,000 30,000 80,000 35,000 85,000 40,000 270,000 61,000
(3) (4) _
52,000 13,000 16,500 81,500
95,000 _ 1,500 1,500 4,800 1,200 7,500 _71,500 166,500 45,000 _ _
_ _
_ 81,500
(2) (6) _
121,500 82,300 87,000 55,000 194,200 330,000 60,000 808,500
121,500 112,300 167,000 90,000
(3) (4) (3) (4)
20,000 5,000 12,000 3,000 40,000
(2) 2,200 (3) 192,000 (1) 3,000 (5) 2,500 _ 199,700 (4) (6) 48,000 1,300
434,500 100,000 15,000 918,800 151,000 49,300 484,400
90,000
484,400 100,000 112,600 35,000 121,500 808,500 _74,000 270,000 (3) (4) 28,000 7,000 81,500 256,500 7,500 256,500 (3) (4) 80,000 20,000
112,600 121,500 918,800
56
4)
During year 2 no other intercompany sales of fixed assets took place Company P's Books: Investment in Company S 15,500 (80% x (20,000 - 25,000 / 10) + 4,500 / 3) Subsidiary Income 15,500 Cash (80% x 8,000) Investment in Company S Eliminations: Investment in Company S (4,500 - 1,500) Depreciation Expense Plant and Equipment (4,500 - 2 x 1,500) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 74,000) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 74,000) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest 6,400 6,400 3,000 1,500 1,500 15,500 6,400 9,100 80,000 28,000 59,200 18,000 12,000 197,200 20,000 7,000 14,800 4,500 3,000 49,300
57
Expense Plant and Equipment Minority Interest in Net Income (20% x 17,500) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Depreciation Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Depreciation Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 17,500) Controlling Interest in Net Income Minority Interest in Net Income (20% x 17,500) Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Asset Adjustment: Plant and Equipment (22,500 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 256,000) Minority Interest (20% x 256,000)
2,500 2,500 3,500 1,600 1,900 70,000 20,000 1,500 ( 2,500) 89,000 Company P 70,000 1,500 71,500 14,000 85,500 3,500 Company S 20,000 ( 2,500) 17,500
Company S 100,000 35,000 86,000 221,000 20,000 15,000 204,800 35,000 256,000 51,200
58
Second Subsequent Period Downstream Sales of Fixed Assets Company P 500,000 275,000 225,000 155,000 70,000 15,500 _ _ _85,500 Company S 140,000 _77,000 63,000 _43,000 20,000 _ _ _20,000 _ Eliminations _ _ _Debit __ Credit _ _ (5) (2) (6) _ _ 2,500 2,500 15,500 3,500 21,500 (1) _ _ 1,500 1,500 _ 1,500 Consolidated 640,000 352,000 288,000 199,000 89,000 _ 3,500 _85,500
121,500 74,000 _85,500 207,000 64,000 _ _ 8,000 _ _ _86,000 31,000 81,000 38,000 90,000 40,000 280,000 59,000 _ _ _ 95,500 (2) (6) _ 6,400 1,600 9,500 _20,000 94,000 (3) (4) _ 59,200 14,800 21,500 95,500 _ 1,500 1,500
121,500 _85,500 207,000 64,000 _ _
143,000 79,700 90,000 60,000 203,300 340,000 60,000 833,000
143,000 110,700 171,000 98,000
(1) (3) (4) (3) (4)
3,000 18,000 4,500 12,000 3,000 40,500
(2) 9,100 (3) 197,200 (1) 1,500 (5) 2,500 _ 210,300 (4) (6) 49,300 1,900
448,500 100,000 15,000 943,200 152,000 51,200 484,400
93,000
484,400
100,000
(3) (4) (3) (4)
80,000 20,000 28,000 7,000 95,500 271,000
112,600 143,000 833,000
35,000 _86,000 280,000
112,600 9,500 271,000 143,000 943,200
59
3.
Intercompany Bondholdings a. Accounting 1) Parent Company--in computing subsidiary income the following adjustments are made a) Upstream Sales--the net income of the subsidiary company is increased/decreased for any gain/loss on the early extinguishment of debt (the difference between the amount the parent company paid to acquire the bonds of the subsidiary company and the carrying value of the bonds of the subsidiary company that were acquired by the parent company) and is decreased/increased for the interest income/interest expense on the intercompany bondholdings until the bonds either mature or are retired b) Downstream Sales--the subsidiary income is increased/decreased for any gain/loss on the early extinguishment of debt (the difference between the amount the subsidiary company paid to acquire the bonds of the parent company and the carrying value of the bonds of the parent company that were acquired by the subsidiary company) and is decreased/increased for the interest income/interest expense on the intercompany bondholdings until the bonds either mature or are retired 2) Worksheet a) Eliminations--in addition to the five basic elimination entries for subsequent periods, the following elimination entries are necessary to adjust for the intercompany bondholdings I) Gain/Loss Adjustment--any gain/loss on the early extinguishment of debt is recognized A) Upstream Sale--for years after the year of early extinguishment of debt the beginning retained earnings of the subsidiary is increased/decreased for the gain/loss less the interest income/interest expense adjustments for the prior years until the bonds either mature or are retired 1) Investment Elimination--the entries to eliminate the investment in common stock at the beginning of the year and to reclassify the minority interest at the beginning of the year use the corrected beginning retained earnings of the subsidiary B) Downstream Sales-- for years after the year of early extinguishment of debt the beginning investment in common stock is increased/decreased for the gain/loss less the interest income/interest expense adjustments for the prior years until the
60
bonds either mature or are retired 1) Investment Elimination--the entry to eliminate the investment in common stock at the beginning of the year uses the corrected beginning investment in common stock II) Interest Adjustment--the intercompany interest income/interest expense are eliminated III) Intercompany Debt Adjustment--the intercompany receivable/payable are eliminated b) Consolidated Net Income--consolidated net income is equal to the net income of the parent company plus the net income of the subsidiary company I) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized II) Bond Adjustment--consolidated net income is increased/decreased for any gain/loss on the early extinguishment of debt during the current year and is decreased/increased for the interest income/interest expense on the intercompany bondholdings until the bonds either mature or are retired c) Income Allocation--when the parent company owns less than 100% of the subsidiary company, the consolidated net income must be allocated to the two stockholder groups I) Controlling Interest in Net Income--the controlling interest in net income is equal to the net income of the parent company plus the percentage of the net income of the subsidiary company that is owned by the parent company A) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of any net asset adjustment at the date of acquisition that has not previously been amortized B) Bond Adjustment--the net income of the issuing company is increased/decreased for any gain/loss on the early extinguishment of debt during the current year and is decreased/increased for the interest income/interest expense on the intercompany bondholdings until the bonds either mature or are retired II) Minority Interest in Net Income--the minority interest in net income is equal to the percentage of the net income of the subsidiary company that is not owned by the parent company A) Net Asset Adjustment--the net income of the subsidiary company is adjusted for amortization of
61
b.
any net asset adjustment at the date of acquisition that has not previously been amortized B) Bond Adjustment--the net income of the issuing company is increased/decreased for any gain/loss on the early extinguishment of debt during the current year and is decreased/increased for the interest income/interest expense on the intercompany bondholdings until the bonds either mature or are retired d) Reconciliation--the ending balances of the investment in common stock account and the minority interest can be reconciled with the ending owners equity of the subsidiary company I) Investment in Common Stock--the investment in common stock account is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is owned by the parent company A) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized B) Bond Adjustment--the owners equity of the subsidiary company is increased/decreased for any gain/loss on the early extinguishment of debt on intercompany bondholdings on which the subsidiary was the issuing company less the interest income/interest expense adjustments that have been recognized by the end of this year II) Minority Interest--the minority interest is equal to the owners equity of the subsidiary company multiplied by the percentage of the subsidiary company that is not owned by the parent company A) Net Asset Adjustment--the owners equity of the subsidiary company is adjusted for any net asset adjustment at the date of acquisition that has not been previously amortized B) Bond Adjustment--the owners equity of the subsidiary company is increased/decreased for any gain/loss on the early extinguishment of debt on intercompany bondholdings on which the subsidiary was the issuing company less the interest income/interest expense adjustments that have been recognized by the end of this year Illustrations--all of the illustrations will use illustration i. at the acquisition date as a common starting point 1) On January 1 of year 1 Company P purchased 40% of the 8% bonds of Company S for $20,400 when the bonds of Company S had a par
62
value of $50,000 and a carrying value of $52,000; the bonds mature on December 31 of year 4 Company P's Books: Investment in Company S 7,440 (80% x (11,500 - 25,000 / 10 + 400 - 1,500 + 1,400)) Subsidiary Income 7,440 Cash (80% x 6,000) Investment in Company S 4,800 4,800
Eliminations: Bonds Payable 20,000 (40% x 50,000) Premium on Bonds Payable 600 (40% x (2,000 - 2,000 / 4)) Interest Income 1,500 (8% x 20,000 - (20,400 - 20,000) / 4) Investment in Bonds (20,400 - 100) Interest Expense (40% x (8% x 50,000 - 500)) Gain on Retirement (20,400 - 40% x (50,000 + 2,000)) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S 7,440
20,300 1,400 400
4,800 2,640 80,000 28,000 52,000 20,000 12,000 192,000
63
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment
20,000 7,000 13,000 5,000 3,000 48,000 2,500 2,500
Minority Interest in Net Income 1,860 (20% x (9,000 + 400 - 1,500 + 1,400)) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Gain Adjustment Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Gain Adjustment Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 9,300) Controlling Interest in Net Income Minority Interest in Net Income (20% x 9,300) Company P 61,500
1,200 660 61,500 11,500 ( 400) ( 1,500) 1,400 ( 2,500) 70,800
61,500 7,440 68,940
Company S 11,500 ( 400) ( 1,500) 1,400 ( 2,500) 9,300
1,860
64
Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Gain Adjustment (400 1,500 + 1,400) Net Asset Adjustment: Plant and Equipment (25,000 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 243,300) Minority Interest (20% x 243,300) Company S 100,000 35,000 70,500 205,500 300 22,500 15,000 194,640 37,500 243,300 48,660
65
First Subsequent Period Upstream Bondholdings Company P Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Interest Expense Interest Income Subsidiary Income Gain on Retirement of Debt Consolidated Net Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in Bonds Investment in S Plant and Equipment Land Goodwill 450,000 270,000 180,000 120,000 60,000 _ _ 60,000 1,500 7,440 _ _ 68,940 _ _ _68,940 Company S 100,000 _60,000 40,000 _25,000 15,000 __3,500 11,500 _ _ 11,500 _ _ _11,500 _ Eliminations _ _ _Debit __ Credit _ Consolidated 550,000 330,000 220,000 147,500 72,500 _ 2,100 70,400 _ 400 70,800 _ 1,860 _68,940
(5) _ (1) (2) _ (6) _
2,500 2,500 _ 2,500 1,500 7,440 _ 11,440 1,860 13,300
(1)
1,400 1,400 400 1,800 _ 1,800
(1) _ _
95,000 65,000 _68,940 163,940 45,000 _ _ 118,940 59,000 87,000 55,000 20,300 194,640 330,000 60,000 805,940 6,000 _ _ _70,500 30,000 80,000 35,000 (1) 20,300 (2) 2,640 (3) 192,000 (5) 2,500 _ _ _ 78,300 (2) (6) _ 4,800 1,200 7,800 _11,500 76,500 (3) (4) _ 52,000 13,000 13,300 78,300 _ 1,800 1,800
95,000 _68,940 163,940 45,000 _ _ 118,940 89,000 167,000 90,000
85,000 40,000
(3) (4) (3) (4)
20,000 5,000 12,000 3,000 40,000 20,000 600
437,500 100,000 _ 217,440 15,000 898,500 103,000 30,000 900 (4) (6) 48,000 660 48,660 484,400
270,000 13,000 50,000 1,500 (1) (1)
Accounts Payable Bonds Payable Premium on Bonds Payable Minority Interest Common Stock Company P Company S Paid-in Capital Company P Company S Retained Earnings--Brought Forward
90,000
484,400 100,000 112,600 35,000 118,940 805,940 _70,500 270,000 (3) (4) 28,000 7,000 78,300 273,900 7,800 273,900 (3) (4) 80,000 20,000
112,600 118,940 898,500
66
2)
During year 2 no other purchases of intercompany bonds took place Company P's Books: Investment in Company S 11,120 (80% x (16,500 - 25,000 / 10 1,500 + 1,400)) Subsidiary Income 11,120 Cash (80% x 8,000) Investment in Company S Eliminations: Bonds Payable Premium on Bonds Payable (40% x (1,500 - 500)) Interest Income Investment in Bonds (20,300 - 100) Interest Expense Retained Earnings--S (400 - 1,500 + 1,400) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x (70,500 + 300)) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S 6,400 6,400 20,000 400 1,500 20,200 1,400 300 11,120 6,400 4,720 80,000 28,000 56,640 18,000 12,000 194,640
67
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 70,800) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x (14,000 - 1,500 + 1,400)) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 13,900) Controlling Interest in Net Income Minority Interest in Net Income (20% x 13,900)
20,000 7,000 14,160 4,500 3,000 48,660 2,500 2,500 2,780 1,600 1,180 71,500 16,500 ( 1,500) 1,400 ( 2,500) 85,400 Company P 71,500 Company S 16,500 ( 1,500) 1,400 ( 2,500) 13,900
71,500 11,120 82,620
2,780
68
Reconciliation: Common Stock Paid-in Capital Retained Earnings Owners Equity Net Gain Adjustment (400 2 x 1,500 + 2 x 1,400) Net Asset Adjustment: Plant and Equipment (22,500 2,500) Goodwill Adjusted Owners Equity Investment in S (80% x 249,200) Minority Interest (20% x 249,200) Company S 100,000 35,000 79,000 214,000 200 20,000 15,000 199,360 35,000 249,200 49,840
69
Second Subsequent Period Upstream Bondholdings Company P Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Interest Expense Consolidated Net Income Interest Income Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in Bonds Investment in S Plant and Equipment Land Goodwill 500,000 275,000 225,000 155,000 70,000 _ _ 70,000 1,500 11,120 _ _ _82,620 Company S 140,000 _77,000 63,000 _43,000 20,000 _ 3,500 16,500 _ _ _16,500 _ Eliminations _ _ _Debit __ Credit _ _ (5) _ (1) (2) (6) _ _ 2,500 2,500 _ 2,500 1,500 11,120 2,780 17,900 Consolidated 640,000 352,000 288,000 200,500 87,500 _ 2,100 85,400 _ 2,780 _82,620
(1)
1,400 1,400 _ 1,400
_ _
118,940 70,500 _82,620 201,560 64,000 _ _ 137,560 58,000 90,000 60,000 20,200 199,360 340,000 60,000 827,560 8,000 _ _ _79,000 31,000 81,000 38,000 (1) 20,200 (2) 4,720 (3) 194,640 (5) 2,500 _ _ _ 88,700 (2) (6) _ 6,400 1,600 9,700 _16,500 87,000 (3) (4) _ 56,640 14,160 17,900 88,700 (1) _ 300 1,400 1,700
118,940
_82,620 201,560 64,000 _ _ 137,560 89,000 171,000 98,000
90,000 40,000
(3) (4) (3) (4)
18,000 4,500 12,000 3,000 37,500 20,000 400
450,000 100,000 _ 222,060 15,000 923,000 108,000 30,000 600 (4) (6) 48,660 1,180 49,840 484,400
280,000 15,000 50,000 1,000 (1) (1)
93,000
484,400 100,000 112,600 35,000 137,560 827,560 _79,000 280,000 (3) (4) 28,000 7,000 88,700 281,600 9,700 281,600 (3) (4) 80,000 20,000
112,600 137,560 923,000
70
3)
On January 1 of year 1 Company S purchased 40% of the 8% bonds of Company P for $20,400 when the bonds of Company P had a par value of $50,000 and a carrying value of $52,000; the bonds mature on December 31 of year Company Ps Books: Investment in Company S 11,500 (80% x (16,500 - 25,000 / 10) + 400 - 1,500 + 1,400) Subsidiary Income 11,500 Cash (80% x 6,000) Investment in Company S 4,800 4,800
Eliminations: Bonds Payable 20,000 (40% x 50,000) Premium on Bonds Payable 600 (40% x (2,000 - 2,000 / 4)) Interest Income 1,500 (8% x 20,000 - (20,400 - 20,000) / 4) Investment in Bonds (20,400 - 100) Interest Expense (40% x (8% x 50,000 - 500)) Gain on Retirement (20,400 - 40% x (50,000 + 2,000)) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 65,000) Plant and Equipment (80% x 25,000) Goodwill (80% x 15,000) Investment in Company S 11,500
20,300 1,400 400
4,800 6,700 80,000 28,000 52,000 20,000 12,000 192,000
71
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 65,000) Plant and Equipment (20% x 25,000) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x 14,000) Dividends Declared--S (20% x 6,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Gain Adjustment Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation: Net Income Gain Adjustment Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Adjusted Net Income Subsidiary Income (80% x 14,000) Controlling Interest in Net Income Minority Interest in Net Income (20% x 14,000)
20,000 7,000 13,000 5,000 3,000 48,000 2,500 2,500 2,800 1,200 1,600 56,500 16,500 ( 400) ( 1,500) 1,400 ( 2,500) 70,800 Company P 56,500 ( 400) ( 1,500) 1,400 56,800 11,200 68,000 1,860 Company S 16,500
( 2,500) 14,000
72
73
First Subsequent Period Downstream Bondholdings Company P Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Interest Expense Interest Income Subsidiary Income Gain on Retirement of Debt Consolidated Net Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in Bonds Investment in S Plant and Equipment Land Goodwill 450,000 270,000 180,000 120,000 60,000 _ 3,500 56,500 11,500 _ _ 68,000 _ _ _68,000 Company S 100,000 _60,000 40,000 _25,000 15,000 __ 15,000 1,500 _ _ 16,500 _ _ _16,500 _ Eliminations _ _ _Debit __ Credit _ Consolidated 550,000 330,000 220,000 147,500 72,500 _ 2,100 70,400 _ 400 70,800 _ 2,800 _68,000
(5) _ (1) (2) _ (6) _
2,500 2,500 _ 2,500 1,500 11,500 _ 15,500 2,800 18,300
(1)
1,400 1,400 400 1,800 _ 1,800
(1) _ _
95,000 65,000 _68,000 163,000 45,000 _ _ 118,000 74,300 87,000 55,000 198,700 330,000 60,000 805,000 85,000 40,000 (3) (4) 270,000 59,500 (1) (1) 20,000 600 (4) (6) 484,400 100,000 112,600 35,000 118,000 805,000 _75,500 270,000 (3) (4) 28,000 7,000 83,300 278,900 7,800 278,900 (3) (4) 80,000 20,000 48,000 1,600 38,500 50,000 1,500 12,000 3,000 40,000 _ 221,500 (3) (4) 20,000 5,000 6,000 _ _ _75,500 9,700 80,000 35,000 20,300 _ _ _ 83,300 (2) (6) _ 4,800 1,200 7,800 _16,500 81,500 (3) (4) _ 52,000 13,000 18,300 83,300 _ 1,800 1,800
95,000 _68,000 163,000 45,000 _ _ 118,000 84,000 167,000 90,000 (1) 20,300 (2) 6,700 (3) 192,000 (5) 2,500 437,500 100,000 15,000 893,500 98,000 30,000 900 49,600 484,400
112,600 118,000 893,500
74
4)
During year 2 no other purchases of intercompany bonds took place Company P's Books: Investment in Company S 15,100 (80% x (21,500 - 20,000 / 10) 1,500 + 1,400) Subsidiary Income Cash (80% x 8,000) Investment in Company S Eliminations: Bonds Payable Premium on Bonds Payable (40% x (1,500 - 500)) Interest Income Investment in Bonds (20,300 - 100) Interest Expense Investment in Company S (400 - 1,500 + 1,400) Subsidiary Income Dividends Declared--S Investment in Company S Common Stock--S (80% x 100,000) Paid-in Capital--S (80% x 35,000) Retained Earnings--S (80% x 75,500) Plant and Equipment (80% x (25,000 - 2,500)) Goodwill (80% x 15,000) Investment in Company S 6,400 6,400 20,000 400 1,500 20,200 1,400 300 15,100 6,400 8,700 80,000 28,000 60,400 18,000 12,000 198,400 15,100
75
Common Stock--S (20% x 100,000) Paid-in Capital--S (20% x 35,000) Retained Earnings--S (20% x 75,500) Plant and Equipment (20% x 22,500) Goodwill (20% x 15,000) Minority Interest Expense Plant and Equipment Minority Interest in Net Income (20% x 19,000) Dividends Declared--S (20% x 8,000) Minority Interest Consolidated Net Income: Company P Net Income Company S Net Income Interest Income Adjustment Interest Expense Adjustment Net Asset Adjustment Amortization Consolidated Net Income Income Allocation:
20,000 7,000 15,100 4,500 3,000 49,600 2,500 2,500 3,800 1,600 2,200 66,500 21,500 ( 1,500) 1,400 ( 2,500) 85,400
Company P Company S Net Income 66,500 21,500 Interest Income Adjustment ( 1,500) Interest Expense Adjustment 1,400 Net Asset Adjustment Amortization ( 2,500) Adjusted Net Income 66,400 19,000 Subsidiary Income 15,200 (80% x 19,000) Controlling Interest in Net Income 81,600 Minority Interest in Net Income (20% x 19,000) 3,800
76
77
Second Subsequent Period Downstream Bondholdings Company P Income Statement: Sales Cost of Goods Sold Gross Margin Expenses Interest Expense Consolidated Net Income Interest Income Subsidiary Income Minority Interest in Net Income Net Income--Carried Forward Retained Earnings Statement: Retained Earnings 1/1: Company P Company S Net Income--Brought Forward Dividends Declared: Company P Company S Retained Earnings 12/31--Carried Forward Balance Sheet: Cash Receivables Inventory Investment in Bonds Investment in S Plant and Equipment Land Goodwill 500,000 275,000 225,000 155,000 70,000 _ 3,500 66,500 15,100 _ _ _81,600 Company S 140,000 _77,000 63,000 _43,000 20,000 _ 20,000 1,500 _ _ _21,500 _ Eliminations _ _ _Debit __ Credit _ _ (5) _ (1) (2) (6) _ _ 2,500 2,500 _ 2,500 1,500 15,100 3,800 22,900 Consolidated 640,000 352,000 288,000 200,500 87,500 _ 2,100 85,400 _ 3,800 _81,600
(1)
1,400 1,400 _ 1,400
_ _
118,000 75,500 _81,600 199,600 64,000 _ _ 135,600 72,600 90,000 60,000 207,400 340,000 60,000 830,000 90,000 40,000 (3) (4) 280,000 56,000 (1) (1) 20,000 400 (4) (6) 484,400 100,000 112,600 35,000 135,600 830,000 _89,000 280,000 (3) (4) 28,000 7,000 98,400 291,300 9,400 291,300 (3) (4) 80,000 20,000 49,600 2,200 46,400 50,000 1,000 12,000 3,000 37,500 _ 230,100 (3) (4) 18,000 4,500 8,000 _ _ _89,000 10,800 81,000 38,000 20,200 _ _ _ 98,400 (2) (6) _ 6,400 1,600 9,400 _21,500 97,000 (3) (4) _ 60,400 15,100 22,900 98,400 _ 1,400 1,400
118,000
_81,600 199,600 64,000 _ _ 135,600 83,400 171,000 98,000
(1) 20,200 (1) 300 (2) 8,700 (3) 198,400 (5) 2,500 450,000 100,000 15,000 917,400 102,400 30,000 600 51,800 484,400
112,600 135,600 917,400
78

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Consolidated Financial Statements A.

100,000 35,000 65,000 200,000

(1) 200,000 _ _ 200,000

80,000 28,000 52,000 160,000 20,000 7,000 13,000 40,000

(1) 160,000 _ _ 160,000

100,000 35,000 65,000 40,000 240,000

Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill

100,000 35,000 65,000 25,000 15,000 240,000

Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill

(1) 240,000 (1) 25,000 (1) 15,000_ 40,000 _ 240,000

Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill

Cash Receivables Inventory Investment in S Plant and Equipment Land Goodwill

(1) 192,000 (1) (2) 20,000 5,000

200,000 140,000 60,000 10,000 10,000 3,000 3,000 5,000 5,000

95,000 _70,000 165,000 45,000 _ _

52,000 13,000 15,000 80,000

95,000 _ _ _70,000 165,000 45,000 _ _

4,800 1,200 6,000

120,000 77,800 87,000 55,000 197,200 330,000 60,000 807,000

120,000 107,800 167,000 90,000

(2) (3) (2) (3)

20,000 5,000 12,000 3,000 40,000

(1) 5,200 (2) 192,000 (4) 2,500

437,500 100,000 15,000 917,300 151,000

_ 199,700 (3) (5) 48,000 1,300

112,600 120,000 917,300

120,000 _84,000 204,000 64,000 _ _

59,200 14,800 20,000 94,000

120,000 _ _ _84,000 204,000 64,000 _ _

6,400 1,600 8,000

140,000 75,200 90,000 60,000 204,800 340,000 60,000 830,000

140,000 106,200 171,000 98,000

(2) (3) (2) (3)

18,000 4,500 12,000 3,000 37,500

(1) 7,600 (2) 197,200 (4) 2,500

450,000 100,000 15,000 940,200 152,000

_ 207,300 (3) (5) 49,300 1,900

112,600 140,000 940,200

95,000 _69,360 164,360 45,000 _

119,360 77,800 87,000 55,000 196,560 330,000 60,000

119,360 107,800 167,000 89,200

(2) 800 (3) 4,560 (4) 192,000 (6) 2,500

112,600 119,360 806,360

35,000 _74,000 270,000

112,600 26,000 275,000 119,360 916,500

70,000 13,560 83,560

_83,560 202,920 64,000 _ _

(1) (5) (6) _

800 58,560 14,640 45,800 119,800

25,800 25,800 6,400 1,600 33,800

_83,560 202,920 64,000

138,920 75,200 90,000 60,000 203,720 340,000 60,000 828,920

138,920 106,200 171,000 96,650

(5) (6) (5) (6)

18,000 4,500 12,000 12,000 37,500

(3) 1,350 (4) 7,160 (5) 196,560 (7) 2,500

(5) (6) (5) (6)

80,000 20,000 28,000 7,000 119,800 292,300

112,600 138,920 828,920

35,000 _86,000 280,000

112,600 33,800 292,300 138,920 938,850

95,000 _69,200 164,200 45,000 _

119,200 77,800 87,000 55,000 196,400 330,000 60,000