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Consolidated Financial Statements After Acquisition

Advanced Accounting, Fourth Edition


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Learning Objectives
1. Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors.

2. Prepare journal entries on the parents books to account for an investment using the cost method, the partial equity method, and the complete equity method. 3. Understand the use of the workpaper in preparing consolidated financial statements. 4. Prepare a schedule for the computation and allocation of the difference between implied and book values. 5. Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods. 6. Describe two alternative methods to account for interim acquisitions of subsidiary stock at the end of the first year. 7. Explain how the consolidated statement of cash flows differs from a single firms statement of cash flows.

8. Understand how the reporting of an acquisition on the consolidated statement of cash flows differs when stock is issued rather than cash.
9. Describe some of the differences between U.S. GAAP and IFRS in accounting for equity investments.

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Investments in Stock
Investments in voting stock may be consolidated, or separately reported at cost, fair value, or equity.

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Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods
Ownership Percentages

0 --------------20% ------------ 50% -------------- 100%


No significant influence Investment valued using the cost method but with adjustments to fair value.
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Significant influence (no control) Investment valued using Equity Method

Effective control Investment valued using Cost Method or Equity Method (investment eliminated in Consolidation)

LO 1 Varying levels of ownership are accounted for differently.

Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods
Consolidated financial statements will be identical, regardless of method used. However, if the parent issues parent-only financial statements, the complete equity method should be used for investees over which the parent has either significant influence or effective control.

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LO 1 Varying levels of ownership are accounted for differently.

Accounting for Investments by the Cost Method


E4-1: Percy Company purchased 80% of the outstanding voting shares of Song Company at the beginning of 2009 for $387,000. At the time of purchase, Song Companys total stockholders equity amounted to $475,000. Income and dividend distributions for Song Company from 2009 through 2010 are as follows:
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

Required: Prepare journal entries for Percy Company from the date of purchase through 2011 to account for its investment in Song Company under each of the following assumptions:
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LO 2 Journal entries for Parent using cost method.

Accounting for Investments by the Cost Method


E4-1: A. Percy Company uses the cost method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2009

Investment in Song
Cash Cash

387,000
387,000 20,000 20,000

Dividend income (.8 x $25,000)

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LO 2 Journal entries for Parent using cost method.

Accounting for Investments by the Cost Method


E4-1: A. Percy Company uses the cost method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2010

Cash

40,000
40,000

Dividend income (.8 x $50,000) 2011 Cash


(Liquidating dividend)
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28,000 28,000

Investment in Song (.8 x $35,000)

LO 2 Journal entries for Parent using cost method.

Accounting for Investments by Partial Equity


E4-1: B. Percy Company uses the partial equity method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2009

Investment in Song
Cash Investment in Song Equity income (.8 x $63,500) Cash

387,000
387,000 50,800 50,800 20,000 20,000

Investment in Song (.8 x $25,000)


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LO 2 Journal entries for Parent using partial equity method.

Accounting for Investments by Partial Equity


E4-1: B. Percy Company uses the partial equity method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2010

Investment in Song
Equity income (.8 x $52,500) Cash

42,000
42,000 40,000 40,000

Investment in Song (.8 x $50,000)

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LO 2 Journal entries for Parent using partial equity method.

Accounting for Investments by Partial Equity


E4-1: B. Percy Company uses the partial equity method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2011

Equity loss (.8 x $55,000)


Investment in Song Cash

44,000
44,000 28,000 28,000

Investment in Song (.8 x $35,000)

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LO 2 Journal entries for Parent using partial equity method.

Accounting for Investments by Complete Equity


E4-1: C. Percy Company uses the complete equity method to record its investment. The difference between book value of equity acquired and the value implied by the purchase price was attributed solely to an excess of market over book values of depreciable assets, with a remaining life of 10 years.
2009
Net income (loss) Dividend distribution $ 63,500 25,000 $

2010
52,500 50,000

2011
$ (55,000) 35,000

The complete equity method is usually required to report common stock investments in the 20% to 50% range, assuming the investor has the ability to exercise significant influence and does not have effective control over the investee.
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LO 2 Journal entries for Parent using complete equity method.

Accounting for Investments by Complete Equity


E4-1: C. Percy Company uses the complete equity method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2009

Investment in Song
Cash Investment in Song Equity income (.8 x $63,500) Cash

387,000
387,000 50,800 50,800 20,000 20,000

Investment in Song (.8 x $25,000)


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LO 2 Journal entries for Parent using complete equity method.

Accounting for Investments by Complete Equity


E4-1: C. Percy Company uses the complete equity method to record its investment.

A journal entry is required to adjust for depreciation related to the excess of market over book values of depreciable assets.
Cost of investment Book value acquired ($475,000 x 80%) Difference between Cost and Book value $387,000 380,000 $ 7,000

2009

Equity income ($7,000 / 10 yrs.) Investment in Song

700 700

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LO 2 Journal entries for Parent using complete equity method.

Accounting for Investments by Complete Equity


E4-1: C. Percy Company uses the complete equity method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2010

Investment in Song
Equity income (.8 x $52,500) Cash Equity income ($7,000 / 10 yrs.) Investment in Song

42,000
42,000 40,000 40,000 700 700

Investment in Song (.8 x $50,000)

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LO 2 Journal entries for Parent using complete equity method.

Accounting for Investments by Complete Equity


E4-1: C. Percy Company uses the complete equity method to record its investment.
2009 2010 2011
Net income (loss) Dividend distribution $ 63,500 25,000 $ 52,500 50,000 $ (55,000) 35,000

2011

Equity Loss (.8 x $55,000)


Investment in Song Cash Equity income ($7,000 / 10) Investment in Song

44,000
44,000 28,000 28,000 700 700

Investment in Song (.8 x $35,000)

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LO 2 Journal entries for Parent using complete equity method.

Consolidated Statements After Acquisition


On the date of acquisition, the only relevant financial statement is the consolidated balance sheet.

After acquisition, a complete set of consolidated financial statements must be prepared for the affiliated group:
Income statement,

Retained earnings statement,


Balance sheet, and Statement of cash flows

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LO 3 Use of workpapers.

Consolidated Statements After Acquisition


Year of AcquisitionCost Method
P4-8: On January 1, 2010, Parker Company purchased 95% of the outstanding common stock of Sid Company for $160,000. At that time, Sids stockholders equity consisted of common stock, $120,000; other contributed capital, $10,000; and retained earnings, $23,000.

Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2010. B. Prepare a consolidated statements workpaper on Dec. 31, 2011.

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LO 3 Use of workpapers.

Consolidated Statements After Acquisition


P4-8: Begin the consolidating process by preparing a Computation and Allocation Schedule, as follows:
95% Parent Share $ 160,000 5% NCI Share $ 8,421 100% Total Value $ 168,421

Purchase price and implied value Less: Book value of equity acquired: Common stock Other contributed capital Retained earings Total book value Difference between implied and book value Record new goodwill Balance

114,000 9,500 21,850 145,350 14,650 (14,650) -

6,000 500 1,150 7,650 771 (771) -

120,000 10,000 23,000 153,000 15,421 (15,421) -

Difference between implied and book values is established only at the date of acquisition.
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LO 4 Preparing Computation and Allocation (CAD) Schedule.

Consolidated Statements After Acquisition


P4-8: A. 2010 Year of Acquisition
Cash Accounts receivable Inventory Investment in Sid Plant and equipment Land Dividends declared Cost of goods sold Operating expenses Total debits Accounts payable Other liabilities Common stock Other contributed capital Retained earnings Sales Dividend income Total credits Parker $ 62,000 32,000 30,000 160,000 105,000 29,000 20,000 130,000 20,000 $ 588,000 $ 19,000 10,000 180,000 60,000 40,000 260,000 19,000 $ 588,000 Sid $ 30,000 29,000 16,000 82,000 34,000 20,000 40,000 14,000 $ 265,000 $ 12,000 20,000 120,000 10,000 23,000 80,000 $ 265,000

On December 31, 2010, the two companies trial balances were as follows at right: Required A. Prepare a consolidated statements workpaper on December 31, 2010.

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LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


P4-8: A. 2010
Income Statement Sales Dividend income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Noncontrolling interest Net income

Year of Acquisition
Parker $ 260,000 19,000 279,000 130,000 20,000 150,000 129,000 $ 129,000 Sid $ 80,000 80,000 40,000 14,000 54,000 26,000 $ 26,000 $ 19,000 $ $ 1,300 1,300 Eliminations Debit Credit 19,000 NCI Consolidated Balances $ 340,000 340,000 170,000 34,000 204,000 136,000 (1,300) $ 134,700

Retained Earnings Statement Retained earnings, 1/1/10 40,000 Net income 129,000 Dividends declared (20,000) Retained earnings, 12/31/10 $ 149,000 $

23,000 26,000 (20,000) 29,000 $

23,000 19,000 42,000 19,000 $ 19,000 $

1,300 (1,000) 300 $

40,000 134,700 (20,000) 154,700

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LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


P4-8: A. 2010
Balance Sheet Cash Accounts receivable Inventory Investment in Sid Difference (cost & book) Plant and equipment Land Goodwill Total assets

Year of Acquisition
Parker $ 62,000 32,000 30,000 160,000 105,000 29,000 $ 418,000 19,000 10,000 180,000 60,000 149,000 Sid $ 30,000 29,000 16,000 82,000 34,000 15,421 $ 191,000 $ 12,000 20,000 120,000 10,000 29,000 Eliminations Debit Credit NCI Consolidated Balances $ 92,000 61,000 46,000 187,000 63,000 15,421 $ 464,421 $ 120,000 10,000 42,000 31,000 30,000 180,000 60,000 154,700 8,721 464,421

15,421

160,000 15,421

Accounts payable $ Other liabilities Common stock Other contributed capital Retained earnings Noncontrolling interest 1/1 Noncontrolling interest 12/31 Total liabilities & equity $
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19,000 8,421 $ $ 202,842

300 8,421 8,721 $

418,000

$ 191,000

$ 202,842

LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


Workpaper Observations
1. 2.

Each section of the workpaper represents one of three consolidated financial statements. Elimination of the investment account.
Common stock Other contributed capital Retained earnings, 1/1 Difference between Implied and Book Noncontrolling interest in equity Investment in Sid 120,000 10,000 23,000 15,421 8,421 160,000
LO 5 Workpapers eliminating entries.

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Consolidated Statements After Acquisition


Workpaper Observations
3.

Allocation of the difference between implied and book value:


Goodwill Difference between Implied and Book 15,421 15,421

4.

Elimination of intercompany dividends


Dividend income Dividends declared Sid Company 19,000 19,000

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LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


Workpaper Observations
5.

Noncontrolling interest in consolidated net income:


Internally generated income of Sid Company Noncontrolling percentage owned $26,000 5%

Noncontrolling interest in income

$ 1,300

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LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


Workpaper Observations
6.

Consolidated retained earnings:


Parker Companys retained earnings, 1/1 + Parkers income $ 40,000 129,000

- Dividends from Sid Company


+ Parkers percentage of Sid income (95%) - Parkers dividends declared Parker Companys retained earnings, 12/31

- 19,000
24,700 - 20,000 $154,700

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LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


Workpaper Observations
7. 8.

Total eliminations for all three sections are in balance. To calculate the noncontrolling interest in net assets or equity at year-end, compute the following:
NCI at Acquisition Date + NCI share of Sid income ($26,000 x 5%) - NCI share of Sid dividends ($20,000 x 5%) Noncontrolling Interest in Equity $ 8,421 1,300 -1,000 $ 8,721

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LO 5 Workpapers eliminating entries.

Consolidated Statements After Acquisition


After Year of Acquisition Cost Method
P4-8: B. 2011 On December 31, 2011, the two companies trial balances were as follows at right: Required B. Prepare a consolidated statements workpaper on December 31, 2011.
Cash Accounts receivable Inventory Investment in Sid Plant and equipment Land Dividends declared Cost of goods sold Operating expenses Total debits Accounts payable Other liabilities Common stock Other contributed capital Retained earnings Sales Dividend income Total credits Parker $ 67,000 56,000 38,000 160,000 124,000 29,000 20,000 155,000 30,000 $ 679,000 $ 16,000 15,000 180,000 60,000 149,000 240,000 19,000 $ 679,000 Sid $ 16,000 32,000 48,500 80,000 34,000 20,000 52,000 18,000 $ 300,500 $ 7,000 14,500 120,000 10,000 29,000 120,000 $ 300,500

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LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated Statements After Acquisition


P4-8: B. 2011
Income Statement Sales Dividend income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Noncontrolling interest Net income

After Year of Acquisition


Parker $ 240,000 19,000 259,000 155,000 30,000 185,000 74,000 $ 74,000 Sid $ 120,000 120,000 52,000 18,000 70,000 50,000 $ 50,000 $ 19,000 $ $ 2,500 2,500 Eliminations Debit Credit 19,000 NCI Consolidated Balances $ 360,000 360,000 207,000 48,000 255,000 105,000 (2,500) $ 102,500

Retained Earnings Statement Retained earnings, 1/1/11 149,000 Net income 74,000 Dividends declared (20,000) Retained earnings, 12/31/11 $ 203,000 $

29,000 50,000 (20,000) 59,000 $

29,000 19,000 48,000

5,700 19,000 $ 24,700 2,500 (1,000) 1,500 $

154,700 102,500 (20,000) 237,200

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LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated Statements After Acquisition


P4-8: B. 2011
Balance Sheet Cash Accounts receivable Inventory Investment in Sid Difference (cost & book) Plant and equipment Land Goodwill Total assets

After Year of Acquisition


Parker $ 67,000 56,000 38,000 160,000 124,000 29,000 $ 474,000 16,000 15,000 180,000 60,000 203,000 Sid $ 16,000 32,000 48,500 80,000 34,000 15,421 $ 210,500 $ 7,000 14,500 120,000 10,000 59,000 Eliminations Debit Credit NCI Consolidated Balances $ 83,000 88,000 86,500 204,000 63,000 15,421 $ 539,921 $ 120,000 10,000 48,000 23,000 29,500 180,000 60,000 237,200 10,221 539,921

5,700 15,421

165,700 15,421

Accounts payable $ Other liabilities Common stock Other contributed capital Retained earnings Noncontrolling interest 1/1 Noncontrolling interest 12/31 Total liabilities & equity $
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24,700 8,721 $ 214,542

1,500 8,721 $ 10,221 $

474,000

$ 210,500

$ 214,542

LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated Statements After Acquisition


Workpaper Observations
1. Before elimination of the investment account, a workpaper

entry is made to the investment account and Parker Companys beginning retained earnings to recognize Parkers share of the cumulative undistributed income or loss of Sid Company from the date of acquisition to the beginning of the current year as follows: Investment in Sid Company 5,700

Retained earnings, 1/1


($29,000 $23,000 )
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5,700
Entry to establish Reciprocity

.95 = $5,700

LO 5 Workpapers eliminating entries after acquisition (cost method).

Consolidated Statements After Acquisition


Workpaper Observations
The following workpaper entries are also made: 2. Eliminate investment in Sid Company. 3. Eliminate intercompany dividends. 4. Allocate difference between cost and book value.
5. All (100%) of Sids revenues, expenses, assets, and

liabilities are included in the consolidated totals. The noncontrolling interests share of income and net assets are shown as separate line items.
LO 5 Workpapers eliminating entries after acquisition (cost method).

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Recording Investments Equity Method


Equity Method
Record the investment at cost and subsequently adjust the amount each period for
the investors proportionate share of the

earnings (losses) and

dividends received by the investor.


If investors share of investees losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method.
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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


Example: (Equity Method) On January 1, 2010, Pennington Corporation purchased 30% of the common shares of Edwards Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000. Instructions Prepare the journal entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2010.

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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


Example: Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2010.
Investment in Stock Cash Investment in Stock 24,000 24,000 180,000 180,000

Equity in subsidiary income ($80,000 x 30%)

Cash
Investment in Stock ($20,000 x 30%)
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6,000
6,000

LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


Investment Carried at EquityYear of Acquisition
P4-12: On January 1, 2010, Parker Company purchased 90% of the outstanding common stock of Sid Company for $180,000. At that time, Sids stockholders equity consisted of common stock, $120,000; other contributed capital, $20,000; and retained earnings, $25,000. Assume that any difference between book value of equity and the value implied by the purchase price is attributable to land. Required: A. Prepare a consolidated statements workpaper on Dec. 31, 2010. B. Prepare a consolidated statements workpaper on Dec. 31, 2011.
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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


P4-12: Begin the consolidating process by preparing a Computation and Allocation Schedule, as follows:
90% Parent Share $ 180,000 10% NCI Share $ 20,000 100% Total Value $ 200,000

Purchase price and implied value Less: Book value of equity acquired: Common stock Other contributed capital Retained earings Total book value Difference between implied and book value Allocated to land Balance

108,000 18,000 22,500 148,500 31,500 (31,500) -

12,000 2,000 2,500 16,500 3,500 (3,500) -

120,000 20,000 25,000 165,000 35,000 (35,000) -

Difference between implied and book values is established only at the date of acquisition.
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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


P4-12: A. 2010 Year of Acquisition
Cash Accounts receivable Inventory Investment in Sid Plant and equipment Land Dividends declared Cost of goods sold Operating expenses Total debits Accounts payable Other liabilities Common stock Other contributed capital Retained earnings Sales Equity in subsidiary income Total credits
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On December 31, 2010, the two companies trial balances were as follows: Required A. Prepare a consolidated statements workpaper on December 31, 2010.

Parker $ 65,000 40,000 25,000 184,500 110,000 48,500 20,000 150,000 35,000 $ 678,000 $ 20,000 15,000 200,000 70,000 55,000 300,000 18,000 $ 678,000

Sid $ 35,000 30,000 15,000 85,000 45,000 15,000 60,000 15,000 $ 300,000 $ 15,000 25,000 120,000 20,000 25,000 95,000 $ 300,000

LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


P4-12: A. 2010 Year of Acquisition
Sid $ 95,000 95,000 60,000 15,000 75,000 20,000 $ 20,000 $ 18,000 $ $ 2,000 2,000 Eliminations Debit Credit 18,000 NCI Consolidated Balances $ 395,000 395,000 210,000 50,000 260,000 135,000 (2,000) $ 133,000 Income Statement Parker Sales $ 300,000 Equity in subsidiary income 18,000 Total revenue 318,000 Cost of goods sold 150,000 Other expenses 35,000 Total cost and expense 185,000 Net income 133,000 Noncontrolling interest Net income $ 133,000

Retained Earnings Statement Retained earnings, 1/1/10 55,000 Net income 133,000 Dividends declared (20,000) Retained earnings, 12/31/10 $ 168,000 $

25,000 20,000 (15,000) 30,000 $

25,000 18,000 43,000 13,500 $ 13,500 $

2,000 (1,500) 500 $

55,000 133,000 (20,000) 168,000

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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


P4-12: A. 2010
Balance Sheet Cash Accounts receivable Inventory Investment in Sid Difference (cost & book) Plant and equipment Land Total assets

Year of Acquisition
Parker $ 65,000 40,000 25,000 184,500 $ Sid 35,000 30,000 15,000 Eliminations Debit Credit NCI Consolidated Balances $ 100,000 70,000 40,000 195,000 128,500 533,500 35,000 40,000 200,000 70,000 168,000 20,500 533,500

35,000 110,000 48,500 $ 473,000 85,000 45,000 $ 210,000 $ 15,000 25,000 120,000 20,000 30,000 35,000

4,500 180,000 35,000

$ $ 120,000 20,000 43,000

Accounts payable $ 20,000 Other liabilities 15,000 Common stock 200,000 Other contributed capital 70,000 Retained earnings 168,000 Noncontrolling interest 1/1 Noncontrolling interest 12/31 Total liabilities & equity $ 473,000
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13,500 20,000 $ $ 253,000

500 20,000 20,500 $

$ 210,000

$ 253,000

LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


Workpaper Observations
The following workpaper entries were made: To eliminate the account equity in subsidiary income and intercompany dividends. To eliminate the Investment account against subsidiary equity. To distribute the difference between implied and book value of equity acquired.

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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


Investment Carried at EquityAfter Year of Acquisition
P4-12: B. 2011 On December 31, 2011, the two companies trial balances were as follows at right: Required B. Prepare a consolidated statements workpaper on December 31, 2011.
Cash Accounts receivable Inventory Investment in Sid Plant and equipment Land Dividends declared Cost of goods sold Operating expenses Total debits Accounts payable Other liabilities Common stock Other contributed capital Retained earnings Sales Equity in subsidiary income Total credits Parker $ 70,000 60,000 40,000 193,500 125,000 48,500 20,000 160,000 35,000 $ 752,000 $ 16,500 15,000 200,000 70,000 168,000 260,000 22,500 $ 752,000 Sid $ 20,000 35,000 30,000 90,000 45,000 15,000 65,000 20,000 $ 320,000 $ 16,000 24,000 120,000 20,000 30,000 110,000 $ 320,000

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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


P4-12: B. 2011 After Year of Acquisition
Sid $ 110,000 110,000 65,000 20,000 85,000 25,000 $ 25,000 $ 22,500 $ $ 2,500 2,500 Eliminations Debit Credit 22,500 NCI Consolidated Balances $ 370,000 370,000 225,000 55,000 280,000 90,000 (2,500) $ 87,500 Income Statement Parker Sales $ 260,000 Equity in subsidiary income 22,500 Total revenue 282,500 Cost of goods sold 160,000 Other expenses 35,000 Total cost and expense 195,000 Net income 87,500 Noncontrolling interest Net income $ 87,500

Retained Earnings Statement Retained earnings, 1/1/11 168,000 Net income 87,500 Dividends declared (20,000) Retained earnings, 12/31/11 $ 235,500 $

30,000 25,000 (15,000) 40,000 $

30,000 22,500 52,500 13,500 $ 13,500 $

2,500 (1,500) 1,000 $

168,000 87,500 (20,000) 235,500

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LO 5 Workpaper eliminating entries (equity method).

Recording Investments Equity Method


P4-12: B. 2011
Balance Sheet Cash Accounts receivable Inventory Investment in Sid Difference (cost & book) Plant and equipment Land Total assets

After Year of Acquisition


Parker $ 70,000 60,000 40,000 193,500 Sid $ 20,000 35,000 30,000 Eliminations Debit Credit NCI Consolidated Balances $ 90,000 95,000 70,000 215,000 128,500 598,500 32,500 39,000 200,000 70,000 235,500 21,500 598,500

35,000 125,000 48,500 $ 537,000 16,500 15,000 200,000 70,000 235,500 90,000 45,000 $ 220,000 $ 16,000 24,000 120,000 20,000 40,000 35,000

9,000 184,500 35,000

$ $ 120,000 20,000 52,500

Accounts payable $ Other liabilities Common stock Other contributed capital Retained earnings Noncontrolling interest 1/1 Noncontrolling interest 12/31 Total liabilities & equity $
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13,500 20,500 $ 262,500

1,000 20,500 $ 21,500 $

537,000

$ 220,000

$ 262,500

LO 5 Workpaper eliminating entries (equity method).

Interim Acquisitions of Subsidiary Stock


Revenues and expenses of the acquired company are included with those of the acquiring company only from the date of acquisition forward. Two acceptable alternatives for presenting the subsidiarys revenue and expense items in the consolidated income statement in the year of acquisition: Full-year reporting alternative. Partial-year reporting alternative.

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LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


Equity MethodFull-Year Reporting Alternative
P4-16:
Pillow $ 390,600 510,000 1,334,000 1,261,000 484,000 $ 3,979,600 $ 270,240 1,000,000 364,000 315,360 1,940,000 90,000 $ 3,979,600 Satin $ 179,200 32,000 562,000 584,000 242,000 60,000 $ 1,659,200 $ 124,000 60,000 200,000 90,000 209,200 976,000 $ 1,659,200

Pillow Company purchased 90% of the common stock of Satin Company on May 1, 2009, for a cash payment of $474,000. December 31, 2009, trial balances for Pillow and Satin were:

Cash Treasury stock at cost Investment in Satin Plant and equipment Cost of goods sold Operating expenses Dividends declares Total debits Accounts and notes payable Dividends payable Common stock Other contributed capital Retained earnings Sales Equity in subsidiary income Total credits

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LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


P4-16:
Satin Company declared a $60,000 cash dividend on December 20, 2009, payable on January 10, 2010, to stockholders of record on December 31, 2009. Pillow Company recognized the dividend on its declaration date. Any difference between book value and the value implied by the purchase price relates to subsidiary land, included in property and equipment. Required: Prepare a consolidated statements workpaper at December 31, 2009, assuming that Satin Company uses the fullyear reporting alternative.

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LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


P4-16: Computation and Allocation of Difference between Cost and Book Value Acquired: 90% 10% 100%
Purchase price and implied value Less: Book value of equity acquired: Common stock Other contributed capital Retained earings Treasury stock Subsidiary income 1/1 to 5/1 Total book value Difference between implied and book value Allocated to land Balance Parent Share $ 474,000 NCI Share $ 52,667 Total Value $ 526,667

180,000 81,000 188,280 (28,800) 45,000 465,480 8,520 (8,520) -

20,000 9,000 20,920 (3,200) 5,000 51,720 947 (947) -

200,000 90,000 209,200 (32,000) 50,000 517,200 9,467 (9,467) -

Slide 4-49

LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


P4-16: Full-Year Reporting Alternative
Income Statement Sales Equity in subsidiary income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Net income purchased Noncontrolling interest Net income Pillow $ 1,940,000 90,000 2,030,000 1,261,000 484,000 1,745,000 285,000 Satin $ 976,000 976,000 584,000 242,000 826,000 150,000 45,000 $ 285,000 $ 150,000 $ 135,000 $ 15,000 $ 15,000 Eliminations Debit Credit 90,000 NCI Consolidated Balances $ 2,916,000 2,916,000 1,845,000 726,000 2,571,000 345,000 (45,000) (15,000) $ 285,000

Retained Earnings Statement Retained earnings, 1/1 Net income Dividends declared Retained earnings, 12/31 $

315,360 285,000 600,360

209,200 209,200 150,000 135,000 (60,000) $ 299,200 $ 344,200

54,000 $ 54,000

15,000 (6,000) $ 9,000 $

315,360 285,000 600,360

Slide 4-50

LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


P4-16: Full-Year Reporting Alternative
Balance Sheet Current assets Investment in Satin Difference (cost & book) Plant and equipment Total assets Pillow Satin $ 390,600 $ 179,200 510,000 Eliminations Debit Credit 54,000 474,000 36,000 9,467 9,467 9,467 NCI Consolidated Balances $ 515,800 1,905,467 $ 2,421,267

1,334,000 562,000 $ 2,234,600 $ 741,200

Accounts and notes payable $ 270,240 $ 124,000 $ 394,240 Dividends payable 60,000 54,000 6,000 Common stock 1,000,000 200,000 200,000 1,000,000 Other contributed capital 364,000 90,000 90,000 364,000 Treasury stock (32,000) 32,000 Retained earnings 600,360 299,200 344,200 54,000 9,000 600,360 Noncontrolling interest 1/1 47,667 47,667 Noncontrolling interest 12/31 $ 56,667 56,667 Total liabilities & equity $ 2,234,600 $ 741,200 $ 707,134 $ 707,134 $ 2,421,267
Slide 4-51

LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


P4-17: (Data from P4-16) Partial-Year Reporting Alternative
Income Statement Sales Equity in subsidiary income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Noncontrolling interest Net income Pillow $ 1,940,000 90,000 2,030,000 1,261,000 484,000 1,745,000 285,000 $ 285,000 Satin $ 650,666 650,666 389,333 161,333 550,666 100,000 $ 100,000 $ 90,000 $ 10,000 $ 10,000 Eliminations Debit Credit 90,000 NCI Consolidated Balances $ 2,590,666 2,590,666 1,650,333 645,333 2,295,666 295,000 (10,000) $ 285,000

Retained Earnings Statement Retained earnings, 1/1 Net income Dividends declared Retained earnings, 12/31 $

315,360 285,000 600,360

259,200 259,200 100,000 90,000 (60,000) $ 299,200 $ 349,200

54,000 $ 54,000

10,000 (6,000) $ 4,000 $

315,360 285,000 600,360

Slide 4-52

LO 6 Two approaches for interim acquisitions.

Interim Acquisitions of Subsidiary Stock


P4-17: (Data from P4-16) Partial-Year Reporting Alternative
Balance Sheet Current assets Investment in Satin Difference (cost & book) Plant and equipment Total assets Pillow $ 390,600 510,000 Satin $ 179,200 Eliminations Debit Credit 54,000 474,000 36,000 9,467 9,467 9,467 NCI Consolidated Balances $ 515,800 1,905,467 2,421,267 394,240 6,000 1,000,000 364,000 600,360 56,667 2,421,267

1,334,000 $ 2,234,600

562,000 $ 741,200 $ 124,000 60,000 200,000 90,000 (32,000) 299,200

$ $ 54,000 200,000 90,000 349,200 32,000 54,000 52,667 $ 712,134 4,000 52,667 $ 56,667 $

Accounts and notes payable $ 270,240 Dividends payable Common stock 1,000,000 Other contributed capital 364,000 Treasury stock Retained earnings 600,360 Noncontrolling interest 1/1 Noncontrolling interest 12/31 Total liabilities & equity $ 2,234,600

$ 741,200

$ 712,134

Slide 4-53

LO 6 Two approaches for interim acquisitions.

Consolidated Statement of Cash Flows


Peculiarities:
1. If the statement of cash flows starts with consolidated net income, then the noncontrolling interest is already included and need not be added back.

2. Subsidiary dividends paid to the noncontrolling stockholders must be included with dividends paid by the parent company when calculating cash outflow from financing activities. 3. Subsidiary stock acquired directly from the subsidiary represents an intercompany cash transfer that does not affect the total cash balance of the consolidated group.
Slide 4-54

LO 7 Peculiarities of Consolidated Statement of Cash Flows.

Consolidated Statement of Cash Flows


The preparation of the consolidated statement of cash flows in the year of acquisition is complicated slightly because the comparative balance sheets at the beginning and end of the current year are dissimilar. 1. Any cash spent or received in the acquisition itself should be reflected in the Investing activities section. 2. Assets and liabilities of the subsidiary at the date of acquisition must be added to those of the parent at the beginning of the current year.
Slide 4-55

LO 8 Stock issued as Consideration in Statement of Cash Flows.

Compare U.S. GAAP and IFRS


Application of the Equity Method
Issue U.S. GAAP IFRS

Slide 4-56

LO 9 Differences between U.S. GAAP and IFRS.

Compare U.S. GAAP and IFRS


Application of the Equity Method
Issue U.S. GAAP IFRS

Slide 4-57

LO 9 Differences between U.S. GAAP and IFRS.

Compare U.S. GAAP and IFRS


Application of the Equity Method
Issue U.S. GAAP IFRS

Slide 4-58

LO 9 Differences between U.S. GAAP and IFRS.

Two categories:
Three-division workpaper format used in this text.

Trial balance format.


Columns are provided for the trial balances, the elimination entries, and normally, each financial statement to be prepared, except for the statement of cash flows.

Slide 4-59

Two major topics require attention in addressing the treatment of deferred income tax consequences when

the affiliates each file separate income tax returns:


1. Undistributed subsidiary income (Appendix B of Chapter 4).

2. Elimination of unrealized intercompany profit


(discussed in the appendices to Chapters 6 and 7).

Slide 4-60

When affiliated companies elect to file one consolidated return, the tax expense amount is computed on the consolidated workpapers rather than on the individual books of the parent and subsidiary. The amount of tax expense attributed to each company is computed from combined income and allocated back to each companys books.

Slide 4-61

When separate tax returns are filed, the parent company will include dividends received from the subsidiary in its

taxable income, while the subsidiarys reported income is


included in consolidated net income. Thus the difference between the subsidiarys income and

dividends paid represents a temporary difference because


eventually this undistributed amount will be realized through future dividends or upon sale of the subsidiary.

Slide 4-62

Assume that the parent uses the cost method to account for the investment and that both the parent and the

subsidiary file separate tax returns. This means each


company records a tax provision based on the items reported on its individual books.

Tax consequences relating to undistributed income are not


recorded on the books of the parent company when the investment in the subsidiary is recorded using the cost

method.

Slide 4-63

If the undistributed income is not expected to be received as a future dividend but is expected to be realized when

the investment is sold, the undistributed income is taxed at


the capital gains rate

Slide 4-64

If the equity method is used to account for the investment, there is a timing difference between books and tax on the books of the parent. Equity income is reported on the parents income statement while dividends are included on the tax return. Therefore, deferred taxes on the parents books must reflect the amount of undistributed income in the subsidiary.

Slide 4-65

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Slide 4-66