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Chapter 4: Consolidation

Techniques and Procedures


by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

Pearson Education, Inc. publishing as Prentice Hal

4-1

Consolidation Techniques: Objectives


1. Prepare consolidation working papers for the
year of acquisition when the parent company
uses the full equity method to account for its
invesment in a subsidiary.
2. Prepare consolidation working papers for the
year subsequent to acquisition.
3. Locate errors in preparing consolidation working
papers.
4. Allocate excess fair value over book value to
include identifiable net assets.
Pearson Education, Inc. publishing as Prentice Hal

4-2

Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
6. Appendix: Understand the alternative trial
balance consolidation working paper format.

Pearson Education, Inc. publishing as Prentice Hal

4-3

Consolidation Techniques and Procedures

1: Acquisition-Year Working Papers

Pearson Education, Inc. publishing as Prentice Hal

4-4

Preparing the Worksheet


Statements are entered onto the worksheet:
Income statement
Statement of retained earnings
Balance sheet
Columns needed:
Parent
Subsidiary
DR and CR columns for elimination entries
Consolidated
Pearson Education, Inc. publishing as Prentice Hal

4-5

Completing the Worksheet


Enter Parent and Sub. amounts at 100% of book value.
(Even if parent owns less)
Enter elimination entries into the DR and CR columns.
(Check totals)
Consolidated expenses, dividends and assets:
Add parent, subsidiary, plus DR, less CR
Consolidated revenues, liabilities and equity (other than
ending retained earnings):
Add parent, subsidiary, less DR, plus CR
Income, ending retained earnings and all subtotals and
totals:
Compute directly in consolidated column.

Pearson Education, Inc. publishing as Prentice Hal

4-6

Working Paper Entries


1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
4. Record noncontrolling interest in sub's
earnings & dividends
5. Eliminate reciprocal Investment & sub's equity
balances
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances
Pearson Education, Inc. publishing as Prentice Hal

4-7

Example: Prep & Snap Data


Prep pays $88 for 80% of Snap on 1/1/2009 when
Snap's equity consisted of $60 capital stock and
$30 retained earnings. All excess was due to
unrecorded patents with a 10-year life.
Snap's income and dividends follow:
2009

2010

Net income

$25

$30

Dividends

$15

$15

Pearson Education, Inc. publishing as Prentice Hal

4-8

Analysis
Cost of 80% of Snap

$88

Implied value of Snap ($88/.80)


Book value (60+30)
Excess

Patents

$110
90

Allocated to:

Amt Amort.

Patents

$20 10 yrs

$20

Unamort.
Bal.

Amortization

Unamort. Bal.

Amortization

Unamort. Bal.

on 1/1/2009

in 2009

on 12/31/2009

in 2010

on 12/31/2010

$20

$2

$18

$2

$16

Use these amounts in


2009 worksheet for
amortization expense
and patents.

Use these amounts in


2010 worksheet for
amortization expense
and patents.

Pearson Education, Inc. publishing as Prentice Hal

4-9

Income & Dividend Calculations


2009:
Snap's net income
Amortization
Adjusted income
Dividends
2010:
Snap's net income
Amortization
Adjusted income
Dividends

$25 Prep's 80% share


$18.4
(2)
$12.0
$23
NCI 20% share
$4.6
$15
$3.0
80% share
$30 Prep's$22.4
(2)
$12.0
$28
NCI 20% share
$5.6
$15
$3.0

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4-10

Prep's 2009 Worksheet Entries


1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance

Income from Snap (I.S.)


Dividends (St. RE)
Investment in Snap (B.S.)
Pearson Education, Inc. publishing as Prentice Hal

18.4
12.0
6.4
4-11

Prep 2009: Entries (2 of 3)


4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.)
4.6

Dividends (St. RE)

3.0

Noncontrolling interest (B.S.)


5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.)
60
Retained earnings (St. RE, beg.)

30

Patents (B.S.)

20

1.6

Investment in Snap (B.S.)

88

Noncontrolling interest (B.S.)

22

Pearson Education, Inc. publishing as Prentice Hal

4-12

Prep 2009: Entries (3 of 3)


6. Amortize fair value/book value differentials
Amortization Expense (I.S.)
2
Patents (B.S.)
2
7. Eliminate other reciprocal balances
none
Note that in last chapter, all worksheet entries were prepared
for the balance sheet. Here worksheet entries are
prepared for the income statement, statement of retained
earnings and balance sheet.
Pearson Education, Inc. publishing as Prentice Hal

4-13

Prep's 2009 Worksheet


Year ended 12/31/2009

Prep Snap

DR

CR Consol

Income statement:
Revenues
Income from Snap
Expenses

250.0

65.0

18.4
(200.0) (40.0)

Noncontrolling interest share


Net income/ Controlling share

68.4

315.0
18.4

0.0

2.0

(242.0)

4.6

(4.6)

25.0

68.4

Statement of retained earnings:


Beginning retained earnings
Add net income

5.0
68.4

30.0 30.0

5.0

25.0

Pearson
Education, Inc. publishing as
Prentice
Hal
Deduct
dividends
(30.0)
(15.0)

68.4
12.0

4-14
(30.0)

Balance sheet, 12/31/2009:

Prep Snap

DR

CR Consol

Cash

39.0

10.0

49.0

Other current assets

90.0

50.0

140.0

Investment in Snap

94.4

6.4

0.0

88.0
Plant & equipment, net

250.0

70.0

Patents
Total
Liabilities
Capital stock
Retained earnings

320.0
20.0

2.0

473.4 130.0
80.0
350.0
43.4

18.0
527.0

30.0

110.0

60.0 60.0

350.0

40.0

Noncontrolling interest, Jan.1


Noncontrolling
interest, Dec. 31
Pearson Education, Inc. publishing as Prentice Hal

43.4
22.0
1.6

23.6
4-15

A Look at the Income Statement


Year ended 12/31/2009

Prep Snap

DR

CR Consol

Income statement:
Revenues
Income from Snap
Expenses

250.0

65.0

18.4
(200.0) (40.0)

Noncontrolling interest share

315.0
18.4

0.0

2.0

(242.0)

4.6

(4.6)

Income from Snap is eliminated.


Net income/ Controlling share
68.4 25.0
68.4
Expenses are adjusted for 2009 amortization - $2 on patents
Noncontrolling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6
Pearson Education, Inc. publishing as Prentice Hal

4-16

A Look at Retained Earnings


Year ended 12/31/2009

Prep Snap

DR

CR Consol

30.0 30.0

5.0

Statement of retained earnings:


Beginning retained earnings
Add net income
Deduct dividends

5.0
68.4

25.0

(30.0) (15.0)

68.4
12.0

(30.0)

Beginning retained earnings of Snap is eliminated. 3.0


Ending
earnings are eliminated.
43.4 40.0
43.4
All of retained
Snap's dividends
Net income is not calculated across the line, but taken from the
consolidated income statement.
Ending retained earnings is calculated in the consolidated
column.
Pearson Education, Inc. publishing as Prentice Hal

4-17

A Look at Assets
Balance sheet:

Prep

Snap

DR

CR

Cash

39.0

10.0

49.0

Other current assets

90.0

50.0

140.0

Investment in Snap

94.4

6.4

Consol

0.0

88.0
Plant & equipment, net
Patents

250.0

70.0

320.0
20.0

2.0

Total
Investment in Snap is eliminated.
473.4 130.0
Patents at the start of 2009 were $20, and current
amortization is $2; they are $18 at the end of 2009.
The total is calculated in the consolidated column.
Pearson Education, Inc. publishing as Prentice Hal

18.0
527.0

4-18

A Look at Liabilities & Equity


Balance sheet:

Prep Snap

Liabilities

80.0

Capital stock
Retained earnings

350.0
43.4

DR

CR Consol

30.0

110.0

60.0 60.0

350.0

40.0

Noncontrolling interest, Jan.1


Noncontrolling interest, Dec. 31

43.4
22.0
1.6

23.6

Snap's capital stock is eliminated.


527.0
Total
Retained earnings are not calculated across473.4
the row; 130.0
they are taken from the statement
of retained earnings.
Noncontrolling interest at year-end is proportional to Prep's Investment in Snap
account.
$94.4 x .20/.80 = $23.6

Pearson Education, Inc. publishing as Prentice Hal

4-19

Consolidation Techniques and Procedures

2: Working Papers in Subsequent


Years
Pearson Education, Inc. publishing as Prentice Hal

4-20

Analysis, for 2010


Cost of 80% of Snap

$88

Implied value of Snap ($88/.80)


Book value (60+30)

90

Excess
Unamort. Bal. Amortization
Patents

$110

Allocated to:

Amt

Amort.

Patents

$20 10 yrs

$20
Unamort. Bal.

Amortization

Unamort. Bal.

on 1/1/2009

in 2009

on 12/31/2009

in 2010

on 12/31/2010

$20

$2

$18

$2

$16

Use these amounts in


2009 worksheet for
amortization expense
and patents.

Use these amounts in


2010 worksheet for
amortization expense
and patents.

Pearson Education, Inc. publishing as Prentice Hal

4-21

Income & Dividend Calculations


2009:
Snap's net income
Amortization
Adjusted income
Dividends
2010:
Snap's net income
Amortization
Adjusted income
Dividends

$25 Prep's 80% share


$18.4
(2)
$12.0
$23
NCI 20% share
$4.6
$15
$3.0
80% share
$30 Prep's$22.4
(2)
$12.0
$28
NCI 20% share
$5.6
$15
$3.0

Pearson Education, Inc. publishing as Prentice Hal

4-22

Prep's Worksheet Entries for 2010


1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance

Income from Snap (I.S.)


Dividends (St. RE)
Investment in Snap (B.S.)
Pearson Education, Inc. publishing as Prentice Hal

22.4
12.0
10.4
4-23

Prep 2010: Entries (2 of 3)


4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.)
5.6

Dividends (St. RE)

3.0

Noncontrolling interest (B.S.)


5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.)
60
Retained earnings (St. RE, beg.)

40

Patents (B.S.)

18

2.6

Investment in Snap (B.S.)

94.4

Noncontrolling interest (B.S.)

23.6

Pearson Education, Inc. publishing as Prentice Hal

4-24

Eliminating Investment in Snap


Entry 5 eliminates the Investment in Snap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
Implied value of Snap at acquisition $88/.80

$110

Add the increase in retained earnings from


acquisition to the beginning of the current year
$40 at 1/1/2010 minus $30 at 1/1/2009

10

Less amortization for all prior periods


$2 patent amortization for 2009

(2)

Adjusted value of Snap at 1/1/2010

Investment in Snap (80% x $118) = $94.4


Noncontrolling interest (20% x $118) = $23.6

$118

Verify the $118 from the entry (60 + 40 + 18).


Pearson Education, Inc. publishing as Prentice Hal

4-25

Prep 2010: Entries (3 of 3)


6. Amortize fair value/book value differentials

Amortization Expense (I.S.)


Patents (B.S.)

2
2

7. Eliminate other reciprocal balances

Note payable Prep (B.S.)


Note receivable Snap (B.S.)

Pearson Education, Inc. publishing as Prentice Hal

10
10

4-26

Prep's 2010 Worksheet


Year ended 12/31/2010

Prep Snap

DR

CR Consol

Income statement:
Revenues
Income from Snap
Expenses

300.0

75.0

22.4
(244.0) (45.0)

Noncontrolling interest share


Net income/ Controlling share

375.0
22.4

0.0

2.0

(291.0)

5.6

(5.6)

78.4

30.0

78.4

Beginning retained earnings

43.4

40.0 40.0

43.4

Add net income

78.4

30.0

78.4

Statement of retained earnings:

Pearson
Education, Inc. publishing as
Prentice
Hal
Deduct
dividends
(45.0)
(15.0)

12.0

4-27
(45.0)

Balance sheet, 12/31/2010:

Prep Snap

Cash

45.0

Note receivable Snap

10.0

Other current assets

97.0

Investment in Snap

104.8

DR

CR Consol

20.0

65.0
10.0

70.0

0.0
167.0

10.4

0.0

94.4
Plant & equipment, net

240.0

60.0

Patents
Total

18.0

Capital stock
Retained earnings

2.0

496.8 150.0

Note payable Prep


Liabilities

300.0
16.0
548.0

10.0 10.0
70.0
350.0
76.8

25.0

95.0

60.0 60.0

350.0

55.0

Noncontrolling
interest, Jan.1
Pearson Education, Inc. publishing as Prentice Hal

76.8
23.6

4-28

Consolidation Techniques and Procedures

3: Locating Errors in Working


Papers
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4-29

Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
Noncontrolling interest share (income)
Goodwill
Noncontrolling interest (equity)
Check equality of DR and CR adjustments.
Verify totals for parent and subsidiary statements.
Re-calculate the consolidated amounts.
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4-30

Consolidation Techniques and Procedures

4: Allocating Excess of Fair Value


over Book Value
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4-31

Example with Excess Allocated


Pate pays $360 for 90% of Solo on 12/31/2009
when Solo's equity consisted of $200 capital
stock and $50 retained earnings. Inventory (sold
in 2010), land and buildings (20 years) were
undervalued by $10, $30, and $80, respectively.
Equipment (10 years) was overvalued by $20.
Solo's income and dividends for 2010 were $60
and $20.
At year-end, Solo has dividends payable of $10
which Pate has not yet recorded. There is $20
cash in transit from Solo to Pate for the note.
Pearson Education, Inc. publishing as Prentice Hal

4-32

Analysis at Acquisition
Cost of 90% of Solo

$360

Allocated to:

Amt Amort

Implied value of Snap ($360/.90)

$400

Inventories

$10 1st yr

Book value (200+50)

250

Excess

$150

Land

30 -

Building

80 20 yrs

Equipment
Noncontrolling interest, 10%(400)
$40 Goodwill
Unamort. Bal. Amortization Unamort. Bal.
12/31/2009 *

in 2010 *

on 12/31/2010

Inventorie
s

$10

($10)

$0

Land

30

30

Building

80

(4)

76

Equipment

(20)

(18)

Pearson Education, Inc. publishing as Prentice Hal

(20) 10 yrs
50

150
* Use the
12/31/2009
and 2010
amortization
in worksheet
entries for
2010.
4-33

Solo's Income & Dividend


2010
Solo's net income
Amortization

$60
($12)

Adjusted

$48

Solo's dividends

$20

Pate's 90% share


$43.2
$18.0

NCI 10% share


$4.8
$2.0
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4-34

Pate's Worksheet Entries


1. Adjust for errors & omissions

Dividends receivable (B.S.)

9.0

Investment in Solo (B.S.)


Cash (B.S.)

9.0
20.0

Note receivable
(B.S.)
20.0
2. Eliminate
intercompany
profits and losses
none
3. Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Solo (I.S.)

43.2

Dividends (St. RE)

18.0

Investment in Solo (B.S.)

25.2

Pearson Education, Inc. publishing as Prentice Hal

4-35

Pate: Entries (2 of 4)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.)
4.8

Dividends (St. RE)

2.0

Noncontrolling interest (B.S.)


5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.)
200
Retained earnings (St. RE, beg.)
Unamortized excess
Investment in Solo (B.S.)
Noncontrolling interest (B.S.)
Pearson Education, Inc. publishing as Prentice Hal

2.8

50
150
360
40
4-36

Pate: Entries (3 of 4)
Allocate the unamortized excess according to
beginning of year balances.
Inventory
10
Land
30
Building, net
80
Goodwill
50
Equipment, net
20
Unamortized excess
150
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4-37

Pate: Entries (4 of 4)
6. Amortize fair value/book value differentials
Cost of sales

10

Inventory
Operating (depreciation) expense

10
4

Buildings, net
Equipment, net

4
2

Operating (depreciation) expense

7. Eliminate other reciprocal balances


Dividends payable (B.S.)
Dividends receivable (B.S.)
Pearson Education, Inc. publishing as Prentice Hal

9.0
9.0
4-38

Pate's 2010 Worksheet


Year ended 12/31/2010

Pate

Solo

900.0

300.0

DR

CR

Consol

Income statement:
Revenues
Income from Snap

43.2

Cost of goods sold

(600.0
)

Operating expenses

(190.0
)

43.2

0.0

(150.0
)

10.0

(760.0)

(90.0)

4.0

Noncontrolling interest share


Net income/ Controlling share

1,200.0

4.8
153.2

60.0

Beginning retained earnings

120.0

50.0

Add net income

153.2

60.0

2.0

(282.0)
(4.8)
153.2

Statement of retained earnings:

Pearson Education, Inc. publishing as Prentice Hal

50.0

120.0
153.2

4-39

Balance sheet, 12/31/2010:

Prep

Snap

DR

CR

Consol

Cash

13.0

15.0

20.0

Accounts receivable, net

76.0

25.0

Note receivable - solo

20.0

Inventories

90.0

60.0

10.0

Land

60.0

30.0

30.0

Building, net

190.0

110.0

80.0

4.0

376.0

Equipment, net

150.0

120.0

2.0

20.0

252.0

Investment in Solo

394.2

9.0

0.0

48.0
101.0
20.0

0.0

10.0

150.0
120.0

25.2
360.0
Dividends receivable

9.0

9.0

Goodwill

50.0

Unamortized excess

150.0 150.0

Total
Accounts payable

0.0
50.0
0.0

993.2

360.0

1,097.0

120.0

60.0

180.0

Pearson
Education, Inc. publishing as Prentice
Dividends
payable
10.0Hal 9.0

4-40
1.0

Consolidation Techniques and Procedures

5: Consolidated Statement of Cash


Flows
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4-41

Consolidated Cash Flows


The consolidated statement of cash flows is
prepared from
Consolidated balance sheets, beginning &
ending
Consolidated income statement
Other information
Procedure similar to an "unconsolidated"
statement of cash flows
Look at items specific to companies with
Subsidiaries
Equity investments
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4-42

Investing & Financing Cash Flows


Investing cash flows:
Include cash acquisition and/or disposition of
subsidiaries
Include cash acquisition and/or disposition of
equity investees
Financing cash flows:
Include cash dividends paid to
noncontrolling interests

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4-43

Operating Cash Flows


Direct method:
Include cash dividends received from equity
investees (not equity method income)
Indirect method:
Starting with consolidated net income to the
controlling interest share, ADD the
noncontrolling interest share
Deduct the excess of equity method income over
cash dividends received from equity investees

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4-44

Consolidation Techniques and Procedures

6: Appendix Trial Balance Format

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4-45

Alternative Worksheet Format


Worksheet format presented earlier used the
basic financial statements
Alternative uses the ADJUSTED trial balances
of the parent and subsidiary.
Columns on worksheet:
Parent and subsidiary adjusted trial
balances,
DR and CR adjustments,
Income statement,
Statement of retained earnings, and
Balance sheet columns.
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4-46

Completing the Worksheet


1. Enter worksheet elimination entries into the DR and
CR columns.
2. Add accounts as needed (e.g., noncontrolling interest,
goodwill, noncontrolling interest share).
3. Carry consolidated balances to income statement,
retained earnings, or balance sheet columns, as
appropriate.
4. Move consolidated net income, or controlling interest
share, to retained earnings.
5. Move ending retained earnings to the balance sheet.

Pearson Education, Inc. publishing as Prentice Hal

4-47

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Printed in the United States of America.

Copyright 2009 Pearson Education, Inc.


Publishing as Prentice Hall
Pearson Education, Inc. publishing as Prentice Hal

4-48