Advanced accounting 10th by a beams athony ch04

Check totals • Consolidated expenses, dividends and assets: – Add parent, subsidiary, plus DR, less CR • Consolidated revenues, liabilities and equity other than ending retained earning

Chapter 4: Consolidation Techniques and Procedures

by Jeanne M David, Ph.D., Univ of Detroit Mercy

to accompany

by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

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.

Objectives (continued)

5 Apply concepts to prepare a consolidated

statement of cash flows.

6 Appendix: Understand the alternative trial

balance consolidation working paper format.

1: Acquisition-Year Working Papers

Consolidation Techniques and Procedures

Preparing the Worksheet

• Statements are entered onto the worksheet:

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.

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

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:

Use these amounts in

2009 worksheet for amortization expense

and patents.

Use these amounts in

2010 worksheet for amortization expense

and patents.

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.) 18.4

Prep 2009: Entries (3 of 3)

6 Amortize fair value/book value differentials

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.

Year ended 12/31/2009 Prep Snap DR CR Consol

Income statement:

Income from Snap 18.4 18.4 0.0 Expenses (200.0) (40.0) 2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share 68.4 25.0 68.4

Statement of retained earnings:

Beginning retained earnings 5.0 30.0 30.0 5.0

Deduct dividends (30.0) (15.0) 12.0 (30.0)

3.0 Ending retained earnings 43.4 40.0 43.4

Prep's 2009 Worksheet

Balance sheet, 12/31/2009: Prep Snap DR CR Consol

Other current assets 90.0 50.0 140.0

88.0 Plant & equipment, net 250.0 70.0 320.0

Capital stock 350.0 60.0 60.0 350.0 Retained earnings 43.4 40.0 43.4 Noncontrolling interest, Jan.1 22.0

Noncontrolling interest, Dec 31 1.6 23.6

A Look at the Income Statement

Year ended 12/31/2009 Prep Snap DR CR Consol

Income statement:

Income from Snap 18.4 18.4 0.0 Expenses (200.0) (40.0) 2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share 68.4 25.0 68.4

• Income from Snap is eliminated.

• 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

A Look at Retained Earnings

• Beginning retained earnings of Snap is eliminated.

• All of Snap's dividends are eliminated.

• Net income is not calculated across the line, but taken from the consolidated income statement.

• Ending retained earnings is calculated in the consolidated

column.

Year ended 12/31/2009 Prep Snap DR CR Consol

Statement of retained earnings:

Beginning retained earnings 5.0 30.0 30.0 5.0

Deduct dividends (30.0) (15.0) 12.0 (30.0)

3.0 Ending retained earnings 43.4 40.0 43.4

A Look at Assets

• Investment in Snap is eliminated.

• 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.

Balance sheet: Prep Snap DR CR Consol

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 70.0 320.0

A Look at Liabilities & Equity

• Snap's capital stock is eliminated.

• Retained earnings are not calculated across the row; they are taken from the statement

Noncontrolling interest, Dec 31 1.6 23.6

2: Working Papers in Subsequent

Years

Consolidation Techniques and Procedures

Use these amounts in

2009 worksheet for amortization expense

and patents.

Use these amounts in

2010 worksheet for amortization expense

and patents.

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.) 22.4

Investment in Snap (B.S.) 10.4

Eliminating Investment in Snap

• Entry 5 eliminates the Investment in Snap and

establishes the Noncontrolling Interest as of the

beginning of the current year.

Less amortization for all prior periods

Prep 2010: Entries (3 of 3)

6 Amortize fair value/book value differentials

7 Eliminate other reciprocal balances

Note payable – Prep (B.S.) 10

Note receivable – Snap (B.S.) 10

Year ended 12/31/2010 Prep Snap DR CR Consol

Income statement:

Expenses (244.0) (45.0) 2.0 (291.0) Noncontrolling interest share 5.6 (5.6) Net income/ Controlling share 78.4 30.0 78.4

Statement of retained earnings:

Beginning retained earnings 43.4 40.0 40.0 43.4

Deduct dividends (45.0) (15.0) 12.0 (45.0)

3.0 Ending retained earnings 76.8 55.0 76.8

Prep's 2010 Worksheet

Balance sheet, 12/31/2010: Prep Snap DR CR Consol

Other current assets 97.0 70.0 167.0

94.4 Plant & equipment, net 240.0 60.0 300.0

Noncontrolling interest, Jan.1 23.6

Noncontrolling interest, Dec 31 2.6 26.2

3: Locating Errors in Working

Papers

Consolidation Techniques and Procedures

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.

4: Allocating Excess of Fair Value

over Book Value

Consolidation Techniques and Procedures

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

Analysis at Acquisition

* Use the

12/31/2009 and 2010 amortization

in worksheet entries for

Pate's Worksheet Entries

1 Adjust for errors & omissions

2 Eliminate intercompany profits and losses

none

3 Eliminate income & dividends from sub and bring Investment

account to its beginning balance

Pate: Entries (3 of 4)

Allocate the unamortized excess according to

beginning of year balances.

Pate: Entries (4 of 4)

6 Amortize fair value/book value differentials

7 Eliminate other reciprocal balances

Pate's 2010 Worksheet

Income statement:

Revenues 900.0 300.0 1,200.0 Income from Snap 43.2 43.2 0.0 Cost of goods sold (600.0 ) (150.0 ) 10.0 (760.0)

Operating expenses (190.0 ) (90.0) 4.0 2.0 (282.0) Noncontrolling interest share 4.8 (4.8) Net income/ Controlling share 153.2 60.0 153.2

Statement of retained earnings:

Beginning retained earnings 120.0 50.0 50.0 120.0 Add net income 153.2 60.0 153.2 Deduct dividends (100.0 ) (20.0) 18.0 (100.0)

Balance sheet, 12/31/2010: Prep Snap DR CR Consol

Cash 13.0 15.0 20.0 48.0 Accounts receivable, net 76.0 25.0 101.0 Note receivable - solo 20.0 20.0 0.0 Inventories 90.0 60.0 10.0 10.0 150.0 Land 60.0 30.0 30.0 120.0 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

25.2 360.0 Dividends receivable 9.0 9.0 0.0

Unamortized excess 150.0 150.0 0.0 Total 993.2 360.0 1,097.0

Accounts payable 120.0 60.0 180.0 Dividends payable 10.0 9.0 1.0 Capital stock 700.0 200.0 200.0 700.0 Retained earnings 173.2 90.0 173.2 Noncontrolling interest, Jan.1 40.0

Noncontrolling interest, Dec 31 2.8 42.8 Total 993.2 360.0 1,097.0

5: Consolidated Statement of Cash

Flows

Consolidation Techniques and Procedures

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

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

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

6: Appendix – Trial Balance Format

Consolidation Techniques and Procedures

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.

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.

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