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4
Consolidated Financial Statements After Acquisition
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.
Slide 4-4
Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods
Ownership Percentages
Effective control Investment valued using Cost Method or Equity Method (investment eliminated in Consolidation)
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.
Slide 4-6
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:
Slide 4-7
2009
Investment in Song
Cash Cash
387,000
387,000 20,000 20,000
Slide 4-8
2010
Cash
40,000
40,000
28,000 28,000
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
2010
Investment in Song
Equity income (.8 x $52,500) Cash
42,000
42,000 40,000 40,000
Slide 4-11
2011
44,000
44,000 28,000 28,000
Slide 4-12
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.
Slide 4-13
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
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
700 700
Slide 4-15
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
Slide 4-16
2011
44,000
44,000 28,000 28,000 700 700
Slide 4-17
After acquisition, a complete set of consolidated financial statements must be prepared for the affiliated group:
Income statement,
Slide 4-18
LO 3 Use of workpapers.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2010. B. Prepare a consolidated statements workpaper on Dec. 31, 2011.
Slide 4-19
LO 3 Use of workpapers.
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
Difference between implied and book values is established only at the date of acquisition.
Slide 4-20
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.
Slide 4-21
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 $
Slide 4-22
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 $
Slide 4-23
418,000
$ 191,000
$ 202,842
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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4.
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$ 1,300
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- 19,000
24,700 - 20,000 $154,700
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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
Slide 4-28
Slide 4-29
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 $
Slide 4-30
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 $
Slide 4-31
474,000
$ 210,500
$ 214,542
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
5,700
Entry to establish Reciprocity
.95 = $5,700
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).
Slide 4-33
Slide 4-35
Cash
Investment in Stock ($20,000 x 30%)
Slide 4-36
6,000
6,000
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
Difference between implied and book values is established only at the date of acquisition.
Slide 4-38
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
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 $
Slide 4-40
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
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
Slide 4-41
$ 210,000
$ 253,000
Slide 4-42
Slide 4-43
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 $
Slide 4-44
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
Accounts payable $ Other liabilities Common stock Other contributed capital Retained earnings Noncontrolling interest 1/1 Noncontrolling interest 12/31 Total liabilities & equity $
Slide 4-45
537,000
$ 220,000
$ 262,500
Slide 4-46
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
Slide 4-47
Slide 4-48
Slide 4-49
Retained Earnings Statement Retained earnings, 1/1 Net income Dividends declared Retained earnings, 12/31 $
54,000 $ 54,000
Slide 4-50
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
Retained Earnings Statement Retained earnings, 1/1 Net income Dividends declared Retained earnings, 12/31 $
54,000 $ 54,000
Slide 4-52
1,334,000 $ 2,234,600
$ $ 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
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.
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Slide 4-57
Slide 4-58
Two categories:
Three-division workpaper format used in this text.
Slide 4-59
Two major topics require attention in addressing the treatment of deferred income tax consequences when
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
Slide 4-62
Assume that the parent uses the cost method to account for the investment and that both the parent and the
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
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
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.