157 37725 EY427 2013 1 2 1 Beams10e Ch04

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.
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.
4-3
Consolidation Techniques and Procedures
1: Acquisition-Year Working Papers
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
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.
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
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
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.

2010 worksheet for
and patents.
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
4-10
Prep's 2009 Worksheet Entries

none
none
balance
Income from Snap (I.S.)

Dividends (St. RE)
Investment in Snap (B.S.)
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.)

balances
Capital stock (B.S.)
60
Retained earnings (St. RE, beg.)
30
Patents (B.S.)
20
1.6
88
22
4-12

Amortization Expense (I.S.)
2
Patents (B.S.)
2
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.
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
43.4
22.0
1.6
23.6
4-15
A Look at the Income Statement

Prep Snap
DR
CR Consol
Income statement:
Revenues
Income from Snap
Expenses
250.0
65.0
18.4
(200.0) (40.0)
315.0
18.4
0.0
2.0
(242.0)
4.6
(4.6)
Income from Snap is eliminated.

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
4-16
A Look at Retained Earnings

Prep Snap
DR
CR Consol
30.0 30.0
5.0

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.
4-17
A Look at Assets
Balance sheet:
Prep
Snap
DR
CR
Cash
39.0
10.0
49.0
90.0
50.0
140.0
Investment in Snap
94.4
6.4
Consol
0.0
88.0
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.
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
4-19
2: Working Papers in Subsequent

Years
4-20
Analysis, for 2010

Cost of 80% of Snap
$88

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

2009 worksheet for
and patents.

2010 worksheet for
and patents.
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
4-22
Prep's Worksheet Entries for 2010

none
none
balance
Income from Snap (I.S.)

Dividends (St. RE)
22.4
12.0
10.4
4-23

dividends
5.6
Dividends (St. RE)
3.0

balances
60
40
Patents (B.S.)
18
2.6
94.4
23.6
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).

4-25

Amortization Expense (I.S.)

Patents (B.S.)
2
2
Note payable Prep (B.S.)

Note receivable Snap (B.S.)
10
10
4-26
Prep's 2010 Worksheet

Prep Snap
DR
CR Consol
Income statement:
Revenues
Income from Snap
Expenses
300.0
75.0
22.4
(244.0) (45.0)

375.0
22.4
0.0
2.0
(291.0)
5.6
(5.6)
78.4
30.0
78.4
43.4
40.0 40.0
43.4
Add net income
78.4
30.0
78.4
Pearson
Education, Inc. publishing as
Prentice
Hal
Deduct
dividends
(45.0)
(15.0)
12.0
4-27
(45.0)
Prep Snap
Cash
45.0
Note receivable Snap
10.0
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
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
76.8
23.6
4-28
3: Locating Errors in Working

Papers
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.
4-30
4: Allocating Excess of Fair Value

over Book Value
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.
4-32
Analysis at Acquisition
Cost of 90% of Solo
$360
Allocated to:
Amt Amort
$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)
(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
4-34
Pate's Worksheet Entries

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
25.2
4-35
Pate: Entries (2 of 4)
dividends
4.8
Dividends (St. RE)
2.0

balances
200
Unamortized excess
2.8
50
150
360
40
4-36
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
4-37
Cost of sales
10
Inventory
Operating (depreciation) expense
10
4
Buildings, net
Equipment, net
4
2
Operating (depreciation) expense

Dividends payable (B.S.)
Dividends receivable (B.S.)
9.0
9.0
4-38
Pate's 2010 Worksheet

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

1,200.0
4.8
153.2
60.0
120.0
50.0
Add net income
153.2
60.0
2.0
(282.0)
(4.8)
153.2
50.0
120.0
153.2
4-39
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
5: Consolidated Statement of Cash

Flows
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
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
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
4-44
6: Appendix Trial Balance Format
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.
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.
4-47
All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
4-48

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Chapter 4: Consolidation

Techniques and Procedures

Pearson Education, Inc. publishing as Prentice Hal

Consolidation Techniques: Objectives

Pearson Education, Inc. publishing as Prentice Hal

Consolidation Techniques and Procedures

1: Acquisition-Year Working Papers

Pearson Education, Inc. publishing as Prentice Hal

Preparing the Worksheet

Completing the Worksheet

Pearson Education, Inc. publishing as Prentice Hal

Working Paper Entries

Example: Prep & Snap Data

Pearson Education, Inc. publishing as Prentice Hal

Implied value of Snap ($88/.80)

Use these amounts in

Use these amounts in

Pearson Education, Inc. publishing as Prentice Hal

Income & Dividend Calculations

$25 Prep's 80% share

Pearson Education, Inc. publishing as Prentice Hal

Prep's 2009 Worksheet Entries

Income from Snap (I.S.)

Prep 2009: Entries (2 of 3)

Dividends (St. RE)

Noncontrolling interest (B.S.)

Investment in Snap (B.S.)

Noncontrolling interest (B.S.)

Pearson Education, Inc. publishing as Prentice Hal

Prep 2009: Entries (3 of 3)

Prep's 2009 Worksheet

Noncontrolling interest share

Statement of retained earnings:

Balance sheet, 12/31/2009:

Other current assets

Noncontrolling interest, Jan.1

A Look at the Income Statement

Noncontrolling interest share

Income from Snap is eliminated.

A Look at Retained Earnings

Statement of retained earnings:

Beginning retained earnings of Snap is eliminated. 3.0

Other current assets

A Look at Liabilities & Equity

Noncontrolling interest, Jan.1

Snap's capital stock is eliminated.

Pearson Education, Inc. publishing as Prentice Hal

Consolidation Techniques and Procedures

2: Working Papers in Subsequent

Analysis, for 2010

Implied value of Snap ($88/.80)

Use these amounts in

Use these amounts in

Pearson Education, Inc. publishing as Prentice Hal

Income & Dividend Calculations

$25 Prep's 80% share

Pearson Education, Inc. publishing as Prentice Hal

Prep's Worksheet Entries for 2010

Income from Snap (I.S.)

Prep 2010: Entries (2 of 3)

Dividends (St. RE)

Noncontrolling interest (B.S.)

Investment in Snap (B.S.)