Professional Documents
Culture Documents
4-1
4
Consolidated Financial
Statements After Acquisition
Slide
4-2
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 parent’s 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 firm’s
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.
Slide
4-3
Investments in Stock
Slide
4-4
Accounting for Investments by the Cost,
Partial Equity, and Complete Equity Methods
Ownership Percentages
Slide
4-5
LO 1 Varying levels of ownership are accounted for differently.
Accounting for Investments by the Cost,
Partial Equity, and Complete Equity Methods
Slide
4-6
LO 1 Varying levels of ownership are accounted for differently.
Accounting for Investments by the Cost Method
Cash 20,000
Dividend income (.8 x $25,000) 20,000
Slide
4-8
LO 2 Journal entries for Parent using cost method.
Accounting for Investments by the Cost Method
Slide
4-9
LO 2 Journal entries for Parent using cost method.
Accounting for Investments by Partial Equity
Cash 20,000
Investment in Song (.8 x $25,000) 20,000
Slide
4-10
LO 2 Journal entries for Parent using partial equity method.
Accounting for Investments by Partial Equity
Cash 40,000
Investment in Song (.8 x $50,000) 40,000
Slide
4-11
LO 2 Journal entries for Parent using partial equity method.
Accounting for Investments by Partial Equity
Cash 28,000
Investment in Song (.8 x $35,000) 28,000
Slide
4-12
LO 2 Journal entries for Parent using partial equity method.
Accounting for Investments by Complete Equity
Cash 20,000
Investment in Song (.8 x $25,000) 20,000
Slide
4-14
LO 2 Journal entries for Parent using complete equity method.
Accounting for Investments by Complete Equity
Slide
4-15
LO 2 Journal entries for Parent using complete equity method.
Accounting for Investments by Complete Equity
Cash 40,000
Investment in Song (.8 x $50,000) 40,000
Cash 28,000
Investment in Song (.8 x $35,000) 28,000
Slide
4-18
LO 3 Use of workpapers.
Consolidated Statements After Acquisition
Slide
4-19
LO 3 Use of workpapers.
Consolidated Statements After Acquisition
Slide
4-22
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
P4-8: A. 2010 Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 62,000 $ 30,000 $ 92,000
Accounts receivable 32,000 29,000 61,000
Inventory 30,000 16,000 46,000
Investment in Sid 160,000 - 160,000 -
Difference (cost & book) 15,421 15,421 -
Plant and equipment 105,000 82,000 187,000
Land 29,000 34,000 63,000
Goodwill 15,421 15,421
Total assets $ 418,000 $ 191,000 $ 464,421
Slide
4-23
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
Workpaper Observations
1. Each section of the workpaper represents one of
three consolidated financial statements.
2. Elimination of the investment account.
Goodwill 15,421
Difference between Implied and Book 15,421
Slide
4-25
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
Slide
4-26
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
Slide
4-27
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
Slide
4-28
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
After Year of Acquisition – Cost Method
Parker Sid
P4-8: B. 2011 Cash $ 67,000 $ 16,000
On December 31, 2011, Accounts receivable
Inventory
56,000
38,000
32,000
48,500
the two companies’ trial Investment in Sid 160,000 -
balances were as follows Plant and equipment
Land
124,000
29,000
80,000
34,000
at right: Dividends declared 20,000 20,000
Cost of goods sold 155,000 52,000
Required B. Prepare a Operating expenses 30,000 18,000
consolidated statements Total debits $ 679,000 $ 300,500
Slide
4-30
LO 5 Workpapers eliminating entries after acquisition (cost method).
Consolidated Statements After Acquisition
P4-8: B. 2011 After Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 67,000 $ 16,000 $ 83,000
Accounts receivable 56,000 32,000 88,000
Inventory 38,000 48,500 86,500
Investment in Sid 160,000 - 5,700 165,700 -
Difference (cost & book) 15,421 15,421 -
Plant and equipment 124,000 80,000 204,000
Land 29,000 34,000 63,000
Goodwill 15,421 15,421
Total assets $ 474,000 $ 210,500 $ 539,921
Slide
4-31
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
Company’s beginning retained earnings to recognize
Parker’s 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:
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.
Slide
4-33
LO 5 Workpapers eliminating entries after acquisition (cost method).
Recording Investments – Equity Method
Equity Method
Record the investment at cost and subsequently
adjust the amount each period for
the investor’s proportionate share of the
earnings (losses) and
dividends received by the investor.
Slide
4-34
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
Instructions
Prepare the journal entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2010.
Slide
4-35
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
Cash 6,000
Investment in Stock ($20,000 x 30%) 6,000
Slide
4-36
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
Slide
4-37
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
consolidated statements
Dividends declared 20,000 15,000
Cost of goods sold 150,000 60,000
workpaper on December Operating expenses 35,000 15,000
Total debits $ 678,000 $ 300,000
31, 2010.
Accounts payable $ 20,000 $ 15,000
Other liabilities 15,000 25,000
Common stock 200,000 120,000
Other contributed capital 70,000 20,000
Retained earnings 55,000 25,000
Sales 300,000 95,000
Equity in subsidiary income 18,000 -
Total credits $ 678,000 $ 300,000
Slide
4-39
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
P4-12: A. 2010 Year of Acquisition
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 300,000 $ 95,000 $ 395,000
Equity in subsidiary income 18,000 18,000 -
Total revenue 318,000 95,000 395,000
Cost of goods sold 150,000 60,000 210,000
Other expenses 35,000 15,000 50,000
Total cost and expense 185,000 75,000 260,000
Net income 133,000 20,000 135,000
Noncontrolling interest 2,000 (2,000)
Net income $ 133,000 $ 20,000 $ 18,000 $ - $ 2,000 $ 133,000
Slide
4-40
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
P4-12: A. 2010 Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 65,000 $ 35,000 $ 100,000
Accounts receivable 40,000 30,000 70,000
Inventory 25,000 15,000 40,000
Investment in Sid 184,500 - 4,500 -
180,000
Difference (cost & book) 35,000 35,000 -
Plant and equipment 110,000 85,000 195,000
Land 48,500 45,000 35,000 128,500
Total assets $ 473,000 $ 210,000 $ 533,500
Slide
4-41
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.
Slide
4-42
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
Investment Carried at Equity—After Year of Acquisition
Parker Sid
P4-12: B. 2011 Cash $ 70,000 $ 20,000
On December 31, 2011, Accounts receivable
Inventory
60,000
40,000
35,000
30,000
the two companies’ trial Investment in Sid 193,500 -
balances were as follows Plant and equipment
Land
125,000
48,500
90,000
45,000
at right: Dividends declared 20,000 15,000
Cost of goods sold 160,000 65,000
Required B. Prepare a Operating expenses 35,000 20,000
consolidated statements Total debits $ 752,000 $ 320,000
Slide
4-44
LO 5 Workpaper eliminating entries (equity method).
Recording Investments – Equity Method
P4-12: B. 2011 After Year of Acquisition
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 70,000 $ 20,000 $ 90,000
Accounts receivable 60,000 35,000 95,000
Inventory 40,000 30,000 70,000
Investment in Sid 193,500 - 9,000 -
184,500
Difference (cost & book) 35,000 35,000 -
Plant and equipment 125,000 90,000 215,000
Land 48,500 45,000 35,000 128,500
Total assets $ 537,000 $ 220,000 $ 598,500
Slide
4-45
LO 5 Workpaper eliminating entries (equity method).
Interim Acquisitions of Subsidiary Stock
Slide
4-46
LO 6 Two approaches for interim acquisitions.
Interim Acquisitions of Subsidiary Stock
Slide
4-47
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.
Slide
4-48
LO 6 Two approaches for interim acquisitions.
Interim Acquisitions of Subsidiary Stock
Slide
4-49
LO 6 Two approaches for interim acquisitions.
Interim Acquisitions of Subsidiary Stock
P4-16: Full-Year Reporting Alternative
Eliminations Consolidated
Income Statement Pillow Satin Debit Credit NCI Balances
Sales $ 1,940,000 $ 976,000 $ 2,916,000
Equity in subsidiary income 90,000 90,000 -
Total revenue 2,030,000 976,000 2,916,000
Cost of goods sold 1,261,000 584,000 1,845,000
Other expenses 484,000 242,000 726,000
Total cost and expense 1,745,000 826,000 2,571,000
Net income 285,000 150,000 345,000
Net income purchased 45,000 (45,000)
Noncontrolling interest 15,000 (15,000)
Net income $ 285,000 $ 150,000 $ 135,000 $ - $ 15,000 $ 285,000
Slide
4-50
LO 6 Two approaches for interim acquisitions.
Interim Acquisitions of Subsidiary Stock
P4-16: Full-Year Reporting Alternative
Eliminations Consolidated
Balance Sheet Pillow Satin Debit Credit NCI Balances
Current assets $ 390,600 $ 179,200 54,000 $ 515,800
Investment in Satin 510,000 474,000 -
36,000
Difference (cost & book) 9,467 9,467 -
Plant and equipment 1,334,000 562,000 9,467 1,905,467
Total assets $ 2,234,600 $ 741,200 $ 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
Eliminations Consolidated
Income Statement Pillow Satin Debit Credit NCI Balances
Sales $ 1,940,000 $ 650,666 $ 2,590,666
Equity in subsidiary income 90,000 90,000 -
Total revenue 2,030,000 650,666 2,590,666
Cost of goods sold 1,261,000 389,333 1,650,333
Other expenses 484,000 161,333 645,333
Total cost and expense 1,745,000 550,666 2,295,666
Net income 285,000 100,000 295,000
Noncontrolling interest 10,000 (10,000)
Net income $ 285,000 $ 100,000 $ 90,000 $ - $ 10,000 $ 285,000
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
Eliminations Consolidated
Balance Sheet Pillow Satin Debit Credit NCI Balances
Current assets $ 390,600 $ 179,200 54,000 $ 515,800
Investment in Satin 510,000 474,000 -
36,000
Difference (cost & book) 9,467 9,467 -
Plant and equipment 1,334,000 562,000 9,467 1,905,467
Total assets $ 2,234,600 $ 741,200 $ 2,421,267
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
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
Slide
4-56 LO 9 Differences between U.S. GAAP and IFRS.
Compare U.S. GAAP and IFRS
Application of the Equity Method
Slide
4-57 LO 9 Differences between U.S. GAAP and IFRS.
Compare U.S. GAAP and IFRS
Application of the Equity Method
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.
Note: The consolidated balances derived in a
workpaper are the same regardless of the
format selected.
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).
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.
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 subsidiary’s reported income is
included in consolidated net income.
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.
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 parent’s income statement while dividends are
included on the tax return.
Slide
4-65
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Slide
4-66