AK0007 – Advanced Accounting

Consolidated Techniques
and Procedures

ACCOUNTING PROGRAM
Learn Objectives
1. Prepare consolidated working papers for the year of acquisition when
the parent company uses the full equity method to account for its
investment in a subsiddiary

2. Prepare consolidated working papers for the year subsequent to

acquisition

3. Locate errors in preparing consolidated working papers

4. Allocate excess of purchase price over book value to include

identifiable net assets

5. Apply concepts to prepare a consolidated statement of cash flows

 Learning Objective 1

Prepare consolidated working papers

for the year of acquisition when the
parent company uses the full equity
method to account for its
investment in a subsidiary.
 Equity Method –
Year of Acquisition

1. Prep pays $87,000 for 80% interest in Snap

on January 1, when Snap stockholders’ equity
consists of $60,000 capital stock and $30,000
retained earnings.
2. The $15,000 excess of investment cost is
allocated to patents with a 10-year useful life.
 Equity Method –
Year of Acquisition

Snap’s net income and dividends are as follows:

2003 2004
Net income $25,000 Net income $30,000
Dividends $15,000 Dividends $15,000
 Working Paper Entries

Adjusting and eliminating entries on the working

papers do not affect the general ledger accounts.
a Income from Snap 18,500
Dividends 12,000
Investment in Snap 6,500
To eliminate income and dividend from Snap
and return the investment account to its
beginning balance
 Working Paper Entries

b Minority Interest Expense 5,000

Dividends Snap 3,000
Minority Interest 2,000
To enter minority interest share of subsidiary
income and dividends
 Working Paper Entries

c Retained Earnings, Snap 30,000

Capital Stock, Snap 60,000
Patents 15,000
Investment in Snap 87,000
Minority Interest 18,000
To eliminate reciprocal equity and investment
balances, establish beginning minority interest,
and enter unamortized patents
 Working Paper Entries

d Expenses 1,500
Patents 1,500
To enter current amortization
 Working Papers for
Year of Acquisition

Adjustments and
Eliminations Consolidated
Income Statement Prep Snap Dr. Cr. Statements
Revenue 250 65 315
Income from Snap 18.5 a 18.5
Expenses (200) (40) d 1.5 (241.5)
Minority interest b 5 (5)
Net income 68.5 25 68.5
Retained earnings P 5 5
Retained earnings S 30 c 30
Add net income 68.5 25 68.5
Deduct dividends (30) (15) a 12
b 3 (30)
Retained
earnings Dec 31 43.5 40 43.5
 Working Papers for
Year of Acquisition
Adjustments and
Eliminations Consolidated
Balance Sheet Prep Snap Dr. Cr. Statements
Cash 40 10 50
Other current assets 90 50 140
Investment in Snap 93.5 a 6.5 c 87
Plant and equipment 300 100 400
Accum. depreciation (50) (30) (80)
Patents c 15 d 1.5 13.5
Total assets 473.5 130 523.5
Liabilities 80 30 110
Capital stock 350 60 c 60 350
Retained earnings 43.5 40 43.5
Total 473.5 130
Minority 1/1 c 18
interest 12/31 b 2 20 523.5
 Sequence of Working Paper Entries

1. Adjustments for errors and omissions in the

separate parent company and subsidiary statements
2. Adjustments to eliminate intercompany profits
and losses
3. Adjustments to eliminate income and dividends
from subsidiary and adjust the investment in
subsidiary to its beginning-of-the-period balance
 Sequence of Working Paper Entries

4. Adjustment to record the minority interest in

subsidiary’s earnings and dividends
5. Elimination of reciprocal investment in
subsidiary and subsidiary equity balances
6. Allocation and amortization of cost/book value
differentials
7. Elimination of other reciprocal balances
 Learning Objective 2

Prepare consolidated working

papers for the year
subsequent to acquisition.
 Equity Method –
Year Subsequent to Acquisition

Prep maintains its 80% interest in

Snap throughout 2004.
The only intercompany transaction
during 2004 was a $10,000, non-
interest-bearing loan to Snap.
 Equity Method –
Year Subsequent to Acquisition

What is Prep’s income from Snap?

($30,000 × 80%) – $1,500* = $22,500
What is Prep’s investment in Snap
account at December 31, 2004?

*Patent amortization
 Equity Method –
Year Subsequent to Acquisition
Investment cost January 1, 2003 $ 87,000
Income from Snap, 2003 18,500
Dividends from Snap, 2003 – 12,000
Investment in Snap December 31, 2003 $ 93,500
Income from Snap, 2004 22,500
Dividends from Snap, 2004 – 12,000
Investment in Snap December 31, 2004 $104,000
 Consolidation –
Year Subsequent to Acquisition

Income from Snap 22,500

Dividends 12,000
Investment in Snap 10,500
To eliminate income and dividends from Snap
and return the investment account to its
beginning-of-the-period balance
 Consolidation –
Year Subsequent to Acquisition
Retained Earnings, Snap 40,000
Capital Stock, Snap 60,000
Patents 13,500
Investment in Snap 93,500
Minority Interest 20,000
To eliminate reciprocal equity and investment
balances, establish beginning minority interest,
and enter unamortized patents
 Consolidation –
Year Subsequent to Acquisition

Expenses 1,500
Patents 1,500
To enter current amortization
Notes Payable, Prep 10,000
Note Receivable, Snap 10,000
To eliminate reciprocal receivable and
payable balances
 Learning Objective 3

Locate errors in preparing

consolidation working papers.
 Locating Errors

Most errors made in consolidating the financial

statements will show up when the consolidated
balance sheet does not balance.
Totals are Check Omissions
recomputed. individual involving
items. minority interest
occur frequently.
 Learning Objective 4

Allocate excess of purchase price

over book value to include
identifiable net assets.
 Excess Allocated
to Identifiable Assets

Both FASB Statements No. 141 and 142 require

firms to provide at least summary disclosures
regarding the allocation of the purchase price
of an acquired subsidiary.
 Excess Allocated to Identifiable
Assets (FASB No. 141)

Disclose in the year of acquisition:

– the cost of the acquired enterprise
– a condensed balance sheet (assets and liabilities)
– amounts of purchased R&D in process
– total amounts assigned to major asset categories
 Excess Allocated to Identifiable
Assets (FASB No. 142)

The amount of goodwill is to be shown as a

separate
balance sheet line item (assuming it is
material).
 Additional Disclosures

Firms must Firms must report

disclose material noncontrolling
noncontrolling interests’ share of
interests (minority subsidiary income
interest) on the (minority interest
balance sheet. expense).
 Excess Allocation Example

Pate acquired its 90% equity interest in Solo

on December 31, 2003, for $365,000 cash, when
Solo’s stockholders’ equity consisted of $200,000
capital stock and $50,000 retained earnings.
During 2004, Solo borrows $20,000 from Pate
on a non-interest-bearing note.
 Excess Allocation Example

What is the excess of cost over book value?

90% × $250,000 = $225,000

$365,000 – $225,000 = $140,000

 Excess Allocation Example

Fair Book Undervaluation

Solo (000) Value Value (Overvaluation)
Assets
Inventories $ 60 $ 50 $ 10
Land 60 30 30
Buildings 180 100 80
Equipment 70 90 (20)
Total $370 $270 $100
 Excess Allocation Example

Undervaluation Interest Excess Amortization

(Overvaluation) Acquired Allocation Period
Assets
Inventories $10 × 90% = $ 9 Sold in 2004
Land 30 × 90% = 27 None
Buildings, net 80 × 90% = 72 36 years
Equipment, net (20) × 90% = (18) 9 years
Goodwill, remainder 50 None
Total $140
 Consolidation After Acquisition

Solo reports $60,000 net income for 2004.

Solo declares dividends of $10,000
on June 1 which is paid on July 1.
Solo declares dividends of
$10,000 on December 1.
The December dividend has not
been paid at year end.
 Consolidation After Acquisition

July 1, 2004
Cash 9,000
Investment in Solo 9,000
To record dividends from Solo
December 31, 2004
Investment in Solo 45,000
Income from Solo 45,000
To record income from Solo
How was this determined?
 Consolidation After Acquisition

Share of Solo’s net income

($60,000 × 90%) $54,000
Amortization of excess allocated to:
Inventories ($9,000 × 100%) – 9,000
Buildings ($72,000 ÷ 36) – 2,000
Equipment ($18,000 ÷ 9 years) + 2,000
Income from Solo for 2004 $45,000
 Working Paper Entries

a Dividends Receivable 9,000

Investment in Solo 9,000
To correct investment balance for unrecorded
dividends receivable

b Cash 20,000
Note Receivable, Solo 20,000
To enter receipt of intercompany note receivable
 Working Paper Entries

c Income from Solo 45,000

Dividends 18,000
Investment in Solo 27,000
To eliminate income and dividend from Pate
and return the investment account to the
beginning of the period balance
 Working Paper Entries

d Minority Interest Expense 6,000

Dividends, Solo 2,000
Minority Interest 4,000
To enter minority interest share of subsidiary
income and dividends
 Working Paper Entries

e Retained Earnings, Solo 50,000

Capital Stock, Solo 200,000
Unamortized Excess 140,000
Investment in Solo 365,000
Minority Interest, Jan 1 25,000
To eliminate reciprocal investment and equity
amounts, establish beginning minority interest,
and enter unamortized excess
 Working Paper Entries

f Cost of Goods Sold 9,000

Land 27,000
Buildings (net) 72,000
Goodwill 50,000
Equipment (net) 18,000
Unamortized Excess 140,000
To allocate unamortized excess to identifiable
assets and goodwill
 Working Paper Entries

g Operating Expenses 2,000

Buildings (net) 2,000
To enter current depreciation on excess
allocated to buildings
 Working Paper Entries

h Equipment (net) 2,000

Operating Expenses 2,000
To adjust current depreciation for excess
allocated to reduce equipment

i Dividends Payable 9,000

Dividends Receivable 9,000
To eliminate reciprocal receivables and payables
 Learning Objective 5

Apply concepts to prepare a

consolidated statement
of cash flows.
Consolidated Statement of Cash Flows

Consolidated Consolidated
balance income
sheets statements

Consolidated
statement of
cash flows
Consolidated Statement of Cash Flows
1. During 2004, Seed sold land that cost
$20,000 to outside entities for $10,000 cash.
2. Polski issued a $300,000, two-year note on
January 8 for new equipment.
3. Patents amortization from the Polski-Seed
business combination is $10,000 per year.
4. Polski received $10,000 dividends from its
investments in equity investees.
5. Changes in plant assets not explained are
due to provisions for depreciation.
 Polski and Seed Comparative
Balance Sheets at December 31

Assets (000) 2004 2003 Changes

Cash $ 255 $ 180 $ 75
Accts. receivable, net 375 270 105
Inventories 250 205 45
Equity investments 100 95 5
Land 80 100 (20)
Buildings, net 200 220 (20)
Equipment, net 800 600 200
Patents 90 100 (10)
Total assets $2,150 $1,770 $380
 Polski and Seed Comparative
Balance Sheets at December 31

Liabilities (000) 2004 2003 Changes

Accounts payable $ 250 $ 270 $(20)
Dividends payable 20 20 –
Notes payable 300 – 300
Common stock 500 500 –
Other paid-in capital 300 300 –
Retained earnings 670 600 70
Minority interest – 20% 110 80 30
Total liabilities and
stockholders’ equity $2,150 $1,770 $380
 Consolidated Income Statement
Year Ended December 31, 2004
Sales $750
Income from equity investees 15
Total revenue 765
Less expenses:
Cost of goods sold 300
Depreciation expense 120
Patents amortization 10
Wages and salaries 54
Other operating expenses 47
Interest expense 24
Loss on sale of land 10 (565)
Total consolidated income $200
 Consolidated Income Statement
Year Ended December 31, 2004

Total consolidated income $200

Less: Minority interest (50)
Consolidated net income 150
Consolidated retained earnings 1/1/2004 600
Less: Cash dividends paid (80)
Consolidated retained earnings 12/31/2004 $670
 Consolidated Statement of Cash Flows
Year Ended December 31, 2004
Cash flows from operating activities
Consolidated net income $150
Adjustments to reconcile net income to
cash provided by operating activities
Minority interest $ 50
Undistributed income–equity investees (5)
Loss on sale of land (10)
Depreciation on equipment 100
Depreciation on buildings 20
Amortization of patents 10
Increase in accounts receivable (105)
Increase in inventories (45)
Decrease in accounts payable (20) 15
Net cash flows from operating activities $165
 Consolidated Statement of Cash Flows
Year Ended December 31, 2004

Net cash flows from operating activities $165

Cash flows from investing activities 10
Cash flows from financing activities
Payment of cash dividends–majority $(80)
Payment of cash dividends–minority (20) (100)
Increase in cash for 2004 75
Cash on January 1, 2004 180
Cash on December 31, 2004 $255
Thank You