CONSOLIDATED TECHNIQUES

AND PROCEDURES
CHAPTER 4
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 (JANUARY, 2016)

1. Pop pays $176,000 for 80% interest in Son

on January 1, 2016 when Sap stockholders’ equity
consists of $120,000 capital stock and $60,000
retained earnings.
2. The $40,000 excess of investment cost is
allocated to patent (amortized 10 years)
Implied FV = (176,000 / 80%) = $220,000
BV ($120.000 + $60,000) 90,000
Patent amortization = $ 40,000  amortization $4,000/year
EQUITY METHOD –
YEAR OF ACQUISITION

Son’s net income and dividends are as follows:

2016 2017
Net income$50,000 Net income $60,000
Dividends $30,000 Dividends $30,000
WORKING PAPER ENTRIES 2016

a Income from Son 36,800  Income statement

Dividends 24,000
Investment in Son 12,800  Balance sheet
To eliminate income and dividend from Son
and return the investment account to its
beginning balance
Income from Son: (50,000 x 80%) = $40,000 Investment Jan 1, 2016 = $176,000
Patent Amortization (4,000 x 80%) = 3,200 - (+) Income from Son = 36,800
Income from Son $36,800 (-) Dividend = (24,000)
Dividend = 30,000 x 80% = 24,000 Investment Dec 31, 2016 = $188,800
WORKING PAPER ENTRIES 2016

b Non-controlling Interest share 9,200  Income statement

Dividends Son 6,000
Non-controlling Interest 3,200  Balance sheet
To enter non-controlling interest share of subsidiary
income and dividends
Share of Son’s Income: (50,000 x 20%) = $10,000 (+) NCI Income Share = 9,200
Patent amortization = $4,000 x 20% 800 - (-) NCI Dividend = (6,000)
Non-Controlling interest share $9,200 Additional NCI = $3,200
Dividend = 30,000 x 20% = 6,000
Additional NCI = 12.800/80% x 20% = $3,200
NCI share = 18.400/80% x 20% = $4,600 100%
WORKING PAPER ENTRIES 2016

c Retained Earnings, Son 60,000

Capital Stock, Son 120,000
Patent 40,000
Investment in Son 176,000
Non-controlling Interest (220,000x20%) 44,000
To eliminate reciprocal equity and investment
balances, establish beginning NCI (non-controlling
interest), and enter unamortized Patent
WORKING PAPER ENTRIES 2016

d Expenses 4,000
Patent 4,000
To enter current amortization of Patent $40,000/10
3 method to calculate NCI’s end of year:
Son’s Equity Dec 31, 2016 = $200,000
NCI Jan 1, 2016 (220,000 x 20%) = $44,000 (x) NCI Share $200,000 x20% = $40,000
Additional NCI = $ 3,200 (+) unamortized Patent $36,000x20% = $ 7,200
NCI Dec 31, 2016 = $47,200 NCI Dec 31, 2016 = $47,200

Investment in Son Dec 31, 2016 = $188,800  (80%)

100% Investment in Son = $188,800 : 80% = $236,000
NCI 31 Dec, 2016 = $236,000 x 20% = $47,200
CONSOLIDATED FINANCIAL STATEMENT DECEMBER 31, 2016

RECIPROCAL ACCOUNT

$188.8 + $47.2 = $200 + (40-4) (Sons Equity + Patent)

$36.8 + $9.2 + $4 = $50 (Sons Income)

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 noncontrolling 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 (2017)

2017
Net income $60,000
Dividends $30,000
Pop maintains its 80% interest in
Son throughout 2017.
The only intercompany transaction
during 2017 was a $20,000, non-
interest-bearing loan to Son.
EQUITY METHOD –
YEAR SUBSEQUENT TO ACQUISITION

What is Pop’s income from Son?

($60,000-4,000*) × 80% = $44,800
What is Pop’s investment in Son
account at December 31, 2017?

*Patent amortization
EQUITY METHOD –
YEAR SUBSEQUENT TO ACQUISITION (2017)

Investment cost January 1, 2016 $176,000

(+) Income from Son 2016 36,800
(-) Dividends from Son, 2016 – 24,000
Investment in Son Dec 31, 2016 $188,800
(+) Income from Son, 2017 44,800
(-) Dividends from Son, 2017 – 24,000
Investment in Son Dec 31, 2017 $209,600
CONSOLIDATION – 2017
YEAR SUBSEQUENT TO ACQUISITION

a. Income from Son 44,800  Income statement

Dividends 24,000
Investment in Son 20,800  Balance sheet
To eliminate income and dividends from Son
and return the investment account to its
beginning-of-the-period balance
Investment in Son Dec 31, 2017 $209,600
20,800
Investment in Son Dec 31, 2016 $188,800
WORKING PAPER ENTRIES 2017

b. Non-controlling Interest share 11,200  Income statement

Dividends Son 6,000
Non-controlling Interest 5,200 Balance sheet
To enter non-controlling interest share of subsidiary
income and dividends

NCI share = (60,000-4,000)x20% = 11,200

Or NCI share = 44,800/80% x 20% = 11,200
Dividend Son = 30,000 x 20% = 6,000
NCI = 20.800/80% x 20% = 5.200
CONSOLIDATION–
YEAR SUBSEQUENT TO ACQUISITION

c. Retained Earnings, Son 80,000

Capital Stock, Son 120,000
Patent 36,000
Investment in Son 188,800
Non-controlling Interest (236,000x20%) 47,200
To eliminate reciprocal equity and investment
balances, establish beginning NCI (non-controlling
Interest), and enter unamortized patent
CONSOLIDATION–
YEAR SUBSEQUENT TO ACQUISITION

d. Expenses 4,000
Patent 4,000
To enter current amortization
e. Notes Payable, Pop 20,000
Note Receivable, Sop 20,000
To eliminate reciprocal receivable and
payable balances
CONSOLIDATED FINANCIAL STATEMENT DECEMBER 31, 2017
RECIPROCAL ACCOUNT
$209.6 + $52.4 = $230 + (40-8) (Sons Equity + Patent)

$44.8 + $11.2 + $4 = $60 (Sons Income)

SUMMARY

CONTROLLING INTEREST NON-CONTROLLING INTEREST

(INVESTMENT) (NCI)

Income Statement Account Income Statement Account

 Income from S  NCI share
Balance Sheet Account Balance Sheet Account
 Investment in S  NCI
CLASS ASSIGNMENT – 1 (20 MINUTES)
 Son reports net income of $40,000 in 2018
 Son declares dividend of $20,000 on Dec 31, 2018
Required:
1. Income from Son for 2018
2. Investment in Son on Dec 31, 2018
3. Non-Controlling interest on Dec 31, 2018
4. Pop’s journal entries to account investment in Son (equity
method)
5. Adjustment and Elimination Entries for Pop and Subsidiaries
working paper
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. Non-controlling
interest
occur frequently.
LEARNING OBJECTIVE 4

Allocate excess of purchase price

over book value to include
identifiable net assets.
EXCESS ALLOCATION EXAMPLE

Pam acquired its 90% equity interest in Sun

on December 31, 2016, for $360,000 cash, when
Sun’s stockholders’ equity consisted of $200,000
capital stock and $50,000 retained earnings.
During 2016, Sun borrows $20,000 from Pam
on a non-interest-bearing note.
EXCESS ALLOCATION EXAMPLE

What is the excess of cost over book value?

Sun’s Fair Value = $360,000/90% = $400,000

Excess: $400,000 – $250,000 = $150,000

EXCESS ALLOCATION EXAMPLE

Fair Book Undervaluation

Sun (000) Value Value (Overvaluation)
Assets
Inventories $ 60 $ 50 $ 10 U
Land 60 30 30 U
Buildings 180 100 80 U
Equipment 70 90 (20) O
Total $370 $270 $100
EXCESS ALLOCATION EXAMPLE

Undervaluation Excess Amortization

(Overvaluation) Allocation Period
Assets
Inventories $10 = $ 10 Sold in 2012
Land 30 = 30 None
Buildings, net 80 = 80 20 years
Equipment, net (20) = (20) 10 years
Goodwill, remainder 50 None
Total $150
 CONSOLIDATION
AT ACQUISITION

RECIPROCAL ACCOUNT
$360 + $40 = $250 + 150
(Investment = Suns Equity + Excess)
CONSOLIDATION AFTER ACQUISITION

Sun reports $60,000 net income for 2017.

Sun declares dividends of $10,000
on June 1 which is paid on July 1.
Sun declares dividends of
$10,000 on December 1.
The December dividend has not
been paid at year end.
PAT’S ENTRY TO ACCOUNT FOR EQUITY METHOD
YEAR AFTER ACQUISITION

PAT’S July 1, 2017

Cash 9,000
BOOK
Investment in Sun 9,000
To record dividends from Sun
December 31, 2017
Investment in Sun 43,200
Income from Sun 43,200
To record net income from Sun
CONSOLIDATION AFTER ACQUISITION

Share of Sun’s net income 100% $60,000

Amortization of excess allocated to:
Inventories ($10,000 × 100%) –10,000
Buildings ($80,000 ÷ 20) – 4,000
Equipment ($20,000 ÷ 10 years) + 2,000
Adjusted Income from Sun for 2017 $48,000

Income from Sun for 2017 = 48,000 x 90% = 43,200

WORKING PAPER ENTRIES – 2017

a Dividends Receivable 9,000

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

b Cash 20,000
Note Receivable, Sun 20,000
To enter receipt of intercompany note receivable
WORKING PAPER ENTRIES – 2017

c Income from Sun 43,200

Dividends 18,000
Investment in Sun 25,200
To eliminate income and dividend from Pam
and return the investment account to the
beginning of the period balance
 WORKING PAPER ENTRIES 2017

d Non-controlling Interest share 4,800

Dividends Sun 2,000
Non-controlling Interest 2,800
To enter non-controlling interest share of subsidiary
income and dividends
NCI share = 48,000 x 10% = 4,800 Income from Sun = 43,200  90%
Dividend Sun = 10,000 x 10% = 2,000 100% (Income Sun) = 43,200 : 90% = 48,000
NCI share = 48,000 x 10% = 4,800
WORKING PAPER ENTRIES – 2017

e Retained Earnings, Sun 50,000

Capital Stock, Sun 200,000
Unamortized Excess 150,000
Investment in Sun 360,000
Non-controlling Interest, Jan 1 40,000
To eliminate reciprocal investment and equity
amounts, establish beginning (NCI) non-controlling
interest, and enter unamortized excess
WORKING PAPER ENTRIES – 2012

f Cost of Goods Sold 10,000

Land 30,000
Buildings (net) 80,000
Goodwill 50,000
Equipment (net) 20,000
Unamortized Excess 150,000
To allocate unamortized excess to identifiable
assets and goodwill
WORKING PAPER ENTRIES – 2012

g Operating Expenses 4,000

Buildings (net) 4,000
To enter current depreciation on excess
allocated to buildings

h Equipment (net) 2,000

Operating Expenses 2,000
To adjust current depreciation for excess
allocated to reduce equipment
WORKING PAPER ENTRIES – 2017

i Dividends Payable 9,000

Dividends Receivable 9,000
To eliminate reciprocal receivables and payables
CONSOLIDATED FINANCIAL STATEMENT DECEMBER 31, 2017
RECIPROCAL ACCOUNT
$394.2 + $42.8 = $290 + (150-3) (Sons Equity + Excess)

$43.2 + $4.8 + ($10+$4-$2) = $60 (Sons Income)

CLASS ASSIGNMENT – 2 (INDIVIDUAL HOME WORK)
 Sun reports net income of $80,000 in 2018
 Sun paid dividend of $15,000 on July 1 and $15,000 on Dec 31,
2018
Required:
1. Income from Sun for 2018
2. Investment in Sun on Dec 31, 2018
3. Non-Controlling interest on Dec 31, 2018
4. Pat’s journal entries to account investment in Sun (equity
method)
5. Adjustment and Elimination Entries for Pam and Subsidiaries
working paper
LEARNING OBJECTIVE 5

Apply concepts to prepare

a consolidated statement of
Cash flows
CASH FLOW
P4-17

Required:
Prepare a consolidated statement of cash
flows for Pam Corporation and
Subsidiary for the year ended December
31, 2016, using either the indirect
method or the direct method.
All changes in plant assets are due to
asset acquisitions with cash and
depreciation. Sun’s net income and
dividends for 2016 are $100,000 and
$40,000, respectively.
END OF CHAPTER 4

Insanity is doing the same thing

over and over again while
expecting different outcome
(Albert Einstein)
LEARNING OBJECTIVE 5

Apply concepts to prepare

a consolidated statement of
Cash flows
STATEMENT OF CASH FLOW (SCF)
COMPARATIVE BALANCE
SHEET (2012 – 2011)
CONSOLIDATED INCOME
STATEMENT DEC 31,2012
SCF INDIRECT METHOD
(EXHIBIT 4-6)
SCF DIRECT METHOD
(EXHIBIT 4-8)
END OF CHAPTER 4
INDIVIDUAL HOMEWORK: E4-2

Insanity is doing the same thing

over and over again while
expecting different outcome
(Albert Einstein)