CH 04
CH 04
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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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.
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Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
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Consolidation Techniques and Procedures
1: Acquisition-Year Working Papers
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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
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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.
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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 non-controlling 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
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Example A : Parent & Subs Data
P123 (1/8)
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Analysis (2/8)
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Income & Dividend Calculations (3/8)
2009:
Subs.'s net income $150 Parent's 70% share
Amortization (0) $105
Adjusted income $150 $70 NCI 30% share
$45
Dividends $100 $30
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Parent‘s Worksheet Entries ( 1/3 )
(4/8)
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Parent’s Worksheet ( p123) (7/8)
Year ended 12/31/2009 Parent Subs DR CR Consol
Income statement:
sales 3,100 1,000 4,100
Income from Subsidiary 105 a105 0
Cost of goods sold (2,000) (650) (2,650)
Operating expenses (770) (200) (970)
Net income/ consolidated net
income 435 150 480
Noncontrolling interest share b45 (45)
Controlling share of
consolidated net income 435
Statement of retained earnings:
Beginning retained earnings 650 110 c110 650
Add net income 435 150 435
Deduct dividends (300) (100) a70 (300)
b30
Ending retained earnings
倪慧萍 785 160 785
4-14
Balance sheet, 12/31/2009: Parent Subs DR CR Consol
Cash 455 115 605
Receivables-net 600 300 900
inventories 240 200 440
Plant & equipment, net 1,200 350 1,770
Investment in Subsidiary 490 a35 0
c455
Total assets 2,985 1,000 3,495
Accounts payable 300 180 480
Other liabilities 200 120 320
Capital stock, $10 par 1,500 500 c500 1,500
Other paid-in capital 200 40 c40 200
Retained earnings 785 160 785
Total equities 2,985 1,000
Noncontrolling interest, Jan.1 c195
Noncontrolling interest, Dec. 31 b15 210
Total 800 800 3,495
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Example B: Prep & Snap Data (1/12)
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
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Analysis (2/12)
2009:
Snap's net income $25 Prep's 80% share
Amortization (2) $18.4
Adjusted income $23 $12.0 NCI 20% share
$4.6
Dividends $15 $3.0
2010: Prep's 80% share
Snap's net income $30 $22.4
Amortization (2) $12.0
Adjusted income $28 NCI 20% share
$5.6
Dividends $15 $3.0
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Prep‘s 2009 Worksheet Entries ( 1/3 )
(4/12)
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A re-Look at Liabilities & Equity (12/12)
Balance sheet: Prep Snap DR CR Consol
Liabilities 80.0 30.0 110.0
Capital stock 350.0 60.0 c60.0 350.0
Retained earnings 43.4 40.0 43.4
Noncontrolling interest, Jan.1 c22.0
Noncontrolling interest, Dec. 31 b1.6 23.6
Total 473.4 130.0 527.0
2009:
Snap's net income $25 Prep's 80% share
Amortization (2) $18.4
Adjusted income $23 $12.0 NCI 20% share
$4.6
Dividends $15 $3.0
2010:
Snap's net income $30 Prep's$22.4
80% share
Amortization (2) $12.0
Adjusted income $28 NCI 20% share
$5.6
Dividends $15 $3.0
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Prep‘s Worksheet Entries for 2010 (3/8)
1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
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Prep‘s 2010 Worksheet (7/8)
Year ended 12/31/2010 Prep Snap DR CR Consol
Income statement:
Revenues 300.0 75.0 375.0
Income from Snap 22.4 a22.4 0.0
Expenses (244.0) (45.0) d2.0 (291.0)
Net income/ consolidated net
income 78.4 30.0 84
Noncontrolling interest share b5.6 (5.6)
Controlling share of
consolidated net income 78.4
Statement of retained earnings:
Beginning retained earnings 43.4 40.0 c40.0 43.4
Add net income 78.4 30.0 78.4
Deduct dividends (45.0) (15.0) a12.0 (45.0)
b3.0
Ending retained earnings 76.8 55.0 76.8
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Prep‘s 2010 Worksheet (8/8)
Balance sheet, 12/31/2010: Prep Snap DR CR Consol
Cash 45.0 20.0 65.0
Note receivable – Snap 10.0 e10.0 0.0
Other current assets 97.0 70.0 167.0
Investment in Snap 104.8 a10.4 0.0
c94.4
Plant & equipment, net 240.0 60.0 300.0
Patents c18.0 d2.0 16.0
Total 496.8 150.0 548.0
Note payable – Prep 10.0 e10.0
Liabilities 70.0 25.0 95.0
Capital stock 350.0 60.0 c60.0 350.0
Retained earnings 76.8 55.0 76.8
Noncontrolling interest, Jan.1 c23.6
Noncontrolling interest, Dec. 31
倪慧萍 b2.6 26.2
Total 496.8 150.0 548.0
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Consolidation Techniques and Procedures
3: Locating Errors in Working
Papers
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Errors
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Consolidation Techniques and Procedures
4: Allocating Excess of Fair Value
over Book Value
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Example C: with Excess Allocated (1/9)
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.
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Analysis at Acquisition (2/9)
Cost of 90% of Solo $360 Allocated to: Amt Amort
Implied value of Snap ($360/.90) $400 Inventories $10 1st yr
Book value (200+50) 250 Land 30 -
Excess $150 Building 80 20 yrs
Equipment (20) 10 yrs
Noncontrolling interest, 10%(400) $40 Goodwill 50 -
150
Unamort. Bal. Amortization Unamort. Bal.
* Use the
12/31/2009 * in 2010 * on 12/31/2010 12/31/2009
Inventorie and 2010
s $10 ($10) $0 amortization
Land 30 0 30 in worksheet
Building 80 (4) 76 entries for
Equipment (20) 2 (18) 2010.
Goodwill 50 0 50
$150 ($12) $138
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Solo‘s Income & Dividend (3/9)
2010
Pate's 90% share
Solo's net income $60 $43.2
Amortization ($12) $18.0
Adjusted $48
Solo's dividends $20
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Pate: Entries (4/4) (7/9)
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Balance sheet, 12/31/2010: Prep Snap DR CR Consol
Cash 13.0 15.0 b20.0 48.0
Accounts receivable, net 76.0 25.0 101.0
Note receivable - solo 20.0 b20.0 0.0
Inventories 90.0 60.0 f10.0 h10.0 150.0
Land 60.0 30.0 f30.0 120.0
Building, net 190.0 110.0 f80.0 h4.0 376.0
Equipment, net 150.0 120.0 i2.0 f20.0 252.0
Investment in Solo 394.2 a 9.0 0.0
c25.2
e360.0
Dividends receivable a 9.0 j9.0 0.0
Goodwill e50.0 50.0
Unamortized excess e150.0 f150.0 0.0
Total 993.2 360.0 1,097.0
Accounts payable 120.0 60.0 180.0
Dividends payable 10.0 j9.0 1.0
Capital stock 700.0 200.0 e200.0 700.0
Retained earnings 173.2 90.0 173.2
Noncontrolling interest, Jan.1 e40.0
Noncontrolling interest, Dec. 31 d2.8 42.8
Total
倪慧萍 993.2 360.0 1,097.0
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Consolidation Techniques and Procedures
5: Consolidated Statement of Cash
Flows
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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
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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
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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
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Thanks!
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