Accounting for Investments Acquisition Method

Accounting for Investments Acquisition Method

General Ledger accounts 1

Investment in Subsidiary FV of Net Assets Net Income Dividends Incremental Expense

Journal Entries At purchase:

Stock Transaction Investment in Subsidiary Common Stock APIC XXXXX XXX XX

Income from Subsidiary Incremental Expense Net Income

Cash Transaction Investment in Subsidiary Cash

XXXXX XXXXX

FV of Net Assets calculation:

BV of Net Assets + Revaluation Increment FV of Identiable Net Assets + Goodwill FV of Net Assets (Purchase Price)

At end of year:
Net Income Investment in Subsidiary Income from Subsidiary Dividends Cash Investment in Subsidiary Incremental Expense Income from Subsidiary Investment in Subsidiary XX XX XXX XXX

Incremental Expense: = Revaluation Increment Remaining Life of Asset

1

X X

Record entries according to the share owned by parent.

Accounting for Investments Acquisition Method

Accounting for Investments Acquisition Method

Consolidation Procedures (1) Eliminate SE accounts: - Common Stock - Retained Earnings - Dividends (2) Recognize additional beginning balances: - Revaluation Increment - Goodwill (3) Recognize current year total incremental expense (4) Eliminate Income from Subsidiary: - Net amount (5) Recognize NCIs I/S accounts: - Net Income - Incremental expenses (6) Eliminate intercompany receivables & payables - Remove remaining balance (7) Eliminate intercompany sales, COGS & inventory - Remove intercompany sales - Remove COGS to outer party & leftover COGS - Remove remaining increment to inventory

Consolidation Problem
1. Parent acquires 75% of Subsidiary, whose fair value is $80,000. 2. Fair value of equipment is $40,000 (remaining life of 5 years). 3. Parent sold goods costing $3,000 to Subsidiary for $5,000. 4. Subsidiary sold 20% of goods to outer party for $1,500. 5. Trial balance at year end: Parent Subsidiary DEBITS Cash Accounts Receivable Inventory Investment in Subsidiary PPE Dividends Cost of goods sold Depreciation Total CREDITS Accounts Payable Common Stock Beginning Retained Earnings Sales Income from Subsidiary $ 14,000 70,000 20,000 60,000 9,000 $ 173,000 $ $ 7,000 40,000 10,000 35,000 0 92,000 $ 3,000 18,000 12,000 63,000 32,000 5,000 25,000 15,000 $ 173,000 $ $ 5,000 24,000 16,000 0 20,000 8,000 15,000 4,000 92,000

(1) & (2): Split proportionally between parent & NCI (4) & (5): Recognized individually

Total