Consolidated Statements: Subsequent To Acquisition

CHAPTER
Consolidated Statements:
Subsequent to Acquisition

Fundamentals of Advanced Accounting
1
th
Edition
Fischer, Taylor, and Cheng
3
3
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Chapter 3, Slide #2
Consolidated Statements Subsequent to
Acquisition
Two basic methods to maintain the
parents investment account:
Equity Method (Simple &
Sophisticated)
Cost Method
Chapter 3, Slide #3
Equity Method of Accounting for Investments
Equity Method: Parent records income when
subsidiary reports income
Parent used percent of ownership time subs net
income to record investment income
Dividends treated as return of investment
investment account is reduced
Sophisticated Equity Method recognizes
amortization on the parents ledger for the
difference from book value to fair value.
Chapter 3, Slide #4
Cost Method of Accounting for Investments
Cost Method: Parent records income
when subsidiary declares dividends
Most commonly used method
No adjustments to investment account

Chapter 3, Slide #5
Example
Company P and Subsidiary Company S
Parent purchases 90% of Subs stock for
$145,000.
Sub has equity accounts:
Common Stock $100,000
Retained Earnings 50,000
20X1 Sub:
Net Income = $30,000, Dividends = $10,000
20X2 Sub:
Net Loss = ($10,000), Dividends = $5,000

Chapter 3, Slide #6
D&D Schedule Example
Company P and Subsidiary Company S
Price paid: $ 145,000
Interest acquired:
Common stock $ 100,000
Retained earnings 50,000
Total equity 150,000
Ownership interest 90% 135,000
Excess cost 10,000
Annual
Life Amort.
Patent $10,000 10 $1,000
Chapter 3, Slide #7
Parent Recording of Subsidiary Income
(Year 1)
Equity
Sophisticated
Equity Cost
Investment balance 145,000 145,000 145,000
Year 1 income (90%):
Investment in Sub
Investment income

27,000
27,000

26,000
26,000
(1,000 amort.)

no entry
Year 1 dividends(90%):
Dividend receivable
Investment in Sub
Dividend income

9,000
9000

9,000
9,000

9,000

9,000

Chapter 3, Slide #8
Parent Recording of Subsidiary Income
(Year 2)
Equity
Sophisticated
Equity Cost
Year 2 income (90%):
Investment Loss
Investment in Sub

9,000
9,000

10,000
10,000
(1,000 amort.)

no entry
Year 2 dividends (90%):
Dividend receivable
Investment in Sub
Dividend income

4,500
4,500

4,500
4,500

4,500

4,500

Chapter 3, Slide #9
Worksheet Procedures
The RE of the Sub and the Investment account must
be at the same point in time
Eliminate entries during the year to complete alignment

When adjusted to the same point in time, the excess
upon elimination will agree with the D&D on
purchase date
Sophisticated Equity results in only the amortized balance
of the excess

The account adjustments made require amortization
for current and prior periods
No entries are made on either firms books for worksheet
eliminations
Chapter 3, Slide #10
Worksheet Elimination Procedures
Key Description
Simple
Equity
Soph.
Equity Cost
CV Convert to Equity

CY1 Eliminate Sub Income

CY2 Eliminate intercompany dividends

EL Eliminate parents % of sub equity

D Distribute excess per D&D
schedule

A Amortize excess

Worksheet Elimination Entries
Simple Equity
CY1 Sub Income - Par 27,000
Invest. In Sub - Par 27,000
(Eliminates current year income and creates date alignment)
CY2 Invest. In Sub - Par 9,000
Dividends Declared - Sub 9,000
(Eliminates intercompany dividends)
EL Common Stock - Sub 90,000
Retained Earnings - Sub 45,000
(Eliminates investment account against 90% of equity)

Simple Equity Continued
D Patent 10,000
(Eliminates balance of investment account and distributes to
proper accounts)
A Patent Amort. Expense 1,000
Patent 1,000
(Amortized excess cost of the patent over its 10 year life)

Simple Equity: Worksheet 3-1 Year 1
Selected Accounts Trial Balances Eliminations
Parent Sub Dr Cr
Investment in Sub 163,000 CY2 9,000 CY1 27,000
EL 135,000
D 10,000
Patent D 10,000 A 1,000
Other net assets 227,000 170,000
Com. Stock Par (200,000)
RE Parent (123,000)
Com. stock Sub (100,000) EL 90,000
RE Sub (50,000) EL 45,000
Revenue (100,000) (80,000)
Expenses 60,000 50,000
Patent Amort. A 1,000
Subsidiary Income (27,000) CY1 27,000
Dividends declared 10,000 CY2 9,000

Review of Worksheet Procedures
Elimination of equity income and
intercompany dividends returns investment
to Jan. 1 for date alignment
Excess is distributed per D&D; amortized for
current and prior years
IDS (income distribution schedule) is used to
allocate income to P & S
All excess amortizations go to P; only Ps share
is recorded initially
Features of Consolidated Statements
Consolidated net income is total income
earned by the entity.
Consolidated net income is distributed to:
Parent
Non-Controlling interest
Retained Earnings statement
Shows only controlling interest
Consolidated Balance Sheet reports
NCI as subdivision of equity
Cost Method
CY2 Dividend Income - Par 9,000
D Patent 10,000
(Eliminates balance of investment account and distributes to proper accounts)
A Patent Amort. Expense 1,000
Patent 1,000
(Amortized excess cost of the patent over its 10 year life)
Cost Method: Worksheet 3-3 Year 1
Parent Sub Dr Cr
Investment in Sub 145,000 EL 135,000
D 10,000
Patent D 10,000 A 1,000
RE Parent (123,000)
Com. stock Sub (100,000) EL 90,000
RE Sub (50,000) EL 45,000
Revenue (100,000) (80,000)
Expenses 60,000 50,000

Subsequent years Cost Method
For periods after the first year, date
alignment will not exist.
Balance of parents investment account subs
retained earnings.
Calculate simple equity balance for
investment account.
Record entry to adjust investment
account.
DR Investment in Sub Par
CR RE 1/1/20X2 - Par
Effect of Sophisticated Equity Method on
Consolidation
Parent amortizes excess costs of net
assets
Investment account includes only
unamortized costs
Sophisticated Equity Method
CY1 Sub Income - Par 26,000
(Eliminates current year income and creates date alignment)
CY2 Invest. In Sub - Par 9,000
D Patent 10,000
(Eliminates balance of investment account and distributes to proper accounts
includes only UNAMORTIZED excess cost)
Sophisticated Equity Method: Year 1
Parent Sub Dr Cr
Investment in Sub 162,000 CY2 9,000 CY1 26,000
EL 135,000
D 10,000
Patent D 10,000 A 1,000
RE Parent (123,000)
Com. stock Sub (100,000) EL 90,000
RE Sub (50,000) EL 45,000
Revenue (100,000) (80,000)
Expenses 60,000 50,000

Disclosure Concerns
Consolidated net income The net income of the
consolidated entity
NCI share of income This is the NCI share of
consolidated net income; it has often (incorrectly)
been treated as an expense.
Controlling share of net income This is the
controlling share of consolidated net income; it has
often (incorrectly) been treated as consolidated net
income (the NCI share having been deducted)
Total NCI Best theory is to show as aggregated
part of total equity
Some have shown it as liability or put it between liabilities
and equity
During-the-Year Purchases
Option 1 - Close Books
(WS 3-7)
D&D includes Sub RE
on purchase date
WS includes Sub
operations for only later
part of year
Option 2 - Books Open
(WS 3-8)
D&D has Beginning of
year RE and
Purchased Income
WS includes Sub
operations for entire
year
Purchased income is
used to remove income
prior to purchase
Goodwill Impairment Losses
If remaining goodwill is estimated to be less
book value of goodwill, record a goodwill
impairment loss.
Impairment loss is reported on consolidated
income statement for period in which it
occurs.
Presented before-tax basis.
Two options for impairment losses:
Record loss on parents books
Record loss on consolidated worksheet.
Goodwill Impairment Losses - Calculation
Company P purchased 80% interest in
Company S in 20X2 resulting in $165,000
of Goodwill.

20X4 information is as follows:
Invest in Sub (Soph. Equity) $800,000
Estimated fair value of S. Co. 900,000
Est. fair value of net assets 850,000
Goodwill Impairment Losses - Calculation
Step one determine if Goodwill is impaired:
Investment in Sub $800,000
Fair value of investment 720,000*
*($900,000 total fair value x 80% ownership)
If investment account exceeds fair value,
calculate impairment.
Impairment calculation:
Est. fair value of company $900,000
Est. fair value of net assets 850,000
Est. goodwill 50,000

Parents % of goodwill = $50,000 x 80% = $40,000
Original goodwill calculation 165,000
Goodwill Impairment (125,000)
Tax Issues: Tax-Free Exchange
Occurs when seller is not taxed; buyer gets book
value for future depreciation
Adjustment from market to book accompanied by
DTL = tax % market adjustment
DTL has same priority as the related asset.
DTL is amortized over same period as asset
adjustment; increases tax liability in future years
Tax loss carryover is asset recorded in purchase;
there are limits on its use in year of purchase and
later years

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