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Consolidation
Techniques and
Procedures
Consolidation Techniques:
Objectives
1. Prepare consolidation workpaper for the
year of acquisition when the parent uses
the complete equity method to account for
its investment in a subsidiary.
2. Prepare a consolidation workpaper for the
years subsequent to acquisition.
3. Locate errors in a consolidation workpaper.
4. Record fair values to identifiable net assets
acquired.
4-2
Objectives (continued)
5. Prepare a consolidated statement of cash
flows.
6. (Students) Create an electronic
spreadsheet to prepare a consolidation
workpaper
7. Appendix: Understand the alternative trial
balance consolidation workpaper format.
4-3
1: ACQUISITION-YEAR
WORKPAPER
4-4
Columns needed:
Parent
Subsidiary
DR and CR columns for elimination entries
Consolidated
4-5
4-6
Note:
The total consolidated assets should equal the
total consolidated liabilities and equity.
Expenses on the income statement and dividends
on the statement of retained earnings are
generally shown as negative numbers. So
compute the consolidated amounts as you would
for revenues.
Copyright 2015 Pearson Education, Inc. All rights reserved.
4-7
Workpaper 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 noncontrolling interest in sub.'s
earnings & dividends
5. Eliminate reciprocal Investment & sub.'s equity
balances
6. Amortize fair value differentials
7. Eliminate other reciprocal balances
Copyright 2015 Pearson Education, Inc. All rights reserved.
4-8
2012
Net income
$50
$60
Dividends
$30
$30
4-9
Analysis
Cost of 80% of Sap
Implied value of Sap
($176/.80)
$176
Patents
$40
Amort.
10 yrs
180
$40
Amortization
Unamort.
Bal.
Amortization
Unamort. Bal.
on 1/1/2011
in 2011
on
12/31/2011
in 2012
on 12/31/2012
$40
$4
$36
$4
$32
Unamort. Bal.
Patents
Amt
$220
Allocated to:
4-10
$30
2012:
Sap's net income $60
Amortization
(4)
Adjusted income $56
Dividends
$30
4-11
none
none
36.8
Dividends (+SE)
24.0
12.8
4-12
9.2
Dividends (+SE)
6.0
3.2
120
60
Patents (+A)
40
176
44
4-13
4
4
none
4-14
Pep
Sap
DR
CR
Consol
Income statement:
Revenues
Income from Sap
Expenses
500.0
130.0
36.8
36.8
(400.0) (80.0)
630.0
136.8
50.0
10.0
60.0
136.8
50.0
Deduct dividends
(60.0) (30.0)
0.0
4.0
(484.0)
9.2
(9.2)
136.8
Statement of retained
earnings:
Beginning retained earnings
60.0
10.0
136.8
24.0
(60.0)
6.0
Ending retained earnings
86.8
80.0
86.8
4-15
Pep
Sap
DR
CR
Consol
78.0
20.0
98.0
180.0
100.0
280.0
Investment in Sap
188.8
12.8
0.0
176.0
Plant & equipment, net
500.0
140.0
Patents
680.0
40.0
4.0
36.0
Total
946.8
260.0
1,054.0
Liabilities
160.0
60.0
220.0
Capital stock
700.0
120.0
86.8
80.0
Retained earnings
Noncontrolling interest, Jan.1
700.0
86.8
44.0
120.0
3.2
946.8
260.0
47.2
1,054.0
4-16
Pep
Sap
DR
CR
Consol
Income statement:
Revenues
Income from Sap
Expenses
500.0
130.0
36.8
(400.0)
36.8
(80.0)
136.8
630.0
50.0
0.0
4.0
(484.0)
9.2
(9.2)
136.8
4-17
Pep
Sap
DR
CR
Consol
Statement of retained
earnings:
Beginning retained earnings
10.0
60.0
136.8
50.0
Deduct dividends
(60.0) (30.0)
60.0
10.0
136.8
24.0
(60.0)
6.0
Ending retained earnings
86.8
80.0
86.8
4-18
A Look at Assets
Investment in Sap is eliminated.
Patents at the start of 2011 were $20, and current
amortization is $2; they are $18 at the end of 2011.
The total is calculated in the consolidated column.
Balance sheet, 12/31/2011:
Cash
Pep
78.0
180.0
Investment in Sap
188.8
Sap
DR
CR
20.0
Consol
98.0
100.0
280.0
12.8
0.0
176.0
Plant & equipment, net
500.0
140.0
Patents
Total
680.0
40.0
946.8
360.0
4.0
36.0
1,054.0
4-19
Pep
Sap
Liabilities
160.0
60.0
Capital stock
700.0
120.0
86.8
80.0
Retained earnings
Noncontrolling interest, Jan.1
CR
Consol
220.0
120.0
700.0
86.8
44.0
DR
3.2
946.8
260.0
47.2
1,054.0
4-20
2: WORKPAPERS IN
SUBSEQUENT YEARS
4-21
$176
Allocated to:
Amt
Amort.
$220
Patents
$40
10 yrs
180
Excess
Patents
$40
Unamort.
Bal.
Amortization
Unamort. Bal.
Amortization
Unamort.
Bal.
on
1/1/2011
in 2011
on 12/31/2011
in 2012
on
12/31/2012
$40
$4
$36
$24
$32
$50
(4)
$46
Dividends
$30
2012:
Sap's net income $60
Amortization
(4)
Adjusted income $56
Dividends
$30
4-23
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Sap (-R, -SE)
44.8
Dividends (+SE)
24.0
20.8
4-24
11.2
Dividends (+SE)
6.0
5.2
120
80
Patents (+A)
36
188.8
47.2
4-25
$220
20
(4)
$236
4-26
Patents (-A)
20
20
4-27
Pep
Sap
600.0
150.0
DR
CR
Consol
Income statement:
Revenues
Income from Sap
Expenses
44.8
(488.0)
44.8
(90.0)
750.0
0.0
4.0
(582.0)
11.2
156.8
60.0
86.8
80.0
156.8
60.0
Deduct dividends
(90.0)
(30.0)
(11.2)
156.8
80.0
86.8
156.8
24.0
(90.0)
6.0
Ending retained earnings
153.6
110.0
153.6
4-28
Pep
Sap
Cash
90.0
40.0
20.0
194.0
Investment in Sap
209.6
DR
CR
Consol
130.0
20.0
140.0
0.0
334.0
20.8
0.0
188.8
Plant & equipment, net
480.0
120.0
Patents
Total
36.0
993.6
20.0
140.0
790.0
153.6
120.0
32.0
1,096.0
20.0
50.0
190.0
120.0
700.0
110.0
153.6
47.2
4.0
300.0
Total
600.0
5.2
993.6
300.0
52.4
1,096.0
4-29
3: ERRORS IN THE
WORKPAPERS
4-30
Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
Noncontrolling interest share (income)
Goodwill
Noncontrolling interest (equity)
4-31
4-32
4-33
Analysis at Acquisition
$36
0
$400
250
Excess
$15
0
Allocated to:
Amt
Amort
Inventories
$10
1st yr
Land
30
Building
80 20 yrs
Equipment
Goodwill
Noncontrolling interest,
10%(400)
$40
Amortization
Unamort. Bal.
12/31/2011 *
in 2012 *
on 12/31/2012
$10
($10)
$0
Land
30
30
Building
80
(4)
76
(20)
(18)
50
50
$150
($12)
$138
Equipment
Goodwill
(20) 10 yrs
50
150
Unamort. Bal.
Inventories
* Use the
12/31/2011
and 2012
amortization
in worksheet
entries for
2012.
4-34
$60
($12)
Adjusted
income
$48
Sol's dividends
$20
4-35
9.0
9.0
20.0
20.0
none
3. Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Sol (-R, -SE)
43.2
Dividends (+SE)
18.0
25.2
4-36
Pat: Entries (2 of 4)
4. Record noncontrolling interest in sub.'s earnings &
dividends
Noncontrolling interest share (-SE)
4.8
Dividends (+SE)
2.0
2.8
200
50
150
360
40
4-37
Pat: Entries (3 of 4)
5b. Allocate the unamortized excess
according to beginning-of-year balances.
Cost of Goods Sold (-SE)
10
Land (+A)
30
80
Goodwill (+A)
50
20
150
4-38
Pat: Entries (4 of 4)
6. Amortize fair value/book value differentials
Operating (depreciation) expense (E, -SE)
4
2
9.0
9.0
4-39
Pat
Sol
DR
CR
Consol
Income statement:
Revenues
Income from Sol
900.0
300.0
43.2
43.2
(600.0)
(150.0)
Operating expenses
(190.0)
(90.0)
1,200.0
0.0
10.0
4.0
(760.0)
2.0
4.8
153.2
60.0
120.0
50.0
153.2
60.0
(100.0)
(20.0)
(282.0)
(4.8)
153.2
Statement of retained
earnings:
Deduct dividends
50.0
120.0
153.2
18.0
(100.0)
2.0
Ending retained earnings
Copyright 2015 Pearson Education, Inc. All rights reserved.
173.2
90.0
173.2
4-40
Pat
Sol
DR
CR
20.0
Consol
Cash
13.0
15.0
48.0
76.0
25.0
20.0
Inventories
90.0
60.0
10.0
Land
60.0
30.0
30.0
Building, net
190.0
110.0
80.0
4.0
376.0
Equipment, net
150.0
120.0
2.0
20.0
252.0
Investment in Sol
394.2
9.0
0.0
101.0
20.0
0.0
10.0
150.0
120.0
25.2
360.0
Dividends receivable
9.0
Goodwill
50.0
Unamortized excess
150.0
Total
Accounts payable
993.2
360.0
120.0
60.0
Dividends payable
10.0
Capital stock
700.0
200.0
Retained earnings
173.2
90.0
9.0
0.0
50.0
150.0
0.0
1,097.0
180.0
9.0
1.0
200.0
700.0
173.2
40.0
4-41
5: CONSOLIDATED
STATEMENT OF CASH
FLOWS
4-42
4-43
4-44
Indirect method:
Start with controlling share of net income
Add the noncontrolling interest share
Deduct the excess of equity method income over
cash dividends received from equity investees
4-45
7: APPENDIX TRIAL
BALANCE FORMAT
4-46
4-47
4-48