CHAPTER 4-6 ADVANCED ACCOUNTING 5009

Roger Mayer 7:00 PM & 8:30 PM

4-1

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

4-2

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.

4-3

WORKING PAPER ENTRIES

1. 2. 3. 4. 5. 6. 7.

Adjust for errors & omissions Eliminate intercompany profits and losses Eliminate income & dividends from sub. and bring Investment account to its beginning balance Record noncontrolling interest in sub's earnings & dividends Eliminate reciprocal Investment & sub's equity balances Amortize fair value/book value differentials Eliminate other reciprocal balances

4-4

EXAMPLE: PREP & SNAP DATA

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 $25 $15 2010 $30 $15

Net income Dividends

4-5

ANALYSIS
Cost of 80% of Snap Implied value of Snap ($88/.80) Book value (60+30) Excess Unamort. Bal. on 1/1/2009 $20 $88 $110 90 $20

Allocated to: Patents

Amt Amort. $20 10 yrs

Patents

Amortization in 2009 $2

Unamort. Bal. on 12/31/2009 $18

Amortization in 2010 $2

Unamort. Bal. on 12/31/2010 $16

Use these amounts in 2009 worksheet for amortization expense and patents.

Use these amounts in 2010 worksheet for amortization expense and patents.
4-6

INCOME & DIVIDEND CALCULATIONS

2009: Snap's net income Amortization Adjusted income Dividends
2010: Snap's net income Amortization Adjusted income Dividends $25 Prep's 80% share $18.4 (2) $12.0 $23 NCI 20% share $4.6 $15 $3.0 80% $30 Prep's$22.4 share (2) $12.0 $28 NCI 20% share $5.6 $15 $3.0
4-7

PREP'S 2009 WORKSHEET ENTRIES

1. 2. 3.

Adjust for errors & omissions

none
4-8

Eliminate intercompany profits and losses

none

Eliminate income & dividends from sub. and bring Investment account to its beginning balance

Income from Snap (I.S.) Dividends (St. RE) Investment in Snap (B.S.)

18.4
12.0 6.4

PREP 2009: ENTRIES (2 OF 3)

Record noncontrolling interest in sub's earnings & dividends Noncontrolling interest share (I.S.) 4.6 Dividends (St. RE) 3.0 Noncontrolling interest (B.S.) 1.6
4.
4-9

Eliminate reciprocal Investment & sub's equity balances Capital stock (B.S.) 60 Retained earnings (St. RE, beg.) 30 Patents (B.S.) 20 Investment in Snap (B.S.) Noncontrolling interest (B.S.)
5.

88 22

PREP 2009: ENTRIES (3 OF 3)

6.

Amortize fair value/book value differentials

4-10

Amortization Expense (I.S.) Patents (B.S.)

7.

Eliminate other reciprocal balances

none

Note that in last chapter, all worksheet entries were prepared for the balance sheet. Here worksheet entries are prepared for the income statement, statement of retained earnings and balance sheet.

PREP'S 2009 WORKSHEET

Year ended 12/31/2009 Income statement: Revenues Income from Snap Expenses Noncontrolling interest share Net income/ Controlling share Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends Ending retained earnings Prep Snap DR CR Consol
315.0 0.0 (242.0) (4.6) 68.4 5.0 68.4 (30.0)

250.0 65.0 18.4 18.4 (200.0) (40.0) 2.0 4.6 68.4 25.0 5.0 30.0 30.0 68.4 25.0 (30.0) (15.0) 12.0 3.0 43.4 40.0
4-11

43.4

Balance sheet, 12/31/2009: Cash Other current assets Investment in Snap Plant & equipment, net Patents Total Liabilities Capital stock Retained earnings Noncontrolling interest, Jan.1 Noncontrolling interest, Dec. 31 Total

CR Consol 49.0 140.0 6.4 0.0 88.0 250.0 70.0 320.0 20.0 2.0 18.0 473.4 130.0 527.0 80.0 30.0 110.0 350.0 60.0 60.0 350.0 43.4 40.0 43.4 22.0 1.6 23.6 473.4 130.0 527.0
4-12

Prep Snap 39.0 10.0 90.0 50.0 94.4

DR

A LOOK AT THE INCOME STATEMENT

Year ended 12/31/2009 Income statement: Revenues Income from Snap Expenses Noncontrolling interest share Net income/ Controlling share Prep Snap DR CR Consol 315.0 0.0 (242.0) (4.6) 68.4

250.0 65.0 18.4 18.4 (200.0) (40.0) 2.0 4.6 68.4 25.0

Income from Snap is eliminated. Expenses are adjusted for 2009 amortization - $2 on patents Noncontrolling interest is proportional to Prep's Income from Snap since Prep uses the equity method. $18.4 x .20/.80 = $4.6
4-13

A LOOK AT RETAINED EARNINGS

Year ended 12/31/2009 Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends
Ending retained earnings

Prep Snap

DR

CR Consol
5.0 68.4 (30.0) 43.4

5.0 30.0 30.0 68.4 25.0 (30.0) (15.0) 12.0 3.0 43.4 40.0

Beginning retained earnings of Snap is eliminated. All of Snap's dividends are eliminated. Net income is not calculated across the line, but taken from the consolidated income statement. Ending retained earnings is calculated in the consolidated column.
4-14

4: ALLOCATING EXCESS OF FAIR VALUE OVER BOOK VALUE

Consolidation Techniques and Procedures

4-15

EXAMPLE WITH EXCESS ALLOCATED

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.

4-16

ANALYSIS AT ACQUISITION
Cost of 90% of Solo Implied value of Snap ($360/.90) Book value (200+50) Excess Noncontrolling interest, 10%(400) $360 $400 250 $150 $40 Allocated to: Inventories Land Building Equipment Goodwill Amt $10 30 80 (20) 50 150 Amort 1st yr 20 yrs 10 yrs -

Unamort. Bal. Amortization Unamort. Bal. 12/31/2009 * in 2010 * on 12/31/2010 Inventories $10 ($10) $0 Land 30 0 30 Building 80 (4) 76 Equipment (20) 2 (18) Goodwill 50 0 50 $150 ($12) $138

* Use the 12/31/2009 and 2010 amortization in worksheet entries for 2010.
4-17

SOLO'S INCOME & DIVIDEND

2010 Solo's net income Amortization Adjusted $60 ($12) $48

Pate's 90% share $43.2 $18.0

Solo's dividends

$20

NCI 10% share $4.8 $2.0

4-18

PATE'S WORKSHEET ENTRIES

1.

Adjust for errors & omissions

9.0
4-19

Dividends receivable (B.S.) Investment in Solo (B.S.) Cash (B.S.) Note receivable (B.S.)
2. 3.

9.0 20.0 20.0

Eliminate intercompany profits and losses Eliminate income & dividends from sub. and bring Investment account to its beginning balance

Income from Solo (I.S.) Dividends (St. RE) Investment in Solo (B.S.)

43.2 18.0 25.2

PATE: ENTRIES (2 OF 4)
Record noncontrolling interest in sub's earnings & dividends Noncontrolling interest share (I.S.) 4.8 Dividends (St. RE) 2.0 Noncontrolling interest (B.S.) 2.8
4.
4-20

Eliminate reciprocal Investment & sub's equity balances Capital stock (B.S.) 200 Retained earnings (St. RE, beg.) 50 Unamortized excess 150 Investment in Solo (B.S.) 360 Noncontrolling interest (B.S.) 40
5.

PATE: ENTRIES (3 OF 4)
Allocate the unamortized excess according to beginning of year balances.
4-21

Inventory Land Building, net Goodwill Equipment, net Unamortized excess

10 30 80 50
20 150

PATE: ENTRIES (4 OF 4)
6.

Amortize fair value/book value differentials

Cost of sales Inventory

10

10

4-22

Operating (depreciation) expense

Buildings, net Equipment, net

4
4 2

Operating (depreciation) expense

7.

2 9.0
9.0

Eliminate other reciprocal balances

Dividends payable (B.S.) Dividends receivable (B.S.)

PATE'S 2010 WORKSHEET

Year ended 12/31/2010 Income statement: Revenues Income from Snap Cost of goods sold Operating expenses Noncontrolling interest share Net income/ Controlling share Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends Ending retained earnings Pate Solo DR CR Consol 1,200.0 0.0 (760.0) (282.0) (4.8) 153.2 120.0 153.2 (100.0) 173.2
4-23

900.0 300.0 43.2 (600.0) (150.0) (190.0) (90.0) 153.2 120.0 153.2 (100.0) 173.2 60.0 50.0 60.0 (20.0) 90.0

43.2 10.0 4.0 4.8

2.0

50.0 18.0 2.0

Balance sheet, 12/31/2010: Cash Accounts receivable, net Note receivable - solo Inventories Land Building, net Equipment, net Investment in Solo

Prep 13.0 76.0 20.0 90.0 60.0 190.0 150.0 394.2

Snap 15.0 25.0 60.0 30.0 110.0 120.0

DR 20.0

CR

Dividends receivable Goodwill Unamortized excess Total Accounts payable Dividends payable Capital stock Retained earnings Noncontrolling interest, Jan.1 Noncontrolling interest, Dec. 31 Total

4.0 20.0 9.0 25.2 360.0 9.0 9.0 50.0 150.0 150.0

10.0 30.0 80.0 2.0

20.0 10.0

Consol 48.0 101.0 0.0 150.0 120.0 376.0 252.0 0.0

993.2 120.0 700.0 173.2

360.0 60.0 10.0 9.0 200.0 200.0 90.0 40.0 2.8

0.0 50.0 0.0 1,097.0 180.0 1.0 700.0 173.2 42.8 1,097.0

993.2

360.0
4-24

CHAPTER 5 1: INTERCOMPANY INVENTORY PROFITS

5-25

INTERCOMPANY TRANSACTIONS

For consolidated financial statements, ARB No. 51 (as amended by FASB Statement No. 160) states:

"intercompany balances and transactions shall be eliminated."

Show income and financial position as if the intercompany transactions had never taken place.

5-26

INTERCOMPANY SALES OF INVENTORY

Profits on intercompany sales of inventory

All recognized if goods have been resold to outsiders Deferred if the goods are still held in inventory

Previously deferred profits in beginning inventory are recognized Consider a FIFO inventory system

Beginning inventories are sold Ending inventories are from current period

5-27

NO INTERCOMPANY PROFITS IN INVENTORIES

During 2009, Pretty sold goods costing $1,000 to its subsidiary, Simple, at a gross profit of 30%. Simple had none of this inventory on hand at the end of 2009. Worksheet entry for 2009:
Sales Cost of sales Sales = $1,000 / (1-30%) = $1,429 1,429 1,429

All intercompany sales of inventories have been resold to outside parties, so remove the full sales price from both sales and cost of sales. Pretty's sales are reduced $1,429. Simple's cost of sales are reduced $1,429. The same entry is used if Simple sells to Pretty.
5-28

INTERCOMPANY PROFITS ONLY IN ENDING INVENTORIES

Last year, 2009, Paul sold goods costing $500 to its subsidiary, Sal, at a gross profit of 25%. Sal had none of this inventory on hand at the end of 2009. During 2010, Paul sold additional goods costing $900 to Sal at a gross profit of 40%. Sal has $200 of these goods on hand at 12/31/2010. Worksheet entries for 2010:
Sales Cost of sales Sales = $900 / (1-40%) = $1,500 Cost of sales Inventory Ending inventory profit = $200 x 40% 1,500 1,500

80
80
5-29

INTERCOMPANY PROFITS BEGINNING AND ENDING INVENTORIES

Last year, 2009, Pam sold goods costing $300 to its subsidiary, Sir, at mark-up of 25%. Sir had $120 of this inventory on hand at the end of 2009. During 2010, Pam sold additional goods costing $500 to Sir at a 30% mark-up. Sir has $260 of these goods on hand at 12/31/2010. Worksheet entries for 2010: Sales 650 Cost of sales 650
Sales = $500 + 30%($500) = $650

Cost of sales Inventory

Ending inv. profits = $260 x 30%/130%

60 60 24 24
5-30

Investment in Subsidiary Cost of sales

Begin. inv. profits = $120 x 25%/125% = $24

2: UPSTREAM & DOWNSTREAM INVENTORY SALES

Intercompany Profit Transactions Inventories

5-31

UPSTREAM AND DOWNSTREAM SALES

Downstream Sales
Parent Parent sells to subsidiary

Subsidiary sells to parent

Subsidiary 1

Subsidiary 2

Subsidiary 3
Upstream Sales
5-32

INTERCOMPANY INVENTORY SALES

The worksheet entries for eliminating intercompany profits for downstream sales

Sales Cost of sales

For the intercompany sales price

XXX XXX XX

For upstream sales, the last entry would also include a debit to noncontrolling interest, splitting the profit to be realized between controlling and noncontrolling interests.

Cost of sales Inventory

For the profits in ending inventory

XX
XX XX

Investment in Subsidiary Cost of sales

For the profits in beginning inventory

5-33

DATA FOR EXAMPLE

For the year ended 12/31/2011:

Subsidiary income is $5,200 Subsidiary dividends are $3,000 Current amortization of acquisition price is $450

Intercompany (IC) sales information:

IC sales during 2011 were $650 IC profits in ending inventory $60 IC profit in beginning inventory $24

5-34

INCOME SHARING WITH DOWNSTREAM SALES PARENT MAKES SALE

Subsidiary net income Current amortizations Adjusted income Defer profits in EI Recognize profits in BI $5,200 (450) $4,750 (60) 24 CI 80% share $3,800 (60) 24 Income from subsidiary $3,764 $2,400 NCI 20% share $950

Income recognized
Subsidiary dividends

$4,714
$3,000

When parent makes the IC sale, the impact of deferring and recognizing profits falls all to the parent.

$600
5-35

INCOME SHARING WITH UPSTREAM SALES SUBSIDIARY MAKES SALE

Subsidiary net income Current amortizations Adjusted income
Defer profits in EI Recognize profits in BI Income recognized Subsidiary dividends

$5,200 (450) $4,750

(60) 24 $4,714 $3,000

CI 80% share $3,800 (48) 19.2 $3,771.2 $2,400

Income from subsidiary

NCI 20% share When subsidiary makes the IC sale, the impact of deferring and recognizing profits is split among controlling and noncontrolling interests. $950.0 (12.0) 4.8 $942.8
5-36

$600

CHAPTER 6: INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

6-37

1: TRANSFERS OF PLANT ASSETS

Intercompany Profit Transactions Plant Assets

6-38

INTERCOMPANY FIXED ASSET SALES

Intercompany sales of nondepreciable fixed assets: In year of intercompany sale

Defer any gain or loss Restate fixed asset to cost

In years of continued ownership

Adjust investment account to defer gain or loss (adjust noncontrolling interest too, if upstream sale) Restate fixed asset to cost

In year of sale to outside entity

Adjust investment account (and noncontrolling interest if upstream sale) Recognize the previously deferred gain or loss

6-39

INTERCOMPANY SALE OF LAND

Park owns 90% of Stan, acquired at cost equal to fair value. In 2009, Park sells (downstream) land to Stan and records a $10 gain. In 2013, Stan sells the land to an outside entity at a $15 gain. Stan's separate income was $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

6-40

2009 CALCULATIONS
Defer the unrealized gain, with full effect to Park Park's Income from Stan 90%(70) 10 = $53 Noncontrolling interest share 10%(70) = $7 Elimination entry for 2009 Worksheet

Gain on sale of land Land

10 10
6-41

2010 TO 2012 CALCULATIONS

Continue to defer gain, with full effect to Park Park's Income from Stan 90%(80) = $72 Noncontrolling interest share 10%(80) = $8 Elimination entry for Worksheets in 2010 to 2012

Investment in Stan Land

10 10
6-42

2013 CALCULATIONS
Recognize the previously deferred gain, with full effect to Park Park's Income from Stan 90%(90) + 10 = $91 Noncontrolling interest share 10%(90) = $9 Elimination entry for 2013 Worksheet

Investment in Stan Gain on sale of land

10 10
6-43