11 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 11: Alternative Concepts of...
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11 - 1 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 11: Alternative Concepts of Consolidated Financial Statements Slides Authored by Hannah Wong, Ph. Rutgers University
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Transcript of 11 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 11: Alternative Concepts of...
11 - 1
Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 11: Alternative
Concepts of Consolidated
Financial Statements
Slides Authored by Hannah Wong, Ph.D.Rutgers University
11 - 2
Pooling of Interests Method
Recent developments Upsurge in pooling activity in 1998
FASB voted to eliminate the pooling method in 4/1999
exposure draft eliminating the pooling method issued in 9/1999
final standard expected late 2000
11 - 3
Pooling of Interests Method
Why is the FASB considering elimination of the pooling method?
The purchase method provides better information on the profitabilityof an investment
International compatibility
11 - 4
Pooling of Interests MethodStock Acquisition
Main Requirement
a stock acquisition through an exchange of voting stock for at least 90% of the voting stock of the acquired company
11 - 5
Wholly Owned Subsidiary Equity Allocation
Case A: P issued shares with par value of $60,000
Common stock -S$50,000
Other ContributedCapital - S
$10,000
Retained Earnings- S
$20,000
Common Stock - P
$200,000
Other ContributedCapital - P
$40,000
Retained Earnings- P
$100,000
$50,000 $10,000 $20,000
11 - 6
Wholly Owned Subsidiary Journal Entry
Investment in S 80,000
Common Stock 60,000
Retained Earnings 20,000
net assets acquired are recorded at their book value
Total shareholders’ equity of S Company ($80,000) is carried
forward to P Company
Par value of common stock issued is recorded
Case A: P issued shares with par value of $60,000
11 - 7
Wholly Owned Subsidiary Eliminating Entry
Common stock - S 50,000
Other contributed capital - S 10,000
Retained earnings - S 20,000
Investment in S 80,000
There is no purchase differential under pooling method because the investment account carries the book value of S
Case A: P issued shares with par value of $60,000
11 - 8
Wholly Owned Subsidiary Equity Allocation
Case B: P issued shares with par value of $90,000
Common stock -S$50,000
Other ContributedCapital - S
$10,000
Retained Earnings- S
$20,000
Common Stock - P
$200,000
Other ContributedCapital - P
$40,000
Retained Earnings- P
$100,000
$50,000 $10,000 $20,000
$30,000
11 - 9
Wholly Owned Subsidiary Journal Entry
Investment in S 80,000
Other contributed capital 30,000
Common Stock 90,000
Retained Earnings 20,000
net assets acquired are recorded at their book value
Total shareholders’ equity of S Company ($80,000) is carried
forward to P Company
Par value of common stock issued is recorded
Case B: P issued shares with par value of $90,000
11 - 10
Wholly Owned Subsidiary Equity Allocation
Case C: P issued shares with par value of $110,000
Common stock -S$50,000
Other ContributedCapital - S
$10,000
Retained Earnings- S
$20,000
Common Stock - P
$200,000
Other ContributedCapital - P
$40,000
Retained Earnings- P
$100,000
$50,000 $10,000 $10,000
$40,000
$10,000
11 - 11
Wholly Owned Subsidiary Journal Entry
Investment in S 80,000
Other contributed capital 40,000
Common Stock 110,000
Retained Earnings 10,000
net assets acquired are recorded at their book value
Total shareholders’ equity of S Company ($80,000) is carried
forward to P Company
Par value of common stock issued is recorded
Case C: P issued shares with par value of $110,000
11 - 12
95% Owned Subsidiary Equity Allocation
Case D: P issued shares with par value of $50,000
Common stock -S$47,500
Other ContributedCapital - S
$9,500
Retained Earnings- S
$19,000
Common Stock - P
$200,000
Other ContributedCapital - P
$40,000
Retained Earnings- P
$100,000
$47,500 $2,500 $19,000$7,500
11 - 13
95% Owned Subsidiary Journal Entry
Investment in S 76,000
Common Stock 50,000
Other contributed capital 7,000
Retained Earnings 19,000
net assets acquired are recorded at their book value
Total shareholders’ equity of S Company ($80,000) is carried
forward to P Company
Par value of common stock issued is recorded
Case D: P issued shares with par value of $50,000
11 - 14
95% Owned Subsidiary Eliminating Entry
Common stock - S 47,500
Other contributed capital - S 9,000
Retained earnings - S 19,000
Investment in S 76,000
There is no purchase differential under pooling method because the investment account carries the book value of S
Case D: P issued shares with par value of $50,000
11 - 15
Accounting for a Pooled Subsidiary After Acquisition
Book value method equivalent to cost method in a
purchase
Partial equity method
Complete equity method
11 - 16
Accounting After Acquisition Book Value Method
Journal entries of parent:
investment account remains unchanged unless the parent buys or sells shares of the subsidiary
parent records dividend income from subsidiary
11 - 17
Accounting After Acquisition Book Value Method
Eliminating entries: reciprocity EE dividend EE investment EE
The eliminating entries are similar to those under purchase method, without allocation and amortization of purchase differential
11 - 18
Accounting After Acquisition Partial or Complete Equity Method
Journal entries of parent: investment account is increased for the
parent’s share of reported net income of subsidiary
investment account is decreased for dividends received from the subsidiary
complete equity method: investment account is adjusted for unrealized profit from intercompany sale of inventory or equipment
11 - 19
Eliminating entries:
dividend EE
investment EE
The eliminating entries are similar to
those under purchase method, without
allocation and amortization of purchase
differential
Accounting After Acquisition Partial or Complete Equity Method
11 - 20
Interim Acquisition
Revenues and expenses of the subsidiary are included in the consolidated income statement for the entire year
The investment account is recorded as if the pooling took place at the beginning of the year
No “net income purchased”
11 - 21
Intercompany Sale of Assets
All unrealized profit from intercompany sale of inventory or property is excluded from consolidated financial statements
The eliminating entries are similar to those
under purchase method
11 - 22
Alternative Concepts of Consolidation
Parent Company Concept
Current practice is a compromise between the two
general concepts
Economic Unit
Concept
11 - 23
Parent Company Concept
Focus: the interests of the parent’s shareholders
consolidated balance sheet = parent’s balance sheet + assets and liabilities of subsidiary substituted for the Investment in S account
consolidated income statement = parent’s income statement + revenues, expenses, gains and losses of subsidiary substituted for the parent’s income from investment
11 - 24
Economic Unit Concept
Focus: control of the whole by a single management
the parent and the subsidiary as a single economic unit
consolidated balance sheet = assets and liabilities of all affiliated companies
consolidated income statement = revenues, expenses, gains and losses of all affiliated companies
11 - 25
Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
