Slide 4-1. Slide 4-2 Consolidated Financial Statements After Acquisition Advanced Accounting, Fourth...

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Consolidated Financial Consolidated Financial Statements After AcquisitionStatements After Acquisition

Advanced Accounting, Fourth Edition

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1. Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors.

2. Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method.

3. Understand the use of the workpaper in preparing consolidated financial statements.

4. Prepare a schedule for the computation and allocation of the difference between implied and book values.

5. Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods.

6. Describe two alternative methods to account for interim acquisitions of subsidiary stock at the end of the first year.

7. Explain how the consolidated statement of cash flows differs from a single firm’s statement of cash flows.

8. Understand how the reporting of an acquisition on the consolidated statement of cash flows differs when stock is issued rather than cash.

9. Describe some of the differences between U.S. GAAP and IFRS in accounting for equity investments.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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Investments in voting stock of other companies may be consolidated, or separately reported in the financial statements at

cost,

fair value, or

equity.

Investments in StockInvestments in StockInvestments in StockInvestments in Stock

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Accounting for Investments by the Accounting for Investments by the Cost,Cost,Partial Equity, and Complete Equity Partial Equity, and Complete Equity MethodsMethods

Accounting for Investments by the Accounting for Investments by the Cost,Cost,Partial Equity, and Complete Equity Partial Equity, and Complete Equity MethodsMethods Generally speaking, there are three levels of

influence or control by an investor over an investee, which determine the appropriate accounting treatment.

There are no absolute percentage to distinguish between these three levels, but there are guidelines.

The three levels and the corresponding

accounting treatment are summarized as presented in the next slide.

All these methods are methods to record investments after acquisition. The cost method is the most commonly used method in practice and the simplest.

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0 --------------20% ------------ 50% -------------- 100%0 --------------20% ------------ 50% -------------- 100%No

significant influence

Significant influence (no control)

Effective control

Investment valued using the “cost” method but

with adjustments to fair value.

Investment valued using

the complete Equity Method

Investment valued using

(Cost, partial, Equity,

complete Equity) Method

(investment eliminated in

Consolidation)

Ownership PercentagesOwnership Percentages



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Accounting for Investments by the Accounting for Investments by the Cost,Cost,Partial Equity, and Complete Equity Partial Equity, and Complete Equity MethodsMethodsConsolidated financial statements will be

identical, regardless of method used.

However, if the parent issues parent-only financial statements, the complete equity method should be used for investees over which the parent has either significant influence or effective control.

LO 1 Varying levels of ownership are accounted for LO 1 Varying levels of ownership are accounted for differently.differently.

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E4-1:E4-1: Percy Company purchased 80% of the outstanding voting shares of Song Company at the beginning of 2009 for $387,000. At the time of purchase, Song Company’s total stockholders’ equity amounted to $475,000. Income and dividend distributions for Song Company from 2009 through 2010 are as follows:

2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$

Dividend distribution 25,000 50,000 35,000

Required:Required: Prepare journal entries for Percy Company from the date of purchase through 2011 to account for its investment in Song Company under each of the following assumptions:

LO 2 Journal entries for Parent using cost method.LO 2 Journal entries for Parent using cost method.

Accounting for Investments by the Cost Accounting for Investments by the Cost MethodMethodAccounting for Investments by the Cost Accounting for Investments by the Cost MethodMethod

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LO 2 Journal entries for Parent using cost method.LO 2 Journal entries for Parent using cost method.

Investment in Song 387,000

Cash

387,000

2009

Cash 20,000

Dividend income (.8 x $25,000)

20,000

E4-1:E4-1: A. Percy Company uses the cost method to record its investment.

2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


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**Liquidating dividend= the cumulative dividends declared exceeds the cumulative income earned.

Cash 40,000

Dividend income (.8 x $50,000)

40,000

2010

Cash 28,000

Investment in Song (.8 x $35,000)

28,000

2011

(Liquidating dividend)

E4-1:E4-1: A. Percy Company uses the cost method to record its investment.

2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


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E4-1:E4-1: B. Percy Company uses the partial equity method to record its investment.

Accounting for Investments by Partial Accounting for Investments by Partial EquityEquityAccounting for Investments by Partial Accounting for Investments by Partial EquityEquity

2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$



Cash

387,000

2009


Equity income (.8 x $63,500)

50,800Cash 20,000


20,000

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2010



42,000Cash 40,000


40,000


LO 2 Journal entries for Parent using partial equity method.LO 2 Journal entries for Parent using partial equity method.


2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


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2011

Equity loss (.8 x $55,000) 44,000

Investment in Song

44,000Cash 28,000


28,000


LO 2 Journal entries for Parent using partial equity method.LO 2 Journal entries for Parent using partial equity method.


2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


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E4-1:E4-1: C. Percy Company uses the complete equity method to record its investment. The difference between book value of equity acquired and the value implied by the purchase price was attributed solely to an excess of market over book values of depreciable assets, with a remaining life of 10 years.2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


The complete equity method is usually required to report common stock investments in the 20% to 50% range, assuming the investor has the ability to exercise significant influence and does not have effective control over the investee.

Accounting for Investments by Complete Accounting for Investments by Complete EquityEquityAccounting for Investments by Complete Accounting for Investments by Complete EquityEquity

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E4-1:E4-1: C. Percy Company uses the complete equity method to record its investment.


LO 2 Journal entries for Parent using complete equity LO 2 Journal entries for Parent using complete equity method.method.

2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$



Cash

387,000

2009



50,800Cash 20,000


20,000

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Equity income ($7,000 / 10 yrs.) 700

Investment in Song

700

2009

A journal entry is required to adjust for depreciation related to the excess of market over book values of depreciable assets.

Cost of investment (IV) $387,000Book value acquired ($475,000 x 80%) 380,000Difference between Cost and Book value $ 7,000

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2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


2010



42,000Cash 40,000


40,000Equity income ($7,000 / 10 yrs.) 700

Investment in Song

700

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2011

Equity Loss (.8 x $55,000) 44,000

Investment in Song

44,000Cash 28,000


28,000Equity income ($7,000 / 10) 700

Investment in Song

700


2009 2010 2011

Net income (loss) 63,500$ 52,500$ (55,000)$


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On the date of acquisition, the only relevant financial statement is the consolidated balance sheet.

After acquisition, a complete set of consolidated financial statements must be prepared for the affiliated group:

Income statement,

Retained earnings statement,

Balance sheet, and

Statement of cash flows

LO 3 Use of workpapers.LO 3 Use of workpapers.

Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition

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P4-8: On January 1, 2010, Parker Company purchased 95% of the outstanding common stock of Sid Company for $160,000. At that time, Sid’s stockholders’ equity consisted of common stock, $120,000; other contributed capital, $10,000; and retained earnings, $23,000.

Required:

A. Prepare a consolidated statements workpaper on Dec. 31, 2010.

B. Prepare a consolidated statements workpaper on Dec. 31, 2011.

LO 3 Use of workpapers.LO 3 Use of workpapers.

Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Year of Acquisition—Cost Method

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On December 31, 2010, the two companies’ trial balances were as follows at right:

Required A. Prepare a consolidated statements workpaper on December 31, 2010.


Parker SidCash 62,000$ 30,000$ Accounts receivable 32,000 29,000 Inventory 30,000 16,000 Investment in Sid 160,000 - Plant and equipment 105,000 82,000 Land 29,000 34,000 Dividends declared 20,000 20,000 Cost of goods sold 130,000 40,000 Operating expenses 20,000 14,000

Total debits 588,000$ 265,000$

Accounts payable 19,000$ 12,000$ Other liabilities 10,000 20,000 Common stock 180,000 120,000 Other contributed capital 60,000 10,000 Retained earnings 40,000 23,000 Sales 260,000 80,000 Dividend income 19,000 -

Total credits 588,000$ 265,000$

P4-8: A. 2010 Year of Acquisition

LO 5 Workpapers eliminating entries.LO 5 Workpapers eliminating entries.

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LO 4 Preparing Computation and Allocation (CAD) Schedule.LO 4 Preparing Computation and Allocation (CAD) Schedule.

95% 5% 100%Parent NCI TotalShare Share Value

Purchase price and implied value 160,000$ 8,421$ 168,421$

Less: Book value of equity acquired:Common stock 114,000 6,000 120,000 Other contributed capital 9,500 500 10,000 Retained earings 21,850 1,150 23,000 Total book value 145,350 7,650 153,000

Difference between implied and book value 14,650 771 15,421 Record new goodwill (14,650) (771) (15,421) Balance -$ -$ -$

P4-8: Begin the consolidating process by preparing a Computation and Allocation Schedule, as follows:

Difference between implied and book values is established only at the date of acquisition.

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1. Each section of the workpaper represents one of three consolidated financial statements.

2. Elimination of the investment account (The investment entry)


Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Workpaper Observations

Common stock 120,000

Other contributed capital 10,000

Retained earnings, 1/1 23,000

Difference between Implied and Book 15,421

Noncontrolling interest in equity8,421Investment in Sid

160,000

Bahaa

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3. Allocation of the difference between implied and book value (the differential entry):



Goodwill 15,421

Difference between Implied and Book 15,421

4. Elimination of intercompany dividends (The dividends entry)

Dividend income 19,000

Dividends declared – Sid Company 19,000

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ConsolidatedIncome Statement Parker Sid Debit Credit NCI BalancesSales 260,000$ 80,000$ 340,000$ Dividend income 19,000 19,000 -

Total revenue 279,000 80,000 340,000 Cost of goods sold 130,000 40,000 170,000 Other expenses 20,000 14,000 34,000

Total cost and expense 150,000 54,000 204,000 Net income 129,000 26,000 136,000 Noncontrolling interest 1,300 (1,300) Net income 129,000$ 26,000$ 19,000$ -$ 1,300$ 134,700$

Retained Earnings StatementRetained earnings, 1/1/10 40,000 23,000 23,000 40,000 Net income 129,000 26,000 19,000 1,300 134,700 Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000) Retained earnings, 12/31/10 149,000$ 29,000$ 42,000$ 19,000$ 300$ 154,700$

Eliminations



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ConsolidatedBalance Sheet Parker Sid Debit Credit NCI BalancesCash 62,000$ 30,000$ 92,000$ Accounts receivable 32,000 29,000 61,000 Inventory 30,000 16,000 46,000 Investment in Sid 160,000 - 160,000 - Difference (cost & book) 15,421 15,421 - Plant and equipment 105,000 82,000 187,000 Land 29,000 34,000 63,000 Goodwill 15,421 15,421

Total assets 418,000$ 191,000$ 464,421$

Accounts payable 19,000$ 12,000$ 31,000$ Other liabilities 10,000 20,000 30,000 Common stock 180,000 120,000 120,000 180,000 Other contributed capital 60,000 10,000 10,000 60,000 Retained earnings 149,000 29,000 42,000 19,000 300 154,700 Noncontrolling interest 1/1 8,421 8,421 - Noncontrolling interest 12/31 8,721$ 8,721

Total liabilities & equity 418,000$ 191,000$ 202,842$ 202,842$ 464,421$

EliminationsP4-8: A. 2010 Year of Acquisition


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5. Noncontrolling interest in consolidated net income:



Internally generated income of Sid Company $26,000

Noncontrolling percentage owned 5%

Noncontrolling interest in income $ 1,300

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6. Consolidated retained earnings:



Parker Company’s retained earnings, 1/1 $ 40,000

+ Parker’s income 129,000

- Dividends from Sid Company - 19,000

+ Parker’s percentage of Sid income (95%) 24,700

- Parker’s dividends declared - 20,000

Parker Company’s retained earnings, 12/31 $154,700

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7. Total eliminations for all three sections are in balance.

8. To calculate the noncontrolling interest in net assets or equity at year-end, compute the following:



NCI at Acquisition Date

$ 8,421

+ NCI share of Sid income ($26,000 x 5%)

1,300

- NCI share of Sid dividends ($20,000 x 5%)

-1,000

Noncontrolling Interest in Equity

$ 8,721

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Required B. Prepare a consolidated statements workpaper on December 31, 2011.


P4-8: B. 2011

After Year of Acquisition – Cost MethodParker Sid

Cash 67,000$ 16,000$ Accounts receivable 56,000 32,000 Inventory 38,000 48,500 Investment in Sid 160,000 - Plant and equipment 124,000 80,000 Land 29,000 34,000 Dividends declared 20,000 20,000 Cost of goods sold 155,000 52,000 Operating expenses 30,000 18,000

Total debits 679,000$ 300,500$

Accounts payable 16,000$ 7,000$ Other liabilities 15,000 14,500 Common stock 180,000 120,000 Other contributed capital 60,000 10,000 Retained earnings 149,000 29,000 Sales 240,000 120,000 Dividend income 19,000 -

Total credits 679,000$ 300,500$

LO 5 Workpapers eliminating entries after acquisition (cost LO 5 Workpapers eliminating entries after acquisition (cost method).method).

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1. Before elimination of the investment account, a workpaper entry is made to the investment account and Parker Company’s beginning retained earnings to recognize Parker’s share of the cumulative undistributed income or loss of Sid Company from the date of acquisition to the beginning of the current year as follows:



Investment in Sid Company 5,700

Retained earnings, 1/1 5,700

($29,000 – $23,000 ) X .95 = $5,700 Entry to establish Reciprocity

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The following workpaper entries are also made:

2. Eliminate investment in Sid Company.

3. Eliminate intercompany dividends.

4. Allocate difference between cost and book value.



5. All (100%) of Sid’s revenues, expenses, assets, and liabilities are included in the consolidated totals. The noncontrolling interest’s share of income and net assets are shown as separate line items.

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ConsolidatedIncome Statement Parker Sid Debit Credit NCI BalancesSales 240,000$ 120,000$ 360,000$ Dividend income 19,000 19,000 -



Retained Earnings StatementRetained earnings, 1/1/11 149,000 29,000 29,000 5,700 154,700 Net income 74,000 50,000 19,000 2,500 102,500 Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000) Retained earnings, 12/31/11 203,000$ 59,000$ 48,000$ 24,700$ 1,500$ 237,200$

Eliminations


P4-8: B. 2011 After Year of Acquisition

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ConsolidatedBalance Sheet Parker Sid Debit Credit NCI BalancesCash 67,000$ 16,000$ 83,000$ Accounts receivable 56,000 32,000 88,000 Inventory 38,000 48,500 86,500 Investment in Sid 160,000 - 5,700 165,700 - Difference (cost & book) 15,421 15,421 - Plant and equipment 124,000 80,000 204,000 Land 29,000 34,000 63,000 Goodwill 15,421 15,421

Total assets 474,000$ 210,500$ 539,921$

Accounts payable 16,000$ 7,000$ 23,000$ Other liabilities 15,000 14,500 29,500 Common stock 180,000 120,000 120,000 180,000 Other contributed capital 60,000 10,000 10,000 60,000 Retained earnings 203,000 59,000 48,000 24,700 1,500 237,200 Noncontrolling interest 1/1 8,721 8,721 Noncontrolling interest 12/31 10,221$ 10,221


Eliminations



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Equity Method

Record the investment at cost and subsequently adjust the amount each period for

the investor’s proportionate share of the earnings (losses) and

dividends received by the investor.

If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity

method.

Recording Investments – Equity Recording Investments – Equity MethodMethod Recording Investments – Equity Recording Investments – Equity MethodMethod

LO 5 Workpaper eliminating entries (equity method).LO 5 Workpaper eliminating entries (equity method).

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Example: Example: (Equity Method) On January 1, 2010, Pennington Corporation purchased 30% of the common shares of Edwards Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000.

Instructions

Prepare the journal entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2010.



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Example: Example: Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2010.

Investment in Stock 180,000

Cash 180,000

Cash 6,000

Investment in Stock ($20,000 x 30%) 6,000

Investment in Stock 24,000

Equity in subsidiary income ($80,000 x 30%) 24,000



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P4-12: On January 1, 2010, Parker Company purchased 90% of the outstanding common stock of Sid Company for $180,000. At that time, Sid’s stockholders’ equity consisted of common stock, $120,000; other contributed capital, $20,000; and retained earnings, $25,000. Assume that any difference between book value of equity and the value implied by the purchase price is attributable to land.

Required:

A. Prepare a consolidated statements workpaper on Dec. 31, 2010.

B. Prepare a consolidated statements workpaper on Dec. 31, 2011.

Investment Carried at Equity—Year of Acquisition



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Less: Book value of equity acquired:Common stock 108,000 12,000 120,000 Other contributed capital 18,000 2,000 20,000 Retained earings 22,500 2,500 25,000 Total book value 148,500 16,500 165,000

Difference between implied and book value 31,500 3,500 35,000 Allocated to land (31,500) (3,500) (35,000) Balance -$ -$ -$

P4-12: Begin the consolidating process by preparing a Computation and Allocation Schedule, as follows:

Difference between implied and book values is established only at the date of acquisition.



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On December 31, 2010, the two companies’ trial balances were as follows:

Required A. Prepare a consolidated statements workpaper on December 31, 2010.

Parker SidCash 65,000$ 35,000$ Accounts receivable 40,000 30,000 Inventory 25,000 15,000 Investment in Sid 184,500 - Plant and equipment 110,000 85,000 Land 48,500 45,000 Dividends declared 20,000 15,000 Cost of goods sold 150,000 60,000 Operating expenses 35,000 15,000

Total debits 678,000$ 300,000$

Accounts payable 20,000$ 15,000$ Other liabilities 15,000 25,000 Common stock 200,000 120,000 Other contributed capital 70,000 20,000 Retained earnings 55,000 25,000 Sales 300,000 95,000 Equity in subsidiary income 18,000 -

Total credits 678,000$ 300,000$




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ConsolidatedIncome Statement Parker Sid Debit Credit NCI BalancesSales 300,000$ 95,000$ 395,000$ Equity in subsidiary income 18,000 18,000 -



Retained Earnings StatementRetained earnings, 1/1/10 55,000 25,000 25,000 55,000 Net income 133,000 20,000 18,000 2,000 133,000 Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000) Retained earnings, 12/31/10 168,000$ 30,000$ 43,000$ 13,500$ 500$ 168,000$

Eliminations




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ConsolidatedBalance Sheet Parker Sid Debit Credit NCI BalancesCash 65,000$ 35,000$ 100,000$ Accounts receivable 40,000 30,000 70,000 Inventory 25,000 15,000 40,000 Investment in Sid 184,500 - 4,500 -

180,000 Difference (cost & book) 35,000 35,000 - Plant and equipment 110,000 85,000 195,000 Land 48,500 45,000 35,000 128,500

Total assets 473,000$ 210,000$ 533,500$

Accounts payable 20,000$ 15,000$ 35,000$ Other liabilities 15,000 25,000 40,000 Common stock 200,000 120,000 120,000 200,000 Other contributed capital 70,000 20,000 20,000 70,000 Retained earnings 168,000 30,000 43,000 13,500 500 168,000 Noncontrolling interest 1/1 20,000 20,000 Noncontrolling interest 12/31 20,500$ 20,500


Eliminations




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The following workpaper entries were made:

To eliminate the account “equity in subsidiary income” and intercompany dividends.

To eliminate the Investment account against subsidiary equity.

To distribute the difference between implied and book value of equity acquired.

Workpaper Observations



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Required B. Prepare a consolidated statements workpaper on December 31, 2011.

P4-12: B. 2011

Investment Carried at Equity—After Year of AcquisitionParker Sid

Cash 70,000$ 20,000$ Accounts receivable 60,000 35,000 Inventory 40,000 30,000 Investment in Sid 193,500 - Plant and equipment 125,000 90,000 Land 48,500 45,000 Dividends declared 20,000 15,000 Cost of goods sold 160,000 65,000 Operating expenses 35,000 20,000

Total debits 752,000$ 320,000$

Accounts payable 16,500$ 16,000$ Other liabilities 15,000 24,000 Common stock 200,000 120,000 Other contributed capital 70,000 20,000 Retained earnings 168,000 30,000 Sales 260,000 110,000 Equity in subsidiary income 22,500 -

Total credits 752,000$ 320,000$



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ConsolidatedIncome Statement Parker Sid Debit Credit NCI BalancesSales 260,000$ 110,000$ 370,000$ Equity in subsidiary income 22,500 22,500 -



Retained Earnings StatementRetained earnings, 1/1/11 168,000 30,000 30,000 168,000 Net income 87,500 25,000 22,500 2,500 87,500 Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000) Retained earnings, 12/31/11 235,500$ 40,000$ 52,500$ 13,500$ 1,000$ 235,500$

Eliminations




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ConsolidatedBalance Sheet Parker Sid Debit Credit NCI BalancesCash 70,000$ 20,000$ 90,000$ Accounts receivable 60,000 35,000 95,000 Inventory 40,000 30,000 70,000 Investment in Sid 193,500 - 9,000 -

184,500 Difference (cost & book) 35,000 35,000 - Plant and equipment 125,000 90,000 215,000 Land 48,500 45,000 35,000 128,500

Total assets 537,000$ 220,000$ 598,500$

Accounts payable 16,500$ 16,000$ 32,500$ Other liabilities 15,000 24,000 39,000 Common stock 200,000 120,000 120,000 200,000 Other contributed capital 70,000 20,000 20,000 70,000 Retained earnings 235,500 40,000 52,500 13,500 1,000 235,500 Noncontrolling interest 1/1 20,500 20,500 Noncontrolling interest 12/31 21,500$ 21,500


Eliminations




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Revenues and expenses of the acquired company are included with those of the acquiring company only from the date of acquisition forward.

Two acceptable alternatives for presenting the subsidiary’s revenue and expense items in the consolidated income statement in the year of acquisition:

Full-year reporting alternative.

Partial-year reporting alternative.

Interim Acquisitions of Subsidiary Interim Acquisitions of Subsidiary StockStock Interim Acquisitions of Subsidiary Interim Acquisitions of Subsidiary StockStock

LO 6 Two approaches for interim acquisitions.LO 6 Two approaches for interim acquisitions.

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Equity Method—Full-Year Reporting Alternative

Pillow Company purchased 90% of the common stock of Satin Company on May 1, 2009, for a cash payment of $474,000. December 31, 2009, trial balances for Pillow and Satin were:

P4-16: Pillow SatinCash 390,600$ 179,200$ Treasury stock at cost 32,000 Investment in Satin 510,000 - Plant and equipment 1,334,000 562,000 Cost of goods sold 1,261,000 584,000 Operating expenses 484,000 242,000 Dividends declares - 60,000

Total debits 3,979,600$ 1,659,200$

Accounts and notes payable 270,240$ 124,000$ Dividends payable - 60,000 Common stock 1,000,000 200,000 Other contributed capital 364,000 90,000 Retained earnings 315,360 209,200 Sales 1,940,000 976,000 Equity in subsidiary income 90,000 -

Total credits 3,979,600$ 1,659,200$

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Satin Company declared a $60,000 cash dividend on December 20, 2009, payable on January 10, 2010, to stockholders of record on December 31, 2009. Pillow Company recognized the dividend on its declaration date. Any difference between book value and the value implied by the purchase price relates to subsidiary land, included in property and equipment.

Required: Prepare a consolidated statements workpaper at December 31, 2009, assuming that Satin Company uses the full-year reporting alternative.

P4-16:



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Less: Book value of equity acquired:Common stock 180,000 20,000 200,000 Other contributed capital 81,000 9,000 90,000 Retained earings 188,280 20,920 209,200 Treasury stock (28,800) (3,200) (32,000) Subsidiary income 1/1 to 5/1 45,000 5,000 50,000 Total book value 465,480 51,720 517,200

Difference between implied and book value 8,520 947 9,467 Allocated to land (8,520) (947) (9,467) Balance -$ -$ -$

P4-16: Computation and Allocation of Difference between Cost and Book Value Acquired:



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ConsolidatedIncome Statement Pillow Satin Debit Credit NCI BalancesSales 1,940,000$ 976,000$ 2,916,000$ Equity in subsidiary income 90,000 90,000 -

Total revenue 2,030,000 976,000 2,916,000 Cost of goods sold 1,261,000 584,000 1,845,000 Other expenses 484,000 242,000 726,000

Total cost and expense 1,745,000 826,000 2,571,000 Net income 285,000 150,000 345,000 Net income purchased 45,000 (45,000) Noncontrolling interest 15,000 (15,000) Net income 285,000$ 150,000$ 135,000$ -$ 15,000$ 285,000$

Retained Earnings StatementRetained earnings, 1/1 315,360 209,200 209,200 315,360 Net income 285,000 150,000 135,000 15,000 285,000 Dividends declared - (60,000) 54,000 (6,000) - Retained earnings, 12/31 600,360$ 299,200$ 344,200$ 54,000$ 9,000$ 600,360$

Eliminations

P4-16: Full-Year Reporting Alternative



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ConsolidatedBalance Sheet Pillow Satin Debit Credit NCI BalancesCurrent assets 390,600$ 179,200$ 54,000 515,800$ Investment in Satin 510,000 474,000 -

36,000 Difference (cost & book) 9,467 9,467 - Plant and equipment 1,334,000 562,000 9,467 1,905,467

Total assets 2,234,600$ 741,200$ 2,421,267$

Accounts and notes payable 270,240$ 124,000$ 394,240$ Dividends payable 60,000 54,000 6,000 Common stock 1,000,000 200,000 200,000 1,000,000 Other contributed capital 364,000 90,000 90,000 364,000 Treasury stock (32,000) 32,000 - Retained earnings 600,360 299,200 344,200 54,000 9,000 600,360 Noncontrolling interest 1/1 47,667 47,667 Noncontrolling interest 12/31 56,667$ 56,667

Total liabilities & equity 2,234,600$ 741,200$ 707,134$ 707,134$ 2,421,267$

Eliminations



P4-16: Full-Year Reporting Alternative

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ConsolidatedIncome Statement Pillow Satin Debit Credit NCI BalancesSales 1,940,000$ 650,666$ 2,590,666$ Equity in subsidiary income 90,000 90,000 -

Total revenue 2,030,000 650,666 2,590,666 Cost of goods sold 1,261,000 389,333 1,650,333 Other expenses 484,000 161,333 645,333

Total cost and expense 1,745,000 550,666 2,295,666 Net income 285,000 100,000 295,000 Noncontrolling interest 10,000 (10,000) Net income 285,000$ 100,000$ 90,000$ -$ 10,000$ 285,000$

Retained Earnings StatementRetained earnings, 1/1 315,360 259,200 259,200 315,360 Net income 285,000 100,000 90,000 10,000 285,000 Dividends declared - (60,000) 54,000 (6,000) - Retained earnings, 12/31 600,360$ 299,200$ 349,200$ 54,000$ 4,000$ 600,360$

Eliminations

P4-17: (Data from P4-16) Partial-Year Reporting Alternative



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ConsolidatedBalance Sheet Pillow Satin Debit Credit NCI BalancesCurrent assets 390,600$ 179,200$ 54,000 515,800$ Investment in Satin 510,000 474,000 -

36,000 Difference (cost & book) 9,467 9,467 - Plant and equipment 1,334,000 562,000 9,467 1,905,467

Total assets 2,234,600$ 741,200$ 2,421,267$

Accounts and notes payable 270,240$ 124,000$ 394,240$ Dividends payable 60,000 54,000 6,000 Common stock 1,000,000 200,000 200,000 1,000,000 Other contributed capital 364,000 90,000 90,000 364,000 Treasury stock (32,000) 32,000 - Retained earnings 600,360 299,200 349,200 54,000 4,000 600,360 Noncontrolling interest 1/1 52,667 52,667 Noncontrolling interest 12/31 56,667$ 56,667

Total liabilities & equity 2,234,600$ 741,200$ 712,134$ 712,134$ 2,421,267$

Eliminations



P4-17: (Data from P4-16) Partial-Year Reporting Alternative

55

Peculiarities:

1. If the statement of cash flows starts with consolidated net income, then the noncontrolling interest is already included and need not be added back.

2. Subsidiary dividends paid to the noncontrolling stockholders must be included with dividends paid by the parent company when calculating cash outflow from financing activities.

3. Subsidiary stock acquired directly from the subsidiary represents an intercompany cash transfer that does not affect the total cash balance of the consolidated group.

Consolidated Statement of Cash Consolidated Statement of Cash FlowsFlows Consolidated Statement of Cash Consolidated Statement of Cash FlowsFlows

LO 7 Peculiarities of Consolidated Statement of Cash Flows.LO 7 Peculiarities of Consolidated Statement of Cash Flows.

56

The preparation of the consolidated statement of cash flows in the year of acquisition is complicated slightly because the comparative balance sheets at the beginning and end of the current year are dissimilar.

1. Any cash spent or received in the acquisition itself should be reflected in the Investing activities section.

2. Assets and liabilities of the subsidiary at the date of acquisition must be added to those of the parent at the beginning of the current year.

Consolidated Statement of Cash Consolidated Statement of Cash FlowsFlows Consolidated Statement of Cash Consolidated Statement of Cash FlowsFlows

LO 8 Stock issued as Consideration in Statement of Cash Flows.LO 8 Stock issued as Consideration in Statement of Cash Flows.

57

Compare U.S. GAAP and IFRSCompare U.S. GAAP and IFRSCompare U.S. GAAP and IFRSCompare U.S. GAAP and IFRS

LO 9 Differences between U.S. GAAP and IFRS. LO 9 Differences between U.S. GAAP and IFRS.

Application of the Equity Method

Issue U.S. GAAP IFRS

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59





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Two categories:

Three-division workpaper format used in this text.

Trial balance format.

Columns are provided for the trial balances, the elimination entries, and normally, each financial statement to be prepared, except for the statement of cash flows.

61

Two major topics require attention in addressing

the treatment of deferred income tax

consequences when the affiliates each file

separate income tax returns:

1. Undistributed subsidiary income (Appendix B of

Chapter 4).

2. Elimination of unrealized intercompany profit

(discussed in the appendices to Chapters 6 and 7).

62

When affiliated companies elect to file one

consolidated return, the tax expense amount is

computed on the consolidated workpapers rather than

on the individual books of the parent and subsidiary.

The amount of tax expense attributed to each

company is computed from combined income and

allocated back to each company’s books.

63

When separate tax returns are filed, the parent

company will include dividends received from the

subsidiary in its taxable income, while the subsidiary’s

reported income is included in consolidated net

income.

Thus the difference between the subsidiary’s income

and dividends paid represents a temporary difference

because eventually this undistributed amount will be

realized through future dividends or upon sale of the

subsidiary.

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Assume that the parent uses the cost method to

account for the investment and that both the parent

and the subsidiary file separate tax returns. This means

each company records a tax provision based on the

items reported on its individual books.

Tax consequences relating to undistributed income are

not recorded on the books of the parent company when

the investment in the subsidiary is recorded using the

cost method.

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If the undistributed income is not expected to be

received as a future dividend but is expected to be

realized when the investment is sold, the undistributed

income is taxed at the capital gains rate

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If the equity method is used to account for the

investment, there is a timing difference between books

and tax on the books of the parent. Equity income is

reported on the parent’s income statement while

dividends are included on the tax return.

Therefore, deferred taxes on the parent’s books must

reflect the amount of undistributed income in the

subsidiary.

67

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