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© Pearson Education, Inc. publishing as Prentice Hall4-1 Chapter 4: Consolidation Techniques and Procedures by Jeanne M. David, Ph.D., Univ. of Detroit.

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Presentation on theme: "© Pearson Education, Inc. publishing as Prentice Hall4-1 Chapter 4: Consolidation Techniques and Procedures by Jeanne M. David, Ph.D., Univ. of Detroit."— Presentation transcript:

1 © Pearson Education, Inc. publishing as Prentice Hall4-1 Chapter 4: Consolidation Techniques and Procedures by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10 th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

2 © Pearson Education, Inc. publishing as Prentice Hall4-2 Consolidation Techniques: Objectives 1.Prepare consolidation working papers for the year of acquisition when the parent company uses the full equity method to account for its invesment in a subsidiary. 2.Prepare consolidation working papers for the year subsequent to acquisition. 3.Locate errors in preparing consolidation working papers. 4.Allocate excess fair value over book value to include identifiable net assets.

3 © Pearson Education, Inc. publishing as Prentice Hall4-3 Objectives (continued) 5.Apply concepts to prepare a consolidated statement of cash flows. 6.Appendix: Understand the alternative trial balance consolidation working paper format.

4 © Pearson Education, Inc. publishing as Prentice Hall4-4 1: Acquisition-Year Working Papers Consolidation Techniques and Procedures

5 © Pearson Education, Inc. publishing as Prentice Hall4-5 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

6 © Pearson Education, Inc. publishing as Prentice Hall4-6 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.

7 © Pearson Education, Inc. publishing as Prentice Hall4-7 Working Paper 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/book value differentials 7.Eliminate other reciprocal balances

8 © Pearson Education, Inc. publishing as Prentice Hall4-8 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: Net income$25$30 Dividends$15

9 © Pearson Education, Inc. publishing as Prentice Hall4-9 Analysis Cost of 80% of Snap$88 Implied value of Snap ($88/.80)$110 Book value (60+30)90 Excess$20 Allocated to:AmtAmort. Patents$2010 yrs Unamort. Bal.Amortization Unamort. Bal.AmortizationUnamort. Bal. on 1/1/2009in 2009 on 12/31/2009in 2010on 12/31/2010 Patents $20$2 $18$2$16 Use these amounts in 2009 worksheet for amortization expense and patents. Use these amounts in 2010 worksheet for amortization expense and patents.

10 © Pearson Education, Inc. publishing as Prentice Hall4-10 NCI 20% share $5.6 $3.0 NCI 20% share $4.6 $3.0 Prep's 80% share $18.4 $12.0 Prep's 80% share $22.4 $12.0 Income & Dividend Calculations 2009: Snap's net income$25 Amortization (2) Adjusted income$23 Dividends$ : Snap's net income$30 Amortization (2) Adjusted income$28 Dividends$15

11 © Pearson Education, Inc. publishing as Prentice Hall4-11 Prep's 2009 Worksheet Entries 1.Adjust for errors & omissions none 2.Eliminate intercompany profits and losses none 3.Eliminate income & dividends from sub. and bring Investment account to its beginning balance Income from Snap (I.S.)18.4 Dividends (St. RE)12.0 Investment in Snap (B.S.)6.4

12 © Pearson Education, Inc. publishing as Prentice Hall4-12 Prep 2009: Entries (2 of 3) 4.Record noncontrolling interest in sub's earnings & dividends 5.Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.)4.6 Dividends (St. RE)3.0 Noncontrolling interest (B.S.)1.6 Capital stock (B.S.)60 Retained earnings (St. RE, beg.)30 Patents (B.S.)20 Investment in Snap (B.S.)88 Noncontrolling interest (B.S.) 22

13 © Pearson Education, Inc. publishing as Prentice Hall4-13 Prep 2009: Entries (3 of 3) 6.Amortize fair value/book value differentials 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. Amortization Expense (I.S.)2 Patents (B.S.)2

14 © Pearson Education, Inc. publishing as Prentice Hall4-14 Year ended 12/31/2009PrepSnapDRCRConsol Income statement: Revenues Income from Snap Expenses(200.0)(40.0)2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends(30.0)(15.0) 12.0(30.0) 3.0 Ending retained earnings Prep's 2009 Worksheet

15 © Pearson Education, Inc. publishing as Prentice Hall4-15 Balance sheet, 12/31/2009:PrepSnapDRCRConsol Cash Other current assets Investment in Snap Plant & equipment, net Patents Total Liabilities Capital stock Retained earnings Noncontrolling interest, Jan Noncontrolling interest, Dec Total

16 © Pearson Education, Inc. publishing as Prentice Hall4-16 A Look at the Income Statement Year ended 12/31/2009PrepSnapDRCRConsol Income statement: Revenues Income from Snap Expenses(200.0)(40.0)2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share 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

17 © Pearson Education, Inc. publishing as Prentice Hall4-17 A Look at Retained Earnings 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. Year ended 12/31/2009PrepSnapDRCRConsol Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends(30.0)(15.0) 12.0(30.0) 3.0 Ending retained earnings

18 © Pearson Education, Inc. publishing as Prentice Hall4-18 A Look at Assets Investment in Snap is eliminated. Patents at the start of 2009 were $20, and current amortization is $2; they are $18 at the end of The total is calculated in the consolidated column. Balance sheet:PrepSnapDRCRConsol Cash Other current assets Investment in Snap Plant & equipment, net Patents Total

19 © Pearson Education, Inc. publishing as Prentice Hall4-19 A Look at Liabilities & Equity Snap's capital stock is eliminated. Retained earnings are not calculated across the row; they are taken from the statement of retained earnings. Noncontrolling interest at year-end is proportional to Prep's Investment in Snap account. $94.4 x.20/.80 = $23.6 Balance sheet:PrepSnapDRCRConsol Liabilities Capital stock Retained earnings Noncontrolling interest, Jan Noncontrolling interest, Dec Total

20 © Pearson Education, Inc. publishing as Prentice Hall4-20 2: Working Papers in Subsequent Years Consolidation Techniques and Procedures

21 © Pearson Education, Inc. publishing as Prentice Hall4-21 Analysis, for 2010 Cost of 80% of Snap$88 Implied value of Snap ($88/.80)$110 Book value (60+30)90 Excess$20 Allocated to:AmtAmort. Patents$2010 yrs Unamort. Bal.Amortization Unamort. Bal.Amortization Unamort. Bal. on 1/1/2009in 2009 on 12/31/2009in 2010 on 12/31/2010 Patents$20$2 $18$2 $16 Use these amounts in 2009 worksheet for amortization expense and patents. Use these amounts in 2010 worksheet for amortization expense and patents.

22 © Pearson Education, Inc. publishing as Prentice Hall4-22 NCI 20% share $5.6 $3.0 NCI 20% share $4.6 $3.0 Prep's 80% share $18.4 $12.0 Prep's 80% share $22.4 $12.0 Income & Dividend Calculations 2009: Snap's net income$25 Amortization (2) Adjusted income$23 Dividends$ : Snap's net income$30 Amortization (2) Adjusted income$28 Dividends$15

23 © Pearson Education, Inc. publishing as Prentice Hall4-23 Prep's Worksheet Entries for Adjust for errors & omissions none 2.Eliminate intercompany profits and losses none 3.Eliminate income & dividends from sub. and bring Investment account to its beginning balance Income from Snap (I.S.)22.4 Dividends (St. RE)12.0 Investment in Snap (B.S.)10.4

24 © Pearson Education, Inc. publishing as Prentice Hall4-24 Prep 2010: Entries (2 of 3) 4.Record noncontrolling interest in sub's earnings & dividends 5.Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.)5.6 Dividends (St. RE)3.0 Noncontrolling interest (B.S.)2.6 Capital stock (B.S.)60 Retained earnings (St. RE, beg.)40 Patents (B.S.)18 Investment in Snap (B.S.)94.4 Noncontrolling interest (B.S.) 23.6

25 © Pearson Education, Inc. publishing as Prentice Hall4-25 Eliminating Investment in Snap Entry 5 eliminates the Investment in Snap and establishes the Noncontrolling Interest as of the beginning of the current year. Investment in Snap (80% x $118) = $94.4 Noncontrolling interest (20% x $118) = $23.6 Verify the $118 from the entry ( ). Implied value of Snap at acquisition $88/.80$110 Add the increase in retained earnings from acquisition to the beginning of the current year $40 at 1/1/2010 minus $30 at 1/1/ Less amortization for all prior periods $2 patent amortization for 2009 (2) Adjusted value of Snap at 1/1/2010$118

26 © Pearson Education, Inc. publishing as Prentice Hall4-26 Prep 2010: Entries (3 of 3) 6.Amortize fair value/book value differentials 7.Eliminate other reciprocal balances Amortization Expense (I.S.)2 Patents (B.S.)2 Note payable – Prep (B.S.)10 Note receivable – Snap (B.S.)10

27 © Pearson Education, Inc. publishing as Prentice Hall4-27 Year ended 12/31/2010PrepSnapDRCRConsol Income statement: Revenues Income from Snap Expenses(244.0)(45.0)2.0 (291.0) Noncontrolling interest share 5.6 (5.6) Net income/ Controlling share Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends(45.0)(15.0) 12.0(45.0) 3.0 Ending retained earnings Prep's 2010 Worksheet

28 © Pearson Education, Inc. publishing as Prentice Hall4-28 Balance sheet, 12/31/2010:PrepSnapDRCRConsol Cash Note receivable – Snap Other current assets Investment in Snap Plant & equipment, net Patents Total Note payable – Prep10.0 Liabilities Capital stock Retained earnings Noncontrolling interest, Jan Noncontrolling interest, Dec Total

29 © Pearson Education, Inc. publishing as Prentice Hall4-29 3: Locating Errors in Working Papers Consolidation Techniques and Procedures

30 © Pearson Education, Inc. publishing as Prentice Hall4-30 Errors Most errors show up when the consolidated balance sheet does not balance. Common omissions: –Noncontrolling interest share (income) –Goodwill –Noncontrolling interest (equity) Check equality of DR and CR adjustments. Verify totals for parent and subsidiary statements. Re-calculate the consolidated amounts.

31 © Pearson Education, Inc. publishing as Prentice Hall4-31 4: Allocating Excess of Fair Value over Book Value Consolidation Techniques and Procedures

32 © Pearson Education, Inc. publishing as Prentice Hall4-32 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.

33 © Pearson Education, Inc. publishing as Prentice Hall4-33 Analysis at Acquisition * Use the 12/31/2009 and 2010 amortization in worksheet entries for Cost of 90% of Solo$360 Implied value of Snap ($360/.90)$400 Book value (200+50)250 Excess$150 Noncontrolling interest, 10%(400)$40 Allocated to:AmtAmort Inventories$101st yr Land30 - Building8020 yrs Equipment(20)10 yrs Goodwill Unamort. Bal.AmortizationUnamort. Bal. 12/31/2009 *in 2010 *on 12/31/2010 Inventories$10($10)$0 Land300 Building80(4)76 Equipment(20)2(18) Goodwill500 $150($12)$138

34 © Pearson Education, Inc. publishing as Prentice Hall4-34 NCI 10% share $4.8 $2.0 Pate's 90% share $43.2 $18.0 Solo's Income & Dividend 2010 Solo's net income$60 Amortization($12) Adjusted$48 Solo's dividends$20

35 © Pearson Education, Inc. publishing as Prentice Hall4-35 Pate's Worksheet Entries 1.Adjust for errors & omissions 2.Eliminate intercompany profits and losses none 3.Eliminate income & dividends from sub. and bring Investment account to its beginning balance Income from Solo (I.S.)43.2 Dividends (St. RE)18.0 Investment in Solo (B.S.)25.2 Dividends receivable (B.S.)9.0 Investment in Solo (B.S.)9.0 Cash (B.S.)20.0 Note receivable (B.S.)20.0

36 © Pearson Education, Inc. publishing as Prentice Hall4-36 Pate: Entries (2 of 4) 4.Record noncontrolling interest in sub's earnings & dividends 5.Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.)4.8 Dividends (St. RE)2.0 Noncontrolling interest (B.S.)2.8 Capital stock (B.S.)200 Retained earnings (St. RE, beg.)50 Unamortized excess150 Investment in Solo (B.S.)360 Noncontrolling interest (B.S.) 40

37 © Pearson Education, Inc. publishing as Prentice Hall4-37 Pate: Entries (3 of 4) Allocate the unamortized excess according to beginning of year balances. Inventory10 Land30 Building, net80 Goodwill50 Equipment, net20 Unamortized excess150

38 © Pearson Education, Inc. publishing as Prentice Hall4-38 Pate: Entries (4 of 4) 6.Amortize fair value/book value differentials 7.Eliminate other reciprocal balances Cost of sales10 Inventory10 Operating (depreciation) expense4 Buildings, net4 Equipment, net2 Operating (depreciation) expense2 Dividends payable (B.S.)9.0 Dividends receivable (B.S.)9.0

39 © Pearson Education, Inc. publishing as Prentice Hall4-39 Pate's 2010 Worksheet Year ended 12/31/2010PateSoloDRCRConsol Income statement: Revenues ,200.0 Income from Snap Cost of goods sold(600.0)(150.0)10.0 (760.0) Operating expenses(190.0)(90.0)4.02.0(282.0) Noncontrolling interest share 4.8 (4.8) Net income/ Controlling share Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends(100.0)(20.0) 18.0(100.0) 2.0 Ending retained earnings

40 © Pearson Education, Inc. publishing as Prentice Hall4-40 Balance sheet, 12/31/2010:PrepSnapDRCRConsol Cash Accounts receivable, net Note receivable - solo Inventories Land Building, net Equipment, net Investment in Solo Dividends receivable Goodwill 50.0 Unamortized excess Total ,097.0 Accounts payable Dividends payable Capital stock Retained earnings Noncontrolling interest, Jan Noncontrolling interest, Dec Total ,097.0

41 © Pearson Education, Inc. publishing as Prentice Hall4-41 5: Consolidated Statement of Cash Flows Consolidation Techniques and Procedures

42 © Pearson Education, Inc. publishing as Prentice Hall4-42 Consolidated Cash Flows The consolidated statement of cash flows is prepared from –Consolidated balance sheets, beginning & ending –Consolidated income statement –Other information Procedure similar to an "unconsolidated" statement of cash flows Look at items specific to companies with –Subsidiaries –Equity investments

43 © Pearson Education, Inc. publishing as Prentice Hall4-43 Investing & Financing Cash Flows Investing cash flows: –Include cash acquisition and/or disposition of subsidiaries –Include cash acquisition and/or disposition of equity investees Financing cash flows: –Include cash dividends paid to noncontrolling interests

44 © Pearson Education, Inc. publishing as Prentice Hall4-44 Operating Cash Flows Direct method: –Include cash dividends received from equity investees (not equity method income) Indirect method: –Starting with consolidated net income to the controlling interest share, ADD the noncontrolling interest share –Deduct the excess of equity method income over cash dividends received from equity investees

45 © Pearson Education, Inc. publishing as Prentice Hall4-45 6: Appendix – Trial Balance Format Consolidation Techniques and Procedures

46 © Pearson Education, Inc. publishing as Prentice Hall4-46 Alternative Worksheet Format Worksheet format presented earlier used the basic financial statements Alternative uses the ADJUSTED trial balances of the parent and subsidiary. Columns on worksheet: –Parent and subsidiary adjusted trial balances, –DR and CR adjustments, –Income statement, –Statement of retained earnings, and –Balance sheet columns.

47 © Pearson Education, Inc. publishing as Prentice Hall4-47 Completing the Worksheet 1.Enter worksheet elimination entries into the DR and CR columns. 2.Add accounts as needed (e.g., noncontrolling interest, goodwill, noncontrolling interest share). 3.Carry consolidated balances to income statement, retained earnings, or balance sheet columns, as appropriate. 4.Move consolidated net income, or controlling interest share, to retained earnings. 5.Move ending retained earnings to the balance sheet.

48 © Pearson Education, Inc. publishing as Prentice Hall4-48 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


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