1. Consolidated Techniques and Procedures
Chapter 4

2. Prepare consolidated working papers
Learning Objective 1
Prepare consolidated working papers
for the year of acquisition when the
parent company uses the full equity
method to account for its
investment in a subsidiary.

3. Equity Method – Year of Acquisition
1. Prep pays $87,000 for 80% interest in Snap
on January 1, when Snap stockholders’ equity
consists of $60,000 capital stock and $30,000
retained earnings.
2. The $15,000 excess of investment cost is
allocated to patents.

4. Equity Method – Year of Acquisition
Snap’s net income and dividends are as follows:
2003
Net income $25,000
Dividends $15,000
2004
Net income $30,000
Dividends $15,000

5. Working Paper Entries Adjusting and eliminating entries on the working
papers do not affect the general ledger accounts.
a Income from Snap 18,500
Dividends ,000
Investment in Snap ,500
To eliminate income and dividend from Snap
and return the investment account to its
beginning balance

6. Working Paper Entries b Minority Interest Expense 5,000
Dividends Snap ,000
Minority Interest ,000
To enter minority interest share of subsidiary
income and dividends

7. Working Paper Entries c Retained Earnings, Snap 30,000
Capital Stock, Snap 60,000
Patents ,000
Investment in Snap ,000
Minority Interest ,000
To eliminate reciprocal equity and investment
balances, establish beginning minority interest,
and enter unamortized patents

8. Working Paper Entries d Expenses 1,500 Patents 1,500
To enter current amortization

9. Working Papers for Year of Acquisition
Adjustments and
Eliminations Consolidated
Income Statement Prep Snap Dr Cr Statements
Revenue
Income from Snap
Expenses
Minority interest
Net income
Retained earnings P
Retained earnings S
Add net income
Deduct dividends
Retained
earnings Dec 31
250
18.5
(200)
68.5 5
(30)
43.5 65
(40) 25 30
(15) 40 a d b c a b
315
(241.5)
(5)
68.5 5
(30)
43.5

10. Working Papers for Year of Acquisition
Adjustments and
Eliminations Consolidated
Balance Sheet Prep Snap Dr Cr Statements
Cash
Other current assets
Investment in Snap
Plant and equipment
Accum. depreciation
Patents
Total assets
Liabilities
Capital stock
Retained earnings
Total
Minority 1/1
interest /31 40 90
93.5
300
(50)
473.5 80
350
43.5 10 50
100
(30)
130 30 60 40 c c
a 6.5 c 87 d c b 50
140
400
(80)
13.5
523.5
110
350
43.5

11. Sequence of Working Paper Entries
1. Adjustments for errors and omissions in the
separate parent company and subsidiary statements
2. Adjustments to eliminate intercompany profits
and losses
3. Adjustments to eliminate income and dividends
from subsidiary and adjust the investment in
subsidiary to its beginning-of-the-period balance

12. Sequence of Working Paper Entries
4. Adjustment to record the minority interest in
subsidiary’s earnings and dividends
5. Elimination of reciprocal investment in
subsidiary and subsidiary equity balances
6. Allocation and amortization of cost/book value
differentials
7. Elimination of other reciprocal balances

13. Prepare consolidated working subsequent to acquisition.
Learning Objective 2
Prepare consolidated working
papers for the year
subsequent to acquisition.

14. Equity Method – Year Subsequent to Acquisition
Prep maintains its 80% interest in
Snap throughout 2004.
The only intercompany transaction
during 2004 was a $10,000, non-
interest-bearing loan to Snap.

15. Equity Method – Year Subsequent to Acquisition
What is Prep’s income from Snap?
($30,000 × 80%) – $1,500* = $22,500
What is Prep’s investment in Snap
account at December 31, 2004?
*Patent amortization

16. Equity Method – Year Subsequent to Acquisition
Investment cost January 1, $ 87,000
Income from Snap, ,500
Dividends from Snap, – 12,000
Investment in Snap December 31, 2003 $ 93,500
Income from Snap, ,500
Dividends from Snap, – 12,000
Investment in Snap December 31, 2004 $104,000

17. Consolidation – Year Subsequent to Acquisition
Income from Snap 22,500
Dividends ,000
Investment in Snap ,500
To eliminate income and dividends from Snap
and return the investment account to its
beginning-of-the-period balance

18. Consolidation– Year Subsequent to Acquisition
Retained Earnings, Snap 40,000
Capital Stock, Snap 60,000
Patents ,500
Investment in Snap ,500
Minority Interest ,000
To eliminate reciprocal equity and investment
balances, establish beginning minority interest,
and enter unamortized patents

19. Consolidation– Year Subsequent to Acquisition
Expenses ,500
Patents ,500
To enter current amortization
Notes Payable, Prep 10,000
Note Receivable, Snap 10,000
To eliminate reciprocal receivable and
payable balances

20. Locate errors in preparing consolidation working papers.
Learning Objective 3
Locate errors in preparing
consolidation working papers.

21. Locating Errors Most errors made in consolidating the financial
statements will show up when the consolidated
balance sheet does not balance.
Totals are
recomputed.
Check
individual
items.
Omissions
involving
minority interest
occur frequently.

22. Allocate excess of purchase price over book value to include
Learning Objective 4
Allocate excess of purchase price
over book value to include
identifiable net assets.

23. Excess Allocated to Identifiable Assets
Both FASB Statements No. 141 and 142 require
firms to provide at least summary disclosures
regarding the allocation of the purchase price
of an acquired subsidiary.

24. Excess Allocated to Identifiable Assets (FASB No. 141)
Disclose in the year of acquisition:
– the cost of the acquired enterprise
– a condensed balance sheet (assets and liabilities)
– amounts of purchased R&D in process
– total amounts assigned to major asset categories

25. Excess Allocated to Identifiable Assets (FASB No. 142)
The amount of goodwill is to be shown as a separate
balance sheet line item (assuming it is material).

26. Additional Disclosures
Firms must
disclose material
noncontrolling
interests (minority
interest) on the
balance sheet.
Firms must report
noncontrolling
interests’ share of
subsidiary income
(minority interest
expense).

27. Excess Allocation Example
Pate acquired its 90% equity interest in Solo
on December 31, 2003, for $365,000 cash, when
Solo’s stockholders’ equity consisted of $200,000
capital stock and $50,000 retained earnings.
During 2004, Solo borrows $20,000 from Pate
on a non-interest-bearing note.

28. Excess Allocation Example
What is the excess of cost over book value?
90% × $250,000 = $225,000
$365,000 – $225,000 = $140,000

29. Excess Allocation Example
Solo (000)
Fair Book Undervaluation
Value Value (Overvaluation)
Assets
Inventories $ $ $ 10
Land
Buildings
Equipment (20)
Total $370 $270 $100

30. Excess Allocation Example
Undervaluation Interest Excess Amortization
(Overvaluation) Acquired Allocation Period
Assets
Inventories $10 × 90% = $ 9 Sold in 2004
Land × 90% = None
Buildings, net × 90% = years
Equipment, net (20) × 90% = (18) 9 years
Goodwill, remainder None
Total $140

31. Consolidation After Acquisition
Solo reports $60,000 net income for 2004.
Solo declares dividends of $10,000
on June 1 which is paid on July 1.
Solo declares dividends of
$10,000 on December 1.
The December dividend has not
been paid at year end.

32. Consolidation After Acquisition
July 1, 2004
Cash ,000
Investment in Solo ,000
To record dividends from Solo
December 31, 2004
Investment in Solo 45,000
Income from Solo ,000
To record dividends from Solo
How was this determined?

33. Consolidation After Acquisition
Share of Solo’s net income
($60,000 × 90%) $54,000
Amortization of excess allocated to:
Inventories ($9,000 × 100%) – 9,000
Buildings ($72,000 ÷ 36) – 2,000
Equipment ($18,000 ÷ 9 years) ,000
Income from Solo for $45,000

34. Working Paper Entries a Dividends Receivable 9,000
Investment in Solo ,000
To correct investment balance for unrecorded
dividends receivable
b Cash ,000
Note Receivable, Solo ,000
To enter receipt of intercompany note receivable

35. Working Paper Entries c Income from Solo 45,000 Dividends 18,000
Investment in Solo ,000
To eliminate income and dividend from Pate
and return the investment account to the
beginning of the period balance

36. Working Paper Entries d Minority Interest Expense 6,000
Dividends, Solo ,000
Minority Interest ,000
To enter minority interest share of subsidiary
income and dividends

37. Working Paper Entries e Retained Earnings, Solo 50,000
Capital Stock, Solo ,000
Unamortized Excess 140,000
Investment in Solo ,000
Minority Interest, Jan ,000
To eliminate reciprocal investment and equity
amounts, establish beginning minority interest,
and enter unamortized excess

38. Working Paper Entries f Cost of Goods Sold 9,000 Land 27,000
Buildings (net) 72,000
Goodwill ,000
Equipment (net) ,000
Unamortized Excess ,000
To allocate unamortized excess to identifiable
assets and goodwill

39. Working Paper Entries g Operating Expenses 2,000 Buildings (net) 2,000
To enter current depreciation on excess
allocated to buildings

40. Working Paper Entries h Equipment (net) 2,000 Operating Expenses 2,000
To adjust current depreciation for excess
allocated to reduce equipment
i Dividends Payable 9,000
Dividends Receivable ,000
To eliminate reciprocal receivables and payables

41. Apply concepts to prepare a consolidated statement
Learning Objective 5
Apply concepts to prepare a
consolidated statement
of cash flows.

42. Consolidated Statement of Cash Flows
balance
sheets
Consolidated
income
statements
Consolidated
statement of
cash flows

43. Consolidated Statement of Cash Flows
1. During 2004, Seed sold land that cost
$20,000 to outside entities for $10,000 cash.
2. Polski issued a $300,000, two-year note on
January 8 for new equipment.
3. Patents amortization from the Polski-Seed
business combination is $10,000 per year.
4. Polski received $10,000 dividends from its
investments in equity investees.
5. Changes in plant assets not explained are
due to provisions for depreciation.

44. Polski and Seed Comparative Balance Sheets at December 31
Assets (000)
Cash $ $ 180
Accts. receivable, net
Inventories
Equity investments
Land
Buildings, net
Equipment, net
Patents
Total assets $2,150 $1,770
Changes
$ 75
105 45 5
(20)
200
(10)
$380

45. Polski and Seed Comparative Balance Sheets at December 31
Liabilities (000)
Accounts payable $ $ 270
Dividends payable
Notes payable –
Common stock
Other paid-in capital
Retained earnings
Minority interest – 20%
Total liabilities and
stockholders’ equity $2,150 $1,770
Changes
$(20) –
300 70 30
$380

46. Consolidated Income Statement Year Ended December 31, 2004
Sales $750
Income from equity investees
Total revenue
Less expenses:
Cost of goods sold
Depreciation expense
Patents amortization
Wages and salaries
Other operating expenses
Interest expense
Loss on sale of land (565)
Total consolidated income $200

47. Consolidated Income Statement Year Ended December 31, 2004
Total consolidated income $200
Less: Minority interest (50)
Consolidated net income
Consolidated retained earnings 1/1/
Less: Cash dividends paid (80)
Consolidated retained earnings 12/31/ $670

48. Consolidated Statement of Cash Flows Year Ended December 31, 2004
Cash flows from operating activities
Consolidated net income $150
Adjustments to reconcile net income to
cash provided by operating activities
Minority interest $ 50
Undistributed income–equity investees (5)
Loss on sale of land (10)
Depreciation on equipment
Depreciation on buildings
Amortization of patents
Increase in accounts receivable (105)
Increase in inventories (45)
Decrease in accounts payable (20)
Net cash flows from operating activities $165

49. Consolidated Statement of Cash Flows Year Ended December 31, 2004
Net cash flows from operating activities $165
Cash flows from investing activities
Cash flows from financing activities
Payment of cash dividends–majority $(80)
Payment of cash dividends–minority (20) (100)
Increase in cash for
Cash on January 1,
Cash on December 31, $255

50. End of Chapter 4