Presentation on theme: "Consolidated Techniques and Procedures"— Presentation transcript:
1 Consolidated Techniques and Procedures Chapter 4
2 Prepare consolidated working papers Learning Objective 1Prepare consolidated working papersfor the year of acquisition when theparent company uses the full equitymethod to account for itsinvestment in a subsidiary.
3 Equity Method – Year of Acquisition 1. Prep pays $87,000 for 80% interest in Snapon January 1, when Snap stockholders’ equityconsists of $60,000 capital stock and $30,000retained earnings.2. The $15,000 excess of investment cost isallocated to patents.
4 Equity Method – Year of Acquisition Snap’s net income and dividends are as follows:2003Net income $25,000Dividends $15,0002004Net income $30,000Dividends $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 18,500Dividends ,000Investment in Snap ,500To eliminate income and dividend from Snapand return the investment account to itsbeginning balance
6 Working Paper Entries b Minority Interest Expense 5,000 Dividends Snap ,000Minority Interest ,000To enter minority interest share of subsidiaryincome and dividends
7 Working Paper Entries c Retained Earnings, Snap 30,000 Capital Stock, Snap 60,000Patents ,000Investment in Snap ,000Minority Interest ,000To eliminate reciprocal equity and investmentbalances, 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 andEliminations ConsolidatedIncome Statement Prep Snap Dr Cr StatementsRevenueIncome from SnapExpensesMinority interestNet incomeRetained earnings PRetained earnings SAdd net incomeDeduct dividendsRetainedearnings Dec 3125018.5(200)68.55(30)43.565(40)2530(15)40adbcab315(241.5)(5)68.55(30)43.5
10 Working Papers for Year of Acquisition Adjustments andEliminations ConsolidatedBalance Sheet Prep Snap Dr Cr StatementsCashOther current assetsInvestment in SnapPlant and equipmentAccum. depreciationPatentsTotal assetsLiabilitiesCapital stockRetained earningsTotalMinority 1/1interest /31409093.5300(50)473.58035043.51050100(30)130306040cca 6.5 c 87dcb50140400(80)13.5523.511035043.5
11 Sequence of Working Paper Entries 1. Adjustments for errors and omissions in theseparate parent company and subsidiary statements2. Adjustments to eliminate intercompany profitsand losses3. Adjustments to eliminate income and dividendsfrom subsidiary and adjust the investment insubsidiary to its beginning-of-the-period balance
12 Sequence of Working Paper Entries 4. Adjustment to record the minority interest insubsidiary’s earnings and dividends5. Elimination of reciprocal investment insubsidiary and subsidiary equity balances6. Allocation and amortization of cost/book valuedifferentials7. Elimination of other reciprocal balances
13 Prepare consolidated working subsequent to acquisition. Learning Objective 2Prepare consolidated workingpapers for the yearsubsequent to acquisition.
14 Equity Method – Year Subsequent to Acquisition Prep maintains its 80% interest inSnap throughout 2004.The only intercompany transactionduring 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* = $22,500What is Prep’s investment in Snapaccount at December 31, 2004?*Patent amortization
16 Equity Method – Year Subsequent to Acquisition Investment cost January 1, $ 87,000Income from Snap, ,500Dividends from Snap, – 12,000Investment in Snap December 31, 2003 $ 93,500Income from Snap, ,500Dividends from Snap, – 12,000Investment in Snap December 31, 2004 $104,000
17 Consolidation – Year Subsequent to Acquisition Income from Snap 22,500Dividends ,000Investment in Snap ,500To eliminate income and dividends from Snapand return the investment account to itsbeginning-of-the-period balance
18 Consolidation– Year Subsequent to Acquisition Retained Earnings, Snap 40,000Capital Stock, Snap 60,000Patents ,500Investment in Snap ,500Minority Interest ,000To eliminate reciprocal equity and investmentbalances, establish beginning minority interest,and enter unamortized patents
19 Consolidation– Year Subsequent to Acquisition Expenses ,500Patents ,500To enter current amortizationNotes Payable, Prep 10,000Note Receivable, Snap 10,000To eliminate reciprocal receivable andpayable balances
20 Locate errors in preparing consolidation working papers. Learning Objective 3Locate errors in preparingconsolidation working papers.
21 Locating Errors Most errors made in consolidating the financial statements will show up when the consolidatedbalance sheet does not balance.Totals arerecomputed.Checkindividualitems.Omissionsinvolvingminority interestoccur frequently.
22 Allocate excess of purchase price over book value to include Learning Objective 4Allocate excess of purchase priceover book value to includeidentifiable net assets.
23 Excess Allocated to Identifiable Assets Both FASB Statements No. 141 and 142 requirefirms to provide at least summary disclosuresregarding the allocation of the purchase priceof 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 separatebalance sheet line item (assuming it is material).
26 Additional Disclosures Firms mustdisclose materialnoncontrollinginterests (minorityinterest) on thebalance sheet.Firms must reportnoncontrollinginterests’ share ofsubsidiary income(minority interestexpense).
27 Excess Allocation Example Pate acquired its 90% equity interest in Soloon December 31, 2003, for $365,000 cash, whenSolo’s stockholders’ equity consisted of $200,000capital stock and $50,000 retained earnings.During 2004, Solo borrows $20,000 from Pateon 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 UndervaluationValue Value (Overvaluation)AssetsInventories $ $ $ 10LandBuildingsEquipment (20)Total $370 $270 $100
30 Excess Allocation Example Undervaluation Interest Excess Amortization(Overvaluation) Acquired Allocation PeriodAssetsInventories $10 × 90% = $ 9 Sold in 2004Land × 90% = NoneBuildings, net × 90% = yearsEquipment, net (20) × 90% = (18) 9 yearsGoodwill, remainder NoneTotal $140
31 Consolidation After Acquisition Solo reports $60,000 net income for 2004.Solo declares dividends of $10,000on June 1 which is paid on July 1.Solo declares dividends of$10,000 on December 1.The December dividend has notbeen paid at year end.
32 Consolidation After Acquisition July 1, 2004Cash ,000Investment in Solo ,000To record dividends from SoloDecember 31, 2004Investment in Solo 45,000Income from Solo ,000To record dividends from SoloHow was this determined?
33 Consolidation After Acquisition Share of Solo’s net income($60,000 × 90%) $54,000Amortization of excess allocated to:Inventories ($9,000 × 100%) – 9,000Buildings ($72,000 ÷ 36) – 2,000Equipment ($18,000 ÷ 9 years) ,000Income from Solo for $45,000
34 Working Paper Entries a Dividends Receivable 9,000 Investment in Solo ,000To correct investment balance for unrecordeddividends receivableb Cash ,000Note Receivable, Solo ,000To enter receipt of intercompany note receivable
35 Working Paper Entries c Income from Solo 45,000 Dividends 18,000 Investment in Solo ,000To eliminate income and dividend from Pateand return the investment account to thebeginning of the period balance
36 Working Paper Entries d Minority Interest Expense 6,000 Dividends, Solo ,000Minority Interest ,000To enter minority interest share of subsidiaryincome and dividends
37 Working Paper Entries e Retained Earnings, Solo 50,000 Capital Stock, Solo ,000Unamortized Excess 140,000Investment in Solo ,000Minority Interest, Jan ,000To eliminate reciprocal investment and equityamounts, establish beginning minority interest,and enter unamortized excess
38 Working Paper Entries f Cost of Goods Sold 9,000 Land 27,000 Buildings (net) 72,000Goodwill ,000Equipment (net) ,000Unamortized Excess ,000To allocate unamortized excess to identifiableassets and goodwill
39 Working Paper Entries g Operating Expenses 2,000 Buildings (net) 2,000 To enter current depreciation on excessallocated to buildings
40 Working Paper Entries h Equipment (net) 2,000 Operating Expenses 2,000 To adjust current depreciation for excessallocated to reduce equipmenti Dividends Payable 9,000Dividends Receivable ,000To eliminate reciprocal receivables and payables
41 Apply concepts to prepare a consolidated statement Learning Objective 5Apply concepts to prepare aconsolidated statementof cash flows.
42 Consolidated Statement of Cash Flows balancesheetsConsolidatedincomestatementsConsolidatedstatement ofcash 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 onJanuary 8 for new equipment.3. Patents amortization from the Polski-Seedbusiness combination is $10,000 per year.4. Polski received $10,000 dividends from itsinvestments in equity investees.5. Changes in plant assets not explained aredue to provisions for depreciation.
44 Polski and Seed Comparative Balance Sheets at December 31 Assets (000)Cash $ $ 180Accts. receivable, netInventoriesEquity investmentsLandBuildings, netEquipment, netPatentsTotal assets $2,150 $1,770Changes$ 75105455(20)200(10)$380
45 Polski and Seed Comparative Balance Sheets at December 31 Liabilities (000)Accounts payable $ $ 270Dividends payableNotes payable –Common stockOther paid-in capitalRetained earningsMinority interest – 20%Total liabilities andstockholders’ equity $2,150 $1,770Changes$(20)–3007030$380
46 Consolidated Income Statement Year Ended December 31, 2004 Sales $750Income from equity investeesTotal revenueLess expenses:Cost of goods soldDepreciation expensePatents amortizationWages and salariesOther operating expensesInterest expenseLoss on sale of land (565)Total consolidated income $200
47 Consolidated Income Statement Year Ended December 31, 2004 Total consolidated income $200Less: Minority interest (50)Consolidated net incomeConsolidated 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 activitiesConsolidated net income $150Adjustments to reconcile net income tocash provided by operating activitiesMinority interest $ 50Undistributed income–equity investees (5)Loss on sale of land (10)Depreciation on equipmentDepreciation on buildingsAmortization of patentsIncrease 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 $165Cash flows from investing activitiesCash flows from financing activitiesPayment of cash dividends–majority $(80)Payment of cash dividends–minority (20) (100)Increase in cash forCash on January 1,Cash on December 31, $255
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