1. Consolidation Techniques and Procedures
Chapter 4:
Consolidation Techniques and Procedures
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2. Consolidation Techniques: Objectives
Prepare consolidation workpaper for the year of acquisition when the parent uses the complete equity method to account for its investment in a subsidiary.
Prepare consolidation workpaper for the years subsequent to acquisition.
Locate errors in consolidation workpaper.
Assign fair value to identifiable net assets.
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3. Objectives (continued)
Apply concepts to prepare a consolidated statement of cash flows.
Appendix: Understand the alternative trial balance consolidation workpaper format.
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4. 1: Acquisition-Year Workpapers
Consolidation Techniques and Procedures
1: Acquisition-Year Workpapers
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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
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6. Completing the Worksheet (1 of 2)
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)
For consolidated revenues, liabilities, and equity (other than ending retained earnings):
Add parent, subsidiary, less DR, plus CR
For consolidated assets:
Add parent, subsidiary, plus DR, less CR
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7. Completing the Worksheet (2 of 2)
For income, ending retained earnings and all subtotals and totals:
Compute directly in consolidated column.
Note:
The total consolidated assets should equal the total consolidated liabilities and equity.
Expenses on the income statement and dividends on the statement of retained earnings are generally shown as negative numbers. So compute the consolidated amounts as you would for revenues.
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Workpaper Entries
Adjust for errors & omissions
Eliminate intercompany profits and losses
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Record noncontrolling interest in sub.'s earnings & dividends
Eliminate reciprocal Investment & sub.'s equity balances
Amortize fair value differentials
Eliminate other reciprocal balances
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9. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Example: Pep & Sap Data
Pep pays $88 for 80% of Sap on 1/1/2011 when Sap's equity consisted of $60 capital stock and $30 retained earnings. All excess was due to unrecorded patents with a 10-year life. Sap's income and dividends follow:
2011
2012
Net income
$25
$30
Dividends
$15
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10. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Analysis
Cost of 80% of Sap
$88
Implied value of Sap ($88/.80)
$110
Book value (60+30) 90
Excess
$20
Allocated to:
Amt
Amort.
Patents
$20
10 yrs
Unamort. Bal.
Amortization
on 1/1/2011
in 2011
on 12/31/2011
in 2012
on 12/31/2012
Patents
$20 $2
$18
$16
Use these amounts in 2011 worksheet for amortization expense and patents.
Use these amounts in 2012 worksheet for amortization expense and patents.
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11. Income & Dividend Calculations
2011:
Sap's net income $25
Amortization (2)
Adjusted income $23
Dividends $15
2012:
Sap's net income $30
Adjusted income $28
Pep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
Pep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0
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12. Pep's 2011 Worksheet Entries (1 of 3)
1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Income from Sap (-R, -SE)
18.4
Dividends (+SE)
12.0
Investment in Sap (-A)
6.4
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Pep 2011: Entries (2 of 3)
4. Record noncontrolling interest in sub.'s earnings & dividends 5. Eliminate reciprocal Investment & sub.'s equity balances
Noncontrolling interest share (-SE)
4.6
Dividends (+SE)
3.0
Noncontrolling interest (+SE)
1.6
Capital stock, Sap (-SE) 60
Retained earnings, Sap (beginning) (-SE) 30
Patents (+A) 20
Investment in Sap (-A) 88
Noncontrolling interest (+SE) 22
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Pep 2011: Entries (3 of 3)
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances
none
Note that in the 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 (E, -SE) 2
Patents (-A)
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Pep's 2011 Worksheet
Year ended 12/31/2011c
Pep
Sap DR CR
Consol
Income statement:
Revenues
250.0
65.0
315.0
Income from Sap
18.4
0.0
Expenses
(200.0)
(40.0)
2.0
(242.0)
Noncontrolling interest share
4.6
(4.6)
Net income/ Controlling share
68.4
25.0
Statement of retained earnings:
Beginning retained earnings
5.0
30.0
Add net income
Deduct dividends
(30.0)
(15.0)
12.0
3.0
Ending retained earnings
43.4
40.0
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16. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Balance sheet, 12/31/2011:
Pep
Sap DR CR
Consol
Cash
39.0
10.0
49.0
Other current assets
90.0
50.0
140.0
Investment in Sap
94.4
6.4
0.0
88.0
Plant & equipment, net
250.0
70.0
320.0
Patents
20.0
2.0
18.0
Total
473.4
130.0
527.0
Liabilities
80.0
30.0
110.0
Capital stock
350.0
60.0
Retained earnings
43.4
40.0
Noncontrolling interest, Jan.1
22.0
Noncontrolling interest, Dec. 31
1.6
23.6
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17. A Look at the Income Statement
Year ended 12/31/2011c
Pep
Sap DR CR
Consol
Income statement:
Revenues
250.0
65.0
315.0
Income from Sap
18.4
0.0
Expenses
(200.0)
(40.0)
2.0
(242.0)
Noncontrolling interest share
4.6
(4.6)
Net income/ Controlling share
68.4
25.0
Income from Sap is eliminated.
Expenses are adjusted for 2011 amortization, - $2 on patents
Noncontrolling interest is proportional to Pep's Income from Sap since Pep uses the equity method.
$18.4 x .20/.80 = $4.6
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18. A Look at Retained Earnings
Year ended 12/31/2011c
Pep
Sap DR CR
Consol
Statement of retained earnings:
Beginning retained earnings
5.0
30.0
Add net income
68.4
25.0
Deduct dividends
(30.0)
(15.0)
12.0
3.0
Ending retained earnings
43.4
40.0
Beginning retained earnings of Sap is eliminated.
All of Sap'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.
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19. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
A Look at Assets
Investment in Sap is eliminated.
Patents at the start of 2011 were $20, and current amortization is $2; they are $18 at the end of 2011.
The total is calculated in the consolidated column.
Balance sheet, 12/31/2011:
Pep
Sap DR CR
Consol
Cash
39.0
10.0
49.0
Other current assets
90.0
50.0
140.0
Investment in Sap
94.4
6.4
0.0
88.0
Plant & equipment, net
250.0
70.0
320.0
Patents
20.0
2.0
18.0
Total
473.4
130.0
527.0
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20. A Look at Liabilities & Equity
Sap'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 Pep's Investment in Sap account.
$94.4 x .20/.80 = $23.6
Balance sheet, 12/31/2011:
Pep
Sap DR CR
Consol
Liabilities
80.0
30.0
110.0
Capital stock
350.0
60.0
Retained earnings
43.4
40.0
Noncontrolling interest, Jan.1
22.0
Noncontrolling interest, Dec. 31
1.6
23.6
Total
473.4
130.0
527.0
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21. 2: Workpapers in Subsequent Years
Consolidation Techniques and Procedures
2: Workpapers in Subsequent Years
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22. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Analysis, for 2012
Cost of 80% of Sap
$88
Implied value of Sap ($88/.80)
$110
Book value (60+30) 90
Excess
$20
Allocated to:
Amt
Amort.
Patents
$20
10 yrs
Unamort. Bal.
Amortization
on 1/1/2011
in 2011
on 12/31/2011
in 2012
on 12/31/2012
Patents
$20 $2
$18
$16
Use these amounts in 2011 worksheet for amortization expense and patents.
Use these amounts in 2012 worksheet for amortization expense and patents.
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23. Income & Dividend Calculations
2011:
Sap's net income $25
Amortization (2)
Adjusted income $23
Dividends $15
2012:
Sap's net income $30
Adjusted income $28
Pep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
Pep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0
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24. Pep's Worksheet Entries for 2012 (1 of 3)
1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Income from Sap (-R, -SE)
22.4
Dividends (+SE)
12.0
Investment in Sap (-A)
10.4
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25. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pep 2012: Entries (2 of 3)
4. Record noncontrolling interest in sub.'s earnings & dividends 5. Eliminate reciprocal Investment & sub.'s equity balances
Noncontrolling interest share (-SE)
5.6
Dividends (+SE)
3.0
Noncontrolling interest (+SE)
2.6
Capital stock, Sap (-SE) 60
Retained earnings, Sap (beginning) (-SE) 40
Patents (+A) 18
Investment in Sap (-A)
94.4
Noncontrolling interest (+SE)
23.6
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26. Eliminating Investment in Sap
Entry 5 eliminates the Investment in Sap and establishes the Noncontrolling Interest as of the beginning of the current year.
Investment in Sap (80% x $118) = $94.4
Noncontrolling interest (20% x $118) = $23.6
Verify the $118 from the debits in Entry 5 ( ).
Implied value of Sap at acquisition $88/.80
$110
Add the increase in retained earnings from acquisition to the beginning of the current year
$40 at 1/1/2012 minus $30 at 1/1/2011 10
Less amortization for all prior periods
$2 patent amortization for 2011
(2)
Adjusted value of Sap at 1/1/2012
$118
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27. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pep 2012: Entries (3 of 3)
6. Amortize fair value differentials 7. Eliminate other reciprocal balances
Amortization Expense (E, -SE) 2
Patents (-A)
Note payable – Pep (-L) 10
Note receivable – Sap (-A)
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28. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pep's 2011 Worksheet
Year ended 12/31/2011
Pep
Sap DR CR
Consol
Income statement:
Revenues
300.0
75.0
375.0
Income from Sap
22.4
0.0
Expenses
(244.0)
(45.0)
2.0
(291.0)
Noncontrolling interest share
5.6
(5.6)
Net income/ Controlling share
78.4
30.0
Statement of retained earnings:
Beginning retained earnings
43.4
40.0
Add net income
Deduct dividends
(15.0)
12.0
3.0
Ending retained earnings
76.8
55.0
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Balance sheet, 12/31/2012:
Pep
Sap DR CR
Consol
Cash
45.0
20.0
65.0
Note receivable – Sap
10.0
0.0
Other current assets
97.0
70.0
167.0
Investment in Sap
104.8
10.4
94.4
Plant & equipment, net
240.0
60.0
300.0
Patents
18.0
2.0
16.0
Total
496.8
150.0
548.0
Note payable – Pep
Liabilities
25.0
95.0
Capital stock
350.0
Retained earnings
76.8
55.0
Noncontrolling interest, Jan.1
23.6
Noncontrolling interest, Dec. 31
2.6
26.2
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30. 3: Errors in the Workpapers
Consolidation Techniques and Procedures
3: Errors in the Workpapers
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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.
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32. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Consolidation Techniques and Procedures
4: Assigning Fair Value
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33. Example with Excess Allocated
Pat pays $360 for 90% of Sol on 12/31/2011 when Sol's equity consisted of $200 capital stock and $50 retained earnings. Inventory (sold in 2011), land, and buildings (20 years) were undervalued by $10, $30, and $80, respectively. Equipment (10 years) was overvalued by $20. Sol's income and dividends for 2012 were $60 and $20. At year-end, Sol has dividends payable of $10 which Pat has not yet recorded. There is $20 cash in transit from Sol to Pat for the note.
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34. Analysis at Acquisition
Allocated to:
Amt
Amort
Inventories
$10
1st yr
Land 30 -
Building 80
20 yrs
Equipment
(20)
10 yrs
Goodwill 50
150
Cost of 90% of Sol
$360
Implied value of Sap ($360/.90)
$400
Book value (200+50)
250
Excess
$150
Noncontrolling interest, 10%(400)
$40
Unamort. Bal.
Amortization
12/31/2011 *
in 2012 *
on 12/31/2012
Inventories
$10
($10) $0
Land 30
Building 80
(4) 76
Equipment
(20) 2
(18)
Goodwill 50
$150
($12)
$138
* Use the 12/31/2011 and 2012 amortization in worksheet entries for 2012.
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35. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Sol's Income & Dividend
2012
Sol's net income
$60
Amortization
($12)
Adjusted income
$48
Sol's dividends
$20
Pat's 90% share
$43.2
$18.0
NCI 10% share
$4.8
$2.0
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36. Pat's Worksheet Entries (1 of 4)
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
Dividends receivable (+A)
9.0
Investment in Sol (-A)
Cash (+A)
20.0
Note receivable, Sol (-A)
Income from Sol (-R, -SE)
43.2
Dividends (+SE)
18.0
Investment in Sol (-A)
25.2
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37. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pat: Entries (2 of 4)
4. Record noncontrolling interest in sub.'s earnings & dividends 5a. Eliminate reciprocal Investment & sub.'s equity balances (with unamortized excess)
Noncontrolling interest share (-SE)
4.8
Dividends (+SE)
2.0
Noncontrolling interest (+SE)
2.8
Capital stock (-SE)
200
Retained earnings, Sol (beginning) (-SE) 50
Unamortized excess (+A)
150
Investment in Sol (-A)
360
Noncontrolling interest (+SE) 40
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38. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pat: Entries (3 of 4)
5b. Allocate the unamortized excess according to beginning-of-year balances.
Inventory (+A) 10
Land (+A) 30
Building, net (+A) 80
Goodwill (+A) 50
Equipment, net (-A) 20
Unamortized excess (-A)
150
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39. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pat: Entries (4 of 4)
6. Amortize fair value/book value differentials 7. Eliminate other reciprocal balances
Cost of sales (E, -SE) 10
Inventory (-A)
Operating (depreciation) expense (E, -SE) 4
Buildings, net (-A)
Equipment, net (-A) 2
Operating (depreciation) expense (-E, SE)
Dividends payable (-L)
9.0
Dividends receivable (-A)
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40. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Pat's 2012 Worksheet
Year ended 12/31/2012
Pat
Sol DR CR
Consol
Income statement:
Revenues
900.0
300.0
1,200.0
Income from Sol
43.2
0.0
Cost of goods sold
(600.0)
(150.0)
10.0
(760.0)
Operating expenses
(190.0)
(90.0)
4.0
2.0
(282.0)
Noncontrolling interest share
4.8
(4.8)
Net income/ Controlling share
153.2
60.0
Statement of retained earnings:
Beginning retained earnings
120.0
50.0
Add net income
Deduct dividends
(100.0)
(20.0)
18.0
Ending retained earnings
173.2
90.0
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41. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Balance sheet, 12/31/2012:
Pat
Sol DR CR
Consol
Cash
13.0
15.0
20.0
48.0
Accounts receivable, net
76.0
25.0
101.0
Note receivable – Sol
0.0
Inventories
90.0
60.0
10.0
150.0
Land
30.0
120.0
Building, net
190.0
110.0
80.0
4.0
376.0
Equipment, net
2.0
252.0
Investment in Sol
394.2
9.0
25.2
360.0
Dividends receivable
Goodwill
50.0
Unamortized excess
Total
993.2
1,097.0
Accounts payable
180.0
Dividends payable
1.0
Capital stock
700.0
200.0
Retained earnings
173.2
Noncontrolling interest, Jan.1
40.0
Noncontrolling interest, Dec. 31
2.8
42.8
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42. 5: Consolidated Statement of Cash Flows
Consolidation Techniques and Procedures
5: Consolidated Statement of Cash Flows
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43. 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
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44. 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
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45. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Operating Cash Flows
Direct method:
Include cash dividends received from equity investees (not equity method income)
Indirect method:
Start with controlling share of net income
Add the noncontrolling interest share
Deduct the excess of equity method income over cash dividends received from equity investees
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46. 6: Appendix – Trial Balance Format
Consolidation Techniques and Procedures
6: Appendix – Trial Balance Format
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47. 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
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48. Completing the Worksheet
Enter worksheet elimination entries into the DR and CR columns.
Add accounts as needed (e.g., noncontrolling interest, goodwill, noncontrolling interest share).
Carry consolidated balances to income statement, retained earnings, or balance sheet columns, as appropriate.
Move controlling share of income to the retained earnings column.
Move ending retained earnings to the balance sheet column.
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49. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall