1. Applying the Initial Value Method
3-1
If the parent uses the Initial Value Method to account for the investment, then the consolidation entries will change only slightly.
Remember, under the initial value method . . .
No adjustments are recorded in the Investment account for current year operations, dividends paid by the subsidiary, or amortization of purchase price allocations.
Dividends received from the subsidiary are recorded as Dividend Income.

2. Converting from the initial value method to the equity method
When the parent employs the initial value method, the parent’s books (and pre-consolidation statements) reflect the cash basis of income recognition for its equity in subsidiary earnings since acquisition date. The consolidated statements, however, must reflect the accrual basis. So, worksheet adjustments convert the investment and retained earnings accounts of the parent from: Cash Basis to Accrual Basis (Initial Value Method) (Equity Method)

3. Converting from the initial value method to the equity method
(Adj. *C) The Conversion Adjustment: Investment in S xx Retained earnings-P (January 1) xx where xx = P’s %  (change in subsidiary RE from acquisition date to the beginning of the current year less accumulated excess amortizations for the same time period) *C enters all post-acquisition changes in subsidiary RE into the parent’s RE. Note: This adjustment is not needed in the first year subsequent to acquisition.

4. Consolidation Entries Initial Value Method
3-4
Entry S
Eliminate the sub’s equity balances as of the beginning of the period.
Assign the difference to Investment in Sub.
This entry is the same under both the Equity Method and the Initial Value Method. 4

5. Consolidation Entries Initial Value Method
3-5
Entry A
Adjust sub’s assets and liabilities to FV.
Set up the Goodwill account and the other intangible assets. The difference is a reduction of the Investment in Subsidiary account.
This entry is the same under both the Equity Method and the Initial Value Method. 5

6. Consolidation Entries: Initial Value Method
3-6
Entry I
This entry is different under the Initial Value Method.
Eliminate the Parent’s Dividend Income account.
Also, eliminate the Sub’s Dividends Paid account. 6

7. Consolidation Entries Initial Value Method
3-7
Entry D
Under the Initial Value Method we DO NOT make an Entry D. 7

8. Consolidation Entries Initial Value Method
3-8
Entry E
Regardless of the method used, we must record the amortization of the purchase price allocations. This entry is the same as the Equity Method. 8

9. Other Consolidation Entries
3-9
In addition to the Entries *C, S, A, I, D, & E, you must also eliminate intercompany payables or receivables.
So far, we have assumed that the parent acquired 100% of the subsidiary in the combination. If control acquired is less than 100%, an additional adjustment must be made (see Chapter 4).