1. Consolidated Statements: Subsequent to Acquisition3

2. Learning Objectives (1 of 2)
Show how an investment in a subsidiary account is maintained under the simple equity, sophisticated equity, and cost methods.
Complete a consolidated worksheet using the simple equity method for the parent's investment account.
Complete a consolidated worksheet using the cost method for the parent's investment account.
Describe the special worksheet procedures that are used for an investment maintained under the sophisticated equity method.
Distribute and amortize multiple adjustments resulting from the difference between the price paid for an investment in a subsidiary and the subsidiary equity eliminated.
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3. Learning Objectives (2 of 2)
Demonstrate the worksheet procedures used for investments purchased during the financial reporting period.
Demonstrate an understanding of when goodwill impairment loss exists and how it is calculated.
Consolidate a subsidiary using vertical worksheet format. (Appendix A)
Explain the impact of tax-related complications arising on the purchase date. (Appendix B)
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4. Accounting for the Investment in a Subsidiary
Simple equity method
Every change in sub’s Retained Earnings in recorded on a pro-rata basis in the Investment account
Cost method
The Investment account remains at its original cost-of-acquisition balance
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5. Accounting for the Investment in the Subsidiary
Sophisticated equity method
The parent records controlling interest in the subsidiary’s income
The parent also records the amortization adjustment for the excess
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6. Elimination Procedures
The consolidation process is performed independently each year
All elimination entries are workpaper only
They are not posted to the general ledger of parent or subsidiary
Steps for dates subsequent to acquisition:
Date alignment (varies by method)
EL Eliminate parent’s share of sub equity
D Distribute excess purchase price
A Amortize the excess
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7. Date Alignment for Simple Equity Method
Investment in Sub carries information through the end of the fiscal year
Subsidiary’s Retained Earnings is at its beginning-of-year balance
Must align the content of the two accounts before eliminating sub equity against the investment account
Eliminate the effects of the current year’s recognition of income and dividends
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8. Date Alignment: Simple Equity
CY1 Eliminate Parent’s recognition of Sub income:
Subsidiary Income XX
Investment in Sub XX
CY2 Eliminate Parent’s share of Sub’s dividends:
Investment in Sub XX
Dividends Declared-Sub XX
The Investment in Sub account has been returned to its beginning-of-year balance; it has been “aligned” with the Sub’s Retained Earnings account
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9. Date Alignment for Cost Method
Investment account carries information as of the date of acquisition
Subsidiary’s Retained Earnings is at its beginning-of-year balance
Must align the content of the two accounts before eliminating sub equity against the investment account
Convert the Investment account to its simple equity balance as of the beginning of the period
Required at end of second and subsequent years
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10. Date Alignment: Cost Method End of First Year
CV Not required at end of first year
CY2 Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc XX
Dividends Declared-Sub XX
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11. Date Alignment: Cost Method End of Second and Subsequent Years
CV Bring Investment account to its simple equity balance as of the beginning of the year:
Investment in Sub XX
RE-Parent XX
(Change in Sub RE since acquisition × P%)
CY2 Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc XX
Dividends Declared-Sub XX
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12. Further Consolidation Procedures
After date alignment is completed
The cost method investment is converted to its simple equity balance at the beginning of the year
Same procedures regardless of method (simple equity or cost) to account for investment in subsidiary
Next steps
EL Eliminate P% of Sub’s beginning of year equity
D/NCI Distribute excess to controlling interest and NCI
A Amortize the excess
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13. Elimination Procedures EL: Eliminate Parent’s share of Sub’s Equity
C Stk-Sub (P%) 80,000
Addn’l Pd-In Capt-Sub (P%) 120,000
Retained Earnings-Sub (P%) NOTE
Investment in Sub XX
NOTE: Controlling interest in the Sub’s beginning of current year Retained Earnings is eliminated.
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14. Determination of the Method Being Used
START:
Investment account balance is original acquisition cost?
Cost Method
Yes
Parent records subsidiary income that is Sub’s Net Income × P%
Equity Method
Yes
Parent records subsidiary income that is less than Sub’s Net Income × P%
Sophisticated Equity Method
Yes
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15. Complicated Purchase Several Distributions of Excess
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16. Elimination Procedures D: Distribute excess per D&D schedule
Cost of Goods Sold* 5,000
Land 50,000
Buildings 200,000
Patent 25,000
Discount on B Pay 13,240
Goodwill 126,770
Equipment 20,000
Investment in Sub 320,000
RE-Sub 80,000
*Inventory valuations are distributed:
On date of acquisition: to Inventory
End of first year: to Cost of Goods Sold
End of subsequent years: split between RE-P & RE-S
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17. Elimination Procedures A: Amortize the excess per D&D Schedule
Dep Exp-Bldgs 10,000
A/D-Bldgs 10,000
A/D-Equipment 4,000
Dep Exp-Equipment 4,000
Other expenses 2,500
Patent 2,500
Interest Exp 3,310
Disc on Bond Pay 3,310
First year:
Current year amortization is recorded as an adjustment to expense
Balance sheet account changed accordingly
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18. Elimination Procedures A: Amortize the excess per D&D Schedule
Subsequent years:
Current year amortization is recorded as an adjustment to expense
Balance sheet account changed for all years’ amortization
Prior years’ amortization allocated to RE-P and RE-S
Dep Exp-Bldgs 10,000
A/D-Bldgs (2 yr) 20,000
A/D-Equipment (2 yr) 8,000
Dep Exp-Equipment 4,000
Other expenses 2,500
Patent (2 yr) 5,000
Interest Exp 3,310
Disc on Bond Pay (2 yr) 6,620
RE-Par 9,448
RE-Sub 2,362
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19. Effect of the Sophisticated Equity Method
Ramifications:
Current year’s equity adjustment is net of excess amortizations
The investment account contains only the remaining unamortized excess applicable to the investment
Distribution and amortization of excess procedures are altered:
Distribute the remaining unamortized excess applicable to the controlling interest to the balance sheet account; adjust the NCI for the remaining excess attributable to its share
Amortize the excess for the current year only
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20. Intraperiod purchase Simple equity method
D&D schedule developed as of the date of purchase
Sub closes nominal accounts on purchase date
Consolidated income includes Sub income from date of purchase
Only subsidiary income earned after the purchase date is distributed to the NCI and controlling interest
Cost method same as above except
Eliminate intercompany dividends only
Cost-to-Equity conversion is from date of purchase
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21. Summary: Worksheet Technique
Extend all account balances to correct column(s)
Assets and liabilities and Parent paid-in capital to balance sheet column
Parent RE to Controlling RE column
NCI interest in Sub’s equity and Sub dividends to NCI column
Revenue and expenses to Consolidated Net Income
Parent dividends to Controlling RE
Calculate consolidated net income
Distribute and extend to NCI and Controlling RE
Calculate ending NCI and Controlling RE
Extend to Balance Sheet
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22. Income Distribution Schedules
Subsidiary
- Full amortization of excess
Internally generated net income
+ Other adjustments, if any
= Adjusted income
× NIC interest
= Distribute to NCI
Parent
Internally generated net income
+ Parent share Sub adj income
= Controlling interest
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23. Goodwill Impairment Losses
The impairment loss is
reported in the consolidated income statement for the period in which it occurs
presented on a before-tax basis as part of continuing operations
Recognizing and recording the impairment
Parent records its share of the impairment loss on its books and credits the investment in subsidiary account; NCI share of the loss is recorded on the worksheet or
Impairment loss could be recorded only on the consolidated worksheet
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24. Goodwill Impairment Losses
Impairment calculation: Estimated fair value of 80% sub $900,000 Estimated fair value of identifiable net assets (850,000) Estimated goodwill 50,000 Existing goodwill 165,000 Impairment loss 115,000
Parent’s Journal Entry:
Goodwill Impairment Loss ($115,000 × 80%) 92,000
Investment in Sub 92,000
Consolidating worksheet:
Record the remaining $23,000 loss
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25. Appendix B: Tax-Related Adjustments
Occurs when seller is not taxed; buyer gets book value for future depreciation
Adjustment from market to book accompanied by DTL = tax % × market adjustment
DTL is amortized over same period as asset adjustment; increases tax liability in future years
Tax loss carryover is asset recorded in purchase
Limitations on its use in year of purchase and later years
All amortizations and tax adjustments are carried to Sub’s Income Distribution Schedule
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26. Consolidated Financial Statements
Consolidated net income is distributed to two owner constituents
NCI interest is not an expense
Statement of RE reflects both owner constituents
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27. Consolidated Financial Statements
NCI equity = (NCI ending RE + NCI share of Sub Paid-in Capital)
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