2. Consolidation Techniques and Procedure Pertemuan 3-4
Mata kuliah : F Akuntansi Keuangan Lanjutan II
Tahun : 2010
Consolidation Techniques and Procedure Pertemuan 3-4

3. 1: Acquisition-Year Working Papers
Consolidation Techniques and Procedures
1: Acquisition-Year Working Papers

4. 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

5. Completing the Worksheet
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)
Consolidated expenses, dividends and assets:
Add parent, subsidiary, plus DR, less CR
Consolidated revenues, liabilities and equity (other than ending retained earnings):
Add parent, subsidiary, less DR, plus CR
Income, ending retained earnings and all subtotals and totals:
Compute directly in consolidated column.

6. Working Paper 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/book value differentials
Eliminate other reciprocal balances

7. Example: Prep & Snap Data
Prep pays $88 for 80% of Snap on 1/1/2009 when Snap's equity consisted of $60 capital stock and $30 retained earnings. All excess was due to unrecorded patents with a 10-year life.
Snap's income and dividends follow:
2009
2010
Net income
$25
$30
Dividends
$15

8. Analysis
Cost of 80% of Snap
$88
Implied value of Snap ($88/.80)
$110
Book value (60+30) 90
Excess
$20
Allocated to:
Amt
Amort.
Patents
$20
10 yrs
Unamort. Bal.
Amortization
on 1/1/2009
in 2009
on 12/31/2009
in 2010
on 12/31/2010
Patents
$20 $2
$18
$16
Use these amounts in 2009 worksheet for amortization expense and patents.
Use these amounts in 2010 worksheet for amortization expense and patents.

9. Income & Dividend Calculations
2009:
Snap's net income $25
Amortization (2)
Adjusted income $23
Dividends $15
2010:
Snap's net income $30
Adjusted income $28
Prep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
Prep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0

10. Prep's 2009 Worksheet Entries
Adjust for errors & omissions
none
Eliminate intercompany profits and losses
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Income from Snap (I.S.)
18.4
Dividends (St. RE)
12.0
Investment in Snap (B.S.)
6.4

11. Prep 2009: Entries (2 of 3)
Record non-controlling interest in sub's earnings & dividends
Eliminate reciprocal Investment & sub's equity balances
Non-controlling interest share (I.S.)
4.6
Dividends (St. RE)
3.0
Non-controlling interest (B.S.)
1.6
Capital stock (B.S.) 60
Retained earnings (St. RE, beg.) 30
Patents (B.S.) 20
Investment in Snap (B.S.) 88
Non-controlling interest (B.S.) 22

12. Prep 2009: Entries (3 of 3)
Amortize fair value/book value differentials
Eliminate other reciprocal balances
none
Note that in 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 (I.S.) 2
Patents (B.S.)

13. Prep's 2009 Worksheet Year ended 12/31/2009 Prep Snap DR CR Consol
Income statement:
Revenues
250.0
65.0
315.0
Income from Snap
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

14. Balance sheet, 12/31/2009:
Prep
Snap DR CR
Consol
Cash
39.0
10.0
49.0
Other current assets
90.0
50.0
140.0
Investment in Snap
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

15. A Look at the Income Statement
Year ended 12/31/2009
Prep
Snap DR CR
Consol
Income statement:
Revenues
250.0
65.0
315.0
Income from Snap
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 Snap is eliminated.
Expenses are adjusted for 2009 amortization - $2 on patents
Non-controlling interest is proportional to Prep's Income from Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6

16. A Look at Retained Earnings
Year ended 12/31/2009
Prep
Snap 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 Snap is eliminated.
All of Snap'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.

17. A Look at Assets Investment in Snap is eliminated.
Balance sheet:
Prep
Snap DR CR
Consol
Cash
39.0
10.0
49.0
Other current assets
90.0
50.0
140.0
Investment in Snap
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
Investment in Snap is eliminated.
Patents at the start of 2009 were $20, and current amortization is $2; they are $18 at the end of 2009.
The total is calculated in the consolidated column.

18. A Look at Liabilities & Equity
Balance sheet:
Prep
Snap 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
Snap's capital stock is eliminated.
Retained earnings are not calculated across the row; they are taken from the statement of retained earnings.
Non-controlling interest at year-end is proportional to Prep's Investment in Snap account.
$94.4 x .20/.80 = $23.6

19. 2: Working Papers in Subsequent Years
Consolidation Techniques and Procedures
2: Working Papers in Subsequent Years

20. Analysis, for 2010
Cost of 80% of Snap
$88
Implied value of Snap ($88/.80)
$110
Book value (60+30) 90
Excess
$20
Allocated to:
Amt
Amort.
Patents
$20
10 yrs
Unamort. Bal.
Amortization
on 1/1/2009
in 2009
on 12/31/2009
in 2010
on 12/31/2010
Patents
$20 $2
$18
$16
Use these amounts in 2009 worksheet for amortization expense and patents.
Use these amounts in 2010 worksheet for amortization expense and patents.

21. Income & Dividend Calculations
2009:
Snap's net income $25
Amortization (2)
Adjusted income $23
Dividends $15
2010:
Snap's net income $30
Adjusted income $28
Prep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
Prep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0

22. Prep's Worksheet Entries for 2010
Adjust for errors & omissions
none
Eliminate intercompany profits and losses
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Income from Snap (I.S.)
22.4
Dividends (St. RE)
12.0
Investment in Snap (B.S.)
10.4

23. Prep 2010: Entries (2 of 3)
Record non-controlling interest in sub's earnings & dividends
Eliminate reciprocal Investment & sub's equity balances
Non-controlling interest share (I.S.)
5.6
Dividends (St. RE)
3.0
Non-controlling interest (B.S.)
2.6
Capital stock (B.S.) 60
Retained earnings (St. RE, beg.) 40
Patents (B.S.) 18
Investment in Snap (B.S.)
94.4
Non-controlling interest (B.S.)
23.6

24. Eliminating Investment in Snap
Entry 5 eliminates the Investment in Snap and establishes the Non-controlling Interest as of the beginning of the current year.
Investment in Snap (80% x $118) = $94.4
Non-controlling interest (20% x $118) = $23.6
Verify the $118 from the entry ( ).
Implied value of Snap at acquisition $88/.80
$110
Add the increase in retained earnings from acquisition to the beginning of the current year
$40 at 1/1/2010 minus $30 at 1/1/2009 10
Less amortization for all prior periods
$2 patent amortization for 2009
(2)
Adjusted value of Snap at 1/1/2010
$118

25. Prep 2010: Entries (3 of 3)
Amortize fair value/book value differentials
Eliminate other reciprocal balances
Amortization Expense (I.S.) 2
Patents (B.S.)
Note payable – Prep (B.S.) 10
Note receivable – Snap (B.S.)

26. Prep's 2010 Worksheet Year ended 12/31/2010 Prep Snap DR CR Consol
Income statement:
Revenues
300.0
75.0
375.0
Income from Snap
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

27. Balance sheet, 12/31/2010:
Prep
Snap DR CR
Consol
Cash
45.0
20.0
65.0
Note receivable – Snap
10.0
0.0
Other current assets
97.0
70.0
167.0
Investment in Snap
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 – Prep
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

28. 3: Locating Errors in Working Papers
Consolidation Techniques and Procedures
3: Locating Errors in Working Papers

29. Errors
Most errors show up when the consolidated balance sheet does not balance.
Common omissions:
Non-controlling interest share (income)
Goodwill
Non-controlling interest (equity)
Check equality of DR and CR adjustments.
Verify totals for parent and subsidiary statements.
Re-calculate the consolidated amounts.

30. 4: Allocating Excess of Fair Value over Book Value
Consolidation Techniques and Procedures
4: Allocating Excess of Fair Value over Book Value

31. Example with Excess Allocated
Pate pays $360 for 90% of Solo on 12/31/2009 when Solo's equity consisted of $200 capital stock and $50 retained earnings. Inventory (sold in 2010), land and buildings (20 years) were undervalued by $10, $30, and $80, respectively. Equipment (10 years) was overvalued by $20.
Solo's income and dividends for 2010 were $60 and $20.
At year-end, Solo has dividends payable of $10 which Pate has not yet recorded. There is $20 cash in transit from Solo to Pate for the note.

32. 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 Solo
$360
Implied value of Snap ($360/.90)
$400
Book value (200+50)
250
Excess
$150
Noncontrolling interest, 10%(400)
$40
Unamort. Bal.
Amortization
12/31/2009 *
in 2010 *
on 12/31/2010
Inventories
$10
($10) $0
Land 30
Building 80
(4) 76
Equipment
(20) 2
(18)
Goodwill 50
$150
($12)
$138
* Use the 12/31/2009 and 2010 amortization in worksheet entries for 2010.

33. Solo's Income & Dividend
2010
Solo's net income
$60
Amortization
($12)
Adjusted
$48
Solo's dividends
$20
Pate's 90% share
$43.2
$18.0
NCI 10% share
$4.8
$2.0

34. Pate's Worksheet Entries
Adjust for errors & omissions
Eliminate intercompany profits and losses
none
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Dividends receivable (B.S.)
9.0
Investment in Solo (B.S.)
Cash (B.S.)
20.0
Note receivable (B.S.)
Income from Solo (I.S.)
43.2
Dividends (St. RE)
18.0
Investment in Solo (B.S.)
25.2

35. Pate: Entries (2 of 4)
Record non-controlling interest in sub's earnings & dividends
Eliminate reciprocal Investment & sub's equity balances
Noncontrolling interest share (I.S.)
4.8
Dividends (St. RE)
2.0
Noncontrolling interest (B.S.)
2.8
Capital stock (B.S.)
200
Retained earnings (St. RE, beg.) 50
Unamortized excess
150
Investment in Solo (B.S.)
360
Noncontrolling interest (B.S.) 40

36. Pate: Entries (3 of 4)
Allocate the unamortized excess according to beginning of year balances.
Inventory 10
Land 30
Building, net 80
Goodwill 50
Equipment, net 20
Unamortized excess
150

37. Pate: Entries (4 of 4) Amortize fair value/book value differentials
Eliminate other reciprocal balances
Cost of sales 10
Inventory
Operating (depreciation) expense 4
Buildings, net
Equipment, net 2
Dividends payable (B.S.)
9.0
Dividends receivable (B.S.)

38. Pate's 2010 Worksheet Year ended 12/31/2010 Pate Solo DR CR Consol
Income statement:
Revenues
900.0
300.0
1,200.0
Income from Snap
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

39. Balance sheet, 12/31/2010:
Prep
Snap DR CR
Consol
Cash
13.0
15.0
20.0
48.0
Accounts receivable, net
76.0
25.0
101.0
Note receivable - solo
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 Solo
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

40. 5: Consolidated Statement of Cash Flows
Consolidation Techniques and Procedures
5: Consolidated Statement of Cash Flows

41. 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

42. 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 non-controlling interests

43. Operating Cash Flows Direct method:
Include cash dividends received from equity investees (not equity method income)
Indirect method:
Starting with consolidated net income to the controlling interest share, ADD the noncontrolling interest share
Deduct the excess of equity method income over cash dividends received from equity investees

44. 6: Appendix – Trial Balance Format
Consolidation Techniques and Procedures
6: Appendix – Trial Balance Format

45. 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.

46. Completing the Worksheet
Enter worksheet elimination entries into the DR and CR columns.
Add accounts as needed (e.g., non-controlling interest, goodwill, non-controlling interest share).
Carry consolidated balances to income statement, retained earnings, or balance sheet columns, as appropriate.
Move consolidated net income, or controlling interest share, to retained earnings.
Move ending retained earnings to the balance sheet.