1. © Pearson Education, Inc. publishing as Prentice Hall4-1 Chapter 4: Consolidation Techniques and Procedures by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10 th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

2. © Pearson Education, Inc. publishing as Prentice Hall4-2 Consolidation Techniques: Objectives 1.Prepare consolidation working papers for the year of acquisition when the parent company uses the full equity method to account for its invesment in a subsidiary. 2.Prepare consolidation working papers for the year subsequent to acquisition. 3.Locate errors in preparing consolidation working papers. 4.Allocate excess fair value over book value to include identifiable net assets.

3. © Pearson Education, Inc. publishing as Prentice Hall4-3 Objectives (continued) 5.Apply concepts to prepare a consolidated statement of cash flows. 6.Appendix: Understand the alternative trial balance consolidation working paper format.

4. © Pearson Education, Inc. publishing as Prentice Hall4-4 1: Acquisition-Year Working Papers Consolidation Techniques and Procedures

5. © Pearson Education, Inc. publishing as Prentice Hall4-5 Preparing the Worksheet Completing the Worksheet Working Paper Entries Steps of Preparing Consolidation Statements

6. © Pearson Education, Inc. publishing as Prentice Hall4-6 Preparing the Worksheet Statements are entered onto the worksheet: 1.Income statement 2.Statement of retained earnings 3.Balance sheet Columns needed: 1.Parent 2.Subsidiary 3.DR and CR columns for elimination and adjustment entries 4.Consolidated

7. © Pearson Education, Inc. publishing as Prentice Hall4-7 Completing the Worksheet Enter Parent and Sub. amounts at 100% of book value. (Even if parent owns less) Enter elimination and adjustment 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.

8. © Pearson Education, Inc. publishing as Prentice Hall4-8 Working Paper Entries 1.Adjust for errors & omissions 2.Eliminate intercompany profits and losses 3.Eliminate income & dividends from sub. (to parent) and bring Investment account to its beginning balance 4.Record noncontrolling interest in sub's earnings & dividends 5.Eliminate reciprocal Investment & sub's equity balances 6.Amortize fair value/book value differentials 7.Eliminate other reciprocal balances

9. © Pearson Education, Inc. publishing as Prentice Hall4-9 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: 20092010 Net income$25$30 Dividends$15

10. © Pearson Education, Inc. publishing as Prentice Hall4-10 Analysis Cost of 80% of Snap$88 Implied value of Snap ($88/.80)$110 Book value (60+30)90 Excess$20 Allocated to:AmtAmort. Patents$2010 yrs Unamort. Bal.Amortization Unamort. Bal.AmortizationUnamort. Bal. on 1/1/2009in 2009 on 12/31/2009in 2010on 12/31/2010 Patents $20$2 $18$2$16 Use these amounts in 2009 worksheet for amortization expense and patents. Use these amounts in 2010 worksheet for amortization expense and patents.

11. © Pearson Education, Inc. publishing as Prentice Hall4-11 NCI 20% share $5.6 $3.0 NCI 20% share $4.6 $3.0 Prep's 80% share $18.4 $12.0 Prep's 80% share $22.4 $12.0 Income & Dividend Calculations 2009: Snap's net income$25 Amortization (2) Adjusted income$23 Dividends$15 2010: Snap's net income$30 Amortization (2) Adjusted income$28 Dividends$15

12. © Pearson Education, Inc. publishing as Prentice Hall4-12 Prep's 2009 Worksheet Entries 1.Adjust for errors & omissions none 2.Eliminate intercompany profits and losses none 3.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

13. © Pearson Education, Inc. publishing as Prentice Hall4-13 Prep 2009: Entries (2 of 3) 4.Record noncontrolling interest in sub's earnings & dividends 5.Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.)4.6 Dividends (St. RE)3.0 Noncontrolling 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 Noncontrolling interest (B.S.) 22

14. © Pearson Education, Inc. publishing as Prentice Hall4-14 Prep 2009: Entries (3 of 3) 6.Amortize fair value/book value differentials 7.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.)2

15. © Pearson Education, Inc. publishing as Prentice Hall4-15 Year ended 12/31/2009PrepSnapDRCRConsol Income statement: Revenues250.065.0 315.0 Income from Snap18.4 0.0 Expenses(200.0)(40.0)2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share68.425.0 68.4 Statement of retained earnings: Beginning retained earnings5.030.0 5.0 Add net income68.425.0 68.4 Deduct dividends(30.0)(15.0) 12.0(30.0) 3.0 Ending retained earnings43.440.043.4 Prep's 2009 Worksheet

16. © Pearson Education, Inc. publishing as Prentice Hall4-16 Balance sheet, 12/31/2009:PrepSnapDRCRConsol Cash39.010.0 49.0 Other current assets90.050.0 140.0 Investment in Snap94.4 6.40.0 88.0 Plant & equipment, net250.070.0 320.0 Patents 20.02.018.0 Total473.4130.0 527.0 Liabilities80.030.0 110.0 Capital stock350.060.0 350.0 Retained earnings43.440.0 43.4 Noncontrolling interest, Jan.1 22.0 Noncontrolling interest, Dec. 31 1.623.6 Total473.4130.0 527.0

17. © Pearson Education, Inc. publishing as Prentice Hall4-17 A Look at the Income Statement Year ended 12/31/2009PrepSnapDRCRConsol Income statement: Revenues250.065.0 315.0 Income from Snap18.4 0.0 Expenses(200.0)(40.0)2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share68.425.0 68.4 Income from Snap is eliminated. Expenses are adjusted for 2009 amortization - $2 on patents Noncontrolling interest is proportional to Prep's Income from Snap since Prep uses the equity method. $18.4 x.20/.80 = $4.6

18. © Pearson Education, Inc. publishing as Prentice Hall4-18 A Look at Retained Earnings 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. Year ended 12/31/2009PrepSnapDRCRConsol Statement of retained earnings: Beginning retained earnings5.030.0 5.0 Add net income68.425.0 68.4 Deduct dividends(30.0)(15.0) 12.0(30.0) 3.0 Ending retained earnings43.440.043.4

19. © Pearson Education, Inc. publishing as Prentice Hall4-19 A Look at Assets 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. Balance sheet:PrepSnapDRCRConsol Cash39.010.0 49.0 Other current assets90.050.0 140.0 Investment in Snap94.4 6.40.0 88.0 Plant & equipment, net250.070.0 320.0 Patents 20.02.018.0 Total473.4130.0 527.0

20. © Pearson Education, Inc. publishing as Prentice Hall4-20 A Look at Liabilities & Equity Snap'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 Prep's Investment in Snap account. $94.4 x.20/.80 = $23.6 Balance sheet:PrepSnapDRCRConsol Liabilities80.030.0 110.0 Capital stock350.060.0 350.0 Retained earnings43.440.0 43.4 Noncontrolling interest, Jan.1 22.0 Noncontrolling interest, Dec. 31 1.623.6 Total473.4130.0 527.0