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Chapter 4: Consolidation Techniques and Procedures

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn

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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.

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Objectives (continued)

5. Apply concepts to prepare a consolidated statement of cash flows.

6. Appendix: Understand the alternative trial balance consolidation working paper format.

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1: Acquisition-Year Working Papers1: Acquisition-Year Working PapersConsolidation Techniques and Procedures

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Preparing the Worksheet

Completing the Worksheet

Working Paper Entries

Steps of Preparing Consolidation Statements

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Preparing the Worksheet

• Statements are entered onto the worksheet:1. Income statement2. Statement of retained earnings3. Balance sheet

• Columns needed:1. Parent2. Subsidiary3. DR and CR columns for elimination and

adjustment entries4. Consolidated

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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.

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Working Paper Entries

1. Adjust for errors & omissions2. Eliminate intercompany profits and losses3. 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 differentials7. Eliminate other reciprocal balances

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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 $30Dividends $15 $15

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AnalysisCost of 80% of Snap $88 Implied value of Snap ($88/.80) $110 Book value (60+30) 90Excess $20

Allocated to: Amt Amort.Patents $20 10 yrs

Unamort. Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.

on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010Patents $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.

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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 $25Amortization (2)Adjusted income $23

Dividends $15

2010:Snap's net income $30Amortization (2)Adjusted income $28

Dividends $15

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Prep's 2009 Worksheet Entries

1. Adjust for errors & omissionsnone

2. Eliminate intercompany profits and lossesnone

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

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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

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Prep 2009: Entries (3 of 3)

6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balancesnone

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

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Year ended 12/31/2009 Prep Snap DR CR ConsolIncome statement:          Revenues 250.0 65.0     315.0 Income from Snap 18.4   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     68.4 Statement of retained earnings:          Beginning retained earnings 5.0 30.0 30.0   5.0 Add net income 68.4 25.0     68.4 Deduct dividends (30.0) (15.0)   12.0 (30.0)        3.0  

Ending retained earnings 43.4 40.0 43.4

Prep's 2009 Worksheet

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Balance sheet, 12/31/2009: Prep Snap DR CR ConsolCash 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 60.0   350.0 Retained earnings 43.4 40.0     43.4 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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A Look at the Income StatementYear ended 12/31/2009 Prep Snap DR CR ConsolIncome statement:          Revenues 250.0 65.0     315.0 Income from Snap 18.4   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     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

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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 12/31/2009 Prep Snap DR CR ConsolStatement of retained earnings:          Beginning retained earnings 5.0 30.0 30.0   5.0 Add net income 68.4 25.0     68.4 Deduct dividends (30.0) (15.0)   12.0 (30.0)        3.0  

Ending retained earnings 43.4 40.0 43.4

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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: Prep Snap DR CR ConsolCash 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

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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: Prep Snap DR CR ConsolLiabilities 80.0 30.0     110.0 Capital stock 350.0 60.0 60.0   350.0 Retained earnings 43.4 40.0     43.4 Noncontrolling interest, Jan.1       22.0  Noncontrolling interest, Dec. 31       1.6 23.6 Total 473.4 130.0     527.0