Beams10e Ch03 an Introduction to Consolidated Financial Statements

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This is a power point of Advanced Accounting with the author Beams, et al Edition 11.with the name of the chapter is An Introduction Consolidated Financial Statement


<ul><li><p>Chapter 3: An Introduction to Consolidated Financial Statementsby Jeanne M. David, Ph.D., Univ. of Detroit Mercy</p><p>to accompany Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn</p></li><li><p>Intro to Consolidations: ObjectivesRecognize the benefits and limitations of consolidated financial statements.Understand the requirements for inclusion of a subsidiary in consolidated financial statements.Apply the consolidation concepts to parent company recording of the investment in a subsidiary at the date of acquisition.Allocate the excess of the fair value over the book value of the subsidiary at the date of acquisition.</p></li><li><p>Objectives (continued)Learn the concept of noncontrolling interest when the parent company acquires less than 100% of the subsidiary's outstanding common stock.Amortize the excess of the fair value over the book value in periods subsequent to the acquisition.Prepare consolidated balance sheets subsequent to the date of acquisition, including preparation of elimination entries.Apply the concepts underlying preparation of a consolidated income statement.</p><p>3-*</p></li><li><p>1: Benefits &amp; LimitationsAn Introduction to Consolidated Financial Statements</p></li><li><p>Business AcquisitionsFASB Statement 141RBusiness combinations occurAcquire controlling interest in voting stockMore than 50%May have control through indirect ownershipConsolidated financial statementsPrimarily for owners &amp; creditors of parentNot for noncontrolling owners or subsidiary creditors</p><p>3-*</p></li><li><p>2: SubsidiariesAn Introduction to Consolidated Financial Statements</p></li><li><p>Who is a Subsidiary?ARB No. 51 allowed broad discretionFASB Statement No. 94 Control based on share ownershipFASB Statement No. 160Financial control</p><p>Subsidiaries, or affiliates, continue as separate legal entities and reporting to their controlling and noncontrolling interests.</p><p>3-*</p></li><li><p>Consolidated StatementsPrepared by the parent companyParent disclosesConsolidation policy, Reg. S-XExceptions to consolidation, temporary control and inability to obtain controlFiscal year endUse parent's FYE, butMay include subsidiary statements with FYE within 3 months of parent's FYE.Disclose intervening material events</p><p>3-*</p></li><li><p>3: Parent Company RecordingAn Introduction to Consolidated Financial Statements</p></li><li><p>Penn Example: Acquisition Cost = Fair Value = Book ValuePenn acquires 100% of Skelly for $40, which equals the book value and fair values of the net assets acquired.To consolidate, eliminate Penn's Investment account and Skelly's capital stock and retained earnings.</p><p>Cost of acquisition$40Less 100% book value40Excess of cost over book value$0</p><p>Skelly BV=FVCash$10Other current assets15Net plant assets40Total$65Accounts payable$15Other liabilities10Capital stock30Retained earnings10Total $65</p><p>3-*</p></li><li><p>Balance sheetsSeparateConsolidatedPennSkellyPenn &amp; Sub.Cash$20$10$30Other curr. assets451560Net plant6040100Investment in Skelly4000Total$165$65$190Accounts payable$20$15$35Other curr. liabilities251035Capital stock100 30100Retained earnings201020Total$165$65$190</p></li><li><p>4: Allocations at Acquisition DateAn Introduction to Consolidated Financial Statements</p></li><li><p>Cost, Fair Value and Book ValueAcquisition cost, fair values of identifiable net assets and book values may differ.Allocate excess or deficiency of cost over book value and determine goodwill, if any.When BV = FV, excess is goodwill.Cost less BV = Excess to allocateAllocate first to FV-BV differencesRemainder is goodwill (or bargain purchase)</p></li><li><p>Example: BV FV but Cost = FVPiper acquires 100% of Sandy for $310. BV = 100 + 145 = $245FV = 385 75 = $310</p><p>Cost FV = $0 goodwill</p><p>SandyBVFVCash$40 $40 Receivables3030Inventory5075Plant, net200240Total$320 $385 Liabilities$75 $75 Capital stock100Retained earnings145Total$320 </p><p>Cost$310 100% BV245Excess of cost over BV$65 </p><p>3-*</p></li><li><p>Piper and Sandy (cont.)</p><p>Allocate to:AmtAmort.Inventory 100%(+25)251st yrPlant 100%(+40)4010 yrsTotal$65 </p><p>Piper's elimination worksheet entry:Capital stock100Retained earnings145Inventory25Plant40Investment in Sandy310</p><p>3-*</p></li><li><p>Example: BV FV and Cost FVPanda acquires 100% of Salty for $530.BV = 250 + 190 = $440FV = 580 85 = $495</p><p>Cost FV = $35 goodwill</p><p>SaltyBVFVCash$100 $100 Receivables4040Inventory250250Plant, net130190Total$520 $580 Liabilities$80 $85 Capital stock250Retained earnings190Total$520 </p><p>Cost$530 100% BV (250+190)440Excess of cost over BV$90 </p><p>3-*</p></li><li><p>Panda and Salty (cont.)</p><p>Panda's elimination worksheet entry:Capital stock250Retained earnings190Plant60Goodwill35Liabilities5Investment in Salty530</p><p>Allocate to:AmtAmort.Plant604 yrsLiabilities-55 yrsGoodwill 35 - Total$90 </p><p>3-*</p></li><li><p>Example: BV FV and Cost FVPrintemps acquires 100% of Summer for $185.BV = 75 + 105 = $180FV = 250 - 40 = $210</p><p>Cost$185 100% BV (75+105)180Excess of cost over BV$5</p><p>SummerBVFVCash$10 $10 Receivables3030Inventory8090Plant, net100120Total$220 $250 Liabilities$40 $40 Capital stock75Retained earnings105Total$220 </p><p>3-*</p></li><li><p>Printemps and Summer (cont.)Printemps records the acquisition of Summer assuming a cash purchase as follows. Note that the investment account is recorded at its fair value and the bargain purchase is treated immediately as a gain.</p><p>Allocate to:AmtAmort.Inventory101st yrPlant, land20 - Bargain purchase(25)GainTotal$5</p><p>Investment in Summer210 Gain on Bargain purchase25Cash 185</p><p>3-*</p></li><li><p>Worksheet Elimination EntryUnamortized excess equals $30 (gain is recognized) $10 for undervalued inventory $20 for undervalued land included in plant assets</p><p>3-*</p></li><li><p>PrintempsSummerAdjustmentsConsol-BVBVDRCRidatedCash$30 $10 $40 Receivables503080Inventory1008010190Plant, net45010020570Investment in Summer2102100Unamortized excess3030Total$840 $220 $880 Liabilities$270 $40 $310 Capital stock2007575200Retained earnings370105105370Total$840 $220 $880 240240</p><p>3-*</p></li><li><p>5: Noncontrolling InterestsAn Introduction to Consolidated Financial Statements</p><p>3-*</p></li><li><p>Noncontrolling InterestParent owns less than 100%Noncontrolling interest represents the minority shareholdersPart of stockholders' equityMeasured at fair value, based on parent's acquisition price</p><p>Parent pays $40,000 for an 85% interestImplied value of the full investee is 40,000/85% = $47,059.Minority share = 15%(47,059) = $7,059.</p><p>3-*</p></li><li><p>Example: Noncontrolling InterestsPopo acquires 80% of Sine for $400 when Sine had capital stock of $200 and retained earnings of $175. Sine's assets and liabilities equaled their fair values except for buildings which are undervalued by $50. Buildings have a 10-year remaining life. </p><p>Cost of 80% of Sine$400 Implied value of Sine (400/80%)$500 Book value (200+175)375Excess over book value$125 </p><p>Allocate to:Building$50 Goodwill75Total$125 </p><p>3-*</p></li><li><p>Elimination EntryAn unamortized excess account could have been used for the excess assigned to the building and goodwill. </p><p>Popo's elimination worksheet entry:Capital stock200Retained earnings175Building50Goodwill75Investment in Sine400Noncontrolling interest100</p><p>3-*</p></li><li><p>PopoSineAdjustmentsConsol-BVBVDRCRidatedCash$50 $10 $60 Receivables13050180Inventory80100180Building, net30024050590Investment in Sine4004000Goodwill7575Total$960 $400 $1,085 Liabilities$150 $25 $175 Capital stock250200200250Retained earnings560175175560Noncontrolling interest100100Total$960 $400 $1,085 500500</p><p>3-*</p></li><li><p>6: Amortizations After AcquisitionAn Introduction to Consolidated Financial Statements</p><p>3-*</p></li><li><p>Unamortized ExcessExcess assigned to assets and liabilities are amortized according to the account</p><p>Balance sheet accountAmortization periodIncome statement accountInventories and other current assetsGenerally, 1st yearCost of sales and other expenseBuildings, equipment, patents, Remaining life at business combinationDepreciation and amortization expenseLand, copyrightsNot amortizedLong term debtTime to maturityInterest expense</p><p>3-*</p></li><li><p>Piper and Sandy (cont.)</p><p>Allocate to:AmtAmort.Inventory251st yrPlant4010 yrsTotal$65 </p><p>Cost$310 100% BV245Excess$65 </p><p>Beginning unamortized excessCurrent year's amortizationEnding unamortized excessInventory25(25)0Plant40(4)36Total65(29)36</p><p>3-*</p></li><li><p>Panda and Salty (cont.)</p><p>Beginning unamortized excessCurrent year's amortizationEnding unamortized excessPlant60(15)45Liabilities(5)1(4)Goodwill35035Total901476</p><p>Cost$530 100% BV440Excess$90 </p><p>Allocate to:AmtAmort.Plant604 yrsLiabilities-55 yrsGoodwill 35 - Total$90 </p><p>3-*</p></li><li><p>Printemps and Summer (cont.)</p><p>Beginning unamortized excessCurrent year's amortizationEnding unamortized excessInventory10(10)0Land20020Total30(10)20</p><p>Cost$185 100% BV180Excess$5</p><p>Allocate to:AmtAmort.Inventory101st yrPlant, land20 - Bargain purchase(25)GainTotal$5</p><p>3-*</p></li><li><p>7: Subsequent Balance SheetsAn Introduction to Consolidated Financial Statements</p><p>3-*</p></li><li><p>Balance Sheets After AcquisitionIn preparing a consolidated balance sheetEliminate the parent's Investment in SubsidiaryEliminate the subsidiary's equity accounts (common stock, retained earnings, etc.)Adjust asset and liability accounts for any unamortized excess balanceRecord goodwill, if anyRecord Noncontrolling Interest, if any</p><p>3-*</p></li><li><p>Popo and Sine (cont.)</p><p>Cost of 80% of Sine$400 Implied value of Sine$500 Book value375Excess$125 </p><p>Allocate to:Building$50 10 yrsGoodwill75 - Total$125 </p><p>Beginning unamortized excessCurrent year's amortizationEnding unamortized excessBuilding50(5)45Goodwill75075Total125(5)120</p><p>3-*</p></li><li><p>After 1 year:PopoSineCash$40 $15 Receivables11085Inventory90100Building, net280235Investment in Sine404Total$924 $435 </p><p>PopoSineLiabilities$100 $50 Capital stock250200Retained earnings574185</p><p>Total$924 $435 </p><p>3-*</p></li><li><p>After 1 year:PopoSineAdjustmentsConsol-BVBVDRCRidatedCash$40 $15 $55 Receivables11085195Inventory90100190Building, net28023545560Investment in Sine4044040Goodwill7575Unamortized excess120120Total$924 $435 $1,075 Liabilities$100 $50 $150 Capital stock250200200250Retained earnings574185185574Noncontrolling interest101101Total$924 $435 $1,075 505505</p><p>3-*</p></li><li><p>Key Balance Sheet ItemsInvestment in Subsidiary does not exist on the consolidated balance sheetEquity on the consolidated balance sheet consists of the parent's equity plus the noncontrolling interest.Noncontrolling interest is proportional to the Investment in Subsidiary account when the equity method is used.$101 = $404 x .20/.80</p><p>3-*</p></li><li><p>8: Consolidated Income StatementsAn Introduction to Consolidated Financial Statements</p><p>3-*</p></li><li><p>Comprehensive Example, DataPilot acquires 90% of Sand on 12/31/2009 for $4,333 when Sand's equity consists of $4,000 common stock, $1,000 other paid in capital, and $900 retained earnings. On that date Sand's inventories, land and buildings are understated by $100, $200, and $1,000, respectively and its equipment and notes payable are overstated by $300 and $100. </p><p>3-*</p></li><li><p>Assignment and Amortization</p><p>Cost of 90% of Sand$10,200 Implied value of Sand 10,200/.90$11,333 Book value (4000+1000+900)5,900Excess over book value$5,433 </p><p>Unamortized excess 1/1/10Current amortizationUnamortized excess 12/31/10Inventory100(100)0Land2000200Building1,000(25)975Equipment(300)60(240)Note payable100(100)0Goodwill4,33304,333Total5,433(165)5,268</p><p>Allocate to:Inventory$100 1st yrLand200 - Building1,00040 yrsEquipment(300)5 yrsNote payable1001st yrGoodwill4,333 -Total$5,433 </p><p>3-*</p></li><li><p>* Cost of sales, building depreciation and interest expense are increased by $100, $25, and $100, and equipment depreciation is $60 lower than the sum of Pilot and Sand.</p><p>PilotSandConsol.*Sales$9,523.50 $2,200.00 $11,723.50 Income from Sand571.50$0.00 Cost of sales(4,000.00)(700.00)(4,800.00)Depreciation exp - bldg(200.00)(80.00)(305.00)Depreciation exp - equip(700.00)(360.00)(1,000.00)Other expense(1,800.00)(120.00)(1,920.00)Interest expense(300.00)(140.00)(540.00)Net income$3,095.00 $800.00 Total consolidated income$3,158.50 Noncontrolling interest share63.50 Controlling interest share$3,095.00 </p><p>3-*</p></li><li><p>Key Income Statement ItemsThe Income from Subsidiary account is eliminated.Current period amortizations are included in the appropriate expense accounts.Noncontrolling interest share of net income is proportional to the Income from Subsidiary under the equity method.$571.50 x .10/.90= $63.50</p><p>3-*</p></li><li><p>Push-Down AccountingSEC requirementSubsidiary is substantially wholly-owned (approx. 90%)No publicly held debt or preferred stockBooks of the subsidiary are adjustedAssets, including goodwill, and liabilities revalued based on acquisition priceRetained earnings is replaced by Push-Down Capital which includes retained earnings and the valuation adjustments</p><p>3-*</p></li><li><p>Copyright 2009 Pearson Education, Inc. Publishing as Prentice HallAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.</p><p>*</p></li></ul>


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