1

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

5© The McGraw-Hill Companies, Inc., 1999

Consolidation Following Acquisition

Baker / Lembke / King

2

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Push Corporation owns 80 percent of the stock of Shove Company, which was

purchased at book value. Shove reports net income of $25,000, while Push reports

earnings of $100,000, plus equity-method investment income of $20,000.

Push Corporation owns 80 percent of the stock of Shove Company, which was

purchased at book value. Shove reports net income of $25,000, while Push reports

earnings of $100,000, plus equity-method investment income of $20,000.

Computation of Consolidated Net Income

3

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Computation of Consolidated Net Income

Additive ComputationSeparate operating income of Push $100,000 Net income of Shove $25,000 Push’s proportionate share x .80 20,000 Consolidated net income $120,000

Residual ComputationNet income of Push $120,000 Less: Income from subsidiary (20,000) $100,000 Net income of Shove 25,000

$125,000 Less: Income to noncontrolling interest $25,000

x .20 (5,000)Consolidated net income $120,000

4

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Consolidated Retained Earnings

Push Shove

Balance, January 1, 19X1 $400,000 $250,000

Net income, 19X1 120,000 25,000

Dividends declared in 19X1 (30,000) (10,000)

Balance, December 31, 19X1 $490,000 $265,000

Consolidated retained earnings equals the parent’s retained earnings when the

parent has used the equity method

5

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Comprehensive Three-Part Workpaper

Trial Balance Data Elimination Entries Item Parent Subsidiary Debits Credits Consolidated

Revenues Expenses Net Income

Beginning RE Add: Net Income Ded: Dividends Ending RE Assets Liabilities Stockholders’ Eq.:

Capital StockRetained Earn.

INCOME STATEMENT SECTION

RETAINED EARNINGS SECTION

BALANCE SHEET SECTION

6

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

19X1 Consolidation--100 Percent Ownership

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income from Subsidiary 50,000

Dividends Decl. (60,000) (30,000)

Investment in Special Foods 320,000

Remove both the investment income reflected in the parent’s income statement and the parent’s

portion of any dividends declared by the subsidiary.

Remove both the investment income reflected in the parent’s income statement and the parent’s

portion of any dividends declared by the subsidiary.

7

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income from Subsidiary 50,000 50,000

Dividends Decl. (60,000) (30,000) 30,000 (60,000)

Investment in Special Foods 320,000 20,000

19X1 Consolidation--100 Percent Ownership

8

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Remove the intercorporate ownership claim and stockholders’accounts of the subsidiary as of the beginning of the period.

Remove the intercorporate ownership claim and stockholders’accounts of the subsidiary as of the beginning of the period.

Retained Earnings, January 1 300,000 100,000

Investment in Special Foods 320,000 20,000

Common Stock 500,000 200,000

19X1 Consolidation--100 Percent Ownership

9

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Retained Earnings, January 1 300,000 100,000 100,000 300,000

Investment in Special Foods 320,000 20,000

300,000

Common Stock 500,000 200,000 200,000 500,000

19X1 Consolidation--100 Percent Ownership

10

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income from Subsidiary 75,000

Dividends Declared (60,000) (40,000)

Investment in Special Foods 355,000

19X2 Consolidation--100 Percent Ownership

Remove both the investment income reflected in the parent’s income statement and the parent’s

portion of any dividends declared by the subsidiary.

Remove both the investment income reflected in the parent’s income statement and the parent’s

portion of any dividends declared by the subsidiary.

11

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income from Subsidiary 75,000 75,000

Dividends Declared (60,000) (40,000) 40,000 (60,000)

Investment in Special Foods 355,000 35,000

19X2 Consolidation--100 Percent Ownership

12

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

The beginning balance in the investment account andthe stockholders’ equity accounts of the subsidiary at

the beginning of 19X2 need to be eliminated.

The beginning balance in the investment account andthe stockholders’ equity accounts of the subsidiary at

the beginning of 19X2 need to be eliminated.

Retained Earnings, January 1 430,000 120,000

Investment in Special Foods 355,000 35,000

Common Stock 500,000 200,000

19X2 Consolidation--100 Percent Ownership

13

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Retained Earnings, January 1 430,000 120,000 120,000 430,000

Investment in Special Foods 355,000 35,000

320,000

Common Stock 500,000 200,000 200,000 500,000

19X2 Consolidation--100 Percent Ownership

14

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

19X1 Consolidation--80 Percent Ownership

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Peerless’s 80 percent share of Special Foods’income and dividends is eliminated.

Peerless’s 80 percent share of Special Foods’income and dividends is eliminated.

Income from Subsidiary 40,000

Dividends Declared (60,000) (30,000)

Investment in Special Foods 256,000

15

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income from Subsidiary 40,000 40,000

Dividends Declared (60,000) (30,000) 24,000

Investment in Special Foods 256,000 16,000

19X1 Consolidation--80 Percent Ownership

16

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

A separate entry establishes the amount of incomeallocated to noncontrolling shareholders and enters

the increase in their claim on net assets of the subsidiary.

A separate entry establishes the amount of incomeallocated to noncontrolling shareholders and enters

the increase in their claim on net assets of the subsidiary.

Income to Non- controlling Int.

Dividends Declared (60,000) (30,000) 24,000

Noncontrolling interest

19X1 Consolidation--80 Percent Ownership

17

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income to Non- controlling Int. 10,000

Dividends Declared (60,000) (30,000) 24,000

6,000 (60,000)

Noncontrolling interest 4,000

19X1 Consolidation--80 Percent Ownership

18

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account

balance shown at the beginning of the period.

An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account

balance shown at the beginning of the period.

Retained Earnings, January 1 300,000 100,000

Investment in Special Foods 256,000 16,000

Noncontrolling interest 4,000

19X1 Consolidation--80 Percent Ownership

19

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Retained Earnings, January 1 300,000 100,000 100,000 300,000

Investment in Special Foods 256,000 16,000

240,000

Noncontrolling interest 4,000

60,000 64,000

19X1 Consolidation--80 Percent Ownership

20

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

19X2 Consolidation--80 Percent Ownership

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

An entry is required to remove the income that Peerlesshas recognized from Special Foods, Peerless’s share (80

percent) of Special Foods’ dividends, and the changein the investment account that occurred in 19X2.

An entry is required to remove the income that Peerlesshas recognized from Special Foods, Peerless’s share (80

percent) of Special Foods’ dividends, and the changein the investment account that occurred in 19X2.

Income from Subsidiary 60,000

Dividends Declared (60,000) (40,000)

Investment in Special Foods 284,000

21

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income from Subsidiary 60,000 60,000

Dividends Declared (60,000) (40,000) 32,000

Investment in Special Foods 284,000 28,000

19X2 Consolidation--80 Percent Ownership

22

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

An entry is needed to assign $15,000 of subsidiary income tothe noncontrolling shareholders, based on subsidiary income

of $75,000 and a 20 percent noncontrolling interest.

An entry is needed to assign $15,000 of subsidiary income tothe noncontrolling shareholders, based on subsidiary income

of $75,000 and a 20 percent noncontrolling interest.

Income to Non- controlling Int.

Dividends Declared (60,000) (40,000) 32,000

Noncontrolling Interest

19X2 Consolidation--80 Percent Ownership

23

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Income to Non- controlling Int. 15,000 (15,000)

Dividends Declared (60,000) (40,000) 32,000

8,000 (60,000)

Noncontrolling Interest 7,000

19X2 Consolidation--80 Percent Ownership

24

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account balance

reported by the parent at the beginning of the year and toestablish the amount of the noncontrolling interest’s claim onthe net assets of the subsidiary at the beginning of the year.

An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account balance

reported by the parent at the beginning of the year and toestablish the amount of the noncontrolling interest’s claim onthe net assets of the subsidiary at the beginning of the year.

Retained Earnings, January 1 420,000 120,000Investment in Special Foods 284,000 28,000

Common Stock 500,000 200,000Noncontrolling Interest 7,000

19X2 Consolidation--80 Percent Ownership

25

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Retained Earnings, January 1 420,000 120,000 120,000 420,000Investment in Special Foods 284,000 28,000

256,000Common Stock 500,000 200,000 200,000 500,000Noncontrolling Interest 7,000

64,000 71,000

19X2 Consolidation--80 Percent Ownership

26

Irwin/McGraw-Hill

© The McGraw-Hill Companies, Inc., 1999

TheThe EndEndTheThe EndEnd

Chapter Five