Chapter Three

Consolidations Subsequentto Date of Acquisition

After combination, parent tracks its investment in the subsidiary.

records changes in the value of investment

records income earned

One of three accounting methods to track.

Financial statements continue to be consolidated.

Consolidated amounts are the same regardless of accounting method used.

INVESTMENT ACCOUNTING BY PARENT

Investment at original cost.

Dividends recorded as income.

Cost Method

Income accrued when earned by subsidiary.

Dividends reduce value of investment.

Amortization of excess of cost over book value.

Equity Method

Partial Equity Method Equity method without last step.

SUBSQNT CONSOLIDATION: EQUITY METHOD

Exercise 3-31

2000: Palm acquires 100% of Storm.

Excess AnnualCost Amortization

LandEquipmentFormula Total

2004: Palm receives dividend from Storm.

2004: Palm records income of Storm less extra amortization.

Debits Credits

(S)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

176

$ (745)

(66)

$ (261)

$ (659)

(261)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Entry S eliminates beginningbalance of R/E.

Debits Credits

(A)

(A)

(A)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

216

(745)

$ (1,625)

428

0

$ 1,625

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5)

Adjusts for excess over book value less prior yr. amortization.

$5 – ( 4 x $1 )

$20 – ( 4 x $1 )

Debits Credits

(S)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

176

$ (745)

(66)

$ (261)

$ (659)

(261)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Entry I eliminates income accrual.

(I) 66

Debits Credits

(A)

(A)

(A)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

216

(745)

$ (1,625)

428

0

$ 1,625

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5)

Entry D to eliminate dividends.

(I) 66

(D) 40

Debits Credits

(S)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

176

$ (745)

(66)

$ (261)

$ (659)

(261)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Totals

$ (675)

230

1

(176)

0

$ (261)

(261)

183

Entry E records the extra amortization for current period.

(I) 66

(D) 40

(E) 1

(E) 1

Debits Credits

(A)

(A)

(A)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

216

(745)

$ (1,625)

428

0

$ 1,625

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5)

Totals

$ 343

$ (129)

(164)

(I) 66

(D) 40

(E) 1

(E) 1

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (745)

(66)

$ (261)

$ (659)

(261)

130

Differences Across Methods

Palm Co.

$ (485)

160

0

175

$ (669)

(40)

$ (235)

$ (609)

(235)

130

Palm Co.

$ (485)

160

0

175

$ (755)

(68)

$ (263)

$ (667)

(263)

130

Equity Cost Partial Equity

Divid Income

Cost records dividends as

income

Partial Equity ignores extra amortizations.

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Build & eqp

Add Pd-in

Palm Co.

$ 268

216

(745)

$ (1,625)

428

0

$ 1,625

$ (110)

(80)

(600)

713

(90)

Palm Co.

$ 268

140

(669)

$ (1,549)

428

0

$ 1,549

$ (110)

(80)

(600)

713

(90)

Palm Co.

$ 268

226

(755)

$ (1,635)

428

0

$ 1,635

$ (110)

(80)

(600)

713

(90)

Equity Cost Partial Equity

Cost: Investment remains

at original cost.

Partial Equity: Investment doesn’t

include extra amortizations.

Debits Credits

(S)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Divid Income

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (669)

(40)

$ (235)

$ (609)

(235)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Cost

(*C)

Entry *C adjusts Palm’s beginning R/E.

Debits Credits

(S)

(S)

(A)

(A)

(A)

(A)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

140

(669)

$ (1,549)

428

0

$ 1,549

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5) (S)

Cost

(*C)

Adjustments (S) and (A) are the same as with the equity method.

Debits Credits

(S)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Divid Income

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (669)

(40)

$ (235)

$ (609)

(235)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

(I)

Cost

(*C)

(I)

Entry I eliminates dividend income (Entry D not needed).

Debits Credits

(S)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Divid Income

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (669)

(40)

$ (235)

$ (609)

(235)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Totals

$ (675)

230

1

(175)

$ (745)

0

$ (261)

$ (659)

(261)

183

Entry E is the same as before.

(I)

(E) 1

(E) 1

(261)

Cost

(*C)

(I)

Debits Credits

(S)

(S)

(A)

(A)

(A)

(A)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

140

(669)

$ (1,549)

428

0

$ 1,549

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5) (S)

Totals

$ 343

0

(745)

$ (1,728)

496

15

$ 1,728

$ (129)

(164)

(600)

874

(90)

(E) 1

(E) 1

(745)

Cost

(*C)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04

Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (755)

(68)

$ (263)

$ (667)

(263)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Debits Credits

(S) 98

Entry *C adjusts Palm’s beginning R/E.

Partial Equity

(*C)

Debits Credits

(S) 163

(S) 60

(A) 27

(A) 10

(A) 16

(A) 1

(S) 5

Partial Equity

(*C)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

226

(755)

$ (1,635)

428

0

$ 1,635

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5)

Adjustments (S) and (A) are the same as with the equity method.

Debits Credits

Entry I affects same accounts as equity (but

different in amount).

(I)

Partial Equity

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04

Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (755)

(68)

$ (263)

$ (667)

(263)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

(S) 98

(*C)

Debits Credits

(S) 60

(A) 10

(A) 16

(A) 1

(S) 5

Partial Equity

(I)

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

226

(755)

$ (1,635)

428

0

$ 1,635

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5)

Entry D to eliminate dividends.

(S) 163

(A) 27

(*C)(D)

RevenuesCGS

Amort Exp

Dividends

R/E, 12/31

Eqty in Sub

Net Inc

Inc Stmnt

Stmnt R/ER/E, 1/1/04

Net Income

Depr Exp

Palm Co.

$ (485)

160

0

175

$ (755)

(68)

$ (263)

$ (667)

(263)

130

Storm Co.

$ (190)

70

0

40

$ (126)

0

$ (68)

$ (98)

(68)

52

Debits Credits

Entry E records the extra amortization for current period.

(I)

(D)

(E) 1

(E) 1

Partial EquityTotals

$ (675)

230

1

(175)

$ (745)

0

$ (261)

$ (659)

(261)

183

(261)

(S) 98

(*C)

Debits Credits

(S) 60

(A) 10

(A) 16

(A) 1

(S) 5

(E) 1

(E) 1

Partial Equity

Curr AssetsInvst - Storm

R/E, 12/31

Total

Land

Formula

Total

Bal Sheet

Curr LiabL-T LiabComm Stk

Palm Co.

$ 268

226

(755)

$ (1,635)

428

0

$ 1,635

$ (110)

(80)

(600)

Storm Co.

$ 75

0

(126)

$ (294)

58

0

$ 294

$ (19)

(84)

(60)

Build & eqp 713 161

Add Pd-in (90) (5)

Totals

$ 343

0

(745)

$ (1,728)

496

15

$ 1,728

$ (129)

(164)

(600)

874

(90)

(745)

(I)

(S) 163

(A) 27

(*C)(D)

Prob 3-18

Differences in income and the

investment account.

Sub Income Dividends

Amortiz

Bal. 12/31/05

Total

’04 Income

Cost

Dividends

Sub Income

Amortiz.

Dividends

Amortiz.Bal. 12/31/04

Sub Income

Investment

Equity Cost Partial Equity

Prob 3-21

Differences in income and the

investment account.

Sub Income Dividends

Total

’05 Income

Amortiz.

Amortiz

Bal. 12/31/05

Cost

Dividends

Sub Income Dividends

Amortiz.Bal. 12/31/04

Sub Income

Investment

Sub Income Dividends

Total

’04 Income

Amortiz.

Equity Cost Partial Equity