Consolidated Statements: Subsequent to Acquisition Chapter 3

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Consolidated Statements: Subsequent to Acquisition Chapter 3. Accounting for the Investment in a Subsidiary. Simple Equity Method Every change in subs Retained Earnings in recorded on a pro-rata basis in the Investment account Cost Method - PowerPoint PPT Presentation

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<ul><li><p>Consolidated Statements:Subsequent to AcquisitionChapter 3</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Accounting for the Investment in a SubsidiarySimple Equity Method Every change in subs Retained Earnings in recorded on a pro-rata basis in the Investment account</p><p>Cost Method Investment account remains at its original cost-of-acquisition balance</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p><p>Simple Equity Method</p><p>Cost Method</p><p>Recognize parent share of subs net income</p><p>Invest in Subxx</p><p>Invest Rev</p><p>xx</p><p>N/A</p><p>Receipt of dividends</p><p>Cashxx</p><p>Invest in Sub</p><p>xx</p><p>Cashxx</p><p>Dividend Rev</p><p>xx</p></li><li><p>Accounting for the Investment in the SubsidiarySophisticated Equity Method Parent records controlling interest in the subsidiarys income</p><p> Parent also records the amortization adjustment for the excess</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p><p>Simple Equity Method</p><p>Sophisticated Equity Method</p><p>Recognize parent share of subs net income</p><p>Invest in Subxx</p><p>Invest Rev</p><p>xx</p><p>Invest in Subxx</p><p>Invest Rev</p><p>xx</p><p>Receipt of dividends</p><p>Cashxx</p><p>Invest in Sub</p><p>xx</p><p>Cashxx</p><p>Invest in Sub</p><p>xx</p><p>Amortize excess</p><p>N/A</p><p>Invest Revxx</p><p>Invest In Sub</p><p>xx</p></li><li><p>Elimination ProceduresConsolidation process is performed independently each year</p><p>All elimination entries are Workpaper Only --- not posted to the general ledger of parent or subsidiary</p><p>Steps for dates subsequent to acquisition:Date Alignment (varies by method) Eliminate parents share of sub equity Distribute excess purchase price Amortize/Depreciate the excess</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Date Alignment for Simple Equity MethodInvestment in Sub carries information through the end of the fiscal year</p><p>Subsidiarys Retained Earnings is at its beginning-of-year balance</p><p>Must align the content of the two accounts before eliminating sub equity against the investment accountEliminate the effects of the current years recognition of income and dividends</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Date Alignment: Simple EquityEliminate Parents recognition of Sub income:Investment RevenueXXInvestment in SubXXEliminate Parents share of Subs dividends:Investment in SubXXDividends Declared-SubXXInvestment in Sub account has been returned to its beginning-of-year balance; it has been aligned with the Subs Retained Earnings account</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Income Distribution Schedules</p><p>ParentInternally generated net income+ Parent share Sub adj income= Controlling interest </p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Date Alignment for Cost MethodInvestment account carries information as of the date of acquisition</p><p>Subsidiarys Retained Earnings is at its beginning-of-year balance</p><p>Must align the content of the two accounts before eliminating sub equity against the investment accountConvert the Investment account to its simple equity balance as of the beginning of the periodRequired at end of second and subsequent years</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Date Alignment: Cost Method </p><p>End of First Year No date alignment required Eliminate Parents share of Subs dividends:Subsidiary (Dividend) IncXXDividends Declared-SubXX</p><p>End of Second and Subsequent Years</p><p> Bring Investment account to its simple equity balance as of the beginning of the year:Investment in SubXXRE-ParentXX Eliminate Parents share of Subs dividends:Subsidiary (Dividend) IncXXDividends Declared-SubXX</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Further Consolidation ProceduresAfter date alignment is completedThe cost method investment is converted to its simple equity balance at the beginning of the yearSame procedure regardless of method (simple equity or cost) to account for investment in subsidiary</p><p>Next stepsEliminate P% of Subs beginning of year equityDistribute excess to controlling interest and NCIAmortize/Depreciate the excess</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>D&amp;D Schedule for Example</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p><p>D&amp;D for PPT</p><p>Value Analysis Schedule80%20%</p><p>Company Implied Fair ValueParent PriceNCI Value</p><p>Company fair value$900,000$720,000$180,000</p><p>Fair value identifiable net assets773,240618,592154,648</p><p>Goodwill$126,760$101,408$25,352</p><p>D&amp;D Schedule80%20%</p><p>Company Implied Fair ValueParent PriceNCI ValueConsolidated worksheet: Parent &amp; 80% Sub</p><p>Fair value of subsidiary$900,000$720,000$180,000ParSubElim DRElim CRNCIBalSh DRBalSh CR</p><p>Less book value:Curr Assets425,000500,000D300,0001,225,000</p><p>C Stk$100,000Accts Rec530,000200,000D50,000680,000</p><p>APIC150,000Inven1,600,000800,0002,400,000</p><p>R/E250,000Invest in S1,550,000E520,000710,000</p><p>Total S/E$500,000$500,000$500,000D320,000</p><p>Interest Acquired80%20%</p><p>Book value$400,000$100,000Land225,000100,000D500,000825,000</p><p>Excess of fair over book$400,000$320,000$80,000Bldg &amp; Eqp1,200,0001,100,000D200,0002,500,000</p><p>A/D(800,000)(400,000)1,200,000</p><p>Adjust identifiable accounts:LifeAmort/YearGoodwillD492,500492,500</p><p>Inventory$5,000[assume FIFO; sold in Yr 1]TOTAL A4,730,0002,300,000</p><p>Land50,000</p><p>Buildings200,0002010,000DRCurr Liabil2,100,000800,000D75,0002,975,000</p><p>Equipment(20,000)5(4,000)CRBond Pay1,000,000850,000D80,0001,930,000</p><p>Patent25,000102,500DR</p><p>Discount on Bonds Pay13,24043,310DR</p><p>Goodwill126,760C Stk-Par900,000900,000</p><p>Total$400,000APIC-Par670,000670,000</p><p>R/E-Par60,00060,000</p><p>ELIMINATION ENTRY 'EL'C Stk-Sub100,000E80,00020,000</p><p>C Stk-Sub80,000APIC-Sub200,000E160,00040,000</p><p>APIC-Sub160,000R/E-Sub350,000E280,000D80,000150,000</p><p>R/E-Sub280,000Total L&amp;SE4,730,0002,300,0002,012,5001,125,000</p><p>Investment in Sub520,0000.00.00.0</p><p>520,000520,000NCI210,000210,000</p><p>ELIMINATION ENTRY 'D'8,832,5007,945,000</p><p>Current assets$300,0000.0</p><p>Accounts Receivable(50,000)</p><p>Land500,000</p><p>Buildings (net)200,000</p><p>Current liabilities(75,000)</p><p>Long-term debt(80,000)</p><p>Goodwill492,500</p><p>Investment in Sbu320,000</p><p>R/E-Sub (NCI)80,000</p><p>1,287,500400,000</p></li><li><p>Elimination ProceduresEliminate Parents share of Subs EquityC Stk-Sub (P%)80,000Addnl Pd-In Capt-Sub (P%)120,000Retained Earnings-Sub (P%)NOTEInvestment in SubXXNOTE: Controlling interest in the Subs Beginning of Current Year R/E is eliminated.</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Elimination Procedures Distribute excess per D&amp;D scheduleCost of Goods Sold*5,000Land50,000Buildings200,000Patent25,000Discount on B Pay13,240Goodwill126,770Equipment20,000Investment in Sub320,000RE-Sub80,000*Inventory valuations are distributed:On date of acquisition: to InventoryEnd of first year: to Cost of Goods SoldEnd of subsequent years: split between RE-P &amp; RE-S</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Elimination Procedures Amortize/Depreciate the excess per the D&amp;D ScheduleDep Exp-Bldgs10,000A/D-Bldgs10,000A/D-Equipment4,000Dep Exp-Equipment4,000Other expenses2,500Patent2,500Interest Exp3,310Disc on Bond Pay3,310First year:Current year amortization is recorded as an adjustment to expenseBalance sheet account changed accordingly</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Elimination Procedures Amortize/Depreciate the excess per the D&amp;D ScheduleDep Exp-Bldgs10,000A/D-Bldgs (2 yr)20,000A/D-Equipment (2 yr)8,000Dep Exp-Equipment4,000Other expenses2,500Patent (2 yr)5,000Interest Exp3,310Disc on Bond Pay (2 yr)6,620RE-Par9,448RE-Sub2,362Subsequent years:Current year amortization is recorded as an adjustment to expenseBalance sheet account changed for all years amortizationPrior years amortization allocated to RE-P and RE-S</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p><p>Sheet1</p><p>Adjustments to be Amortized/Depreciated:</p><p>AdjustmentLifeAnnual AmountCurrent YearPrior YearsTotal</p><p>Buildings200,0002010,00010,00010,00020,000</p><p>Equipment(20,000)5(4,000)(4,000)(4,000)(8,000)</p><p>Patent25,000102,5002,5002,5005,000</p><p>Disc B Pay13,24043,3103,3103,3106,620</p><p>11,810</p><p>Controlling interest adjustment$9,448</p><p>NCI (RE-Sub) adjustment$2,362</p><p>D&amp;D for PPT</p><p>Value Analysis Schedule80%20%</p><p>Company Implied Fair ValueParent PriceNCI Value</p><p>Company fair value$900,000$720,000$180,000</p><p>Fair value identifiable net assets773,240618,592154,648</p><p>Goodwill$126,760$101,408$25,352</p><p>D&amp;D Schedule80%20%</p><p>Company Implied Fair ValueParent PriceNCI ValueConsolidated worksheet: Parent &amp; 80% Sub</p><p>Fair value of subsidiary$900,000$720,000$180,000ParSubElim DRElim CRNCIBalSh DRBalSh CR</p><p>Less book value:Curr Assets425,000500,000D300,0001,225,000</p><p>C Stk$100,000Accts Rec530,000200,000D50,000680,000</p><p>APIC150,000Inven1,600,000800,0002,400,000</p><p>R/E250,000Invest in S1,550,000E520,000710,000</p><p>Total S/E$500,000$500,000$500,000D320,000</p><p>Interest Acquired80%20%</p><p>Book value$400,000$100,000Land225,000100,000D500,000825,000</p><p>Excess of fair over book$400,000$320,000$80,000Bldg &amp; Eqp1,200,0001,100,000D200,0002,500,000</p><p>A/D(800,000)(400,000)1,200,000</p><p>Adjust identifiable accounts:LifeAmort/YearGoodwillD492,500492,500</p><p>Inventory$5,000[assume FIFO; sold in Yr 1]TOTAL A4,730,0002,300,000</p><p>Land50,000</p><p>Buildings200,0002010,000DRCurr Liabil2,100,000800,000D75,0002,975,000</p><p>Equipment(20,000)5(4,000)CRBond Pay1,000,000850,000D80,0001,930,000</p><p>Patent25,000102,500DR</p><p>Discount on Bonds Pay13,24043,310DR</p><p>Goodwill126,760C Stk-Par900,000900,000</p><p>Total$400,000APIC-Par670,000670,000</p><p>R/E-Par60,00060,000</p><p>ELIMINATION ENTRY 'EL'C Stk-Sub100,000E80,00020,000</p><p>C Stk-Sub80,000APIC-Sub200,000E160,00040,000</p><p>APIC-Sub160,000R/E-Sub350,000E280,000D80,000150,000</p><p>R/E-Sub280,000Total L&amp;SE4,730,0002,300,0002,012,5001,125,000</p><p>Investment in Sub520,0000.00.00.0</p><p>520,000520,000NCI210,000210,000</p><p>ELIMINATION ENTRY 'D'8,832,5007,945,000</p><p>Current assets$300,0000.0</p><p>Accounts Receivable(50,000)</p><p>Land500,000</p><p>Buildings (net)200,000</p><p>Current liabilities(75,000)</p><p>Long-term debt(80,000)</p><p>Goodwill492,500</p><p>Investment in Sbu320,000</p><p>R/E-Sub (NCI)80,000</p><p>1,287,500400,000</p></li><li><p>Effect of the Sophisticated Equity MethodRamifications:Current years equity adjustment is net of excess amortizationsThe investment account contains only the remaining unamortized excess applicable to the investmentDistribution and amortization of excess procedures are altered:Distribute the remaining unamortized excess applicable to the controlling interest to the balance sheet account; adjust the NCI for the remaining excess attributable to its shareAmortize the excess for the current year only</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Determination of the Method Being UsedInvestment account balance is original acquisition cost?</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Intraperiod PurchaseSimple Equity MethodD&amp;D schedule developed as of the date of purchaseSub closes nominal accounts on purchase dateConsolidated income includes Sub income from date of purchaseOnly subsidiary income earned after the purchase date is distributed to the NCI and controlling interestCost Method same as above exceptEliminate intercompany dividends onlyCost-to-Equity conversion is from date of purchase</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Goodwill Impairment LossesImpairment loss isreported in the consolidated income statement for the period in which it occurspresented on a before-tax basis as part of continuing operations</p><p>Recognizing and recording the impairmentParent records its share of the impairment loss on its books and credits the investment in subsidiary account; NCI share of the loss is recorded on the worksheet orImpairment loss could be recorded only on the consolidated worksheet</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p>Goodwill Impairment LossesImpairment calculation:Estimated fair value of 80% sub$900,000Estimated fair value of identifiable net assets850,000Estimated goodwill50,000Existing goodwill165,000Impairment loss115,000Parents Journal Entry:Goodwill Impairment Loss92,000Investment in Sub92,000Consolidating worksheet:Record the remaining $23,000 loss</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li><li><p> Tax-Related AdjustmentsOccurs when seller is not taxed; buyer gets book value for future depreciationAdjustment from market to book accompanied by DTL = tax % market adjustmentDTL is amortized over same period as asset adjustment; increases tax liability in future yearsTax loss carryover is asset recorded in purchaseLimitations on its use in year of purchase and later yearsAll amortizations and tax adjustments are carried to Subs Income Distribution Schedule</p><p>COPYRIGHT 2009 South-Western/Cengage Learning</p></li></ul>

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