Consolidated Statements:Subsequent to Acquisition
Chapter 3
2
Accounting for the Investment in a Subsidiary
Simple Equity
Method Cost Method Recognize parent share of sub’s net income
Invest in Sub xx Invest Rev xx
N/A
Receipt of dividends
Cash xx Invest in Sub xx
Cash xx Dividend Rev xx
Simple Equity Method Every change in sub’s Retained Earnings in recorded on a pro-
rata basis in the Investment account
Cost Method Investment account remains at its original cost-of-acquisition
balance
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Accounting for the Investment in the Subsidiary
Simple Equity
Method Sophisticated Equity Method
Recognize parent share of sub’s net income
Invest in Sub xx Invest Rev xx
Invest in Sub xx Invest Rev xx
Receipt of dividends
Cash xx Invest in Sub xx
Cash xx Invest in Sub xx
Amortize excess
N/A Invest Rev xx Invest In Sub xx
Sophisticated Equity Method
Parent records controlling interest in the subsidiary’s income
Parent also records the amortization adjustment for the excess
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Elimination Procedures
Consolidation process is performed independently each year
All elimination entries are Workpaper Only --- not posted to the general ledger of parent or subsidiary
Steps for dates subsequent to acquisition:Date Alignment (varies by method)
Eliminate parent’s share of sub equity Distribute excess purchase price Amortize/Depreciate the excess
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Date Alignment for Simple Equity Method
Investment in Sub carries information through the end of the fiscal year
Subsidiary’s Retained Earnings is at its beginning-of-year balance
Must align the content of the two accounts before eliminating sub equity against the investment account– Eliminate the effects of the current year’s recognition of income
and dividends
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Date Alignment: Simple Equity
Eliminate Parent’s recognition of Sub income:
Investment Revenue XXInvestment in Sub XX
Eliminate Parent’s share of Sub’s dividends:
Investment in Sub XXDividends Declared-Sub XX
Investment in Sub account has been returned to its beginning-of-year balance; it has been aligned with the Sub’s Retained Earnings account
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Income Distribution Schedules
Subsidiary
- Full amortization of excess
Internally generated net income
+ Other adjustments, if any
= Adjusted income
× NIC interest
= Distribute to NCI
Parent
Internally generated net income
+ Parent share Sub adj income
= Controlling interest
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Date Alignment for Cost Method
Investment account carries information as of the date of acquisition
Subsidiary’s Retained Earnings is at its beginning-of-year balance
Must align the content of the two accounts before eliminating sub equity against the investment account– Convert the Investment account to its simple equity
balance as of the beginning of the period– Required at end of second and subsequent years
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Date Alignment: Cost Method
End of First Year
No date alignment required Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc XXDividends Declared-Sub XX
End of Second and Subsequent Years
Bring Investment account to its simple equity balance as of the beginning of the year:Investment in Sub XX
RE-Parent XX
Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc XXDividends Declared-Sub XX
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Further Consolidation Procedures
After date alignment is completed– The cost method investment is converted to its simple
equity balance at the beginning of the year– Same procedure regardless of method (simple equity
or cost) to account for investment in subsidiary
Next stepsEliminate P% of Sub’s beginning of year equity
Distribute excess to controlling interest and NCI
Amortize/Depreciate the excess
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D&D Schedule for ExampleCompany
Implied Fair Value Parent Price NCI Value
Fair value of subsidiary 900,000$ 720,000$ 180,000$ Less book value:
C Stk 100,000$ APIC 150,000 R/E 250,000
Total S/E 500,000$ 500,000$ 500,000$ Interest Acquired 80% 20%
Book value 400,000$ 100,000$ Excess of fair over book 400,000$ 320,000$ 80,000$
Adjust identifiable accounts: Life Amort/YearInventory 5,000$
Land 50,000 Buildings 200,000 20 10,000 DREquipment (20,000) 5 (4,000) CRPatent 25,000 10 2,500 DRDiscount on Bonds Pay 13,240 4 3,310 DRGoodwill 126,760
Total 400,000$
[assume FIFO; sold in Yr 1]
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Elimination ProceduresEliminate Parent’s share of Sub’s Equity
C Stk-Sub (P%) 80,000Addn’l Pd-In Capt-Sub (P%) 120,000Retained Earnings-Sub (P%) NOTE
Investment in SubXX
NOTE: Controlling interest in the Sub’s Beginning of Current Year R/E is eliminated.
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Elimination Procedures Distribute excess per D&D schedule
Cost of Goods Sold* 5,000Land 50,000Buildings 200,000Patent 25,000Discount on B Pay 13,240Goodwill 126,770
Equipment 20,000Investment in Sub 320,000RE-Sub 80,000
*Inventory valuations are distributed:• On date of acquisition: to Inventory• End of first year: to Cost of Goods Sold• End of subsequent years: split between RE-P
& RE-S
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Elimination Procedures Amortize/Depreciate the excess per the
D&D ScheduleDep Exp-Bldgs 10,000
A/D-Bldgs 10,000A/D-Equipment 4,000
Dep Exp-Equipment 4,000Other expenses 2,500
Patent 2,500Interest Exp 3,310
Disc on Bond Pay 3,310
First year:• Current year amortization is
recorded as an adjustment to expense
• Balance sheet account changed accordingly
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Elimination Procedures Amortize/Depreciate the excess per the
D&D ScheduleDep Exp-Bldgs 10,000
A/D-Bldgs (2 yr) 20,000A/D-Equipment (2 yr) 8,000
Dep Exp-Equipment 4,000Other expenses 2,500
Patent (2 yr) 5,000Interest Exp 3,310
Disc on Bond Pay (2 yr) 6,620RE-Par 9,448RE-Sub 2,362
Subsequent years:• Current year amortization is
recorded as an adjustment to expense
• Balance sheet account changed for all years’ amortization
• Prior years’ amortization allocated to RE-P and RE-S
Adjustments to be Amortized/Depreciated:Annual Amount Current Year Prior Years Total
Buildings 10,000 10,000 10,000 20,000 Equipment (4,000) (4,000) (4,000) (8,000) Patent 2,500 2,500 2,500 5,000 Disc B Pay 3,310 3,310 3,310 6,620
11,810 Controlling interest adjustment 9,448$
NCI (RE-Sub) adjustment 2,362$
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Effect of the Sophisticated Equity Method
• Ramifications:– Current year’s equity adjustment is net of excess amortizations– The investment account contains only the remaining
unamortized excess applicable to the investment
• Distribution 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 share
– Amortize the excess for the current year only
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Determination of the Method Being Used
Investment account balance is original acquisition cost?
Parent records subsidiary income that isSub’s Net Income × P%
Parent records subsidiary income that is
less thanSub’s Net Income × P%
Cost MethodYes
Equity MethodYes
Sophisticated Equity Method
Yes
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Intraperiod Purchase
• Simple Equity Method– D&D schedule developed as of the date of purchase– Sub closes nominal accounts on purchase date– Consolidated income includes Sub income from date
of purchase– Only subsidiary income earned after the purchase
date is distributed to the NCI and controlling interest
• Cost Method same as above except– Eliminate intercompany dividends only– Cost-to-Equity conversion is from date of purchase
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Goodwill Impairment Losses
Impairment loss is– reported in the consolidated income statement for the period in
which it occurs– presented on a before-tax basis as part of continuing operations
Recognizing and recording the impairment– Parent 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 or
– Impairment loss could be recorded only on the consolidated worksheet
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Goodwill Impairment Losses
Impairment calculation:Estimated fair value of 80% sub $900,000Estimated fair value of identifiable net assets 850,000Estimated goodwill 50,000Existing goodwill 165,000Impairment loss 115,000
Parent’s Journal Entry:Goodwill Impairment Loss 92,000
Investment in Sub 92,000Consolidating worksheet:
Record the remaining $23,000 loss
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Tax-Related Adjustments
• Occurs when seller is not taxed; buyer gets book value for future depreciation
• Adjustment from market to book accompanied by DTL = tax % × market adjustment
• DTL is amortized over same period as asset adjustment; increases tax liability in future years
• Tax loss carryover is asset recorded in purchase– Limitations on its use in year of purchase and later years
• All amortizations and tax adjustments are carried to Sub’s Income Distribution Schedule
