Chapter 4: Consolidation Techniques and Procedures by Jeanne M David, Ph.D., Univ of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn © Pearson Education, Inc publishing as Prentice Hal 4-1 Consolidation Techniques: Objectives Prepare consolidation working papers for the year of acquisition when the parent company uses the full equity method to account for its invesment in a subsidiary Prepare consolidation working papers for the year subsequent to acquisition Locate errors in preparing consolidation working papers Allocate excess fair value over book value to include identifiable net assets © Pearson Education, Inc publishing as Prentice Hal 4-2 Objectives (continued) Apply concepts to prepare a consolidated statement of cash flows Appendix: Understand the alternative trial balance consolidation working paper format © Pearson Education, Inc publishing as Prentice Hal 4-3 Consolidation Techniques and Procedures 1: Acquisition-Year Working Papers © Pearson Education, Inc publishing as Prentice Hal 4-4 Preparing the Worksheet • Statements are entered onto the worksheet: – Income statement – Statement of retained earnings – Balance sheet • Columns needed: – – – – Parent Subsidiary DR and CR columns for elimination entries Consolidated © Pearson Education, Inc publishing as Prentice Hal 4-5 Completing the Worksheet • Enter Parent and Sub amounts at 100% of book value (Even if parent owns less) • Enter elimination entries into the DR and CR columns (Check totals) • Consolidated expenses, dividends and assets: – Add parent, subsidiary, plus DR, less CR • Consolidated revenues, liabilities and equity (other than ending retained earnings): – Add parent, subsidiary, less DR, plus CR • Income, ending retained earnings and all subtotals and totals: – Compute directly in consolidated column © Pearson Education, Inc publishing as Prentice Hal 4-6 Working Paper Entries Adjust for errors & omissions Eliminate intercompany profits and losses Eliminate income & dividends from sub and bring Investment account to its beginning balance Record noncontrolling interest in sub's earnings & dividends Eliminate reciprocal Investment & sub's equity balances Amortize fair value/book value differentials Eliminate other reciprocal balances © Pearson Education, Inc publishing as Prentice Hal 4-7 Example: Prep & Snap Data Prep pays $88 for 80% of Snap on 1/1/2009 when Snap's equity consisted of $60 capital stock and $30 retained earnings All excess was due to unrecorded patents with a 10-year life Snap's income and dividends follow: Net income Dividends 2009 $25 $15 2010 $30 $15 © Pearson Education, Inc publishing as Prentice Hal 4-8 Analysis Cost of 80% of Snap Implied value of Snap ($88/.80) Book value (60+30) Excess Patents Unamort Bal on 1/1/2009 $20 $88 $110 90 $20 Allocated to: Patents Amt Amort $20 10 yrs Amortization Unamort Bal Amortization Unamort Bal in 2009 $2 on 12/31/2009 $18 in 2010 $2 on 12/31/2010 $16 Use these amounts in 2009 worksheet for amortization expense and patents Use these amounts in 2010 worksheet for amortization expense and patents © Pearson Education, Inc publishing as Prentice Hal 4-9 Income & Dividend Calculations 2009: Snap's net income Amortization Adjusted income Dividends 2010: Snap's net income Amortization Adjusted income Dividends $25 Prep's 80% share $18.4 (2) $12.0 $23 NCI 20% share $4.6 $15 $3.0 80% share $30 Prep's$22.4 (2) $12.0 $28 NCI 20% share $5.6 $15 $3.0 © Pearson Education, Inc publishing as Prentice Hal 4-10 Solo's Income & Dividend 2010 Solo's net income $60 Amortization Adjusted ($12) $48 Solo's dividends Pate's 90% share $43.2 $18.0 $20 NCI 10% share $4.8 $2.0 © Pearson Education, Inc publishing as Prentice Hal 4-34 Pate's Worksheet Entries Adjust for errors & omissions Dividends receivable (B.S.) Investment in Solo (B.S.) Cash (B.S.) 9.0 9.0 20.0 Note receivable (B.S.) 20.0 Eliminate intercompany profits and losses none Eliminate income & dividends from sub and bring Investment account to its beginning balance Income from Solo (I.S.) Dividends (St RE) Investment in Solo (B.S.) © Pearson Education, Inc publishing as Prentice Hal 43.2 18.0 25.2 4-35 Pate: Entries (2 of 4) Record noncontrolling interest in sub's earnings & dividends Noncontrolling interest share (I.S.) 4.8 Dividends (St RE) 2.0 Noncontrolling interest (B.S.) 2.8 Eliminate reciprocal Investment & sub's equity balances Capital stock (B.S.) 200 Retained earnings (St RE, beg.) 50 Unamortized excess 150 Investment in Solo (B.S.) Noncontrolling interest (B.S.) © Pearson Education, Inc publishing as Prentice Hal 360 40 4-36 Pate: Entries (3 of 4) Allocate the unamortized excess according to beginning of year balances Inventory Land Building, net Goodwill Equipment, net Unamortized excess © Pearson Education, Inc publishing as Prentice Hal 10 30 80 50 20 150 4-37 Pate: Entries (4 of 4) Amortize fair value/book value differentials Cost of sales Inventory Operating (depreciation) expense 10 10 Buildings, net Equipment, net Operating (depreciation) expense Eliminate other reciprocal balances Dividends payable (B.S.) Dividends receivable (B.S.) © Pearson Education, Inc publishing as Prentice Hal 9.0 9.0 4-38 Pate's 2010 Worksheet Year ended 12/31/2010 Income statement: Revenues Income from Snap Cost of goods sold Operating expenses Noncontrolling interest share Net income/ Controlling share Statement of retained earnings: Beginning retained earnings Add net income Deduct dividends Ending retained earnings Pate Solo 900.0 300.0 43.2 (600.0) (150.0) (190.0) (90.0) 153.2 60.0 120.0 50.0 153.2 60.0 (100.0) (20.0) 173.2 90.0 © Pearson Education, Inc publishing as Prentice Hal DR 43.2 10.0 4.0 4.8 50.0 CR 2.0 18.0 2.0 Consol 1,200.0 0.0 (760.0) (282.0) (4.8) 153.2 120.0 153.2 (100.0) 173.2 4-39 Balance sheet, 12/31/2010: Cash Accounts receivable, net Note receivable - solo Inventories Land Building, net Equipment, net Investment in Solo Dividends receivable Goodwill Unamortized excess Total Accounts payable Dividends payable Capital stock Retained earnings Noncontrolling interest, Jan.1 Noncontrolling interest, Dec 31 Total Prep 13.0 76.0 20.0 90.0 60.0 190.0 150.0 394.2 993.2 120.0 700.0 173.2 993.2 Snap DR CR 15.0 20.0 25.0 20.0 60.0 10.0 10.0 30.0 30.0 110.0 80.0 4.0 120.0 2.0 20.0 9.0 25.2 360.0 9.0 9.0 50.0 150.0 150.0 360.0 60.0 10.0 9.0 200.0 200.0 90.0 40.0 2.8 360.0 © Pearson Education, Inc publishing as Prentice Hal Consol 48.0 101.0 0.0 150.0 120.0 376.0 252.0 0.0 0.0 50.0 0.0 1,097.0 180.0 1.0 700.0 173.2 42.8 1,097.0 4-40 Consolidation Techniques and Procedures 5: Consolidated Statement of Cash Flows © Pearson Education, Inc publishing as Prentice Hal 4-41 Consolidated Cash Flows The consolidated statement of cash flows is prepared from – Consolidated balance sheets, beginning & ending – Consolidated income statement – Other information Procedure similar to an "unconsolidated" statement of cash flows Look at items specific to companies with – Subsidiaries – Equity investments © Pearson Education, Inc publishing as Prentice Hal 4-42 Investing & Financing Cash Flows • Investing cash flows: – Include cash acquisition and/or disposition of subsidiaries – Include cash acquisition and/or disposition of equity investees • Financing cash flows: – Include cash dividends paid to noncontrolling interests © Pearson Education, Inc publishing as Prentice Hal 4-43 Operating Cash Flows • Direct method: – Include cash dividends received from equity investees (not equity method income) • Indirect method: – Starting with consolidated net income to the controlling interest share, ADD the noncontrolling interest share – Deduct the excess of equity method income over cash dividends received from equity investees © Pearson Education, Inc publishing as Prentice Hal 4-44 Consolidation Techniques and Procedures 6: Appendix – Trial Balance Format © Pearson Education, Inc publishing as Prentice Hal 4-45 Alternative Worksheet Format • Worksheet format presented earlier used the basic financial statements • Alternative uses the ADJUSTED trial balances of the parent and subsidiary • Columns on worksheet: – Parent and subsidiary adjusted trial balances, – DR and CR adjustments, – Income statement, – Statement of retained earnings, and – Balance sheet columns © Pearson Education, Inc publishing as Prentice Hal 4-46 Completing the Worksheet Enter worksheet elimination entries into the DR and CR columns Add accounts as needed (e.g., noncontrolling interest, goodwill, noncontrolling interest share) Carry consolidated balances to income statement, retained earnings, or balance sheet columns, as appropriate Move consolidated net income, or controlling interest share, to retained earnings Move ending retained earnings to the balance sheet © Pearson Education, Inc publishing as Prentice Hal 4-47 All 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 Copyright © 2009 Pearson Education, Inc Publishing as Prentice Hall © Pearson Education, Inc publishing as Prentice Hal 4-48 ... value/book value differentials Eliminate other reciprocal balances © Pearson Education, Inc publishing as Prentice Hal 4-7 Example: Prep & Snap Data Prep pays $88 for 80% of Snap on 1/1/2009 when Snap's... 527.0 • Snap's capital stock is eliminated • Retained earnings are not calculated across the row; they are taken from the statement of retained earnings • Noncontrolling interest at year-end is... Balance sheet, 12/31/2010: Cash Note receivable – Snap Other current assets Investment in Snap Plant & equipment, net Patents Total Note payable – Prep Liabilities Capital stock Retained earnings