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Chapter 3. Consolidated Statements Subsequent to Acquisition. Consolidated statements subsequent to acquisition. Worksheet procedures; Purchase Method Using the Income Distribution Schedule Reporting income for the consolidated company. Maintaining the investment account. - PowerPoint PPT Presentation
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Chapter 3
Consolidated Statements
Subsequent to Acquisition
Consolidated statements subsequent to acquisition
Worksheet procedures; Purchase Method
•Using the Income Distribution Schedule
•Reporting income for the consolidated company
Maintaining the investment account
Incomplete
Equity Complete
Equity Cost Add parent % of subsidiary income
Yes Yes No
Adjust for amortizations of excess
No Yes No
Recording of dividends
Reduce investment
account
Reduce investment
account
Parent % reported as
income
Price paid: $ 800,000
Interest acquired:
Common stock $ 200,000
Retained earnings 400,000
Total Equity 600,000
Ownership interest 80% 480,000
Excess cost 320,000 Life Ann Amort
Inventory (80% 50,000) 40,000 1 40,000
Building (80% 100,000) 80,000 20 4,000
Goodwill 200,000 n/a
Subsidiary income and dividends
Year 1 100,000 10,000
Year 2 150,000 20,000
Income Dividends
• Parent reports only 80% of above amounts
Parent recording of subsidiary income (year 1)
Incomplete Equity
Complete Equity Cost
Investment balance 800,000 800,000 800,000
Year 1 income: Investment in Sub Investment income
80,000
80,000
(44,000 amort) 36,000
36,000
no entry
Year 1 dividends: Cash Investment in Sub Dividend income
8,000
8,000
8,000
8,000
8,000
8,000 Investment balance 872,000 828,000 800,000
Incomplete Equity
Complete Equity Cost
Investment balance 872,000 828,000 800,000 Year 2 income: Investment in Sub Investment income
120,000
120,000
(4,000 amort) 116,000
116,000
no entry
Year 2 dividends: Cash Investment in Sub Dividend income
16,000
16,000
16,000
16,000
16,000
16,000 Investment balance 976,000 928,000 800,000
Parent recording of subsidiary income (year 2)
Worksheet procedures• The RE of the Sub and the Investment
account must be at the same point in time
• The account adjustments made require amortization for current and prior periods– No entries are made on either firm’s books for
worksheet eliminations
Cost Method: Year 1Selected accounts Trial Balances Eliminations
Parent Sub Dr CrInvestment in Sub 800,000 EL 480.000
D 320,000Building 500,000 D2 80,000Accumulated depr. (200,000) A2 4,000Goodwill D3 200,000Dividend income (8,000) CY2 8,000Dividends declared 10,000 CY2 8,000Com Stock - Sub (200,000) EL 160,000RE - Sub (400,000) EL 320,000RE - Parent (700,000)Cost of goods sold 400,000 300.000 D1 40,000Expenses 250,000 180,000 A2 4,000
Cost Method: Year 2Selected accounts Trial Balances Eliminations
Parent Sub Dr CrInvestment in Sub 800,000 CV 72,000 EL 552.000
D 320,000Building 500,000 D2 80,000Accumulated depr. (200,000) A2 8,000Goodwill D3 200,000Dividend income (16,000) CY2 16,000Dividends declared 20,000 CY2 16,000Com Stock - Sub (200,000) EL 160,000RE - Sub (490,000) EL 392,000RE - Parent (828,000) D1 40,000
A2 4,000CV 72,000
Cost of goods sold 500,000 400.000Expenses 350,000 280,000 A2 4000
Consolidation procedures for a pooling• Recall that investment was recorded at amount
equal to book value. If this was not the case, correct the investment account.
• Cost or equity method may be used (sophisticated equity has no application - no excess)
• There should not be any excess to distribute or amortize - it was just like a purchase at a price equal to underlying subsidiary book value!
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