1 ©2009 Accounting Department, University Of Siliwangi Consolidated Techniques and Procedures

1©2009 Accounting Department, University Of Siliwangi

Consolidated Techniquesand Procedures

2

©2009 Accounting Department, University Of Siliwangi

Equity Method –Year of Acquisition

1. Prep pays $87,000 for 80% interest in Snapon January 1, when Snap stockholders’ equityconsists of $60,000 capital stock and $30,000retained earnings.

2. The $15,000 excess of investment cost isallocated to patents.

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Equity Method –Year of Acquisition

Snap’s net income and dividends are as follows:

2003Net income $25,000Dividends $15,000

2004Net income $30,000

Dividends $15,000

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Working Paper Entries

Adjusting and eliminating entries on the workingpapers do not affect the general ledger accounts.

a Income from Snap 18,500Dividends 12,000Investment in Snap 6,500

To eliminate income and dividend from Snapand return the investment account to itsbeginning balance

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b Minority Interest Expense 5,000Dividends Snap 3,000Minority Interest 2,000

To enter minority interest share of subsidiaryincome and dividends

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c Retained Earnings, Snap 30,000Capital Stock, Snap 60,000Patents 15,000

Investment in Snap 87,000Minority Interest 18,000

To eliminate reciprocal equity and investmentbalances, establish beginning minority interest,and enter unamortized patents

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d Expenses 1,500Patents 1,500

To enter current amortization

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RevenueIncome from SnapExpensesMinority interestNet incomeRetained earnings PRetained earnings SAdd net incomeDeduct dividends

Retained earnings Dec 31

250 18.5 (200)

68.5 5

68.5 (30)

43.5

65

(40)

25

30 25 (15)

40

a 18.5d 1.5 b 5

c 30

a 12 b 3

315

(241.5) (5) 68.5 5

68.5 (30)

43.5

Working Papers forYear of Acquisition

Adjustments and Eliminations Consolidated

Income Statement Prep Snap Dr. Cr. Statements

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CashOther current assetsInvestment in SnapPlant and equipmentAccum. depreciationPatentsTotal assetsLiabilitiesCapital stockRetained earningsTotal Minority 1/1interest 12/31

40 90 93.5 300 (50)

473.5 80 350 43.5 473.5

10 50

100 (30)

130 30 60 40 130

c 15

c 60

a 6.5 c 87

d 1.5

c 18b 2

50140

400 (80) 13.5 523.5110350 43.5

20 523.5

Working Papers forYear of Acquisition

Adjustments and Eliminations Consolidated

Balance Sheet Prep Snap Dr. Cr. Statements

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Sequence of Working Paper Entries

1. Adjustments for errors and omissions in theseparate parent company and subsidiary statements

2. Adjustments to eliminate intercompany profits and losses

3. Adjustments to eliminate income and dividends from subsidiary and adjust the investment in subsidiary to its beginning-of-the-period balance

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Sequence of Working Paper Entries

4. Adjustment to record the minority interest in subsidiary’s earnings and dividends

5. Elimination of reciprocal investment in subsidiary and subsidiary equity balances

6. Allocation and amortization of cost/book value differentials

7. Elimination of other reciprocal balances

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Equity Method –Year Subsequent to Acquisition

The only intercompany transaction during 2004 was a $10,000, non-

interest-bearing loan to Snap.

Prep maintains its 80% interest inSnap throughout 2004.

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What is Prep’s income from Snap?

What is Prep’s investment in Snapaccount at December 31, 2004?

($30,000 × 80%) – $1,500* = $22,500

*Patent amortization

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Investment cost January 1, 2003 $ 87,000Income from Snap, 2003 18,500Dividends from Snap, 2003 – 12,000

Investment in Snap December 31, 2003 $ 93,500Income from Snap, 2004 22,500Dividends from Snap, 2004 – 12,000

Investment in Snap December 31, 2004 $104,000

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Consolidation –Year Subsequent to Acquisition

Income from Snap 22,500Dividends 12,000Investment in Snap 10,500

To eliminate income and dividends from Snapand return the investment account to itsbeginning-of-the-period balance

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Consolidation–Year Subsequent to Acquisition

Retained Earnings, Snap 40,000Capital Stock, Snap 60,000Patents 13,500

Investment in Snap 93,500Minority Interest 20,000

To eliminate reciprocal equity and investmentbalances, establish beginning minority interest,and enter unamortized patents

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Consolidation–Year Subsequent to Acquisition

Expenses 1,500Patents 1,500

To enter current amortization

Notes Payable, Prep 10,000Note Receivable, Snap 10,000

To eliminate reciprocal receivable andpayable balances

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Locating Errors

Most errors made in consolidating the financialstatements will show up when the consolidated

balance sheet does not balance.

Totals arerecomputed.

Checkindividual

items.

Omissionsinvolving

minority interestoccur frequently.

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Both FASB Statements No. 141 and 142 requirefirms to provide at least summary disclosuresregarding the allocation of the purchase price

of an acquired subsidiary.

Excess Allocatedto Identifiable Assets

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Disclose in the year of acquisition:

– a condensed balance sheet (assets and liabilities)

– amounts of purchased R&D in process

– total amounts assigned to major asset categories

Excess Allocated to IdentifiableAssets (FASB No. 141)

– the cost of the acquired enterprise

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Excess Allocated to IdentifiableAssets (FASB No. 142)

The amount of goodwill is to be shown as a separatebalance sheet line item (assuming it is material).

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Firms mustdisclose materialnoncontrolling

interests (minorityinterest) on thebalance sheet.

Firms must reportnoncontrolling

interests’ share ofsubsidiary income(minority interest

expense).

Additional Disclosures

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Pate acquired its 90% equity interest in Soloon December 31, 2003, for $365,000 cash, when

Solo’s stockholders’ equity consisted of $200,000capital stock and $50,000 retained earnings.

During 2004, Solo borrows $20,000 from Pateon a non-interest-bearing note.

Excess Allocation Example

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What is the excess of cost over book value?

90% × $250,000 = $225,000

$365,000 – $225,000 = $140,000


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Solo (000) Fair Book UndervaluationValue Value (Overvaluation)

AssetsInventories $ 60 $ 50 $ 10Land 60 30 30Buildings 180 100 80Equipment 70 90 (20)Total $370 $270 $100


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Undervaluation Interest Excess Amortization(Overvaluation) Acquired Allocation Period

AssetsInventories $10 × 90% = $ 9 Sold in 2004Land 30 × 90% = 27 NoneBuildings, net 80 × 90% = 72 36 yearsEquipment, net (20) × 90% = (18) 9 yearsGoodwill, remainder 50 NoneTotal $140


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Consolidation After Acquisition

Solo reports $60,000 net income for 2004.

Solo declares dividends of $10,000on June 1 which is paid on July 1.

Solo declares dividends of$10,000 on December 1.

The December dividend has notbeen paid at year end.

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July 1, 2004Cash 9,000

Investment in Solo 9,000To record dividends from Solo


December 31, 2004Investment in Solo 45,000

Income from Solo 45,000To record dividends from SoloHow was this determined?

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Share of Solo’s net income ($60,000 × 90%) $54,000Amortization of excess allocated to: Inventories ($9,000 × 100%) – 9,000 Buildings ($72,000 ÷ 36) – 2,000 Equipment ($18,000 ÷ 9 years) + 2,000Income from Solo for 2004 $45,000


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a Dividends Receivable 9,000Investment in Solo 9,000

To correct investment balance for unrecordeddividends receivable


b Cash 20,000Note Receivable, Solo 20,000

To enter receipt of intercompany note receivable

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c Income from Solo 45,000Dividends 18,000Investment in Solo 27,000

To eliminate income and dividend from Pateand return the investment account to thebeginning of the period balance


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d Minority Interest Expense 6,000Dividends, Solo 2,000Minority Interest 4,000

To enter minority interest share of subsidiaryincome and dividends


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e Retained Earnings, Solo 50,000Capital Stock, Solo 200,000Unamortized Excess 140,000

Investment in Solo 365,000Minority Interest, Jan 1 25,000

To eliminate reciprocal investment and equityamounts, establish beginning minority interest,and enter unamortized excess


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f Cost of Goods Sold 9,000Land 27,000Buildings (net) 72,000Goodwill 50,000

Equipment (net) 18,000Unamortized Excess 140,000

To allocate unamortized excess to identifiableassets and goodwill


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g Operating Expenses 2,000Buildings (net) 2,000

To enter current depreciation on excessallocated to buildings


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i Dividends Payable 9,000Dividends Receivable 9,000

To eliminate reciprocal receivables and payables


h Equipment (net) 2,000Operating Expenses 2,000

To adjust current depreciation for excessallocated to reduce equipment

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Learning Objective 5

Apply concepts to prepare a

consolidated statement

of cash flows.

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Consolidated Statement of Cash Flows

Consolidatedbalancesheets

Consolidatedincome

statements

Consolidatedstatement ofcash flows

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1. During 2004, Seed sold land that cost$20,000 to outside entities for $10,000 cash.

2. Polski issued a $300,000, two-year note onJanuary 8 for new equipment.

3. Patents amortization from the Polski-Seedbusiness combination is $10,000 per year.

4. Polski received $10,000 dividends from itsinvestments in equity investees.

5. Changes in plant assets not explained aredue to provisions for depreciation.


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Polski and Seed ComparativeBalance Sheets at December 31

Assets (000) 2004 2003Cash $ 255 $ 180Accts. receivable, net 375 270Inventories 250 205Equity investments 100 95Land 80 100Buildings, net 200 220Equipment, net 800 600Patents 90 100

Total assets $2,150 $1,770

Changes$ 75 105 45 5 (20) (20) 200 (10)$380

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Polski and Seed ComparativeBalance Sheets at December 31

Liabilities (000) 2004 2003 Accounts payable $ 250 $ 270 Dividends payable 20 20 Notes payable 300 –Common stock 500 500Other paid-in capital 300 300Retained earnings 670 600Minority interest – 20% 110 80Total liabilities and stockholders’ equity $2,150 $1,770

Changes$(20) – 300 – – 70 30

$380

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Consolidated Income StatementYear Ended December 31, 2004

Sales $750Income from equity investees 15Total revenue 765Less expenses:

Cost of goods sold 300Depreciation expense 120Patents amortization 10Wages and salaries 54Other operating expenses 47Interest expense 24Loss on sale of land 10 (565)

Total consolidated income $200

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Consolidated Income StatementYear Ended December 31, 2004

Total consolidated income $200Less: Minority interest (50)Consolidated net income 150Consolidated retained earnings 1/1/2004 600Less: Cash dividends paid (80)Consolidated retained earnings 12/31/2004 $670

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Year Ended December 31, 2004Cash flows from operating activitiesConsolidated net income $150Adjustments to reconcile net income to

cash provided by operating activities Minority interest $ 50 Undistributed income–equity investees (5) Loss on sale of land (10) Depreciation on equipment 100 Depreciation on buildings 20 Amortization of patents 10 Increase in accounts receivable (105) Increase in inventories (45) Decrease in accounts payable (20) 15Net cash flows from operating activities $165

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Year Ended December 31, 2004

Net cash flows from operating activities $165Cash flows from investing activities 10Cash flows from financing activitiesPayment of cash dividends–majority $(80)Payment of cash dividends–minority (20) (100)Increase in cash for 2004 75Cash on January 1, 2004 180 Cash on December 31, 2004 $255

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1 ©2009 Accounting Department, University Of Siliwangi Consolidated Techniques and Procedures