Advanced Accounting Jeter Chapter 4

Advanced
Accounting
Jeter Chaney
Consolidated
Financial Statements
After Acquisition
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
Describe the accounting treatment required under current
GAAP for varying levels of influence or control by
investors.
Prepare journal entries on the parents books to account
for an investment using the cost method, the partial
equity method, and the complete equity method.
Understand the use of the workpaper in preparing
consolidated financial statements.
Prepare a schedule for the computation and allocation of
the difference between implied and book values.
2
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Learning Objectives
Prepare the workpaper eliminating entries for the year of
acquisition (and subsequent years) for the cost and equity methods.
Describe how to account for interim acquisitions of subsidiary
stock at the end of the first year.
Explain how the consolidated statement of cash flows differs from a
single firms statement of cash flows.
Understand how the reporting of an acquisition on the consolidated
statement of cash flows differs when stock is issued instead of cash
payment.
Describe some of the differences between U.S. GAAP and IFRS in
accounting for equity investments.
3
Investments in Stock
Investments in voting stock may be consolidated, or separately
reported at
cost,
fair value, or
carrying value of equity.
The method of reporting adopted depends on a number of factors
including
size of investment
extent to which the investor exercises control over activities of
the investee
marketability of the securities.
4
Accounting for Investments by the Cost, Partial

Equity, and Complete Equity Methods
Ownership Percentages
0 --------------20% ------------ 50% -------------- 100%

No significant
influence
Significant
influence (no
control)
Investment
valued using the
cost method
but with
adjustments to
fair value.
Investment
measured under
equity method
Effective control
Investment recorded
using cost method or
equity method
(investment
eliminated in
consolidation)
5
LO 1 Varying levels of ownership are accounted for differently.

When a company owns a sufficient amount of another
companys stock to have significant influence (usually at
least 20%), but not enough to effectively control the other
company (less than 50% in most cases), the equity method
is required.
Under FASB ASC paragraph 825-10-25-2, these equity
investments may alternatively be carried at fair value under
an irrevocable election to do so.
Once the investor is deemed to have effective control over
the other company (with or without a majority of stock
ownership), consolidated statements are required.
6

The parent company must account for its investment
income from the subsidiary in its own books by one of
the methods used for accounting for investments.
Consolidated financial statements will be identical,
regardless of method used.
However, if the parent issues parent-only financial
statements, the complete equity method should be used
for investees over which the parent has either
significant influence or effective control.
7
Accounting for Investments by the Cost

Method
E4-1: Percy Company purchased 80% of the outstanding voting shares
of Song Company at the beginning of 2014 for $387,000. At the time of
purchase, Song Companys total stockholders equity amounted to
$475,000. Income and dividend distributions for Song Company from
2014 through 2016 are as follows:
Required: Prepare journal entries for Percy Company from the date of
purchase through 2016 to account for its investment in Song Company
under each of the following assumptions:
8
LO 2 Journal entries for Parent using cost method.

Method
E4-1: A. Percy Company uses the cost method to record its
investment.
2014
Investment in Song
Cash
387,000
387,000
Cash
20,000
Dividend income (.8 x $25,000) 20,000
9

Method
E4-1: A. Percy Company uses the cost method to record its
investment.
2015
Cash
40,000
Dividend income (.8 x $50,000)

2016
Cash
40,000
28,000
Investment in Song (.8 x $35,000)
28,000
(liquidating dividend)
10
Accounting for Investments by Partial

Equity
E4-1: B. Percy Company uses the partial equity method to record its
investment.
2014
Investment in Song
Cash
387,000
387,000
Investment in Song
50,800
Equity income (.8 x $63,500)
50,800
Cash
20,000
20,000
11
LO 2 Journal entries for Parent using partial equity method.

Equity
investment.
2015
Investment in Song
42,000
42,000
Cash
40,000
40,000
12

Equity
investment.
2016
Equity loss (.8 x $55,000)
44,000
Investment in Song 44,000

Cash
28,000
28,000
13
Accounting for Investments by Complete

Equity
E4-1: C. Percy Company uses the complete equity method to record
its investment. The difference between book value of equity acquired
and the value implied by the purchase price was attributed solely to an
excess of market over book values of depreciable assets, with a
remaining life of 10 years.
The complete equity method is usually required to report common stock

investments in the 20% to 50% range, assuming the investor has the
ability to exercise significant influence and does not have effective
control over the investee.
14
LO 2 Journal entries for Parent using complete equity method.

Equity
its investment.
2014
Investment in Song
Cash
387,000
387,000
Investment in Song
50,800
50,800
Cash
20,000
20,000
15

Equity
its investment.
A journal entry is required to adjust for depreciation related to the
excess of market over book values of depreciable assets.
Cost of investment
Book value acquired ($475,000 x 80%)
Difference between Cost and Book value
2014
Equity income ($7,000 / 10 yrs.)

Investment in Song
$387,000
380,000
$ 7,000
700
700
16

Equity
its investment.
2015
Investment in Song
42,000
42,000
Cash
40,000
40,000
Equity income ($7,000 / 10 yrs.)

Investment in Song
700
700
17

Equity
its investment.
2016
Equity Loss (.8 x $55,000)
44,000
Investment in Song 44,000

Cash
28,000
28,000
Equity income ($7,000 / 10)

Investment in Song
700
700
18
Consolidated Statements After

Acquisition
On the date of acquisition, the only relevant financial
statement is the consolidated balance sheet.
After acquisition, a complete set of consolidated
financial statements must be prepared for the affiliated
group:
Income Statement,
Retained Earnings Statement,
Balance Sheet, and
Statement of Cash Flows.
19
LO 3 Use of workpapers.

Acquisition
Year of AcquisitionCost Method
P4-8: On January 1, 2012, Parker Company purchased 95%
of the outstanding common stock of Sid Company for
$160,000. At that time, Sids stockholders equity consisted
of common stock, $120,000; other contributed capital,
$10,000; and retained earnings, $23,000.
Required: Prepare a consolidated statements workpaper on
A. Dec. 31, 2012.
B. Dec. 31, 2013.
20
LO 3 Use of workpapers.

Acquisition
P4-8: Begin the consolidating process by preparing a Computation and
Allocation Schedule, as follows:
Difference between implied and book values is established

only at the date of acquisition.
21
LO 4 Preparing Computation and Allocation (CAD) Schedule.

Acquisition
P4-8: A. 2012 Year of Acquisition
On December 31, 2012, the
two companies trial balances
were as follows at right:
Required A. Prepare a
consolidated statements
workpaper on December 31,
2012.
22
LO 5 Workpapers eliminating entries.

Acquisition
23

Acquisition
24

Acquisition
Workpaper Observations
1.
Each section of the workpaper represents one of three

consolidated financial statements.
2.
Elimination of the investment account.

Common stock
120,000
Other contributed capital
10,000
Retained earnings, 1/1
23,000
Difference between Implied and Book
15,421
Noncontrolling interest in equity

Investment in Sid
8,421
160,000
25

Acquisition
Workpaper Observations (continued)
3.
Allocation of the difference between implied and book value:
Goodwill
15,421
Difference between Implied and Book Value

4.
15,421
Elimination of intercompany dividends

Dividend income
19,000
Dividends declared Sid Company
19,000
26

Acquisition
5.
Noncontrolling interest in consolidated net income:

Internally generated income of Sid Company
$26,000
Noncontrolling percentage owned
5%
Noncontrolling interest in income
$ 1,300
27

Acquisition
6.
Consolidated retained earnings:

Parker Companys retained earnings, 1/1
$ 40,000
+ Parkers income
129,000
- Dividends from Sid Company
- 19,000
+ Parkers percentage of Sid income (95%)
24,700
- Parkers dividends declared
- 20,000
Parker Companys retained earnings, 12/31
$154,700
28

Acquisition
7.
Total eliminations for all three sections are in balance.
8.
To calculate the noncontrolling interest in net assets or equity

at year-end, compute the following:
NCI at Acquisition Date
8,421
+ NCI share of Sid income ($26,000 x 5%)
1,300
- NCI share of Sid dividends ($20,000 x 5%)

Noncontrolling Interest in Equity
-1,000
$ 8,721
29

Acquisition
After Year of
Acquisition Cost
Method
P4-8: B. 2013
Required B. Prepare a
2013.
30
LO 5 Workpapers eliminating entries after acquisition (cost method).

Acquisition
P4-8: B. 2013 After Year of Acquisition
31

Acquisition
32

Acquisition
1. Before elimination of the investment account, a workpaper entry is
made to the investment account and Parker Companys beginning

retained earnings to recognize Parkers share of the cumulative
undistributed income or loss of Sid Company from the date of
acquisition to the beginning of the current year as follows:
Investment in Sid Company
Retained earnings, 1/1
5,700
5,700
($29,000 $23,000 ) X .95 = $5,700
Entry to establish
Reciprocity
33

Acquisition
The following workpaper entries are also made:
1) Eliminate investment in Sid Company.
2) Eliminate intercompany dividends.
3) Allocate difference between cost and book value.
4) All (100%) of Sids revenues, expenses, assets, and
liabilities are included in the consolidated totals.
The noncontrolling interests share of income and
net assets are shown as separate line items.
34
Recording Investments Equity

Method
Investment Carried at EquityYear of Acquisition
P4-12: On January 1, 2012, Parker Company purchased 90% of
the outstanding common stock of Sid Company for $180,000. At
that time, Sids stockholders equity consisted of common stock,
$120,000; other contributed capital, $20,000; and retained earnings,
$25,000. Assume that any difference between book value of equity
and the value implied by the purchase price is attributable to land.
Required: Prepare a consolidated statements workpaper on
A. Dec. 31, 2012.
B. Dec. 31, 2013.
35
LO 5 Workpaper eliminating entries (equity method).

Method
P4-12: Begin the consolidating process by preparing a Computation and
Allocation Schedule, as follows:
Difference between implied and book values is

established only at the date of acquisition.
36

Method
P4-12: A. 2010 Year of
Acquisition
were as follows:
Required A. Prepare a
2012.
37

Method
38

Method
39

Method
The following workpaper entries were made:
To eliminate the account equity in subsidiary
income and intercompany dividends.
To eliminate the investment account against
subsidiary equity.
To distribute the difference between implied and
book value of equity acquired.
40

Method
Investment Carried at
EquityAfter Year of
Acquisition
P4-12: B. 2013
Required B. Prepare a
2013.
Cash
Accounts receivable
Inventory
Investment in Sid
Plant and equipment
Land
Dividends declared
Cost of goods sold
Operating expenses
Total debits
Accounts payable
Other liabilities
Common stock
Other contributed capital
Retained earnings
Sales
Equity in subsidiary income
Total credits
Parker
$ 70,000
60,000
40,000
193,500
125,000
48,500
20,000
160,000
35,000
$ 752,000
Sid
$ 20,000
35,000
30,000
90,000
45,000
15,000
65,000
20,000
$ 320,000
16,500
15,000
200,000
70,000
168,000
260,000
22,500
$ 752,000
16,000
24,000
120,000
20,000
30,000
110,000
$ 320,000
41

Method
42

Method
P4-12: B. 2013 After Year of
Acquisition
43
Interim Acquisitions of Subsidiary

Stock
FASB requires that the consolidated financial statements
include the subsidiarys revenues, expenses, gains, and
losses only from the date of acquisition (FASB ASC
paragraph 810-10-45-4).
To accomplish this, the subsidiary usually closes the
books on the date of acquisition
i.e. preacquisition income is closed to retained
earnings.
44
LO 6 Interim acquisitions of subsidiary stock.

Stock
Equity Method
Interim Purchase
P4-15:
Pillow Company purchased
90% of the common stock of
Satin Company on May 1,
2011, for a cash payment of
$474,000. December 31, 2011,
trial balances for Pillow and
Satin were:
45

Stock
P4-15:
Satin Company declared a $60,000 cash dividend on
December 20, 2011, payable on January 10, 2012, to
stockholders of record on December 31, 2011. Pillow
Company recognized the dividend on its declaration date.
Any difference between book value and the value implied by
the purchase price relates to subsidiary land, included in
property and equipment. Income is earned evenly throughout
the year.
Required: Prepare a consolidated statements workpaper at
December 31, 2011.
46

Stock
P4-15: Computation and Allocation of Difference between Cost and Book
Value Acquired:
47

Stock
P4-15: Workpaper Interim Basis, Partial Equity Method
48

Stock
P4-15: Workpaper Interim Basis, Partial Equity Method
49
Consolidated Statement of Cash

Flows
Peculiarities:
When the company is reporting on a consolidated basis, the statement of
cash flows must also be presented on a consolidated basis.
The starting point for the consolidated cash flow statement is the
consolidated income statement and comparative consolidated balance
sheets.
Thus, the preparation of the consolidated statement of cash flows will
be the same, regardless of how the parent accounts for its investment
(cost, partial equity, or complete equity method).
This is true because the final product (the consolidated financial
statements) is always the same if consolidated procedures are
done correctly.
50
LO 7 Peculiarities of Consolidated Statement of Cash Flows.

Flows
Peculiarities (continued):
1. If the statement of cash flows starts with consolidated net income, then
the noncontrolling interest is already included and need not be added
back.
2. Subsidiary dividends paid to the noncontrolling stockholders must be
included with dividends paid by the parent company when calculating
cash outflow from financing activities.
3. Subsidiary stock acquired directly from the subsidiary represents an
intercompany cash transfer that does not affect the total cash balance
of the consolidated group. If the acquisition is an open market
purchase, it does represent such an outflow.
51
LO 7 Peculiarities of Consolidated Statement of Cash Flows.

Flows
The preparation of the consolidated statement of cash flows
in the year of acquisition is complicated slightly because the
comparative balance sheets at the beginning and end of the
current year are dissimilar.
1.Any cash spent or received in the acquisition itself
should be reflected in the Investing activities section.
2.Assets and liabilities of the subsidiary at the date of
acquisition must be added to those of the parent at the
beginning of the current year.
52
LO 8 Stock issued as Consideration in Statement of Cash Flows.
Compare U.S. GAAP and IFRS

Application of the Equity Method
LO 9 Differences between U.S. GAAP and IFRS.

53


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Prepared by Sheila Ammons, Austin Community College

Accounting for Investments by the Cost, Partial

0 --------------20% ------------ 50% -------------- 100%

Accounting for Investments by the Cost, Partial

Accounting for Investments by the Cost, Partial

Accounting for Investments by the Cost

Accounting for Investments by the Cost

Dividend income (.8 x $25,000) 20,000

Accounting for Investments by the Cost

Dividend income (.8 x $50,000)

Investment in Song (.8 x $35,000)

Accounting for Investments by Partial

Equity income (.8 x $63,500)

Investment in Song (.8 x $25,000)

Accounting for Investments by Partial

Equity income (.8 x $52,500)

Investment in Song (.8 x $50,000)

Accounting for Investments by Partial

Equity loss (.8 x $55,000)

Investment in Song 44,000

Investment in Song (.8 x $35,000)

Accounting for Investments by Complete

The complete equity method is usually required to report common stock

Accounting for Investments by Complete

Investment in Song (.8 x $25,000)

Accounting for Investments by Complete

Equity income ($7,000 / 10 yrs.)

Accounting for Investments by Complete

Equity income (.8 x $52,500)

Investment in Song (.8 x $50,000)

Equity income ($7,000 / 10 yrs.)

Accounting for Investments by Complete

Equity Loss (.8 x $55,000)

Investment in Song 44,000

Investment in Song (.8 x $35,000)

Equity income ($7,000 / 10)

Consolidated Statements After

Consolidated Statements After

Consolidated Statements After

Difference between implied and book values is established

Consolidated Statements After

Consolidated Statements After

Consolidated Statements After

Consolidated Statements After

Each section of the workpaper represents one of three

Elimination of the investment account.

Other contributed capital

Retained earnings, 1/1

Difference between Implied and Book

Noncontrolling interest in equity

Consolidated Statements After

Allocation of the difference between implied and book value:

Difference between Implied and Book Value

Elimination of intercompany dividends

Dividends declared Sid Company

Consolidated Statements After

Noncontrolling interest in consolidated net income:

Noncontrolling percentage owned

Noncontrolling interest in income

Consolidated Statements After

Consolidated retained earnings:

- Dividends from Sid Company