1. CHAPTER 3 3
Consolidated Statements: Subsequent to Acquisition Fundamentals of Advanced Accounting 1th Edition Fischer, Taylor, and Cheng

2. Consolidated Statements Subsequent to Acquisition
Two basic methods to maintain the parent’s investment account:
Equity Method (Simple & Sophisticated)
Cost Method
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3. Equity Method of Accounting for Investments
Equity Method: Parent records income when subsidiary reports income
Parent used percent of ownership time sub’s net income to record investment income
Dividends treated as return of investment – investment account is reduced
Sophisticated Equity Method recognizes amortization on the parent’s ledger for the difference from book value to fair value.
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4. Cost Method of Accounting for Investments
Cost Method: Parent records income when subsidiary declares dividends
Most commonly used method
No adjustments to investment account
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5. Example – Company P and Subsidiary Company S
Parent purchases 90% of Sub’s stock for $145,000.
Sub has equity accounts:
Common Stock $100,000
Retained Earnings 50,000
20X1 – Sub:
Net Income = $30,000, Dividends = $10,000
20X2 – Sub:
Net Loss = ($10,000), Dividends = $5,000
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6. D&D Schedule Example – Company P and Subsidiary Company S
Price paid: $ 145,000
Interest acquired:
Common stock $ 100,000
Retained earnings 50,000
Total equity ,000
Ownership interest × 90% 135,000
Excess cost 10,000
Annual
Life Amort.
Patent …………………………… $10, $1,000
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7. Parent Recording of Subsidiary Income (Year 1)
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8. Parent Recording of Subsidiary Income (Year 2)
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9. Worksheet Procedures
The RE of the Sub and the Investment account must be at the same point in time
Eliminate entries during the year to complete alignment
When adjusted to the same point in time, the excess upon elimination will agree with the D&D on purchase date
Sophisticated Equity results in only the amortized balance of the excess
The account adjustments made require amortization for current and prior periods
No entries are made on either firm’s books for worksheet eliminations
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10. Worksheet Elimination Procedures
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11. Worksheet Elimination Entries – Simple Equity
CY1 Sub Income - Par 27,000
Invest. In Sub - Par 27,000
(Eliminates current year income and creates date alignment)
CY2 Invest. In Sub - Par 9,000
Dividends Declared - Sub 9,000
(Eliminates intercompany dividends)
EL Common Stock - Sub 90,000
Retained Earnings - Sub 45,000
Invest. In Sub - Par 135,000
(Eliminates investment account against 90% of equity)
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12. Worksheet Elimination Entries – Simple Equity Continued
D Patent 10,000
Invest. In Sub - Par 10,000
(Eliminates balance of investment account and distributes to proper accounts)
A Patent Amort. Expense 1,000
Patent 1,000
(Amortized excess cost of the patent over its 10 year life)
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13. Simple Equity: Worksheet 3-1 Year 1
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14. Review of Worksheet Procedures
Elimination of equity income and intercompany dividends returns investment to Jan. 1 for date alignment
Excess is distributed per D&D; amortized for current and prior years
IDS (income distribution schedule) is used to allocate income to P & S
All excess amortizations go to P; only P’s share is recorded initially
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15. Features of Consolidated Statements
Consolidated net income is total income earned by the entity.
Consolidated net income is distributed to:
Parent
Non-Controlling interest
Retained Earnings statement
Shows only controlling interest
Consolidated Balance Sheet reports NCI as subdivision of equity
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16. Worksheet Elimination Entries – Cost Method
CY2 Dividend Income - Par 9,000
Dividends Declared - Sub 9,000
(Eliminates intercompany dividends)
EL Common Stock - Sub 90,000
Retained Earnings - Sub 45,000
Invest. In Sub - Par 135,000
(Eliminates investment account against 90% of equity)
D Patent 10,000
Invest. In Sub - Par 10,000
(Eliminates balance of investment account and distributes to proper accounts)
A Patent Amort. Expense 1,000
Patent 1,000
(Amortized excess cost of the patent over its 10 year life)
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17. Cost Method: Worksheet 3-3 Year 1
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18. Subsequent years – Cost Method
For periods after the first year, date alignment will not exist.
Balance of parents investment account ≠ sub’s retained earnings.
Calculate simple equity balance for investment account.
Record entry to adjust investment account.
DR Investment in Sub – Par
CR RE 1/1/20X2 - Par
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19. Effect of Sophisticated Equity Method on Consolidation
Parent amortizes excess costs of net assets
Investment account includes only unamortized costs
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20. Worksheet Elimination Entries – Sophisticated Equity Method
CY1 Sub Income - Par 26,000
Invest. In Sub - Par 26,000
(Eliminates current year income and creates date alignment)
CY2 Invest. In Sub - Par 9,000
Dividends Declared - Sub 9,000
(Eliminates intercompany dividends)
EL Common Stock - Sub 90,000
Retained Earnings - Sub 45,000
Invest. In Sub - Par 135,000
(Eliminates investment account against 90% of equity)
D Patent 10,000
Invest. In Sub - Par 10,000
(Eliminates balance of investment account and distributes to proper accounts – includes only UNAMORTIZED excess cost)
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21. Sophisticated Equity Method: Year 1
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22. Disclosure Concerns
Consolidated net income – The net income of the consolidated entity
NCI share of income – This is the NCI share of consolidated net income; it has often (incorrectly) been treated as an expense.
Controlling share of net income – This is the controlling share of consolidated net income; it has often (incorrectly) been treated as consolidated net income (the NCI share having been deducted)
Total NCI – Best theory is to show as aggregated part of total equity
Some have shown it as liability or put it between liabilities and equity
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23. During-the-Year Purchases
Option 1 - Close Books (WS 3-7)
D&D includes Sub RE on purchase date
WS includes Sub operations for only later part of year
Option 2 - Books Open (WS 3-8)
D&D has Beginning of year RE and “Purchased Income”
WS includes Sub operations for entire year
Purchased income is used to remove income prior to purchase
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24. Goodwill Impairment Losses
If remaining goodwill is estimated to be less book value of goodwill, record a goodwill impairment loss.
Impairment loss is reported on consolidated income statement for period in which it occurs.
Presented before-tax basis.
Two options for impairment losses:
Record loss on parent’s books
Record loss on consolidated worksheet.
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25. Goodwill Impairment Losses - Calculation
Company P purchased 80% interest in Company S in 20X2 resulting in $165,000 of Goodwill.
20X4 information is as follows:
Invest in Sub (Soph. Equity) $800,000
Estimated fair value of S. Co. 900,000
Est. fair value of net assets 850,000
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26. Goodwill Impairment Losses - Calculation
Step one – determine if Goodwill is impaired:
Investment in Sub $800,000
Fair value of investment 720,000*
*($900,000 total fair value x 80% ownership)
If investment account exceeds fair value, calculate impairment.
Impairment calculation:
Est. fair value of company $900,000
Est. fair value of net assets 850,000
Est. goodwill 50,000
Parent’s % of goodwill = $50,000 x 80% = $40,000
Original goodwill calculation 165,000
Goodwill Impairment (125,000)
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27. Tax Issues: Tax-Free Exchange
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 has same priority as the related asset.
DTL is amortized over same period as asset adjustment; increases tax liability in future years
Tax loss carryover is asset recorded in purchase; there are limits on its use in year of purchase and later years
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