Chapter 4: Consolidation Techniques and Procedures Beams, Advanced Accounting 10e, Ch. 4 5/5/2018 Chapter 4: Consolidation Techniques and Procedures 4-1 Pearson Education Inc., publishing as Prentice Hall 1

1: Acquisition-Year Working Papers Consolidation Techniques and Procedures 1: Acquisition-Year Working Papers 4-2

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 4-3

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 4-4

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: 2009 2010 Net income $25 $30 Dividends $15 4-5

Analysis Cost of 80% of Snap $88 Implied value of Snap ($88/.80) $110 Book value (60+30) 90 Excess $20 Allocated to: Amt Amort. Patents $20 10 yrs Unamort. Bal. Amortization on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010 Patents $20 $2 $18 $16 Use these amounts in 2009 worksheet for amortization expense and patents. Use these amounts in 2010 worksheet for amortization expense and patents. 4-6

Income & Dividend Calculations 2009: Snap's net income $25 Amortization (2) Adjusted income $23 Dividends $15 2010: Snap's net income $30 Adjusted income $28 Prep's 80% share $18.4 $12.0 NCI 20% share $4.6 $3.0 Prep's 80% share $22.4 $12.0 NCI 20% share $5.6 $3.0 4-7

Prep's 2009 Worksheet Entries Adjust for errors & omissions none Eliminate intercompany profits and losses Eliminate income & dividends from sub. and bring Investment account to its beginning balance Income from Snap (I.S.) 18.4 Dividends (St. RE) 12.0 Investment in Snap (B.S.) 6.4 4-8

Prep 2009: Entries (2 of 3) Record noncontrolling interest in sub's earnings & dividends Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.) 4.6 Dividends (St. RE) 3.0 Noncontrolling interest (B.S.) 1.6 Capital stock (B.S.) 60 Retained earnings (St. RE, beg.) 30 Patents (B.S.) 20 Investment in Snap (B.S.) 88 Noncontrolling interest (B.S.) 22 4-9

Prep 2009: Entries (3 of 3) Amortize fair value/book value differentials Eliminate other reciprocal balances none Note that in last chapter, all worksheet entries were prepared for the balance sheet. Here worksheet entries are prepared for the income statement, statement of retained earnings and balance sheet. Amortization Expense (I.S.) 2 Patents (B.S.) 4-10

Prep's 2009 Worksheet Year ended 12/31/2009 Prep Snap DR CR Consol Income statement:   Revenues 250.0 65.0 315.0 Income from Snap 18.4 0.0 Expenses (200.0) (40.0) 2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share 68.4 25.0 Statement of retained earnings: Beginning retained earnings 5.0 30.0 Add net income Deduct dividends (30.0) (15.0) 12.0 3.0 Ending retained earnings 43.4 40.0 4-11

Noncontrolling interest, Jan.1 22.0 Noncontrolling interest, Dec. 31 Balance sheet, 12/31/2009: Prep Snap DR CR Consol Cash 39.0 10.0   49.0 Other current assets 90.0 50.0 140.0 Investment in Snap 94.4 6.4 0.0 88.0 Plant & equipment, net 250.0 70.0 320.0 Patents 20.0 2.0 18.0 Total 473.4 130.0 527.0 Liabilities 80.0 30.0 110.0 Capital stock 350.0 60.0 Retained earnings 43.4 40.0 Noncontrolling interest, Jan.1 22.0 Noncontrolling interest, Dec. 31 1.6 23.6 4-12

A Look at the Income Statement Year ended 12/31/2009 Prep Snap DR CR Consol Income statement:   Revenues 250.0 65.0 315.0 Income from Snap 18.4 0.0 Expenses (200.0) (40.0) 2.0 (242.0) Noncontrolling interest share 4.6 (4.6) Net income/ Controlling share 68.4 25.0 Income from Snap is eliminated. Expenses are adjusted for 2009 amortization - $2 on patents Noncontrolling interest is proportional to Prep's Income from Snap since Prep uses the equity method. $18.4 x .20/.80 = $4.6 4-13

A Look at Retained Earnings Year ended 12/31/2009 Prep Snap DR CR Consol Statement of retained earnings:   Beginning retained earnings 5.0 30.0 Add net income 68.4 25.0 Deduct dividends (30.0) (15.0) 12.0 3.0 Ending retained earnings 43.4 40.0 Beginning retained earnings of Snap is eliminated. All of Snap's dividends are eliminated. Net income is not calculated across the line, but taken from the consolidated income statement. Ending retained earnings is calculated in the consolidated column. 4-14

A Look at Assets Investment in Snap is eliminated. Balance sheet: Prep Snap DR CR Consol Cash 39.0 10.0   49.0 Other current assets 90.0 50.0 140.0 Investment in Snap 94.4 6.4 0.0 88.0 Plant & equipment, net 250.0 70.0 320.0 Patents 20.0 2.0 18.0 Total 473.4 130.0 527.0 Investment in Snap is eliminated. Patents at the start of 2009 were $20, and current amortization is $2; they are $18 at the end of 2009. The total is calculated in the consolidated column. 4-15

A Look at Liabilities & Equity Balance sheet: Prep Snap DR CR Consol Liabilities 80.0 30.0   110.0 Capital stock 350.0 60.0 Retained earnings 43.4 40.0 Noncontrolling interest, Jan.1 22.0 Noncontrolling interest, Dec. 31 1.6 23.6 Total 473.4 130.0 527.0 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 proportional to Prep's Investment in Snap account. $94.4 x .20/.80 = $23.6 4-16

2: Working Papers in Subsequent Years Consolidation Techniques and Procedures 2: Working Papers in Subsequent Years 4-17

Analysis, for 2010 Cost of 80% of Snap $88 Implied value of Snap ($88/.80) $110 Book value (60+30) 90 Excess $20 Allocated to: Amt Amort. Patents $20 10 yrs Unamort. Bal. Amortization on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010 Patents $20 $2 $18 $16 Use these amounts in 2009 worksheet for amortization expense and patents. Use these amounts in 2010 worksheet for amortization expense and patents. 4-18

Income & Dividend Calculations 2009: Snap's net income $25 Amortization (2) Adjusted income $23 Dividends $15 2010: Snap's net income $30 Adjusted income $28 Prep's 80% share $18.4 $12.0 NCI 20% share $4.6 $3.0 Prep's 80% share $22.4 $12.0 NCI 20% share $5.6 $3.0 4-19

Prep's Worksheet Entries for 2010 Adjust for errors & omissions none Eliminate intercompany profits and losses Eliminate income & dividends from sub. and bring Investment account to its beginning balance Income from Snap (I.S.) 22.4 Dividends (St. RE) 12.0 Investment in Snap (B.S.) 10.4 4-20

Prep 2010: Entries (2 of 3) Record noncontrolling interest in sub's earnings & dividends Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.) 5.6 Dividends (St. RE) 3.0 Noncontrolling interest (B.S.) 2.6 Capital stock (B.S.) 60 Retained earnings (St. RE, beg.) 40 Patents (B.S.) 18 Investment in Snap (B.S.) 94.4 Noncontrolling interest (B.S.) 23.6 4-21

Eliminating Investment in Snap Entry 5 eliminates the Investment in Snap and establishes the Noncontrolling Interest as of the beginning of the current year. Investment in Snap (80% x $118) = $94.4 Noncontrolling interest (20% x $118) = $23.6 Verify the $118 from the entry (60 + 40 + 18). Implied value of Snap at acquisition $88/.80 $110 Add the increase in retained earnings from acquisition to the beginning of the current year $40 at 1/1/2010 minus $30 at 1/1/2009 10 Less amortization for all prior periods $2 patent amortization for 2009 (2) Adjusted value of Snap at 1/1/2010 $118 4-22

Prep 2010: Entries (3 of 3) Amortize fair value/book value differentials Eliminate other reciprocal balances Amortization Expense (I.S.) 2 Patents (B.S.) Note payable – Prep (B.S.) 10 Note receivable – Snap (B.S.) 4-23

Prep's 2010 Worksheet Year ended 12/31/2010 Prep Snap DR CR Consol Income statement:   Revenues 300.0 75.0 375.0 Income from Snap 22.4 0.0 Expenses (244.0) (45.0) 2.0 (291.0) Noncontrolling interest share 5.6 (5.6) Net income/ Controlling share 78.4 30.0 Statement of retained earnings: Beginning retained earnings 43.4 40.0 Add net income Deduct dividends (15.0) 12.0 3.0 Ending retained earnings 76.8 55.0 4-24

Noncontrolling interest, Jan.1 23.6 Noncontrolling interest, Dec. 31 Balance sheet, 12/31/2010: Prep Snap DR CR Consol Cash 45.0 20.0   65.0 Note receivable – Snap 10.0 0.0 Other current assets 97.0 70.0 167.0 Investment in Snap 104.8 10.4 94.4 Plant & equipment, net 240.0 60.0 300.0 Patents 18.0 2.0 16.0 Total 496.8 150.0 548.0 Note payable – Prep Liabilities 25.0 95.0 Capital stock 350.0 Retained earnings 76.8 55.0 Noncontrolling interest, Jan.1 23.6 Noncontrolling interest, Dec. 31 2.6 26.2 4-25

3: Locating Errors in Working Papers Consolidation Techniques and Procedures 3: Locating Errors in Working Papers 4-26

Errors Most errors show up when the consolidated balance sheet does not balance. Common omissions: Noncontrolling interest share (income) Goodwill Noncontrolling interest (equity) Check equality of DR and CR adjustments. Verify totals for parent and subsidiary statements. Re-calculate the consolidated amounts. 4-27

4: Allocating Excess of Fair Value over Book Value Consolidation Techniques and Procedures 4: Allocating Excess of Fair Value over Book Value 4-28

Example with Excess Allocated Pate pays $360 for 90% of Solo on 12/31/2009 when Solo's equity consisted of $200 capital stock and $50 retained earnings. Inventory (sold in 2010), land and buildings (20 years) were undervalued by $10, $30, and $80, respectively. Equipment (10 years) was overvalued by $20. Solo's income and dividends for 2010 were $60 and $20. At year-end, Solo has dividends payable of $10 which Pate has not yet recorded. There is $20 cash in transit from Solo to Pate for the note. 4-29

Analysis at Acquisition Allocated to: Amt Amort Inventories $10 1st yr Land 30 - Building 80 20 yrs Equipment (20) 10 yrs Goodwill 50   150 Cost of 90% of Solo $360 Implied value of Snap ($360/.90) $400 Book value (200+50) 250 Excess $150 Noncontrolling interest, 10%(400) $40   Unamort. Bal. Amortization 12/31/2009 * in 2010 * on 12/31/2010 Inventories $10 ($10) $0 Land 30 Building 80 (4) 76 Equipment (20) 2 (18) Goodwill 50 $150 ($12) $138 * Use the 12/31/2009 and 2010 amortization in worksheet entries for 2010. 4-30

Solo's Income & Dividend   2010 Solo's net income $60 Amortization ($12) Adjusted $48 Solo's dividends $20 Pate's 90% share $43.2 $18.0 NCI 10% share $4.8 $2.0 4-31

Pate's Worksheet Entries Adjust for errors & omissions Eliminate intercompany profits and losses none Eliminate income & dividends from sub. and bring Investment account to its beginning balance Dividends receivable (B.S.) 9.0 Investment in Solo (B.S.) Cash (B.S.) 20.0 Note receivable (B.S.) Income from Solo (I.S.) 43.2 Dividends (St. RE) 18.0 Investment in Solo (B.S.) 25.2 4-32

Pate: Entries (2 of 4) Record noncontrolling interest in sub's earnings & dividends Eliminate reciprocal Investment & sub's equity balances Noncontrolling interest share (I.S.) 4.8 Dividends (St. RE) 2.0 Noncontrolling interest (B.S.) 2.8 Capital stock (B.S.) 200 Retained earnings (St. RE, beg.) 50 Unamortized excess 150 Investment in Solo (B.S.) 360 Noncontrolling interest (B.S.) 40 4-33

Pate: Entries (3 of 4) Allocate the unamortized excess according to beginning of year balances. Inventory 10 Land 30 Building, net 80 Goodwill 50 Equipment, net 20 Unamortized excess 150 4-34

Pate: Entries (4 of 4) Amortize fair value/book value differentials Eliminate other reciprocal balances Cost of sales 10 Inventory Operating (depreciation) expense 4 Buildings, net Equipment, net 2 Dividends payable (B.S.) 9.0 Dividends receivable (B.S.) 4-35

Pate's 2010 Worksheet Year ended 12/31/2010 Pate Solo DR CR Consol Income statement:   Revenues 900.0 300.0 1,200.0 Income from Snap 43.2 0.0 Cost of goods sold (600.0) (150.0) 10.0 (760.0) Operating expenses (190.0) (90.0) 4.0 2.0 (282.0) Noncontrolling interest share 4.8 (4.8) Net income/ Controlling share 153.2 60.0 Statement of retained earnings: Beginning retained earnings 120.0 50.0 Add net income Deduct dividends (100.0) (20.0) 18.0 Ending retained earnings 173.2 90.0 4-36

Accounts receivable, net 76.0 25.0 101.0 Note receivable - solo 0.0 Balance sheet, 12/31/2010: Prep Snap DR CR Consol Cash 13.0 15.0 20.0   48.0 Accounts receivable, net 76.0 25.0 101.0 Note receivable - solo 0.0 Inventories 90.0 60.0 10.0 150.0 Land 30.0 120.0 Building, net 190.0 110.0 80.0 4.0 376.0 Equipment, net 2.0 252.0 Investment in Solo 394.2 9.0 25.2 360.0 Dividends receivable Goodwill 50.0 Unamortized excess Total 993.2 1,097.0 Accounts payable 180.0 Dividends payable 1.0 Capital stock 700.0 200.0 Retained earnings 173.2 Noncontrolling interest, Jan.1 40.0 Noncontrolling interest, Dec. 31 2.8 42.8 4-37