Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King The Reporting Entity and Consolidated Financial Statements 3 Electronic Presentation by Douglas Cloud Pepperdine University

Consolidated Financial Statements Consolidated financial statements present the financial position and results of operations for a parent and one or more subsidiaries as if the individual entities were actually a single company.

Consolidated Financial Statements Consolidated financial statements are primarily for those having a long-run interest in the parent company, such as the stockholders and long-term creditors of the parent company.

Limitations of Consolidated Financial Statements The poor performance or position of one or more companies may be hidden. Not all the consolidated retained earnings balance is necessarily available for dividends of the parent. Financial ratios based on consolidated statements are not necessarily representative of any single company in the consolidation, including the parent. Similar accounts of different companies that are combined in the consolidation may not be entirely comparable. Additional information about individual companies may require voluminous footnotes.

P indirectly controls Z Indirect Control P X P owns 80 percent of X Z X owns 60 percent of Z P indirectly controls Z

P indirectly controls Z Indirect Control P Y .70 X .90 .30 Z .40 P indirectly controls Z

P indirectly controls Z Indirect Control P Y .80 X .90 W .80 Z .15 .30 P indirectly controls Z

Changing Concept of the Reporting Entity In determining control, the FASB has moved beyond the traditional view of legal control to one of effective control.

Questions Preparer Should Ask Are there items included in the statements that would not appear, or that would be stated at a different amount, in the statements of a single company?

Questions Preparer Should Ask Are there any items that do not appear in these statements that would appear if the consolidated entity were actually a single company?

Balance Sheets --December 31, 20X1 Popper Sun Assets Cash $ 5,000 $ 3,000 Receivable (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375,000 250,000 Other Assets 25,000 15,000 Investment in Sun Stock 300,000 Total Assets $884,000 $358,000 Liabilities and Equities Short-Term Payables $ 60,000 $ 8,000 Long-Term Payables 200,000 50,000 Common Stock 500,000 200,000 Retained Earnings 124,000 100,000 Total Liabilities and Equities $884,000 $358,000 On January 1, 20X1, Popper Company purchased at book value all the common stock of Sun Corporation.

The Consolidation Process Illustrated Additional data: 1. Popper uses the basic equity method to account for its investments in Sun. The investment account is carried at the book value of Sun’s net assets and is adjusted for Popper’s share of Sun’s earnings and dividends. 2. Sun owes Popper $1,000 on account at the end of the year. 3. Sun purchases $6,000 of inventory from Popper during 20X1. The inventory originally cost Popper $4,000. Sun still holds all the inventory at the end of the year.

The Consolidated Entity Parent Subsidiary

The Consolidated Entity Popper’s common stock Popper Company Sun’s common stock Sun Corporation

Consolidated Balance Sheet Popper Company Consolidated Balance Sheet December 31, 20X1 Assets Liabilities and Equities Cash $ 8,000 Short-Term Payables $ 67,000 Receivables (net) 113,000 Long-Term Payables 250,000 Inventory 153,000 Fixed Assets (net) 625,000 Common Stock 500,000 Other Assets 40,000 Retained Earnings 122,000 Total Assets $939,000 Total Liabil. and Equities $939,000 $5,000 + $3,000 $84,000 + $30,000 - $1,000 $95,000 + $60,000 - $2,000 $375,000 + $250,000 $25,000 + $15,000

Consolidated Balance Sheet Popper Company Consolidated Balance Sheet December 31, 20X1 Assets Liabilities and Equities Cash $ 8,000 Short-Term Payables $ 67,000 Receivables (net) 113,000 Long-Term Payables 250,000 Inventory 153,000 Fixed Assets (net) 625,000 Common Stock 500,000 Other Assets 40,000 Retained Earnings 122,000 Total Assets $939,000 Total Liabil. and Equities $939,000 $60,000 + $8,000 - $1,000 $200,000 + $50,000 $500,000 + $200,000 - $200,000 $124,000 + $100,000 - $100,000 - $2,000

Intercompany receivable/payable $1,000 Intercompany Receivable and Payable Popper Company Intercompany receivable/payable $1,000 Sun Corporation

Profits on Intercompany Sales Cost of goods $4,000 Popper Company Sales $6,000 Sun Corporation

Noncontrolling Interest Those shareholders of the subsidiary other than the parent are referred to as “noncontrolling” or “minority” shareholders. Their interests must be included in the consolidated statements. Most commonly this interest is shown with liabilities or between liabilities and stockholders’ equity in the balance sheet.

Consolidated Balance Sheet Workpaper Popper Sun Consoli- Item Company Corp. Debit Credit dated Cash 5,000 3,000 Receivables (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375,000 250,000 Other Assets 25,000 15,000 Investment in Sun 300,000 884,000 358,000 Short-Term Pay. 60,000 8,000 Long-Term Pay. 200,000 50,000 Common Stock 500,000 200,000 Retained Earnings 124,000 100,000 (a) 1,000 (a) 1,000

Consolidated Balance Sheet Workpaper Popper Sun Consoli- Item Company Corp. Debit Credit dated Cash 5,000 3,000 Receivables (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375,000 250,000 Other Assets 25,000 15,000 Investment in Sun 300,000 884,000 358,000 Short-Term Pay. 60,000 8,000 Long-Term Pay. 200,000 50,000 Common Stock 500,000 200,000 Retained Earnings 124,000 100,000 (a) 1,000 (b) 2,000 (a) 1,000 (b) 2,000

Consolidated Balance Sheet Workpaper Popper Sun Consoli- Item Company Corp. Debit Credit dated 8,000 113,000 153,000 625,000 40,000 939,000 Cash 5,000 3,000 Receivables (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375,000 250,000 Other Assets 25,000 15,000 Investment in Sun 300,000 884,000 358,000 Short-Term Pay. 60,000 8,000 Long-Term Pay. 200,000 50,000 Common Stock 500,000 200,000 Retained Earnings 124,000 100,000 (a) 1,000 (b) 2,000 (c)300,000 (a) 1,000 (c)200,000 (b) 2,000 (c)100,000 67,000 250,000 500,000 122,000 939,000

Additional Considerations--Different Approaches to Consolidation 3-23 Additional Considerations--Different Approaches to Consolidation

Recognition of Subsidiary Net Assets Proprietary Theory Noncon-trolling share Parent’s share Goodwill Fair value increment Book value Portion included in consolidated financial statements Recognition of Subsidiary Net Assets

Recognition of Subsidiary Net Income Proprietary Theory Noncon-trolling share Parent’s share Revenue Expenses Net income Portion included in consolidated financial statements Recognition of Subsidiary Net Income

Recognition of Subsidiary Net Assets Parent Company Theory Noncon-trolling share Parent’s share Goodwill Fair value Increment Book value Portion included in consolidated financial statements Recognition of Subsidiary Net Assets

Recognition of Subsidiary Net Income Parent Company Theory Noncon-trolling share Parent’s share Revenue Expenses Net income Portion included in consolidated financial statements Recognition of Subsidiary Net Income

Recognition of Subsidiary Net Assets Entity Theory Noncon-trolling share Parent’s share Goodwill Fair value increment Book value Portion included in consolidated financial statements Recognition of Subsidiary Net Assets

Recognition of Subsidiary Net Income Entity Theory Noncon-trolling share Parent’s share Revenue Expenses Net income Portion included in consolidated financial statements Recognition of Subsidiary Net Income

KUIS PT. Kenanga membeli 30% kepemilikan PT. Anggrek pada 1 April 2003 dengan menerbitkan saham sebanyak 100.000 dengan nilai par 100 dan harga pasar 320. Saat pembelian ekuitas PT. Anggrek terdiri dari common stock 500.000.000, additional paid in capital 100.000.000 dan retained earning 300.000.000. Berikut asset yang memiliki perbedaan nilai buku dan nilai wajar nilai buku nilai wajar Tanah 100.000.000 200.000.000 Bangunan (10) 200.000.000 240.000.000 Peralatan (4) 130.000.000 100.000.000 Hutang jk panjang (5) 100.000.000 120.000.000 Selama tahun 2003 laba PT. Anggrek 120.000.000, deviden 10 juta (Februari) dan 40 juta (September). Buat jurnal selama tahun 2003 dan hitung nilai investasi 31/12/03

Chapter Three The End