Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King Consolidation of Wholly Owned Subsidiaries 4 Electronic Presentation by Douglas Cloud Pepperdine University Edited by Taufik Hidayat

Edited by Taufik Hidayat Consolidation Procedures The starting point for preparing consolidated financial statements is the books of the separate consolidating companies. Because the consolidated entity has no books, all amounts in the consolidated financial statements originate on the books of the parent and subsidiary. Edited by Taufik Hidayat

Edited by Taufik Hidayat Consolidation Workpaper Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated Work flow Edited by Taufik Hidayat

Edited by Taufik Hidayat Nature of Eliminating Entries …to reflect the amounts that would appear if all the legally separate companies were actually a single company. Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account balances of the separate companies... Eliminating entries appear only in the consolidating workpapers and do not affect the books of the separate companies. Edited by Taufik Hidayat

Edited by Taufik Hidayat Full Ownership Purchased at Book Value Peerless purchases all of Special Foods’ outstanding common stock for $300,000. Let’s take a look at the balance sheets of Peerless and Special Foods immediately before combination. Edited by Taufik Hidayat

Edited by Taufik Hidayat Balance Sheets Before Combination Peerless Special Foods Assets Cash $ 350,000 $ 50,000 Accounts Receivable 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Buildings and Equipment 800,000 600,000 Accumulated Depreciation (400,000 (300,000 Total Assets $1,100,000 $500,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earnings 300,000 100,000 Total Liabilities & Stockholders’ Equity $1,100,000 $500,000 ) ) Edited by Taufik Hidayat

Edited by Taufik Hidayat Full Ownership Purchased at Book Value Investment cost $300,000 Book value: Common stock-Special Foods $200,000 Retained earnings-Special Foods 100,000 $300,000 Peerless’s share x 1.00 (300,000 Differential $ -0- P S 100% ) January 1, 20X1 entry: Investment in Special Foods Stock 300,000 Cash 300,000 Record purchase of Special Foods stock. Edited by Taufik Hidayat

Edited by Taufik Hidayat Balance Sheets After Combination Peerless Special Foods Assets Cash $ 50,000 $ 50,000 Accounts Receivable 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Buildings and Equipment 800,000 600,000 Accumulated Depreciation (400,000 (300,000 Investment in Special Foods Stock 300,000 Total Assets $1,100,000 $500,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earnings 300,000 100,000 Total Liabilities & Stockholders’ Equity $1,100,000 $500,000 3 ) ) Edited by Taufik Hidayat

Edited by Taufik Hidayat 100% Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 50,000 50,000 100,000 Accounts Rec. 75,000 50,000 125,000 Inventory 100,000 60,000 160,000 Land 175,000 40,000 215,000 Bldg. and Equip. 800,000 600,000 1,400,000 Inv. in Sp. Foods 300,000 Total Debits 1,500,000 800,000 2,000,000 Accum. Depr. 400,000 300,000 700,000 Accounts Payable 100,000 100,000 200,000 Bonds Payable 200,000 100,000 300,000 Common Stock 500,000 200,000 500,000 Retained Earn. 300,000 100,000 300,000 Total Credits 1,500,000 800,000 2,000,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat 100% Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 50,000 50,000 100,000 Accounts Rec. 75,000 50,000 125,000 Inventory 100,000 60,000 160,000 Land 175,000 40,000 215,000 Bldg. and Equip. 800,000 600,000 1,400,000 Inv. in Sp. Foods 300,000 (1) 300,000 Total Debits 1,500,000 800,000 2,000,000 Accum. Depr. 400,000 300,000 700,000 Accounts Payable 100,000 100,000 200,000 Bonds Payable 200,000 100,000 300,000 Common Stock 500,000 200,000 (1)200,000 500,000 Retained Earn. 300,000 100,000 (1)100,000 300,000 Total Credits 1,500,000 800,000 2,000,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat 100% Purchase at Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 50,000 50,000 100,000 Accounts Rec. 75,000 50,000 125,000 Inventory 100,000 60,000 160,000 Land 175,000 40,000 215,000 Bldg. and Equip. 800,000 600,000 1,400,000 Inv. in Sp. Foods 300,000 (1) 300,000 Total Debits 1,500,000 800,000 2,000,000 Accum. Depr. 400,000 300,000 700,000 Accounts Payable 100,000 100,000 200,000 Bonds Payable 200,000 100,000 300,000 Common Stock 500,000 200,000 (1)200,000 500,000 Retained Earn. 300,000 100,000 (1)100,000 300,000 Total Credits 1,500,000 800,000 2,000,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Elimination Entry E(1) Entry E(1) Common Stock--Special Foods 200,000 Retained Earnings 100,000 Investment in Special Foods Stock 300,000 Eliminate investment balance. Edited by Taufik Hidayat

Edited by Taufik Hidayat Purchase At More Than Book Value Reasons the purchase price of a company’s stock might exceed the stock’s book value: Errors or omissions on the books of the subsidiary Excess of fair value over the book value of the subsidiary’s net identifiable assets Existence of goodwill Other reasons Edited by Taufik Hidayat

Edited by Taufik Hidayat Purchase At More Than Book Value Investment cost $340,000 Book value: Common stock-Special Foods $200,000 Retained earnings-Special Foods 100,000 $300,000 Peerless’s share x 1.00 (300,000 Differential $ 40,000 ) P S 100% January 1, 20X1 entry: Investment in Special Foods Stock 340,000 Cash 340,000 Record purchase of Special Foods stock. Edited by Taufik Hidayat

Edited by Taufik Hidayat Purchase At More Than Book Value Investment cost $340,000 Book value: Common stock-Special Foods $200,000 Retained earnings-Special Foods 100,000 $300,000 Peerless’s share x 1.00 (300,000 Differential $ 40,000 ) P S 100% The elimination entry on the workpaper would be: E(1) Common Stock--Special Foods 200,000 Retained Earnings 100,000 Differential 40,000 Investment in Special Foods Stock 340,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 10,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800,000 600,000 Inv. in Sp. Foods 340,000 Differential Total Debits 1,500,000 800,000 Accum. Depr. 400,000 300,000 Accounts Payable 100,000 100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earn. 300,000 100,000 Total Credits 1,500,000 800,000 (1) 340,000 (1) 40,000 (1)200,000 (1)100,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 10,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800,000 600,000 Inv. in Sp. Foods 340,000 Differential Total Debits 1,500,000 800,000 Accum. Depr. 400,000 300,000 Accounts Payable 100,000 100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earn. 300,000 100,000 Total Credits 1,500,000 800,000 (2) 40,000 (1) 340,000 (1) 40,000 (2) 40,000 (1)200,000 (1)100,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Purchase At More Than Book Value Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 10,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800,000 600,000 Inv. in Sp. Foods 340,000 Differential Total Debits 1,500,000 800,000 Accum. Depr. 400,000 300,000 Accounts Payable 100,000 100,000 Bonds Payable 200,000 100,000 Common Stock 500,000 200,000 Retained Earn. 300,000 100,000 Total Credits 1,500,000 800,000 60,000 125,000 160,000 255,000 1,400,000 2,000,000 (2) 40,000 (1) 340,000 (1) 40,000 (2) 40,000 700,000 200,000 300,000 500,000 2,000,000 (1)200,000 (1)100,000 380,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Elimination Entry E(5) Land 40,000 Differential 40,000 Entry E(2) Edited by Taufik Hidayat

Edited by Taufik Hidayat Existence of Goodwill If a company purchases a subsidiary at a price in excess of the total of the fair value of the subsidiary’s net identifiable assets, the additional amount generally is considered to be a payment for the excess earning power of the acquired company, referred to as goodwill. Edited by Taufik Hidayat

Edited by Taufik Hidayat PSAK No. 22 Selisih lebih antara biaya perolehan dan bagian (interest) perusahaan pengakuisisi atas nilai wajar aktiva dan kewajiban yang dapat diidentifikasi pada tanggal transaksi pertukaran diakui sebagai goodwill dan disajikan sebagai aktiva. Goodwill harus diamortisasi sebagai beban selama masa manfaatnya. Dalam mengamortisasi goodwill digunakan metode garis lurus. Periode amortisasi goodwill tidak boleh lebih dari 5 tahun, kecuali periode yang lebih panjang tetapi tidak lebih dari 20 tahun. Edited by Taufik Hidayat

Edited by Taufik Hidayat Existence of Goodwill If the fair values of Special Foods’ assets and liabilities are equal to their book values, and the $40,000 differential is considered a payment for goodwill, the following elimination entry is needed: E(2) Goodwill 40,000 Differential 40,000 Assign differential to goodwill. Edited by Taufik Hidayat

Edited by Taufik Hidayat Illustration of Debit Differential Peerless Products acquires all Special Foods’ capital stock for $400,000 on January 1, 20X1, by issuing $100,000 of 9 percent first mortgage bonds and paying cash of $300,000. Edited by Taufik Hidayat

Edited by Taufik Hidayat Balance Sheets – Special Food Assets Cash $ 50,000 $ 50,000 Accounts Receivable 50,000 50,000 Inventory 60,000 75,000 Land 40,000 100,000 Buildings and Equipment 600,000 Accumulated Depreciation (300,000 290,000 Total Assets $500,000 $565,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 100,000 135,000 Common Stock 200,000 Retained Earnings 100,000 Total Liabilities & Stockholders’ Equity $500,000 Fair Value of Net Asset $330,000 Book Value Fair Value ) Edited by Taufik Hidayat

Edited by Taufik Hidayat Debit Differential Investment cost $400,000 Book value: Common stock--Special Foods $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x 1.00 (300,000 Differential $100,000 P S 100% ) January 1, 20X1 entry: Investment in Special Foods Stock 400,000 Bonds Payable 100,000 Cash 300,000 Record purchase of Special Foods stock. Edited by Taufik Hidayat

Excess of cost over fair value of net identifiable assets Debit Differential Cost of investment $400,000 Total differential $100,000 Excess of cost over fair value of net identifiable assets $70,000 Goodwill Fair value of net identifiable assets $330,000 Excess of fair value over book value of net identifiable assets $30,000 Book value of net identifiable assets $300,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Debit Differential The eliminations entered in the consolidation workpaper in preparing the consolidated balance sheet immediately after the combination are: E(1) Common Stock--Special Foods 200,000 Retained Earnings 100,000 Differential 100,000 Investment in Special Foods Stock 400,000 Eliminate investment balance. E(2) Inventory 15,000 Land 60,000 Goodwill 70,000 Buildings and Equipment 10,000 Premium on Bonds Payable 35,000 Differential 100,000 Assign differential. Edited by Taufik Hidayat

Edited by Taufik Hidayat Illustration of Credit Differential Peerless Products acquires all Special Foods’ capital stock for $260,000 on January 1, 20X1, by paying cash. Edited by Taufik Hidayat

Edited by Taufik Hidayat Balance Sheets – Special Food Assets Cash $ 50,000 $ 50,000 Accounts Receivable 50,000 50,000 Inventory 60,000 60,000 Land 40,000 45,000 Buildings and Equipment 600,000 Accumulated Depreciation (300,000 280,000 Total Assets $500,000 $485,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 100,000 100,000 Common Stock 200,000 Retained Earnings 100,000 Total Liabilities & Stockholders’ Equity $500,000 Fair Value of Net Asset $285,000 Book Value Fair Value ) Edited by Taufik Hidayat

Edited by Taufik Hidayat Credit Differential Investment cost $260,000 Book value: Common stock--Special Foods $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x 1.00 (300,000 Differential $(40,000 P S 100% ) ) January 1, 20X1 entry: Investment in Special Foods Stock 260,000 Cash 260,000 Record purchase of Special Foods stock. Edited by Taufik Hidayat

Book value of net identifiable assets $300,000 Credit Differential Book value of net identifiable assets $300,000 Total differential $(40,000) Excess of book value over fair value of net identifiable assets $15,000 Fair value of net identifiable assets $285,000 Excess of fair value of net identifiable assets over cost $25,000 Negative Goodwill Cost of investment $260,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Credit Differential The eliminations entered in the consolidation workpaper in preparing the consolidated balance sheet immediately after the combination are: E(1) Common Stock--Special Foods 200,000 Retained Earnings 100,000 Investment in Special Foods Stock 260,000 Differential 40,000 Eliminate investment balance. E(2) Land 5,000 Differential 15,000 Buildings and Equipment 20,000 Assign differential to Fair Value. Edited by Taufik Hidayat

Edited by Taufik Hidayat Allocation of Credit Differential Fair Value Allocation Ratio Unallocated Allocated Differential Reduction E(3) Differential 25,000 Land 3,462 Buildings and Equipment 21,538 Assign remaining credit differential. Edited by Taufik Hidayat

Edited by Taufik Hidayat Consolidation Subsequent to Acquisition Push Corporation owns 80 percent of the stock of Shove Company, which was purchased at book value. During 20X1, Shove reports net income of $25,000, while Push reports earnings of $100,000, plus equity-method investment income of $20,000. Edited by Taufik Hidayat

Edited by Taufik Hidayat Computation of Consolidated Net Income Additive Computation Separate operating income of Push $100,000 Net income of Shove $25,000 Push’s proportionate share x .80 20,000 Consolidated net income $120,000 Residual Computation Net income of Push $120,000 Less: Income from subsidiary - 20,000 $100,000 Net income of Shove 25,000 $125,000 Less: Income to noncontrolling interest $25,000 x .20 - 5,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat Consolidated Retained Earnings On January 1, 20X1, Push has a retained earnings balance of $400,000, and Shove has a retained earnings balance of $250,000. During 20X1, Push reports net income of $100,000 and equity-method income from Shove of $20,000; Push declares dividends of $30,000. Shove reports net income of $25,000 and declares dividends of $10,000. Edited by Taufik Hidayat

Edited by Taufik Hidayat Consolidated Retained Earnings Push Shove Balance, January 1, 20X1 $400,000 $250,000 Net income, 20X1 120,000 25,000 Dividends declared in 20X1 - 30,000 - 10,000 Balance, December 31, 20X1 $490,000 $265,000 Consolidated retained earnings equals the parent’s retained earnings when the parent uses the equity method Edited by Taufik Hidayat

Edited by Taufik Hidayat Consolidated Retained Earnings When the parent does not account for its subsidiary investment using the equity method, consolidated retained earnings is determined by adding the parent’s retained earnings from its own operations and the parent’s share of the subsidiary’s net income from the date of acquisition. Edited by Taufik Hidayat

INCOME STATEMENT SECTION RETAINED EARNINGS SECTION Comprehensive Three-Part Workpaper Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Credit Accounts: Revenues Gains Debit Accounts: Contra Revenues Expenses Losses Net Income Beginning Retained Earnings Add: Net Income Deduct: Dividends Ending Retained INCOME STATEMENT SECTION RETAINED EARNINGS SECTION to Balance Sheet section Edited by Taufik Hidayat

Edited by Taufik Hidayat Comprehensive Three-Part Workpaper Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Debit Accounts: Assets Contra Liabilities Credit Accounts: Contra Assets Liabilities Stockholders’ Equity: Capital Stock Paid-in Capital Retained Earnings BALANCE SHEET SECTION From Retained Earnings Statement section Edited by Taufik Hidayat

Edited by Taufik Hidayat 20X1 Consolidation--100 Percent Ownership Peerless Special Products Foods Common Stock, January 1, 20X1 $500,000 $200,000 Retained Earnings, January 1, 20X1 300,000 100,000 20X1: Separate Operating Income, Peerless 140,000 Net Income, Special Foods 50,000 Dividends 60,000 30,000 20X2: Separate Operating Income, Peerless 160,000 Net Income, Special Foods 75,000 Dividends 60,000 40,000 Edited by Taufik Hidayat

Edited by Taufik Hidayat 20X1 Consolidation--100 Percent Ownership Investment cost $300,000 Book value: Common stock--Special Foods $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x 1.00 -300,000 Differential $ -0- P S 100% January 1, 20X1 (1) Investment in Special Foods Stock 300,000 Cash 300,000 Record purchase of Special Foods stock. Edited by Taufik Hidayat

Edited by Taufik Hidayat 20X1 Consolidation--100 Percent Ownership Peerless records its 20X1 income and dividends from Special Foods under the equity method with the following entries: (2) Investment in Special Foods Stock 50,000 Income from Subsidiary 50,000 Record equity-method income. $50,000 x 1.00 (3) Cash 30,000 Investment in Special Foods Stock 30,000 Record dividends from Special Foods. $30,000 x 1.00 Edited by Taufik Hidayat

20X1 Consolidation--100 Percent Ownership Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (1) 50,000 (1) 30,000 (60,000) (1) 20,000 Income from Subsidiary 50,000 Dividends Declared (60,000 (30,000) Investment in Special Foods Stock 320,000 ) Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary. Edited by Taufik Hidayat

20X1 Consolidation--100 Percent Ownership Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (2)100,000 300,000 (2)300,000 (2)200,000 500,000 Income from Subsidiary 50,000 (1) 50,000 Retained Earnings, January 1 300,000 100,000 Dividends Declared (60,000 (30,000 (1) 30,000 (60,000) Investment in Special Foods Stock 320,000 (1) 20,000 Common Stock 500,000 200,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period. Edited by Taufik Hidayat

Edited by Taufik Hidayat 20X2 Consolidation--100 Percent Ownership Peerless records its 20X2 income and dividends from Special Foods under the equity method with the following entries: (1) Investment in Special Foods Stock 75,000 Income from Subsidiary 75,000 Record equity-method income. $75,000 x 1.00 (2) Cash 40,000 Investment in Special Foods Stock 40,000 Record dividends from Special Foods. $40,000 x 1.00 Edited by Taufik Hidayat

20X2 Consolidation--100 Percent Ownership Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 Retained Earnings, January 1 430,000 120,000 Dividends Declared (60,000 (40,000 Investment in Special Foods Stock 355,000 (1) 75,000 (1) 40,000 (60,000) (1) 35,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period. Edited by Taufik Hidayat

Edited by Taufik Hidayat 20X2 Consolidation--100 Percent Ownership Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (2)120,000 430,000 (2) 320,000 (2)200,000 500,000 Income from Subsidiary 75,000 (1) 75,000 Retained Earnings, January 1 430,000 120,000 Dividends Declared (60,000 (40,000 (1) 40,000 (60,000 Investment in Special Foods Stock 355,000 (1) 35,000 Common Stock 500,000 200,000 ) ) ) Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2. Edited by Taufik Hidayat

Edited by Taufik Hidayat Chapter Four The End Edited by Taufik Hidayat