Chapter 3 Consolidated Statements Subsequent to Acquisition

C32 Consolidated statements subsequent to acquisition Alternative methods to maintain the investment uEstablishing date alignment Worksheet procedures; Purchase Method uAmortization of D&D adjustments uUsing the Income Distribution Schedule uReporting income for the consolidated company uProcedures for purchases made during the period

C33 Maintaining the investment account

C34 D&D schedule for example Price paid:$ 800,000 Interest acquired: Common stock$ 200,000 Retained earnings 400,000 Total Equity 600,000 Ownership interest80%480,000 Excess cost320,000 Life Ann Amort Inventory (80%  50,000)40,000140,000 Building (80%  100,000)80,000204,000 Goodwill200,000n/a

C35 Subsidiary income and dividends Year 1100,00010,000 Year 2150,00020,000 IncomeDividends Parent reports only 80% of above amounts Regardless of method used, amortizations from D&D must be made on consolidated worksheet

C36 Parent recording of subsidiary income (year 1)

C37 Parent recording of subsidiary income (year 2)

C38 Worksheet procedures uThe RE of the Sub and the Investment account must be at the same point in time uIf they are, the excess upon elimination will agree with the D&D on purchase date –Under Sophisticated equity, it is only the amortized balance of the excess uThe account adjustments made require amortization for current and prior periods –No entries are made on either firm’s books for worksheet eliminations

C39 Specifics of date alignment

C310 Worksheet elimination procedures CV - Convert to equity (only applies to cost method) CY1 - Eliminate Sub income (equity method) CY2 - Eliminate intercompany dividends (cost & equity method) EL - Eliminate parent % of sub’s equity

C311 Worksheet elimination procedures (continued) D - Distribute excess per D&D schedule 1 Inventory (cost of goods sold year1, RE thereafter) 2 Building 3 Goodwill A - Amortize excess 2 Building

C312 Simple Equity: Year 1

C313 Simple Equity: Year 2

C314 Cost Method: Year 1

C315 Cost Method: Year 2

C316 Review of worksheet procedures Using WS 6 as an example: uElimination of equity income & intercompany dividends returns investment to Jan 1 for date alignment uExcess is distributed per D&D; amortized for current and prior years uIDS (income distribution schedule.) is used to allocate income to P & S –All excess amortizations go to P, only P’s share is recorded initially

C317 Income distribution schedules Subsidiary Int generated net income Adjusted net income NCI % NCI Parent Excess amortizationsInt generated net income + Parent % Sub income Controlling interest

C318 Disclosure concerns uConsolidated Net Income - The net income of the consolidated entity uNCI share of income - This is the NCI share of consolidated net income, it has often (incorrectly) been treated as an expense. uControlling 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). uTotal 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

C319 During the year purchases Close Books (WS 7) uD&D includes Sub RE on purchase date uWS includes Sub operations for only later part of year Books Open (WS 8) uD&D has Beginning of year RE and “purchased income” uWS includes Sub operations for entire year uPurchased income is used to remove income prior to purchase

C320 Tax issues - tax free exchange uOccurs when seller is not taxed; buyer gets book value for future depreciation uAdjustment from market to book accompanied by DTL = tax %  market adjustment uDTL is amortized over same period as asset adjustment, increases tax liability in future years uTax loss carryover is asset recorded in purchase, there are limits on its use in year of purchase and later years

C321 Consolidation procedures for a pooling uRecall that investment was recorded at amount equal to book value. If this was not the case, correct the investment account. uCost or equity method may be used (sophisticated equity has no application - no excess) uThere should not be any excess to distribute or amortize - it was just like a purchase at a price equal to underlying subsidiary book value!