CHAPTER Consolidated Statements: Date of Acquisition Fundamentals of Advanced Accounting 1st Edition Fischer, Taylor, and Cheng 2 2

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #2 Consolidation procedures on the day the controlling interest is acquired. Levels of investment Investment Income % Owned Recorded Recorded < 20%At costDividends Declared 20 – 50%At costShare of Income/ (Loss) > 50%At costShare of Income/(Loss) Consolidation Process Consolidated Statements – Date of Acquisition

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #3 Merge two legal entities into one economic entity Combine financial statements of parent and subsidiary Presented as if they were one, single company The Consolidation Concept

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #4 Control Through Stock Acquisition A parent purchases the stock of another company – the subsidiary. The subsidiary (sub) remains a separate legal entity. A 100% purchase of a sub’s stock –Different entry from purchase of net assets –Same combined balance sheet as if net assets were purchased

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #5 Illustration 2-1: Asset Acquisition $500,000 Purchase Price

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #6 Illustration 2-1: Asset Acquisition Entry on P’s Books Accounts receivable200,000 Inventory100,000 Equipment300,000 Current liabilities100,000 Cash500,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #7 Illustration 2-1: Asset Acquisition Balance Sheet After Acquisition

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #8 Stock Acquisition Acquiring company purchases stock of target company from shareholders. Entry recorded on parent’s books: Investment in Sub S500,000 Cash500,000 Investment account represents controlling interest in sub.

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #9 Consolidation Concept - Duplication Parent company has an investment account recorded at $500,000. Sub has accounts: –Common Stock $200,000 –Retained Earnings $300,000 When combining the balance sheets, these accounts actually represent one another.

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #10 Elimination of Investment Account - EL Accounts are eliminated in consolidation. ELCommon Stock200,000 Retained Earnings300,000 Investment in Sub S500,000 “EL” is a “key” for this entry. Investment account is eliminated (a company cannot own itself). Sub’s equity accounts are eliminated - parent is owner.

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #11 Consolidation Worksheet: 2-1 Review Worksheet 2-1 Column 1 – Parent company’s Balance Sheet Column 2 – Sub’s Balance Sheet Columns 3 & 4 – Consolidation (elimination) entries Column 5 – Consolidated Balance Sheet

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #12 Consolidation Worksheet: 2-1 (Continued) Parent’s investment account is reduced to zero. Sub’s equity accounts are reduced to zero. Consolidated balance sheet reported as if net assets were purchased.

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #13 Purchase Price Exceeds Book Value Common for purchase price to be more than equity (book value) of sub. Common for fair value to be higher than book value of sub. Change prior example: –Purchase price $700,000 Entry recorded on parent’s books: Investment in Sub S700,000 Cash700,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #14 Asset Acquisition $700,000 Purchase Price

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #15 Consolidation entries EL eliminates the parent’s investment account and the sub’s equity accounts. D reclassifies amount of purchase price to assets: –Increase sub’s assets to fair value –Record any goodwill (amount paid in excess of fair value) See Worksheet 2-2

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #16 Consolidation Entries EL Common Stock200,000 Retained Earnings300,000 Investment in Sub S500,000 D1 Inventory20,000 D2 Equipment100,000 D3 Goodwill80,000 D Investment in Sub S200,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #17 Consolidation Entries D1 – increases sub’s inventory to fair value of $120,000. D2 – increases sub’s equipment to fair value of $400,000. D3 – records goodwill –$700,000 price less $620,000 fair value = $80,000 Goodwill

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #18 Example – 100% of Shares Complex Purchase Acquisitions Inc. issues 7,000 shares of common stock –Par Value, $1 –Market Value, $50 $10,000 direct acquisition costs –Attorney & accountant fees $5,000 brokerage fees

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #19 100% Complex purchase – continued Acquisitions Inc. Journal Entries: Investment in Johnson Co.360,000* Common Stock (7,000 x $1) 7,000 Paid-in Capital in Excess of Par343,000** Cash10,000 Paid-in Capital in Excess of Par5,000^ Cash5,000 *7,000 shares x $50 plus $10,000 direct costs ** 7,000 shares x $50 less $7,000 ^Brokerage costs reduce parent’s Paid-in Capital

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #20 AssetsBook ValueFair Value Accounts receivable 28,000 28,000* Inventory40,00045,000* Land10,00050,000 Buildings (net)40,00080,000 Equipment (net)20,00050,000 Patent15,00030,000 Copyright - 40,000 Total Assets153,000323,000 Liabilities & Equity Current liabilities 5,0005,000* Bonds payable20,00021,000* Total liabilities25,00026,000 Net assets 128, ,000 * Priority accounts net to $47, % Complex purchase – continued Johnson, Inc. Net Asset Values

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #21 100% Complex purchase – continued Zone Analysis

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #22 Using purchase rules: Goodwill above what price? $297,000 at $360,000 Goodwill = $63,000 Bargain below what price? $297,000 Cost less $47,000 (priority) is assigned to non- priority accounts Extraordinary gain below what price? $47,000 $47,000 less the price is the extraordinary gain Zone Analysis

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #23 Determination & Distribution Schedule Compares price for acquisition vs. equity of sub Difference of price vs. equity represents –Book value vs. fair value of net assets –Fair value of net assets vs. price of acquisition

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #24 Price360,000 Equity (100%  $128,000) 128,000 Excess cost232,000 Adjustments: Inventory (increase to $45,000) 5,000 Bonds payable (increase liability) (1,000) Land (increase to $50,000) 40,000 Building (increase to $80,000)40,000 Equipment (increase to $50,000)30,000 Patent (increase to $30,000)15,000 Copyright (record) 40,000169,000 Goodwill (record) 63,000 D&D for $360,000 – Goodwill

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #25 Consolidation Entries – 100% Ownership with Goodwill ELCommon Stock1,000 Paid-in Capital in Excess Par59,000 Retained Earnings68,000 Investment in Sub S128,000 D1Inventory5,000 D2Premium on Bonds Payable1,000 D3Land40,000 D4Buildings (net)40,000 D5Equipment (net)30,000 D6Patent (net)15,000 D7Copyright40,000 D8Goodwill63,000 DInvestment in Johnson Company232,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #26 Price210,000 Equity (100%  $128,000)128,000 Excess cost82,000 Adjustments: Inventory (increase to $45,000) 5,000 Bonds payable (increase liability) (1,000) Land (allocation on next slide) 22,600 Building (allocation on next slide)12,160 Equipment (allocation on next slide)12,600 Patent (allocation on next slide)4,560 Copyright (allocation on next slide) 26,080 82,000 0 D&D for $210,000 – Bargain Purchase

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #27 Allocation – Bargain purchase

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #28 Consolidation Entries – Bargain Purchase ELCommon Stock1,000 Paid-in Capital in Excess Par59,000 Retained Earnings68,000 Investment in Sub S128,000 D1Inventory5,000 D2Premium on Bonds Payable1,000 D3Land22,600 D4Buildings (net)12,160 D5Equipment (net)12,600 D6Patent (net)4,560 D7Copyright26,080 DInvestment in Johnson Company82,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #29 Price35,000 Equity (100%  $128,000)128,000 Excess cost(93,000) Adjustments: Inventory (increase to $45,000) 5,000 Bonds payable (increase liability) (1,000) Land (eliminate book value)(250,000) Building (eliminate book value)(250,000) Equipment (eliminate book value)(250,000) Patent (eliminate book value)(250,000) Copyright (eliminate book value)(250,000) 255,000) Extraordinary gain(12,000) D&D for $35,000 – Extraordinary Gain

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #30 Consolidation Entries – Extraordinary Gain ELCommon Stock1,000 Paid-in Capital in Excess Par59,000 Retained Earnings68,000 Investment in Sub S128,000 D1Inventory5,000 D2Premium on Bonds Payable1,000 D3Land10,000 D4Buildings (net)40,000 D5Equipment (net)20,000 D6Patent (net)15,000 D7Extraordinary gain12,000 DInvestment in Johnson Company93,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #31 Less than 100% Ownership Investment account is eliminated only against it’s % ownership of equity accounts –Creates a Non-Controlling Interest (NCI) that represents minority ownership of net assets All income statement accounts are combined –Creates a Non-Controlling Interest (NCI) that represents minority ownership of net income/(loss) Adjust sub’s assets/liabilities to parent’s % of fair value

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #32 Zone Analysis: 80% Purchase

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #33 Use the same subsidiary information for 80% purchase All adjustments are for 80% of fair-book difference Goodwill above what price? $237,600 $297,000  80% = $237,600 We will use $290,000, so goodwill = $52,400 Bargain below what price? $237,600 $297,000  80% = $237,600 If price was $210,000, $189,000 ($210,000 – [$47,000  80%]) is available for P’s 80% share of nonpriority accounts Extraordinary gain below what price? $37,600 80%  $47,000 = $37,600 Zones for an 80% Purchase

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #34 Price290,000 Equity (80%  $128,000)102,400 Excess cost187,600 Adjustments: Inventory (80%  5,000) 4,000 Prem. Bonds payable (80%  1,000) (800) Land (80%  40,000) 32,000 Building (80%  40,000) 32,000 Equipment (80%  30,000) 24,000 Patent (80%  15,000) 12,000 Copyright (80%  40,000) 32, ,200 Goodwill 52,400 D&D for 80% Interest at $290,000 – with Goodwill

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #35 Consolidation Entries – 80% with Goodwill ELCommon Stock800 Paid-in Capital in Excess Par47,200 Retained Earnings54,400 Investment in Sub S102,400 (Eliminated at 80% of parent’s ownership) D1Inventory4,000 D2Premium on Bonds Payable800 D3Land32,000 D4Buildings (net)32,000 D5Equipment (net)24,000 D6Patent (net)12,000 D7Copyright32,000 D8Goodwill52,400 DInvestment in Johnson Company187,600

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #36 Price210,000 Equity (80%  $128,000)102,400 Excess cost107,600 Adjustments: Inventory (80%  5,000) 4,000 Bonds payable (80%  1,000) (800) Land (allocation next slide) 26,480 Building (allocation next slide) 23,168 Equipment (allocation next slide)18,480 Patent (allocation next slide)8,688 Copyright (allocation next slide) 27, ,600 0 D&D for 80% Interest at $210,000 Price – Bargain Purchase

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #37 Allocation for Bargain Purchase 80% Ownership – Price $210,000

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #38 Consolidation Entries 80% Ownership – Bargain Purchase ELCommon Stock800 Paid-in Capital in Excess Par47,200 Retained Earnings54,400 Investment in Sub S102,400 D1Inventory4,000 D2Premium on Bonds Payable800 D3Land26,480 D4Buildings (net)23,168 D5Equipment (net)18,480 D6Patent (net)8,688 D7Copyright27,584 DInvestment in Johnson Company107,600

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #39 Price30,000 Equity (80%  $128,000)102,400 Excess cost(72,400) Adjustments: Inventory (80%  5,000) 4,000 Prem. Bonds payable (80%  1,000) (800) Land (80%  10,000) (8,000) Building (80%  40,000)(32,000) Equipment (80%  20,000)(16,000) Patent (80%  15,000) (12,000) 64,800 Extraordinary gain(7,600) D&D for 80% Ownership – Price $30,000 Extraordinary Gain

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #40 Consolidation Entries 80% Ownership – Extraordinary Gain ELCommon Stock800 Paid-in Capital in Excess Par47,200 Retained Earnings54,400 Investment in Sub S102,400 D1Inventory4,000 D2Premium on Bonds Payable800 D3Land8,000 D4Buildings (net)32,000 D5Equipment (net)16,000 D6Patent (net)12,000 D7Extraordinary gain7,600 DInvestment in Johnson Company72,400

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #41 Purchase: Subsidiary Goodwill No assets, including intangible assets, can be discounted until parent share of goodwill is eliminated Ignore existing goodwill in “zone and price analysis” –No priority D&D schedule adjusts goodwill –Does not create it

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #42 Price290,000 Equity (80%  168,000*)134,400 Excess cost155,600 Adjustments: Inventory (80%  5,000) 4,000 Prem. Bonds payable (80%  1,000) (800) Land (80%  40,000) 32,000 Building (80%  40,000) 32,000 Equipment (80%  30,000)24,000 Patent (80%  15,000) 12,000 Copyright (80%  40,000) 32, ,200 Increase existing goodwill20,400 *Previously $128,000. This amount includes $40,000 existing Goodwill D&D for 80% Interest at $290,000 – Sub has existing Goodwill

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #43 Consolidation Entries – 80% with Existing Goodwill ELCommon Stock800 Paid-in Capital in Excess Par47,200 Retained Earnings ($108,000 x 80%)86,400 Investment in Sub S134,400 (Eliminated at 80% of parent’s ownership) D1Inventory4,000 D2Premium on Bonds Payable800 D3Land32,000 D4Buildings (net)32,000 D5Equipment (net)24,000 D6Patent (net)12,000 D7Copyright32,000 D8Goodwill20,400 DInvestment in Johnson Company155,600

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 2, Slide #44 Push-Down Accounting Push-Down Accounting – Sub’s accounts are adjusted to fair value Advocates contend this is consistent with treatment at consolidation SEC requires push-down accounting for certain subs who issue separate financial statements. Consolidation is unaffected.