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4 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 4 - 1 ©2003 Prentice Hall Business Publishing,

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Presentation on theme: "4 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 4 - 1 ©2003 Prentice Hall Business Publishing,"— Presentation transcript:

1 4 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 4 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidated Techniques and Procedures Chapter 4

2 4 - 2 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Prepare consolidated working papers for the year of acquisition when the parent company uses the full equity method to account for its investment in a subsidiary.

3 4 - 3 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Equity Method – Year of Acquisition 1.Prep pays $87,000 for 80% interest in Snap on January 1, when Snap stockholders’ equity consists of $60,000 capital stock and $30,000 retained earnings. 2.The $15,000 excess of investment cost is allocated to patents.

4 4 - 4 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Equity Method – Year of Acquisition Snap’s net income and dividends are as follows: 2003 Net income$25,000 Dividends$15,000 2004 Net income$30,000 Dividends$15,000

5 4 - 5 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries Adjusting and eliminating entries on the working papers do not affect the general ledger accounts. aIncome from Snap18,500 Dividends12,000 Investment in Snap 6,500 To eliminate income and dividend from Snap and return the investment account to its beginning balance

6 4 - 6 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries bMinority Interest Expense5,000 Dividends Snap3,000 Minority Interest2,000 To enter minority interest share of subsidiary income and dividends

7 4 - 7 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries cRetained Earnings, Snap30,000 Capital Stock, Snap60,000 Patents15,000 Investment in Snap87,000 Minority Interest18,000 To eliminate reciprocal equity and investment balances, establish beginning minority interest, and enter unamortized patents

8 4 - 8 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Working Paper Entries dExpenses1,500 Patents1,500 To enter current amortization

9 4 - 9 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Revenue Income from Snap Expenses Minority interest Net income Retained earnings P Retained earnings S Add net income Deduct dividends Retained earnings Dec 31 250 18.5 (200) 68.5 5 68.5 (30) 43.5 65 (40) 25 30 25 (15) 40 a 18.5 d 1.5 b 5 c 30 a 12 b 3 315 (241.5) (5) 68.5 5 68.5 (30) 43.5 Working Papers for Year of Acquisition Adjustments and Eliminations Consolidated Income Statement Prep Snap Dr. Cr. Statements

10 4 - 10 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Other current assets Investment in Snap Plant and equipment Accum. depreciation Patents Total assets Liabilities Capital stock Retained earnings Total Minority1/1 interest 12/31 40 90 93.5 300 (50) 473.5 80 350 43.5 473.5 10 50 100 (30) 130 30 60 40 130 c 15 c 60 a 6.5 c 87 d 1.5 c 18 b 2 50 140 400 (80) 13.5 523.5 110 350 43.5 20 523.5 Working Papers for Year of Acquisition Adjustments and Eliminations Consolidated Balance Sheet Prep Snap Dr. Cr. Statements

11 4 - 11 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sequence of Working Paper Entries 1.Adjustments for errors and omissions in the separate parent company and subsidiary statements 2. Adjustments to eliminate intercompany profits and losses 3. Adjustments to eliminate income and dividends from subsidiary and adjust the investment in subsidiary to its beginning-of-the-period balance

12 4 - 12 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sequence of Working Paper Entries 4. Adjustment to record the minority interest in subsidiary’s earnings and dividends 5. Elimination of reciprocal investment in subsidiary and subsidiary equity balances 6. Allocation and amortization of cost/book value differentials 7. Elimination of other reciprocal balances

13 4 - 13 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Prepare consolidated working papers for the year subsequent to acquisition.

14 4 - 14 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Equity Method – Year Subsequent to Acquisition The only intercompany transaction during 2004 was a $10,000, non- interest-bearing loan to Snap. Prep maintains its 80% interest in Snap throughout 2004.

15 4 - 15 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Equity Method – Year Subsequent to Acquisition What is Prep’s income from Snap? What is Prep’s investment in Snap account at December 31, 2004? ($30,000 × 80%) – $1,500* = $22,500 *Patent amortization

16 4 - 16 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Equity Method – Year Subsequent to Acquisition Investment cost January 1, 2003$ 87,000 Income from Snap, 2003 18,500 Dividends from Snap, 2003 – 12,000 Investment in Snap December 31, 2003$ 93,500 Income from Snap, 2004 22,500 Dividends from Snap, 2004 – 12,000 Investment in Snap December 31, 2004$104,000

17 4 - 17 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation – Year Subsequent to Acquisition Income from Snap22,500 Dividends12,000 Investment in Snap10,500 To eliminate income and dividends from Snap and return the investment account to its beginning-of-the-period balance

18 4 - 18 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation– Year Subsequent to Acquisition Retained Earnings, Snap40,000 Capital Stock, Snap60,000 Patents13,500 Investment in Snap93,500 Minority Interest20,000 To eliminate reciprocal equity and investment balances, establish beginning minority interest, and enter unamortized patents

19 4 - 19 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation– Year Subsequent to Acquisition Expenses 1,500 Patents 1,500 To enter current amortization Notes Payable, Prep10,000 Note Receivable, Snap10,000 To eliminate reciprocal receivable and payable balances

20 4 - 20 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 4 Allocate excess of purchase price over book value to include identifiable net assets.

21 4 - 21 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Both FASB Statements No. 141 and 142 require firms to provide at least summary disclosures regarding the allocation of the purchase price of an acquired subsidiary. Excess Allocated to Identifiable Assets

22 4 - 22 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Disclose in the year of acquisition: – a condensed balance sheet (assets and liabilities) – amounts of purchased R&D in process – total amounts assigned to major asset categories Excess Allocated to Identifiable Assets (FASB No. 141) – the cost of the acquired enterprise

23 4 - 23 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Excess Allocated to Identifiable Assets (FASB No. 142) The amount of goodwill is to be shown as a separate balance sheet line item (assuming it is material).

24 4 - 24 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Firms must disclose material noncontrolling interests (minority interest) on the balance sheet. Firms must report noncontrolling interests’ share of subsidiary income (minority interest expense). Additional Disclosures

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