1. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 4: Consolidated Financial Statements after Acquisition
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

2. Accounting for Investments
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3. Accounting Methods for Investments
Cost Method
The investment account is adjusted only when additional shares are purchased or sold
Partial Equity Method
The investment account is adjusted for the investor’s share of investee income and dividends
Complete Equity Method
Additional adjustments are made for unrealized intercompany profit and amortization of purchase differential
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4. Cost Method Investment Related Accounts of Parent Investment in S
Dividend Income
Share of dividends declared of S
Liquidating
dividend
Acquisition
Cost
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5. Partial Equity Method Investment Related Accounts of Parent
Investment in S
Equity in subsidiary income
Acquisition
Cost
Share of
dividends
declared
Equity in
subsidiary
loss
Equity in
subsidiary
income
Equity in
subsidiary
income
Equity in
subsidiary
loss
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6. Complete Equity Method
Investment Related Accounts of Parent
Investment in S
Equity in subsidiary income
Acquisition
Cost
Share of
dividends
declared
Equity in
subsidiary
loss
Equity in
subsidiary
income
Equity in
subsidiary
income
Equity in
subsidiary
loss
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7. Aid in preparing consolidated financials.
Work Paper Format
Aid in preparing consolidated financials.
Segregated into sections for the income statement, regained earnings statement and balance sheet.
See illustration 4-2 on page 128
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8. Difference Between Cost and Book Value Cost or Equity Method
Actual:
Less:
Equals:
Record:
Balance:
Purchase Price
Total Equity
Difference Between Cost & Book Value
Difference as Goodwill
Zero
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9. Cost Method - Eliminating Entries (EE) Year of Acquisition
The Investment Entry
Common Stock - S Company 80,000
Other Contributed Capital - S Company 40,000
1/1 Retained Earnings - S Company 32,000
Difference between cost and book value 13,000
Investment in S Company ,000
Note: eliminate beginning
retained earnings of the
subsidiary
This entry is the same as the
investment entry on the acquisition
date (true for the first year only)
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10. Cost Method - Eliminating Entries (EE) Year of Acquisition
The Differential Entry
Land ,000
Difference between cost and book value ,000
To allocate the differential
between cost and book value
to the appropriate account(s)
This entry is the same as the
differential entry on the
acquisition date
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11. Cost Method - Eliminating Entries (EE) Year of Acquisition
The Dividend Entry
Dividend income - P 8,000
Dividends declared - S 8,000
To eliminate the contra-equity
account of the subsidiary
To avoid double counting
of income
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12. Noncontrolling Interest in Income
Reported income of S + -
Adjustments
Adjusted NI of S x
Noncontrolling %
Noncontrolling interest in income
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13. Controlling Interest in Income
Reported income of P + -
Adjustments
(Adjusted NI of S) x (P %) +
Controlling interest in income
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14. Consolidated Retained Earnings
Reported R/E of P +
Consolidated NI -
Dividends declared of P
Consolidated R/E
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15. Cost Method EE’s After Year of Acquisition
The Reciprocal Entry
Investment in S Company 16,000
1/1 Retained Earnings - P Company ,000
Adjust the investment account
to equal the amount it would
have under equity method
Adjust P’s reported beginning R/E
to equal beginning
consolidated R/E
Other Entries
(similar to the first year EE)
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16. Equity Method EE’s Year of Acquisition
The Income Entry
Equity in subsidiary income 24,000
Investment in S Company ,000
(To eliminate equity in net income included in reported NI of P)
The Dividend Entry
Investment in S Company 8,000
Dividends declared ,000
(To eliminate intercompany dividend)
These two entries return the investment account to its beginning balance,
to be matched against the subsidiary’s beginning R/E in the next EE.
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17. Equity Method EE’s Year of Acquisition
The Investment Entry
Common Stock - S Company 80,000
Other Contributed Capital - S Company 40,000
1/1 Retained Earnings - S Company 32,000
Difference between cost and book value 13,000
Investment in S Company ,000
Note:
eliminate
beginning
R/E of the
subsidiary
The Differential Entry
Land ,000
Difference between cost and book value 13,000
To allocate the differential between cost and BV to the appropriate account(s)
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18. More on Eliminating Entries
Equity Method EE’s After Year of Acquisition
Similar to entries in the year of acquisition
Intercompany revenue and expenses
Interest revenue 8,000
Interest expense 8,000
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19. Included in consolidated NI
Interim Acquisitions
Accounting under the purchase method
Revenues and expenses of the subsidiary are included with those of parent only from the date of acquisition forward
Beginning
of S fiscal yr.
Acquisition
date
End
of S fiscal yr.
Not included
in consolidated NI
Included in consolidated NI
Net income of S
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20. Interim Acquisitions Full Year Reporting
Consolidated Income Statement
Revenues
and expenses
of P
Post-
acquisition
revenues
and expenses
of S
Pre-
acquisition
revenues
and expenses
of S
Post-
acquisition
revenues
and expenses
of S
plus +
minus
Pre-acquisition NI amount of S
Noncontrolling interest in income
minus
Consolidated Net Income
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21. Interim Acquisitions Partial Year Reporting
Consolidated Income Statement
Revenues
and expenses
of P
Post-
acquisition
revenues
and expenses
of S
plus +
Noncontrolling interest in income
minus
Consolidated Net Income
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22. Consolidated Statement of Cash Flows
Purpose
to reflect all cash outlays and inflows of the consolidated entity except those between parent and subsidiary
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23. Consolidated Statement of Cash Flows
Procedure
derived from
consolidated income statement
beginning and ending consolidated balance sheets
similar to unconsolidated firm, except:
noncontrolling interests in combined income
subsidiary dividends
parent acquisition of additional subsidiary shares
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24. Consolidated Statement of Cash Flows
Cash inflow from operating activities
indirect method: add back noncontrolling interest in combined income
Cash outflow from financing activities
includes subsidiary dividends to noncontrolling shareholders
Cash outflow from investing activities
excludes parent’s acquisition of additional subsidiary shares directly from subsidiary
includes parent’s acquisition of additional subsidiary shares in open market
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25. Consolidated Statement of Cash Flows
Effect of method of payment in an acquisition
cash acquisition:
cash spent or received is included in the investing activity section of the cash flow statement
stock acquisition:
issuance of stock or debt is reported in the notes to the financial statements
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26. Advanced Accounting by Debra Jeter and Paul Chaney
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