ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED FINANCIAL STATEMENT

ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED FINANCIAL STATEMENT
Training Material ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED FINANCIAL STATEMENT Anne Rosalia S.E M.Ak CPA

Intercorporate Acquisitions and Investments in Other Entities
Section 1 Intercorporate Acquisitions and Investments in Other Entities Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter. We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since instructors often have different styles and preferences, we have attempted to include slides that will accommodate different approaches and that can be adapted to classes with different levels of preparation. For example, some instructors prefer to introduce the material before students have read the chapter. We have tried to facilitate these types of introductory discussions by including slides that replicate key points from the chapter. Other instructors expect students to have read the chapter and attempted homework problems before coming to class. As a result, they may not find it useful to review all of the topics in the chapter or to include slides that simply review many of the details they expect students to study before class. However, instructors following this approach often like to use sample exercises and problems built into the slides that allow them to have extended discussions or to facilitate group interaction in class. If instructors elect to spend two class periods on the same subject, they might find a combination of both styles to be useful by first introducing foundational material before students have read the chapter and studied the topic, followed by an extended discussion the next class period after students have read the chapter and attempted homework problems. We have tried to develop slides that can facilitate a flexible approach to allow instructors to select the slides that best match their objectives and style for class discussions. This is the reason we are including a large number of slides for some chapters in the text. We do not expect all instructors to use all slides, but the slide files should help support different teaching approaches and allow instructors to select the subset of slides that best matches their specific discussion objectives. The slides are organized by learning objective. We have included a slide at the beginning of each learning objective to show where the new material begins. Instructors may or may not want to use these learning objective slides in class. We provide them primarily as a way of organizing the material. We also include short multiple choice questions at the end of most learning objectives. Some instructors find it useful to pause periodically during class to assess students’ level of understanding. For this reason, we include several “practice quiz questions” that can be used throughout class discussions to engage students, help them focus on key points, or to facilitate group interaction. Finally, we provide longer exercises and problems that many instructors find useful in assessing understanding and encouraging group learning.

Organizational Structure and Business Objectives
A subsidiary is a corporation that is controlled by another corporation, referred to as a parent company. Control is usually through majority ownership of its common stock. Because a subsidiary is a separate legal entity, the parent’s risk associated with the subsidiary’s activities is limited. P S 3

Business Expansion: The Big Picture
Two Types of Expansion Internal Expansion Investment account (Parent) = BV of net assets (Sub) External Expansion Acquisition price usually is not the same as BV, carrying value, or even FMV of net assets P S Stock $ External Expansion P S Stock Sub Shareholders $ Internal Expansion

Business Expansion through Combinations
Traditional view Control is gained by acquiring a majority of the company’s common stock. However, it is possible to gain control with less than majority ownership or with no ownership at all: Informal arrangements Formal agreements Consummation of a written agreement requires recognition on the books of one or more of the companies that are a party to the combination. 5

Forms of Organizational Structure
Expansion through business combinations Entry into new product areas or geographic regions by acquiring or combining with other companies. A business combination occurs when “. . . an acquirer obtains control of one or more businesses.” The concept of control relates to the ability to direct policies and management. 6

Organizational Structure and Reporting
Merger A business combination in which the acquired company’s assets and liabilities are combined with those of the acquiring company results in no additional organizational components. Financial reporting is based on the original organizational structure. 7

Controlling ownership A business combination in which the acquired company remains as a separate legal entity with a majority of its common stock owned by the purchasing company leads to a parent–subsidiary relationship. Accounting standards normally require consolidated financial statements. 8

Noncontrolling ownership The purchase of a less-than-majority interest in another corporation does not usually result in a business combination or controlling situation. Other beneficial interest One company may have a beneficial interest in another entity even without a direct ownership interest. The beneficial interest may be defined by the agreement establishing the entity or by an operating or financing agreement. 9

Forms of Business Combinations
A statutory merger The acquired company’s assets and liabilities are transferred to the acquiring company, and the acquired company is dissolved, or liquidated The operations of the previously separate companies are carried on in a single legal entity A statutory consolidation Both combining companies are dissolved and the assets and liabilities of both companies are transferred to a newly created corporation 10

Types of Business Combination
(a) Statutory Merger AA Company BB Company AA Company Only one of the combining companies survives and the other loses its separate identify. 11

(b) Statutory Consolidation
Types of Business Combination (b) Statutory Consolidation AA Company BB Company CC Company Both the combining companies are dissolved and the assets and liabilities of both companies are transferred to a newly created corporation. 12

Forms of Business Combinations
A stock acquisition One company acquires the voting shares of another company and the two companies continue to operate as separate, but related, legal entities. The acquiring company accounts for its ownership interest in the other company as an investment. Parent–subsidiary relationship For general-purpose financial reporting, a parent company and its subsidiaries present consolidated financial statements that appear largely as if the companies had actually merged into one. 13

Types of Business Combination
(c) Stock Acquisition AA Company AA Company BB Company BB Company One company acquires the voting shares of another company and the two companies continue to operate separately. 14

AA Company Invests in BB Company
Determining the Type of Business Combination AA Company Invests in BB Company Acquires Net Assets Acquires Stock Record as Statutory Merger or Statutory Consolidation Acquired Company Liquidated? Yes Record as Stock Acquisition and Operate as Subsidiary. No 15

Accounting for Business Combinations
The accounting standards – relevant to the preparation & presentation of consolidated financial statements: * IFRS 3 Business Combination * IAS 27 Consolidated and Separate Financial Statements * PSAK no 22 Accounting for Business Combination 16

Business Combination in this topic is
The result from one entity purchasing the equity of another entity. The acquirer is a “parent” & the acquiree is a “subsidiary” This is the result from the parent acquiring a controlling interest in the equity (not net assets) of the subsidiary. 17

Acquisition Method The full acquisition date Fair Value of individual assets acquired, both tangible an intangible, and liabilities assumed in a business combination are recognized. Several points related to assets and liabilities acquire the acquired in a business combination are as follows: 1. No separate asset valuation accounts related to assets acquired are recognized. 2. Long lived assets classified at the acquisition date as held for sale are value at fair value less cost to sell. 3. Deferred income taxes related to the business combination and assets and liabilities related to an acquiree’s employee benefit plans are valued in accordance with specific PSAK. 18

Any excess of (1) the sum of the fair value of the consideration given by the acquirer in a business combination and the acquisition date fair value of any non-controlling interest over (2) the acquisition date fair value of the net identifiable assets acquired in a business combination is considered: Goodwill The amount of goodwill is arising in business combination is unaffected by the percentage of the acquiree acquired. 19

All costs of bringing about and consummating a business combination in are charged to expense as incurred. The costs of issuing equity securities used to acquiree are treated in the same manner as stock issues costs are normally treated, as reduction in share-premium ordinary associated with the securities 20

Point Corporation Illustration
On January 1, 20X1, Point Corporation purchases all the assets and liabilities of Sharp Company in a statutory merger by issuing to Sharp 10,000 shares of $10 par value common stock. The shares issued have a total market value of $610,000. Point incurs legal and appraisal fees of $40,000, in connection with the combination and stock issue costs of $25,000. Fair value of stock issued $610,000 Stock issue costs -25,000 Recorded amount of stock $585,000 21

Sharp Corporation Illustration
Assets, Liabilities, and Equities Book Value Fair Value Cash and Receivables $ 45,000 $ 45,000 Inventory 65, ,000 Land 40, ,000 Buildings and Equipment 400, ,000 Accumulated Depreciation (150,000 Patent ,000 Total Assets $400,000 $620,000 Current Liabilities $100,000 $110,000 Share Capital Ordinary ($5 par) 100,000 Share Premium Ordinary 50,000 Retained Earnings 150,000 Total Liabilities and Equities $400,000 Fair value of Net Assets $510,000 ) 22

Fair Value consideration given/ Cost of Investment $610,000 Total differential $310,000 Excess of cost over fair value of net identifiable assets $100,000 Fair value of net identifiable assets $510,000 Excess of fair value over book value of net identifiable assets $210,000 Book value of net identifiable assets $300,000 23

The $40,000 of other acquisition costs associated with the combination and the $25,000 of stock issue costs may be recorded as incurred: Merger Expense 40,000 Cash 40,000 Record costs related to purchase of Sharp Company. Deferred Stock Issue Costs 25,000 Cash 25,000 Record costs related to issuance of common stock. 24

fair value Cash and Receivables 45,000 Inventory 75,000 Land 70,000 Buildings and Equipment 350,000 Patent 80,000 Current Liabilities ,000 Share Capital Ordinary 100,000 Share Premium Ordinary 485,000* Deferred Stock Issue Costs 25,000 Record purchase of Sharp Company. * 610,000 – 25,000 = 585,000 – 100,000 (10,000 x 10) = 485,000 fair value fair value fair value fair value Goodwill ,000 fair value book value fair value 25

Entries Recorded by Acquired Company
The fair value of Point Corporation shares is recognized by Sharp at the time of the exchange, and a gain of $310,000 is recorded. Investment in Point Stock 610,000 Current Liabilities 100,000 Accumulated Depreciation 150,000 Cash and Receivables 45,000 Inventory 65,000 Land 40,000 Building and Equipment 400,000 Gain on Sale of Net Assets 310,000 Record transfer of assets to Point Corporation. 26

The distribution of Point Corporation stock is recorded.
Entries Recorded by Acquired Company The distribution of Point Corporation stock is recorded. Share Capital Ordinary 100,000 Share Premium Ordinary 50,000 Retained Earnings 150,000 Gain on Sale of Net Assets 310,000 Investment in Point Stock 610,000 Record distribution of Point Corporation stock. 27

Acquisition Method - Goodwill
Conceptually, goodwill related to business combination consists of all those tangible factors that allow a business to earn above average profits Based on PSAK 19 “ Intangible Assets” (PSAK 19), goodwill is an assets representing the future economic benefit arising from other assets aquired in a business combination that are not individually identified and separately recognized 28

Recording Goodwill However, when goodwill is purchased in connection with a business combination, the amount is viewed as objectively determinable and is capitalized. 29

Recording Goodwill In a purchase-type business combination, the cost of goodwill purchased is measured as the excess of the total purchase price over the fair value of the net identifiable assets acquired. 30

Goodwill vs. Bargain Purchase Element
FMV Given > FMV of Net Assets  FMV Given < FMV of Net Assets  FMV Given = FMV of Net Assets  Bargain Purchase Element Neither GW nor BPE

Goodwill Is recorded by the acquirer for the difference between fair value of the consideration exchanged and the fair value of the identifiable net assets acquired. 32

Goodwill Example (1) Assume that Albert Co. acquires all of the assets of Zanfor Co. for $400,000 when the fair value of Zanfor’s net identifiable assets is $380,000. Goodwill is recognized for $20,000 difference between the total consideration given and the fair value of the net identifiable assets acquired. 33

Goodwill Example (2) If, instead of an acquisition of assets, Albert Co acquires 75 percent of the share-capital ordinary of Zanfor Co. for $300,000 and the fair value of the non-controlling interest is $100,000, goodwill is computed as follows: Fair value of consideration given by Albert Co ,000 Fair value of noncontrolling interest ,000 400,000 Fair value of net identifiable assets acquired (380,000) Goodwill ,000 ======== 34

Goodwill is carried forward at the originally recorded amount unless it becomes impaired.
A goodwill impairment loss that occurs subsequent to recording goodwill must be reported as a separate line item within income from operations in income statement unless the loss relates to discontinued operation, in which case the loss is reported within the discontinued operation section. 35

Goodwill Impairment PSAK 48 requires that impairment loss is recognised when an asset’s carrying amount is higher than its recoverable amount. An impairment loss is the amount by which the carrying amount of an asset (or a cash-generating unit) exceeds its recoverable amount. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Goodwill has to be reviewed annually for impairment loss Source from; Tan, Pearl & P. Lee, Advanced Financial Accounting: An IAS and IFRS Approach, McGraw Hill, 2009 36

Subsequent Accounting for Goodwill
Once goodwill has been recorded  accounted for in accordance with PSAK no19 – Intangible Assets and PSAK no 22 – Accounting for Business Combination Must be tested for impairment at least annually or, more frequently if impair the value of goodwill occur 37

Steps for impairment test
Goodwill Impairment Steps for impairment test Determine the carrying amount of the CGU Determine the recoverable amount of the CGU Recoverable amount: Higher of fair value or value in use If carrying amount ≤ recoverable amount If carrying amount ≥ recoverable amount No impairment loss Allocate impairment loss to goodwill first and balance to other net assets Source from; Tan, Pearl & P. Lee, Advanced Financial Accounting: An IAS and IFRS Approach, McGraw Hill, 2009 38

Example of goodwill impairment
Item C/amount Fair Value Cash & Reciv 50, ,000 Inventory 80, ,000 Equipment 120, ,000 Goodwill 100,000 Total assets 350, ,000 Current Payble (10,000) (10,000) Net assets 340, ,000 39

The impairment loss is measured:
If the fair value/recoverable amount of the reporting unit is estimated to be 360,000  no impairment of goodwill is indicated. 360,000 > 340,000 If the fair value /recoverable amount of the reporting unit is estimated to be 320,000  there is an impairment. The impairment loss is measured: the difference 40,000 ( 320,000 – 280,000 ) as represents reporting unit A’s implied goodwill then the impairment loss is (100,000 – 40,000 )= 60,000. Once Goodwill has been written down  It might not be recovered 40

There is no Negative Goodwill – it is Bargain Purchase
Purchase price is < fair value of the net identifiable assets acquired The acquisition represents a bargain purchase Any excess fair value over the cost of acquired entity is to be a gain on bargain purchase. 41

Bargain Purchase via Stock Exchange
Fair value of net identifiable assets $510,000 Excess of fair value over book value of net identifiable assets $210,000 Excess of fair value of net identifiable assets over cost $50,000 Cost of investment $460,000 Total differential $160,000 Book value of net identifiable assets $300,000 42

Purchase via Stock Exchange
Cash & Receivable 45,000 Inventory ,000 Land ,000 Building & Equip 350,000 Patent ,000 Current Liabilities ,000 Share Capital Ordinary 100,000 Share Premium Ordinary ,000* Deferred Stock Issue Cost ,000 Gain on Bargain Purchase ,000 *460,000 – 25,000 =435,000 – 100,000 (10,000 x 10) =335,000 43

Bargain Purchase – pay in cash
Point is able to acquire Sharp for cash, the fair value of Sharp’s net identifiable assets is estimated to be 510,000. Point get gain 10,000 to be recognized. 44

Bargain Purchase – pay in Cash
Fair value of net identifiable assets $510,000 Excess of fair value over book value of net identifiable assets $210,000 Excess of fair value of net identifiable assets over cost $10,000 Cost of investment $500,000 Total differential $200,000 Book value of net identifiable assets $300,000 45

Gain on Bargain Purchase 10,000
Pay in Cash Cash & Receivable 45,000 Inventory ,000 Land ,000 Building & Equip 350,000 Patent ,000 Cash ,000 Current Liabilities 110,000 Gain on Bargain Purchase 10,000 46

Combination Effected through Purchase of Stock
Point Corporation exchanges 10,000 shares of its stock with a total market value of $610,000 for all the shares of Sharp Company in a purchase transaction and incurs and records merger costs of $40,000 and stock issue costs of $25,000. Merger Expense 40,000 Deferred Stock Issue Cost 25,000 Cash 65,000 Investment in Sharp Stock 610,000 Share Capital Ordinary 100,000 Share Premium Ordinary 485,000 Deferred Stock Issue Costs 25,000 Record purchase of Sharp Coy Stock. 47

Additional Considerations In Accounting For Business Combination
Measurement Period: the period when the acquirer have sufficient information available to properly ascertain fair value. Earlier estimated fair value for the land is 100,000, but later receives from reliable appraisal is 110,000. Land 10,000 Goodwill 10,000 48

At the same period, it is known that the zoning of a neighboring parcel of land reduces the value of the land to become 75,000. Impairment Loss 35,000 Land ,000 49

Non controlling Equity Held Prior to Combination
L invest 10% in A at $300,000, now the fair value is $500,000. L aquired the 90% remaining share of A for $4,500,000 in cash. L’s total investment to become $5,000,000. 50

Fair value of Investment 500,000 ----------------
Recognizes 200,000 as a gain on the revaluation at the date of acquired. Cost of Investment ,000 Fair value of Investment ,000 Gain on revaluation ,000 Investment in A 200,000 Gain on revaluation of A stock ,000 51

Acquire controlling interest – additional 90%:
Investment in A 4,500,000 Cash ,500,000 52

Disclosure PSAK No. 15, “Investment in Associated Companies”, (revised 2009) requires, among others, the following to be disclosed: 1. Fair value of investment at quoted available public price. 2. Financial highlight of associated companies, including total assets, liabilities, revenues and income or loss. 3. Financial highlight of associated companies that is not accounted for using equity method, including total asset, total liabilities, revenues, and income or loss. 4. Reasons for having significant influence over associated companies even though parent has ownership share of less than 20%; and reasons for not having significant influence over associated companies, even though parent has ownership of more than 20%. 53

5. Investment in associated companies accounted for using equity method is classified as noncurrent asset. Claim of parent on income or loss of associated companies, and its investment value, is disclosed separately. Claim or portion of parent on discontinued operation of associated companies also disclosed separately. PSAK 22 requires that acquirer disclose the information that enable the user of financial statement to evaluate nature and financial impact of business combination that occurs: a) during the current period, or b) after the reporting date but before issuing date of financial statement. 54

Consolidation– The Big Picture
How do we report the results of subsidiaries? Parent Company 80% 51% 21% Sub A Sub B Sub C Consolidation (plus the Equity Method) Equity Method

Consolidation: The Concept
Two or more separate entities under common control Present “as if ” they were one company. Two or more sets of books are merged together into one set of financial statements

Consolidation: Basic Idea
Presentation: Sum the parent’s and subsidiary’s accounts. We’ll start covering this in detail in subsequent slides. “One-line” consolidation Replace with… Parent Cash $ 200 Investment in Sub PP&E Total Assets $1,600 Liabilities $ 300 Equity ,300 Total Liabilities & Equity $1,600 Sub $100 600 $700 $200 500 Consolidated $ 300 1,500 $1,800 $ 500 1,300 “The Detail”

Consolidation Entries
Just a quick introduction… Two examples of eliminating entries: The “Basic” eliminating entry Removes the “investment” account from the parent’s balance sheet and the subsidiary’s equity accounts. An intercompany loan (from Parent to Sub) Worksheet Entry Only! Equity Investment in Sub 500 Payable to Parent 100 Receivable from Sub 100

Simple Consolidation Example
Parent Cash $ 200 Receivable from Sub Investment in Sub PP&E Total Assets $1,600 Liabilities $ 300 Payable to Parent Equity ,300 Total Liabilities & Equity $1,600 Sub $100 600 $700 100 500 DR CR 100 500 $ 300 1,400 $1,700 $ 400 1,300 Cons.

Section 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter. We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since instructors often have different styles and preferences, we have attempted to include slides that will accommodate different approaches and that can be adapted to classes with different levels of preparation. For example, some instructors prefer to introduce the material before students have read the chapter. We have tried to facilitate these types of introductory discussions by including slides that replicate key points from the chapter. Other instructors expect students to have read the chapter and attempted homework problems before coming to class. As a result, they may not find it useful to review all of the topics in the chapter or to include slides that simply review many of the details they expect students to study before class. However, instructors following this approach often like to use sample exercises and problems built into the slides that allow them to have extended discussions or to facilitate group interaction in class. If instructors elect to spend two class periods on the same subject, they might find a combination of both styles to be useful by first introducing foundational material before students have read the chapter and studied the topic, followed by an extended discussion the next class period after students have read the chapter and attempted homework problems. We have tried to develop slides that can facilitate a flexible approach to allow instructors to select the slides that best match their objectives and style for class discussions. This is the reason we are including a large number of slides for some chapters in the text. We do not expect all instructors to use all slides, but the slide files should help support different teaching approaches and allow instructors to select the subset of slides that best matches their specific discussion objectives. The slides are organized by learning objective. We have included a slide at the beginning of each learning objective to show where the new material begins. Instructors may or may not want to use these learning objective slides in class. We provide them primarily as a way of organizing the material. We also include short multiple choice questions at the end of most learning objectives. Some instructors find it useful to pause periodically during class to assess students’ level of understanding. For this reason, we include several “practice quiz questions” that can be used throughout class discussions to engage students, help them focus on key points, or to facilitate group interaction. Finally, we provide longer exercises and problems that many instructors find useful in assessing understanding and encouraging group learning. 60

Financial Reporting Basis by Ownership Level
Continuum of intercorporate ownership Zero Ownership 20% Ownership 50% 100% Active Investment Passive Investment Trading securities Available- for-sale securities Associated company Joint-venture Partially-owned subsidiary Fully-owned subsidiary Earn dividend income Make capital gain Exert significant influence or control over investee’s operation Gain entry intro a new market Achieve synergistic benefits from complementary strengths Gain market dominance Source from; Tan, Pearl & P. Lee, Advanced Financial Accounting: An IAS and IFRS Approach, McGraw Hill, 2009 61

Investment vs. Ownership
Consolidation eliminates the investment account and replaces it with “the detail.” Account for as trading, AFS. Fair Value method Ownership Percentage Usually equity method and consolidation (but cost method is also okay here) Equity method No significant influence Significant influence Control Why is the cost method okay? 100% 0% 20% 50%

Accounting for Investments in Ordinary Share (Common Stock)
The level of influence is the primary factor determining whether investor and investee will present consolidated financial statements. If the investor has more than 50% ownership then the investor has control over the investee. Investor should prepare Consolidated Financial Statement. 63

If the investor (parent) prepares the separate financial statement as additional information to support the consolidated financial statement, the parent records the investment using cost method (PSAK No. 4) 64

The investor will report the investment in common stock in its statement of financial position using fair value method if the investor has little influence because has less than 20% ownership or equity method if the investor has significant influence because has more than 20% ownership. 65

Income is recorded by investor as dividends are declared by investee
The Fair Value Method Inability investor to exercise either control or significant influence over an investee. No influence over the investee Investment initially recorded by investor at purchase price and adjusted each period to market price Income is recorded by investor as dividends are declared by investee 66

The Fair Value Method Investor Company purchases 10 percent of Investee Company’s common stock for $50,000 at the beginning of 20X1. Influence is determined to be not significant. Investment in XYZ Company Stock 50,000 Cash 50,000 Record purchase of XYZ Company stock. 67

XYZ declare & pay dividend of $15,000 and ABC receive 10% of it.
The Fair Value Method XYZ declare & pay dividend of $15,000 and ABC receive 10% of it. Cash 1,500 Dividend Income 1,500 Record dividend income from XYZ Company. 10% of $15,000 Note that ABC records only its share of the distributed earnings of XYZ. 68

The Fair Value Method At year end, the fair value of its investment in XYZ to be 57,000. Investment in XYZ 7,000 Unrealized Gain on increase in value of stock 7,000 Record increase in value of stock XYZ Company. 57,000–50,000 Note that ABC records increase in value of the stock XYZ. 69

Investment carried by investor at historical cost
The Cost Method It is used if the parent prepare separate financial statement as additional information to support consolidated financial statement. Investment carried by investor at historical cost Income is recorded by investor as dividends are declared by investee 70

The Cost Method Investor Company purchases 60% of Investee Company’s common stock for $1000,000 at the beginning of 20X1. Parent prepare separate financial statement as additional information. Investment in XYZ Company Stock 1000,000 Cash 1000,000 Record purchase of XYZ Company stock. 71

The Cost Method During the year, XYZ has net income of $50,000 and pays dividends of $20,000. Cash 12,000 Dividend Income 12,000 Record dividend income from XYZ Company. 60% of $20,000 Note that ABC records only its share of the distributed earnings of XYZ. 72

The Equity Method Investments is intended to reflect the investor’s changing equity or interest in investee Investment is recorded at initial purchase price and adjusted each period for the investor’s share of the investee’s profit & loss and dividend declared Investor’s voting stock interest gives the investor the ability to exercise significant influence over operating and financial policies of company 73

The Equity Method Equity method be used for:
Corporate joint ventures (PSAK 12) Companies in which the investor’s voting stock interest gives the investor the “ability to exercise significant influence over operating and financial policies” of that company (PASK 15) “Significant influence” criterion – 20 percent rule In the absence of evidence to the contrary, an investor holding 20 percent or more of an investee’s voting stock is presumed to have the ability to exercise significant influence over the investee. 74

Investor’s equity in the investee
The Equity Method Investor’s equity in the investee The investor records its investment at the original cost This amount is adjusted periodically: Reported by Investee Effect on Investor’s Accounts Net income Record income from investment Increase investment account Net loss Record loss from investment Decrease investment account Dividend declaration Record asset (cash or receivable) 75

Equity Method--Recognition of Income
ABC Company purchase 20% of common stock of XYZ for $100,000 at the beginning of the year. ABC pay its investment of $100,000. Investment in XYZ Common Stock 100,000 Cash 100,000 Record an investment in XYZ Co. 76

Equity Method--Recognition of Income
ABC Company acquires significant influence over XYZ Company by purchasing 20 percent of the common stock of XYZ at the beginning of the year. XYZ reports net income of $60,000. Investment in XYZ Common Stock 12,000 Income from Investee 12,000 Record income from investment in XYZ Co. 20% x $60,000 77

XYZ declares and pays a $20,000 dividend.
Equity Method--Recognition of Dividends XYZ declares and pays a $20,000 dividend. Cash 4,000 Investment in XYZ Company Stock 4,000 Record receipt of dividend from XYZ. 20% x $20,000 78

Investment in XYZ Common Stock
Equity Method--Carrying Amount Investment in XYZ Common Stock Original cost 100,000 Equity accrual ($60,000 x .20) 12,000 Ending balance 108,000 Dividends ($20,000 x .20) 4,000 79

Acquisition at Interim Date
The Equity Method Acquisition at Interim Date No income earned by the investee before the date of acquisition may be accrued by the investor Acquisition between balance sheet dates The amount of income earned by the investee from the date of acquisition to the end of the fiscal period may need to be estimated by the investor in recording the equity accrual 80

Investment in XYZ Common Stock
Equity Method--Interim Acquisitions ABC Company acquires 20 percent of XYZ’s common stock on October 1 for $109,000. XYZ earns income of $60,000 and pays dividends of $20,000. Investment in XYZ Common Stock Original cost 109,000 Equity accrual ($60,000 x 3/12 x .20) 3,000 Ending balance 108,000 Dividends ($20,000 x .20) 4,000 81

The Cost and Equity Methods Compared
Item Cost Method Equity Method Recorded amount of investment at date of acquisition Original cost Original Cost Usual carrying amount of investment subsequent to acquisition Original cost increased (decreased) by investor’s share of investee’s income (loss) and decreased by investor’s share of investee’s dividends Income recognition by investor Investor’s share of investee’s dividends declared from earnings since acquisition Investor’s share of investee’s earnings since acquisition, whether distributed or not Investee dividends from earnings since acquisition by investor Income Reduction of investment Investee dividends in excess of earnings since acquisition by investor 2-82 82

Example: Equity versus Cost Method
Equity Method Investment in Soup Corp. 500 Cash 500 Income from Soup Corp. 100 Investment in Soup Corp. 100 Investment in Soup Corp. 200 Income from Soup Corp. 200 Cash 50 Investment in Soup Corp. 50 Cost Method Investment in Soup Corp. 500 Cash 500 No Entry Cash 50 Dividend Income 50 2-83

Overview of the Consolidation Process
Section 2 introduces the most simple setting for a consolidation. The subsidiary is wholly owned. It is either a created subsidiary or we assume it is purchased for an amount equal to the book value of net assets. Wholly Owned Subsidiary Partially Owned Subsidiary Investment = Book Value Section 2 Section 3 Investment > Book Value Section 4 Section 5

Consolidated Financial Statements
3-85 Consolidated Financial Statements Consolidated financial statements present the financial position and results of operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities were actually a single company. 85

Consolidated Financial Statements
3-86 1. Consolidation is required when a corporation owns a majority of another corporation’s outstanding common stock. 2. The accounting principles applied in the preparation of the consolidated financial statements are the same accounting principles applied in preparing separate- company financial statements. 3. Consolidated financial statements are generally considered to be more useful than the separate financial statements of the individual companies when the companies are related. 86

Limitations of Consolidated Financial Statements
The poor performance or position of one or more companies may be hidden. Not all the consolidated retained earnings balance is necessarily available for dividends of the parent. Financial ratios based on consolidated statements are not necessarily representative of any single company in the consolidation, including the parent. 87

Limitations of Consolidated Financial Statements
Similar accounts of different companies that are combined in the consolidation may not be entirely comparable. Additional information about individual companies may require voluminous footnotes. 88

“Consolidated Financial Statement”
3-89 Exceptions of Consolidated Financial Statements According to PSAK no 4, “Consolidated Financial Statement” The subsidiary company can not be consolidated if the subsidiary, to become a subject of control of the government, the court, the administrator, and the regulator 89

Differences in Fiscal Periods
3-90 Differences in Fiscal Periods In PSAK No. 4, ”Consolidated Financial Statement” Paragragh 09 and 10, stated that : Financial Statement of Parent and Subsidiary which are used for preparing Consolidated Financial Statement should have the same date of reporting. If the end period of reporting of Parent is different with the subsidiary, then the subsidiary should prepare additional financial statement with the same date as its parent, if it is practical. If financial statement of subsidiary which is used for preparing consolidated financial statement has a different reporting date with its parent, adjustment must be made on the impact of transactions or events between the date of reporting of financial statement of subsidiary and the financial statement of its parent. In this case, the different between the end of period of reporting of subsidiary and the parent is not over than three months. The reporting period and the different between the end of period should be the same from period to period. 90

Statement of Financial Position --December 31, 20X1
Popper Sun Assets Cash $ 5,000 $ 3,000 Receivable (net) 84, ,000 Inventory 95, ,000 Fixed Assets (net) 375, ,000 Other Assets 25, ,000 Investment in Sun Stock 300,000 Total Assets $884,000 $358,000 Liabilities and Equities Short-Term Payables $ 60,000 $ 8,000 Long-Term Payables 200, ,000 Share Capital - Ordinary 500, ,000 Retained Earnings 124, ,000 Total Liabilities and Equities $884,000 $358,000 On January 1, 20X1, Popper Company purchased at book value all the common stock of Sun Corporation. 91

The Consolidation Process Illustrated
Additional data: 1. Popper uses the equity method or cost method to account for its investments in Sun. The investment account is booked at the book value of Sun’s net assets. 2. Sun owes Popper $1,000 on account at the end of the year. 3. Sun purchases $6,000 of inventory from Popper during 20X1. The inventory originally cost Popper $4,000. Sun still holds all the inventory at the end of the year. 92

The Consolidated Entity
Parent Subsidiary 93

Consolidated Statement of Financial Position
Popper Company Consolidated Statement of Financial Position December 31, 20X1 Assets Liabilities and Equities Cash $ 8,000 Short-Term Payables $ 67,000 Receivables (net) 113,000 Long-Term Payables 250,000 Inventory 153,000 Fixed Assets (net) 625,000 Share Capital-Ordinary 500,000 Other Assets 40,000 Retained Earnings 122,000 Total Assets $939,000 Total Liabil. and Equities $939,000 $5,000 + $3,000 $84,000 + $30,000 - $1,000 $95,000 + $60,000 - $2,000 $375,000 + $250,000 $25,000 + $15,000 94

Consolidated Statement of Financial Position
Popper Company Consolidated Statement of Financial Position December 31, 20X1 Assets Liabilities and Equities Cash $ 8,000 Short-Term Payables $ 67,000 Receivables (net) 113,000 Long-Term Payables 250,000 Inventory 153,000 Fixed Assets (net) 625,000 Share Capital - Ordinary 500,000 Other Assets 40,000 Retained Earnings 122,000 Total Assets $939,000 Total Liabil. and Equities $939,000 $60,000 + $8,000 - $1,000 $200,000 + $50,000 $500,000 + $200,000 - $200,000 $124,000 + $100,000 - $100,000 - $2,000 95

Intercompany receivable/payable $1,000
Intercompany Receivable and Payable Popper Company Intercompany receivable/payable $1,000 Sun Corporation 96

Profits on Intercompany Sales
Cost of goods $4,000 Popper Company Sales $6,000 Sun Corporation 97

Consolidated Statement of Financial Position Worksheet
Popper Sun Consoli- Item Company Corp Debit Credit dated Cash 5,000 3,000 Receivables (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375, ,000 Other Assets 25,000 15,000 Investment in Sun 300,000 884, ,000 Short-Term Pay. 60,000 8,000 Long-Term Pay. 200,000 50,000 Share Capital - O 500, ,000 Retained Earnings 124, ,000 (a) 1,000 (a) 1,000 98

Popper Sun Consoli- Item Company Corp Debit Credit dated Cash 5,000 3,000 Receivables (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375, ,000 Other Assets 25,000 15,000 Investment in Sun 300,000 884, ,000 Short-Term Pay. 60,000 8,000 Long-Term Pay. 200,000 50,000 Share Capital-O 500, ,000 Retained Earnings 124, ,000 (a) 1,000 (b) 2,000 (a) 1,000 (b) 2,000 99

Popper Sun Consoli- Item Company Corp Debit Credit dated 8,000 113,000 153,000 625,000 40,000 939,000 Cash 5,000 3,000 Receivables (net) 84,000 30,000 Inventory 95,000 60,000 Fixed Assets (net) 375, ,000 Other Assets 25,000 15,000 Investment in Sun 300,000 884, ,000 Short-Term Pay. 60,000 8,000 Long-Term Pay. 200,000 50,000 Share Capital-O 500, ,000 Retained Earnings 124, ,000 (a) 1,000 (b) 2,000 (c)300,000 (a) 1,000 (c)200,000 (b) 2,000 (c)100,000 67,000 250,000 500,000 122,000 939,000 100

Consolidation Procedures
4-101 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.

Consolidation Procedures
4-102 The term subsidiary has been defined as “an entity to be controlled in which another entity known as its parent holds a controlling financial interest.” This is begins the in-depth examination of consolidation procedures by focusing on the procedures for wholly owned subsidiaries ( 100% ownership)

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 Statement of Financial Position section

STATEMENT OF FINANCIAL POSITION SECTION
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: Share Capital Ordinary Share Premium Ordinary Retained Earnings STATEMENT OF FINANCIAL POSITION SECTION From Retained Earnings Statement section

Edited by Taufik Hidayat
Nature of Eliminating Entries 4-105 …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

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 statement of financial position of Peerless and Special Foods immediately before combination.

Statement of Financial Position Before Combination
Peerless Special Foods Assets Cash $ 350,000 $ 50,000 Accounts Receivable 75, ,000 Inventory 100, ,000 Land 175, ,000 Buildings and Equipment 800, ,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 Share Capital-Ordinary 500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stockholders’ Equity $1,100,000 $500,000 ) )

Full Ownership Purchased at Book Value
Fair Value of consideration $300,000 Book value: Share Capital-Ordinary SP $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x (300,000 Differential $ P S 100% ) January 1, 20X1 entry: E(1) Investment in Special Foods Stock 300,000 Cash 300,000 Record purchase of Special Foods stock.

Optional Accumulation Elimination Entry
The optional accumulated depreciation elimination entry: Accumulated Depreciation 300,000 Buildings and Equipment 300,000 Property, Plant & Equipment Accumulated Depreciation 600,000 300,000 2-109

Optional Accumulation Elimination Entry
The optional accumulated depreciation elimination entry: Accumulated Depreciation 300,000 Buildings and Equipment 300,000 Property, Plant & Equipment Accumulated Depreciation 600,000 300,000 300,000 300,000 300,000 Shows the Buildings and Equipment “as if” they have been recorded on the Sub’s books as new assets at book value. 2-110

Statement of Financial Position After Combination
Peerless Special Foods Assets Cash $ ,000 $ 50,000 Accounts Receivable 75, ,000 Inventory 100, ,000 Land 175, ,000 Buildings and Equipment 800, ,000 Accumulated Depreciation (400,000 (300,000 Investment in Special Foods Stock ,000 Total Assets $1,100,000 $500,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 200, ,000 Share Capital-Ordinary 500, ,000 Retained Earnings 300, ,000 Total Liabilities and Stockholders’ Equity $1,100,000 $500,000 ) )

100% Purchase at Book Value
Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 50,000 50, ,000 Accounts Rec. 75,000 50, ,000 Inventory 100,000 60, ,000 Land 175,000 40, ,000 Bldg. and Equip. 800, , ,400,000 Inv. in Sp. Foods ,000 Total Debits 1,500, , ,000,000 Accum. Depr. 400, , ,000 Accounts Payable 100, , ,000 Bonds Payable 200, , ,000 Share Capital-Ord 500, , ,000 Retained Earn , , ,000 Total Credits 1,500, , ,000,000

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 50,000 50, ,000 Accounts Rec. 75,000 50, ,000 Inventory 100,000 60, ,000 Land 175,000 40, ,000 Bldg. and Equip. 800, , ,000 1,100,000 Inv. in Sp. Foods ,000 (2) 300,000 Total Debits 1,500, , ,700,000 Accum. Depr. 400, , , ,000 Accounts Payable 100, , ,000 Bonds Payable 200, , ,000 Share Capital-Ord 500, ,000 (2)200, ,000 Retained Earn , ,000 (2)100, ,000 Total Credits 1,500, , , ,000 1,700,000

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Foods Debits Credits Consolidated Cash 50,000 50, ,000 Accounts Rec. 75,000 50, ,000 Inventory 100,000 60, ,000 Land 175,000 40, ,000 Bldg. and Equip. 800, , ,000 1,100,000 Inv. in Sp. Foods , ,000 Total Debits 1,500, , ,700,000 Accum. Depr. 400, , , ,000 Accounts Payable 100, , ,000 Bonds Payable 200, , ,000 Share Capital-Ord 500, , , ,000 Retained Earn , , , ,000 Total Credits 1,500, , , ,000 1,700,000

Elimination Entry E(2) Entry E(2) Share Capital-Ordinary SP 200,000
Retained Earnings 100,000 Investment in Special Foods Stock 300,000 Eliminate investment balance.

Consolidation Subsequent to Acquisition
5-116 Consolidation Subsequent to Acquisition The approach followed to prepare a complete set of consolidated financial statements subsequent to a business combination is quite similar to that used to prepare a consolidated st of financial position as of the date of combination However, in addition to the assets and liabilities, the revenues and expenses of the consolidating companies must be combined Eliminations must be made in the consolidation workpaper so that the consolidated statements appear as if they are the financial statements of a single company

Consolidated Net Income
5-117 Consolidated Net Income In the absence of transactions among the consolidating companies, consolidated net income is equal to the parent’s income from its own operations, excluding any investment income from consolidated subsidiaries, plus the net income from each of the consolidated subsidiaries, and adjusted for any differential write-off Includes 100 percent of the revenues and expenses regardless of the parent’s percentage ownership

Equity Method Push purchases all of stock of Shove.
In 2001, net income Shove 25,000 net income Push 125,000 (included income from Shove – use equity method) Consolidated net income for 2001: Push’s net income ,000 Less: income from Shove (25,000) Plus: Shove’s net income ,000 Consolidated net income ,000

Cost Method Push purchases all of stock of Shove. In 2001, net income Shove 25,000 net income Push 100,000 (not included income from Shove – use cost method) Consolidated net income for 2001: Push’s net income 100,000 Shove’s net income ,000 Consolidated net income 125,000

Consolidated Retained Earnings
5-120 Consolidated Retained Earnings That portion of the consolidated enterprise’s undistributed earnings accruing to the parent company shareholders Consolidated retained earnings at the end of the period is equal to the beginning consolidated retained earnings balance plus consolidated net income attributable to the controlling interest, less dividends declared by the parent company

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 of separate operating earning plus $25,000 of equity-method income from Shove; Push declares dividends of $30,000. Shove reports net income of $25,000 and declares dividends of $10,000.

Push Shove Balance, January 1, 20X1 $400,000 $250,000 Net income, 20X1 125, ,000 Dividends declared in 20X , ,000 Balance, December 31, 20X1 $495,000 $265,000 Consolidated retained earnings equals the parent’s retained earnings when the parent uses the equity method

When the parent account for its subsidiary investment using the cost 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.

Retained Earnings : Push Shove Balance, January 1, 20X1 $400,000 $250,000 Net income, 20X1 100, ,000 Dividends declared in 20X , ,000 Balance, December 31, 20X1 $470,000 $265,000 Consolidated retained earnings 495,000 (470, ,000) is not equals the parent’s retained earnings when the parent uses the cost method

Cost Method Purchase at Book Value

20X1 Consolidation--100 Percent Ownership
Peerless Special Products Foods Share Capital-Ordinary, January 1, 20X1 $500,000 $200,000 Retained Earnings, January 1, 20X1 300, ,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

Separate Financial Statements
5-127 Separate Financial Statements PSAK No. 4 (Revisi 2009), par 35 If the separate financial statement is prepared by the investor as financial statement for the entity, then: Investment in subsidiary, associated entity, and joined venture should record at cost method or fair value method.

20X1 Consolidation--100 % - Cost Method
5-128 20X1 Consolidation--100 % - Cost Method Peerless records its 20X1 dividends from Special Foods under the cost method with the following entries: (2) Cash 30,000 Dividend Income 30,000 Record dividends from Special Foods. $30,000 x 1.00

portion of any dividends declared by the subsidiary.
5-129 20X1 Consolidation--100 % - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (1) 30,000 (1) 30,000 (60,000) Dividend Income 30,000 Dividends Declared (60,000 (30,000) Remove the parent’s portion of any dividends declared by the subsidiary.

5-130 20X1 Consolidation--100 % - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (2)100, ,000 (2)300,000 (2)200, ,000 Dividend Income 30,000 (1) 30,000 Retained Earnings, January 1 300, ,000 Dividends Declared (60,000 (30,000 (1) 30,000 (60,000) Investment in Special Foods Stock 300,000 Share Capital-Ordinary 500, ,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period.

Basic Elimination Entry: The Cost Method
Common Stock 200 Retained Earnings (BB) 100 Dividend Income 30 Dividends Declared 30 Investment in Special Food 300 Investment in Special Food. Dividend Income Dividend 30 Ending Balance 30 Beginning Balance 300 Net Income 0 Ending Balance 300 Dividends 0 300 Basic 30 2-131

5-132 20X2 Consolidation--100 % - Cost Method Peerless records its 20X2 income and dividends from Special Foods under the cost method with the following entries: (1) Cash 40,000 Dividend Income 40,000 Record dividends from Special Foods. $40,000 x 1.00

5-133 20X2 Consolidation--100 % - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (1) 40,000 (1) 40,000 (60,000) Dividend Income 40,000 Retained Earnings, January 1 430, ,000 Dividends Declared (60,000 (40,000 Investment in Special Foods Stock 300,000 ) ) Remove the parent’s portion of any dividends declared by the subsidiary in second year.

20X2 Consolidation—100% Cost Method
Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (9) 100, ,000 300,000 (9) 200, ,000 Dividend income 40,000 (8) 40,000 Retained Earnings, January 1 430, ,000 Dividends Declared (60,000 (40,000 (8) 40,000 (60,000 Investment in Special Foods Stock 300,000 Share Capital-Ordinary 500, ,000 ) ) ) Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2.

Basic Elimination Entry: The Cost Method
Common Stock 200 Retained Earnings (AB) 100 Dividend Income 40 Dividends Declared 40 Investment in Special Food 300 Investment in Special Food. Dividend Income Dividend 40 Ending Balance 40 Beginning Balance 300 Net Income 0 Ending Balance 300 Dividends 0 300 Basic 40 2-135

Consolidated Net Income – Cost Method
Peerless’ net income 170, ,000 Div income fr SP -30, ,000 Special Food net income 50, ,000 Consolidated net income 190, ,000 Note: Parent net income is not equal to consolidated net income Peerless’ net income: (separate operating income 140,000 + dividend income from SF 30,000=170,000);(separate operating income 160,000 + dividend income from SF 40,000=200,000)

Consolidated Retained Earning - Cost Method
Beg Peerless RE 300, ,000* Difference of RE balance ,000** Income fr Op-Peerless 140, ,000 Income fr Op-Special F , ,000 Dividend declared-Peer , ,000 Consolidated RE , ,000 *Peerless RE = 300, , ,000 dividend income from SF=410,000 ** Consolidated RE 430,000 – Peerless RE 410,000 = 20,000

Equity Method Purchase at Book Value

Peerless Special Products Foods Common Stock, January 1, 20X1 $500,000 $200,000 Retained Earnings, January 1, 20X1 300, ,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

20X1 Consolidation—100 % Equity Method
5-140 20X1 Consolidation—100 % Equity Method 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

20X1 Consolidation--100 % Equity Method
Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 50,000 Dividends Declared (60,000 (30,000) Investment in Special Foods Stock 320,000 (4) 50,000 (4) 30,000 (60,000) (4) 20,000 ) Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary.

20X1 Consolidation--100 % Equity Method
Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (5) 100, ,000 (5) 300,000 (5) 200, ,000 Income from Subsidiary 50,000 (4) 50,000 Retained Earnings, January 1 300, ,000 Dividends Declared (60,000 (30,000 (4) 30,000 (60,000) Investment in Special Foods Stock 320, (4) 20,000 Share Capital-Ordinary 500, ,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary as of the beginning of the period.

Basic Elimination Entry: The Equity Method
Common Stock 200 Retained Earnings (BB) 100 Income from Special Food 50 Dividends Declared 30 Investment in Special Food 320 Investment in Special Food. Income from Special Food. Net Income 50 Ending Balance 50 Beginning Balance 300 Net Income 50 Ending Balance 320 Dividends 30 320 Basic 50 2-143

20X2 Consolidation—100% Equity Method
Peerless records its 20X2 income and dividends from Special Foods under the equity method with the following entries: (6) Investment in Special Foods Stock 75,000 Income from Subsidiary 75,000 Record equity-method income. $75,000 x 1.00 (7) Cash 40,000 Investment in Special Foods Stock 40,000 Record dividends from Special Foods. $40,000 x 1.00

Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 75,000 Retained Earnings, January 1 430, ,000 Dividends Declared (60,000 (40,000 Investment in Special Foods Stock 355,000 (8) 75,000 (8) 40,000 (60,000) (8) 35,000 ) ) Remove the intercorporate ownership claim and stockholders’ accounts of the subsidiary recorded during the period.

Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (9) 120, ,000 (9) 320,000 (9) 200, ,000 Income from Subsidiary 75,000 (8) 75,000 Retained Earnings, January 1 430, ,000 Dividends Declared (60,000 (40,000 (8) 40,000 (60,000 Investment in Special Foods Stock 355, (8) 35,000 Share Capital-Ordinary 500, ,000 ) ) ) Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2.

Basic Elimination Entry: The Equity Method
Common Stock 200 Retained Earnings (CB) 120 Income from Special Food 75 Dividends Declared 40 Investment in Special Food 355 Investment in Special Food. Income from Special Food. Net Income 75 Ending Balance 75 Beginning Balance 320 Net Income 75 Ending Balance 355 Dividends 40 355 Basic 75 2-147

Consolidated Net Income – Equity Method
Peerless’ net income 190, ,000 Equity income fr SP -50, ,000 Special Food net income 50, ,000 Consolidated net income 190, ,000 Note: Parent net income equal than Consolidated Net Income.

Consolidated Retained Earning – Equity Method
Beg RE Peerless fr Op 300, ,000 Consolidated net income , ,000 Dividend declared-Peer -60, ,000 Consolidated RE 430, ,000 RE Parent = Consolidated RE

The Equity Method: Things to Remember in Consolidation
Consolidated net income EQUALS the parent’s net income. Consolidated retained earnings EQUALS the parent’s retained earnings. Parent Consolidated $235 = $235 Parent Consolidated $605 = $605 2-150

Consolidation: The Most Important Point of All on Investment Basis
The consolidated statement amounts are identical whether the parent uses the cost method or the equity method—this holds true for all three statements. Equity Method Consolidated Statements Cost Method Consolidated Statements =

Section 3 The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differential Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter. We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since instructors often have different styles and preferences, we have attempted to include slides that will accommodate different approaches and that can be adapted to classes with different levels of preparation. For example, some instructors prefer to introduce the material before students have read the chapter. We have tried to facilitate these types of introductory discussions by including slides that replicate key points from the chapter. Other instructors expect students to have read the chapter and attempted homework problems before coming to class. As a result, they may not find it useful to review all of the topics in the chapter or to include slides that simply review many of the details they expect students to study before class. However, instructors following this approach often like to use sample exercises and problems built into the slides that allow them to have extended discussions or to facilitate group interaction in class. If instructors elect to spend two class periods on the same subject, they might find a combination of both styles to be useful by first introducing foundational material before students have read the chapter and studied the topic, followed by an extended discussion the next class period after students have read the chapter and attempted homework problems. We have tried to develop slides that can facilitate a flexible approach to allow instructors to select the slides that best match their objectives and style for class discussions. This is the reason we are including a large number of slides for some chapters in the text. We do not expect all instructors to use all slides, but the slide files should help support different teaching approaches and allow instructors to select the subset of slides that best matches their specific discussion objectives. The slides are organized by learning objective. We have included a slide at the beginning of each learning objective to show where the new material begins. Instructors may or may not want to use these learning objective slides in class. We provide them primarily as a way of organizing the material. We also include short multiple choice questions at the end of most learning objectives. Some instructors find it useful to pause periodically during class to assess students’ level of understanding. For this reason, we include several “practice quiz questions” that can be used throughout class discussions to engage students, help them focus on key points, or to facilitate group interaction. Finally, we provide longer exercises and problems that many instructors find useful in assessing understanding and encouraging group learning. 152

P indirectly controls Z
Indirect Control P Y .80 X .90 W .80 Z .15 .30 P indirectly controls Z 153

Indirect Control P X P owns 80 percent of X Z X owns 60 percent of Z P indirectly controls Z 154

Indirect Control P Y .70 X .90 .30 Z .40 P indirectly controls Z 155

Indirect Control P Y .80 X .90 W .80 Z .15 .30 P indirectly controls Z 156

Indirect Control Example
Does X control Y? Yes Does X control Z? Yes 51% 75% Y Z 20% 40% Does Y control K? No K Does Z control K? No Does X control K? Yes, indirectly through Y and Z! X must consolidate Y, Z, and K. 3-157 157

3-158 Parent Company Theory The parent company theory is perhaps better suited to the modern corporation and the preparation of consolidated financial statements than is the proprietary approach. This theory recognizes that although the parent does not have direct ownership of the assets or direct responsibility for the liabilities of the subsidiary, it has the ability to exercise effective control over all of the subsidiary’s assets and liabilities, not simply a proportionate share. 158 158

Parent Company Theory Recognizes that although the parent does not have direct ownership or responsibility, it has the ability to exercise effective control over all of the subsidiary’s assets and liabilities, not simply a proportionate share. Separate recognition is given, in the consolidated financial statements, to the noncontrolling interest’s claim on the net assets and earnings of the subsidiary. 3-159 159

Recognition of Subsidiary Net Assets
Parent Company Theory Noncon-trolling share Parent’s share Goodwill Fair value Increment Book value Portion included in consolidated financial statements Recognition of Subsidiary Net Assets 160

Recognition of Subsidiary Net Income
Parent Company Theory Noncon-trolling share Parent’s share Revenue Expenses Net income Portion included in consolidated financial statements Recognition of Subsidiary Net Income 161

5-162 Consolidation of Less-Than-Wholly-Owned Subsidiaries The stockholders who own the shares of the subsidiary not held by the parent are referred to collectively as the noncontrolling interest or minority interest . When a subsidiary is less than wholly owned, the general approach to consolidation is the same as discussed in section 2, but the consolidation procedures must be modified slightly to recognize the noncontrolling interest. Also, the computation of consolidated net income and retained earnings must allow for the claim of the noncontrolling interest.

5-163 Consolidated Net Income In the absence of transactions between companies included in the consolidation, consolidated net income is equal to The parent’s income from its own operations, excluding any investment income from consolidated subsidiaries, plus the net income from each of the consolidated subsidiaries, adjusted for any differential write-off

Income to Noncontrolling Interest
5-164 Income to Noncontrolling Interest Income to noncontrolling interest in a subsidiary is based on a proportionate share of that subsidiary’s net income, adjusted for any differential write-off Income to Controlling Interest is equal to Consolidated Net Income Iess Income to Noncontrolling Interest.

Equity Method – Push has 80% of Shove share
Push’s net income $120,000 Less: Equity M. income fr S (20,000) Shove’s net income ,000 Consolidated Net Income $125,000 Income attributable to Non ($ 5,000)* Controlling interest Income attributable to Controlling interest $120,000 * 25,000 x 0.20=5,000

Cost Method – Push has 80% of Shove share
Push’s net income $100,000 Shove’s net income ,000 Consolidated Net Income $125,000 Income attributable to Non ($ 5,000) Controlling interest (25,000 x .20) Income attributable to Controlling $120,000 interest

5-167 Consolidated Retained Earnings Consolidated retained earnings is equal to parent’s retained earnings at the date of combination add income to controlling interest, less dividend declared by parent. For subsequent years, consolidated retained earnings is equal to consolidated retained earnings at beginning of year add income to controlling interest, less dividend declared by parent.

Retained Earnings Parent & Subsidiary
5-168 Retained Earnings Parent & Subsidiary Push Corporation acquires 80 percent of the stock of Shove Company for an amount equal to 80 percent of Shove’s total book value. Net income and dividends during the two years following acquisition are: (Equity Method)

5-169 Consolidated Net Income Consolidated Net income, Income to both Noncontrolling & Controlling Interest during the two years following acquisition are: (Equity Method)

Edited by Taufik Hidayat
5-170 Consolidated Retained Earnings Consolidated retained earnings at December 31, 20X2, two years after the date of combination, is computed as follows, assuming no differential: Edited by Taufik Hidayat

5-171 Consolidated Retained Earnings Consolidated retained earnings at December 31, 20X2, with alternative calculation, is computed as follows:

Retained Earnings - Cost Method
Push Shove RE beg,20X , ,000 Net Income, 20X1 108,000* 25,000 Dividend, 20X , ,000 RE end, 20X , ,000 Net Income, 20X2 128,000** 35,000 Dividend, 20X , ,000 RE end,20X , , *100,000 + (10,000 x 0.80) = 108,000 **120,000 + (10,000 x 0.80) = 128,000

Consolidated Retained Earnings - Cost Method
RE beg, 20X ,000 Net Income P 100,000 Net Income S ,000 Income to Non Cont Int (5,000) Dividend, 20X1 (30,000) Consolidated RE, 20X1 490,000 RE of P at end 20X1 478,000

Consolidated Retained Earnings - Cost Method
RE beg, 20X ,000 Net Income P 120,000 Net Income S ,000 Income to Non Cont Int (7,000) Dividend, 20X2 (30,000) Consolidated RE, 20X2 608,000 RE of P at end 20X2 576,000

FV of Consideration = 240,000+60,000 or
4-175 80 Percent Purchase at Book Value On January 1, 20X1, Peerless Products purchases 80 percent of the outstanding common stock of Special Foods for $240,000 cash. The purchase price represents 80 percent of the book value of Special Foods’ stock on the date of combination. At that date, the fair value of the noncontrolling interest is estimated to be $60,000 FV of Consideration = 240,000+60,000 or 240,000 = 0.8

Statement of Financial Position Before Combination
4-176 Peerless Special Foods Assets Cash $ 350,000 $ 50,000 Accounts Receivable 75, ,000 Inventory 100, ,000 Land 175, ,000 Buildings and Equipment 800, ,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 Share Capital-Ordinary 500, ,000 Retained Earnings 300, ,000 Total Liabilities & Stockholders’ Equity $1,100,000 $500,000 ) )

80 Percent Purchase at Book Value
4-177 80 Percent Purchase at Book Value FV of Considerations (240,000+60,000) $300,000 Book value: Share Capital Ordinary-S Foods $200,000 Retained earnings-Special Foods 100,000 (300,000 Differential $ P S 80% ) 20% January 1, 20X1 entry: Investment in Special Foods Stock 240,000 Cash 240,000 Record purchase of Special Foods stock. NCI 177

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd Debits Credits Consolidated Cash 110,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800, ,000 Inv. in Sp. Foods ,000 Total Debits 1,500, ,000 Accum. Depr. 400, ,000 Accounts Payable 100, ,000 Bonds Payable 200, ,000 Share Capital Ord 500, ,000 Retained Earn. 300, ,000 Total Credits 1,500, ,000 240,000 200,000 100,000 Nonctrl. Interest ,000

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd Debits Credits Consolidated Cash 110,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800, ,000 Inv. in Sp. Foods ,000 Total Debits 1,500, ,000 Accum. Depr. 400, ,000 Accounts Payable 100, ,000 Bonds Payable 200, ,000 Share Capital Ord 500, ,000 Retained Earn. 300, ,000 Total Credits 1,500, ,000 240,000 200,000 100,000 Nonctrl. Interest ,000 300,000 300,000

Trial Balance Data Elimination Entries Account Titles Peerless Spec. Fd Debits Credits Consolidated Cash 110,000 50,000 Accounts Rec. 75,000 50,000 Inventory 100,000 60,000 Land 175,000 40,000 Bldg. and Equip. 800, ,000 Inv. in Sp. Foods ,000 Total Debits 1,500, ,000 Accum. Depr. 400, ,000 Accounts Payable 100, ,000 Bonds Payable 200, ,000 Share Capital Ord 500, ,000 Retained Earn. 300, ,000 Total Credits 1,500, ,000 160,000 125,000 215,000 1,400,000 2,060,000 240,000 200,000 100,000 700,000 200,000 300,000 500,000 60,000 2,060,000 Nonctrl. Interest ,000 300,000 300,000

Elimination Entry E(15) Entry E(15)
Share Capital Ordinary--S F 200,000 Retained Earnings 100,000 Investment in Special Foods Stock 240,000 Noncontrolling Interest 60,000

Property, Plant & Equipment Accumulated Depreciation
Don’t forget the accumulated depreciation elimination entry: Accumulated Depreciation 300,000 Buildings and Equipment 300,000 Property, Plant & Equipment Accumulated Depreciation 600,000 300,000 3-182

Don’t forget the accumulated depreciation elimination entry: Accumulated Depreciation 300,000 Buildings and Equipment 300,000 Property, Plant & Equipment Accumulated Depreciation 600,000 300,000 300,000 300,000 300,000 Shows the Buildings and Equipment “as if” they have been recorded on the Sub’s books as new assets at book value. 3-183

Consolidated Statement of Financial Position 80%
Peerless Products Corporation and Subsidiary Consolidated Statement of Financial Position January 1, 20X1 Assets: Cash $ 160,000 Accounts Receivable 125,000 Inventory 160,000 Land 215,000 Building and Equipment $1,100,000 Accumulated Depreciation (400, ,000 Total Assets $1,360,000 ) Continued

Consolidated Statement of Financial Position--80 %
Liabilities: Accounts Payable $ 200,000 Bonds Payable 300,000 Stockholders’ Equity: Share Capital - Ordinary 500,000 Retained Earnings 300,000 Noncontrolling interest 60,000 Total Liabilities and Equity $1,360,000

Equity Method Purchase at Book Value

5-187 20X1 Consolidation--80 Percent Ownership Peerless Special Products Foods Share Capital Ordinary, January 1, 20X1 $500,000 $200,000 Retained Earnings, January 1, 20X1 300, ,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

Total Fair Value (240,000+60,000) $300,000 Book value: Share Capital Ordinary--S F $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless & Noncontrl share x ,000 Differential $ S 80% NCI 20% January 1, 20X1 entry: (10) Investment in Special Foods Stock 240,000 Cash 240,000 Record purchase of Special Foods stock.

20X1 Consolidation--80 Percent Ownership Equity Method
(16) Investment in Special Foods Stock 40,000 Income from Subsidiary 40,000 Record equity-method income. $50,000 x .80 (17) Cash 24,000 Investment in Special Foods Stock 24,000 Record dividends from Special Foods. $30,000 x .80

Investment account – 20X1 1/1 240, I I 31/ , I 31/ ,000 256, I

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 40,000 Dividends Declared (60,000 (30,000 Investment in Special Foods 256,000 (13) 40,000 (13) 24,000 (13) 16,000 ) ) Peerless’s 80 percent share of Special Foods’ income and dividends is eliminated.

Income to Non Controlling Interest
Net Income S 50,000 Non Controlling portion x 0.20 Income to Non Cont Int ,000

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Int. Dividends Declared (60,000) (30,000) (13) 24,000 Noncontrolling interest . (14) 10,000 (10,000) (14) 6,000 (60,000) (14) 4,000 A separate entry establishes the amount of income allocated to noncontrolling shareholders and enters the increase in their claim on net assets of the subsidiary.

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 300, ,000 Investment in Special Foods 256,000 (14) 16,000 Share Capital Ord 500, ,000 Noncontrolling interest (14) ,000 (15) 100, (15) 240,000 (15) 200, ,000 (15) 60,000 64,000 An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance shown at the beginning of the period.

Basic Elimination Entry
Book Value Calculations Parent’s Subsidiary’s Equity Accounts NCI Investment Common Retained (20%) Account (80%) Stock Earnings NCI (10%) (90%) Stock Earnings = Balances, 1/1/X8 60, , , ,000 + Net Income 10,000 40, ,000 Dividends (6,000) (24,000) (30,000) Balances, 12/31/X8 64, , , ,000 Basic Elimination Entry Common Stock 200,000 Retained Earnings, BB 100,000 Income from Smith 40,000 NCI in Net Income 10,000 Dividends Declared 30,000 Investment in Smith NCI in Net Assets 64,000 3-195

5-198 PSAK No. 4 (Revised 2009) Balance of investment in parent book should be eliminated proportionately with equity of subsidiary. (Investment vs Share Capital & RE should be eliminated) Income attributable to Non Controlling Interest should be indentified in consolidation. Non controlling interest in consolidation should be separately identified from the parent equity. Non controlling interest consist of: balance of non controlling interest at the date of beginning combination which is calculated accordance with PSAK 22; and the portion of non controlling interest on equity changing since the date of combination. Cost Method

5-199 PSAK No. 4 (Revised2009) Non controlling interest in consolidation should be separately identified from the parent equity. Non controlling interest consist of: balance of non controlling interest at the date of beginning consolidated financial statement; and the portion of non controlling interest on changing in equity during the consolidation period; Balance of revenues transaction, and expenses intracompany, and also dividend should be fully eliminated. Gain or loss from transaction intracompany which is recognized in the assets, such as inventory and fixed assets, should be fully eliminated. Equity Method

20X2 Consolidation--80 % Ownership, Equity Method
(16) Investment in Special Foods Stock 60,000 Income from Subsidiary 60,000 Record equity-method income. $75,000 x .80 (17) Cash 32,000 Investment in Special Foods Stock 32,000 Record dividends from Special Foods. $40,000 x .80

Investment account – 20X2 1/1 256,000 I I 31/1 60,000 I 31/1 32,000
284, I

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (18) 60,000 (18) 32,000 (18) 28,000 Income from Subsidiary 60,000 Dividends Declared (60,000 (40,000 Investment in Special Foods 284,000 ) ) An entry is required to remove the income that Peerless has recognized from Special Foods, Peerless’s share (80 percent) of Special Foods’ dividends, and the change in the investment account that occurred in 20X2.

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Int. Dividends Declared (60,000) (40,000) (18) 32,000 Noncontrolling Interest An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest.

Income to Non Controlling Interest
Net Income S 75,000 Non Controlling portion x 0.20 Income to Non Cont Int ,000

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Int. (19) 15,000 (15,000) Dividends Declared (60,000) (40,000) (18) 32,000 (19) 8,000 (60,000) Noncontrolling Interest (19) 7,000 An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest.

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 420, ,000 Investment in Special Foods 284,000 (18) 28,000 Share Capital Ord 500, ,000 Noncontrolling Interest (19) 7,000 An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance reported by the parent at the beginning of the year and to establish the amount of the noncontrolling interest’s claim on the net assets of the subsidiary at the beginning of the year.

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 420, ,000 (20) 120, ,000 Investment in Special Foods 284,000 (18) 28,000 (20) 256,000 Share Capital Ord 500, ,000 (20) 200, ,000 Noncontrolling Interest (19) 7,000 (20) 64,000 71,000 An entry is required to eliminate the stockholders’ equity accounts of the subsidiary and the investment account balance reported by the parent at the beginning of the year and to establish the amount of the noncontrolling interest’s claim on the net assets of the subsidiary at the beginning of the year.

Book Value Calculations Parent’s Subsidiary’s Equity Accounts NCI Investment Common Retained (20%) Account (80%) Stock Earnings NCI (10%) (90%) Stock Earnings = Balances, 1/1/X8 64, , , ,000 + Net Income 15,000 60, ,000 Dividends (8,000) (32,000) (40,000) Balances, 12/31/X8 71, , , ,000 Basic Elimination Entry Common Stock 200,000 Retained Earnings, 120,000 Income from Smith 60,000 NCI in Net Income 15,000 Dividends Declared 40,000 Investment in Smith NCI in Net Assets 71,000 3-208

Cost Method Purchase at Book Value

First Year 20X1 Consolidation--80 % Ownership - Cost Method
5-212 Peerless records its 20X1 dividends from Special Foods under the cost method with the following entries: (2) Cash 24,000 Dividend Income 24,000 Record dividends from Special Foods. $30,000 x 0.80

portion of any dividends declared by the subsidiary.
5-213 20X1 Consolidation--80% - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (1) 24,000 (1) 24,000 Dividend Income 24,000 Dividends Declared (60,000 (30,000) Remove the parent’s portion of any dividends declared by the subsidiary.

20X1 Consolidation--80 % Cost Method
Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Int. Dividends Declared (60,000) (30,000) (13) 24,000 Noncontrolling interest . (14) 10,000 (10,000) (14) 6,000 (60,000) (14) 4,000 A separate entry establishes the amount of income allocated to noncontrolling shareholders and enters the increase in their claim on net assets of the subsidiary.

5-215 20X1 Consolidation--80 % - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (2)100, ,000 (2)240,000 (2)200, ,000 Noncontrolling interest 60,000 4,000 Dividend Income 24,000 (1) 24,000 Retained Earnings, January 1 300, ,000 Dividends Declared (60,000 (30,000 (1) 24,000 (60,000) 6,000 Investment in Special Foods Stock 240,000 Share Capital Ord 500, ,000 ) ) Eliminate the stockholders’ accounts of the subsidiary and invest. accounts balance shown at the beginning of the period.

Book Value Calculations Parent’s Subsidiary’s Equity Accounts NCI Investment Common Retained (20%) Account (80%) Stock Earnings NCI (10%) (90%) Stock Earnings = Balances, 1/1/X8 60, , , ,000 + Net Income 10, ,000 Dividends (6,000) 0 (30,000) Balances, 12/31/X8 64, , , ,000 Basic Elimination Entry Common Stock 200,000 Retained Earnings, BB 100,000 Dividend Income 24,000 NCI in Net Income 10,000 Dividends Declared 30,000 Investment in Smith NCI in Net Assets 64,000 3-216

Second Year 20X2 Consolidation--80 % - Cost Method
5-219 Second Year 20X2 Consolidation--80 % - Cost Method Peerless records its 20X2 income and dividends from Special Foods under the cost method with the following entries: (1) Cash 32,000 Dividend Income 32,000 Record dividends from Special Foods. $40,000 x 0.80

5-220 20X2 Consolidation--80 % - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated (1) 32,000 Dividend Income 32,000 Retained Earnings, January 1 430, ,000 Dividends Declared (60,000 (40,000 Investment in Special Foods Stock 240,000 ) ) Remove the parent’s portion of any dividends declared by the subsidiary in second year.

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Int. (19) 15,000 (15,000) Dividends Declared (60,000) (40,000) (18) 32,000 (19) 8,000 (60,000) Noncontrolling Interest (19) 7,000 An entry is needed to assign $15,000 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest.

20X2 Consolidation--80 % Cost Method
Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earning , ,000 (19)4,000 Noncontrolling Interest (19) 7, ,000 An entry is needed to allocate to noncontrolling shareholders for previous year (2001) (50,000 – 30,000) x 20% = 4,000, to debit Retained Earnings

20X2 Consolidation--80% - Cost Method
5-223 20X2 Consolidation--80% - Cost Method Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated 4,000 (2)100, ,000 (2) 240,000 (2)200, ,000 Noncontrolling interest 60,000 71,000 7,000 Dividend Income 32,000 (1) 32,000 Retained Earnings, January 1 430, ,000 Dividends Declared (60,000 (40,000 (1) 32,000 (60,000 8,000 Investment in Special Foods Stock 240,000 Share Capital Ord 500, ,000 ) ) ) Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the subsidiary at the beginning of 20X2.

Book Value Calculations Parent’s Subsidiary’s Equity Accounts NCI Investment Common Retained (20%) Account (80%) Stock Earnings NCI (10%) (90%) Stock Earnings = Balances, 1/1/X8 64, , , ,000 + Net Income 15, ,000 Dividends (8,000) 0 (40,000) Balances, 12/31/X8 71, , , ,000 Basic Elimination Entry Common Stock 200,000 Retained Earnings, 104,000 Dividend Income 32,000 NCI in Net Income 15,000 Dividends Declared 40,000 Investment in Smith NCI in Net Assets 71,000 3-224

Section 4 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter. We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since instructors often have different styles and preferences, we have attempted to include slides that will accommodate different approaches and that can be adapted to classes with different levels of preparation. For example, some instructors prefer to introduce the material before students have read the chapter. We have tried to facilitate these types of introductory discussions by including slides that replicate key points from the chapter. Other instructors expect students to have read the chapter and attempted homework problems before coming to class. As a result, they may not find it useful to review all of the topics in the chapter or to include slides that simply review many of the details they expect students to study before class. However, instructors following this approach often like to use sample exercises and problems built into the slides that allow them to have extended discussions or to facilitate group interaction in class. If instructors elect to spend two class periods on the same subject, they might find a combination of both styles to be useful by first introducing foundational material before students have read the chapter and studied the topic, followed by an extended discussion the next class period after students have read the chapter and attempted homework problems. We have tried to develop slides that can facilitate a flexible approach to allow instructors to select the slides that best match their objectives and style for class discussions. This is the reason we are including a large number of slides for some chapters in the text. We do not expect all instructors to use all slides, but the slide files should help support different teaching approaches and allow instructors to select the subset of slides that best matches their specific discussion objectives. The slides are organized by learning objective. We have included a slide at the beginning of each learning objective to show where the new material begins. Instructors may or may not want to use these learning objective slides in class. We provide them primarily as a way of organizing the material. We also include short multiple choice questions at the end of most learning objectives. Some instructors find it useful to pause periodically during class to assess students’ level of understanding. For this reason, we include several “practice quiz questions” that can be used throughout class discussions to engage students, help them focus on key points, or to facilitate group interaction. Finally, we provide longer exercises and problems that many instructors find useful in assessing understanding and encouraging group learning. 227

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

Treatment of Positive Differential
4-229 Errors or omissions on the books of the subsidiary: corrections should be made directly on the subsidiary’s books as of the date of acquisition, treated as prior-period adjustments in accordance with PSAK No. 25, “Net Income or Loss for Current Period, Fundamental Errors, and Changes in Accounting Principles”

Treatment of Positive Differential – Cont’d
4-230 2. Excess of fair value over the book value of the subsidiary’s net identifiable assets. This valuation may be accomplished in one of two ways: (1) the assets and liabilities of the subsidiary may be revalued directly on the books of the subsidiary, it is called Push-Down Accounting. But this approach is not allowed according to PSAK 4. (2) the accounting basis of the subsidiary may be maintained and the revaluations made each period in the consolidation workpaper.

Treatment of Positive Differential
4-231 3. Existence of Goodwill: if fair value of the consideration exchanged for an acquired subsidiary is greater than fair value of subsidiary’s net identifiable asset, the difference is considered to be related to future economic benefit.

Fair value of consideration given $340,000 Book value: Share Capital-Ordinary SP $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x (300,000 Differential $ 40,000 ) P S 100% January 1, 20X1 entry: E(3) Investment in Special Foods Stock 340,000 Cash 340,000 Record purchase of Special Foods stock.

Fair value of consideration given $340,000 Book value: Share Capital-Ordinary SP $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x (300,000 Differential $ 40,000 ) P S 100% The elimination entry on the workpaper would be: E(4) Share Capital-Ordinary,Special Foods 200,000 Retained Earnings 100,000 Differential 40,000 Investment in Special Foods Stock 340,000

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 Inv. in Sp. Foods ,000 Differential Total Debits 1,500, ,000 Accum. Depr. 400, ,000 Accounts Payable 100, ,000 Bonds Payable 200, ,000 Share Capital-Ord 500, ,000 Retained Earn , ,000 Total Credits 1,500, ,000 (4) 40,000 (4)200,000 (4)100,000 (4) 340,000

Differential Assuming the differential is allocated to Land

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 Inv. in Sp. Foods ,000 Differential Total Debits 1,500, ,000 Accum. Depr. 400, ,000 Accounts Payable 100, ,000 Bonds Payable 200, ,000 Share Capital-Ord 500, ,000 Retained Earn , ,000 Total Credits 1,500, ,000 (5) 40,000 (4) 340,000 (4) 40,000 (5) 40,000 (4)200,000 (4)100,000 380,000

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 Inv. in Sp. Foods ,000 Differential Total Debits 1,500, ,000 Accum. Depr. 400, ,000 Accounts Payable 100, ,000 Bonds Payable 200, ,000 Share Capital-Ord 500, ,000 Retained Earn , ,000 Total Credits 1,500, ,000 60,000 125,000 160,000 255,000 1,400,000 2,000,000 (5) 40,000 (4) 340,000 (4) 40,000 (5) 40,000 700,000 200,000 300,000 500,000 2,000,000 (4)200,000 (4)100,000 380,000

Elimination Entry E(5) Land 40,000 Differential 40,000 Entry E(5)

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.

Goodwill Components used in determining goodwill:
The fair value of the consideration given by the acquirer The fair value of any interest in the acquiree already held by the acquirer The fair value of the noncontrolling interest in the acquiree, if any The total of these three amounts, all measured at the acquisition date, is compared with the acquisition-date fair value of the acquiree’s net identifiable assets, and the difference is goodwill 1-240 240

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(6) Goodwill 40,000 Differential 40,000 Assign differential to goodwill.

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.

Debit Differential Fair value of consideration given $400,000 P
Book value: Share Capital-Ordinary SP $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x (300,000 Differential $100,000 P S 100% ) January 1, 20X1 entry: E(7) Investment in Special Foods Stock 400,000 Bonds Payable 100, Cash 300,000 Record purchase of Special Foods stock.

Fair value of consideration given - $400,000
Debit Differential Fair value of consideration given - $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

Details - Differential
Goodwill = Cost of investment - Fair value 70, = , ,000 Net assets= Fair value - Book Value incremental 30, = , ,000 Net Assets Incremental consist of: Inventory + Land Build & Eq- Bond Payable 15, , , , = 30,000

Debit Differential The eliminations entered in the consolidation workpaper in preparing the consolidated statement of financial position immediately after the combination are: E(8) Share Capital-Ordinary, Special Foods 200,000 Retained Earnings 100,000 Differential 100,000 Investment in Special Foods Stock 400,000 Eliminate investment balance. E(9) Inventory 15,000 Land 60,000 Goodwill 70,000 Buildings and Equipment 10,000 Bonds Payable 35,000 Differential 100,000 Assign differential.

Errors or omissions on the books of the subsidiary.
Bargain Purchase 4-249 Differential may include: Errors or omissions on the books of the subsidiary. 2. Bargain purchase. The existence of “negative goodwill,” indicating that the subsidiary’s net assets are worth less as a going concern than if they were sold individually.

Illustration of Treatment of Bargain Purchase Differential
Peerless purchases all of Special Foods’ stock for $310,000. The resulting ownership situation is as follows: Fair value of consideration given $310,000 Book value 1/1/X1: Share-Capital Ordinary SF $200,000 Retained earnings SF ,000 $300,000 Peerless’ s share x (300,000) Differential $10,000* Fair value of identifiable net assets over the book value of identifiable net assets is 40,000. It is allocated to Land by 40,000 Fair value of identifiable net assets is over the cost of investment by (30,000) as Bargain Purchase * (40,000 – 30,000 =10,000) 4-250

Illustration of Bargain Purchase
4-251 Illustration of Bargain Purchase Peerless Products acquires all Special Foods’ capital stock for $310,000 on January 1, 20X1, by paying cash.

Statement of Financial Position – Special Food
4-252 Statement of Financial Position – Special Food Assets Cash $ 50,000 $ 50,000 Accounts Receivable 50, ,000 Inventory 60, ,000 Land 40, ,000 Buildings and Equipment 600,000 Accumulated Depreciation (300, ,000 Total Assets $500,000 $540,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 100, ,000 Share Capital 200,000 Retained Earnings 100,000 Total Liabilities & Stockholders’ Equity $500,000 Fair Value of Net Asset $340,000 Book Value Fair Value )

Bargain Purchase Fair value of consideration given $310,000 P
4-253 Bargain Purchase Fair value of consideration given $310,000 Book value: Share Capital-Ordinary SP $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x (300,000) Differential ,000 P S 100% January 1, 20X1 entry: Investment in Special Foods Stock 310,000 Cash 310,000 Record purchase of Special Foods stock.

Fair value of consideration given $310,000
4-254 Bargain Purchase Fair value of consideration given $310,000 Total differential $ 10,000 Excess fair value of net identifiable assets over cost of investment ($30,000) Bargain Purchase Fair value of net identifiable assets $340,000 Excess of fair value of net identifiable assets over book value of identifiable of net assets $40,000 Book value of net identifiable assets $300,000

4-255 Bargain Purchase The eliminations entered in the consolidation workpaper in preparing the consolidated statement of financial position immediately after the combination are: E(1) Share Capital-Ordinary, SP 200,000 Retained Earnings 100,000 Differential ,000 Investment in Special Foods Stock 310,000 Eliminate investment balance. E(2) Land 40,000 Differential ,000 R E (Gain on Bargain Purchase ) ,000 Assign differential in bargain purchase (The gain is directly to Retained Earnings because no income statements being prepared, only statement of financial position.)

Purchase at more than Book Value
Equity Method Purchase at more than Book Value

Acquired at more than Book Value
Peerless purchase all Special stock on January 1, 2001 for $ 387,500, an amount 87,500 in excess of the book value. The acquisition price includes cash of $ 300,000 and a 60 day note for $ 87,500 (paid at maturity during 2001)

Investment cost $387,500 Book value: Share Capital-Ordinary SP $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless’s share x ,000 Differential $87,500 P S 100% January 1, 20X1 (1) Investment in Special Foods Stock 387,500 Cash 300,000 Notes Payable – 60 days ,500 Record purchase of Special Foods stock.

Fair value of consideration/Cost of Investment $387,500
Debit Differential Fair value of consideration/Cost of Investment $387,500 Total differential $87,500 Excess of cost over fair value of net identifiable assets $12,500 (Goodwill) Fair value of net identifiable assets $375,000 Excess of fair value over book value of net identifiable assets $75,000 Book value of net identifiable assets $300,000

First year – Equity Method
Special Food reports net income of $ 50,000 and pays dividends of $ 30,000

Investment in Special F 30,000
Equity Method Investment in Special F 50,000 Income from Subs 50,000 Cash ,000 Investment in Special F 30,000

First year – Equity Method
In Peerless’s books the differential is included in investment account. Inventory for 5,000, Land for 10,000, Build & Equip for 60,000 ( useful life is 10 years) and Goodwill for 12,500

Excess Fair value over Book value
Book value Fair value Increment Inventory 60, ,000 5,000 Land 40, , ,000 Build & Equip , ,000 60,000 400, ,000 75,000

Adjusted to the investment
Inventory is sold Inventory sold is adjusted on Parent’s books. Adjusted to the investment

Adjust income for differential related to inventory sold
Income from Subsidiary 5,000 Investment in SF ,000 Adjust income for differential related to inventory sold

Building and Equipment must be amortized each year
Amortization of building and equipment is adjusted on Parent’s books. Adjusted to the investment

Amortize differential related to Building & Equipment
Amortization= 60,000/10 yrs=6,000/yr Income from Subsidiary 6,000 Investment in SF 6,000 Amortize differential related to building and equipment

Adjusted to the investment
Goodwill must be evaluated every time/periodically and must be adjusted the value for the impairment Goodwill impairment loss is adjusted on Parent’s books. Adjusted to the investment

Impairment of Goodwill
If it is found that the value of goodwill decreasing $ 3,000 then: Impairment of goodwill = $ 3,000 Income from Subsidiary 3,000 Investment in SF ,000 Write down goodwill for impairment

Elimination entries – 1st year
Income from Subsidiary 36,000 Dividend declared ,000 Investment in SF ,000 Eliminate income from Subsidiary (50,000 – 5,000 – 6,000 – 3,000 = 36,000) Share Capital-Ordinary SF 200,000 RE- Jan ,000 Differential ,500 Investment in SF ,500 Eliminate beginning investment balance

100 PERCENT OWNERSHIP PURCHASED AT MORE THAN BOOK VALUE 1st Year
5-271 Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 36,000 Dividends Declared (60,000 (30,000) Investment in Special Food 393,500 (29) 36,000 (29) 30,000 (60,000) (29) 6,000 ) Remove both the investment income reflected in the parent’s income statement and the parent’s portion of any dividends declared by the subsidiary.

100 PERCENT OWNERSHIP PURCHASED AT MORE THAN BOOK VALUE 1st Year
5-272 Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated Income from Subsidiary 36,000 (17) 36,000 Retained Earnings, January 1 300, ,000 Dividends Declared (60,000 (30,000 (17) 30,000 (60,000) Differential Investment in Special Food 393, (17) 6,000 Share Capital Ordinary 500, ,000 (18) 100, ,000 (18) 87,500 ( (18) 387,500 (18)200, ,000 ) )

Cost of Good Sold 5,000 Land 10,000 Build & Equip 60,000
Goodwill ,500 Differential 87,500 Assign beginning differential

An entry is needed to assign differential to
5-274 Parent Subsidiary Eliminations Item Debits Credits Consolidated Cost of Goods Sold 170, ,000 Land 175, ,000 Buildings and Equipment 800, ,000 Goodwill Differential (12) 87,500 (13) 5, , (13) 10, ,000 (13) 60,000 1,460,000 (13) 12,500 (13) 87,500 An entry is needed to assign differential to COGS, Land, Build & Equip and Goodwill.

Elimination entry Depreciation Expense 6,000
Accumulated Depreciation ,000 Depreciation expense related to building & equipment: 60,000/10=6,000 Goodwill impairment loss 3,000 Goodwill ,000 Write down goodwill from 12,500 to be 9,500

Accumulated Depreciation
3. The accumulated depreciation elimination entry: Accumulated Depreciation 300,000 Building and Equipment 300,000 Buildings & Equipment Accumulated Depreciation 600,000 300,000 300,000 300,000 300,000 Shows the Buildings and Equipment “as if” they have been recorded on the sub’s books as new assets at book value. 4-276

Consolidated net income
Net Income P ,000 Equity income from S (36,000)** Net income S ,000 Write off differential inventory ,000* Amortization differential B & E ,000* Impairment loss of goodwill ,000* Consolidated net income ,000 ** 50,000 – 5, ,000 – 3,000 = 36,000 * Charged to cogs, depr exp and impairment loos in workpaper consolidation.

RE of P beginning/Jan 1, ,000 Consolidated net income ,000 Dividend declared by P ,000 Consolidated retained earning 416,000

Second year – Equity Method

Investment in Special F 40,000
Equity Method Investment in Special F 75,000 Income from Subs 75,000 Cash ,000 Investment in Special F 40,000

Amortize differential related to Building & Equipment
Amortization= 60,000/10 yrs=6,000/yr Income from Subsidiary 6,000 Investment in SF ,000

The Parent’s investment account
Bal at start , ,500 Income from S , ,000 W/off inventory ,000 Impairment Goodwill ,000 Amort B & E , ,000 423, ,500 Less: Div received from Subs -30, ,000 Bal at end , ,500

Elimination entries – 2nd year
Income from Subs 69,000 Dividend declared 40,000 Investment in SF 29,000 Eliminate income from Subsidiary (75,000 – 6,000 = 69,000) Share Capital-Ordinary SF 200,000 RE- Jan ,000 Differential ,500* Investment in SF ,500 Eliminate beginning invest bal *(87,500 – 5,000 – 6, ,000 = 73,500)

Accumulated Depreciation 6,000
Land 10,000 Build & Equip 60,000 Goodwill 9,500 Differential ,500 Accumulated Depreciation 6,000 Assign beginning differential

Depreciation expense 6,000 Accumulated depreciation 6,000 Depreciation of increment B & E for the year 20X2

Consolidated net income
P net income ,000 Equity income from S (69,000) Net income S ,000 Amortization differential B & E ,000 Consolidated net income 229,000

RE of P beginning/Jan 1, ,000 Consolidated net income ,000 Dividend declared by P ,000 Consolidated Retained Earnings ,000

Cost Method Purchase at more than Book Value

First year – Cost Method

Cost Method Cash 30,000 Dividend Income 30,000

Elimination entries – 1st year Cost Method
Dividend income ,000 Dividend declared 30,000 Eliminate dividend income from Subsidiary Share Capital-Ordinary SF ,000 RE- Jan ,000 Differential ,500 Investment in SF ,500 Eliminate beginning investment balalance

Cost of Good Sold 5,000 Land 10,000 Build & Equip 60,000
Goodwill ,500 Differential ,500 Assign beginning differential

Accumulated depreciation 6,000 Goodwill impairment loss 3,000
Depreciation expense 6,000 Accumulated depreciation 6,000 Goodwill impairment loss 3,000 Goodwill 3,000 Amortize B & E and reduce goodwill for impairment

Consolidated net income – Cost Method
Operating income P ,000 Net income S ,000 Cost of good sold ,000* Depreciation expense for B & E ,000* Impairment loss of goodwill ,000* Consolidated net income 176,000 * Charged to cogs, depr exp and impairment loss in workpaper consolidation.

Consolidated Retained Earnings – Cost Method
RE of P beginning/Jan 1, ,000 Op income P ,000 Net income S ,000 Cost of good sold ,000 Depreciation expense for B & E ,000 Impairment loss of goodwill ,000 Dividend declared by P ,000 Consolidated Retained Earning 416,000

Second year – Cost Method

Cost Method Cash 40,000 Dividend income ,000

Elimination entries – 2nd year Cost Method
Dividend income ,000 Dividend declared 40,000 Eliminate dividend income from Subsidiary Common stock-SF ,000 RE- Jan 1-at acquisition 100,000 Differential ,500 Investment in SF ,500 Eliminate beginning investment balance

Land 10,000 Build & Equip ,000 Goodwill ,500 Retained Earning ,000* Differential ,500 Accumulated Depreciation 6,000 Assign beginning differential *(5,000-cogs + 6,000-amort + 3,000-impairment loss = 14,000)

Depreciation Expense ,000 Accumulated Depreciation 6,000 Depreciation of incremental related to B & E for the year 20X2

Consolidated net income – Cost Method
Operating income P ,000 Net income S ,000 Amortization differential B & E ,000 Consolidated net income 229,000

Consolidated R E – Cost Method
RE of P beginning/Jan 1, ,000 Op income P ,000 Net income S ,000 Depreciation exp for B & E ,000 Dividend declared by P ,000 Consolidated retained earning 585,000

Road Map: Intercompany Transactions
Typical intercompany transactions Intercompany reciprocal accounts (Chapter 4) Inventory transfers (Chapter 6) Fixed asset transfers (Chapter 7) Intercompany Indebtedness (Chapter 8) 4-306

Intercompany Transactions
Questions Can a company pay money to itself? Can a company receive funds from itself? Answers All forms of intercompany receivables and payables need to be eliminated when consolidated financial statements are prepared. From a single-company viewpoint, a company cannot owe itself money. If intercompany payables and receivables are not eliminated, both the consolidated assets and liabilities are overstated by an equal amount. 4-307

Group Exercise 4: Solution
Three things to think about: Note receivable / payable Interest revenue / expense Interest receivable / payable How would you eliminate each item? 1. Note Payable (sub) XXX Note Receivable (parent) XXX 2. Interest Revenue (parent) XXX Interest Expense (sub) XXX 3. Interest Payable (sub) XXX Interest Receivable (parent) XXX 4-308

Push Down Accounting is not allowed in PSAK
Not to be discuss

Section 5 Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter. We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since instructors often have different styles and preferences, we have attempted to include slides that will accommodate different approaches and that can be adapted to classes with different levels of preparation. For example, some instructors prefer to introduce the material before students have read the chapter. We have tried to facilitate these types of introductory discussions by including slides that replicate key points from the chapter. Other instructors expect students to have read the chapter and attempted homework problems before coming to class. As a result, they may not find it useful to review all of the topics in the chapter or to include slides that simply review many of the details they expect students to study before class. However, instructors following this approach often like to use sample exercises and problems built into the slides that allow them to have extended discussions or to facilitate group interaction in class. If instructors elect to spend two class periods on the same subject, they might find a combination of both styles to be useful by first introducing foundational material before students have read the chapter and studied the topic, followed by an extended discussion the next class period after students have read the chapter and attempted homework problems. We have tried to develop slides that can facilitate a flexible approach to allow instructors to select the slides that best match their objectives and style for class discussions. This is the reason we are including a large number of slides for some chapters in the text. We do not expect all instructors to use all slides, but the slide files should help support different teaching approaches and allow instructors to select the subset of slides that best matches their specific discussion objectives. The slides are organized by learning objective. We have included a slide at the beginning of each learning objective to show where the new material begins. Instructors may or may not want to use these learning objective slides in class. We provide them primarily as a way of organizing the material. We also include short multiple choice questions at the end of most learning objectives. Some instructors find it useful to pause periodically during class to assess students’ level of understanding. For this reason, we include several “practice quiz questions” that can be used throughout class discussions to engage students, help them focus on key points, or to facilitate group interaction. Finally, we provide longer exercises and problems that many instructors find useful in assessing understanding and encouraging group learning. 310

Equity Method Purchase at more than Book Value

Purchase at More Than Book Value
Peerless purchases 80% of Special Food for $310,000 at January 1, 20X1. At that date the fair value of Noncontrolling interest (20%) is estimated to be $77,500.

Statement of Financial Position – Special Food
4-313 Statement of Financial Position – Special Food Assets Cash $ 50,000 $ 50,000 Accounts Receivable 50, ,000 Inventory 60, ,000 Land 40, ,000 Buildings and Equipment 600,000 Accumulated Depreciation (300,000) 360,000 Total Assets $500,000 $575,000 Liabilities and Stockholders’ Equity Accounts Payable $ 100,000 $100,000 Bonds Payable 100, ,000 Share Capital-Ordinary 200,000 Retained Earnings 100,000 Total Liabilities & Stockholders’ Equity $500,000 Fair Value of Net Asset $375,000 Book Value Fair Value )

For differential must be jurnalized in workpaper
Allocation of Differential 4-314 Book Fair Value Value Fair Value Peerless Increment (80%) Inventory is written-off to COGS at the year of acquisition. Land is not amortized until it’s sold to outside party. Building & Equipment have remaining useful life of 10 years. For differential must be jurnalized in workpaper

Fair Value for Controlling and Noncontrolling Interest
S’ common stock ,000 S’ RE ,000 300,000 x .80= 240,000 Differential to inv ,000 x .80= 4,000 Differential to land ,000 x .80= ,000 Differential to b & e ,000 x .80= 48,000 Differential to g’will ,500 x .80= 10,000 Total Fair Value ,500 x .20 Noncontrolling interest Jan 1,20X ,500 Controlling interest-purchase price 310,000

Total Fair Value Investment Cost (80%) 310,000 Noncontrol Int (20%) 77,500 Total Fair Value (100%) ,500

80% Total Fair Value $387,500 Book value: Share Capital Ordinary--S F $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless + Nonctrl share x ,000 Differential $ 87,500 NCI 20% Peerless Products purchases 80 percent of the common stock of Special Foods on January 1, 20X1, for $310,000.

The entry to record Peerless Products purchasing Special Foods stock on January 1, 20X1 is: (21) Investment in Special Foods Stock 310,000 Cash 310,000 Record purchase of Special Foods stock.

Excess of cost over fair value of net identifiable assets
5-319 Purchase at More Than Book Value FV of Consideration $387,500 Total differential $87,500 Excess of cost over fair value of net identifiable assets $12,500 Goodwill Fair value of net identifiable assets $375,000 Excess of fair value over book value of net identifiable assets $75,000 Book value of net identifiable assets $300,000

Debit Differential The eliminations entered in the consolidation workpaper in preparing the consolidated balance sheet immediately after the combination are: E(8) Share Capital Ordinary--Special Foods 200,000 Retained Earnings 100,000 Differential 87,500 Investment in Special Foods Stock 310,000 Noncontrolling interest ,500 Eliminate investment balance + Noncontrolling Interest. E(9) Inventory 5,000 Land 10,000 Building & Equipment ,000 Goodwill 12,500 Differential 87,500 Assign differential.

Book Value Calculations:
Salt’s Equity Accounts, BV NCI’s 20% Pepper’s 80% Common Retained Share of BV Share of BV Stock Earnings Balances, 12/31/X8 60, , , ,000 = + The Basic Elimination Entry: Common Stock 200,000 Retained Earnings 100,000 Investment in Salt 240,000 NCI in NA in Salt 60,000 5-321

Excess Value Calculations:
NCI’s 20% Pepper’s 80% Salt’s Under- or (Over-) Valuation of Net Assets Share of Share of Excess Value Excess Value Inventory Land Building Covenant Goodwill Balances, 12/31/X ,500 70,000 5,000 10,000 60, ,500 = The Accumulated Depreciation Elimination Entry: The Excess Value Reclassification Entry: Land 10,000 Building & Equipment 60,000 Inventory 5,000 Goodwill 12,500 Investment in Salt 70,000 NCI in NA of Salt 17,500 Accumulated Depreciation 300,000 Building & Equipment 300,000 5-322

5-323 20X1 Consolidation--80 Percent Ownership Peerless Special Products Foods Share Capital Ordinary, January 1, 20X1 $500,000 $200,000 Retained Earnings, January 1, 20X1 300, ,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

In 20X1, Peerless Products earns income of $140,000 and pays dividends of $60,000. Special Foods reports net income of $50,000 and pays dividends of $30,000. (22) Investment in S F Stock 40,000 Income from Subsidiary 40,000 Record equity method income: $50,000 x .80 (23) Cash 24,000 Investment in Special Foods Stock 24,000 Record dividends from Special Foods: $30,000 x .80

Entries are needed on Peerless’s books to recognize the write-off of the differential: (24) Income from Subsidiary 4,000 Investment in Special Foods Stock 4,000 Adjust income for differential related to inventory sold: $5,000 x .80 (25) Income from Subsidiary 4,800 Investment in Special Foods Stock 4,800 Amortize differential related to buildings and equipment: 60,000/10 x .80

Entries are needed on Peerless’s books to recognize the write-off of the differential for goodwill: (26) Income from Subsidiary 2,500 Investment in Special Foods Stock 2,500 Adjust income for differential related to impairment of goodwill: $3,125 x .80

Entries are needed on Peerless’s books to recognize the write-off of the differential for combining of 3 written off: (alt) Income from Subsidiary 11,300 Investment in Special Foods Stock 11,300 Adjust income for differential related to impairment of inventory (4,000), building (4,800) and goodwill (2,500) – the total is 11,300.

Book Value Calculations Parent’s Subsidiary’s Equity Accounts NCI Investment Common Retained (20%) Account (80%) Stock Earnings NCI (10%) (90%) Stock Earnings = Balances, 1/1/X8 60, , , ,000 + Net Income 10,000 40, ,000 Dividends (6,000) (24,000) (30,000) Balances, 12/31/X8 64, , , ,000 Basic Elimination Entry Common Stock 200,000 Retained Earnings, BB 100,000 Income from Smith 40,000 NCI in Net Income 10,000 Dividends Declared 30,000 Investment in Smith NCI in Net Assets 64,000 3-328

Group Exercise 2: 80% End of First Year
Excess Value Calculations: NCI’s Pepper’s 20% 80% Salt’s Under- or (Over-) Valuation of Net Assets Element Share of Share of Inventory Land Building Acc Dep Covenant Goodwill Excess Value Excess Value Indefinite 10 years Balances, 1/1/X9 17,500 70,000 5,000 10,000 60, ,500 Less: Amortization ( 2,825) ( 11,300) (5,000) 0 (6,000) (3,125) Balances, 12/31/X9 14,675 58, ,000 60,000 (6,000) 9,375 = The Excess Value Reclassification Entry: Cost of Good Sold ,000 Depreciation expense ,000 Goodwill impairment 3,125 Accumulated Depreciation 6,000 Income from Subs 11,300 NCI in NI of Subs 2,825 The Accumulated Depreciation Elimination Entry: Accumulated Depreciation 300,000 Building & Equipment 300,000 5-329

Income from Subsidiary A/C
Income fr S = ,000 P’ share x 40,000 W’off invent ( 4,000) ,000 x 0.8 Amort B & E ( 4,800) ,000 x 0.8 Impaired of Goodwill ( 2,500) – ,125 x 0.8 28,700

Parent’s Investment A/C
20X1 Beg Bal 310,000 Inc fr Subs: Parent’s share 40,000 Adjustment w/off: W’off inventory ,000 Amort B & E ,800 Impaired goodwill ,500 Less; Div received -24,000 End Bal 314,700

An entry is required to eliminate the subsidiary income.
20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 28,700 Dividends Declared (60,000) (30,000) Investment in Special Foods Stock 314,700 . (26) 28,700 (26) 24,000 (26) 4,700 An entry is required to eliminate the subsidiary income.

Income to Noncontrolling interest
S’net income 50,000 x 20% = 10,000 W’off inv 5000 x 20% = -1,000 Amort B & E 6000 x 20% = -1,200 G’wil impair 3,125 x 20% = 7,175

An entry is required to eliminate the subsidiary dividends.
20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000) (30,000) (26) 24,000 (27) 7,175 (27) 6,000 (60,000) (27) 1,175 An entry is required to eliminate the subsidiary dividends.

Noncontrolling interest January 1
S’ common stock 200,000 S’ RE ,000 300,000 x 0.2 = 60,000 Differential to inv ,000 x 0.2 = 1,000 Differential to land ,000 x 0.2= 2,000 Differential to b & e ,000 x 0.2= 12,000 Differential to g’will , x 0.2= 2,500 387,500 x .20 Noncontrolling interest Jan 1,20X , or ,500

20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January , ,000 Investment in Special Foods Stock 314, (26) 4,700 Differential Share Capital Ord 500, ,000 Noncontrolling Interest (27) 1,175 (28) 100, ,000 (28) 310, (28) 87,500 (28) 200, ,000 (28) 77, ,675 An entry is required to eliminate the subsidiary dividends.

An entry is needed to assign beginning differential.
20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Inventory 170, ,000 Land 175, ,000 Buildings and Equipment 800, ,000 Goodwill Differential (28) 87,500 (29) 5, , (29) 10, ,000 (29) 60,000 1,460,000 (29) 12,500 (29) 87,500 An entry is needed to assign beginning differential.

Depreciation Expense 6,000 Accumulated Depreciation 6,000 Amortize differential related to build & equip: 60,000/10=6,000 Goodwill impairment loss 3,125 Goodwill 3,125 Write down goodwill from 12,500 to be 9,375 Cost of Good Sold 5,000 Inventory 5,000 Write down the inventory to COGS because the inventory is sold

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (30) 6, ,000 Cost of Good Sold 5,000 (31) 3, ,125 Inventory 5,000 5,000 (31) 3,125 9,375 (30) 6, ,000 Depreciation 50, ,000 Goodwill Im- pairment Loss Goodwill (29) 12,500 Accumulated Depreciation 450, ,000 Entries are necessary to amortize the differential related to buildings and equipment and to write down the differential related to goodwill.

Consolidated Net Income, 20X1
Peerless’s separate operating income $140,000 Special Foods net income: 50,000 Write-off of differential related to inventory sold during 20X1 - 5,000 Amortization of differential related to buildings and equipment - 6,000 Goodwill impairment loss ,125 Consolidated net income, 20X1 $175,875

Income to Controlling Interest, 2001:
Consolidated net income 175,875 Income to non controlling interest (7,175) Income to controlling interest 168,700

Consolidated Retained Earnings, 20X1
Consolidated retained earnings, December 31, 20X1: Peerless’s retained earnings on date of combination, January 1, 20X1 $300,000 Income to controlling interest 168,700 Dividends declared by Peerless, 20X1 - 60,000 Consolidated retained earnings, December 31, 20X1 $408,700

Entries are needed on Peerless’s books during 20X2:
Second Year of Ownership, 20X2 Entries are needed on Peerless’s books during 20X2: (32) Investment in Special Foods Stock 60,000 Income from Subsidiary 60,000 Record equity-method income: $75,000 x .80 (33) Cash 32,000 Investment in Special Foods Stock 32,000 Record dividends from Special Foods: $40,000 x .80 (34) Income from Subsidiary 4,800 Investment in Special Foods Stock 4,800 Amortize differential related to buildings and equipment, $6,000 x 0.8 = $4,800

Parent’s Investment Beg Bal 310,000 314,700 Inc fr Subs:
20X X2 Beg Bal 310, ,700 Inc fr Subs: Parent’s share , ,000 W’off inv ,000 Amort B & E , ,800 Impaired Goodwill ,500 Less; Div receiv , ,000 End Bal 314, ,900

Income from Subsidiary
Net Income S 75,000 P’ share x 0.80 60,000 Amortize B & E ,800 55,200

20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 55,200 Dividends Declared (60,000) (40,000) Investment in Special Foods Stock 337,900 (35) 55,200 (35) 32,000 (35) 23,200 An entry is required to eliminate the subsidiary income.

S’net income 75,000 x 20% = 15,000 Amort B & E 6000 x 20% = -1,200 13,800

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (36) 13,800 (13,800) (36) 8,000 (60,000) (36) 5,800 Income to Non- controlling Int. Dividends Declared (60,000) (40,000) (35) 32,000 Noncontrolling Interest An entry is needed to assign $13,800 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest.

Differential at the beginning 2nd year
Land ,000 Build & Eq (60,000-6,000) ,000 Unimpaired g’wil (12,500-3,125) 9,375 73,375

Noncontrolling interest December 31
S’ common stock 200,000 S’ RE ,000 320,000 Differential to land ,000 Unamortized differential to b & e ,000 (60,000-6,000) Unimpaired Goodwill ,375 (12,500-3,125) 393,375 x .20 Noncontrolling interest Dec 31,20X1 78,675

An entry is required to eliminate the beginning investment balance.
20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 408, ,000 Investment in Special Foods 337,900 (35) 23,200 Differential Share Capital Ord 500, ,000 Noncontrolling Interest (36) ,800 (37) 120, ,700 (37) 314,700 (37) 73,375 (37) 200, ,000 (37) 78,675 84,475 An entry is required to eliminate the beginning investment balance.

An entry is required to assign beginning differential.
20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (38) 10, , (38) 60,000 1,460,000 (38) 9,375 9,375 (38) 73,375 (38) 6,000 Land 175, ,000 Buildings and Equipment 800, ,000 Goodwill Differential (37) 73,375 Accumulated Depreciation 500, ,000 An entry is required to assign beginning differential.

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Depreciation and Amortization 50, ,000 Retained Earnings, January , ,000 (37)120,000 Goodwill (38) 9,375 Accumulated Depreciation 500, ,000 (38) ,000 (39) 6, ,000 408,700 9,375 (39) 6, ,000 Entry for amortization of the differential in build & equip for the 2nd year.

Peerless’s separate operating income $160,000 Special Foods net income: 75,000 Amortization of differential related to buildings and equipment - 6,000 Consolidated net income, 20X2 $229,000

Income to Controlling Interest
Consolidated net income 229,000 Income to non controlling int (13,800) Income to controlling interest 215,200

Consolidated retained earnings, December 31, 20X2: Consolidated retained earnings on January 1, 20X $408,700 Income to controlling interest 215,200 Dividends declared by Peerless, 20X2 - 60,000 Consolidated retained earnings, December 31, 20X2 $563,900

Treatment of Other Comprehensive Income – Equity Method
Subsidiary purchase investment AFS (Available for Sale)

Assume during 20X2, Special Food (Subs) purchase $20,000 investment classified as Available for Sale (AFS). Fair Value as per 31 December 20X2 increase to become $30,000

Other Comprehensive Income
5-361 Other Comprehensive Income At December 31, 20X2, Special Food recognizes increase the value of Available for Sale securities: (1) Investment in Available for Sale 10,000 Unrealized Gain (OCI) 10,000 Special Food record increase in value of Available for Sale securities (2) Investment in Special Foods Stock 8,000 Other Comprehensive Income (OCI) from Subsidiary 8,000 Peerless record proportion of increase in value of Available for Sale securities , 10,000 x 0.80=8,000

Elimination for consolidation
5-362 Other Comprehensive Income Elimination for consolidation (1) OCI from Subsidiary - Unrealized 8,000 Investment in Special Food 8,000 (2) OCI to Noncontrolling interest 2,000 Noncontrolling interest 2,000

An entry is required to eliminate OCI.
5-363 20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Investment in Special Foods Stock 348,400 NCI OCI form Subsi- diary 8,000 Unrealized Gain 10,000 OCI to NCI (1) 8, (1) 2,000 (1) 8,000 10, (1) 2,000 (2,000) An entry is required to eliminate OCI.

Accumulated OCI Accumulated OCI, Jan 1, Unrealized gain on investment in book of SF ,000 OCI to Noncontrolling interest (2,000) Accumulated OCI, Dec 31, ,000

Consolidated Statement of Financial Position, Dec 31, 2002
Total Assets ,658,375 ========== Total Liabilities ,000 Stockholders’ Equity Controlling interest: Share ordinary ,000 RE ,900 Accumulated OCI ,000 1,071,900 Non controlling interest: ,475* Total Stockholders’ Equity 1,158,375 Total Liab and Stockholders’ Eq 1,658,375 *(78, , ,000)

Cost Method Purchase at more than Book Value

80% Total Fair Value $387,500 Book value: Share Capital Ordinary--S F $200,000 Retained earnings--Special Foods 100,000 $300,000 Peerless + Nonctrl share x ,000 Differential $ 87,500 NCI 20% Peerless Products purchases 80 percent of the common stock of Special Foods on January 1, 20X1, for $310,000.

The entry to record Peerless Products purchasing Special Foods stock on January 1, 20X1 is: (21) Investment in Special Foods Stock 310,000 Cash 310,000 Record purchase of Special Foods stock.

Excess of cost over fair value of net identifiable assets
Purchase at More Than Book Value Total Fair Value $387,500 Total differential $87,500 Excess of cost over fair value of net identifiable assets $12,500 Fair value of net identifiable assets $375,000 Excess of fair value over book value of net identifiable assets $75,000 Book value of net identifiable assets $300,000

20X1 Consolidation – 80% Ownership
In 20X1, Peerless Products earns income of $140,000 and pays dividends of $60,000. Special Foods reports net income of $50,000 and pays dividends of $30,000. (23) Cash 24,000 Dividend Income 24,000 Record dividends from Special Foods: $30,000 x .80

20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Dividend Income 24,000 Dividends Declared (60,000) (30,000) Investment in Special Foods Stock 310,000 . (26) 24,000 (26) 24,000 An entry is required to eliminate the subsidiary income.

S’net income 50,000 x 20% = 10,000 W’off inv 5000 x 20% = -1,000 Amort B & E 6000 x 20% = -1,200 G’wil impair 3,125 x 20% = 7,175

20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000) (30,000) (26) 24,000 (27) 7,175 (27) 6,000 (60,000) (27) 1,175 An entry is required to eliminate the subsidiary dividends.

Noncontrolling interest January 1
S’ common stock ,000 S’ RE ,000 300,000 Differential to inv ,000 Differential to land ,000 Differential to b & e ,000 Differential to g’will ,500 387,500 x .20 Noncontrolling interest Jan 1,20X ,500

Elimination E(8) Share Capital Ordinary--S F 200,000
Retained Earnings 100,000 Differential 87,500 Investment in Special Foods Stock 310,000 Noncontrolling interest ,500 Eliminate investment balance + Noncontrolling Interest E(9) Cost of Good Sold 5,000 Land 10,000 Building & Equipment ,000 Goodwill 12,500 Differential 87,500 Assign differential.

20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January , ,000 Investment in Special Foods Stock 310,000 Differential Share Capital Ord 500, ,000 Noncontrolling Interest (27) 1,175 (28) 100, ,000 (28) 310,000 (28) 87,500 (28) 200, ,000 (28) 77, ,675 An entry is required to eliminate the subsidiary dividends.

An entry is needed to assign beginning differential.
20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Cost of Goods Sold 170, ,000 Land 175, ,000 Buildings and Equipment 800, ,000 Goodwill Differential (28) 87,500 (29) 5, , (29) 10, ,000 (29) 60,000 1,460,000 (29) 12,500 (29) 87,500 An entry is needed to assign beginning differential.

Depreciation Expense 6,000 Accumulated Depreciation 6,000 Amortize differential related to build & equip: 60,000/10=6,000 in 1st year Goodwill impairment loss 3,125 Goodwill 3,125 Write down goodwill from 12,500 to be 9,375

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (30) 6, ,000 (31) 3, ,125 (31) 3,125 9,375 (30) 6, ,000 Depreciation 50, ,000 Goodwill Im- pairment Loss Goodwill (29) 12,500 Accumulated Depreciation 450, ,000 Entries are necessary to amortize the differential related to buildings and equipment and to write down the differential related to goodwill.

Peerless’s separate operating income $140,000 Special Foods net income: 50,000 Write-off of differential related to inventory sold during 20X1 - 5,000 Amortization of differential related to buildings and equipment - 6,000 Goodwill impairment loss ,125 Consolidated net income, 20X1 $175,875

Consolidated retained earnings, December 31, 20X1: Peerless’s retained earnings on date of combination, January 1, 20X1 $300,000 Peerless’s separate operating income, 20X1 140,000 Special Foods’ 20X1 net income: 50,000 Write-off of differential related to inventory sold - 5,000 Amortization of differential related to buildings and equipment -6,000 Goodwill impairment loss - 3,125 Income to Non controlling interest ,175 Dividends declared by Peerless, 20X1 - 60,000 Consolidated retained earnings, December 31, 20X1 $408,700

In 20X2, Peerless Products earns income of $160,000 and pays dividends of $60,000. Special Foods reports net income of $75,000 and pays dividends of $40,000.

Entries are needed on Peerless’s books during 20X2:
Second Year of Ownership, 20X2 Entries are needed on Peerless’s books during 20X2: (33) Cash 32,000 Dividend Income 32,000 Record dividends from Special Foods: $40,000 x .80

20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (35) 32,000 (35) 32,000 Dividend Income 32,000 Dividends Declared (60,000) (40,000) Investment in Special Foods Stock 310,000 An entry is required to eliminate the subsidiary income.

S’net income 75,000 x 20% = 15,000 Amort B & E 6000 x 20% = -1,200 13,800

Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (36) 13,800 (13,800) (36) 8,000 (60,000) (36) 5,800 Income to Non- controlling Int. Dividends Declared (60,000) (40,000) (35) 32,000 Noncontrolling Interest An entry is needed to assign $13,800 of subsidiary income to the noncontrolling shareholders, based on subsidiary income of $75,000 and a 20 percent noncontrolling interest.

Increased assignable to noncontrolling interest
Balance RE of S on Jan 1,20X ,000 Balance RE of S at acquisition -100,000 Undistributed earning ,000 Noncontrolling interest’share x 0.20 Increased assignable to noncontr int 4,000

An entry is required to eliminate the beginning investment balance.
20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (37) 100,000 4,000 (37) 310,000 (37) 87,500 (37) 200, ,000 (37) 77,500 Retained Earnings, January 1 404, ,000 Investment in Special Foods 310,000 Differential Share Capital Ord 500, ,000 Noncontrolling Interest (36) ,800 An entry is required to eliminate the beginning investment balance.

Assign differential remaining at beginning of year for Goodwill
Impairment loss ( 3,125) 9,375

Assign Differential remaining at beginning of the year
Inventory sold in 20X1 5,000 Additional depreciation ,000 (2001) Goodwill impairment 3,125 14,125 X x 0.2 RE 1/ , ,825 Noncont int

An entry is required to assign beginning differential.
5-392 20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated R/E, January , ,000 (3)100,000 (4) 4,000 Land 175, ,000 Build & Equip 800, ,000 Goodwill Differential (3) 87,500 Acc Depreciation 500, ,000 NCI (2) 5,800 (3) 77,500 (4) 4,000 (5) 11, ,700 (5) 10, ,000 (5) 60,000 1,460,000 (5) 9, ,375 (5) 87,500 (5) ,000 (5) 2, ,475 An entry is required to assign beginning differential.

Depreciation Expense 6,000 Accumulated Depreciation 6,000 Amortize differential related to build & equip: 60,000/10=6,000 in 2nd year

Entries are necessary to show the amortization of the differential.
20X2 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Depreciation and Amortization 50, ,000 Retained Earnings, January , ,000 (37)115, ,700 Goodwill (38) 9,375 Accumulated Depreciation 500, ,000 (38) ,000 (39) 6, ,000 9,375 (39) 6, ,000 Entries are necessary to show the amortization of the differential.

Peerless’s separate operating income $160,000 Special Foods net income: 75,000 Amortization of differential related to buildings and equipment - 6,000 Consolidated net income, 20X2 $229,000

Consolidated retained earnings, December 31, 20X2: Consolidated retained earnings, December 31, 20X1 $408,700 Peerless’s separate operating income, 20X2 160,000 Peerless’ share of Special Foods’ 20X2 net income: 75,000 Amortization of differential in 20X2 - 6,000 Income to Noncontrolling interest -13,800 Dividends declared by Peerless, 20X2 - 60,000 Consolidated retained earnings, December 31, 20X2 $563,900

Treatment of Other Comprehensive Income – Cost Method
Subsidiary purchase investment AFS (Available for Sale)

Other Comprehensive Income
5-399 Other Comprehensive Income At December 31, 20X2, Special Food recognizes increase the value of Available for Sale securities: (1) Investment in Available for Sale 10,000 Unrealized Gain (OCI) 10,000 Special Food record increase in value of Available for Sale securities No entries are needed on Peerless’s books to recognize Other Comprehensive Income

Elimination for consolidation
5-400 Other Comprehensive Income Elimination for consolidation (1) OCI to Noncontrolling interest 2,000 Noncontrolling interest 2,000

An entry is required to assign OCI to NCI.
5-401 20X1 Consolidation--80 Percent Ownership Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Investment in Special Foods Stock 310,000 NCI Unrealized Gain 10,000 OCI to NCI (1) 2,000 10, (1) 2,000 (2,000) An entry is required to assign OCI to NCI.

Additional Consideration

Negative RE of Subs at acquisition
Debit RE account is eliminated with a credit entry: Capital Stock – Subs XXX Differential XXX RE XXX Investment in Subs XXX

Subs’ disposal of differential-related assets
Jan 1, 2001, B purchases all S stock at 10,000 more than book value. The 10,000 differential allocate to Land. S bought the Land at 25,000. Now S sell the Land at 40,000.

S records when Land is sold: Cash 40,000 Land 25,000
Gain on Sale of Land 15,000 Elimination Gain on Sale of Land 10,000 Differential 10,000 (Actual gain in consolidation is only 5,000 instead of 15,000 because the value of the Land is 35,000 instead of 25,000.)

If S sell at 32,000 Gain on sale of Land di book of S 32,000-25,000=7,000 Actually in consolidation, it is not the gain but it is a loss = 3,000 32,000-(25,000+10,000)=(3,000)

S records when Land is sold:
Cash 32,000 Land ,000 Gain on Sale of Land ,000 Elimination Gain on Sale of Land 7,000 Loss on Sale of Land ,000 Differential 10,000

Discontinuance of consolidation
P has 80% ownership of S Jan 1, 2002, P sell 60% of its ownership of S at 246,000. On Jan 1, 2001, assume fair value of 80% is 410,000 whereas the carrying amount is 317,200. Assume the remaining 20% has value at 82,000.

Cash proceeds received 246,000
Fair value of P remaining 20% ,000 328,000 P total interest at date of sale 317,200 Gain on sale of 60% interest in S ,800 P reports the 10,800 gain in 2002 income

Journal by P when 60% ownership is sold:
Cash 246,000 Investment in S 235,200* Gain on Sale of invest 10,800 * 317,200 – 82,000 = 235,200.

Conclusion Continued 411

ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED FINANCIAL STATEMENT

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ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED FINANCIAL STATEMENT

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