1. Electronic Presentation by Douglas Cloud Pepperdine University
Baker / Lembke / King
The Reporting Entity and Consolidated Financial Statements 3
Electronic Presentation by Douglas Cloud Pepperdine University

2. Consolidated Financial Statements
Consolidated financial statements present the financial position and results of operations for a parent and one or more subsidiaries as if the individual entities were actually a single company.

3. Consolidated Financial Statements
Consolidated financial statements are primarily for those having a long-run interest in the parent company, such as the stockholders and long-term creditors of the parent company.

4. 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.
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.

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

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

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

8. Changing Concept of the Reporting Entity
In determining control, the FASB has moved beyond the traditional view of legal control to one of effective control.

9. Questions Preparer Should Ask
Are there items included in the statements that would not appear, or that would be stated at a different amount, in the statements of a single company?

10. Questions Preparer Should Ask
Are there any items that do not appear in these statements that would appear if the consolidated entity were actually a single company?

11. Balance Sheets --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
Common Stock 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.

12. The Consolidation Process Illustrated
Additional data:
1. Popper uses the basic equity method to account for its investments in Sun. The investment account is carried at the book value of Sun’s net assets and is adjusted for Popper’s share of Sun’s earnings and dividends.
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.

13. The Consolidated Entity
Parent
Subsidiary

14. The Consolidated Entity
Popper’s
common
stock
Popper
Company
Sun’s common stock
Sun
Corporation

15. Consolidated Balance Sheet
Popper Company
Consolidated Balance Sheet
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 Common Stock 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

16. Consolidated Balance Sheet
Popper Company
Consolidated Balance Sheet
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 Common Stock 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

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

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

19. Noncontrolling Interest
Those shareholders of the subsidiary other than the parent are referred to as “noncontrolling” or “minority” shareholders.
Their interests must be included in the consolidated statements. Most commonly this interest is shown with liabilities or between liabilities and stockholders’ equity in the balance sheet.

20. Consolidated Balance Sheet Workpaper
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
Common Stock 500, ,000
Retained Earnings 124, ,000
(a) 1,000
(a) 1,000

21. Consolidated Balance Sheet Workpaper
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
Common Stock 500, ,000
Retained Earnings 124, ,000
(a) 1,000
(b) 2,000
(a) 1,000
(b) 2,000

22. Consolidated Balance Sheet Workpaper
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
Common Stock 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

23. Additional Considerations--Different Approaches to Consolidation
3-23
Additional Considerations--Different Approaches to Consolidation

24. Recognition of Subsidiary Net Assets
Proprietary Theory
Noncon-trolling share
Parent’s share
Goodwill
Fair value increment
Book value
Portion included in consolidated financial statements
Recognition of Subsidiary Net Assets

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

26. 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

27. 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

28. Recognition of Subsidiary Net Assets
Entity Theory
Noncon-trolling share
Parent’s share
Goodwill
Fair value increment
Book value
Portion included in consolidated financial statements
Recognition of Subsidiary Net Assets

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

30. KUIS
PT. Kenanga membeli 30% kepemilikan PT. Anggrek pada 1 April 2003 dengan menerbitkan saham sebanyak dengan nilai par 100 dan harga pasar 320. Saat pembelian ekuitas PT. Anggrek terdiri dari common stock , additional paid in capital dan retained earning Berikut asset yang memiliki perbedaan nilai buku dan nilai wajar
nilai buku nilai wajar
Tanah
Bangunan (10)
Peralatan (4)
Hutang jk panjang (5)
Selama tahun 2003 laba PT. Anggrek , deviden 10 juta (Februari) dan 40 juta (September).
Buat jurnal selama tahun 2003 dan hitung nilai investasi 31/12/03

31. Chapter Three
The End