0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 11: Alternative Concepts of Consolidated Financial Statements
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Pooling of Interests Method
Recent developments
Upsurge in pooling activity in 1998
FASB voted to eliminate the pooling method in 4/1999
exposure draft eliminating the pooling method issued in 9/1999
final standard expected late 2000

2. Pooling of Interests Method
Why is the FASB considering elimination of the pooling method?
The purchase method provides better information on the profitability of an investment
International compatibility

3. Pooling of Interests Method Stock Acquisition
Main Requirement
a stock acquisition through an exchange of voting stock for at least 90% of the voting stock of the acquired company

4. Wholly Owned Subsidiary Equity Allocation
Case A: P issued shares with par value of $60,000
Other Contributed
Capital - S
$10,000
Retained Earnings
- S
$20,000
Common stock -S
$50,000
$10,000
$50,000
$20,000
Common Stock
- P
$200,000
Other Contributed
Capital - P
$40,000
Retained Earnings
- P
$100,000

5. Wholly Owned Subsidiary Journal Entry
Case A: P issued shares with par value of $60,000
net assets acquired are recorded
at their book value
Investment in S 80,000
Common Stock ,000
Retained Earnings 20,000
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
Par value of common stock issued
is recorded

6. Wholly Owned Subsidiary Eliminating Entry
Case A: P issued shares with par value of $60,000
Common stock - S 50,000
Other contributed capital - S 10,000
Retained earnings - S 20,000
Investment in S 80,000
There is no purchase differential under pooling method
because the investment account carries the book value of S

7. Wholly Owned Subsidiary Equity Allocation
Case B: P issued shares with par value of $90,000
Other Contributed
Capital - S
$10,000
Retained Earnings
- S
$20,000
Common stock -S
$50,000
$10,000
$50,000
$20,000
Common Stock
- P
$200,000
Other Contributed
Capital - P
$40,000
Retained Earnings
- P
$100,000
$30,000

8. Wholly Owned Subsidiary Journal Entry
Case B: P issued shares with par value of $90,000
net assets acquired are recorded
at their book value
Investment in S 80,000
Other contributed capital 30,000
Common Stock ,000
Retained Earnings 20,000
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
Par value of common stock issued
is recorded

9. Wholly Owned Subsidiary Equity Allocation
Case C: P issued shares with par value of $110,000
Other Contributed
Capital - S
$10,000
Retained Earnings
- S
$20,000
Common stock -S
$50,000
$10,000
$10,000
$50,000
$10,000
Common Stock
- P
$200,000
Other Contributed
Capital - P
$40,000
Retained Earnings
- P
$100,000
$40,000

10. Wholly Owned Subsidiary Journal Entry
Case C: P issued shares with par value of $110,000
net assets acquired are recorded
at their book value
Investment in S 80,000
Other contributed capital 40,000
Common Stock ,000
Retained Earnings ,000
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
Par value of common stock issued
is recorded

11. 95% Owned Subsidiary Equity Allocation
Case D: P issued shares with par value of $50,000
Other Contributed
Capital - S
$9,500
Retained Earnings
- S
$19,000
Common stock -S
$47,500
$2,500
$47,500
$7,500
$19,000
Common Stock
- P
$200,000
Other Contributed
Capital - P
$40,000
Retained Earnings
- P
$100,000

12. 95% Owned Subsidiary Journal Entry
Case D: P issued shares with par value of $50,000
net assets acquired are recorded
at their book value
Investment in S 76,000
Common Stock ,000
Other contributed capital 7,000
Retained Earnings 19,000
Total shareholders’ equity of S
Company ($80,000) is carried
forward to P Company
Par value of common stock issued
is recorded

13. 95% Owned Subsidiary Eliminating Entry
Case D: P issued shares with par value of $50,000
Common stock - S 47,500
Other contributed capital - S 9,000
Retained earnings - S 19,000
Investment in S 76,000
There is no purchase differential under pooling method
because the investment account carries the book value of S

14. Accounting for a Pooled Subsidiary After Acquisition
Book value method
equivalent to cost method in a purchase
Partial equity method
Complete equity method

15. Accounting After Acquisition Book Value Method
Journal entries of parent:
investment account remains unchanged unless the parent buys or sells shares of the subsidiary
parent records dividend income from subsidiary

16. Accounting After Acquisition Book Value Method
Eliminating entries:
reciprocity EE
dividend EE
investment EE
The eliminating entries are similar to those under purchase method, without allocation and amortization of purchase differential

17. Accounting After Acquisition Partial or Complete Equity Method
Journal entries of parent:
investment account is increased for the parent’s share of reported net income of subsidiary
investment account is decreased for dividends received from the subsidiary
complete equity method: investment account is adjusted for unrealized profit from intercompany sale of inventory or equipment

18. Accounting After Acquisition Partial or Complete Equity Method
Eliminating entries:
dividend EE
investment EE
The eliminating entries are similar to those under purchase method, without allocation and amortization of purchase differential

19. Interim Acquisition
Revenues and expenses of the subsidiary are included in the consolidated income statement for the entire year
The investment account is recorded as if the pooling took place at the beginning of the year
No “net income purchased”

20. Intercompany Sale of Assets
All unrealized profit from intercompany sale of inventory or property is excluded from consolidated financial statements
The eliminating entries are similar to those under purchase method

21. Alternative Concepts of Consolidation
Parent
Company Concept
Economic Unit Concept
Current practice is a compromise between the two general concepts

22. Parent Company Concept
Focus: the interests of the parent’s shareholders
consolidated balance sheet = parent’s balance sheet + assets and liabilities of subsidiary substituted for the Investment in S account
consolidated income statement = parent’s income statement + revenues, expenses, gains and losses of subsidiary substituted for the parent’s income from investment

23. Economic Unit Concept
Focus: control of the whole by a single management
the parent and the subsidiary as a single economic unit
consolidated balance sheet = assets and liabilities of all affiliated companies
consolidated income statement = revenues, expenses, gains and losses of all affiliated companies

24. Advanced Accounting by Debra Jeter and Paul Chaney
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