1. Chapter 7
Consolidated Financial Statements: Subsequent to Date of Purchase-Type Business Combination

2. Objectives of this Chapter
Prepare the consolidated financial statements for the parent company and its subsidiaries for the years following business combination for purchase-type business combination
For wholly owned purchased subsidiaries
For partially owned purchased subsidiaries
Consolidated FS-Subsequent to date of purchase type

3. Consolidated FS-Subsequent to date of purchase type
Accounting for Operating Results of Wholly Owned Purchased Subsidiaries
A parent company may choose the equity method or the cost method in accounting for the operating results of purchased subsidiaries.
Consolidated FS-Subsequent to date of purchase type

4. Consolidated FS-Subsequent to date of purchase type
Equity Method
The parent company recognizes its share of the subsidiary’s net income or loss and adjusted for the depreciation and amortization of the step up on purchased subsidiary’s net assets.
The parent company also recognizes its share of dividends declared by the subsidiary.
Consolidated FS-Subsequent to date of purchase type

5. Consolidated FS-Subsequent to date of purchase type
Equity Method (contd.)
Thus, the equity method is consistent with the accrual basis accounting.
Equity method emphasizes the economic substance of the parent-subsidiary.
Dividends declared by subsidiaries are not revenue to the parent company, rather, they are a liquidation of a portion of the parent company’s investment in the subsidiary.
Consolidated FS-Subsequent to date of purchase type

6. Consolidated FS-Subsequent to date of purchase type
Cost Method
Under this method, the parent company accounts for the operations of a subsidiary only to the extend that dividends are declared by the subsidiary.
This method emphasizes the legal form of the parent-subsidiary relationship.
Consolidated FS-Subsequent to date of purchase type

7. Choosing Between Equity Method and Cost Method
Consolidated financial statement amounts are the same regardless of the method used to account for a subsidiary’s operations.
The differences are in the working paper elimination.
Consolidated FS-Subsequent to date of purchase type

8. Choosing Between Equity Method and Cost Method (contd.)
Equity method is appropriate for both pooled subsidiaries and purchased subsidiaries.
The cost method is only appropriate for purchased subsidiaries.
Consolidated FS-Subsequent to date of purchase type

9. Consolidated FS-Subsequent to date of purchase type
Example 7.1: Equity Method for holly Owned Purchased Subsidiary for First Year after Business Combination (textbook p )
Assumed that Palm Corporation had used purchase accounting for the December 31, 1999, business combination with its wholly owned subsidiary- Starr Company. Starr had a net income of $60,000 (income statement is on p293 of the textbook) for the year ended December 31, 2000.
Consolidated FS-Subsequent to date of purchase type

10. Consolidated FS-Subsequent to date of purchase type
Example 7.1: (contd.)
On December 20, 2000, Starr’s board of directors declared a cash dividend of $0.60 a share on the 40,000 outstanding shares of common stock owned by Palm. The divided was payable January8, 2001, to stockholders recorded December 29, 2000.
Consolidated FS-Subsequent to date of purchase type

11. Consolidated FS-Subsequent to date of purchase type
Example 7.1: (contd.)
Starr’s December 20, 2000, journal entry to record the dividend declaration is as follows:
12/20
Dividends Declared 24,000
Intercompany Dividend payable 24,000
The intercompany dividend payable account must be eliminated in the preparation of consolidated financial statements for the year 2000.
Consolidated FS-Subsequent to date of purchase type

12. Consolidated FS-Subsequent to date of purchase type
Example 7.1: (contd.)
Under the equity method, Palm Corp. prepares the following journal entries to record the dividend and net income of Starr for the year ended 12/31/2000:
12/20/00
Intercompany
Dividend Receivable 24,000
Investment in Starr Company Stock 24,000
To record the dividends declared by Starr.
Consolidated FS-Subsequent to date of purchase type

13. Consolidated FS-Subsequent to date of purchase type
Example 7.1: (contd.)
12/31/00
Investment in
Starr Company Stock ,000
Intercompany Investment Income 60,000
To record the Palm’s share (100%) of net income on
Starr under equity method
Consolidated FS-Subsequent to date of purchase type

14. Adjustment of Purchased Subsidiary’s Net Income
Since Palm’s acquisition of Starr is accounted for using the purchase method, adjustments are needed to adjust Starr’s net income for depreciation and amortization attributable to the step up on Starr’s net assets on 12/31/99.
Consolidated FS-Subsequent to date of purchase type

15. Adjustment of Purchased Subsidiary’s Net Income (contd.)
Assumed that on 12/31/99, differences between the current fair values and carrying amounts of Starr’s net assets were as follows (also see p236 and p241 of chapter 6 of the textbook):
Consolidated FS-Subsequent to date of purchase type

16. Adjustment of Purchased Subsidiary’s Net Income (contd.)
Inventories (FIFO)
$ 25,000
Plant assets (net)
Land
$15,000
Building(eco. life 10 yrs.)
30,000
Machinery(eco. life 10yrs.)
20,000
65,000
Patent (eco. life 5 yrs.)
5,000
Goodwill (eco. life 30 yrs.)
15,000
Total
$110,000
Consolidated FS-Subsequent to date of purchase type

17. Adjustment of Purchased Subsidiary’s Net Income (contd.)
Palm prepares the following journal entry to account for the depreciation and amortization of the step up on Starr’s net assets:
12/31/2000
Intercompany
Investment Income 30,500
Investment in
Starr Company Stock 30,500
Consolidated FS-Subsequent to date of purchase type

18. Adjustment of Purchased Subsidiary’s Net Income (contd.)
The annual depreciation and amortization of the step up are as follows:
Inventory (to cost of goods sold)
$25,000
Building (30,000/15)
2,000
Machinery (20,000/10)
Patent (5,000/5)
1,000
Goodwill (15,000/30)
500
Total depr. And amort. For year 2000
$30,500
(income tax effects are disregarded)
Consolidated FS-Subsequent to date of purchase type

19. Adjustment of Purchased Subsidiary’s Net Income (contd.)
After the three foregoing journal entries, Palm Corp.’s Investment in Starr Company’s Common Stock and intercompany Investment Income accounts are as follows:
Investment in Starr’s Common Stock
12/31/99
450,000 a
50,000 b
12/31/00
60,000 d
24,000 c
12/20/00
30,500 e
505,500
Consolidated FS-Subsequent to date of purchase type

20. Adjustment of Purchased Subsidiary’s Net Income (contd.)
a. Issuance of common stock (by Palm) in the acquisition of Starr.
b. Direct out-of-pocket costs of business combination.
c. Recognition of dividend declared by the subsidiary-Starr.
d. Recognition of wholly owned subsidiary’s (Starr) net income.
e. Recognition of depre. and amor. on the step-up of Starr’s net assets.
Consolidated FS-Subsequent to date of purchase type

21. Adjustment of Purchased Subsidiary’s Net Income (contd.)
Intercompany Investment Income
60,000 a
12/20/00
12/31/00
30,500 b
29,500
Consolidated FS-Subsequent to date of purchase type

22. Development of the Elimination
Analysis of Investment in Starr Stock account (for the year ended 12/31/2000)
Carrying Amount.
Step-up
Total
Beginning Balances (on 12/31/99)
$390,000
$110,000
$500,000
Net Income(Starr)
60,000
Amort. On Step-up
(30,500)
Dividends Declared by Starr
(24,000)
Ending Balance
$426,000
$79,500
$505,500
Consolidated FS-Subsequent to date of purchase type

23. Development of the Elimination (contd.)
Note:
1. The ending balance on the carrying amount (book value),$426,000, equals the balance the total stockholder’s equity of Starr on 12/31/2000 as follows (see the balance sheet section of Starr on p293 of textbook):
Consolidated FS-Subsequent to date of purchase type

24. Development of the Elimination (contd.)
Common Stock,$5 par
$200,000
Additional Paid-in Capital
58,000
Retained Earnings (132,000+60,000-24,000)
168,000
Total Stockholder’s Equity
$426,000
Consolidated FS-Subsequent to date of purchase type

25. Development of the Elimination (contd.)
The $79,500 balance on the Step-up column represents the unamortized excess amount (the difference between the current fair value of net assets and the carrying amount). The details are in the following table:
Consolidated FS-Subsequent to date of purchase type

26. Development of the Elimination (contd.)
Balances, Dec.31,1999
Amort. for Year 2000
Balances, Dec. 31,2000
Inventories
$ 25,000
$(25,000)
Plant assets(net):
Land
$ 15,000
$15,000
Building
30,000
$ (2,000)
28,000
Machinery
20,000
(2,000)
18,000
Total plant
assets
$ 65,000
$ (4,000)
$61,000
Patent
$ 5,000
$ (1,000)
$ 4,000
Goodwill
15,000
(500)
14,500
Totals
$110,000
$(30,500)
$79,500
Consolidated FS-Subsequent to date of purchase type

27. Palm Corp. and Subsidiary Working Paper Elimination (on 12/31/2000)
All three basic financial statements (the income statement, the statement of retained earnings and the balance sheet) must be consolidated for accounting period following the date of a purchase-type business combination.The items that must be included in the elimination are:
Consolidated FS-Subsequent to date of purchase type

28. Consolidated FS-Subsequent to date of purchase type
Palm Corp. and Subsidiary Working Paper Elimination (on 12/31/2000) (contd.)
1)The subsidiary’s beginning balance of stockholder’s equity accounts and its dividends and parent’s investment account;
2)the parent’s intercompany investment income ;
3)unamortized current fair value excess of the subsidiary;
4)certain operating expense of the subsidiary.
Consolidated FS-Subsequent to date of purchase type

29. Consolidated FS-Subsequent to date of purchase type
Palm Corp. and Subsidiary Working Paper Elimination (on 12/31/2000) (contd.)
Assuming that Starr allocates machinery depreciation and patent amortization entirely to cost of goods sold, goodwill amortization entirely to operating expense and building depreciation 50% each to cost of goods sold and operating expenses, the working paper elimination (in journal entry format) for Palm and subsidiary on 12/31/2000 is as follows:
Consolidated FS-Subsequent to date of purchase type

30. Consolidated FS-Subsequent to date of purchase type
Palm Corp. and Subsidiary Working Paper Elimination (on 12/31/2000) (contd.)
Common Stock-Starr
200,000
Additional Paid-in Capital-Starr
58,000
Retained Earnings-Starr
132,000
Investment Income-Palm
29,500
Plant Assets (net)-Starr
($65,000-4,000)
61,000
Patent (net)-Starr ($5,000-1,000)
4,000
Goodwill (net)-Starr ($15, )
14,500
Cost of Goods Sold-Starr
29,000
Operating Expenses-Starr
1,500
Investment in Starr
Common Stock
505,500
Dividends Declared-Starr
24,000
Consolidated FS-Subsequent to date of purchase type

31. Consolidated FS-Subsequent to date of purchase type
Palm Corp. and Subsidiary Working Paper Elimination (on 12/31/2000) (contd.)
Note:
1. Income tax effects are disregarded
2. the computation of cost of goods sold and operating expense are as follows:
Consolidated FS-Subsequent to date of purchase type

32. Consolidated FS-Subsequent to date of purchase type
Palm Corp. and Subsidiary Working Paper Elimination (on 12/31/2000) (contd.)
Cost of Goods Sold
Operating Expenses
Inventories sold
$25,000
Building depreciation
1,000
$1,000
Machinery depreciation
2,000
Patent amortization
Goodwill amortization
500
Totals
$29,000
$1,500
Consolidated FS-Subsequent to date of purchase type

33. Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (on p293 of textbook)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Income Statement
Palm Corporation
Starr Company
Eliminations Increase
Consolidated
Revenue:
Net Sales
1,100,000
680,000
1,780,000
Intercompany investment
income
29,500
(a)(29,500)
Total revenue
1,129,500
(29,500)
Costs and expenses:
Cost of good sold
700,000
450,000
(a) 29,000
1,179,000
Operating expenses
217,667
130,000
(a) 1,500
349,167
Interest expenses
49,000
Income taxes expense
53,333
40,000
93,333
Total costs and
expenses
1,020,000
620,000
30,500*
1,670,500
Net income
109,500
60,000
(60,000)
Consolidated FS-Subsequent to date of purchase type

34. Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Statement of Retained Earnings
Palm Corporation
Starr Company
Eliminations Increase
Consolidated
Retained earnings,
beginning of year
134,000
132,000
(a) (132,000)
Net income
109,500
60,000
(60,000)
Subtotal
243,500
192,000
(192,000)
Dividends
declared
30,000
24,000
(a) (24,000)+
end of year
213,500
168,000
(168,000)
(Continued)
Consolidated FS-Subsequent to date of purchase type

35. Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Balance/Assets
Palm Corporation
Starr Company
Eliminations Increase
Consolidated
Cash
15,900
72,100
88,000
Intercomapny receivable (payable)
24,000
(24,000)
Inventories
136,000
115,000
251,000
Other current assets
131,000
219,000
Investment in Starr
Company common stock
505,500
(a) (505,500)
Plant assets (net)
3,500,000
340,000
(a) ,000
841,000
Patent (net)
440,000
16,000
(a) ,000
20,000
Goodwill (net)
(a) ,500
14,500
Total assets
1,209,400
650,100
(426,000)
1,433,,500
Consolidated FS-Subsequent to date of purchase type

36. Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Liabilities &Stockholders’ Equity
Palm Corporation
Starr Company
Eliminations Increase
Consolidated
Income taxes payable
40,000
20,000
60,000
Other liabilities
190,900
204,100
395,000
Common stock,$10par
400,000
Common stock, $5 par
200,000
(a) (200,000)
Additional paid-in capital
365,000
58,000
(a) (58,000)
Retained earnings
213,500
168,000
(168,000)
Total liabilities
& stockholders’
equity
1,209,400
650,000
(426,000)
1,433,500
Consolidated FS-Subsequent to date of purchase type

37. Consolidated FS-Subsequent to date of purchase type
Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
Notes:
1.The intercompany receivable and payable, placed in adjacent columns on the same line, are offset without a formal elimination.
2. The FIFO methods used by Starr; thus, the $25,000 difference attributable to the beginning inventories of Starr is allocated to the cost of goods sold for year 2000.
Consolidated FS-Subsequent to date of purchase type

38. Consolidated FS-Subsequent to date of purchase type
Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
3. The step up (current fair value excess on Starr’s net assets) is only included in the consolidated balance sheet for the unamortized balance.
4. Step- up on land is not subject to amortization.
Consolidated FS-Subsequent to date of purchase type

39. Consolidated FS-Subsequent to date of purchase type
Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
5. The use of equity method results in:
Parent company net income = consolidated net income
Parent company retained earnings = consolidated retained earnings
These equalities exist when the equity method is used and no intercompany profits accounted for in the determination of consolidated net assets.
Consolidated FS-Subsequent to date of purchase type

40. Consolidated FS-Subsequent to date of purchase type
Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd.)
6. Consolidated financial statements provide more information than those of the parent company despite the equalities in the net income and retained earnings.
7. The retained earnings of Palm on 12/31/2000 includes only $29, share of the subsidiary’s adjusted net income for the year ended 12/31/2000.
Consolidated FS-Subsequent to date of purchase type

41. Consolidated Financial Statements (for example 7.1)
The consolidated income statement, statement of retained earnings and balance sheet of Palm corp. and subsidiary for the year ended December 31, 2000 are as follows: (on p294 and 295 of textbook)
Consolidated FS-Subsequent to date of purchase type

42. Consolidated Financial Statements (contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Income Statement
For Year Ended December 31,2000
Net Sales
$1,780,000
Costs and expenses:
Costs and goods sold
$1,179,000
Operating expenses
349,167
Interest expense
49,000
Income taxes expense
93,333
Total costs and
expenses
1,670,000
Net income
$109,500
Basic earnings per share
of common stock (40,000
shares outstanding)
$ 2.74
Consolidated FS-Subsequent to date of purchase type

43. Consolidated Financial Statements (contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Statement of Retained Earnings
For Year Ended December 31,2000
Retained earnings,
beginning of year:
$ 134,000
Add: Net income
109,500
Subtotals
$ 243,500
Less: Dividends($0.75 a share)
30,000
end of year
$ 213,500
Consolidated FS-Subsequent to date of purchase type

44. Consolidated Financial Statements (contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Assets
Current assets:
Cash
$ ,000
Inventories
251,000
Other
219,000
Total current assets
$ 558,000
Plant assets (net)
841,000
Intangible assets:
Patent(net)
$20,000
Goodwill (net)
14,500
34,500
Total assets
$1,433,500
Consolidated FS-Subsequent to date of purchase type

45. Consolidated Financial Statements (contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Liabilities $ Stockholders’ Equity
Liabilities:
Income taxes payable
$ ,000
Other
395,000
Total liabilities
$ 455,000
Stockholders’ equity:
Common stock, $10 par
$ 400,000
Additional paid-in capital
365,000
Retained earnings
213,500
978,500
Total Liabilities&
stockholders’ equity
$1,433,500
Consolidated FS-Subsequent to date of purchase type

46. Closing Entries for Example 7.1
Closing entries should be prepared for both the parent company and the subsidiary at the end of the fiscal year after the financial statements[1] being prepared.
The closing entries for the subsidiary are prepared in the usual fashion.
The closing entries for the parent company are prepared in the usual fashion except for the closing of the income summary to the retained earnings.
Consolidated FS-Subsequent to date of purchase type

47. Closing Entries (contd.)
Palm Corporation prepares the closing entries on 12/31/2000, after the consolidated financial statements have been prepared, as follows:
Note: Palm closes its income statement accounts, not the consolidated I/S accounts.
Consolidated FS-Subsequent to date of purchase type

48. Closing Entries (contd.)
[1] Consolidated financial statements for the parent company and the regular F/S for the subsidiary.
The parent and subsidiary are two separate legal entities. When consolidated F/S are prepared using the equity method, the economic substance of the parent-subsidiary relationship is being emphasized rather than their legal form.
Consolidated FS-Subsequent to date of purchase type

49. Closing Entries (contd.)
Net Sales ,100,000
Intercompany
Invest. Income ,500
Income Summary
1,129,500
Income Summary 1,020,000
Cost of Goods Sold
700,000
Operating Expense
217,667
Interest Expense
49,000
Income Taxes Expense
53,333
Consolidated FS-Subsequent to date of purchase type

50. Closing Entries (contd.)
Income Summary
109,500
Retained Earnings of
Subsidiarya
5,500
Retained Earnings b
104,000
Retained Earnings
30,000
Dividends Declared
Consolidated FS-Subsequent to date of purchase type

51. Closing Entries (contd.)
a.The portion of retained earnings which is contributed by the subsidiary. The computation is $29,500 (adjusted net income of subsidiary) – 24,000 (dividends declared by the subsidiary).
This amount of retained earnings is NOT available for dividends to Palm’s stockholders.
b.The portion of retained earnings which is contributed by the operation of the parent company.
Consolidated FS-Subsequent to date of purchase type

52. Closing Entries (contd.)
After the foregoing closing entries, the balances of Palm Corp.’s Retained Earnings and Retained Earnings of subsidiary ledger accounts are as follows:
Retained Earnings
134,000
Beg.Balance
104,500
Close net income available for dividends to stockholders of Palm
Close dividends declared
30,000
208,000
Consolidated FS-Subsequent to date of purchase type

53. Closing Entries (contd.)
Retained Earnings of Subsidiary
5,500
Close net income not available for dividends to stockholders of Palm
Consolidated FS-Subsequent to date of purchase type

54. Closing Entries (contd.)
The balance of the retained earnings of subsidiary is equal to the net increase in the balance of Palm’s investment in Starr Company Stock account as shown below:
$505,500 ( the balance of the Investment account on 12/31/2000)
- 500,000 ( the balance of the Investment account on 12/31/99)
$5,500
Consolidated FS-Subsequent to date of purchase type

55. Consolidated FS-Subsequent to date of purchase type
Example 7.2: Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (textbook p )
The Palm-Starr example is continued to be used to illustrate the application of the equity method for a wholly owned purchased subsidiary for the second year after a business combination.
On December 17, 2001, Starr declared a dividend of $40,000, payable January 6, 2002, to Palm Corp., the stockholder of record on December 28, For the year ended 12/31/2001, Starr had a net income of $90,000.
Consolidated FS-Subsequent to date of purchase type

56. Example 7.2: Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (contd.)
After the posting of appropriate journal entries for 2001 under the equity method, selected ledger accounts for Palm Corp. are as follows:
Investment in Starr’s Common Stock
12/31/99
450,000 a
50,000 b
12/31/00
60,000 d
24,000 c
12/20/00
30,500 e
12/31/01
90,000 f
40,000 g
12/17/01
5,500 h
550,000
Consolidated FS-Subsequent to date of purchase type

57. Consolidated FS-Subsequent to date of purchase type
Example 7.2 :(contd.)
a.Issuance of common stock (by Palm) in the acquisition of Starr.
b.Direct out-of-pocket costs of business combination.
c.Recognition of dividend declared by the subsidiary-Starr for year 2000.
d.Recognition of wholly owned subsidiary’s (Starr) net income for 2000.
e.Recog. of depre. and amor. on the step-up of Starr’s net assets for 2000.
Consolidated FS-Subsequent to date of purchase type

58. Consolidated FS-Subsequent to date of purchase type
Example 7.2 :(contd.)
f.Recognition of wholly owned subsidiary’s (Starr) net income for 2001.
g.Recognition of dividend declared by the subsidiary-Starr for year 2001.
h.Recog. of depre. and amor. on the step-up of Starr’s net assets for 2001.
Consolidated FS-Subsequent to date of purchase type

59. Example 7.2: (contd.) Intercompany Investment Income 60,000 a 12/20/00
12/31/00
30,500 b
29,500 d
29,500 c
12/21/00
90,000 e
12/31/01
5,500 f
84,500
Consolidated FS-Subsequent to date of purchase type

60. Consolidated FS-Subsequent to date of purchase type
Example 7.2: (contd.)
a. Palm Corp.’s share in the net income of Starr for the year ended 12/31/00
b. The adjustment for the amort. and depre. of step-up in net assets of Starr for year 2000.
c. Palm Corp.’s share in the adjusted net income of Starr.
d. Closing entry prepared on 12/31/00 to close the intercompany Investment income balance to zero.
e. Plam Corp’s share in the net income of Starr for the year ended 12/31/01.
f. The adjustment for the amort. and derp. of step-up in net assets of Starr for the year of 2001.
Consolidated FS-Subsequent to date of purchase type

61. Consolidated FS-Subsequent to date of purchase type
Developing the Elimination for the Second Year Subsequent to the Business Combination (Example 7.2)
The working paper elimination for December 31, 2001, is similar to that for December 31, 2000, as follows:
Common Stock-Starr
200,000
Additional Paid-in Capital –
Starr
58,000
Retained Earnings-Starr
162,500a
Retained Earnings of
Subsidiary-Palm
5,500
Investment Income-Palm
84,500
Plant Assets (net)-Starr
($61,000-4,000)
57,000
Consolidated FS-Subsequent to date of purchase type

62. Consolidated FS-Subsequent to date of purchase type
Developing the Elimination for the Second Year Subsequent to the Business Combination (contd.)
Patent (net)- Starr
($4,000-1,000)
3,000
Goodwill (net)- Starr
($14, )
14,000
Cost of Goods Sold-Starr
4,000 b
Operating Expense-Starr
1,500 b
Investment in Starr
Common Stock
550,000
Dividends Declared-Starr
40,000
a. 168,000-5,500
Consolidated FS-Subsequent to date of purchase type

63. Consolidated FS-Subsequent to date of purchase type
Developing the Elimination for the Second Year Subsequent to the Business Combination (contd.)
b.The depre. and amor. on differences between current fair value and carrying amount of Starr’s net assets for year 2001 are as follows:
Cost of Goods Sold
Operating Exp.
Building Depre.
$1,000
Machinery Depre.
2,000
Patent Amort.
1,000
Goodwill Amort.
500
Totals
$4,000
$1,500
Consolidated FS-Subsequent to date of purchase type

64. Consolidated FS-Subsequent to date of purchase type
Working Paper for Consolidated Financial Statement for the Second Year following the Business Combination (Equity Method: Wholly Owned Purchase-Type Business Combination)-example 7.2
The following is a partial working paper for consolidated financial statement. The net income and dividends for Palm Corp. are assumed.(on textbook p299)
Consolidated FS-Subsequent to date of purchase type

65. Working Paper for Consolidated Financial Statement for the Second Year following the Business Combination (Equity Method: Wholly Owned Purchase-Type Business Combination)
PALM CORPORATION AND SUBSIDIARY
Partial Working paper for Consolidated Financial Statements
For Year Ended December 31,2001
Statement of Retained Earnings
Palm Corporation
Starr Company
Eliminations Increase
Consolidated
Retained earnings,
beginning of year
208,000
168,000
(a) (162,500)
213,500
Net income
244,500
90,000
(90,000)*
Subtotal
452,500
258,000
(252,500)
458,000
Dividends
declared
60,000
40,000
(a) (40,000)+
end of year
392,500
218,000
(212,500)
398,000
* Decrease in intercompany investment income($84,500), plus total increase in costs and expenses ($4,000 +$1,500), equals $90,000.
+ A decrease in dividends and an increase in retained earnings.
(Continued)
Consolidated FS-Subsequent to date of purchase type

66. Working Paper for Consolidated Financial Statement for the Second Year following the Business Combination (Equity Method: Wholly Owned Purchase-Type Business Combination)
PALM CORPORATION AND SUBSIDIARY
Partial Working paper for Consolidated Financial Statements
For Year Ended December 31,2001
Balance Sheet
Palm Corporation
Starr Company
Eliminations Increase
Consolidated
Common Stock,
$10 par
400,000
Common Stock, $5 par
200,000
(a)(200,000)
Additional paid-in
capital
365,000
58,000
(a) (58,000)
Retained earnings
392,500
218,000
(212,500)
398,000
of subsidiary
5,500
(a) (5,500)
Total stockholders’
equity
1,163,000
476,000
(476,000)
Total liabilities &
stockholders’
x,xxx,xxx
xxx,xxx
Consolidated FS-Subsequent to date of purchase type

67. Closing Entries for Example 7.2
The closing entries for Palm are prepared in the usual way except for the closing of the income summary to retained earnings.
As in the first year, the portion of retained earnings contributed by Starr should be reported separated from other retained earnings contributed by Plam.
Consolidated FS-Subsequent to date of purchase type

68. Closing Entries for Example 7.2 (contd.)
The closing entries pertaining the income summary are as follows:
Income Summary ,500
Retained Earnings of ,500
Subsidiaries a
Retained Earnings b ,000
Consolidated FS-Subsequent to date of purchase type

69. Closing Entries (contd.)
a.The portion of retained earnings contributed by the subsidiary and is NOT available for dividends to Palm’s stockholders. The computation is as follows:
$ 84,500…the adjusted net income of Starr
,000…declared dividend by Starr $ 44,500
b.the portion of retained earnings contributed by Palm ($244,500 – 44,500)
Consolidated FS-Subsequent to date of purchase type

70. Closing Entries (contd.)
Thus, the parent company’s ledger accounts for retained earnings are as follows after the closing entries:
Retained Earnings
134,000
Bal. On 12/31/99
104,500
R/E contributed by Palm in Year 2000
Div. of 2000
30,000
200,000
R/E contributed by Palm in Year 2001
Div. of 2001
60,000
348,000
Bal. On 12/31/2001
Consolidated FS-Subsequent to date of purchase type

71. Closing Entries (contd.)
Retained Earnings of Subsidiary
5,500
R/E contributed by Starr in year 2000, not available for dividends.
44,500
R/E contributed by Starr in year 2001, not available for dividends.
50,000
Bal. On 12/31/2001
Consolidated FS-Subsequent to date of purchase type

72. Consolidated FS-Subsequent to date of purchase type
Accounting for Operating Results of Partially Owned Purchased Subsidiaries
The minority interest in net income (or net loss) needs to be computed and reported in the consolidated income statement as an expense: minority interest in income (or loss) of subsidiary.
In the balance sheet statement, the minority interest in net assets of subsidiary is reported as a liability.
Consolidated FS-Subsequent to date of purchase type

73. Consolidated FS-Subsequent to date of purchase type
Example 7.3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination
Continued with the Post Corporation-Sage Company consolidated equity example of Chapter 6a , assumed that Sage Company declared a $1 a share dividend on 11/24/2000, payable 12/16/2000 to stockholders of record 12/1/2000.
a. Example 6.2 in the PowerPoint notes or on pages 244 to 245 of the textbook.
Consolidated FS-Subsequent to date of purchase type

74. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Also, Sage had a net income of $90,000 for the year-ended 12/31/2000
Note: Post owns 95% of the outstanding shares of Sage Corp.
Consolidated FS-Subsequent to date of purchase type

75. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Sage’s journal entries pertaining the declaration and payment of the dividend are as follows:
Journal Entries for Sage (Year 2000)
11/24
Dividends Declared (40,000 x $1)
40,000
Dividends Payable
($40,000 x 0.05)
2,000
Intercompany
($40,000 x 0.95)
38,000
To record declaration of dividend payable Dec. 16,2000, to stockholders of record Dec. 1,2000
Consolidated FS-Subsequent to date of purchase type

76. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Journal Entries for Sage(Year 2000) (contd.)
12/16
Dividends Payable
2,000
Intercompany Dividends
Payable
38,000
Cash
40,000
To record payment of dividend declared Nov. 24, 2000, to stockholders of record Dec. 1, 2000
Consolidated FS-Subsequent to date of purchase type

77. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Following the equity method, Post’s journal entries for year 2000 include the following:
Journal Entries for Post (Year 2000)
11/24
Intercompany Dividends
Receivable
38,000
Investment in Sage
Company Common
Stock
To record dividend declared by Sage Company, payable Dec. 16, 2000, to stockholders of record Dec. 1,2000.
Consolidated FS-Subsequent to date of purchase type

78. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Journal Entries for Post(Year 2000) (contd.)
12/16
Cash
2,000
Intercompany
Dividends Receivable
38,000
To record receipt of dividend from Sage Company
12/31
Investment in Sage Company Common Stock ($90,000 x 0.95)
85,500
Intercompany Investment
Income
To record 95% of net income of Sage Company for the year ended Dec. 31,2000(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type

79. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Similar to the adjustment on the wholly owned subsidiary’s net income, the net income of the partially owned subsidiary also needs to be adjusted for the depreciation of the assets step-upa and the amortization of goodwill.b The assets step-up for Sage on 12/31/99 is as follows:
a.$246,000; see p64 of Chapter 6 notes.
b.$38,000; see p68 of Chapter 6 notes.
Consolidated FS-Subsequent to date of purchase type

80. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Inventories(FIFO cost)
$ 26,000
Plant assets (net):
Land
$ 60,000
Building (economic
life 20 years)
80,000
Machinery (economic
life 5 years)
50,000
190,000
Leasehold (economic
life 6 years)
30,000
Total
$246,000
Consolidated FS-Subsequent to date of purchase type

81. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
The goodwill of for the purchase of 95% of Sage is calculated as follows:
Cost of Post Corporation’s 95%
interest in Sage Company
$1,192,250
Less:95% of $1,215,000
aggregate current fair values of
Sage’s identifiable net assets
1,154,250
Goodwill acquired by Post (to be
amortized over 40 years)
$ 38,000
Consolidated FS-Subsequent to date of purchase type

82. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Therefore, Post Corp. prepares the following journal entry on 12/31/2000 to reflect the effects of the depreciation on the assets step-up under the equity method:
Journal Entry for Post (12/31/2000)
Intercompany Investment
Income
42,750
Investment in Sage
Company Common
Stock
Consolidated FS-Subsequent to date of purchase type

83. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
To amortize differences between current fair values and carrying amounts of Sage Company’s identifiable net assets on Dec. 31,1999, as follows:
Inventories– to cost of goods sold
$26,000
Building—depreciation ($80,000/20)
4,000
Machinery—depreciation ($50,000/5)
10,000
Leasehold—amortization ($30,000/6)
5,000
Total difference applicable to 2000
$45,000
Amortization for 2000($45,000 x 0.95)
$42,750
(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type

84. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
In addition, Post also prepares the following entry to recognize the amortization of goodwill:
Journal Entry for Post (12/31/2000)
Amortization Expense ($38,000/40)
950
Investment in Sage
Company Common Stock
To amortize goodwill acquired in business combination with partially owned purchased subsidiary over an economic life of 40 years.
Consolidated FS-Subsequent to date of purchase type

85. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
Note: goodwill in a business combination involving partially owned subsidiary is attributed to the parent company rather than to the subsidiary under the FASB recommended treatment. This technique avoids charging any portion of the goodwill amortization to the minority interest, which did not acquire any goodwill.
Consolidated FS-Subsequent to date of purchase type

86. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
After posting the foregoing entries, Post Corporation’s Investment in Sage Company Common Stock and Intercompany Investment Income ledger accounts are as follows:
Consolidated FS-Subsequent to date of purchase type

87. Investment in Sage Company Common Stock
Example 7.3: (contd.)
Investment in Sage Company Common Stock
Date
Explanation
Debit
Credit
Balance
1999
12/31
Issuance of common stock
in business combination
1,140,000
1,140,000 dr 31
Direct out-of-pocket costs of
business combination
52,250
1,192,250 dr
2000
11/24
Dividend declared by Sage
38,000
1,154,250 dr
Net income of Sage
85,500
1,239,750 dr
Amortization of differences
between current fair values
and carrying amounts of
Sage’s identifiable net
assets
42,750
1,197,000 dr
Amortization of goodwill
950
1,196,050 dr
Consolidated FS-Subsequent to date of purchase type

88. Example 7.3: contd.) Intercompany Investment Income Date Explanation
Debit
Credit
Balance
2000
12/31
Net Income of Sage
85,500
85,500 cr 31
Amortization of
differences between
current fair values and
carrying amounts of
Sage’s identifiable net
assets
42,750
42,750 cr
Consolidated FS-Subsequent to date of purchase type

89. Consolidated FS-Subsequent to date of purchase type
Example 7.3: (contd.)
The $42,750 balance of Post Corporation’s Intercompany Investment Income account represents 95% of the $45,000 adjusted net income ($90,000-$45,000) of Sage Company for the year ended 12/31/2000.
Consolidated FS-Subsequent to date of purchase type

90. Developing the eliminations for Example 7.3
Using the equity method to account for the investment in Sage results in a balance in the Investment ledger account with three components:
(1) the carrying amount of Sage’s identifiable net assets;(2)the “current fair value excess” , which is attributable to Sage’s identifiable net assets; and (3) the goodwill acquired by Post in the business combination with Sage. These components are analyzed as follows:
Consolidated FS-Subsequent to date of purchase type

91. Developing the eliminations for Example 7.3 (contd.)
Post Corporation
Analysis of Investment in Sage Company Common Stock Ledger Account (For Year Ended December 31,2000)
Carrying Amount
Current Fair Value Excess
Goodwill
Total
Beginning balances
$920,550
$233,700
$38,000
$1,192,250
Net income of Sage
($90,000 x 0.95)
85,500
Amortization of
differences between
current fair values
and carrying
amounts of Sage’s
identifiable net
assets ($45,000 x 0.95)
(42,750)
Consolidated FS-Subsequent to date of purchase type

92. Developing the eliminations for Example 7.3 (contd.)
Carrying Amount
Current Fair Value Excess
Goodwill
Total
Amortization of
goodwill
(950)
Dividend declared by
Sage ($40,000 x 0.95)
(38,000)
Ending balances
$968,050
$190,950
$37,050
$1,196,050
Consolidated FS-Subsequent to date of purchase type

93. Developing the eliminations for Example 7.3 (contd.)
The minority interest in Sage’s net assets (which is not recorded in a ledger account) is analyzed similarly, except that there is not goodwill attributable to the minority interest:
Consolidated FS-Subsequent to date of purchase type

94. Developing the eliminations for Example 7.3 (contd.)
Post Corporation
Analysis of Minority Interest in Net Assets of Sage Company
For Year Ended December 31,2000
Carrying Amount
Current Fair Value Excess
Total
Beginning balances
$48,450
$12,300
$60,750
Net income of Sage($90,000 x 0.05)
4,500
Amortization of differences
between current fair values
and carrying amounts of
Sage’s identifiable net assets
($45,000 x 0.05)
(2,250)
Dividend declared by Sage
($40,000 x 0.05)
(2,000)
Ending balances
$50,950
$10,050
$61,000
Consolidated FS-Subsequent to date of purchase type

95. Developing the eliminations for Example 7.3 (contd.)
The sum of the ending balances of the carrying amount columns of the above two tables equals $1,019,000 ($968,050 +$50,950).This amount agrees with the total stockholders’ equity of Sage Company on 12/31/2000 as follows:
Common stock,$10 par
$ 400,000
Additional paid-in capital
235,000
Retained earnings
384,000
Total stockholders’ equity
$1,019,000
Consolidated FS-Subsequent to date of purchase type

96. Developing the eliminations for Example 7.3 (contd.)
Also, the sum of the ending balances of the carrying fair value excess columns of the above two tables equals $201,000 ($190,950 +$10,050). This amount represents the unamortized identifiable assets step-up as follows:
Consolidated FS-Subsequent to date of purchase type

97. Developing the eliminations for Example 7.3 (contd.)
Balances,
Dec.31,1999
(p.302)
Amortization for Year 2000 (p.302)
Dec.31,2000
Inventories
$ 26,000
$ (26,000)
Plant assets(net):
Land
$ 60,000
Building
80,000
$ (4,000)
76,000
Machinery
50,000
(10,000)
40,000
Total plant
assets
$190,000
$ (14,000)
$176,000
Leasehold
$ 30,000
$ (5,000)
$ 25,000
Totals
$246,000
$ (45,000)
$201,000
Consolidated FS-Subsequent to date of purchase type

98. Developing the eliminations for Example 7.3 (contd.)
Assuming that Sage Company allocates machinery depreciation and leasehold amortization entirely to cost of goods sold and building depreciation 50% each to cost of goods sold and operating expense, the working paper eliminations for Post Corp. and subsidiary on 12/31/200 are as follows:
Consolidated FS-Subsequent to date of purchase type

99. Developing the eliminations for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Working Paper Eliminations
December 31,2000
(a)Common Stock–Sage
400,000(1)
Additional Paid-in Capital–Sage
235,000(1)
Retained Earnings-Sage
334,000(1)
Intercompany Investment Income-Psot
42,750(2)
Plant Assets(net)-Sage($190,000-$14,000)
176,000(3)
Leasehold(net)-Sage ($30,000-$5,000)
25,000(3)
Goodwill (net)-Post($38,000-$950)
37,050(3)
Cost of Goods Sold-Sage
43,000(4)
Operating Expenses-Sage
2,000(4)
Consolidated FS-Subsequent to date of purchase type

100. Developing the eliminations for Example 7.3 (contd.)
Investment in Sage Company
Common Stock-Post
1,196,050(1)
Dividends Declared-Sage
40,000(1)
Minority Interest in Net Assets of
Subsidiary ($60,750 - $2,000)[See(d)]
58,750(1)
Consolidated FS-Subsequent to date of purchase type

101. Developing the eliminations for Example 7.3 (contd.)
The above eliminations are to carry out the following:
(1) Eliminate intercompany investment and equity accounts of subsidiary at the beginning of year,and subsidiary dividends.
(2) Provide for Year 2000 depreciation and amortization on differences between current fair values and carrying amounts of Sage's identifiable net assets as follows:
Consolidated FS-Subsequent to date of purchase type

102. Developing the eliminations for Example 7.3 (contd.)
Cost of Goods Sold
Operating Expenses
Inventories sold
$ 26,000
Building depreciation
2,000
$ 2,000
Machinery depreciation
10,000
Leasehold amortization
5,000
Totals
$ 43,000
Consolidated FS-Subsequent to date of purchase type

103. Developing the eliminations for Example 7.3 (contd.)
(3) Allocate unamortized differences between combination date current fair values and carrying amounts to appropriate assets.
(4) Establish minority interest in net assets of subsidiary at beginning of year ($60,750), less minority interest share of dividends declared by subsidiary during year ($40,000 x 0.05=$2,000).
(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type

104. Developing the eliminations for Example 7.3 (contd.)
(b)Minority Interest in Net
Income of Subsidiary
2,250
Minority Interest in
Net Assets of
Subsidiary
Consolidated FS-Subsequent to date of purchase type

105. Developing the eliminations for Example 7.3 (contd.)
To establish minority interest in subsidiary’s adjusted net income for Year 2000 as follows:
Net income of subsidiary
$ 90,000
Net reduction of
elimination (a) ($43,000 +$2,000)
(45,000)
Adjuste net income of
subsidiary
$45,000
Minority interest share
($45,000 x 0.05)
$ 2,250
Consolidated FS-Subsequent to date of purchase type

106. Notes to the elimination entries for Example 7.3 (contd.)
1. The working paper eliminations at the time of business combination is as follows (i.e., 12/31/1999 or 1/1/2000):
Common Stock ,000
Add. Paid-in Cap ,000
Retained Earnings ,000
Plant Assets ,000
Leashold ,000
Inventory ,000
Goodwill ,000b
Investment in Sage ,192,250
Minority Interest ,750a
Consolidated FS-Subsequent to date of purchase type

107. Consolidated FS-Subsequent to date of purchase type
Notes (contd.)
2. The working paper eliminations for Post Corporation and subsidiary on 12/31/2000 are doing the follows:
a. Eliminate stockholders’ equity of subsidiary as of 1/1/2000.
b. Increase the assets (i.e., plant assets and Leashold) of the subsidiary to the fair value on the business combination date adjusted for depreciation,
Consolidated FS-Subsequent to date of purchase type

108. Consolidated FS-Subsequent to date of purchase type
Notes (contd.)
c. The recognition of additional depreciation expense due to asset step up and the recognition of additional cost of goods sold due to inventory step-up (assuming FIFO).
d. The recognition of goodwill adjusted for the goodwill amortization,
Consolidated FS-Subsequent to date of purchase type

109. Consolidated FS-Subsequent to date of purchase type
Notes (contd.)
e. Elimination of intercompany investment income – post (due to income of Post and Sage will be consolidated in the consolidated income statement).
(all the above accounts are debited in the elimination entries)
(the following accounts are credited in the elimination entries)
Consolidated FS-Subsequent to date of purchase type

110. Consolidated FS-Subsequent to date of purchase type
Notes (contd.)
f. Elimination of investment in sage account balance (due to the assets and liabilities of both companies are to be combined in the consolidated balance sheet statement).
g. Recognize minority interest as a liability ($60,750- $2,000 div. for subsidiary).
h. Elimination of dividends declared by Sage ($40,000= 38, ).
Consolidated FS-Subsequent to date of purchase type

111. Consolidated FS-Subsequent to date of purchase type
Notes :(contd.)
The balance of investment account is $1,196,050. The components of this balance include:
1,192,250 (beg. Balance)
,750 a
– b
– ,000 c
1,196,050
a.Post’s share of net increase in Sage’s income of 2000 after adjusting for depreciation exp., etc. (i.e., 85, ,750). b.amor. of goodwill c.Post’s share of dividends.
Consolidated FS-Subsequent to date of purchase type

112. Working Paper for Example 7
Working Paper for Example 7.3: Consolidated Financial Statements for year Ended 12/31/2000
POST CORPORATION AND SUBSIDIARY
Working Paper for Consolidated Financial Statements
For Year Ended Dec. 31,2000
Income Statement
Post Corp.
Sage Company
Eliminations Inc. (Dec.)
Consolidated
Revenue:
Net Sales
5,611,000
1,089,000
6,700,000
Intercompany investment income
42,750
(a) (42,750)
Total revenue
5,653,750
(42,750)
Costs and expenses:
Costs of goods sold
3,925,000
700,000
(a) 43,000
4,668,000
Operating expenses
556,950*
129,000
(a) 2,000
687,950
Interest and income taxes
expense
710,000
170,000
880,000
Minority interest in net income of
subsidiary
(b) 2,250
2,250
Total costs and expenses
5,191,950
999,000
47,250 †
6,238,200
Net Income
461,800
90,000
(90,000)
Consolidated FS-Subsequent to date of purchase type

113. Eliminations Inc. (Dec.)
Working Paper for Example 7.3: Consolidated Financial Statements for year Ended 12/31/2000 (contd.)
Contd.
Statement of
Retained Earnings
Post Corp.
Sage Company
Eliminations Inc. (Dec.)
Consolidated
Retained earnings,
beginning of year
1,050,000
334,000
(a) (334,000)
Net income
461,800
90,000
(90,000)
Subtotal
1,511,800
424,000
(424,000)
Dividends declared
158,550
40,000
(a) (40,000)‡
end of year
1,353,250
384,000
(384,000)
Consolidated FS-Subsequent to date of purchase type

114. Eliminations Inc. (Dec.)
Working Paper for Example 7.3: Consolidated Financial Statements for year Ended 12/31/2000 (contd.)
Contd.
Balance Sheet/ Assets
Post Corp.
Sage Company
Eliminations Inc. (Dec.)
Consolidated
Inventories
861,000
439,000
1,300,000
Other current
assets
639,000
371,000
1,010,000
Investment in Sage
Company common
stock
1,196,050
(a)(1,196,050)
Plant assets (net)
3,600,000
1,150,000
(a) ,000
4,926,000
Leasehold (net)
(a) ,000
25,000
Goodwill (net)
95,000
(a) ,050
132,050
Total assets
6,391,050
1,960,000
(958,000)
7,393,050
Consolidated FS-Subsequent to date of purchase type

115. Liabilities &Stockholders’ Equity Eliminations Inc. (Dec.)
Working Paper for Example 7.3: Consolidated Financial Statements for year Ended 12/31/2000 (contd.)
Contd.
Liabilities &Stockholders’ Equity
Post Corp.
Sage Company
Eliminations Inc. (Dec.)
Consolidated
Liabilities
2,420,550
941,000
3,361,550
Minority interest in
net assets of
subsidiary
(a) ,750
(b) ,250
61,000
Common stock,$1 par
1,057,000
Common stock, $10 par
400,000
(a) (400,000)
Additional paid-in
capital
1,560,250
235,000
(a) (235,000)
Retained earnings
1,353,250
384,000
(384,000)
Total liabilities
& stockholders’
equity
6,391,050
1,960,000
(958,000)
7,393,050
Consolidated FS-Subsequent to date of purchase type

116. Consolidated Financial Statements for Example 7.3
The consolidated income statement, statement of retained earnings, and balance sheet of Post Corporation and subsidiary for the year ended December 31, 2000, are as follows (the amounts are from the consolidated column in the previous working paper):
Consolidated FS-Subsequent to date of purchase type

117. Consolidated Financial Statements for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Income Statement
For Year Ended December 31,2000
Net Sales
$ 6,700,000
Costs and expenses:
Costs and goods sold
$4,668,000
Operating expenses
687,950
Interest and income taxes
expense
880,000
Minority interest in net income of
subsidiary
2,250
Total costs and expenses
6,238,200
Net income
$ 461,800
Basic earnings per share of common stock(1,057,000 shares outstanding) $
Consolidated FS-Subsequent to date of purchase type

118. Consolidated Financial Statements for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Statement of Retained Earnings
For Year Ended December 31,2000
Retained earnings,
beginning of year:
$ 1,050,000
Add: Net income
461,800
Subtotals
$1,511,800
Less: Dividends ($0.15 a share)
158,550
end of year
$ 1,353,250
Consolidated FS-Subsequent to date of purchase type

119. Consolidated Financial Statements for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Assets
Current assets:
Inventories
$ 1,300,000
Other
1,010,000
Total current assets
$ 2,310,000
Plant assets (net)
4,926,000
Intangible assets:
Leasehold (net)
$ ,000
Goodwill (net)
132,050
157,050
Total assets
$7,393,050
Consolidated FS-Subsequent to date of purchase type

120. Consolidated Financial Statements for Example 7.3 (contd.)
Liabilities & Stockholders’ Equity
Liabilities
Other than minority
interest
$3,361,550
Minority interest in net
assets of subsidiary
61,000
Total liabilities
$3,422,550
Stockholder’s equity:
Common stock, $1 par
$1,057,000
Additional paid-in capital
1,560,250
Retained earnings
1,353,250
3,970,500
Total liabilities &
stockholders’ equity
$7,393,050
Consolidated FS-Subsequent to date of purchase type

121. Closing Entries for Example 7.3
Post Corporation Closing Entries on 12/31/2000
Net Sales
5,611,000
Intercompany Investment Income
42,750
Income Summary
5,653,750
To close revenue accounts.
5,191,950
Cost of Goods Sold
3,925,000
Operating Expenses
556,950
Interest and Income
Taxes Expense
710,000
To close expense accounts.
Consolidated FS-Subsequent to date of purchase type

122. Closing Entries for Example 7.3 (contd.)
Income Summary
461,800
Retained Earnings of
Subsidiary ($42,750-$38,000)
4,750
Retained Earnings
($461,800-$4,750)
457,050
To close Income Summary account; to transfer net income legally available for dividends to retained earnings; and to segregate 95% share of adjusted net income of subsidiary not distributed as dividends.
158,550
Dividends Declared
To close Dividends Declared account.
Consolidated FS-Subsequent to date of purchase type

123. Closing Entries for Example 7.3 (contd.)
After posting the above closing entries, Post’s Retained Earnings and Retained Earnings of Subsidiary ledger accounts are as follows:
Consolidated FS-Subsequent to date of purchase type

124. Closing Entries for Example 7.3 (contd.)
Retained Earnings
Date
Explanation
Debit
Credit
Balance
1999
12/31
1,105,000 cr
2000
Close net income available for dividends
457,050
1,507,050 cr 31
Close Dividends Declared account
158,550
1,348,500 cr
Consolidated FS-Subsequent to date of purchase type

125. Closing Entries for Example 7.3 (contd.)
Retained Earnings of Subsidiary
Date
Explanation
Debit
Credit
Balance
2000
12/31
Close net income not available for dividends
4,750
4,750 cr
Consolidated FS-Subsequent to date of purchase type

126. Closing Entries for Example 7.3
The retained earnings of subsidiary account balance can be reconciled to the increase in Post’s investment ledger account as follows:
Consolidated FS-Subsequent to date of purchase type

127. Closing Entries for Example 7.3
Reconciliation of Undistributed Earnings of Subsidiary
Undistributed earnings of subsidiary,
year ended Dec. 31, $4,750
Less: Amortization of goodwill acquired
by parent company in business
combination
Increase in balance of Investment in
Sage Company Common Stock ledger
account during $3,800
Consolidated FS-Subsequent to date of purchase type

128. Closing Entries for Example 7.3
In addition, the total ending balances of Post is equal to consolidated retained earnings as showed below:
Consolidated FS-Subsequent to date of purchase type

129. Closing Entries for Example 7.3
Total of Parent Company’s Two Retained Earnings Account Balances Equals Consolidated Retained Earnings
Balances, Dec. 31, 2000:
Retained earning $1,348,500
Retained earning of subsidiary ,750
Total $1,353,250
Consolidated FS-Subsequent to date of purchase type

130. Consolidated FS-Subsequent to date of purchase type
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination
Continued with the Post Corporation-Sage Company example, assuming that on 11/22/2001 (the second year after business combination), Sage company declared a dividend of $50,000, payable 12/17/2001, to stockholders of record 12/1/2001.
Consolidated FS-Subsequent to date of purchase type

131. Consolidated FS-Subsequent to date of purchase type
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination (contd.)
Sage had a net income of $105,000 for the year ended 12/31/2001.
Based on 95% of ownership, Post’s share in net income and dividend were $99,750 and $47,500, respectively.
Selected ledger accounts for Post Corp. are as follows after posting subsidiary related income and dividends:
Consolidated FS-Subsequent to date of purchase type

132. Investment in Sage Company Stock
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination (contd.)
Investment in Sage Company Stock
1,192,250 dr
52,250
Direct out-of-pocket
costs of business
combination 31
1,140,000 dr
1,140,000
Issuance of common
stock in business
12/31
1999
Balance
Credit
Debit
Explanation
Date
Consolidated FS-Subsequent to date of purchase type

133. Consolidated FS-Subsequent to date of purchase type
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination (contd.)
Contd.
1,197,000 dr
42,750
Amortization of
differences between
current fair values and
carrying amounts of
Sage’s identifiable net
assets 31
1,239,750 dr
85,500
Net income of Sage
12/31
1,196,050 dr
950
goodwill
1,154,250 dr
38,000
Dividend declared by Sage
11/24
2000
Balance
Credit
Debit
Explanation
Date
Consolidated FS-Subsequent to date of purchase type

134. Consolidated FS-Subsequent to date of purchase type
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination (contd.)
Contd.
1,230,250 dr
18,050*
Amortization of
differences between
current fair values and
carrying amounts of
Sage’s identifiable net
assets 31
1,248,300 dr
99,750
Net income of Sage
12/31
1,229,300 dr
950
goodwill
1,148,550 dr
47,500
Dividend declared by Sage
11/22
2001
Balance
Credit
Debit
Explanation
Date
Consolidated FS-Subsequent to date of purchase type

135. Intercompany Investment Income
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination (contd.)
Intercompany Investment Income
42,750 cr
42,750
Amortization of
differences between
current fair values and
carrying amounts of
Sage’s identifiable net
assets 31
- 0 -
Closing entry
85,500 cr
85,500
Net income of Sage
12/31
2000
Balance
Credit
Debit
Explanation
Date
Consolidated FS-Subsequent to date of purchase type

136. Consolidated FS-Subsequent to date of purchase type
Example 7.4 – Equity Method for Partially Owned Purchased Subsidiary for Second Year after Business Combination (contd.)
Contd.
81,700 cr
18,050*
Amortization of
differences between
current fair values and
carrying amounts of
Sage’s identifiable net
assets 31
99,750 cr
99,750
Net income of Sage
12/31
2001
Balance
Credit
Debit
Explanation
Date
$ 18,050
Post Corporation’s share 9$19,000 x 0.95)
$ 19,000
Total amortization applicable to 2001
5,000
Leasehold amortization ($30,000/6)
10,000
Machinery depreciation ($50,000/5)
$ 4,000
* Building depreciation($80,000/20)
Consolidated FS-Subsequent to date of purchase type

137. Developing the Elimination
The working paper eliminations for 12/31/2001, are developed in the similar way as for the eliminations for 12/31/ The are as follows:
Consolidated FS-Subsequent to date of purchase type

138. Developing the Elimination (contd.)
Post corporation and Subsidiary
Working Paper Eliminations
December 31,2001
4,750
Retained Earnings of Subsidiary-Post
2,000
Operating Expenses-Sage
17,000
Cost of Goods Sold-Sage
36,100
Goodwill (net)-Post($37,050-$950)
20,000
Leasehold(net)-Sage ($25,000-$5,000)
162,000
Plant Assets(net)-Sage($176,000-$14,000)
81,700
Intercompany Investment Income-Post
379,250
Retained Earnings-Sage($384,000-$4,750)
235,000
Additional Paid-in Capital–Sage
400,000
(a)Common Stock–Sage
Consolidated FS-Subsequent to date of purchase type

139. Developing the Elimination (contd.)
58,500
Minority Interest in Net Assets of
Subsidiary ($61,000 - $2,500)
50,000
Dividends Declared-Sage
1,229,300
Investment in Sage Company
Common Stock-Post
Consolidated FS-Subsequent to date of purchase type

140. Developing the Elimination (contd.)
The elimination is to carry out the following:
(a) Eliminate intercompany investment, equity accounts of subsidiary at the beginning of year, and subsidiary dividend.
(b) Provide for Year 2000 depreciation and amortization on differences between current fair values and carrying amounts of Sage's identifiable net assets as follows:
Consolidated FS-Subsequent to date of purchase type

141. Developing the Elimination (contd.)
$ 2,000
$ 17,000
Totals
5,000
Leasehold amortization
10,000
Machinery depreciation
$ 2,000
Building depreciation
Operating Expenses
Cost of Goods Sold
Consolidated FS-Subsequent to date of purchase type

142. Developing the Elimination (contd.)
(c) Allocate unamortized differences of the asset step-up.
(d) Establish minority interest in net assets of subsidiary at beginning of year ($61,000), less minority interest share of dividends declared by subsidiary during year ($50,000 x 0.05=$2,500).
(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type

143. Developing the Elimination (contd.)
$105,000
Net income of subsidiary
(19,000)
Net reduction in elimination (a)
($17,000+ $2,000)
$ 86,000
Adjusted net income of
subsidiary
To establish minority interest in subsidiary’s
adjusted net income for Year 2001 as
follows:
4,300
Minority Interest in Net Assets
of Subsidiary
$ 4,300
Minority interest share
($86,000 x 0.05)
(b)Minority Interest in Net Income
Consolidated FS-Subsequent to date of purchase type

144. Working Paper for Consolidated Financial Statements
The eliminations for Post Corp. and subsidiary described above are illustrated in the following partial working paper for consolidated financial statements. The amounts presented for Post Corp. are assumed.
Consolidated FS-Subsequent to date of purchase type

145. Working Paper for Consolidated Financial Statements (contd.)
POST CORPORATION AND SUBSIDIARY
Partial Working Paper for Consolidated Financial Statements
For Year Ended Dec. 31,2001
1,547,300
(434,250)
439,000
1,542,550
Retained earnings,
end of year
158,550
(a)(50,000) †
50,000
Dividends declared
1,705,850
(484,250)
489,000
1,701,100
Subtotal
352,600
(105,000)*
105,000
Net income
1,353,250
(a) (379,250)
384,000
1,348,500
beginning of year
Consolidated
Eliminations Inc. (Dec.)
Sage Company
Post Corp.
Statement of
Retained Earnings
* Decrease in intercompany investment income ($81,700), plus total increase in costs and expenses ($17,000 + $2,000 + $4,300), equals $ 105,000.
† A decrease in dividends and an increase in retained earnings.
Consolidated FS-Subsequent to date of purchase type

146. Working Paper for Consolidated Financial Statements (contd.)
4,750
Retained earnings of
subsidiary
1,547,300
(434,250)
439,000
1,542,550
Retained earnings
62,800
(a) 58,5000
(b) ,300
Minority interest in net assets of subsidiary
1,560,250
(a) (235,000)
235,000
Additional paid-in
capital
4,164,550
(1,074,000)
1,074,000
Total stockholders’
equity
xxxx,xxx
(1,011,200)
x,xxx,xxx
Total liabilities
& stockholders’
(a) (400,000)
400,000
Common stock, $10 par
1,057,000
Common stock,$1 par
xxx,xxx
Consolidated
Eliminations Inc. (Dec.)
Sage Company
Post Corp.
Balance Sheet
Consolidated FS-Subsequent to date of purchase type

147. Working Paper for Consolidated Financial Statements (contd.)
The 12/31/2001 balance of the minority interest in net assets of subsidiary may be verified as follows:
$ ,800
Minority interest in net assets of
subsidiary ($1,256,000 x 0.05)
$1,256,000
Sage’s adjusted stockholders’ equity,
Dec. 31,2001
182,000
Add: Unamortized difference between
combination date current fair values
and carrying amounts of Sage’s
identifiable net assets ($162,000+ $20,000)
$1,074,000
Sage Company’s total stockholders’
equity, Dec. 31, 2001
Consolidated FS-Subsequent to date of purchase type

148. Consolidated FS-Subsequent to date of purchase type
Closing Entries
Post Corp.’s share of the undistributed earnings of Sage Company for 2001 is $34,200, computed as follows:
$ 34,200
Post’s share of amount of Sage’s
adjusted net income not distributed
as dividends
47,500
Less : Post’s share of dividends
declared by Sage ($50,000 x 0.95)
$ 81,700
Adjusted net income of Sage
Company recorded by Post
Corporation in Intercompany
Investment Income ledger account
(p.632)
Consolidated FS-Subsequent to date of purchase type

149. Closing Entries (contd.)
The following are the partial closing entries of Post on 12/31/2001:
318,400
Retained earnings
(352,600-34,200)
34,200
Retained Earnings
of Subsidiary
(81,700-47,500)
461,800
Income Summary
Consolidated FS-Subsequent to date of purchase type

150. Closing Entries (contd.)
Following the posting of the closing entries, the two ledger accounts of retained earnings of Post are as follows:
Consolidated FS-Subsequent to date of purchase type

151. Closing Entries (contd.)
Retained Earnings
1,666,900 cr
318,400
Close net income
available for dividends
12/31
2001
2000
1,348,500 cr
158,550
Close Dividends
Declared account 31
1,507,050 cr
457,050
1,508,350 cr
1,050,000 cr
Balance
1999
Credit
Debit
Explanation
Date
Consolidated FS-Subsequent to date of purchase type

152. Closing Entries (contd.)
Retained Earnings of Subsidiary
38,950 cr
34,200
Close net income not
available for dividends
12/31
2001
2000
4,750 cr
4,750
Balance
Credit
Debit
Explanation
Date
Consolidated FS-Subsequent to date of purchase type

153. Closing Entries (contd.)
The total balances of these two retained earnings is equal to consolidated retained earnings ( $1,508,350+38,950= $1,547,300).
Also, the $38,950 balance of retained earnings of subsidiary represents Post’s share of the undistributed earnings of Sage since 12/31/99.
Consolidated FS-Subsequent to date of purchase type

154. Closing Entries (contd.)
The undistributed earnings of Sage may be reconciled to the increase in Post’s Investment ledger account balance as follows:
$ 37,050
Increase in balance of Investment in
Sage Company Common Stock
ledger account since Dec. 31, 1999,
date of business combination
($1,229,300 - $1,192,250)
1,900
Less : Amortization of goodwill
acquired in business combination
($950 x 2)
$ 38,950
Undistributed earnings of subsidiary
Consolidated FS-Subsequent to date of purchase type

155. Comments on Equity Method of Accounting
The equity method of accounting for a subsidiary’s operation is preferable to the cost method for the following reasons:
1. The equity method emphasizes economic substance of the parent – subsidiary relationship. The cost method emphasizes the legal form of the relationship.
Consolidated FS-Subsequent to date of purchase type

156. Comments on Equity Method of Accounting (contd.)
2. The equity method allows the use of parent company journal entries to reflect many items that must be included only in working paper elimination in the cost method.
3. The equity method facilitates issuance of separate financial statements for the parent company.
Consolidated FS-Subsequent to date of purchase type

157. Comments on Equity Method of Accounting (contd.)
4. Except when intercompany profits (gains) or losses exist in assets or liabilities to be consolidated, the parent company’s net income and combined retained earnings account balances are identical in the equity method for the related consolidated amounts.
Consolidated FS-Subsequent to date of purchase type

158. Comments on Equity Method of Accounting (contd.)
5. the cost method is not considered appropriate for accounting for a pooled subsidiary’s operations.
Thus, this textbook emphasizes the equity method of accounting for a subsidiary’s operations.
Note: Regardless whether the cost method or the equity method is used, consolidated financial statement amounts are the same.
Consolidated FS-Subsequent to date of purchase type