2. Chapter Three Consolidations – Subsequent to the Date of Acquisition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Investment Accounting 3-2 MethodInvestment AccountIncome Account EquityContinually adjusted to reflect ownership of acquired company. Income accrued as earned; amortization and other adjustments are recognized. Initial ValueRemains at Initially- Recorded cost Cash received is recorded as Dividend Income Partial EquityAdjusted only for accrued income and dividends received from acquired company. Income accrued as earned; no other adjustments recognized.

4. During the year, the Parent will adjust its investment account for the Subsidiary under application of the equity method. The original investment, recorded at the date of acquisition, is adjusted for: Subsequent Consolidation - Equity Method 1.FMV adjustments and other intangible assets, 2.The parent’s share of the sub’s income (loss), and 3.The receipt of dividends from the sub. 3-3

5. Subsequent Consolidation - Worksheet Entries S) The Sub’s equity accounts are eliminated. A) Other intangible assets are recorded and A) the Sub’s assets are adjusted to FV. I) The Equity in Sub Income account is I)eliminated. D) The Sub’s dividends are eliminated. E) Amortization Expense is recorded for the E)FMV adjustments and other intangible F)assets that were recorded in consolidation. 3-4

6. Subsequent Consolidation – Equity Method – Example Entry S Note: If this is the first year of the investment, and the investment was made at a time other than the beginning of the fiscal year, then pre- acquisition income of the sub must be accounted for in the retained earnings balance. Common Stock (Sun Company).... 200,000 APIC (Sun Company)............ 20,000 R/E, 1/1/10 (Sun Company)....... 380,000 Investment in Sun Company.......... 600,000 3-5

7. Subsequent Consolidation – Equity Method – Example Entry A Trademarks...............20,000 Patented technology.......130,000 Goodwill.................80,000 Equipment.................. 30,000 Investment in Sun Company... 200,000 Note: In the first year, the FV adjustments for this entry are calculated in the allocation computation. In subsequent years, the FV adjustments must be reduced by any depreciation taken in prior consolidations. 3-6

8. Subsequent Consolidation – Equity Method–Example Entry I&D Equity in Subsidiary Earnings...93,000 Investment in Sun Company....... 93,000 Investment in Sun Company.... 40,000 Dividends Paid................ 40,000 3-7

9. Subsequent Consolidation – Equity Method – Example Entry E Remember: Never amortize land or goodwill! Amortization Expense......... 13,000 Equipment................... 6,000 Patented Technology................... 13,000 Depreciation Expense................... 6,000 3-8

10. Applying the Initial Value Method If the Initial Value Method is used by the parent company to account for the investment, then the consolidation entries will change only slightly. Remember... The PARENT will record the sub’s activity differently under this method, so the Parent’s accounts will differ from the Equity Method. 1.No adjustments are recorded in the Investment account for current year operations, dividends paid by the subsidiary, or amortization of purchase price allocations. 2.Dividends received from the subsidiary are recorded as Dividend Revenue. 3-9

11. Consolidation Entries – Partial Equity Method If the Parent uses the Partial Equity Method, what will change from the previous two methods? So, the Investment and Income account balances will differ from the other methods, and so will worksheet Entries I and D. Remember, the Parent’s record-keeping is limited to two periodic journal entries: 1) the annual accrual of subsidiary income and 2) the receipt of dividends. 3-10

12. Other Consolidation Entries In addition to the Entries S, A, I, D, & E, we will also eliminate intercompany payables or receivables. AND, if control acquired is less than 100%, an additional adjustment must be made (see Chapter 4). 3-11

13. Consolidation Entries – ALL METHODS Now, check out the consolidated results! No matter which method the Parent chooses to record the Sub’s activity, the consolidated totals end up the SAME! This is because we are eliminating all the entries that we made during the year, regardless of the method used, and regardless of the amount! 3-12

14. Goodwill and Other Intangible Assets (ASC Topic 350) Generally, once goodwill has been recorded, the value will remain unchanged. We will adjust goodwill on the consolidated balance sheet if: 1.We sell all or part of the related subsidiary, or 2.We determine that there has been a permanent decline in value (in which case we record the impairment as an extraordinary item). 3-13

15. Acquisition Method – Accounting for Contingent Consideration What if part of the consideration to be transferred is contingent on a future event? Then the acquiring firm must estimate the fair value of the contingent portion and record a liability in consolidation.  The amount of the payment, times  The likelihood it will be paid, times,  A factor for the time value of money (represented as [1 / (1+%)] 3-14