1. Consolidated Statements: Subsequent to Acquisition Chapter 3

2. Accounting for the Investment in a Subsidiary
Simple Equity Method
Every change in sub’s Retained Earnings in recorded on a pro-rata basis in the Investment account
Cost Method
Investment account remains at its original cost-of-acquisition balance

3. Accounting for the Investment in the Subsidiary
Sophisticated Equity Method
Parent records controlling interest in the subsidiary’s income
Parent also records the amortization adjustment for the excess

4. Elimination Procedures
Consolidation process is performed independently each year
All elimination entries are Workpaper Only --- not posted to the general ledger of parent or subsidiary
Steps for dates subsequent to acquisition:
Date Alignment (varies by method)
Eliminate parent’s share of sub equity
Distribute excess purchase price
Amortize/Depreciate the excess

5. Date Alignment for Simple Equity Method
Investment in Sub carries information through the end of the fiscal year
Subsidiary’s Retained Earnings is at its beginning-of-year balance
Must align the content of the two accounts before eliminating sub equity against the investment account
Eliminate the effects of the current year’s recognition of income and dividends

6. Date Alignment: Simple Equity
Eliminate Parent’s recognition of Sub income:
Investment Revenue XX
Investment in Sub XX
Eliminate Parent’s share of Sub’s dividends:
Investment in Sub XX
Dividends Declared-Sub XX
Investment in Sub account has been returned to its beginning-of-year balance; it has been aligned with the Sub’s Retained Earnings account

7. Income Distribution Schedules
Subsidiary
- Full amortization of excess
Internally generated net income
+ Other adjustments, if any
= Adjusted income
× NIC interest
= Distribute to NCI
Parent
Internally generated net income
+ Parent share Sub adj income
= Controlling interest

8. Date Alignment for Cost Method
Investment account carries information as of the date of acquisition
Subsidiary’s Retained Earnings is at its beginning-of-year balance
Must align the content of the two accounts before eliminating sub equity against the investment account
Convert the Investment account to its simple equity balance as of the beginning of the period
Required at end of second and subsequent years

9. Date Alignment: Cost Method
End of First Year
No date alignment required
Eliminate Parent’s share of Sub’s dividends:
Subsidiary (Dividend) Inc XX
Dividends Declared-Sub XX
End of Second and Subsequent Years
Bring Investment account to its simple equity balance as of the beginning of the year:
Investment in Sub XX
RE-Parent XX

10. Further Consolidation Procedures
After date alignment is completed
The cost method investment is converted to its simple equity balance at the beginning of the year
Same procedure regardless of method (simple equity or cost) to account for investment in subsidiary
Next steps
Eliminate P% of Sub’s beginning of year equity
Distribute excess to controlling interest and NCI
Amortize/Depreciate the excess

11. D&D Schedule for Example

12. Elimination Procedures Eliminate Parent’s share of Sub’s Equity
C Stk-Sub (P%) 80,000
Addn’l Pd-In Capt-Sub (P%) 120,000
Retained Earnings-Sub (P%) NOTE
Investment in Sub XX
NOTE: Controlling interest in the Sub’s Beginning of Current Year R/E is eliminated.

13. Elimination Procedures Distribute excess per D&D schedule
Cost of Goods Sold* 5,000
Land 50,000
Buildings 200,000
Patent 25,000
Discount on B Pay 13,240
Goodwill 126,770
Equipment 20,000
Investment in Sub 320,000
RE-Sub 80,000
*Inventory valuations are distributed:
On date of acquisition: to Inventory
End of first year: to Cost of Goods Sold
End of subsequent years: split between RE-P & RE-S

14. Elimination Procedures Amortize/Depreciate the excess per the D&D Schedule
Dep Exp-Bldgs 10,000
A/D-Bldgs 10,000
A/D-Equipment 4,000
Dep Exp-Equipment 4,000
Other expenses 2,500
Patent 2,500
Interest Exp 3,310
Disc on Bond Pay 3,310
First year:
Current year amortization is recorded as an adjustment to expense
Balance sheet account changed accordingly

15. Elimination Procedures Amortize/Depreciate the excess per the D&D Schedule
Subsequent years:
Current year amortization is recorded as an adjustment to expense
Balance sheet account changed for all years’ amortization
Prior years’ amortization allocated to RE-P and RE-S
Dep Exp-Bldgs 10,000
A/D-Bldgs (2 yr) 20,000
A/D-Equipment (2 yr) 8,000
Dep Exp-Equipment 4,000
Other expenses 2,500
Patent (2 yr) 5,000
Interest Exp 3,310
Disc on Bond Pay (2 yr) 6,620
RE-Par 9,448
RE-Sub 2,362

16. Effect of the Sophisticated Equity Method
Ramifications:
Current year’s equity adjustment is net of excess amortizations
The investment account contains only the remaining unamortized excess applicable to the investment
Distribution and amortization of excess procedures are altered:
Distribute the remaining unamortized excess applicable to the controlling interest to the balance sheet account; adjust the NCI for the remaining excess attributable to its share
Amortize the excess for the current year only

17. Determination of the Method Being Used
Investment account balance is original acquisition cost?
Cost Method
Yes
Parent records subsidiary income that is Sub’s Net Income × P%
Equity Method
Yes
Parent records subsidiary income that is less than Sub’s Net Income × P%
Sophisticated Equity Method
Yes

18. Intraperiod Purchase Simple Equity Method
D&D schedule developed as of the date of purchase
Sub closes nominal accounts on purchase date
Consolidated income includes Sub income from date of purchase
Only subsidiary income earned after the purchase date is distributed to the NCI and controlling interest
Cost Method same as above except
Eliminate intercompany dividends only
Cost-to-Equity conversion is from date of purchase

19. Goodwill Impairment Losses
Impairment loss is
reported in the consolidated income statement for the period in which it occurs
presented on a before-tax basis as part of continuing operations
Recognizing and recording the impairment
Parent records its share of the impairment loss on its books and credits the investment in subsidiary account; NCI share of the loss is recorded on the worksheet or
Impairment loss could be recorded only on the consolidated worksheet

20. Goodwill Impairment Losses
Impairment calculation:
Estimated fair value of 80% sub $900,000
Estimated fair value of identifiable net assets 850,000
Estimated goodwill 50,000
Existing goodwill 165,000
Impairment loss 115,000
Parent’s Journal Entry:
Goodwill Impairment Loss 92,000
Investment in Sub 92,000
Consolidating worksheet:
Record the remaining $23,000 loss

21. Tax-Related Adjustments
Occurs when seller is not taxed; buyer gets book value for future depreciation
Adjustment from market to book accompanied by DTL = tax % × market adjustment
DTL is amortized over same period as asset adjustment; increases tax liability in future years
Tax loss carryover is asset recorded in purchase
Limitations on its use in year of purchase and later years
All amortizations and tax adjustments are carried to Sub’s Income Distribution Schedule