1. 1 Learning Objectives After studying the material in this chapter you will be able to do the following: LO1 Understand why companies invest in other companies. LO2 Describe how corporations account for their subsidiaries. LO3 Discuss the accounting for investments where there is significant influence. LO4 Explain the accounting for passive investments. LO5 Recognize the issues affecting financial statements in periods after a subsidiary is purchased (Appendix). Copyright © 2013 McGraw-Hill Ryerson Limited

2. 2 Consolidation After Purchase (Appendix) Consolidated financial statements are more than the sum of lines on parent and subsidiary income statement and balance sheet. Three adjustments are required Record any amortization of fair value adjustments Assess for goodwill impairment Intercompany transactions must be eliminated Copyright © 2013 McGraw-Hill Ryerson Limited LO5

3. 3 1)Fair Value Adjustments ▫Any adjustment to fair value of inventory must be reflected in the cost of sales when sold ▫Any adjustments to fair value of capital assets must be amortized on consolidated balance sheet and expensed in consolidated income statement Must amortize over useful life of assets Original cost amortized by subsidiary Copyright © 2013 McGraw-Hill Ryerson Limited LO5 Consolidation After Purchase (Appendix)

4. 4 Consolidation After Purchase - Appendix 2) Goodwill ▫Must regularly evaluate goodwill and write it down if impaired ▫A writedown reduces the amount of goodwill on consolidated balance sheet is expensed on consolidated income statement Copyright © 2013 McGraw-Hill Ryerson Limited LO5

5. 5 Consolidation After Purchase (Appendix) 3) Intercompany Transactions ▫Intercompany transactions are not reflected in consolidated statements ▫Only transactions with external entities have economic significance ▫If not eliminated, revenues, expenses, receivables, inventory and payables may be overstated Copyright © 2013 McGraw-Hill Ryerson Limited LO5