2. 11 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidated Theories, Push-Down Accounting, and Corporate Joint Ventures Chapter 11

3. 11 - 2 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Compare and contrast the elements of consolidation approaches under contemporary theory, parent company theory, and entity theory.

4. 11 - 3 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparison of Consolidation Theories Parent company theory adopts the viewpoint of parent company stockholders. Entity theory focuses on the total consolidated entity.

5. 11 - 4 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparison of Consolidation Theories Contemporary theory identifies the primary users of consolidated financial statements as the stockholders and creditors of the parent company with the objective of reporting the operations as a single business entity.

6. 11 - 5 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparison of Consolidation Theories Following are areas in which the three theories have differences: Basic purpose and users of consolidated financial statements Consolidated net income Minority interest expense

7. 11 - 6 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparison of Consolidation Theories Equity of minority interests Consolidation of subsidiary net assets Unrealized gains and losses Constructive gains and losses on debt retirement

8. 11 - 7 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration: Consolidation Under Parent Company and Entity Theories Pedrich acquires a 90% interest in Sandy on January 1, 2003, for $198,000. Sandy’s net book value was $120,000 on this date. $198,000 – ($120,000 × 90%) = $90,000

9. 11 - 8 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration: Consolidation Under Parent Company and Entity Theories Cash$220$220 Net receivables 80 80 Inventories 90 100 Other current assets 20 20 Plant assets, net 220 300 Total assets$630$720 Liabilities$ 80$ 80 Capital stock, $10 par 400 Retained earnings 150 Total liabilities and stockholders’ equities$630 BookFair Pedrich 12/31/02 (000) Value Value

10. 11 - 9 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration: Consolidation Under Parent Company and Entity Theories Cash$ 5$ 5 Net receivables 30 35 Inventories 40 50 Other current assets 10 10 Plant assets, net 60 80 Total assets$145$180 Liabilities$ 25$ 25 Capital stock, $10 par 100 Retained earnings 20 Total liabilities and stockholders’ equities$145 BookFair Sandy 12/31/02 (000) Value Value

11. 11 - 10 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Entity Theory Accounts receivable, net$35$30$ 5 Inventories 50 40 10 Plant assets, net 80 60 20 Remainder to goodwill 65 Total implied value over book value$100 Fair Value Book Value Excess Fair Value –=

12. 11 - 11 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Parent Company Theory Accounts receivable, net$35$30$ 4.5 Inventories 50 40 9.0 Plant assets, net 80 60 18.0 Remainder to goodwill 58.5 Total implied value over book value$90.0 Fair Value Book Value Excess Fair Value – × 90% =

13. 11 - 12 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers January 1, 2003 (Parent Company) Assets Cash Receivables, net Inventories Other current assets Plant assets, net Investment in Sandy Goodwill Unamortized excess Total assets $ 22 80 90 20 220 198 $630 $ 5 30 40 10 60 $145 b 4.5 b 9 b 18 b 58.5 a 90 a 198 b 90 $ 27 114.5 139 30 298 58.5 $667 Adjustments and Consolidated Eliminations Balance Account Title Pedrich Sandy Dr. Cr. Sheet

14. 11 - 13 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Liabilities and Equity Liabilities Capital stock Retained earnings Minority interest Total equities $ 80 400 150 $630 $ 25 100 20 $145 a 100 a 20 a 12 $105 400 150 12 $667 Consolidation Working Papers January 1, 2003 (Parent Company) Adjustments and Consolidated Eliminations Balance Account Title Pedrich Sandy Dr. Cr. Sheet

15. 11 - 14 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers January 1, 2003 (Entity Theory) Assets Cash Receivables, net Inventories Other current assets Plant assets, net Investment in Sandy Goodwill Unamortized excess Total assets $ 22 80 90 20 220 198 $630 $ 5 30 40 10 60 $145 b 5 b 10 b 20 b 65 a 100 a 198 b 100 $ 27 115 140 30 300 65 $677 Adjustments and Consolidated Eliminations Balance Account Title Pedrich Sandy Dr. Cr. Sheet

16. 11 - 15 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Liabilities and Equity Liabilities Capital stock Retained earnings Minority interest Total equities $ 80 400 150 $630 $ 25 100 20 $145 a 100 a 20 a 22 $105 400 150 22 $677 Consolidation Working Papers January 1, 2003 (Entity Theory) Adjustments and Consolidated Eliminations Balance Account Title Pedrich Sandy Dr. Cr. Sheet

17. 11 - 16 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation After Acquisition Sandy’s net income and dividends for 2003 are $35,000 and $10,000, respectively. The excess of fair value over book value of Sandy’s accounts receivable and inventories at January 1, 2003, is realized during 2003. Sandy’s plant assets are being depreciated at a 5% annual rate.

18. 11 - 17 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Share of Sandy’s net income ($35,000 × 90%)$31,500 Realization of excess allocated to: Receivables ($5,000 × 90%) – 4,500 Inventories ($10,000 × 90%) – 9,000 Depreciation ($20,000 × 90%) ÷ 20 years – 900 Income from Sandy for 2003$17,100 Consolidation After Acquisition: Equity Method

19. 11 - 18 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Parent Company) Adjustments/ Consol- Pedrich Sandy Eliminations idated Sales Income from Sandy Cost of sales Operating expenses Minority interest Net income Retained earnings Dividends Add: Net income Retained earnings December 31, 2003 $600 17.1 (300) (211.25) $105.85 $150 (80) 105.85 $175.85 $200 (120) (45) $ 35 $20 (10) 35 $ 45 a 17.1 c 9 c 4.5 d.9 e 3.5 b 20 a 9 e 1 $800 (429) (261.65) (3.5) $105.85 $150 (80) 105.85 $175.85 Income Statement

20. 11 - 19 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Parent Company) Cash Receivables, net Inventories Other current assets Plant assets, net Investment in Sandy Goodwill Unamortized excess Total assets $ 29.75 90 100 30 200 206.1 $655.85 $ 13 32 48 17 57 $167 c 18d 9 a 8.1 b 198 c 58.5 b 90c 90 $ 42.75 122 148 47 274.1 58.5 $692.35 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

21. 11 - 20 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Parent Company) Liabilities Capital stock Retained earnings Minority interest Total equities $ 80 400 175.85 $655.85 $ 22 100 45 $167 b 100 b 12 e 2.5 $102 400 175.85 14.5 $692.35 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

22. 11 - 21 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Entity Theory) Adjustments/ Consol- Pedrich Sandy Eliminations idated Sales Income from Sandy Cost of sales Operating expenses Minority interest Net income Retained earnings Dividends Add: Net income Retained earnings December 31, 2003 $600 17.1 (300) (211.25) $105.85 $150 (80) 105.85 $175.85 $200 (120) (45) $ 35 $20 (10) 35 $ 45 a17.1 c10 c 5 d 1 e 1.9 b20 a 9 e 1 $800 (430) (262.25) (1.9) $105.85 $150 (80) 105.85 $175.85 Income Statement

23. 11 - 22 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Entity Theory) Cash Receivables, net Inventories Other current assets Plant assets, net Investment in Sandy Goodwill Unamortized excess Total assets $ 29.75 90 100 30 200 206.1 $655.85 $ 13 32 48 17 57 $167 c 20d 1 a 8.1 b 198 c 65 b 100c 100 $ 42.75 122 148 47 276 65 $700.75 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

24. 11 - 23 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Entity Theory) Liabilities Capital stock Retained earnings Minority interest Total equities $ 80 400 175.85 $655.85 $ 22 100 45 $167 b 100 b 22 e.9 $102 400 175.85 22.9 $700.75 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

25. 11 - 24 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidated Income Statements at December 31, 2003 Parent Co. Entity Contemp. (000)TheoryTheoryTheory Sales$ 800.00$ 800.00$ 800.00 Cost of sales– 429.00– 430.00– 429.00 Operating expenses– 261.65– 262.25– 261.65 Minority interest expense – 3.50 – – Consolidated net income$ 105.85$ 107.75 Distributions to: Minority stockholders$ 1.90 Majority stockholders$ 105.85 Total consolidated net income$ 109.35 Minority interest expense – 3.50 Consolidated net income$ 105.85

26. 11 - 25 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidated Balance Sheets at December 31, 2003 Parent Co. EntityContemp. Assets Theory Theory Theory Cash$ 42.75$ 42.75$ 42.75 Net A/R 122.00 122.00 122.00 Inventories 148.00 148.00 148.00 Other current assets 47.00 47.00 47.00 Total current assets$359.75$359.75$359.75 Plant assets, net 274.10 276.00 274.10 Goodwill 58.50 65.00 58.50 Total noncurrent assets$332.60$341.00$332.60 Total assets$692.35$700.75$692.35

27. 11 - 26 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidated Balance Sheets at December 31, 2003 Liabilities Parent Co. Entity Contemp. and Equity Theory TheoryTheory Liabilities$102.00 $102.00 $102.00 Minority interest 14.50 – – Total liabilities$116.50 $102.00 $102.00 Capital stock 400.00 400.00 400.00 Retained earnings 175.85 175.85 175.85 Minority interest – 22.90 14.50 Total stockholders’ equity$575.85 $598.75 $590.35 Total equities$692.35 $700.75 $692.35

28. 11 - 27 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Adjust subsidiary assets and liabilities to fair values using push-down accounting.

29. 11 - 28 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting In certain situations, the SEC requires that the fair values of the acquired subsidiary’s assets and liabilities, which represent the parent company’s cost basis, be recorded in the separate financial statements of the purchased subsidiary. In certain situations, the SEC requires that the fair values of the acquired subsidiary’s assets and liabilities, which represent the parent company’s cost basis, be recorded in the separate financial statements of the purchased subsidiary.

30. 11 - 29 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Parent Company Theory Cash$ 5.0 $ –$ 5.0 Accounts receivable, net 30.0 4.5 34.5 Inventory 40.0 9.0 49.0 Other current assets 10.0 – 10.0 Plant assets, net 60.0 18.0 78.0 Goodwill – 58.5 58.5 $145.0 $90.0$235.0 BookPush-Down BV Value ValueAdjustmentafter P-D

31. 11 - 30 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Parent Company Theory Liabilities$ 25.0$ –$ 25.0 Capital stock 100.0 – 100.0 Retained earnings 20.0 (20.0) – Push-down capital – 110.0 110.0 $145.0$ 90.0$235.0 BookPush-Down BV Value ValueAdjustmentafter P-D

32. 11 - 31 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Parent Company Theory Accounts Receivable 4,500 Inventory 9,000 Plant Assets18,000 Goodwill58,500 Retained Earnings20,000 Push-down Capital110,000 Accounts Receivable 4,500 Inventory 9,000 Plant Assets18,000 Goodwill58,500 Retained Earnings20,000 Push-down Capital110,000

33. 11 - 32 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Entity Theory $198,000 cost ÷ 90% = $220,000 implied value $220,000 – $120,000 book value = $100,000 excess

34. 11 - 33 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Entity Theory Cash$ 5.0 $ –$ 5.0 Accounts receivable, net 30.0 5.0 35.0 Inventory 40.0 10.0 50.0 Other current assets 10.0 – 10.0 Plant assets, net 60.0 20.0 80.0 Goodwill – 65.0 65.0 $145.0 $100.0$245.0 BookPush-Down BV Value ValueAdjustmentafter P-D

35. 11 - 34 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Entity Theory Liabilities$ 25.0$ –$ 25.0 Capital stock 100.0 – 100.0 Retained earnings 20.0 – 20.0 – Push-down capital – 120.0 120.0 $145.0$100.0$245.0 BookPush-Down BV Value ValueAdjustmentafter P-D

36. 11 - 35 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Push-Down Accounting: Entity Theory Accounts Receivable 5,000 Inventory10,000 Plant Assets20,000 Goodwill65,000 Retained Earnings20,000 Push-down Capital120,000 Accounts Receivable 5,000 Inventory10,000 Plant Assets20,000 Goodwill65,000 Retained Earnings20,000 Push-down Capital120,000

37. 11 - 36 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Parent Company) Adjustments/ Consol- Pedrich Sandy Eliminations idated Sales Income from Sandy Cost of sales Operating expenses Minority interest Net income Retained earnings Dividends Add: Net income Retained earnings December 31, 2003 $600 17.1 (300) (211.25) $105.85 $150 (80) 105.85 $175.85 $200 (129) (50.4) $ 20.6 $ 0 (10) 20.6 $ 10.6 a 17.1 c 3.5 a 9 c 1 $800 (429) (261.65) (3.5) $105.85 $150 (80) 105.85 $175.85 Income Statement

38. 11 - 37 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Parent Company) Cash Receivables, net Inventories Other current assets Plant assets, net Investment in Sandy Goodwill Total assets $ 29.75 90 100 30 200 206.1 $655.85 $ 13 32 48 17 74.1 58.5 $242.6 a 8.1 b198 $ 42.75 122 148 47 274.1 58.5 $692.35 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

39. 11 - 38 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Parent Company) Liabilities Capital stock Retained earnings Push-down capital, Sandy Minority interest Total equities $ 80 400 175.85 $655.85 $ 22 100 10.6 110 $242.6 b 100 b 110 b 12 c 2.5 $102 400 175.85 14.5 $692.35 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

40. 11 - 39 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Entity Theory) Adjustments/ Consol- Pedrich Sandy Eliminations idated Sales Income from Sandy Cost of sales Operating expenses Minority interest Net income Retained earnings Dividends Add: Net income Retained earnings December 31, 2003 $600 17.1 (300) (211.25) $105.85 $150 (80) 105.85 $175.85 $200 (130) (51) $ 19 $ 0 (10) 19 $ 9 a17.1 c 1.9 a 9 e 1 $800 (430) (262.25) (1.9) $105.85 $150 (80) 105.85 $175.85 Income Statement

41. 11 - 40 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Entity Theory) Cash Receivables, net Inventories Other current assets Plant assets, net Investment in Sandy Goodwill Total assets $ 29.75 90 100 30 200 206.1 $655.85 $ 13 32 48 17 76 65 $251 a 8.1 b198 $ 42.75 122 148 47 276 65 $700.75 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

42. 11 - 41 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consolidation Working Papers December 31, 2003 (Entity Theory) Liabilities Capital stock Retained earnings Push-down capital, Sandy Minority interest Total equities $ 80 400 175.85 $655.85 $ 22 100 9 120 $251 b 100 b 120 b 22 c.9 $102 400 175.85 22.9 $700.75 Balance Sheet Adjustments/ Consol- Pedrich Sandy Eliminations idated

43. 11 - 42 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3 Account for corporate and unincorporated joint ventures.

44. 11 - 43 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Nature of Joint Ventures A joint venture is a business entity that is owned, operated, and jointly controlled by a small group of investors (venturers) for their mutual benefit. A joint venture is a business entity that is owned, operated, and jointly controlled by a small group of investors (venturers) for their mutual benefit. Each venturer usually has the ability to exercise significant influence over the joint venture investee. Each venturer usually has the ability to exercise significant influence over the joint venture investee.

45. 11 - 44 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Organizational Structures of Joint Ventures Corporate joint venture General partnership Limited partnership Undivided interest

46. 11 - 45 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Investment Corporate joint venture Corporate joint venture Equity method Unincorporated joint ventures Unincorporated joint ventures Equity method Proportionate consolidation

47. 11 - 46 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 11