1. 4 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 4: Consolidated Financial Statements after Acquisition Slides Authored by Hannah Wong, Ph.D. Rutgers University

2. 4 - 1 Accounting for Investments

3. 4 - 2 Accounting Methods for Investments lCost Method n The investment account is adjusted only when additional shares are purchased or sold lPartial Equity Method n The investment account is adjusted for the investor’s share of investee income and dividends lComplete Equity Method n Additional adjustments are made for unrealized intercompany profit and amortization of purchase differential

4. 4 - 3 Cost Method Investment in S Acquisition Cost Dividend Income Share of dividends declared of S Investment Related Accounts of Parent Liquidating dividend

5. 4 - 4 Partial Equity Method Investment in S Equity in subsidiary income Investment Related Accounts of Parent Acquisition Cost Equity in subsidiary income Share of dividends declared Equity in subsidiary loss Equity in subsidiary loss Equity in subsidiary income

6. 4 - 5 Complete Equity Method Investment in S Equity in subsidiary income Investment Related Accounts of Parent Acquisition Cost Equity in subsidiary income Share of dividends declared Equity in subsidiary loss Equity in subsidiary loss Equity in subsidiary income Amortization of goodwill

7. 4 - 6 Cost Method - Eliminating Entries (EE) Year of Acquisition The Investment Entry Common Stock - S Company 80,000 Other Contributed Capital - S Company 40,000 1/1 Retained Earnings - S Company 32,000 Difference between cost and book value13,000 Investment in S Company 165,000 Note: eliminate beginning retained earnings of the subsidiary This entry is the same as the investment entry on the acquisition date (true for the first year only)

8. 4 - 7 Cost Method - Eliminating Entries (EE) Year of Acquisition The Differential Entry Land 13,000 Difference between cost and book value 13,000 To allocate the differential between cost and book value to the appropriate account(s) This entry is the same as the differential entry on the acquisition date

9. 4 - 8 Cost Method - Eliminating Entries (EE) Year of Acquisition The Dividend Entry Dividend income - P 8,000 Dividends declared - S8,000 To eliminate the contra-equity account of the subsidiary To avoid double counting of income

10. 4 - 9 Noncontrolling Interest in Income Reported income of S Adjustments Adjusted NI of S Noncontrolling % Noncontrolling interest in income +-+- x Noncontrolling Interest in Income

11. 4 - 10 Controlling Interest in Income Reported income of P Adjustments (Adjusted NI of S) x (P %) Controlling interest in income +-+- Controlling Interest in Income +

12. 4 - 11 Consolidated Retained Earnings Reported R/E of P Consolidated NI Consolidated R/E Consolidated Retained Earnings + Dividends declared of P -

13. 4 - 12 Cost Method EE’s After Year of Acquisition The Reciprocal Entry Investment in S Company16,000 1/1 Retained Earnings - P Company 16,000 Adjust the investment account to equal the amount it would have under equity method Adjust P’s reported beginning R/E to equal beginning consolidated R/E Other Entries (similar to the first year EE)

14. 4 - 13 Equity Method EE’s Year of Acquisition The Income Entry Equity in subsidiary income24,000 Investment in S Company 24,000 (To eliminate equity in net income included in reported NI of P) The Dividend Entry Investment in S Company 8,000 Dividends declared 8,000 (To eliminate intercompany dividend) These two entries return the investment account to its beginning balance, to be matched against the subsidiary’s beginning R/E in the next EE.

15. 4 - 14 Equity Method EE’s Year of Acquisition The Investment Entry Common Stock - S Company 80,000 Other Contributed Capital - S Company 40,000 1/1 Retained Earnings - S Company 32,000 Difference between cost and book value13,000 Investment in S Company 165,000 Note: eliminate beginning R/E of the subsidiary The Differential Entry Land 13,000 Difference between cost and book value13,000 To allocate the differential between cost and BV to the appropriate account(s)

16. 4 - 15 More on Eliminating Entries lEquity Method EE’s After Year of Acquisition n Similar to entries in the year of acquisition lIntercompany revenue and expenses Interest revenue8,000 Interest expense8,000

17. 4 - 16 Interim Acquisitions lAccounting under the purchase method n Revenues and expenses of the subsidiary are included with those of parent only from the date of acquisition forward Beginning of S fiscal yr. End of S fiscal yr. Acquisition date Not included in consolidated NI Included in consolidated NI Net income of S

18. 4 - 17 Interim Acquisitions Full Year Reporting Consolidated Income Statement Post- acquisition revenues and expenses of S + Pre-acquisition NI amount of S Revenues and expenses of P Pre- acquisition revenues and expenses of S Post- acquisition revenues and expenses of S plus Noncontrolling interest in income minus Consolidated Net Income

19. 4 - 18 Interim Acquisitions Partial Year Reporting Consolidated Income Statement + Revenues and expenses of P Post- acquisition revenues and expenses of S plus minus Noncontrolling interest in income Consolidated Net Income

20. 4 - 19 Consolidated Statement of Cash Flows lPurpose n to reflect all cash outlays and inflows of the consolidated entity except those between parent and subsidiary

21. 4 - 20 Consolidated Statement of Cash Flows lProcedure n derived from  consolidated income statement  beginning and ending consolidated balance sheets n similar to unconsolidated firm, except:  noncontrolling interests in combined income  subsidiary dividends  parent acquisition of additional subsidiary shares

22. 4 - 21 Consolidated Statement of Cash Flows n Cash inflow from operating activities  indirect method: add back noncontrolling interest in combined income n Cash outflow from financing activities  includes subsidiary dividends to noncontrolling shareholders n Cash outflow from investing activities  excludes parent’s acquisition of additional subsidiary shares directly from subsidiary  includes parent’s acquisition of additional subsidiary shares in open market

23. 4 - 22 Consolidated Statement of Cash Flows cash acquisition: cash spent or received is included in the investing activity section of the cash flow statement stock acquisition: issuance of stock or debt is reported in the notes to the financial statements n Effect of method of payment in an acquisition

24. 4 - 23 Advanced Accounting by Debra Jeter and Paul Chaney Copyright © 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.