Advanced Accounting

by Debra Jeter and Paul Chaney

Chapter 4: Consolidated Financial Statements after Acquisition

Slides Authored by Hannah Wong, Ph.D. Rutgers University

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Accounting for Investments

Influence No significant influence Significant influence Control Ownership Accounting Treatment <20% 20 - 50% >50% Cost method Partial equity method Cost, partial equity, or complete equity method; Consolidation
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Accounting Methods for Investments

q Cost Method
s The

investment account is adjusted only when additional shares are purchased or sold

q Partial Equity Method

s The

investment account is adjusted for the investors share of investee income and dividends

q Complete Equity Method

s Additional

adjustments are made for unrealized intercompany profit and amortization of purchase differential
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Cost Method
Investment Related Accounts of Parent
Investment in S Acquisition Cost Liquidating dividend Dividend Income Share of dividends declared of S

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Partial Equity Method

Investment Related Accounts of Parent
Investment in S Acquisition Cost Equity in subsidiary income Share of dividends declared Equity in subsidiary loss Equity in subsidiary income

Equity in subsidiary loss

Equity in subsidiary income

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Complete Equity Method

Investment Related Accounts of Parent
Investment in S Acquisition Cost Share of dividends declared Equity in subsidiary loss Amortization of goodwill
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Equity in subsidiary income

Equity in subsidiary loss

Equity in subsidiary income

Equity in subsidiary income

Cost Method - Eliminating Entries (EE) Year of Acquisition

The Investment Entry
Common Stock - S Company Other Contributed Capital - S Company 1/1 Retained Earnings - S Company 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)

80,000 40,000 32,000

Difference between cost and book value 13,000

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Cost Method - Eliminating Entries (EE) Year of Acquisition

The Differential Entry
Land Difference between cost and book value 13,000
To allocate the differential between cost and book value to the appropriate account(s)

13,000

This entry is the same as the differential entry on the acquisition date

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Cost Method - Eliminating Entries (EE) Year of Acquisition

The Dividend Entry
Dividend income - P Dividends declared - S 8,000 8,000

To avoid double counting of income

To eliminate the contra-equity account of the subsidiary

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Noncontrolling Interest in Income

Noncontrolling Interest in Income Reported income of S

+ -

Adjustments Adjusted NI of S

x Noncontrolling %
Noncontrolling interest in income
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Controlling Interest in Income

Controlling Interest in Income Reported income of P

+ +

Adjustments (Adjusted NI of S) x (P %)

Controlling interest in income

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Consolidated Retained Earnings

Consolidated Retained Earnings Reported R/E of P

+ -

Consolidated NI Dividends declared of P Consolidated R/E

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Cost Method EEs After Year of Acquisition

The Reciprocal Entry
Investment in S Company 1/1 Retained Earnings - P Company 16,000 16,000

Adjust the investment account to equal the amount it would have under equity method

Adjust Ps reported beginning R/E to equal beginning consolidated R/E

Other Entries
(similar to the first year EE)

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Equity Method EEs Year of Acquisition

The Income Entry
Equity in subsidiary income Investment in S Company 24,000 24,000

(To eliminate equity in net income included in reported NI of P)

The Dividend Entry

Investment in S Company Dividends declared

8,000 8,000

(To eliminate intercompany dividend)

These two entries return the investment account to its beginning balance, to be matched against the subsidiarys beginning R/E in the next EE.

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Equity Method EEs Year of Acquisition

The Investment Entry
Common Stock - S Company Other Contributed Capital - S Company 1/1 Retained Earnings - S Company Investment in S Company 80,000 40,000 32,000
Note: eliminate beginning R/E of the subsidiary

Difference between cost and book value 13,000 165,000

The Differential Entry

Land Difference between cost and book value 13,000 13,000

To allocate the differential between cost and BV to the appropriate account(s)

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More on Eliminating Entries

q Equity Method EEs After Year of Acquisition
s

Similar to entries in the year of acquisition

q Intercompany revenue and expenses

Interest revenue Interest expense 8,000 8,000

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Interim Acquisitions q Accounting under the purchase method

s Revenues

and expenses of the subsidiary are included with those of parent only from the date of acquisition forward
Acquisition date End of S fiscal yr.

Beginning of S fiscal yr.

Not included in consolidated NI

Included in consolidated NI

Net income of S
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Interim Acquisitions Full Year Reporting

Consolidated Income Statement
PrePost-

Revenues and expenses of P +

plus

Post- acquisition acquisition revenues acquisition revenues revenues and expenses and expenses and of S expenses of S of S

minus minus

Pre-acquisition NI amount of S Noncontrolling interest in income

Consolidated Net Income

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Interim Acquisitions Partial Year Reporting

Consolidated Income Statement
Post-

Revenues and expenses of P +

acquisition

plus

revenues and expenses of S

minus

Noncontrolling interest in income

Consolidated Net Income

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Consolidated Statement of Cash Flows q Purpose

s to

reflect all cash outlays and inflows of the consolidated entity except those between parent and subsidiary

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Consolidated Statement of Cash Flows q Procedure

s derived

from

consolidated income statement beginning and ending consolidated balance sheets

s similar

to unconsolidated firm, except:

noncontrolling interests in combined income subsidiary dividends parent acquisition of additional subsidiary shares

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Consolidated Statement of Cash Flows

s Cash

inflow from operating activities

indirect method: add back noncontrolling interest in combined income

s Cash

outflow from financing activities

includes subsidiary dividends to noncontrolling shareholders

s Cash

outflow from investing activities

excludes parents acquisition of additional subsidiary shares directly from subsidiary includes parents acquisition of additional subsidiary shares in open market
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Consolidated Statement of Cash Flows

s Effect

of method of payment in an acquisition stock acquisition: issuance of stock or debt is reported in the notes to the financial statements
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cash acquisition: cash spent or received is included in the investing activity section of the cash flow statement

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.

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