Beams10e_Ch03aadvancedaccountinghhhh.ppt

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1. © Pearson Education, Inc. publishing as Prentice Hall 3-1
Chapter 3: An Introduction to
Consolidated Financial Statements
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10
th
edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

2. © Pearson Education, Inc. publishing as Prentice Hall 3-2
Intro to Consolidations: Objectives
1.Recognize the benefits and limitations of
consolidated financial statements.
2.Understand the requirements for inclusion of a
subsidiary in consolidated financial statements.
3.Apply the consolidation concepts to parent
company recording of the investment in a
subsidiary at the date of acquisition.
4.Allocate the excess of the fair value over the book
value of the subsidiary at the date of acquisition.

3. © Pearson Education, Inc. publishing as Prentice Hall 3-3
Objectives (continued)
5.Learn the concept of noncontrolling interest when
the parent company acquires less than 100% of the
subsidiary's outstanding common stock.
6.Amortize the excess of the fair value over the book
value in periods subsequent to the acquisition.
7.Prepare consolidated balance sheets subsequent
to the date of acquisition, including preparation of
elimination entries.
8.Apply the concepts underlying preparation of a
consolidated income statement.

4. © Pearson Education, Inc. publishing as Prentice Hall 3-4
1: Benefits & Limitations1: Benefits & Limitations
An Introduction to Consolidated Financial Statements

5. © Pearson Education, Inc. publishing as Prentice Hall 3-5
Business Acquisitions
•FASB Statement 141R
•Business combinations occur
–Acquire controlling interest in voting stock
–More than 50%
–May have control through indirect
ownership
•Consolidated financial statements
–Primarily for owners & creditors of parent
–Not for noncontrolling owners or subsidiary
creditors

6. © Pearson Education, Inc. publishing as Prentice Hall 3-6
2: Subsidiaries2: Subsidiaries
An Introduction to Consolidated Financial Statements

7. © Pearson Education, Inc. publishing as Prentice Hall 3-7
Who is a Subsidiary?
•ARB No. 51 allowed broad discretion
•FASB Statement No. 94
–Control based on share ownership
•FASB Statement No. 160
–Financial control
•Subsidiaries, or affiliates, continue as separate legal
entities and reporting to their controlling and
noncontrolling interests.

8. © Pearson Education, Inc. publishing as Prentice Hall 3-8
Consolidated Statements
•Prepared by the parent company
•Parent discloses
–Consolidation policy, Reg. S-X
–Exceptions to consolidation, temporary
control and inability to obtain control
•Fiscal year end
–Use parent's FYE, but
–May include subsidiary statements with FYE
within 3 months of parent's FYE.
•Disclose intervening material events

9. © Pearson Education, Inc. publishing as Prentice Hall 3-9
3: Parent Company Recording3: Parent Company Recording
An Introduction to Consolidated Financial Statements

10. © Pearson Education, Inc. publishing as Prentice Hall 3-10
Penn Example: Acquisition Cost =
Fair Value = Book Value
Penn acquires 100% of Skelly for
$40, which equals the book value
and fair values of the net assets
acquired.
Cost of acquisition $40
Less 100% book value 40
Excess of cost over book value$0
Skelly BV=FV
Cash $10
Other current assets15
Net plant assets40
Total $65
Accounts payable$15
Other liabilities10
Capital stock 30
Retained earnings10
Total $65
To consolidate, eliminate Penn's
Investment account and Skelly's
capital stock and retained earnings.

11. © Pearson Education, Inc. publishing as Prentice Hall 3-11
Balance sheets SeparateConsolidated
PennSkellyPenn & Sub.
Cash $20$10 $30
Other curr. assets45 15 60
Net plant 60 40 100
Investment in Skelly40 0 0
Total $165$65 $190
Accounts payable$20$15 $35
Other curr. liabilities25 10 35
Capital stock 100 30 100
Retained earnings20 10 20
Total $165$65 $190

12. © Pearson Education, Inc. publishing as Prentice Hall 3-12
4: Allocations at Acquisition Date4: Allocations at Acquisition Date
An Introduction to Consolidated Financial Statements

13. © Pearson Education, Inc. publishing as Prentice Hall 3-13
Cost, Fair Value and Book Value
Acquisition cost, fair values of identifiable net
assets and book values may differ.
–Allocate excess or deficiency of cost over
book value and determine goodwill, if any.
–When BV = FV, excess is goodwill.
Cost less BV = Excess to allocate
–Allocate first to FV-BV differences
–Remainder is goodwill (or bargain purchase)

14. © Pearson Education, Inc. publishing as Prentice Hall 3-14
Example: BV ≠ FV but Cost = FV
Piper acquires 100% of Sandy for $310.
BV = 100 + 145 = $245
FV = 385 – 75 = $310
Cost – FV = $0 goodwill
Sandy BV FV
Cash $40 $40
Receivables 3030
Inventory 5075
Plant, net 200240
Total $320 $385
Liabilities $75 $75
Capital stock 100
Retained
earnings 145
Total $320
Cost $310
100% BV 245
Excess of cost over BV$65

15. © Pearson Education, Inc. publishing as Prentice Hall 3-15
Piper and Sandy (cont.)
Allocate to: AmtAmort.
Inventory 100%(+25) 251st yr
Plant 100%(+40) 4010 yrs
Total $65
Piper's elimination worksheet entry:
Capital stock 100
Retained earnings 145
Inventory 25
Plant 40
Investment in Sandy 310

16. © Pearson Education, Inc. publishing as Prentice Hall 3-16
Example: BV ≠ FV and Cost ≠ FV
Panda acquires 100% of Salty for $530.
BV = 250 + 190 = $440
FV = 580 – 85 = $495
Cost – FV = $35 goodwill
Salty BV FV
Cash $100 $100
Receivables 4040
Inventory 250250
Plant, net 130190
Total $520 $580
Liabilities $80 $85
Capital stock 250 
Retained earnings190 
Total $520  
Cost $530
100% BV (250+190) 440
Excess of cost over BV$90

17. © Pearson Education, Inc. publishing as Prentice Hall 3-17
Panda and Salty (cont.)
Panda's elimination worksheet entry:
Capital stock 250
Retained earnings 190
Plant 60
Goodwill 35
Liabilities 5
Investment in Salty 530
Allocate to: AmtAmort.
Plant 604 yrs
Liabilities -55 yrs
Goodwill 35 -
Total $90

18. © Pearson Education, Inc. publishing as Prentice Hall 3-18
Example: BV ≠ FV and Cost ≠ FV
Printemps acquires 100% of Summer for $185.
BV = 75 + 105 = $180
FV = 250 - 40 = $210
Cost $185
100% BV (75+105) 180
Excess of cost over BV$5
Summer BV FV
Cash $10 $10
Receivables 3030
Inventory 8090
Plant, net 100120
Total $220 $250
Liabilities $40 $40
Capital stock 75 
Retained earnings105 
Total $220  

19. © Pearson Education, Inc. publishing as Prentice Hall 3-19
Printemps and Summer (cont.)
Allocate to: AmtAmort.
Inventory 101st yr
Plant, land 20 -
Bargain purchase (25)Gain
Total $5
Investment in Summer 210
Gain on Bargain purchase 25
Cash 185
Printemps records the acquisition of Summer assuming a cash
purchase as follows. Note that the investment account is
recorded at its fair value and the bargain purchase is treated
immediately as a gain.

20. © Pearson Education, Inc. publishing as Prentice Hall 3-20
Worksheet Elimination Entry
Printemps' elimination worksheet entry:
Capital stock 75
Retained earnings 105
Unamortized excess 30
Investment in Summer 210
Inventory 10
Plant 20
Unamortized excess 30
Unamortized excess equals $30 (gain is recognized)
• $10 for undervalued inventory
• $20 for undervalued land included in plant
assets

21. © Pearson Education, Inc. publishing as Prentice Hall 3-21
 PrintempsSummerAdjustmentsConsol-
  BV BVDR CRidated
Cash $30 $10    $40
Receivables 50 30   80
Inventory 100 8010  190
Plant, net 450 10020  570
Investment in
Summer 210   210 0
Unamortized excess  3030 
Total $840 $220    $880
Liabilities $270 $40    $310
Capital stock 200 7575  200
Retained earnings 370 105105  370
Total $840 $220    $880
    240240 

22. © Pearson Education, Inc. publishing as Prentice Hall 3-22
5: Noncontrolling Interests5: Noncontrolling Interests
An Introduction to Consolidated Financial Statements

23. © Pearson Education, Inc. publishing as Prentice Hall 3-23
Noncontrolling Interest
Parent owns less than 100%
–Noncontrolling interest represents the
minority shareholders
–Part of stockholders' equity
–Measured at fair value, based on parent's
acquisition price
•Parent pays $40,000 for an 85% interest
–Implied value of the full investee is
40,000/85% = $47,059.
–Minority share = 15%(47,059) = $7,059.

24. © Pearson Education, Inc. publishing as Prentice Hall 3-24
Example: Noncontrolling Interests
Popo acquires 80% of Sine for $400 when Sine had
capital stock of $200 and retained earnings of
$175. Sine's assets and liabilities equaled their fair
values except for buildings which are undervalued
by $50. Buildings have a 10-year remaining life.
Cost of 80% of Sine $400
Implied value of Sine (400/80%)$500
Book value (200+175) 375
Excess over book value $125
Allocate to:
Building $50
Goodwill 75
Total $125

25. © Pearson Education, Inc. publishing as Prentice Hall 3-25
Elimination Entry
Popo's elimination worksheet entry:
Capital stock 200
Retained earnings 175
Building 50
Goodwill 75
Investment in Sine 400
Noncontrolling interest 100
An unamortized excess account could have been used for the
excess assigned to the building and goodwill.

26. © Pearson Education, Inc. publishing as Prentice Hall 3-26
 Popo SineAdjustmentsConsol-
  BV BVDRCR idated
Cash $50 $10    $60
Receivables 130 50   180
Inventory 80 100   180
Building, net 300 24050  590
Investment in Sine 400   400 0
Goodwill  75  75
Total $960 $400    $1,085
Liabilities $150 $25    $175
Capital stock 250 200200  250
Retained earnings 560 175175  560
Noncontrolling interest     100 100
Total $960 $400    $1,085
    500500 

27. © Pearson Education, Inc. publishing as Prentice Hall 3-27
6: Amortizations After Acquisition6: Amortizations After Acquisition
An Introduction to Consolidated Financial Statements

28. © Pearson Education, Inc. publishing as Prentice Hall 3-28
Unamortized Excess
Excess assigned to assets and liabilities are
amortized according to the account
Balance sheet
account
Amortization
period
Income statement
account
Inventories and
other current assets
Generally, 1
st
yearCost of sales and
other expense
Buildings,
equipment,
patents,
Remaining life at
business
combination
Depreciation and
amortization
expense
Land, copyrightsNot amortized
Long term debtTime to maturityInterest expense

29. © Pearson Education, Inc. publishing as Prentice Hall 3-29
Piper and Sandy (cont.)
Allocate to: AmtAmort.
Inventory 251st yr
Plant 4010 yrs
Total $65
Cost $310
100% BV 245
Excess $65
Beginning
unamortized
excess
Current
year's
amortization
Ending
unamortized
excess
Inventory 25 (25) 0
Plant 40 (4) 36
Total 65 (29) 36

30. © Pearson Education, Inc. publishing as Prentice Hall 3-30
Panda and Salty (cont.)
Beginning
unamortized
excess
Current
year's
amortization
Ending
unamortized
excess
Plant 60 (15) 45
Liabilities (5) 1 (4)
Goodwill 35 0 35
Total 90 14 76
Cost $530
100% BV 440
Excess $90
Allocate to:AmtAmort.
Plant 604 yrs
Liabilities -55 yrs
Goodwill 35 -
Total $90

31. © Pearson Education, Inc. publishing as Prentice Hall 3-31
Printemps and Summer (cont.)
Beginning
unamortized
excess
Current
year's
amortization
Ending
unamortized
excess
Inventory 10 (10) 0
Land 20 0 20
Total 30 (10) 20
Cost $185
100% BV 180
Excess $5
Allocate to: AmtAmort.
Inventory 101st yr
Plant, land 20 -
Bargain purchase (25)Gain
Total $5

32. © Pearson Education, Inc. publishing as Prentice Hall 3-32
7: Subsequent Balance Sheets7: Subsequent Balance Sheets
An Introduction to Consolidated Financial Statements

33. © Pearson Education, Inc. publishing as Prentice Hall 3-33
Balance Sheets After Acquisition
In preparing a consolidated balance sheet
–Eliminate the parent's Investment in
Subsidiary
–Eliminate the subsidiary's equity accounts
(common stock, retained earnings, etc.)
–Adjust asset and liability accounts for any
unamortized excess balance
–Record goodwill, if any
–Record Noncontrolling Interest, if any

34. © Pearson Education, Inc. publishing as Prentice Hall 3-34
Popo and Sine (cont.)
Cost of 80% of Sine$400
Implied value of Sine$500
Book value 375
Excess $125
Allocate to:
Building$50 10 yrs
Goodwill 75 -
Total $125
Beginning
unamortized
excess
Current
year's
amortization
Ending
unamortized
excess
Building 50 (5) 45
Goodwill 75 0 75
Total 125 (5) 120

35. © Pearson Education, Inc. publishing as Prentice Hall 3-35
After 1 year: PopoSine
Cash $40 $15
Receivables 110 85
Inventory 90100
Building, net 280235
Investment in Sine404 
Total $924 $435
PopoSine
Liabilities $100 $50
Capital stock 250200
Retained earnings574185
Total $924 $435
Popo's elimination worksheet entry:
Capital stock 200
Retained earnings 185
Unamortized excess 120
Investment in Sine (80%) 404
Noncontrolling interest (20%) 101
Building 45
Goodwill 75
Unamortized excess 120

36. © Pearson Education, Inc. publishing as Prentice Hall 3-36
After 1 year: Popo SineAdjustmentsConsol-
  BV BV DRCR idated
Cash $40 $15    $55
Receivables 110 85   195
Inventory 90 100   190
Building, net 280 235 45  560
Investment in Sine404   404 0
Goodwill   75  75
Unamortized excess 120120
Total $924 $435    $1,075
Liabilities $100 $50    $150
Capital stock 250 200 200  250
Retained earnings574 185 185  574
Noncontrolling interest   101 101
Total $924 $435    $1,075
    505505 

37. © Pearson Education, Inc. publishing as Prentice Hall 3-37
Key Balance Sheet Items
•Investment in Subsidiary does not exist on the
consolidated balance sheet
•Equity on the consolidated balance sheet consists
of the parent's equity plus the noncontrolling
interest.
•Noncontrolling interest is proportional to the
Investment in Subsidiary account when the
equity method is used.
$101 = $404 x .20/.80

38. © Pearson Education, Inc. publishing as Prentice Hall 3-38
8: Consolidated Income Statements8: Consolidated Income Statements
An Introduction to Consolidated Financial Statements

39. © Pearson Education, Inc. publishing as Prentice Hall 3-39
Comprehensive Example, Data
Pilot acquires 90% of Sand on 12/31/2009 for
$4,333 when Sand's equity consists of $4,000
common stock, $1,000 other paid in capital, and
$900 retained earnings. On that date Sand's
inventories, land and buildings are understated
by $100, $200, and $1,000, respectively and its
equipment and notes payable are overstated by
$300 and $100.

40. © Pearson Education, Inc. publishing as Prentice Hall 3-40
Assignment and
Amortization
Cost of 90% of Sand $10,200
Implied value of Sand
10,200/.90 $11,333
Book value (4000+1000+900) 5,900
Excess over book value $5,433
Unamortized
excess 1/1/10
Current
amortization
Unamortized
excess 12/31/10
Inventory 100 (100) 0
Land 200 0 200
Building 1,000 (25) 975
Equipment (300) 60 (240)
Note payable 100 (100) 0
Goodwill 4,333 0 4,333
Total 5,433 (165) 5,268
Allocate to:
Inventory $100 1st yr
Land 200 -
Building 1,00040 yrs
Equipment (300)5 yrs
Note payable1001st yr
Goodwill 4,333 -
Total $5,433

41. © Pearson Education, Inc. publishing as Prentice Hall 3-41
Pilot SandConsol.*
Sales $9,523.50 $2,200.00 $11,723.50
Income from Sand 571.50 $0.00
Cost of sales (4,000.00)(700.00)(4,800.00)
Depreciation exp - bldg(200.00)(80.00)(305.00)
Depreciation exp - equip(700.00)(360.00)(1,000.00)
Other expense (1,800.00)(120.00)(1,920.00)
Interest expense (300.00)(140.00)(540.00)
Net income $3,095.00 $800.00
Total consolidated income $3,158.50
Noncontrolling interest
share 63.50
Controlling interest share $3,095.00
* Cost of sales, building depreciation and interest expense are
increased by $100, $25, and $100, and equipment
depreciation is $60 lower than the sum of Pilot and Sand.

42. © Pearson Education, Inc. publishing as Prentice Hall 3-42
Key Income Statement Items
•The Income from Subsidiary account is
eliminated.
•Current period amortizations are included in
the appropriate expense accounts.
•Noncontrolling interest share of net income is
proportional to the Income from Subsidiary
under the equity method.
$571.50 x .10/.90
= $63.50

43. © Pearson Education, Inc. publishing as Prentice Hall 3-43
Push-Down Accounting
•SEC requirement
–Subsidiary is substantially wholly-owned (approx.
90%)
–No publicly held debt or preferred stock
•Books of the subsidiary are adjusted
–Assets, including goodwill, and liabilities revalued
based on acquisition price
–Retained earnings is replaced by Push-Down
Capital which includes retained earnings and the
valuation adjustments

44. © Pearson Education, Inc. publishing as Prentice Hall 3-44
Copyright © 2009 Pearson Education, Inc.
 
Copyright © 2009 Pearson Education, Inc.
 
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