HahahaushayayayhayayayavvaBeams10e_Ch04.ppt

Gagagshs

1. © Pearson Education, Inc. publishing as Prentice Hall 4-1
Chapter 4: Consolidation
Techniques and Procedures
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 4-2
Consolidation Techniques: Objectives
1.Prepare consolidation working papers for the
year of acquisition when the parent company
uses the full equity method to account for its
invesment in a subsidiary.
2.Prepare consolidation working papers for the
year subsequent to acquisition.
3.Locate errors in preparing consolidation
working papers.
4.Allocate excess fair value over book value to
include identifiable net assets.

3. © Pearson Education, Inc. publishing as Prentice Hall 4-3
Objectives (continued)
5.Apply concepts to prepare a consolidated
statement of cash flows.
6.Appendix: Understand the alternative trial
balance consolidation working paper format.

4. © Pearson Education, Inc. publishing as Prentice Hall 4-4
1: Acquisition-Year Working Papers1: Acquisition-Year Working Papers
Consolidation Techniques and Procedures

5. © Pearson Education, Inc. publishing as Prentice Hall 4-5
Preparing the Worksheet
•Statements are entered onto the worksheet:
–Income statement
–Statement of retained earnings
–Balance sheet
•Columns needed:
–Parent
–Subsidiary
–DR and CR columns for elimination entries
–Consolidated

6. © Pearson Education, Inc. publishing as Prentice Hall 4-6
Completing the Worksheet
•Enter Parent and Sub. amounts at 100% of book value.
(Even if parent owns less)
•Enter elimination entries into the DR and CR columns.
(Check totals)
•Consolidated expenses, dividends and assets:
–Add parent, subsidiary, plus DR, less CR
•Consolidated revenues, liabilities and equity (other than
ending retained earnings):
–Add parent, subsidiary, less DR, plus CR
•Income, ending retained earnings and all subtotals and
totals:
–Compute directly in consolidated column.

7. © Pearson Education, Inc. publishing as Prentice Hall 4-7
Working Paper Entries
1.Adjust for errors & omissions
2.Eliminate intercompany profits and losses
3.Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
4.Record noncontrolling interest in sub's
earnings & dividends
5.Eliminate reciprocal Investment & sub's
equity balances
6.Amortize fair value/book value differentials
7.Eliminate other reciprocal balances

8. © Pearson Education, Inc. publishing as Prentice Hall 4-8
Example: Prep & Snap Data
Prep pays $88 for 80% of Snap on 1/1/2009 when
Snap's equity consisted of $60 capital stock and
$30 retained earnings. All excess was due to
unrecorded patents with a 10-year life.
Snap's income and dividends follow:
2009 2010
Net income $25 $30
Dividends $15 $15

9. © Pearson Education, Inc. publishing as Prentice Hall 4-9
Analysis
Cost of 80% of Snap $88
Implied value of Snap ($88/.80)$110
Book value (60+30) 90
Excess $20
Allocated to:AmtAmort.
Patents $20 10 yrs
Unamort.
Bal. AmortizationUnamort. Bal.AmortizationUnamort. Bal.
on 1/1/2009in 2009on 12/31/2009in 2010on 12/31/2010
Patents$20 $2 $18 $2 $16
Use these amounts in
2009 worksheet for
amortization expense
and patents.
Use these amounts in
2010 worksheet for
amortization expense
and patents.

10. © Pearson Education, Inc. publishing as Prentice Hall 4-10
NCI 20% share
$5.6
$3.0
NCI 20% share
$4.6
$3.0
Prep's 80% share
$18.4
$12.0
Prep's 80% share
$22.4
$12.0
Income & Dividend Calculations
2009:
Snap's net income$25
Amortization (2)
Adjusted income$23
Dividends $15
2010:
Snap's net income$30
Amortization (2)
Adjusted income$28
Dividends $15

11. © Pearson Education, Inc. publishing as Prentice Hall 4-11
Prep's 2009 Worksheet Entries
1.Adjust for errors & omissions
none
2.Eliminate intercompany profits and losses
none
3.Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
Income from Snap (I.S.) 18.4
Dividends (St. RE) 12.0
Investment in Snap (B.S.) 6.4

12. © Pearson Education, Inc. publishing as Prentice Hall 4-12
Prep 2009: Entries (2 of 3)
4.Record noncontrolling interest in sub's earnings &
dividends
5.Eliminate reciprocal Investment & sub's equity
balances
Noncontrolling interest share (I.S.)4.6
Dividends (St. RE) 3.0
Noncontrolling interest (B.S.) 1.6
Capital stock (B.S.) 60
Retained earnings (St. RE, beg.) 30
Patents (B.S.) 20
Investment in Snap (B.S.) 88
Noncontrolling interest (B.S.) 22

13. © Pearson Education, Inc. publishing as Prentice Hall 4-13
Prep 2009: Entries (3 of 3)
6.Amortize fair value/book value differentials
7.Eliminate other reciprocal balances
none
Note that in last chapter, all worksheet entries were prepared
for the balance sheet. Here worksheet entries are
prepared for the income statement, statement of retained
earnings and balance sheet.
Amortization Expense (I.S.) 2
Patents (B.S.) 2

14. © Pearson Education, Inc. publishing as Prentice Hall 4-14
Year ended 12/31/2009 PrepSnapDRCRConsol
Income statement:     
Revenues 250.0 65.0    315.0
Income from Snap 18.4   18.4   0.0
Expenses (200.0)(40.0)2.0   (242.0)
Noncontrolling interest share   4.6   (4.6)
Net income/ Controlling share68.4 25.0    68.4
Statement of retained earnings:     
Beginning retained earnings 5.0 30.0 30.0   5.0
Add net income 68.4 25.0    68.4
Deduct dividends (30.0)(15.0)  12.0 (30.0)
     3.0  
Ending retained earnings 43.4 40.0 43.4
Prep's 2009 Worksheet

15. © Pearson Education, Inc. publishing as Prentice Hall 4-15
Balance sheet, 12/31/2009: PrepSnapDRCRConsol
Cash 39.0 10.0    49.0
Other current assets 90.0 50.0    140.0
Investment in Snap 94.4    6.4 0.0
     88.0  
Plant & equipment, net 250.0 70.0    320.0
Patents   20.0 2.0 18.0
Total 473.4 130.0    527.0
Liabilities 80.0 30.0    110.0
Capital stock 350.0 60.0 60.0   350.0
Retained earnings 43.4 40.0    43.4
Noncontrolling interest, Jan.1    22.0 
Noncontrolling interest, Dec. 31    1.623.6
Total 473.4 130.0    527.0

16. © Pearson Education, Inc. publishing as Prentice Hall 4-16
A Look at the Income Statement
Year ended 12/31/2009 PrepSnapDRCRConsol
Income statement:     
Revenues 250.0 65.0    315.0
Income from Snap 18.4   18.4   0.0
Expenses (200.0)(40.0)2.0   (242.0)
Noncontrolling interest share   4.6   (4.6)
Net income/ Controlling share68.4 25.0    68.4
• Income from Snap is eliminated.
• Expenses are adjusted for 2009 amortization - $2 on patents
• Noncontrolling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6

17. © Pearson Education, Inc. publishing as Prentice Hall 4-17
A Look at Retained Earnings
• Beginning retained earnings of Snap is eliminated.
• All of Snap's dividends are eliminated.
• Net income is not calculated across the line, but taken from the
consolidated income statement.
• Ending retained earnings is calculated in the consolidated
column.
Year ended 12/31/2009 PrepSnapDRCRConsol
Statement of retained earnings:     
Beginning retained earnings 5.0 30.0 30.0   5.0
Add net income 68.4 25.0    68.4
Deduct dividends (30.0)(15.0)  12.0 (30.0)
     3.0  
Ending retained earnings 43.4 40.0 43.4

18. © Pearson Education, Inc. publishing as Prentice Hall 4-18
A Look at Assets
•Investment in Snap is eliminated.
•Patents at the start of 2009 were $20, and current
amortization is $2; they are $18 at the end of 2009.
•The total is calculated in the consolidated column.
Balance sheet: PrepSnapDR CRConsol
Cash 39.0 10.0    49.0
Other current assets 90.0 50.0    140.0
Investment in Snap 94.4    6.4 0.0
     88.0  
Plant & equipment, net250.0 70.0    320.0
Patents   20.0 2.0 18.0
Total 473.4 130.0    527.0

19. © Pearson Education, Inc. publishing as Prentice Hall 4-19
A Look at Liabilities & Equity
•Snap's capital stock is eliminated.
•Retained earnings are not calculated across the row; they are taken from the statement
of retained earnings.
•Noncontrolling interest at year-end is proportional to Prep's Investment in Snap
account.
$94.4 x .20/.80 = $23.6
Balance sheet: PrepSnapDRCRConsol
Liabilities 80.0 30.0    110.0
Capital stock 350.0 60.0 60.0   350.0
Retained earnings 43.4 40.0    43.4
Noncontrolling interest, Jan.1    22.0 
Noncontrolling interest, Dec. 31    1.623.6
Total 473.4 130.0    527.0

20. © Pearson Education, Inc. publishing as Prentice Hall 4-20
2: Working Papers in Subsequent Years2: Working Papers in Subsequent Years
Consolidation Techniques and Procedures

21. © Pearson Education, Inc. publishing as Prentice Hall 4-21
Analysis, for 2010
Cost of 80% of Snap $88
Implied value of Snap ($88/.80)$110
Book value (60+30) 90
Excess $20
Allocated to:AmtAmort.
Patents $20 10 yrs
Unamort. Bal.AmortizationUnamort. Bal.AmortizationUnamort. Bal.
on 1/1/2009in 2009on 12/31/2009in 2010on 12/31/2010
Patents$20 $2 $18 $2 $16
Use these amounts in
2009 worksheet for
amortization expense
and patents.
Use these amounts in
2010 worksheet for
amortization expense
and patents.

22. © Pearson Education, Inc. publishing as Prentice Hall 4-22
NCI 20% share
$5.6
$3.0
NCI 20% share
$4.6
$3.0
Prep's 80% share
$18.4
$12.0
Prep's 80% share
$22.4
$12.0
Income & Dividend Calculations
2009:
Snap's net income$25
Amortization (2)
Adjusted income$23
Dividends $15
2010:
Snap's net income$30
Amortization (2)
Adjusted income$28
Dividends $15

23. © Pearson Education, Inc. publishing as Prentice Hall 4-23
Prep's Worksheet Entries for 2010
1.Adjust for errors & omissions
none
2.Eliminate intercompany profits and losses
none
3.Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
Income from Snap (I.S.) 22.4
Dividends (St. RE) 12.0
Investment in Snap (B.S.) 10.4

24. © Pearson Education, Inc. publishing as Prentice Hall 4-24
Prep 2010: Entries (2 of 3)
4.Record noncontrolling interest in sub's earnings &
dividends
5.Eliminate reciprocal Investment & sub's equity
balances
Noncontrolling interest share (I.S.)5.6
Dividends (St. RE) 3.0
Noncontrolling interest (B.S.) 2.6
Capital stock (B.S.) 60
Retained earnings (St. RE, beg.) 40
Patents (B.S.) 18
Investment in Snap (B.S.) 94.4
Noncontrolling interest (B.S.) 23.6

25. © Pearson Education, Inc. publishing as Prentice Hall 4-25
Eliminating Investment in Snap
•Entry 5 eliminates the Investment in Snap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
•Investment in Snap (80% x $118) = $94.4
•Noncontrolling interest (20% x $118) = $23.6
Verify the $118 from the entry (60 + 40 + 18).
Implied value of Snap at acquisition $88/.80 $110
Add the increase in retained earnings from
acquisition to the beginning of the current year
$40 at 1/1/2010 minus $30 at 1/1/2009
10
Less amortization for all prior periods
$2 patent amortization for 2009
(2)
Adjusted value of Snap at 1/1/2010 $118

26. © Pearson Education, Inc. publishing as Prentice Hall 4-26
Prep 2010: Entries (3 of 3)
6.Amortize fair value/book value differentials
7.Eliminate other reciprocal balances
Amortization Expense (I.S.) 2
Patents (B.S.) 2
Note payable – Prep (B.S.) 10
Note receivable – Snap (B.S.) 10

27. © Pearson Education, Inc. publishing as Prentice Hall 4-27
Year ended 12/31/2010 PrepSnapDRCRConsol
Income statement:     
Revenues 300.075.0   375.0
Income from Snap 22.4  22.4  0.0
Expenses (244.0)(45.0)2.0   (291.0)
Noncontrolling interest share   5.6  (5.6)
Net income/ Controlling share78.430.0   78.4
Statement of retained earnings:     
Beginning retained earnings43.440.040.0  43.4
Add net income 78.430.0   78.4
Deduct dividends (45.0)(15.0)  12.0 (45.0)
     3.0  
Ending retained earnings 76.855.0 76.8
Prep's 2010 Worksheet

28. © Pearson Education, Inc. publishing as Prentice Hall 4-28
Balance sheet, 12/31/2010: PrepSnapDRCRConsol
Cash 45.020.0   65.0
Note receivable – Snap 10.0 10.0 0.0
Other current assets 97.070.0   167.0
Investment in Snap 104.8   10.4 0.0
     94.4 
Plant & equipment, net 240.060.0   300.0
Patents   18.02.0 16.0
Total 496.8150.0   548.0
Note payable – Prep 10.010.0
Liabilities 70.025.0   95.0
Capital stock 350.0 60.0 60.0   350.0
Retained earnings 76.855.0   76.8
Noncontrolling interest, Jan.1    23.6 
Noncontrolling interest, Dec. 31    2.626.2
Total 496.8150.0   548.0

29. © Pearson Education, Inc. publishing as Prentice Hall 4-29
3: Locating Errors in Working Papers3: Locating Errors in Working Papers
Consolidation Techniques and Procedures

30. © Pearson Education, Inc. publishing as Prentice Hall 4-30
Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
–Noncontrolling interest share (income)
–Goodwill
–Noncontrolling interest (equity)
Check equality of DR and CR adjustments.
Verify totals for parent and subsidiary statements.
Re-calculate the consolidated amounts.

31. © Pearson Education, Inc. publishing as Prentice Hall 4-31
4: Allocating Excess of Fair Value over Book 4: Allocating Excess of Fair Value over Book
ValueValue
Consolidation Techniques and Procedures

32. © Pearson Education, Inc. publishing as Prentice Hall 4-32
Example with Excess Allocated
Pate pays $360 for 90% of Solo on 12/31/2009
when Solo's equity consisted of $200 capital
stock and $50 retained earnings. Inventory
(sold in 2010), land and buildings (20 years)
were undervalued by $10, $30, and $80,
respectively. Equipment (10 years) was
overvalued by $20.
Solo's income and dividends for 2010 were $60
and $20.
At year-end, Solo has dividends payable of $10
which Pate has not yet recorded. There is $20
cash in transit from Solo to Pate for the note.

33. © Pearson Education, Inc. publishing as Prentice Hall 4-33
Analysis at Acquisition
* Use the
12/31/2009
and 2010
amortization
in worksheet
entries for
2010.
Cost of 90% of Solo $360
Implied value of Snap ($360/.90)$400
Book value (200+50) 250
Excess $150
Noncontrolling interest, 10%(400)$40
Allocated to:AmtAmort
Inventories$10 1st yr
Land 30 -
Building 8020 yrs
Equipment(20)10 yrs
Goodwill 50 -
  150 
  Unamort. Bal.AmortizationUnamort. Bal.
  12/31/2009 *in 2010 *on 12/31/2010
Inventorie
s $10 ($10) $0
Land 30 0 30
Building 80 (4) 76
Equipment (20) 2 (18)
Goodwill 50 0 50
  $150 ($12) $138

34. © Pearson Education, Inc. publishing as Prentice Hall 4-34
NCI 10% share
$4.8
$2.0
Pate's 90% share
$43.2
$18.0
Solo's Income & Dividend
  2010
Solo's net income$60
Amortization ($12)
Adjusted $48
   
Solo's dividends $20

35. © Pearson Education, Inc. publishing as Prentice Hall 4-35
Pate's Worksheet Entries
1.Adjust for errors & omissions
2.Eliminate intercompany profits and losses
none
3.Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Solo (I.S.) 43.2
Dividends (St. RE) 18.0
Investment in Solo (B.S.) 25.2
Dividends receivable (B.S.) 9.0
Investment in Solo (B.S.) 9.0
Cash (B.S.) 20.0
Note receivable (B.S.) 20.0

36. © Pearson Education, Inc. publishing as Prentice Hall 4-36
Pate: Entries (2 of 4)
4.Record noncontrolling interest in sub's earnings &
dividends
5.Eliminate reciprocal Investment & sub's equity
balances
Noncontrolling interest share (I.S.)4.8
Dividends (St. RE) 2.0
Noncontrolling interest (B.S.) 2.8
Capital stock (B.S.) 200
Retained earnings (St. RE, beg.) 50
Unamortized excess 150
Investment in Solo (B.S.) 360
Noncontrolling interest (B.S.) 40

37. © Pearson Education, Inc. publishing as Prentice Hall 4-37
Pate: Entries (3 of 4)
Allocate the unamortized excess according to
beginning of year balances.
Inventory 10
Land 30
Building, net 80
Goodwill 50
Equipment, net 20
Unamortized excess 150

38. © Pearson Education, Inc. publishing as Prentice Hall 4-38
Pate: Entries (4 of 4)
6.Amortize fair value/book value differentials
7.Eliminate other reciprocal balances
Cost of sales 10
Inventory 10
Operating (depreciation) expense 4
Buildings, net 4
Equipment, net 2
Operating (depreciation) expense 2
Dividends payable (B.S.) 9.0
Dividends receivable (B.S.) 9.0

39. © Pearson Education, Inc. publishing as Prentice Hall 4-39
Pate's 2010 Worksheet
Year ended 12/31/2010 PateSoloDR CRConsol
Income statement:     
Revenues 900.0 300.0   1,200.0
Income from Snap 43.2  43.2   0.0
Cost of goods sold
(600.0
)
(150.0
)10.0  (760.0)
Operating expenses
(190.0
)(90.0)4.0 2.0 (282.0)
Noncontrolling interest share  4.8   (4.8)
Net income/ Controlling share153.2 60.0   153.2
Statement of retained earnings:     
Beginning retained earnings120.0 50.0 50.0  120.0
Add net income 153.2 60.0   153.2
Deduct dividends
(100.0
)(20.0) 18.0 (100.0)
    2.0  
Ending retained earnings 173.2 90.0   173.2

40. © Pearson Education, Inc. publishing as Prentice Hall 4-40
Balance sheet, 12/31/2010:PrepSnapDR CRConsol
Cash 13.0 15.0 20.0   48.0
Accounts receivable, net 76.0 25.0   101.0
Note receivable - solo 20.0   20.0 0.0
Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0  120.0
Building, net 190.0 110.0 80.0 4.0 376.0
Equipment, net 150.0 120.0 2.0 20.0 252.0
Investment in Solo 394.2   9.0 0.0
    25.2  
    360.0  
Dividends receivable  9.0 9.0 0.0
Goodwill  50.0   50.0
Unamortized excess  150.0 150.0 0.0
Total 993.2 360.0   1,097.0
Accounts payable 120.0 60.0   180.0
Dividends payable 10.0 9.0   1.0
Capital stock 700.0 200.0 200.0  700.0
Retained earnings 173.2 90.0   173.2
Noncontrolling interest, Jan.1   40.0  
Noncontrolling interest, Dec. 31   2.8 42.8
Total 993.2 360.0   1,097.0

41. © Pearson Education, Inc. publishing as Prentice Hall 4-41
5: Consolidated Statement of Cash 5: Consolidated Statement of Cash
FlowsFlows
Consolidation Techniques and Procedures

42. © Pearson Education, Inc. publishing as Prentice Hall 4-42
Consolidated Cash Flows
The consolidated statement of cash flows is
prepared from
–Consolidated balance sheets, beginning &
ending
–Consolidated income statement
–Other information
Procedure similar to an "unconsolidated"
statement of cash flows
Look at items specific to companies with
–Subsidiaries
–Equity investments

43. © Pearson Education, Inc. publishing as Prentice Hall 4-43
Investing & Financing Cash Flows
•Investing cash flows:
–Include cash acquisition and/or disposition of
subsidiaries
–Include cash acquisition and/or disposition of
equity investees
•Financing cash flows:
–Include cash dividends paid to
noncontrolling interests

44. © Pearson Education, Inc. publishing as Prentice Hall 4-44
Operating Cash Flows
•Direct method:
–Include cash dividends received from equity
investees (not equity method income)
•Indirect method:
–Starting with consolidated net income to the
controlling interest share, ADD the
noncontrolling interest share
–Deduct the excess of equity method income over
cash dividends received from equity investees

45. © Pearson Education, Inc. publishing as Prentice Hall 4-45
6: Appendix – Trial Balance Format6: Appendix – Trial Balance Format
Consolidation Techniques and Procedures

46. © Pearson Education, Inc. publishing as Prentice Hall 4-46
Alternative Worksheet Format
•Worksheet format presented earlier used the
basic financial statements
•Alternative uses the ADJUSTED trial balances
of the parent and subsidiary.
•Columns on worksheet:
–Parent and subsidiary adjusted trial
balances,
–DR and CR adjustments,
–Income statement,
–Statement of retained earnings, and
–Balance sheet columns.

47. © Pearson Education, Inc. publishing as Prentice Hall 4-47
Completing the Worksheet
1.Enter worksheet elimination entries into the DR and
CR columns.
2.Add accounts as needed (e.g., noncontrolling interest,
goodwill, noncontrolling interest share).
3.Carry consolidated balances to income statement,
retained earnings, or balance sheet columns, as
appropriate.
4.Move consolidated net income, or controlling interest
share, to retained earnings.
5.Move ending retained earnings to the balance sheet.

48. © Pearson Education, Inc. publishing as Prentice Hall 4-48
Copyright © 2009 Pearson Education, Inc.  Copyright © 2009 Pearson Education, Inc.  
Publishing as Prentice HallPublishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.