beams10e ch04 consolidation techniques and procedures

© 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, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


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.


Objectives (continued)

5. Apply concepts to prepare a consolidated statement of cash flows.

6. Appendix: Understand the alternative trial balance consolidation working paper format.


1: Acquisition-Year Working Papers1: Acquisition-Year Working PapersConsolidation Techniques and Procedures


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


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.


Working Paper Entries

1. Adjust for errors & omissions2. Eliminate intercompany profits and losses3. 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 differentials7. Eliminate other reciprocal balances


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 $30Dividends $15 $15


AnalysisCost of 80% of Snap $88 Implied value of Snap ($88/.80) $110 Book value (60+30) 90Excess $20

Allocated to: Amt Amort.Patents $20 10 yrs

Unamort. Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.

on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010Patents $20 $2 $18 $2 $16

Use these amounts in 2009 worksheet for

amortization expense and patents.




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 $25Amortization (2)Adjusted income $23

Dividends $15

2010:Snap's net income $30Amortization (2)Adjusted income $28

Dividends $15


Prep's 2009 Worksheet Entries

1. Adjust for errors & omissionsnone

2. Eliminate intercompany profits and lossesnone

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


Prep 2009: Entries (2 of 3)4. Record noncontrolling interest in sub's earnings &

dividends


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


Prep 2009: Entries (3 of 3)

6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balancesnone

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


Year ended 12/31/2009 Prep Snap DR CR ConsolIncome 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 share 68.4 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


Balance sheet, 12/31/2009: Prep Snap DR CR ConsolCash 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 1.6 23.6 Total 473.4 130.0 527.0


A Look at the Income StatementYear ended 12/31/2009 Prep Snap DR CR ConsolIncome 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 share 68.4 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


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 Prep Snap DR CR ConsolStatement 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



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: Prep Snap DR CR ConsolCash 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


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: Prep Snap DR CR ConsolLiabilities 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 1.6 23.6 Total 473.4 130.0 527.0


2: Working Papers in Subsequent 2: Working Papers in Subsequent YearsYears

Consolidation Techniques and Procedures


Analysis, for 2010Cost of 80% of Snap $88 Implied value of Snap ($88/.80) $110 Book value (60+30) 90Excess $20

Allocated to: Amt Amort.Patents $20 10 yrs

Unamort. Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.

on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010Patents $20 $2 $18 $2 $16






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 $25Amortization (2)Adjusted income $23

Dividends $15

2010:Snap's net income $30Amortization (2)Adjusted income $28

Dividends $15


Prep's Worksheet Entries for 2010

1. Adjust for errors & omissionsnone



Income from Snap (I.S.) 22.4

Dividends (St. RE) 12.0



Prep 2010: Entries (2 of 3)4. Record noncontrolling interest in sub's earnings &

dividends




Capital stock (B.S.) 60 Retained earnings (St. RE, beg.) 40 Patents (B.S.) 18




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) = $23.6Verify the $118 from the entry (60 + 40 + 18).

Implied value of Snap at acquisition $88/.80 $110Add 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


Prep 2010: Entries (3 of 3)


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


Year ended 12/31/2010 Prep Snap DR CR ConsolIncome statement: Revenues 300.0 75.0 375.0Income 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 share 78.4 30.0 78.4Statement of retained earnings: Beginning retained earnings 43.4 40.0 40.0 43.4Add net income 78.4 30.0 78.4Deduct dividends (45.0) (15.0) 12.0 (45.0) 3.0


Prep's 2010 Worksheet


Balance sheet, 12/31/2010: Prep Snap DR CR ConsolCash 45.0 20.0 65.0

Note receivable – Snap 10.0 10.0 0.0Other current assets 97.0 70.0 167.0Investment in Snap 104.8 10.4 0.0 94.4 Plant & equipment, net 240.0 60.0 300.0Patents 18.0 2.0 16.0 Total 496.8 150.0 548.0

Note payable – Prep 10.0 10.0Liabilities 70.0 25.0 95.0Capital stock 350.0 60.0 60.0 350.0 Retained earnings 76.8 55.0 76.8Noncontrolling interest, Jan.1 23.6 Noncontrolling interest, Dec. 31 2.6 26.2 Total 496.8 150.0 548.0


3: Locating Errors in Working 3: Locating Errors in Working PapersPapers



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.


4: Allocating Excess of Fair Value 4: Allocating Excess of Fair Value over Book Valueover Book Value



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.


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) 250Excess $150

Noncontrolling interest, 10%(400) $40

Allocated to: Amt AmortInventories $10 1st yrLand 30 - Building 80 20 yrsEquipment (20) 10 yrsGoodwill 50 - 150

Unamort. Bal. Amortization Unamort. Bal. 12/31/2009 * in 2010 * on 12/31/2010Inventories $10 ($10) $0 Land 30 0 30 Building 80 (4) 76 Equipment (20) 2 (18) Goodwill 50 0 50 $150 ($12) $138


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


Pate's Worksheet Entries1. Adjust for errors & omissions



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


Pate: Entries (2 of 4)4. Record noncontrolling interest in sub's earnings &

dividends




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


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


Pate: Entries (4 of 4)


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


Pate's 2010 WorksheetYear ended 12/31/2010 Pate Solo DR CR ConsolIncome 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 share 153.2 60.0 153.2 Statement of retained earnings: Beginning retained earnings 120.0 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


Balance sheet, 12/31/2010: Prep Snap DR CR ConsolCash 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


5: Consolidated Statement of Cash 5: Consolidated Statement of Cash FlowsFlows



Consolidated Cash FlowsThe 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


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


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


6: Appendix – Trial Balance Format6: Appendix – Trial Balance FormatConsolidation Techniques and Procedures


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.


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.


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