consolidation+after+acquisition+ +pasewark+accounting

CONSOLIDATION AFTER ACQUISITION

Effect of Internal Accounting Method Acquisition Method Treatments

Receivables / Payables Sales / Inventory Investment / Subsidiary Equity

Consolidation (Basic Example) Acquisition Method Treatments (continued)

Income Reported by the Subsidiary Dividends Paid to the Parent Excesses between Subsidiary BV and FMVs

Push Down Accounting Consolidation (More Complex Example)

Assuming Equity Method Internally Assuming Initial Value Method Internally

“After Consolidation” refers to entries in the years after investment is made.

EFFECT OF INTERNAL ACCOUNTING METHOD

Parent will use one of the following for internal accounting:

Initial Value (Cost) Method Equity Method Partial Equity Method

EffectEffect: Each method requires different elimination entries. ResultResult: All methods yield same result after consolidation.

Partial Equity MethodPartial Equity Method:

Parent recognizes reported subsidiary income. Dividends reduce investment balance. No other equity adjustments are made.

Consolidation after Acquisition 2

ACQUISITION METHOD TREATMENTSTreatment of Receivables / Payables

ProblemProblem – Inappropriate for company to “owe money to itself”

TreatmentTreatment: Eliminate: Payable of borrower Receivable of lender

ExampleExample: Parent makes a loan to the subsidiary for $100,000.

Elimination EntryElimination Entry:Note Payable 100,000

Note Receivable 100,000


ACQUISITION METHOD TREATMENTSTreatment of Sales / Inventory

ProblemProblem – Inappropriate for company to make a profit by “selling to itself”

TreatmentTreatment: Eliminate: Profit related to intercompany sale from retained earnings

of seller Profit related to the intercompany sale of inventory of the

buyer Sale from revenue on consolidated income statement

ExampleExample: Parent sells inventory that cost $200 to a subsidiary for $220. The subsidiary has not sold the inventory externally.

Parent EntryParent Entry:Cash 220

Sales 220CoGS 200

Inventory 200

Subsidiary EntrySubsidiary Entry:Inventory 220

Cash 220

Elimination EntryElimination Entry:Sales 220

CoGS 200Inventory 20

Or if closed:Retained Earnings 20


Inventory 20

ACQUISITION METHOD TREATMENTSTreatment of Investment / Subsidiary Equity

ProblemProblem – Inappropriate to report an “investment in itself”

TreatmentTreatment: Eliminate: Investment in the subsidiary Subsidiary common stock, APIC, and retained

earnings (removes subsidiary equity from consolidated statements)

ExampleExample: Parent obtains ownership of a subsidiary.

Elimination EntryElimination Entry:Common Stock (of Sub) 200,000Retained Earnings (of Sub) 300,000

Investment in Subsidiary (of Parent) 500,000


NoteNote: This entry is made each year.

CONSOLIDATIONBasic ExampleBasic Example

Mother, Corp. purchases all the common stock of Daughter, Co. at their book values.

Other informationOther information: Daughter owes Mother $200 on accountLast year, Daughter purchased $2,000 in inventory from Mother. The original inventory cost to Mother was $1,500 (profit of $500). Daughter had not sold the inventory by year end.


CONSOLIDATIONBasic Example (Continued)Basic Example (Continued)Accounts Prior to EliminationAccounts Prior to Elimination

Balance SheetBalance SheetMotherMother

Corp.Corp.Daughter,Daughter,

Co.Co.AssetsAssetsCash 2,000 1,000Receivables 30,000 10,000Inventory 32,000 20,000Fixed Assets 127,000 86,000Investment in Daughter 100,000 0Total Assets 291,000 117,000

EquitiesEquitiesPayables 20,000 2,000Debt 70,000 15,000Common Stock 150,000 70,000Retained Earnings 51,000 30,000Total Equities 291,000 117,000

The following eliminations are necessary for the consolidated balance sheet. Eliminate:

(a) the $200 intercompany receivable / payable(b) unrealized profit of $500 from intercompany sale from the buyer

inventory and seller retained earnings(c) the $100,000 investment by Mother and the equity of Daughter.


CONSOLIDATIONBasic Example (Continued)Basic Example (Continued)

Elimination EntriesElimination Entries

Balance SheetBalance Sheet EliminationsEliminationsMother Mother Daughter Daughter DebitDebit CreditCredit ConsolidatedConsolidated

Assets

Cash 2,000 1,000 3,000

Receivables 30,000 10,000 (a) 200 39,800

Inventory 32,000 20,000 (b) 500 51,500

Fixed Assets 127,000 86,000 213,000

Investment in Daughter

100,000 0 (c) 100,000 0

Total Assets 291,000 117,000 307,300

Equities

Payables 20,000 2,000 (a) 200 21,800

Debt 70,000 15,000 85,000

Common Stock 150,000 70,000 (c) 70,000 150,000

Retained Earnings 51,000 30,000 (c) 30,000 50,500

(b) 500

Total Equities 291,000 117,000 100,700 100,700 307,300

(a) the $200 intercompany receivable / payable(b) unrealized profit of $500 from intercompany sale from the buyer

inventory and seller retained earnings(c) the $100,000 investment by Mother and the equity of Daughter.


Thought QuestionThought Question: Do any of the entries need to be repeated in subsequent periods?

ACQUISITION METHOD TREATMENTSIncome Reported by the Subsidiary

ProblemProblem – Equity method recorded subsidiary income

as an increase in the value of the investment.

TreatmentTreatment: Eliminate: Investment of parent Income from Subsidiary of parent

ExampleExample: During the year, the subsidiary informed the parent of earnings of $400,000. The parent uses the equity or partial equity method.

Original Entry by ParentOriginal Entry by Parent: Investment in Subsidiary (BS) 400,000

Equity in Subsidiary Income (IS) 400,000

Elimination EntryElimination Entry:Equity in Subsidiary Income (IS) 400,000

Investment in Subsidiary 400,000

Reason for EntryReason for Entry: Consolidated statements should include 100% of subsidiary sales and expenses (not proportional amount as a separate line called “Equity in Subsidiary Income”)


ACQUISITION METHOD TREATMENTSDividends Paid to the Parent

ProblemProblem – Equity method recorded dividend from subsidiary as a decrease in the value of the investment.

TreatmentTreatment: Eliminate: Investment of parent Dividends Paid or RE of subsidiary

ExampleExample: During the year, the subsidiary paid the parent $50,000 in dividends. The parent uses the equity or partial equity method.

Subsidiary EntrySubsidiary Entry: Dividends Paid 50,000

Cash 50,000

Parent EntryParent Entry: Cash 50,000


Elimination EntryElimination Entry:Investment in Subsidiary 50,000

Dividends Paid 50,000


ACQUISITION METHOD TREATMENTSExcesses between Subsidiary BV and FMVs

ProblemProblem – Assets of subsidiary must be adjusted to fair market value

TreatmentTreatment: Eliminate Investment of parent Increase Value of Assets of Subsidiary

ExampleExample: A parent acquires a subsidiary whose land was undervalued by $1,000.

Elimination EntryElimination Entry:Land 1,000


Note: Entry not needed if “Push Down” accounting is used by subsidiary.


“Push down” accounting saves me from having to repeat several entries each year.

“Push down” accounting saves me from having to repeat several entries each year.

PUSH DOWN ACCOUNTING

What it doesWhat it does:Subsidiary restates assets and liabilities on OWN books at FMV. (Goodwill determined in same manner.)

JustificationJustification:Change in ownership justifies new basis of reporting.

ControversyControversy:Is difference income or equity to the subsidiary? Typically net assets are increased. Example:

Equipment 500APIC or RE or Revaluation due to Consolidation 500

Current RequirementsCurrent RequirementsNot required by the FASB, but the SEC required when subsidiary is “substantially wholly owned” (> 95%, NCI < 5%) encourages if subsidiary is publicly-traded discourages if ownership is < 80%

NOTENOTE: This is mostly an internal issue unless: The subsidiary is substantially wholly owned, but NCI is publicly traded.

SAB 54 and 73

AdvantagesAdvantages:Push down eliminates several consolidation entries: recognition of FMV of assets, and amortization of excess amounts


COMPREHENSIVE EXAMPLE

Gander Inc. obtains 100% of Gosling Co. on Jan 1, 2009 for $490,000 in cash. Gander uses the equity method for internal purposes.

Gander, Inc. Gosling, Co.Cash 120,000 60,000Accounts Receivable 270,000 40,000Inventory 550,000 100,000Equipment (5 year life) 800,000 200,000Buildings 600,000 120,000Land 170,000 80,000Investment in Gosling, Co. 490,000Accounts Payable 50,000LT Liabilities 150,000Common Stock 300,000Retained Earnings 100,000

On Jan 1, 2009, Gosling’s assets had fair market value of

Land 86,000Building 144,000Equipment 200,000

Gosling income and dividends:

2009 2010Income 80,000 110,000Dividends 10,000 30,000

The difference between BV and FMV follows:

FMV BV DifferenceLand 86,000 80,000 6,000Building 144,000 120,000 24,000

30,000


Fair Value Allocation and Annual Amortization:Consideration (Acquisition FV) ................................. $490,000Book value (assets minus equities) .......................... (400,000)Excess fair value over book value ............................. $90,000

Excess fair value assigned

Excess Life Annual Amortization

Land $6,000 indefinite -0-Buildings 24,000 4 yrs. $6,000Total 30,000Goodwill 60,000 Indefinite -0- Total $90,000 $6,000

Consolidation Entries as of December 31, 2009

Elimination of Subsidiary EquityCommon Stock—Gosling................................................. 300,000Retained Earnings—1/1/09 ............................................ 100,000

Investment in Gosling ............................................... 400,000

Allocation of FMV Excess (not needed if Push-Down is used)Land ............................................................................... 6,000Buildings ......................................................................... 24,000Goodwill ......................................................................... 60,000


Record Amortization of Excess (not needed if Push-Down is used)Depreciation expense..................................................... 6,000

Buildings.................................................................... 6,000

Eliminate Subsidiary Income Equity in Subsidiary Income (IS)...................................... 74,000


Income – Amortization of Excess = $80,000 - $6,000 = 74,000

Eliminate Subsidiary Dividend Investment in Gosling .................................................... 10,000

Dividends Paid .......................................................... 10,000


CS + RE = $300,000 + $100,000 = $400,000CS + RE = $300,000 + $100,000 = $400,000

If push-down is used, Gosling would report $74,000 in income. If push-down is used, Gosling would report $74,000 in income.

Plug to find GoodwillPlug to find Goodwill

Consolidation Entries as of December 31, 2010

Elimination of Subsidiary EquityCommon Stock—Gosling ................................................ 300,000Retained Earnings—1/1/10 *.......................................... 170,000


* Beginning Balance + Net Income + Dividends = 100,000 + 80,000 – 10,000 = 170,000

Allocation of FMV Excess (not needed if Push-Down is used)Land ............................................................................... 6,000Buildings *...................................................................... 18,000Goodwill ......................................................................... 60,000


* Original excess – prior year depreciation = $24,000 - $6,000 = $18,000

Record Amortization of Excess (not needed if Push-Down is used)Depreciation expense..................................................... 6,000

Buildings.................................................................... 6,000

Eliminate Subsidiary Income Equity in Subsidiary Income (IS)..................................... 104,000


* Income – Amortization of Excess = $110,000 - $6,000 = 104,000

Eliminate Subsidiary Dividend Investment in Gosling .................................................... 30,000

Dividends Paid .......................................................... 30,000


consolidation+after+acquisition+ +pasewark+accounting

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