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Chapter Three
Consolidations Subsequentto Date of Acquisition
After combination, parent tracks its investment in the subsidiary.
records changes in the value of investment
records income earned
One of three accounting methods to track.
Financial statements continue to be consolidated.
Consolidated amounts are the same regardless of accounting method used.
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INVESTMENT ACCOUNTING BY PARENT
Investment at original cost.
Dividends recorded as income.
Cost Method
Income accrued when earned by subsidiary.
Dividends reduce value of investment.
Amortization of excess of cost over book value.
Equity Method
Partial Equity Method Equity method without last step.
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SUBSQNT CONSOLIDATION: EQUITY METHOD
Exercise 3-31
2000: Palm acquires 100% of Storm.
Excess AnnualCost Amortization
LandEquipmentFormula Total
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2004: Palm receives dividend from Storm.
2004: Palm records income of Storm less extra amortization.
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Debits Credits
(S)
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
176
$ (745)
(66)
$ (261)
$ (659)
(261)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Entry S eliminates beginningbalance of R/E.
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Debits Credits
(A)
(A)
(A)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
216
(745)
$ (1,625)
428
0
$ 1,625
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5)
Adjusts for excess over book value less prior yr. amortization.
$5 – ( 4 x $1 )
$20 – ( 4 x $1 )
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Debits Credits
(S)
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
176
$ (745)
(66)
$ (261)
$ (659)
(261)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Entry I eliminates income accrual.
(I) 66
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Debits Credits
(A)
(A)
(A)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
216
(745)
$ (1,625)
428
0
$ 1,625
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5)
Entry D to eliminate dividends.
(I) 66
(D) 40
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Debits Credits
(S)
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
176
$ (745)
(66)
$ (261)
$ (659)
(261)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Totals
$ (675)
230
1
(176)
0
$ (261)
(261)
183
Entry E records the extra amortization for current period.
(I) 66
(D) 40
(E) 1
(E) 1
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Debits Credits
(A)
(A)
(A)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
216
(745)
$ (1,625)
428
0
$ 1,625
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5)
Totals
$ 343
$ (129)
(164)
(I) 66
(D) 40
(E) 1
(E) 1
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RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (745)
(66)
$ (261)
$ (659)
(261)
130
Differences Across Methods
Palm Co.
$ (485)
160
0
175
$ (669)
(40)
$ (235)
$ (609)
(235)
130
Palm Co.
$ (485)
160
0
175
$ (755)
(68)
$ (263)
$ (667)
(263)
130
Equity Cost Partial Equity
Divid Income
Cost records dividends as
income
Partial Equity ignores extra amortizations.
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Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Build & eqp
Add Pd-in
Palm Co.
$ 268
216
(745)
$ (1,625)
428
0
$ 1,625
$ (110)
(80)
(600)
713
(90)
Palm Co.
$ 268
140
(669)
$ (1,549)
428
0
$ 1,549
$ (110)
(80)
(600)
713
(90)
Palm Co.
$ 268
226
(755)
$ (1,635)
428
0
$ 1,635
$ (110)
(80)
(600)
713
(90)
Equity Cost Partial Equity
Cost: Investment remains
at original cost.
Partial Equity: Investment doesn’t
include extra amortizations.
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Debits Credits
(S)
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Divid Income
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (669)
(40)
$ (235)
$ (609)
(235)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Cost
(*C)
Entry *C adjusts Palm’s beginning R/E.
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Debits Credits
(S)
(S)
(A)
(A)
(A)
(A)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
140
(669)
$ (1,549)
428
0
$ 1,549
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5) (S)
Cost
(*C)
Adjustments (S) and (A) are the same as with the equity method.
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Debits Credits
(S)
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Divid Income
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (669)
(40)
$ (235)
$ (609)
(235)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
(I)
Cost
(*C)
(I)
Entry I eliminates dividend income (Entry D not needed).
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Debits Credits
(S)
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Divid Income
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (669)
(40)
$ (235)
$ (609)
(235)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Totals
$ (675)
230
1
(175)
$ (745)
0
$ (261)
$ (659)
(261)
183
Entry E is the same as before.
(I)
(E) 1
(E) 1
(261)
Cost
(*C)
(I)
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Debits Credits
(S)
(S)
(A)
(A)
(A)
(A)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
140
(669)
$ (1,549)
428
0
$ 1,549
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5) (S)
Totals
$ 343
0
(745)
$ (1,728)
496
15
$ 1,728
$ (129)
(164)
(600)
874
(90)
(E) 1
(E) 1
(745)
Cost
(*C)
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RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04
Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (755)
(68)
$ (263)
$ (667)
(263)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Debits Credits
(S) 98
Entry *C adjusts Palm’s beginning R/E.
Partial Equity
(*C)
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Debits Credits
(S) 163
(S) 60
(A) 27
(A) 10
(A) 16
(A) 1
(S) 5
Partial Equity
(*C)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
226
(755)
$ (1,635)
428
0
$ 1,635
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5)
Adjustments (S) and (A) are the same as with the equity method.
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Debits Credits
Entry I affects same accounts as equity (but
different in amount).
(I)
Partial Equity
RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04
Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (755)
(68)
$ (263)
$ (667)
(263)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
(S) 98
(*C)
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Debits Credits
(S) 60
(A) 10
(A) 16
(A) 1
(S) 5
Partial Equity
(I)
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
226
(755)
$ (1,635)
428
0
$ 1,635
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5)
Entry D to eliminate dividends.
(S) 163
(A) 27
(*C)(D)
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RevenuesCGS
Amort Exp
Dividends
R/E, 12/31
Eqty in Sub
Net Inc
Inc Stmnt
Stmnt R/ER/E, 1/1/04
Net Income
Depr Exp
Palm Co.
$ (485)
160
0
175
$ (755)
(68)
$ (263)
$ (667)
(263)
130
Storm Co.
$ (190)
70
0
40
$ (126)
0
$ (68)
$ (98)
(68)
52
Debits Credits
Entry E records the extra amortization for current period.
(I)
(D)
(E) 1
(E) 1
Partial EquityTotals
$ (675)
230
1
(175)
$ (745)
0
$ (261)
$ (659)
(261)
183
(261)
(S) 98
(*C)
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Debits Credits
(S) 60
(A) 10
(A) 16
(A) 1
(S) 5
(E) 1
(E) 1
Partial Equity
Curr AssetsInvst - Storm
R/E, 12/31
Total
Land
Formula
Total
Bal Sheet
Curr LiabL-T LiabComm Stk
Palm Co.
$ 268
226
(755)
$ (1,635)
428
0
$ 1,635
$ (110)
(80)
(600)
Storm Co.
$ 75
0
(126)
$ (294)
58
0
$ 294
$ (19)
(84)
(60)
Build & eqp 713 161
Add Pd-in (90) (5)
Totals
$ 343
0
(745)
$ (1,728)
496
15
$ 1,728
$ (129)
(164)
(600)
874
(90)
(745)
(I)
(S) 163
(A) 27
(*C)(D)
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Prob 3-18
Differences in income and the
investment account.
Sub Income Dividends
Amortiz
Bal. 12/31/05
Total
’04 Income
Cost
Dividends
Sub Income
Amortiz.
Dividends
Amortiz.Bal. 12/31/04
Sub Income
Investment
Equity Cost Partial Equity
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Prob 3-21
Differences in income and the
investment account.
Sub Income Dividends
Total
’05 Income
Amortiz.
Amortiz
Bal. 12/31/05
Cost
Dividends
Sub Income Dividends
Amortiz.Bal. 12/31/04
Sub Income
Investment
Sub Income Dividends
Total
’04 Income
Amortiz.
Equity Cost Partial Equity