Transcript Chapter 4: Consolidation Techniques and Procedures

Chapter 4:
Consolidation
Techniques and
Procedures
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright ©2012 Pearson Education,
Inc. Publishing as Prentice Hall
4-1
Consolidation Techniques: Objectives
1. Prepare consolidation workpaper for the
year of acquisition when the parent uses the
complete equity method to account for its
investment in a subsidiary.
2. Prepare consolidation workpaper for the
years subsequent to acquisition.
3. Locate errors in consolidation workpaper.
4. Assign fair value to identifiable net assets.
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4-2
Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
6. Appendix: Understand the alternative trial
balance consolidation workpaper format.
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4-3
Consolidation Techniques and Procedures
1: ACQUISITION-YEAR
WORKPAPERS
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4-4
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
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4-5
Completing the Worksheet (1 of 2)
1. Enter Parent and Sub. amounts at 100% of
book value. (Even if parent owns less)
2. Enter elimination entries into the DR and CR
columns. (Check totals)
3. For consolidated revenues, liabilities, and
equity (other than ending retained
earnings):
 Add parent, subsidiary, less DR, plus CR
4. For consolidated assets:
 Add parent, subsidiary, plus DR, less CR
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4-6
Completing the Worksheet (2 of 2)
5. For income, ending retained earnings and
all subtotals and totals:
 Compute directly in consolidated column.
Note:
 The total consolidated assets should equal the
total consolidated liabilities and equity.
 Expenses on the income statement and dividends
on the statement of retained earnings are generally
shown as negative numbers. So compute the
consolidated amounts as you would for revenues.
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4-7
Workpaper 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 differentials
7. Eliminate other reciprocal balances
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4-8
Example: Pep & Sap Data
Pep pays $88 for 80% of Sap on 1/1/2011 when
Sap's equity consisted of $60 capital stock
and $30 retained earnings. All excess was due
to unrecorded patents with a 10-year life.
Sap's income and dividends follow:
Net income
Dividends
2011
$25
$15
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2012
$30
$15
4-9
Analysis
Cost of 80% of Sap
Implied value of Sap ($88/.80)
Book value (60+30)
Excess
$88
$110
90
$20
Allocated to:
Patents
Unamort.
Amortizatio
Unamort. Bal. Amortization
Bal.
n
on 1/1/2011
in 2011
on 12/31/2011
in 2012
Patents
$20
$2
$18
$2
Use these amounts in
2011 worksheet for
amortization expense
and patents.
Amt Amort.
$20 10 yrs
Unamort. Bal.
on 12/31/2012
$16
Use these amounts in
2012 worksheet for
amortization expense
and patents.
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4-10
Income & Dividend Calculations
2011:
Sap's net income
Amortization
Adjusted income
$25
(2)
$23
Dividends
$15
Pep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
2012:
Sap's net income
Amortization
Adjusted income
$30
(2)
$28
Pep's 80% share
$22.4
$12.0
Dividends
$15
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NCI 20% share
$5.6
$3.0
4-11
Pep's 2011 Worksheet Entries (1 of 3)
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 Sap (-R, -SE)
Dividends (+SE)
Investment in Sap (-A)
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18.4
12.0
6.4
4-12
Pep 2011: Entries (2 of 3)
4. Record noncontrolling interest in sub.'s
earnings & dividends
Noncontrolling interest share (-SE)
Dividends (+SE)
Noncontrolling interest (+SE)
4.6
3.0
1.6
5. Eliminate reciprocal Investment & sub.'s
equity balances
Capital stock, Sap (-SE)
Retained earnings, Sap (beginning) (-SE)
Patents (+A)
Investment in Sap (-A)
Noncontrolling interest (+SE)
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60
30
20
88
22
4-13
Pep 2011: Entries (3 of 3)
6. Amortize fair value/book value differentials
Amortization Expense (E, -SE)
2
Patents (-A)
2
7. Eliminate other reciprocal balances

none
Note that in the 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.
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4-14
Pep's 2011 Worksheet
Year ended 12/31/2011c
Income statement:
Revenues
Income from Sap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Pep
Sap
250.0
65.0
18.4
(200.0) (40.0)
68.4
CR Consol
18.4
2.0
4.6
315.0
0.0
(242.0)
(4.6)
68.4
25.0
5.0
30.0
68.4
25.0
(30.0) (15.0)
43.4
DR
40.0
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30.0
12.0
3.0
5.0
68.4
(30.0)
43.4
4-15
Balance sheet, 12/31/2011:
Cash
Other current assets
Investment in Sap
Plant & equipment, net
Patents
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Pep
39.0
90.0
94.4
Sap
10.0
50.0
250.0
70.0
DR
CR
6.4
88.0
20.0
473.4 130.0
80.0 30.0
350.0 60.0
43.4 40.0
2.0
60.0
22.0
1.6
473.4 130.0
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Consol
49.0
140.0
0.0
320.0
18.0
527.0
110.0
350.0
43.4
23.6
527.0
4-16
A Look at the Income Statement
Year ended 12/31/2011c
Income statement:
Revenues
Income from Sap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Pep
Sap
250.0
65.0
18.4
(200.0) (40.0)
68.4
25.0
DR
CR Consol
18.4
2.0
4.6
315.0
0.0
(242.0)
(4.6)
68.4
 Income from Sap is eliminated.
 Expenses are adjusted for 2011 amortization, - $2 on patents
 Noncontrolling interest is proportional to Pep's Income from
Sap since Pep uses the equity method.
 $18.4 x .20/.80 = $4.6
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A Look at Retained Earnings
Year ended 12/31/2011c
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Pep
Sap
DR
CR Consol
5.0
30.0
68.4
25.0
(30.0) (15.0)
30.0
5.0
68.4
(30.0)
43.4
40.0
12.0
3.0
43.4
 Beginning retained earnings of Sap is eliminated.
 All of Sap'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.
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A Look at Assets
 Investment in Sap is eliminated.
 Patents at the start of 2011 were $20, and current
amortization is $2; they are $18 at the end of 2011.
 The total is calculated in the consolidated column.
Balance sheet, 12/31/2011:
Cash
Other current assets
Investment in Sap
Plant & equipment, net
Patents
Total
Pep
39.0
90.0
94.4
Sap
10.0
50.0
250.0
70.0
DR
CR
6.4
88.0
20.0
473.4 130.0
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2.0
Consol
49.0
140.0
0.0
320.0
18.0
527.0
4-19
A Look at Liabilities & Equity
 Sap'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
Pep's Investment in Sap account.
 $94.4 x .20/.80 = $23.6
Balance sheet, 12/31/2011:
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Pep
80.0
350.0
43.4
Sap
30.0
60.0
40.0
DR
CR
60.0
22.0
1.6
473.4 130.0
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Consol
110.0
350.0
43.4
23.6
527.0
4-20
Consolidation Techniques and Procedures
2: WORKPAPERS IN
SUBSEQUENT YEARS
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4-21
Analysis, for 2012
Cost of 80% of Sap
Implied value of Sap ($88/.80)
Book value (60+30)
Excess
Patents
Unamort.
Bal.
on 1/1/2011
$20
$88
$110
90
$20
Allocated to:
Patents
Amt Amort.
$20 10 yrs
Amortization
Unamort. Bal.
Amortization
in 2011
$2
on 12/31/2011
$18
in 2012
$2
Use these amounts in
2011 worksheet for
amortization expense
and patents.
Unamort.
Bal.
on 12/31/2012
$16
Use these amounts in
2012 worksheet for
amortization expense
and patents.
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4-22
Income & Dividend Calculations
2011:
Sap's net income
Amortization
Adjusted income
$25
(2)
$23
Dividends
$15
2012:
Sap's net income
Amortization
Adjusted income
$30
(2)
$28
Dividends
$15
Pep's 80% share
$18.4
$12.0
NCI 20% share
$4.6
$3.0
Pep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0
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Pep's Worksheet Entries for 2012 (1 of 3)
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 Sap (-R, -SE)
Dividends (+SE)
Investment in Sap (-A)
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22.4
12.0
10.4
4-24
Pep 2012: Entries (2 of 3)
4. Record noncontrolling interest in sub.'s
earnings & dividends
Noncontrolling interest share (-SE)
Dividends (+SE)
Noncontrolling interest (+SE)
5.6
3.0
2.6
5. Eliminate reciprocal Investment & sub.'s
equity balances
Capital stock, Sap (-SE)
Retained earnings, Sap (beginning) (-SE)
Patents (+A)
Investment in Sap (-A)
Noncontrolling interest (+SE)
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60
40
18
94.4
23.6
4-25
Eliminating Investment in Sap
Entry 5 eliminates the Investment in Sap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
Implied value of Sap at acquisition $88/.80
Add the increase in retained earnings from
acquisition to the beginning of the current year
$40 at 1/1/2012 minus $30 at 1/1/2011
Less amortization for all prior periods
$2 patent amortization for 2011
Adjusted value of Sap at 1/1/2012
$110
10
(2)
$118
 Investment in Sap (80% x $118) = $94.4
 Noncontrolling interest (20% x $118) = $23.6
 Verify the $118 from the debits in Entry 5 (60 + 40 + 18).
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Pep 2012: Entries (3 of 3)
6. Amortize fair value differentials
Amortization Expense (E, -SE)
Patents (-A)
2
2
7. Eliminate other reciprocal balances
Note payable – Pep (-L)
Note receivable – Sap (-A)
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10
10
4-27
Pep's 2011 Worksheet
Year ended 12/31/2011
Income statement:
Revenues
Income from Sap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Pep
Sap
300.0
75.0
22.4
(244.0) (45.0)
78.4
CR Consol
22.4
2.0
5.6
375.0
0.0
(291.0)
(5.6)
78.4
30.0
43.4
40.0
78.4
30.0
(45.0) (15.0)
76.8
DR
55.0
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40.0
12.0
3.0
43.4
78.4
(45.0)
76.8
4-28
Balance sheet, 12/31/2012:
Cash
Note receivable – Sap
Other current assets
Investment in Sap
Pep
45.0
10.0
97.0
104.8
Sap
20.0
Plant & equipment, net
Patents
Total
Note payable – Pep
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
240.0
60.0
DR
CR
10.0
70.0
10.4
94.4
18.0
2.0
496.8 150.0
10.0 10.0
70.0 25.0
350.0 60.0 60.0
76.8 55.0
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300.0
16.0
548.0
95.0
350.0
76.8
23.6
2.6
496.8 150.0
Consol
65.0
0.0
167.0
0.0
26.2
548.0
4-29
Consolidation Techniques and Procedures
3: ERRORS IN THE
WORKPAPERS
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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.
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Consolidation Techniques and Procedures
4: ASSIGNING FAIR VALUE
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Example with Excess Allocated
Pat pays $360 for 90% of Sol on 12/31/2011 when
Sol's equity consisted of $200 capital stock and
$50 retained earnings. Inventory (sold in 2011),
land, and buildings (20 years) were undervalued
by $10, $30, and $80, respectively. Equipment (10
years) was overvalued by $20.
Sol's income and dividends for 2012 were $60 and
$20.
At year-end, Sol has dividends payable of $10
which Pat has not yet recorded. There is $20 cash
in transit from Sol to Pat for the note.
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Analysis at Acquisition
Cost of 90% of Sol
Implied value of Sap ($360/.90)
Book value (200+50)
Excess
$360
$400
250
$150
Noncontrolling interest, 10%(400)
Inventories
Land
Building
Equipment
Goodwill
Unamort. Bal.
12/31/2011 *
$10
30
80
(20)
50
$150
$40
Amortization
in 2012 *
($10)
0
(4)
2
0
($12)
Allocated to:
Inventories
Land
Building
Equipment
Goodwill
Unamort. Bal.
on 12/31/2012
$0
30
76
(18)
50
$138
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Amt
$10
30
80
(20)
50
150
Amort
1st yr
20 yrs
10 yrs
-
* Use the
12/31/2011
and 2012
amortization
in worksheet
entries for
2012.
4-34
Sol's Income & Dividend
2012
Sol's net income
Amortization
$60
($12)
Adjusted income
$48
Sol's dividends
$20
Pat's 90% share
$43.2
$18.0
NCI 10% share
$4.8
$2.0
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Pat's Worksheet Entries (1 of 4)
1. Adjust for errors & omissions
Dividends receivable (+A)
Investment in Sol (-A)
Cash (+A)
Note receivable, Sol (-A)
9.0
9.0
20.0
20.0
2. Eliminate intercompany profits and losses

none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning balance
Income from Sol (-R, -SE)
Dividends (+SE)
Investment in Sol (-A)
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43.2
18.0
25.2
4-36
Pat: Entries (2 of 4)
4. Record noncontrolling interest in sub.'s
earnings & dividends
Noncontrolling interest share (-SE)
Dividends (+SE)
Noncontrolling interest (+SE)
4.8
2.0
2.8
5a. Eliminate reciprocal Investment & sub.'s
equity balances (with unamortized excess)
Capital stock (-SE)
Retained earnings, Sol (beginning) (-SE)
Unamortized excess (+A)
Investment in Sol (-A)
Noncontrolling interest (+SE)
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200
50
150
360
40
4-37
Pat: Entries (3 of 4)
5b. Allocate the unamortized excess according
to beginning-of-year balances.
Inventory (+A)
Land (+A)
Building, net (+A)
Goodwill (+A)
Equipment, net (-A)
Unamortized excess (-A)
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10
30
80
50
20
150
4-38
Pat: Entries (4 of 4)
6. Amortize fair value/book value differentials
Cost of sales (E, -SE)
Inventory (-A)
Operating (depreciation) expense (E, -SE)
Buildings, net (-A)
Equipment, net (-A)
Operating (depreciation) expense (-E, SE)
10
10
4
4
2
2
7. Eliminate other reciprocal balances
Dividends payable (-L)
Dividends receivable (-A)
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9.0
9.0
4-39
Pat's 2012 Worksheet
Year ended 12/31/2012
Income statement:
Revenues
Income from Sol
Cost of goods sold
Operating expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Pat
Sol
DR
900.0
43.2
(600.0)
(190.0)
300.0
(150.0)
(90.0)
153.2
60.0
120.0
153.2
(100.0)
50.0
60.0
(20.0)
173.2
90.0
173.2
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4-40
43.2
10.0
4.0
4.8
CR
2.0
50.0
18.0
2.0
Consol
1,200.0
0.0
(760.0)
(282.0)
(4.8)
153.2
120.0
153.2
(100.0)
Balance sheet, 12/31/2012:
Cash
Accounts receivable, net
Note receivable – Sol
Inventories
Land
Building, net
Equipment, net
Investment in Sol
Pat
13.0
76.0
20.0
90.0
60.0
190.0
150.0
394.2
Dividends receivable
Goodwill
Unamortized excess
Total
Accounts payable
Dividends payable
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
993.2
120.0
700.0
173.2
993.2
Sol
15.0
25.0
DR
20.0
60.0
30.0
110.0
120.0
10.0
30.0
80.0
2.0
360.0
60.0
10.0
200.0
90.0
360.0
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9.0
50.0
150.0
CR
20.0
10.0
4.0
20.0
9.0
25.2
360.0
9.0
150.0
9.0
200.0
40.0
2.8
Consol
48.0
101.0
0.0
150.0
120.0
376.0
252.0
0.0
0.0
50.0
0.0
1,097.0
180.0
1.0
700.0
173.2
42.8
1,097.0
4-41
Consolidation Techniques and Procedures
5: CONSOLIDATED
STATEMENT OF CASH
FLOWS
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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
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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
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Operating Cash Flows
Direct method:
 Include cash dividends received from equity
investees (not equity method income)
Indirect method:
 Start with controlling share of net income
 Add the noncontrolling interest share
 Deduct the excess of equity method income over
cash dividends received from equity investees
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Consolidation Techniques and Procedures
6: APPENDIX – TRIAL
BALANCE FORMAT
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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
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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 controlling share of income to the
retained earnings column.
5. Move ending retained earnings to the balance
sheet column.
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