Transcript Consolidations Subsequent to Date of Acquisition Three

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