Ringkasan AKL1

Disusun oleh : Muhammad Firman (Akuntansi FE UI 2012)
AKUNTANSI KEUANGAN LANJUTAN 1

Motivating factors:
CHAPTER 1 1. Helps establish clear lines of control and facilitate
INTERCORPORATE ACQUISITIONS AND the evaluation of operating results
2. Special tax incentives
INVESTMENTS IN OTHER ENTITIES 3. Regulatory reasons
4. Protection from legal liability
5. Disposing of a portion of existing operations
Development of Complex Business Structures Business Expansion
 Size often allows economies of scale A spin-off
 New earning potential Occurs when the ownership of a newly created or existing
 Earnings stability through diversification subsidiary is distributed to the parent’s stockholders
 Management rewards for bigger company size without the stockholders surrendering any of their stock in
 Prestige associated with company size the parent company.
Business Objectives A split-off

A subsidiaryis a corporation that is controlled by another Occurs when the subsidiary’s shares are exchanged for
corporation, referred to as a parent company.Control is shares of the parent, thereby leading to a reduction in the
usually through majority ownership of its common stock. outstanding shares of the parent company.
Because a subsidiary is a separate legal entity, the parent’s
risk associated with the subsidiary’s activities is limited. Control: How?
The Usual Way
Ethical Considerations Owning more than 50% of the subsidiary’s outstanding
Manipulation of financial reporting voting stock (50% plus only 1 share will do it)
 The use of subsidiaries or other entities to borrow
money without reporting the debt on their balance The Unusual Way
sheets Having contractual agreements or financial arrangements
 Using special entities to manipulate profits that effectively achieve control
 Manipulation of accounting for mergers and 1. Informal arrangements
acquisitions 2. Formal agreements (Consummation of a written
 Pooling-of-interests allowed for manipulation agreement requires recognition on the books of one
or more of the companies that are a party to the
 The FASB did away with it and modified acquisition combination)
accounting
Two Types of Expansion Forms of Organizational Structure
Expansion through business combinations
Internal Expansion
Investment account (Parent) = BV of net assets (Sub)  Entry into new product areas or geographic regions
by acquiring or combining with other companies.
External Expansion  A business combinationoccurs when “. . . an
Acquisition price usually is not the same as BV, carrying acquirer obtains control of one or more
value, or even FMV of net assets businesses.”
 The concept of control relates to the ability to direct
policies and management.
Organizational Structure and Reporting
Merger
A business combination in which the acquired company’s
assets and liabilities are combined with those of the
acquiring company, resulting in no additional organizational
components.Financial reporting is based on the original
Business Expansion for Within organizational structure.
New entities are created
 subsidiaries Controlling ownership
 partnerships A business combination in which the acquired company
 joint ventures remains as a separate legal entity with a majority of its
 special entities common stock owned by the purchasing company leading
to a parent–subsidiary relationship.Accounting standards
normally require consolidated financial statements.
M a t a k u l i a h l a i n y a n g b e l u m a d a d i P D F i n i a k a n s a y a u p d a t e d i www. a k u n t a n s i d a n b i s n i s . wo rd p re s s . c o m
Contac t me : muhammad.f irman177@gmail.com /@f irmanmhmd (Line) 274
PE1
Noncontrolling ownership  The target company’s basis of accounting in its

The purchase of a less-than-majority interest in another assets was used by the consolidated group.
corporation does not usually result in a business  The depreciation cycle merely continued along as if
combination or a controlling situation. no business combination had occurred.
 Goodwill was never recognized; thus, future income
Other beneficial interest statements did not have goodwill amortization
One company may have a beneficial interest in another expense.
entity even without a direct ownership interest.The  Managers loved it!
beneficial interest may be defined by the agreement
establishing the entity or by an operating or financing Methods of Effecting Business Combinations
agreement. Acquisition of assets
 Statutory Merger
Accounting for Business Combinations  Statutory Consolidation
Big Picture: Valuation of the acquired company
In the past, there were two methods: Acquisition of stock
1. Pooling of Interests Method (Investment = BV of  A majority of the outstanding voting shares usually
Sub) is required unless other factors lead to the acquirer
2. Purchase Method (Investment in Sub = FV given) gaining control.
 Noncontrolling interest: the total of the shares of an
SFAS 141 (ASC 805)(Effective July 2001) required the acquired company not held by the controlling
purchase method.SFAS 141R (ASC 805) (Effective December shareholder.
2008) modified rules—“Acquisition Method”.FASB 141R
(ASC 805) may not be applied retroactively Acquisition by other means
Acquisition Accounting Valuation of Business Entities
The acquirer recognizes all assets acquired and liabilities Value of individual assets and liabilities
assumed in a business combination and measures them at Value determined by appraisal
their acquisition-date fair values.If less than 100 percent of
the acquiree is acquired, the noncontrolling interest also is Value of potential earnings
measured at its acquisition-date fair value. “Going-concern value” based on:
1. A multiple of current earnings.
Fair value measurement 2. Present value of the anticipated future net cash
The FASB decided in FASB 141R (ASC 805) to focus directly flows generated by the company.
on the value of the consideration given.
Valuation of consideration exchanged
Goodwill
Components used in determining goodwill: Acquiring Assets vs. Stock
1.The fair value of the consideration given by the acquirer Major Decision Factors :
2.The fair value of any interest in the acquiree already held Legal considerations
by the acquirer Buyer must be extremelycareful NOT to assume
3.The fair value of the noncontrolling interest in the responsibility for (andthus “inherit”) the target company’s :
acquiree, if any 1. Unrecorded liabilities.
2. Contingent liabilities (lawsuits).
The total of these three amounts, all measured at the Tax considerations
acquisition date, is compared with the acquisition-date fair Often requires majornegotiations involving resolution of
value of the acquiree’s net identifiable assets, and the 1. Seller’s tax desires.
difference is goodwill. 2. Buyer’s tax desires.
Ease of consummation—acquiring common stockis simple
The Acquisition Method compared with acquiring assets.
 Establishes A New Basis of Accounting
 The new basis of accounting depends on the Acquiring Assets
acquirer’s purchase price (FMV) + the NCI’s (FMV). Major Advantages of Acquiring Assets
 The depreciation cycle for fixed assets starts over 1. Will not inherit a target’s contingent
based on current values and estimates liabilities(excluding environmental).
2. Will not inherit a target’s unwanted labor union.
If acquisition price > FMV, goodwill exists.
1. Recognize as an asset. Major Disadvantages of Acquiring Assets
2. Do notamortize. 1. Transfer of titles on real estate and other assetscan
3. Evaluate periodically for possible impairment. be time consuming.
2. Transfer of contracts may not be possible.
If acquisition price < FMV, a bargain purchase element
exists. Acquiring Common Stock
Advantages of Acquiring Common Stock
The Pooling of Interests Method 1. Easy transfer
 No longer allowed! 2. May inherit nontransferable contracts
PE1
Disadvantages of Acquiring Common Stock The operations of the previously separate companies are
 May inherit contingent liabilities or unwantedlabor carried on in a single legal entity.
union connection.
 May acquire unwanted facilities/units. A statutory consolidation
 Will likely be hard to access target’s cash. Both combining companies are dissolved and the assets and
liabilities of both companies are transferred to a newly
Organizational Forms—What acquired? created corporation.
Target’s Assets—Results in a home office-branch/division
relationship. A stock acquisition
One company acquires the voting shares of another
company and the two companies continue to operate as
separate, but related, legal entities.The acquiring company
accounts for its ownership interest in the other company as
an investment.
Parent–subsidiary relationship
For general-purpose financial reporting, a parent company
and its subsidiaries present consolidated financial
statements that appear largely as if the companies had
actually merged into one.Forms of Business Combinations
Creating Business Entities
The company transfers assets, and perhaps liabilities, to an
entity that the company has created and controls and in
which it holds majority ownership.
The company transfers assets and liabilities to the created
entity at book value, and the transferring company
recognizes an ownership interest in the newly created
entity equal to the book value of the net assets transferred.
Recognition of fair values of the assets transferred in excess
of their carrying values on the books of the transferring
company is not appropriate in the absence of an arm’s-
length transaction.No gains or losses are recognized on the
transfer by the transferring company.
If the value of an asset transferred to a newly created entity
has been impaired prior to the transfer and its fair value is
less than the carrying value on the transferring company’s
books, the transferring company should recognize an
impairment loss and transfer the asset to the new entity at
the lower fair value.
Internal Expansion: Creating a subsidiary
1. Parent sets up the new legal entity.Based on state
laws
2. Parent transfers assets to the new company.
3. Subsidiary begins to operate.
Example: Parent sets up Sub and transfers $1,000 for no-par Forms of Business Combination—Details
stock.
Option #1: Statutory Merger
1. Peaceful Merger:One entity transfers assets to
another in exchange for stock and/or cash.It
liquidates pursuant to state laws.
2. Hostile Takeover:One company buys the stock of
another, creating a temporary parent-subsidiary
relationship.The parentthen liquidates the
subsidiaryinto the parentpursuant to state laws.
Forms of Business Combinations
The result: one legal entity survives.
A statutory merger
The acquired company’s assets and liabilities are
transferred to the acquiring company, and the acquired
company is dissolved, or liquidated.
PE1
Statutory Merger: Peaceful Merger The Result
Option #2: Statutory Consolidation

Need SH approval from both corporations.  New corporation (Newco) is created.
 Newco issues stock to bothcombining companies in
The Result exchange for their stock.
 Each combining company becomes a
temporarysubsidiaryof Newco.
 Both subs are liquidatedinto Newco and become
divisions.
Result: One legal entity survives.
Statutory Consolidation: The Process
Statutory Merger: Hostile Takeover
Need SH approval from both corporations.

The Result
A takes all of T’s assets and liquidates the corporate shell.
Option #3: HOLDING COMPANY:

Similar to a statutory consolidation except that the two
subsidiaries are NOT liquidated into newly formed parent
corporation.Instead, the new company issues its stock to
the shareholders of the two existing corporations in
exchange for their stock in the two new subsidiary
corporations.
A
PE1
The Result
Acquirer’s Cost: Category 2

In the past, costs traceable to the acquisition were
capitalized:
 Legal fees—the acquisition agreement
 Purchase investigation fees
 Finder’s fees
 Travel costs
 Professional consulting fees
ASC 805 requires that they be expensed in the acquisition
The Acquisition Method: Items Included in the Acquirer’s period.Do not expense direct costs of issuing stock. Charge
Cost to Additional Paid-In Capital
1. Category #1: The fair value of the consideration
given Assume the same information provided in Exercise 1. In
2. Category #2: Certain out-of-pocket direct costs addition, assume that Pete incurred the following direct
In the past, these were included in acquisition. costs:.
Now expense!
3. Category #3: Contingent consideration. Paid
subsequent to the acquisition date
Types of Consideration: Practically any type
 Cash
 Common stock
 Preferred stock
 Notes receivable or Bonds
 Used trucks Prior to the consummation date, $117,000 had been paid
and charged to a deferred charges account pending
General Rule consummation of the acquisition. The remaining $27,000
Use the FMV of the consideration given. has notbeen paid or accrued.Required: Prepare the journal
entry to record the direct costs
Exception
Use the FMV of the property received. . . if it is more readily
determinable.
Group Exercise 1: Basic Acquisition

Pete Inc. acquired 100% of the outstanding common stock
of Sake Inc. for $2,500,000 cash and 20,000 shares of its
own common stock ($1 par value), which was trading at $50
per share at the acquisition date.Required: Prepare the
journal entry to record the acquisition.
Contingent Consideration
Contingent payments depending on some unresolved future
event.Example: agree to issue additional shares in 6 months
if shares given lose value.Record at fair value as of the
PE1
acquisition date.Mark to market each subsequent period Bargain Purchase Element: What to Do With It?
until the contingent event is resolved.
Bargain Purchase Element
Goodwill vs. Bargain Purchase Element  Still record assets and liabilities assumed at their
fair values.
 The amount by which consideration given exceeds
the fair value of net assets is a gain to the acquirer.
Assume Bigco Corp. pays $150,000 for Littleco Inc. and that
the estimated fair market valuesof assets, liabilities, and
equity accounts are as follows:
Goodwill:How to calculate it?

Goodwill is calculated as the residualamount.
 First, estimate the FMV of identifiable net assets.
Includes both tangible AND intangible assets
 Second, subtract the total FMV of all identifiable net
assets from the total FMV given by owners.The
residual is deemed to be goodwill.
GW = Total FMV Given –FMV of Identifiable Net Assets
Goodwill Example
Assume Bigco Corp. pays $400,000 for Littleco Inc. and that
the estimated fair market valuesof assets, liabilities, and
equity accounts are as follows:
Acquisition of Intangibles
ASC 805
An intangible asset should be recognized separately from
goodwill onlyif its benefits can be separately
identified.Finite intangible assets should be amortized over
their useful life with no arbitrary cap (i.e., no 40-year
limit).Some intangible assets (such as goodwill) may have an
indefinite or infinite life. They should notbe amortized, but
tested for impairment at least annually.
Intangible Assets
More are recognized under ASC 805
Record at fair valuebut only if either of the following two
criteria are met:
 1.Intangible arises from a legalor contractualright.
 2.Intangible does notarise from a legal or
contractual right butis separable.
Separately Recognized Intangibles
Goodwill:What to Do With It? ASC 805 specifies that the following should be recognized
separately from goodwill:
Goodwill  Marketing-related intangibles, trademarks and
 Must capitalize as an asset internet domains
 Cannot amortize to earnings  Customer-related intangibles, customer lists, order
 Must periodically (at least annually) assess for backlogs, etc.
impairment  Artistic-related intangibles, normally items
 If impaired, must write it down—charge to earnings protected by copyrights
 Contract-based intangibles, licenses, franchises,
broadcast rights
PE1
 Technology-based intangible assets, both patented

and unpatented technologies
Key:Purpose is to get companies to recognize intangibles Record costs related to issuance of common stock.
separately from goodwill.
Example : On the date of combination, Point records the acquisition
On January 1, 2009, Buyer Company acquired 100-percent Corporation.of Sharp with the following entry:
ownership of Target Company’s assets for $9,400 cash and
assumed its liabilities.
Current Assets $2,400
Property, Plant, and Equipment 1,500
Current Liabilities 500
Long-term Debt 1,100
In addition, Target Company had the following intangible
items on the acquisition date (notincluded in Target’s
balance sheet):
 a.Trademarks(not recognized on Target’s books)

because they were internally developed. The
trademarks have a value of $1,400. The useful life of Record acquisition of sharp company
these trademarks is indefinite.
Entries Recorded by Acquired company
 b.Ongoing researchprojects that have an estimated
value of $1,000
 c.Internally-developed computer softwarewith a

value of $1,500. This software has a useful life of
three years.
 d.Internally-developed patentswith a value of $800.

The patents have a useful life of seven years.
 e.Other separately-identifiable intangibleswith a Record transfer of assets to Point

value of $200. These assets have an average useful
life of five years.
Record distribution of point corporation stock

Acquisition Accounting
Testing for goodwill impairment
When goodwill arises in a business combination, it must be
assigned to cash generating units(CGU).To test for
impairment, the recoverable amount of the CGUis
compared with its carrying amount.If the recoverable
amount of the CGUexceeds its carrying amount, the
goodwill of that reporting unit is considered unimpaired.If
the carrying amount of the CGU exceeds its recoverable
amount, an impairment of the reporting unit’s goodwill is
implied.
Acquisition Method – Comprehensive Example An impairment loss

Entries Recorded by Acquiring Company –is recognised for a CGU if, and only if, the recoverable
amount of the CGU (group of CGUs) is less than the carrying
amount of the CGU (group of CGUs).
Record costs related to acquisition of Sharp Company.
PE1
–is allocated to reduce the carrying amount of the assets of Additional Considerations
the CGU (group of CGUs) in the following order: Uncertainty in business combinations
Measurement Period
 a)first, to reduce the carrying amount of any  ASC 805 allows for this period of time to properly
goodwillallocated to the CGU (group of CGUs); ascertain fair values.
 The period ends once the acquirer obtains the
 b)then, to the other assets of the CGU (group of necessary information about the facts as of the
CGUs) pro rataon the basis of the carrying amount acquisition date.
of each asset in the CGU (group of CGUs).  May not exceed one year.
These reductions in carrying amounts shall be treated as Contingent consideration
impairment losses on individual assets  Sometimes the consideration exchanged is not fixed
in amount, but rather is contingent on future
Example events; e.g., a contingent-share agreement
Bear Bull performed an impairment review on the CGU X,  ASC 805 requires contingent consideration to be
which has the following assets on hand: valued at fair value as of the acquisition date and
classified as either a liability or equity.
Acquiree contingencies
 Under ASC 805, the acquirer must recognize all
contingencies that arise from contractual rights or
obligations and other contingencies if it is more
likely than not that they meet the definition of an
asset/liability at the acquisition date.
 Recorded by the acquirer at acquisition-date fair
value.
In-process research and development
 The FASB concluded that valuable ongoing research
and development projects of an acquiree are assets
After an impairment review, Bear Bull found that the and should be recorded at their acquisition-date fair
recoverable amount of CGU X is $8,000 and of the values, even if they have no alternative use.
investment property is $2,000. Calculate the impairment  These projects should be classified as indefinite-
loss and allocate to the individual asset. lived and, therefore, should not be amortized until
completed or abandoned.
 They should be tested for impairment.
Noncontrolling equity held prior to combination
 An acquirer that held an equity position in an
acquiree immediately prior to the acquisition date
must revalue that equity position to its fair value at
the acquisition date and recognize a gain or loss on
the revaluation.
Acquisitions by contract alone
 The amount of the acquiree’s net assets at the date
of acquisition is attributed to the noncontrolling
interest and included in the noncontrolling interest
reported in subsequent consolidated financial
statements.
Consolidation–The Big Picture
*3/5 x (10870-8000-1000) How do we report the results of subsidiaries?
Firstly, the impairment loss reduces any amount of goodwill

Then, the residual loss is allocated to other non-current
assets pro rata based on the carrying amounts of those non-
current asset.
Financial reporting subsequent to a business combination
Financial statements prepared subsequent to a business
combination reflect the combined entity only from the date
of combination.When a combination occurs during a fiscal
period, income earned by the acquiree prior to the
combination is not reported in the income of the combined
enterprise.
PE1
Consolidation: The Concept

 Two or more separate entities undercommon CHAPTER 2
control REPORTING INTERCORPORATE INVESTMENT AND
CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
 Present “as if ” they were one company. WITH NO DIFFERENTIAL
 Two or more sets of books are mergedtogether into
one set of financial statements
Consolidation: Basic Idea
Presentation:Sum the parent’s and subsidiary’s accounts.
Accounting for Investments in Common Stock
The method used to account for investments in common
stock depends on:
 the level of influence or control that the investor is
able to exercise over the investee.
 choices made by the investor because of options
available.
Financial Reporting Basis by Ownership Level
 0-25 % = Insignificant influence (Cost method)
 20-50% = Significant influence (equity method)

 50-100% = Control (Equity method or cost method +
consolidation)
Consolidation Entries Investment vs. Ownership

Two examples of eliminating entries: Consolidation eliminates the investment account and
 The “Basic” eliminating entry, Removes the replaces it with “the detail.”
“investment” account from the parent’s balance
sheet and the subsidiary’s equity accounts.
 An intercompany loan (from Parent to Sub)
Simple Consolidation Example
Accounting for Investments in Common Stock

The Cost Method
Used for reporting investments in equity securities when
both consolidation and equity-method reporting are
inappropriate
TheEquity Method
Used when the investor exercises significant influence over
the operating and financial policies of the investee and
consolidation is not appropriate. May not be used in place
of consolidation if consolidation is appropriate. Its primary
use is in reporting nonsubsidiary investments
Consolidation
Involves combining for financial reporting the individual
assets, liabilities, revenues, and expenses of two or more
related companies as if they were part of a single company
PE1
Normally is appropriate when one company, referred to as The Cost Method

the parent, controls another company, referred to as a Used when the investor lacks the ability either to control or
subsidiary. A subsidiary that is not consolidated with the to exercise significant influence over the investee.
parent is referred to as an unconsolidated subsidiary and is
shown as an investment on the parent’s balance sheet. Accounting Procedures
The cost method is consistent with the treatment normally
The Cost Method: How It Works accorded noncurrent assets.
Record the investment at “cost.”
General Rule:Leave it on the books at cost. At the time of purchase, the investor records its investment
in common stock at the total cost incurred in making the
Review purchase.The investment continues to be carried at its
Assume P Corp creates a subsidiary, S Corp, and invests original cost until the time of sale.Income from the
$100,000 cash in exchange for all of the $1 par common investment is recognized as dividends are declared by the
stock (1,000 shares).What journal entries would P and S investee.Recognition of investment income before a
make at the time of the investment? dividend declaration is inappropriate.
Example: The Cost Method
ABC Company acquires 20 percent of XYZ Company’s
common stock for $100,000 at the beginning of the year but
does not gain significant influence over XYZ. During the
year, XYZ has net income of $60,000 and pays dividends of
$20,000. ABC Company records the following entries:
General Rule : The investment remains on parent’s books at

cost. Record income at the parent level ONLY when sub
declares a dividend.
Generally, the sub’s income does not affect parent’s
investment account balance.However, the parent cannot
ignore the sub’s losses.Parent writes-down investment Declaration of dividends in excess of earnings since
ONLY IF value has been impaired.Write-downs result in a acquisition
NEW cost basis. Liquidating dividends: Dividends declared by the investee in
excess of its earnings since acquisition by the investor from
 The cost method is a one-way street! the investor’s viewpoint
 The investment can be written down,but
neverwritten up. The investor’s share of these liquidating dividends is treated
as a return of capital, and the investment account balance is
reduced by that amount.These dividends usually are not
liquidating dividends from the investee’spoint of view.
Acquisition at interim date
 Does not create any major problems when the cost
method is used.
 Potential difficulty: liquidating dividend
determination
The Cost Method: Pros & Cons Changes in the number of shares held
Changes resulting from stock dividends, stock splits, or
Pros reverse splits receive no formal recognition in the accounts
 Minimal G/L bookkeeping by parent of the investor
 Simple consolidation procedures Purchases of additional shares
Cons  Recorded at cost similar to initial purchase
 Overly conservative valuation  New percentage ownership is calculated to
 Parent can manipulate its reported income.Parent determine whether switch to the equity method is
controls when sub pays dividends required
 PCO statements,if used internally or issued—may Sales of shares
be misleading. Accounted for in the same manner as the sale of any other
noncurrent asset
The Cost Method: Key Concept
Although the parent can manipulate itsown reported net
income, it can nevermanipulate consolidated net income.
PE1
The Equity Method:How It Works

The equity method is accrual basis driven:
Record income at the parent level based on sub’s earnings
and losses—a built in valuation technique.
 It isn’t the same as fair value accounting.
 Nevertheless, the investment generally goes up and
down based on the operations of the investee
company.
Sub’s dividends reduce the parent’s investment (the parent
has less invested).
Example: The Equity Method

ABC Company acquires significant influence over XYZ
Company by purchasing 20 percent of the common stock of
the XYZ Company for $100,000, XYZ earns income of
$60,000 and pays dividends of $20,000.
Recognition of income
 This entry (equity accrual) is normally made as an
The equity method is a two-way street! adjusting entry at the end of the period
The investment can be:  If the investee reports a loss, the investor
1.written up based on the sub’s income recognizes its share of the loss and reduces the
2.written down based on sub losses and dividends carrying amount of the investment by that amount
The Equity Method: Pros and Cons
Pros
Based on economic activity—not the parent-controlled
dividend policy.
Has two built-in checking figures:
 Consolidated NI = Parent’s NI
 Consolidated RE = Parent’s RE Recognition of dividends
Cons
 Requires continual bookkeeping.
 Unnecessary work if PCO statements are not used
internally or issued to outsiders.
Carrying amount of the investment
The equity method is intended to reflect the investor’s
changing equity or interest in the investee.The investment
is recorded at the initial purchase price and adjusted each
period for the investor’s share of the investee’s profits or
losses and the dividends declared by the investee.
ASC 323-10-30 requires that the equity method be used for:
 1.Corporate joint ventures
 2.Companies in which the investor’s voting stock The Equity Method : Acquisition at Interim Date
interest gives the investor the “ability to exercise No income earned by the investee before the date of
significant influence over operating and financial acquisition may be accrued by the investor
policies” of that company
Acquisition between balance sheet dates
“Significant influence” criterion –20 percent rule The amount of income earned by the investee from the
In the absence of evidence to the contrary, an investor date of acquisition to the end of the fiscal period may need
holding 20 percent or more of an investee’s voting stock is to be estimated by the investor in recording the equity
presumed to have the ability to exercise significant accrual
influence over the investee.
Purchases of additional shares
Investor’s equity in the investee If the equity method was being used to account for shares
The investor records its investment at the original cost. This already held, the acquisition involves adding the cost of the
amount is adjusted periodically: new shares to the investment account and applying the
equity method from the date of acquisition forward.New
and old investments in the same stock are combined for
financial reporting purposes.
PE1
Sale of shares
Treated the same as the sale of any noncurrent assetFirst,
the investment account is adjusted to the date of sale for
the investor’s share of the investee’s current earnings.
Then, a gain or loss is recognized for the difference between
the proceeds received and the carrying amount of the
shares sold. If only part of the investment is sold, the
investor must decide whether to continue using the equity
method or to change to the cost method
The Cost and Equity Methods Compared What if Parent uses the cost method? $500 cost !!!
What journal entries would Parent make under each
method?
Summary of Year 1 Equity Method Entries
Summary of Year 2 Equity Method Entries
Example: Equity Method versus Cost Method

Pea Corporation created Soup Corporation with a transfer
of $500 cash. During Soup Corp.’s first year of operations, it
generated a net loss of $100 and paid no dividends. During
Soup Corp.’s second year of operations, it generated net
income of $200 and paid dividends of $50. What is the
balance in the Investment in Sub account on Parent’s books
at the end of year 2 using the equity method?
PE1
The objective is to combine the financial statements of two

or more entities as if they are a single corporation.The
consolidation worksheet facilitates the combining of the
two companies.Certain accounts need to be eliminated in
the consolidation process to avoid “double
counting.”Replaces “one-line” consolidation with the
The Fair Value Option “detail.”
ASC 825-10-45permits but does not require companies to
make fair value measurements In the consolidation worksheet, the three financial
 Option available only for investments that are not statements need to articulate.Net income from the income
required to be consolidated statement carries down to the statement of retained
 Rather than using the cost or equity method to earnings.The ending balance in retained earnings carries
report nonsubsidiary investments in common stock, down to the balance sheet.Elimination entries are entered
investors may report those investments at fair value into the “Elimination Entries” column (debit or credit) to
 The investor remeasures the investment to its fair eliminate any amounts that would result in “double
value at the end of each period counting.”
 The change in value is then recognized in income The Basic Elimination Entry: The Equity Method
for the period What needs to be eliminated?
 Normally the investor recognizes dividend income
in the same manner as under the cost method
 The parent’s investment account . It represents the
Example: The Fair Value Option initial investment adjusted for the parent’s
Ajax Corporation purchases 40 percent of Barclay cumulative share of the subsidiary’s income and
Company’s common stock on January 1, 20X1, for $200,000. dividends.
Barclay has net assets on that date with a book value of  The parent’s income from sub account
$400,000 and fair value of $465,000. On March 1, 20X1,  The subsidiary’s equity accounts
Ajax receives a cash dividend of $1,500 from Barclay. On
March 31, 20X1, Ajax determines the fair value of its Example: Equity Method
investment in Barclay to be $207,000. During the first Pea Corporation created Soup Corporation with a transfer
quarter of 20X1, Ajax records the following entries: of $500 cash. During Soup Corp.’s first year of operations, it
generated a net loss of $100 and paid no dividends. During
Soup Corp.’s second year of operations, it generated net
income of $200 and paid dividends of $50. What is the
balance in the Investment in Sub account on Parent’s books
at the end of year 2 using the equity method?
The Basic Elimination Entry: Equity Method

The investment account represents the initial investment
adjusted for the parents cumulative share of the
subsidiary’s income and dividends.
Overview of the Consolidation Process
Chapter 2 introduces the most simple setting for a Therefore, the elimination entry eliminates:
consolidation.  The subsidiary’s paid-in capital accounts (original
 The subsidiary is wholly owned. investment)
 It is either a created subsidiary or we assume it is  Beginning retained earnings (past earnings /
purchased for an amount equal to the book value of dividends)
net assets.
PE1
The subsidiary’s current year earnings and

dividends
Generically, it looks like this: Worksheet
The Equity Method: Things to Remember in Consolidation

Consolidated net income EQUALS the parent’s net income.
Consolidated retained earnings EQUALS the parent’s

retained earnings.
Exercise
REQUIRED
 Assume Pinkettacquired Smith on1/1/11
 Prepare alleliminationentries as of12/31/11.
 Prepare aconsolidationworksheet at12/31/11.
 Assume Smith’saccumulateddepreciation on1/1/11
was$20,000.
PE1
Objective:
 Eliminate equity accounts of Sub
 Eliminate equity method accounts of Parent.
Book Value Calculations
Solution
The optional accumulated depreciation elimination entry:
Shows the Buildings and Equipment “as if” they have been
recorded on the Sub’s books as new assets at book value.
PE1
The Basic Elimination Entry: The Cost Method Group Exercise 1: Cost Method Consolidation
REQUIRED
Cost Method  Prepare all consolidationentries as of 12/31/X3.
The investment account is generally exactly equal to the  Prepare a consolidationworksheet at 12/31/X3.
sum of the subsidiary’s paid-in capital accounts.Unless the  What is the maximumdividend the parent
parent records an impairment loss. coulddeclare ($84,000 or$180,000) if cash
wereavailable?
Basic elimination entry
Under the cost method, we also eliminate dividends from

sub to parent.
PE1
PCO Statements: Presented in Notes to the Consolidated

Statements
Retained Earnings Available for Dividends:
 Based on the parent’sG/L amount—noton the
consolidatedretained earnings amount.
 Use of the equity method in PCO statements
produces identical retained earnings amounts.
 Use of the cost method in PCO statements creates
confusion.
CHAPTER 3
THE REPORTING ENTITY AND CONSOLIDATION OF
LESS-THAN-WHOLLY-OWNED SUBSIDIARIES WITH
NO DIFFERENTIAL
Consolidated Financial Statements

Consolidated financial statements present thefinancial
position and results of operations for: a parent (controlling
entity) and one or more subsidiaries (controlled entities) as
if the individual entities actually were a singlecompany or
entity.
Benefits of Consolidated Financial Statements
Presented primarily for those parties having a long-run
interest in the parent company:
 shareholders,
 long-term creditors, or
 other resource providers.
Provide a means of obtaining a clear picture of the total
resources of the combined entity that are under the
parent's control.
Limitations of Consolidated Financial Statements
 Results of individual companies not disclosed (hides
poor performance).
 Financial ratios are not necessarily representative of
any single company in the consolidation.
The Cost Method: Things to Remember in Consolidation  Similar accounts of different companies may not be
Consolidated net income does NOT equal the parent’s net entirely comparable.
income.  Information is lost any time data sets are
aggregated.
Subsidiary Financial Statements
Creditors, preferred stockholders, and noncontrolling
Consolidated retained earnings does NOT equal the parent’s common stockholders of subsidiaries are most interested in
retained earnings. the separate financial statements of the subsidiaries in
which they have an interest.Because subsidiaries are legally
separate from their parents :
 the creditors and stockholders of a subsidiary
generally have no claim on the parent, and
Consolidation: The Most Important Point of All on  the stockholders of the subsidiary do not share in
Investment Basis the profits of the parent.
The consolidated statement amounts are identicalwhether
the parent uses the cost method or the equity method— Concepts and Standards
this holds true forall three statements. Traditional view of control includes:
 Direct controlthat occurs when one company owns
EquityMethodConsolidatedStatements = a majority of another company’s common stock.
CostMethodConsolidatedStatements
 Indirect control or pyramiding that occurs when a
company’s common stock is owned by one or more
PE1
other companies that are all under common Enron’s Accounting “Sleight of Hand”
control.
Special Purpose Entities (SPEs)
Ability to Exercise Control What is normally the business purpose?
Sometimes, majority stockholders may not be able to Bundle peripheral activities and have them done by an
exercise control even though they hold more than 50 independent, but close, friend.
percent of outstanding voting stock.
 Subsidiary is in legal reorganization or bankruptcy Examples:
 Foreign country restricts remittance of subsidiary  Acquire financing for a project
profits to domestic parent company  Package receivables and sell them to third parties
The unconsolidated subsidiary is reported as an What was Enron’s purpose?
intercorporate investment.  Move liabilities off the balance sheet
 Provide favorable terms for some transactions
Differences in Fiscal Periods
Difference in the fiscal periods of a parent and subsidiary “Raptors”
should not preclude consolidation.Often the fiscal period of Established by Enron CFO to provide a quick buyer for Enron
the subsidiary is changed to coincide with that of the assets.
parent.Another alternative is to adjust the financial  Option 1: Find a bona fide third party.Can’t find
statement data of the subsidiary each period to place the anyone?
data on a basis consistent with the fiscal period of the  Option 2: Establish a SPE to take the other side of
parent. the transaction.
Changing Concept of the Reporting Entity Where does the financing come from?
FASB 94, requiring consolidation of all majority-owned  97% sponsoring institution
subsidiaries, was issued to eliminate the inconsistencies  3% third party
found in practice until a more comprehensive standard
could be issued.Completion of the FASB’s consolidation Raptor’s Impact on Earnings
project has been hampered by, among other things, issues
related to:
 Control
 Reporting entity
The FASB has been attempting to move toward a
consolidation requirement for entities under effective
control.Ability to direct the policies of another entity even
though majority ownership is lacking.Even though FASB
141R indicates that control can be achieved without
majority ownership, a comprehensive consolidation policy
has yet to be achieved.
Defining the accounting entity would help resolve the issue
of when to prepare consolidated financial statements and
what entities should be included.FASB 160deals only with
selected issues related to consolidated financial statements,
leaving a comprehensive consolidation policy until a later Variable Interest Entities (VIEs)
time. As a result of the Enron collapse and other notable scandals
related to SPEs, the FASB issued Interpretation No. 46
Special Purpose Entities (FIN46) [the revised version is FIN46R].
Corporations, trusts, or partnerships created for a single
specified purpose.Usually have no substantive operations What is a VIE?
and are used only for financing purposes.Used for several An entity that either
decades for asset securitization, risk sharing, and taking  does not have equity investors with voting rights
advantage of tax statutes. and a percentage of profits and losses, OR
 has equity investors that do not provide sufficient
Variable Interest Entities financial resources to support the entity’s activities.
A legal structure used for business purposes, usually a
corporation, trust, or partnership, that either: What is a variable interest?
 does not have equity investors that have voting an interest that changes with changes in the VIE’s net
rights and share in all profits and losses of the assets.
entity.
 has equity investors that do not provide sufficient FIN 46 (an interpretation of ARB 51) uses the term variable
financial resources to support the entity’s activities. interest entities to encompass SPEs and other entities
falling within its conditions.Does not apply to entities that
are considered SPEs under FASB 140.
PE1
FIN 46R defines a variable interestin a VIE as a contractual,  Most commonly used for securitizations (of
ownership (with or without voting rights), or other money- receivables).
related interest in an entity that changes with changes in
the fair value of the entity’s net assets exclusive of variable VIEs: Potential Variable Interests
interests.
Potential Variable Interests
Purpose of FIN46R  Subordinated loans to a VIE.
The main effect of Fin46R is to capturethose investment  Equity interests in a VIE (50% or less).
relationshipsin which a controlling financial interest is not  Guarantees to a VIE’s lenders or equity holders
indicated by voting rights, but is indicated by residual (that reduce the true risk of these parties).
interests in risks and benefits, which is the conceptual  Written putoptions on a VIE’s assets held by a VIE or
definition of ownership in CON6. its lenders or equity holders.
 Forward contracts on purchases and sales.
Example: Variable Interest Entities
VIEs: The Primary Beneficiary
The primary beneficiary of a VIE must consolidate the
VIE.The primary beneficiary is the entity that:
 Will absorb a majority (more than 50%) of the VIE’s
expected losses and/or
 Will receive a majority (more than 50%) of the VIE’s
expected residual returns.
 Expected losses are given more weight than
expected residual returns in certain situations.
Only one primary beneficiary can exist for a VIE (by
definition).
IFRS Differences Related to VIEs and SPEs
U.S. GAAP and International Financial Reporting Standards
 How would ABC Corp. typically determine whether (IFRS) are rapidly converging.
to consolidate Leasing Corp.?  The FASB and the IASB are working together to
 What if ABC Corp. were a related party to Investor? remove differences in existing standards.
 What if ABC Corp. guaranteed the value of the  They are also working jointly on all new standards
building at the end of the lease? so that agreed-upon standards can be adopted.
 What if ABC Corp. received any residual value above
$100k when building sold? Despite convergence efforts, there are still some differences
related to VIEs and SPEs.
Variable Interest Entities (VIEs)
Key Differences between U.S. GAAP and IFRS
Variable Interest Relationships
Situations in which an entity receives benefits and/or is Topic : Determination of control
exposed to risks similar to those received from having a
majority ownership interest.Results from contractual
arrangements.
VIEs: “Contractual Arrangements”
Contractual Arrangement Types:
 Options
 Leases
 Guarantees of asset recovery values
 Guarantees of debt repayment
Contractual arrangements may exist simultaneously with a
less than majority ownership in a VIE.
VIEs: Most are “SPEs”
Special Purpose Entities
 Legally structured entities to serve a specific,
predetermined, limited purpose.
 May be a corporation, partnership, trust, or some
other legal entity.
 Creator is called the “sponsor.”
 Usually thinly capitalized.
PE1
Topic : Related parties
Topic : Definitions of VIEs versus SPEs

Two Issues:
(1)Should 100% of the financial statements be
consolidated?
(2) Where to report NCI in the financial statements?
Issue 1: Should 100% be Consolidated?
Full consolidation required by US GAAP (100%). This means
two special accounts appear in consolidated statements:
 NCI in Net Income of Sub
Like an “expense” in the consolidated income
statement
“Reported income that doesn’t belong to us.”
 NCI in Net Assets of Sub
Equity of unrelated owners
“Net assets on our balance sheet not belonging to
us.”
Topic : Disclosure Issue 2: Where to report NCI in Net Assets?
Old rules: Could report in in equity, liabilities, or “no man’s
land” between liabilities and equity.
New rules: Must report in equity
FASB 160 makes clear that the noncontrolling interest’s
claim on net assets is an element of equity, not a liability.
Computation of income to the noncontrolling interest
In uncomplicated situations, it is a simple proportionate
Topic : Accounting for joint ventures share of the subsidiary’s net income
Presentation
FASB 160requires that
 the term “consolidated net income” be applied to
the income available to all stockholders,
 with the allocation of that income between the
controlling and noncontrolling stockholders shown.
Different Approaches to Consolidation
Theories that might serve as a basis for preparing
consolidated financial statements:
 Proprietary theory
 Parent company theory
 Entity theory
With the issuance of FASB 141R, the FASB’s approach to
Noncontrolling Interest consolidation now focuses on the entity theory.
Only a controllinginterest is needed for the parent to
consolidate the subsidiary not 100% interest.Shareholders Proprietary Theory
of the subsidiary other than the parent are referred to as Views the firm as an extension of its owners.Assets and
“noncontrolling” shareholders.Noncontrolling interest or liabilities of the firm are considered to be those of the
refers to the claim of these shareholders on the income and owners.Results in a pro rata consolidation where the parent
net assets of the subsidiary. consolidates only its proportionate share of a less-than-
wholly owned subsidiary’s assets, liabilities, revenues and
What is a noncontrolling interest (NCI)? expenses.
Voting shares notowned by the parent company
NCI was formerly called the “Minority Interest”Parent
PE1
Parent Company Theory Entity Theory

Recognizes that though the parent does not have direct All of the assets, liabilities, revenues, and expenses of a less-
ownership or responsibility, it has the ability to exercise than-wholly owned subsidiary are included in the
effective control over all of the subsidiary’s assets and consolidated financial statements, with no special
liabilities, not simply a proportionate share.Separate treatment accorded either the controlling or noncontrolling
recognition is given, in the consolidated financial interest.
statements, to the noncontrolling interest’s claim on the net
assets and earnings of the subsidiary. Reporting Net Assets of the Subsidiary
Entity Theory
Focuses on the firm as a separate economic entity, rather
than on the ownership rights of the shareholders.Emphasis
is on the consolidated entity itself, with the controlling and
noncontrolling shareholders viewed as two separate
groups, each having an equity in the consolidated entity.
Recognition of Subsidiary Income
Current Practice
FASB 141Rhas significantly changed the preparation of
consolidated financial statements subsequent to the
acquisition of less-than-wholly owned subsidiaries.
 Under FASB 141R, consolidation follows largely an
entity-theory approach.
 Accordingly, the full entity fair value increment and

the full amount of goodwill are recognized.
PE1
Current approach clearly follows the entity theory with

minor modifications aimed at the practical reality that
consolidated financial statements are used primarily by
those having a long-run interest in the parent company.
Summary of differences in consolidation
Consolidation of Less-than-wholly-owned Subs

The entity theory requires that the entity’s entire income
and value be reported.
 The subsidiary’s income is divided between the
parent (controlling interest) and the NCI
shareholders.
 The subsidiary’s net assets are divided between the
parent (controlling interest) and the NCI
shareholders.
Basic elimination entry is modified to split both:
Consolidation of < Wholly Owned Subs

The worksheet is modified when the parentowns less than
100% of the subsidiary. The total “Net Income” is divided
between:
 the noncontrolling interest (NCI shareholders) and
Exercise : Basic Elimination Entry  the controlling interest (the parent company)
Given the following information: Assume Pinkett only purchases90% of Smith.
1)Photo owns 70% of Snap REQUIRED
2)Snap’s net income for 20X4 is $160,000  Prepare an analysis of theinvestment for 20X8.
3)Photo’s net income for 20X4 from its own  Prepare all consolidationentries as of 12/31/X8.
separateoperations is $500,000.  Prepare a consolidationworksheet at 12/31/X8.
4)Snap’s declares dividends of $12,000 during 20X4.
5)Snap has 10,000 shares of $4 par stock outstanding that
were originally issued at $14 per share.
6)Snap’s beginning balance in Retained Earnings for 20X4 is
$120,000.
PE1
Basic Elimination Entry
The accumulated depreciation elimination entry:
CHAPTER 4
CONSOLIDATION OF WHOLLY OWNED SUBSIDIARIES
ACQUIRED AT MORE THAN BOOK VALUE
Basic Concepts: Parent and Subsidiary

Parent’s books
Investment account initially contains the acquisition cost
 FMV of net assets,
 Plus goodwill, or
 Minus bargain purchase price
Parent can use the cost or equity method
Subsidiary’s books
Balance sheet: Assets and Liabilities are recorded at BOOK
values.
PE1
Income statement: Expenses calculated based on BOOK

values
What happens when you consolidate the parent’s and
subsidiary’s books?
Remember:
 The parent’s investment account is based on the
actual acquisition price.
 The sub’s books contain only historical book values.
The parent needs to make adjustments for both
 Balance Sheet
 Income Statement accounts.
Why wasn’t this a problem with created subs?
 No goodwill Consolidation: Equity Method
 No undervalued assets at the time of creation The Parent’s initial investment in a sub is based on the FMV
of the sub’s net assets (+/-GW).
Basic Concepts: Income Statement Impacts
Big Picture: Essentially, we switch the sub’s books from BV Equity method entries:
to FMV in the consolidation process.  Recording share of sub’s income
 Recording share of sub’s dividends
Income Statement effects
Example :
When Acquisition Price > Book Value What entries would Pepper record in its general ledger
related to Salt’s income and dividends for 20X9 under the
equity method?
Example: Equity Method Journal Entries
If expenses are UNDERSTATED, then income is too high

(OVERSTATED).To fix the problem, Parent needs to
INCREASEexpenses.
Example: Acquisition Price > Book Value
Pepper Inc., a calendar-year reporting company, acquired
100% of Salt Inc.’s outstanding common stock at a cost of
$442,500 on 12/31/X8. The analysis of the parent’s
Investment account as of the acquisition date shows:
in Pepper’s Investment in Salt account using the equity
method:
Simple Example
Assume the BV of Sub’s net assets is $800 and that the FMV
of the net assets is $1,000. Finally, assume that the
acquisition price was $1,500. The acquisition price consists
of three parts:
PE1
Exercise : Analyzing Acquisition Costs

Prince Inc. acquired 100% of She-Ra Inc.’s outstanding
common stock for$1,600,000 cash. Divide the cost into its
major elements and prepare theconsolidation entries as of
the acquisition date.
Key:We need to keep track of each element of the purchase

price separately!Why?
The Consolidation Process
When a subsidiary is acquired (instead of created), the
consolidation process is more complicated:
 Must eliminate intercompany items (same).
 Must update Sub’s assets and liabilities to FMV.
 Must recognize goodwill.
Summary of Consolidation Entries
1.The basic elimination entry:
Buildings and equipment netof $98,000
accumulateddepreciation. Goodwill is from
a prior acquisition.
2.The excess value reclassificationentry:
3.The amortized excess value reclassificationentry:
This entry reclassifies the equity method amortization of

cost in excess of book from Income from Sub to the
appropriate expense accounts where the costs would have
been had the sub used FMV instead of BV. How would this affect your worksheet elimination entries?
4.The accumulated depreciation eliminationentry: What did we pay for?
PE1
Excess Value Analysis ( Balances 12/31/X8)
The excess value reclassification elimination entrybrings the

Buildings and Equipment up to fair value.
Exercise 2: Worksheet at Acquisition
Pepper acquired 100% of Salt’s outstanding stock for
$442,500.
Required: Prepare the consolidation entries and worksheet.
PE1
2. Prepare all consolidation entries as of 12/31/X9.

3. Prepare a consolidation worksheet at 12/31/X9. (The
parent’s retained earnings as of 1/1/X9 were $455,000.
Basic elimination entry :
Acquired at Less than Fair Value of Net Assets

Bargain purchase Excess value calculations :
A business combination where the sum of
 the acquisition-date fair values of the consideration
given,
 any equity interest already held by the acquirer, and
 any noncontrolling interest
is less than the amounts at which the identifiable net assets
must be valued at the acquisition date as specified by ASC
805-10-20. The acquirer recognizes a gain for the difference.
Basic Concepts
Income Statement Effects
When Acquisition Price < BV The excess value reclassification entry :
The amortized excess value reclassification entry
Exercise 3
Pepper Inc., a calendar-year reporting company, acquired
100% of Salt Inc.’s outstanding common stock at a cost of
$442,500 on 12/31/X8. The analysis of the parent’s
Investment account as of the acquisition date shows:
The accumulated depreciation elimination entry
1. Update the analyses of theInvestment account through

12/31/X9.
PE1
Questions
 Can a company pay money to itself?
 Can a company receive funds from itself?
Answers
 All forms of intercompany receivables and payables
need to be eliminated when consolidated financial
statements are prepared.
 From a single-company viewpoint, a company
cannot owe itself money.
If intercompany payables and receivables are not
eliminated, both the consolidated assets and liabilities are
overstatedby an equal amount.
Three things to think about:
1.Note receivable / payable
2.Interest revenue / expense
3.Interest receivable / payable
Purchase Price > Book Value

What happens if you pay more than the book value of the
subsidiary’s assets? This is the case MOSTof the time!
Parent has two options:
1. Push-Down Accounting : Force Sub to revalue to
FMV
2. Non-Push-Down Accounting : Account for the
“extra” value separately.
Push-Down Accounting: The EASIER Way
Push-Down Accounting(an absolute gem)
In the subsidiary’s general ledger:
 Adjust assetsand liabilitiesto FVbased on the
parent’s acquisition price. This establishes a new
basis of accounting.
 Record goodwill.
 Record “Revaluation Capital” for the difference
Nonpush-Down Accounting: The HARDER Way
Non-Push-Down Accounting:
 Don’t touch the subsidiary’s general ledger (treat
like a “sacred cow”).
 Make fair value adjustments and record goodwill in
consolidation (on the worksheets).
Consolidation Consequences: Push-Down vs. Non-Push-
Road Map: Intercompany Transactions Down
Typical intercompany transactions Push-down accounting: Consolidation effort is minimal (has
 Intercompany reciprocal accounts (Chapter 4) received the “Better Bookkeeping” stamp of approval).
 Inventory transfers (Chapter 6)
 Fixed asset transfers (Chapter 7) Non-push-down accounting: Consolidation effort is
 Intercompany Indebtedness (Chapter 8) cumbersome (often a headache).
Intercompany Transactions
PE1
The consolidated financial statement amounts are the  This, however, refers to the BV of the subsidiary.
SAME either way!
 ONLY the accounting procedures differ What about revaluation of assets to FMV?
 Who does the work–parent or sub? The extent of revaluation of undervalued assetsand
goodwillcan vary.
Parent’s Amortization of Cost in Excess of Book Value: 1. Parent Company Concept: Partial valuation
How Handled? 2. Entity Concept: Full valuation
Non-push-down accounting
Equity Method Partial Ownership Example
1. Recorded in parent’s general ledger Assume Parent owns land with a book value of $400,000.
2. Maintains built-in checking features Parent’s 80%-owned subsidiary also owns land. At the time
of the acquisition, Sub’s land has a FMV of $100,000 and a
Cost Method book value of $61,000. Thus, the land has excess value of
Recorded on consolidation worksheets $39,000.
Push-down accounting
Parent has no amortization–sub records the amortization
Consolidated Financial Statements
Partial Ownership: Undervalued Assets & GW

How much to revalue the Subsidiary’s undervalued assets
and goodwill?
Parent company concept: <100% of FMV
Revalued only to the extent of the parent’s percent
ownership
Postacquisition Subsidiary Earnings: Reportable Earnings Entity concept: 100% of FMV
Under Acquisition Method The offsetting credit for the additional valuation increases
ONLY the subsidiary’s postacquisition earnings are reported the NCI in net assets
in the consolidated financial statements.
 For a mid-year acquisition, only consolidate Exercise 1: 80% Acquisition
earnings after the acquisition date. Pepper Inc., a calendar-year reporting company, acquired
 The same is true for dividends declared. 80% of Salt Inc.’s outstanding common stock for $354,000
on 12/31/X8 when the fair value of Salt’s net assets was
The subsidiary’s preacquisition earnings (included in its $422,500. The following data summarize the fair value
retained earnings account) are always eliminated against calculation:
the parent’s Investment account in consolidation.
CHAPTER 5
CONSOLIDATION OF LESS THAN WHOLLY OWNED
SUBSIDIARIES ACQUIRED AT MORE THAN BOOK
VALUE
Partial Ownerships: Partial or Full Valuation?

We learned earlier that full consolidation is required, as
opposed to partial consolidation.
 Thus, we consolidate 100% of the sub. 1. Prepare an analysis of the Investment account through
PE1
12/31/X8.
2. Prepare all consolidation entries as of 12/31/X8.
3. Prepare a consolidation worksheet at 12/31/X8.
4. What amount of income does Pepper report for 20X8?
How Do the Elimination Entries Change?

1.The basic elimination entry:
Excess Value calculations : Balances 12/31/X8
2.The excess value reclassificationentry:
3.The amortized excess value reclassification entry:
This entry reclassifies the equity method amortization of

cost in excess of book from Income from Sub to the
appropriate expense accounts where the costs would have
been had the Sub used FMV instead of BV.
4.The accumulated depreciation elimination entry:
Exercise 2: 80% End of First Year

Continuation of Exercise 1
1. Update the analysis of the Investment account through
12/31/X9.
2. Prepare the consolidation entries as of 12/31/X9.
3. Prepare a consolidation worksheet at 12/31/X9.
PE1
Notice how the worksheet entries “eliminate” Pepper’s

equity method accounts:
PE1
recognize a gain or loss for the difference, at the date

control is lost, between:
 the sum of any proceeds received by the parent and
the fair value of its remaining equity interest in the
former subsidiary, and
 the carrying amount of the parent’s total interest in
the subsidiary.
Example: Parent Maintains an Equity Interest
1.) Assume that on December 31, 20X9, Pepper’s
Investment in Salt account has a balance of $368,000. Also
assume that Pepper’s 80% interest in Salt has a fair value of
$410,000. On January 1, 20X0, Pepper sells half (remaining
40%)of Salt’s shares for $200,000. How should Pepper
account for this transaction?
Discontinuance of Consolidation 2.) Paul Corp. owns 90% of Sam Inc.’s outstanding common
A parent should stop consolidating a subsidiary if it can no stock. The carrying value of the investment in Sam is
longer exercise control. $170,000 and the fair value of this investment is $250,000.
Paul sells half of its Sam Inc. shares for $130,000. What is
Two possible scenarios: the carrying amount of the remaining shares?
1. The parent loses control of a subsidiary and no
longer holds an equity interest.
2. The parent loses control but still holds an equity
interest.
Parent No Longer Holds an Equity Interest
If a parent loses control of a subsidiary and no longer holds
an equity interest in the former subsidiary, Parent
recognizes a gain or loss for the difference between any
proceeds received from the event leading to loss of control,
and the carrying amount of the parent’s equity interest.
Example: Parent No Longer Holds an Equity Interest
Assume that on December 31, 20X9, Pepper’s Investment in
Salt account has a balance of $368,000. Also assume that
Pepper’s 80% interest in Salt has a fair value of $410,000.
On January 1, 20X0, Pepper sells all of its Salt shares for Treatment of Other Comprehensive Income
$400,000. How should Pepper account for this transaction? ASC 220-10-55requires that companies separately report
other comprehensive income.
 Includes revenues, expenses, gains, and losses that
under GAAP are excluded from net income.
 Other comprehensive income accounts are
temporary accounts that are closed at the end of
each period to a special stockholders’ equity
account, Accumulated Other Comprehensive
Income.
 The consolidation worksheet normally includes an
additional section at the bottom for other
If the parent loses control but maintains a noncontrolling comprehensive income.
equity interest in the former subsidiary, Parent must
PE1
Exercise 3: 80% with OCI Additional Considerations

Assume that during 20X9, Saltpurchases $10,000 of Subsidiary valuation accounts at acquisition :
investments classified as available-for-sale. By December  ASC 805-20-30indicates that all assets and liabilities
31, 20X9, the fair value of the securities increases to acquired in a business combination should be
$30,000. Other than the effects of accounting for Salt’s valued at their acquisition-date fair values and no
investment in securities, the financial information reported valuation accounts are to be carried over.
at December 31, 20X9, is identical to that presented in the  Its application in consolidation following a stock
previous examples. acquisition is less clear.
Additional Considerations—Deficit in RE
Negative retained earnings of subsidiary at acquisition
 A parent company may acquire a subsidiary with a
negative in its retained earnings account.
 The basic elimination entry will have a credit rather
than a debit to Retained Earnings.
Additional Considerations : Other stockholders’ equity

accounts
In general, all stockholders’ equity accounts accruing to the
common shareholders receive the same treatment as
common stock and are eliminated at the time common
stock is eliminated.
Additional Considerations : Subsidiary’s disposal of
differential-related assets
 Both the parent’s equity-method income and
consolidated net income are affected.
 Parent’s books: The portion of the differential
included in the subsidiary investment account that
relates to the asset sold must be written off by the
parent under the equity method as a reduction in
both the income from the subsidiary and the
investment account.
 In consolidation, the portion of the differential
related to the asset sold is treated as an adjustment
to consolidated income.
Additional Considerations : Inventory
Any inventory-related differential is assigned to inventory
for as long as the subsidiary holds the units. In the period in
which the inventory units are sold, the inventory-related
differential is assigned to Cost of Goods Sold. The inventory
costing method used by the subsidiary determines the
period in which the differential cost of goods sold is
recognized.
1. FIFO: The inventory units on hand on the date of
combination are viewed as being the first units sold
after the combination .
2. LIFO: The inventory units on the date of
combination are viewed as remaining in the
subsidiary’s inventory.
Additional Considerations : Fixed Assets
A differential related to land held by a subsidiary is added to
PE1
the Land balance in the consolidation workpaper each time Example 1: Intercompany Loan
a consolidated balance sheet is prepared.If the subsidiary A 12-year old girl lends $5 to her 17-year old brother. From
sells the land to which the differential relates, the the standpoint of individuals, this represents a receivable
differential is treated in the consolidation workpaper as an and a payable. If the family prepares a “consolidated
adjustment to the gain or loss on the sale of the land in the balance sheet,” what is the effect?
period of the sale.  No net change to the family’s wealth.
 Not a transaction with a non-family person.
The sale of differential-related equipment is treated in the
same manner as land except that the amortization for the Example 2:Sale from Parent to Sub to Outsider
current and previous periods must be considered. Parent has 19 subsidiaries. Parent has received a $1 order
from an outsider. Parent sells inventory to Sub 1 for $1.
CHAPTER 6  Sub 1 sells the inventory to Sub 2 for $1.
INTERCOMPANY INVENTORY TRANSACTIONS  Sub 2 sells the inventory to Sub 3 for $1.
 The inventory is sold from one sub to another until
Sub 19 sells it to the outsider for $1.
The parent and each sub reports sales of $1. From a
Road Map: Intercompany Transactions consolidated standpoint, what is the total amount of sales?
Typical intercompany transactions
 Intercompany reciprocal accounts (Chapter 4) Example 3: Sale from Parent to Sub, But Not Yet to an
 Inventory transfers (Chapter 6) Outsider
 Fixed asset transfers (Chapter 7) Sleazy Parent Company has one sub. Sleazy Parent is
 Intercompany Indebtedness (Chapter 8) preparing for an IPO. Sleazy Parent owns lots of obsolete
inventory which it cannot sell. Sleazy Parent sells the
Arm’s-Length Transactions obsolete inventory (costing $1,000) to its sub for $100,000.
Q: What are “Arm’s-length” Transactions? Sleazy Sub now holds the inventory. Without any
A: “Transactions that take place between completely adjustment, what items in Sleazy’s consolidated financial
independent parties.” statements will be misstated?
Categories of Transactions Conceptually, how would you correct each of these three
Arm’s Length Transactions problems?
 The only transactions that can be reported in the
consolidated statements.
 We want to report the results of our interactions
with outside parties!
Non-Arm’s Length Transactions
 Usually referred to as “related party transactions.”
 Include all intercompany transactions.
Types of “Related Party” Transactions
Involving only Individuals
Transactions among family members
Involving Corporations
 With management and other employees
 With directors and stockholders
 With affiliates (controlled entities), Probably
constitutes at least 99% of all corporate related- Example:
party transactions Assume Parent Co. owns 100% of Sub Co.
The following intercompany transactions occurred during
Necessity of Eliminating Intercompany Transactions the year:
Eliminate all intercompany transactions in consolidation:  Parent loaned $500 to Sub. To keep things simple,
 Because they are internal transactions from a assume that there is no interest revenue or interest
consolidated perspective. expense associated with this loan.
 Not because they are related-party transactions.  Parent made a sale to Sub for $400 cash. The
 Only transactions with outside unrelated parties can inventory had originally cost Parent $250. Sub then
be reported in the consolidated statements. sold that same inventory to an outsider for $500.
 Parent made a sale to Sub for $300 cash. The
Intercompany Transactions: Additional Opportunities for inventory had originally cost Parent $200. Sub has
Fraud not yet soldthat same inventory to an outsider.
Intercompany transactions sometimes occur to What consolidation worksheet entries would you make?
 conceal embezzlements.
 overstate reported profits (a) Loan from Parent to Sub
Example : 2 + 2 = 5 Does this transaction include outsiders?
PE1
Summary of transaction :
- parent purchased inventory $200
- parent sold the inventory to a sub for $300
Reverse the entries made by the parent and sub.
(b) Sale from Parent to Sub to Outsider
Summary of Consolidation Entries:
Which transactions are legitimate?
Fully-adjusted Equity Method Adjustment

Parent companies have to adjust their equity method
investment accounts for certain transactions. At this point,
let’s just consider one:
 Sale from parent to sub, but not yet sold to an
outsider.
 It represents “fake profit” that hasn’t really been
Is this a legitimate arm’s length transaction? realized in an arm’s-length transaction.
PE1
Both the balance sheet and income statement accounts Issue #1: Eliminate Intercompany Transfers?
need to be adjusted. This is a REAL journal entry, not a Whether to Eliminate Intercompany Transactions in
consolidation worksheet entry! Consolidation:
 No controversy—they must be eliminated.
Equity Method Adjustment Example  Not eliminating them would cause two problems:
Meaningless double-counting of
1. sales
2. expenses
Potential to manipulate income.
The Substance of Inventory Transfers
The CONSOLIDATED Perspective:
 Merely the physical movement of inventory from
one location to another location.
 Similar to the movement of inventory from one
division to another division.
 Not a bona fide transaction.
Issue #2: Which Measure of Profit To Use?
The Parent recognized $100 of “fake” gross profit! Possible theoretical profit measures:
The Parent should have transferred the inventory at cost.  Gross profit
This profit is not from a transaction with an arm’s-length  Operating profit
independent party.
 Net income
Practice Profit measure required under GAAP:
Assume Parent Co. owns 100% of Sub Co.
The following intercompany transactions occurred during Gross profit (of the selling entity):
the year:
 Parent loaned $100 to Sub. To keep things simple,
assume that there is no interest revenue or interest
expense associated with this loan.
 Parent made a sale to Sub for $200 cash. The
inventory had originally cost Parent $120. Sub then Issue #3: Eliminate Income Tax Effects?
sold that same inventory to an outsider for $300. Income taxes play a major role in intercompany sales and
 Parent made a sale to Sub for $300 cash. The transfer pricing decisions. Income taxes on the selling
inventory had originally cost Parent $180. Sub has entity’s unrealized gross profit must also be eliminated.
not yet soldthat same inventory to an outsider. In this chapter:
(Don’t forget equity method entry!)  No income tax entries are required.
Based on our “conceptual discussion,” what consolidation  Because we assume that the tax effects have
worksheet entries would you make? already been recorded in the parent’s or the
subsidiary’s general ledger.
Consolidation entries
Issue #4: Whether To Eliminate All or Some?
Downstream sales to a partially-owned subsidiary:
 Eliminate 100% of unrealized profit.
 Fractional elimination is prohibited.
Upstream sales from a partially-owned subsidiary:
 Eliminate 100% of unrealized profit.
 Fractional elimination is prohibited.6-478
Issue #4: Whether To Eliminate All or
Some?
Downstream sales to a partially-
owned subsidiary: Entire profit
accrues to the parent; thus, sharing is
not appropriate.
Upstream sales from a partially-
owned subsidiary:
 Must share deferral with the
NCI shareholders (if amount is
material).
PE1
 Because S profits are shared with the NCI CRITICAL ASSUMPTION:

shareholders. The gross profit percentage derivable from the total column
applies to both (1) the inventory that has been resoldAND
Inventory Transfers: What is “Realization”? (2) the inventory that is still on hand.
Realization for consolidated reporting purposes:
Does not focus on whether the seller has Completed Analysis:
 delivered the product,
 collected on the sale, or
 reduced to an acceptable level the uncertainty
about the net cash flow effect of an earnings
activity.
Realization for consolidated reporting purposes:
Depends on whether the BUYER has resold the inventory to
an outside unaffiliated customer.
The Inventory/COGS Change in Basis Elimination Entry is
Review: Two Types of Transfers derived from this analysis.
Unrealized profit= Inventory on hand x GP%
= $200 x 40% = $80
Inventory Transfers: Terminology
Understanding Inventory Transfers: Map it out
Watch out for terminology like “mark-up based on cost”!

Practice Quiz Question
For 20X8, Pete reported intercompany cost of sales of
$800,000 (markup is 20% of transfer price) to Sampras,
which reported $300,000 of intercompany acquired
inventory at 12/31/X8. The unrealized profit at 12/31/X8 is
Calculating Unrealized Gross Profit

Amounts that will alwaysbe known (given):
PE1

For 20X8, Post reported $90,000 of intercompany sales
(25% markup on costand fully paid for by year end) to
Script, which reported $30,000 of intercompany acquired
inventory at 12/31/X8. The unrealized profit at 12/31/X8 is
Agreement between Parent Company and Consolidated

Financial Statements
Under the fully adjusted equity method,the parent
company’s financial statements should report the same net
income and retained earnings amounts as appear in the
consolidated statements.
Therefore, we record and equity method adjustment on the
parent’s books to defer unrealized gross profit, and prepare
consolidation worksheet elimination entries to avoid double
counting in the income statement and overstating
inventory.
Big Picture—Elimination entry: Sale From Parent to Sub to
Outsider
Get rid of the non-arm’s-length transaction!

For 20X8, Sempre (80% owned by Para) reported
$1,600,000 of intercompany sales (1/3 markup on cost) to
Para, which resold $1,400,000 of this inventory by Big Picture—Elimination entry: Sale From Parent to Sub
12/31/X8. The unrealized profit at 12/31/X8 is (not yet sold outside)
Reverse the entire transaction!
PE1
Get rid of the non-arm’s-length transaction!
Part 2: Sale from Parent to Sub (Not Outside)

What to Look For
Most problems will contain
 Inventory transferred from parent to sub
(downstream), or
 Inventory transferred from sub to parent
(upstream).
Often part of the inventory is sold to an outsider, but part
remains in the buyer’s ending inventory.
Key:Any problem can be split into two parts
1. The portion of the inventory that is sold
2. The portion of the inventory that is still on hand
A Comprehensive Downstream Example
During 20X8, Parent sold inventory originally costing
$60,000 to its 100% owned Sub for $75,000. Sub sold most
of the inventory purchased from Parent (all but $10,000) Summary
for $70,000 to outsiders during the year.
One Approach: Split into Two Transactions

This transaction can be broken into two pieces: Partial Consolidated Worksheet
 Parent sells Sub inventory with a cost of $52,000 for
$65,000. Sub then sells this inventory to outsiders
for $70,000.
 Parent sells Sub inventory with a cost of $8,000 for
$10,000, which remains on hand in Sub’s ending
inventory.
Part 1: Sale from Parent to Sub to Outsider
PE1
Second Approach: Short Cut Method
Partial Consolidated Worksheet

Don’t forget that one of the desirable properties of using
the equity method is that the parent’s net income should be
equal to the consolidated net income. If you only adjust for
unrealized deferred profit in the consolidation, the
consolidated net income will be different from the parent’s
income!
Partial Consolidated Worksheet Review Exercise Part 1: Downstream
Para sold inventory costing $100,000 to its 75%-owned
subsidiary, Shute, for $125,000 in 20X8. Shute resold most
of this inventory for $230,000 in 20X8. At 12/31/X8, Shute’s
balance sheet showed intercompany-acquired inventory on
hand of $20,000.
Required:
 Prepare the consolidation entryand/or entries
required at 12/31/X8 under the equity method.
 Since this is a DOWNSTREAM transaction, we
don’tshare the GP deferral with the NCI.
Review Exercise Part 1: Big Picture

Don’t forget that one of the desirable properties of using
the equity method is that the parent’s net income should be
equal to the consolidated net income. If you only adjust for
unrealized deferred profit in the consolidation, the
consolidated net income will be different from the parent’s
income!Thus, an actual adjustment on the parent’s books in
addition to the worksheet entries above. Like we did for the
excess fair value amortization.
After calculating the unrealized deferred profit, simply make
an extra adjustment to back it out. Do this at the same time
you record the parent’s share of the sub’s income.
PE1
Review Exercise Part 1
FYI, this year’s deferral is REVERSED next year to recognize

Review Exercise 1: Summary when sold!
Review Exercise 1: Equity Method Entry
Review Exercise Part 1: Short Cut
Review Exercise 1: Partial Consolidated Worksheet Parent
Review Exercise 1: Equity Method Entry
Reverse this next year !

Review Exercise 1: Equity Method Reversal Next Year
PE1
Partially Owned Upstream Sales 20X7 Upstream Sales: Elimination Entries—20X7 & 20X8
 Must share deferral with the NCI shareholders.
 Simply split up the adjustment for unrealized gross
profit proportionately.
Deferred GP this year “reversed” to recognize in the

financial statements next year when sold.
Deferral of GP in 20X7 because not yet sold this year.
Review Exercise Part 2

In 20X7, Sensei, a 90%-owned subsidiary of Padawan, sold
inventory to Padawan for $600,000, which includes a
markup of 25% on Sensei’s cost. Padawan resold most of 20X7 Upstream Sales: 20X7 Equity Accounts
this inventory in 20X7 for $588,000.
At 12/31/X7, Padawan reported $110,000 of this inventory
in its balance sheet. (This ending inventory was resold in
20X8 by Padawan.) In 20X8, Sensei sold Padawan inventory
for $900,000 that had a cost of $675,000, of which Padawan
resold $700,000 by12/31/X8 for $840,000.
Required:
 Prepare the consolidation entryand/or entries 20X7 Upstream Sales: Elimination Entries—20X7 & 20X8
required at 12/31/X8 under the equity method.
 Since this is an UPSTREAMtransaction, we doshare
the GP deferral with the NCI.
Review Exercise Part 2: The Big Picture—20X7
Deferred GP this year “reversed” to recognize in the

financial statements next year when sold.
20X7 Upstream Sales: 20X7 Partial Worksheet
Total Sold On hand

PE1
Review Exercise Part 2: The Big Picture—20X8 20X8 Upstream Sales: 20X8 Equity Accounts
20X7 & 20X8 Upstream Sales: 20X8 Partial Worksheet
Review Exercise 2: Summary
Additional Considerations
Sale from one subsidiary to another
 Transfers of inventory often occur between
companies that are under common control or
ownership.
 The eliminating entries are identical to those
presented earlier for sales from a subsidiary to its
parent.
 The full amount of any unrealized intercompany
profit is eliminated, with the profit elimination
allocated proportionately against the ownership
interests of the selling subsidiary.
Costs associated with transfers
 When one affiliate transfers inventory to another,
some additional cost is often incurred.
Review Exercise 2: Short Cut  Such costs should be treated in the same way as if
the affiliates were operating divisions of a single
company.
Lower-of-cost-or-market
 A company might write down inventory purchased
from an affiliate under this rule if the market value
at the end of the period is less than the
intercompany transfer price.
Lower-of-Cost-or-Market Example
Assume that a parent company purchases inventory for
$20,000 and sells it to its subsidiary for $35,000. The
PE1
subsidiary still holds the inventory at year-end and  Make it appear as if we only changed the estimated
determines that its market value (replacement cost) is useful life of asset.
$25,000 at that time. The subsidiary writes the inventory
down from $35,000 to its lower market value of $25,000 at Different Asset Types
the end of the year and records the following entry: Non-depreciable Assets
 The transfer of non-depreciable assets is very
similar to the transfer of inventory
 Eliminate gains like unrealized gross profit
Depreciable Assets
 Eliminate the seller’s gain
 Adjust transferred asset back to old basis
 Adjust depreciation back to what it would have
otherwise been if the original owner had
depreciated the asset based on the revised estimate
of useful life
Intercompany Transfers of Services
Additional Considerations When one company purchases services from a related
Sales and purchases before affiliation company, the purchaser typically records an expense and
the seller records a revenue.
 The consolidation treatment of profits on inventory  In the consolidation worksheet, an eliminating entry
transfers that occurred before the business would be needed to reduce both revenue (debit)
combination depends on whether the companies and expense (credit).
were at that time independent and the sale
transaction was the result of arm’s-length  Because the revenue and expense are equal and
bargaining. both are eliminated, income is unaffected by the
elimination.
 As a general rule, the effects of transactions that
are not the result of arm’s-length bargaining must  The elimination is still important because otherwise
be eliminated. both revenues and expenses are overstated.
In the absence of evidence to the contrary, companies that Example 1: 100% Ownership Land Transfer (Non-
have joined together in a business combination are viewed Depreciable)
as having been separate and independent prior to the On 3/31/X5, Parker Inc. sold land costing $40,000 to its
combination. 100% owned subsidiary, Stubben Inc., for $100,000. In this
 If the prior sales were the result of arm’s-length example, we’ll do consolidation worksheet entries
withoutadjusting the equity method accounts. This is the
bargaining, they are viewed as transactions modified equity method. This is meant to be a
between unrelated parties. conceptualexercise only. (We will switch to the fully
 No elimination or adjustment is needed in adjusted equity method next.)
preparing consolidated statements subsequent to Required:
the combination, even if an affiliate still holds the 1. Prepare the consolidation entry(ies) as of 12/31/X5
inventory. and 12/31/X6.
2. Prepare the consolidation entry at 12/31/X7,
CHAPTER 7 assuming that Stubben sold the land in 20X7 for
INTERCOMPANY TRANSFERS OF SERVICES AND $120,000.
NONCURRENT ASSETS
Summary of GAAP Requirements for Preparing

Consolidated Statements
All intercompany transactions must be eliminated in
consolidation. The full amount of unrealized intercompany
profit or gain must be eliminated. The deferral is shared
with NCI shareholders in upstream transactions.
Big Picture: The Consolidated Perspective
From a consolidated viewpoint, the reported amount for a Consolidation Entry at 12/31/X5
fixed asset cannot change merely because the asset has
been moved to a different location within the consolidated
group.
Objective:
 Undo the transfer.
PE1
This ensures that the parent income is equal to the

consolidated income
Example 2: 100% Ownership Land Transfer
On 3/31/X5, Parker Inc. sold land costing $40,000 to its
100% owned subsidiary, Stubben Inc., for $100,000. Now
assume Parker adjusts for this transaction in the equity
accounts. This is the fully adjusted equity method! How
would your answers change?
Required:
1. Prepare the consolidation entry(ies) as of 12/31/X5
and 12/31/X6.
2. Prepare the consolidation entry at 12/31/X7,
assuming that Stubben sold the land in 20X7 for
$120,000.
Thus, the consolidated gain is $80,000! ONE EXTRA STEP! Equity Method Adjustment
What’s the only problem with the partial equity method?
THE PARENT’S FINANCIAL STATEMENTS ARE NOT CORRECT!
Solution: Parker Company Equity Method Journal Entries
This defers the gain until laterONE

Example 2: Consolidation Entry at 12/31/X5
Requirement 1:
Equity Method Adjustment

After calculating the unrealized gain, simply make an extra
adjustment to back it out. Do this at the same time you
record the parent’s share of the sub’s income.This ensures
that the parent income is equal to the consolidated income.
Reverse later when the asset is sold!

PE1
Example 2: Consolidation Entry at 12/31/X6 Consolidation Worksheet—20X5
Consolidation Worksheet—20X6
Example 2: Consolidation Entry at 12/31/X7
Example 2: Solution Summary
Exercise 1: Partial Ownership Land Transfer

Stubben Corporation is a 90%-owned subsidiary of Parker
Corporation, acquired for $270,000 on 1/1/X5.
Investment cost was equal to book value and fair value.
Stubben’s net income in 20X5 was $70,000, and Parker’s
income, excluding its income from Stubben, was $90,000.
Parker’s income includes a $10,000 unrealized gain on land
that cost $40,000 and was sold to Stubben for $50,000.
Assume that Stubben sold the land in 20X7 for $65,000.
Assume Parker adjusts for this transaction in the equity
accounts.
NOTE: This is a downstream transaction.
PE1
Required: Consolidation Worksheet—20X7

1.What entry(ies) would Parker make in 20X5 and 20X7?
2.Prepare the consolidation entries at 12/31/X5, 12/31/X6,
and 12/31/X7.
Group Exercise 1: Solution
Requirement 1
Exercise 2: Partial Ownership Land Transfer

Stubben Corporation is a 90%-owned subsidiary of Parker
Corporation, acquired for $270,000 on 1/1/X5. Investment
cost was equal to book value and fair value. Stubben’s net
Requirement 2 income in 20X5 was $70,000, and Parker’s income,
excluding its income from Stubben, was $90,000. Stubben’s
income includes a $10,000 unrealized gain on land that cost
$40,000 and was sold to Parker for $50,000. Assume that
Parker sold the land in 20X7 for $65,000. Assume Parker
adjusts for this transaction in the equity accounts. Assume
that Stubben sold the land in 20X7 for $65,000. Assume
Parker adjusts for this transaction in the equity accounts.
Required:
1.What entry(ies) would Parker make in 20X5 and 20X7?
2.Prepare the consolidation entries at 12/31/X5, 12/31/X6,
and 12/31/X7.
Partially Owned Upstream Sales Equity Method Adjustment
Similar to what we did with inventory transfers: we must
share deferral with the NCI shareholders. Simply split up the
adjustment for unrealized gains proportionately.
Solution: Parker Company Equity Method Journal Entries

Requirement 1
PE1
Requirement 2
Requirement 3
Transfers of Depreciable Assets

What is the major difference between depreciable and non-
Consolidation Worksheet—20X5 depreciable assets?
 Depreciation!
 Adds complexity because you have a “moving
target” instead of a stationary target. However, the
concepts are the same!
Adjust for:
 Unrealized gain (same as with land)
 Differences in depreciation expense
The goal is to get back to the asset’s old basis “as if ” it were
still on the books of the original owner.
 One difference—depreciated going forward based
on the new estimated new life.
 Same as a change of depreciation estimates on any
company’s books
Developing Fixed Asset Elimination Entries
Compare “Actual” with “As if ”
Consolidation Worksheet—20X6  “Actual” = How the transferred asset and related
accounts actually appear on the companies’ books
 “ As if ”= How the transferred asset and related
accounts would have appeared if the asset had
stayed on the original owner’s books
The difference between the two gives the elimination entry
or entries.
Choosing the Right Depreciable Life
What’s notrelevant?
The original owner’s remaining useful life at the transfer
date.
What’s relevant?
The acquirer’s estimated remaining useful life (if different
from the original remaining life).
Example 3—End of Year Transfer
Consolidation Worksheet—20X7 Assume Padre Corp. purchased a machine on 1/1/20X1 for
$100,000 and estimated that the machine would have a
useful life of 10 years with no salvage value. After two
years, on 12/31/20X2, Padre Corp. sold the machine to its
100% owned subsidiary, Sonny Co., for $90,000. Sonny Co.
estimated that the asset had a remaining useful life of five
years.
PE1
What is the amount of the gain or loss recorded by Padre at How much depreciation expense would Padre have
the time of the fixed asset transfer? recorded in 20X3 if it had retained the machine and simply
changed the estimated life to five years?
Depreciation Expense= (BV –SV) / # years left
= (80,000 –0) / 5 years =$16,000
Sonny’s 20X3 expense can be separated into two parts:
 The portion associated with the original book value
from Padre’s books.
 The portion associated with the extra amount paid
above Padre’s book value (the gain).
What accounts and balances actually exist after the fixed
asset transfer?
How do we “fix” the depreciation expense so that it will

appear “as if” the asset had not been transferred?
What balances would have existed if the transfer had not In other words, how do eliminate the “extra” depreciation
taken place? expense?
The worksheet entry on 12/31/X2 to eliminate the asset

transfer is simply the “adjustment” to change from “actual”
to “as if” the asset hadn’t been transferred.
In addition to the depreciation adjustment, the asset’s basis

needs to be adjusted and the gain eliminated. What
accounts and balances actually exist after the fixed asset
transfer?
What balances would have existed if the transfer hadn’t

taken place?
Example 4: Beginning of Year Transfer
Assume Padre Corp. purchased a machine on 1/1/20X1 for
$100,000 and estimated that the machine would have a
useful life of 10 years with no salvage value. After two
years, on 1/1/20X3, Padre Corp. sold the machine to its
100% owned subsidiary, Sonny Co., for $90,000. Sonny Co.
estimated that the asset had a remaining useful life of five
years.
How much depreciation expense will Sonny record in 20X3?
Depreciation Expense= (C –SV) / # years There are two worksheet entries on 12/31/X3 to compare
= (90,000 –0) / 5 years =$18,000 “actual” to “as if” to make it appear like the asset hadn’t
been transferred.
PE1
Example 6: Depreciable Asset Transfer at Beginning of Year

Given all other information from the previous example,
assume that the transfer takes place on 1/1/20X4. Also,
assume that as of the date of transfer, the machinery has a
five-year remaining useful life (with no residual value) and
that Sophocles uses straight-line depreciation. In addition to
the journal entries to record the transfer of the asset,
Sophocles also records depreciation expense of $18,000 for
Example 5: Partial Ownership Depreciable Asset Transfer 20X4 ($90,000 / 5 years).Note: Transfer is on firstday of the
at the End of the Year year.
Required:
On Pericles Corporation sells machinery to its 80%-owned 1.What journal entry(ies) would Pericles make on its books
subsidiary, Sophocles Corporation, on 12/31/20X4. The to adjust for the unrealized gain from this transaction?
machinery has a book value of $60,000 on this date (cost 2. What worksheet entry(ies) would Pericles make to
$120,000 and accumulated depreciation $60,000), and it is consolidate on this date?
sold to Sophocles for $90,000. Thus, this transaction
produces an unrealized gain of $30,000. Assume that
Pericles adjusts its equity method accounts accordingly.
Note: Transfer is on last day of the year.
Required:
1.What journal entry would Pericles make on itsbooks to
adjust for the unrealized gain from this transaction? Requirement 1:
2.What worksheet entry would Pericles make toconsolidate Of the $18,000 of depreciation recorded, $12,000 is based
on this date? on the BV at the time of transfer and $6,000 is based on the
unrealized gain component. We can think of the $6,000 as
the cancelation of 1/5 of the unrealized gain.
PE1
Consolidation Worksheet—20X4 Solution 6: Subsequent Years
Example 6: Subsequent Years

Given all other information from the previous examples,
consider what happens in the last 5 years of the asset’s
useful life. Think about both the equity method entry
Pericles would have to make each year and what
elimination entry would be made each year.Note: Transfer
is on firstday of the year. Required:
1.What journal entry would Pericles make on its books to
adjust for the unrealized gain from this transaction on
12/31/X5?
2. What worksheet entry(ies) would Pericles make to
consolidate on this date on 12/31/X5?
Requirement 1:
Pericles will continue to extinguish $6,000 (1/5) of the
unrealized gain each year to its equity accounts.
PE1
Solution: Peanut Company Equity Method Journal Entries
Example 7: Upstream with Partial Ownership Depreciable

Asset Transfer
On 1/3/X6, Snoopy (an 85%-owned subsidiary of Peanut)
sold equipment costing $150,000 to Peanut for $90,000. At
the time of the sale, the equipment had accumulated
depreciation of $110,000. Peanut continued depreciating
the equipment using the straight-line method and assigned
a remaining useful life of five years.Note: Transfer is on first
day of the year
Required: Worksheet Entries
1.What journal entry would Peanut make on itsbooks each
year to adjust for the unrealizedgain from this transaction?
2.What worksheet entry would Peanut make eachyear to
consolidate on this date?
PE1
Consolidation Worksheet—Year 1
PE1
Consolidation Worksheet—Year 4 An indirect intercompany debt transfer involves the

issuance of debt to an unrelated party and the subsequent
purchase of the debt instrument by an affiliate of the issuer.
Direct Intercompany Debt Transfer
Indirect Intercompany Debt Transfer
Bond Sale Directly to an Affiliate
When one company sells bonds directly to an affiliate, all
effects of the intercompany indebtedness must be
eliminated in preparing consolidated financial statements.
(Transfer at par value)
Bond Sale Directly to an Affiliate
Assume that on January 1, 20X1, Special Foods borrows
$100,000 from Peerless Products by issuing $100,000 par
value, 12 percent, 10-year bonds. During 20X1, Special
Foods records interest expense on the bonds of $12,000
($100,000 x.12), and Peerless records an equal amount of
interest income.
In the preparation of consolidated financial statements for
20X1, two elimination entries are needed in the
consolidation worksheet to remove the effects of the
intercompany indebtedness:
Intercompany Transfers of Amortizable Assets

Accounting for intangible assets usually differs from
accounting for tangible assets in that amortizable
intangibles normally are reported at the remaining
unamortized balance without the use of a contra account.
Other than netting the accumulated amortization on an
intangible asset against the asset cost, the intercompany These entries have no effect on consolidated net income
sale of intangibles is treated the same in consolidation as because they reduce interest income and interest expense
the intercompany sale of tangible assets. by the same amount
CHAPTER 8 Bond Sale Directly to an Affiliate

INTERCOMPANY INDEBTNESS
Transfer at a discount or premium
 Bond interest income or expense recorded do not
equal cash interest payments.
 Interest income/expense amounts are adjusted for
Consolidation Overview the amortization of the discount or premium.
A direct intercompany debt transfer involves a loan from
one affiliate to another without the participation of an
unrelated party.
PE1
Bond Sale Directly to an Affiliate Elimination Entries at Year-End—20X1:

On January 1, 20X1, Peerless Products purchases $100,000 Eliminates the bonds payable and associated discount
par value, 12 percent, 10-year bonds from Special Foods for against the investment in bonds:
$90,000. Interest on the bonds is payable on January 1 and
July 1. The interest expense recognized by Special Foods
and the interest income recognized by Peerless each year
include straight-line amortization of the discount, as
follows:
Eliminates the bond interest income recognized by Peerless
during 20X1 against the bond interest expense recognized
by Special Foods:
Entries by the debtor

Eliminates the interest receivable against the interest
payable.
Elimination Entries at Year-End—20X2:

Eliminates intercorporate bond holding.
Eliminates intercompany interest:
Eliminates intercompany interest receivable/payable.
Entries by the bond investor Consolidation at the end of 20X2 requires Elimination
entries similar to those at the end of 20X1. Because $1,000
of the discount is amortized each year, the bond investment
balance on Peerless’ books increases to $92,000.
Bonds of Affiliate Purchased from a Nonaffiliate
Scenario: Bonds that were issued to an unrelated party are
acquired later by an affiliate of the issuer. From the
viewpoint of the consolidated entity, an acquisition of an
affiliate’s bonds retires the bonds at the time they are
purchased.
Acquisition of the bonds of an affiliate by another company
within the consolidated entity is referred to as constructive
retirement. Although the bonds actually are not retired,
they are treated as if they were retired in preparing
consolidated financial statements.
When a constructive retirement occurs:
 The consolidated income statement for the period
reports a gain or loss on debt retirement based on
the difference between the carrying value of the
bonds on the books of the debtor and the purchase
price paid by the affiliate.
PE1
 Neither the bonds payable nor the purchaser’s

investment in the bonds is reported in the
consolidated balance sheet because the bonds are
no longer considered outstanding.
Purchase at an amount less than book value:
 When the price paid to acquire the bonds of an
affiliate differs from the liability reported by the
debtor, a gain or loss is reported in the consolidated
income statement in the period of constructive
retirement.
 The bond interest income and interest expense
reported by the two affiliates subsequent to the
purchase must be eliminated in preparing
consolidated statements. Bonds of Affiliate Purchased from a Nonaffiliate:
 Interest income reported by the investing affiliate Illustration—YEAR 1
and interest expense reported by the debtor are
not equal in this case because of the different bond Total interest expense for 20X1 is $11,800 ($5,900 x2), and
carrying amounts on the books of the two the book value of the bonds on December 31, 20X1, is as
companies. follows:
Bonds of Affiliate Purchased from a Nonaffiliate:

Illustration
Peerless Products Corporation acquires 80 percent of the
common stock of Special Foods Inc. on December 31, 20X0,
for its underlying book value of $240,000. At that date, the
fair value of the noncontrolling interest is equal to its book
value of $60,000.
Additionally:
1. On January 1, 20X1, Special Foods issues 10-year, 12
percent bonds payable with a par value of $100,000; the
bonds are issued at 102. Nonaffiliated Corporation
purchases the bonds from Special Foods.
2. The bonds pay interest on June 30 and December 31.
3. Both Peerless and Special amortize bond discount and
premium using the straight-line method.
4. On December 31, 20X1, Peerless purchases the bonds
from Nonaffiliated for $91,000.
5. Special Foods reports net income of $50,000 for 20X1 and
$75,000 for 20X2 and declares dividends of $30,000 in 20X1
and $40,000 in 20X2. This gain is included in the consolidated income statement
6. Peerless earns $140,000 in 20X1 and $160,000 in 20X2 as a gain on the retirement of bonds.
from its own separate operations. Peerless declares
dividends of $60,000 in both 20X1 and 20X2. Assignment of gain: constructive retirement
Four approaches have been used:
1.The affiliate issuing the bonds
2.The affiliate purchasing the bonds
3.The parent company
4.The issuing and purchasing companies, based on the
difference between the carrying amounts of the bonds on
their books at the date of purchase and the par value of the
bonds
Fully Adjusted Equity-Method Entries—20X1:
In addition to recording the bond investment, Peerless
records the following equity-method entries during 20X1 to
account for its investment in Special Foods stock:
Bond Liability Entries—20X1 (Special Foods)

January 1, 20X1
PE1
These entries result in a $264,640 balance in the investment

account at the end of 20X1 as shown:
The impact of the constructive gain on the beginning

noncontrolling interest balance and on the beginning
consolidated retained earnings balance is reflected in the
entry to eliminate intercompany bond holdings. The entry
to eliminate intercompany bond holdings also eliminates all
aspects of the intercorporate bond holdings, including:
1. Peerless’ investment in bonds
In preparing a consolidation worksheet prepared at the end 2. Special Foods’ bonds payable and the associated
of 20X1, the first two elimination entries are the same as we premium
prepared in Chapter 3 with one minor exception. While the 3. Peerless’ bond interest income
analysis of the “book value” portion of the investment 4. Special Foods’ bond interest expense
account is the same, in preparing the basic elimination
entry, we increase the amounts in Peerless’ Income from The optional accumulated depreciation entry can be made
Special Foods and Investment in Special Foods Stock by netting the accumulated depreciation at the time of
accounts by Peerless’ share of the gain on bond retirement, acquisition against the cost as shown:
$8,640 ($10,800 x0.80). We also increase the NCI in Net
Income of Special Foods and NCI in Net Assets of Special
Foods by the NCI share of the deferral, $2,160 ($10,800
x0.20).
Original depreciation at the time of the acquisition netted

against cost
Consolidation Worksheet at December 31, 20X2
The amounts related to the bonds from the books of

Peerless and Special Foods and the appropriate
consolidated amounts are shown below along with entry to
eliminate intercompany bond holdings:
PE1
Subsequent recognition of gain on constructive retirement

In 20X1, the entire $10,800 gain on the retirement was
recognized in the consolidated income statement but not
on the books of either Peerless or Special Foods.
Consolidated Net Income—20X1
In each year subsequent to 20X1, both Peerless and Special

Foods recognize a portion of the constructive gain as they
amortize the discount on the bond investment and the
premium on the bond liability:
Bonds of Affiliate Purchased from a Nonaffiliate:

Illustration—YEAR 2
Whereas neither Peerless nor Special Foods recognized any
of the gain from the constructive bond retirement on its
separate books in 20X1, Peerless adjusts its equity method
income from Special Foods for its 80 percent share of the
$10,800 gain, $8,640. Therefore, as Peerless and Special
Foods recognize the gain over the remaining term of the
bonds, Peerless must reverse its 20X1 equity-method entry
for its share of the gain amortization each year. Thus, the
PE1
original adjustment of $8,640 is reversed by $960 ($8,640 The entry to eliminate intercompany bond holdings also
÷9 years) each year. eliminates all aspects of the intercorporate bond holdings,
including:
 Peerless’ investment in bonds
 Special Foods’ bonds payable and the associated
premium
 Peerless’ bond interest income
 Special Foods’ bond interest expense
The optional accumulated depreciation entry can be made
by netting the accumulated depreciation at the time of
acquisition against the cost as shown:
Original depreciation at the time of the acquisition netted

against cost
The amounts related to the bonds from the books of

Peerless and Special Foods and the appropriate
consolidated amounts are shown below along with entry to
eliminate intercompany bond holdings:
This analysis leads to the following worksheet entry to

eliminateintercompany bond holdings.
The impact of the constructive gain on the beginning

noncontrolling interest balance and on the beginning
consolidated retained earnings balance is reflected in the
entry to eliminate intercompany bond holdings.
PE1
Consolidated Net Income—20X2 Bonds of Affiliate Purchased from a Nonaffiliate

Purchase at an amount greater than book value
 The consolidation procedures are virtually the same
except that a loss is recognized on the constructive
retirement of the debt
Bonds of Affiliate Purchased from a Nonaffiliate
Special Foods issues 10-year 12 percent bonds on January 1,
20X1, at par of $100,000. The bonds are purchased from
Special Foods by Nonaffiliated Corporation, which sells the
bonds to Peerless on December 31, 20X1, for $104,500.
Special Foods recognizes $12,000 ($100,000 x .12) of
interest expense each year. Peerless recognizes interest
income of $11,500 in each year after 20X1:
Noncontrolling Interest—December 31, 20X2
Because the bonds were issued at par, the carrying amount

on Special Foods’ books remains at $100,000. Thus, once
Peerless purchases the bonds from Nonaffiliated
Corporation for $104,500, a loss on the constructive
retirement must be recognized in the consolidated income
statement for $4,500. The bond elimination entry in the
consolidation worksheet prepared at the end of 20X1
removes the bonds payable and the bond investment and
recognizes the loss on the constructive retirement:
Eliminate intercorporate bond holdings:
Bond elimination entry in subsequent years
 In years after 20X2, the worksheet entry to
eliminate the intercompany bonds and to adjust for
the gain on constructive retirement of the bonds is
similar to the entry to eliminate intercompany bond The bond elimination entry needed in the consolidation
holdings. worksheet prepared at the end of 20X2 is as follows:
 The unamortized bond discount and premium
decrease each year by $1,000 and $200, Eliminate intercorporatebond holdings:
respectively.
As of the beginning of 20X3, $9,600 of the gain on the
constructive retirement of the bonds remains unrecognized
by the affiliates:
In the bond elimination entry in the consolidation

worksheet prepared at the end of 20X3, this amount is
allocated between beginning retained earnings and the Similarly, the following entry is needed in the consolidation
noncontrolling interest. Eliminate intercompany bond worksheet at the end of 20X3:
holdings:
Eliminate intercorporate bond holdings:
PE1
Income assigned to the noncontrollinginterest for 20X1:
CHAPTER 9
CONSOLIDATION OWNERSHIP ISSUES
Subsidiary Preferred Stock Outstanding: Preferred Stock
owned by the NCI
Preparing the worksheet:
General Overview  In order to prepare the consolidation worksheet,
The following topics are discussed in this chapter: we first analyze the book value of common equity in
1.Subsidiary preferred stock outstanding order to prepare the basic elimination entry.
2.Changes in the parent’s ownership interest in the  Since Snoopy was purchased for an amount equal
subsidiary to the book value of net assets, there is no
3.Multiple ownership levels differential in this example.
4.Reciprocal or mutual ownership  In consolidation, the $8,000 preferred dividend is
5.Subsidiary stock dividends treated as income assigned to the noncontrolling
6.Ownership interests other than common stock interest.
 Because Peanut holds none of Snoopy's preferred
Subsidiary Preferred Stock Outstanding stock, the entire $8,000 is allocated to the
Preferred stockholders normally have preference over noncontrolling interest.
common shareholders with respect to dividends and the
distribution of assets in a liquidation. Example 1: Preferred Stock Owned by the NCI
 The right to vote usually is withheld. An analysis of these book value calculations leads to the
 Special attention must be given to the claim of a following basic elimination entry. Note that the numbers
subsidiary’s preferred shareholders on the net highlighted in blue are the figures that appear in the basic
assets of the subsidiary. elimination entry.
Consolidation with subsidiary preferred stock outstanding

 The amount of subsidiary stockholders’ equity
accruing to preferred shareholders must be
considered with the elimination of the
intercompany common stock ownership.
 If the parent holds some of the subsidiary’s
preferred stock, its portion of the preferred stock
interest must be eliminated.
 Any portion of the subsidiary’s preferred stock
interest not held by the parent is assigned to the
noncontrolling interest.
Example 1: Preferred Stock Owned by the NCI
Assume Peanut acquired 75% of Snoopy’s voting stock for
$300,000 (an amount equal to 75% of the book value of net
assets). At the time of the acquisition, Snoopy had common
stock of $150,000, retained earnings of $250,000, and
$80,000 of par value, 10% preferred stock. During 20X1, the
first fiscal year after the acquisition, Snoopy reported net
income of $60,000 and declared dividends of $20,000.
Assume the NCI shareholders own all of the preferred stock.
Also assume $200,000 of accumulated depreciation on the
acquisition date.
Allocation of Snoopy’s net income
Of the total $60,000 of net income reported by Snoopy for
20X1, $8,000 ($80,000 x 0.10) is assigned to the preferred In addition to closing out Snoopy's equity accounts, this
shareholders as their current dividend. Peanut records its elimination entry also eliminates Peanut's Investment in
share of the remaining amount: Snoopy and Income from Snoopy accounts:
PE1
The only other elimination entry is the optional

accumulated depreciation elimination entry:
Subsidiary Preferred Stock Outstanding
Optional accumulated depreciation elimination entry: Subsidiary preferred stock with special provisions
The provisions of the preferred stock agreement must be
examined to determine the portion of the subsidiary’s
stockholders’ equity to be assigned to the preferred stock
interest.
 Cumulative dividend provision
Subsidiary Preferred Stock Outstanding: Preferred Stock  Noncumulative preferred stock
Owned by the Parent  Preferred stock participation features
 Preferred stocks that are callable
Subsidiary preferred stock held by parent
Example 3: Subsidiary Preferred Stock with Special
 Because the preferred stock held by the parent is Features
within the consolidated entity, it must be To examine the consolidation treatment of subsidiary
eliminated when consolidated financial statements preferred stock with the most common special features,
are prepared. assume the following:
 Any income from the preferred stock recorded by 1. Snoopy issues $80,000 par value 10 percent
the parent also must be eliminated. preferred stock on January 1, 20X0. It is cumulative,
nonparticipating, and callable at 102.
Example 2: Parent Owns 50 Percent of Preferred Stock 2. No dividends are declared on the preferred stock
during 20X0.
Assume Peanut acquired 75% of Snoopy’s voting stock for 3. On January 1, 20X1, Peanut Products acquires 75
$300,000 (an amount equal to 75% of the book value of net percent of Snoopy’s common stock for $300,000,
assets). At the time of the acquisition, Snoopy had common when the fair value of the noncontrolling interest in
stock of $150,000, retained earnings of $250,000, and Snoopy’s common stock is $150,000.
$80,000 of par value, 10% preferred stock. During 20X1, the 4. On January 1, 20X1, Peanut acquires 50 percent of
first fiscal year after the acquisition, Snoopy reported net the preferred stock for $42,000.
income of $60,000 and declared dividends of $20,000.
Assume Peanut also purchased 50% of Snoopy’s preferred Stockholders’ equity accounts of Snoopy on January 1, 20X1
stock. follow:
Peanut acquires 50 percent of Snoopy’s $80,000 par value,

10 percent preferred stock for $40,000 when issued on
January 1, 20X1. During 20X1 dividends of $8,000 are
declared on the preferred stock. Peanut recognizes $7,200
of dividend income from its investment in preferred stock,
and the remaining $4,800 is paid to the holders of the other
preferred shares.
PE1
This amount is apportioned between Peanut and the assigned to the appropriate assets and liabilities in the
noncontrolling shareholders: worksheet.
Example 4: Parent Buys Additional Shares

Parent’s purchase of additional shares from non-affiliate:
 Effects of multiple purchases of a subsidiary’s stock
Because the preferred stock interest exceeds the par value on the consolidation process are illustrated in the
by $9,600, the portion of Snoopy’s retained earnings following example:
accruing to the common shareholders is reduced by that
amount. Therefore, Snoopy’s common stockholders have a Assume that on January1, 20X1, Snoopy has $150,000 of
total claim on the company’s net assets as follows: common stock outstanding and retained earnings of
$250,000. During 20X0, 20X1, and 20X2, Snoopy reports the
following information:
PeanutProducts purchases its 75 percent interest in Snoopy

in several blocks, as follows:
This analysis leads to the following basic elimination entry:
All of the differential relates to land held by Snoopy. Note

that Peanut does not gain control of Snoopyuntil January 1,
20X2.
The next elimination entry allocates the $9,600 reduction in The investment account on Peanut's books includes the
retained earnings to the preferred interest: following amounts through 20X1:
Under ASC 805, Peanut must remeasure the equity interest

Because the book value of Snoopy's common stock is only it already held in Snoopy to its fair value at the date of
$390,400 on January 1, 20X1, Peanut's acquisition of 75 combination and recognize a gain or loss for the difference
percent of Snoopy's common stock for $300,000 results in a between the fair value and its carrying amount:
differential:
The total balance of the investment account on Peanut's

books immediately after the combination is:
Stated differently, because of the combination date the sum

of the fair values of the consideration exchanged ($300,000)
and the noncontrolling interest in Snoopy's common stock Because Peanut Products gains control of Snoopy on
($100,000) exceeds the book value of the common shares January 1, 20X2, consolidated statements are prepared for
($390,400), a differential arises. This $9,600 differential is
PE1
the year 20X2. The ending balance in the Investment in the differential at the date of combination is computed as
Snoopy account at the end of 20X2 is calculated as follows: follows:
Because all of the differential relates to land, it is not

amortized or written off either on Peanut's books or for
The investment account on Peanut's books includes the consolidation.E
following amounts through 20X1:
We then analyze the differential and its changes during the
period:
Changes in Parent Company Ownership

A parent’s sale of subsidiary shares to a non-affiliate:
 When a parent sells some shares of a subsidiary but
continues to hold a controlling interest, ASC
810makes clear that this is considered to be an
equity transaction and no gain or loss may be
recognized in consolidated net income.
 An adjustment is required to the amount assigned
to the noncontrolling interest to reflect its change in
ownership of the subsidiary.
 The difference between the fair value of the
consideration exchanged and the adjustment to the
noncontrolling interest results in an adjustment to
the stockholders’ equity attributable to the
controlling interest.
 Some parent companies might choose to recognize
a gain on their separate books.
A better alternative is to avoid recognizing a gain that later
will have to be eliminated and instead recognize an increase
A subsidiary’s sale of additional shares to a non-affiliate:
Example 4: Parent Buys Additional Shares  increases the total stockholders’ equity of the
When Peanut gains control of Snoopy on January 1, 20X2, consolidated entity by the amount received by the
assume that the fair value of the 25 percent equity interest subsidiary from the sale.
it already holds in Snoopy is $120,000, and the fair value of
Snoopy's 25 percent remaining noncontrolling interest after  increases the subsidiary’s total shares outstanding
the additional purchase is also $120,000. The book value of and reduces the percentage ownership held by the
Snoopy as a whole on that date is $450,000. Under ASC 805, parent.
PE1
 increases the dollar amount assigned to the

noncontrolling interest in the consolidated financial
statements.
The resulting amounts of the controlling and noncontrolling
interests are affected by two factors:
1.The number of shares sold to non-affiliates, and
2.The price at which the shares are sold to non-affiliates.
Difference between book value and sale price of subsidiary
shares:
 If the sale price of new shares equals the book value
of outstanding shares, there is no change in the
existing shareholders’ claim.
 The consolidation eliminating entries are changed
to recognize the increase in the claim of the
noncontrolling shareholders and the corresponding
increase in the stockholders’ equity balances of the
subsidiary.
When the sale price and book value are not the same:
 all common shareholders are assigned a pro rata
portion of the difference. In 20X2, the gain on the sale of the shares is reclassified to
 the book value of the subsidiary’s shares held by additional paid-in capital with an elimination entry:
the parent changes.
 this change is recognized by the parent by adjusting
the carrying amount of its investment in the
subsidiary and additional paid-in capital.
 the parent’s additional paid-in capital is then carried
to the workpaper in consolidation. In subsequent years, an additional elimination entry must
be made to continue to reclassify the gain from retained
Example 5: Parent Sells Stock to Non-Affiliate earnings to additional paid-in capital:
Assume Peanut acquired 75% of Snoopy’s voting stock for
$300,000 (an amount equal to 75% of the book value of net
assets). At the time of the acquisition, Snoopy had common
stock of $150,000, retained earnings of $250,000. During
20X1, the first fiscal year after the acquisition, Snoopy
reported net income of $60,000 and declared dividends of A subsidiary’s sale of additional shares to the parent at a
$20,000. Assume Peanut sold some of its shares to a non- price equal to the book value of the existing shares.
affiliated party for $25,000 cash, recording a gain of $3,000.  A sale of additional shares directly from a less-than-
Peanut’s new post-sale ownership percentage was 70%. In wholly owned subsidiary to its parent increases the
20X2, Snoopy had income of $70,000 and paid dividends of parent’s ownership percentage.
$30,000.  The increase in the parent’s investment account
equals the increase in the stockholders’ equity of
the subsidiary.
 The net book value assigned to the noncontrolling
interest remains unchanged.
 Normal elimination entries are made based on the
parent’s new ownership percentage.
A subsidiary’s sale of additional shares to the parent at an
amount other than book value.
 It increases the carrying amount of its investment
by the fair value of the consideration given.
 In consolidation, the amount of the noncontrolling
interest must be adjusted to reflect the change in
its interest in the subsidiary.
 ASC 810 then requires an adjustment to
consolidated additional paid-in capital for the
difference between any consideration given or
received by the consolidated entity and the amount
of the adjustment to the noncontrolling interest.
In order to prepare the consolidation worksheet at the end
of the year, we first analyze the book value component to A subsidiary’s sale of additional shares to the parent at an
construct the basic elimination entry: amount other than book value.
PE1
 If the shares are sold at an amount equalto the

book value of common equity, the value of the NCI
in net assets will not change.
 If the shares are sold at an amount greaterthan the
in net assets will increase.
 If the shares are sold at an amount lessthan the
in net assets will decrease.
Example 6a: Sub Sells Parent Additional Shares
Assume Peanut acquired 75% of Snoopy’s no par voting
stock (7,500 shares) on 1/1 20X1 for $300,000 (an amount In order to prepare the consolidation worksheet on the date
equal to 75% of the book value of net assets). At the time of the additional shares are purchased, we first analyze the
the acquisition, Snoopy had common stock of $150,000, book value component to construct the basic elimination
retained earnings of $250,000. During 20X1, the first fiscal entry:
year after the acquisition, Snoopy reported net income of
$60,000 and declared dividends of $20,000. Assume Snoopy
sold Peanut 2,500 additional shares for $130,000 on
1/1/20X2, increasing Peanut’s ownership percentage to
80%.
The book value per share of common equity prior to the
issuance of the new shares is:
Since the new shares are issued at $52/share ($130,000

÷2,500), which is greater than the $44 BV per share, the
value of the NCI in NA will INCREASE by $4,000
Example 6b: Sub Sells Parent Additional Shares

Assume Peanut acquired 75% of Snoopy’s no par voting
stock (7,500 shares) on 1/1 20X1 for $300,000 (an amount
equal to 75% of the book value of net assets). At the time of
the acquisition, Snoopy had common stock of $150,000,
retained earnings of $250,000. During 20X1, the first fiscal
sold Peanut 2,500 additional shares for $80,000 on
1/1/20X2, increasing Peanut’s ownership percentage to
80%.
The book value per share of common equity prior to the
issuance of the new shares is:
Since the new shares are issued at $32/share ($80,000

÷2,500 ), which is less than the $44 BV per share, the value
of the NCI in NA will DECREASE by $6,000
Although Peanut pays $130,000 for the additional 2,500
shares, the NCI increases by $4,000, reducing the value of
Peanut’s investment in these shares to $126,000 (130,000 –
4,000):
PE1
 When this occurs, the amount of the change must

be recognized in preparing the consolidated
statements.
Example 7: Sub Buys Shares from Non-Affiliate
Assume Peanut acquired 75% of Snoopy’s voting stock
(7,500 shares) on 1/1 20X1 for $300,000 (an amount equal
to 75% of the book value of net assets). At the time of the
acquisition, Snoopy had common stock of $150,000,
repurchased 625 shares for $40,000 on 1/1/20X2 from a
non-affiliate.
Although Peanut pays $80,000 for the additional 2,500
shares, the NCI decreases by $6,000, increasing the value of
Peanut’s investment in these shares to $86,000 (80,000 +
6,000):
In order to prepare the consolidation worksheet on the date

the additional shares are purchased, we first analyze the
book value component to construct the basic elimination
entry:
A subsidiary’s purchase of shares from a non-affiliate.

 Sometimes a subsidiary purchases treasury shares
from noncontrolling shareholders, who may be
willing sellers.
 The parent’s equity in the net assets of the
subsidiary may change as a result of the
transaction.
PE1

book value component to construct the basic elimination
entry:

A subsidiary’s purchase of shares from the parent. book value component to construct the basic elimination
 When this happens, the parent has traditionally entry:
recognized a gain or loss on the difference between
the selling price and the change in the carrying
amount of its investment.
 From a consolidated viewpoint, the transaction
represents an internal transfer and does not give
rise to a gain or loss.
 A better approach is for the parent to adjust
additional paid-in capital.
Example 8: Sub Buys Shares from Parent
Assume Peanut acquired 75% of Snoopy’s voting stock
(7,500 shares) on 1/1 20X1 for $300,000 (an amount equal
to 75% of the book value of net assets). At the time of the
acquisition, Snoopy had common stock of $150,000,
repurchased 3,750 shares for $40,000 on 1/1/20X2 from
Peanut.
Complex Ownership Structures
PE1
Direct ownership: The parent has controlling interest in The stock dividend declaration must be eliminated along
each of the subsidiaries. with the increased common stock and increased additional
paid-in capital, if any.
Multilevel ownership: The parent has only indirect control
over the company controlled by its subsidiary. The stock dividend represents a permanent capitalization of
retained earnings, thus:
The eliminating entries used are similar to those used in a  In subsequent years, the balances in the
simple ownership situation, but careful attention must be subsidiary’s stockholders’ equity accounts are
given to the sequence in which the data are brought eliminated in the normal manner.
together.  The full balances of all the subsidiary’s stockholders’
equity accounts must be eliminated in
Reciprocal ownershipor mutual holdings consolidation, even though amounts have been
The parent owns a majority of the subsidiary’s common shifted from one account to another.
stock and the subsidiary holds some of the parent’s
common shares. If mutual shareholdings are ignored in Example 9: Subsidiary stock dividend
consolidation, some reported amounts may be materially Assume Peanut acquired 75% of Snoopy’s voting stock on
overstated. 1/1 20X1 for $300,000 (an amount equal to 75% of the book
value of net assets). At the time of the acquisition, Snoopy
Multilevel ownership and control had common stock of $250,000, retained earnings of
When consolidated statements are prepared, they include $150,000. During 20X1, the first fiscal year after the
companies in which the parent has only an indirect acquisition, Snoopy reported net income of $60,000 and
investment along with those in which it holds direct declared dividends of $20,000. Assume Snoopy declared a
ownership. The complexity of the consolidation process 25% stock dividend on 12/31/20X1
increases as additional ownership levels are included. The
amount of income and net assets to be assigned to the Common Stock $250,000 x25% = $62,500 stock div.
controlling and noncontrolling shareholders, and the
amount of unrealized profits and losses to be eliminated, In order to prepare the consolidation worksheet at the end
must be determined at each level of ownership. of the year, we first analyze the book value component to
construct the basic elimination entry:
When a number of different levels of ownership exist, the
first step normally is to consolidate the bottom, or most
remote, subsidiaries with the companies at the next higher
level. This sequence is continued up through the ownership
structure until the subsidiaries owned directly by the parent
company are consolidated with it. Income is apportioned
between the controlling and noncontrolling shareholders of
the companies at each level.
Reciprocal or Mutual Ownership
The treasury stock method is used to deal with reciprocal
relationships.
 Purchases of a parent’s stock by a subsidiary are
treated in the same way as if the parent had
repurchased its own stock and was holding it in the
treasury.
 The subsidiary normally accounts for the
investment in the parent’s stock using the cost
method.
Subsidiary Stock Dividends
Stock dividends are issued proportionally to all common
stockholders
 The relative interests of the controlling and
noncontrolling stockholders do not change.
 The investment’s carrying amount on the parent’s
books also is unaffected.
 The stockholders’ equity accounts of the subsidiary
do change, although total stockholders’ equity does CHAPTER 10
not. ADDITIONAL CONSOLIDATION REPORTING ISSUES
The stock dividend represents a permanent capitalization of

retained earnings, thus:
 Decreasing retained earnings and increasing capital General Overview
stock and, perhaps, additional paid-in capital. This chapter discusses the following general financial
 Effect on the preparation of consolidated financial reporting topics as they relate to consolidated financial
statements for the period: statements:
PE1
1.The consolidated statement of cash flows Consolidated cash flow statement—direct method
2.Consolidation following an interim acquisition  Nearly all major companies use the indirect
3.Consolidation tax considerations method.
4.Consolidated earnings per share  Critics have argued that the direct method is less
confusing and more useful.
Consolidated Statement of Cash Flows
A consolidated statement of cash flows is similar to a The only section affected by the difference in approaches is
statement of cash flows prepared for a single-corporate the operating activities section.
entity and is prepared in basically the same manner.  Under the indirect approach, the operating
activities section starts with net income and, to
Preparation derive cash provided by operating activities, adjusts
 Typically prepared after the consolidated income for all items affecting cash and net income
statement, retained earnings statement, and differently.
balance sheet.  Under the direct approach, the operating activities
 Prepared from the information in the other three section of the statement shows the actual cash
statements. flows.
 Requires only a few adjustments (such as those for
depreciation and amortization resulting from the Direct approach:
write-off of a differential) beyond those used in As an example, the only cash flows related to operations are
preparing a cash flow statement for an individual
company.
 All transfers between affiliates should be
eliminated.
 Noncontrolling interest typically does not cause any
special problems.
Consolidated Statement of Cash Flows for the Year Ended The remainder of the cash flow statement is the same
December 31, 20X2 under both approaches except that a separate
reconciliation of operating cash flows and net income is
required under the direct approach.
Consolidation Following an Interim Acquisition
When a subsidiary is acquired during a fiscal period, the
results of the subsidiary’s operations are included in the
consolidated statements only for the portion of the year
that the stock is owned by the parent.
Consolidation Following an Interim Acquisition: Illustration
Peanut purchases 75% of Snoopy’s outstanding common
stock on July 1, 20X1 for an amount equal to 75% of the
book value of Snoopy’s net assets. Prior to the acquisition,
Snoopy had earned net income of $35,000 and declared
$8,000 of dividends. The income and dividends for the year
are summarized in the following table:
Parent Company Entries

Peanut records the purchase of Snoopy stock with the
following entry:
PE1
During the second half of 20X1, Peanut records its share of

Snoopy's income and dividends under the equity method:
Consolidation Following an Interim Acquisition: Illustration Again, we include the normal accumulated depreciation
Pre-acquisition income and dividend elimination entry: elimination entry based on the balance in accumulated
depreciation on Snoopy’s books on the acquisition date.
Assume that this amount is 65,000 on the acquisition date.
Optional accumulated depreciation elimination entry:
Consolidation Income Tax Issues

After making this worksheet entry to close the pre- A parent company and its subsidiaries may file a
acquisition earnings and dividends to the Retained Earnings consolidated income tax return, or they may choose to file
account, the beginning balance in Retained Earnings as of separate returns. For a subsidiary to be eligible to be
the date of acquisition is $117,000. included in a consolidated tax return, at least 80percent of
its stock must be held by the parent company or another
company included in the consolidated return.
Filing a consolidated return: advantages
1. The losses of one company may be offset against
the profits of another.
2. Dividends and other transfers between the
affiliated companies are not taxed.
3. May make it possible to avoid limits on the use of
Based on this acquisition date beginning balance, we certain items such as foreign tax credits and
calculate the post-acquisition changes in book value as charitable contributions.
follows:
Filing a consolidated return: limitations
1. Once an election is made to include a subsidiary in
the consolidated return, the company cannot file
separate tax returns in the future unless it receives
IRS approval.
2. The subsidiary’s tax year also must be brought into
conformity with the parent’s tax year.
3. Can become quite difficult when numerous
companies are involved and complex ownership
arrangements exist.
This leads to the basic elimination entry, following the
normal procedure (but based on post-acquisition earnings Allocation of tax expense when a consolidated return is filed
and dividends):  Portrays the companies included in the return as if
they were actually a single legal entity.
 All intercorporate transfers of goods and services
and intercompany dividends are eliminated and a
single income tax figure is assessed
 Because only a single income tax amount is
determined, income tax expense must be assigned
to the individual companies.
 The method of tax allocation can affect the
amounts reported in the income statements of both
the separate companies and the consolidated
The following T-accounts illustrate how the basic entity.
elimination entry zeros out the balances in the Investment  When a subsidiary is less than 100 percent owned,
in Snoopy and Income from Snoopy accounts: tax expense assigned to the subsidiary reduces
PE1
proportionately the income assigned to the parent If Peanut accounts for its investment in Snoopy using the
and the noncontrolling interest. fully adjusted equity method, Peanut would make the
 The more tax expense assigned to the subsidiary, following journal entries on its books:
the less is assigned to the parent; the income
attributed to the controlling interest then becomes
greater.
Unrealized profits when a consolidated return is filed
 Intercompany transfers are eliminated in computing
both consolidated net income and taxable income.
 Because profits are taxed in the same period they
are recognized for financial reporting purposes, no
temporary differences arise, and no additional tax
accruals are needed in preparing the consolidated Peanut also defers its 75% share of the unrealized profit on
financial statements. intercompany upstream sales (net of taxes). Thus, the
 The companies are taxed individually on the profits $10,000 of unrealized profit ($40,000 -$30,000) net of 40%
from intercompany sales. taxes is $6,000 ($10,000 x0.60). Thus, the deferral of
 No consideration is given to whether the Peanut's relative share of the unrealized gross profit is
intercompany profits are realized from a $4,500 ($6,000 x0.75).
consolidated viewpoint.
 The tax expense on the unrealized intercompany
profit must be eliminated when the unrealized
intercompany profit is eliminated in preparing
consolidated financial statements.
 This difference in timing of the tax expense
recognition results in the recording of deferred In order to prepare the basic elimination entry, we first
income taxes. analyze the book value of Snoopy's equity accounts and the
related 75% share belonging to Peanut and the 25% share
Consolidation Income Tax Issues belonging to the NCI shareholders
Assume that Peanut acquired 75% of Snoopy’s common
stock. Peanut acquired the stock when the book value of
Snoopy’s common stock was $250,000 and retained
earnings were $150,000. During the year, Snoopy reports
pre-tax income of $60,000 and declares $20,000 of
dividends. In addition, during 20X1 Snoopy sold inventory
costing $75,000 to Peanut for $100,000. $60,000 of this
inventory was resold by year end. Assume the two
companies file separate a tax returns for 20X1. Both Peanut
and Snoopy are subject to a 40% tax rate. We note that the book value calculations form the basis for
the basic elimination entry, but Peanut's share of income
Snoopy sells inventory costing $75,000 to Peanut Products and its investment account must be adjusted for the equity-
for $100,000, and resold $60,000 of this inventory before method entry previously made for $4,500. In addition, the
year-end. Assume 40 percent tax rate. NCI share of income and net assets is adjusted for the 25%
share of the unrealized gross profit (net of 40 percent
taxes).
With a 40 percent income tax rate, the following eliminating

entry adjusts income tax expense of the consolidated entity
downward by $4,000 ($10,000 x0.40) to reflect the
reduction of reported profits:
PE1
Subsequent Profit Realization When Separate Returns Are The Accounting Issues
Filed Foreign currency transactions of a U.S. company
If income taxes were ignored, the following eliminating denominated in other currencies must be restated to their
entry would be used in preparing consolidated statements U.S. dollar equivalents before they can be recorded in the
as of December 31, 20X2, assuming that Snoopy had U.S. company’s books and included in its financial
$10,000 of unrealized inventory profit on its books on statements.
January 1, 20X2, and the inventory was resold in 20X2:
Translation
The process of restating foreign currency transactions to
their U.S. dollar equivalent values.
Many U.S. corporations have multinational operations
 The foreign subsidiaries prepare their financial
On the other hand, if the 40 percent tax rate is considered, statements in the currency of their countries.
the eliminating entry would be modified as follows:  The foreign currency amounts in these financial
statements have to be translated into their U.S.
dollar equivalents before they can be consolidated
with the U.S. parent’s financial statements.PS
Foreign currency exchange rates between currencies are
established daily by foreign exchange brokers who serve as
Consolidated Earnings Per Share agents for individuals or countries wishing to deal in foreign
Basic consolidated EPS is calculated by deducting income to currencies.Some countries maintain an official fixed rate of
the noncontrolling interest and any preferred dividend currency exchange.
requirement of the parent company from consolidated net
income Determination of exchange rates
 The resulting amount is then divided by the Exchange rates change because of a number of economic
weighted-average number of the parent’s common factors affecting the supply of and demand for a nation’s
shares outstanding during the period. currency.
 While consolidated net income is viewed from an
entity perspective, consolidated earnings per share Factors causing fluctuations are a nation’s
follows a parent company approach and clearly is 1. Level of inflation
aimed at the stockholders of the parent company. 2. Balance of payments
3. Changes in a country’s interest rate
4. Investment levels
5. Stability and process of governance
Direct Exchange Rate (DER) is the number of local currency
units (LCUs) needed to acquire one foreign currency unit
(FCU)
From the viewpoint of a U.S. entity:
Example: Assume a U.S. based company can purchase one

Euro for $1.40.
Diluted consolidated earnings per share Indirect Exchange Rate (IER) is the reciprocal of the direct
 The parent’s share of consolidated net income exchange rate
normally is the starting point in the computation of
diluted consolidated EPS. From the viewpoint of a U.S. entity:
 It then is adjusted for the effects of parent and
subsidiary dilutive securities.
CHAPTER 11 Example: Assume a U.S. based company can purchase one

MULTINATIONAL ACCOUNTING : FOREIGN CURRENCY Euro for $1.40.
TRANSACTIONS AND FINANCIAL INSTRUMENTS
DER is identified as American terms

To indicate that it is U.S. dollar–based and represents an
exchange rate quote from the perspective of a person in the
PE1
United States The Spread:

 The difference between the forward rate and the
IER is identified as European terms spot rate on a given date.
To indicate the direct exchange rate from the perspective of  Gives information about the perceived strengths or
a person in Europe, which means the exchange rate shows weaknesses of currencies.
the number of units of the European’s local currency units
per one U.S. dollar Forward Exchange Rates Example:
Assume a U.S.-based company purchases inventory for
Changes in exchange rates €1,000 on 3/31 and the contract requires payment on
Strengthening of the U.S. dollar—direct exchange rate 9/30.3/319/30Spot rate = $1.35/€
decreases, implies:
 Taking less U.S. currency to acquire one FCU
 One U.S. dollar acquiring more FCUs
 Example: DER decreases from $1.40/€to $1.30/€
Weakening of the U.S. dollar—direct exchange rate
increases, implies:
 Taking more U.S. currency to acquire one FCU
 One U.S. dollar acquiring fewer FCUs
 Example: DER increases from $1.40/€to $1.50/€
Relationships between Currencies and Exchange Rates
Foreign Currency Transactions

Foreign currency transactions are economic activities
denominated in a currency other than the entity’s recording
currency.
These include:
1.Purchases or sales of goods or services (imports or
exports), the prices of which are stated in a foreign currency
2.Loans payable or receivable in a foreign currency
3.Purchase or sale of foreign currency forward exchange
contracts
4.Purchase or sale of foreign currency units
For financial statement purposes, transactions denominated
in a foreign currency must be translated into the currency
the reporting company uses.
At each balance sheet date, account balances denominated
in a currency other than the entity’s reporting currency
must be adjusted to reflect changes in exchange rates
during the period. The adjustment in equivalent U.S. dollar
values is a foreign currency transaction gain or loss for the
entity when exchange rates have changed.
Example: Foreign Currency Transactions
Assume that a U.S. company acquires €5,000 from its bank
on January 1, 20X1, for use in future purchases from
German companies. The direct exchange rate is $1.20 = €1;
thus, the company pays the bank $6,000 for €5,000, as
Foreign Currency Exchange Rates follows:
Spot Rates versus Current Rates U.S. dollar equivalent value = Foreign currency units x Direct
 The spot rate is the exchange rate for immediate exchange rate
delivery of currencies. $6,000 = €5,000x$1.20
 The current rate is defined simply as the spot rate
on the entity’s balance sheet date. The following entry records this exchange of currencies:
Forward Exchange Rates
 The forward rate on a given date is not the same as
the spot rate on the same date.
 Expectations about the relative value of currencies
are built into the forward rate.
PE1
On July 2, 20X1, the exchange rate is $1.100 = €1. The expected to have a similar response to changes in
following adjusting entry is required in preparing financial market factors.
statements on July 1:
The contract terms:
 Require or permit net settlement
 Provide for the delivery of an asset that puts the
recipient in an economic position not substantially
different from net settlement, or
Foreign Currency Transactions  Allow for the contract to be readily settled net by a
Foreign currency import and export transactions –required market or other mechanism outside the contract
accounting overview (assuming the company does not use
forward contracts) Derivatives Designated as Hedges
Two criteria to be met for a derivative instrument to qualify
Transaction date: as a hedging instrument:
Record the purchase or sale transaction at the U.S. dollar- 1. Sufficient documentation must be provided at the
equivalent value using the spot direct exchange rate on this beginning of the hedge term to identify the
date. objective and strategy of the hedge, the hedging
instrument and the hedged item, and how the
Balance sheet date: hedge’s effectiveness will be assessed on an
 Adjust the payable or receivable to its U.S. dollar– ongoing basis.
equivalent, end-of-period value using the current 2. The hedge must be highly effective throughout its
direct exchange rate. term.Effectiveness is measured by evaluating the
 Recognize any exchange gain or loss for the change hedging instrument’s ability to generate changes in
in rates between the transaction and balance sheet fair value that offset the changes in value of the
dates. hedged item.
Settlement date: Fair value hedgesare designated to hedge the exposure to
 Adjust the foreign currency payable or receivable potential changes in the fair value of
for any changes in the exchange rate between the a)a recognized asset or liability such as available-for-sale
balance sheet date (or transaction date) and the investments, or
settlement date, recording any exchange gain or b)an unrecognized firm commitment for which a binding
loss as required. agreement exists.
 Record the settlement of the foreign currency
payable or receivable. The net gains and losses on the hedged asset or liability and
the hedging instrument are recognized in current earnings
The two-transaction approach on the statement of income.
 Views the purchase or sale of an item as a separate
transaction from the foreign currency commitment. Cash flow hedges
 The FASB established that foreign currency Designated to hedge the exposure to potential changes in
exchange gains or losses resulting from the the anticipated cash flows, either into or out of the
revaluation of assets or liabilities denominated in a company, for
foreign currency must be recognized currently in  a recognized asset or liability such as future interest
the income statement of the period in which the payments on variable-interest debt, or
exchange rate changes.  a forecasted cash transaction such as a forecasted
purchase or sale.
Managing International Currency Risk with Foreign
Currency Forward Exchange Financial Instruments Changes in the fair market value are separated into an
A financial instrumentis cash, evidence of ownership, or a effective portion and an ineffective portion.
contract that both:  The net gain or loss on the effective portion of the
1. Imposes on one entity a contractual obligation to hedging instrument should be reported in other
deliver cash or another instrument, and comprehensive income.
2. Conveys to the second entity that contractual right  The gain or loss on the ineffective portion is
to receive cash or another financial instrument. reported in current earnings on the income
statement.
A derivativeis a financial instrument or other contract
whose value is “derived from” some other item that has a Derivatives Designated as Hedges
variable value over time. Foreign currency hedgesare hedges in which the hedged
item is denominated in a foreign currency
Characteristics of derivatives:  A fair value hedge of a firm commitment to enter
 The financial instrument must contain one or more into a foreign currency transaction
underlyings and one or more notional amounts,  A cash flow hedge of a forecasted foreign currency
which specify the terms of the financial instrument. transaction
 The financial instrument/contract requires no initial  A hedge of a net investment in a foreign operation
net investment or an initial net investment that is
smaller than required for other types of contracts Forward Exchange Contracts
 Contracted through a dealer, usually a bank
PE1
 Possibly customized to meet contracting company’s Case 1 Entries—October 1, 20X1

terms and needs Entry to record the Forward Contract
 Typically no margin deposit required
 Must be completed either with the underlying’s
future delivery or net cash settlement
ASC 815 establishes a basic rule of fair value for accounting
for forward exchange contracts.
 Changes in the fair value are recognized in the
accounts, but the specific accounting for the change
depends on the purpose of the hedge. Entry to record the Account Payable
 For forward exchange contracts, the basic rule is to
use the forward exchange rate to value the forward
contract.
Case 1: Forward Exchange Contracts
Managing an Exposed Foreign Currency Net Asset or
Liability Position: Not a Designated Hedging Instrument
 This case presents the most common use of foreign
currency forward contracts, which is to manage a Entry to Revalue the Forward Contract
part of the foreign currency exposure from accounts
payable or accounts receivable denominated in a
foreign currency.
 Note that the company has entered into a foreign
currency forward contract but that the contract
does not qualify for or the company does not
designate the forward contract as a hedging
instrument. Entry to Revalue the Account Payable
Case 1 Timeline
Entry to revalue the forward contract
Entry to revalue the account payable
Rates Summary
Case 1 summary
PE1
Rates Summary
Case 2 Entries—August 1, 20X1

Hedging an Unrecognized Foreign Currency Firm
Commitment: A Foreign Currency Fair Value Hedge
 This case presents the accounting for an Case 2 Entries—October 1, 20X1
unrecognized firm commitment to enter into a
foreign currency transaction, which is accounted for
as a fair value hedge.
 A firm commitment exists because of a binding
agreement for the future transaction that meets all
requirements for a firm commitment.
 The hedge is against the possible changes in fair
value of the firm commitment from changes in the
foreign currency exchange rates.
Case 2 Timeline
Case 2 Entries—December 31, 20X1
PE1

Hedging a Forecasted Foreign Currency Transaction: A
Foreign Currency Cash Flow Hedge
 This case presents the accounting for a forecasted
foreign currency-denominated transaction, which is
accounted for as a cash flow hedge of the possible
Case 2 Entries—April 1, 20X2 changes in future cash flows.
 The forecasted transaction is probable but not a
firm commitment. Thus, the transaction has not yet
occurred nor is it assured; the company is
anticipating a possible future foreign currency
transaction.
 Because the foreign currency hedge is against the
impact of changes in the foreign currency exchange
rates used to predict the possible future foreign
currency-denominated cash flows, it is accounted
for as a cash flow hedge.
Case 3 Timeline
Case 2 Summary
PE1
Case 3 Entries—August 1, 20X1
Case 3 Entries—October 1, 20X1
Case 3 Entries—December 31, 20X1
Case 3 Entries—April 1, 20X2
PE1
Case 4: Forward Exchange Contracts Case 4 Entry—April 1, 20X2

Speculation in Foreign Currency Markets
 This case presents the accounting for foreign
currency forward contracts used to speculate in
foreign currency markets. These transactions are
not hedging transactions.
 The foreign currency forward contract is revalued
periodically to its fair value using the forward
exchange rate for the remainder of the contract
term.
 The gain or loss on the revaluation is recognized
currently in earnings on the income statement.
Case 4 Timeline
Rates Summary
Case 4 Entry—October 1, 20X1
Additional Considerations
Measuring hedge effectiveness
 Effectiveness: There will be an approximate offset,
within the range of 80 to 125 percent, of the
changes in the fair value of the cash flows or
changes in fair value to the risk being hedged.
 Must be assessed at least every three months and
when the company reports financial statements or
earnings.
Case 4 Entry—December 31, 20X1  Intrinsic value and Time value
Entry to Revalue the Forward Contract
Interperiod tax allocation for foreign currency gains (losses)
 Temporary differences in the recognition of foreign
currency gains or losses between tax accounting
and GAAP accounting require interperiod tax
allocation.
 The temporary difference is recognized in
accordance with ASC 740.
Hedges of a net investment in a foreign entity
PE1
 A number of balance sheet management tools are 2. How should gains and losses be accounted for?
available for a U.S. company to hedge its net Should they be included in income?
investment in a foreign affiliate.
 ASC 815 specifies that for derivative financial Exchange rates that may be used in converting foreign
instruments designated as a hedge of the foreign currency values to the U.S. dollar:
currency exposure of a net investment in a foreign 1. The current rate
operation, the portion of the change in fair value 2. The historical rate
equivalent to a foreign currency transaction gain or 3. The average rate for the period
loss should be reported in other comprehensive
income. Functional currency
1. “The currency of the primary economic
environment in which the entity operates; normally
CHAPTER 12 that is the currency of the environment in which an
MULTINATIONAL ACCOUNTING : ISSUES IN FINANCIAL entity primarily generates and receives cash”
REPORTING AND TRANSLATION OF FOREIGN ENTITY 2. Used to differentiate between foreign operations
STATEMENTS that are self-contained and integrated into a local
environment, and those that are an extension of
the parent and integrated with the parent
Functional Currency Indicators
General Overview
Accountants preparing financial statements for
multinationals must consider:
 Differences in accounting standards across
countries and jurisdictions
 Differences in currencies used to measure the
foreign entity’s operations
Differences in Accounting Principles
Methods used to measure economic activity differ around
the world
Benefits of adoption of a single set of globally accepted
accounting standards
1. Expansion of capital markets across borders
2. Help investors to better evaluate opportunities
across borders
3. Reduce reporting costs for companies accessing
capital in other countries
4. Increased confidence for users
International Financial Reporting Standards (IFRS)
 Standards published by the International
Accounting Standards Board (IASB)
 Widely accepted
 Mandated or permitted in over 100 countries
 FASB is working with the IASB to improve the
quality of standards and to “converge” their two
sets of standards
New SEC rules
Allow foreign private issuers to file statements prepared in
accordance with IFRS as issued by the IASB without
reconciliation to U.S. GAAP (January 4, 2008)
Next steps:
1. AllowU.S. issuers to choose between IFRS and U.S.
GAAP
2. RequireU.S. issuers to use IFRS
Determining the Functional Currency
Two major issues that must be addressed when financial
statements are restated from a foreign currency into U.S.
dollars:
1. Which exchange rate should be used to restate
foreign currency balances to domestic currency?
PE1
Functional currency designation in highly inflationary If LC ≠ FC -> Remeasureto FC

economies
 The volatility of hyperinflationary currencies  If FC = U.S. dollars, no further work is needed (this is
distorts the financial statements if the local the case for subsidiaries in countries with
currency is used as the foreign entity’s functional hyperinflationary currencies)
currency  If FC ≠ U.S. dollars Translate to U.S. Dollars (this is
 In such cases, the reporting currency of the U.S. the case for Scenario 2 of the Argentinian company
parent—the U.S. dollar—should be used as the in the previous example)
foreign entity’s functional currency
An overview of the methods a U.S. company would use to
Translation Versus Remeasurement of Foreign Financial restate a foreign affiliate’s financial statements in U.S.
Statements dollars.
Methods used to restate foreign entity statements to U.S.
dollars:
The translationof the foreign entity’s functional currency
statements into U.S. dollars
The remeasurementof the foreign entity’s statements into
the functional currency of the entity
 After remeasurement, the statements must then be
translated if the functional currency is not the U.S.
dollar.
 No additional work is needed if the functional
currency is the U.S. dollar
Translation Versus Remeasurement
Translation is the most common method used
 Applied when the local currency is the foreign
entity’s functional currency
 The current rate is used to convert local currency
asset and liability accounts into U.S. dollars
 Historical rates are used to convert equity accounts
into U.S. dollars
 Revenues and expenses are translated using the
average rate for the reporting period
 Any translation adjustment that occurs is a
component of comprehensive income
 This method is called the current rate method
Remeasurement is the restatement of the foreign entity’s
financial statements from the local currency that the entity
used into the foreign entity’s functional currency
 Required only when the functional currency is
different from the currency used to maintain the
books and records of the foreign entity
 The method used is called the temporal method
Example: A U.S. company owns 100% of the stock of an
Argentinian company. The local currency in Argentina is the
peso.
1. Scenario 1: The company pays employees, buys
inventory, and conducts most of its operations in
pesos. Thus, its functional currency is the peso. Remeasurement
Translate the financial statements to U.S. dollars Monetarybalance sheet items are remeasuredusing the
2. Scenario 2: The company pays buys and sells most current rate. Nonmonetarybalance sheet items are
of its inventory in southern Brazil. It also pays many remeasuredusing historical rates
of its employees in Brazilian reias. Thus, its
functional currency is the Brazilian real. Revenues and expenses are remeasuredusing:
Remeasurethe financial statements to reais. Then,  The average rate for items related to monetary
translate them back to U.S. dollars. items (e.g., the gain on the sale of a fixed asset)
 Historical rates for income statement items related
to nonmonetary items (e.g., depreciation)
Summary for U.S. Parent Companies: Any imbalance flows through the income statement as a
If LC = FC -> Translate to U.S. Dollars remeasurementgain or loss.
PE1
Translation  Adjustments in the minimum pension liability

Generally, accounts are translated as follows: itemSales
Each period’s other comprehensive income (OCI) is closed
to accumulated other comprehensive income (AOCI). An
appropriate title, such as “Accumulated Other
Comprehensive Income,” is used to describe this
stockholders’ equity item
Exercise 1: Translation
On 1/2/X7, Padre Corp. (a U.S. based company) formed a
new subsidiary in Honduras, SucursalInc., with an initial
investment of 150,000 Honduras Lempiras (HNL).
Assume Sucursal:
1. Purchases inventory evenly throughout 20X7. The
ending inventory is purchased 11/30/X7.
2. Uses straight-line depreciation on fixed assets.
3. Declares and pays dividends on 11/30/X7.
4. Purchased the fixed assets on 4/1/X7.
5. Uses Lempiras as the functional currency.
REQUIRED
Prepare a schedule to translate Sucursal’sfinancial
Note: Retained Earnings is unique (with a mixed rates). statements on 12/31/X7 to U.S. dollars.
 Net income is translated using the average
exchange rate
 Dividends are translated using the historical rate on
the date of declaration.
Translation
The outcome of the translation process:
 Because various rates are used, the trial balance
debits and credits after translation generally are not
equal
 The balancing item to make the translated trial
balance debits equal the credits is called the
translation adjustment
 It by-passes the income statement and as “other
comprehensive income.”
Financial statement presentation
 The translation adjustment is part of the entity’s
comprehensive income for the period
 Comprehensive income includes net income and
“other comprehensive income”Sales
Financial statement presentation

Major items comprising the other comprehensive income:
 Foreign currency translation adjustments (Ch. 12)
 Revaluation of cash flow hedges (Ch. 11)
 Unrealized gains/losses on available-for-sale
securities
PE1
Note: Beginning Retained Earnings does not appear in the Remeasuremen tRates
trial balance because it is zero.
Group Exercise 1: Translation
The resulting journal entry on Padre’s books:
Remeasurement
Remeasurement is similar to translation in that its goal is to
obtain equivalent U.S. dollar values for the foreign affiliate’s Points to remember:
accounts so they may be combined or consolidated with the  PP&E: Use the historical rate on the date the parent
U.S. company’s statements. The exchange rates used are acquires the subsidiary or the actual date an asset is
different from those used for translation acquired if after the subsidiary’s acquisition
 Depreciation:Use the same historical rate for
Monetary Accounts depreciation expense used for each associated
Monetary Related to “Money” asset.
By definition: Points to remember:
1. Monetary accounts are those that have their  COGS:Use historical rates for beginning and ending
amounts “fixed” in terms of the units of currency. inventory and the weighted average rate for
2. They represent amounts that will be received or purchases.
paid in a fixed number of monetary units.
Generally, they include:
1. Cash and cash equivalents
2. Receivables (short-and long-term)
3. Payables (short-and long-term)
Nonmonetary Accounts
Points to remember:
 Retained Earnings
Similar to translation except that while most income items

are remeasuredusing the weighted average rate, items
related to non-monetary balance sheet items are
remeasuredusing the corresponding historical
rates.Dividends are translated using the historical rate on
the date of declaration.
Remeasurement
The process produces the same end result as if the foreign
entity’s transactions had been initially recorded in dollars
PE1
 Debits = credits in the local currency trial balance. Exercise 2: Remeasurement

 Because of the variety of rates used to On 1/2/X7, Padre Corp. (a U.S. based company) formed a
remeasurethe accounts, the debits and credits of new subsidiary in Honduras, SucursalInc., with an initial
the remeasuredtrial balance will generally not be investment of 150,000 Honduras Lempiras (HNL).
equal. Assume Sucursal:
 A remeasurement gain or loss balances the 1. Purchases inventory evenly throughout 20X7. The
remeasuredtrial balance. ending inventory is purchased 11/30/X7.
 The remeasurementgain or loss only exists in the 2. Uses straight-line depreciation on fixed assets.
subsidiary’s remeasuredtrial balance. 3. Declares and pays dividends on 11/30/X7.
 It appears on the subsidiary’sremeasuredincome 4. Purchased the fixed assets on 4/1/X7.
statement, but it is not recorded via a journal entry. 5. Uses the U.S. dollar as the functional currency.
Statement presentation REQUIRED:

Remeasurement gain or loss is included in the current Prepare a schedule to remeasure Sucursal’sfinancial
period income statement, usually under “Other statements on 12/31/X7 to U.S. dollars.
Income”.Upon completion of the remeasurement process,
the foreign entity’s financial statements are presented as
they would have been had the U.S. dollar been used to
record the transactions in the local currency as they
occurred
Summary of the Translation and Remeasurement
Processes
PE1
This remeasurement gain appears in disclosure is usually a one-sentence footnote summarizing

Sucursal’s“remeasured” income statement. No entry is the foreign operations
required on Sucursal’sbooks because the gain only exists on
the remeasuredtrial balance. Additional Considerations
Proof of remeasurement exchange gain or loss
 The analysis primarily involves the monetary items,
because they are remeasured from the exchange
rate at the beginning of the period, or on the date
of the generating transaction to the current
exchange rate at the end of the period
Statement of Cash Flows
 Accounts reported in the statement of cash flows
The effect on Padre’s books would be through the regular should be restated in U.S. dollars using the same
entry to record its share of Sucursal’sremeasurednet rates as used for balance sheet and income
income. statement purposes
Lower-of-cost-or-market inventory valuation under
remeasurement
 The historical cost of inventories must be
Foreign Investments and Unconsolidated Subsidiaries remeasured using historical exchange rates to
A parent company consolidates a foreign subsidiary, except determine the functional currency historical cost
when it is unable to exercise economic control: value
1. Restrictions on foreign exchange in the foreign  These remeasured costs are compared with the
country inventory market value translated using the current
2. Restrictions on transfers of property in the foreign rate
country  The final step is to compare the cost and market
3. Other governmentally imposed uncertainties and to recognize any appropriate write-downs to
market
An unconsolidated foreign subsidiary is reported as an
investment on the U.S. parent company’s balance sheet.The Intercompany transactions
U.S. company must use the equity method if it has the  Assume that a U.S. company has a foreign
ability to exercise “significant influence”.When the equity currency–denominated receivable from its foreign
method is used, the investee’s financial statements are subsidiary
either remeasured or translated, depending on the  The U.S. company would first revalue the receivable
determination of the functional currency.If the equity to its U.S. dollar equivalent value as of the date of
method cannot be applied, the cost method is used the financial statements
 After the foreign affiliate’s statements have been
Liquidation of a foreign investment translated or remeasured, the receivable should be
 The translation adjustment account is directly at the same U.S. dollar value and can be eliminated
related to a company’s investment in a foreign
entity Intercompany transactions
 If the investor sells a substantial portion of its stock  ASC 830 provides an exception when the
investment, ASC 830 requires that the pro rata intercompany foreign currency transactions will not
portion of the accumulated translation adjustment be settled within the foreseeable future
account attributable to that investment be included  These transactions may be considered part of the
in computing the gain or loss on the disposition of net investment in the foreign entity
the investment  The translation adjustments on these are deferred
and accumulated as part of the cumulative
Hedge of a Net Investment in a Foreign Subsidiary translation account
ASC 815 permits hedging of a net investment in foreign
subsidiaries Income taxes
 The gain or loss on the effective portion of a hedge  Interperiod tax allocation is required whenever
of a net investment is taken to other temporary differences exist in the recognition of
comprehensive income as part of the translation revenue and expenses for income statement
adjustment purposes and for tax purposes
 The amount of offset to comprehensive income is  Exchange gains and losses from foreign currency
limited to the translation adjustment for the net transactions require the recognition of a deferred
investment tax if they are included in income but not
 Any excess must be recognized currently in earnings recognized for tax purposes in the same period
 A deferral is required for the portion of the
Disclosure Requirements translation adjustment related to the subsidiary’s
ASC 830 requires the aggregate foreign transaction gain or undistributed earnings that are included in the
loss included in income to be separately disclosed in the parent’s income
income statement or in an accompanying note.If not
disclosed as a one-line item on the income statement, this
PE1
 Deferred taxes need not be recognized if the

undistributed earnings will be indefinitely
reinvested in the subsidiary
 If the parent expects eventually to receive the
presently undistributed earnings of a foreign
subsidiary, deferred tax recognition is required, and
the tax entry would be:
Translation when a third currency is the functional currency

If the entity’s books and records are not expressed in its
functional currency, the following two-step process must be
used:
 Remeasure the subsidiary’s financial statements
into the functional currency
 The statements expressed in the functional
currency are then translated into U.S. dollars
UTS SEMESTER GENAP 2014/2015

CLOSE BOOK
PE1
*We put its bonds payable value at book value because

We recorded "bond discount" too. If you want,you can skip
Recording bond discount and go with 180000 for bonds
payable
* We deduct the share premium (600000) with (9000) to
take the stock issuance cost into account
ANSWER for PROBLEM 2:
ANSWER
PE1
ANSWER for PROBLEM 3:
PE1
PE1
2013 end
Excess value calculation
PE1
UAS SEMESTER GENAP 2014/2015

CLOSE BOOK
PE1
PE1
SOAL 1
a. Compute the amount of income assigned to the NCI in
the consolidated income statement
b. Prepare a reconciliation between the balance in the

investment in PT Bobom stock account reported by PT
Fantasi at Dec 31, 2005 and the underlying BV of NA
reported by PT Bobom at that date.
BOOK VALUE CALCULATION
PE1
PE1
PE1
SOAL 2
2A
a. Compute the balance in Big’s Investment in Small account
on Dec 31,2005
2B, EPS calculation is said to be not on the test, therefore, is

not included here
SOAL 3
a. Prepare a schedule translating the 31 December 2003
trial balance of Western Ranching from AUD to USD
b. Prepare the elimination entries needed as of Dec 31,

2005
PE1
2013 (assuming 14% market rate)
SOAL 5
a. What amount of intercompany sales occurred during
2013
SOAL 4
a. What amount of gain or loss will be reported in PT
MajuTerus' Income Statement on the retirement of the
bonds intercompany sales during 2013 $ 380,000.00
b. How much unrealize d intercompany profit existed on J
anuary 1, 2013? H ow much in December 31 2013?
- 1 Jan 2013, $25.000
- 31 Dec 2013, $15.000
b. Will a gain be reported in the 2012 consolidated financial
statements for PT MajuSekali for the constructive c. Worksheet elimination entry
retirement of the bonds? What amount will be reported?
c. How much will PT MajuSekali's purchase of the bonds

change the consolidated net income for 2012?
$ 19,278.02
d. Prepare the worksheet eliminating entries needed to
remove the effects of the intercorporate bond ownership in
preparing the consolidated financial statements on Dec 31,
2012
d. If Djokovic reports $290.000 NI, what amount is assigned

to NCI?
NI portion 20% $ 58,000.00
Unrealized income $ (3,000.00)
$ 55,000.00
e. Assuming that PT MajuTerus reports20000 NI for 2012.

Compute the amount of income assigned to non-controlling
shareholders in the 2012 consolidated income statement.
(2000*25%) * 4819,5 parent’s portion of retirement =
9819,5
f. Prepare the worksheet eliminating entry needed to
remove the effects of the intercorporate bond ownership in
preparing consolidated financial statements at Dec 31
PE1

Ringkasan AKL1

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Ringkasan AKL1

Hochgeladen von

Copyright:

Verfügbare Formate

Disusun oleh : Muhammad Firman (Akuntansi FE UI 2012)

AKUNTANSI KEUANGAN LANJUTAN 1

Business Objectives A split-off

Noncontrolling ownership  The target company’s basis of accounting in its

Statutory Merger: Peaceful Merger The Result

Option #2: Statutory Consolidation

Statutory Merger: Hostile Takeover

Need SH approval from both corporations.

A takes all of T’s assets and liquidates the corporate shell.

Option #3: HOLDING COMPANY:

Acquirer’s Cost: Category 2

Group Exercise 1: Basic Acquisition

Goodwill:How to calculate it?

 Technology-based intangible assets, both patented

 a.Trademarks(not recognized on Target’s books)

 c.Internally-developed computer softwarewith a

 d.Internally-developed patentswith a value of $800.

 e.Other separately-identifiable intangibleswith a Record transfer of assets to Point

Record distribution of point corporation stock

Acquisition Method – Comprehensive Example An impairment loss

Firstly, the impairment loss reduces any amount of goodwill

Consolidation: The Concept

 20-50% = Significant influence (equity method)

Consolidation Entries Investment vs. Ownership

Simple Consolidation Example

Accounting for Investments in Common Stock

Normally is appropriate when one company, referred to as The Cost Method

General Rule : The investment remains on parent’s books at

The Equity Method:How It Works

Example: The Equity Method

Summary of Year 2 Equity Method Entries

Example: Equity Method versus Cost Method

The objective is to combine the financial statements of two

The Basic Elimination Entry: Equity Method

The subsidiary’s current year earnings and

The Equity Method: Things to Remember in Consolidation

Consolidated retained earnings EQUALS the parent’s

Under the cost method, we also eliminate dividends from

PCO Statements: Presented in Notes to the Consolidated

Consolidated Financial Statements

Topic : Related parties

Topic : Definitions of VIEs versus SPEs

Parent Company Theory Entity Theory

 Accordingly, the full entity fair value increment and

Current approach clearly follows the entity theory with

Consolidation of Less-than-wholly-owned Subs

Consolidation of < Wholly Owned Subs

Basic Elimination Entry

The accumulated depreciation elimination entry:

Basic Concepts: Parent and Subsidiary

Income statement: Expenses calculated based on BOOK

If expenses are UNDERSTATED, then income is too high

Exercise : Analyzing Acquisition Costs

Key:We need to keep track of each element of the purchase

2.The excess value reclassificationentry:

3.The amortized excess value reclassificationentry:

This entry reclassifies the equity method amortization of

Excess Value Analysis ( Balances 12/31/X8)

The excess value reclassification elimination entrybrings the

2. Prepare all consolidation entries as of 12/31/X9.

Basic elimination entry :

Acquired at Less than Fair Value of Net Assets

The amortized excess value reclassification entry

1. Update the analyses of theInvestment account through