Beams11 ppt04

Chapter 4:
Consolidation
Techniques and
Procedures
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
4-1
Consolidation Techniques: Objectives

1. Prepare consolidation workpaper for the
year of acquisition when the parent uses the
complete equity method to account for its
investment in a subsidiary.
2. Prepare consolidation workpaper for the
years subsequent to acquisition.
3. Locate errors in consolidation workpaper.
4. Assign fair value to identifiable net assets.

4-2
Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
6. Appendix: Understand the alternative trial
balance consolidation workpaper format.

4-3
Consolidation Techniques and Procedures
1: ACQUISITION-YEAR
WORKPAPERS

4-4
Preparing the Worksheet

Statements are entered onto the worksheet:
Income statement
Statement of retained earnings
Balance sheet
Columns needed:
Parent
Subsidiary
DR and CR columns for elimination entries
Consolidated

4-5
Completing the Worksheet (1 of 2)

1. Enter Parent and Sub. amounts at 100% of
book value. (Even if parent owns less)
2. Enter elimination entries into the DR and CR
columns. (Check totals)
3. For consolidated revenues, liabilities, and
equity (other than ending retained
earnings):
Add parent, subsidiary, less DR, plus CR
4. For consolidated assets:
Add parent, subsidiary, plus DR, less CR
4-6
Completing the Worksheet (2 of 2)

5. For income, ending retained earnings and
all subtotals and totals:
Compute directly in consolidated column.
Note:
The total consolidated assets should equal the
total consolidated liabilities and equity.
Expenses on the income statement and dividends
on the statement of retained earnings are generally
shown as negative numbers. So compute the
consolidated amounts as you would for revenues.
4-7
Workpaper Entries
1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
4. Record noncontrolling interest in sub.'s
earnings & dividends
5. Eliminate reciprocal Investment & sub.'s
equity balances
6. Amortize fair value differentials
7. Eliminate other reciprocal balances
4-8
Example: Pep & Sap Data

Pep pays $88 for 80% of Sap on 1/1/2011 when
Sap's equity consisted of $60 capital stock
and $30 retained earnings. All excess was due
to unrecorded patents with a 10-year life.
Sap's income and dividends follow:
Net income
Dividends
2011
$25
$15

2012
$30
$15
4-9
Analysis
Cost of 80% of Sap
$88
Implied value of Sap ($88/.80)

Book value (60+30)
90
Excess
Unamort. Bal. Amortization
Patents
$110
Allocated to:
Amt
Amort.
Patents
$20 10 yrs
$20
Unamort.
Bal.
Amortizatio
n
Unamort. Bal.
on 1/1/2011
in 2011
on 12/31/2011
in 2012
on 12/31/2012
$20
$2
$18
$2
$16
Use these amounts in

2011 worksheet for
amortization expense
and patents.

2012 worksheet for
and patents.

4-10
Income & Dividend Calculations

2011:
Sap's net income $25
Amortization
(2)
Adjusted income $23
Dividends
$15
2012:
Sap's net income
Amortization
Adjusted income
Dividends
$30
(2)
$28
Pep's 80% share

$18.4
$12.0
NCI 20% share
$4.6
$3.0
Pep's 80% share
$22.4
$12.0
$15
NCI 20% share

$5.6
$3.0
4-11
Pep's 2011 Worksheet Entries (1 of 3)

none
none
balance
Income from Sap (-R, -SE)
Dividends (+SE)
Investment in Sap (-A)
18.4
12.0
6.4
4-12
Pep 2011: Entries (2 of 3)

Noncontrolling interest share (-SE)
Dividends (+SE)
Noncontrolling interest (+SE)
4.6
Capital stock, Sap (-SE)

Retained earnings, Sap (beginning) (-SE)
Patents (+A)
Noncontrolling interest
(+SE)
Copyright
2012 Pearson Education,
60
30
20

equity balances
3.0
1.6
88
22
4-13

6. Amortize fair value/book value differentials
Amortization Expense (E, -SE)

Patents (-A)
2
2

none
Note that in the last chapter, all worksheet entries
were prepared for the balance sheet. Here
worksheet entries are prepared for the income
statement, statement of retained earnings, and
balance sheet.
4-14
Pep's 2011 Worksheet

Year ended 12/31/2011c
Income statement:
Revenues
Income from Sap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Pep
Sap
DR
CR Consol
250.0
65.0
18.4
18.4
(200.0) (40.0) 2.0
4.6
68.4
25.0
315.0
0.0
(242.0)
(4.6)
68.4
5.0
30.0 30.0
68.4
25.0
(30.0) (15.0)
5.0
68.4
(30.0)

43.4
40.0
12.0
3.0
4-15
43.4
Balance sheet, 12/31/2011:

Cash
Other current assets
Investment in Sap
Pep
39.0
90.0
94.4
Sap
10.0
50.0
Plant & equipment, net

250.0 70.0
Patents
Total
473.4 130.0
Liabilities
80.0 30.0
Capital stock
350.0 60.0
Retained earnings
43.4 40.0
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
473.4 130.0
DR
CR
6.4
88.0
20.0
2.0
60.0
22.0
1.6
Consol
49.0
140.0
0.0
320.0
18.0
527.0
110.0
350.0
43.4
23.6
527.0
4-16
A Look at the Income Statement

Pep
Sap
250.0
65.0
DR
CR Consol
Income statement:
Revenues
Income from Sap
18.4
Expenses
(200.0) (40.0)
315.0
18.4
0.0
2.0
(242.0)
4.6
(4.6)
Income from Sap is eliminated.

68.4
25.0
68.4
Expenses are adjusted for 2011 amortization, - $2 on patents
Noncontrolling interest is proportional to Pep's Income from
Sap since Pep uses the equity method.
$18.4 x .20/.80 = $4.6
4-17
A Look at Retained Earnings

Pep
Sap
DR
CR Consol
5.0
30.0
30.0
5.0
68.4
25.0

Add net income
Deduct dividends
(30.0) (15.0)
68.4
12.0
(30.0)
3.0
Beginning retained earnings of Sap is eliminated.

Ending
earnings
43.4
40.0
43.4
retained
All of Sap's
dividends are eliminated.
Net income is not calculated across the line, but taken from
the consolidated income statement.
Ending retained earnings is calculated in the consolidated
column.
4-18
A Look at Assets
Investment in Sap is eliminated.
Patents at the start of 2011 were $20, and current
amortization is $2; they are $18 at the end of 2011.
The total is calculated in the consolidated column.
Cash
Investment in Sap
Patents
Total
Pep
39.0
90.0
94.4
Sap
10.0
50.0
250.0
70.0
DR
CR
6.4
88.0
20.0
473.4 130.0

2.0
Consol
49.0
140.0
0.0
320.0
18.0
527.0
4-19
A Look at Liabilities & Equity

Sap's capital stock is eliminated.
Retained earnings are not calculated across the row;
they are taken from the statement of retained earnings.
Noncontrolling interest at year-end is proportional to
Pep's Investment in Sap account.
$94.4 x .20/.80 = $23.6
Pep
Sap
DR
Liabilities
80.0 30.0
Capital stock
350.0 60.0 60.0
Retained earnings
43.4 40.0
Noncontrolling interest, Dec. 31
Total
473.4Education,
130.0
Copyright 2012 Pearson
CR
22.0
1.6
Consol
110.0
350.0
43.4
23.6
527.0
4-20
2: WORKPAPERS IN
SUBSEQUENT YEARS

4-21
Analysis, for 2012

Cost of 80% of Sap
$88
$110
Book value (60+30)

Excess
Patents
90
Allocated to:
Amt
Amort.
Patents
$20 10 yrs
Unamort.
Bal.
Amortization
$20
Unamort. Bal.
on 1/1/2011
in 2011
on 12/31/2011
in 2012
on 12/31/2012
$20
$2
$18
$2
$16

2011 worksheet for
and patents.
Amortization
Unamort.
Bal.

2012 worksheet for
and patents.

4-22
Income & Dividend Calculations

2011:
Sap's net income
Amortization
Adjusted income
Dividends
$25
(2)
$23
$15
2012:
Sap's net income $30
Amortization
(2)
Adjusted income $28
Dividends
$15
Pep's 80% share

$18.4
$12.0
NCI 20% share
$4.6
$3.0
Pep's 80% share
$22.4
$12.0
NCI 20% share
$5.6
$3.0

4-23
Pep's Worksheet Entries for 2012 (1 of 3)

none
none
balance
Income from Sap (-R, -SE)
Dividends (+SE)
22.4
12.0
10.4
4-24

Dividends (+SE)
5.6

equity balances
Capital stock, Sap (-SE)
Retained earnings, Sap (beginning) (-SE)
Patents (+A)
(+SE)
Copyright
2012 Pearson Education,
3.0
2.6
60
40
18
94.4
23.64-25
Eliminating Investment in Sap

Entry 5 eliminates the Investment in Sap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
Implied value of Sap at acquisition $88/.80
$110
Add the increase in retained earnings from
10
acquisition to the beginning of the current year
$40 at 1/1/2012 minus $30 at 1/1/2011
Less amortization for all prior periods
(2)
$2 patent amortization for 2011
Adjusted value of Sap at 1/1/2012
$118
Investment in Sap (80% x $118) = $94.4
Noncontrolling interest (20% x $118) = $23.6
Verify the $118 from the debits in Entry 5 (60 + 40 + 18).
4-26

6. Amortize fair value differentials
Amortization Expense (E, -SE)
Patents (-A)
2
2

Note payable Pep (-L)
Note receivable Sap (-A)

10
10
4-27
Pep's 2011 Worksheet

Year ended 12/31/2011
Income statement:
Revenues
Income from Sap
Expenses
Add net income
Deduct dividends
Ending retained earnings
Pep
Sap
300.0
75.0
22.4
(244.0) (45.0)
78.4
CR Consol
22.4
2.0
5.6
375.0
0.0
(291.0)
(5.6)
78.4
30.0
43.4
40.0
78.4
30.0
(45.0) (15.0)

76.8
DR
55.0
40.0
12.0
3.0
43.4
78.4
(45.0)
4-28
76.8

Cash
Pep
45.0
Note receivable Sap
10.0
Sap
20.0
CR
10.0

Investment in Sap
97.0
104.8
70.0

Patents
Total
240.0
60.0
Note payable Pep
DR
10.4
94.4
18.0
2.0
496.8 150.0
Consol
65.0
0.0
167.0
0.0
300.0
16.0
548.0
10.0 10.0
Liabilities
70.0 25.0
Capital stock
350.0 60.0 60.0
Retained earnings
76.8 55.0
Noncontrolling interest, Dec. 31Inc. Publishing as Prentice Hall
95.0
350.0
76.8
23.6
2.6
4-29
26.2
3: ERRORS IN THE
WORKPAPERS

4-30
Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
Noncontrolling interest share (income)
Goodwill
Noncontrolling interest (equity)
Check equality of DR and CR adjustments.
Verify totals for parent and subsidiary
statements.
Re-calculate the consolidated amounts.
4-31
4: ASSIGNING FAIR VALUE

4-32
Example with Excess Allocated

Pat pays $360 for 90% of Sol on 12/31/2011 when
Sol's equity consisted of $200 capital stock and
$50 retained earnings. Inventory (sold in 2011),
land, and buildings (20 years) were undervalued
by $10, $30, and $80, respectively. Equipment (10
years) was overvalued by $20.
Sol's income and dividends for 2012 were $60 and
$20.
At year-end, Sol has dividends payable of $10
which Pat has not yet recorded. There is $20 cash
in transit from Sol to Pat for the note.
4-33
Analysis at Acquisition
Cost of 90% of Sol
$360
Allocated to:
Amt
$400
Inventories
$10 1st yr
Book value (200+50)
250
Excess
$150
Land
30 -
Building
80 20 yrs
Equipment
Noncontrolling interest, 10%(400)
$40 Goodwill
Unamort. Bal. Amortization Unamort. Bal.
12/31/2011 *
in 2012 *
on 12/31/2012
Inventories
$10
($10)
$0
Land
30
30
Building
80
(4)
76
Equipment
(20)
(18)
Goodwill
50
50
($12)
$138
$150
Amort

(20) 10 yrs
50
150
* Use the
12/31/2011
and 2012
amortization
in worksheet
entries for
2012.
4-34
Sol's Income & Dividend
2012
Sol's net income
Amortization
$60
($12)
Adjusted income
$48
Sol's dividends
$20
Pat's 90% share

$43.2
$18.0
NCI 10% share

$4.8
$2.0
4-35
Pat's Worksheet Entries (1 of 4)

Dividends receivable (+A)
Investment in Sol (-A)
Cash (+A)
Note receivable, Sol (-A)
9.0
9.0
20.0
20.0
none
bring Investment account to its beginning balance
Income from Sol (-R, -SE)
Dividends (+SE)

43.2
18.0
25.2
4-36
Pat: Entries (2 of 4)
Dividends (+SE)
4.8
Capital stock (-SE)

Retained earnings, Sol (beginning) (-SE)
Unamortized excess (+A)
(+SE)
200
50
150
5a. Eliminate reciprocal Investment & sub.'s

equity balances (with unamortized excess)
2.0
2.8
360
40
4-37
5b. Allocate the unamortized excess according
to beginning-of-year balances.
Inventory (+A)
Land (+A)
Building, net (+A)
Goodwill (+A)
Equipment, net (-A)
Unamortized excess (-A)

10
30
80
50
20
150
4-38
6. Amortize fair value/book value differentials
Cost of sales (E, -SE)
Inventory (-A)
Operating (depreciation) expense (E, -SE)
Buildings, net (-A)
Equipment, net (-A)
Operating (depreciation) expense (-E, SE)
10
10
4
4
2
2

Dividends payable (-L)
Dividends receivable (-A)
9.0
9.0
4-39
Pat's 2012 Worksheet

Year ended 12/31/2012
Pat
Sol
900.0
300.0
DR
CR
Consol
Income statement:
Revenues
Income from Sol
43.2
1,200.0
43.2
0.0
(760.0)
Cost of goods sold
(600.0)
(150.0)
10.0
Operating expenses
(190.0)
(90.0)
4.0
2.0
4.8
(282.0)
(4.8)
153.2
60.0
153.2
120.0
50.0
Add net income
153.2
60.0
Deduct dividends
(100.0)
(20.0)
18.0
(100.0)

2.0
4-40

50.0
120.0
153.2
Pat
Sol
DR
CR
Consol
Cash
13.0
15.0
20.0
Accounts receivable, net
76.0
25.0
Note receivable Sol
20.0
Inventories
90.0
60.0
10.0
Land
60.0
30.0
30.0
Building, net
190.0
110.0
80.0
4.0
376.0
Equipment, net
150.0
120.0
2.0
20.0
252.0
Investment in Sol
394.2
9.0
0.0
48.0
101.0
20.0
0.0
10.0
150.0
120.0
25.2
360.0
Dividends receivable
9.0
Goodwill
50.0
Unamortized excess
Total
Accounts payable
Dividends payable
9.0
150.0
0.0
50.0
150.0
0.0
993.2
360.0
1,097.0
120.0
60.0
180.0
10.0

9.0
1.0
4-41
5: CONSOLIDATED
STATEMENT OF CASH
FLOWS

4-42
Consolidated Cash Flows

The consolidated statement of cash flows is
prepared from:
Consolidated balance sheets, beginning & ending
Consolidated income statement
Other information
Procedure similar to an "unconsolidated"
statement of cash flows
Look at items specific to companies with:
Subsidiaries
Equity investments
4-43
Investing & Financing Cash Flows

Investing cash flows:
Include cash acquisition and/or disposition of
subsidiaries
Include cash acquisition and/or disposition of
equity investees
Financing cash flows:
Include cash dividends paid to noncontrolling
interests

4-44
Operating Cash Flows

Direct method:
Include cash dividends received from equity
investees (not equity method income)
Indirect method:
Start with controlling share of net income
Add the noncontrolling interest share
Deduct the excess of equity method income over
cash dividends received from equity investees

4-45
6: APPENDIX TRIAL
BALANCE FORMAT

4-46
Alternative Worksheet Format

Worksheet format presented earlier used the
basic financial statements
Alternative uses the ADJUSTED trial balances
of the parent and subsidiary.
Columns on worksheet:
Parent and subsidiary adjusted trial balances,
DR and CR adjustments,
Income statement,
Statement of retained earnings, and
Balance sheet columns
4-47
Completing the Worksheet

1. Enter worksheet elimination entries into the
DR and CR columns.
2. Add accounts as needed (e.g., noncontrolling
interest, goodwill, noncontrolling interest
share).
3. Carry consolidated balances to income
statement, retained earnings, or balance
sheet columns, as appropriate.
4. Move controlling share of income to the
retained earnings column.
5. Move ending retained earnings to the balance
sheet column.
4-48
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4-49

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Chapter 4:

Consolidation Techniques: Objectives

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Consolidation Techniques and Procedures

Copyright 2012 Pearson Education,

Preparing the Worksheet

Copyright 2012 Pearson Education,

Completing the Worksheet (1 of 2)

Completing the Worksheet (2 of 2)

Example: Pep & Sap Data

Copyright 2012 Pearson Education,

Implied value of Sap ($88/.80)

Use these amounts in

Use these amounts in

Copyright 2012 Pearson Education,

Income & Dividend Calculations

Pep's 80% share

NCI 20% share

Pep's 2011 Worksheet Entries (1 of 3)

Pep 2011: Entries (2 of 3)

Capital stock, Sap (-SE)

5. Eliminate reciprocal Investment & sub.'s

Inc. Publishing as Prentice Hall

Pep 2011: Entries (3 of 3)

Amortization Expense (E, -SE)

7. Eliminate other reciprocal balances

Pep's 2011 Worksheet

Copyright 2012 Pearson Education,

Balance sheet, 12/31/2011:

Plant & equipment, net

A Look at the Income Statement

Noncontrolling interest share

Income from Sap is eliminated.

A Look at Retained Earnings

Statement of retained earnings:

Beginning retained earnings of Sap is eliminated.

Copyright 2012 Pearson Education,

A Look at Liabilities & Equity

Consolidation Techniques and Procedures

Copyright 2012 Pearson Education,

Analysis, for 2012

Implied value of Sap ($88/.80)

Book value (60+30)

Use these amounts in

Use these amounts in

Copyright 2012 Pearson Education,

Income & Dividend Calculations

Pep's 80% share

Copyright 2012 Pearson Education,

Pep's Worksheet Entries for 2012 (1 of 3)

Pep 2012: Entries (2 of 3)

5. Eliminate reciprocal Investment & sub.'s

Eliminating Investment in Sap

Pep 2012: Entries (3 of 3)

7. Eliminate other reciprocal balances

Copyright 2012 Pearson Education,

Pep's 2011 Worksheet

Copyright 2012 Pearson Education,

Balance sheet, 12/31/2012:

Note receivable Sap

Other current assets

Plant & equipment, net