Beams10e Ch03 An Introduction To Consolidated Financial Statements

Chapter 3: An Introduction to
Consolidated Financial Statements

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
Pearson Education, Inc. publishing as Prentice Hal
3-1
Intro to Consolidations: Objectives

1. Recognize the benefits and limitations of
consolidated financial statements.
2. Understand the requirements for inclusion of a
subsidiary in consolidated financial statements.
3. Apply the consolidation concepts to parent
company recording of the investment in a
subsidiary at the date of acquisition.
4. Allocate the excess of the fair value over the book
value of the subsidiary at the date of acquisition.
3-2
Objectives (continued)
5. Learn the concept of noncontrolling interest when
the parent company acquires less than 100% of the
subsidiary's outstanding common stock.
6. Amortize the excess of the fair value over the book
value in periods subsequent to the acquisition.
7. Prepare consolidated balance sheets subsequent
to the date of acquisition, including preparation of
elimination entries.
8. Apply the concepts underlying preparation of a
consolidated income statement.
3-3
An Introduction to Consolidated Financial Statements
1: Benefits & Limitations
3-4
Business Acquisitions
FASB Statement 141R
Business combinations occur
Acquire controlling interest in voting stock
More than 50%
May have control through indirect ownership
Consolidated financial statements
Primarily for owners & creditors of parent
Not for noncontrolling owners or subsidiary
creditors
3-5
2: Subsidiaries
3-6
Who is a Subsidiary?
ARB No. 51 allowed broad discretion
FASB Statement No. 94
Control based on share ownership
FASB Statement No. 160
Financial control
Subsidiaries, or affiliates, continue as separate legal
entities and reporting to their controlling and
noncontrolling interests.
3-7
Consolidated Statements
Prepared by the parent company
Parent discloses
Consolidation policy, Reg. S-X
Exceptions to consolidation, temporary
control and inability to obtain control
Fiscal year end
Use parent's FYE, but
May include subsidiary statements with FYE
within 3 months of parent's FYE.
Disclose intervening material events
3-8
3: Parent Company Recording
3-9
Penn Example: Acquisition Cost =

Fair Value = Book Value
Skelly BV=FV
Cash
$10
Other current assets
15
Net plant assets
40
Penn acquires 100% of Skelly for

$40, which equals the book value
and fair values of the net assets
acquired.
Total
$65
Cost of acquisition
$40
Accounts payable
$15
Less 100% book value
40
$0
Other liabilities
10
Excess of cost over book value
Capital stock
30
Retained earnings
10
To consolidate, eliminate Penn's

Investment account and Skelly's
capital stock and retained earnings.
Total
$65
3-10
Balance sheets
Cash
Separate
Consolidated
Penn Skelly
Penn & Sub.
$20
$10
$30
Other curr. assets
45
15
60
Net plant
60
40
100
Investment in Skelly
40
$165
$65
$190
$20
$15
$35
25
10
35
100
30
100
20
10
20
$165
$65
$190
Total
Accounts payable
Other curr. liabilities
Capital stock
Retained earnings
Total
3-11
4: Allocations at Acquisition Date
3-12
Cost, Fair Value and Book Value

Acquisition cost, fair values of identifiable net
assets and book values may differ.
Allocate excess or deficiency of cost over
book value and determine goodwill, if any.
When BV = FV, excess is goodwill.
Cost less BV = Excess to allocate
Allocate first to FV-BV differences
Remainder is goodwill (or bargain purchase)
3-13
Example: BV FV but Cost = FV

Piper acquires 100% of Sandy for $310.
BV = 100 + 145 = $245
FV = 385 75 = $310
Cost FV = $0 goodwill
Sandy
BV
FV
$40
$40
Receivables
30
30
Inventory
50
75
Plant, net
200
240
Cash
Total
$320 $385
Liabilities
$75
Capital stock
100
Retained
earnings
145
Total
$320
$75
Cost
$310
100% BV
245
Excess of cost over BV
$65
3-14
Piper and Sandy (cont.)

Allocate to:
Amt Amort.
Inventory 100%(+25)
25 1st yr
Plant 100%(+40)
40 10 yrs
Total
$65
Piper's elimination worksheet entry:

Capital stock
100
Retained earnings
145
Inventory
25
Plant
40
Investment in Sandy
310
3-15
Example: BV FV and Cost FV

Panda acquires 100% of Salty for $530.
Salty
Cash
Receivables
BV
FV
$100 $100
40
40
Inventory
250
250
Plant, net
130
190
Total
$520 $580
Liabilities
$80
Capital stock
250
Retained earnings
190
Total
BV = 250 + 190 = $440

FV = 580 85 = $495
$520
$85
Cost FV = $35 goodwill
Cost
$530
100% BV (250+190)
440
$90
3-16
Panda and Salty (cont.)

Allocate to:
Amt Amort.
Plant
60 4 yrs
Liabilities
-5 5 yrs
Goodwill
35 -
Total
Panda's elimination worksheet $90
entry:
Capital stock
250
Retained earnings
190
Plant
60
Goodwill
35
Liabilities
Investment
Salty
Pearson
Education,in
Inc.
publishing as Prentice Hal
5
530
3-17
Example: BV FV and Cost FV

Printemps acquires 100% of Summer for $185.
BV = 75 + 105 = $180
Summer
BV
FV
FV = 250 - 40 = $210
Cash
$10 $10
Receivables
30
30
Inventory
80
90
Plant, net
100
120
Total
$220 $250
Liabilities
$40
Capital stock
Retained earnings
Total
75
105
$40
Cost
100% BV (75+105)
$185
180
$5
$220
3-18
Printemps and Summer (cont.)

Allocate to:
Amt Amort.
Inventory
10 1st yr
Plant, land
20 -
Bargain purchase
(25) Gain
Total
$5
Printemps
records the acquisition
of Summer assuming a cash
purchase as follows. Note that the investment account is
recorded at its fair value and the bargain purchase is treated
immediately as a gain.
Investment in Summer
210
Gain on Bargain purchase

Cash
25
185
3-19
Worksheet Elimination Entry

Unamortized excess equals $30 (gain is recognized)
$10 for undervalued inventory
$20 for undervalued land included in plant
assets
Printemps' elimination worksheet entry:
Capital stock
Retained earnings
Unamortized excess
75
105
30
Investment in Summer
210
Inventory
10
Plant
20
Pearson
Education, Inc.
publishing as Prentice Hal
Unamortized
excess
3-20
30
Printemps
Summer Adjustments Consol-
BV
BV
$30
$10
$40
50
30
80
Inventory
100
80
10
190
Plant, net
450
100
20
570
Investment in
Summer
210
Cash
Receivables
DR
CR
210
Unamortized excess
30
idated
30
Total
$840
$220
$880
Liabilities
$270
$40
$310
Capital stock
200
75
75
200
Retained earnings
370
105
105
370
$840
$220
Total
$880
240
240
3-21
5: Noncontrolling Interests
3-22
Noncontrolling Interest
Parent owns less than 100%
Noncontrolling interest represents the
minority shareholders
Part of stockholders' equity
Measured at fair value, based on parent's
acquisition price
Parent pays $40,000 for an 85% interest
Implied value of the full investee is
40,000/85% = $47,059.
Minority share = 15%(47,059) = $7,059.
3-23
Example: Noncontrolling Interests

Popo acquires 80% of Sine for $400 when Sine had
capital stock of $200 and retained earnings of
$175. Sine's assets and liabilities equaled their fair
values except for buildings which are undervalued
by $50. Buildings have a 10-year remaining life.
Cost of 80% of Sine
$400
Allocate to:
Implied value of Sine (400/80%)
$500
Building
$50
Book value (200+175)
375
Goodwill
75
Excess over book value
$125
Total
$125
3-24
Elimination Entry
Popo's elimination worksheet entry:
Capital stock
200
Retained earnings
175
Building
50
Goodwill
75
Investment in Sine
400
Noncontrolling interest
100
An unamortized excess account could have been used for the
excess assigned to the building and goodwill.
3-25
Popo
Sine Adjustments
BV
BV
Cash
$50
$10
$60
Receivables
130
50
180
80
100
180
Building, net
300
240
Investment in Sine
400
Inventory
DR
CR
Consol-
50
590
400
Goodwill
idated
75
0
75
Total
$960
$400
$1,085
Liabilities
$150
$25
$175
Capital stock
250
200
200
250
Retained earnings
560
175
175
560
Total
100
$960
$400

500
100
$1,085
500
3-26
6: Amortizations After Acquisition
3-27
Unamortized Excess
Excess assigned to assets and liabilities are
amortized according to the account
Balance sheet
account
Amortization
period
Income statement
account
Inventories and
Generally, 1st year
other current assets
Cost of sales and

other expense
Buildings,
equipment,
patents,
Remaining life at
business
combination
Depreciation and
amortization
expense
Land, copyrights
Not amortized
Long term debt
Time to maturity
Interest expense
3-28
Piper and Sandy (cont.)

Cost
$310
Allocate to:
Amt Amort.
100% BV
245
Inventory
25 1st yr
Excess
$65
Plant
40 10 yrs
Total
$65
Beginning
Current
Ending
unamortized
year's
unamortized
excess
amortization
excess
Inventory
25
(25)
Plant
40
(4)
36
Total
65
(29)
36
3-29
Panda and Salty (cont.)

Cost
$530
Allocate to:
Amt Amort.
100% BV
440
Plant
60 4 yrs
Excess
$90
Liabilities
-5 5 yrs
Goodwill
35 -
$90Ending
BeginningTotal Current
unamortized
year's
unamortized
excess
amortization
excess
Plant
60
(15)
45
Liabilities
(5)
(4)
Goodwill
35
35
Total
90
14
76
3-30
Printemps and Summer (cont.)

Cost
100% BV
Excess
Allocate to:
$185
180
$5
Amt Amort.
Inventory
10 1st yr
Plant, land
20 -
Bargain purchase
Total
(25) Gain
$5
Beginning
Current
Ending
unamortized
year's
unamortized
excess
amortization
excess
Inventory
10
(10)
Land
20
20
Total
30
(10)
20
3-31
7: Subsequent Balance Sheets
3-32
Balance Sheets After Acquisition

In preparing a consolidated balance sheet
Eliminate the parent's Investment in
Subsidiary
Eliminate the subsidiary's equity accounts
(common stock, retained earnings, etc.)
Adjust asset and liability accounts for any
unamortized excess balance
Record goodwill, if any
Record Noncontrolling Interest, if any
3-33
Popo and Sine (cont.)

Cost of 80% of Sine
$400
Allocate to:
Implied value of Sine
$500
Building
375
Goodwill
Book value
Excess
$125
Total
$50 10 yrs
75 $125
Beginning
Current
Ending
unamortized
year's
unamortized
excess
amortization
excess
Building
50
(5)
45
Goodwill
75
75
Total
125
(5)
120
3-34
After 1 year:
Popo
Cash
$40
Receivables
110
Inventory
90
Building, net
280
Investment in Sine
404
Sine
Popo
Sine
$15 Liabilities
$100
$50
250
200
574
185
$924
$435
85 Capital stock
100 Retained earnings
235
Total
$924 $435 Total

Popo's elimination worksheet
entry:
Capital stock
200
Retained earnings
185
Unamortized excess
120
Investment in Sine (80%)
404
Noncontrolling interest (20%)
101
Building
45
Goodwill
75
Unamortized excess
3-35
120
After 1 year:
Popo
Sine
BV
BV
Cash
$40
$15
$55
Receivables
110
85
195
90
100
190
Building, net
280
235
Investment in Sine
404
Inventory
Adjustments
DR
CR
45
75
Unamortized excess
120
idated
560
404
Goodwill
Consol-
0
75
120
Total
$924
$435
$1,075
Liabilities
$100
$50
$150
Capital stock
250
200
200
250
Retained earnings
574
185
185
574
Noncontrolling
interest
Pearson Education,
Inc. publishing as Prentice Hal
101
101
3-36
Key Balance Sheet Items

Investment in Subsidiary does not exist on the
consolidated balance sheet
Equity on the consolidated balance sheet consists
of the parent's equity plus the noncontrolling
interest.
Noncontrolling interest is proportional to the
Investment in Subsidiary account when the
equity method is used.
$101 = $404 x .20/.80
3-37
8: Consolidated Income Statements
3-38
Comprehensive Example, Data

Pilot acquires 90% of Sand on 12/31/2009 for
$4,333 when Sand's equity consists of $4,000
common stock, $1,000 other paid in capital, and
$900 retained earnings. On that date Sand's
inventories, land and buildings are understated
by $100, $200, and $1,000, respectively and its
equipment and notes payable are overstated by
$300 and $100.
3-39
Assignment and
Amortization
Cost of 90% of Sand
Allocate to:
Inventory
$10,200
Implied value of Sand

10,200/.90
$11,333
Book value (4000+1000+900)

Excess over book value
5,900
Land
$100 1st yr
200 -
Building
1,000 40 yrs
Equipment
(300) 5 yrs
Note payable
Goodwill
$5,433
Unamortized
Current
Total
excess 1/1/10
amortization
100 1st yr
4,333 Unamortized
$5,433
excess 12/31/10
Inventory
100
(100)
Land
200
200
Building
1,000
(25)
975
Equipment
(300)
60
(240)
100
(100)
Goodwill
4,333
4,333
Total
5,433
(165)
5,268
Note payable
3-40
Pilot
Sales
Income from Sand
Cost of sales
Sand
Consol.*
$9,523.50
$2,200.00 $11,723.50
571.50
$0.00
(4,000.00)
(700.00)
(4,800.00)
Depreciation exp - bldg
(200.00)
(80.00)
(305.00)
Depreciation exp - equip
(700.00)
(360.00)
(1,000.00)
(1,800.00)
(120.00)
(1,920.00)
(300.00)
(140.00)
(540.00)
$3,095.00
$800.00
Other expense
Interest expense
Net income
Total consolidated income
$3,158.50
share
63.50
* Cost of sales, building depreciation and interest expense are
Controlling
increased interest
by $100,share
$25, and $100, and equipment $3,095.00
depreciation is $60 lower than the sum of Pilot and Sand.
3-41
Key Income Statement Items

The Income from Subsidiary account is
eliminated.
Current period amortizations are included in
the appropriate expense accounts.
Noncontrolling interest share of net income is
proportional to the Income from Subsidiary
under the equity method.
$571.50 x .10/.90
= $63.50
3-42
Push-Down Accounting
SEC requirement
Subsidiary is substantially wholly-owned (approx.
90%)
No publicly held debt or preferred stock
Books of the subsidiary are adjusted
Assets, including goodwill, and liabilities revalued
based on acquisition price
Retained earnings is replaced by Push-Down
Capital which includes retained earnings and the
valuation adjustments
3-43
All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
3-44

Beams10e Ch03 An Introduction To Consolidated Financial Statements

Hochgeladen von

Dokumentinformationen

Originaltitel

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

Beams10e Ch03 An Introduction To Consolidated Financial Statements

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter 3: An Introduction to

Consolidated Financial Statements

Pearson Education, Inc. publishing as Prentice Hal

Intro to Consolidations: Objectives

An Introduction to Consolidated Financial Statements

1: Benefits & Limitations

Pearson Education, Inc. publishing as Prentice Hal

An Introduction to Consolidated Financial Statements

Pearson Education, Inc. publishing as Prentice Hal

An Introduction to Consolidated Financial Statements

3: Parent Company Recording

Pearson Education, Inc. publishing as Prentice Hal

Penn Example: Acquisition Cost =

Other current assets

Net plant assets

Penn acquires 100% of Skelly for

Less 100% book value

Excess of cost over book value

To consolidate, eliminate Penn's

Pearson Education, Inc. publishing as Prentice Hal

Penn & Sub.

Other curr. assets

Pearson Education, Inc. publishing as Prentice Hal

An Introduction to Consolidated Financial Statements

4: Allocations at Acquisition Date

Pearson Education, Inc. publishing as Prentice Hal

Cost, Fair Value and Book Value

Pearson Education, Inc. publishing as Prentice Hal

Example: BV FV but Cost = FV

Excess of cost over BV

Pearson Education, Inc. publishing as Prentice Hal

Piper and Sandy (cont.)

Piper's elimination worksheet entry:

Example: BV FV and Cost FV

BV = 250 + 190 = $440

Cost FV = $35 goodwill

Excess of cost over BV

Pearson Education, Inc. publishing as Prentice Hal

Panda and Salty (cont.)

Example: BV FV and Cost FV

Pearson Education, Inc. publishing as Prentice Hal

Printemps and Summer (cont.)

Gain on Bargain purchase

Worksheet Elimination Entry

Summer Adjustments Consol-

Pearson Education, Inc. publishing as Prentice Hal

An Introduction to Consolidated Financial Statements

Pearson Education, Inc. publishing as Prentice Hal

Example: Noncontrolling Interests

Implied value of Sine (400/80%)

Book value (200+175)

Excess over book value

Pearson Education, Inc. publishing as Prentice Hal

Pearson Education, Inc. publishing as Prentice Hal

Pearson Education, Inc. publishing as Prentice Hal

An Introduction to Consolidated Financial Statements

6: Amortizations After Acquisition

Pearson Education, Inc. publishing as Prentice Hal

Cost of sales and

Long term debt

Pearson Education, Inc. publishing as Prentice Hal

Piper and Sandy (cont.)

Pearson Education, Inc. publishing as Prentice Hal