Beams11 ppt03

Chapter 3:
An Introduction to
Consolidated
Financial
Statements
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,

3-1
Inc. Publishing as Prentice Hall
Intro to Consolidations: Objectives
1. Recognize the benefits and limitations of
consolidated financial statements.
2. Understand the requirements for including a
subsidiary in consolidated financial
statements.
3. Apply consolidation concepts to parent
company recording of an investment in a
subsidiary company at the date of
acquisition.
4. Record the fair value of the subsidiary at the
date of acquisition.
3-2
Objectives (continued)
5. Learn the concept of noncontrolling interest
when a parent company acquires less than
100 percent of a subsidiary's outstanding
common stock.
6. Prepare consolidated balance sheets
subsequent to the acquisition date,
including preparation of elimination entries.
7. Amortize the excess of the fair value over
the book value in periods subsequent to the
acquisition.
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
Business combinations through stock
acquisitions
Acquire controlling interest in voting stock
More than 50%
May have control through indirect ownership
Business combination occurs once
Acquisition of additional subsidiary stock is simply
additional investment

3-5
Consolidated Statements
Primarily benefit the owners and creditors of the
parent
Not primarily intended for the noncontrolling

owners nor the subsidiarys creditors
Subsidiaries issue separate statements for the

benefit of their owners and creditors

3-6
Statements
2: SUBSIDIARIES

3-7
Who is a Subsidiary?
A corporation becomes a subsidiary when another
corporation acquires controlling interest in its
outstanding voting stock.
In a 100 percent acquisition, the investee continues
to operate as a separate legal entity.
Subsidiaries, or affiliates, continue as separate
legal entities and prepare their own financial
reports.

3-8
Subsidiaries Are Consolidated
Cases where a subsidiary may be excluded
from consolidation:
Control doesnt rest with majority owner
Joint ventures
Acquisitions of groups of assets that do not
constitute a business
Combination between entities under common
control
Combination of not-for-profit entities or acquisition
of a for-profit company by a not-for-profit entity

3-9
Consolidated Statements
Prepared by the parent company
Parent discloses
Consolidation policy [SEC Reg. S-X, Rule 3A-03]
Any exceptions to consolidation
Fiscal year-end for consolidated entity:
Use parent's FYE, but
May include subsidiary statements with FYE within
3 months of parent's FYE.
Disclose intervening material events

3-10
Statements
3: PARENT COMPANY
RECORDING

3-11
Pen Example: Acquisition Cost = Fair
Value = Book Value
Sels Balance Sheet: BV=FV Pen acquires 100% of Sel for
Cash $10 $40, which equals the book value
Other current assets 15 and fair values of the net assets
Plant assets, net 40 acquired.
Total $65
Accounts payable $15 Cost of acquisition $40
Other current liabilities 10 Less 100% book value 40
Capital stock 30 Excess of cost over book value $0
Retained earnings 10 To consolidate, eliminate Pen's
Total $65 Investment account and Sel's
capital stock and retained
earnings.
3-12
Balance Sheets Separate Consolidated
Pen Sel Pen & Sub.
Cash $20 $10 $30
Other curr. assets 45 15 60
Plant assets, net 60 40 100
Investment in Sel 40 0 0
Total $165 $65 $190
Accounts payable $20 $15 $35
Other curr. liabilities 25 10 35
Capital stock 100 30 100
Retained earnings 20 10 20
Total $165 $65 $190
3-13
Statements
4: FAIR VALUE AT
ACQUISITION DATE

3-14
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
Cost > BV, excess is goodwill
Cost < BV, excess is a gain on the bargain
purchase

3-15
BV FV Cost
Difference between the book value of net
assets (BV) and the fair value of identifiable net
assets (FV) is assigned to the specific assets
or liabilities
E.g., undervalued or overvalued inventories, plant
assets
Unrecorded assets (patents) or liabilities (existing
contingencies)
Difference between FV and Cost is goodwill or
a gain on the bargain purchase

3-16
Example: BV FV but Cost = FV
Piper acquires 100% of Sandy for $310.
Sandy BV FV BV = 100 + 145 = $245

FV = 385 75 = $310
Cash $40 $40
Receivables 30 30 Cost FV = $0
goodwill
Inventory 50 75
Plant, net 200 240
Total $320 $385 Cost $310
Liabilities $75 $75 100% Book value 245
Capital stock 100 Excess of cost over BV $65
Retained earnings 145
Total $320
3-17
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 (-SE) 100
Retained earnings (-SE) 145
Inventory (+A) 25
Plant (+A) 40
Investment in Sandy (-A) 310
3-18
Example: BV FV and Cost FV
Panda acquires 100% of Salty for $530.
BV = 250 + 190 = $440
Salty BV FV FV = 580 85 = $495
Cash $100 $100 Cost FV = $35 goodwill

Receivables 40 40
Inventory 250 250
Plant, net 130 190
Total $520 $580
Liabilities $80 $85 Cost $530
Capital stock 250 100% Book value 440
Retained Excess of cost over BV $90
earnings 190
Total $520
3-19
Panda and Salty (cont.)
Allocate to: Amount Amort.
Plant 60 4 yrs
Liabilities -5 5 yrs
Goodwill 35
Total $90
Panda's elimination worksheet entry:
Plant (+A) 60
Goodwill (+A) 35
Liabilities (+L) 5
Investment in Salty (-A) 530
3-20
Example: BV FV and Cost FV
Print acquires 100% of Sum for $185.
Sum BV FV
Cash $10 $10 BV = 75 + 105 = $180
Receivables 30 30 FV = 250 - 40 = $210
Inventory 80 90
Plant, net 100 120
Cost FV = -$25:
Total $220 $250 Gain on bargain purchase
Liabilities $40 $40
Capital stock 75 Cost $185
Retained earnings 105 100% BV 180
Total $220 Excess of cost over BV $5
3-21
Print and Sum (cont.)
Allocate to: Amt Amort.
Inventory 10 1st yr
Plant, land 20 -
Bargain purchase (25) Gain
Total $5
Print records the acquisition of Sum 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 Sum (+A) 210
Gain on bargain purchase (R, +SE) 25
Cash (-A) 185
3-22
Worksheet Elimination Entry
Unamortized excess equals $30
$10 for undervalued inventory
$20 for undervalued land included in plant
assets
Prints elimination worksheet entry:
Unamortized excess (+A) 30
Investment in Sum (-A) 210
Inventory (+A) 10
Plant (+A) 20
Unamortized excess (-A) 30
3-23
Print Sum Adjustments Consol-
BV BV DR CR idated
Cash $30 $10 $40
Receivables 50 30 80
Inventory 100 80 10 190
Plant, net 450 100 20 570
Investment in Sum 210 210 0
Unamortized excess 30 30
Total $840 $220 $880
Liabilities $270 $40 $310
Capital stock 200 75 75 200
Retained earnings 370 105 105 370
Total $840 $220 $880
240 240

3-24
Statements
5: NONCONTROLLING
INTERESTS

3-25
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
3-26
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

3-27
Elimination Entry
Popo's elimination worksheet entry:

Building (+A) 50
Goodwill (+A) 75
Investment in Sine (-A) 400
Noncontrolling interest (+SE) 100
An unamortized excess account could have been

used for the excess assigned to the building and
goodwill.

3-28
Popo Sine Adjustments Consol-
BV BV DR CR idated
Cash $50 $10 $60
Inventory 80 100 180
Building, net 300 240 50 590
Investment in Sine 400 400 0
Goodwill 75 75
Total $960 $400 $1,085
Noncontrolling interest 100 100
Total $960 $400 $1,085
500 500
3-29
Statements
6: SUBSEQUENT BALANCE
SHEETS

3-30
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

3-31
Popo and Sine (cont.)
Cost of 80% of Sine $400 Allocate to:

Implied value of Sine $500 Building $50 10 yrs
Book value 375 Goodwill 75 -
Excess $125 Total $125
Beginning Current year's Ending

unamortized amortization unamortized
excess excess
Building 50 (5) 45
Goodwill 75 0 75
Total 125 (5) 120

3-32
After 1 year: Popo Sine Popo Sine
Cash $40 $15 Liabilities $100 $50
Receivables 110 85 Capital stock 250 200
Inventory 90 100 Retained earnings 574 185
Building, net 280 235
Investment in Sine 404
Total $924 $435 Total $924 $435
Popo's elimination worksheet entry:
Unamortized excess (+A) 120
Investment in Sine (80%) (-A) 404
Noncontrolling interest (20%) (+SE) 101
Building (+A) 45
Goodwill (+A) 75
Unamortized excess (-A) 120
3-33
After 1 year: Popo Sine Adjustments Consol-
BV BV DR CR idated
Cash $40 $15 $55
Inventory 90 100 190
Building, net 280 235 45 560
Investment in Sine 404 404 0
Goodwill 75 75
Unamortized excess 120 120
Total $924 $435 $1,075
Noncontrolling interest 101 101
Total $924 $435 $1,075
505 505
3-34
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

3-35
Statements
7: AMORTIZATIONS AFTER
ACQUISITION

3-36
Unamortized Excess
Excess assigned to assets and liabilities are
amortized according to the account
Balance sheet Amortization period Income statement
account account
Inventories and other Generally, 1st year Cost of sales and
current assets other expense
Buildings, equipment, Remaining life at Depreciation and
patents business combination amortization expense
Land, copyrights Not amortized

Long-term debt Time to maturity Interest expense

3-37
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

excess excess
Inventory 25 (25) 0
Plant 40 (4) 36
Total 65 (29) 36

3-38
Panda and Salty (cont.)
100% BV 440 Plant 60 4 yrs
Liabilities -5 5 yrs
Excess $90
Goodwill 35 -
Total $90
excess excess
Plant 60 (15) 45
Liabilities (5) 1 (4)
Goodwill 35 0 35
Total 90 (14) 76
3-39
Print and Sum (cont.)

Inventory 10 1st yr
100% BV 180 Plant, land 20 -
Excess $5 Bargain purchase (25) Gain
Total $5

excess excess
Inventory 10 (10) 0
Land 20 0 20
Total 30 (10) 20

3-40
Statements
8: CONSOLIDATED INCOME
STATEMENTS

3-41
Comprehensive Example, Data
Pil acquires 90% of Sad on 12/31/2011 for
$4,333 when Sad's equity consists of $4,000
common stock, $1,000 other paid in capital,
and $900 retained earnings. On that date
Sad'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.

3-42
Cost of 90% of Sad $10,200 Allocate to:
Implied value of Sad 10,200/.90 $11,333 Inventory $100 1st yr
Land 200 -
Book value (4000+1000+900) 5,900
Building 1,000 40 yrs
Excess over book value $5,433 Equipment (300) 5 yrs
Note payable 100 1st yr
Goodwill 4,333 -
Total $5,433
Unamortized Current Unamortized
excess 1/1/12 amortization excess 12/31/12
Inventory 100 (100) 0
Land 200 0 200
Building 1,000 (25) 975
Equipment (300) 60 (240)
Note payable 100 (100) 0
Goodwill 4,333 0 4,333
Total 5,433 (165) 5,268
3-43
Pil Sad Consol.*
Sales $9,523.50 $2,200.00 $11,723.50
Income from Sad 571.50 $0.00
Cost of sales (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)
Other expense (1,800.00)(120.00) (1,920.00)
Interest expense (300.00)(140.00) (540.00)
Net income $3,095.00 $800.00
Total consolidated income $3,158.50
Noncontrolling interest share 63.50
Controlling interest share $3,095.00
* Cost of sales, building depreciation, and interest expense are
increased by $100, $25, and $100, and equipment
depreciation is $60 lower than the sum of Pil and Sad.
3-44
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

3-45
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

3-46
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Chapter 3:

Copyright 2012 Pearson Education,

1: BENEFITS & LIMITATIONS

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Not primarily intended for the noncontrolling

Subsidiaries issue separate statements for the

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Sandy BV FV BV = 100 + 145 = $245

Allocate to: Amt Amort.

Piper's elimination worksheet entry:

Cash $100 $100 Cost FV = $35 goodwill

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Parent pays $40,000 for an 85% interest

Cost of 80% of Sine $400 Allocate to:

Copyright 2012 Pearson Education,

Popo's elimination worksheet entry:

An unamortized excess account could have been

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Cost of 80% of Sine $400 Allocate to:

Beginning Current year's Ending

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Land, copyrights Not amortized

Copyright 2012 Pearson Education,

Cost $310 Allocate to: Amt Amort.

Beginning Current year's Ending

Copyright 2012 Pearson Education,

Cost $185 Allocate to: Amt Amort.

Beginning Current year's Ending

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

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