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3

Consolidated Financial
Statements—Date of Acquisition

Advanced Accounting, Fifth Edition

Slide
3-1
Learning Objectives
1. Understand the concept of control as used in reference to consolidations.
2. Explain the role of a noncontrolling interest in business combinations.
3. Describe the reasons why a company acquires a subsidiary rather than its net
assets.
4. Describe the valuation and classification of accounts in consolidated financial
statements.
5. List the requirements for inclusion of a subsidiary in consolidated financial
statements.
6. Discuss the limitations of consolidated financial statements.
7. Record the investment in the subsidiary on the parent’s books at the date of
acquisition.
8. Prepare the consolidated workpapers and eliminating entries at the date of
acquisition.
9. Compute and allocate the difference between implied value and book value of the
acquired firm’s equity.
10. Discuss some of the similarities and differences between U.S. GAAP and IFRS
with respect to the preparation of consolidated financial statements at the date
of acquisition.
Slide
3-2
Stock Acquisition

Chapter Focus - Accounting for Stock Acquisitions


When one company controls another company through
direct or indirect ownership of its voting stock.

Acquiring company referred to as the parent.


Acquired company referred to as the subsidiary.
Other shareholders considered noncontrolling interest.
Parent records interest in subsidiary as an investment.
If a subsidiary owns a controlling interest in one or more
other companies, a chain of ownership is forged by which the
parent company controls other companies.

Slide
3-3
LO 2 Noncontrolling interest (NCI).
Definitions of Subsidiary and Control

The Securities and Exchange Commission defines a


subsidiary as an affiliate controlled by another entity,
directly or indirectly, through one or more
intermediaries.

Control means the possession, direct or indirect, of the


power to direct management and policies of another
entity, whether through the ownership of voting
shares, by contract, or otherwise.

Slide
3-4
LO 1 Meaning of control.
Definitions of Subsidiary and Control

Control using U.S. GAAP:

the direct or indirect ability to determine the


direction of management and policies through
ownership, contract, or otherwise

FASB ASC paragraph 810-10-15-8 states:

the usual condition for a controlling financial


interest is ownership of a majority voting
interest

Slide
3-5
LO 1 Meaning of control.
Definitions of Subsidiary and Control

However, application of the majority voting interest


requirement may not identify the party with a
controlling financial interest because the controlling
financial interest may be achieved through
arrangements that do not involve voting interests.

The first step in determining whether the financial


statements should be consolidated is to determine if
the reporting entity has a variable interest in another
entity, referred to as a potential variable interest
entity (VIE).

Slide
3-6
LO 1 Meaning of control.
Definitions of Control

Slide
3-7
LO 1 Meaning of control.
Requirements for the Inclusion of Subsidiaries
in the Consolidated Financial Statements

Purpose of consolidated statements - to present the


operating results and the financial position of a parent and
all its subsidiaries as if they are one economic entity.

Circumstances when majority-owned subsidiaries should be


excluded from the consolidated statements:

1. Control does not rest with the majority owner.

2. Subsidiary operates under governmentally imposed


uncertainty so severe as to raise significant doubt about
the parent’s control.

Slide
3-8
LO 5 Requirements regarding consolidation of subsidiaries.
Reasons For Subsidiary Companies

Advantages to acquiring a controlling interest in


another company.
1. Stock acquisition is relatively simple.
2. Control of subsidiary can be accomplished with a smaller
investment.
3. Separate legal existence of affiliates provides an
element of protection of the parent’s assets.

Slide
3-9
LO 3 Acquiring assets or stock.
Consolidated Financial Statements

Statements prepared for a parent company and its


subsidiaries are called consolidated financial
statements.
Ignore legal aspects of separate entities, focus on
economic entity under “control” of management.
Substance rather than form.
Not substitute for statements prepared by separate
subsidiaries, which may be used by:
 Creditors
 Noncontrolling stockholders
 Regulatory agencies

Slide
3-10
LO 4 Valuation and classification of subsidiary assets and liabilities.
Investments at the Date of Acquisition

Recording Investments at Cost (Parent’s Books)


Stock investment is recorded at cost as measured by
fair value of the consideration given or consideration
received, whichever is more clearly evident.
Consideration given may include cash, other assets, debt
securities, stock of the acquiring company.

Slide
3-11
LO 7 Recording of investment at acquisition.
Investments at the Date of Acquisition

E3-2: On January 1, 2011, Polo Company purchased 100% of


the common stock of Save Company by issuing 40,000 shares
of its (Polo’s) $10 par value common stock with a market price
of $17.50 per share. Polo incurred cash expenses of $20,000
for registering and issuing the common stock. The
stockholders’ equity section of the two company’s balance
sheets on December 31, 2010, were:

Polo Save
Common stock, $10 par value $350,000 $320,000
Other contributed capital 590,000 175,000
Retained earnings 380,000 205,000

Slide
3-12
LO 7 Recording of investment at acquisition.
Investments at the Date of Acquisition

E3-2: Prepare the journal entry on the books of Polo


Company to record the purchase of the common stock of Save
Company and related expenses.

Investment in Save (40,000 x $17.50) 700,000


Common Stock 400,000
Other Contributed Capital 300,000

Other Contributed Capital 20,000


Cash 20,000

Slide
3-13
LO 7 Recording of investment at acquisition.
Consolidated Balance Sheets: Use of Workpapers

Assets and liabilities are summed, regardless of


whether the parent owns 100% or a smaller controlling
interest.
Noncontrolling interests (NCI) are reflected as a
component of owners’ equity.
Eliminations must be made to cancel the effects of
transactions among the parent and its subsidiaries.
A workpaper is frequently used to summarize the
effects of various additions and eliminations.

Slide
3-14
LO 8 Preparing consolidated statements using a workpaper.
Consolidated Balance Sheets: Use of Workpapers

Intercompany Accounts to Be Eliminated


Parent’s Accounts Subsidiary’s Accounts
Investment in subsidiary Against Equity accounts

Intercompany receivable (payable) Against Intercompany payable (receivable)

Advances to subsidiary (from subsidiary) Against Advances from parent (to parent)

Interest revenue (interest expense) Against Interest expense (interest revenue)

Dividend revenue (dividends declared) Against Dividends declared (dividend revenue)

Management fee received from


Against Management fee paid to parent
subsidiary
Sales to subsidiary (purchases of Purchases of inventory from parent
Against
inventory from subsidiary) (sales to parent)

Slide
3-15
LO 8 Preparing consolidated statements using a workpaper.
Consolidated Balance Sheets: Use of Workpapers

Investment Elimination
It is necessary to eliminate the investment account of the
parent company against the related stockholders’ equity
of the subsidiary to avoid double counting of these net
assets.

When parent’s share of subsidiary’s equity is eliminated


against the investment account, subsidiary’s net assets
are substituted for the investment account in the
consolidated balance sheet.

Slide
3-16
LO 8 Investment is eliminated for consolidated statements.
Consolidated Balance Sheets: Use of Workpapers

Investment Elimination
“Computation and Allocation of Difference between Implied
Value and Book Value”

Step 1: Determine percentage of stock acquired.

Step 2: Divide purchase price by the percentage acquired to


calculate the implied value of the subsidiary.

Step 3: Difference between step 2 and book value of


subsidiary’s equity must be allocated to adjust the
underlying assets and liabilities of the acquired company.

Slide LO 9 Computing and allocating the difference


3-17 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

The prior steps lead to the following possible cases:


Case 1. The implied value (IV) of the subsidiary is equal to the book value of
the subsidiary’s equity (IV = BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.

Case 2. The implied value of the subsidiary exceeds the book value of the
subsidiary’s equity (IV > BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.

Case 3. The implied value of the subsidiary is less than the book value of the
subsidiary’s equity (IV < BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.

Slide LO 9 Computing and allocating the difference


3-18 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(a): Implied Value of Subsidiary Is Equal to Book Value


of Subsidiary Company’s Equity (IV BV)—100% of Stock
Acquired.

Illustration: Assume that on January 1, 2013, P Company


acquired all the outstanding stock (10,000 shares) of S
Company for cash of $160,000. What journal entry would P
Company make to record the shares of S Company acquired?

Investment in S Company $160,000


Cash $160,000

Slide LO 9 Computing and allocating the difference


3-19 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(a): The balance sheets of both companies immediately


after the acquisition of shares is as follows:
Implied value =
Book value
Balance Sheet P Company S Company
Cash $ 40,000 $ 40,000
Other current assets 280,000 100,000
Plant and equipment
Land
240,000
80,000
80,000
40,000
Price paid $160,000
Investment in Sill
Total assets
160,000
$ 800,000 $ 260,000
% acquired 100%

Liabilities $ 120,000 $ 100,000 Implied value 160,000


Common stock 400,000 100,000
Other Contributed capital 80,000 20,000 Book value 160,000
Retained earnings 200,000 40,000
Total Liab. and Equity $ 800,000 $ 260,000 Difference $0

Slide LO 9 Computing and allocating the difference


3-20 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(a): The workpaper to consolidate the balance sheets for


P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 40,000 $ 40,000 $ 80,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 120,000
Investment in Sill 160,000 160,000
Total assets $ 800,000 $ 260,000 $ 1,060,000

Liabilities $ 120,000 $ 100,000 $ 220,000


Common stock 400,000 100,000 500,000
Other Contributed capital 80,000 20,000 100,000
Retained earnings 200,000 40,000 240,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 1,060,000

Adjusting and eliminating entries are made on the workpaper for the
preparation of consolidated statements.
Slide LO 9 Computing and allocating the difference
3-21 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(a): The workpaper to consolidate the balance sheets for


P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 40,000 $ 40,000 $ 80,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 120,000
Investment in Sill 160,000 160,000 -
Total assets $ 800,000 $ 260,000 $ 900,000

Liabilities $ 120,000 $ 100,000 $ 220,000


Common stock 400,000 100,000 100,000 400,000
Other Contributed capital 80,000 20,000 20,000 80,000
Retained earnings 200,000 40,000 40,000 200,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 160,000 $ 160,000 $ 900,000

Solution on
Slide notes page LO 9 Computing and allocating the difference
3-22 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(a): The workpaper entry to eliminate S Company’s


stockholders’ equity against the investment account is:

Common stock (S) 100,000


Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Investment in S Company 160,000

This is a workpaper-only entry.

Slide LO 9 Computing and allocating the difference


3-23 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(a): Note the following on the workpaper.

1. The investment account and related subsidiary’s


stockholders’ equity have been eliminated and the
subsidiary’s net assets substituted for the investment
account.
2. Consolidated assets and liabilities consist of the sum
of the parent and subsidiary assets and liabilities in
each classification.
3. Consolidated stockholders’ equity is the same as the
parent company’s stockholders’ equity.

Slide LO 9 Computing and allocating the difference


3-24 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of


Subsidiary’s Stock Acquired (IV=BV) - Partial Ownership.

Illustration: Assume that on January 1, 2013, P Company


acquired 90% (9,000 shares) of the stock of S Company for
$144,000. What journal entry would P Company make to
record the shares of S Company acquired?

Investment in S Company $144,000


Cash $144,000

Slide LO 9 Computing and allocating the difference


3-25 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(b): The balance sheets of both companies immediately


after the acquisition of shares is as follows:

Balance Sheet P Company S Company Implied value =


Cash
Other current assets
$ 56,000 $ 40,000
280,000 100,000
Book value
Plant and equipment 240,000 80,000
Land 80,000 40,000 Price paid $144,000
Investment in Sill 144,000
Total assets $ 800,000 $ 260,000 % acquired 90%
Liabilities $ 120,000 $ 100,000 Implied value 160,000
Common stock 400,000 100,000
Other Contributed capital 80,000 20,000 Book value 160,000
Retained earnings 200,000 40,000
Noncontrolling interest Difference $0
Total Liab. and Equity $ 800,000 $ 260,000

Slide LO 9 Computing and allocating the difference


3-26 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(b): Computation and Allocation of Difference between


Implied and Book Values:
90% 10%
Parent Noncontrolling Total
Share Share Value
Purchase price and implied value $ 144,000 $ 16,000 $ 160,000
Less: Book value of equity acquired:
Common stock 90,000 10,000 100,000
Other contributed capital 18,000 2,000 20,000
Retained earnings 36,000 4,000 40,000
Total book value $ 144,000 $ 16,000 $ 160,000

Difference between implied and book value $ - $ - $ -

Slide LO 9 Computing and allocating the difference


3-27 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(b): The workpaper to consolidate the balance sheets for


P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 56,000 $ 40,000 $ 96,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 120,000
Investment in Sill 144,000 144,000
Total assets $ 800,000 $ 260,000 $ 1,060,000

Liabilities $ 120,000 $ 100,000 $ 220,000


Common stock 400,000 100,000 500,000
Other Contributed capital 80,000 20,000 100,000
Retained earnings 200,000 40,000 240,000
Noncontrolling interest -
Total Liab. and Equity $ 800,000 $ 260,000 $ 1,060,000

Solution on
Slide notes page LO 9 Computing and allocating the difference
3-28 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(b): The workpaper to consolidate the balance sheets for


P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 56,000 $ 40,000 $ 96,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 120,000
Investment in Sill 144,000 144,000 -
Total assets $ 800,000 $ 260,000 $ 916,000

Liabilities $ 120,000 $ 100,000 $ 220,000


Common stock 400,000 100,000 100,000 400,000
Other Contributed capital 80,000 20,000 20,000 80,000
Retained earnings 200,000 40,000 40,000 200,000
Noncontrolling interest 16,000 16,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 160,000 $ 160,000 $ 916,000

Slide LO 9 Computing and allocating the difference


3-29 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 1(b): The workpaper entry to eliminate S Company’s


stockholders’ equity against the investment account is:

Common stock (S) 100,000


Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Investment in S Company 144,000
Noncontrolling interest in equity 16,000
(establish the NCI)

Slide LO 9 Computing and allocating the difference


3-30 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 2(b): Implied Value Exceeds Book Value of Subsidiary


Company’s Equity (IV>BV)—Partial Ownership.

Illustration: Assume that on January 1, 2013, P Company


acquired 80% (8,000 shares) of the stock of S Company for
$148,000. What journal entry would P Company make to
record the shares of S Company acquired?

Investment in S Company $148,000


Cash $148,000

Slide LO 9 Computing and allocating the difference


3-31 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 2(b): The balance sheets of both companies immediately


after the acquisition of shares is as follows:

Implied value =
Balance Sheet P Company S Company
Cash $ 52,000 $ 40,000
Other current assets 280,000 100,000 Book value
Plant and equipment 240,000 80,000

Price paid $148,000


Land 80,000 40,000
Investment in Sill 148,000
Difference (IV>BV)
Total assets $ 800,000 $ 260,000 % acquired 80%
Liabilities $ 120,000 $ 100,000 Implied value 185,000
Common stock 400,000 100,000
Other Contributed capital 80,000 20,000 Book value 160,000
Retained earnings 200,000 40,000
Noncontrolling interest Difference $25,000
Total Liab. and Equity $ 800,000 $ 260,000

Slide LO 9 Computing and allocating the difference


3-32 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 2(b): Computation and Allocation of Difference between


Implied and Book Values:
80% 20%
Parent Noncontrolling Total
Share Share Value
Purchase price and implied value $ 148,000 $ 37,000 $ 185,000
Less: Book value of equity acquired:
Common stock 80,000 20,000 100,000
Other contributed capital 16,000 4,000 20,000
Retained earnings 32,000 8,000 40,000
Total book value $ 128,000 $ 32,000 $ 160,000

Difference between implied and book value $ 20,000 $ 5,000 $ 25,000


Land revaluation (mark to market) (20,000) (5,000) (25,000)
Balance $ - $ - $ -

We assume the entire difference is attributable to


land with a current value higher than historical cost.
Slide LO 9 Computing and allocating the difference
3-33 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 2(b): The workpaper to consolidate the balance sheets for


P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 52,000 $ 40,000 $ 92,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 25,000 145,000
Investment in Sill 148,000 148,000 -
Difference (IV>BV) 25,000 25,000 -
Total assets $ 800,000 $ 260,000 $ 937,000

Liabilities $ 120,000 $ 100,000 $ 220,000


Common stock 400,000 100,000 100,000 400,000
Other Contributed capital 80,000 20,000 20,000 80,000
Retained earnings 200,000 40,000 40,000 200,000
Noncontrolling interest 37,000 37,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 210,000 $ 210,000 $ 937,000

Slide LO 9 Computing and allocating the difference


3-34 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 2(b): The workpaper (elimination) entries are as follows:

#1 Common stock (S) 100,000


Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Difference between IV and BV 25,000
Investment in S Company 148,000
Noncontrolling interest in equity 37,000

#2 Land 25,000
Difference between IV and BV 25,000

Slide LO 9 Computing and allocating the difference


3-35 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 2(b): Reasons an Acquiring Company May Pay More Than


Book Value.
1. Fair value of specific tangible or intangible assets of
the subsidiary may exceed its recorded value because
of appreciation.
2. Excess payment may indicate existence of goodwill.
3. Liabilities, generally long-term, may be overvalued.
4. A variety of market factors may affect the price
paid.

Slide LO 9 Computing and allocating the difference


3-36 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 3(b): Implied Value of Subsidiary is Less Than Book


Value (IV<BV)—Partial Ownership.

Illustration: Assume that on January 1, 2013, P Company


acquired 80% (8,000 shares) of the stock of S Company for
$120,000. What journal entry would P Company make to
record the shares of S Company acquired?

Investment in S Company $120,000


Cash $120,000

Slide LO 9 Computing and allocating the difference


3-37 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 3(b): The balance sheets of both companies immediately


after the acquisition of shares is as follows:

Implied value =
Balance Sheet P Company S Company
Cash $ 80,000 $ 40,000
Other current assets 280,000 100,000 Book value
Plant and equipment 240,000 80,000

Price paid $120,000


Land 80,000 40,000
Investment in Sill 120,000
Difference (IV<BV)
Total assets $ 800,000 $ 260,000 % acquired 80%
Liabilities $ 120,000 $ 100,000 Implied value 150,000
Common stock 400,000 100,000
Other Contributed capital 80,000 20,000 Book value 160,000
Retained earnings 200,000 40,000
Noncontrolling interest Difference $10,000
Total Liab. and Equity $ 800,000 $ 260,000

Slide LO 9 Computing and allocating the difference


3-38 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 3(b): Computation and Allocation of Difference between


Implied and Book Values:
80% 20%
Parent Noncontrolling Total
Share Share Value
Purchase price and implied value $ 120,000 $ 30,000 $ 150,000
Less: Book value of equity acquired:
Common stock 80,000 20,000 100,000
Other contributed capital 16,000 4,000 20,000
Retained earnings 32,000 8,000 40,000
Total book value $ 128,000 $ 32,000 $ 160,000

Difference between implied and book value $ (8,000) $ (2,000) $ (10,000)


Plant & equipment (mark to market) 8,000 2,000 10,000
Balance $ - $ - $ -

Assume the difference is attributable to plant and


equipment, in this case an overvaluation of $10,000.
Slide LO 9 Computing and allocating the difference
3-39 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 3(b): The workpaper to consolidate the balance sheets for


P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 80,000 $ 40,000 $ 120,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 10,000 110,000
Investment in Sill 120,000 120,000 -
Difference (IV>BV) 10,000 10,000 -
Total assets $ 800,000 $ 260,000 $ 930,000

Liabilities $ 120,000 $ 100,000 $ 220,000


Common stock 400,000 100,000 100,000 400,000
Other Contributed capital 80,000 20,000 20,000 80,000
Retained earnings 200,000 40,000 40,000 200,000
Noncontrolling interest 30,000 30,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 170,000 $ 170,000 $ 930,000

Slide LO 9 Computing and allocating the difference


3-40 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Case 3(b): The workpaper (elimination) entries are as follows:

#1 Common stock (S) 100,000


Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Difference between IV and BV 10,000
Investment in S Company 120,000
Noncontrolling interest in equity 30,000

#2 Difference between IV and BV 10,000


Plant and equipment 10,000

Slide LO 9 Computing and allocating the difference


3-41 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Review Question
The noncontrolling interest in the subsidiary is
reported as:
a. Asset
b. Liability
c. Equity
d. Expense

Slide LO 9 Computing and allocating the difference


3-42 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Subsidiary Treasury Stock Holdings


A subsidiary may hold some of its own shares as
treasury stock at the time the parent company
acquires its interest.

Because the treasury stock account represents a


contra stockholders’ equity account, it must be
eliminated by a credit when the investment account
and subsidiary company’s equity accounts are
eliminated on the workpaper.

Slide LO 9 Computing and allocating the difference


3-43 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Other Intercompany Balance Sheet Eliminations


Intercompany accounts receivable, notes receivable,
and interest receivable, for example, must be
eliminated against the reciprocal accounts payable,
notes payable, and interest payable.

The full amount of all intercompany receivables and


payables is eliminated without regard to the
percentage of control held by the parent company.

Slide LO 9 Computing and allocating the difference


3-44 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Adjusting Entries Prior to Eliminating Entries


At times, workpaper adjustments to accounting data
may be needed before appropriate eliminating entries
can be accomplished.

Make on workpaper in eliminations columns or

Adjust the subsidiary’s statements prior to their


entry on the workpaper.

Slide LO 9 Computing and allocating the difference


3-45 between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers

Review Question
Which of the following adjustments do not occur in the
consolidating process?
a. Elimination of parent’s retained earnings
b. Elimination of intra-company balances
c. Allocations of difference between implied and book
values
d. Elimination of the investment account

Slide LO 9 Computing and allocating the difference


3-46 between implied and book value (CAD).
Limitations of Consolidated Statements

For Example:

Little information of value in consolidated


statements because they contain insufficient detail
about the individual subsidiaries.

Highly diversified companies operating across


several industries, often the result of mergers and
acquisitions, are difficult to analyze or compare.

Slide
3-47
LO 6 Limitations of consolidated statements.
IFRS Versus U.S. GAAP

Slide
3-48 LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS Versus U.S. GAAP

Slide
3-49 LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS Versus U.S. GAAP

Slide
3-50 LO 10 Similarities and differences between U.S. GAAP and IFRS.
Deferred Taxes on the Date of Acquisition

APPENDIX A
If a purchase acquisition is tax-free to the seller
 Tax bases of the acquired assets and liabilities are
carried forward at historical book values.
 Assets and liabilities of the acquired company are
recorded on the consolidated books at adjusted fair
value.

Under current guidelines, the tax effects of the difference


between consolidated book values and the tax bases must be
recorded as deferred tax liabilities or assets.

Slide
3-51
Deferred Taxes on the Date of Acquisition

Illustration: Suppose that Purchasing Company acquires


90% of Selling Company by issuing stock valued at $800,000.
The only difference between book value and fair value relates
to depreciable plant and equipment. Plant and equipment has a
market value of $400,000 and a book value of $250,000. All
other book values approximate market values. Assume that the
combination qualifies as a nontaxable exchange. On the date of
acquisition, Selling Company’s book value of equity is $600,000,
which includes $150,000 of common stock and $450,000 of
retained earnings. Assume a 30% tax rate. Consider the
following Computation and Allocation Schedule with and without
considering deferred taxes.

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Deferred Taxes on the Date of Acquisition

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Deferred Taxes on the Date of Acquisition

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Deferred Taxes on the Date of Acquisition

The workpaper entry to eliminate the investment account is


as follows:

Entries for allocation with and without deferred taxes.

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Consolidation of Variable Interest Entities
APPENDIX B
FASB has issued guidance for the consolidation of special-
purpose entities (SPEs) through Interpretation No. 46(R)
“Consolidation of Variable Interest Entities” and SFAS No. 167,
“Amendments to FASB Interpretation No. 46(R)[ASC 810–10–
30].”
An enterprise shall consolidate a variable interest entity (VIE)
when that enterprise has a variable interest (or combination of
variable interests) that provides the enterprise with a
controlling financial interest on the basis of the certain
provisions (listed below).
FASB Statement No. 167 requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable
interest entity.
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Copyright

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
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to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.

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