157 37725 EY427 2013 1 2 1 Beams10e Ch04

Chapter 4: Consolidation
Techniques and Procedures

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 Hall 4-1

Consolidation Techniques: Objectives
1. Prepare consolidation working papers for the
year of acquisition when the parent company
uses the full equity method to account for its
invesment in a subsidiary.
2. Prepare consolidation working papers for the
year subsequent to acquisition.
3. Locate errors in preparing consolidation
working papers.
4. Allocate excess fair value over book value to
include identifiable net assets.
Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
6. Appendix: Understand the alternative trial
balance consolidation working paper format.

Consolidation Techniques and Procedures
1: Acquisition-Year Working Papers

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

Completing the Worksheet
• Enter Parent and Sub. amounts at 100% of
book value. (Even if parent owns less)
• Enter elimination entries into the DR and CR
columns. (Check totals)
• Consolidated expenses, dividends and assets:
– Add parent, subsidiary, plus DR, less CR
• Consolidated revenues, liabilities and equity
(other than ending retained earnings):
– Add parent, subsidiary, less DR, plus CR
• Income, ending retained earnings and all
subtotals and totals:
– Compute directly in consolidated column.
Working Paper 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/book value differentials
7. Eliminate other reciprocal balances

Example: Prep & Snap Data
Prep pays $88 for 80% of Snap on 1/1/2009 when
Snap's equity consisted of $60 capital stock and
$30 retained earnings. All excess was due to
unrecorded patents with a 10-year life.
Snap's income and dividends follow:
2009 2010
Net income $25 $30
Dividends $15 $15

Analysis
Cost of 80% of Snap $88
Implied value of Snap ($88/.80) $110 Allocated to: Amt Amort.
Book value (60+30) 90 Patents $20 10 yrs
Excess $20
Unamort.
Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.
on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010
Patents $20 $2 $18 $2 $16
Use these amounts in Use these amounts in

2009 worksheet for 2010 worksheet for
amortization expense amortization expense
and patents. and patents.
Income & Dividend Calculations
2009:
Snap's net income $25 Prep's 80% share
Amortization (2) $18.4
Adjusted income $23 $12.0 NCI 20% share
$4.6
Dividends $15 $3.0
2010:
Snap's net income $30 Prep's$22.4
80% share
Adjusted income $28 NCI 20% share
$5.6
Dividends $15 $3.0

Prep's 2009 Worksheet Entries
none
none
balance
Income from Snap (I.S.) 18.4
Dividends (St. RE) 12.0
Investment in Snap (B.S.) 6.4
Prep 2009: Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.) 4.6
Noncontrolling interest (B.S.) 1.6
5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.) 60
Retained earnings (St. RE, beg.) 30
Patents (B.S.) 20
Investment in Snap (B.S.) 88
Noncontrolling interest (B.S.) 22
Amortization Expense (I.S.) 2
Patents (B.S.) 2
none
Note that in 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.

Prep's 2009 Worksheet
Year ended 12/31/2009 Prep Snap DR CR Consol
Income statement:
Revenues 250.0 65.0 315.0
Income from Snap 18.4 18.4 0.0
Expenses (200.0) (40.0) 2.0 (242.0)
Noncontrolling interest share 4.6 (4.6)
Net income/ Controlling share 68.4 25.0 68.4
Statement of retained earnings:
Beginning retained earnings 5.0 30.0 30.0 5.0
Add net income 68.4 25.0 68.4
Deduct dividends (30.0) (15.0) 12.0 (30.0)
3.0
Ending retained earnings 43.4 40.0 43.4
Balance sheet, 12/31/2009: Prep Snap DR CR Consol
Cash 39.0 10.0 49.0
Other current assets 90.0 50.0 140.0
Investment in Snap 94.4 6.4 0.0
88.0
Plant & equipment, net 250.0 70.0 320.0
Patents 20.0 2.0 18.0
Total 473.4 130.0 527.0
Liabilities 80.0 30.0 110.0
Capital stock 350.0 60.0 60.0 350.0
Retained earnings 43.4 40.0 43.4
Noncontrolling interest, Jan.1 22.0
Noncontrolling interest, Dec. 31 1.6 23.6
Total 473.4 130.0 527.0

A Look at the Income Statement
Income statement:
Revenues 250.0 65.0 315.0
Expenses (200.0) (40.0) 2.0 (242.0)
• Income from Snap is eliminated.
• Expenses are adjusted for 2009 amortization - $2 on patents
• Noncontrolling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6

A Look at Retained Earnings
3.0
• Beginning retained earnings of Snap is eliminated.
• All of Snap'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.
A Look at Assets
Balance sheet: Prep Snap DR CR Consol
Cash 39.0 10.0 49.0
88.0
Patents 20.0 2.0 18.0
Total 473.4 130.0 527.0
• Investment in Snap is eliminated.
• Patents at the start of 2009 were $20, and current
amortization is $2; they are $18 at the end of 2009.
• The total is calculated in the consolidated column.
A Look at Liabilities & Equity
Balance sheet: Prep Snap DR CR Consol
Capital stock 350.0 60.0 60.0 350.0
Total 473.4 130.0 527.0
• Snap'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 Prep's
Investment in Snap account.
$94.4 x .20/.80 = $23.6
2: Working Papers in Subsequent
Years

Analysis, for 2010
Cost of 80% of Snap $88
Implied value of Snap ($88/.80) $110 Allocated to: Amt Amort.
Book value (60+30) 90 Patents $20 10 yrs
Excess $20
Unamort. Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.
on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010
Patents $20 $2 $18 $2 $16
Use these amounts in Use these amounts in

2009 worksheet for 2010 worksheet for
amortization expense amortization expense
and patents. and patents.
Income & Dividend Calculations
2009:
Snap's net income $25 Prep's 80% share
Adjusted income $23 $12.0 NCI 20% share
$4.6
Dividends $15 $3.0
2010:
Snap's net income $30 Prep's$22.4
80% share
Adjusted income $28 NCI 20% share
$5.6
Dividends $15 $3.0

Prep's Worksheet Entries for 2010
none
none
balance
Income from Snap (I.S.) 22.4
dividends
balances
Patents (B.S.) 18
Eliminating Investment in Snap
• Entry 5 eliminates the Investment in Snap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
Implied value of Snap at acquisition $88/.80 $110
Add the increase in retained earnings from 10
acquisition to the beginning of the current year
$40 at 1/1/2010 minus $30 at 1/1/2009
Less amortization for all prior periods (2)
$2 patent amortization for 2009
Adjusted value of Snap at 1/1/2010 $118
• Investment in Snap (80% x $118) = $94.4
• Noncontrolling interest (20% x $118) = $23.6
Verify the $118 from the entry (60 + 40 + 18).
Amortization Expense (I.S.) 2
Patents (B.S.) 2
Note payable – Prep (B.S.) 10
Note receivable – Snap (B.S.) 10

Prep's 2010 Worksheet
Income statement:
Revenues 300.0 75.0 375.0
Expenses (244.0) (45.0) 2.0 (291.0)
3.0
Cash 45.0 20.0 65.0
Note receivable – Snap 10.0 10.0 0.0
94.4
Patents 18.0 2.0 16.0
Total 496.8 150.0 548.0
Note payable – Prep 10.0 10.0
Capital stock 350.0 60.0 60.0 350.0
Total 496.8 150.0 548.0
3: Locating Errors in Working
Papers

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: Allocating Excess of Fair Value
over Book Value

Example with Excess Allocated
Pate pays $360 for 90% of Solo on 12/31/2009
when Solo's equity consisted of $200 capital
stock and $50 retained earnings. Inventory
(sold in 2010), land and buildings (20 years)
were undervalued by $10, $30, and $80,
respectively. Equipment (10 years) was
overvalued by $20.
Solo's income and dividends for 2010 were $60
and $20.
At year-end, Solo has dividends payable of $10
which Pate has not yet recorded. There is $20
cash in transit from Solo to Pate for the note.
Analysis at Acquisition
Cost of 90% of Solo $360 Allocated to: Amt Amort
Implied value of Snap ($360/.90) $400 Inventories $10 1st yr
Book value (200+50) 250 Land 30 -
Excess $150 Building 80 20 yrs
Equipment (20) 10 yrs
Noncontrolling interest, 10%(400) $40 Goodwill 50 -
150
Unamort. Bal. Amortization Unamort. Bal.
12/31/2009 * in 2010 * on 12/31/2010
Inventories $10 ($10) $0 * Use the
Land 30 0 30 12/31/2009
Building 80 (4) 76 and 2010
amortization
Equipment (20) 2 (18) in worksheet
Goodwill 50 0 50 entries for
$150 ($12) $138 2010.
Solo's Income & Dividend
2010
Solo's net income $60 Pate's 90% share
$43.2
Amortization ($12) $18.0
Adjusted $48
Solo's dividends $20
NCI 10% share

$4.8
$2.0

Pate's Worksheet Entries
Dividends receivable (B.S.) 9.0
Investment in Solo (B.S.) 9.0
Cash (B.S.) 20.0
Note receivable (B.S.) 20.0
none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Solo (I.S.) 43.2
Investment in Solo (B.S.) 25.2
Pate: Entries (2 of 4)
dividends
balances
Unamortized excess 150
Investment in Solo (B.S.) 360
Noncontrolling interest (B.S.) 40
Allocate the unamortized excess according to
beginning of year balances.
Inventory 10
Land 30
Building, net 80
Goodwill 50
Equipment, net 20
Unamortized excess 150

Cost of sales 10
Inventory 10
Operating (depreciation) expense 4
Buildings, net 4
Equipment, net 2
Operating (depreciation) expense 2
Dividends payable (B.S.) 9.0
Dividends receivable (B.S.) 9.0
Pate's 2010 Worksheet
Year ended 12/31/2010 Pate Solo DR CR Consol
Income statement:
Revenues 900.0 300.0 1,200.0
Cost of goods sold (600.0) (150.0) 10.0 (760.0)
Operating expenses (190.0) (90.0) 4.0 2.0 (282.0)
Add net income 153.2 60.0 153.2
2.0

Cash 13.0 15.0 20.0 48.0
Accounts receivable, net 76.0 25.0 101.0
Note receivable - solo 20.0 20.0 0.0
Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0 120.0
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 Solo 394.2 9.0 0.0
25.2
360.0
Dividends receivable 9.0 9.0 0.0
Goodwill 50.0 50.0
Unamortized excess 150.0 150.0 0.0
Total 993.2 360.0 1,097.0
Accounts payable 120.0 60.0 180.0
Dividends payable 10.0 9.0 1.0
Capital stock 700.0 200.0 200.0 700.0
Total 993.2 360.0 1,097.0
5: Consolidated Statement of Cash
Flows

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
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

Operating Cash Flows
• Direct method:
– Include cash dividends received from equity
investees (not equity method income)
• Indirect method:
– Starting with consolidated net income to the
controlling interest share, ADD the
noncontrolling interest share
– Deduct the excess of equity method income
over cash dividends received from equity
investees
6: Appendix – Trial Balance Format

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.
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 consolidated net income, or controlling
interest share, to retained earnings.
5. Move ending retained earnings to the balance
sheet.
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Printed in the United States of America.
Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice Hall

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Chapter 4: Consolidation

Techniques and Procedures

© Pearson Education, Inc. publishing as Prentice Hall 4-1

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Use these amounts in Use these amounts in

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Solo's dividends $20

NCI 10% share

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