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Advanced Accounting Jeter Chaney Consolidated Financial Statements After Acquisition 1 Prepared by Sheila Ammons, Austin Community College  Learning Objectives Describe the accounting treatment required under current GAAP for varying levels...

Advanced Accounting Jeter Chaney Consolidated Financial Statements After Acquisition 1 Prepared by Sheila Ammons, Austin Community College  Learning Objectives Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Understand the use of the workpaper in preparing consolidated financial statements. Prepare a schedule for the computation and allocation of the difference between implied and book values. 2 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Learning Objectives Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods. Describe how to account for interim acquisitions of subsidiary stock at the end of the first year. Explain how the consolidated statement of cash flows differs from a single firm’s statement of cash flows. Understand how the reporting of an acquisition on the consolidated statement of cash flows differs when stock is issued instead of cash payment. Describe some of the differences between U.S. GAAP and IFRS in accounting for equity investments. 3 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Investments in Stock Investments in voting stock may be consolidated, or separately reported at – cost, – fair value, or – carrying value of equity. The method of reporting adopted depends on a number of factors including – size of investment – extent to which the investor exercises control over activities of the investee – marketability of the securities. 4 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods Ownership Percentages 0 --------------20% ------------ 50% -------------- 100% No significant Significant Effective control influence influence (no control) Investment Investment Investment recorded valued using the measured under using cost method or “cost” method equity method equity method but with (investment adjustments to eliminated in fair value. consolidation) LO 1 Varying levels of ownership are accounted for differently. 5 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods When a company owns a sufficient amount of another company’s stock to have significant influence (usually at least 20%), but not enough to effectively control the other company (less than 50% in most cases), the equity method is required. Under FASB ASC paragraph 825-10-25-2, these equity investments may alternatively be carried at fair value under an irrevocable election to do so. Once the investor is deemed to have effective control over the other company (with or without a majority of stock ownership), consolidated statements are required. LO 1 Varying levels of ownership are accounted for differently. 6 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods The parent company must account for its investment income from the subsidiary in its own books by one of the methods used for accounting for investments. Consolidated financial statements will be identical, regardless of method used. However, if the parent issues parent-only financial statements, the complete equity method should be used for investees over which the parent has either significant influence or effective control. LO 1 Varying levels of ownership are accounted for differently. 7 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by the Cost Method E4-1: Percy Company purchased 80% of the outstanding voting shares of Song Company at the beginning of 2014 for $387,000. At the time of purchase, Song Company’s total stockholders’ equity amounted to $475,000. Income and dividend distributions for Song Company from 2014 through 2016 are as follows: 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 Required: Prepare journal entries for Percy Company from the date of purchase through 2016 to account for its investment in Song Company under each of the following assumptions: LO 2 J ournal entries for Parent using cost method. 8 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by the Cost Method E4-1: A. Percy Company uses the cost method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2014 Investment in Song 387,000 Cash 387,000 Cash 20,000 Dividend income (.8 x $25,000) 20,000 LO 2 J ournal entries for Parent using cost method. 9 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by the Cost Method E4-1: A. Percy Company uses the cost method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2015 Cash 40,000 Dividend income (.8 x $50,000) 40,000 2016 Cash 28,000 Investment in Song (.8 x $35,000) 28,000 (liquidating dividend) LO 2 J ournal entries for Parent using cost method. 10 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Partial Equity E4-1: B. Percy Company uses the partial equity method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2014 Investment in Song 387,000 Cash 387,000 Investment in Song 50,800 Equity income (.8 x $63,500) 50,800 Cash 20,000 Investment in Song (.8 x $25,000) 20,000 LO 2 J ournal entries for Parent using partial equity method. 11 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Partial Equity E4-1: B. Percy Company uses the partial equity method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2015 Investment in Song 42,000 Equity income (.8 x $52,500) 42,000 Cash 40,000 Investment in Song (.8 x $50,000) 40,000 LO 2 J ournal entries for Parent using partial equity method. 12 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Partial Equity E4-1: B. Percy Company uses the partial equity method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2016 Equity loss (.8 x $55,000) 44,000 Investment in Song 44,000 Cash 28,000 Investment in Song (.8 x $35,000) 28,000 LO 2 J ournal entries for Parent using partial equity method. 13 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Complete Equity E4-1: C. Percy Company uses the complete equity method to record its investment. The difference between book value of equity acquired and the value implied by the purchase price was attributed solely to an excess of market over book values of depreciable assets, with a remaining life of 10 years. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 The complete equity method is usually required to report common stock investments in the 20% to 50% range, assuming the investor has the ability to exercise significant influence and does not have effective control over the investee. LO 2 J ournal entries for Parent using complete equity method. 14 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Complete Equity E4-1: C. Percy Company uses the complete equity method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2014 Investment in Song 387,000 Cash 387,000 Investment in Song 50,800 Equity income (.8 x $63,500) 50,800 Cash 20,000 Investment in Song (.8 x $25,000) 20,000 LO 2 J ournal entries for Parent using complete equity method. 15 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Complete Equity E4-1: C. Percy Company uses the complete equity method to record its investment. A journal entry is required to adjust for depreciation related to the excess of market over book values of depreciable assets. Cost of investment $387,000 Book value acquired ($475,000 x 80%) 380,000 Difference between Cost and Book value $ 7,000 2014 Equity income ($7,000 / 10 yrs.) 700 Investment in Song 700 LO 2 J ournal entries for Parent using complete equity method. 16 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Complete Equity E4-1: C. Percy Company uses the complete equity method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2015 Investment in Song 42,000 Equity income (.8 x $52,500) 42,000 Cash 40,000 Investment in Song (.8 x $50,000) 40,000 Equity income ($7,000 / 10 yrs.) 700 Investment in Song 700 LO 2 J ournal entries for Parent using complete equity method. 17 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Accounting for Investments by Complete Equity E4-1: C. Percy Company uses the complete equity method to record its investment. 2014 2015 2016 Net income (loss) $ 63,500 $ 52,500 $ (55,000) Dividend distribution 25,000 50,000 35,000 2016 Equity Loss (.8 x $55,000) 44,000 Investment in Song 44,000 Cash 28,000 Investment in Song (.8 x $35,000) 28,000 Equity income ($7,000 / 10) 700 Investment in Song 700 LO 2 J ournal entries for Parent using complete equity method. 18 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition On the date of acquisition, the only relevant financial statement is the consolidated balance sheet. After acquisition, a complete set of consolidated financial statements must be prepared for the affiliated group: – Income Statement, – Retained Earnings Statement, – Balance Sheet, and – Statement of Cash Flows. LO 3 Use of workpapers. 19 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Year of Acquisition—Cost Method P4-8: On January 1, 2012, Parker Company purchased 95% of the outstanding common stock of Sid Company for $160,000. At that time, Sid’s stockholders’ equity consisted of common stock, $120,000; other contributed capital, $10,000; and retained earnings, $23,000. Required: Prepare a consolidated statements workpaper on A. Dec. 31, 2012. B. Dec. 31, 2013. LO 3 Use of workpapers. 20 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition P4-8: Begin the consolidating process by preparing a Computation and Allocation Schedule, as follows: 95% 5% 100% Parent NCI Total Share Share Value Purchase price and implied value $ 160,000 $ 8,421 $ 168,421 Less: Book value of equity acquired: Common stock 114,000 6,000 120,000 Other contributed capital 9,500 500 10,000 Retained earings 21,850 1,150 23,000 Total book value 145,350 7,650 153,000 Difference between implied and book value 14,650 771 15,421 Record new goodwill (14,650) (771) (15,421) Balance $ - $ - $ - Difference between implied and book values is established only at the date of acquisition. LO 4 Preparing Computation and Allocation (CAD) Schedule. 21 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Parker Sid P4-8: A. 2012 Year of Acquisition Cash $ 62,000 $ 30,000 Accounts receivable 32,000 29,000 On December 31, 2012, the Inventory 30,000 16,000 Investment in Sid 160,000 - two companies’ trial balances Plant and equipment 105,000 82,000 were as follows at right: Land 29,000 34,000 Dividends declared 20,000 20,000 Required A. Prepare a Cost of goods sold 130,000 40,000 Operating expenses 20,000 14,000 consolidated statements Total debits $ 588,000 $ 265,000 workpaper on December 31, 2012. Accounts payable $ 19,000 $ 12,000 Other liabilities 10,000 20,000 Common stock 180,000 120,000 Other contributed capital 60,000 10,000 Retained earnings 40,000 23,000 Sales 260,000 80,000 Dividend income 19,000 - Total credits $ 588,000 $ 265,000 LO 5 Workpapers eliminating entries. 22 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition P4-8: A. 2012 Year of Acquisition Eliminations Consolidated Income Statement Parker Sid Debit Credit NCI Balances Sales $ 260,000 $ 80,000 $ 340,000 Dividend income 19,000 19,000 - Total revenue 279,000 80,000 340,000 Cost of goods sold 130,000 40,000 170,000 Other expenses 20,000 14,000 34,000 Total cost and expense 150,000 54,000 204,000 Net income 129,000 26,000 136,000 Noncontrolling interest 1,300 (1,300) Net income $ 129,000 $ 26,000 $ 19,000 $ - $ 1,300 $ 134,700 Retained Earnings Statement Retained earnings, 1/1/12 40,000 23,000 23,000 40,000 Net income 129,000 26,000 19,000 1,300 134,700 Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000) Retained earnings, 12/31/12 $ 149,000 $ 29,000 $ 42,000 $ 19,000 $ 300 $ 154,700 LO 5 Workpapers eliminating entries. 23 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition P4-8: A. 2012 Year of Acquisition Eliminations Consolidated Balance Sheet Parker Sid Debit Credit NCI Balances Cash $ 62,000 $ 30,000 $ 92,000 Accounts receivable 32,000 29,000 61,000 Inventory 30,000 16,000 46,000 Investment in Sid 160,000 - 160,000 - Difference (cost & book) 15,421 15,421 - Plant and equipment 105,000 82,000 187,000 Land 29,000 34,000 63,000 Goodwill 15,421 15,421 Total assets $ 418,000 $ 191,000 $ 464,421 Accounts payable $ 19,000 $ 12,000 $ 31,000 Other liabilities 10,000 20,000 30,000 Common stock 180,000 120,000 120,000 180,000 Other contributed capital 60,000 10,000 10,000 60,000 Retained earnings 149,000 29,000 42,000 19,000 300 154,700 Noncontrolling interest 1/1 8,421 8,421 - Noncontrolling interest 12/31 $ 8,721 8,721 Total liabilities & equity $ 418,000 $ 191,000 $ 202,842 $ 202,842 $ 464,421 LO 5 Workpapers eliminating entries. 24 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations 1. Each section of the workpaper represents one of three consolidated financial statements. 2. Elimination of the investment account. Common stock 120,000 Other contributed capital 10,000 Retained earnings, 1/1 23,000 Difference between Implied and Book 15,421 Noncontrolling interest in equity 8,421 Investment in Sid 160,000 LO 5 Workpapers eliminating entries. 25 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations (continued) 3. Allocation of the difference between implied and book value: Goodwill 15,421 Difference between Implied and Book Value 15,421 4. Elimination of intercompany dividends Dividend income 19,000 Dividends declared – Sid Company 19,000 LO 5 Workpapers eliminating entries. 26 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations (continued) 5. Noncontrolling interest in consolidated net income: Internally generated income of Sid Company $26,000 Noncontrolling percentage owned 5% Noncontrolling interest in income $ 1,300 LO 5 Workpapers eliminating entries. 27 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations (continued) 6. Consolidated retained earnings: Parker Company’s retained earnings, 1/1 $ 40,000 + Parker’s income 129,000 - Dividends from Sid Company - 19,000 + Parker’s percentage of Sid income (95%) 24,700 - Parker’s dividends declared - 20,000 Parker Company’s retained earnings, 12/31 $154,700 LO 5 Workpapers eliminating entries. 28 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations (continued) 7. Total eliminations for all three sections are in balance. 8. To calculate the noncontrolling interest in net assets or equity at year-end, compute the following: NCI at Acquisition Date $ 8,421 + NCI share of Sid income ($26,000 x 5%) 1,300 - NCI share of Sid dividends ($20,000 x 5%) -1,000 Noncontrolling Interest in Equity $ 8,721 LO 5 Workpapers eliminating entries. 29 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Parker Sid After Year of Cash $ 67,000 $ 16,000 Acquisition – Cost Accounts receivable 56,000 32,000 Inventory 38,000 48,500 Method Investment in Sid 160,000 - Plant and equipment 124,000 80,000 P4-8: B. 2013 Land 29,000 34,000 Dividends declared 20,000 20,000 On December 31, 2013, the Cost of goods sold 155,000 52,000 two companies’ trial balances Operating expenses 30,000 18,000 Total debits $ 679,000 $ 300,500 were as follows at right: Accounts payable $ 16,000 $ 7,000 Required B. Prepare a Other liabilities 15,000 14,500 consolidated statements Common stock 180,000 120,000 Other contributed capital 60,000 10,000 workpaper on December 31, Retained earnings 149,000 29,000 2013. Sales 240,000 120,000 Dividend income 19,000 - Total credits $ 679,000 $ 300,500 LO 5 Workpapers eliminating entries after acquisition (cost method). 30 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition P4-8: B. 2013 After Year of Acquisition Eliminations Consolidated Income Statement Parker Sid Debit Credit NCI Balances Sales $ 240,000 $ 120,000 $ 360,000 Dividend income 19,000 19,000 - Total revenue 259,000 120,000 360,000 Cost of goods sold 155,000 52,000 207,000 Other expenses 30,000 18,000 48,000 Total cost and expense 185,000 70,000 255,000 Net income 74,000 50,000 105,000 Noncontrolling interest 2,500 (2,500) Net income $ 74,000 $ 50,000 $ 19,000 $ - $ 2,500 $ 102,500 Retained Earnings Statement Retained earnings, 1/1/13 149,000 29,000 29,000 5,700 154,700 Net income 74,000 50,000 19,000 2,500 102,500 Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000) Retained earnings, 12/31/13 $ 203,000 $ 59,000 $ 48,000 $ 24,700 $ 1,500 $ 237,200 LO 5 Workpapers eliminating entries after acquisition (cost method). 31 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition P4-8: B. 2013 After Year of Acquisition Eliminations Consolidated Balance Sheet Parker Sid Debit Credit NCI Balances Cash $ 67,000 $ 16,000 $ 83,000 Accounts receivable 56,000 32,000 88,000 Inventory 38,000 48,500 86,500 Investment in Sid 160,000 - 5,700 165,700 - Difference (cost & book) 15,421 15,421 - Plant and equipment 124,000 80,000 204,000 Land 29,000 34,000 63,000 Goodwill 15,421 15,421 Total assets $ 474,000 $ 210,500 $ 539,921 Accounts payable $ 16,000 $ 7,000 $ 23,000 Other liabilities 15,000 14,500 29,500 Common stock 180,000 120,000 120,000 180,000 Other contributed capital 60,000 10,000 10,000 60,000 Retained earnings 203,000 59,000 48,000 24,700 1,500 237,200 Noncontrolling interest 1/1 8,721 8,721 Noncontrolling interest 12/31 $ 10,221 10,221 Total liabilities & equity $ 474,000 $ 210,500 $ 214,542 $ 214,542 $ 539,921 LO 5 Workpapers eliminating entries after acquisition (cost method). 32 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations 1. Before elimination of the investment account, a workpaper entry is made to the investment account and Parker Company’s beginning retained earnings to recognize Parker’s share of the cumulative undistributed income or loss of Sid Company from the date of acquisition to the beginning of the cur rent year as follows: Investment in Sid Company 5,700 Retained earnings, 1/1 5,700 ($29,000 – $23,000 ) X.95 = $5,700 Entry to establish Reciprocity LO 5 Workpapers eliminating entries after acquisition (cost method). 33 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statements After Acquisition Workpaper Observations The following workpaper entries are also made: 1) Eliminate investment in Sid Company. 2) Eliminate intercompany dividends. 3) Allocate difference between cost and book value. 4) All (100%) of Sid’s revenues, expenses, assets, and liabilities are included in the consolidated totals. The noncontrolling interest’s share of income and net assets are shown as separate line items. LO 5 Workpapers eliminating entries after acquisition (cost method). 34 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method Investment Carried at Equity—Year of Acquisition P4-12: On January 1, 2012, Parker Company purchased 90% of the outstanding common stock of Sid Company for $180,000. At that time, Sid’s stockholders’ equity consisted of common stock, $120,000; other contributed capital, $20,000; and retained earnings, $25,000. Assume that any difference between book value of equity and the value implied by the purchase price is attributable to land. Required: Prepare a consolidated statements workpaper on A. Dec. 31, 2012. B. Dec. 31, 2013. LO 5 Workpaper eliminating entries (equity method). 35 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method P4-12: Begin the consolidating process by preparing a Computation and Allocation Schedule, as follows: 90% 10% 100% Parent NCI Total Share Share Value Purchase price and implied value $ 180,000 $ 20,000 $ 200,000 Less: Book value of equity acquired: Common stock 108,000 12,000 120,000 Other contributed capital 18,000 2,000 20,000 Retained earings 22,500 2,500 25,000 Total book value 148,500 16,500 165,000 Difference between implied and book value 31,500 3,500 35,000 Allocated to land (31,500) (3,500) (35,000) Balance $ - $ - $ - Difference between implied and book values is established only at the date of acquisition. LO 5 Workpaper eliminating entries (equity method). 36 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method P4-12: A. 2010 Year of Parker Sid Acquisition Cash $ 65,000 $ 35,000 Accounts receivable 40,000 30,000 On December 31, 2012, the Inventory 25,000 15,000 Investment in Sid 184,500 - two companies’ trial balances Plant and equipment 110,000 85,000 Land 48,500 45,000 were as follows: Dividends declared 20,000 15,000 Cost of goods sold 150,000 60,000 Required A. Prepare a Operating expenses 35,000 15,000 consolidated statements Total debits $ 678,000 $ 300,000 workpaper on December 31, Accounts payable $ 20,000 $ 15,000 2012. Other liabilities 15,000 25,000 Common stock 200,000 120,000 Other contributed capital 70,000 20,000 Retained earnings 55,000 25,000 Sales 300,000 95,000 Equity in subsidiary income 18,000 - Total credits $ 678,000 $ 300,000 LO 5 Workpaper eliminating entries (equity method). 37 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method P4-12: A. 2012 Year of Acquisition Eliminations Consolidated Income Statement Parker Sid Debit Credit NCI Balances Sales $ 300,000 $ 95,000 $ 395,000 Equity in subsidiary income 18,000 18,000 - Total revenue 318,000 95,000 395,000 Cost of goods sold 150,000 60,000 210,000 Other expenses 35,000 15,000 50,000 Total cost and expense 185,000 75,000 260,000 Net income 133,000 20,000 135,000 Noncontrolling interest 2,000 (2,000) Net income $ 133,000 $ 20,000 $ 18,000 $ - $ 2,000 $ 133,000 Retained Earnings Statement Retained earnings, 1/1/12 55,000 25,000 25,000 55,000 Net income 133,000 20,000 18,000 2,000 133,000 Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000) Retained earnings, 12/31/12 $ 168,000 $ 30,000 $ 43,000 $ 13,500 $ 500 $ 168,000 LO 5 Workpaper eliminating entries (equity method). 38 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method P4-12: A. 2012 Year of Acquisition Eliminations Consolidated Balance Sheet Parker Sid Debit Credit NCI Balances Cash $ 65,000 $ 35,000 $ 100,000 Accounts receivable 40,000 30,000 70,000 Inventory 25,000 15,000 40,000 Investment in Sid 184,500 - 4,500 - 180,000 Difference (cost & book) 35,000 35,000 - Plant and equipment 110,000 85,000 195,000 Land 48,500 45,000 35,000 128,500 Total assets $ 473,000 $ 210,000 $ 533,500 Accounts payable $ 20,000 $ 15,000 $ 35,000 Other liabilities 15,000 25,000 40,000 Common stock 200,000 120,000 120,000 200,000 Other contributed capital 70,000 20,000 20,000 70,000 Retained earnings 168,000 30,000 43,000 13,500 500 168,000 Noncontrolling interest 1/1 20,000 20,000 Noncontrolling interest 12/31 $ 20,500 20,500 Total liabilities & equity $ 473,000 $ 210,000 $ 253,000 $ 253,000 $ 533,500 LO 5 Workpaper eliminating entries (equity method). 39 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method Workpaper Observations The following workpaper entries were made: To eliminate the account “equity in subsidiary income” and intercompany dividends. To eliminate the investment account against subsidiary equity. To distribute the difference between implied and book value of equity acquired. LO 5 Workpaper eliminating entries (equity method). 40 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method Parker Sid Investment Carried at Cash $ 70,000 $ 20,000 Equity—After Year of Accounts receivable Inventory 60,000 40,000 35,000 30,000 Acquisition Investment in Sid 193,500 - Plant and equipment 125,000 90,000 P4-12: B. 2013 Land 48,500 45,000 Dividends declared 20,000 15,000 On December 31, 2013, the Cost of goods sold 160,000 65,000 Operating expenses 35,000 20,000 two companies’ trial balances Total debits $ 752,000 $ 320,000 were as follows at right: Accounts payable $ 16,500 $ 16,000 Required B. Prepare a Other liabilities 15,000 24,000 Common stock 200,000 120,000 consolidated statements Other contributed capital 70,000 20,000 workpaper on December 31, Retained earnings 168,000 30,000 Sales 260,000 110,000 2013. Equity in subsidiary income 22,500 - Total credits $ 752,000 $ 320,000 LO 5 Workpaper eliminating entries (equity method). 41 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method P4-12: B. 2013 After Year of Acquisition Eliminations Consolidated Income Statement Parker Sid Debit Credit NCI Balances Sales $ 260,000 $ 110,000 $ 370,000 Equity in subsidiary income 22,500 22,500 - Total revenue 282,500 110,000 370,000 Cost of goods sold 160,000 65,000 225,000 Other expenses 35,000 20,000 55,000 Total cost and expense 195,000 85,000 280,000 Net income 87,500 25,000 90,000 Noncontrolling interest 2,500 (2,500) Net income $ 87,500 $ 25,000 $ 22,500 $ - $ 2,500 $ 87,500 Retained Earnings Statement Retained earnings, 1/1/13 168,000 30,000 30,000 168,000 Net income 87,500 25,000 22,500 2,500 87,500 Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000) Retained earnings, 12/31/13 $ 235,500 $ 40,000 $ 52,500 $ 13,500 $ 1,000 $ 235,500 LO 5 Workpaper eliminating entries (equity method). 42 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Recording Investments – Equity Method P4-12: B. 2013 After Year of Acquisition Eliminations Consolidated Balance Sheet Parker Sid Debit Credit NCI Balances Cash $ 70,000 $ 20,000 $ 90,000 Accounts receivable 60,000 35,000 95,000 Inventory 40,000 30,000 70,000 Investment in Sid 193,500 - 9,000 - 184,500 Difference (cost & book) 35,000 35,000 - Plant and equipment 125,000 90,000 215,000 Land 48,500 45,000 35,000 128,500 Total assets $ 537,000 $ 220,000 $ 598,500 Accounts payable $ 16,500 $ 16,000 $ 32,500 Other liabilities 15,000 24,000 39,000 Common stock 200,000 120,000 120,000 200,000 Other contributed capital 70,000 20,000 20,000 70,000 Retained earnings 235,500 40,000 52,500 13,500 1,000 235,500 Noncontrolling interest 1/1 20,500 20,500 Noncontrolling interest 12/31 $ 21,500 21,500 Total liabilities & equity $ 537,000 $ 220,000 $ 262,500 $ 262,500 $ 598,500 LO 5 Workpaper eliminating entries (equity method). 43 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Interim Acquisitions of Subsidiary Stock FASB requires that the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date of acquisition (FASB ASC paragraph 810-10-45-4). To accomplish this, the subsidiary usually closes the books on the date of acquisition –i.e. preacquisition income is closed to retained earnings. LO 6 Interim acquisitions of subsidiary stock. 44 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Interim Acquisitions of Subsidiary Stock Equity Method— Pillow Satin Interim Purchase Cash $ 390,600 $ 179,200 Treasury stock at cost 32,000 Investment in Satin 510,000 - P4-15: Plant and equipment 1,334,000 562,000 Pillow Company purchased Cost of goods sold 1,261,000 584,000 Operating expenses 484,000 242,000 90% of the common stock of Dividends declared - 60,000 Satin Company on May 1, Total debits $ 3,979,600 $ 1,659,200 2011, for a cash payment of Accounts and notes payable $ 270,240 $ 124,000 $474,000. December 31, 2011, Dividends payable - 60,000 Common stock 1,000,000 200,000 trial balances for Pillow and Other contributed capital 364,000 90,000 Satin were: Retained earnings 315,360 209,200 Sales 1,940,000 976,000 Equity in subsidiary income 90,000 - Total credits $ 3,979,600 $ 1,659,200 LO 6 Interim acquisitions of subsidiary stock. 45 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Interim Acquisitions of Subsidiary Stock P4-15: Satin Company declared a $60,000 cash dividend on December 20, 2011, payable on January 10, 2012, to stockholders of record on December 31, 2011. Pillow Company recognized the dividend on its declaration date. Any difference between book value and the value implied by the purchase price relates to subsidiary land, included in property and equipment. Income is earned evenly throughout the year. Required: Prepare a consolidated statements workpaper at December 31, 2011. LO 6 Interim acquisitions of subsidiary stock. 46 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Interim Acquisitions of Subsidiary Stock P4-15: Computation and Allocation of Difference between Cost and Book Value Acquired: 90% 10% 100% Parent NCI Total Share Share Value Purchase price and implied value $ 474,000 $ 52,667 $ 526,667 Less: Book value of equity acquired: Common stock 180,000 20,000 200,000 Other contributed capital 81,000 9,000 90,000 Retained earings 188,280 20,920 209,200 Treasury stock (28,800) (3,200) (32,000) Subsidiary income 1/1 to 5/1 45,000 5,000 50,000 Total book value 465,480 51,720 517,200 Difference between implied and book value 8,520 947 9,467 Allocated to land (8,520) (947) (9,467) Balance $ - $ - $ - LO 6 Interim acquisitions of subsidiary stock. 47 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Interim Acquisitions of Subsidiary Stock P4-15: Workpaper – Interim Basis, Partial Equity Method Eliminations Consolidated Income Statement Pillow Satin Debit Credit NCI Balances Sales $ 1,940,000 $ 976,000 $ 2,916,000 Equity in subsidiary income 90,000 90,000 - Total revenue 2,030,000 976,000 2,916,000 Cost of goods sold 1,261,000 584,000 1,845,000 Other expenses 484,000 242,000 726,000 Total cost and expense 1,745,000 826,000 2,571,000 Net income 285,000 150,000 345,000 Net income purchased 45,000 (45,000) Noncontrolling interest 15,000 (15,000) Net income $ 285,000 $ 150,000 $ 135,000 $ - $ 15,000 $ 285,000 Retained Earnings Statement Retained earnings, 1/1 315,360 209,200 209,200 315,360 Net income 285,000 150,000 135,000 15,000 285,000 Dividends declared - (60,000) 54,000 (6,000) - Retained earnings, 12/31 $ 600,360 $ 299,200 $ 344,200 $ 54,000 $ 9,000 $ 600,360 LO 6 Interim acquisitions of subsidiary stock. 48 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Interim Acquisitions of Subsidiary Stock P4-15: Workpaper – Interim Basis, Partial Equity Method Eliminations Consolidated Balance Sheet Pillow Satin Debit Credit NCI Balances Current assets $ 390,600 $ 179,200 54,000 $ 515,800 Investment in Satin 510,000 474,000 - 36,000 Difference (cost & book) 9,467 9,467 - Plant and equipment 1,334,000 562,000 9,467 1,905,467 Total assets $ 2,234,600 $ 741,200 $ 2,421,267 Accounts and notes payable $ 270,240 $ 124,000 $ 394,240 Dividends payable 60,000 54,000 6,000 Common stock 1,000,000 200,000 200,000 1,000,000 Other contributed capital 364,000 90,000 90,000 364,000 Treasury stock (32,000) 32,000 - Retained earnings 600,360 299,200 344,200 54,000 9,000 600,360 Noncontrolling interest 1/1 47,667 47,667 Noncontrolling interest 12/31 $ 56,667 56,667 Total liabilities & equity $ 2,234,600 $ 741,200 $ 707,134 $ 707,134 $ 2,421,267 LO 6 Interim acquisitions of subsidiary stock. 49 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statement of Cash Flows Peculiarities: When the company is reporting on a consolidated basis, the statement of cash flows must also be presented on a consolidated basis. The star ting point for the consolidated cash flow statement is the consolidated income statement and comparative consolidated balance sheets. – Thus, the preparation of the consolidated statement of cash flows will be the same, regardless of how the parent accounts for its investment (cost, partial equity, or complete equity method). This is true because the final product (the consolidated financial statements) is always the same if consolidated procedures are done correctly. LO 7 Peculiarities of Consolidated Statement of Cash Flows. 50 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statement of Cash Flows Peculiarities (continued): 1. If the statement of cash flows starts with consolidated net income, then the noncontrolling interest is already included and need not be added back. 2. Subsidiary dividends paid to the noncontrolling stockholders must be included with dividends paid by the parent company when calculating cash outflow from financing activities. 3. Subsidiary stock acquired directly from the subsidiary represents an intercompany cash transfer that does not affect the total cash balance of the consolidated group. If the acquisition is an open market purchase, it does represent such an outflow. LO 7 Peculiarities of Consolidated Statement of Cash Flows. 51 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Consolidated Statement of Cash Flows The preparation of the consolidated statement of cash flows in the year of acquisition is complicated slightly because the comparative balance sheets at the beginning and end of the current year are dissimilar. 1. Any cash spent or received in the acquisition itself should be reflected in the Investing activities section. 2. Assets and liabilities of the subsidiary at the date of acquisition must be added to those of the parent at the beginning of the current year. LO 8 Stock issued as Consideration in Statement of Cash Flows. 52 Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Compare U.S. GAAP and IFRS Application of the Equity Method LO 9 Differences between U.S. GAAP and 53 IFRS. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Compare U.S. GAAP and IFRS Application of the Equity Method LO 9 Differences between U.S. GAAP and 54 IFRS. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.  Compare U.S. GAAP and IFRS Application of the Equity Method LO 9 Differences between U.S. GAAP and 55 IFRS. Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.