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Additional Consolidation Reporting Issues

Baker / Lembke / King. Additional Consolidation Reporting Issues. 10. Electronic Presentation by Douglas Cloud Pepperdine University. Consolidated Income Statement, 20X2. Peerless Products Corporation and Subsidiary Consolidated Income Statement For the Year Ended December 31, 20X2.

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Additional Consolidation Reporting Issues

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  1. Baker / Lembke / King Additional Consolidation Reporting Issues 10 Electronic Presentation by Douglas Cloud Pepperdine University

  2. Consolidated Income Statement, 20X2 Peerless Products Corporation and Subsidiary Consolidated Income Statement For the Year Ended December 31, 20X2 Sales $720,000 Gain on Sale of Land 30,000 $750,000 Less: Cost of Goods Sold $340,000 Depreciation Expense 74,800 Other Expenses 105,000-519,800 Income Available to All Shareholders $230,200 Income to Noncontrolling Interest -15,000 Consolidated Net Income $215,200

  3. Consolidated Cash Flows Statement, 20X2 Peerless Products Corporation and Subsidiary Consolidated Statement of Cash Flows For the Year Ended December 31, 20X2 Cash Flows from Operating Activities: Consolidated Net Income $215,200 Noncash Expenses, Revenues, Losses, and Gains included in Income: Depreciation Expense 74,800 Income Assigned to Noncontrolling Interest 15,000 Gain on Sale of Land -30,000 Increase in Accounts Receivable -105,000 Increase in Inventory -95,000 Increase in Accounts Payable 30,000 Net Cash Provided by Operating Activities $l05,000 Top portion

  4. Consolidated Cash Flows Statement, 20X2 Peerless Products Corporation and Subsidiary Consolidated Statement of Cash Flows For the Year Ended December 31, 20X2 Cash Flows from Investing Activities: Acquisition of Equipment -$100,000 Sale of Land 70,000 Net Cash Used in Investing Activities -$ 30,000 Cash Flows from Financing Activities: Dividends Paid: To Parent Company Shareholders -$ 60,000 To Noncontrolling Shareholders -8,000 Net Cash Used in Financing Activities -68,000 Net Increase in Cash $ 7,000 Bottom portion

  5. Consolidation Following a Pooling When a business combination has qualified as a pooling of interests, the consolidation is simplified because no new basis of accounting has been established.

  6. Consolidation Following a Pooling On December 31, 20X0, Peerless Products Corporation exchanges 12,000 shares of its $10 par common stock for 90 percent of the 10,000 shares of Special Foods. (1) Investment in Special Foods Stock 270,000 Common Stock 120,000 Additional Paid-In Capital 60,000 Retained Earnings 90,000 Record acquisition of Special Foods stock. $300,000 x .90 $10 x 12,000 shares ($200,000 x .90) - $120,000 $100,000 x .90

  7. Consolidation Following a Pooling 20X0 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Investment in Special Foods Stock 270,000 Common Stock 620,000 200,000 Add. PI Capital 60,000 Retained Earnings 390,000 100,000 Noncontrolling Interest An entry is necessary to eliminate the investment balance.

  8. Consolidation Following a Pooling 20X0 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Investment in Special Foods Stock 270,000 (2) 270,000 Common Stock 620,000 200,000 (2) 200,000 620,000 Add. PI Capital 60,000 60,000 Retained Earnings 390,000 100,000 (2) 100,000 390,000 Noncontrolling Interest (2) 30,000 30,000

  9. Consolidation Following a Pooling Original investment amount recorded $270,000 Income from subsidiary 45,000 Peerless’s share of dividends ($30,000 x .90) -27,000 Balance of investment, December 31, 20X1 $288,000 Special Foods reports net income of $50,000 for 20X1 and declares dividends of $30,000. During 20X1, Peerless sells inventory that it purchased for $7,000 to Special Foods for $10,000. Special Foods still holds all the inventory at the end of the year.

  10. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 45,000 Dividends Declared (60,000 (30,000) Investment in Special Foods Stock 288,000 ) An entry is needed to eliminate the income from subsidiary.

  11. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 45,000 (3) 45,000 Dividends Declared (60,000 (30,000) (3) 27,000 Investment in Special Foods Stock 288,000 (3) 18,000 )

  12. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000) (30,000) (3) 27,000 Noncontrolling Interest An entry should be made to assign income to noncontrolling interest.

  13. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest (4) 5,000 5,000 Dividends Declared (60,000) (30,000) (3) 27,000 (4) 3,000 (60,000 Noncontrolling Interest (4) 2,000 )

  14. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, Jan. 1 390,000 100,000 Investment in Special Foods Stock 288,000 (3) 18,000 Common Stock 620,000 200,000 Noncontrolling Interest (4) 2,000 An entry is required to eliminate the beginning investment balance.

  15. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, Jan. 1 390,000 100,000 (5)100,000 390,000 Investment in Special Foods Stock 288,000 (3) 18,000 (5) 270,000 Common Stock 620,000 200,000 (5)200,000 620,000 Noncontrolling Interest (4) 2,000 (5) 30,000 32,000

  16. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Sales 400,000 200,000 Cost of Goods Sold 170,000 115,000 Inventory 100,000 75,000 An entry is needed to eliminate intercompany downstream sale of inventory.

  17. Consolidation Following a Pooling 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Sales 400,000 200,000 (6) 10,000 590,000 Cost of Goods Sold 170,000 115,000 (6) 7,000 278,000 Inventory 100,000 75,000 (6) 3,000 172,000

  18. Consolidation Following an Interim Purchase The results of operations for a subsidiary purchased during the fiscal period are included in the consolidated income statement in one of two ways: • Include in the consolidated income statement the revenue and expenses of the subsidiary as if it had been acquired at the beginning of the fiscal period, and deduct the parent’s share of the subsidiary’s preacquisition earnings at the bottom of the consolidated income statement. • Include in the consolidated income statement only the subsidiary’s revenue earned and expenses incurred subsequent to the date of combination.

  19. Book value of Special Foods on January 1, 20X1: Common stock $200,000 Retained earnings 100,000 $300,000 Net income, January 1 to June 30, 20X1 20,000 Dividends, January 1 to June 30, 20X1 -12,000 Book value of Special Foods on July 1, 20X1 $308,000 Peerless’s ownership interest x .80 Book value on July 1, 20X1, of shares acquired $246,400 Consolidation Following an Interim Purchase On July 1, 20X1, Peerless Products purchases 80 percent of the common stock of Special Foods for its underlying book value of $246,400.

  20. P 7/1/X1 80% S NCI 20% Consolidation Following an Interim Purchase The ownership situation on July 1, 20X1, is as follows: Cost of investment $246,400 Book value (7/1/X1) Common stock-- Special Foods $200,000 Retained earnings-- Special Foods 108,000 $308,000 Peerless’s share x .80-246,400 Differential $ -0-

  21. Parent Company Entries On July 1, 20X1, Peerless Products records the purchase of Special Foods’ stock. July 1, 20X1 (7) Investment in Special Foods Stock 246,400 Cash 246,400 Record purchase of Special Foods stock. During the second half of 20X1, Peerless records its share of Special Foods’ income. $30,000 x. 80 (8) Investment in Special Foods Stock 24,000 Income from Subsidiary 24,000 Record equity-method income.

  22. Parent Company Entries Peerless records dividends received from Special Foods during the second half of 20X1. (9) Cash 14,400 Investment in Special Foods Stock 14,400 Record dividends from Special Foods. $18,000 x .80

  23. Consolidation Following an Interim Purchase 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 24,000 Dividends Declared (60,000 (30,000) Investment in Special Foods Stock 256,000 ) An entry is needed to eliminate income from the subsidiary.

  24. Consolidation Following an Interim Purchase 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 24,000 (10) 24,000 Dividends Declared (60,000 (30,000) (10) 14,400 Investment in Special Foods Stock 256,000 (10) 9,600 )

  25. Consolidation Following an Interim Purchase 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000) (30,000) (10) 14,400 Noncontrolling Interest An entry is required to assign income to noncontrolling interest.

  26. Consolidation Following an Interim Purchase 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest (11) 10,000 (10,000) Dividends Declared (60,000) (30,000) (10) 14,400 (11) 6,000 Noncontrolling Interest (11) 4,000

  27. Consolidation Following an Interim Purchase 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Preacquisition Subsidiary Inc. Retained Earnings, Jan. 1 300,000 100,000 Dividend Decl. (60,000 (30,000 (10) 14,400 (11) 6,000 Investment in Special Foods 256,000 (10) 9,600 Common Stock 500,000 200,000 Noncontrolling Interest (11) 4,000 ) ) An entry is necessary to eliminate the beginning investment balance.

  28. Consolidation Following an Interim Purchase 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Preacquisition Subsidiary Inc. (12) 16,000 (16,000 Retained Earnings, Jan. 1 300,000 100,000 (12)100,000300,000 Dividend Decl. (60,000 (30,000 (10) 14,400 (11) 6,000 9,600 (60,000 Investment in Special Foods 256,000 (10) 9,600 (12)246,400 Common Stock 500,000 200,000 (12)200,000 500,000 Noncontrolling Interest (11) 4,000 (12) 60,000 64,000 ) ) ) )

  29. Consolidated Income Statement, 20X1 Peerless Products Corporation and Subsidiary Consolidated Income Statement For the Year Ended December 31, 20X1 Sales $600,000 Cost of Goods Sold -285,000 Gross Margin $315,000 Expenses: Depreciation and Amortization $70,000 Other Expenses 55,000 Total Expenses -125,000 $190,000 Preacquisition Subsidiary Income -16,000 Income to Noncontrolling Interest -10,000 Consolidated Net Income $164,000

  30. Consolidated Earnings per Share Income available to common share-holders of subsidi-ary Consol- idated net income Adjust-ment for parent securities Percent owner-ship held by parent Subsi-diary diluted EPS Shares held by parent - x + x +- Diluted consoli-dated EPS = Shares of parent to be issued if dilutive securities are converted and options exercised Weighted average of parent company shares outstanding +

  31. Consolidated Net Income Peerless’s separate operating income $140,000 Special Foods’ income before taxes 50,000 Total entity income before taxes $190,000 Consolidated income taxes (40%) -76,000 Total entity income after taxes $114,000 Less: Income to noncontrolling shareholders ($30,000 x .20) -6,000 Consolidated net income $108,000

  32. Special Food’s Earnings Per Share Basic Diluted Special Foods’ net income $30,000 $30,000 Interest effect of assumed conversion of bonds, net of taxes ($100,000 x .06) x (1 - .40) 3,600 Income accruing to common stock $30,000 $33,600 Weighted-average common shares outstanding in 20X1 20,000 20,000 Additional shares from assumed bond conversion 4,000 Weighted-average shares and share equivalents 20,000 24,000 EPS$1.50 $1.40

  33. Chapter Ten The End

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