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Chapter 3

Chapter 3. Consolidated Statements Subsequent to Acquisition. Consolidated statements subsequent to acquisition. Alternative methods to maintain the investment Establishing date alignment Worksheet procedures; Purchase Method Amortization of D&D adjustments

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Chapter 3

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  1. Chapter 3 Consolidated Statements Subsequent to Acquisition

  2. Consolidated statements subsequent to acquisition Alternative methods to maintain the investment • Establishing date alignment Worksheet procedures; Purchase Method • Amortization of D&D adjustments • Using the Income Distribution Schedule • Reporting income for the consolidated company • Procedures for purchases made during the period C3

  3. Maintaining the investment account C3

  4. D&D schedule for example Price paid: $ 800,000 Interest acquired: Common stock $ 200,000 Retained earnings 400,000 Total Equity 600,000 Ownership interest 80%480,000 Excess cost 320,000 Life Ann Amort Inventory (80%  50,000) 40,000 140,000 Building (80%  100,000) 80,000204,000 Goodwill 200,000n/a C3

  5. Subsidiary income and dividends Income Dividends Year 1 100,000 10,000 Year 2 150,000 20,000 • Parent reports only 80% of above amounts • Regardless of method used, amortizations from D&D must be made on consolidated worksheet C3

  6. Parent recording of subsidiary income (year 1) C3

  7. Parent recording of subsidiary income (year 2) C3

  8. Worksheet procedures • The RE of the Sub and the Investment account must be at the same point in time • If they are, the excess upon elimination will agree with the D&D on purchase date • Under Sophisticated equity, it is only the amortized balance of the excess • The account adjustments made require amortization for current and priorperiods • No entries are made on either firm’s books for worksheet eliminations C3

  9. Specifics of date alignment C3

  10. Worksheet elimination procedures CV - Convert to equity (only applies to cost method) CY1 - Eliminate Sub income (equity method) CY2- Eliminate intercompany dividends (cost & equity method) EL - Eliminate parent % of sub’s equity C3

  11. Worksheet elimination procedures (continued) D - Distribute excess per D&D schedule 1 Inventory (cost of goods sold year1, RE thereafter) 2 Building 3 Goodwill A- Amortize excess 2 Building C3

  12. Simple Equity: Year 1 C3

  13. Simple Equity: Year 2 C3

  14. Cost Method: Year 1 C3

  15. Cost Method: Year 2 C3

  16. Review of worksheet procedures Using WS 6 as an example: • Elimination of equity income & intercompany dividends returns investment to Jan 1 for date alignment • Excess is distributed per D&D; amortized for current and prior years • IDS (income distribution schedule.) is used to allocate income to P & S • All excess amortizations go to P, only P’s share is recorded initially C3

  17. Income distribution schedules Subsidiary Int generated net income Adjusted net income NCI % NCI Parent Excess amortizations Int generated net income + Parent % Sub income Controlling interest C3

  18. Disclosure concerns • Consolidated Net Income - The net income of the consolidated entity • NCI share of income - This is the NCI share of consolidated net income,it has often (incorrectly) been treated as an expense. • Controlling share of net income - This is the controlling share of consolidated net income,it has often (incorrectly) been treated as consolidated net income (the NCI share having been deducted). • Total NCI - Best theory is to show as aggregated part of total equity. Some have shown it as liability or put it between liabilities and equity C3

  19. Close Books (WS 7) D&D includes Sub RE on purchase date WS includes Sub operations for only later part of year Books Open (WS 8) D&D has Beginning of year RE and “purchased income” WS includes Sub operations for entire year Purchased income is used to remove income prior to purchase During the year purchases C3

  20. Tax issues - tax free exchange • Occurs when seller is not taxed; buyer gets book value for future depreciation • Adjustment from market to book accompanied by DTL = tax %  market adjustment • DTL is amortized over same period as asset adjustment, increases tax liability in future years • Tax loss carryover is asset recorded in purchase, there are limits on its use in year of purchase and later years C3

  21. Consolidation procedures for a pooling • Recall that investment was recorded at amount equal to book value. If this was not the case, correct the investment account. • Cost or equity method may be used (sophisticated equity has no application - no excess) • There should not be any excess to distribute or amortize - it was just like a purchase at a price equal to underlying subsidiary book value! C3

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