McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-1 Consolidation Following Acquisition 5 Electronic Presentation.

5-5-11

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Consolidation Following Acquisition 5

Electronic Presentation by Douglas Cloud

Pepperdine University

Baker / Lembke / KingBaker / Lembke / King

5-5-22


Nature of Eliminating EntriesNature of Eliminating Entries

Eliminating entries are used in the consolidation workpaper to adjust the totals of the individual account

balances of the separate companies...

…to reflect the amounts that would appear if all the legally

separate companies were actually a single company.

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Consolidation WorkpaperConsolidation Workpaper

Trial Balance Data Elimination Entries Account Titles Parent Subsidiary Debits Credits Consolidated

5-5-44


Comprehensive Three-Part WorkpaperComprehensive Three-Part Workpaper

Trial Balance Data Elimination Entries Consoli- Item Parent Subsidiary Debits Credits dated

Credit Accounts: Revenues GainsDebit Accounts: Contra Revenues Expenses LossesNet IncomeBeginning Retained

EarningsAdd: Net IncomeDeduct: DividendsEnding Retained

Earnings

INCOME STATEMENT SECTION

RETAINED EARNINGS SECTION

to Balance Sheet section

5-5-55


Comprehensive Three-Part WorkpaperComprehensive Three-Part Workpaper


Debit Accounts: Assets Contra LiabilitiesCredit Accounts: Contra Assets Liabilities Stockholders’

Equity:Capital StockPaid-in CapitalRetained Earnings

BALANCE SHEET SECTION

From Retained Earnings Statement section

5-5-66


Push Corporation owns 80 percent of the stock of Shove Company, which

was purchased at book value. During 20X1, Shove reports net income of

$25,000, while Push reports earnings of $100,000, plus equity-method investment income of $20,000.

Computation of Consolidated Net IncomeComputation of Consolidated Net Income

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Computation of Consolidated Net IncomeComputation of Consolidated Net Income

Additive ComputationSeparate operating income of Push $100,000 Net income of Shove $25,000 Push’s proportionate share x .80 20,000 Consolidated net income $120,000

Residual ComputationNet income of Push $120,000 Less: Income from subsidiary - 20,000 $100,000 Net income of Shove 25,000

$125,000 Less: Y to noncontrolling interest $25,000

x .20 - 5,000Consolidated net income $120,000

5-5-88


Consolidated Retained EarningsConsolidated Retained Earnings

On January 1, 20X1, Push has a retained earnings balance of $400,000,

and Shove has a retained earnings balance of $250,000. During 20X1, Push

reports net income of $100,000 and equity-method income from Shove of $20,000; Push declares dividends of

$30,000. Shove reports net income of $25,000 and declares dividends of

$10,000.

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Push Shove

Balance, January 1, 20X1 $400,000 $250,000

Net income, 20X1 120,000 25,000

Dividends declared in 20X1 - 30,000 - 10,000

Balance, December 31, 20X1 $490,000 $265,000

Consolidated retained earnings equals the parent’s retained earnings when the parent

Uses the equity method

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When the parent does not account for its subsidiary investment using the

equity method, consolidated retained earnings is determined by adding the

parent’s retained earnings from its own operations and the parent’s share of the subsidiary’s net income from the

date of acquisition.

5-5-1111


20X1 Consolidation--100 Percent Ownership20X1 Consolidation--100 Percent OwnershipInvestment cost $300,000 Book value:Common stock--S Foods $200,000Retained earnings--S Foods 100,000

$300,000Peerless’s share x 1.00 -300,000

Differential $ -0-

P

S

100%

January 1, 20X1(1) Investment in S Foods Stock 300,000

Cash 300,000 Record purchase of Special Foods stock.

5-5-1212


20X1 Consolidation--100 Percent Ownership20X1 Consolidation--100 Percent Ownership

Peerless SpecialProducts Foods

Common Stock, January 1, 20X1 $500,000 $200,000Retained Earnings, January 1, 20X1 300,000 100,00020X1:

Separate Operating Y, Peerless 140,000Net Income, Special Foods 50,000Dividends 60,000 30,000

20X2:Separate Operating Y, Peerless 160,000Net Income, Special Foods 75,000Dividends 60,000 40,000

5-5-1313



Peerless records its 20X1 income and dividends from Special Foods under the equity method with the following entries:(2) Investment in S Foods Stock 50,000

Income from Subsidiary 50,000 Record equity-method income.

$50,000 x 1.00

(3) Cash 30,000 Investment in S Foods Stock 30,000

Record dividends from S Foods.

$30,000 x 1.00

5-5-1414



Income from Subsidiary 50,000

Dividends Declared (60,000) (30,000)

Investment in S Foods Stock 320,000


(4) 50,000

(4) 30,000 (60,000)

(4) 20,000

Remove both the investment income reflected in the parent’s income statement and the parent’s

portion of any dividends declared by the subsidiary.

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Income from Subsidiary 50,000 (4) 50,000

Retained Earnings, January 1 300,000 100,000 Dividend Declared (60,000 (30,000 (4) 30,000 (60,000)

Investment in S Foods Stock 320,000 (4) 20,000

Common Stock 500,000 200,000


Remove the intercorporate ownership claim and stockholders’accounts of the subsidiary as of the beginning of the period.

(5) 100,000 300,000

(5) 300,000 (5) 200,000 500,000

) )

5-5-1616



Peerless records its 20X2 income and dividends from Special Foods under the equity method :

(6) Investment in S Foods Stock 75,000 Income from Subsidiary 75,000

Record equity-method income.

$75,000 x 1.00(7) Cash 40,000

Investment in S Foods Stock 40,000 Record dividends from Special Foods.

$40,000 x 1.00

5-5-1717




Retained Earning, January 1 430,000 120,000 Dividend Declared (60,000) (40,000)

Investment in S Foods Stock 355,000


Remove the intercorporate ownership claim and stockholders’accounts of the subsidiary recorded during the period.

(8)75,000

(8) 40,000 (60,000)

(8) 35,000

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Income from Subsidiary 75,000 (8) 75,000

Retained Earnings, January 1 430,000 120,000 Dividends Declared (60,000 (40,000 (8) 40,000 (60,000

Investment in Special Foods Stock 355,000 (8) 35,000

Common Stock 500,000 200,000


Eliminate the beginning balance in the investment account and the stockholders’ equity accounts of the

subsidiary at the beginning of 20X2.

) ) )

(9) 120,000 430,000

(9) 320,000 (9) 200,000 500,000

5-5-1919


20X1 Consolidation--80 Percent Ownership20X1 Consolidation--80 Percent OwnershipInvestment cost $240,000 Book value:

Common stock--S Foods $200,000Retained earning -S Foods 100,000

$300,000Peerless’s share x .80 -240,000

Differential $ -0-

P

S

80%

NCI

20%

January 1, 20X1 entry:

(10) Investment in S Foods Stock 240,000 Cash 240,000

Record purchase of Special Foods stock.

5-5-2020



Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Peerless’s 80 percent share of Special Foods’income and dividends is eliminated.


Dividends Declared (60,000 (30,000

Investment in Special Foods 256,000

) )

(13) 40,000

(13) 24,000

(13) 16,000

5-5-2121



A separate entry establishes the amount of incomeallocated to noncontrolling shareholders and enters

the increase in their claim on net assets of the subsidiary.

Income to Non- controlling Int.

Dividends Declared (60,000) (30,000) (13)24,000

Noncontrolling interest


. (14) 10,000 (10,000)

(14) 6,000 (60,000)

(14) 4,000

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An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account

balance shown at the beginning of the period.

Retained Earnings, January 1 300,000 100,000

Investment in Special Foods 256,000 (14) 16,000

Common Stock 500,000 200,000

Noncontrolling interest (14) 4,000


(15)100,000 300,000

(15)240,000 (15)200,000 500,000

(15) 60,000 64,000

5-5-2323


Second Year of Ownership--20X2Second Year of Ownership--20X2

Peerless earns separate operating income of $160,000 and pays dividends of $60,000. In 20X2, Special Foods reports net income of $75,000 and pays dividends of $40,000.

5-5-2424



(16) Investment in S Foods Stock 60,000Income from Subsidiary 60,000

Record equity-method income.$75,000 x .80

(17) Cash 32,000Investment in S Foods Stock 32,000

Record dividends from Special Foods.

$40,000 x .80

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An entry is required to remove the income that Peerlesshas recognized from Special Foods, Peerless’s share (80

percent) of Special Foods’ dividends, and the changein the investment account that occurred in 20X2.


Dividends Declared (60,000 (40,000

Investment in Special Foods 284,000


) ) (18) 60,000

(18) 32,000

(18) 28,000

5-5-2626



An entry is needed to assign $15,000 of subsidiary income tothe noncontrolling shareholders, based on subsidiary income

of $75,000 and a 20 percent noncontrolling interest.


Dividends Declared (60,000) (40,000) (18) 32,000

Noncontrolling Interest


5-5-2727



Income to Non- controlling Int. (19) 15,000 (15,000)


(19) 8,000 (60,000)

Noncontrolling Interest (19) 7,000




5-5-2828



An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account balance

reported by the parent at the beginning of the year and toestablish the amount of the noncontrolling interest’s claim onthe net assets of the subsidiary at the beginning of the year.


Ret. Earnings, January 1 420,000 120,000Investment in Special Foods 284,000 (18) 28,000

Common Stock 500,000 200,000Noncontrolling Interest (19) 7,000

5-5-2929



Ret. Earnings, January 1 420,000 120,000 (20) 120,000 420,000Investment in Special Foods 284,000 (18) 28,000

(20) 256,000Common Stock 500,000 200,000 (20) 200,000 500,000Noncontrolling Interest (19) 7,000

(20) 64,000 71,000


An entry is required to eliminate the stockholders’ equityaccounts of the subsidiary and the investment account balance

reported by the parent at the beginning of the year and toestablish the amount of the noncontrolling interest’s claim onthe net assets of the subsidiary at the beginning of the year.

5-5-3030


Purchase at More Than Book ValuePurchase at More Than Book Value

Investment cost $310,000 Book value:

Common stock--S Foods $200,000Retained earning--S Foods 100,000

$300,000Peerless’s share x .80 -240,000

Differential $ 70,000

P

S

80%

NCI

20% Peerless Products purchases 80 percent of the common stock of Special Foods on January 1,

20X1, for $310,000.

5-5-3131



Fair value of net identifiable assets

$300,000Total

differential$70,000

Excess of cost over fair value of net identifiable

assets (80%)$10,000

Excess of fair value over book

value of net identifiable assets

(80%) $60,000

Book value of net identifiable assets (80%) $240,000

Cost of investment $310,000

5-5-3232


(21) Investment in S Foods Stock 310,000 Cash 310,000

Record purchase of Special Foods stock.


The entry to record Peerless Products purchasing Special Foods stock on January 1, 20X1 is:

5-5-3333



Record equity method income: $50,000 x .80


In 20X1, Peerless Products earns income of $140,000 and pays dividends of $60,000. Special Foods reports net income of $50,000 and pays dividends of $30,000.


Record dividends from Special Foods:$30,000 x .80

5-5-3434


Entries are needed on Peerless’s books to recognize the write-off of the differential:

(24) Income from Subsidiary 4,000 Investment in S Foods Stock 4,000

Adjust income for differential relatedto inventory sold: $5,000 x .80


Amortize differential related to buildings and equipment.


5-5-3535



An entry is required to eliminate the subsidiary income.



Investment in Special Foods Stock 317,200


. (26) 31,200

(26) 24,000

(26) 7,200

5-5-3636



An entry is required to eliminate the subsidiary dividends.

Income from Noncontrolling Interest




(27) 10,000

(27) 6,000 (60,000)

(27) 4,000

5-5-3737



An entry is required to eliminate the subsidiary Equity.

Ret. Earnings, January 1 300,000 100,000

Investment in Special Foods Stock 317,200 (26) 7,200

Differential



(28)100,000 300,000

(28) 310,000 (28) 70,000

(28)200,000 500,000

(28) 60,000 64,000

5-5-3838



An entry is needed to assign beginning differential.

Cost of Goods Sold 170,000 115,000

Land 175,000 40,000Buildings and Equipment 800,000 600,000

GoodwillDifferential (28) 70,000


(29) 4,000 289,000

(29) 8,000223,000

(29) 48,000 1,448,000

(29) 10,000 (29) 70,000

5-5-3939



Entries are necessary to amortize the differential related to buildings and equipment and to write down the

differential related to goodwill.

Depreciation 50,000 20,000

Goodwill Im- pairment Loss

Goodwill (29) 10,000

Accumulated Depreciation 450,000 320,000


(30) 4,800 74,800

(31) 2,500 2,500

(31) 2,500 7,500

(30) 4,800 774,800

5-5-4040


Consolidated Net Income, 20X1Consolidated Net Income, 20X1

Consolidated net income, 20X1:Peerless’s separate operating income $140,000Peerless’s share of Special Foods net income: $50,000 x .80 40,000Write-off of differential related to inventory sold during 20X1 - 4,000Amortization of differential related to buildings and equipment - 4,800Goodwill impairment loss -2,500Consolidated net income, 20X1 $168,700

5-5-4141


Consolidated Retained Earnings, 20X1Consolidated Retained Earnings, 20X1

Consolidated R/E, December 31, 20X1:Peerless’s R/E on date of combination, January 1, 20X1 $300,000Peerless’s separate operating income, 20X1 140,000Peerless’ share of S Foods’ 20X1 net income: $50,000 x .80 40,000Write-off of differential related to inventory sold - 4,000Amortization of differential related to buildings & equipment -4,800Goodwill impairment loss - 2,500Dividends declared by Peerless, 20X1 - 60,000Consolidated R/E earnings, December 31, 20X1 $408,700

5-5-4242


Entries are needed on Peerless’s books during 20X2:


Record equity-method income:$75,000 x .80


Record dividends from Special Foods:$40,000 x .80

Second Year of Ownership, 20X2Second Year of Ownership, 20X2


Amortize differential related to buildingsand equipment.

5-5-4343



An entry is required to eliminate the subsidiary income.



Investment in Special Foods Stock 340,400


(35) 55,200

(35) 32,000

(35) 23,200

5-5-4444









(36) 15,000 (15,000)

(36) 8,000 (60,000)

(36) 7,000

5-5-4545



Retained Earnings, January 1 411,200 120,000

Investment in Special Foods 340,400 (35) 23,200

Differential



An entry is required to eliminate the beginning investment balance.

(37) 120,000

(37) 317,200

(37) 61,200

(37) 200,000 500,000

(37) 64,000 71,000

5-5-4646



An entry is required to assign beginning differential.

Land 175,000 40,000Buildings and Equipment 800,000 600,000

GoodwillDifferential (37) 61,200

Accumulated Depreciation 500,000 340,000


(38) 8,000 223,000

(38) 48,000 1,448,000

(38) 10,000(38) 61,200

(38) 4,800

5-5-4747




Entries are necessary to show the amortization of the differential.

Depreciation and Amortization 50,000 20,000

Retained Earnings, January 1 411,200 120,000 (37)120,000

Goodwill (38) 10,000

Accumulated Depreciation 500,000 340,000 (38) 4,800

(39) 4,800 74,800

(40) 2,500 408,700

(40) 2,500 7,500

(39) 4,800 849,600

5-5-4848


Consolidated Net Income, 20X2Consolidated Net Income, 20X2

Consolidated net income, 20X2:Peerless’s separate operating income $160,000Peerless’s share of Special Foods net income: $75,000 x .80 60,000Amortization of buildings and equipment - 4,800Consolidated net income, 20X2 $215,200

5-5-4949


Consolidated Retained Earnings, 20X2Consolidated Retained Earnings, 20X2

Consolidated retained earnings, December 31, 20X2:Consolidated retained earnings, December 31, 20X1 $408,700Peerless’s separate operating income, 20X2 160,000Peerless’ share of Special Foods’ 20X2 net income: $75,000 x .80 60,000Amortization of differential in 20X2 - 4,800Dividends declared by Peerless, 20X2 - 60,000Consolidated retained earnings, December 31, 20X2 $563,900

5-5-5050


Chapter FiveChapter Five

The The EndEnd

5-5-5151


McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 5-1 Consolidation Following Acquisition 5 Electronic Presentation.

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