4 - 0 advanced accounting by debra jeter and paul chaney chapter 4: consolidated financial...
DESCRIPTION
4 - 2 Accounting Methods for Investments lCost Method n The investment account is adjusted only when additional shares are purchased or sold lPartial Equity Method n The investment account is adjusted for the investor’s share of investee income and dividends lComplete Equity Method n Additional adjustments are made for unrealized intercompany profit and amortization of purchase differentialTRANSCRIPT
4 - 1
Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 4: Consolidated Financial Statements after
Acquisition
Slides Authored by Hannah Wong, Ph.D.Rutgers University
4 - 2
Accounting for Investments
Influence Ownership Accounting TreatmentNo significantinfluence
<20% Cost method
Significantinfluence
20 - 50% Partial equity method
Control >50% Cost, partial equity, orcomplete equitymethod; Consolidation
4 - 3
Accounting Methods for Investments
Cost Method The investment account is adjusted only when
additional shares are purchased or sold Partial Equity Method
The investment account is adjusted for the investor’s share of investee income and dividends
Complete Equity Method Additional adjustments are made for unrealized
intercompany profit and amortization of purchase differential
4 - 4
Cost Method
Investment in S
AcquisitionCost
Dividend Income
Share of dividends declared
of S
Investment Related Accounts of Parent
Liquidating dividend
4 - 5
Partial Equity Method
Investment in S Equity in subsidiary income
Investment Related Accounts of Parent
Acquisition Cost
Equity in subsidiary income
Share of dividendsdeclared
Equity in subsidiary loss
Equity in subsidiary loss
Equity in subsidiary income
4 - 6
Complete Equity Method
Investment in S Equity in subsidiary income
Investment Related Accounts of Parent
Acquisition Cost
Equity in subsidiary income
Share of dividendsdeclared
Equity in subsidiary loss
Equity in subsidiary loss
Equity in subsidiary income
Amortization of goodwill
4 - 7
Cost Method - Eliminating Entries (EE)Year of Acquisition
The Investment EntryCommon Stock - S Company 80,000Other Contributed Capital - S Company 40,0001/1 Retained Earnings - S Company 32,000Difference between cost and book value 13,000
Investment in S Company 165,000
Note: eliminate beginning retained earnings of the
subsidiaryThis entry is the same as the
investment entry on the acquisition date (true for the first year only)
4 - 8
Cost Method - Eliminating Entries (EE)Year of Acquisition
The Differential Entry
Land 13,000Difference between cost and book value 13,000
To allocate the differential between cost and book valueto the appropriate account(s)
This entry is the same as the differential entry on the
acquisition date
4 - 9
Cost Method - Eliminating Entries (EE)Year of Acquisition
The Dividend Entry
Dividend income - P 8,000Dividends declared - S 8,000
To eliminate the contra-equityaccount of the subsidiary
To avoid double counting of income
4 - 10
Noncontrolling Interest in Income
Reported income of S
Adjustments
Adjusted NI of S
Noncontrolling %
Noncontrolling interest in income
+-
x
Noncontrolling Interest in Income
4 - 11
Controlling Interest in Income
Reported income of P
Adjustments
(Adjusted NI of S) x (P %)
Controlling interest in income
+-
Controlling Interest in Income
+
4 - 12
Consolidated Retained Earnings
Reported R/E of P
Consolidated NI
Consolidated R/E
Consolidated Retained Earnings
+Dividends declared of P-
4 - 13
Cost Method EE’s After Year of Acquisition
The Reciprocal EntryInvestment in S Company 16,000
1/1 Retained Earnings - P Company 16,000
Adjust the investment account to equal the amount it would
have under equity method
Adjust P’s reported beginning R/E to equal beginning
consolidated R/E
Other Entries(similar to the first year EE)
4 - 14
Equity Method EE’s Year of Acquisition
The Income EntryEquity in subsidiary income 24,000
Investment in S Company 24,000
(To eliminate equity in net income included in reported NI of P)The Dividend Entry
Investment in S Company 8,000Dividends declared 8,000
(To eliminate intercompany dividend)
These two entries return the investment account to its beginning balance, to be matched against the subsidiary’s beginning R/E in the next EE.
4 - 15
Equity Method EE’sYear of AcquisitionThe Investment Entry
Common Stock - S Company 80,000Other Contributed Capital - S Company 40,0001/1 Retained Earnings - S Company 32,000Difference between cost and book value 13,000
Investment in S Company 165,000
Note: eliminate beginning R/E of the subsidiary
The Differential EntryLand 13,000
Difference between cost and book value13,000
To allocate the differential between cost and BV to the appropriate account(s)
4 - 16
More on Eliminating Entries
Equity Method EE’s After Year of Acquisition Similar to entries in the year of
acquisition
Intercompany revenue and expensesInterest revenue 8,000
Interest expense 8,000
4 - 17
Interim Acquisitions
Accounting under the purchase method Revenues and expenses of the
subsidiary are included with those of parent only from the date of acquisition forward
Beginningof S fiscal yr.
Endof S fiscal yr.
Acquisitiondate
Not includedin consolidated NI
Included in consolidated NI
Net income of S
4 - 18
Interim AcquisitionsFull Year Reporting
Consolidated Income Statement
Post-acquisition revenues
and expenses of S
+
Pre-acquisition NI amount of S
Revenues and expenses
of P
Pre-acquisitionrevenues
and expensesof S
Post-acquisition revenues
and expenses of S
plus
Noncontrolling interest in income
minus
minus
Consolidated Net Income
4 - 19
Interim AcquisitionsPartial Year ReportingConsolidated Income Statement
+
Revenues and expenses
of P
Post-acquisition revenues
and expenses of S
plus
minus Noncontrolling interest in income
Consolidated Net Income
4 - 20
Consolidated Statement of Cash Flows
Purpose to reflect all cash outlays and inflows of
the consolidated entity except those between parent and subsidiary
4 - 21
Consolidated Statement of Cash Flows
Procedure derived from
consolidated income statementbeginning and ending consolidated balance
sheets similar to unconsolidated firm, except:
noncontrolling interests in combined incomesubsidiary dividendsparent acquisition of additional subsidiary
shares
4 - 22
Consolidated Statement of Cash Flows Cash inflow from operating activities
indirect method: add back noncontrolling interest in combined income
Cash outflow from financing activitiesincludes subsidiary dividends to noncontrolling
shareholders Cash outflow from investing activities
excludes parent’s acquisition of additional subsidiary shares directly from subsidiary
includes parent’s acquisition of additional subsidiary shares in open market
4 - 23
Consolidated Statement of Cash Flows
cash acquisition: cash spent or received is included in the investing activity section of the cash flow statement
stock acquisition: issuance of stock or debt is reported in the notes to the financial statements
Effect of method of payment in an acquisition
4 - 24
Advanced Accounting by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.