Date post: | 18-Jan-2016 |
Category: |
Documents |
Upload: | kerry-atkinson |
View: | 215 times |
Download: | 0 times |
CHAPTER
Consolidated Statements:Date of Acquisition
Fundamentals of Advanced Accounting 1st Edition
Fischer, Taylor, and Cheng
22
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #2
• Consolidation procedures on the day the controlling interest is acquired.
• Levels of investment Investment Income
% Owned Recorded Recorded< 20% At cost Dividends Declared
20 – 50% At cost Share of Income/ (Loss)
> 50% At cost Share of Income/(Loss)Consolidation Process
Consolidated Statements – Date of Acquisition
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #3
• Merge two legal entities into one economic entity
• Combine financial statements of parent and subsidiary
• Presented as if they were one, single company
The Consolidation Concept
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #4
Control Through Stock Acquisition
• A parent purchases the stock of another company – the subsidiary.
• The subsidiary (sub) remains a separate legal entity.
• A 100% purchase of a sub’s stock– Different entry from purchase of net assets– Same combined balance sheet as if net
assets were purchased
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #5
Illustration 2-1: Asset Acquisition$500,000 Purchase Price
Cash 800,000 0Accounts receivable 300,000 200,000Inventory 100,000 100,000Equipment (net) 150,000 300,000 Total Assets 1,350,000 600,000
Current liabilities 150,000 100,000Bonds payable 500,000 0Common Stock 100,000 200,000Retained earnings 600,000 300,000 Total Liabilities and Equity 1,350,000 600,000
Account S CompanyP Company
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #6
Illustration 2-1: Asset AcquisitionEntry on P’s Books
Accounts receivable 200,000
Inventory 100,000
Equipment 300,000
Current liabilities100,000
Cash500,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #7
Illustration 2-1: Asset AcquisitionBalance Sheet After Acquisition
Cash 300,000Accounts receivable 500,000Inventory 200,000Equipment (net) 450,000 Total Assets 1,450,000
Current liabilities 250,000Bonds payable 500,000Common Stock 100,000Retained earnings 600,000 Total Liabilities and Equity 1,450,000
Account P Company
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #8
Stock Acquisition
• Acquiring company purchases stock of target company from shareholders.
• Entry recorded on parent’s books:
Investment in Sub S 500,000
Cash500,000
• Investment account represents controlling interest in sub.
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #9
Consolidation Concept - Duplication
• Parent company has an investment account recorded at $500,000.
• Sub has accounts:– Common Stock $200,000– Retained Earnings $300,000
• When combining the balance sheets, these accounts actually represent one another.
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #10
Elimination of Investment Account - EL
• Accounts are eliminated in consolidation.
EL Common Stock 200,000
Retained Earnings 300,000
Investment in Sub S500,000
• “EL” is a “key” for this entry.• Investment account is eliminated (a company
cannot own itself).• Sub’s equity accounts are eliminated - parent
is owner.
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #11
Consolidation Worksheet: 2-1
• Review Worksheet 2-1• Column 1 – Parent company’s Balance
Sheet• Column 2 – Sub’s Balance Sheet• Columns 3 & 4 – Consolidation
(elimination) entries• Column 5 – Consolidated Balance
Sheet
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #12
Consolidation Worksheet: 2-1(Continued)
• Parent’s investment account is reduced to zero.
• Sub’s equity accounts are reduced to zero.
• Consolidated balance sheet reported as if net assets were purchased.
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #13
Purchase Price Exceeds Book Value
• Common for purchase price to be more than equity (book value) of sub.
• Common for fair value to be higher than book value of sub.
• Change prior example:– Purchase price $700,000
Entry recorded on parent’s books:
Investment in Sub S 700,000
Cash700,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #14
Asset Acquisition$700,000 Purchase Price
Accounts receivable 200,000 200,000Inventory 100,000 120,000Equipment (net) 300,000 400,000 Total Assets 600,000 720,000
Current liabilities 100,000 100,000
Value of Net Assets 500,000 620,000
Subsidiary S Fair ValueBook Value
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #15
Consolidation entries
• EL eliminates the parent’s investment account and the sub’s equity accounts.
• D reclassifies amount of purchase price to assets:– Increase sub’s assets to fair value– Record any goodwill (amount paid in
excess of fair value)
See Worksheet 2-2
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #16
Consolidation Entries
EL Common Stock 200,000
Retained Earnings 300,000
Investment in Sub S 500,000
D1 Inventory 20,000
D2 Equipment 100,000
D3 Goodwill 80,000
D Investment in Sub S 200,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #17
Consolidation Entries
• D1 – increases sub’s inventory to fair value of $120,000.
• D2 – increases sub’s equipment to fair value of $400,000.
• D3 – records goodwill– $700,000 price less $620,000 fair value =
$80,000 Goodwill
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #18
Example – 100% of SharesComplex Purchase
• Acquisitions Inc. issues 7,000 shares of common stock– Par Value, $1– Market Value, $50
• $10,000 direct acquisition costs– Attorney & accountant fees
• $5,000 brokerage fees
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #19
100% Complex purchase – continuedAcquisitions Inc. Journal Entries:
Investment in Johnson Co. 360,000*Common Stock (7,000 x $1) 7,000Paid-in Capital in Excess of Par 343,000 ** Cash 10,000
Paid-in Capital in Excess of Par 5,000^Cash 5,000
*7,000 shares x $50 plus $10,000 direct costs** 7,000 shares x $50 less $7,000^Brokerage costs reduce parent’s Paid-in Capital
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #20
Assets Book Value Fair ValueAccounts receivable 28,000 28,000 *Inventory 40,000 45,000 *Land 10,000 50,000Buildings (net) 40,000 80,000Equipment (net) 20,000 50,000Patent 15,000 30,000Copyright - 40,000Total Assets 153,000 323,000
Liabilities & EquityCurrent liabilities 5,000 5,000 *Bonds payable 20,000 21,000 *Total liabilities 25,000 26,000
Net assets 128,000 297,000
* Priority accounts net to $47,000
100% Complex purchase – continuedJohnson, Inc. Net Asset Values
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #21
Accounts TotalCumulative
TotalAccounts receivable
Inventory
Current liabilities
Bonds payableLandBuildingEquipmentPatentsCopyright
47,000Priority
Nonpriority 250,000 297,000
47,000
100% Complex purchase – continued Zone Analysis
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #22
Using purchase rules:• Goodwill above what price? $297,000
at $360,000 Goodwill = $63,000
• Bargain below what price? $297,000Cost less $47,000 (priority) is assigned to non-priority accounts
• Extraordinary gain below what price? $47,000$47,000 less the price is the extraordinary gain
Zone Analysis
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #23
Determination & Distribution Schedule
• Compares price for acquisition vs. equity of sub
• Difference of price vs. equity represents– Book value vs. fair value of net assets– Fair value of net assets vs. price of
acquisition
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #24
Price 360,000Equity (100% $128,000) 128,000Excess cost 232,000Adjustments:
Inventory (increase to $45,000) 5,000Bonds payable (increase liability) (1,000)Land (increase to $50,000) 40,000Building (increase to $80,000) 40,000Equipment (increase to $50,000) 30,000Patent (increase to $30,000) 15,000Copyright (record) 40,000 169,000
Goodwill (record) 63,000
D&D for $360,000 – Goodwill
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #25
Consolidation Entries – 100% Ownership with Goodwill
EL Common Stock 1,000Paid-in Capital in Excess Par 59,000Retained Earnings 68,000
Investment in Sub S 128,000
D1 Inventory 5,000D2 Premium on Bonds Payable 1,000D3 Land 40,000D4 Buildings (net) 40,000D5 Equipment (net) 30,000D6 Patent (net) 15,000D7 Copyright 40,000D8 Goodwill 63,000D Investment in Johnson Company 232,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #26
Price 210,000Equity (100% $128,000) 128,000Excess cost 82,000Adjustments:
Inventory (increase to $45,000) 5,000 Bonds payable (increase liability) (1,000)Land (allocation on next slide) 22,600Building (allocation on next slide) 12,160Equipment (allocation on next slide) 12,600Patent (allocation on next slide) 4,560Copyright (allocation on next slide) 26,080 82,000
0
D&D for $210,000 – Bargain Purchase
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #27
Asset Fair
Value % Assign Total*
Allocated Value
Book Value Adjustment
Land 50,000 20% 163,000 32,600 10,000 22,600
Building 80,000 32 163,000 52,160 40,000 12,160
Equipment 50,000 20 163,000 32,600 20,000 12,600
Patents 30,000 12 163,000 19,560 15,000 4,560
Copyright 40,000 16 163,000 26,080 0 26,080
Total 250,000 163,000 85,000 78,000 *Amount to assign:
$210,000 purchase price less $47,000 to priority accounts.
Allocation – Bargain purchase
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #28
Consolidation Entries – Bargain Purchase
EL Common Stock 1,000Paid-in Capital in Excess Par 59,000Retained Earnings 68,000
Investment in Sub S128,000
D1 Inventory 5,000D2 Premium on Bonds Payable
1,000D3 Land 22,600D4 Buildings (net) 12,160D5 Equipment (net) 12,600D6 Patent (net) 4,560D7 Copyright 26,080D Investment in Johnson Company
82,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #29
Price 35,000Equity (100% $128,000) 128,000Excess cost (93,000)Adjustments:
Inventory (increase to $45,000) 5,000Bonds payable (increase liability) (1,000)Land (eliminate book value) (250,000)Building (eliminate book value) (250,000)Equipment (eliminate book value) (250,000)Patent (eliminate book value) (250,000)Copyright (eliminate book value)(250,000) 255,000)
Extraordinary gain (12,000)
D&D for $35,000 – Extraordinary Gain
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #30
Consolidation Entries – Extraordinary Gain
EL Common Stock 1,000Paid-in Capital in Excess Par 59,000Retained Earnings 68,000
Investment in Sub S 128,000
D1 Inventory 5,000D2 Premium on Bonds Payable 1,000D3 Land 10,000D4 Buildings (net) 40,000D5 Equipment (net) 20,000D6 Patent (net) 15,000D7 Extraordinary gain 12,000D Investment in Johnson Company 93,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #31
Less than 100% Ownership
• Investment account is eliminated only against it’s % ownership of equity accounts– Creates a Non-Controlling Interest (NCI) that
represents minority ownership of net assets
• All income statement accounts are combined– Creates a Non-Controlling Interest (NCI) that
represents minority ownership of net income/(loss)
• Adjust sub’s assets/liabilities to parent’s % of fair value
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #32
Zone Analysis: 80% Purchase
Accounts Total%
OwnedCumulative
TotalAccounts receivable
Inventory
Current liabilities
Bonds payableLandBuilding
Equipment
Patents
Copyright
37,600Priority
Nonpriority 250,000 237,600
47,000x 80% = 37,600
x 80% = 200,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #33
Use the same subsidiary information for 80% purchaseAll adjustments are for 80% of fair-book difference
• Goodwill above what price? $237,600$297,000 80% = $237,600We will use $290,000, so goodwill = $52,400
• Bargain below what price? $237,600$297,000 80% = $237,600If price was $210,000, $189,000 ($210,000 – [$47,000 80%]) is available for P’s 80% share of nonpriority accounts
• Extraordinary gain below what price? $37,60080% $47,000 = $37,600
Zones for an 80% Purchase
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #34
Price 290,000
Equity (80% $128,000) 102,400
Excess cost 187,600
Adjustments:
Inventory (80% 5,000) 4,000
Prem. Bonds payable (80% 1,000) (800)
Land (80% 40,000) 32,000
Building (80% 40,000) 32,000
Equipment (80% 30,000) 24,000
Patent (80% 15,000) 12,000
Copyright (80% 40,000) 32,000 135,200
Goodwill 52,400
D&D for 80% Interest at $290,000 – with Goodwill
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #35
Consolidation Entries – 80% with Goodwill
EL Common Stock 800Paid-in Capital in Excess Par 47,200Retained Earnings 54,400
Investment in Sub S 102,400(Eliminated at 80% of parent’s ownership)
D1 Inventory 4,000D2 Premium on Bonds Payable 800D3 Land 32,000D4 Buildings (net) 32,000D5 Equipment (net) 24,000D6 Patent (net) 12,000D7 Copyright 32,000D8 Goodwill 52,400D Investment in Johnson Company 187,600
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #36
Price 210,000
Equity (80% $128,000) 102,400
Excess cost 107,600
Adjustments:
Inventory (80% 5,000) 4,000
Bonds payable (80% 1,000) (800)
Land (allocation next slide) 26,480
Building (allocation next slide) 23,168
Equipment (allocation next slide) 18,480
Patent (allocation next slide) 8,688
Copyright (allocation next slide) 27,584 107,6000
D&D for 80% Interest at $210,000 Price – Bargain Purchase
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #37
Asset Fair
Value % Assign Total*
Allocated Value
Book Value 80% Adjustment
Land 50,000 20% 172,400 34,480 8,000 26,480
Building 80,000 32 172,400 55,168 32,000 23,168
Equipment 50,000 20 172,400 34,480 16,000 18,480
Patents 30,000 12 172,400 20,688 12,000 8,688
Copyright 40,000 16 172,400 27,584 0 27,584
Total 250,000 163,000 68,000 104,00 *Amount to assign:
$210,000 purchase price less $37,600 ($47,000 x 80%) to priority accounts.
Allocation for Bargain Purchase 80% Ownership – Price $210,000
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #38
Consolidation Entries 80% Ownership – Bargain Purchase
EL Common Stock 800Paid-in Capital in Excess Par 47,200Retained Earnings 54,400
Investment in Sub S102,400
D1 Inventory 4,000D2 Premium on Bonds Payable
800D3 Land 26,480D4 Buildings (net) 23,168D5 Equipment (net) 18,480D6 Patent (net) 8,688D7 Copyright 27,584D Investment in Johnson Company
107,600
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #39
Price 30,000Equity (80% $128,000) 102,400Excess cost (72,400)Adjustments: Inventory (80% 5,000) 4,000 Prem. Bonds payable (80% 1,000) (800) Land (80% 10,000) (8,000) Building (80% 40,000) (32,000) Equipment (80% 20,000) (16,000) Patent (80% 15,000) (12,000) 64,800Extraordinary gain (7,600)
D&D for 80% Ownership – Price $30,000 Extraordinary Gain
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #40
Consolidation Entries 80% Ownership – Extraordinary Gain
EL Common Stock 800Paid-in Capital in Excess Par 47,200Retained Earnings 54,400
Investment in Sub S 102,400
D1 Inventory 4,000D2 Premium on Bonds Payable 800D3 Land 8,000D4 Buildings (net) 32,000D5 Equipment (net) 16,000D6 Patent (net) 12,000D7 Extraordinary gain 7,600D Investment in Johnson Company 72,400
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #41
Purchase: Subsidiary Goodwill
• No assets, including intangible assets, can be discounted until parent share of goodwill is eliminated
• Ignore existing goodwill in “zone and price analysis”– No priority
• D&D schedule adjusts goodwill– Does not create it
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #42
Price 290,000Equity (80% 168,000*) 134,400Excess cost 155,600Adjustments: Inventory (80% 5,000)
4,000 Prem. Bonds payable (80% 1,000) (800) Land (80% 40,000)
32,000 Building (80% 40,000)
32,000 Equipment (80% 30,000) 24,000 Patent (80% 15,000)
12,000 Copyright (80% 40,000) 32,000
135,200
Increase existing goodwill 20,400*Previously $128,000. This amount includes $40,000 existing
Goodwill
D&D for 80% Interest at $290,000 – Sub has existing Goodwill
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #43
Consolidation Entries – 80% with Existing Goodwill
EL Common Stock 800Paid-in Capital in Excess Par 47,200Retained Earnings ($108,000 x 80%) 86,400
Investment in Sub S 134,400(Eliminated at 80% of parent’s ownership)
D1 Inventory 4,000D2 Premium on Bonds Payable 800D3 Land 32,000D4 Buildings (net) 32,000D5 Equipment (net) 24,000D6 Patent (net) 12,000D7 Copyright 32,000D8 Goodwill 20,400D Investment in Johnson Company 155,600
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 2, Slide #44
Push-Down Accounting
Push-Down Accounting – Sub’s accounts are adjusted to fair value
• Advocates contend this is consistent with treatment at consolidation
• SEC requires push-down accounting for certain subs who issue separate financial statements.
• Consolidation is unaffected.