Consolidation Techniques and Procedures: Preparing The Worksheet

3/3/2021
Chapter 4:
Consolidation
Techniques and
Procedures
Zuni Barokah
Departemen Akuntansi
FEB UGM
Preparing the Worksheet
Statements are entered onto the worksheet:

– Income statement
– Statement of retained earnings
– Balance sheet/statement of financial position
Columns needed:
– Parent
– Subsidiary
– DR and CR columns for elimination entries
– Consolidated
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Completing the Worksheet

(1 of 2)
1. Enter Parent and Sub. amounts at 100% of

book value. (Even if parent owns less)
2. Enter elimination entries into the DR and CR
columns. (Check totals)
3. For consolidated revenues, liabilities, and
equity (other than ending retained earnings):
– Add parent, subsidiary, less DR, plus CR.
4. For consolidated assets:
– Add parent, subsidiary, plus DR, less CR.
Completing the Worksheet (2 of 2)
5. For income, ending retained earnings and all

subtotals and totals:
– Compute directly in consolidated column.
Note:
– The total consolidated assets should equal the
total consolidated liabilities and equity.
– Expenses on the income statement and
dividends on the statement of retained
earnings are generally shown as negative
numbers. So compute the consolidated
amounts as you would for revenues
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Workpaper Entries
1. Adjust for errors & omissions

2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
4. Record noncontrolling interest in sub.'s earnings
& dividends
5. Eliminate reciprocal Investment & sub.'s equity
balances
6. Amortize fair value differentials
7. Eliminate other reciprocal balances
Example: Pop & Son Data
Pop paid $176 for 80% of Son on 1/1/2016 when

Son's equity consisted of $120 capital stock and
$60 retained earnings. All excess was due to
unrecorded patents with a 10-year life
Son’s income and dividends follow:
blank 2016 2017

Net income $50 $60
Dividends $30 $30
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Analysis
Cost of 80% of Son $176 Allocated to: Amt Amort.

Implied value of Son Patents $40 10 yrs
($176/.80) $220
Book value (120+60) 180
Excess $40
Unamort. Unamort.
Blank Unamort. Bal. Amortization Bal. Amortization Bal.
on on on
Blank 1/1/2016 in 2016 12/31/2016 in 2017 12/31/2017
Patents $40 $4 $36 $4 $32
Use these amounts Use these amounts in

in 2016 worksheet 2017 worksheet for
for amortization amortization expense
expense and and patents.
patents.
Income & Dividend Calculations (1 of 2)
2016: blank
Son's net income $50 Pop's 80% share

Amortization (4) $36.8
Adjusted income $46 $24.0 NCI 20% share
Blank blank $9.2
Dividends $30 $6.0
Blank blank
2017: blank

Adjusted income $56 $24.0
Blank blank NCI 20% share
Dividends $30
$11.2
$6.0
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Pop's 2016 Worksheet Entries (1 of 3)

● none
● none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
Income from Son (-R, -SE) 36.8 Blank

Dividends (+SE) Blank 24.0
Investment in Son (-A) blank 12.8

& dividends
Noncontrolling interest share (-SE) 9.2 blank
Dividends (+SE) blank 6.0
Noncontrolling interest (+SE) blank 3.2

balances
Capital stock, Son (-SE) 120 blank
Retained earnings, Son (beginning) (-SE) 60 blank
Patents (+A) 40 blank
Investment in Son (-A) blank 176
Noncontrolling interest (+SE) blank 44
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6. Amortize fair value/book value differentials

Amortization Expense (E, -SE) 4 blank
Patents (-A) blank 4

● None
Note that in the last chapter, all worksheet entries
were prepared for the balance sheet. Here
worksheet entries are prepared for the income
statement, statement of retained earnings, and
balance sheet.
Pop's 2016 Worksheet (1 of 2)

Year ended 12/31/2016c Pop Son DR CR Consol
Income statement blank blank blank blank blank
Revenues 500.0 130.0 blank blank 630.0
Income from Son 36.8 blank 36.8 blank 0.0
Expenses (400.0) (80.0) 4.0 blank (484.0)
Noncontrolling interest share blank blank 9.2 blank (9.2)
Net income/Controlling share 136.8 50.0 blank blank 136.8
Statement of retained earnings blank blank blank blank blank

Beginning retained earnings 10.0 60.0 60.0 blank 10.0
Add net income 136.8 50.0 blank blank 136.8
Deduct dividends (60.0) (30.0) blank 24.0 (60.0)
Blank blank blank blank 6.0 blank
Ending retained earnings 86.8 80.0 blank blank 86.8
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Balance Sheet 12/31/2016

Balance sheet, 12/31/2016 Pop Son DR CR Consol
Cash 78.0 20.0 blank blank 98.0
Other current assets 180.0 100.0 blank blank 280.0
Investment in Son 188.8 blank blank 12.8 0.0
Plant & equipment, net 500.0 140.0 blank blank 680.0
Patents blank blank 40.0 4.0 36.0
Total 946.8 260.0 blank blank 1,054.0
Liabilities 160.0 60.0 blank blank 220.0
Capital stock 700.0 120.0 120.0 blank 700.0
Retained earnings 86.8 80.0 80.0 blank 86.8
Noncontrolling interest, Jan.1 blank blank blank 44.0 blank
Noncontrolling interest, Dec. 31 blank blank blank 3.2 47.2
A Look at the Income

Statement
Year ended 12/31/2016 Pop Son DR CR Consol
Income from Son 36.8 36.8 blank 0.0
Expenses (400.0) (80.0) 4.0 blank (484.0)
● Income from Son is eliminated.

● Expenses are adjusted for 2016 amortization, - $4 on
patents.
● Noncontrolling interest is proportional to Pop's Income
from Son since Pop uses the equity method.
● $36.8 x .20/.80 = $9.2
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A Look at Retained Earnings
Year ended 12/31/2016c Pop Son DR CR Consol


● Beginning retained earnings of Son is eliminated.

● All of Son's dividends are eliminated.
● Net income is not calculated across the line but taken
from the consolidated income statement.
● Ending retained earnings is calculated in the consolidated
column.
A Look at Assets
– Investment in Son is eliminated.
– Patents at the start of 2016 were $40, and current
amortization is $4. They are $36 at the end of 2016.
– The total is calculated in the consolidated column.

Investment in Son 188.8 blank blank 12.8 0.0
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A Look at Liabilities & Equity

– Son's capital stock is eliminated.
– Retained earnings are not calculated across the row;
they are taken from the statement of retained earnings.
– Noncontrolling interest at year-end is proportional to
Pop's Investment in Son account.
● $94.4 x .20/.80 = $23.6

Retained earnings 86.8 80.0 blank blank 86.8
4.2: Workpapers in
Subsequent Years
Consolidation Techniques and
Procedures
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Analysis, for 2017

Cost of 80% of Son $176 Allocated to: Amt Amor.
Implied value of Son ($88/.80) $220 Patents $40 10 yrs
Book value (120+60) 180
Excess $40
Unamort. Unamort. Unamort.

Blank Bal. Amortization Bal. Amortization Bal.
on on on
Blank 1/1/2016 in 2016 12/31/2016 in 2017 12/31/2017
Patents $40 $4 $36 $4 $32
Use these amounts in Use these amounts in

2016 worksheet for 2017 worksheet for
amortization expense amortization expense
and patents and patents.
Income & Dividend Calculations (2 of 2)
2016: blank
Son's net income $50
Pop's 80% share
Amortization (4)
$36.8
Blank blank $9.2
Dividends $30 $6.0
2017: Blank

Blank blank $11.2
Dividends $30 $6.0
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Pop's Worksheet Entries for 2017 (1 of 3)

● none
● none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
Income from Son (-R, -SE) 44.8 blank

& dividends

balances
Capital stock, Son (-SE) 120 blank
Retained earnings, Son (beginning) (-SE) 80 blank
Patents (+A) 36 blank
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Eliminating Investment in Son
Entry 5 eliminates the Investment in Son and establishes the

Noncontrolling Interest as of the beginning of the current year.
Implied value of Son at acquisition $176/.80 $220

Add the increase in retained earnings from acquisition
to the beginning of the current year
$80 at 1/1/2017 minus $60 at 1/1/2016 20
Less amortization for all prior periods
$4 patent amortization for 2016 (4)
Adjusted value of Son at 1/1/2017 $236
– Investment in Son (80% x $236) = $188.8

– Noncontrolling interest (20% x $236) = $47.2
– Verify the $236 from the debits in Entry 5 (120 + 80 +
36).
6. Amortize fair value differentials
Amortization Expense (E, -SE) 4 blank
Patents (-A) blank 4

Note payable – Pop (-L) 20 blank
Note receivable – Son (-A) blank 20
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Pop's 2016 Worksheet (2 of 2)
Year ended 12/31/2016 Pop Son DR CR Consol

Income from Son 44.8 blank 44.8 blank 0.0
Expenses (488.0) (90.0) 4.0 blank (582.0)
Pop’s Balance Sheet 12/31/2017

Note receivable – Son 20.0 blank blank 20.0 0.0
Investment in Son 209.6 blank Blank 20.8 0.0
Blank blank blank Blank 188.8 blank
Note payable – Pop blank 20.0 20.0 blank blank
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4.3: Errors in the

Workpapers
Procedures
Errors
Most errors show up when the consolidated balance

sheet does not balance.
● Check for common omissions:
– Noncontrolling interest share (income)
– Goodwill
– Noncontrolling interest (equity)
● Check equality of DR and CR adjustments.
● Verify totals for parent and subsidiary statements.
● Re-calculate the consolidated amounts.
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4.4: Assigning Fair Value

Procedures
Example with Excess Allocated

● Pam paid $360 for 90% of Sun on 12/31/2016
when Sun's equity consisted of $200 capital stock
and $50 retained earnings.
● Inventory (sold in 2016), land, and buildings (20
years) were undervalued by $10, $30, and $80,
respectively. Equipment (10 years) was
overvalued by $20.
● Sun's income and dividends for 2017 were $60
and $20.
● At year-end, Sun has dividends payable of $10,
which Pam has not yet recorded. There is $20
cash in transit from Sun to Pam for the note.
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Analysis at Acquisition
Cost of 90% of Sun $360 Allocated to: Amt Amort
Implied value of Son ($360/.90) $400 Inventories $10 1st yr
Book value (200+50) 250 Land 30 -
Excess $150 Building 80 20 yrs
Blank blank Equipment (20) 10 yrs
Noncontrolling interest, Goodwill 50 -
10%(400) $40 blank 150 blank
blank Unamort. Bal. Amortization Unamort. Bal.

blank 12/31/2016 * in 2017 * on 12/31/2017
* Use the
Inventories $10 ($10) $0 12/31/2016
Land 30 0 30 and 2017
Building 80 (4) 76 amortization
Equipment (20) 2 (18)
in worksheet
entries for
Goodwill 50 0 50
2017.
blank $150 ($12) $138
Sun's Income & Dividends
blank 2017
Pam's 90% share
Sun's net income $60 $43.2
Amortization ($12) $18.0
Adjusted income $48
blank blank
Sun's dividends $20
NCI 10% share

$4.8
$2.0
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3/3/2021
Pam's Worksheet Entries (1 of 4)

Dividends receivable (+A) 9.0 blank
Investment in Sun (-A) blank 9.0
Cash (+A) 20.0 blank
Note receivable, Sun (-A) blank 20.0

● none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Sun (-R, -SE) 43.2 blank

Investment in Sun (-A) blank 25.2

& dividends
5a. Eliminate reciprocal Investment & sub.'s equity

balances (with unamortized excess)
Capital stock (-SE) 200 blank
Retained earnings, Sun (beginning) (-SE) 50 blank
Unamortized excess (+A) 150 blank
Investment in Sun (-A) blank 360
Noncontrolling interest (+SE) blank 40
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5b. Allocate the unamortized excess according to

beginning-of-year balances.
Cost of Goods Sold (-SE) 10 blank

Land (+A) 30 blank
Building, net (+A) 80 blank
Goodwill (+A) 50 blank
Equipment, net (-A) blank 20
Unamortized excess (-A) blank 150

6. Amortize fair value/book value differentials
Operating (depreciation) expense (E, -SE) 4 blank
Buildings, net (-A) blank 4
Equipment, net (-A) 2 blank
Operating (depreciation) expense (-E, SE) blank 2

Dividends payable (-L) 9.0 blank
Dividends receivable (-A) blank 9.0
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Pam's 2017 Worksheet

Year ended 12/31/2017 Pam Sun DR CR Consol
Revenues 900.0 300.0 blank blank 1,200.0

Income from Sun 43.2 blank 43.2 blank 0.0
Cost of goods sold (600.0) (150.0) 10.0 blank (760.0)
Operating expenses (190.0) (90.0) 4.0 2.0 (282.0)
Pam’s Balance sheet 12/31/2017

Balance sheet, 12/31/2017 Pam Sun DR CR Consol
Cash 13.0 15.0 20.0 blank 48.0
Accounts receivable, net 76.0 25.0 blank blank 101.0
Note receivable – Sun 20.0 blank blank 20.0 0.0
Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0 blank 120.0
Building, net 190.0 110.0 80.0 4.0 376.0
Equipment, net 150.0 120.0 2.0 20.0 252.0
Investment in Sun 394.2 blank blank 9.0 0.0
blank blank blank blank 25.2 blank
blank blank blank blank 360.0 blank
Dividends receivable blank blank 9.0 9.0 0.0
Goodwill blank blank 50.0 blank 50.0
Unamortized excess blank blank 150.0 150.0 0.0
Accounts payable 120.0 60.0 blank blank 180.0
Dividends payable blank 10.0 9.0 blank 1.0
Noncontrolling interest, Jan.1 blank blank blank 40.0
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4.5: Consolidated
Statement of Cash Flows
Procedures
Consolidated Cash Flows
The consolidated statement of cash flows is

prepared from:
– Consolidated balance sheets, beginning &
ending
– Consolidated income statement
– Other information
Procedure similar to an "unconsolidated"
statement of cash flows
Look at items specific to companies with:
– Subsidiaries
– Equity investments
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Investing & Financing Cash Flows
Investing cash flows:

– Include cash acquisition and/or disposition of
subsidiaries
– Include cash acquisition and/or disposition of
equity investees
Financing cash flows:
– Include cash dividends paid to noncontrolling
interests
Operating Cash Flows
Direct method:
– Include cash dividends received from equity
investees (not equity method income)
Indirect method:
– Start with controlling share of net income
– Add the noncontrolling interest share
– Deduct the excess of equity method income over
cash dividends received from equity investees
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4.7: Appendix A – Trial

Balance Format
Procedures
Alternative (Trial Balance)

Worksheet Format
Worksheet format presented earlier used the

basic financial statements
Alternative uses the ADJUSTED trial balances of
the parent and subsidiary.
Columns on worksheet:
– Parent and subsidiary adjusted trial balances,
– DR and CR adjustments,
– Income statement,
– Statement of retained earnings, and
– Balance sheet columns
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Completing the Worksheet
1. Enter worksheet elimination entries into the

DR and CR columns.
2. Add accounts as needed (e.g., noncontrolling
interest, goodwill, noncontrolling interest
share).
3. Carry consolidated balances to income
statement, retained earnings, or balance
sheet columns, as appropriate.
4. Move controlling share of income to the
retained earnings column.
5. Move ending retained earnings to the balance
sheet column.
4.8: Appendix B –
Consolidation Worksheet
Procedures
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Worksheet: Incomplete Equity Method

(1 of 2)
Under the complete equity method, the parent

company’s net income equals the controlling
share of consolidated net income, and the parent
company’s retained earnings equal consolidated
retained earnings.
If these equalities are not present, then the

incomplete equity method is used.
Worksheet: Incomplete Equity Method

(2 of 2)
1. Results from an incorrect application of the

equity method or use of the cost method of
subsidiary accounting.
2. This is not considered a violation of GAAP as
long as the consolidated financial statements
prepared for stockholders are correct.
3. An approach to preparing consolidation
working papers under an incomplete equity
method is to convert the parent company’s
accounts to the equity method as the first
working paper entry.
24
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Worksheet: Cost Method
Subsidiary income only recognized when dividends

are declared.
1. Conversion to equity approach
2. Use traditional working paper entries to
consolidate parent and subsidiary under the cost
method.
3. This is easier in year of acquisition, but becomes
more complicated in years after, especially if
there are intercompany activities.
25

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3/3/2021

Preparing the Worksheet

Statements are entered onto the worksheet:

Completing the Worksheet

1. Enter Parent and Sub. amounts at 100% of

Completing the Worksheet (2 of 2)

5. For income, ending retained earnings and all

1. Adjust for errors & omissions

Example: Pop & Son Data

Pop paid $176 for 80% of Son on 1/1/2016 when

Son’s income and dividends follow:

blank 2016 2017

Cost of 80% of Son $176 Allocated to: Amt Amort.

Use these amounts Use these amounts in

Income & Dividend Calculations (1 of 2)

Son's net income $50 Pop's 80% share

Son's net income $60 Pop's 80% share

Pop's 2016 Worksheet Entries (1 of 3)

1. Adjust for errors & omissions

Income from Son (-R, -SE) 36.8 Blank

Pop's 2016 Worksheet Entries (2 of 3)

4. Record noncontrolling interest in sub.'s earnings

5. Eliminate reciprocal Investment & sub.'s equity

Pop's 2016 Worksheet Entries (3 of 3)

6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balances

Pop's 2016 Worksheet (1 of 2)

Statement of retained earnings blank blank blank blank blank

Balance Sheet 12/31/2016

A Look at the Income

● Income from Son is eliminated.

● $36.8 x .20/.80 = $9.2

A Look at Retained Earnings

Year ended 12/31/2016c Pop Son DR CR Consol

Beginning retained earnings 10.0 60.0 60.0 blank 10.0

● Beginning retained earnings of Son is eliminated.

Balance sheet, 12/31/2016 Pop Son DR CR Consol

A Look at Liabilities & Equity

Balance sheet, 12/31/2016 Pop Son DR CR Consol

Analysis, for 2017

Unamort. Unamort. Unamort.

Patents $40 $4 $36 $4 $32

Use these amounts in Use these amounts in

Income & Dividend Calculations (2 of 2)

Son's net income $60 Pop's 80% share

Pop's Worksheet Entries for 2017 (1 of 3)

1. Adjust for errors & omissions

Income from Son (-R, -SE) 44.8 blank

Dividends (+SE) blank 24.0

Investment in Son (-A) blank 20.8

Pop's Worksheet Entries for 2017 (2 of 3)

4. Record noncontrolling interest in sub.'s earnings

5. Eliminate reciprocal Investment & sub.'s equity

Eliminating Investment in Son

Entry 5 eliminates the Investment in Son and establishes the

Implied value of Son at acquisition $176/.80 $220

– Investment in Son (80% x $236) = $188.8

Pop's Worksheet Entries for 2017 (3 of 3)

6. Amortize fair value differentials

Amortization Expense (E, -SE) 4 blank

Patents (-A) blank 4

7. Eliminate other reciprocal balances