Chapt

er6
6.
1. Consol
i
dat
ion:
subsequentt
odat
eofpur
chase-
typebusi
nesscombi
nat
ion
Subsequentt
othedat
eofbusi
nesscombi
nat
ion,t
hepar
entcompanymustaccountf
or
t
heoper
ati
ngr
esul
tsoft
hesubsi
diar
y:t
heneti
ncomeornetl
ossanddi
vi
dendsdecl
aredand
pai
dbyt
hesubsi
diar
y.I
nter
companyt
ransact
ionsmustal
sober
ecor
ded.
6.
1.1.Account
ingf
orOper
ati
ngResul
tsofWhol
l
yOwnedPur
chasedSubsi
diar
ies
Ther
e ar
etwo al
ter
nat
ive met
hods f
ort
his pur
pose:t
he equi
tymet
hod and t
he cost
met
hodofaccount
ing.
Equi
tyMet
hod
Undert
hismet
hod,
thepar
entcompanyr
ecogni
zesi
tsshar
eoft
hesubsi
diar
y’sneti
ncomeor
netl
oss,adj
ust
edf
ordepr
eci
ati
onandamor
ti
zat
ionofdi
ffer
encesbet
weencur
rentf
air
val
uesand car
ryi
ng amount
sofpur
chased subsi
diar
y’snetasset
sont
hedat
eoft
he
busi
nesscombi
nat
ion,
aswel
lasi
tsshar
eofdi
vi
denddecl
aredbyt
hesubsi
diar
y.
Theequi
tymet
hod i
ssai
dto beconsi
stentwi
tht
heaccr
ualbasi
sofaccount
ing asi
t
r
ecogni
zesi
ncr
easesordecr
easesi
nthecar
ryi
ngamountofpar
entcompany
’si
nvest
menti
n
t
hesubsi
diar
yasneti
ncomeornetl
oss,notwhent
heyar
epai
dasdi
vidends.Thus,
pr
oponent
scl
aim,t
heequi
tymet
hod st
ressest
heeconomi
csubst
anceoft
hepar
ent
subsi
diar
yrel
ati
onshi
p.Di
videndsdecl
aredbyt
hesubsi
diar
ydonotconst
it
uter
evenuet
he
par
entcompanybutar
eal
iqui
dat
ionofapor
tionoft
hepar
entcompany’
sinv
est
menti
n
t
hesubsi
diar
y.
CostMet
hod
Undert
hismet
hod,
thepar
entcompanyaccount
sfort
heoper
ati
onofasubsi
diar
yonl
ytot
he
ext
entt
hat0di
vi
dends ar
e decl
ared by t
he subsi
diar
y. Di
vi
dends decl
ared by t
he
subsi
diar
yfr
om neti
ncomesubsequentt
othebusi
nesscombi
nat
ionar
erecogni
zedas
r
evenuebyt
hepar
entcompany
;di
videndsdecl
aredbyt
hesubsi
diar
yinexcessofpost
-
combi
nat
ionneti
ncomeconst
itut
ear
educt
ionoft
hecar
ryi
ngamountoft
hepar
ent
company
’si
nvest
menti
nthesubsi
diar
y.Neti
ncomeornetl
ossoft
hesubsi
diar
yisnot
r
ecogni
zedbyt
hepar
entcompany
.
Suppor
ter
s cl
aim t
hatt
his met
hod appr
opr
iat
elyr
ecogni
zes t
he l
egalf
orm ofpar
ent
subsi
diar
yrel
ati
onshi
p.Thus,a par
entcompany r
eal
i
zes r
evenue when t
he subsi
diar
y
decl
aresdi
vi
dend,
notwheni
trepor
tsneti
ncome.
I
ll
ust
rat
ion ofEqui
tyMet
hod f
orWhol
l
yOwned Pur
chased Subsi
diar
yforFi
rstYearaf
ter
Busi
nessCombi
nat
ion

1
Exampl
e1:Assumet
hatPal
m Cor
por
ati
onhad used pur
chaseaccount
ing f
orbusi
ness
combi
nat
ionwi
thi
tswhol
l
yownedsubsi
diar
y,St
arCompany
,andt
heSt
arhadaneti
ncome
of60,
000f
ort
hey
earendedDecember31,2018.OnDecember20,2018,St
ar’
sBODs
decl
aredacashdi
vi
dendof$0.
60ashar
eont
he40,
000out
standi
ngshar
es.
Dec.20:
Star
’sj
our
nal
ent
ryt
orecor
ddi
vi
denddecl
arat
ioni
s:
Di
vi
dendsDecl
ared 24,
000
I
nter
companyDi
vi
dendsPay
abl
e 24,
000
Torecor
ddecl
arat
ionofdi
vi
dend
Undertheequi
tymet hodofaccount
ing,Pal
m Cor
por
ati
onpr
epar
est
hef
oll
owi
ngj
our
nal
ent
riest
o
r
ecor
dthedi
vi
dendandneti
ncomeofSt
ar.
1.I
nter
companyDi
vi
dendRecei
vabl
e 24,
000
I
nvest
menti
nSt
arCo. 24,
000
Tor
ecor
ddi
vi
denddecl
aredbySt
arCompany
2.I
nvest
menti
nSt
arCo. 60,
000

I
nter
companyI
nvest
mentI
ncome 60,
000
Tor
ecor
d100%ofSt
arCompany
’sneti
ncome
The cr
edi
ttoi
nvest
menti
n subsi
diar
yaccounti
nthe f
ir
stent
ryr
efl
ect
san under
lyi
ng
pr
emi
seoft
heequi
tymet
hodofaccount
ing:di
vi
dendsdecl
aredbyasubsi
diar
yrepr
esenta
r
etur
nofapor
ti
onoft
hepar
entcompany
’si
nvest
menti
nthesubsi
diar
y.
The second ent
ryr
ecor
ds t
he par
ent
s 100% shar
e oft
he subsi
diar
y’s neti
ncome.The
subsi
diar
y’sneti
ncomeaccr
uest
othepar
entcompanyundert
heequi
tymet
hodofaccount
ing.
Adj
ust
mentofPur
chasedSubsi
diar
y’sNetI
ncome
Cont
inui
ngwi
tht
hePal
m Cor
por
ati
onSt
arCompanybusi
nesscombi
nat
ion,Pal
m mustpr
epar
e
at
hir
djour
nal ent
ryt
o adj
ust St
ar’
s net i
ncome f
or depr
eci
ati
on and amor
ti
zat
ion
at
tr
ibut
abl
etot
hedi
ff
erencebet
weent
hecur
rentf
ri
arv
aluesandcar
ryi
ngamount
sofSt
ar’
s
netasset
sont
hedat
eoft
hebusi
ness combi
nat
ion-
December 31,
2017. Becausesuch
di
ff
erenceswer
enotr
ecor
dedbyt
hesubsi
diar
y,i
tsneti
ncomei
sov
erst
atedf
rom t
hepoi
ntof
v
iewoft
heconsol
i
dat
edent
it
y.
Onthedat
eoft
hebusi
nesscombi
nat
ion,di
ff
erencesbet
weencur
rentf
airv
aluesandcar
ryi
ng
amount
s

2
ofSt
arCompany
’snetasset
swer
easf
oll
ows:

I
nvent
ori
es(
FIFO)
25,
000
Pl
antasset
s(net
)
Land 15,
000

Bui
l
ding(
economi
cli
fe15y
ear
s) 30,
000
Machi
ner
y(economi
cli
fe10y
ear
s) 20,
000 65,
000
Pat
ent(
economi
cli
fe5y
ear
s) 5,
000
Goodwi
l
l(economi
cli
fe30y
ear
s) (
35,
000)
Tot
al 60,
000

Pal
m Cor
por
ati
on pr
epar
es t
he f
oll
owi
ng j
our
nalent
ryt
oref
lectt
he ef
fect
s of
depr
eci
ati
on andamor
ti
zat
ionont
heabov
edi
ff
erencesont
heneti
ncomeofSt
ar
Companyf
ort
hey
earendedDecember31,
2018:
I
nter
companyI
nvest
mentI
ncome 28,
833
I
nvest
menti
nSt
arCoCommonSt
ock 28,
833
Toamor
ti
zedi
ff
erencesbet
weencur
rentf
airv
alueandcar
ryi
ngamount
s

I
nvent
ori
es-t
ocostofgoodssol
d 25,
000
Bui
l
ding-depr
eci
ati
on(
30,
000/
15) 2,
000
Machi
ner
y-depr
eci
ati
on(
20,
000/
10) 2,
000
Pat
ent
-Amor
ti
zat
ion(
5,000/
5) 1,
000
Goodwi
l
l-amor
ti
zat
ion(
35,
000/
30) (
1,167)
Tot
al 28,
833

Dev
elopi
ngt
heEl
i
minat
ion
Pal
m Cor
por
ati
on’
suseofequi
tymet
hodofaccount
ingf
ori
tsi
nvest
menti
nSt
arCompany
r
esul
tsi
nabal
ancei
ninv
est
mentaccountt
hati
sami
xtur
eoft
wocomponent
s:
 Thecar
ryi
ngamountofSt
ar’
snetasset
s
 Theexcessofcur
rentf
airval
uesovert
hecar
ryi
ngamountofSt
ar’
sident
if
iabl
enet
asset
s,i
ncl
udi
nggoodwi
l
l,ont
hedat
eofbusi
nesscombi
nat
ion
Al
lthr
eebasi
cfi
nanci
alst
atement
smustbeconsol
i
dat
edf
oraccount
ingper
iods

3
subsequentt
othe dat
e ofpur
chase t
ype busi
ness combi
nat
ion and hence t
he
el
i
minat
ion wor
king papermusti
ncl
ude account
sthatappeari
nthe const
it
uent
compani
es‟i
ncomest
atement
,st
atementofr
etai
nedear
ningsandbal
ancesheet
s.
Thei
temst
hatmustbei
ncl
udedi
nel
i
minat
ionar
e:
1.Thesubsi
diar
y’sbegi
nni
ngofy
earst
ockhol
der
’sequi
tyandi
tsdi
vi
dends,
andt
hepar
ent
’s
i
nvest
ment
2.Thepar
ent
’si
nter
companyi
nvest
menti
ncome
3.Unamor
ti
zedcur
rentf
airv
alueexcessoft
hesubsi
diar
y
4.Cer
tai
noper
ati
ngexpensesoft
hesubsi
diar
y
Exampl
e4:
Assumet
hatSt
arCompanyal
l
ocat
es:
 Machi
ner
ydepr
eci
ati
onandpat
entamor
ti
zat
iont
ocostofgoodssol
d
 Goodwi
l
lamor
ti
zat
iont
ooper
ati
ngexpenses
 Bui
l
dingdepr
eci
ati
on50%eacht
ocostofgoodssol
dandoper
ati
ngexpenses
The wor
king paperel
i
minat
ion i
n wor
king paperf
ormati
s as f
oll
ows wi
tht
he
componenti
temsnumber
edi
naccor
dancewi
tht
hef
oregoi
ngbr
eakdown:
Commonst
ock-
Star 200,
000
Excessov
erpar 58,
000
Ret
ainedEar
nings-
Star 132,
000
I
ntr
ecompanyI
nvest
mentI
ncome-
Pal
m 31,
167
Pl
antAsset
s(net
)-
Star(
65,
000-
4,000) 61,
000
Pat
ent
-St
ar(
net
)(5,
000-
1,000) 4,
000
Goodwi
l
l-St
ar(
net
)(35,
000-
1,167) (
33,
833)
CostofGoodsSol
d-St
ar 29,
000
Oper
ati
ngExpenses-
Star 2,
167
I
nvest
menti
nSt
arCoCo. 459,
501
Di
vi
dendDecl
ared-
Star 24,
000
Tocar
ryoutt
hef
oll
owi
ng:
a)El
imi
nat
eint
ercompanyi
nvest
mentandequi
tyaccount
sofsubsi
diar
yatbegi
nni
ngof
y
earandsubsi
diar
ydi
vi
dend
b)Pr
ovi
def
ordepr
eci
ati
onandamor
ti
zat
ionondi
ff
erencebet
weencur
rentf
airv
aluesand
car
ryi
ngamount
s
c)Al
l
ocat
eunamor
ti
zeddi
ff
erencest
opr
operaccount
s
Wor
kingPaperf
orConsol
i
dat
edFi
nanci
alSt
atement
s
Thef
oll
owi
ngaspect
soft
hewor
kingpapershoul
dbeemphasi
zed:

4
  Thei
nter
companyr
ecei
vabl
eandpay
abl
ear
epl
acedont
hesamel
i
neandof
fsetwi
thout
f
ormal
eli
minat
ion
 The el
i
minat
ion cancel
sthe subsi
diar
y’sr
etai
ned ear
nings bal
ance att
he dat
e of
busi
nesscombi
nat
ion,sot
hateachoft
het
hreebasi
cfi
nanci
alst
atement
smaybe
consol
i
dat
edi
ntur
n.
 TheFI
FO met
hod i
sused t
o accountf
ori
nvent
ori
esbySt
arCompany
.Thus,t
he
di
ff
erenceof25,
000at
tri
but
abl
etobegi
nni
ngi
nvent
ori
esi
sal
l
ocat
edt
ocostofgoods
sol
d.
 One ef
fectoft
he el
imi
nat
ion i
stor
educe t
he di
ffer
ence bet
ween t
he car
ryi
ng
amount
sandcur
rentf
airv
aluesbyt
heamountofamor
ti
zat
ion.(
60,
000-
28,
833=31,
167)
Thepar
entcompany
’suseoft
heequi
tymet
hodofaccount
ingr
esul
tsi
ntheequal
i
tiesdescr
ibed
bel
ow:
Par
entcompanyneti
ncome=consol
i
dat
edneti
ncome
Par
entcompanyr
etai
nedear
nings=consol
i
dat
edr
etai
nedear
nings

6.
1.2.Account
ingf
orOper
ati
ngResul
tsofPar
ti
all
yOwnedPur
chasedSubsi
diar
ies
 Requi
rescomput
ati
onofmi
nor
it
yint
eresti
nneti
ncomeornetl
ossoft
hesubsi
diar
y.
 Undert
hepar
entcompanyconcept
,themi
nor
it
yint
eresti
nneti
ncomeornetl
ossofa
subsi
diar
yisi
ncl
udedasexpensei
ntheconsol
i
dat
edi
ncomest
atement
.
I
ll
ust
rat
ion:
ThePostCor
por
ati
on-SageCompanyconsol
idat
edent
it
yisusedt
oil
lust
rat
e.Postowns
95%oft
he
out
standi
ngcommonst
ockofSageandmi
nor
it
yst
ockhol
der
sownt
her
emai
ning5%.Assume
t
hatSageCompanydecl
aredandpai
ddi
vi
dend40,
000of1ashar
eandhadaneti
ncomeof
90,
000f
ort
hey
earended31December2018.Sagepr
epar
est
hef
oll
owi
ngent
ri
esf
ort
he
decl
arat
ionandpay
mentoft
hedi
vi
dend:

Di
vi
dendsDecl
ared(
40,
000*
$1) 40,
000
Di
vi
dendsPay
abl
e(40,
000*
.05) 2,
000
I
nter
companyDi
vi
dendsPay
abl
e(40,
000*
.95) 38,
000
Tor
ecor
ddecl
arat
ionofdi
vi
dend
Di
vi
dendsPay
abl
e 2,
000

I
nter
companyDi
vi
dendsPay
abl
e 38,
000
Cash 40,
000

5
Tor
ecor
dpay
mentofdi
vi
denddecl
ared
Post
’sj
our
nal
ent
ri
eswi
thr
egar
dst
oSage’
soper
ati
ngr
esul
tsi
ncl
udet
hef
oll
owi
ng:
I
nter
companyDi
vi
dendsRecei
vabl
e 38,
000
I
nvest
menti
nSageCoCommonSt
ock 38,
000

Tor
ecorddi
vi
denddeclar
edbySageCompany
Cash 38,
000
Int
ercompanyDi
vi
dendsRecei
vabl
e 38,
000
Torecor
drecei
ptofdi
vi
dendfrom SageCompany
I
nvestmenti
nSageCo.(90,
000*.
95) 85,
500
I
nter
companyI
nvest
mentI
ncome 85,
500
Tor
ecord95%ofneti
ncomeofSageCompanyf ort
hey earendedDec31,2018
Asnot
edearl
ier
,apurchase-
typebusi
nesscombi
nati
oninvolvesarest
atementofnet
assetv
aluesoft
hesubsi
diar
y. Howev
er,t
he net i
ncome r
epor
ted by Sage
Companydoes notr
efl
ectcostexpi
rat
ionat
tri
but
abl
etot
her
est
atednetasset
val
uesast
her
est
atement
swer
enotent
eredi
nthecompany’
saccount
ingr
ecor
ds.
Assumet
hatt
hedi
ff
erencewasal
l
ocat
edt
oSage’
sident
if
iabl
easset
sasf
oll
ows:
I
nvent
ori
es(
FIFO)
26,
000
Pl
antasset
s:
Land 60,
000

Bui
l
ding(
economi
cli
fe20y
rs) 80,
000
Machi
ner
y(economi
cli
fe5y
rs) 50,
000 190,
000
Leasehol
d(economi
cli
fe6y
rs) 30,
000
Tot
al 246,
000
PostCor
por
ati
onpr
epar
est
hef
oll
owi
ngj
our
nalent
ryonDecember31,
2018t
oref
lectt
heef
fect
oft
hedi
ff
erencesbet
weent
hecur
rentf
airv
aluesandcar
ryi
ngamount
sofpar
ti
all
yowned
subsi
diar
ysi
dent
if
iabl
enetasset
s:
I
nter
companyI
nvest
mentI
ncome 42,
750
42,
750
I
nvest
menti
nSageCoCommonSt
ock

To amor
ti
ze di
ff
erences bet
ween cur
rentf
airv
alues and car
ryi
ng amount
s of
SageCompany
’si
dent
if
iabl
enetasset
sonDec31,
2017
I
nvent
ori
est
ocostofgoodssol
d 26,
000
Bui
l
ding–Dep.(
80,
000/
20) 4,
000
Machi
ner
y–Dep.(
50,
000/
5) 10.
000
Leasehol
d–Amr
t.(
30,
000/
6) 5,
000
Tot
aldi
ff
erenceappl
i
cabl
eto2018 45,
000

6
Amor
ti
zat
ionf
or2018(
45,
000*
.95) 42,
750
Assumet
hatSageCompanyal
l
ocat
es:
 Machi
ner
ydepr
eci
ati
onandl
easehol
damor
ti
zat
ionent
ir
elyt
ocostofgoodssol
d
 Bui
l
dingdepr
eci
ati
on50%eacht
ocostofgoodssol
dandoper
ati
ngexpenses
Dev
elopi
ngt
heEl
i
minat
ion
PostCorpor
ati
on‟
suseofequi
tymet
hodofaccount
ingf
ori
tsi
nvest
menti
nSt
arCompany
resul
tsi
na
bal
ancei
ninv
est
mentaccountt
hati
sami
xtur
eoft
wocomponent
s:
 Thecar
ryi
ngamountofSage’
snetasset
s
 Theexcessofcur
rentf
airval
uesovert
hecar
ryi
ngamountofSage’
sident
if
iabl
enet
asset
s,i
ncl
udi
nggoodwi
l
l,ont
hedat
eofbusi
nesscombi
nat
ion
Thef
oll
owi
ngi
sthewor
kingpaperel
i
minat
ioni
njour
nal
ent
ryf
ormat
CommonSt
ock-
Sage 400,
000
Excessov
erpar 235,
000
Ret
ainedEar
nings-
Sage 334,
000
I
nter
companyI
nvest
mentI
ncome-
Post 42,
750
Pl
antAsset
s-Sage(
190,
000-
14,
000) 176,
000
Leasehol
d(net
)(30,
000-
5,000) 25,
000
CostofGoodsSol
d-Sage 43,
000
Oper
ati
ngExpenses-
Sage 2,
000
Negat
iveGoodwi
l
l(net
)(14,
250) 14,250
I
nvest
menti
nSageCoCommonSt ock-
Post 1,144,
750
Di
vi
dendsDecl
ared-
Sage 40,
000
Minor
it
yInt
eresti
nNetAsset
sofSub(
60,
750-
2,000) 58,
750
Tocarr
youtthefol
lowi
ng:
a)Eli
minat
ei nt
er company i
nv est
ment and amor ti
zati
on on di ff
erencescombinat
ion
datecur
rentfairval
uesandcar r
yingamountstoappropriat
eassets
b)Provi
de for y ear 2018depr eciat
ion and amor t
izat
ion on di ffer
encesbetween
curr
entf
airvaluesandcarr
yingamount sofSage’
sidenti
fi
ablenetassets:

CGS Op.Exp
I
nvent
ori
essol
d 26,
000
Bui
l
dingDep. 2,
000 2,
000
Machi
ner
yDep. 10,
000
Leasehol
dAmor
t 5,
000
Tot
al 43,
000 2,
000
a)Al
locat
e unamor
ti
zed di
ffer
ences bet
ween combi
nat
ion dat
e cur
rentf
airv
aluesand
car
ryi
ngamount
stoappr
opr
iat
easset
s
b)Est
abl
i
shmi
nor
it
yint
erestofsubsi
diar
yatbegi
nni
ngofy
ear(
60,
750)
,lessmi
nor
it
yint
erest

7
 shar
eofdi
vi
dendsdecl
aredbysubsi
diar
ydur
ingt
hey
ear(
40,
000*
.05=2,
000)

Mi
nor
it
yInt
eresti
nNetincomeofSub 2,
250
Minori
tyi
nter
estinnetasset
sofsub 2,
250

Toest
abl
i
shmi
nor
it
yint
eresti
nsubsi
diar
y‟sadj
ust
edneti
ncome
Neti
ncomeofsubsi
diar
y 90,
000
Netr
educt
ion(
43,
000+2,
000) 45,
000
Adj
ust
edNetI
ncome 45,
000
Mi
nor
it
yint
erest(
45,
000*
.05) 2,
250