Chapter 7

Consolidated Financial Statements:

Subsequent to Date of Purchase-
Type Business Combination

ACCT 501
Objectives of this Chapter
Prepare the consolidated financial
statements for the parent company
and its subsidiaries for the years
following business combination for
purchase-type business combination
For wholly owned purchased
subsidiaries
For partially owned purchased
subsidiaries
Consolidated FS-Subsequent to date of purchase type 2
Accounting for Operating Results of
Wholly Owned Purchased Subsidiaries
A parent company may choose the
equity method or the cost method
in accounting for the operating
results of purchased subsidiaries.

Consolidated FS-Subsequent to date of purchase type 3

Equity Method
The parent company recognizes its
share of the subsidiarys net income or
loss and adjusted for the depreciation
and amortization of the step up on
purchased subsidiarys net assets.
The parent company also recognizes
its share of dividends declared by the
subsidiary.

Consolidated FS-Subsequent to date of purchase type 4

Equity Method (contd.)
Thus, the equity method is consistent
with the accrual basis accounting.
Equity method emphasizes the economic
substance of the parent-subsidiary.
Dividends declared by subsidiaries are
not revenue to the parent company,
rather, they are a liquidation of a portion
of the parent companys investment in
the subsidiary.
Consolidated FS-Subsequent to date of purchase type 5
Cost Method
Under this method, the parent
company accounts for the operations
of a subsidiary only to the extend that
dividends are declared by the
subsidiary.
This method emphasizes the legal
form of the parent-subsidiary
relationship.
Consolidated FS-Subsequent to date of purchase type 6
Choosing Between Equity Method
and Cost Method
Consolidated financial statement
amounts are the same regardless
of the method used to account for
a subsidiarys operations.
The differences are in the working
paper elimination.

Consolidated FS-Subsequent to date of purchase type 7

Choosing Between Equity Method
and Cost Method (contd.)
Equity method is appropriate for
both pooled subsidiaries and
purchased subsidiaries.
The cost method is only
appropriate for purchased
subsidiaries.

Consolidated FS-Subsequent to date of purchase type 8

Example 7.1: Equity Method for holly Owned
Purchased Subsidiary for First Year after
Business Combination (textbook p286-296)
Assumed that Palm Corporation had
used purchase accounting for the
December 31, 1999, business
combination with its wholly owned
subsidiary- Starr Company. Starr had
a net income of $60,000 (income
statement is on p293 of the textbook)
for the year ended December 31,
2000.
Consolidated FS-Subsequent to date of purchase type 9
Example 7.1: (contd.)
On December 20, 2000, Starrs board
of directors declared a cash dividend
of $0.60 a share on the 40,000
outstanding shares of common stock
owned by Palm. The divided was
payable January8, 2001, to
stockholders recorded December 29,
2000.
Consolidated FS-Subsequent to date of purchase type 10
Example 7.1: (contd.)
Starrs December 20, 2000, journal entry to
record the dividend declaration is as follows:
12/20
Dividends Declared 24,000
Intercompany Dividend payable 24,000

The intercompany dividend payable account

must be eliminated in the preparation of
consolidated financial statements for the
year 2000.
Consolidated FS-Subsequent to date of purchase type 11
Example 7.1: (contd.)
Under the equity method, Palm Corp.
prepares the following journal entries to
record the dividend and net income of
Starr for the year ended 12/31/2000:
12/20/00
Intercompany
Dividend Receivable 24,000
Investment in Starr Company Stock 24,000

To record the dividends declared by Starr.

Consolidated FS-Subsequent to date of purchase type 12
Example 7.1: (contd.)
12/31/00
Investment in
Starr Company Stock 60,000
Intercompany Investment Income 60,000

To record the Palms share (100%) of net income on

Starr under equity method

Consolidated FS-Subsequent to date of purchase type 13

Adjustment of Purchased
Subsidiarys Net Income
Since Palms acquisition of Starr is
accounted for using the purchase
method, adjustments are needed to
adjust Starrs net income for
depreciation and amortization
attributable to the step up on Starrs
net assets on 12/31/99.

Consolidated FS-Subsequent to date of purchase type 14

Adjustment of Purchased
Subsidiarys Net Income (contd.)
Assumed that on 12/31/99,
differences between the current fair
values and carrying amounts of
Starrs net assets were as follows
(also see p236 and p241 of chapter 6
of the textbook):

Consolidated FS-Subsequent to date of purchase type 15

Adjustment of Purchased
Subsidiarys Net Income (contd.)
Inventories (FIFO) $ 25,000
Plant assets (net)
Land $15,000
Building(eco. life 10 yrs.) 30,000
Machinery(eco. life 10yrs.) 20,000 65,000
Patent (eco. life 5 yrs.) 5,000
Goodwill (eco. life 30 yrs.) 15,000
Total $110,000
Consolidated FS-Subsequent to date of purchase type 16
Adjustment of Purchased
Subsidiarys Net Income (contd.)
Palm prepares the following journal entry to
account for the depreciation and
amortization of the step up on Starrs net
assets:

12/31/2000
Intercompany
Investment Income 30,500
Investment in
Starr Company Stock 30,500
Consolidated FS-Subsequent to date of purchase type 17
Adjustment of Purchased
Subsidiarys Net Income (contd.)
The annual depreciation and amortization of
the step up are as follows:
Inventory (to cost of goods sold) $25,000
Building (30,000/15) 2,000
Machinery (20,000/10) 2,000
Patent (5,000/5) 1,000
Goodwill (15,000/30) 500
Total depr. And amort. For year 2000 $30,500

(income tax effects are disregarded)

Consolidated FS-Subsequent to date of purchase type 18
Adjustment of Purchased
Subsidiarys Net Income (contd.)
After the three foregoing journal entries,
Palm Corp.s Investment in Starr Companys
Common Stock and intercompany
Investment Income accounts are as follows:
Investment in Starrs
Common Stock
12/31/99 450,000 a
12/31/99 50,000 b
12/31/00 60,000 d 24,000 c 12/20/00
30,500 e 12/31/00
12/31/00 505,500
Consolidated FS-Subsequent to date of purchase type 19
Adjustment of Purchased
Subsidiarys Net Income (contd.)
a. Issuance of common stock (by Palm) in
the acquisition of Starr.
b. Direct out-of-pocket costs of business
combination.
c. Recognition of dividend declared by the
subsidiary-Starr.
d. Recognition of wholly owned subsidiarys
(Starr) net income.
e. Recognition of depre. and amor. on the
step-up of Starrs net assets.
Consolidated FS-Subsequent to date of purchase type 20
Adjustment of Purchased
Subsidiarys Net Income (contd.)
Intercompany
Investment Income
60,000 a 12/20/00
12/31/00 30,500 b
29,500

Consolidated FS-Subsequent to date of purchase type 21

Development of the Elimination
Analysis of Investment in Starr Stock
account (for the year ended 12/31/2000)
Carrying Step-up Total
Amount.
Beginning Balances $390,000 $110,000 $500,000
(on 12/31/99)
Net Income(Starr) 60,000 60,000
Amort. On Step-up (30,500) (30,500)
Dividends Declared (24,000) (24,000)
by Starr
Ending Balance $426,000 $79,500 $505,500
Consolidated FS-Subsequent to date of purchase type 22
Development of the Elimination
(contd.)
Note:
1. The ending balance on the carrying
amount (book value),$426,000,
equals the balance the total
stockholders equity of Starr on
12/31/2000 as follows (see the
balance sheet section of Starr on p293
of textbook):

Consolidated FS-Subsequent to date of purchase type 23

Development of the Elimination
(contd.)

Common Stock,$5 par $200,000

Additional Paid-in Capital 58,000
Retained Earnings 168,000
(132,000+60,000-24,000)
Total Stockholders Equity $426,000

Consolidated FS-Subsequent to date of purchase type 24

Development of the Elimination
(contd.)
The $79,500 balance on the Step-up
column represents the unamortized
excess amount (the difference
between the current fair value of net
assets and the carrying amount). The
details are in the following table:

Consolidated FS-Subsequent to date of purchase type 25

Development of the Elimination
(contd.)
Balances, Amort. for Balances,
Dec.31,1999 Year 2000 Dec. 31,2000
Inventories $ 25,000 $(25,000)
Plant assets(net):
Land $ 15,000 $15,000
Building 30,000 $ (2,000) 28,000
Machinery 20,000 (2,000) 18,000
Total plant
assets $ 65,000 $ (4,000) $61,000
Patent $ 5,000 $ (1,000) $ 4,000
Goodwill 15,000 (500) 14,500
Totals $110,000 $(30,500) $79,500
Consolidated FS-Subsequent to date of purchase type 26
Palm Corp. and Subsidiary Working Paper
Elimination (on 12/31/2000)
All three basic financial statements (the
income statement, the statement of
retained earnings and the balance
sheet) must be consolidated for
accounting period following the date of
a purchase-type business
combination.The items that must be
included in the elimination are:

Consolidated FS-Subsequent to date of purchase type 27

Palm Corp. and Subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
1)The subsidiarys beginning balance of
stockholders equity accounts and its
dividends and parents investment account;
2)the parents intercompany investment
income ;
3)unamortized current fair value excess of the
subsidiary;
4)certain operating expense of the subsidiary.

Consolidated FS-Subsequent to date of purchase type 28

Palm Corp. and Subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
Assuming that Starr allocates machinery
depreciation and patent amortization entirely
to cost of goods sold, goodwill amortization
entirely to operating expense and building
depreciation 50% each to cost of goods sold
and operating expenses, the working paper
elimination (in journal entry format) for Palm
and subsidiary on 12/31/2000 is as follows:

Consolidated FS-Subsequent to date of purchase type 29

Palm Corp. and Subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
Common Stock-Starr 200,000
Additional Paid-in Capital-Starr 58,000
Retained Earnings-Starr 132,000
Investment Income-Palm 29,500
Plant Assets (net)-Starr
($65,000-4,000) 61,000
Patent (net)-Starr ($5,000-1,000) 4,000
Goodwill (net)-Starr ($15,000-500) 14,500
Cost of Goods Sold-Starr 29,000
Operating Expenses-Starr 1,500
Investment in Starr
Common Stock 505,500
Dividends Declared-Starr 24,000
Consolidated FS-Subsequent to date of purchase type 30
Palm Corp. and Subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
Note:
1. Income tax effects are disregarded
2. the computation of cost of goods
sold and operating expense are as
follows:

Consolidated FS-Subsequent to date of purchase type 31

Palm Corp. and Subsidiary Working Paper
Elimination (on 12/31/2000) (contd.)
Cost of Operating
Goods Sold Expenses
Inventories sold $25,000
Building depreciation 1,000 $1,000
Machinery depreciation 2,000
Patent amortization 1,000
Goodwill amortization 500
Totals $29,000 $1,500

Consolidated FS-Subsequent to date of purchase type 32

 Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (on p293 of textbook)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Income Statement Palm Starr Eliminations Consolidated
Corporation Company Increase
Revenue:
Net Sales 1,100,000 680,000 1,780,000
Intercompany investment
income 29,500 (a)(29,500)
Total revenue 1,129,500 680,000 (29,500) 1,780,000
Costs and expenses:
Cost of good sold 700,000 450,000 (a) 29,000 1,179,000
Operating expenses 217,667 130,000 (a) 1,500 349,167
Interest expenses 49,000 49,000
Income taxes expense 53,333 40,000 93,333
Total costs and
expenses 1,020,000 620,000 30,500* 1,670,500
Net income 109,500 60,000 (60,000) 109,500
Consolidated FS-Subsequent to date of purchase type 33
 Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Statement of Palm Starr Eliminations Consolidated
Retained Earnings Corporation Company Increase
Retained earnings,
beginning of year 134,000 132,000 (a) (132,000) 134,000
Net income 109,500 60,000 (60,000) 109,500
Subtotal 243,500 192,000 (192,000) 243,500
Dividends
declared 30,000 24,000 (a) (24,000)+ 30,000
Retained earnings,
end of year 213,500 168,000 (168,000) 213,500

(Continued)
Consolidated FS-Subsequent to date of purchase type 34
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Balance/Assets Palm Starr Eliminations Consolidated
Corporation Company Increase
Cash 15,900 72,100 88,000
Intercomapny receivable
(payable) 24,000 (24,000)
Inventories 136,000 115,000 251,000
Other current assets 88,000 131,000 219,000
Investment in Starr
Company common stock 505,500 (a) (505,500)
Plant assets (net) 3,500,000 340,000 (a) 61,000 841,000
Patent (net) 440,000 16,000 (a) 4,000 20,000
Goodwill (net) (a) 14,500 14,500
Total assets 1,209,400 650,100 (426,000) 1,433,,500
Consolidated FS-Subsequent to date of purchase type 35
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
PALM CORPORATION AND SUBSIDIARY
Working paper for Consolidated Financial Statements
For Year Ended December 31,2000
Liabilities Palm Starr Eliminations Consolidated
&Stockholders Equity Corporation Company Increase
Income taxes payable 40,000 20,000 60,000
Other liabilities 190,900 204,100 395,000
Common stock,$10par 400,000 400,000
Common stock, $5 par 200,000 (a) (200,000)
Additional paid-in
capital 365,000 58,000 (a) (58,000) 365,000
Retained earnings 213,500 168,000 (168,000) 213,500
Total liabilities
& stockholders
equity 1,209,400 650,000 (426,000) 1,433,500
Consolidated FS-Subsequent to date of purchase type 36
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
Notes:
1.The intercompany receivable and
payable, placed in adjacent columns
on the same line, are offset without a
formal elimination.
2. The FIFO methods used by Starr; thus,
the $25,000 difference attributable to
the beginning inventories of Starr is
allocated to the cost of goods sold for
year 2000. Consolidated FS-Subsequent to date of purchase type 37
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
3. The step up (current fair value
excess on Starrs net assets) is
only included in the consolidated
balance sheet for the unamortized
balance.
4. Step- up on land is not subject to
amortization.

Consolidated FS-Subsequent to date of purchase type 38

Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
5. The use of equity method results in:
Parent company net income =
consolidated net income
Parent company retained earnings =
consolidated retained earnings
These equalities exist when the equity
method is used and no intercompany
profits accounted for in the
determination of consolidated net
assets. Consolidated FS-Subsequent to date of purchase type 39
Equity Method: Wholly Owned Subsidiary
Subsequent to Date of Purchase-type Business
Combination (contd.)
6. Consolidated financial statements
provide more information than those of
the parent company despite the
equalities in the net income and
retained earnings.
7. The retained earnings of Palm on
12/31/2000 includes only $29,500
share of the subsidiarys adjusted net
income for the year ended 12/31/2000.
Consolidated FS-Subsequent to date of purchase type 40
Consolidated Financial Statements
(for example 7.1)
The consolidated income statement,
statement of retained earnings and
balance sheet of Palm corp. and
subsidiary for the year ended
December 31, 2000 are as follows: (on
p294 and 295 of textbook)

Consolidated FS-Subsequent to date of purchase type 41

Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Income Statement
For Year Ended December 31,2000
Net Sales $1,780,000
Costs and expenses:
Costs and goods sold $1,179,000
Operating expenses 349,167
Interest expense 49,000
Income taxes expense 93,333
Total costs and 1,670,000
expenses
Net income $109,500
Basic earnings per share
of common stock (40,000
shares outstanding) $ 2.74
Consolidated FS-Subsequent to date of purchase type 42
Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Statement of Retained Earnings
For Year Ended December 31,2000

Retained earnings,
beginning of year: $ 134,000
Add: Net income 109,500
Subtotals $ 243,500
Less: Dividends($0.75 a share) 30,000
Retained earnings,
end of year $ 213,500

Consolidated FS-Subsequent to date of purchase type 43

Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Assets
Current assets:
Cash $ 88,000
Inventories 251,000
Other 219,000
Total current assets $ 558,000
Plant assets (net) 841,000
Intangible assets:
Patent(net) $20,000
Goodwill (net) 14,500 34,500
Total assets $1,433,500
Consolidated FS-Subsequent to date of purchase type 44
Consolidated Financial Statements
(contd.)
PALM CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Liabilities $ Stockholders Equity
Liabilities:
Income taxes payable $ 60,000
Other 395,000
Total liabilities $ 455,000
Stockholders equity:
Common stock, $10 par $ 400,000
Additional paid-in capital 365,000
Retained earnings 213,500 978,500
Total Liabilities&
stockholders equity $1,433,500
Consolidated FS-Subsequent to date of purchase type 45
Closing Entries for Example 7.1
Closing entries should be prepared for both
the parent company and the subsidiary at
the end of the fiscal year after the financial
statements[1] being prepared.
The closing entries for the subsidiary are
prepared in the usual fashion.
The closing entries for the parent company
are prepared in the usual fashion except for
the closing of the income summary to the
retained earnings.

Consolidated FS-Subsequent to date of purchase type 46

Closing Entries (contd.)
Palm Corporation prepares the closing
entries on 12/31/2000, after the
consolidated financial statements have
been prepared, as follows:
Note: Palm closes its income statement
accounts, not the consolidated I/S
accounts.

Consolidated FS-Subsequent to date of purchase type 47

Closing Entries (contd.)

[1] Consolidated financial statements for the

parent company and the regular F/S for the
subsidiary.
The parent and subsidiary are two separate
legal entities. When consolidated F/S are
prepared using the equity method, the
economic substance of the parent-subsidiary
relationship is being emphasized rather than
their legal form.

Consolidated FS-Subsequent to date of purchase type 48

 Closing Entries (contd.)
Net Sales 1,100,000
Intercompany
Invest. Income 29,500
Income Summary 1,129,500
Income Summary 1,020,000

Cost of Goods Sold 700,000

Operating Expense 217,667
Interest Expense 49,000
Income Taxes Expense 53,333

Consolidated FS-Subsequent to date of purchase type 49

Closing Entries (contd.)

Income Summary 109,500

Retained Earnings of
Subsidiarya 5,500
Retained Earnings b 104,000
Retained Earnings 30,000
Dividends Declared 30,000

Consolidated FS-Subsequent to date of purchase type 50

Closing Entries (contd.)
a.The portion of retained earnings which is
contributed by the subsidiary. The
computation is $29,500 (adjusted net
income of subsidiary) 24,000 (dividends
declared by the subsidiary).
This amount of retained earnings is NOT
available for dividends to Palms
stockholders.
b.The portion of retained earnings which is
contributed by the operation of the parent
company. Consolidated FS-Subsequent to date of purchase type 51
Closing Entries (contd.)
After the foregoing closing entries, the
balances of Palm Corp.s Retained Earnings
and Retained Earnings of subsidiary ledger
accounts are as follows:
Retained Earnings
134,000 Beg.Balance
104,500 Close net income
available for dividends
to stockholders of Palm
Close dividends 30,000
declared
208,000
Consolidated FS-Subsequent to date of purchase type 52
Closing Entries (contd.)

Retained Earnings of Subsidiary

5,500 Close net income not
available for dividends
to stockholders of Palm

Consolidated FS-Subsequent to date of purchase type 53

Closing Entries (contd.)
The balance of the retained earnings of
subsidiary is equal to the net increase in the
balance of Palms investment in Starr
Company Stock account as shown below:

$505,500 ( the balance of the Investment

account on 12/31/2000)
- 500,000 ( the balance of the Investment
account on 12/31/99)
$5,500
Consolidated FS-Subsequent to date of purchase type 54
Example 7.2: Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (textbook p297-300)
The Palm-Starr example is continued to be
used to illustrate the application of the equity
method for a wholly owned purchased
subsidiary for the second year after a
business combination.
On December 17, 2001, Starr declared a
dividend of $40,000, payable January 6,
2002, to Palm Corp., the stockholder of
record on December 28, 2001. For the year
ended 12/31/2001, Starr had a net income of
$90,000.
Consolidated FS-Subsequent to date of purchase type 55
Example 7.2: Equity Method for Wholly Owned
Purchased Subsidiary for Second Year After
Business Combination (contd.)
After the posting of appropriate journal
entries for 2001 under the equity method,
selected ledger accounts for Palm Corp. are
as follows:
Investment in Starrs Common Stock
12/31/99 450,000 a
12/31/99 50,000 b
12/31/00 60,000 d 24,000 c 12/20/00
30,500 e 12/31/00
12/31/01 90,000 f 40,000 g 12/17/01
5,500 h 12/31/01
12/31/00 550,000
Consolidated FS-Subsequent to date of purchase type 56
Example 7.2 :(contd.)
a.Issuance of common stock (by Palm) in the
acquisition of Starr.
b.Direct out-of-pocket costs of business
combination.
c.Recognition of dividend declared by the
subsidiary-Starr for year 2000.
d.Recognition of wholly owned subsidiarys
(Starr) net income for 2000.
e.Recog. of depre. and amor. on the step-up
of Starrs net assets for 2000.
Consolidated FS-Subsequent to date of purchase type 57
Example 7.2 :(contd.)
f.Recognition of wholly owned subsidiarys
(Starr) net income for 2001.
g.Recognition of dividend declared by the
subsidiary-Starr for year 2001.
h.Recog. of depre. and amor. on the step-up
of Starrs net assets for 2001.

Consolidated FS-Subsequent to date of purchase type 58

Example 7.2: (contd.)
Intercompany Investment Income
60,000 a 12/20/00
12/31/00 30,500 b
12/31/00 29,500 d 29,500 c 12/21/00
0 12/31/00
90,000 e 12/31/01
12/31/00 5,500 f
84,500 12/31/01

Consolidated FS-Subsequent to date of purchase type 59

Example 7.2: (contd.)
a. Palm Corp.s share in the net income of Starr for
the year ended 12/31/00
b. The adjustment for the amort. and depre. of step-
up in net assets of Starr for year 2000.
c. Palm Corp.s share in the adjusted net income of
Starr.
d. Closing entry prepared on 12/31/00 to close the
intercompany Investment income balance to zero.
e. Plam Corps share in the net income of Starr for
the year ended 12/31/01.
f. The adjustment for the amort. and derp. of step-up
in net assets of Starr for the year of 2001.
Consolidated FS-Subsequent to date of purchase type 60
Developing the Elimination for the
Second Year Subsequent to the
Business Combination (Example 7.2)
The working paper elimination for December
31, 2001, is similar to that for December 31,
2000, as follows:
Common Stock-Starr 200,000
Additional Paid-in Capital 58,000
Starr
Retained Earnings-Starr 162,500a
Retained Earnings of 5,500
Subsidiary-Palm
Investment Income-Palm 84,500
Plant Assets (net)-Starr 57,000
($61,000-4,000)
Consolidated FS-Subsequent to date of purchase type 61
Developing the Elimination for the
Second Year Subsequent to the
Business Combination (contd.)
Patent (net)- Starr 3,000
($4,000-1,000)
Goodwill (net)- Starr 14,000
($14,500-500)
Cost of Goods Sold-Starr 4,000 b
Operating Expense-Starr 1,500 b
Investment in Starr
Common Stock 550,000
Dividends Declared-Starr 40,000
a. 168,000-5,500
Consolidated FS-Subsequent to date of purchase type 62
Developing the Elimination for the
Second Year Subsequent to the
Business Combination (contd.)
b.The depre. and amor. on differences
between current fair value and carrying
amount of Starrs net assets for year 2001
are as follows:
Cost of Operating
Goods Sold Exp.
Building Depre. $1,000 $1,000
Machinery Depre. 2,000
Patent Amort. 1,000
Goodwill Amort. 500
Totals $4,000 $1,500
Consolidated FS-Subsequent to date of purchase type 63
Working Paper for Consolidated Financial Statement for
the Second Year following the Business Combination
(Equity Method: Wholly Owned Purchase-Type Business
Combination)-example 7.2
The following is a partial working paper
for consolidated financial statement.
The net income and dividends for Palm
Corp. are assumed.(on textbook p299)

Consolidated FS-Subsequent to date of purchase type 64

Working Paper for Consolidated Financial Statement for
the Second Year following the Business Combination
(Equity Method: Wholly Owned Purchase-Type Business
Combination)
PALM CORPORATION AND SUBSIDIARY
Partial Working paper for Consolidated Financial Statements
For Year Ended December 31,2001
Statement of Palm Starr Eliminations Consolidated
Retained Earnings Corporation Company Increase
Retained earnings,
beginning of year 208,000 168,000 (a) (162,500) 213,500
Net income 244,500 90,000 (90,000)* 244,500
Subtotal 452,500 258,000 (252,500) 458,000
Dividends
declared 60,000 40,000 (a) (40,000)+ 60,000
Retained earnings,
end of year 392,500 218,000 (212,500) 398,000
* Decrease in intercompany investment income($84,500), plus total increase
in costs and expenses ($4,000 +$1,500), equals $90,000.
+ A decrease in dividends and an increase in retained earnings. (Continued)
Consolidated FS-Subsequent to date of purchase type 65
Working Paper for Consolidated Financial Statement for
the Second Year following the Business Combination
(Equity Method: Wholly Owned Purchase-Type Business
Combination)
PALM CORPORATION AND SUBSIDIARY
Partial Working paper for Consolidated Financial Statements
For Year Ended December 31,2001
Balance Sheet Palm Starr Eliminations Consolidated
Corporation Company Increase
Common Stock,
$10 par 400,000 400,000
Common Stock, $5 par 200,000 (a)(200,000)
Additional paid-in
capital 365,000 58,000 (a) (58,000) 365,000
Retained earnings 392,500 218,000 (212,500) 398,000
Retained earnings
of subsidiary 5,500 (a) (5,500)
Total stockholders
equity 1,163,000 476,000 (476,000) 1,163,000
Total liabilities &
stockholders x,xxx,xxx xxx,xxx (476,000) x,xxx,xxx
equity
Consolidated FS-Subsequent to date of purchase type 66
Closing Entries for Example 7.2
The closing entries for Palm are
prepared in the usual way except for
the closing of the income summary to
retained earnings.

As in the first year, the portion of

retained earnings contributed by Starr
should be reported separated from
other retained earnings contributed by
Plam.
Consolidated FS-Subsequent to date of purchase type 67
Closing Entries for Example 7.2 (contd.)
The closing entries pertaining the
income summary are as follows:
Income Summary 244,500
Retained Earnings of 44,500
Subsidiaries a
Retained Earnings b 200,000

Consolidated FS-Subsequent to date of purchase type 68

Closing Entries (contd.)
a.The portion of retained earnings contributed
by the subsidiary and is NOT available for
dividends to Palms stockholders. The
computation is as follows:
$ 84,500the adjusted net income of Starr
- 40,000declared dividend by Starr
$ 44,500

b.the portion of retained earnings contributed

by Palm ($244,500 44,500)
Consolidated FS-Subsequent to date of purchase type 69
Closing Entries (contd.)
Thus, the parent companys ledger accounts
for retained earnings are as follows after the
closing entries:
Retained Earnings
134,000 Bal. On 12/31/99
104,500 R/E contributed by
Palm in Year 2000
Div. of 2000 30,000
200,000 R/E contributed by
Palm in Year 2001
Div. of 2001 60,000
348,000 Bal. On 12/31/2001
Consolidated FS-Subsequent to date of purchase type 70
Closing Entries (contd.)

Retained Earnings of Subsidiary

5,500 R/E contributed by Starr
in year 2000, not
available for dividends.
44,500 R/E contributed by Starr
in year 2001, not
available for dividends.
50,000 Bal. On 12/31/2001

Consolidated FS-Subsequent to date of purchase type 71

Accounting for Operating Results of
Partially Owned Purchased Subsidiaries
The minority interest in net income (or
net loss) needs to be computed and
reported in the consolidated income
statement as an expense: minority
interest in income (or loss) of
subsidiary.
In the balance sheet statement, the
minority interest in net assets of
subsidiary is reported as a liability.

Consolidated FS-Subsequent to date of purchase type 72

Example 7.3: Equity Method for Partially
Owned Purchased Subsidiary for First Year
after Business Combination
Continued with the Post Corporation-
Sage Company consolidated equity
example of Chapter 6a , assumed that
Sage Company declared a $1 a share
dividend on 11/24/2000, payable
12/16/2000 to stockholders of record
12/1/2000.
a. Example 6.2 in the PowerPoint notes
or on pages 244 to 245 of the textbook.

Consolidated FS-Subsequent to date of purchase type 73

Example 7.3: (contd.)
Also, Sage had a net income of
$90,000 for the year-ended 12/31/2000

Note: Post owns 95% of the

outstanding shares of Sage Corp.

Consolidated FS-Subsequent to date of purchase type 74

Example 7.3: (contd.)
Sages journal entries pertaining the
declaration and payment of the dividend are
as follows:
Journal Entries for Sage (Year 2000)
11/24 Dividends Declared (40,000 x $1) 40,000
Dividends Payable
($40,000 x 0.05) 2,000
Intercompany
Dividends Payable
($40,000 x 0.95) 38,000
To record declaration of dividend
payable Dec. 16,2000, to
stockholders of record Dec. 1,2000
Consolidated FS-Subsequent to date of purchase type 75
Example 7.3: (contd.)
Journal Entries for Sage(Year 2000) (contd.)

12/16 Dividends Payable 2,000

Intercompany Dividends
Payable 38,000
Cash 40,000
To record payment of dividend
declared Nov. 24, 2000, to
stockholders of record Dec. 1, 2000

Consolidated FS-Subsequent to date of purchase type 76

Example 7.3: (contd.)
Following the equity method, Posts journal
entries for year 2000 include the following:
Journal Entries for Post (Year 2000)
11/24 Intercompany Dividends 38,000
Receivable
Investment in Sage
Company Common 38,000
Stock
To record dividend declared by
Sage Company, payable Dec. 16,
2000, to stockholders of record
Dec. 1,2000.

Consolidated FS-Subsequent to date of purchase type 77

Example 7.3: (contd.)
Journal Entries for Post(Year 2000) (contd.)
12/16 Cash 2,000
Intercompany
Dividends Receivable 38,000
To record receipt of dividend from
Sage Company
12/31 Investment in Sage Company
Common Stock ($90,000 x 0.95) 85,500
Intercompany Investment
Income 85,500
To record 95% of net income of
Sage Company for the year ended
Dec. 31,2000(Income tax effects are
disregarded.)
Consolidated FS-Subsequent to date of purchase type 78
Example 7.3: (contd.)
Similar to the adjustment on the wholly
owned subsidiarys net income, the net
income of the partially owned
subsidiary also needs to be adjusted for
the depreciation of the assets step-upa
and the amortization of goodwill.b The
assets step-up for Sage on 12/31/99 is
as follows:
a.$246,000; see p64 of Chapter 6 notes.
b.$38,000; see p68 of Chapter 6 notes.
Consolidated FS-Subsequent to date of purchase type 79
Example 7.3: (contd.)
Inventories(FIFO cost) $ 26,000
Plant assets (net):
Land $ 60,000
Building (economic
life 20 years) 80,000
Machinery (economic
life 5 years) 50,000 190,000
Leasehold (economic
life 6 years) 30,000
Total $246,000
Consolidated FS-Subsequent to date of purchase type 80
Example 7.3: (contd.)
The goodwill of for the purchase of 95%
of Sage is calculated as follows:
Cost of Post Corporations 95%
interest in Sage Company $1,192,250
Less:95% of $1,215,000
aggregate current fair values of
Sages identifiable net assets 1,154,250
Goodwill acquired by Post (to be
amortized over 40 years) $ 38,000
Consolidated FS-Subsequent to date of purchase type 81
Example 7.3: (contd.)
Therefore, Post Corp. prepares the following
journal entry on 12/31/2000 to reflect the
effects of the depreciation on the assets
step-up under the equity method:
Journal Entry for Post (12/31/2000)

Intercompany Investment
Income 42,750
Investment in Sage
Company Common
Stock 42,750
Consolidated FS-Subsequent to date of purchase type 82
Example 7.3: (contd.)
To amortize differences between current fair
values and carrying amounts of Sage
Companys identifiable net assets on Dec.
31,1999, as follows:
Inventories to cost of goods sold $26,000
Buildingdepreciation ($80,000/20) 4,000
Machinerydepreciation ($50,000/5) 10,000
Leaseholdamortization ($30,000/6) 5,000
Total difference applicable to 2000 $45,000
Amortization for 2000($45,000 x 0.95) $42,750
(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type 83
Example 7.3: (contd.)
In addition, Post also prepares the following
entry to recognize the amortization of
goodwill:
Journal Entry for Post (12/31/2000)

Amortization Expense ($38,000/40) 950

Investment in Sage
Company Common Stock 950
To amortize goodwill acquired in
business combination with partially
owned purchased subsidiary over an
economic life of 40 years.
Consolidated FS-Subsequent to date of purchase type 84
Example 7.3: (contd.)
Note: goodwill in a business
combination involving partially owned
subsidiary is attributed to the parent
company rather than to the subsidiary
under the FASB recommended
treatment. This technique avoids
charging any portion of the goodwill
amortization to the minority interest,
which did not acquire any goodwill.

Consolidated FS-Subsequent to date of purchase type 85

Example 7.3: (contd.)
After posting the foregoing entries,
Post Corporations Investment in
Sage Company Common Stock and
Intercompany Investment Income
ledger accounts are as follows:

Consolidated FS-Subsequent to date of purchase type 86

Example 7.3: (contd.)
Investment in Sage Company Common Stock
Date Explanation Debit Credit Balance
1999
12/31 Issuance of common stock
in business combination 1,140,000 1,140,000 dr
31 Direct out-of-pocket costs of
business combination 52,250 1,192,250 dr
2000
11/24 Dividend declared by Sage 38,000 1,154,250 dr
12/31 Net income of Sage 85,500 1,239,750 dr
31 Amortization of differences
between current fair values
and carrying amounts of
Sages identifiable net
assets 42,750 1,197,000 dr
31 Amortization of goodwill 950 1,196,050 dr
Consolidated FS-Subsequent to date of purchase type 87
Example 7.3: contd.)
Intercompany Investment Income
Date Explanation Debit Credit Balance
2000
12/31 Net Income of Sage 85,500 85,500 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets 42,750 42,750 cr

Consolidated FS-Subsequent to date of purchase type 88

Example 7.3: (contd.)
The $42,750 balance of Post
Corporations Intercompany Investment
Income account represents 95% of the
$45,000 adjusted net income ($90,000-
$45,000) of Sage Company for the year
ended 12/31/2000.

Consolidated FS-Subsequent to date of purchase type 89

Developing the eliminations for
Example 7.3
Using the equity method to account for
the investment in Sage results in a
balance in the Investment ledger account
with three components:
(1) the carrying amount of Sages
identifiable net assets;(2)the current fair
value excess , which is attributable to
Sages identifiable net assets; and (3) the
goodwill acquired by Post in the business
combination with Sage. These
components are analyzed as follows:
Consolidated FS-Subsequent to date of purchase type 90
 Developing the eliminations for
Example 7.3 (contd.)
Post Corporation
Analysis of Investment in Sage Company Common Stock
Ledger Account (For Year Ended December 31,2000)
Carrying Current Goodwill Total
Amount Fair Value
Excess
Beginning balances $920,550 $233,700 $38,000 $1,192,250
Net income of Sage
($90,000 x 0.95) 85,500 85,500
Amortization of
differences between
current fair values
and carrying
amounts of Sages
identifiable net
assets ($45,000 x 0.95) (42,750) (42,750)
Consolidated FS-Subsequent to date of purchase type 91
 Developing the eliminations for
Example 7.3 (contd.)
Contd.
Carrying Current Goodwill Total
Amount Fair Value
Excess
Amortization of
goodwill (950) (950)
Dividend declared by
Sage ($40,000 x 0.95) (38,000) (38,000)
Ending balances $968,050 $190,950 $37,050 $1,196,050

Consolidated FS-Subsequent to date of purchase type 92

Developing the eliminations for
Example 7.3 (contd.)
The minority interest in Sages net
assets (which is not recorded in a
ledger account) is analyzed similarly,
except that there is not goodwill
attributable to the minority interest:

Consolidated FS-Subsequent to date of purchase type 93

 Developing the eliminations for
Example 7.3 (contd.)
Post Corporation
Analysis of Minority Interest in Net Assets of Sage Company
For Year Ended December 31,2000
Carrying Current Total
Amount Fair Value
Excess
Beginning balances $48,450 $12,300 $60,750
Net income of Sage($90,000 x 0.05) 4,500 4,500
Amortization of differences
between current fair values
and carrying amounts of
Sages identifiable net assets
($45,000 x 0.05) (2,250) (2,250)
Dividend declared by Sage
($40,000 x 0.05) (2,000) (2,000)
Ending balances $50,950 $10,050 $61,000
Consolidated FS-Subsequent to date of purchase type 94
Developing the eliminations for
Example 7.3 (contd.)
The sum of the ending balances of the
carrying amount columns of the above two
tables equals $1,019,000 ($968,050
+$50,950).This amount agrees with the total
stockholders equity of Sage Company on
12/31/2000 as follows:
Common stock,$10 par $ 400,000
Additional paid-in capital 235,000
Retained earnings 384,000
Total stockholders equity $1,019,000
Consolidated FS-Subsequent to date of purchase type 95
Developing the eliminations for
Example 7.3 (contd.)
Also, the sum of the ending balances of
the carrying fair value excess columns
of the above two tables equals
$201,000 ($190,950 +$10,050). This
amount represents the unamortized
identifiable assets step-up as follows:

Consolidated FS-Subsequent to date of purchase type 96

Developing the eliminations for
Example 7.3 (contd.)
Balances, Amortization Balances,
Dec.31,1999 for Year 2000 Dec.31,2000
(p.302) (p.302)
Inventories $ 26,000 $ (26,000)
Plant assets(net):
Land $ 60,000 $ 60,000
Building 80,000 $ (4,000) 76,000
Machinery 50,000 (10,000) 40,000
Total plant
assets $190,000 $ (14,000) $176,000
Leasehold $ 30,000 $ (5,000) $ 25,000
Totals $246,000 $ (45,000) $201,000
Consolidated FS-Subsequent to date of purchase type 97
Developing the eliminations for
Example 7.3 (contd.)
Assuming that Sage Company
allocates machinery depreciation and
leasehold amortization entirely to cost
of goods sold and building depreciation
50% each to cost of goods sold and
operating expense, the working paper
eliminations for Post Corp. and
subsidiary on 12/31/200 are as follows:

Consolidated FS-Subsequent to date of purchase type 98

Developing the eliminations for
Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Working Paper Eliminations
December 31,2000
(a)Common StockSage 400,000(1)
Additional Paid-in CapitalSage 235,000(1)
Retained Earnings-Sage 334,000(1)
Intercompany Investment Income-Psot 42,750(2)
Plant Assets(net)-Sage($190,000-$14,000) 176,000(3)
Leasehold(net)-Sage ($30,000-$5,000) 25,000(3)
Goodwill (net)-Post($38,000-$950) 37,050(3)
Cost of Goods Sold-Sage 43,000(4)
Operating Expenses-Sage 2,000(4)

Consolidated FS-Subsequent to date of purchase type 99

Developing the eliminations for
Example 7.3 (contd.)
Contd.

Investment in Sage Company

Common Stock-Post 1,196,050(1)
Dividends Declared-Sage 40,000(1)
Minority Interest in Net Assets of
Subsidiary ($60,750 - $2,000)[See(d)] 58,750(1)

Consolidated FS-Subsequent to date of purchase type 100

Developing the eliminations for
Example 7.3 (contd.)
The above eliminations are to carry out the
following:
(1) Eliminate intercompany investment and
equity accounts of subsidiary at the
beginning of year,and subsidiary
dividends.
(2) Provide for Year 2000 depreciation and
amortization on differences between
current fair values and carrying amounts
of Sage's identifiable net assets as
follows: Consolidated FS-Subsequent to date of purchase type 101
Developing the eliminations for
Example 7.3 (contd.)
Cost of Operating
Goods Sold Expenses
Inventories sold $ 26,000
Building depreciation 2,000 $ 2,000
Machinery depreciation 10,000
Leasehold amortization 5,000
Totals $ 43,000 $ 2,000

Consolidated FS-Subsequent to date of purchase type 102

Developing the eliminations for
Example 7.3 (contd.)
(3) Allocate unamortized differences
between combination date current fair
values and carrying amounts to
appropriate assets.
(4) Establish minority interest in net assets of
subsidiary at beginning of year ($60,750),
less minority interest share of dividends
declared by subsidiary during year
($40,000 x 0.05=$2,000).
(Income tax effects are disregarded.)
Consolidated FS-Subsequent to date of purchase type 103
Developing the eliminations for
Example 7.3 (contd.)

(b)Minority Interest in Net

Income of Subsidiary 2,250
Minority Interest in
Net Assets of 2,250
Subsidiary

Consolidated FS-Subsequent to date of purchase type 104

Developing the eliminations for
Example 7.3 (contd.)
To establish minority interest in subsidiarys
adjusted net income for Year 2000 as
follows:
Net income of subsidiary $ 90,000
Net reduction of
elimination (a) ($43,000 +$2,000) (45,000)
Adjuste net income of
subsidiary $45,000
Minority interest share
($45,000 x 0.05) $ 2,250

Consolidated FS-Subsequent to date of purchase type 105

Notes to the elimination entries for
Example 7.3 (contd.)
1. The working paper eliminations at the time of business combination is
as follows (i.e., 12/31/1999 or 1/1/2000):
Common Stock 400,000
Add. Paid-in Cap. 235,000
Retained Earnings 334,000
Plant Assets 190,000
Leashold 30,000
Inventory 26,000
Goodwill 38,000b
Investment in Sage 1,192,250
Minority Interest 60,750a
Consolidated FS-Subsequent to date of purchase type 106
Notes (contd.)

2. The working paper eliminations for Post

Corporation and subsidiary on 12/31/2000
are doing the follows:
a. Eliminate stockholders equity of subsidiary
as of 1/1/2000.
b. Increase the assets (i.e., plant assets and
Leashold) of the subsidiary to the fair value
on the business combination date adjusted
for depreciation,
Consolidated FS-Subsequent to date of purchase type 107
Notes (contd.)

c. The recognition of additional

depreciation expense due to asset step
up and the recognition of additional cost
of goods sold due to inventory step-up
(assuming FIFO).
d. The recognition of goodwill adjusted
for the goodwill amortization,

Consolidated FS-Subsequent to date of purchase type 108

Notes (contd.)

e. Elimination of intercompany
investment income post (due to
income of Post and Sage will be
consolidated in the consolidated
income statement).
(all the above accounts are debited in the
elimination entries)
(the following accounts are credited in
the elimination entries)
Consolidated FS-Subsequent to date of purchase type 109
Notes (contd.)
f. Elimination of investment in sage account
balance (due to the assets and liabilities of
both companies are to be combined in the
consolidated balance sheet statement).
g. Recognize minority interest as a liability
($60,750- $2,000 div. for subsidiary).
h. Elimination of dividends declared by Sage
($40,000= 38,000+2000).

Consolidated FS-Subsequent to date of purchase type 110

Notes :(contd.)
The balance of investment account is
$1,196,050. The components of this balance
include:
1,192,250 (beg. Balance)
+ 42,750 a
950 b
38,000 c
1,196,050
a.Posts share of net increase in Sages income of 2000 after
adjusting for depreciation exp., etc. (i.e., 85,500 - 42,750).
b.amor. of goodwill c.Posts share of dividends.
Consolidated FS-Subsequent to date of purchase type 111
 Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000
POST CORPORATION AND SUBSIDIARY
Working Paper for Consolidated Financial Statements
For Year Ended Dec. 31,2000
Income Statement Post Sage Eliminations Consolidated
Corp. Company Inc. (Dec.)
Revenue:
Net Sales 5,611,000 1,089,000 6,700,000
Intercompany investment income 42,750 (a) (42,750)
Total revenue 5,653,750 1,089,000 (42,750) 6,700,000
Costs and expenses:
Costs of goods sold 3,925,000 700,000 (a) 43,000 4,668,000
Operating expenses 556,950* 129,000 (a) 2,000 687,950
Interest and income taxes
expense 710,000 170,000 880,000
Minority interest in net income of
subsidiary (b) 2,250 2,250
Total costs and expenses 5,191,950 999,000 47,250 6,238,200
Net Income 461,800 90,000 (90,000) 461,800
Consolidated FS-Subsequent to date of purchase type 112
 Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000 (contd.)
Contd.

Statement of Post Sage Eliminations Consolidated

Retained Earnings Corp. Company Inc. (Dec.)
Retained earnings,
beginning of year 1,050,000 334,000 (a) (334,000) 1,050,000
Net income 461,800 90,000 (90,000) 461,800
Subtotal 1,511,800 424,000 (424,000) 1,511,800
Dividends declared 158,550 40,000 (a) (40,000) 158,550
Retained earnings,
end of year 1,353,250 384,000 (384,000) 1,353,250

Consolidated FS-Subsequent to date of purchase type 113

 Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000 (contd.)
Contd.
Balance Sheet/ Post Sage Eliminations Consolidated
Assets Corp. Company Inc. (Dec.)
Inventories 861,000 439,000 1,300,000
Other current
assets 639,000 371,000 1,010,000
Investment in Sage
Company common
stock 1,196,050 (a)(1,196,050)
Plant assets (net) 3,600,000 1,150,000 (a) 176,000 4,926,000
Leasehold (net) (a) 25,000 25,000
Goodwill (net) 95,000 (a) 37,050 132,050
Total assets 6,391,050 1,960,000 (958,000) 7,393,050

Consolidated FS-Subsequent to date of purchase type 114

 Working Paper for Example 7.3:
Consolidated Financial Statements for year
Ended 12/31/2000 (contd.)
Contd.
Liabilities Post Sage Eliminations Consolidated
&Stockholders Equity Corp. Company Inc. (Dec.)
Liabilities 2,420,550 941,000 3,361,550
Minority interest in
net assets of (a) 58,750
subsidiary (b) 2,250 61,000
Common stock,$1 par 1,057,000 1,057,000
Common stock, $10 par 400,000 (a) (400,000)
Additional paid-in
capital 1,560,250 235,000 (a) (235,000) 1,560,250
Retained earnings 1,353,250 384,000 (384,000) 1,353,250
Total liabilities
& stockholders
equity 6,391,050 1,960,000 (958,000) 7,393,050

Consolidated FS-Subsequent to date of purchase type 115

Consolidated Financial Statements
for Example 7.3
The consolidated income statement,
statement of retained earnings, and
balance sheet of Post Corporation and
subsidiary for the year ended
December 31, 2000, are as follows (the
amounts are from the consolidated
column in the previous working paper):

Consolidated FS-Subsequent to date of purchase type 116

Consolidated Financial Statements
for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Income Statement
For Year Ended December 31,2000
Net Sales $ 6,700,000
Costs and expenses:
Costs and goods sold $4,668,000
Operating expenses 687,950
Interest and income taxes 880,000
expense
Minority interest in net income of
subsidiary 2,250
Total costs and expenses 6,238,200
Net income $ 461,800
Basic earnings per share of common
stock(1,057,000 shares outstanding) $ 0.44
Consolidated FS-Subsequent to date of purchase type 117
Consolidated Financial Statements
for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Statement of Retained Earnings
For Year Ended December 31,2000
Retained earnings,
beginning of year: $ 1,050,000
Add: Net income 461,800
Subtotals $1,511,800
Less: Dividends ($0.15 a share) 158,550
Retained earnings,
end of year $ 1,353,250

Consolidated FS-Subsequent to date of purchase type 118

Consolidated Financial Statements
for Example 7.3 (contd.)
POST CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
For Year Ended December 31,2000
Assets
Current assets:
Inventories $ 1,300,000
Other 1,010,000
Total current assets $ 2,310,000
Plant assets (net) 4,926,000
Intangible assets:
Leasehold (net) $ 25,000
Goodwill (net) 132,050 157,050
Total assets $7,393,050
Consolidated FS-Subsequent to date of purchase type 119
Consolidated Financial Statements
for Example 7.3 (contd.)
Contd.
Liabilities & Stockholders Equity
Liabilities
Other than minority
interest $3,361,550
Minority interest in net
assets of subsidiary 61,000
Total liabilities $3,422,550
Stockholders equity:
Common stock, $1 par $1,057,000
Additional paid-in capital 1,560,250
Retained earnings 1,353,250 3,970,500
Total liabilities &
stockholders equity $7,393,050
Consolidated FS-Subsequent to date of purchase type 120
Closing Entries for Example 7.3
Post Corporation Closing Entries on 12/31/2000
Net Sales 5,611,000
Intercompany Investment
Income 42,750
Income Summary 5,653,750
To close revenue accounts.
Income Summary 5,191,950
Cost of Goods Sold 3,925,000
Operating Expenses 556,950
Interest and Income
Taxes Expense 710,000
To close expense accounts.
Consolidated FS-Subsequent to date of purchase type 121
 Closing Entries for Example 7.3 (contd.)
Contd.
Income Summary 461,800
Retained Earnings of
Subsidiary ($42,750-$38,000) 4,750
Retained Earnings 457,050
($461,800-$4,750)
To close Income Summary account; to
transfer net income legally available for
dividends to retained earnings; and to
segregate 95% share of adjusted net
income of subsidiary not distributed as
dividends.
Retained Earnings 158,550
Dividends Declared 158,550
To close Dividends Declared account.
Consolidated FS-Subsequent to date of purchase type 122
Closing Entries for Example 7.3 (contd.)

After posting the above closing entries,

Posts Retained Earnings and Retained
Earnings of Subsidiary ledger accounts
are as follows:

Consolidated FS-Subsequent to date of purchase type 123

Closing Entries for Example 7.3 (contd.)
Retained Earnings
Date Explanation Debit Credit Balance
1999
12/31 Balance 1,105,000 cr
2000
12/31 Close net income
available for dividends 457,050 1,507,050 cr
31 Close Dividends
Declared account 158,550 1,348,500 cr

Consolidated FS-Subsequent to date of purchase type 124

Closing Entries for Example 7.3 (contd.)
Retained Earnings of Subsidiary
Date Explanation Debit Credit Balance
2000
12/31 Close net income not
available for dividends 4,750 4,750 cr

Consolidated FS-Subsequent to date of purchase type 125

Closing Entries for Example 7.3
The retained earnings of subsidiary account
balance can be reconciled to the increase
in Posts investment ledger account as
follows:

Consolidated FS-Subsequent to date of purchase type 126

Closing Entries for Example 7.3
Reconciliation of Undistributed Earnings
of Subsidiary
Undistributed earnings of subsidiary,
year ended Dec. 31, 2000 $4,750
Less: Amortization of goodwill acquired
by parent company in business
combination 950
Increase in balance of Investment in
Sage Company Common Stock ledger
account during 2000 $3,800

Consolidated FS-Subsequent to date of purchase type 127

Closing Entries for Example 7.3

In addition, the total ending balances of

Post is equal to consolidated retained
earnings as showed below:

Consolidated FS-Subsequent to date of purchase type 128

Closing Entries for Example 7.3

Total of Parent Companys Two Retained

Earnings Account Balances Equals
Consolidated Retained Earnings
Balances, Dec. 31, 2000:
Retained earning $1,348,500
Retained earning of subsidiary 4,750
Total $1,353,250

Consolidated FS-Subsequent to date of purchase type 129

Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination
Continued with the Post Corporation-
Sage Company example, assuming
that on 11/22/2001 (the second year
after business combination), Sage
company declared a dividend of
$50,000, payable 12/17/2001, to
stockholders of record 12/1/2001.

Consolidated FS-Subsequent to date of purchase type 130

Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination (contd.)
Sage had a net income of $105,000 for
the year ended 12/31/2001.
Based on 95% of ownership, Posts
share in net income and dividend were
$99,750 and $47,500, respectively.
Selected ledger accounts for Post Corp.
are as follows after posting subsidiary
related income and dividends:
Consolidated FS-Subsequent to date of purchase type 131
Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination (contd.)
Investment in Sage Company Stock
Date Explanation Debit Credit Balance
1999
12/31 Issuance of common
stock in business
combination 1,140,000 1,140,000 dr
31 Direct out-of-pocket
costs of business
combination 52,250 1,192,250 dr

Consolidated FS-Subsequent to date of purchase type 132

Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination (contd.)
Contd.
Date Explanation Debit Credit Balance
2000
11/24 Dividend declared by
Sage 38,000 1,154,250 dr
12/31 Net income of Sage 85,500 1,239,750 dr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets 42,750 1,197,000 dr
31 Amortization of 950 1,196,050 dr
goodwill
Consolidated FS-Subsequent to date of purchase type 133
Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination (contd.)
Contd.
Date Explanation Debit Credit Balance
2001
11/22 Dividend declared by
Sage 47,500 1,148,550 dr
12/31 Net income of Sage 99,750 1,248,300 dr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets 18,050* 1,230,250 dr
31 Amortization of 950 1,229,300 dr
goodwill
Consolidated FS-Subsequent to date of purchase type 134
Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination (contd.)
Intercompany Investment Income
Date Explanation Debit Credit Balance
2000
12/31 Net income of Sage 85,500 85,500 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets 42,750 42,750 cr
31 Closing entry 42,750 -0-

Consolidated FS-Subsequent to date of purchase type 135

 Example 7.4 Equity Method for Partially
Owned Purchased Subsidiary for Second
Year after Business Combination (contd.)
Contd.
Date Explanation Debit Credit Balance
2001
12/31 Net income of Sage 99,750 99,750 cr
31 Amortization of
differences between
current fair values and
carrying amounts of
Sages identifiable net
assets 18,050* 81,700 cr
* Building depreciation($80,000/20) $ 4,000
Machinery depreciation ($50,000/5) 10,000
Leasehold amortization ($30,000/6) 5,000
Total amortization applicable to 2001 $ 19,000
Post Corporations share 9$19,000 x 0.95) $ 18,050
Consolidated FS-Subsequent to date of purchase type 136
Developing the Elimination
The working paper eliminations for
12/31/2001, are developed in the
similar way as for the eliminations for
12/31/2000. The are as follows:

Consolidated FS-Subsequent to date of purchase type 137

Developing the Elimination (contd.)
Post corporation and Subsidiary
Working Paper Eliminations
December 31,2001
(a)Common StockSage 400,000
Additional Paid-in CapitalSage 235,000
Retained Earnings-Sage($384,000-$4,750) 379,250
Retained Earnings of Subsidiary-Post 4,750
Intercompany Investment Income-Post 81,700
Plant Assets(net)-Sage($176,000-$14,000) 162,000
Leasehold(net)-Sage ($25,000-$5,000) 20,000
Goodwill (net)-Post($37,050-$950) 36,100
Cost of Goods Sold-Sage 17,000
Operating Expenses-Sage 2,000

Consolidated FS-Subsequent to date of purchase type 138

Developing the Elimination (contd.)
Contd.

Investment in Sage Company

Common Stock-Post 1,229,300
Dividends Declared-Sage 50,000
Minority Interest in Net Assets of
Subsidiary ($61,000 - $2,500) 58,500

Consolidated FS-Subsequent to date of purchase type 139

Developing the Elimination (contd.)
The elimination is to carry out the
following:
(a) Eliminate intercompany investment,
equity accounts of subsidiary at the
beginning of year, and subsidiary
dividend.
(b) Provide for Year 2000 depreciation and
amortization on differences between
current fair values and carrying amounts
of Sage's identifiable net assets as
follows: Consolidated FS-Subsequent to date of purchase type 140
Developing the Elimination (contd.)

Cost of Operating
Goods Sold Expenses
Building depreciation $ 2,000 $ 2,000
Machinery depreciation 10,000
Leasehold amortization 5,000
Totals $ 17,000 $ 2,000

Consolidated FS-Subsequent to date of purchase type 141

Developing the Elimination (contd.)
(c) Allocate unamortized differences of the
asset step-up.
(d) Establish minority interest in net assets of
subsidiary at beginning of year ($61,000),
less minority interest share of dividends
declared by subsidiary during year
($50,000 x 0.05=$2,500).

(Income tax effects are disregarded.)

Consolidated FS-Subsequent to date of purchase type 142

Developing the Elimination (contd.)
(b)Minority Interest in Net Income
of Subsidiary 4,300
Minority Interest in Net Assets
of Subsidiary 4,300
To establish minority interest in subsidiarys
adjusted net income for Year 2001 as
follows:
Net income of subsidiary $105,000
Net reduction in elimination (a)
($17,000+ $2,000) (19,000)
Adjusted net income of
subsidiary $ 86,000
Minority interest share
($86,000 x 0.05) $ 4,300
Consolidated FS-Subsequent to date of purchase type 143
Working Paper for Consolidated
Financial Statements
The eliminations for Post Corp. and
subsidiary described above are
illustrated in the following partial
working paper for consolidated financial
statements. The amounts presented
for Post Corp. are assumed.

Consolidated FS-Subsequent to date of purchase type 144

 Working Paper for Consolidated
Financial Statements (contd.)
POST CORPORATION AND SUBSIDIARY
Partial Working Paper for Consolidated Financial Statements
For Year Ended Dec. 31,2001
Statement of Post Sage Eliminations Consolidated
Retained Earnings Corp. Company Inc. (Dec.)
Retained earnings,
beginning of year 1,348,500 384,000 (a) (379,250) 1,353,250
Net income 352,600 105,000 (105,000)* 352,600
Subtotal 1,701,100 489,000 (484,250) 1,705,850
Dividends declared 158,550 50,000 (a)(50,000) 158,550
Retained earnings,
end of year 1,542,550 439,000 (434,250) 1,547,300
* Decrease in intercompany investment income ($81,700), plus total
increase in costs and expenses ($17,000 + $2,000 + $4,300),
equals $ 105,000.
A decrease in dividends and an increase in retained earnings.
Consolidated FS-Subsequent to date of purchase type 145
 Working Paper for Consolidated
Financial Statements (contd.)
Contd.
Balance Sheet Post Sage Eliminations Consolidated
Corp. Company Inc. (Dec.)
Minority interest in net (a) 58,5000
assets of subsidiary (b) 4,300 62,800
Total liabilities x,xxx,xxx xxx,xxx 62,800 xxx,xxx
Common stock,$1 par 1,057,000 1,057,000
Common stock, $10 par 400,000 (a) (400,000)
Additional paid-in
capital 1,560,250 235,000 (a) (235,000) 1,560,250
Retained earnings 1,542,550 439,000 (434,250) 1,547,300
Retained earnings of
subsidiary 4,750 (a) (4,750)
Total stockholders
equity 4,164,550 1,074,000 (1,074,000) 4,164,550
Total liabilities
& stockholders x,xxx,xxx x,xxx,xxx (1,011,200) xxxx,xxx
equity
Consolidated FS-Subsequent to date of purchase type 146
Working Paper for Consolidated
Financial Statements (contd.)
The 12/31/2001 balance of the minority
interest in net assets of subsidiary may be
verified as follows:
Sage Companys total stockholders
equity, Dec. 31, 2001 $1,074,000
Add: Unamortized difference between
combination date current fair values
and carrying amounts of Sages
identifiable net assets ($162,000+ $20,000) 182,000
Sages adjusted stockholders equity,
Dec. 31,2001 $1,256,000
Minority interest in net assets of
subsidiary ($1,256,000 x 0.05) $ 62,800
Consolidated FS-Subsequent to date of purchase type 147
Closing Entries
Post Corp.s share of the undistributed
earnings of Sage Company for 2001 is
$34,200, computed as follows:
Adjusted net income of Sage
Company recorded by Post
Corporation in Intercompany
Investment Income ledger account $ 81,700
(p.632)
Less : Posts share of dividends
declared by Sage ($50,000 x 0.95) 47,500
Posts share of amount of Sages
adjusted net income not distributed
as dividends $ 34,200
Consolidated FS-Subsequent to date of purchase type 148
Closing Entries (contd.)
The following are the partial closing
entries of Post on 12/31/2001:
Income Summary 461,800
Retained Earnings
of Subsidiary
(81,700-47,500) 34,200
Retained earnings
(352,600-34,200) 318,400

Consolidated FS-Subsequent to date of purchase type 149

Closing Entries (contd.)
Following the posting of the closing
entries, the two ledger accounts of
retained earnings of Post are as
follows:

Consolidated FS-Subsequent to date of purchase type 150

Closing Entries (contd.)
Retained Earnings
Date Explanation Debit Credit Balance
1999
12/31 Balance 1,050,000 cr
2000
12/31 Close net income
available for dividends 457,050 1,507,050 cr
31 Close Dividends
Declared account 158,550 1,348,500 cr
2001
12/31 Close net income
available for dividends 318,400 1,666,900 cr
31 Close Dividends
Declared account 158,550 1,508,350 cr
Consolidated FS-Subsequent to date of purchase type 151
Closing Entries (contd.)
Retained Earnings of Subsidiary
Date Explanation Debit Credit Balance
2000
12/31 Close net income not
available for dividends 4,750 4,750 cr
2001
12/31 Close net income not
available for dividends 34,200 38,950 cr

Consolidated FS-Subsequent to date of purchase type 152

Closing Entries (contd.)

The total balances of these two

retained earnings is equal to
consolidated retained earnings (
$1,508,350+38,950= $1,547,300).
Also, the $38,950 balance of retained
earnings of subsidiary represents
Posts share of the undistributed
earnings of Sage since 12/31/99.

Consolidated FS-Subsequent to date of purchase type 153

Closing Entries (contd.)
The undistributed earnings of Sage may be
reconciled to the increase in Posts
Investment ledger account balance as
follows:
Undistributed earnings of subsidiary $ 38,950
Less : Amortization of goodwill
acquired in business combination
($950 x 2) 1,900
Increase in balance of Investment in
Sage Company Common Stock
ledger account since Dec. 31, 1999,
date of business combination
($1,229,300 - $1,192,250) $ 37,050
Consolidated FS-Subsequent to date of purchase type 154
Comments on Equity Method of
Accounting
The equity method of accounting for a
subsidiarys operation is preferable to
the cost method for the following
reasons:
1. The equity method emphasizes
economic substance of the parent
subsidiary relationship. The cost
method emphasizes the legal form of
the relationship.
Consolidated FS-Subsequent to date of purchase type 155
Comments on Equity Method of
Accounting (contd.)
2. The equity method allows the use of
parent company journal entries to
reflect many items that must be
included only in working paper
elimination in the cost method.
3. The equity method facilitates
issuance of separate financial
statements for the parent company.

Consolidated FS-Subsequent to date of purchase type 156

Comments on Equity Method of
Accounting (contd.)
4. Except when intercompany
profits (gains) or losses exist in
assets or liabilities to be
consolidated, the parent
companys net income and
combined retained earnings
account balances are identical in
the equity method for the related
consolidated amounts.
Consolidated FS-Subsequent to date of purchase type 157
Comments on Equity Method of
Accounting (contd.)
5. the cost method is not considered
appropriate for accounting for a
pooled subsidiarys operations.
Thus, this textbook emphasizes the
equity method of accounting for a
subsidiarys operations.
Note: Regardless whether the cost
method or the equity method is used,
consolidated financial statement
amounts are the same.
Consolidated FS-Subsequent to date of purchase type 158