This document discusses procedures for consolidating financial statements after an acquisition using the purchase method. It provides examples of recording the parent company's share of the subsidiary's income and dividends over two years under the cost and equity methods. The cost method does not adjust the investment account for the parent's share of subsidiary income, while the equity method does along with amortizing any excess costs. Worksheet procedures are also outlined to eliminate entries between the parent and subsidiary for consolidation purposes.
This document discusses procedures for consolidating financial statements after an acquisition using the purchase method. It provides examples of recording the parent company's share of the subsidiary's income and dividends over two years under the cost and equity methods. The cost method does not adjust the investment account for the parent's share of subsidiary income, while the equity method does along with amortizing any excess costs. Worksheet procedures are also outlined to eliminate entries between the parent and subsidiary for consolidation purposes.
This document discusses procedures for consolidating financial statements after an acquisition using the purchase method. It provides examples of recording the parent company's share of the subsidiary's income and dividends over two years under the cost and equity methods. The cost method does not adjust the investment account for the parent's share of subsidiary income, while the equity method does along with amortizing any excess costs. Worksheet procedures are also outlined to eliminate entries between the parent and subsidiary for consolidation purposes.
Subsequent to Acquisition Consolidated statements subsequent to acquisition
Worksheet procedures; Purchase Method
Using the Income Distribution Schedule Reporting income for the consolidated company Maintaining the investment account Incomplete Complete Equity Equity Cost Add parent % of subsidiary Yes Yes No income Adjust for amortizations No Yes No of excess Reduce Reduce Parent % Recording of investment investment reported as dividends account account income Price paid: $ 800,000 Interest acquired: Common stock $ 200,000 Retained earnings 400,000 Total Equity 600,000 Ownership interest 80% 480,000 Excess cost 320,000 Life Ann Amort Inventory (80% 50,000) 40,000 1 40,000 Building (80% 100,000) 80,000 20 4,000 Goodwill 200,000 n/a Subsidiary income Income and dividends Dividends Year 1 100,000 10,000 Year 2 150,000 20,000
Parent reports only 80% of above amounts
Parent recording of subsidiary income (year 1) Incomplete Complete Equity Equity Cost Investment balance 800,000 800,000 800,000 Year 1 income: (44,000 amort) Investment in Sub 80,000 36,000 no entry Investment income 80,000 36,000 Year 1 dividends: Cash 8,000 8,000 8,000 Investment in Sub 8,000 8,000 Dividend income 8,000 Investment balance 872,000 828,000 800,000 Parent recording of subsidiary income (year 2) Incomplete Complete Equity Equity Cost Investment balance 872,000 828,000 800,000 Year 2 income: (4,000 amort) Investment in Sub 120,000 116,000 no entry Investment income 120,000 116,000 Year 2 dividends: Cash 16,000 16,000 16,000 Investment in Sub 16,000 16,000 Dividend income 16,000 Investment balance 976,000 928,000 800,000 Worksheet procedures The RE of the Sub and the Investment account must be at the same point in time The account adjustments made require amortization for current and prior periods No entries are made on either firms books for worksheet eliminations Cost Method: Year 1 Selected accounts Trial Balances Eliminations Parent Sub Dr Cr Investment in Sub 800,000 EL 480.000 D 320,000 Building 500,000 D2 80,000 Accumulated depr. (200,000) A2 4,000 Goodwill D3 200,000 Dividend income (8,000) CY2 8,000 Dividends declared 10,000 CY2 8,000 Com Stock - Sub (200,000) EL 160,000 RE - Sub (400,000) EL 320,000 RE - Parent (700,000) Cost of goods sold 400,000 300.000 D1 40,000 Expenses 250,000 180,000 A2 4,000 Cost Method: Year 2 Selected accounts Trial Balances Eliminations Parent Sub Dr Cr Investment in Sub 800,000 CV 72,000 EL 552.000 D 320,000 Building 500,000 D2 80,000 Accumulated depr. (200,000) A2 8,000 Goodwill D3 200,000 Dividend income (16,000) CY2 16,000 Dividends declared 20,000 CY2 16,000 Com Stock - Sub (200,000) EL 160,000 RE - Sub (490,000) EL 392,000 RE - Parent (828,000) D1 40,000 CV 72,000 A2 4,000 Cost of goods sold 500,000 400.000 Expenses 350,000 280,000 A2 4000 Consolidation procedures for a pooling Recall that investment was recorded at amount equal to book value. If this was not the case, correct the investment account. Cost or equity method may be used (sophisticated equity has no application - no excess) There should not be any excess to distribute or amortize - it was just like a purchase at a price equal to underlying subsidiary book value!