AKL 1 - Consolidation Techniques & Procedures

© Pearson Education Limited 2015 4-1
Consolidation Techniques:
Objectives
1. Prepare consolidation workpaper for the

year of acquisition when the parent uses
the complete equity method to account for
its investment in a subsidiary.
2. Prepare a consolidation workpaper for the
years subsequent to acquisition.
3. Locate errors in a consolidation workpaper.
4. Record fair values to identifiable net assets
acquired.

Objectives (continued)
5. Prepare a consolidated statement of cash

flows.
6. (Students) Create an electronic
spreadsheet to prepare a consolidation
workpaper
7. Appendix: Understand the alternative trial
balance consolidation workpaper format.

Consolidation Techniques and Procedures
1: ACQUISITION-YEAR
WORKPAPER

Preparing the Worksheet
Statements are entered onto the worksheet:

– Income statement
– Statement of retained earnings
– Balance sheet
Columns needed:
– Parent
– Subsidiary
– DR and CR columns for elimination entries
– Consolidated

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.
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 pays $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:

2016 2017
Net income $50 $60
Dividends $30 $30

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

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

worksheet for worksheet for amortization
amortization expense and expense and patents.
patents.

Income & Dividend Calculations
2016:
Son's net income$50 Pop's 80% share
Amortization (4) $36.8
Adjusted income $46 $24.0 NCI 20% share
$9.2
Dividends $30 $6.0
2017:
Son's net income $60 Pop's 80% share
Adjusted income $56 $24.0
NCI 20% share
$11.2
Dividends $30 $6.0

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

Pop 2016: Entries (2 of 3)
4. Record noncontrolling interest in sub.'s earnings &

dividends
Noncontrolling interest share (-SE) 9.2
Dividends (+SE) 6.0
Noncontrolling interest (+SE) 3.2
5. Eliminate reciprocal Investment & sub.'s equity
balances
Capital stock, Son (-SE) 120
Retained earnings, Son (beginning) (-SE) 60
Patents (+A) 40
Investment in Son (-A) 176
Noncontrolling interest (+SE) 44

6. Amortize fair value/book value differentials

Amortization Expense (E, -SE) 4
Patents (-A) 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
Year ended 12/31/2016 Pop Son DR CR Consol

Income statement:
Revenues 500.0 130.0 630.0
Income from Son 36.8 36.8 0.0
Expenses (400.0) (80.0) 4.0 (484.0)
Noncontrolling interest share 9.2 (9.2)
Net income/ Controlling
share 136.8 50.0 136.8
Statement of retained
earnings:
Beginning retained earnings 10.0 60.0 60.0 10.0
Add net income 136.8 50.0 136.8
Deduct dividends (60.0) (30.0) 24.0 (60.0)
6.0
Ending retained earnings 86.8 80.0 86.8

Balance sheet, 12/31/2016: Pop Son DR CR Consol
Cash 78.0 20.0 98.0
Other current assets 180.0 100.0 280.0
Investment in Son 188.8 12.8 0.0
176.0
Plant & equipment, net 500.0 140.0 680.0
Patents 40.0 4.0 36.0
Total 946.8 260.0 1,054.0
Liabilities 160.0 60.0 220.0
Capital stock 700.0 120.0 120.0 700.0
Retained earnings 86.8 80.0 86.8
Noncontrolling interest, Jan.1 44.0
Noncontrolling interest, Dec. 31 3.2 47.2
Total 946.8 260.0 1,054.0

A Look at the Income Statement

Income statement:
Revenues 500.0 130.0 630.0
Expenses (400.0) (80.0) 4.0 (484.0)
Net income/ Controlling
share 136.8 50.0 136.8
• 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

A Look at Retained Earnings
earnings:
Add net income 136.8 50.0 136.8
6.0
• 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 $20, and current
amortization is $2; they are $18 at the end of 2016.
– The total is calculated in the consolidated column.

Cash 78.0 20.0 98.0
176.0
Patents 40.0 4.0 36.0
Total 946.8 360.0 1,054.0

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

Liabilities 160.0 60.0 220.0
Capital stock 700.0 120.0 120.0 700.0
Total 946.8 260.0 1,054.0

2: WORKPAPERS IN
SUBSEQUENT YEARS

Analysis, for 2017
Cost of 80% of Son $176 Allocated to: Amt Amort.

Implied value of Son ($88/.80) $220 Patents $40 10 yrs
Book value (120+60) 180
Excess $40
Unamort. Amortization Unamort. Bal. Amortization Unamort.

Bal. Bal.
on in 2016 on 12/31/2016 in 2017 on
1/1/2016 12/31/2017
Patents $40 $4 $36 $24 $32
Use these amounts in Use these amounts

2016 worksheet for in 2017 worksheet
amortization expense for amortization
and patents. expense and
patents.

Income & Dividend Calculations
2016:
$9.2
Dividends $30 $6.0
2017:
$11.2
Dividends $30 $6.0

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
Investment in Sap (-A) 20.8

Pep 2017: Entries (2 of 3)

dividends
Dividends (+SE) 6.0
5. Eliminate reciprocal Investment & sub.'s equity
balances
Capital stock, Son (-SE) 120
Retained earnings, Son (beginning) (-SE) 80
Patents (+A) 36
Investment in Son (-A) 188.8

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 20
acquisition to the beginning of the current year
$80 at 1/1/2017 minus $60 at 1/1/2016
Less amortization for all prior periods (4)
$4 patent amortization for 2016
Adjusted value of Sap 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
Patents (-A) 4
Note payable – Pop (-L) 20
Note receivable – Son (-A) 20

Pop's 2016 Worksheet

Income statement:
Revenues 600.0 150.0 750.0
Expenses (488.0) (90.0) 4.0 (582.0)
Net income/ Controlling share 156.8 60.0 156.8
Statement of retained earnings:
Add net income 156.8 60.0 156.8
6.0

Cash 90.0 40.0 130.0
Note receivable – Son 20.0 20.0 0.0
188.8
Patents 36.0 4.0 32.0
Total 993.6 300.0 1,096.0
Note payable – Pop 20.0 20.0
Liabilities 140.0 50.0 190.0
Capital stock 790.0 120.0 120.0 700.0
Total 993.6 300.0 1,096.0

3: ERRORS IN THE
WORKPAPERS

Errors
Most errors show up when the consolidated

balance sheet does not balance.
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.

4: ASSIGNING FAIR VALUE

Example with Excess Allocated
Pam pays $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
2017), 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 Son to Pam for the note.

Analysis at Acquisition
$36 Allocated to: Amt Amort
Cost of 90% of Sun 0 Inventories $10 1st yr
Implied value of Sun ($360/.90) $400 Land 30 -
Book value (200+50) 250 Building 80 20 yrs
$15 Equipment (20) 10 yrs
Excess 0
Goodwill 50 -
150
Noncontrolling interest,
10%(400) $40
Unamort. Bal. Amortization Unamort. Bal. * Use the

12/31/2016 * in 2017 * on 12/31/2017 12/31/2016
Inventories $10 ($10) $0 and 2017
Land 30 0 30 amortization
Building 80 (4) 76 in worksheet
Equipment (20) 2 (18) entries for
Goodwill 50 0 50 2017.
$150 ($12) $138

Sun's Income & Dividend
2017
Sun's net income $60
Pam's 90% share
Amortization ($12) $43.2
Adjusted $18.0
income $48

Sun's dividends $20
NCI 10% share

$4.8
$2.0

Pam's Worksheet Entries (1 of 4)
Dividends receivable (+A) 9.0

Investment in Sun (-A) 9.0
Cash (+A) 20.0
Note receivable, Sun (-A) 20.0
• none
3. Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Sun (-R, -SE) 43.2

Investment in Sol (-A) 25.2

Pam: Entries (2 of 4)

dividends
Dividends (+SE) 2.0
5a. Eliminate reciprocal Investment & sub.'s equity

balances (with unamortized excess)
Capital stock (-SE) 200
Retained earnings, Sun (beginning) (-SE) 50
Unamortized excess (+A) 150
Investment in Sun (-A) 360
Noncontrolling interest (+SE) 40

5b. Allocate the unamortized excess

according to beginning-of-year balances.
Cost of Goods Sold (-SE) 10
Land (+A) 30
Building, net (+A) 80
Goodwill (+A) 50
Equipment, net (-A) 20
Unamortized excess (-A) 150

6. Amortize fair value/book value differentials
Operating (depreciation) expense (E, -SE) 4

Buildings, net (-A) 4
Equipment, net (-A) 2
Operating (depreciation) expense (-E, 2
SE)
Dividends payable (-L) 9.0

Dividends receivable (-A) 9.0

Pam's 2017 Worksheet
Year ended 12/31/2017 Pam Sun DR CR Consol
Income statement:
Revenues 900.0 300.0 1,200.0
Income from Sun 43.2 43.2 0.0
Cost of goods sold (600.0) (150.0) 10.0 (760.0)
Operating expenses (190.0) (90.0) 4.0 2.0 (282.0)
Net income/ Controlling 153.2 60.0 153.2
share
earnings:
Add net income 153.2 60.0 153.2
2.0

Balance sheet, 12/31/2012: Pam Sun DR CR Consol
Cash 13.0 15.0 20.0 48.0
Accounts receivable, net 76.0 25.0 101.0
Note receivable – Sun 20.0 20.0 0.0
Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0 120.0
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 9.0 0.0
25.2
360.0
Dividends receivable 9.0 9.0 0.0
Goodwill 50.0 50.0
Unamortized excess 150.0 150.0 0.0
Total 993.2 360.0 1,097.0
Accounts payable 120.0 60.0 180.0
Dividends payable 10.0 9.0 1.0
Capital stock 700.0 200.0 200.0 700.0
Total 993.2 360.0 1,097.0

5: CONSOLIDATED
STATEMENT OF CASH
FLOWS

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

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

7: APPENDIX – TRIAL
BALANCE FORMAT

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

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.

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© Pearson Education Limited 2015 4-1

1. Prepare consolidation workpaper for the

© Pearson Education Limited 2015 4-2

5. Prepare a consolidated statement of cash

© Pearson Education Limited 2015 4-3

© Pearson Education Limited 2015 4-4

Statements are entered onto the worksheet:

© Pearson Education Limited 2015 4-5

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

© Pearson Education Limited 2015 4-6

5. For income, ending retained earnings and

1. Adjust for errors & omissions

© Pearson Education Limited 2015 4-8

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

Son's income and dividends follow:

© Pearson Education Limited 2015 4-9

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

Use these amounts in 2016 Use these amounts in 2017

© Pearson Education Limited 2015 4-10

© Pearson Education Limited 2015 4-11

1. Adjust for errors & omissions

Income from Son (-R, -SE) 36.8

Dividends (+SE) 24.0

Investment in Son (-A) 12.8

© Pearson Education Limited 2015 4-12

4. Record noncontrolling interest in sub.'s earnings &

© Pearson Education Limited 2015 4-13

6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balances

Note that in the last chapter, all worksheet entries

© Pearson Education Limited 2015 4-14

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

© Pearson Education Limited 2015 4-15

© Pearson Education Limited 2015 4-16

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

• Income from Son is eliminated.

© Pearson Education Limited 2015 4-17

• Beginning retained earnings of Son is eliminated.

© Pearson Education Limited 2015 4-18

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

© Pearson Education Limited 2015 4-19

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

© Pearson Education Limited 2015 4-20

© Pearson Education Limited 2015 4-21

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

Unamort. Amortization Unamort. Bal. Amortization Unamort.

Use these amounts in Use these amounts

© Pearson Education Limited 2015 4-22

© Pearson Education Limited 2015 4-23

Income from Son (-R, -SE) 44.8

Dividends (+SE) 24.0

Investment in Sap (-A) 20.8

© Pearson Education Limited 2015 4-24

4. Record noncontrolling interest in sub.'s earnings &

© Pearson Education Limited 2015 4-25

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

© Pearson Education Limited 2015 4-26

6. Amortize fair value differentials

Amortization Expense (E, -SE) 4

7. Eliminate other reciprocal balances

Note payable – Pop (-L) 20