Chapter 1.

Consolidations –
Subsequent to the
Date of Acquisition
Consolidation - The Effects of
the Passage of Time
•• Previously,
Previously,we
welooked
lookedatatconsolidation
consolidationon
onthe
thedate
date
the
thecombination
combinationwas
wascreated.
created.
•• As
Astime
timepasses,
passes,the
theinvestment
investmentaccount
accountchanges,
changes,and
and
the
theconsolidation
consolidationprocess
processbecomes
becomesmore
morecomplex.
complex.
Consolidation - The Effects of the
Passage of Time
The
Theparent
parentcan
canaccount
accountfor
for
its
itsinvestment
investmentin
inone
oneofof Let’s briefly
three
threeways:
ways:
•• Equity
compare the
EquityMethod
Method
•• Initial three
InitialValue
ValueMethod
Method
•• Partial
PartialEquity
EquityMethod
Method
methods
 Exh.

Investment Accounting 3-1

Subsequent Consolidation - Equity Method

Before the consolidation balances can be

determined, the Parent’s investment
account must be adjusted to reflect
application of the equity method.
Equity
Equitymethod
methodreview:
review:
Record
RecordthetheInvestment
Investmentin inSub
Subon
onthe
theacquisition
acquisitiondate
dateat
at
fair
fairvalue.
value.
Recognize
Recognizereceipt
receiptof
ofdividends
dividendsfrom
fromthe
thesub.
sub.

Recognize
Recognizeaashare
shareof
ofthe
thesub’s
sub’sincome
income(loss).
(loss).

Excess
Excessfair
fairvalue
valueover
overbook
bookvalue
valueamortizations
amortizationsadjust
adjustthe
the
income
incomerecognized
recognizedin
in3.3.
 Example Equity Method
Parrot Company obtains all of the outstanding common stock of
Sun Company on January 1, 2009. Parrot acquires this stock for
$800,000 in cash.
Example Equity Method
Example Equity Method
Amortization computation:
Additional Information

Sun Company distributed 40, 000 dividend to

the shareholders on 8/01/09

Sun company earned 100,000 profit during

2009 calendar year
Example Equity Method
Example Equity Method
Example Equity Method
Example Equity Method
 Subsequent Consolidation - Worksheet
Entries
55basic
basicentries
entriesare
areposted
postedto
tothe
theworksheet.
worksheet.

The
TheSub’s
Sub’sequity
equityaccounts
accountsareareeliminated
eliminated(S)
(S)

Other
Otherintangible
intangibleassets
assetsare
arerecognized
recognizedandandthe
theSub’s
Sub’sassets
assets
are
areadjusted
adjustedtotofair
fairvalue
value(A)
(A)

The
TheEquity
Equityin
inSub
SubIncome
Incomeaccount
accountisiseliminated
eliminated(I)
(I)
The
TheSub’s
Sub’sdividends
dividendsare
areeliminated
eliminated(D)(D)
Amortization
Amortizationexpense
expenseisisrecognized
recognizedforforthe
the
FV
FVadjustments
adjustmentsand
andother
otherintangible
intangibleassets
assetsassociated
associatedwith
withthe
the
consolidated
consolidatedentity
entity(E)
(E)Illustrations\Equity
Illustrations\EquityMethod.doc
Method.doc
Consolidation Entries Equity
Method
Entry
EntrySS
Eliminate
Eliminatethe
thesub’s
sub’sequity
equitybalances
balancesasasof
ofthe
thebeginning
beginning
of
ofthe
theperiod.
period.
Assign
Assignthe
thedifference
differenceto
to“Investment
“InvestmentininSub.”
Sub.”
 Consolidation Entries Equity Method
Entry
EntryAA
Adjust
Adjustsub’s
sub’sassets
assetsand
andliabilities
liabilitiesto
toFV.
FV.
Set
Setup
upthe
theGoodwill
Goodwillaccount
accountand
andthe
theother
otherintangible
intangibleassets.
assets.
The
Thenet
netamount
amountofofthese
theseadjustments
adjustmentsreduces
reducesthe
the
Investment
InvestmentininSubsidiary
Subsidiaryaccount.
account.

In
Inthe
thefirst
first year
yearofofthe
theinvestment,
investment,the theFV
FV
adjustments
adjustmentsfor forthis
thisentry
entrywill
willbe
beidentified
identifiedduring
during
the
the computation
computation of of Goodwill.
Goodwill. InIn subsequent
subsequent
years,
years,the
theFVFVadjustments
adjustments and
and the
theother
other
intangible
intangibleassets
assetsidentified
identifiedmust
mustbe bereduced
reducedbyby
any
anyamortization
amortizationtaken
takenininprior
priorperiods.
periods.
Consolidation Entries Equity
Method
Entry
EntryII
Eliminate
Eliminatethe
theEquity
Equityin
inSub
SubIncome
Incomeaccount.
account.
Assign
Assignthe
thedifference
differencetotoInvestment
Investmentin
inSub.
Sub.

Entry
EntryDD
Eliminate
Eliminatesub’s
sub’sDividends.
Dividends.
Assign
Assignthe
thedifference
differenceto
toInvestment
Investmentin
inSub.
Sub.
Consolidation Entries Equity
Method
Entry E
Record amortization expense for the period associated
with the FV adjustments and the other intangible
assets identified during the combination.
Remember: Never amortize land, indefinite-lived assets,
or goodwill!
Consolidation Subsequent to year of
acquisition-Equity Method
• As a basis for analysing the procedural changes
necessitated by the passage of time, assume
that Parrot company continues to hold its
ownership of Sun company as of December 31,
2012.
• This date was selected at random; any date
subsequent to 2009 would serve equally well to
illustrate this process.
• As an additional factor, assume that Sun now
has a 40,000 liability that is payable to Parrot.
Continued:
• For this consolidation, assume that the January,
2012, Sun company’s REs balance has risen to
600,000.
• Because that account had a reported total of
only 380,000 on January 1, 2009.
• Sun’s book value apparently has increased by
220,000 during the 2009-2011 period.
• Although knowledge of individual operating
figures in the past is not required, Sun’s
reported totals help to clarify the consolidation
procedures.
Continued:
Year Sun company Divided Increase in Ending
Net Income Paid Book Value Res
2009 100,000 40,000 60,000 440,000
2010 140,000 50,000 90,000 530,000
2011 90,000 20,000 70,000 600,000
330,000 110,000 220,000
Continued:
• For 2012 the current year, we assume that Sun
reports net income of 160,000 and pays cash
dividend of 70,000.
• Because it applies the equity method, Parrot
recognises earnings of 160,000.
• Furthermore, as shown previously amortization
expense of 7,000 applies to 2012 and must also
be recorded by the parent.
• Consequently, Parrot reports equity in
Subsidiary Earnings balance for the year of
153,000 (160,000-7,000)
Continued:
• Althoogh, this income figure can be reconstructed with
little difficulty, the current balance in the Investment in
Sun company account is more complicated.
• Over the years, the initial 800,000 acquisition price has
been subjected to adjustments for
1. The annual accrual of Sun’s income
2. The receipt of dividends from Sun
3. The recognition of annual excess amortization expenses.
• the following table analyses these changes & shows the
components of the Investment in Sun company
account balance as of Dec. 31 ,2012
Continued
FV of consideration transferred at date of Acquisition 800,000

Entries recorded in prior years

Accrued of Sun’s income:

2009 100,000

2010 140,000

2011 90,000 330,000

Sun Company-Dividend paid

2009 (40,000)

2010 (50,000)

2011 (20,000) (110,000)

Excess amortization expense

2009 (7,000)

2010 (7,000)

2011 (7,000) (21,000)

Entries recorded in current year-2012

Continued:
• Accrual of sun company income 160,000
• Sun company-dividend paid (70,000)
• Excess amortization Expenses (7,000)
83,000
• Investment in Sun company 12/31/12
$1,082,000
• Following the construction of the Investment in
Sun company account, the consolidation
worksheet should be easier to understand.
• Current figures for both companies appear in
the first two columns. P 97
Illustrations\Equity Method 2012.doc
Consolidation Entry S
• The first consolidation entry offsets reciprocal
amount representing the subsidiary’s BV as of
the beginning of the current year.
• Sun’s January 1,2012 SHs’ equity accounts are
eliminated against the BV portion of the
parent’s investment account.
• Here the amount eliminated is 820,000 rather
than the 600,000 shown in the previous
example for 2009.
• Both balance changed during 2009-2011 period.
Continued:
• Sun’s operation caused a 220,000 increase in
REs.
• Parrot’s application of the equity method
created a parallel effect on its Investment in Sub
company account(the income accrual of
330,000 less dividend collected of 110,000).
• Entry S removes the REs as of the first day of 2012
rather than at the end of the year.
• The consolidation process is made a bit simpler by
segregating the effect of preceding operation from
the transaction of the current year.
Continued:
• Thus, all worksheet entries relate specifically to
either the previous years (S and A) or the
current period (I, D, E and P).
• Consolidation entry A:
• In the initial consolidation (2009), FV allocations
amounting to 200,000 were entered, but these
balance have now undergone three years of
amortization.
• As computed bellow, expenses for these prior
years totaled 21,000, leaving a balance of
179,000.
Continued:
Annual Expenses Amortizations
Accounts Original 2009 2010 2011 Balance
Allocation 1/1/12
Trademarks 20,000 -0- -0- -0- 20,000
Patented 130,000 13,000 13,000 13,000 91,000
Technology
Equipment (30,000) (6,000) (6,000) (6,000) (12.000)
Goodwill 80,000 -0- -0- -0- 80,000
200,000 7,000 7,000 7,000 179,000
21,000

• Allocation of this amount to the individual accounts is also

determined as above and reflected in worksheet Entry A.
• As with entry S, these balances are calculated as of
January 1,2012, so that the current year expenses can be
included separately (in Entry E)
Continued:
• Consolidation Entry I:
• As before this entry eliminates the equity
income recorded currently by Parrot (153,000)
in connection with its ownership of Sun.
• The subsidiary’s revenue and expenses account
are left intact so they can be included in the
consolidated figures.
• Consolidation Entry D:
• The worksheet entry offsets the 70,000
intercompany dividend payment made by Sun
to Parrot during the current period.
Continued:
• Consolidation E:
• Excess amortization expenses relating to
acquisition date FV adjustments are individually
recorded for the current period.
• Consolidation P:
• This last entry introduces a new element to the
consolidation process.
• Intercompany debt transaction do not relate to
outside parties.
• Therefore, Sun’s 40,000 payable and Parrot’s
40,000 receivable are reciprocals that must be
removed on the worksheet.
END OF CHPTER 1