Consolidations

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Ch. 3 Excel ACC405

Equity Method
Big buys the shares of Small 100% acquisition
100% of shares purchased Sub not dissolved
Data Paid $2,750,000 Parent & sub continue as operating companies
Data Cash $750,000 Equity/consolidation method
Data shares of Big $2,000,000 No initial value method
Data Book Value Acquired $1,900,000
FV adjustment & goodwill $850,000
Detail to Intangibles Acquired // FV ADJUSTMENTS Life per year
Trademarks 30,000 indefinite do not amortize FV adjustments for item on Small Books
Patents 50,000 10 5,000 FV adjustments for item on Small Books
80,000 5,000 all FV adjustments for item on Small Books
straight FV adjustments for item on Small Books
PPE Fair value > Small book 200,000 8 25,000 line FV adjustments for item on Small Books
FV adjustments for items NOT on Small Books
FV adjustments for items NOT on Small Books
Contracts assigned value 480,000 1 480,000 one-year FV adjustments for items NOT on Small Books
Inventory 10,000 1 10,000 inventory turns [< 1 year] FV adjustments for items NOT on Small Books
Accounts receivable (55,000) 1 (55,000) A/R DSO [< I year] FV adjustments for items NOT on Small Books
465,000 ABC have 1 year life
Subtotal FV Adjustments 715,000 A thru E Total FV adjustments ABC have 1 year life
ABC have 1 year life
Goodwill 135,000 do not amortize Backed into goodwill
Total 850,000 Sum A through F GW + FV
Five numbered columns are what are in the consolidating worksheet columns of consolidating Balance sheet
100% Acquisition 4,800,000 Acquired FV
Big Balance Sheet After acquisition & Consolidated Books Books Small Consolidating Consolidating Big
Before Small NOT Dissolved B4 Operations Big B4 BIG After Small BS Fair Value Adjustments Adjustments Consolidated
Ops. Assets: $s $s $s $s Debit Credit $s Create
Cash 1,100,000 350,000 120,000 120,000 0 0 470,000
A/R 3,800,000 3,800,000 750,000 695,000 0 55,000 4,495,000
Before Inventory 2,900,000 2,900,000 680,000 690,000 10,000 0 3,590,000
Ops. Intangible: Customer contracts 0 0 0 480,000 480,000 0 480,000
Current Assets 7,800,000 7,050,000 1,550,000 1,985,000 9,035,000
Before
Ops. Net PPE 6,700,000 6,700,000 800,000 1,000,000 200,000 0 7,700,000
Investments 0 2,750,000 0 0 0 2,750,000 0
Intangibles [Patents/copywrite] 700,000 700,000 167,000 247,000 80,000 0 947,000
Before Goodwill 300,000 300,000 0 135,000 135,000 435,000
Ops. Total Assets 15,500,000 17,500,000 2,517,000 3,367,000 18,117,000
Current Liabilities 4,800,000 4,800,000 110,000 110,000 0 0 4,910,000
Before
Ops. Long term Debt 4,100,000 4,100,000 507,000 507,000 0 0 4,607,000 BEFORE
Total Liabilities 8,900,000 8,900,000 617,000 617,000 0 9,517,000 Post
Acquisition
Before Equity: Capital 5,800,000 7,800,000 1,300,000 0 1,300,000 0 7,800,000 Activities
Ops. Equity: Retained earnings 800,000 800,000 600,000 0 600,000 800,000
Total Equity 6,600,000 8,600,000 1,900,000 0 8,600,000
Before Total Liabilities & Equity 15,500,000 17,500,000 2,517,000 617,000 18,117,000
Ops. Check 0 0 0 2,750,000 2,805,000 2,805,000 0
value acquired
[B] Start NO Transaction but after purchase BIG after & Small & Consolation & before operations
100% Acquisition
Same Big Balance Sheet After acquisition & Consolidated Consolidating Consolidating columns of consolidating Balance sheet
Info Small NOT Dissolved BIG After[books] Small BS [books] Adjustments Adjustments Consolidated
five Assets: $s $s Debit Credit $s
column Cash 350,000 120,000 0 0 470,000
Presentn. A/R 3,800,000 750,000 0 55,000 4,495,000 FV adjustment
Inventory 2,900,000 680,000 10,000 0 3,590,000 + elim. Small equity
Intangible: Customer contracts 0 0 480,000 0 480,000 + elim. Big investment
Current Assets 7,050,000 1,550,000 9,035,000
BEFORE
Same Net PPE 6,700,000 800,000 200,000 0 7,700,000 Post
Info Investments 2,750,000 0 0 2,750,000 0 Acquisition
five Intangibles [Patents/copywrite] 700,000 167,000 80,000 0 947,000 Activities
column Goodwill 300,000 0 135,000 0 435,000
Presentn. Total Assets 17,500,000 2,517,000 18,117,000
Current Liabilities 4,800,000 110,000 0 0 4,910,000
0 0 0 0 0
Long term Debt 4,100,000 507,000 0 0 4,607,000
Total Liabilities 8,900,000 617,000 0 9,517,000
Same
Info Equity: Capital 7,800,000 1,300,000 1,300,000 0 7,800,000
five Equity: Retained earnings 800,000 600,000 600,000 0 800,000
column Total Equity 8,600,000 1,900,000 8,600,000
Presentn.
Total Liabilities & Equity 17,500,000 2,517,000 18,117,000
Check 0 0 2,805,000 2,805,000 0
Detail to Intangibles Acquired Life per year
Trademarks 30,000 indefinite do not amortize From above // no changes from that
Patents 50,000 10 5,000 From above // no changes from that
80,000 5,000 all From above // no changes from that
straight Amortzn. From above // no changes from that
PPE Fair value > Small book 200,000 8 25,000 line Schedule From above // no changes from that
From above // no changes from that
From above // no changes from that
Contracts assigned value 480,000 1 480,000 first yr. only From above // no changes from that
Inventory 10,000 1 10,000 first yr. only From above // no changes from that
Accounts receivable (55,000) 1 (55,000) first yr. only From above // no changes from that
From above // no changes from that
Subtotal FV Adjustments 715,000 From above // no changes from that
From above // no changes from that
Goodwill 135,000 do not amortize From above // no changes from that
Total: 850,000
465,000 Sum/Yr.1
30,000 Sum/Yr.2 & after Note ABC have 1 year life ABC have 1 year life
[C] BIG: Non-operating transaction & entered for the year
During the year the following transaction occurred Actual
JE's Big BIG books JE's
Books Dr. Cr. During
Small profit of $270,000 for the year Year
Investmenté 270,000 Investment UP
Small Equity { other income} 270,000
JE's Cash [Dividend] Small to Big BIG books
Cash 9,000 Net = Investment UP
Investment↓ 9,000 261,000
Amortization FV adjustments BIG books 2,750,000
JE's Small equity-Other (Income)/Exp. Fromm Small/Loss 465,000 Net = (204,000)
Investment↓ 465,000 (204,000) Investment Down 2,546,000
Small Books Small equity-Other (Income)/Exp. Fromm Small/Loss
(270,000) SMALL Credit
JE's 465,000 FV amortization Expenses Debit
195,000 Expense Details below
Small Books
DR. CR
IS clearing [various income/expense accts] 270,000
Equity [retained earnings] 270,000
JE's
Small Books
DR. CR
Equity [retained earnings] 9,000
Cash 9,000
[D] Consolidating entries @ PE after operating In Big books & in consolidation
Reduced investment value by amortization of intangibles in exceed of book
Investment 5,000 Annual -E-
Depreciation on PPE fair value > acquired book value
Investment 25,000 Annual Journal entry above AND entry in consolidation
Small Equity { other income} 30,000 Small equity-Other (Income)/Exp. Fromm Small/Loss 465,000 Debit
Investment 465,000 Credit
Reduce investment for portion of contract to which value has been assigned
Investment 480,000 Yr. 1 only -S-
Small Equity { other income} 480,000
Inventory adjustment realized
Investment 10,000 Yr. 1 only -E-
Small Equity { other income} 10,000
A/R adjustment realized
Investment 55,000 Yr. 1 only -E-
Small Equity { other income} 55,000
Debit/[Credit] Dr./Cr. In consol.
Adjusted excess value after period 1 Begin End Change BS
A/R (55,000) 0 55,000 YES
Inventory 10,000 0 (10,000) YES
Net PPE 200,000 175,000 (25,000) YES
Intangibles [Patents/copywrite] 80,000 75,000 (5,000) YES
Intangible: Customer contracts 480,000 0 (480,000) YES
Goodwill 135,000 135,000 0 NO No adjustment for operating period
850,000 385,000 (465,000) see above
[E] Intercompany transactions Data interco inventory @ SMALL Inter-co Sales eliminated
Small had some interco Sales IN INVENTORY 100,000 Data provided Data provided Dr Cr
purchases from Big CoGS 70,000 400,000 NOT FV Reverse interco sales 400,000 400,000 Net Rev/CoGS
in its inventory Gross Profit 30,000 TOTAL INTRA-ENTITY SALES Given, Data … Elim interco profit in inventory 30,000 30,000 CoGS/Inventory
[F]Period Operations: CONSOLIDATED Income Statement On the Books 1,805,000
BIG SMALL Dr. Cr. Consolidated 195,000
Net Revenue 21,000,000 5,000,000 400,000 25,600,000 2,000,000 Big without Small Income & amortization.
CoGS 13,100,000 3,300,000 30,000 400,000 16,030,000 (30,000) Gross Profit 1,805,000 Big
Gross Profit 7,900,000 1,700,000 9,570,000 270,000 Small (270,000) Small on Big books
Expenses 5,000,000 1,300,000 465,000 6,765,000 (400,000) Interco elim 465,000 Amtzn. On big books
Small equity-Other (Income)/Exp. Fromm Small/Loss 195,000 0 195,000 0 400,000 Interco elim 2,000,000
Income before tax 2,705,000 400,000 2,805,000 (465,000) Amortize FV adjustments
Taxes 900,000 130,000 1,030,000 1,775,000
Net Income 1,805,000 270,000 895,000 595,000 1,775,000 0
Books Books Consol Consol Consol check Small equity-Other (Income)/Exp. Fromm Small/Loss
FV amortization Expenses -E- (270,000) SMALL 1,805,000 195,000
Net PPE 25,000 -E- In Consolation 465,000 FV amortization Expenses Big 2,000,000
Intangibles [Patents/copywrite] 5,000 -E- 195,000 Expense -I- Net Loss Small 270,000
Intangible: Customer contracts 480,000 -E- LOSS Amrtzn. (465,000)
Inventory adjustment realized 10,000 -E- Intreco (30,000)
Eliminate Negative Goodwill to Income 0 -E- 1,775,000
A/R (55,000) -E-
Total 465,000 -E-
[F2 ] Period Operations: DATA
At period end Small owes [A/P] to Big [A/R]
$99,000 Data, given ….
[G] Consolidating PE BS columns of consolidating Balance sheet PPT Slide reference 14
Before consolidating Entries Consolidating Consolidating +55 +99 = 154 cr A/R Amtzn A/R FV AND elim interco A/R
BIG PE Small PE Adjustments Adjustments
Assets: $s $s Debit Credit Consolidated
Cash Back into cash 1,059,000 451,000 0 0 1,510,000 154,000
A/R 4,000,000 700,000 55,000 154,000 4,601,000 (55,000) Cr. @ purchase
Inventory 3,000,000 660,000 10,000 40,000 3,630,000 55,000 Dr. when utilized in Yr.1
Intangible: Customer contracts 0 0 480,000 480,000 0 (99,000) Cr. Elim interco A/R
Current Assets 8,059,000 1,811,000 9,741,000 (99,000) Cr.
Net PPE -E- 8,200,000 1,000,000 200,000 25,000 9,375,000
Investments 2,546,000 0 2,546,000 0 -A- / -D- / -I- / -S-
Intangibles [Patents/copywrite] 600,000 150,000 80,000 5,000 825,000 initial period
Goodwill 300,000 0 135,000 0 435,000 10,000 (10,000) FV amortzn
Total Assets 19,705,000 2,961,000 20,376,000 Debit (30,000) Interco profit in inv.
(40,000)
Current Liabilities 5,000,000 400,000 99,000 0 5,301,000 Credit
Long term Debt 4,300,000 400,000 0 0 4,700,000
Total Liabilities 9,300,000 800,000 0 10,001,000 -S-
Equity: Capital 7,800,000 1,300,000 1,300,000 0 7,800,000
Equity: Retained earnings 2,605,000 861,000 891,000 2,575,000
Total Equity 10,405,000 2,161,000 10,375,000
Total Liabilities & Equity 19,705,000 2,961,000 20,376,000
3,250,000 3,250,000
-A- / -D- / -I- / -S- Check 0 0 0 0
Beginning investment 2,750,000 BIG
Small dividend (9,000) Inventory: Acquisition 10,000 800,000 Beginning
Small period income 270,000 GP in Inventory (30,000) 1,805,000 Period earnings
FV amortization Expenses (465,000) w/Beg.FV adj.= (30,000) (20,000) 2,605,000 End RE
2,546,000 we DR sales 100 & cr CoGS 70 so cr. Inventory 30
Beginning 600,000 N O T --- U S E D Small PE RE 861,000 600,000 Beg.
Earnings 270,000 IS consolidating entries: Interco transaction [Prof in Inv.] (30,000) 270,000 Period Income
Dividends (9,000) IS consolidating entries: Acquisition 465,000 (9,000) Dividends
-S-/-D- 861,000 1,296,000 861,000 Small PE RE
Small owes BIG 99,000 Small PE RE 861,000
decrease A/R - credit (99,000) life = 1 yr. Reduction in consolidation for interco sales 30,000 Profit in inventory
decrease A/P debit (99,000) 55,000 FV adj amtzn Reduction in RE in consolidation 891,000
154,000 combined
-D-
Initial Value vs. Equity method BIG Books
Investment account only
Equity Initial value
Investment in 100% Sub 2,750,000 2,750,000
Dividends declared & paid (9,000) 0 Credit IS for initial value
Amortization of FV adjustments in consolidation 0 No entry
Sub had income of $270000 270,000 0 No entry
Ending investment account balance 3,011,000 2,750,000
no other items considered
Amortization of FV adjustments (465,000) 0
End period One 2,546,000 2,750,000
Goodwill Impairment
Goodwill Impairment Four separate segments of Acquisition GW
At acquisition date 1/1/2xx1 At YE 12/31/2xx1 Increase Ch,3 excel
Paid @ FV Net Assets Goodwill @ Entity FV Net Goodwill @ (Decrease)
$ millions Acquisition @ Acquisition Acquisition FV* Assets YE Goodwill
DSM W $950 $928 $22 $940 $915 $25 $3 GW UP don't record
DSM w-less $748 $593 $155 $600 $596 $4 ($151) GW Down record
Rock $492 $454 $38 $444 $400 $44 $6 GW UP don't record
Vision $710 $704 $6 $804 $795 $9 $3 GW UP don't record
Total $2,900 $2,679 $221 $2,788 $82
$2,900 $2,870
Consolidating Entry
* aka Carrying Value $s millions
DR CR
Impairment test - record loss--do not record gain Impairment loss [IS] $151
Look at each separately Goodwill $151
Contingent Obligations [Liabilities]
Contingent Obligations [Liabilities] Likely outcome not determinable
$000s
Probability of Occurrence Estimated Future Liability Weighted Average Minimum of all reasonable estimates
Scenario A 30% $ 9,000 $ 10,925 $ 9,000
Scenario B 25% $ 14,000 used as FV Used for
Scenario C 45% $ 10,500 at On-going
100% ACQUISITION Operations
Text
Referenced JE or Equity Method Overview
Entry Consol. At date of acquisition
JE 1 Record invest on Parent books
A, E JE 2 Record FV adjustments @ acquisition date
S Consol. 3 Eliminate Sub equity
S Consol. 4 Eliminate Parent investment account
During period & PE
JE 5 Record Sub dividends to Parent [investment down]
I JE 6 Record Sub income on Parent [investment Up]
S, D JE 7 Eliminate Sub equity [PIC & Dividends}
D, S, A, I JE 8 Eliminate Parent investment account
E JE AND Consol. 9 Amortize FV adjustments
Consol. 10 Elim profit in inventory
Consol. 11 Elim Interco sales CoGS
P Consol. 12 Elim interco A/R--A/P
BS must Balance
A Allocation of FV adjustment at Beginning of period
D Eliminate dividend from / to sub
E Amortization / depreciation expense for FV adjustments
S Eliminate investment & sub equity
I Eliminate sub income corded on Parent books
P Elim interco A/R--A/P

1

2

5

3

4

1

2

3

4

5

1

2

4

3

5

5

5

5

5

A

A

B

B

C

C

D

D

E

E

F

F

Before you start operating the company

Investment account accounting on books of Big

Back to PPT

Ch. 3 HW

Income Statement was realized for the period after acquisition
of Small by Big CH.3 Homework
USE This In the period of operations Dividends Small to Big = $ 100,000
To Do:
Prepare Consolidated Income Statement and
Consolidated Balance Sheet of the Form set forth in the Excel Examples
AND reflect changes due to amortizing FV adjustments Data Set
Consolidating Balance Sheet Before operations
Big Small
Assets: $s $s debit Credit Consol.
Cash 640,000 440,000 0 0 1,080,000
A/R 3,200,000 1,100,000 50,000 0 4,350,000
Inventory 2,100,000 1,450,000 0 3,550,000
Current Assets 5,940,000 2,990,000 8,980,000
Net PPE 4,400,000 1,800,000 120,000 0 6,320,000 Small Small
Investments 2,750,000 0 0 2,750,000 0 Book FV
Intangibles [patents & trademarks] 0 0 275,000 0 275,000 Intangibles
Goodwill 110,000 0 75,000 0 185,000 Patents 0 100,000
Total Assets 13,200,000 4,790,000 15,760,000 Trademarks 0 175,000
Total intangibles 275,000
Current Liabilities 3,000,000 790,000 30,000 0 3,760,000
0 0 0 0 0 0
Long term Debt 2,900,000 1,800,000 0 0 4,700,000
Total Liabilities 5,900,000 2,590,000 8,460,000
Equity: Capital 6,300,000 1,800,000 1,800,000 0 6,300,000
Equity: Retained earnings 1,000,000 400,000 400,000 0 1,000,000
Total Equity 7,300,000 2,200,000 7,300,000
Total Liabilities & Equity 13,200,000 4,790,000 2,750,000 2,750,000 15,760,000
check 0 0 0
Fair Value adjustments are in the BS above Calculate enter whether Debit or credit
FV Greater/(Less) Life Period amortzn.. Debit or Credit
A/R 1
Net PPE 5
Inventory 1
Curr. Liab. 1
Patents 4
Trademarks Indefinite
Goodwill N/A
Total: Sum
Consolidated Income Statement
Consolidating entries Income statement
Small Big Debit Credit Consolidated
Net Revenue 1,550,000 4,000,000
CoGS 750,000 3,300,000
Gross Profit 800,000 700,000
Expenses 350,000 480,000
Small equity-Other (Income)/Expense 0
Income before tax 450,000
Taxes 85,000 130,000
Net Income 365,000
Show calculations for
Small equity-Other (Income)/Expense
Then enter into box E57 then Big Income before tax then Big Net Income
Then do consolidating entries Then do consolidated Income statement
Shown calculations [see Excel]
First complete Big investments
Then Big RE then Small Capital then Small RE then Total Equity
Then use cash for both Big & Small to balance then CA and CL then Total Liabilties add A = L + Eq --- must balance
After operations Consolidating Consolidating
BIG PE Small PE Adjustments Adjustments
Assets: $s $s Debit Credit Consolidated
Cash Back into cash
A/R 3,000,000 1,050,000
Inventory 2,100,000 1,400,000
Intangible: Customer contracts 0 0
Current Assets
Net PPE 4,350,000 1,775,000
Investments 0
Intangibles [Patents/trademarks] 0 0
Goodwill 110,000 0
Total Assets 4,460,000 1,775,000
Current Liabilities 3,100,000 7,950,000
0 0
Long term Debt 3,000,000 2,600,000
Total Liabilities 6,100,000 10,550,000
Equity: Capital 6,300,000
Equity: Retained earnings
Total Equity
Total Liabilities & Equity
Check

Sheet3

Text

ReferencedJE or

Equity Method Overview

EntryConsol.

At date of acquisition

JE

1Record invest on Parent books

A, E

JE

2Record FV adjustments @ acquisition date

S

Consol.

3Eliminate Sub equity

S

Consol.

4Eliminate Parent investment account

During period & PE

JE

5Record Sub dividends to Parent [investment down]

I

JE

6Record Sub income on Parent [investment Up]

S, D

JE

7Eliminate Sub equity [PIC & Dividends}

D, S, A, I

JE

8Eliminate Parent investment account

E

JE AND

Consol.

9Amortize FV adjustments

Consol.

10Elim profit in inventory

Consol.

11Elim Interco sales CoGS

P

Consol.

12Elim interco A/R--A/P

BS must Balance

AAllocation of FV adjustment at Beginning of period

DEliminate dividend from / to sub

EAmortization / depreciation expense for FV adjustments

SEliminate investment & sub equity

IElimante sub income corded on Parent books

PElim interco A/R--A/P