Company P:
January 1, 2015, balance
$123,000
Net income, 2015 (including Company P’s share of subsidiary income under simple equity method)
62,500*
Balance, January 1, 2016
$185,500
*
Company P’s own 2015 net income ($100,000 revenue − $60,000 expenses) + Company P’s share of Company S 2015, $25,000 net income ($25,000 × 90%) = $40,000 + $22,500 = $62,500.
Company S:
January 1, 2015, balance
$ 70,000
Net income, 2015
25,000
Dividends declared
(10,000)
Balance, January 1, 2016
$ 85,000
As before, entry (CY1) eliminates the subsidiary income recorded by the parent, and entry (CY2) eliminates the intercompany dividends. Neither subsidiary income nor dividends declared by the subsidiary to the parent should remain in the consolidated statements. In journal form, the entries are as follows:
Create date alignment and eliminate current-year subsidiary income:
(CY1)
Investment in Company S
10,800
Subsidiary Loss
10,800
(CY2)
Investment in Company S
4,500
Dividends Declared (Company S account)
4,500
At this point, the investment account balance is returned to $148,500 ($133,200 on the trial balance + $10,800 loss + $4,500 dividends), which is the balance on January 1, 2016. Date alignment now exists, and elimination of the investment account may proceed. Entry (EL) eliminates 90% of the subsidiary equity accounts against the investment account. Entry (EL) differs in amount from the prior year’s (2015) entry only because Company S’s retained earnings balance has changed. Always eliminate the subsidiary’s equity balances as they appear on the worksheet, not in the original D&D schedule. In journal form, entry (EL) is as follows:
Eliminate investment account at beginning-of-year balance:
(EL)
Common Stock—Company S (90%)
45,000
Retained Earnings, January 1, 2016—Company S (90%)
76,500
Investment in Company S
121,500
Entries (D) and (NCI) are exactly the same as they were on the 2015 worksheet. We are always adjusting the subsidiary accounts as of the acquisition date. It will be necessary to make this same entry every year until the markup caused by the purchase is fully amortized or the asset is sold. In entry form, entry (D)/(NCI) is as follows:
Distribute excess of cost(patent):
(D)/(NCI)
Patent
30,000
Investment in Company S
27,000
NCI (Retained Earnings—Company S)
3,000
Finally, entry (A) includes $3,000 per year amortization of the patent for 2015 and 2016. The expense for 2015 is charged to Company P retained earnings and the NCI in the 90%/10% ratio. The charge is made to both interests because the asset adjustment was made to both interests. In journal form, the entry is as follows:
Amortize patent for current and prior year:
(A)
Retained Earnings, January 1, 2016—Company P
2,700
NCI (Retained Earnings—Company S)
300
Patent Amortization Expense (for current year)
3,000
Patent
6,000
Note that the 2017 worksheet will include three total years of amortization, since the entries made in prior periods’ worksheets have not been recorded in either the parent’s or subsidiary’s books. Even in later years, when the patent is past its 10-year life, it will be necessary to use a revised entry (D), which would adjust all prior years’ amortizations to the patent as follows:
Retained Earnings—Company P (10 years × $2,700)
27,000
NCI
3,000
Investment in Company S (the excess)
30,000
Note that the original D&D schedule prepared on the date of acquisition becomes the foundation for all subsequent worksheets. Once prepared, the schedule is used without modification.
REFLECTION
Date alignment is needed before an investment can be eliminated.
For an equity method investment, date alignment means removing current-year entries to return to the beginning-of-year investment balance.
All amortizations of excess resulting from the consolidations process are adjusted to the subsidiary’s IDS.
Many distributions of excess must be followed by amortizations that cover the current and prior years.
The consolidated net income derived on a worksheet is allocated to the controlling and noncontrolling interests using an income distribution schedule.
Each year’s consolidation procedures begin as if there had never been a previous consolidation.
Effect of Cost Method on Consolidation
OBJECTIVE 3
Complete a consolidated worksheet using the cost method for the parent’s investment account.
Recall that parent companies often may choose to record their investments in a subsidiary under the cost method, whereby the investments are maintained at their original costs. Income from the investments is recorded only when dividends are declared by the subsidiary. The use of the cost method means that the investment account does not reflect changes in subsidiary equity. Rather than develop a new set of procedures for the elimination of an investment under the cost method, the cost method investment will be converted to its simple equity balance at the beginning of the period to create date alignment. Then, the elimination procedures developed earlier can be applied.
knohe_
3.2.docx
0
