Chapter 3
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Transcript of Chapter 3
![Page 1: Chapter 3](https://reader036.fdocuments.us/reader036/viewer/2022082818/56812de9550346895d9345c3/html5/thumbnails/1.jpg)
Chapter 3
Consolidated Statements
Subsequent to Acquisition
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Consolidated statements subsequent to acquisition
Worksheet procedures; Purchase Method
•Using the Income Distribution Schedule
•Reporting income for the consolidated company
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Maintaining the investment account
Incomplete
Equity Complete
Equity Cost Add parent % of subsidiary income
Yes Yes No
Adjust for amortizations of excess
No Yes No
Recording of dividends
Reduce investment
account
Reduce investment
account
Parent % reported as
income
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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
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Subsidiary income and dividends
Year 1 100,000 10,000
Year 2 150,000 20,000
Income Dividends
• Parent reports only 80% of above amounts
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Parent recording of subsidiary income (year 1)
Incomplete Equity
Complete Equity Cost
Investment balance 800,000 800,000 800,000
Year 1 income: Investment in Sub Investment income
80,000
80,000
(44,000 amort) 36,000
36,000
no entry
Year 1 dividends: Cash Investment in Sub Dividend income
8,000
8,000
8,000
8,000
8,000
8,000 Investment balance 872,000 828,000 800,000
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Incomplete Equity
Complete Equity Cost
Investment balance 872,000 828,000 800,000 Year 2 income: Investment in Sub Investment income
120,000
120,000
(4,000 amort) 116,000
116,000
no entry
Year 2 dividends: Cash Investment in Sub Dividend income
16,000
16,000
16,000
16,000
16,000
16,000 Investment balance 976,000 928,000 800,000
Parent recording of subsidiary income (year 2)
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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 firm’s books for
worksheet eliminations
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Cost Method: Year 1Selected accounts Trial Balances Eliminations
Parent Sub Dr CrInvestment in Sub 800,000 EL 480.000
D 320,000Building 500,000 D2 80,000Accumulated depr. (200,000) A2 4,000Goodwill D3 200,000Dividend income (8,000) CY2 8,000Dividends declared 10,000 CY2 8,000Com Stock - Sub (200,000) EL 160,000RE - Sub (400,000) EL 320,000RE - Parent (700,000)Cost of goods sold 400,000 300.000 D1 40,000Expenses 250,000 180,000 A2 4,000
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Cost Method: Year 2Selected accounts Trial Balances Eliminations
Parent Sub Dr CrInvestment in Sub 800,000 CV 72,000 EL 552.000
D 320,000Building 500,000 D2 80,000Accumulated depr. (200,000) A2 8,000Goodwill D3 200,000Dividend income (16,000) CY2 16,000Dividends declared 20,000 CY2 16,000Com Stock - Sub (200,000) EL 160,000RE - Sub (490,000) EL 392,000RE - Parent (828,000) D1 40,000
A2 4,000CV 72,000
Cost of goods sold 500,000 400.000Expenses 350,000 280,000 A2 4000
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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!