Session Two ACC5009 Advanced Accounting

8/3/2019 Session Two ACC5009 Advanced Accounting

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CHAPTER 4-6ADVANCED ACCOUNTING 5009

Roger Mayer

7:00 PM & 8:30 PM

4-1


2/43

PREPARINGTHE 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

4-2


3/43

COMPLETINGTHE WORKSHEET

Enter Parent and Sub. amounts at 100% of bookvalue. (Even if parent owns less)

Enter elimination entries into the DR and CRcolumns. (Check totals)

Consolidated expenses, dividends and assets: Add parent, subsidiary, plus DR, less CR

Consolidated revenues, liabilities and equity (otherthanending retained earnings): Add parent, subsidiary, less DR, plus CR

Income, ending retained earnings and all subtotalsand totals: Compute directly in consolidated column.

4-3


4/43

WORKING PAPER 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 balance4. Record noncontrolling interest in sub's earnings &

dividends

5. Eliminate reciprocal Investment & sub's equitybalances

6. Amortize fair value/book value differentials7. Eliminate other reciprocal balances

4-4


5/43

EXAMPLE: PREP & SNAP DATA

Prep pays $88 for 80% of Snap on 1/1/2009 whenSnap's equity consisted of $60 capital stock and $30retained earnings. All excess was due to unrecorded

patents with a 10-year life.Snap's income and dividends follow:

4-5

2009 2010

Net income $25 $30Dividends $15 $15


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ANALYSIS

4-6

Cost of 80% of Snap $88

Implied value of Snap ($88/.80) $110

Book value (60+30) 90

Excess $20

Allocated to: Amt Amort.

Patents $20 10 yrs

Unamort.Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.

on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010

Patents $20 $2 $18 $2 $16

Use these amounts in2009 worksheet for

amortization expenseand patents.

Use these amounts in2010 worksheet for

amortization expenseand patents.


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INCOME & DIVIDEND CALCULATIONS

4-7

NCI 20% share$5.6$3.0

NCI 20% share

$4.6$3.0

Prep's 80% share$18.4$12.0

Prep's 80% share$22.4

$12.0

2009:Snap's net income $25Amortization (2)Adjusted income $23

Dividends $15

2010:Snap's net income $30

Amortization (2)Adjusted income $28

Dividends $15


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4-8

PREP

'S

2009 WORKSHEET

ENTRIES

1. Adjust for errors & omissions

none


none3. Eliminate income & dividends from sub. and bring

Investment account to its beginning balance

Income from Snap (I.S.) 18.4Dividends (St. RE) 12.0

Investment in Snap (B.S.) 6.4


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4-9

PREP 2009: ENTRIES (2 OF 3)4. Record noncontrolling interest in sub's earnings &dividends


Noncontrolling interest share (I.S.) 4.6

Dividends (St. RE) 3.0

Noncontrolling interest (B.S.) 1.6

Capital stock (B.S.) 60

Retained earnings (St. RE, beg.) 30Patents (B.S.) 20

Investment in Snap (B.S.) 88

Noncontrolling interest (B.S.) 22


10/43

4-10

PREP 2009: ENTRIES (3 OF 3)6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balancesnone

Note that in last chapter, all worksheet entries wereprepared for the balance sheet. Here worksheetentries are prepared for the income statement,statement of retained earnings and balance sheet.

Amortization Expense (I.S.) 2

Patents (B.S.) 2


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PREP'S 2009 WORKSHEET

4-11

Year ended 12/31/2009 Prep Snap DR CR ConsolIncome statement:Revenues 250.0 65.0 315.0

Income from Snap 18.4 18.4 0.0Expenses (200.0) (40.0) 2.0 (242.0)Noncontrolling interest share 4.6 (4.6)Net income/ Controlling share 68.4 25.0 68.4Statement of retained earnings:

Beginning retained earnings 5.0 30.0 30.0 5.0Add net income 68.4 25.0 68.4Deduct dividends (30.0) (15.0) 12.0 (30.0)

3.0Ending retained earnings 43.4 40.0 43.4


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4-12

Balance sheet, 12/31/2009: Prep Snap DR CR Consol

Cash 39.0 10.0 49.0Other current assets 90.0 50.0 140.0

Investment in Snap 94.4 6.4 0.0

88.0

Plant & equipment, net 250.0 70.0 320.0

Patents 20.0 2.0 18.0

Total 473.4 130.0 527.0

Liabilities 80.0 30.0 110.0

Capital stock 350.0 60.0 60.0 350.0

Retained earnings 43.4 40.0 43.4Noncontrolling interest, Jan.1 22.0

Noncontrolling interest, Dec. 31 1.6 23.6

Total 473.4 130.0 527.0


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A LOOKATTHE INCOME STATEMENT

4-13

Year ended 12/31/2009 Prep Snap DR CR ConsolIncome statement:Revenues 250.0 65.0 315.0Income from Snap 18.4 18.4 0.0

Expenses (200.0) (40.0) 2.0 (242.0)Noncontrolling interest share 4.6 (4.6)Net income/ Controlling share 68.4 25.0 68.4

Income from Snap is eliminated.

Expenses are adjusted for 2009 amortization - $2 on patents Noncontrolling interest is proportional to Prep's Income from

Snap since Prep uses the equity method.

$18.4 x .20/.80 = $4.6


14/43

A LOOKAT RETAINED EARNINGS

4-14

Beginning retained earnings of Snap is eliminated.

All of Snap'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.

Year ended 12/31/2009 Prep Snap DR CR ConsolStatement of retained earnings:Beginning retained earnings 5.0 30.0 30.0 5.0Add net income 68.4 25.0 68.4

Deduct dividends (30.0) (15.0) 12.0 (30.0)3.0

Ending retained earnings 43.4 40.0 43.4


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4: ALLOCATING EXCESSOF FAIR

VALUEOVER BOOK VALUEConsolidation Techniques and Procedures

4-15


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EXAMPLEWITH EXCESS ALLOCATED

Pate pays $360 for 90% of Solo on 12/31/2009 whenSolo's equity consisted of $200 capital stock and $50retained earnings. Inventory (sold in 2010), land andbuildings (20 years) were undervalued by $10, $30,

and $80, respectively. Equipment (10 years) wasovervalued by $20.Solo's income and dividends for 2010 were $60 and

$20.At year-end, Solo has dividends payable of $10 which

Pate has not yet recorded. There is $20 cash in transitfrom Solo to Pate for the note.

4-16


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ANALYSISAT ACQUISITION

4-17

* Use the12/31/2009and 2010

amortizationin worksheet

entries for2010.

Cost of 90% of Solo $360

Implied value of Snap ($360/.90) $400

Book value (200+50) 250

Excess $150

Noncontrolling interest, 10%(400) $40

Allocated to: Amt Amort

Inventories $10 1st yr

Land 30 -

Building 80 20 yrs

Equipment (20) 10 yrs

Goodwill 50 -150

Unamort. Bal. Amortization Unamort. Bal.

12/31/2009 * in 2010 * on 12/31/2010

Inventories $10 ($10) $0

Land 30 0 30

Building 80 (4) 76

Equipment (20) 2 (18)

Goodwill 50 0 50

$150 ($12) $138


18/43

SOLO'S INCOME & DIVIDEND

4-18

NCI 10% share$4.8$2.0

Pate's 90% share$43.2

$18.0

2010

Solo's net income $60

Amortization ($12)Adjusted $48

Solo's dividends $20


19/43

4-19

PATE'S WORKSHEET ENTRIES1. Adjust for errors & omissions


3. Eliminate income & dividends from sub. and bring Investment account to its beginningbalance

Income from Solo (I.S.) 43.2


Investment in Solo (B.S.) 25.2

Dividends receivable (B.S.) 9.0

Investment in Solo (B.S.) 9.0

Cash (B.S.) 20.0

Note receivable (B.S.) 20.0


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4-20

PATE: ENTRIES (2 OF 4)4. Record noncontrolling interest in sub's earnings &

dividends


Noncontrolling interest share (I.S.) 4.8


Noncontrolling interest (B.S.) 2.8

Capital stock (B.S.) 200

Retained earnings (St. RE, beg.) 50Unamortized excess 150

Investment in Solo (B.S.) 360

Noncontrolling interest (B.S.) 40


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4-21

PATE: ENTRIES (3 OF 4)

Allocate the unamortized excess according to beginningof year balances.

Inventory 10

Land 30

Building, net 80

Goodwill 50

Equipment, net 20

Unamortized excess 150


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4-22

PATE: ENTRIES (4 OF 4)

6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balances

Cost of sales 10

Inventory 10

Operating (depreciation) expense 4

Buildings, net 4

Equipment, net 2

Operating (depreciation) expense 2

Dividends payable (B.S.) 9.0

Dividends receivable (B.S.) 9.0


23/43

PATE'S 2010 WORKSHEET

4-23

Year ended 12/31/2010 Pate Solo DR CR Consol

Income statement:

Revenues 900.0 300.0 1,200.0

Income from Snap 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)

Noncontrolling interest share 4.8 (4.8)

Net income/ Controlling share 153.2 60.0 153.2

Statement of retained earnings:

Beginning retained earnings 120.0 50.0 50.0 120.0

Add net income 153.2 60.0 153.2Deduct dividends (100.0) (20.0) 18.0 (100.0)

2.0

Ending retained earnings 173.2 90.0 173.2

Balance sheet 12/31/2010: Prep Snap DR CR Consol


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4-24

Balance sheet, 12/31/2010: Prep Snap DR CR ConsolCash 13.0 15.0 20.0 48.0Accounts receivable, net 76.0 25.0 101.0Note receivable - solo 20.0 20.0 0.0Inventories 90.0 60.0 10.0 10.0 150.0

Land 60.0 30.0 30.0 120.0Building, net 190.0 110.0 80.0 4.0 376.0Equipment, net 150.0 120.0 2.0 20.0 252.0Investment in Solo 394.2 9.0 0.0

25.2360.0

Dividends receivable 9.0 9.0 0.0Goodwill 50.0 50.0Unamortized excess 150.0 150.0 0.0

Total 993.2 360.0 1,097.0Accounts payable 120.0 60.0 180.0

Dividends payable 10.0 9.0 1.0Capital stock 700.0 200.0 200.0 700.0Retained earnings 173.2 90.0 173.2Noncontrolling interest, Jan.1 40.0Noncontrolling interest, Dec. 31 2.8 42.8

Total 993.2 360.0 1,097.0


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CHAPTER 51: INTERCOMPANY INVENTORY

PROFITS

5-25


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INTERCOMPANY TRANSACTIONS

For consolidated financial statements, ARB No. 51(as amended by FASB Statement No. 160) states:

"intercompany balances and transactions shall beeliminated."

Show income and financial position as if theintercompany transactions had never taken place.

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27/43

INTERCOMPANY SALESOF INVENTORY

Profits on intercompany sales of inventory

All recognized if goods have been resold to outsiders

Deferred if the goods are still held in inventory

Previously deferred profits in beginning inventory arerecognized

Consider a FIFO inventory system

Beginning inventories are sold

Ending inventories are from current period

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28/43

NO INTERCOMPANY PROFITSIN INVENTORIES

5-28

During 2009, Pretty sold goods costing $1,000 toits subsidiary, Simple, at a gross profit of 30%.

Simple had none of this inventory on hand atthe end of 2009. Worksheet entry for 2009:

All intercompany sales of inventories have been

resold to outside parties, so remove the full salesprice from both sales and cost of sales. Pretty's sales are reduced $1,429.

Simple's cost of sales are reduced $1,429. The same entry is used if Simple sells to Pretty.

Sales 1,429Cost of sales 1,429

Sales = $1,000 / (1-30%) = $1,429


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INTERCOMPANY PROFITS ONLYIN ENDINGINVENTORIES

5-29

Last year, 2009, Paul sold goods costing $500 toits subsidiary, Sal, at a gross profit of 25%. Sal hadnone of this inventory on hand at the end of 2009.

During 2010, Paul sold additional goods costing

$900 to Sal at a gross profit of 40%. Sal has$200 of these goods on hand at 12/31/2010.Worksheet entries for 2010:

Sales 1,500Cost of sales 1,500

Sales = $900 / (1-40%) = $1,500Cost of sales 80

Inventory 80Ending inventory profit = $200 x 40%


30/43

INTERCOMPANY PROFITS BEGINNINGANDENDING INVENTORIESLast year, 2009, Pam sold goods costing $300 to its

subsidiary, Sir, at mark-up of 25%. Sir had $120 of thisinventory on hand at the end of 2009.

During 2010, Pam sold additional goods costing $500 toSir at a 30% mark-up. Sir has $260 of these goods on

hand at 12/31/2010. Worksheet entries for 2010:

5-30

Sales 650Cost of sales 650

Sales = $500 + 30%($500) = $650

Cost of sales 60

Inventory 60Ending inv. profits = $260 x 30%/130%

Investment in Subsidiary 24Cost of sales 24

Begin. inv. profits = $120 x 25%/125% = $24


31/43

2: UPSTREAM & DOWNSTREAM

INVENTORY SALESIntercompany Profit Transactions Inventories

5-31


32/43

UPSTREAMAND DOWNSTREAM SALES

5-32

DownstreamSales

Parent sells tosubsidiary

Subsidiary sellsto parent

Upstream Sales

Parent

Subsidiary 1 Subsidiary 2 Subsidiary 3


33/43

INTERCOMPANY INVENTORY SALES

The worksheet entries for eliminating intercompany profits for downstream sales

For upstream sales, the last entry would also include a debit to noncontrolling interest, splitting the profit to be realized between controlling and noncontrolling interests.

5-33

Sales XXXCost of sales XXX

For the intercompany sales priceCost of sales XX

Inventory XXFor the profits in ending inventory

Investment in Subsidiary XX

Cost of sales XXFor the profits in beginning inventory


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DATAFOR EXAMPLE

For the year ended 12/31/2011:

Subsidiary income is $5,200

Subsidiary dividends are $3,000

Current amortization of acquisition price is $450

Intercompany (IC) sales information:

IC sales during 2011 were $650

IC profits in ending inventory $60

IC profit in beginning inventory $24

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INCOME SHARINGWITH DOWNSTREAM SALESPARENT MAKES SALE

5-35

Subsidiary net income $5,200

Current amortizations (450)

Adjusted income $4,750

Defer profits in EI (60)Recognize profits in BI 24

Income recognized $4,714

Subsidiary dividends $3,000

CI 80% share

$3,800

(60)

24

$3,764

$2,400NCI 20% share

$950

$600

When parent makes the IC sale,

the impact of deferring and

recognizing profits falls all to

the parent.

Income from subsidiary


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INCOME SHARINGWITH UPSTREAM SALESSUBSIDIARY MAKES SALE

5-36

Subsidiary net income $5,200

Current amortizations (450)

Adjusted income $4,750

Defer profits in EI (60)Recognize profits in BI 24

Income recognized $4,714

Subsidiary dividends $3,000

CI 80% share

$3,800

(48)

19.2

$3,771.2

$2,400NCI 20% share

$950.0(12.0)

4.8

$942.8

$600

When subsidiary makes the IC sale,the impact of deferring and

recognizing profits is split amongcontrolling and noncontrolling

interests.

Income from subsidiary


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CHAPTER 6: INTERCOMPANY PROFITTRANSACTIONS PLANT ASSETS

6-37


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1: TRANSFERS

OF

PLANT

ASSETS

Intercompany Profit Transactions Plant Assets

6-38


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INTERCOMPANY FIXED ASSET SALES

Intercompany sales of nondepreciable fixed assets: In year of intercompany sale

Defer any gain or loss Restate fixed asset to cost

In years of continued ownership Adjust investment account to defer gain or loss (adjustnoncontrolling interest too, if upstream sale) Restate fixed asset to cost

In year of sale to outside entity Adjust investment account (and noncontrolling interest if

upstream sale) Recognize the previously deferred gain or loss

6-39


40/43

INTERCOMPANY SALEOF LAND

Park owns 90% of Stan, acquired at cost equal tofair value. In 2009, Park sells (downstream) land toStan and records a $10 gain. In 2013, Stan sellsthe land to an outside entity at a $15 gain. Stan's

separate income was $70 in 2009, $80 per year for2010 to 2012, and $90 in 2013.

6-40


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2009 CALCULATIONS

Defer the unrealized gain, with full effect to Park

Park's Income from Stan

90%(70) 10 = $53

Noncontrolling interest share

10%(70) = $7

Elimination entry for 2009 Worksheet

6-41

Gain on sale of land 10

Land 10


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2010 TO 2012 CALCULATIONS

Continue to defer gain, with full effect to Park


90%(80) = $72

Noncontrolling interest share

10%(80) = $8

Elimination entry for Worksheets in 2010 to 2012

6-42

Investment in Stan 10

Land 10


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2013 CALCULATIONS

Recognize the previously deferred gain, with full effect to Park


90%(90) + 10 = $91

Noncontrolling interest share10%(90) = $9

Elimination entry for 2013 Worksheet

Investment in Stan 10

Gain on sale of land 10

Session Two ACC5009 Advanced Accounting

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