Advanced accounting 10th by a beams athony ch03

Chapter 3: An Introduction to
Consolidated Financial Statements
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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Intro to Consolidations: Objectives
1. Recognize the benefits and limitations of
consolidated financial statements.
2. Understand the requirements for inclusion of a
subsidiary in consolidated financial statements.
3. Apply the consolidation concepts to parent
company recording of the investment in a
subsidiary at the date of acquisition.
4. Allocate the excess of the fair value over the book
value of the subsidiary at the date of acquisition.
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Objectives (continued)
5. Learn the concept of noncontrolling interest when
the parent company acquires less than 100% of the

subsidiary's outstanding common stock.
6. Amortize the excess of the fair value over the book
value in periods subsequent to the acquisition.
7. Prepare consolidated balance sheets subsequent to
the date of acquisition, including preparation of
elimination entries.
8. Apply the concepts underlying preparation of a
consolidated income statement.
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An Introduction to Consolidated Financial Statements

1: Benefits & Limitations

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Business Acquisitions
• FASB Statement 141R
• Business combinations occur
– Acquire controlling interest in voting stock
– More than 50%
– May have control through indirect ownership
• Consolidated financial statements
– Primarily for owners & creditors of parent

– Not for noncontrolling owners or subsidiary
creditors
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An Introduction to Consolidated Financial Statements

2: Subsidiaries

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Who is a Subsidiary?
• ARB No. 51 allowed broad discretion
• FASB Statement No. 94
– Control based on share ownership
• FASB Statement No. 160
– Financial control
• Subsidiaries, or affiliates, continue as separate
legal entities and reporting to their controlling and
noncontrolling interests.
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Consolidated Statements
• Prepared by the parent company
• Parent discloses
– Consolidation policy, Reg. S-X
– Exceptions to consolidation, temporary control
and inability to obtain control
• Fiscal year end
– Use parent's FYE, but
– May include subsidiary statements with FYE
within 3 months of parent's FYE.
• Disclose intervening material events
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An Introduction to Consolidated Financial Statements

3: Parent Company Recording

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Penn Example: Acquisition Cost =
Fair Value = Book Value
Skelly BV=FV
Cash
Other current assets

Net plant assets
Total
Accounts payable
Other liabilities
Capital stock
Retained earnings
Total

$10
15
40
$65
$15
10
30
10
$65

Penn acquires 100% of Skelly for
$40, which equals the book value
and fair values of the net assets
acquired.
Cost of acquisition

$40

Less 100% book value

40

Excess of cost over book value

$0

To consolidate, eliminate Penn's
Investment account and Skelly's
capital stock and retained earnings.

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Balance sheets
Cash

Separate

Consolidated

Penn Skelly

Penn & Sub.

$20

$10

$30

Other curr. assets

45

15

60

Net plant

60

40

100

Investment in Skelly

40

0

0

$165

$65

$190

$20

$15

$35

25

10

35

100

30

100

20

10

20

$165

$65

$190

Total
Accounts payable
Other curr. liabilities
Capital stock
Retained earnings
Total

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An Introduction to Consolidated Financial Statements

4: Allocations at Acquisition Date

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Cost, Fair Value and Book Value
Acquisition cost, fair values of identifiable net assets
and book values may differ.
– Allocate excess or deficiency of cost over book
value and determine goodwill, if any.
– When BV = FV, excess is goodwill.
Cost less BV = Excess to allocate
– Allocate first to FV-BV differences
– Remainder is goodwill (or bargain purchase)

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Example: BV ≠ FV but Cost = FV
Piper acquires 100% of Sandy for $310.
BV = 100 + 145 = $245
FV = 385 – 75 = $310
Cost – FV = $0 goodwill

Sandy

BV

FV

$40

$40

Receivables

30

30

Inventory

50

75

Plant, net

200

240

Cash

Total

$320 $385

Liabilities

$75

Capital stock

100

Retained
earnings

145

Total

$320

$75

Cost
100% BV
Excess of cost over BV

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$310
245
$65
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Piper and Sandy (cont.)
Allocate to:
Inventory 100%(+25)
Plant 100%(+40)
Total

Amt Amort.
25 1st yr
40 10 yrs
$65

Piper's elimination worksheet entry:
Capital stock

100
Retained earnings
145
Inventory
25
Plant
40
Investment in Sandy
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310
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Example: BV ≠ FV and Cost ≠ FV
Panda acquires 100% of Salty for $530.

Salty
Cash
Receivables

BV

FV

$100 $100
40

40

Inventory

250

250

Plant, net

130

190

Total

Cost – FV = $35 goodwill

$520 $580

Liabilities

$80

Capital stock

250

 

Retained earnings

190

 

$520

 

Total

BV = 250 + 190 = $440
FV = 580 – 85 = $495

$85

Cost

$530

100% BV (250+190)

440

Excess of cost over BV

$90

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Panda and Salty (cont.)
Allocate to:
Amt Amort.
Plant
60 4 yrs
Liabilities
-5 5 yrs
Goodwill
35 Total
$90
Panda's elimination worksheet entry:
Capital stock
250
Retained earnings
190
Plant
60
Goodwill
35
Liabilities
Investment in Salty
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5
530
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Example: BV ≠ FV and Cost ≠ FV
Printemps acquires 100% of Summer for $185.
BV = 75 + 105 = $180
Summer
BV
FV
FV = 250 - 40 = $210
Cash
$10 $10
Receivables

30

30

Inventory

80

90

Plant, net

100

120

Total
Liabilities
Capital stock

Retained earnings
Total

$220 $250
$40

Cost

$40

75

 

100% BV (75+105)

105

 

Excess of cost over BV

$220

 

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$185
180

$5
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Printemps and Summer (cont.)
Allocate to:
Inventory
Plant, land
Bargain purchase
Total

Amt
10
20
(25)
$5

Amort.
1st yr
Gain

Printemps records the acquisition of Summer assuming a cash
purchase as follows. Note that the investment account is
recorded at its fair value and the bargain purchase is treated
immediately as a gain.
Investment in Summer
210
Gain on Bargain purchase
Cash
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25
185
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Worksheet Elimination Entry
Unamortized excess equals $30 (gain is recognized)
• $10 for undervalued inventory
• $20 for undervalued land included in plant
assets
Printemps' elimination worksheet entry:
Capital stock
Retained earnings
Unamortized excess
Investment in Summer
Inventory
Plant
Unamortized excess
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75
105
30
210
10
20
30
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  Printemps
 
BV
$30
50
100
450

Cash
Receivables
Inventory
Plant, net
Investment in
Summer
Unamortized excess
Total
Liabilities
Capital stock
Retained earnings
Total
 
 

Summer Adjustments ConsolBV DR
CR
idated
$10  
 
$40

30  
 
80
80
10  
190
100
20  
570

210
 
$840
$270
200
370
$840

 
 
$220
$40
75
105
$220
 

 
30

210
30  

0

 
 

 
$880
 
$310
75  
200
105  
370
 
 
$880
240
240  

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An Introduction to Consolidated Financial Statements

5: Noncontrolling Interests

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Noncontrolling Interest
Parent owns less than 100%
– Noncontrolling interest represents the
minority shareholders
– Part of stockholders' equity
– Measured at fair value, based on parent's
acquisition price
• Parent pays $40,000 for an 85% interest
– Implied value of the full investee is
40,000/85% = $47,059.
– Minority share = 15%(47,059) = $7,059.
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Example: Noncontrolling Interests
Popo acquires 80% of Sine for $400 when Sine had
capital stock of $200 and retained earnings of $175.
Sine's assets and liabilities equaled their fair values
except for buildings which are undervalued by $50.
Buildings have a 10-year remaining life.
Cost of 80% of Sine
Implied value of Sine (400/80%)

Book value (200+175)
Excess over book value

$400
$500
375
$125

Allocate to:
Building
$50
Goodwill
75
Total
$125

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Elimination Entry
Popo's elimination worksheet entry:
Capital stock
Retained earnings
Building
Goodwill
Investment in Sine
Noncontrolling interest

200
175
50
75
400
100

An unamortized excess account could have been used for the
excess assigned to the building and goodwill.

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