Both provide a measure of Sun’s book value as of January 1, 2009. At the same time, the investment account retains its $800,000 initial value. Only the differences found in these balances affect the consolidation process when another method is applied. Total liabilities and equities = $3,561,000. To complete this process, the intercompany debt of $40,000 is offset (Entry P). Consolidation Subsequent to Year of Acquisition—Initial Value and Partial Equity Methods: By again incorporating the December 31, 2012, financial data for Parrot and Sun (presented in Exhibit 3.7), consolidation procedures for the initial value method and the partial equity method are examined for years subsequent to the date of acquisition. These differences affect the periodic consolidation process but not the figures to be reported by the com­bined entity. Disclaimer 8. The Investment in Sun Company and the Equity in Subsidiary Earnings are both removed. Worksheet entries are then utilized to consolidate all balances. For inter­nal record-keeping purposes, the parent must select and apply an accounting method to monitor the relationship between the two companies. Thus, all worksheet entries relate specif­ically to either the previous years (S and A) or the current period (I, D, E, and P). More important, push-down accounting provides better information for internal evaluation. viii. Number each year consolidation elimination/adjusting journal entries by 1, 2, 3, …, etc;. These questions represent just a few of the difficult issues cur­rently being explored. Recognizes excess amortization expenses for the current period on the alloca­tions from the original adjustments to fair value. The resulting current year combined income figure is then added to the adjusted beginning of the year retained earnings to arrive at a full accrual ending retained earnings balance. Plagiarism Prevention 5. Thus, Entry E serves to bring the current year expenses into the consolidated financial statements. The distribution did not affect any outside party. As shown in Exhibit 3.2, individual allocations are used to adjust Sun’s accounts from their book values on January 1, 2009, to fair values. & In many cases, the target firm asks for consideration based on projections of its future performance. The entry originally recorded by the parent is simply reversed on the worksheet to remove its impact. The parent company balance only because the subsidiary’s div­idends were paid intercompany to the parent, not to an outside party. of William Ltd for $227 500. Therefore, as of December 31, 2012, Parrot’s Investment in Sun Company account has a balance of $1,110,000: As indicated here and in Exhibit 3.11, Parrot has properly recognized the yearly equity income accrual but not amortization. Should depreciation be based on $200,000 or $900,000? Consequently, Parrot reports an Equity in Sub­sidiary Earnings balance for the year of $153,000 ($160,000 – $7,000). Additional paid-in capital = $120,000. The income recognized from the subsidiary. 3. Depreciation arising on the fair value adjustment to non-current assets since this date is $5,000.” Now I am asked to prepare the consolidated financial statements for the year ended 31 dec 20X4. © 2003-2020 Chegg Inc. All rights reserved. As with the previous Entry S in Exhibit 3.5, the $600,000 component of the investment account is eliminated against the beginning stockholders’ equity account of the subsidiary. Subsidiary shares are no longer outstanding. By recording Entry C on the worksheet, all of the subsidiary’s operational results for the 2009-2011 period are included in the consolidation. Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries Assume that the parent company acquires its subsidiary by exchanging 50,000 shares of its $1 par value Common Stock, with a fair value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. For this consolidation, assume that the January 1, 2012, Sun Company’s Retained Earnings balance has risen to $600,000. 100 B’s at-acquisition share capital & reserves 700 Goodwill 400 Non-controlling interest 200 A’s investment in B 1,000 Amortization expense = $153,000. At acquisition date, the BCVR entries will recognise an increment to land of $5 000, a deferred tax This BCVR is pre-acquisition equity. Retained earnings, 12/31/09 = $1,413,000. This procedure is identical to the corresponding entry in Exhibit 3.5 in which the equity method was applied. From a consolidated perspective, these two $40,000 balances represent an intercompany trans­fer of cash that had no financial impact outside of the entity. The consolidated financial statements will show the subsidiary’s assets at fair market values as of the date of the acquisition, as well as the purchase goodwill. Acquisition date indicators. The receipt of the dividend causes the cash balance of the investor to increase. Consequently, if the equity method is applied, the process is simpli­fied; no worksheet entries are needed to adjust the parent’s Retained Earnings account to record subsidiary operations or amortization for past years. Think Wealthy with Mike Adams 503,349 views The same $100,000 equity income figure appears within the parent’s income statement. iii. SoFP is at 31.12.2009. Although the $110,000 in dividends was recorded as income, the parent never recognized the remainder of the $330,000 earned by the sub­sidiary. xvi. Although knowledge of individual operating figures in the past is not required Sun’s reported totals help to clarify the consolidation procedures. They can then evaluate whether these earnings provide a sufficient return for the parent’s investment. At acquisition date, the BCVR entries will recognise an increment to land of $5 000, a deferred tax liability of $1 500 and a BCVR of $3 500. The asterisk indicates that this equity simulation relates solely to transactions of prior periods. The parent’s book value. 4 Consolidation journals at the date of acquisition (30/06/2018) Entry 1a Dr Accumulated depreciation – PP&E 270,000 Cr Property, plant and equipment 270,000 (Write back accumulated depreciation of revalued P.P.E. The investment income recorded by the parent is elim­inated so that the subsidiary’s revenues and expenses can be included in the consolidated totals. It is generally the date on which the acquirer legally transfers the consideration (=the payment for the investment), acquires the assets and assumes the liabilities of the acquiree – the closing date. The entire $40,000 payment was made to the parent so that, from the view­point of the consolidated entity, it is simply an intercompany transfer of cash. To quantify this adjustment, the parent’s recognized income for these past three years under each method is first determined (Exhibit 3.11). Why do Business Engage in Business Combinations? To help clarify the consolidation process required under each of the three accounting methods, Exhibit 3.14 describes the purpose of each worksheet entry first during the year of acquisition and second for any period following the year of acquisition. Investment in Sun Company = -0-. Investment Accounting by the Acquiring Company 3. For any particular combination, each of the alternative investment accounting methods (ini­tial value, equity, and partial equity methods) begins with an identical value recorded at the date of acquisition. Within this procedure, several important guidelines must be followed: i. Sun’s assets and liabilities are adjusted to reflect the allocations originating from their acquisition-date fair values. The contingency’s fair value is recognized as part of the acquisition regardless of whether it is based on future performance of the target firm or the future stock prices of the acquirer. Prepare the general journal entries to record the investment and the effect of Fall’s income and dividends on Long Company’s accounts. A vertical summation of consolidated liabilities and equities. Because the parent applies the equity method this account should be correct. An unadjusted balance ($200,000 in the preceding illustra­tion) is a cost figure applicable to previous stockholders. Depreciation expense = $104,000. Although Sun’s Retained Earnings balance is removed in this entry, the income this company earned since the acquisition date is still included in the consolidated figures. Under the initial value method, the parent records dividend collections as income. Investment Accounting by the Acquiring Company: 3. ii. Question 19.14 Consolidation worksheet entries On 1 July 2015, Zack Ltd acquired all the issued shares (ex div.) In the case of Queen Bee Limited ("DBL") set out in the Appendix, in order to calculate the amount of … The parent’s Equity in Subsidiary Earnings account is, therefore, an accurate rep­resentation of Sun’s effect on consolidated net income. The $80,000 residual is attributed to goodwill. Cash contingency = $80,000 × 30% × (1/[1 + .04]) = $23,077, ii. Two items cause this difference. Because the subsidiary’s separate figures include amortization expense, the net income reported by the company is a good representation of the impact that the acquisition has on the earnings of the business combination. Consolidation the Effects Created by the Passage of Time. Under the initial value method, income recognition in 2009 is limited to the $40,000 dividend received by the parent; no equity income accrual is made. a. Sun’s January 1, 2012, stockhold­ers’ equity accounts are eliminated against the book value portion of the parent’s investment account. And, finally, assume that the tax basis of the PPE assets is equal to their book values, and your tax rate is 35%. Equipment = $446,000. Worksheet entries are the catalyst for developing totals to be reported by the entity but are not physically recorded in the individual account balances of either company. Entry of P company on the date of Acquisition:Investment in S company 100,000 Cash 100,000 9. However, this deci­sion does lead to distinct procedures subsequently utilized in consolidating the financial infor­mation of the separate organizations. Copyright 9. The profit and loss account of S on that date was $40,000. iv. However, elimination of the dividend from the Investment in Sun Company actually causes an increase because receipt was recorded by Parrot as a reduc­tion in that account. This allows management to analyze the subsidiary’s results without the effect of amortization.”, Accounting, Business, Consolidations, Consolidations Subsequent to the Date of Acquisition. The balance sheet of the sub will be as above. The depreciation expenses of the parent and subsidiary are added together along with the $6,000 reduction in equipment depreciation, as indicated in Exhibit 3.3. v. Equity in subsidiary earnings = -0-. However, the contin­ual financial evolution undergone by the companies prohibits an exact repetition of the consoli­dation entries demonstrated in Exhibit 3.5. Because the total value of these assets and liabilities was only $720,000, goodwill of $80,000 must be recognized for consolidation purposes. A payment of sufficient shares of Skeptical common stock to ensure a total value of $550,000 if the price per share is less than $55 on January 1, 2010. Thus, elimination of the subsidiary’s entire Retained Earnings is necessary; a portion was earned prior to the acqui­sition and the remainder has already been recorded by the parent. These figures are never affected by the parent’s choice of an accounting method. Net income = $693,000. View desktop site, Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary by exchanging 120,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary's assets and liabilities at an amount equaling their book values except for PPE assets that are undervalued by $1 million, an unrecorded Customer List that the parent values at $200,000, and an unrecorded Brand Name asset valued at $500,000. Reverse acquisitions. for one year only); and Non-controlling Journal entries also. The company tax rate is 30%. Stock contingency = $10,000 × 20% × (1/[1 + .04]) = $1,923. Because it applies the equity method, Parrot recognizes earnings of $160,000. Members of the subsidiary’s management could argue that they are being forced to record a large expense over which they have no control or responsibility. The entries recorded by Parrot in con­nection with Sun’s 2009 operations illustrate both of these approaches. That total is no longer relevant infor­mation. In retrospect, the only new element introduced here is the adjustment of the parent’s begin­ning Retained Earnings. This issue has become especially significant in recent years because of a rash of management- led buyouts as well as corporate reorganizations. 9 000 . $550,000 market value of 10,000 shares of its $5-par common stock. Non-Controlling Interest after Acquisition. Subsequent Consolidation Investment Recorded Using Initial Value or Partial Equality Method 5. The investment and equity income balances are both eliminated as are the subsidiary’s stockholders’ equity accounts. Cost of goods sold = $950,000. P has acquired 120 000 ordinary shares of S on 1.1.2008 for $200,000. Subsidiary equity balances generated prior to the acquisition are not relevant to the business combination and should be deleted. Consequently, using the initial value method rather than the equity method changes only Entries I and D in the year of acquisition. Because the equity method has been applied, Parrot’s receipt of this money was recorded originally as a decrease in the Investment in Sun Company account. Regarding the additional required stock issue, note that Skeptical’s total paid-in capital remains unchanged from the total $551,923 recorded at the acquisition date. Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date. The revenues of the parent and the subsidiary are added together. Sun’s $200,000 excess acquisition-date fair value over book value is allocated to Sun’s assets and liabilities based on their fair values at the date of acquisition. Typically the fair value of the consideration transferred by the parent (or its share of the fair value of the net amount of the assets acquired and liabilities assumed in a bargain purchase) will serve as the valuation basis on the parent’s books. Part C Because of the handling of income recognition and dividend payments, Entries I and D again differ on the worksheet. Recognise the increase/decrease to the asset’s fair value with the tax effect. 138 000. Eliminates the impact of intercompany dividend payments made by the sub­sidiary. Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 96,000 shares of its $5 par value Common Stock, with a fair value on the acquisition date of $42 per share, for all of the outstanding voting shares of the investee. Subsequent Consolidation—Investment Recorded by the Equity Method 4. If adjusted should the $700,000 increase be reported as a gain by the subsidiary or as an addition to contributed capital? Key Concepts: Terms in this set (31) S - Entry. Proponents of push-down accounting argue that a change in ownership creates a new basis for subsidiary assets and liabilities. Uploader Agreement, Read Accounting Notes, Procedures, Problems and Solutions, Learn Accounting: Notes, Procedures, Problems and Solutions, Consolidations Subsequent to the Date of Acquisition, Intercompany Land Transfer and Consolidation Process | Accounting, Partial Ownership Consolidations: Acquisition Method | Business | Accounting, Bonus Shares out of Pre-acquisition and Post Acquisition Profits, Intercompany Inventory Transactions | Consolidations | Accounting. Subsequent Consolidation—Investment Recorded by the Equity Method: Consolidation the Effects Created by the Passage of Time, Investment Accounting by the Acquiring Company, Subsequent Consolidation—Investment Recorded by the Equity Method, Subsequent Consolidation Investment Recorded Using Initial Value or Partial Equality Method. Likewise, the income figure accrued by the parent is removed each period so that the subsidiary’s revenues and expenses can be included when creating an income statement for the combined business entity. • The pre-acquisition entry required in our example is: DR Share capital 300,000 DR Retained earnings 50,000 DR BCVR 50,000 CR Investment in Lotech 400,000 Pre-acquisition entry at acquisition date These figures are taken from the acquisition analysis (refer back to slide 10) Pre-acquisition entry at acquisition date Note values consolidation journal entries for updating the parent entity's accounting records; D. ... At acquisition date Weak Limited had a book carrying amount of $8 000 for goodwill. For example entity bought a machinery of $100,000 paying by cash then journal entry will be as follows: For a consolidation produced after the initial year of acquisition, an Entry C is required if the parent has not applied the equity method. The Dividend Paid account is simply deleted. Several steps are necessary to arrive at these reported totals. There­fore, new worksheet adjustments are required to convert the parent’s beginning of the year retained earnings balance to a full-accrual basis. For 2012 the current year, we assume that Sun reports net income of $160,000 and pays cash dividends of $70,000. The Guide to Business Combinations comes free with the Guide to Consolidation Journal Entries, this covers areas including: Acquirer indicators. In reality, just three of the parent’s accounts actually vary because of the method applied: ii. Consequently, if the partial equity method is in use, the parent’s beginning Retained Earnings Account must be adjusted to include this expense. Contingent Consideration 6. Lydia's assets and liabilities equaled their fair values except for its equipment, which was undervalued by $690,000 and had a 10-year remaining life. Despite the change in methods, reported figures are still derived by- (1) eliminating all reciprocals, (2) allocating the excess portion of the acquisition- date fair values, and (3) recording amortizations on these allocations. It is generally the date on which the acquirer legally transfers the consideration (=the payment for the investment), acquires the assets and assumes the liabilities of the acquiree – the closing date. From a mechanical perspective, a worksheet and consolidation entries con­tinue to provide structure for the production of a single set of financial statements for the com­bined business entity. Trademarks = $820,000. Note that Parrot separately reports net income of $693,000 as well as ending retained earnings of $1,413,000, figures that are identical to the totals generated for the consolidated entity. The elimination is made through this entry because the equity accounts and the $600,000 component of the investment account represent reciprocal balances. Total assets = $3,561,000. ... • Proforma journal entry at acquisition is: Property, plant & equip. Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 96,000 shares of its $5 par value Common Stock, with a fair value on the acquisition date of $42 per share, for all of the outstanding voting shares of the investee.