1、One who is slack in his work is brother to one who destroys.(Proverbs18:9)Chapter ThreeConsolidations - Subsequent to the Date of AcquisitionOne who is slack in his work is brother to one who destroys.(Proverbs18:9)Consolidation The Effects of the Passage of TimeThe passage of time creates complexit

2、ies for internal record keeping and the balance of the investment account varies due to the accounting method used.A worksheet and consolidation entries are used to eliminate the investment account and record the subsidiarys assets and liabilities to create a single set of financial statements for t

3、he combined business entity.LO 13-2One who is slack in his work is brother to one who destroys.(Proverbs18:9)Investment Accounting by Acquiring CompanyThe acquiring company selects one of these three methods to account for its investment:LO 2Equity MethodInitial Value MethodPartial Equity MethodFor

4、each subsidiary owned, there is an asset, the investment account, and an income account to record the earnings on the investment. 3-3One who is slack in his work is brother to one who destroys.(Proverbs18:9)Investment Accounting by Acquiring CompanyComparison of internal reporting of investment meth

5、ods.MethodInvestmentIncome AccountEquityContinually adjusted to reflect ownership of acquired company.Income accrued as earned; amortization and other adjustments are recognized.Initial ValueRemains at Initially-Recorded costCash received is recorded as Dividend IncomePartial EquityAdjusted only for

6、 accrued income and dividends received from acquired company.Income accrued as earned; no other adjustments recognized.3-4One who is slack in his work is brother to one who destroys.(Proverbs18:9)Investment Accounting by Acquiring CompanyA parents choice of internal accounting method for subsidiary

7、investments has no effect on the resulting consolidated financial statements.The selection of a particular method does not affect the totals ultimately reported for the combined companies.The internal accounting method used does require distinct procedures for consolidation of the financial informat

8、ion from the separate organizations.LO 33-5One who is slack in his work is brother to one who destroys.(Proverbs18:9)During the year, the parent will adjust its investment account for the Subsidiary under application of the equity method. The original investment, recorded at the date of acquisition,

9、 is adjusted for:Subsequent Consolidation Equity MethodFMV adjustments and other intangible assets,The parents share of the subs income (loss), The receipt of dividends from the sub.LO 4a3-6Parrot Company obtains all of the outstanding common stock of Sun Company on January 1, 2012. Parrot acquires

10、this stock for $800,000 in cash. Sun Companys balances are shown below.Subsequent Consolidation - Equity Method Example -P883-7Book Values Fair Values 1/1/12 1/1/12 DifferenceCurrent assets . . . . . . . . . . . . . . . . . . .$ 320,000 $ 320,000 0Trademarks (indefinite life) . . . . . . . . . 200,0

11、00 220,000 20,000Patented technology (10-year life) . . . . 320,000 450,000 130,000Equipment (5-year life) . . . . . . . . . . . . .180,000 150,000 (30,000)Liabilities . . . . . . . . . . . . . . . . . . . . . . .(420,000) (420,000) 0Net book value . . . . . . . . . . . . . . . . . .$ 600,000 $ 720,

12、000 $120,000Common stock$40 par value . . . . .$(200,000)Additional paid-in capital . . . . . . . . . . . (20,000)Retained earnings, 1/1/12 . . . . . . . . . . (380,000)Subsequent Consolidation - Equity Method Example3-8FV of consideration transferred by Parrot Company. . $ 800,000Book Value of Sun

13、Company . . . . . . . . . . . . . . . . . . . . .(600,000)Excess of fair value over book value . . . . . . . . . .200,000Allocation to specific accounts based on fair values:Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000Patented technology . . . . . . . . .

14、 . . . . . . . . . . . . . . . . . . . . 130,000Equipment (overvalued) . . . . . . . . . . . . . . . . . . . . . . . . . .(30,000) 120,000Excess FV not specifically identifiedgoodwill. . . . . . . $ 80,000PARROT COMPANY100 Percent Acquisition of Sun CompanyAllocation of Acquisition-Date Subsidiary F

15、air ValueJanuary 1, 2012Subsequent Consolidation - Equity Method ExampleAmortization computation:3-9Useful Annual Account Allocation Life AmortizationTrademarks $ 20,000 Indefinite 0Patented technology 130,000 10 years $13,000Equipment (30,000) 5 years (6,000)Goodwill 80,000 Indefinite 0 $ 7,000Amor

16、tization will be $7,000 annually for the first five years, until the equipment allocation is fully removed.Subsequent Consolidation - Equity Method ExampleParrot Company will record an entry at the date of acquisition, but what happens after that? Lets assume Sun Company earns income of $100,000 in

17、2012 and pays a $40,0000 cash dividend on August 1, 2012.3-10Subsequent Consolidation - Equity Method Example3-111/1/12 Investment in Sun Company . . . . . 800,000Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000To record the acquisition of Sun Company.8/1/12 Cash . . . . . . . . . .

18、. . . . . . . . . . . . . . . 40,000Investment in Sun Company. . . . . . . . . 40,000To record receipt of cash dividend from subsidiaryunder the equity method.12/31/12 Investment in Sun Company. . . . 100,000Equity in Subsidiary Earnings . . . . . . 100,000To accrue income earned by 100% owned subsi

19、diary.12/31/12 Equity in Subsidiary Earnings . . . . 7,000Investment in Sun Company . . . . . . . . . 7,000To recognize amortizations on allocations madein acquisition of subsidiary.Consolidation subsequent to year of acquisition- Equity MethodInvestment in SunSun Equity12/31/12 853,00012/31/12 660,

20、0001/1/12BV 600,000FV Adjustment 200,0001/1/12BV 600,000Investment Income 100,000FV Adjustment (7,000)Net Income 100,000 93,000Dividends Received (40,000)Dividends Paid (40,000)12/31/12 853,00012/31/12 660,000AssetsSAIDInvestment incomeExpensesESubsequent Consolidation Worksheet Entries3-13After the

21、 parent companys books are updated under the equity method, how do we consolidate the two companies?Without the use of a worksheet. P86We will prepare FIVE different entries for the consolidation workpaper!Subsequent Consolidation - Worksheet EntriesS) The Subs equity accounts are eliminated.A) Othe

22、r intangible assets are recorded and the Subs assets are adjusted to FV. I) The Equity in Sub Income account is eliminated.D) The Subs dividends are eliminated.E) Amortization Expense is recorded for the FMV adjustments and other intangibleassets that were recorded in consolidation.3-14Subsequent Co

23、nsolidation Equity Method Example Entry S3-15Note: If this is the first year of the investment, and the investment was made at a time other than the beginning of the fiscal year, then pre-acquisition income of the sub must be accounted for in the retained earnings balance. Common Stock (Sun Company)

24、. . . . 200,000APIC (Sun Company) . . . . . . . . . . . . 20,000R/E, 1/1/12 (Sun Company) . . . . . . . 380,000Investment in Sun Company . . . . . . . . . . 600,000Subsequent Consolidation Equity Method Example Entry A3-16Trademarks . . . . . . . . . . . . . . .20,000Patented technology . . . . . .

25、.130,000Goodwill . . . . . . . . . . . . . . . . .80,000Equipment . . . . . . . . . . . . . . . . . . 30,000Investment in Sun Company . . . 200,000Note: In the first year, the FV adjustments for this entry are calculated in the allocation computation. In subsequent years, the FV adjustments must be

26、reduced by any depreciation taken in prior consolidations.Subsequent Consolidation Equity MethodExample Entry I&D3-17Equity in Subsidiary Earnings . . .93,000Investment in Sun Company. . . . . . . 93,000Investment in Sun Company . . . . 40,000Dividends Paid . . . . . . . . . . . . . . . . 40,000Subs

27、equent Consolidation Equity Method Example Entry E3-18Remember: Never amortize land or goodwill!Amortization Expense . . . . . . . . . 13,000Equipment . . . . . . . . . . . . . . . . . . . 6,000Patented Technology . . . . . . . . . . . . . . . . . . . 13,000Depreciation Expense . . . . . . . . . . .

28、 . . . . . . . . 6,000P94 Exhibit3.5 - the worksheetConsolidation subsequent to year of acquisition- Equity MethodSame basic proceduresNot exact repetitionP95-98Restructure Sub Retained EarningsRestructure Parents InvestmentConsolidation subsequent to year of acquisition- Equity MethodInvestment in

29、SunSun Equity12/31/15 1,082,00012/31/15 910,0001/1/15BV 820,000FV Adjustment 179,0001/1/15BV 820,000Investment Income 160,000FV Adjustment (7,000)Net Income 160,000 153,000Dividends Received (70,000)Dividends Paid (70,000)12/31/15 1,082,00012/31/15 910,000Applying the Initial Value MethodIf the Init

30、ial Value Method is used by the parent company to account for the investment, then the consolidation entries will change only slightly.Remember . . . The PARENT will record the subs activity differently under this method, so the Parents accounts will differ from the Equity Method. No adjustments are

31、 recorded in the Investment account for current year operations, dividends paid by the subsidiary, or amortization of purchase price allocations.Dividends received from the subsidiary are recorded as Dividend Revenue.3-21Consolidation-Initial Value MethodInvestment in SunSun Equity12/31/12 800,00012

32、/31/12 660,0001/1/12BV 600,000FV Adjustment 200,0001/1/12BV 600,000Net Income 100,000Dividends Income40,000 (n/a)Dividends Paid(40,000)12/31/12 800,00012/31/12 660,000Consolidation Equity Method vs. Initial Value MethodInvestment in SunInvestment in SunSun Equity12/31/12 853,00012/31/12 800,00012/31

33、/12 660,0001/1/12BV 600,000FV Adjustment 200,0001/1/12BV 600,000FV Adjustment 200,0001/1/12BV 600,000Investment Income 100,000FV Adjustment (7,000)Net Income 100,000 93,000Dividends Received (40,000)Dividends Income 40,000 (n/a) Dividends Paid (40,000)12/31/12 853,00012/31/12 800,00012/31/12 660,000

34、Consolidation Entries - Initial Value MethodEntry SEliminate the subs equity balances as of the beginning of the period.This entry is the same under the Equity Method and the Initial Value Method.3-24Consolidation Entries Initial Value MethodEntry AAdjust subs assets and liabilities to FV, and set u

35、p the intangible asset accounts.This entry is the same under the Equity Method and the Initial Value Method.3-25Consolidation Entries Initial Value MethodEntry IThis entry is different under the Initial Value Method.Eliminate the Parents Dividend Income account and the Subs Dividends Paid account. 3

36、-26Consolidation Entries Initial Value MethodEntry DUnder the Initial Value Method we DO NOT make an Entry D.3-27Consolidation Entries - Initial Value MethodEntry ERecord the amortization of the purchase price allocations. This entry is the same under the Equity Method and the Initial Value Method.3

37、-28Consolidation subsequent to year of acquisition- Initial Value MethodInvestment in SunInvestment in SunSun Equity12/31/15 1,082,00012/31/15 800,00012/31/15 910,0001/1/15BV 820,000FV Adjustment 179,0001/1/15CV 800,0001/1/15BV 820,000Investment Income 160,000FV Adjustment (7,000)Net Income 160,000

38、153,000Dividends Received (70,000)Dividends Income 70,000 (n/a) Dividends Paid (70,000)12/31/15 1,082,00012/31/15 800,00012/31/15 910,000*C +199,000Other Consolidation EntriesIn addition to the Entries S, A, I, D, & E, we will also eliminate intercompany payables or receivables.3-30AND, if control a

39、cquired is less than 100%, an additional adjustment must be made (see Chapter 4).Consolidation Entries ALL METHODSNow, check out the consolidated results! No matter which method the Parent chooses to record the Subs activity, the consolidated totals end up the SAME! This is because we are eliminatin

40、g all the entries that we made during the year, regardless of the method used, and regardless of the amount!3-31Consolidated TotalsP 107One who is slack in his work is brother to one who destroys.(Proverbs18:9)Consolidation Entries Partial Equity MethodThe same two entries differ for the Partial Equ

41、ity Method . Entry S is the same as the Equity Method. Entry A is the same as the Equity Method. Entry I is different using Partial Equity Method: It eliminates the Parents equity in the subs income and reduces the investment account. Entry D eliminates the dividend income account.Entry E is the sam

42、e as the Equity Method. LO 4c3-33One who is slack in his work is brother to one who destroys.(Proverbs18:9)Consolidation Entries Subsequent YearsNeither the Initial Value or Partial Equity Method provides a full-accrual-based measure of the subsidiary activities on the parents income. The initial va

43、lue method uses the cash basis for income recognition. The partial equity method only partially accrues subsidiary income.A new worksheet adjustment is needed to convert the parents beginning of the year retained earnings balance to a full-accrual basis.3-34One who is slack in his work is brother to

44、 one who destroys.(Proverbs18:9)Consolidation Entries Subsequent YearsFor consolidation purposes, the beginning retained earnings account must be increased (Initial Value Method) or decreased (Partial Equity Method) to create the same effect as the equity method.Entry *C. The C refers to the Convers

45、ion being made to equity method (full accrual) totals. The asterisk indicates that this entry relates solely to transactions of prior periods. Entry *C should be recorded before other worksheet entries to align the beginning balances for the year.3-35One who is slack in his work is brother to one wh

46、o destroys.(Proverbs18:9)Other Consolidation EntriesIn addition to the Entries S, A, I, D, E, and *C, intercompany debt (payables and/or receivables) must be eliminated in entry P.No matter which method the Parent chooses to record the Subs activity, the consolidated totals are always the same! This

47、 is because all the entries that were made during the year are eliminated regardless of the method used or the amount!3-36One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill and Other Intangible Assets (ASC Topic 350)FASB ASC Topic 350, “Intangibles-Goodwill and Other,

48、” provides accounting standards for reporting income statement effects of either amortization or impairment of intangibles acquired in a business combination. In accounting for goodwill subsequent to the acquisition date, GAAP requires an impairment approach rather than amortization. LO 53-37One who

49、 is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill and Other Intangible Assets (ASC Topic 350)Once goodwill has been recorded, the value will remain unchanged until:All or part of the related subsidiary is sold, There has been a permanent decline in value in which case we te

50、st for impairment and record the impairment as an impairment loss if the item is impaired.ORLO 63-38One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill Impairment Two-Step TestStep 1Fair value (with allocated goodwill) is compared to the carrying value (including goodw

51、ill) of the consolidated entitys reporting unit. Does fair value of the reporting unit exceed carrying value?Goodwill is NOT impaired. No further testing is required.A second step must be taken to test for impairment. NOYES3-39One who is slack in his work is brother to one who destroys.(Proverbs18:9

52、)Determination of Implied Fair Value of GoodwillAllocate the fair value of the reporting unit to all its identifiable assets and liabilities.Subtract the fair value of the net assets from the fair value of the reporting unit. The excess is “implied goodwill”.Compare the resulting “implied goodwill”

53、to the “recorded goodwill” on the books.The implied value of goodwill is calculated similar to the initial determination of goodwill in a business combination.3-40One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill Impairment Two-Step TestImplied value of the related g

54、oodwill can be determined using quoted market prices, similar businesses, or present value of future cash flows.Step 2Is “implied goodwill” less than “recorded goodwill”?An impairment loss is recorded for the excess carrying value over implied fair value.Goodwill is NOT impaired. No further testing

55、is required.NOYES3-41One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill Impairment Test ExampleOn January 1, 2013, Newcall Corporation was formed to consolidate operations of three companies in a deal valued at $2.9 billion. Each of the three former firms is considere

56、d an operating segment and will be maintained as a subsidiary of Newcall. One firm comprises two divisions, and the other two firms are treated as independent reporting units. Newcall recognized $221 million as goodwill at the merger date and allocated this entire/amount to its reporting units. 3-42

57、One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill Impairment Test Example Newcalls Acquisition Fair ValueReporting Units Goodwill January 1, 2013DSM Wired $ 22,000,000 $950,000,000DSM Wireless 155,000,000 748,000,000Rocketel 38,000,000 492,000,000Visiontalk 6,000,000

58、 710,000,000Newcall tests for goodwill impairment of DSM Wireless. The implied fair value of goodwill is compared to its carrying value using the following allocation of the fair value of DSM Wireless at year end3-43One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill I

59、mpairment Test ExampleDSM Wireless Dec. 31, 2013, fair value$600,000,000Fair values of DSM Wireless net assets at Dec. 31, 2013:Current asset $ 50,000,000Property 125,000,000Equipment 265,000,000Subscriber list 140,000,000Patented technology 185,000,000Current liabilities (44,000,000)Long-term debt

60、(125,000,000)Value assigned to identifiable net assets 596,000,000Value assigned to goodwill 4,000,000Carrying value before impairment 155,000,000Impairment loss $151,000,0003-44One who is slack in his work is brother to one who destroys.(Proverbs18:9)Goodwill Impairment Test Example Goodwill is now