Advanced Accounting Chapter 4：Consolidated Financial Statements after Acquisition.doc

Advanced Accounting Chapter 4：Consolidated Financial Statements after AcquisitionAdvanced Accounting by Debra Jeter and Paul ChaneyChapter 4: Consolidated Financial Statements after AcquisitionAccounting for InvestmentsAccounting Methods for Investments Cost MethodThe investment account is adjusted only when additional shares are purchased or soldPartial Equity MethodThe investment account is adjusted for the investors share of investee income and dividendsComplete Equity MethodAdditional adjustments are made for unrealized intercompany profit and amortization of purchase differentialCost Method Investment in SAcquisitionCostDividend IncomeShare of dividends declared of SInvestment Related Accounts of ParentLiquidating dividendPartial Equity MethodInvestment in SEquity in subsidiary incomeInvestment Related Accounts of ParentAcquisition CostEquity in subsidiary incomeShare of dividendsdeclaredEquity in subsidiary lossEquity in subsidiary lossEquity in subsidiary incomeComplete Equity MethodInvestment in SEquity in subsidiary incomeInvestment Related Accounts of ParentAcquisition CostEquity in subsidiary incomeShare of dividendsdeclaredEquity in subsidiary lossEquity in subsidiary lossEquity in subsidiary incomeAmortization of goodwillCost Method - Eliminating Entries (EE)Year of AcquisitionThe Investment EntryCommon Stock - S Company 80,000Other Contributed Capital - S Company 40,0001/1 Retained Earnings - S Company 32,000Difference between cost and book value13,000Investment in S Company 165,000Note: eliminate beginning retained earnings of the subsidiaryThis entry is the same as the investment entry on the acquisition date (true for the first year only)Cost Method - Eliminating Entries (EE)Year of AcquisitionThe Differential EntryLand 13,000Difference between cost and book value 13,000To allocate the differential between cost and book valueto the appropriate account(s)This entry is the same as the differential entry on the acquisition dateCost Method - Eliminating Entries (EE)Year of AcquisitionThe Dividend EntryDividend income - P 8,000Dividends declared - S8,000To eliminate the contra-equityaccount of the subsidiaryTo avoid double counting of incomeNoncontrolling Interest in IncomeNoncontrolling Interest in IncomeReported income of SAdjustmentsAdjusted NI of SNoncontrolling %Noncontrolling interest in income+-xControlling Interest in IncomeControlling Interest in IncomeReported income of PAdjustments(Adjusted NI of S) x (P %)Controlling interest in income+-+Consolidated Retained EarningsConsolidated Retained EarningsReported R/E of PConsolidated NIConsolidated R/E+Dividends declared of P-Cost Method EEs After Year of AcquisitionThe Reciprocal EntryInvestment in S Company16,0001/1 Retained Earnings - P Company 16,000Adjust the investment account to equal the amount it would have under equity methodAdjust Ps reported beginning R/E to equal beginning consolidated R/EOther Entries(similar to the first year EE)Equity Method EEs Year of AcquisitionThe Income EntryEquity in subsidiary income24,000Investment in S Company 24,000(To eliminate equity in net income included in reported NI of P)The Dividend EntryInvestment in S Company 8,000Dividends declared 8,000(To eliminate intercompany dividend)These two entries return the investment account to its beginning balance, to be matched against the subsidiarys beginning R/E in the next EE.Equity Method EEsYear of AcquisitionThe Investment EntryCommon Stock - S Company 80,000Other Contributed Capital - S Company 40,0001/1 Retained Earnings - S Company 32,000Difference between cost and book value13,000 Investment in S Company 165,000Note: eliminate beginning R/E of the subsidiaryThe Differential EntryLand 13,000Difference between cost and book value13,000To allocate the differential between cost and BV to the appropriate account(s)More on Eliminating EntriesEquity Method EEs After Year of AcquisitionSimilar to entries in the year of acquisitionIntercompany revenue and expensesInterest revenue8,000Interest expense8,000Interim AcquisitionsAccounting under the purchase methodRevenues and expenses of the subsidiary are included with those of parent only from the date of acquisition forwardBeginningof S fiscal yr.Endof S fiscal yr.AcquisitiondateNot includedin consolidated NIIncluded in consolidated NINet income of SInterim AcquisitionsFull Year ReportingConsolidated Income StatementPost-acquisition revenues and expenses of S+Pre-acquisition NI amount of SRevenues and expensesof PPre-acquisitionrevenues and expensesof SPost-acquisition revenues and expenses of SplusNoncontrolling interest in incomeminusminusConsolidated Net IncomeInterim AcquisitionsPartial Year ReportingConsolidated Income Statement+Revenues and expensesof PPost-acquisition revenues and expenses of SplusminusNoncontrolling interest in incomeConsolidated Net IncomeConsolidated Statement of Cash FlowsPurposeto reflect all cash outlays and inflows of the consolidated entity except those between parent and subsidiaryConsolidated Statement of Cash FlowsProcedurederived from consolidated income statementbeginning and ending consolidated balance sheets similar to unconsolidated firm, except:noncontrolling interests in combined incomesubsidiary dividendsparent acquisition of additional subsidiary sharesConsolidated Statement of Cash FlowsCash inflow from operating activitiesindirect method: add back noncontrolling interest in combined incomeCash outflow from financing activitiesincludes subsidiary dividends to noncontrolling shareholdersCash outflow from investing activitiesexcludes parents acquisition of additional subsidiary shares directly from subsidiaryincludes parents acquisition of additional subsidiary shares in open marketConsolidated Statement of Cash Flowscash acquisition: cash spent or received is included in the investing activity section of the cash flow statementstock acquisition: issuance of stock or debt is reported in the notes to the financial statementsEffect of method of payment in an acquisitionback