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Comprehensive Consolidation Example - Pasewark Accounting

By Thelma Wright,2014-06-27 23:10
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Comprehensive Consolidation Example - Pasewark Accounting ...

    COMPREHENSIVE CONSOLIDATION PROBLEM

Approaching a Consolidation Problem

    ? Original Investment and Past Periods

    ? Throughout the Current Period

    ? Set Up Worksheet

    ? Elimination Entries

    ? Preparing the Financial Statements

     Approaching a Consolidation Problem

1. Original Investment and Past Periods Record using either initial

    value or equity method

    ? Allocate differential to identifiable accounts

    ? Determine goodwill (or gain)

    ? Determine how differential will be amortized

    ? Allocate differential to non-controlling interest

2. Throughout the current period Equity or initial value method is

    used internally to account for the following subsidiary activities:

    ? Reporting of subsidiary net income (equity method only)

    ? Receipt of dividends (equity and initial value methods)

    3. Set up worksheet Organize accounts for preparation of:

    ? Income Statement

    ? Statement of Retained Earnings

    ? Balance Sheet

    4. Elimination entries (most difficult part):

    ? Convert initial value to equity method (if needed)

    ? Eliminate equity section of subsidiary

    ? Adjust identifiable accounts to FMV and recognize goodwill (unless push

    down is used)

    ? Eliminate subsidiary net income

    ? Eliminate intercompany dividend payments

    ? Amortization/Depreciation of the differential (unless push down is used)

    ? Eliminate any intercompany transfers or debts

5. Prepare financial statements

    ? Closing entries

    Comprehensive Consolidation Problem 2

1. Original Investment and Past Periods Record using either initial

    value or equity method

Facts at Purchase Date (January 1, 2009):

    ? Bull, Corp. purchased 80% of Calf, Co. on January 1, 2009 for $425,000.

    ? At acquisition, the FMV of the non-controlling interest is $102,500.

    ? Calf, Co. book value at Jan 1, 2009 was $400,000 (CS + RE = $100,000 +

    $300,000)

    ? Bull uses the initial value method for internal purposes.

    ? Equipment with a 5 year life is undervalued by $12,500

    ? Buildings with an 8 year life are undervalued by $20,000

    ? Land is undervalued by $50,000

    ? A royalty agreement owned by Calf is not recorded and has a FMV of $30,000.

Requirements at January 1, 2009:

    ? Allocate differential to identifiable accounts

    ? Determine goodwill (or gain)

    ? Determine how differential will be amortized

    ? Allocate differential to non-controlling interest

Allocation of Differential to Non-Controlling Interest

     Parent (80%) NCI (20%) Consolidation

    aFMV at Acquisition $425,000 $102,500 $527,500

    Fair Value of

    Identifiable Assets ccb$410,000 $102,500 $512,500 (exclude goodwill)

    Goodwill

    $15,000 $0 $15,000 (Consideration > FMV)

    a Price paid by Parent + FMV of NCI = $425,000 + $102,500 = $527,500 b Book Value + Undervalued Equipment + Undervalued Building + Undervalued Land + Unrecorded

    Royalty Agreement = $400,000 + $12,500 + $20,000 + $50,000 + 30,000 = $512,500 c $512,500 * .2 = $102,500; 512,,500 * .8 = $410,000

Rule: If NCI FMV < (Parent Consideration / Parent Ownership Percentage), do

    not allocate goodwill to the NCI. All goodwill or gain is allocated to the parent.

    Allocation of Differential to Identifiable Accounts and Determination of Goodwill

    Comprehensive Consolidation Problem 3

    aCalf, Co. FMV at acquisition $527,500

    bCalf, Co. book value $400,000

    Differential $127,500

Allocation of Differential

     Equipment $12,500

     Buildings $20,000

     Land $50,000

     Royalty Agreement $30,000

    Goodwill c $15,000

    Differential $127,500

    a Consideration + NCI FMV = $425,000 + $102,500 = $527,500

    b CS + RE = $100,000 + $300,000 = $400,000

    c Plugged item = $127,500 ($12,500 + $20,000 + $50,000 + $30,000) = $15,000

Amortization of the Differential

    Estimated Allocation Amortization Life

    Equipment $12,500 5 $2,500 Buildings $20,000 8 $2,500 Land $50,000 Indefinite $0 Royalty Agreement $30,000 20 $1,500 Goodwill $15,000 Indefinite $0 Differential $127,500 Amortization per year $6,500

    Comprehensive Consolidation Problem 4

    2. Throughout the accounting period Equity or initial value method is used internally to account for the following subsidiary activities:

    ? Reporting of subsidiary net income (equity method only)

    ? Receipt of dividends

During December 31, 2013 (four years after acquisition) Calf paid

    $20,000 in dividends. Under the initial value method, the following

    entries are made:

Calf, Co. records payment of dividend

    Dividends (to be closed into RE) 20,000

     Cash 20,000

Bull, Corp. records receipt of dividend

    Cash 16,000

     Dividend Income ($20,000 X .8 = $16,000) 16,000

Comprehensive Consolidation Problem 5

3. Set up worksheet - Facts at December 31, 2013 (four years after

    acquisition):

    ? Calf, Co. owes Bull, Corp. $20,000 in debt.

    ? Accounts at December 31, 2013 are as follows:

    Bull, Corp. Calf, Co.

    Debits

    Current Assets 605,000 280,000

    Investment in Calf, Co. 425,000 0

    Land 200,000 300,000

    290,000 Building 640,000

    Equipment 380,000 160,000

    Expenses 550,000 190,000

    Dividends 90,000 20,000

    2,890,000 1,240,000

     Credits

     Liabilities 910,000 300,000

    Common Stock 480,000 100,000

    Retained Earnings 704,000 480,000

    Revenue 780,000 360,000

    Dividend Income 16,000 0

    2,890,000 1,240,000

Note: four years have passed

    Accumulated Balance at Allocation Amortization Dec 31, 2013

    aEquipment (5 year life) $12,500 $10,000 $2,500

    bBuildings (8 year life) $20,000 $10,000 $10,000 Land $50,000 $0 $50,000 Royalty Agreement c $24,000 $30,000 $6,000 (20 year life)

    Goodwill $15,000 $0 $15,000 Differential $127,500 $26,000 $101,500 a $2,500 per year * 4 years = $10,000 b $2,500 per year * 4 years = $10,000 c $1,500 per year * 4 years = $6,000

    Comprehensive Consolidation Problem 6

4. Elimination entries (most difficult part):

Calf, Co. Retained Earnings

    January 1, 2013 480,000

    January 1, 2009 300,000

    Difference 180,000

Convert Initial Value Method to Equity Method:

Investment in Calf, Co. 123,200

     Retained Earnings (beginning) 123,200

    2009 to 2013 incomes less dividends less accumulated differential amortization over four years time the

    control percentage = [(180,000 - $26,000) * 80%] = $123,200

Elimination of Calf equity:

    Common Stock 100,000 Retained Earnings (beginning) 480,000

     Investment in Calf, Co. [(100,000 + 480,000) X 80%] 464,000

     Non Controlling Interest [(100,000 + 480,000) X 20%] 116,000

Adjustment of Assets to Fair-Value:

    Equipment 2,500 Buildings 10,000 Land 50,000 Royalty Agreement 24,000 Goodwill 15,000

    a Investment in Calf, Co. 84,200

    b Non Controlling Interest 17,300 a (Excess Equip, Bldg, Land, and Royalty Agreement X NCI %) + Goodwill = (2,500 + 10,000 +

    50,000 + 24,000) X .8] + 15,000 = 84,200 b Excess Equip, Bldg, Land, and Royalty Agreement X NCI % = (2,500 + 10,000 + 50,000 +

    24,000) .2 = 17,300 (Note that goodwill is excluded from this calculation because the NCI

    FMV = NCI FMV of Identifiable Assets)

Comprehensive Consolidation Problem 7

Elimination of intercompany dividend payment

Dividend Income 16,000

     Dividends Paid (closed into RE) 16,000

    Total dividend * ownership percentage = $20,000 * 80% = $16,000

Excess depreciation and amortization

    Depreciation Expense 5,000 Amortization Expense 1,500

     Equipment 2,500

     Buildings 2,500

     Royalty Agreement 1,500

Elimination of intercompany debt

    Liabilities (Note Payable) 20,000

     Current Assets (Note Receivable) 20,000

5. Prepare financial statements

Closing Entry for Income

     aRevenue 1,140,000

    b Expenses 746,500

    c Retained Earnings 360,800

     d Non Controlling Interest in Income 32,700 a Bull Revenue + Calf Revenue = 780,000 + 360,000 = 1,140,000 b Bull Expenses + Calf Expenses + Depreciation of Excess + Amortization of Excess = 550,000 + 190,000 +

    5,000 + 1,500 = 746,500 c (Bull Revenue Bull Expenses) + [(Calf Revenue - Calf Expenses) (Ownership Percentage)] = (780,000 550,000) + [(360,000 196,500)(80%)] = 360,800 d [(Calf Revenue - Calf Expense) X NCI Percentage] = [(360,000 196,500) * 20%] = 32,700

Closing Entry for Dividends

    Retained Earnings 90,000 Non Controlling Interest (20,000 * .2) 4,000

     Dividends 94,000Comprehensive Consolidation Problem 8

    Convert Initial Value to Equity

    Elimination of Sub Equity

    Increase undervalued assets to FVM

    Eliminate Dividend of Sub to Parent

    Recognize Excess Dep and Amort Bull, Corp. (Parent) and Calf, Co. (Subsidiary) Eliminate Intercompany Debt December 31, 2013 Close Income of Consol Entity

    Close Dividends of Consol Entity Elimination

    Entries Pre Closing Closing Entries Closed

     Bull, Corp. Calf, Co. Debit Credit Consolidated Debit Credit Consolidated

     Current Assets 605,000 280,000 20,000 865,000 865,000

     Investment in Calf, Co. 425,000 0 123,200 464,000 0

     84,200 0 0

     Land 200,000 300,000 50,000 550,000 550,000

     Building 640,000 290,000 10,000 2,500 937,500 937,500

     Equipment 380,000 160,000 2,500 2,500 540,000 540,000

     Royalty Agreement 24,000 1,500 22,500 22,500

     Goodwill 15,000 15,000 15,000

     Expenses 550,000 190,000 5,000 0

     1,500 746,500 746,500 0

     Dividends (closed into RE) 90,000 20,000 16,000 94,000 94,000 0

     2,890,000 1,240,000 3,770,500 2,930,000

     Liabilities 910,000 300,000 20,000 1,190,000 1,190,000

     Common Stock - Bull 480,000 480,000 480,000

     Common Stock - Calf 100,000 100,000 0 0

     Retained Earnings - Bull 704,000 123,200 827,200 90,000 360,800 1,098,000

     Retained Earnings - Calf 480,000 480,000 0 0

     Non Controlling Interest 116,000 0

     17,300 133,300 4,000 32,700 162,000

     Revenue 780,000 360,000 1,140,000 1,140,000 0

     Dividend Income 16,000 0 16,000 0 0

     2,890,000 1,240,000 847,200 847,200 3,770,500 1,234,000 1,234,000 2,930,000

Comprehensive Consolidation Problem 9

    Bull Corp. Consolidated

     December 31, 2013

    Current Assets 865,000 Land 550,000 Building 937,500 Equipment 540,000 Royalty Agreement 22,500 Goodwill 15,000

    2,930,000

     Liabilities 1,190,000 Common Stock - Bull 480,000 Retained Earnings - Bull 1,098,000 Non Controlling Interest 162,000

    2,930,000

    Bull Corp. Consolidated

    December 31, 2013

     Revenue 1,140,000 Expenses 746,500 Non Controlling Interest in Income 32,700 Net Income 360,800

    Comprehensive Consolidation Problem 10

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