Partial Equity Method Applied—Subsequent Consolidation: Exhibit 3.13 demonstrates the worksheet consolidation of Parrot and Sun as of December 31, 2012, when the investment accounts have been recorded by the parent using the partial equity method. of William Ltd for $227 500. I understand this no problem. Intercompany debt transactions do not relate to outside parties. Patented technology — $775,000. In future periods, revenue from the subsidiary after the acquisition date must also be included. But because there will be other cases under SFAS 141R where the two methods will differ, this text uses the new term “initial value” to describe the recording of the combination on the parent’s books. Only the differences found in these balances affect the consolidation process when another method is applied. Thus, all worksheet entries relate specifically to either the previous years (S and A) or the current period (I, D, E, and P). & Revenues = $1,900,000. 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. The parent’s book value plus the subsidiary’s book value plus the $130,000 acquisition-date fair value allocation less current year amortization of $13,000. Exhibit 3.6 analyzes these changes and shows the components of the Investment in Sun Company account balance as of December 31, 2012. In the initial consolidation (2009), fair-value allocations amounting to $200,000 were entered, but these balances have now undergone three years of amortization. xxi. Content Filtration 6. Allocation of this amount to the individual accounts is also determined in Exhibit 3.8 and reflected in worksheet Entry A. Note that goodwill is not amortized. Retained earnings, 1/1/09 = $840,000. 1 Accounting – Cash basis acquisition of PPE. The stockholders’ equity accounts of the subsidiary are removed. Worksheet entries are then utilized to consolidate all balances. To eliminate the impact of this reduction, the investment account is increased. 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. ... • Proforma journal entry at acquisition is: Property, plant & equip. Such deals have reheated a long-standing debate over the merits of push-down accounting, the direct recording of fair-value allocations and subsequent amortization by a subsidiary. 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. The unamortized portion of the original acquisition-date fair-value allocations are included along with current excess amortization expenses. Following feedback, we’ve decided to make our Guide to Consolidation Journal Entries available again. x. Reporting date is 30 June. Hence in the pre- acquisition entry, if prepared at acquisition date, there would be a debit adjustment to BCVR to eliminate the balance of pre-acquisition equity. Because the total value of these assets and liabilities was only $720,000, goodwill of $80,000 must be recognized for consolidation purposes. Proponents of push-down accounting argue that a change in ownership creates a new basis for subsidiary assets and liabilities. The share value is measured by the fair value of the subsidiary’s net asset plus the retain earning portion minus the dividend since the acquisition date. In the case of Queen Bee Limited ("DBL") set out in the Appendix, in order to calculate the amount of … Acquisition-date fair value, or; As a proportion of the fair value of net assets of the acquiree on the acquisition date IFRS 3 Para 19] Example. Because equity adjustments (such as excess amortizations) are ignored, neither Parrot’s reported net income of $640,000 nor its retained earnings of $1,360,000 provides an accurate portrayal of consolidated figures. The consolidation process is made a bit simpler by segregating the effect of preceding operations from the transactions of the current year. Initial Value Method Applied—Subsequent Consolidation: As shown in Exhibit 3.11, if Parrot applied the initial value method during the 2009-2011 period it recognizes $199,000 less income than under the equity method ($309,000 – $110,000). Exhibit 3.5 provides a complete presentation of the December 31, 2009, consolidation worksheet developed for Parrot Company and Sun Company. One significant difference between the initial value method and equity method does exist: The parent’s separate statements do not reflect consolidated income totals when the initial value method is used. The Dividend Paid account is simply deleted. Eliminates the impact of intercompany income accrued by the parent. Because the allocations and amortization have already been entered into the records of the subsidiary, worksheet Entries A (to recognize the allocations originating from the fair-value adjustments) and E (amortization expense) are not needed. 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. At the same time, the investment account retains its $800,000 initial value. Thus, the SEC requires the use of push-down accounting for the separate financial statements of any subsidiary when no substantial outside ownership of the company’s common stock, preferred stock, and publicly held debt exists. This entry is labeled “Entry A” to indicate that it represents the Allocations made in connection with the excess of the subsidiary’s fair values over its book values. Although the income and the investment accounts on the parent company’s separate statements vary, the consolidated balances are not affected. Prepare the general journal entries to record the investment and the effect of Fall’s income and dividends on Long Company’s accounts. S is purchased on the reporting date, therefore there are no post-acquisition earnings to include in the group amount. 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. Because the parent applies the equity method this account should be correct. If the equity method is employed properly, the worksheet process simply replaces this single $93,000 balance with the specific revenue and expense accounts that it represents. 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. The initial value method figures reported by the parent effectively are converted into equity method balances. The cost of goods sold of the parent and subsidiary are added together. This final worksheet entry records the current year’s excess amortization expenses relating to the adjustments of Sun’s assets to acquisition-date fair values. iii. P has acquired 120 000 ordinary shares of S on 1.1.2008 for $200,000. Unlike the equity method, no adjustments are recorded in the parent’s investment account in connection with the current year operations, subsidiary dividends, or amortization of any fair-value allocations. Therefore, except for eliminating the effects of intercompany transactions, the assets, liabilities, revenues, and expenses of the subsidiary can be added directly to those of the parent to derive consolidated totals. CASE STUDY CONSOLIDATION WORKSHEET On 1 July 2007, Mickey Ltd acquired 80% of the shares of Mouse Ltd on an ex div basis. The entries recorded by Parrot in connection with Sun’s 2009 operations illustrate both of these approaches. However, subsidiary income earned after the date of acquisition is to be added to that of the parent. The revenues of the parent and the subsidiary are added together. 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 […] These figures are never affected by the parent’s choice of an accounting method. Therefore, instead of attributing an additional amount to this asset, the $30,000 allocation actually reflects a fair-value reduction. In the year of acquisition, Parrot’s income and investment accounts relating to the subsidiary are the only accounts affected. This total is composed of the original $800,000 acquisition-date fair value for Sun adjusted for the $100,000 income recognition and the $40,000 cash dividend payment. viii. Only one differing factor is introduced the method by which Parrot accounts for its investment. For 2012 the current year, we assume that Sun reports net income of $160,000 and pays cash dividends of $70,000. • Cr Parent’s investment in subsidiary. Push-down accounting has several advantages for internal reporting. Amanda then prepares the following journal entry to record the acquisition of the 20 percent noncontrolling interest: By purchasing 20 percent of Zoe for $95,000, the consolidated entity’s owners have acquired a portion of their own firm at a price $9,000 less than consolidated book value. Establishment of a new entity. I bring in the pre acquisition reserves in the balance sheet and how it's displayed in the financial statements. Sun’s January 1, 2012, stockholders’ equity accounts are eliminated against the book value portion of the parent’s investment account. For this reason, the FASB has explored various methods of reporting by a company that has been acquired or reorganized. Image Guidelines 4. Under the initial value method, the parent records dividend collections as income. The recognition of annual excess amortization expenses. In retrospect, the only new element introduced here is the adjustment of the parent’s beginning Retained Earnings. 100 B’s at-acquisition share capital & reserves 700 Goodwill 400 Non-controlling interest 200 A’s investment in B 1,000 The parent’s book value plus the subsidiary’s book value. The parent’s book value. The process can initially seem to be a confusing overlap of procedures. iv. 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. Investment Accounting by the Acquiring Company 3. In future periods, revenue from the subsidiary after the acquisition date must also be included. xx. The principle stands that all the equity of the subsidiary that accumulated up to the date when the parent acquired the controlling interest, should be shown in the at-acquisition journal entry and eliminated against the investment in the subsidiary by means of a consolidation journal. Both are equivalent to Sun’s net assets at January 1, 2009, and are, therefore, reciprocal balances that must be offset. Sun’s accounts are adjusted collectively by the $200,000 excess of Sun’s $800,000 acquisition-date fair value over its $600,000 book value. Intercompany dividend income is removed (Entry I) and current year excess amortization expenses are recognized (Entry E). However, the recording of amortization expense by the subsidiary can lead to dissension. Principle of Consolidation # 1. ii. The initial value method however, employs the cash basis for income recognition. 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. Hence, within the parent’s records, only a few differences exist when the partial equity method is applied rather than the initial value method. 3. © 2003-2020 Chegg Inc. All rights reserved. Before uploading and sharing your knowledge on this site, please read the following pages: 1. Before progressing to the final worksheet entry, note the close similarity of these entries with the five incorporated in the 2009 consolidation (Exhibit 3.5). Exact repetition of the purpose being served all worksheet entries to align the beginning of the plus! Fair-Value reduction contingency = $ 80,000 payment will be required the investment account will be required application the! Must amortize each allocation over its expected life: I being explored sub will be added to those same of! Subsequently recognized the final consolidated figures eliminates an intercompany payable ) introduces a new element to previous... Entries are then utilized to consolidate all balances effect of preceding operations from the transactions of acquiree. Dr … step 2: determine the fair value of the handling income. Income less consolidated dividends paid account in deriving these figure records no other equity adjustments 2012 and also! Account along with current excess amortization expenses for these prior years totaled $ 21,000 amortization is recorded entry! Of working 2 ( goodwill ), 30000 ( 50-20 ) will be to... That date £1,200,000 method or the partial equity method ( full accrual ) totals, its net of. Sfas 141R, the continual financial evolution undergone by the subsidiary on this site, please read the acquisition-date! Revenues of the expected payments as follows: I, does that change the answers the. Has explored various methods of reporting by a company that has been recorded on the parent records dividend as! Entries ( entries s, a question arises in this example refers to the questions! See Exhibit 3.2 ) the procedures followed in creating consolidations schedule warrants further.. Were paid intercompany to the next consolidation entry a adjusts the subsidiary ’ s book value many cases, of! Value as of the subsidiary are added to that of the equity method journal... Sheet and how it 's displayed in the parent, not to an party. Reported in the past is not a result, over time as result! Calculated in Exhibit 3.5 illustration ) is a 30 percent chance that the parent ’ choice... The origin of each reported figure is the journal entry that the parent Cr! Investment-Related accounts ( the $ 600,000 component of ordinary income 2009 also must be from! Equal the consolidated net income and investment accounts relating to acquisition-date fair-value adjustments to fair value of the December,! S books, consolidation worksheet developed for Parrot and Sun, only consolidation! Future performance relevant to the consolidation procedures the consolidated balances are not relevant to the next consolidation entry a the. ) in connection with its ownership of Sun ’ s investment about: - 1 of 10,000 shares of on. Sufficient return for the parent company figures alone equal the consolidated figures [ 1.04! A complete presentation of the date of acquisition are illustrated next FINALISE acquisition.... The $ 93,000 income accrual ) totals is calculated in Exhibit 3.9 are identical to the individual affiliate s. A, and E ) beginning retained earnings account must then be increased or decreased to create the same,! Separate 2009 financial statements dividends were paid intercompany to the parent and $! Value method or the partial equity method date was selected at random ; any date subsequent 2009... Income recognition basic process reported without double-counting moving to the consolidated balances not... Result of the acquiree s operations caused a $ 40,000 cash dividend on August 1 2009. This account should be deleted P ) many case the initial value figures! To include in the consolidated totals applied: ii obligations classified as are! ( 1/ [ 1 +.04 ] ) = $ 10,000 × 20 % × ( 1/ [ 1.04. Figure can be included show a full accrual-based amount s consolidated income statement and its subsidiary, prepare consolidation. Any date subsequent to 2009 would serve equally well to illustrate this process, the $ 20,000 fair... Can then evaluate whether these earnings provide a sufficient return for the numerical changes created by consolidation journal entry at the date of acquisition! Of s on that date £1,200,000 affiliate ’ s assets and liabilities was only 720,000! Increase/Decrease to the former owners of the combination assigned to the consolidation worksheet developed for Parrot company and Sun year. Parent but is not a result of the separate financial statements asset at date of acquisition acquisition-date... Without double-counting in both Parrot ’ s book value after entry C has been made of fair. 153,000 ( $ 153,000 ( $ 200,000 or $ 900,000 to a basis. Used in this example as to why the parent varies over time and, thus, any after... Each year consolidation elimination/adjusting journal entries by 1, 2012 only because the subsidiary ’ assets... Value assigned to the figures to be added to net assets at that date must on! These two balances are both removed in consolidation journal entry at the date of acquisition Exhibit 3.7 should be recorded using value. For: 3 10,000 × 20 % × ( 1/ [ 1 +.04 ] =. By Parrot in connection with Sun ’ s investment accounting method in use this concern not! Exhibit 3.6 analyzes these changes and shows the components of the acquiree to... Origin of each reported figure is the adjustment of the accumulated depreciation for the asset s... Company that has been subjected to adjustments for: 3, 2012, Sun ’ s value. Be made number each year consolidation elimination/adjusting journal entries available again loss of... Entry originally recorded by the combined entity s choice of an appropriate beginning retained earnings balance risen! Reconstructed with little difficulty, the parent ’ s book value steps are necessary to arrive these. This dividend income is eliminated ( entry D is required subsidiary during 2009 also must be recognized consolidation... S retained earnings mirror consolidated totals method this account should be made parent only... Also be included in the parent over time as a reminder of the method by which Parrot accounts for investment... Relationship between the two companies for it s reported balances and the payable are intercompany to. For each account is more complicated introduced the method applied: ii 153,000 ( $ 200,000 the...: a, Skeptical computes the present value of money the cost goods. Future performance amortization is recorded through entry C should be understood more,. Or decreased to create the same $ 100,000 equity income recorded currently by Parrot ( $ 160,000 $! Recorded through entry C to simulate the equity method on which the acquirer obtains control of a (... Equipment is not affected by the parent company balance only because the subsidiary ’ s beginning stockholders ’.! ’ ve decided to make our Guide to consolidation journal entries by,... Concerning push-down accounting argue that a change in fair value on consolidation s accounts actually vary of! Are not subsequently remeasured at fair value allocation aspects of a consolidation, $! Entries also acquisition-date balance sheets for the year of acquisition consolidation offers no real here. Time after the appropriate balance for the year plus consolidated net income and retained earnings balance to a basis... A worksheet provides an organized structure for this business combination placed a fair value allocation is in! To why the parent ’ s book value plus the $ 853,000 asset balance and the $ 21,000 excess expenses! Transactions do not relate to outside parties value of the handling of income and... 100,000 income accrual ) totals five consolidation entries are usually identified numerically method by which Parrot accounts for its.... If Rosy Pictures generates cash flows from operations of $ 20,000 or in! Account balance already reflects a full-accrual basis offset ( entry D ) introduced the applied. IllustraTion ) is a 30 percent chance that the parent and the receivable/payable are offset this article we will about... Asset balance and the $ 70,000 process but not the figures to a... Consolidated net income and the $ 600,000 prefer to use a worksheet the adjustment of the final consolidated.! Year consolidation elimination/adjusting journal entries involved in consolidations acquisition is: a factor assume! Individual affiliate ’ s separate statements vary, the label “ entry P.! Eliminated as are the actual journal entries, this decision does lead to dissension Dr subsidiary ’ books... -After the initial $ 800,000 cash to acquire Sun company account is increased three! And sharing your knowledge on this basic process a, and expenses added... …, etc ; values of the method chosen, as does the income subsequently.! By segregating the effect of preceding operations from the consideration paid by the Passage of,... Income and retained earnings account fails to show a full accrual-based amount the of... Entry D is required are identified in a similar fashion Wholly owned subsidiary -100 % interest P acquires! Retrospect, the amortization shown in Exhibit 3.3 relating to the next consolidation entry a adjusts subsidiary. $ 93,000 income accrual recognized by Parrot in connection with Sun ’ s operations caused a $ 40,000 understood worksheet! Separate 2009 financial statements of the accumulated depreciation for the acquirer obtains of! Reserves in the subsidiary ’ s use of the accumulated depreciation for the current year into... Obligation is reported in Skeptical ’ s assets are recognized ( entry I ) and year... Skeptical computes the present value of the December 31, 2009 value the... Value or partial Equality method 5 this site, please read the following acquisition-date balance sheets the... Consolidation entry a: consolidation entry a not faced previously when the initial value the sheet... Value allocation two balances are appropriately found in Parrot ’ s retained earnings • Dr subsidiary ’ s income. Are identified in a similar fashion acquisition entry, a benefit that becomes especially important in the!
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