11 - 1 ©2003 prentice hall business publishing, advanced accounting 8/e,...

11 - 1©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Consolidated Theories, Push-DownAccounting, and Corporate

Joint Ventures

Chapter 11


Learning Objective 1

Compare and contrast the elements

of consolidation approaches under

contemporary theory, parent

company theory, and entity theory.


Comparison ofConsolidation Theories

Parent company theory adopts theviewpoint of parent company stockholders.

Entity theory focuses on thetotal consolidated entity.



Contemporary theory identifies the primaryusers of consolidated financial statements asthe stockholders and creditors of the parentcompany with the objective of reporting the

operations as a single business entity.



Following are areas in which the threetheories have differences:

Basic purpose and users of consolidatedfinancial statements

Consolidated net income

Minority interest expense



Equity of minority interests

Consolidation of subsidiary net assets

Unrealized gains and losses

Constructive gains and losses ondebt retirement


Illustration: Consolidation UnderParent Company and Entity

Theories

Pedrich acquires a 90% interest in Sandyon January 1, 2003, for $198,000.

Sandy’s net book value was$120,000 on this date.

$198,000 – ($120,000 × 90%) = $90,000



Theories

Cash $220 $220Net receivables 80 80Inventories 90 100Other current assets 20 20Plant assets, net 220 300Total assets $630 $720Liabilities $ 80 $ 80Capital stock, $10 par 400Retained earnings 150Total liabilities and stockholders’ equities $630

Book FairPedrich 12/31/02 (000) Value Value



Theories

Cash $ 5 $ 5Net receivables 30 35Inventories 40 50Other current assets 10 10Plant assets, net 60 80Total assets $145 $180Liabilities $ 25 $ 25Capital stock, $10 par 100Retained earnings 20Total liabilities and stockholders’ equities $145

Book FairSandy 12/31/02 (000) Value Value


Entity Theory

Accounts receivable, net $35 $30 $ 5Inventories 50 40 10Plant assets, net 80 60 20Remainder to goodwill 65Total implied value over book value $100

FairValue

BookValue

ExcessFair Value– =


Parent Company Theory

Accounts receivable, net $35 $30 $ 4.5Inventories 50 40 9.0Plant assets, net 80 60 18.0Remainder to goodwill 58.5Total implied value over book value $90.0

FairValue

BookValue

ExcessFair Value– ×

90% =


Consolidation Working PapersJanuary 1, 2003 (Parent Company)

AssetsCashReceivables, netInventoriesOther current assetsPlant assets, netInvestment in SandyGoodwillUnamortized excess

Total assets

$ 22 80 90 20 220 198

$630

$ 5 30 40 10 60

$145

b 4.5 b 9

b 18

b 58.5a 90

a 198 b 90

$ 27 114.5 139 30 298 58.5

$667

Adjustments and Consolidated Eliminations Balance

Account Title Pedrich Sandy Dr. Cr. Sheet


Liabilities and EquityLiabilitiesCapital stockRetained earnings

Minority interest

Total equities

$ 80 400 150

$630

$ 25 100 20

$145

a 100 a 20

a 12

$105 400 150

12

$667

Consolidation Working PapersJanuary 1, 2003 (Parent Company)




Consolidation Working PapersJanuary 1, 2003 (Entity Theory)

AssetsCashReceivables, netInventoriesOther current assetsPlant assets, netInvestment in SandyGoodwillUnamortized excess

Total assets

$ 22 80 90 20 220 198

$630

$ 5 30 40 10 60

$145

b 5 b 10

b 20

b 65a 100

a 198 b 100

$ 27 115 140 30 300 65

$677




Liabilities and EquityLiabilitiesCapital stockRetained earnings

Minority interest

Total equities

$ 80 400 150

$630

$ 25 100 20

$145

a 100 a 20

a 22

$105 400 150

22

$677

Consolidation Working PapersJanuary 1, 2003 (Entity Theory)




Consolidation After Acquisition

Sandy’s net income and dividends for 2003are $35,000 and $10,000, respectively.

The excess of fair value over book value ofSandy’s accounts receivable and inventoriesat January 1, 2003, is realized during 2003.

Sandy’s plant assets are beingdepreciated at a 5% annual rate.


Share of Sandy’s net income($35,000 × 90%) $31,500

Realization of excess allocated to:Receivables ($5,000 × 90%) – 4,500Inventories ($10,000 × 90%) – 9,000Depreciation($20,000 × 90%) ÷ 20 years – 900

Income from Sandy for 2003 $17,100

Consolidation After Acquisition:Equity Method


Consolidation Working PapersDecember 31, 2003 (Parent

Company) Adjustments/ Consol-Pedrich Sandy Eliminations idated

SalesIncome from SandyCost of salesOperating expenses

Minority interestNet incomeRetained earningsDividends Add: Net incomeRetained earningsDecember 31, 2003

$600 17.1 (300) (211.25)

$105.85 $150 (80)

105.85

$175.85

$200

(120) (45)

$ 35 $20 (10)

35

$ 45

a 17.1c 9c 4.5d .9e 3.5

b 20 a 9 e 1

$800

(429)

(261.65) (3.5) $105.85 $150

(80) 105.85

$175.85

Income Statement



Company)

CashReceivables, netInventoriesOther current assetsPlant assets, netInvestment in Sandy

GoodwillUnamortized excess

Total assets

$ 29.75 90 100 30 200 206.1

$655.85

$ 13 32 48 17 57

$167

c 18 d 9a 8.1b 198

c 58.5b 90 c 90

$ 42.75 122 148 47 274.1

58.5

$692.35

Balance Sheet Adjustments/ Consol-

Pedrich Sandy Eliminations idated



Company)

LiabilitiesCapital stockRetained earnings

Minority interest

Total equities

$ 80 400 175.85

$655.85

$ 22 100 45

$167

b 100

b 12 e 2.5

$102 400 175.85

14.5

$692.35




Consolidation Working PapersDecember 31, 2003 (Entity Theory)

Adjustments/ Consol-Pedrich Sandy Eliminations idated

SalesIncome from SandyCost of salesOperating expenses

Minority interestNet incomeRetained earningsDividends Add: Net incomeRetained earningsDecember 31, 2003

$600 17.1 (300) (211.25)

$105.85 $150 (80)

105.85

$175.85

$200

(120) (45)

$ 35 $20 (10)

35

$ 45

a 17.1c 10c 5d 1e 1.9

b 20 a 9 e 1

$800

(430)

(262.25) (1.9) $105.85 $150

(80) 105.85

$175.85

Income Statement




GoodwillUnamortized excess

Total assets

$ 29.75 90 100 30 200 206.1

$655.85

$ 13 32 48 17 57

$167

c 20 d 1a 8.1b 198

c 65b 100 c 100

$ 42.75 122 148 47 276

65

$700.75





LiabilitiesCapital stockRetained earnings

Minority interest

Total equities

$ 80 400 175.85

$655.85

$ 22 100 45

$167

b 100

b 22 e .9

$102 400 175.85

22.9

$700.75




Consolidated Income Statementsat December 31, 2003

Parent Co. Entity Contemp.(000) Theory Theory TheorySales $ 800.00 $ 800.00 $ 800.00Cost of sales – 429.00 – 430.00 – 429.00Operating expenses – 261.65 – 262.25 – 261.65Minority interest expense – 3.50 – –Consolidated net income $ 105.85 $ 107.75Distributions to:

Minority stockholders $ 1.90Majority stockholders $ 105.85

Total consolidated net income $ 109.35Minority interest expense – 3.50Consolidated net income $ 105.85


Consolidated Balance Sheetsat December 31, 2003

Parent Co. Entity Contemp.Assets Theory Theory TheoryCash $ 42.75 $ 42.75 $ 42.75Net A/R 122.00 122.00 122.00Inventories 148.00 148.00 148.00Other current assets 47.00 47.00 47.00

Total current assets $359.75 $359.75 $359.75Plant assets, net 274.10 276.00 274.10Goodwill 58.50 65.00 58.50

Total noncurrent assets $332.60 $341.00 $332.60Total assets $692.35 $700.75 $692.35


Consolidated Balance Sheetsat December 31, 2003

Liabilities Parent Co. Entity Contemp.and Equity Theory Theory TheoryLiabilities $102.00 $102.00 $102.00Minority interest 14.50 – – Total liabilities $116.50 $102.00 $102.00Capital stock 400.00 400.00 400.00Retained earnings 175.85 175.85 175.85Minority interest – 22.90 14.50 Total stockholders’ equity $575.85 $598.75 $590.35

Total equities $692.35 $700.75 $692.35



Adjust subsidiary assets and

liabilities to fair values using

push-down accounting.


Push-Down Accounting

In certain situations, the SEC requires thatthe fair values of the acquired subsidiary’sassets and liabilities, which represent theparent company’s cost basis, be recorded

in the separate financial statements ofthe purchased subsidiary.

In certain situations, the SEC requires thatthe fair values of the acquired subsidiary’sassets and liabilities, which represent theparent company’s cost basis, be recorded

in the separate financial statements ofthe purchased subsidiary.


Push-Down Accounting:Parent Company Theory

Cash $ 5.0 $ – $ 5.0Accounts receivable, net 30.0 4.5 34.5Inventory 40.0 9.0 49.0Other current assets 10.0 – 10.0Plant assets, net 60.0 18.0 78.0Goodwill – 58.5 58.5

$145.0 $90.0 $235.0

Book Push-Down BV ValueValue Adjustment after P-D



Liabilities $ 25.0 $ – $ 25.0Capital stock 100.0 – 100.0Retained earnings 20.0 (20.0) –Push-down capital – 110.0 110.0

$145.0 $ 90.0 $235.0




Accounts Receivable 4,500Inventory 9,000Plant Assets 18,000Goodwill 58,500Retained Earnings 20,000

Push-down Capital 110,000




Push-Down Accounting:Entity Theory

$198,000 cost ÷ 90% = $220,000 implied value$198,000 cost ÷ 90% = $220,000 implied value

$220,000 – $120,000 book value = $100,000 excess$220,000 – $120,000 book value = $100,000 excess



Cash $ 5.0 $ – $ 5.0Accounts receivable, net 30.0 5.0 35.0Inventory 40.0 10.0 50.0Other current assets 10.0 – 10.0Plant assets, net 60.0 20.0 80.0Goodwill – 65.0 65.0

$145.0 $100.0 $245.0




Liabilities $ 25.0 $ – $ 25.0Capital stock 100.0 – 100.0Retained earnings 20.0 – 20.0 –Push-down capital – 120.0 120.0

$145.0 $100.0 $245.0




Company) Adjustments/ Consol-Pedrich Sandy Eliminations idated

SalesIncome from SandyCost of salesOperating expensesMinority interestNet incomeRetained earningsDividends Add: Net income

Retained earningsDecember 31, 2003

$600 17.1 (300) (211.25)

$105.85 $150 (80)

105.85

$175.85

$200

(129) (50.4)

$ 20.6 $ 0 (10)

20.6

$ 10.6

a 17.1

c 3.5

a 9 c 1

$800

(429) (261.65) (3.5) $105.85 $150

(80) 105.85

$175.85

Income Statement



Company)


Goodwill

Total assets

$ 29.75 90 100 30 200 206.1

$655.85

$ 13 32 48 17 74.1 58.5

$242.6

a 8.1b 198

$ 42.75 122 148 47 274.1

58.5

$692.35





Company)

LiabilitiesCapital stockRetained earningsPush-down capital, Sandy

Minority interest

Total equities

$ 80 400 175.85

$655.85

$ 22 100 10.6

110

$242.6

b 100

b 110

b 12 c 2.5

$102 400 175.85

14.5

$692.35





Adjustments/ Consol-Pedrich Sandy Eliminations idated

SalesIncome from SandyCost of salesOperating expensesMinority interest

Net incomeRetained earningsDividends

Add: Net incomeRetained earningsDecember 31, 2003

$600 17.1 (300) (211.25)

$105.85 $150 (80) 105.85 $175.85

$200

(130) (51)

$ 19 $ 0 (10) 19 $ 9

a 17.1

c 1.9

a 9 e 1

$800

(430) (262.25) (1.9) $105.85 $150

(80) 105.85

$175.85

Income Statement




Goodwill

Total assets

$ 29.75 90 100 30 200 206.1

$655.85

$ 13 32 48 17 76 65

$251

a 8.1b 198

$ 42.75 122 148 47 276

65

$700.75





LiabilitiesCapital stockRetained earningsPush-down capital, Sandy

Minority interest

Total equities

$ 80 400 175.85

$655.85

$ 22 100 9

120

$251

b 100

b 120

b 22 c .9

$102 400 175.85

22.9

$700.75





Account for corporate and

unincorporated joint ventures.


Nature of Joint Ventures

A joint venture is a business entity thatis owned, operated, and jointly controlledby a small group of investors (venturers)

for their mutual benefit.

A joint venture is a business entity thatis owned, operated, and jointly controlledby a small group of investors (venturers)

for their mutual benefit.

Each venturer usually has the ability toexercise significant influence over the

joint venture investee.

Each venturer usually has the ability toexercise significant influence over the

joint venture investee.


Organizational Structuresof Joint Ventures

Corporate joint venture

General partnership

Limited partnership

Undivided interest


Accounting for Investment

Corporatejoint venture

Corporatejoint venture Equity methodEquity method

Unincorporatedjoint ventures

Unincorporatedjoint ventures

Equity methodEquity method

Proportionate consolidationProportionate consolidation


End of Chapter 11

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