3 - 0 advanced accounting by debra jeter and paul chaney chapter 3: consolidated financial...
TRANSCRIPT
3 - 1
Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 3: Consolidated Financial Statements - Date of
Acquisition
Slides Authored by Hannah Wong, Ph.D.Rutgers University
3 - 2
Definition of Subsidiary
Parent Company
Subsidiary
controls
3 - 3
What is Control?
the ability to direct the policies and management of another entity
decision making ability that is not shared with others
means of control:ownership of voting shares
(often over 50%)
by contract
3 - 4
Who Should be Consolidated?
Companies under common control
Generally all majority-owned subsidiaries
Exceptions:
ownership is temporary
control does not rest with the majority owner e.g., legal reorganization or bankruptcy
foreign subsidiary subject to government restrictions
3 - 5
Consolidated Financial Statements
Intended readers stockholders and creditors of
the parent company
Purpose to present the financial position and
operating results of a parent company and its subsidiaries as if the group were a single company
Reason substance over form i.e. economic entity VS legal entity
3 - 6
Parent’s JE at Acquisition Date
Case A: P Company acquires all 10,000 shares of the common stock of S Company for $25 per share and pays acquisition fee of $10,000.
Investment in S Company 260,000
Cash 260,000
3 - 7
Parent’s JE at Acquisition Date
Case B: P Company issues 20,000 of its $10 par value common shares with a fair value of $13 per share for the shares of S Company. P Company paid registration costs of $5,000 and a finder’s fee of $10,000.
Investment in S Company (20,000x$13) 260,000Common stock (20,000x$10) 200,000Other contributed capital(20,000x$3) 60,000
Other contributed capital 5,000Cash 5,000
Investment in S Company 10,000Cash 10,000
Direct costs are part of purchase price and increase the investment account
Registration costs reduce the other contributed capital
3 - 8
Intercompany Accounts to be Eliminated
Parent’s Accounts VS Subsidiary’s Accounts
Investment in Subsidiary Equity Accounts
Intercompany receivable(payable)
Intercompany payable(receivable)
Advances to (from)subsidiary
Advances from (to) parent
Interest revenue (expense) Interest expense (revenue)
Dividend revenue(dividends declared)
Dividends declared(dividends revenue)
Management fee receivedfrom subsidiary
Management fee paid toparent
Sales to (purchases ofinventory from) subsidiary
Purchases of inventory(sales to) parent
3 - 9
Computation and Allocation of Difference between Cost and Book Value
Cost of Investment (Purchase Price)
- Book Value of Equity Acquired
(Sum of Equity Accounts of S Company
x percentage acquired)
= Difference between Cost and Book Value
3 - 10
Case 1(a) Cost = BV, 100% 0wnership
Journal EntryInvestment in S Company 80,000
Cash 80,000
Eliminating EntryCommon Stock - S Company 50,000
Other Contributed Capital - S Company 10,000
Retained Earnings - S Company 20,000
Investment in S Company 80,000
The investment account in theparent’s books record
the parent’s investment in the net assets of the subsidiary
The shareholders’ equity accountsin the subsidiary’s books represent
the parent’s investment in the net assets of the subsidiary
3 - 11
Case 1(a) Cost = BV, 100% 0wnership Illustration 3-2
About the consolidated balances: Investment in S Company = 0 Subsidiary’s net assets are substituted for
the investment account. Consolidated assets and liabilities =
parent’s + subsidiary’s Consolidated S/E = parent’s S/E
3 - 12
Case 1(b) Cost = BV, Partial 0wnership
Journal EntryInvestment in S Company 72,000
Cash 72,000
Computation and Allocation of Difference
between Cost and Book Value
Cost of Investment 72,000
- Book Value of Equity Acquired (80,000 x90%)72,000
= Difference between Cost and Book Value 0
3 - 13
Case 1(b) Cost = BV, Partial 0wnership
The Investment Eliminating Entry
Common Stock - S Company 45,000
Other Contributed Capital - S Company 9,000
Retained Earnings - S Company 20,000
Investment in S Company 72,000
The investment account in theparent’s books record
the parent’s investment in the net assets of the subsidiary
90% of the subsidiary’s shareholders’ equity accounts,
representing the parent’s investment in the net assets
of the subsidiary, is eliminated.
3 - 14
Case 1(b) Cost = BV, Partial 0wnership Illustration 3-3
About the consolidated balances:
100% of subsidiary’s assets and liabilities are included.
Only 90% of subsidiary’s S/E accounts are eliminated.
The other 10% is non-controlling shareholders’ interest in the net assets.
3 - 15
Non-controlling Interests
Definition the stock of the subsidiary which is not
controlled by the parent
Presentation
Non-controlling interests in net assets can be presented in the consolidated balance sheet as:
a liability; part of shareholders’ equity; or a separate section
3 - 16
Case 2(b) Cost > BV, Partial 0wnership
Journal EntryInvestment in S Company 74,000
Cash 74,000
Computation and Allocation of Difference
between Cost and Book Value Cost of Investment 74,000
- Book Value of Equity Acquired (80,000x80%) 64,000
= Difference between Cost and Book Value 10,000
Adjust land upward (mark toward market) (10,000)
Balance 0
3 - 17
Case 2(b) Cost > BV, Partial 0wnership
The Investment Eliminating EntryCommon Stock - S Company 40,000
Other Contributed Capital - S Company 8,000
Retained Earnings - S Company 16,000
Difference between Cost and Book Value 10,000
Investment in S Company 74,000
The Allocation Eliminating Entry
Land 10,000
Difference between Cost and Book Value 10,000
The investment account is eliminatedagainst 80% of the equity accounts
of the subsidiary
The difference between cost and book value is recorded
and allocated to the appropriate account (Land)
3 - 18
Why Would an Acquiring Company Pay More than Book Value
Appreciation of assets expense of costs that contains future benefits accelerated depreciation methods LIFO inventory method unrealized gains that are unrecognized
Goodwill
Overvaluation of long term liabilities
Other market factors, e.g. competitor acquirer
3 - 19
Case 3(b) Cost < BV, Partial 0wnership
Journal EntryInvestment in S Company 60,000
Cash 60,000
Computation and Allocation of Difference
between Cost and Book Value Cost of Investment 60,000
- Book Value of Equity Acquired (80,000x80%) 64,000
= Difference between Cost and Book Value (4,000)
Adjust land downward (mark toward market) 4,000
Balance 0
3 - 20
Case 3(b) Cost < BV, Partial 0wnership
The Investment Eliminating EntryCommon Stock - S Company 40,000
Other Contributed Capital - S Company 8,000
Retained Earnings - S Company 16,000
Difference between Cost and Book Value 10,000
Investment in S Company60,000
The Allocation Eliminating EntryDifference between Cost and Book Value 4,000
Land 4,000
The investment account is eliminatedagainst 80% of the equity accounts
of the subsidiary
The difference between cost and book value is recorded
and allocated to the appropriate account (Land)
3 - 21
Why Would an Acquiring Company Pay Less than Book Value
Overvaluation of assets
Undervaluation of long term liabilities
Bargain purchase
3 - 22
Subsidiary Treasury Stock Holdings
The Investment Eliminating EntryCommon Stock - S Company 187,500
Other Contributed Capital - S Company 37,500
Retained Earnings - S Company 93,750
Difference between Cost and Book Value 16, 250
Investment in S Company 320,000
Treasury Stock 15,000
The parent’s share of treasury stock is eliminated
The remainder of the treasury stock is carried over as a reduction in
non-controlling interests in net assets
3 - 23
Other Eliminations
Cash AdvanceAdvance from P Company 25,000
Advance to S Company 25,000
Receivable/Payable Accounts Payable (to S) 100,000
Accounts Receivable (from P) 100,000
3 - 24
Limitations of Consolidated Statements
Limited information for non-controlling stockholders, subsidiary creditors, and regulatory agencies
Combining financial information of firms in different industries make the statements difficult to analyze
3 - 25
Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.