session two acc5009 advanced accounting
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8/3/2019 Session Two ACC5009 Advanced Accounting
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CHAPTER 4-6ADVANCED ACCOUNTING 5009
Roger Mayer
7:00 PM & 8:30 PM
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PREPARINGTHE WORKSHEET
Statements are entered onto the worksheet:
Income statement
Statement of retained earnings
Balance sheet
Columns needed:
Parent
Subsidiary
DR and CR columns for elimination entries
Consolidated
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COMPLETINGTHE WORKSHEET
Enter Parent and Sub. amounts at 100% of bookvalue. (Even if parent owns less)
Enter elimination entries into the DR and CRcolumns. (Check totals)
Consolidated expenses, dividends and assets: Add parent, subsidiary, plus DR, less CR
Consolidated revenues, liabilities and equity (otherthanending retained earnings): Add parent, subsidiary, less DR, plus CR
Income, ending retained earnings and all subtotalsand totals: Compute directly in consolidated column.
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WORKING PAPER ENTRIES
1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance4. Record noncontrolling interest in sub's earnings &
dividends
5. Eliminate reciprocal Investment & sub's equitybalances
6. Amortize fair value/book value differentials7. Eliminate other reciprocal balances
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EXAMPLE: PREP & SNAP DATA
Prep pays $88 for 80% of Snap on 1/1/2009 whenSnap's equity consisted of $60 capital stock and $30retained earnings. All excess was due to unrecorded
patents with a 10-year life.Snap's income and dividends follow:
4-5
2009 2010
Net income $25 $30Dividends $15 $15
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ANALYSIS
4-6
Cost of 80% of Snap $88
Implied value of Snap ($88/.80) $110
Book value (60+30) 90
Excess $20
Allocated to: Amt Amort.
Patents $20 10 yrs
Unamort.Bal. Amortization Unamort. Bal. Amortization Unamort. Bal.
on 1/1/2009 in 2009 on 12/31/2009 in 2010 on 12/31/2010
Patents $20 $2 $18 $2 $16
Use these amounts in2009 worksheet for
amortization expenseand patents.
Use these amounts in2010 worksheet for
amortization expenseand patents.
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INCOME & DIVIDEND CALCULATIONS
4-7
NCI 20% share$5.6$3.0
NCI 20% share
$4.6$3.0
Prep's 80% share$18.4$12.0
Prep's 80% share$22.4
$12.0
2009:Snap's net income $25Amortization (2)Adjusted income $23
Dividends $15
2010:Snap's net income $30
Amortization (2)Adjusted income $28
Dividends $15
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4-8
PREP
'S
2009 WORKSHEET
ENTRIES
1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Snap (I.S.) 18.4Dividends (St. RE) 12.0
Investment in Snap (B.S.) 6.4
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4-9
PREP 2009: ENTRIES (2 OF 3)4. Record noncontrolling interest in sub's earnings ÷nds
5. Eliminate reciprocal Investment & sub's equitybalances
Noncontrolling interest share (I.S.) 4.6
Dividends (St. RE) 3.0
Noncontrolling interest (B.S.) 1.6
Capital stock (B.S.) 60
Retained earnings (St. RE, beg.) 30Patents (B.S.) 20
Investment in Snap (B.S.) 88
Noncontrolling interest (B.S.) 22
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PREP 2009: ENTRIES (3 OF 3)6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balancesnone
Note that in last chapter, all worksheet entries wereprepared for the balance sheet. Here worksheetentries are prepared for the income statement,statement of retained earnings and balance sheet.
Amortization Expense (I.S.) 2
Patents (B.S.) 2
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PREP'S 2009 WORKSHEET
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Year ended 12/31/2009 Prep Snap DR CR ConsolIncome statement:Revenues 250.0 65.0 315.0
Income from Snap 18.4 18.4 0.0Expenses (200.0) (40.0) 2.0 (242.0)Noncontrolling interest share 4.6 (4.6)Net income/ Controlling share 68.4 25.0 68.4Statement of retained earnings:
Beginning retained earnings 5.0 30.0 30.0 5.0Add net income 68.4 25.0 68.4Deduct dividends (30.0) (15.0) 12.0 (30.0)
3.0Ending retained earnings 43.4 40.0 43.4
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Balance sheet, 12/31/2009: Prep Snap DR CR Consol
Cash 39.0 10.0 49.0Other current assets 90.0 50.0 140.0
Investment in Snap 94.4 6.4 0.0
88.0
Plant & equipment, net 250.0 70.0 320.0
Patents 20.0 2.0 18.0
Total 473.4 130.0 527.0
Liabilities 80.0 30.0 110.0
Capital stock 350.0 60.0 60.0 350.0
Retained earnings 43.4 40.0 43.4Noncontrolling interest, Jan.1 22.0
Noncontrolling interest, Dec. 31 1.6 23.6
Total 473.4 130.0 527.0
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A LOOKATTHE INCOME STATEMENT
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Year ended 12/31/2009 Prep Snap DR CR ConsolIncome statement:Revenues 250.0 65.0 315.0Income from Snap 18.4 18.4 0.0
Expenses (200.0) (40.0) 2.0 (242.0)Noncontrolling interest share 4.6 (4.6)Net income/ Controlling share 68.4 25.0 68.4
Income from Snap is eliminated.
Expenses are adjusted for 2009 amortization - $2 on patents Noncontrolling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6
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A LOOKAT RETAINED EARNINGS
4-14
Beginning retained earnings of Snap is eliminated.
All of Snap's dividends are eliminated. Net income is not calculated across the line, but taken from the
consolidated income statement.
Ending retained earnings is calculated in the consolidated
column.
Year ended 12/31/2009 Prep Snap DR CR ConsolStatement of retained earnings:Beginning retained earnings 5.0 30.0 30.0 5.0Add net income 68.4 25.0 68.4
Deduct dividends (30.0) (15.0) 12.0 (30.0)3.0
Ending retained earnings 43.4 40.0 43.4
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4: ALLOCATING EXCESSOF FAIR
VALUEOVER BOOK VALUEConsolidation Techniques and Procedures
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EXAMPLEWITH EXCESS ALLOCATED
Pate pays $360 for 90% of Solo on 12/31/2009 whenSolo's equity consisted of $200 capital stock and $50retained earnings. Inventory (sold in 2010), land andbuildings (20 years) were undervalued by $10, $30,
and $80, respectively. Equipment (10 years) wasovervalued by $20.Solo's income and dividends for 2010 were $60 and
$20.At year-end, Solo has dividends payable of $10 which
Pate has not yet recorded. There is $20 cash in transitfrom Solo to Pate for the note.
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ANALYSISAT ACQUISITION
4-17
* Use the12/31/2009and 2010
amortizationin worksheet
entries for2010.
Cost of 90% of Solo $360
Implied value of Snap ($360/.90) $400
Book value (200+50) 250
Excess $150
Noncontrolling interest, 10%(400) $40
Allocated to: Amt Amort
Inventories $10 1st yr
Land 30 -
Building 80 20 yrs
Equipment (20) 10 yrs
Goodwill 50 -150
Unamort. Bal. Amortization Unamort. Bal.
12/31/2009 * in 2010 * on 12/31/2010
Inventories $10 ($10) $0
Land 30 0 30
Building 80 (4) 76
Equipment (20) 2 (18)
Goodwill 50 0 50
$150 ($12) $138
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SOLO'S INCOME & DIVIDEND
4-18
NCI 10% share$4.8$2.0
Pate's 90% share$43.2
$18.0
2010
Solo's net income $60
Amortization ($12)Adjusted $48
Solo's dividends $20
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PATE'S WORKSHEET ENTRIES1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring Investment account to its beginningbalance
Income from Solo (I.S.) 43.2
Dividends (St. RE) 18.0
Investment in Solo (B.S.) 25.2
Dividends receivable (B.S.) 9.0
Investment in Solo (B.S.) 9.0
Cash (B.S.) 20.0
Note receivable (B.S.) 20.0
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PATE: ENTRIES (2 OF 4)4. Record noncontrolling interest in sub's earnings &
dividends
5. Eliminate reciprocal Investment & sub's equitybalances
Noncontrolling interest share (I.S.) 4.8
Dividends (St. RE) 2.0
Noncontrolling interest (B.S.) 2.8
Capital stock (B.S.) 200
Retained earnings (St. RE, beg.) 50Unamortized excess 150
Investment in Solo (B.S.) 360
Noncontrolling interest (B.S.) 40
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PATE: ENTRIES (3 OF 4)
Allocate the unamortized excess according to beginningof year balances.
Inventory 10
Land 30
Building, net 80
Goodwill 50
Equipment, net 20
Unamortized excess 150
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PATE: ENTRIES (4 OF 4)
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances
Cost of sales 10
Inventory 10
Operating (depreciation) expense 4
Buildings, net 4
Equipment, net 2
Operating (depreciation) expense 2
Dividends payable (B.S.) 9.0
Dividends receivable (B.S.) 9.0
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PATE'S 2010 WORKSHEET
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Year ended 12/31/2010 Pate Solo DR CR Consol
Income statement:
Revenues 900.0 300.0 1,200.0
Income from Snap 43.2 43.2 0.0
Cost of goods sold (600.0) (150.0) 10.0 (760.0)
Operating expenses (190.0) (90.0) 4.0 2.0 (282.0)
Noncontrolling interest share 4.8 (4.8)
Net income/ Controlling share 153.2 60.0 153.2
Statement of retained earnings:
Beginning retained earnings 120.0 50.0 50.0 120.0
Add net income 153.2 60.0 153.2Deduct dividends (100.0) (20.0) 18.0 (100.0)
2.0
Ending retained earnings 173.2 90.0 173.2
Balance sheet 12/31/2010: Prep Snap DR CR Consol
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Balance sheet, 12/31/2010: Prep Snap DR CR ConsolCash 13.0 15.0 20.0 48.0Accounts receivable, net 76.0 25.0 101.0Note receivable - solo 20.0 20.0 0.0Inventories 90.0 60.0 10.0 10.0 150.0
Land 60.0 30.0 30.0 120.0Building, net 190.0 110.0 80.0 4.0 376.0Equipment, net 150.0 120.0 2.0 20.0 252.0Investment in Solo 394.2 9.0 0.0
25.2360.0
Dividends receivable 9.0 9.0 0.0Goodwill 50.0 50.0Unamortized excess 150.0 150.0 0.0
Total 993.2 360.0 1,097.0Accounts payable 120.0 60.0 180.0
Dividends payable 10.0 9.0 1.0Capital stock 700.0 200.0 200.0 700.0Retained earnings 173.2 90.0 173.2Noncontrolling interest, Jan.1 40.0Noncontrolling interest, Dec. 31 2.8 42.8
Total 993.2 360.0 1,097.0
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CHAPTER 51: INTERCOMPANY INVENTORY
PROFITS
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INTERCOMPANY TRANSACTIONS
For consolidated financial statements, ARB No. 51(as amended by FASB Statement No. 160) states:
"intercompany balances and transactions shall beeliminated."
Show income and financial position as if theintercompany transactions had never taken place.
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INTERCOMPANY SALESOF INVENTORY
Profits on intercompany sales of inventory
All recognized if goods have been resold to outsiders
Deferred if the goods are still held in inventory
Previously deferred profits in beginning inventory arerecognized
Consider a FIFO inventory system
Beginning inventories are sold
Ending inventories are from current period
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NO INTERCOMPANY PROFITSIN INVENTORIES
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During 2009, Pretty sold goods costing $1,000 toits subsidiary, Simple, at a gross profit of 30%.
Simple had none of this inventory on hand atthe end of 2009. Worksheet entry for 2009:
All intercompany sales of inventories have been
resold to outside parties, so remove the full salesprice from both sales and cost of sales. Pretty's sales are reduced $1,429.
Simple's cost of sales are reduced $1,429. The same entry is used if Simple sells to Pretty.
Sales 1,429Cost of sales 1,429
Sales = $1,000 / (1-30%) = $1,429
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INTERCOMPANY PROFITS ONLYIN ENDINGINVENTORIES
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Last year, 2009, Paul sold goods costing $500 toits subsidiary, Sal, at a gross profit of 25%. Sal hadnone of this inventory on hand at the end of 2009.
During 2010, Paul sold additional goods costing
$900 to Sal at a gross profit of 40%. Sal has$200 of these goods on hand at 12/31/2010.Worksheet entries for 2010:
Sales 1,500Cost of sales 1,500
Sales = $900 / (1-40%) = $1,500Cost of sales 80
Inventory 80Ending inventory profit = $200 x 40%
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INTERCOMPANY PROFITS BEGINNINGANDENDING INVENTORIESLast year, 2009, Pam sold goods costing $300 to its
subsidiary, Sir, at mark-up of 25%. Sir had $120 of thisinventory on hand at the end of 2009.
During 2010, Pam sold additional goods costing $500 toSir at a 30% mark-up. Sir has $260 of these goods on
hand at 12/31/2010. Worksheet entries for 2010:
5-30
Sales 650Cost of sales 650
Sales = $500 + 30%($500) = $650
Cost of sales 60
Inventory 60Ending inv. profits = $260 x 30%/130%
Investment in Subsidiary 24Cost of sales 24
Begin. inv. profits = $120 x 25%/125% = $24
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2: UPSTREAM & DOWNSTREAM
INVENTORY SALESIntercompany Profit Transactions Inventories
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UPSTREAMAND DOWNSTREAM SALES
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DownstreamSales
Parent sells tosubsidiary
Subsidiary sellsto parent
Upstream Sales
Parent
Subsidiary 1 Subsidiary 2 Subsidiary 3
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INTERCOMPANY INVENTORY SALES
The worksheet entries for eliminating intercompany profits for downstream sales
For upstream sales, the last entry would also include a debit to noncontrolling interest, splitting the profit to be realized between controlling and noncontrolling interests.
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Sales XXXCost of sales XXX
For the intercompany sales priceCost of sales XX
Inventory XXFor the profits in ending inventory
Investment in Subsidiary XX
Cost of sales XXFor the profits in beginning inventory
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DATAFOR EXAMPLE
For the year ended 12/31/2011:
Subsidiary income is $5,200
Subsidiary dividends are $3,000
Current amortization of acquisition price is $450
Intercompany (IC) sales information:
IC sales during 2011 were $650
IC profits in ending inventory $60
IC profit in beginning inventory $24
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INCOME SHARINGWITH DOWNSTREAM SALESPARENT MAKES SALE
5-35
Subsidiary net income $5,200
Current amortizations (450)
Adjusted income $4,750
Defer profits in EI (60)Recognize profits in BI 24
Income recognized $4,714
Subsidiary dividends $3,000
CI 80% share
$3,800
(60)
24
$3,764
$2,400NCI 20% share
$950
$600
When parent makes the IC sale,
the impact of deferring and
recognizing profits falls all to
the parent.
Income from subsidiary
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INCOME SHARINGWITH UPSTREAM SALESSUBSIDIARY MAKES SALE
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Subsidiary net income $5,200
Current amortizations (450)
Adjusted income $4,750
Defer profits in EI (60)Recognize profits in BI 24
Income recognized $4,714
Subsidiary dividends $3,000
CI 80% share
$3,800
(48)
19.2
$3,771.2
$2,400NCI 20% share
$950.0(12.0)
4.8
$942.8
$600
When subsidiary makes the IC sale,the impact of deferring and
recognizing profits is split amongcontrolling and noncontrolling
interests.
Income from subsidiary
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CHAPTER 6: INTERCOMPANY PROFITTRANSACTIONS PLANT ASSETS
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1: TRANSFERS
OF
PLANT
ASSETS
Intercompany Profit Transactions Plant Assets
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INTERCOMPANY FIXED ASSET SALES
Intercompany sales of nondepreciable fixed assets: In year of intercompany sale
Defer any gain or loss Restate fixed asset to cost
In years of continued ownership Adjust investment account to defer gain or loss (adjustnoncontrolling interest too, if upstream sale) Restate fixed asset to cost
In year of sale to outside entity Adjust investment account (and noncontrolling interest if
upstream sale) Recognize the previously deferred gain or loss
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INTERCOMPANY SALEOF LAND
Park owns 90% of Stan, acquired at cost equal tofair value. In 2009, Park sells (downstream) land toStan and records a $10 gain. In 2013, Stan sellsthe land to an outside entity at a $15 gain. Stan's
separate income was $70 in 2009, $80 per year for2010 to 2012, and $90 in 2013.
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2009 CALCULATIONS
Defer the unrealized gain, with full effect to Park
Park's Income from Stan
90%(70) 10 = $53
Noncontrolling interest share
10%(70) = $7
Elimination entry for 2009 Worksheet
6-41
Gain on sale of land 10
Land 10
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2010 TO 2012 CALCULATIONS
Continue to defer gain, with full effect to Park
Park's Income from Stan
90%(80) = $72
Noncontrolling interest share
10%(80) = $8
Elimination entry for Worksheets in 2010 to 2012
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Investment in Stan 10
Land 10
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2013 CALCULATIONS
Recognize the previously deferred gain, with full effect to Park
Park's Income from Stan
90%(90) + 10 = $91
Noncontrolling interest share10%(90) = $9
Elimination entry for 2013 Worksheet
Investment in Stan 10
Gain on sale of land 10
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