Chapter 2

Consolidated Statements

Date of Acquisition

C2 2

Consolidated statements - date of acquisition The Consolidations Concept Comparing purchase and pooling Apply purchase rule with a Price and Zone

Analysis Guide the worksheet with a Determination and

Distribution of Excess Schedule (D&D) Presentation of the Noncontrolling Interest

(NCI)

C2 3

The consolidation concept Merge two legal entities into one

economic entity Generally required with over 50%

ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%).

Always ask - what should be left when you put on “one firm” eye glasses.

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The consolidation concept (continued) See WS (Worksheet) 2-1

– Investment gone, specific accounts of subsidiary in

– Subsidiary equity gone, no longer exists We start on acquisition date to avoid

complications of later transactions.

C2 5

Consolidating: purchase vs. pooling

Purchase Original investment is at fair

value of net assets received or consideration given

Adjust accounts to fair value as they come across the worksheet (WS 2-2)

Special procedures for bargains

Account adjustments are based on D&D schedule

Pooling (over 90%) before 7/1/01

Possible for some pre 7/1/01 acquisitions

Original investment was at book value of subsidiary equity, equity recorded using transfer rules

Accounts were across worksheet at book value (some adjustments may be needed)

C2 6

Returning to the basic example

Assets Liabilities & EquityInventory 120,000 Bond Payable 100,000Land 50,000 Com. stock, $5 par 10,000Building 250,000 Retained earnings 310,000Total 420,000 Total 420,000

Fair Values:Inventory (priority) 170,000 Bond Payable (priority) 105,000Land 100,000Building 300,000Patents 50,000

C2 7

Zone analysis

Accounts TotalCumulative

TotalInventoryBonds PayLandBuildingPatent

65,000Priority

Non Priority

65,000

450,000 515,000

C2 8

Using purchase rules: Goodwill above what price? $515,000

– at $550,000 Goodwill = $35,000 Bargain below what price? $515,000

– at $245,000, $180,000 ($245,000 - $65,000 to priority) is assigned non-priority accounts

Extraordinary gain below what price? $65,000– at $50,000, the extraordinary gain is 15,000

Zone analysis: do before the D&D schedule

C2 9

D&D for $550,000

Price 550,000

Equity (100% $320,000) 320,000

Excess cost 230,000

Adjustments:

Inventory (increase to 170,000) 50,000

Bonds payable (decrease liability) (5,000)

Land (Increase to 100,000) 50,000

Building (increase to 300,000) 50,000

Patents (record) 50,000 195,000

Goodwill (record) 35,000

C2 10

Eliminations for $550,000 price

Parent SubEliminations

Dr CrInvestment in Sub 550,000 EL 320,000

D 230,000Inventory 120,000 D 50,000

Land 50,000 D 50,000

Building 250,000 D 50,000

Patents D 50,000

Goodwill D 35,000

Bonds payable (100,000) D 5,000

Comm Stk - Sub (10,000) EL 10,000

R E - Sub (310,000) EL 310,000

C2 11

D&D for $245,000

Price 245,000

Equity (100% $320,000) 320,000

Excess cost (75,000)

Adjustments:

Inventory (increase to $170,000) 50,000

Bonds payable (decrease liability)) (5,000)

Land (allocation on next slide) (10,000)

Building (allocation on next slide) (130,000)

Patents (allocation on next slide) 20,000 (75,000)

0

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Allocation

AssetFair

Value

Shareof

TotalAssignTotal*

AllocatedValue

BookValue

Adjust-ment

Land 100,000 2/9 180,000 40,000 50,000 (10,000)

Building 300,000 6/9 180,000 120,000 250,000 (130,000)

Patent 50,000 1/9 180,000 20,000 0 20,000

Total 450,000 180,000 300,000 (120,000)*Amount to assign:

$245,000 purchase price less $65,000 to priority accounts.

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Eliminations for $245,000 price

Parent SubEliminations

Dr CrInvestment in Sub 245,000 D 75,000 EL 320,000

Inventory 120,000 D 50,000

Land 50,000 D 10,000

Building 250,000 D 130,000

Patents D 20,000

Bonds payable (100,000) D 5,000

Comm Stk - Sub (10,000) EL 10,000

R E - Sub (310,000) EL 310,000

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D&D for $50,000Price 50,000

Equity (100% $320,000) 320,000

Excess cost (270,000)

Adjustments:

Inventory (increase to $170,000) 50,000

Bonds payable (decrease liability) (5,000)

Land (eliminate book value) (50,000)

Building (eliminate book value) (250,000) (255,000)

Extraordinary gain (15,000)

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Eliminations for $50,000 price

Parent SubEliminations

Dr CrInvestment in Sub 50,000 D 270,000 EL 320,000

Inventory 120,000 D 50,000

Land 50,000 D 50,000

Building 250,000 D 250,000

Retained earnings(for ext. gain)

D 15,000

Bonds payable (100,000) D 5,000

Comm Stk - Sub (10,000) EL 10,000

R E - Sub (310,000) EL 310,000

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Zones for an 80% purchase

Use the same subsidiary information for 80% purchaseAll adjustments are for 80% of fair-book difference

Above what price will there be goodwill? $412,000$515,000 80% = $412,000We will use $430,000 so goodwill = $18,000

Below what price will there be a bargain? $412,000$515,000 80% = $412,000If price was $241,000, $189,000 ($241,000 - [$65,000 80%]) is available for P’s 80% share of non-priority accounts

Extraordinary gain below what price? $52,00080% $65,000 = $52,000

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Zone Analysis: 80% purchase

Accounts Fair value 80% FVCumulative

totalPriority Inventory

Bonds Pay. 65,000 52,000 52,000

Non-Priority

LandBuildingPatents

450,000 360,000 412,000

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D&D for 80% interest at 430,000

Price 430,000

Equity (80% $320,000) 256,000

Excess cost 174,000

Adjustments:

Inventory (80% 50,000) 40,000

Bonds payable (80% 5,000) (4,000)

Land (80% 50,000) 40,000

Building (80% 50,000) 40,000

Patents (80% 50,000) 40,000 156,000

Goodwill 18,000

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Eliminations for $430,000 price

Parent SubEliminations

Dr CrInvestment in Sub 430,000 EL 256,000

D 174,000Inventory 120,000 D 40,000

Land 50,000 D 40,000

Building 250,000 D 40,000

Patents D 40,000

Goodwill D 18,000

Bonds payable (100,000) D 4,000

Comm Stk - Sub (10,000) EL 8,000

R E - Sub (310,000) EL 248,000

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D&D for 80% interest at $241,000

Price 241,000

Equity (80% $320,000) 256,000

Excess cost (15,000)

Adjustments:

Inventory (80% 50,000) 40,000

Bonds payable (80% 5,000) (4,000)

Land (allocation next slide) 2,000

Building (allocation next slide) (74,000)

Patents (allocation next slide) 21,000 (15,000)

0

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Allocation

AssetFair

Value

Shareof

TotalAssignTotal*

AllocatedValue

80%BookValue

Adjust-ment

Land 100,000 2/9 189,000 42,000 40,000 2,000

Building 300,000 6/9 189,000 126,000 200,000 (74,000)

Patent 50,000 1/9 189,000 21,000 0 21,000

Total 450,000 189,000 240,000 (51,000)*Amount to assign:

$241,000 purchase price less $52,000 to priority accounts.

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Eliminations for $241,000 price

Parent SubEliminations

Dr CrInvestment in Sub 241,000 D 15,000 EL 256,000

Inventory 120,000 D 40,000

Land 50,000 D 2,000

Building 250,000 D 74,000

Patents D 21,000

Bonds payable (100,000) D 4,000

Comm Stk - Sub (10,000) EL 8,000

R E - Sub (310,000) EL 248,000

80% of subsidiary equity

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Purchase: subsidiary goodwill

No assets, including intangible assets, can be discounted until parent share of goodwill is eliminated

Ignore existing goodwill in “Zone analysis” Compare goodwill that results from “Zone analysis” to

parent share of existing goodwill and adjust for the difference

A free standing D&D (not connected to prior examples) follows for subsidiary with $50,000 goodwill

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D&D for 80% interest at $500,000Price 500,000

Equity (80% 450,000) 360,000

Excess cost 140,000

Adjustments:

Inventory (80% 40,000) 32,000

Land (80% 30,000) 24,000

Building (80% 120,000) 96,000 152,000

Reduce existing goodwill (12,000)

• On the worksheet, existing goodwill is reduced $12,000

• The maximum deduction would be $40,000 (80% 50,000)

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Presentation of NCI

Current Practice NCI share of income

deducted to get consolidated net income

NCI equity shown as liability, between liabilities and equity or as subdivision of equity

NCI shown only as aggregate amount within equity

FASB Proposal on Liabilities and Equity

NCI share of income is distribution of consolidated net income

NCI share of equity is aggregate amount within equity (text approach)

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Pooling of interests

Investment should was at book value and should observe equity transfer for equity (Chapter 1)

There could be up to 10% NCI; equity transfer applies only to parent ownership percentage (90% or more)

Investment always eliminated with no excess. If not, the investment account is wrong and needs correction.