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					3
            CHAPTER 3
     PARTIALLY OWNED CREATED
            SUBSIDIARIES




Slide 3-1
      Proportional vs. Full Consolidation:
3
      At Opposite Ends of the Spectrum

                      Propor-
                      tional Full
Percent consolidated. < 100% 100%
Reports NCI amounts..          NO      YES
Complies--U.S. GAAP..          NO      YES
Relative complexity..         EASY    HARD



Slide 3-2
      Control by Other Means: A Classic
3
      Substance vs. Form Issue

l Ways to Control Without Having a Majority
  Voting Interest--A HIGHLY JUDGMENTAL
  AREA:
  n Having stock options exercisable at will
    that can result in majority ownership.
  n Lending arrangements--borrower’s powers
    are severely restricted.
l Safest Course of Action If Publicly Owned:
  n Run it by the SEC (some try to slide it by).

Slide 3-3
   3      The Non Controlling Interest (NCI)


  Assume that S company is 75%- owned subsidiary that reported the
  following balances at Dec. 31, 2010
           Common Stock ……………..…… $ 60,000
           Retained Earnings ……………….. 40,000
                                                $ 100,000



The NCI in S company’s net assets is $ 25,000 (25% of $ 100,000)




  Slide 3-4
3

If the subsidiary net income is $ 32,000, the consolidated net income
statement can shown in the following way:


Sales ……………………………………                       992,000
Cost of Sales ……………………………                  (520,000)
Expenses ……………………………….                     (330,000)
  Net Income (Consolidated) ………            142,000
Net income accruing to the NCI …….          (8,000)
Net Income accruing to the CI ………          134,000



Slide 3-5
3
      Consolidation worksheet: The Cost method
Ex 1: On Dec. 2009 a parent company (P) invested a
$45,000 cash for a 75% equity interest in partially owned
subsidiary (S), outside investors invested $15,000 cash for
25% equity interest
The S company subsequently reported the following items
for 2010, and 2011:

                         Net income    Dividends Declared
       2010 ………………          $ 24,000         $ 4,000
       2011 ………………            32,000         12,000



Slide 3-6
 3      Consolidation worksheet: The Cost method

Unconsolidated statements
                          P- Company Balance sheet - Unconsolidated
                                     As of Dec. 31, 2011

                 Assets                                      Liabilities and Equity

Cash                               $ 77,000        Accounts payable                   $ 160,000

Accounts Receivable                  84,000        Long-term debt                      210,000

Inventory                           140,000             Total Liabilities             $ 370,000

Investment in S company              45,000

Land                                220,000        Common stock, no par               $ 200,000

Buildings and equipment             500,000        Retained earnings                   136,000

Accumulated depreciation          (360,000)             Total equity                  $ 336,000

                                  $ 706,000                                           $ 706,000


Slide 3-7
3       Consolidation worksheet: The Cost method

                           S Company Balance sheet – Unconsolidated
                                     As of Dec. 31, 2011
                  Assets                                     Liabilities and Equity
 Cash                               $ 31,000        Accounts payable                   $90,000
 Accounts Receivable                 43,000         Long-term debt                     120,000
 Inventory                           82,000             Total Liabilities             $ 210,000
 Land                                30,000
 Buildings and equipment            150,000         Common stock, no par               $60,000
 Accumulated depreciation           (26,000)        Retained earnings                   40,000
                                                         Total equity                 $100,000
                                   $ 310,000                                          $ 310,000




Slide 3-8
   3    Consolidation worksheet: The Cost method

Ex 1:
Consolidation entries, Dec. 31, 2011:
Common Stock …………………………………………. 45,000
    Investment in Subsidiary …………………………            45,000

Dividend income …………………………………………. 9,000
    Dividends declared …………………………..…….             9,000

Common Stock ……………………………………….             15,000
Retained Earnings ……………………………………           5,000
NCI in net income ……………………………………           8,000
    Dividends declared …………………………..                 3,000
    NCI in net assets ……………………………..                25,000
  Slide 3-9
    3            Consolidation worksheet: The Cost method

                                      P Company and Subsidiary (S company)
                                     Consolidation Worksheet as of Dec. 31, 2011
                                           P              S             Consolidation Entries   Consolidated
                                        Company        Company            Dr.           Cr.
Income Statement (2011)
 Sales                                      710,000         282,000
 Cost of Sales                             (390,000)      (130,000)
 Expenses                                  (210,000)      (120,000)
 Equity in net income (From S Co.)            9,000
            Net Income                      119,000          32,000
                  NCI in net income
                   CI in net income


Statement of Retained Earnings
 Balances, 1/1/2011                         102,000          20,000
 + Net income                               119,000          32,000
 - Dividends declared                       (85,000)       (12,000)


 Balances, 31/12/2011                       136,000          40,000

   Slide 3-10
                  P Company and Subsidiary (S company) Consolidation Worksheet as of Dec. 31, 2011


3
                                           P             S            Consolidation Entries     Consolidated
                                        Company       Company           Dr.           Cr.
    Balance Sheet
      Cash                                 $ 77,000        31,000
      Accounts Receivable                   84,000         43,000
      Inventory                            140,000         82,000
      Investment in S Company               45,000
      Land                                 220,000         30,000
      Buildings and Equipment              500,000        150,000
      Accumulated Depreciation            (360,000)       (26,000)
               Total Assets               $706,000        310,000
    Payables                               160,000         90,000
    Long-term debt                         210,000        120,000
    NCI in net assets
    P- Company:
      Common Stock                         200,000
      Retained Earnings                    136,000
    S Company:
      Common Stock                                         60,000


    Retained Earnings                                      40,000
        Total Liabilities & equity         706,000        310,000
Slide 3-11 & Credit postings
    Proof of debit
    3            Consolidation worksheet: The Cost method

                                      P Company and Subsidiary (S company)
                                     Consolidation Worksheet as of Dec. 31, 2011
                                           P              S             Consolidation Entries      Consolidated
                                        Company        Company            Dr.           Cr.
Income Statement (2011)
 Sales                                      710,000         282,000                                      992,000
 Cost of Sales                             (390,000)      (130,000)                                     (520,000)
 Expenses                                  (210,000)      (120,000)                                     (330,000)
 Equity in net income (From S Co.)            9,000                      9,000 (2)                                0
            Net Income                      119,000          32,000      9,000                           142,000
                  NCI in net income                                    8,000 (3)                          (8,000)
                   CI in net income                                     17,000                           134,000


Statement of Retained Earnings
 Balances, 1/1/2011                         102,000          20,000      5,000 (3)                       117,000
 + Net income                               119,000          32,000     17,000                           134,000
 - Dividends declared                       (85,000)       (12,000)                    9,000 (2)         (85,000)
                                                                                       3,000 (3)
 Balances, 31/12/2011                       136,000          40,000     22,000        12,000             166,000

   Slide 3-12
                  P Company and Subsidiary (S company) Consolidation Worksheet as of Dec. 31, 2011


3
                                           P             S            Consolidation Entries      Consolidated
                                        Company       Company           Dr.           Cr.
    Balance Sheet
      Cash                                 $ 77,000        31,000                                      108,000
      Accounts Receivable                   84,000         43,000                                      127,000
      Inventory                            140,000         82,000                                      222,000
      Investment in S Company               45,000                                  45,000 (1)               0
      Land                                 220,000         30,000                                      250,000
      Buildings and Equipment              500,000        150,000                                      650,000
      Accumulated Depreciation            (360,000)       (26,000)                                    (386,000)
               Total Assets               $706,000        310,000                   45,000             971,000
    Payables                               160,000         90,000                                      250,000
    Long-term debt                         210,000        120,000                                      330,000
    NCI in net assets                                                               25,000 (3)          25,000
    P- Company:
      Common Stock                         200,000                                                     200,000
      Retained Earnings                    136,000                                                     136,000
    S Company:
      Common Stock                                         60,000     45,000 (1)                             0
                                                                      15,000 (3)
    Retained Earnings                                      40,000     22,000        12,000              30,000
        Total Liabilities & equity         706,000        310,000     82,000        37,000             971,000
Slide 3-13 & Credit postings
    Proof of debit                                                    82,000        82,000
3
      Consolidation worksheet: The Equity method
Ex 1: On Dec. 2009 a parent company (P) invested a
$45,000 cash for a 75% equity interest in partially owned
subsidiary (S), outside investors invested $15,000 cash for
25% equity interest
The S company subsequently reported the following items
for 2010, and 2011:

                         Net income    Dividends Declared
       2010 ………………          $ 24,000         $ 4,000
       2011 ………………            32,000         12,000



Slide 3-14
 3      Consolidation worksheet: The Equity method

Unconsolidated statements
                          P- Company Balance sheet - Unconsolidated
                                     As of Dec. 31, 2011

                 Assets                                      Liabilities and Equity

Cash                               $ 77,000        Accounts payable                   $ 160,000

Accounts Receivable                  84,000        Long-term debt                      210,000

Inventory                           140,000             Total Liabilities             $ 370,000

Investment in S company              75,000

Land                                220,000        Common stock, no par               $ 200,000

Buildings and equipment             500,000        Retained earnings                   166,000

Accumulated depreciation          (360,000)             Total equity                  $ 366,000

                                  $ 736,000                                           $ 736,000


Slide 3-15
3       Consolidation worksheet: The Equity method

                           S Company Balance sheet – Unconsolidated
                                     As of Dec. 31, 2011
                  Assets                                     Liabilities and Equity
 Cash                               $ 31,000        Accounts payable                   $90,000
 Accounts Receivable                 43,000         Long-term debt                     120,000
 Inventory                           82,000             Total Liabilities             $ 210,000
 Land                                30,000
 Buildings and equipment            150,000         Common stock, no par               $60,000
 Accumulated depreciation           (26,000)        Retained earnings                   40,000
                                                         Total equity                 $100,000
                                   $ 310,000                                          $ 310,000




Slide 3-16
  3     Consolidation worksheet: The Equity method

Ex 1:
Consolidation entry, Dec. 31, 2011:


Common Stock ……………………………………….            60,000
Retained Earnings ……………………………………         20,000
Equity in Net income …………………………………       24,000
NCI in net income ……………………………………          8,000
    Dividends declared …………………………..               12,000
    Investment in Subsidiary …………………….            75,000
    NCI in net assets ……………………………..               25,000



  Slide 3-17
    3            Consolidation worksheet: The Equity method

                                      P Company and Subsidiary (S company)
                                     Consolidation Worksheet as of Dec. 31, 2011
                                           P              S             Consolidation Entries   Consolidated
                                        Company        Company            Dr.           Cr.
Income Statement (2011)
 Sales                                      710,000         282,000
 Cost of Sales                             (390,000)      (130,000)
 Expenses                                  (210,000)      (120,000)
 Equity in net income (From S Co.)           24,000
            Net Income                      134,000          32,000
                  NCI in net income
                   CI in net income


Statement of Retained Earnings
 Balances, 1/1/2011                         117,000          20,000
 + Net income                               134,000          32,000
 - Dividends declared                       (85,000)       (12,000)
 Balances, 31/12/2011                       166,000          40,000


   Slide 3-18
                  P Company and Subsidiary (S company) Consolidation Worksheet as of Dec. 31, 2011


3
                                           P             S            Consolidation Entries     Consolidated
                                        Company       Company           Dr.           Cr.
    Balance Sheet
      Cash                                 $ 77,000        31,000
      Accounts Receivable                   84,000         43,000
      Inventory                            140,000         82,000
      Investment in S Company               75,000
      Land                                 220,000         30,000
      Buildings and Equipment              500,000        150,000
      Accumulated Depreciation            (360,000)       (26,000)
               Total Assets               $736,000        310,000
    Payables                               160,000         90,000
    Long-term debt                         210,000        120,000
    NCI in net assets
    P- Company:
      Common Stock                         200,000
      Retained Earnings                    166,000
    S Company:
      Common Stock                                         60,000
    Retained Earnings                                      40,000
        Total Liabilities & equity         736,000        310,000
    Proof of debit & Credit postings
Slide 3-19
    3            Consolidation worksheet: The Equity method

                                      P Company and Subsidiary (S company)
                                     Consolidation Worksheet as of Dec. 31, 2011
                                           P              S             Consolidation Entries   Consolidated
                                        Company        Company            Dr.           Cr.
Income Statement (2011)
 Sales                                      710,000         282,000                                   992,000
 Cost of Sales                             (390,000)      (130,000)                                  (520,000)
 Expenses                                  (210,000)      (120,000)                                  (330,000)
 Equity in net income (From S Co.)           24,000                     24,000 (1)                             0
            Net Income                      134,000          32,000     24,000                        142,000
                  NCI in net income                                    8,000 (1)                       (8,000)
                   CI in net income                                     32,000                        134,000


Statement of Retained Earnings
 Balances, 1/1/2011                         117,000          20,000     20,000 (1)                    117,000
 + Net income                               134,000          32,000     32,000                        134,000
 - Dividends declared                       (85,000)       (12,000)                   12,000          (85,000)
 Balances, 31/12/2011                       166,000          40,000     52,000        12,000          166,000


   Slide 3-20
                  P Company and Subsidiary (S company) Consolidation Worksheet as of Dec. 31, 2011


3
                                           P             S            Consolidation Entries      Consolidated
                                        Company       Company           Dr.           Cr.
    Balance Sheet
      Cash                                 $ 77,000        31,000                                      108,000
      Accounts Receivable                   84,000         43,000                                      127,000
      Inventory                            140,000         82,000                                      222,000
      Investment in S Company               45,000                                  75,000 (1)               0
      Land                                 220,000         30,000                                      250,000
      Buildings and Equipment              500,000        150,000                                      650,000
      Accumulated Depreciation            (360,000)       (26,000)                                    (386,000)
               Total Assets               $736,000        310,000                   75,000             971,000
    Payables                               160,000         90,000                                      250,000
    Long-term debt                         210,000        120,000                                      330,000
    NCI in net assets                                                               25,000 (1)          25,000
    P- Company:
      Common Stock                         200,000                                                     200,000
      Retained Earnings                    166,000                                                     166,000
    S Company:
      Common Stock                                         60,000     60,000 (1)                             0
    Retained Earnings                                      40,000     52,000        12,000                   0
        Total Liabilities & equity         736,000        310,000     112,000       37,000             971,000
    Proof of debit & Credit postings                                  112,000       112,000
Slide 3-21
3 Unconsolidated Subsidiaries:
  100% Ownership Situations

l Permissible Valuation Methods
  (for when control has been lost):
    n Equity Method--but ONLY IF
      significant influence exists.
    n Cost Method--makes sense to use when
      realization of sub’s expected future earnings
      is doubtful.
       s The default method if NO significant
          influence exists.
Slide 3-22
3 Unconsolidated Subsidiaries:
  Partial Ownerships--NCI Shares
  Are NOT Publicly Traded

l Permissible Valuation Methods
  (for when control has been lost):
   n Equity Method--but ONLY IF
     significant influence exists.
   n Cost Method.
      s The default method if NO significant
        influence exists.

Slide 3-23
3 Unconsolidated Subsidiaries:
  Partial Ownerships--NCI Shares
  ARE Publicly Traded
                                           Look for a
                                           new kid on
l Permissible Valuation Methods            the block.
  (for when control has been lost):
   n Equity Method--but ONLY IF significant
     influence exists.
    n   Fair Value Method (the new kid)--must
        use if significant influence does NOT exist.
               WSJ--12/31/04....”33 7/8”

Slide 3-24
3
      Review Question #1

l Which of the following is NOT permitted
  under GAAP?

    A. The economic unit concept.
    B. The parent company concept.
    C. Full consolidation.
    D. Proportional consolidation.
    E. None of the above.


Slide 3-25
3
      Review Question #1--With Answer

l Which of the following is NOT permitted
  under GAAP?

    A. The economic unit concept.
    B. The parent company concept.
    C. Full consolidation.
    D. Proportional consolidation.
    E. None of the above.


Slide 3-26
3
      Review Question #2

l The noncontrolling interest (NCI) is
  reported OUTSIDE consolidated
  stockholders’ equity under:

    A. The economic unit concept.
    B. The parent company concept.
    C. Full consolidation.
    D. Proportional consolidation.
    E. None of the above.

Slide 3-27
3
      Review Question #2--With Answer

l The noncontrolling interest (NCI) is
  reported OUTSIDE consolidated
  stockholders’ equity under:

    A. The economic unit concept.
    B. The parent company concept.
    C. Full consolidation.
    D. Proportional consolidation.
    E. None of the above.

Slide 3-28
3
      Review Question #3

l The noncontrolling interest (NCI) is
  reported AS PART OF consolidated
  stockholders’ equity under:

    A. The economic unit concept.
    B. The parent company concept.
    C. Full consolidation.
    D. Proportional consolidation.
    E. None of the above.

Slide 3-29
3
      Review Question #3--With Answer

l The noncontrolling interest (NCI) is
  reported AS PART OF consolidated
  stockholders’ equity under:

    A. The economic unit concept.
    B. The parent company concept.
    C. Full consolidation.
    D. Proportional consolidation.
    E. None of the above.

Slide 3-30
3
      Review Question #4

l On 1/1/04, Parco invested $900,000 in Sarco
  (90%-owned). For 2004, Sarco: (1) earned
  $60,000, (2) declared dividends of $50,000,
  and (3) paid dividends of $40,000. What
  amounts does Parco report?
                                    Cost Equity
  Investment income for 2004.....
  Investment in Sarco at Y/E......
  Retained earnings increase.......

Slide 3-31
3
      Review Question #4--With Answer

l On 1/1/04, Parco invested $900,000 in Sarco
  (90%-owned). For 2004, Sarco: (1) earned
  $60,000, (2) declared dividends of $50,000,
  and (3) paid dividends of $40,000. What
  amounts does Parco report?
                                     Cost Equity
  Investment income for 2004..... $45,000 $54,000
  Investment in Sarco at Y/E...... $900,000 $909,000
  Retained earnings increase....... $45,000 $54,000

Slide 3-32
3
      Review Question #5

l On 1/1/04, Parco invested $900,000 in Sarco
  (90%-owned) and NCI shareholders invested
  $100,000. For 2004, Sarco: (1) earned $60,000,
  (2) declared dividends of $50,000, and (3)
  paid dividends of $40,000. What amounts
  does Parco report for the items below?

    NCI in net income for 2004..……. _________
    NCI in net assets at 12/31/04….. _________
    Con. retained earnings increase.. _________
Slide 3-33
3
      Review Question #5--With Answer

l On 1/1/04, Parco invested $900,000 in Sarco
  (90%-owned) and NCI shareholders invested
  $100,000. For 2004, Sarco: (1) earned $60,000,
  (2) declared dividends of $50,000, and (3)
  paid dividends of $40,000. What amounts
  does Parco report for the items below?

    NCI in net income for 2004..……. $ 6,000
    NCI in net assets at 12/31/04….. $101,000
    Con. retained earnings increase.. $54,000
Slide 3-34
3
      Review Question #6

l A 100%-owned subsidiary is NOT
  consolidated. The parent could definitely
  NOT use:

    A. The cost method
    B. The equity method.
    C. The lower of cost or market method.
    D. The fair market value method.
    E. None of the above.

Slide 3-35
3
      Review Question #6--With Answer

l A 100%-owned subsidiary is NOT
  consolidated. The parent could definitely
  NOT use:

    A. The cost method
    B. The equity method.
    C. The lower of cost or market method.
    D. The fair market value method.
    E. None of the above.

Slide 3-36
3
      Review Question #7

l A LESS THAN 100%-owned subsidiary is
  NOT consolidated--the NCI shares ARE
  publicly traded. The parent definitely could
  NOT use:

    A.   The cost method
    B.   The equity method.
    C.   The fair market value method.
    D.   None of the above.

Slide 3-37
3
      Review Question #7--With Answer

l A LESS THAN 100%-owned subsidiary is
  NOT consolidated--the NCI shares ARE
  publicly traded. The parent definitely could
  NOT use:

    A.   The cost method
    B.   The equity method.
    C.   The fair market value method.
    D.   None of the above.

Slide 3-38
                 End of Chapter 3
3
             (Appendix material follows)

l Time to Clear Things Up--
  Any Questions?




Slide 3-39
        Appendix: Domestic Subs: Recording
3
        Taxes at Parent Level on Sub’s Income

l Double vs. Triple Taxation--Ways to Easily
  Avoid the THIRD Tax:
    n   Own 80%      or More of Sub’s Stock:
        s    Can file a consolidated tax return or
        s    File separate tax returns--parent uses a
             dividend received deduction of 100%.

               Sub files its own IRS Form 1120

Slide 3-40
3       Appendix: Consolidated Tax Returns--
        Advantages Versus Disadvantages

l Major Advantages:
    n Can offset X’s LOSS against Y’s INCOME.
    n Can offset X’s CAPITAL LOSS against
      Y’s CAPITAL GAIN.
    n Avoids Sec. 482 transfer pricing problems.

l Major Disadvantages:
    n X’s loss on intercompany sale is deferred.
    n Complexity.

Slide 3-41
          Appendix: Domestic Subs:
 3
          Less Than 80% Ownership Situations

          Sub must file its own IRS Form 1120

l Triple Taxation CANNOT be Entirely Avoided:
     n   Dividend received deduction is only 80%.
     n   FASB: Parent must record any triple tax in
         the year in which sub earns its income--
         NO EXCEPTIONS ARE ALLOWED FOR
         DOMESTIC SUBSIDIARIES.

 Slide 3-42

				
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