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									   COMPREHENSIVE CONSOLIDATION PROBLEM
Approaching a Consolidation Problem
   Original Investment
   Throughout the Period
   Set Up Worksheet
   Elimination Entries
   Preparing the Financial Statements
                       Approaching a Consolidation Problem

1. Original Investment – Record original investment using either initial
   value or equity method
        Allocate differential to identifiable accounts
        Determine goodwill (or gain)
        Determine how differential will be amortized
        Allocate differential to non-controlling interest

2. Throughout the accounting period – Equity or initial value method is
   used internally to account for the following subsidiary activities:
     Reporting of subsidiary net income (equity method only)
     Receipt of dividends (equity and initial value methods)

3. Set up worksheet – Organize accounts for preparation of:
     Income Statement
     Statement of Retained Earnings
     Balance Sheet

4. Elimination entries (most difficult part):
     Convert initial value to equity method (if needed)
     Eliminate equity section of subsidiary
     Adjust identifiable accounts to FMV and recognize goodwill (unless push
      down is used)
     Eliminate subsidiary net income
     Eliminate intercompany dividend payments
     Amortization/Depreciation of the differential (unless push down is used)
     Eliminate any intercompany transfers or debts

5. Prepare financial statements
     Closing entries



Comprehensive Consolidation Problem                                        2
1. Original Investment – Record original investment using either initial
   value or equity method

Facts at January 1, 2009:
     Bull, Corp. purchased 80% of Calf, Co. on January 1, 2009 for $425,000.
     At acquisition, the FMV of the non-controlling interest is $102,500.
     Calf, Co. book value at Jan 1, 2009 was $400,000 (CS + RE = $100,000 +
      $300,000)
     Company uses initial value method.
     Equipment with a 5 year life is undervalued by $12,500
     Buildings with an 8 year life are undervalued by $20,000
     Land is undervalued by $50,000
     A royalty agreement owned by Calf is not recorded and has a FMV of
      $30,000.

Requirements at January 1, 2009:
       Allocate differential to identifiable accounts
       Determine goodwill (or gain)
       Determine how differential will be amortized
       Allocate differential to non-controlling interest

Allocation of Differential to Non-Controlling Interest
                                                                                   Company
                                      Parent (80%)        NCI (20%)
                                                                                   Fair Value
FMV at Acquisition                        $425,000             $102,500               $527,500a
Fair Value of
Identifiable Assets
(exclude goodwill)                        $410,000             $102,500                $512,500b
Goodwill
(Consideration > FMV)                       $15,000                     $0               $15,000
a
    Price paid by Parent + FMV of NCI = $425,000 + $102,500 = $527,500
b
    Book Value + Undervalued Equipment + Undervalued Building + Undervalued Land + Unrecorded
    Royalty Agreement = $400,000 + $12,500 + $20,000 + $50,000 + 30,000 = $512,500


Rule: If NCI FMV < (Parent Consideration / Parent Ownership Percentage), do
not allocate goodwill to the NCI. All goodwill or gain is allocated to the parent.



Comprehensive Consolidation Problem                                                       3
Allocation of Differential to Identifiable Accounts and Determination of Goodwill
FMV at acquisition a                               $527,500
Calf, Co. book value b                             $400,000
Differential                                       $127,500

Allocation of Differential
 Equipment                                          $12,500
 Buildings                                          $20,000
 Land                                               $50,000
 Royalty Agreement                                  $30,000
Goodwill c                                          $15,000
Differential                                       $127,500
a
    Consideration + NCI FMV = $425,000 + $102,500 = $527,500
b
    CS + RE = $100,000 + $300,000 = $400,000
c
    Plugged item = $127,500 – ($12,500 + $20,000 + $50,000 + $30,000) = $15,000



Amortization of the Differential
                                                          Estimated
                                      Allocation                              Amortization
                                                             Life
Equipment                                 $12,500              5                    $2,500
Buildings                                 $20,000              8                    $2,500
Land                                      $50,000         Indefinite                    $0
Royalty Agreement                         $30,000             20                    $1,500
Goodwill                                  $15,000         Indefinite                    $0
Differential                             $127,500
Amortization per year                                                               $6,500




Comprehensive Consolidation Problem                                                     4
2. Throughout the accounting period – Equity or initial value method
is used internally to account for the following subsidiary activities:
     Reporting of subsidiary net income (equity method only)
     Receipt of dividends


During December 31, 2013 (four years after acquisition) Calf paid
$20,000 in dividends. Under the initial value method, the following
entries are made:

Calf, Co. records payment of dividend
Dividends (to be closed into RE)                      20,000
       Cash                                                     20,000

Bull, Corp. records receipt of dividend
Cash                                                  16,000
         Dividend Income ($20,000 X .8 = $16,000)               16,000




Comprehensive Consolidation Problem                                  5
3. Set up worksheet - Facts at December 31, 2013 (four years after
acquisition):
     Calf, Co. owes Bull, Corp. $20,000 in debt.
     Accounts at December 31, 2013 are as follows:

                                       Bull, Corp.    Calf, Co.
    Debits
                                                                       $425,000 is same as Jan 1,
    Current Assets                          605,000      280,000       2009; evidence that initial
                                                                       value method used
    Investment in Calf, Co.                 425,000            0
    Land                                    200,000      300,000
    Building                                640,000      290,000
                                                                       The shaded items will
    Equipment                               380,000      160,000       eventually be closed.
    Expenses                                550,000      190,000
    Dividends                                90,000       20,000
                                          2,890,000    1,240,000
    Credits
    Liabilities                             910,000      300,000
    Common Stock                            480,000      100,000
    Retained Earnings                       704,000      480,000
    Revenue                                 780,000      360,000
    Dividend Income                          16,000            0
                                          2,890,000    1,240,000

Note: four years have passed
                                                      Accumulated     Balance at
                                      Allocation
                                                      Amortization   Dec 31, 2013
Equipment (5 year life)                $12,500          $10,000 a       $2,500
Buildings (8 year life)                $20,000          $10,000 b      $10,000
Land                                   $50,000                $0       $50,000
Royalty Agreement
                                       $30,000           $6,000 c      $24,000
(20 year life)
Goodwill                               $15,000               $0        $15,000
Differential                          $127,500          $26,000       $101,500
a
    $2,500 per year * 4 years = $10,000
b
    $2,500 per year * 4 years = $10,000
c
    $1,500 per year * 4 years = $6,000



Comprehensive Consolidation Problem                                                 6
4. Elimination entries (most difficult part):

Calf, Co. Retained Earnings
January 1, 2013                               480,000
January 1, 2009                               300,000
Difference                                    180,000


Convert Initial Value Method to Equity Method:
Investment in Calf, Co.                                              123,200
      Retained Earnings (beginning)                                                  123,200
2009 to 2013 incomes less dividends less accumulated differential amortization over four years time the
control percentage = [(180,000 - $26,000) * 80%] = $123,200


Elimination of Calf equity:
Common Stock                                               100,000
Retained Earnings (beginning)                              480,000
      Investment in Calf, Co. [(100,000 + 480,000) X 80%]                            464,000
      Non Controlling Interest [(100,000 + 480,000) X 20%]                           116,000

Adjustment of Assets to Fair-Value:
Equipment                                                               2,500
Buildings                                                              10,000
Land                                                                   50,000
Royalty Agreement                                                      24,000
Goodwill                                                               15,000
       Investment in Calf, Co. a                                                       84,200
       Non Controlling Interest b                                                      17,300
a
  (Excess Equip, Bldg, Land, and Royalty Agreement X NCI %) + Goodwill = (2,500 + 10,000 +
50,000 + 24,000) X .8] + 15,000 = 84,200
b
  Excess Equip, Bldg, Land, and Royalty Agreement X NCI % = (2,500 + 10,000 + 50,000 + 24,000)
.2 = 17,300 (Note that goodwill is excluded from this calculation because the NCI FMV = NCI
FMV of Identifiable Assets)




Comprehensive Consolidation Problem                                                            7
Elimination of intercompany dividend payment
Dividend Income                                                        16,000
      Dividends Paid (closed into RE)                                                   16,000
Total dividend * ownership percentage = $20,000 * 80% = $16,000


Excess depreciation and amortization
Depreciation Expense                                                     5,000
Amortization Expense                                                     1,500
     Equipment                                                                           2,500
     Buildings                                                                           2,500
     Royalty Agreement                                                                   1,500

Elimination of intercompany debt
Liabilities (Note Payable)                                             20,000
        Current Assets (Note Receivable)                                                20,000

5. Prepare financial statements

Closing Entry for Income
Revenue a                                                          1,140,000
     Expenses b                                                                       746,500
     Retained Earnings c                                                              360,800
     Non Controlling Interest in Income d                                              32,700
a
   Bull Revenue + Calf Revenue = 780,000 + 360,000 = 1,140,000
b
   Bull Expenses + Calf Expenses + Depreciation of Excess + Amortization of Excess = 550,000 + 190,000 +
   5,000 + 1,500 = 746,500
c
   (Bull Revenue – Bull Expenses) + [(Calf Revenue - Calf Expenses) (Ownership Percentage)] = (780,000 –
   550,000) + [(360,000 – 196,500)(80%)] = 360,800
 d
    [(Calf Revenue - Calf Expense) X NCI Percentage] = [(360,000 – 196,500) * 20%] = 32,700


Closing Entry for Dividends
Retained Earnings                                                      90,000
Non Controlling Interest (20,000 * .2)                                  4,000
      Dividends                                                                         94,000




Comprehensive Consolidation Problem                                                             8
                                                                                                                       Convert Initial Value to Equity
                                                                                                                       Elimination of Sub Equity
                                                       CONSOLIDATION WORKSHEET                                         Adjust Sub to FVM
                                                                                                                       Eliminate Dividend of Sub to Parent
                                                    Bull, Corp. (Parent) and Calf, Co. (Subsidiary)                    Recog Excess Dep and Amort
                                                                 December 31, 2013                                     Eliminate Intercompany Debt
                                                                                                                       Close Income of Consol Entity
                                                                   Elimination                                         Close Dividends of Consol Entity
                                                                      Entries           Pre Closing          Closing Entries             Closed
                                      Bull, Corp.   Calf, Co.     Debit     Credit     Consolidated         Debit      Credit          Consolidated

 Current Assets                           605,000     280,000          20,000                865,000                                         865,000
 Investment in Calf, Co.                  425,000           0 123,200 464,000                                                                      0
                                                                       84,200                      0                                               0
 Land                                     200,000     300,000 50,000                         550,000                                         550,000
 Building                                 640,000     290,000 10,000    2,500                937,500                                         937,500
 Equipment                                380,000     160,000   2,500   2,500                540,000                                         540,000
 Royalty Agreement                                             24,000   1,500                 22,500                                          22,500
 Goodwill                                                      15,000                         15,000                                          15,000
 Expenses                                 550,000     190,000   5,000                                                                              0
                                                                1,500                        746,500                      746,500                  0
 Dividends (closed into RE)                90,000      20,000          16,000                 94,000                       94,000                  0
                                        2,890,000   1,240,000                              3,770,500                                       2,930,000

 Liabilities                              910,000     300,000     20,000                   1,190,000                                       1,190,000
 Common Stock - Bull                      480,000                                            480,000                                         480,000
 Common Stock - Calf                                  100,000 100,000                              0                                               0
 Retained Earnings - Bull                 704,000                          123,200           827,200         90,000       360,800          1,098,000
 Retained Earnings - Calf                             480,000 480,000                              0                                               0
 Non Controlling Interest                                                  116,000                                                                 0
                                                                            17,300           133,300           4,000        32,700           162,000
 Revenue                                  780,000     360,000                              1,140,000       1,140,000                               0
 Dividend Income                           16,000           0 16,000                               0                                               0
                                        2,890,000   1,240,000 847,200 847,200              3,770,500       1,234,000    1,234,000          2,930,000



Comprehensive Consolidation Problem                                                                    9
                             BALANCE SHEET
                         Bull Corp. Consolidated
                           December 31, 2013
 Current Assets                                      865,000
 Land                                                550,000
 Building                                            937,500
 Equipment                                           540,000
 Royalty Agreement                                    22,500
 Goodwill                                             15,000
                                                   2,930,000
 Liabilities                                       1,190,000
 Common Stock - Bull                                 480,000
 Retained Earnings - Bull                          1,098,000
 Non Controlling Interest                            162,000
                                                   2,930,000

                          INCOME STATEMENT
                         Bull Corp. Consolidated
                           December 31, 2013
 Revenue                                           1,140,000
 Expenses                                            746,500
 Non Controlling Interest in Income                   32,700
 Net Income                                          360,800




Comprehensive Consolidation Problem                            10

								
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