Income Year to Date

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Income Year to Date Powered By Docstoc
					Chapter 3
            Consolidated
            Statements

            Subsequent to
            Acquisition
Consolidated statements subsequent
to acquisition
Alternative methods to maintain the investment
Establishing date alignment

Worksheet procedures; Purchase Method
Amortization of D&D adjustments
Using the Income Distribution Schedule
Reporting income for the consolidated company
Procedures for purchases made during the period


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Maintaining the investment account
                       Simple      Sophisticated
                       Equity         Equity          Cost
      Add parent %
      of subsidiary      Yes           Yes             No
      income
      Adjust for
      amortizations      No            Yes             No
      of excess
                        Reduce        Reduce        Parent %
      Recording of
                      investment    investment     reported as
      dividends
                        account       account        income




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D&D schedule for example
Price paid:                      $ 800,000
Interest acquired:
  Common stock       $ 200,000
  Retained earnings 400,000
  Total Equity         600,000
  Ownership interest      80%     480,000
  Excess cost                     320,000 Life Ann Amort
Inventory (80%  50,000)           40,000 1     40,000
Building (80%  100,000)           80,000 20     4,000
Goodwill                          200,000 n/a

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Subsidiary income and dividends
                      Income     Dividends
Year 1                100,000      10,000
Year 2                150,000      20,000

 • Parent reports only 80% of above amounts
 • Regardless of method used, amortizations from
   D&D must be made on consolidated worksheet




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Parent recording of subsidiary
income (year 1)
                                 Sophisticated
                    Equity       Equity          Cost
Investment balance  800,000      800,000         800,000
Year 1 income:                   (44,000 amort)
Investment in Sub   80,000       36,000          no entry
  Investment income       80,000          36,000
Year 1 dividends:
Cash                8,000        8,000           8,000
  Investment in Sub        8,000           8,000
  Dividend income                                        8,000
Investment balance  872,000      828,000         800,000




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Parent recording of subsidiary
income (year 2)
                                   Sophisticated
                      Equity       Equity          Cost
Investment balance    872,000      828,000         800,000
Year 2 income:                     (4,000 amort)
Investment in Sub     120,000      116,000         no entry
 Investment income         120,000         116,000
Year 2 dividends:
Cash                  16,000       16,000        16,000
  Investment in Sub         16,000        16,000
  Dividend income                                       16,000
Investment balance    976,000      928,000        800,000



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Worksheet procedures
 The RE of the Sub and the Investment account
  must be at the same point in time
 If they are, the excess upon elimination will agree
  with the D&D on purchase date
      – Under Sophisticated equity, it is only the amortized
        balance of the excess
 The account adjustments made require amortization
  for current and prior periods
      – No entries are made on either firm’s books for
        worksheet eliminations

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Specifics of date alignment
              Equity Method             Cost Method
First            Reverse current year Automatic - Investment
                 invest entries; returns and Sub RE at same date
Year             invest to start of year (WS 3)
                 balance (WS 1,5)
Later            Reverse current year Do equity conversion to
                 invest entries; returns bring investment to
Years            invest to start of year start of year. (WS 4)
                 balance (WS 2,6)
Note: In later years, the sophisticated equity balance will be the
start of the year balance less prior year’s amortizations of excess


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Worksheet elimination procedures
CV - Convert to equity (only applies to cost method)
CY1 - Eliminate Sub income (equity method)
CY2 - Eliminate intercompany dividends (cost &
      equity method)
EL - Eliminate parent % of sub’s equity




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Worksheet elimination procedures
(continued)
D - Distribute excess per D&D schedule
      1 Inventory (cost of goods sold year1, RE thereafter)
      2 Building
      3 Goodwill
A - Amortize excess
      2 Building




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Simple Equity: Year 1
Selected accounts    Trial Balances             Eliminations
                    Parent     Sub             Dr         Cr
Investment in Sub    872,000             CY2 8,000 CY1 80,000000
                                                   EL 480,000
                                                   D 320,000
Building                         500,000 D2 80,000

Accumulated depr.               (200,000)                A2   4,000
Goodwill                                    D3 200,000
Investment income    (80,000)               CY1 80,000
Dividends declared              10,000            CY2 8,000
Com Stock - Sub              (200,000) EL 160,000
RE - Sub                     (400,000) EL 320,000
RE - Parent        (700,000)
Cost of goods sold   400,000   300,000 D1 40,000
Expenses             250,000   180,000 A2 4,000


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Simple Equity: Year 2
Selected accounts    Trial Balances                Eliminations
                     Parent      Sub            Dr          Cr
Investment in Sub     976,000                CY2 16,000 CY1  120,000000
                                                         EL 552.000
                                                          D 320,000
Building                           500,000   D2 80,000
Accumulated depr.                (200,000)                 A2 8,000
Goodwill                                     D3 200,000
Investment income    (120,000)               CY1 120,000
Dividends declared                  20,000               CY2 16,000
Com Stock - Sub                  (200,000)   EL 160,000
RE - Sub                         (490,000)   EL 392,000
RE - Parent          (900,000)                D1 40,000
                                              A2 4,000
Cost of goods sold    500,000     400.000
Expenses              350,000     280,000     A2   4000
Goodwill amort.
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Cost Method: Year 1
Selected accounts       Trial Balances             Eliminations
                     Parent         Sub               Dr        Cr
Investment in Sub      800,000                                EL 480.000
                                                              D 320,000
Building                            500,000   D2 80,000
Accumulated depr.                 (200,000)                   A2 4,000
Goodwill                                      D3 200,000
Dividend income        (8,000)                CY2 8,000
Dividends declared                   10,000                   CY2 8,000
Com Stock - Sub                   (200,000)   EL 160,000
RE - Sub                          (400,000)   EL 320,000
RE - Parent          (700,000)
Cost of goods sold     400,000      300.000   D1 40,000
Expenses               250,000      180,000   A2 4,000




   C3                                                                      14
Cost Method: Year 2
Selected accounts       Trial Balances                Eliminations
                     Parent         Sub          Dr              Cr
Investment in Sub      800,000                CV   72,000     EL  552.000
                                                              D   320,000
Building                            500,000   D2     80,000
Accumulated depr.                 (200,000)                   A2      8,000
Goodwill                                      D3    200,000
Dividend income       (16,000)                CY2    16,000
Dividends declared                   20,000                   CY2    16,000
Com Stock - Sub                   (200,000)   EL    160,000
RE - Sub                          (490,000)   EL    392,000
RE - Parent          (828,000)                D1     40,000   CV     72,000
                                              A2      4,000
Cost of goods sold    500,000       400.000
Expenses              350,000       280,000 A2        4000




   C3                                                                         15
Review of worksheet procedures
Using WS 6 as an example:
 Elimination of equity income & intercompany
   dividends returns investment to Jan 1 for date
   alignment
 Excess is distributed per D&D; amortized for
   current and prior years
 IDS (income distribution schedule.) is used to
   allocate income to P & S
    – All excess amortizations go to P, only P’s
       share is recorded initially
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Income distribution schedules
                     Subsidiary
                               Int generated net income
                               Adjusted net income
                               NCI %
                               NCI
                        Parent
      Excess amortizations     Int generated net income
                              + Parent % Sub income
                               Controlling interest

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Disclosure concerns
 Consolidated Net Income - The net income of the
  consolidated entity
 NCI share of income - This is the NCI share of
  consolidated net income, it has often (incorrectly)
  been treated as an expense.
 Controlling share of net income - This is the
  controlling share of consolidated net income, it has
  often (incorrectly) been treated as consolidated net
  income (the NCI share having been deducted).
 Total NCI - Best theory is to show as aggregated part
  of total equity. Some have shown it as liability or put
  it between liabilities and equity
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During the year purchases
 Close Books (WS 7)       Books Open (WS 8)
D&D includes Sub RE   D&D has Beginning of
 on purchase date       year RE and “purchased
                        income”
WS includes Sub       WS includes Sub
 operations for only    operations for entire year
 later part of year    Purchased income is
                        used to remove income
                        prior to purchase

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Tax issues - tax free exchange
 Occurs when seller is not taxed; buyer gets book
  value for future depreciation
 Adjustment from market to book accompanied by
  DTL = tax %  market adjustment
 DTL is amortized over same period as asset
  adjustment, increases tax liability in future years
 Tax loss carryover is asset recorded in purchase,
  there are limits on its use in year of purchase and
  later years


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Consolidation procedures for a
pooling
 Recall that investment was recorded at amount
  equal to book value. If this was not the case,
  correct the investment account.
 Cost or equity method may be used (sophisticated
  equity has no application - no excess)
 There should not be any excess to distribute or
  amortize - it was just like a purchase at a price
  equal to underlying subsidiary book value!



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