CH 04

4
Consolidated Financial
Statements After Acquisition
Advanced Accounting, Fifth Edition
Slide
4-1
Learning Objectives
1. Describe the accounting treatment required under current GAAP for varying levels of
influence or control by investors.
2. Prepare journal entries on the parent’s books to account for an investment using the
cost method, the partial equity method, and the complete equity method.
3. Understand the use of the workpaper in preparing consolidated financial statements.
4. Prepare a schedule for the computation and allocation of the difference between
implied and book values.
5. Prepare the workpaper eliminating entries for the year of acquisition (and subsequent
years) for the cost and equity methods.
6. Describe two alternative methods to account for interim acquisitions of subsidiary
stock at the end of the first year.
7. Explain how the consolidated statement of cash flows differs from a single firm’s
statement of cash flows.
8. Understand how the reporting of an acquisition on the consolidated statement of cash
flows differs when stock is issued rather than cash.
9. Describe some of the differences between U.S. GAAP and IFRS in accounting for
equity investments.
Slide
4-2
Investments in Stock
Investments in voting stock may be consolidated, or

separately reported at
cost,
fair value, or
equity.
Slide
4-3
Accounting for Investments by the Cost,
Partial Equity, and Complete Equity Methods
Ownership Percentages
0 --------------20% ------------ 50% -------------- 100%

No significant Significant Effective
influence influence control
(no control)
Investment Investment Investment

valued using valued using valued using Cost
the “cost” Equity Method or Equity
method but Method Method
with (investment
adjustments eliminated in
to fair value. Consolidation)
Slide
4-4
LO 1 Varying levels of ownership are accounted for differently.
Accounting for Investments by the Cost,
Partial Equity, and Complete Equity Methods
Consolidated financial statements will be identical,

regardless of method used.
However, if the parent issues parent-only financial
statements, the complete equity method should be
used for investees over which the parent has either
significant influence or effective control.
Slide
4-5
LO 1 Varying levels of ownership are accounted for differently.
Accounting for Investments by the Cost Method
E4-1: Percy Company purchased 80% of the outstanding

voting shares of Song Company at the beginning of 2009 for
$387,000. At the time of purchase, Song Company’s total
stockholders’ equity amounted to $475,000. Income and
dividend distributions for Song Company from 2009 through
2010 are as follows:
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000
Required: Prepare journal entries for Percy Company from

the date of purchase through 2011 to account for its
investment in Song Company under each of the following
assumptions:
Slide
4-6
LO 2 Journal entries for Parent using cost method.
E4-1: A. Percy Company uses the cost method to record its

investment.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2009 Investment in Song 387,000

Cash 387,000
Cash 20,000
Dividend income (.8 x $25,000) 20,000
Slide
4-7
E4-1: A. Percy Company uses the cost method to record its

investment.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2010 Cash 40,000

Dividend income (.8 x $50,000) 40,000
2011 Cash 28,000

Investment in Song (.8 x $35,000) 28,000
(Liquidating dividend)
Slide
4-8
Accounting for Investments by Partial Equity
E4-1: B. Percy Company uses the partial equity method to

record its investment.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)

Cash 387,000
Investment in Song 50,800

Equity income (.8 x $63,500) 50,800
Cash 20,000
Slide
4-9
LO 2 Journal entries for Parent using partial equity method.

2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)

Equity income (.8 x $52,500) 42,000
Cash 40,000
Slide
4-10

2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2011 Equity loss (.8 x $55,000) 44,000

Cash 28,000
Slide
4-11
Accounting for Investments by Complete Equity
E4-1: C. Percy Company uses the complete equity method

to record its investment. The difference between book value
of equity acquired and the value implied by the purchase price
was attributed solely to an excess of market over book values
of depreciable assets, with a remaining life of 10 years.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
The complete equity method is usually required to report

common stock investments in the 20% to 50% range, assuming
the investor has the ability to exercise significant influence
and does not have effective control over the investee.
Slide
4-12
LO 2 Journal entries for Parent using complete equity method.

to record its investment.
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)

Cash 387,000

Equity income (.8 x $63,500) 50,800
Cash 20,000
Slide
4-13

A journal entry is required to adjust for depreciation related

to the excess of market over book values of depreciable
assets.
Cost of investment $387,000
Book value acquired ($475,000 x 80%) 380,000
Difference between Cost and Book value $ 7,000
2009 Equity income ($7,000 / 10 yrs.) 700

Investment in Song 700
Slide
4-14

2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)

Equity income (.8 x $52,500) 42,000
Cash 40,000
Equity income ($7,000 / 10 yrs.) 700

Slide
4-15

2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2011 Equity Loss (.8 x $55,000) 44,000

Cash 28,000
Equity income ($7,000 / 10) 700

Slide
4-16
Consolidated Statements After Acquisition
On the date of acquisition, the only relevant financial

statement is the consolidated balance sheet.
After acquisition, a complete set of consolidated financial
statements must be prepared for the affiliated group:
 Income statement,
 Retained earnings statement,
 Balance sheet, and
 Statement of cash flows
Slide
4-17
LO 3 Use of workpapers.
Year of Acquisition—Cost Method

P4-8: On January 1, 2010, Parker Company purchased 95% of the
outstanding common stock of Sid Company for $160,000. At that
time, Sid’s stockholders’ equity consisted of common stock,
$120,000; other contributed capital, $10,000; and retained
earnings, $23,000.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2010.
B. Prepare a consolidated statements workpaper on Dec. 31, 2011.
Slide
4-18
LO 3 Use of workpapers.
P4-8: Begin the consolidating process by preparing a Computation

and Allocation Schedule, as follows:
95% 5% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 160,000 $ 8,421 $ 168,421
Less: Book value of equity acquired:

Common stock 114,000 6,000 120,000
Other contributed capital 9,500 500 10,000
Retained earings 21,850 1,150 23,000
Total book value 145,350 7,650 153,000
Difference between implied and book value 14,650 771 15,421

Record new goodwill (14,650) (771) (15,421)
Balance $ - $ - $ -
Difference between implied and book values is

established only at the date of acquisition.
Slide
4-19
LO 4 Preparing Computation and Allocation (CAD) Schedule.
P4-8: A. 2010 Year of Acquisition
Parker Sid
On December 31, 2010, Cash $ 62,000 $ 30,000
Accounts receivable 32,000 29,000
the two companies’ trial Inventory 30,000 16,000
balances were as follows Investment in Sid
Plant and equipment
160,000
105,000
-
82,000
at right: Land 29,000 34,000
Dividends declared 20,000 20,000
Required A. Prepare a Cost of goods sold 130,000 40,000
consolidated statements Operating expenses
Total debits
20,000
$ 588,000
14,000
$ 265,000
workpaper on December
31, 2010. Accounts payable
Other liabilities
$ 19,000
10,000
$ 12,000
20,000
Common stock 180,000 120,000
Other contributed capital 60,000 10,000
Retained earnings 40,000 23,000
Sales 260,000 80,000
Dividend income 19,000 -
Total credits $ 588,000 $ 265,000
Slide
4-20
LO 5 Workpapers eliminating entries.
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 260,000 $ 80,000 $ 340,000
Dividend income 19,000 19,000 -
Total revenue 279,000 80,000 340,000
Cost of goods sold 130,000 40,000 170,000
Other expenses 20,000 14,000 34,000
Total cost and expense 150,000 54,000 204,000
Net income 129,000 26,000 136,000
Noncontrolling interest 1,300 (1,300)
Net income $ 129,000 $ 26,000 $ 19,000 $ - $ 1,300 $ 134,700
Retained Earnings Statement

Retained earnings, 1/1/10 40,000 23,000 23,000 40,000
Net income 129,000 26,000 19,000 1,300 134,700
Dividends declared (20,000) (20,000) 19,000 (1,000) (20,000)
Retained earnings, 12/31/10 $ 149,000 $ 29,000 $ 42,000 $ 19,000 $ 300 $ 154,700
Slide
4-21
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 62,000 $ 30,000 $ 92,000
Accounts receivable 32,000 29,000 61,000
Inventory 30,000 16,000 46,000
Investment in Sid 160,000 - 160,000 -
Difference (cost & book) 15,421 15,421 -
Plant and equipment 105,000 82,000 187,000
Land 29,000 34,000 63,000
Goodwill 15,421 15,421
Total assets $ 418,000 $ 191,000 $ 464,421
Accounts payable $ 19,000 $ 12,000 $ 31,000

Other liabilities 10,000 20,000 30,000
Common stock 180,000 120,000 120,000 180,000
Other contributed capital 60,000 10,000 10,000 60,000
Retained earnings 149,000 29,000 42,000 19,000 300 154,700
Noncontrolling interest 1/1 8,421 8,421 -
Noncontrolling interest 12/31 $ 8,721 8,721
Total liabilities & equity $ 418,000 $ 191,000 $ 202,842 $ 202,842 $ 464,421
Slide
4-22
Workpaper Observations
1. Each section of the workpaper represents one of
three consolidated financial statements.
2. Elimination of the investment account.
Common stock 120,000

Other contributed capital 10,000
Retained earnings, 1/1 23,000
Difference between Implied and Book 15,421
Noncontrolling interest in equity 8,421
Investment in Sid 160,000
Slide
4-23
Workpaper Observations (continued)

3. Allocation of the difference between implied and book
value:
Goodwill 15,421
Difference between Implied and Book 15,421
4. Elimination of intercompany dividends
Dividend income 19,000

Dividends declared – Sid Company 19,000
Slide
4-24

5. Noncontrolling interest in consolidated net income:
Internally generated income of Sid Company $26,000

Noncontrolling percentage owned 5%
Noncontrolling interest in income $ 1,300
Slide
4-25

6. Consolidated retained earnings:
Parker Company’s retained earnings, 1/1 $ 40,000

+ Parker’s income 129,000
- Dividends from Sid Company - 19,000
+ Parker’s percentage of Sid income (95%) 24,700
- Parker’s dividends declared - 20,000
Parker Company’s retained earnings, 12/31 $154,700
Slide
4-26

7. Total eliminations for all three sections are in balance.
8. To calculate the noncontrolling interest in net assets
or equity at year-end, compute the following:
NCI at Acquisition Date $ 8,421

+ NCI share of Sid income ($26,000 x 5%) 1,300
- NCI share of Sid dividends ($20,000 x 5%) -1,000
Noncontrolling Interest in Equity $ 8,721
Slide
4-27
After Year of Acquisition – Cost Method
Parker Sid
P4-8: B. 2011 Cash $ 67,000 $ 16,000
On December 31, 2011, Accounts receivable
Inventory
56,000
38,000
32,000
48,500
the two companies’ trial Investment in Sid 160,000 -
balances were as follows Plant and equipment
Land
124,000
29,000
80,000
34,000
at right: Dividends declared 20,000 20,000
Cost of goods sold 155,000 52,000
Required B. Prepare a Operating expenses 30,000 18,000
consolidated statements Total debits $ 679,000 $ 300,500
workpaper on December Accounts payable $ 16,000 $ 7,000

31, 2011. Other liabilities 15,000 14,500
Common stock 180,000 120,000
Sales 240,000 120,000
Dividend income 19,000 -
Total credits $ 679,000 $ 300,500
Slide
4-28
LO 5 Workpapers eliminating entries after acquisition (cost method).
P4-8: B. 2011 After Year of Acquisition
Sales $ 240,000 $ 120,000 $ 360,000
Dividend income 19,000 19,000 -
Total revenue 259,000 120,000 360,000
Other expenses 30,000 18,000 48,000
Net income 74,000 50,000 105,000
Net income $ 74,000 $ 50,000 $ 19,000 $ - $ 2,500 $ 102,500

Retained earnings, 1/1/11 149,000 29,000 29,000 5,700 154,700
Net income 74,000 50,000 19,000 2,500 102,500
Retained earnings, 12/31/11 $ 203,000 $ 59,000 $ 48,000 $ 24,700 $ 1,500 $ 237,200
Slide
4-29
Cash $ 67,000 $ 16,000 $ 83,000
Inventory 38,000 48,500 86,500
Investment in Sid 160,000 - 5,700 165,700 -
Land 29,000 34,000 63,000
Goodwill 15,421 15,421
Total assets $ 474,000 $ 210,500 $ 539,921

Common stock 180,000 120,000 120,000 180,000
Retained earnings 203,000 59,000 48,000 24,700 1,500 237,200
Noncontrolling interest 1/1 8,721 8,721
Slide
4-30
1. Before elimination of the investment account, a workpaper
entry is made to the investment account and Parker
Company’s beginning retained earnings to recognize
Parker’s share of the cumulative undistributed income or
loss of Sid Company from the date of acquisition to the
beginning of the current year as follows:
Investment in Sid Company 5,700

Retained earnings, 1/1 5,700
($29,000 – $23,000 ) X .95 = $5,700 Entry to establish
Reciprocity
Slide
4-31
The following workpaper entries are also made:
2. Eliminate investment in Sid Company.
3. Eliminate intercompany dividends.
4. Allocate difference between cost and book value.
5. All (100%) of Sid’s revenues, expenses, assets, and

liabilities are included in the consolidated totals. The
noncontrolling interest’s share of income and net assets
are shown as separate line items.
Slide
4-32
Recording Investments – Equity Method
Equity Method
Record the investment at cost and subsequently
adjust the amount each period for
 the investor’s proportionate share of the
earnings (losses) and
 dividends received by the investor.
If investor’s share of investee’s losses exceeds the

carrying amount of the investment, the investor ordinarily
should discontinue applying the equity method.
Slide
4-33
LO 5 Workpaper eliminating entries (equity method).
Example: (Equity Method) On January 1, 2010,

Pennington Corporation purchased 30% of the common
shares of Edwards Company for $180,000. During the
year, Edwards earned net income of $80,000 and paid
dividends of $20,000.
Instructions
Prepare the journal entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2010.
Slide
4-34
Example: Prepare the entries for Pennington to record the

purchase and any additional entries related to this
investment in Edwards Company in 2010.
Investment in Stock 180,000

Cash 180,000
Investment in Stock 24,000

Equity in subsidiary income ($80,000 x 30%) 24,000
Cash 6,000
Investment in Stock ($20,000 x 30%) 6,000
Slide
4-35
Investment Carried at Equity—Year of Acquisition

P4-12: On January 1, 2010, Parker Company purchased 90% of
the outstanding common stock of Sid Company for $180,000. At
that time, Sid’s stockholders’ equity consisted of common stock,
$120,000; other contributed capital, $20,000; and retained
earnings, $25,000. Assume that any difference between book
value of equity and the value implied by the purchase price is
attributable to land.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2010.
B. Prepare a consolidated statements workpaper on Dec. 31, 2011.
Slide
4-36
P4-12: Begin the consolidating process by preparing a Computation

and Allocation Schedule, as follows:
90% 10% 100%
Parent NCI Total
Share Share Value

Common stock 108,000 12,000 120,000
Other contributed capital 18,000 2,000 20,000
Total book value 148,500 16,500 165,000
Difference between implied and book value 31,500 3,500 35,000

Allocated to land (31,500) (3,500) (35,000)
Balance $ - $ - $ -
Difference between implied and book values is

established only at the date of acquisition.
Slide
4-37
Parker Sid
On December 31, 2010, Cash $ 65,000 $ 35,000
Accounts receivable 40,000 30,000
the two companies’ trial Inventory 25,000 15,000
balances were as follows: Investment in Sid 184,500 -
Plant and equipment 110,000 85,000
Required A. Prepare a Land 48,500 45,000
consolidated statements
Dividends declared 20,000 15,000
workpaper on December Operating expenses 35,000 15,000
Total debits $ 678,000 $ 300,000
31, 2010.
Accounts payable $ 20,000 $ 15,000
Other liabilities 15,000 25,000
Common stock 200,000 120,000
Sales 300,000 95,000
Equity in subsidiary income 18,000 -
Total credits $ 678,000 $ 300,000
Slide
4-38
Sales $ 300,000 $ 95,000 $ 395,000
Equity in subsidiary income 18,000 18,000 -
Total revenue 318,000 95,000 395,000
Other expenses 35,000 15,000 50,000
Net income 133,000 20,000 135,000
Net income $ 133,000 $ 20,000 $ 18,000 $ - $ 2,000 $ 133,000

Net income 133,000 20,000 18,000 2,000 133,000
Retained earnings, 12/31/10 $ 168,000 $ 30,000 $ 43,000 $ 13,500 $ 500 $ 168,000
Slide
4-39
Cash $ 65,000 $ 35,000 $ 100,000
Inventory 25,000 15,000 40,000
180,000
Land 48,500 45,000 35,000 128,500
Total assets $ 473,000 $ 210,000 $ 533,500

Common stock 200,000 120,000 120,000 200,000
Retained earnings 168,000 30,000 43,000 13,500 500 168,000
Slide
4-40
The following workpaper entries were made:
To eliminate the account “equity in subsidiary income”
and intercompany dividends.
To eliminate the Investment account against subsidiary
equity.
To distribute the difference between implied and book
value of equity acquired.
Slide
4-41
Investment Carried at Equity—After Year of Acquisition
Parker Sid
P4-12: B. 2011 Cash $ 70,000 $ 20,000
On December 31, 2011, Accounts receivable
Inventory
60,000
40,000
35,000
30,000
the two companies’ trial Investment in Sid 193,500 -
balances were as follows Plant and equipment
Land
125,000
48,500
90,000
45,000
at right: Dividends declared 20,000 15,000
Required B. Prepare a Operating expenses 35,000 20,000
consolidated statements Total debits $ 752,000 $ 320,000
workpaper on December Accounts payable $ 16,500 $ 16,000

31, 2011. Other liabilities 15,000 24,000
Common stock 200,000 120,000
Sales 260,000 110,000
Total credits $ 752,000 $ 320,000
Slide
4-42
Sales $ 260,000 $ 110,000 $ 370,000
Total revenue 282,500 110,000 370,000
Other expenses 35,000 20,000 55,000
Net income 87,500 25,000 90,000
Net income $ 87,500 $ 25,000 $ 22,500 $ - $ 2,500 $ 87,500

Net income 87,500 25,000 22,500 2,500 87,500
Retained earnings, 12/31/11 $ 235,500 $ 40,000 $ 52,500 $ 13,500 $ 1,000 $ 235,500
Slide
4-43
Cash $ 70,000 $ 20,000 $ 90,000
Inventory 40,000 30,000 70,000
184,500
Land 48,500 45,000 35,000 128,500
Total assets $ 537,000 $ 220,000 $ 598,500

Common stock 200,000 120,000 120,000 200,000
Slide
4-44
Interim Acquisitions of Subsidiary Stock
Revenues and expenses of the acquired company are included

with those of the acquiring company only from the date of
acquisition forward.
Two acceptable alternatives for presenting the subsidiary’s

revenue and expense items in the consolidated income
statement in the year of acquisition:
Full-year reporting alternative.
Partial-year reporting alternative.
Slide
4-45
LO 6 Two approaches for interim acquisitions.
Equity Method—Full-Year Reporting Alternative

P4-16: Pillow Satin
Cash $ 390,600 $ 179,200
Pillow Company purchased Treasury stock at cost 32,000
90% of the common stock Investment in Satin 510,000 -
Plant and equipment 1,334,000 562,000
of Satin Company on May Cost of goods sold 1,261,000 584,000
1, 2009, for a cash Operating expenses 484,000 242,000
Dividends declares - 60,000
payment of $474,000. Total debits $ 3,979,600 $ 1,659,200
December 31, 2009, trial
Accounts and notes payable $ 270,240 $ 124,000
balances for Pillow and Dividends payable - 60,000
Satin were: Common stock 1,000,000 200,000
Sales 1,940,000 976,000
Total credits $ 3,979,600 $ 1,659,200
Slide
4-46
P4-16:
Satin Company declared a $60,000 cash dividend on December 20,
2009, payable on January 10, 2010, to stockholders of record on
December 31, 2009. Pillow Company recognized the dividend on its
declaration date. Any difference between book value and the value
implied by the purchase price relates to subsidiary land, included
in property and equipment.
Required: Prepare a consolidated statements workpaper at

December 31, 2009, assuming that Satin Company uses the full-
year reporting alternative.
Slide
4-47
P4-16: Computation and Allocation of Difference between Cost

and Book Value Acquired: 90% 10% 100%
Parent NCI Total
Share Share Value

Common stock 180,000 20,000 200,000
Other contributed capital 81,000 9,000 90,000
Treasury stock (28,800) (3,200) (32,000)
Subsidiary income 1/1 to 5/1 45,000 5,000 50,000
Total book value 465,480 51,720 517,200
Difference between implied and book value 8,520 947 9,467

Allocated to land (8,520) (947) (9,467)
Balance $ - $ - $ -
Slide
4-48
P4-16: Full-Year Reporting Alternative
Income Statement Pillow Satin Debit Credit NCI Balances
Sales $ 1,940,000 $ 976,000 $ 2,916,000
Total revenue 2,030,000 976,000 2,916,000
Cost of goods sold 1,261,000 584,000 1,845,000
Other expenses 484,000 242,000 726,000
Total cost and expense 1,745,000 826,000 2,571,000
Net income 285,000 150,000 345,000
Net income purchased 45,000 (45,000)
Net income $ 285,000 $ 150,000 $ 135,000 $ - $ 15,000 $ 285,000

Retained earnings, 1/1 315,360 209,200 209,200 315,360
Net income 285,000 150,000 135,000 15,000 285,000
Dividends declared - (60,000) 54,000 (6,000) -
Retained earnings, 12/31 $ 600,360 $ 299,200 $ 344,200 $ 54,000 $ 9,000 $ 600,360
Slide
4-49
P4-16: Full-Year Reporting Alternative
Balance Sheet Pillow Satin Debit Credit NCI Balances
Current assets $ 390,600 $ 179,200 54,000 $ 515,800
Investment in Satin 510,000 474,000 -
36,000
Plant and equipment 1,334,000 562,000 9,467 1,905,467
Total assets $ 2,234,600 $ 741,200 $ 2,421,267
Accounts and notes payable $ 270,240 $ 124,000 $ 394,240

Dividends payable 60,000 54,000 6,000
Common stock 1,000,000 200,000 200,000 1,000,000
Treasury stock (32,000) 32,000 -
Total liabilities & equity $ 2,234,600 $ 741,200 $ 707,134 $ 707,134 $ 2,421,267
Slide
4-50
P4-17: (Data from P4-16) Partial-Year Reporting Alternative
Income Statement Pillow Satin Debit Credit NCI Balances
Sales $ 1,940,000 $ 650,666 $ 2,590,666
Total revenue 2,030,000 650,666 2,590,666
Cost of goods sold 1,261,000 389,333 1,650,333
Other expenses 484,000 161,333 645,333
Total cost and expense 1,745,000 550,666 2,295,666
Net income 285,000 100,000 295,000
Net income $ 285,000 $ 100,000 $ 90,000 $ - $ 10,000 $ 285,000

Retained earnings, 1/1 315,360 259,200 259,200 315,360
Net income 285,000 100,000 90,000 10,000 285,000
Dividends declared - (60,000) 54,000 (6,000) -
Retained earnings, 12/31 $ 600,360 $ 299,200 $ 349,200 $ 54,000 $ 4,000 $ 600,360
Slide
4-51
P4-17: (Data from P4-16) Partial-Year Reporting Alternative
Balance Sheet Pillow Satin Debit Credit NCI Balances
Current assets $ 390,600 $ 179,200 54,000 $ 515,800
Investment in Satin 510,000 474,000 -
36,000
Plant and equipment 1,334,000 562,000 9,467 1,905,467
Total assets $ 2,234,600 $ 741,200 $ 2,421,267
Accounts and notes payable $ 270,240 $ 124,000 $ 394,240

Dividends payable 60,000 54,000 6,000
Common stock 1,000,000 200,000 200,000 1,000,000
Treasury stock (32,000) 32,000 -
Total liabilities & equity $ 2,234,600 $ 741,200 $ 712,134 $ 712,134 $ 2,421,267
Slide
4-52
Consolidated Statement of Cash Flows
Peculiarities:
1. If the statement of cash flows starts with consolidated
net income, then the noncontrolling interest is already
included and need not be added back.
2. Subsidiary dividends paid to the noncontrolling
stockholders must be included with dividends paid by the
parent company when calculating cash outflow from
financing activities.
3. Subsidiary stock acquired directly from the subsidiary
represents an intercompany cash transfer that does not
affect the total cash balance of the consolidated group.
Slide
4-53
LO 7 Peculiarities of Consolidated Statement of Cash Flows.
Consolidated Statement of Cash Flows
The preparation of the consolidated statement of cash

flows in the year of acquisition is complicated slightly
because the comparative balance sheets at the beginning
and end of the current year are dissimilar.
1. Any cash spent or received in the acquisition itself
should be reflected in the Investing activities
section.
2. Assets and liabilities of the subsidiary at the date
of acquisition must be added to those of the parent
at the beginning of the current year.
Slide
4-54
LO 8 Stock issued as Consideration in Statement of Cash Flows.
Compare U.S. GAAP and IFRS
Application of the Equity Method
Slide
4-55 LO 9 Differences between U.S. GAAP and IFRS.
Slide
Slide
Two categories:
 Three-division workpaper format used in this text.
 Trial balance format.
 Columns are provided for the trial balances, the
elimination entries, and normally, each financial
statement to be prepared, except for the
statement of cash flows.
 Note: The consolidated balances derived in a
workpaper are the same regardless of the
format selected.
Slide
4-58
Two major topics require attention in addressing the
treatment of deferred income tax consequences when
the affiliates each file separate income tax returns:
1. Undistributed subsidiary income (Appendix B of
Chapter 4).
2. Elimination of unrealized intercompany profit

(discussed in the appendices to Chapters 6 and 7).
Slide
4-59
When affiliated companies elect to file one consolidated
return, the tax expense amount is computed on the
consolidated workpapers rather than on the individual
books of the parent and subsidiary.
The amount of tax expense attributed to each company is

computed from combined income and allocated back to each
company’s books.
Slide
4-60
When separate tax returns are filed, the parent company
will include dividends received from the subsidiary in its
taxable income, while the subsidiary’s reported income is
included in consolidated net income.
Thus the difference between the subsidiary’s income and

dividends paid represents a temporary difference because
eventually this undistributed amount will be realized
through future dividends or upon sale of the subsidiary.
Slide
4-61
Assume that the parent uses the cost method to account
for the investment and that both the parent and the
subsidiary file separate tax returns. This means each
company records a tax provision based on the items
reported on its individual books.
Tax consequences relating to undistributed income are not

recorded on the books of the parent company when the
investment in the subsidiary is recorded using the cost
method.
Slide
4-62
If the undistributed income is not expected to be received
as a future dividend but is expected to be realized when
the investment is sold, the undistributed income is taxed at
the capital gains rate
Slide
4-63
If the equity method is used to account for the
investment, there is a timing difference between books and
tax on the books of the parent. Equity income is reported
on the parent’s income statement while dividends are
included on the tax return.
Therefore, deferred taxes on the parent’s books must

reflect the amount of undistributed income in the
subsidiary.
Slide
4-64
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Slide
4-65

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CH 04

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4

Advanced Accounting, Fifth Edition

Investments in voting stock may be consolidated, or

0 --------------20% ------------ 50% -------------- 100%

Investment Investment Investment

Consolidated financial statements will be identical,

E4-1: Percy Company purchased 80% of the outstanding

Required: Prepare journal entries for Percy Company from

E4-1: A. Percy Company uses the cost method to record its

2009 Investment in Song 387,000

E4-1: A. Percy Company uses the cost method to record its

2010 Cash 40,000

2011 Cash 28,000

E4-1: B. Percy Company uses the partial equity method to

2009 Investment in Song 387,000

Investment in Song 50,800

E4-1: B. Percy Company uses the partial equity method to

2010 Investment in Song 42,000

E4-1: B. Percy Company uses the partial equity method to

2011 Equity loss (.8 x $55,000) 44,000

E4-1: C. Percy Company uses the complete equity method

The complete equity method is usually required to report

E4-1: C. Percy Company uses the complete equity method

2009 Investment in Song 387,000

Investment in Song 50,800

E4-1: C. Percy Company uses the complete equity method

A journal entry is required to adjust for depreciation related

2009 Equity income ($7,000 / 10 yrs.) 700

E4-1: C. Percy Company uses the complete equity method

2010 Investment in Song 42,000

Equity income ($7,000 / 10 yrs.) 700

E4-1: C. Percy Company uses the complete equity method

2011 Equity Loss (.8 x $55,000) 44,000

Equity income ($7,000 / 10) 700

On the date of acquisition, the only relevant financial

Year of Acquisition—Cost Method

P4-8: Begin the consolidating process by preparing a Computation

Less: Book value of equity acquired:

Difference between implied and book value 14,650 771 15,421

Difference between implied and book values is

Retained Earnings Statement

Accounts payable $ 19,000 $ 12,000 $ 31,000

Common stock 120,000

Workpaper Observations (continued)

4. Elimination of intercompany dividends

Dividend income 19,000

Workpaper Observations (continued)

Internally generated income of Sid Company $26,000

Workpaper Observations (continued)

Parker Company’s retained earnings, 1/1 $ 40,000

Workpaper Observations (continued)

NCI at Acquisition Date $ 8,421

workpaper on December Accounts payable $ 16,000 $ 7,000

Retained Earnings Statement

Accounts payable $ 16,000 $ 7,000 $ 23,000

Investment in Sid Company 5,700

5. All (100%) of Sid’s revenues, expenses, assets, and

If investor’s share of investee’s losses exceeds the

Example: (Equity Method) On January 1, 2010,

Example: Prepare the entries for Pennington to record the

Investment in Stock 180,000

Investment in Stock 24,000

Investment Carried at Equity—Year of Acquisition