consolidation journal entries for updating the parent entity's accounting records; D. ... At acquisition date Weak Limited had a book carrying amount of $8 000 for goodwill. Current figures for both companies appear in the first two columns. The $21,000 amortization is recorded through Entry C to simulate the equity method and, hence, consolidated totals. iii. Note that Parrot separately reports net income of $693,000 as well as ending retained earnings of $1,413,000, figures that are identical to the totals generated for the consolidated entity. P has acquired 120 000 ordinary shares of S on 1.1.2008 for $200,000. Terms of Service 7. ii. In reality, Sun’s income for this period is contained in both Parrot’s reported balances and the consolidated totals. Skeptical then records in its accounting records the acquisition of Rosy Pictures as follows: Skeptical will report the contingent cash payment under its liabilities and the contingent stock payment as a component of stockholders’ equity. The revenues of the parent and the subsidiary are added together. Consolidation the Effects Created by the Passage of Time 2. As indicated previously, the consolidated totals appearing in Exhibit 3.9 are identical to the figures produced previously in Exhibit 3.5. Parrot paid $800,000 cash to acquire Sun Company, clear evidence of the fair value of the consideration transferred. Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary by exchanging 120,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. From a mechanical perspective, a worksheet and consolidation entries con­tinue to provide structure for the production of a single set of financial statements for the com­bined business entity. As with the previous Entry S in Exhibit 3.5, the $600,000 component of the investment account is eliminated against the beginning stockholders’ equity account of the subsidiary. Push-Down Accounting. Note that the consolidated totals are the same as those computed previously for this combination. Because equity adjustments (such as excess amortizations) are ignored, neither Parrot’s reported net income of $640,000 nor its retained earnings of $1,360,000 provides an accurate portrayal of consolidated figures. The parent’s book value plus the subsidiary’s book value less the $30,000 fair value reduction allocation plus the current year expense reduction of $6,000. 3. iv. Each entry on these worksheets is labeled to correspond with the 2009 consolidation in which the parent used the equity method (Exhibit 3.5). On 10.1.2008 S declared and paid an ordinary dividend of 10% for 2007. In its analysis of the investee company, the parent values all of the subsidiary's assets and liabilities at an amount equaling their book values except for PPE assets that are undervalued by $1 million, an unrecorded Customer List that the parent values at $200,000, and an unrecorded Brand Name asset valued at $500,000. As computed in Exhibit 3.8, expenses for these prior years totaled $21,000, leaving a balance of $179,000. Thus, throughout this textbook, “Entry S” always refers to the removal of the subsidiary’s beginning stockholders’ equity balances for the year against the book value portion of the investment account. Balance sheet accounts should be reported at the cost incurred by the present stock­holders ($900,000 in the illustration) rather than the cost incurred by the company. Also, Skeptical’s stock price had fallen to $54.45 at January 1, 2010, thus requiring Skeptical to issue another 101 shares of its $5 par common stock to the former owners of Rosy Pictures. By recording Entry C on the worksheet, all of the subsidiary’s operational results for the 2009-2011 period are included in the consolidation. The time factor introduces additional complications into the consolidation process. Therefore, by applying the partial equity method, the investment account on the parent’s balance sheet rises to $860,000 by the end of 2009. In the initial consolidation (2009), fair-value allocations amounting to $200,000 were entered, but these balances have now undergone three years of amortization. However, the recording of amortization expense by the subsidiary can lead to dissension. Subsidiary shares are no longer outstanding. © 2003-2020 Chegg Inc. All rights reserved. Question 19.14 Consolidation worksheet entries On 1 July 2015, Zack Ltd acquired all the issued shares (ex div.) The consolidation procedures for Parrot and Sun one year after the date of acquisition are illustrated next. Patented technology — $775,000. Star Co. acquired 80% of Moon Co. for a consideration of $2,900 million. Exhibit 3.10 demonstrates this same process assuming that the parent applied the partial equity method. To continue the preceding example, assume that in 2009 Rosy Pictures exceeds the cash flow from operations threshold of $20,000, thus requiring an additional payment of $80,000. The income recognized from the subsidiary. The parent’s book value plus the subsidiary’s book value. of William Ltd for $227 500. Partial Equity Method Applied—2009 Consolidation: Exhibit 3.10 presents a worksheet to consolidate these two companies for 2009 (the year of acquisition) based on the assumption that Parrot applied the partial equity method. Consolidation Journal Entries Flashcards | Quizlet Recall that consolidation entries are never posted to the individual affiliate’s books. Current assets = $1,440,000. The above worksheet is created at the acquisition date. the consolidation currency Package data entry Enter the purchase price in schedules PA2100 and PA2300 P Enter the date for the acquisition on schedules PA2350 if the parent¶s currency is different from the consolidation currency Consolidation scope Enter the new financial rate of the subsidiary P Manual journal entries: In this first illustration, Parrot has adopted the equity method. Note that we adjust depreciation expense for the tangible asset equipment and we adjust amortization expense for the intangible asset patented technology. Total assets = $3,561,000. Although Sun’s Retained Earnings balance is removed in this entry, the income this company earned since the acquisition date is still included in the consolidated figures. However, the SFAS 141R acquisition method now requires a newly acquired subsidiary to be recorded using fair values, not costs. Partial Equity Method Applied—Subsequent Consolidation: Exhibit 3.13 demonstrates the worksheet consolidation of Parrot and Sun as of December 31, 2012, when the investment accounts have been recorded by the parent using the partial equity method. Investment in Sun Company = -0-. Sun’s $200,000 excess acquisition-date fair value over book value is allocated to Sun’s assets and liabilities based on their fair values at the date of acquisition. • Dr Subsidiary’s total equity balance at acquisition date. Retained earnings, 1/1/09 = $840,000. 4 Consolidation journals at the date of acquisition (30/06/2018) Entry 1a Dr Accumulated depreciation – PP&E 270,000 Cr Property, plant and equipment 270,000 (Write back accumulated depreciation of revalued P.P.E. The stockholders’ equity accounts of the subsidiary are removed. In many case the initial fair value of the combination assigned to the investment account will be identical to its cost. o E.g. Amortization expense = $153,000. This amortization comes directly from the consideration paid by the parent but is not a result of any action taken by the subsidiary. After Entry C has been recorded on the worksheet, the remainder of this consolidation follows the same pattern as previous examples. Here, you should not add NCI at the reporting date, but ON THE ACQUISITION date, as you’re recognizing goodwill on the acquisition date. The depreciation expenses of the parent and subsidiary are added together along with the $6,000 reduction in equipment depreciation, as indicated in Exhibit 3.3. v. Equity in subsidiary earnings = -0-. Depreciation expense = $104,000. As before, this entry eliminates the equity income recorded currently by Parrot ($153,000) in connection with its ownership of Sun. ... • Proforma journal entry at acquisition is: Property, plant & equip. In contrast to the equity method, Parrot has not accrued subsidiary income, nor has amortization been recorded; thus, no further income elimination is needed. Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 96,000 shares of its $5 par value Common Stock, with a fair value on the acquisition date of $42 per share, for all of the outstanding voting shares of the investee. | Furthermore, as shown in Exhibit 3.3, amortization expense of $7,000 applies to 2012 and must also be recorded by the parent. Copyright 9. xiv. Following feedback, we’ve decided to make our Guide to Consolidation Journal Entries available again. Problem 3-38 (LO 3-4, 3-6) On January 1, Prine, Inc., acquired 100 percent of Lydia Company's common stock for a fair value of $130,869,000 in cash and stock. First, Parrot has not accrued the $220,000 increase in the subsidiary’s book value across the periods prior to the current year. Non-Controlling Interest after Acquisition. The loss from revaluation of the contingent performance obligation is reported in Skeptical’s con­solidated income statement as a component of ordinary income. Thus, elimination of the subsidiary’s entire Retained Earnings is necessary; a portion was earned prior to the acqui­sition and the remainder has already been recorded by the parent. This last entry (labeled “Entry P” because it eliminates an intercom­pany Payable) introduces a new element to the consolidation process. xvii. consolidation journal entry examples is available in our book collection an online access to it is set as public so you can get it instantly. Until the FASB takes action, though, application is required only when the subsidiary desires to issue securities (stock or debt) to the public as regulated by the SEC. Should depreciation be based on $200,000 or $900,000? Additional paid-in capital = $120,000. For the partial equity method, the $ 100,000 equity income is eliminated (Entry I) by reversing the parent’s entry. In reviewing Exhibit 3.7, note several aspects of the consolidation process: i. For example entity bought a machinery of $100,000 paying by cash then journal entry will be as follows: As a basis for analyzing the procedural changes necessitated by the passage of time, assume that Parrot Company continues to hold its ownership of Sun Company as of December 31, 2012. the consolidation currency Package data entry Enter the purchase price in schedules PA2100 and PA2300 P Enter the date for the acquisition on schedules PA2350 if the parent¶s currency is different from the consolidation currency Consolidation scope Enter the new financial rate of the subsidiary P Manual journal entries: Dividends paid = $120,000. However, this deci­sion does lead to distinct procedures subsequently utilized in consolidating the financial infor­mation of the separate organizations. Liabilities = $1,428,000. As an example, assume that Ace Corporation owns 100 percent of Waxworth, Inc. Waxworth uses push-down accounting and reports net income of $500,000: $600,000 from operations less $100,000 in amortization expense resulting from fair-value allo­cations. The initial value method however, employs the cash basis for income recog­nition. Reporting date is 30 June. Establishment of a new entity. For this purpose, Exhibit 3.4 presents the separate 2009 financial statements for these two companies. The above worksheet is created at the acquisition date. 43 NON-CONTROLLING INTEREST (cont) Solution: NCI at % of net assets COI NCI (*20% x 5,000,000) FV of net identifiable assets Goodwill on consolidation 5,100,000 *1,000,000 NCI at fair value 5,100,000 1,275,000 However, if Yarrow continues to issue separate financial statements (for example, to its credi­tors or potential stockholders), should the building be reported at $200,000 or $900,000? Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 96,000 shares of its $5 par value Common Stock, with a fair value on the acquisition date of $42 per share, for all of the outstanding voting shares of the investee. Consequently, when the parent employs the equity method, its net income and retained earnings mirror consolidated totals. Following SFAS 142, such assets are not amortized but are subject to periodic impairment testing. BCVR journal entries - Business Combination valuation Reserve (BCVR) is an equity account - To recognise any unrecorded equity of the subsidiaries 4. One aspect of this amortization schedule warrants further explanation. Cash contingency = $80,000 × 30% × (1/[1 + .04]) = $23,077, ii. The parent’s Retained Earnings balance is not adjusted. Mickey Ltd placed a fair value on the asset of $12 000, reflecting expected benefits existing at acquisition date. Non-controlling interest represents the amount of share ownership by others besides the parent company. Account Disable 11. The $80,000 residual is attributed to goodwill. Only the differences found in these balances affect the consolidation process when another method is applied. Principle of Consolidation # 1. Over the years, the initial $800,000 acquisition price has been subjected to adjustments for: 3. Eliminates the impact of intercompany income accrued by the parent. Thus, Entry C should be recorded before the other worksheet entries to align the beginning balances for the year. The parent’s book value plus the subsidiary’s book value plus the $20,000 acquisition-date fair value allocation. The entry originally recorded by the parent is simply reversed on the worksheet to remove its impact. To complete this process, the intercompany debt of $40,000 is offset (Entry P). ii. Entry S removes the $600,000 component of the Investment in Sun Company account so that the book value of each subsidiary asset and liability can be included in the consolidated figures. Rather, according to this argument, it is the historical cost paid by the current owner that is important, a figure that is best reflected by the expenditure made in acquiring the sub­sidiary. Having determined the allocation of the acquisition-date fair value in the previous example as well as the associated amortization, the parent’s separate record-keeping for 2009 can be con­structed. Consolidated worksheet adjusting entries The actual journal entries involved in consolidations. Consolidation the Effects Created by the Passage of Time. However, the contin­ual financial evolution undergone by the companies prohibits an exact repetition of the consoli­dation entries demonstrated in Exhibit 3.5. Pre-acquisition elimination entry The first step in preparing consolidated financial statements is to deal with the pre-acquisition elimination journal entry as at the acquisition date. Thus, the SEC requires the use of push-down accounting for the separate financial state­ments of any subsidiary when no substantial outside ownership of the company’s common stock, preferred stock, and publicly held debt exists. Because the allocations and amortization have already been entered into the records of the subsidiary, worksheet Entries A (to recognize the allocations originating from the fair-value adjustments) and E (amortization expense) are not needed. 200109 Corporate Accounting Systems QUESTION Using the information below and on the next two pages, prepare the following as at 30th June 2014: PART A: Consolidation adjustment/elimination journal entries that are required at the above financial year end date (i.e. View desktop site, Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary by exchanging 120,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. Stock contingency = $10,000 × 20% × (1/[1 + .04]) = $1,923. The parent’s book value plus the subsidiary’s book value plus the $130,000 acquisition-date fair value allocation less current year amortization of $13,000. The unamortized portion of the original acquisition-date fair-value allocations are included along with current excess amortization expenses. Unlike the equity method, no adjustments are recorded in the parent’s investment account in connection with the current year operations, subsidiary div­idends, or amortization of any fair-value allocations. 1 700 000 : The identifiable assets and liabilities (*) are measured at their respective fair values at the acquisition date. Required: Prepare the relevant consolidation journal entries at acquisition date using both methods for the treatment of NCI. It is generally the date on which the acquirer legally transfers the consideration (=the payment for the investment), acquires the assets and assumes the liabilities of the acquiree – the closing date. This issue has become especially significant in recent years because of a rash of management- led buyouts as well as corporate reorganizations. Parrot acquires this stock for $800,000 in cash. Total liabilities and equities = $3,561,000. Entry S also removes Sun’s stockholders’ equity accounts as of the beginning of the year. Subsequent Consolidation—Investment Recorded by the Equity Method 4. Consolidation Journal Entries Flashcards | Quizlet Recall that consolidation entries are never posted to the individual affiliate’s books. Consolidation Subsequent to Year of Acquisition—Initial Value and Partial Equity Methods: By again incorporating the December 31, 2012, financial data for Parrot and Sun (presented in Exhibit 3.7), consolidation procedures for the initial value method and the partial equity method are examined for years subsequent to the date of acquisition. Worksheet entries are then utilized to consolidate all balances. ... equity balance at acquisition date. Exhibit 3.5 provides a complete presentation of the December 31, 2009, consolidation worksheet developed for Parrot Company and Sun Company. 1. For internal record-keeping, though, the parent has the choice of three alternatives for monitoring the activities of its subsidiaries; the initial value method, the equity method, or the partial equity method. Note that goodwill is not amortized. The parent company balance only because the subsidiary’s div­idends were paid intercompany to the parent, not to an outside party. Acquisition-date fair value, or; As a proportion of the fair value of net assets of the acquiree on the acquisition date IFRS 3 Para 19] Example. All other consolidation entries (Entries S, A, and E) are the same for all three methods. When a company utilizes the equity method, it eliminates all reciprocal accounts, assigns unamortized fair-value allocations to specific accounts, and records amortization expense for the current year. Contingent Consideration 6. An unadjusted balance ($200,000 in the preceding illustra­tion) is a cost figure applicable to previous stockholders. Before progressing to the final worksheet entry, note the close similarity of these entries with the five incorporated in the 2009 consolidation (Exhibit 3.5). Although the consolidated figures to be reported can be computed as just shown, accountants normally prefer to use a worksheet. Investment Accounting by the Acquiring Company: 3. In this article we will discuss about:- 1. As such, the amortization shown in Exhibit 3.3 relating to Equipment is not an additional expense but an expense reduction. Although this income figure can be reconstructed with little difficulty, the current balance in the Investment in Sun Company account is more complicated. Goodwill = $80,000. Thus, the worksheet entries necessary for consolidation when the parent has applied the equity method are as follows: Eliminates the subsidiary’s stockholders’ equity accounts as of the beginning of the current year along with the equivalent book value component within the parent’s investment account. Parrot’s application of the equity method, as shown in this series of entries, causes the Investment in Sun Company account balance to rise from $800,000 to $853,000 ($800,000 – $40,000 + $100,000 – $7,000). Before uploading and sharing your knowledge on this site, please read the following pages: 1. What should be reported in the subsidiary’s financial statements being distributed with this offer­ing? At acquisition date, the BCVR entries will recognise an increment to land of $5 000, a deferred tax This BCVR is pre-acquisition equity. At this date, all the identifiable assets and liabilities of Mouse Ltd were recorded at amounts equal to fair value except for: Carrying Fair Amount Value Inventory $120 000 $130 000 Machinery (cost $200 000) 160 000 165 000 Prepare the general journal entries to record the investment and the effect of Fall’s income and dividends on Long Company’s accounts.
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