Additional Consolidation Reporting Issues: Mcgraw-Hill/Irwin
Additional Consolidation Reporting Issues: Mcgraw-Hill/Irwin
Additional
Consolidation
Reporting Issues
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
General Overview
10-2
Learning Objective 10-1
Prepare a consolidated
statement of cash flows.
10-3
Consolidated Statement of Cash Flows
Preparation
Requires only a few adjustments (such as those
for depreciation and amortization resulting from
the write-off of a differential) beyond those used
in preparing a cash flow statement for an
individual company.
All transfers between affiliates should be
eliminated.
Noncontrolling interest typically does not cause
any special problems.
10-5
Consolidated Statement of Cash Flows for the Year
Ended December 31, 20X2 (Figure10–2)
10-6
Consolidated Statement of Cash Flows
10-7
Consolidated Statement of Cash Flows
10-12
Consolidation Following an Interim Acquisition
10-13
Consolidation Following an Interim Acquisition:
Illustration
Peanut purchases 75% of Snoopy’s outstanding common stock on July 1,
20X1 for an amount equal to 75% of the book value of Snoopy’s net assets.
Prior to the acquisition, Snoopy had earned net income of $35,000 and
declared $8,000 of dividends. The income and dividends for the year are
summarized in the following table:
July 1, 20X1
Investment in Snoopy Stock 320,250
Cash 320,250
Record purchase of Snoopy stock.
During the second half of 20X1, Peanut records its share of Snoopy's income and
dividends under the equity method:
Cash 15,000
Investment in Snoopy Stock 15,000
Record dividends from Snoopy: $20,000 x 0.75. 10-15
Consolidation Following an Interim Acquisition:
Illustration
Pre-acquisition income and dividend elimination entry:
Sales 125,000 Close pre-acquisition sales to RE
COGS 50,000 Close pre-acquisition COGS to RE
Depreciation Expense 25,000 Close pre-acquisition depr. exp. To RE
Other Expense 15,000 Close pre-acquisition other expenses to RE
Dividends Declared 8,000 Close pre-acquisition dividends to RE
Retained Earnings 27,000 Pre-acquisition net increase in RE
After making this worksheet entry to close the pre-acquisition earnings and
dividends to the Retained Earnings account, the beginning balance in Retained
Earnings as of the date of acquisition is $117,000.
Retained Earnings
90,000 Balance 1/1/20X1
27,000
117,000 Balance 6/30/20X1
10-16
Consolidation Following an Interim Acquisition:
Illustration
Based on this acquisition date beginning balance, we calculate the post-acquisition
changes in book value as follows:
Book Value Calculations:
NCI Peanut Common Retained
25% + 75% = Stock + Earnings
July 1, 20X1, balances 106,750) 320,250) 250,000 177,000)
+ Net Income 15,000) 45,000) 60,000)
Dividends (5,000) (15,000) (20,000)
December 31, 20X1, balances 116,750) 350,250) 250,000 217,000)
This leads to the basic elimination entry, following the normal procedure (but based
on post-acquisition earnings and dividends):
Basic Elimination Entry
Common Stock 250,000 Original amount invested (100%)
Retained Earnings 177,000 Beginning balance in RE
Income from Snoopy 45,000 Peanut's share of reported NI
NCI in NI of Snoopy 15,000 NCI’s share of reported NI
Dividends Declared 20,000 100% of Sub’s dividends declared
Investment in Snoopy 350,250 Net amount of BV left in inv. acct.
NCI in NA of Snoopy 116,750 NCI’s share of net book value
10-17
Consolidation Following an Interim Acquisition:
Illustration
The following T-accounts illustrate how the basic elimination entry zeros out the balances in the
Investment in Snoopy and Income from Snoopy accounts:
Acquisition 320,250
75% Net Income 45,000 45,000 75% Net Income
15,000 75% Dividends
0 0
Again, we include the normal accumulated depreciation elimination entry based on the balance
in accumulated depreciation on Snoopy’s books on the acquisition date. Assume that this
amount is 65,000 on the acquisition date.
10-19
Consolidation Income Tax Issues
10-20
Consolidation Income Tax Issues
10-21
Consolidation Income Tax Issues
10-22
Consolidation Income Tax Issues
10-23
Consolidation Income Tax Issues
10-24
Consolidation Income Tax Issues
10-25
Consolidation Income Tax Issues
10-26
Consolidation Income Tax Issues
10-27
Consolidation Income Tax Issues
10-28
Consolidation Income Tax Issues
In order to prepare the basic elimination entry, we first analyze the book value of Snoopy's equity
accounts and the related 75% share belonging to Peanut and the 25% share belonging to the NCI
shareholders:
10-31
Unrealized Profit in Separate Tax Return
Illustrated
Book Value Calculations:
NCI Peanut Common Retained
25% + 75% = Stock + Earnings
Original book value 100,000) 300,000) 250,000 150,000)
+ Net Income 9,000) 27,000) 36,000)
Dividends (5,000) (15,000) (20,000)
Ending book value 104,000) 312,000) 250,000 166,000)
We note that the book value calculations form the basis for the basic elimination entry, but
Peanut's share of income and its investment account must be adjusted for the equity-method
entry previously made for $4,500. In addition, the NCI share of income and net assets is adjusted
for the 25% share of the unrealized gross profit (net of 40 percent taxes).
On the other hand, if the 40 percent tax rate is considered, the eliminating
entry would be modified as follows:
10-33
Learning Objective 10-4
10-34
Consolidated Earnings Per Share
10-35
Consolidated Earnings Per Share
10-36
Consolidated Earnings Per Share
10-37
Practice Quiz Question #2
The End
10-40