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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

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chapter 3

Chapter 3

Consolidated Statements

Subsequent to Acquisition

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


d d schedule for example
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) 40,000 140,000

Building (80%  100,000) 80,000204,000

Goodwill 200,000n/a


subsidiary income and dividends
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


worksheet procedures
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 priorperiods
    • No entries are made on either firm’s books for worksheet eliminations


worksheet elimination procedures
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


worksheet elimination procedures continued
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


review of worksheet procedures
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


income distribution schedules
Income distribution schedules


Int generated net income

Adjusted net income




Excess amortizations Int generated net income + Parent % Sub income

Controlling interest


disclosure concerns
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


during the year purchases
Close Books (WS 7)

D&D includes Sub RE on purchase date

WS includes Sub operations for only later part of year

Books Open (WS 8)

D&D has Beginning of year RE and “purchased income”

WS includes Sub operations for entire year

Purchased income is used to remove income prior to purchase

During the year purchases


tax issues tax free exchange
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


consolidation procedures for a pooling
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!