Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Consolidation Techniques and Procedure
Pertemuan 3-4
Consolidation Techniques and Procedures
1: Acquisition-Year Working Papers
Preparing the Worksheet
• Statements are entered onto the worksheet:
– Income statement
– Statement of retained earnings
– Balance sheet
• Columns needed:
– Parent
– Subsidiary
– DR and CR columns for elimination entries
– Consolidated
Completing the Worksheet
• Enter Parent and Sub. amounts at 100% of book value.
(Even if parent owns less)
• Enter elimination entries into the DR and CR columns.
(Check totals)
• Consolidated expenses, dividends and assets:
– Add parent, subsidiary, plus DR, less CR
• Consolidated revenues, liabilities and equity (other than
ending retained earnings):
– Add parent, subsidiary, less DR, plus CR
• Income, ending retained earnings and all subtotals and
totals:
– Compute directly in consolidated column.
Working Paper Entries
1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
4. Record noncontrolling interest in sub's earnings &
dividends
5. Eliminate reciprocal Investment & sub's equity
balances
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances
Example: Prep & Snap Data
Prep pays $88 for 80% of Snap on 1/1/2009 when Snap's
equity consisted of $60 capital stock and $30 retained
earnings. All excess was due to unrecorded patents with a 10year life.
Snap's income and dividends follow:
Net income
2009
$25
2010
$30
Dividends
$15
$15
Analysis
Cost of 80% of Snap
Implied value of Snap ($88/.80)
Book value (60+30)
Excess
Patents
Unamort. Bal.
on 1/1/2009
$20
Amortization
in 2009
$2
Use these amounts in
2009 worksheet for
amortization expense
and patents.
$88
$110
90
$20
Allocated to:
Patents
Unamort. Bal.
on 12/31/2009
$18
Amortization
in 2010
$2
Use these amounts in
2010 worksheet for
amortization expense
and patents.
Amt Amort.
$20 10 yrs
Unamort. Bal.
on 12/31/2010
$16
Income & Dividend Calculations
2009:
Snap's net income
Amortization
Adjusted income
Dividends
2010:
Snap's net income
Amortization
Adjusted income
Dividends
$25 Prep's 80% share
$18.4
(2)
$12.0
$23
NCI 20% share
$4.6
$15
$3.0
80% share
$30 Prep's$22.4
(2)
$12.0
$28
NCI 20% share
$5.6
$15
$3.0
Prep's 2009 Worksheet Entries
1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Snap (I.S.)
Dividends (St. RE)
Investment in Snap (B.S.)
18.4
12.0
6.4
Prep 2009: Entries (2 of 3)
4.
Record non-controlling interest in sub's earnings & dividends
Non-controlling interest share (I.S.)
4.6
Dividends (St. RE)
Non-controlling interest (B.S.)
5.
3.0
1.6
Eliminate reciprocal Investment & sub's equity balances
Capital stock (B.S.)
60
Retained earnings (St. RE, beg.)
30
Patents (B.S.)
20
Investment in Snap (B.S.)
Non-controlling interest (B.S.)
88
22
Prep 2009: Entries (3 of 3)
6. Amortize fair value/book value differentials
Amortization Expense (I.S.)
2
Patents (B.S.)
7. Eliminate other reciprocal balances
none
Note that in last chapter, all worksheet entries were prepared for the
balance sheet. Here worksheet entries are prepared for the income
statement, statement of retained earnings and balance sheet.
2
Prep's 2009 Worksheet
Year ended 12/31/2009
Prep
Snap
250.0
18.4
(200.0)
65.0
(40.0)
68.4
25.0
5.0
68.4
(30.0)
30.0
25.0
(15.0)
43.4
40.0
DR
CR
Consol
Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
315.0
0.0
(242.0)
(4.6)
68.4
18.4
2.0
4.6
30.0
12.0
3.0
5.0
68.4
(30.0)
43.4
Balance sheet, 12/31/2009:
Cash
Other current assets
Investment in Snap
Plant & equipment, net
Patents
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep
39.0
90.0
94.4
Snap
10.0
50.0
250.0
70.0
DR
6.4
88.0
20.0
473.4
80.0
350.0
43.4
CR
130.0
30.0
60.0
40.0
2.0
60.0
22.0
1.6
473.4
130.0
Consol
49.0
140.0
0.0
320.0
18.0
527.0
110.0
350.0
43.4
23.6
527.0
A Look at the Income Statement
Year ended 12/31/2009
Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share
Net income/ Controlling share
•
•
•
Prep
Snap
250.0 65.0
18.4
(200.0) (40.0)
68.4
25.0
DR
CR Consol
18.4
2.0
4.6
315.0
0.0
(242.0)
(4.6)
68.4
Income from Snap is eliminated.
Expenses are adjusted for 2009 amortization - $2 on patents
Non-controlling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6
A Look at Retained Earnings
Year ended 12/31/2009
Statement of retained
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Prep Snap
DR
CR Conso
5.0 30.0 30.0
68.4 25.0
(30.0) (15.0
12.0
3.0
43.4 40.0
5.0
68.4
(30.0)
43.4
• Beginning retained earnings of Snap is eliminated.
• All of Snap's dividends are eliminated.
• Net income is not calculated across the line, but taken from the
consolidated income statement.
• Ending retained earnings is calculated in the consolidated column.
A Look at Assets
Balance sheet:
Cash
Other current assets
Investment in Snap
Plant & equipment, net
Patents
Total
Prep
39.0
90.0
94.4
Snap
10.0
50.0
250.0
70.0
DR
6.4
88.0
20.0
473.4
CR
2.0
130.0
• Investment in Snap is eliminated.
• Patents at the start of 2009 were $20, and current
amortization is $2; they are $18 at the end of 2009.
• The total is calculated in the consolidated column.
Consol
49.0
140.0
0.0
320.0
18.0
527.0
A Look at Liabilities & Equity
Balance sheet:
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep Snap
80.0 30.0
350.0 60.0
43.4 40.0
DR
CR
60.0
22.0
1.6
473.4 130.0
Consol
110.0
350.0
43.4
23.6
527.0
• Snap's capital stock is eliminated.
• Retained earnings are not calculated across the row; they are taken from
the statement of retained earnings.
• Non-controlling interest at year-end is proportional to Prep's Investment
in Snap account.
$94.4 x .20/.80 = $23.6
Consolidation Techniques and Procedures
2: Working Papers in Subsequent Years
Analysis, for 2010
Cost of 80% of Snap
Implied value of Snap ($88/.80)
Book value (60+30)
Excess
Patents
Unamort. Bal.
on 1/1/2009
$20
Amortization
in 2009
$2
Use these amounts in
2009 worksheet for
amortization expense
and patents.
$88
$110
90
$20
Allocated to:
Patents
Unamort. Bal.
on 12/31/2009
$18
Amortization
in 2010
$2
Use these amounts in
2010 worksheet for
amortization expense
and patents.
Amt Amort.
$20 10 yrs
Unamort. Bal.
on 12/31/2010
$16
Income & Dividend Calculations
2009:
Snap's net income
Amortization
Adjusted income
Dividends
2010:
Snap's net income
Amortization
Adjusted income
Dividends
$25 Prep's 80% share
$18.4
(2)
$12.0
$23
NCI 20% share
$4.6
$15
$3.0
80% share
$30 Prep's$22.4
(2)
$12.0
$28
NCI 20% share
$5.6
$15
$3.0
Prep's Worksheet Entries for 2010
1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Snap (I.S.)
22.4
Dividends (St. RE)
12.0
Investment in Snap (B.S.)
10.4
Prep 2010: Entries (2 of 3)
4.
Record non-controlling interest in sub's earnings & dividends
Non-controlling interest share (I.S.)
5.6
3.0
2.6
Dividends (St. RE)
Non-controlling interest (B.S.)
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock (B.S.)
Retained earnings (St. RE, beg.)
Patents (B.S.)
Investment in Snap (B.S.)
Non-controlling interest (B.S.)
60
40
18
94.4
23.6
Eliminating Investment in Snap
• Entry 5 eliminates the Investment in Snap and establishes
the Non-controlling Interest as of the beginning of the current
year.
Implied value of Snap at acquisition $88/.80
Add the increase in retained earnings from acquisition to
current year
$110
10
$40 at 1/1/2010 minus $30 at 1/1/2009
Less amortization for all prior periods
(2)
$2 patent amortization for 2009
Adjusted value of Snap at 1/1/2010
• Investment in Snap (80% x $118) = $94.4
• Non-controlling interest (20% x $118) = $23.6
Verify the $118 from the entry (60 + 40 + 18).
$118
Prep 2010: Entries (3 of 3)
6. Amortize fair value/book value differentials
Amortization Expense (I.S.)
2
Patents (B.S.)
2
7. Eliminate other reciprocal balances
Note payable – Prep (B.S.)
Note receivable – Snap (B.S.)
10
10
Prep's 2010 Worksheet
Year ended 12/31/2010
Prep
Snap
300.0
22.4
(244.0)
75.0
(45.0)
78.4
30.0
43.4
78.4
(45.0)
40.0
30.0
(15.0)
76.8
55.0
DR
CR
Consol
Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share
Net income/ Controlling share
Statement of retained earnings:
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
375.0
0.0
(291.0)
(5.6)
78.4
22.4
2.0
5.6
40.0
12.0
3.0
43.4
78.4
(45.0)
76.8
Balance sheet, 12/31/2010:
Cash
Note receivable – Snap
Other current assets
Investment in Snap
Plant & equipment, net
Patents
Total
Note payable – Prep
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep
45.0
10.0
97.0
104.8
Snap
20.0
240.0
60.0
DR
10.0
70.0
10.4
94.4
18.0
496.8
70.0
350.0
76.8
CR
2.0
150.0
10.0 10.0
25.0
60.0
60.0
55.0
150.0
300.0
16.0
548.0
95.0
350.0
76.8
23.6
2.6
496.8
Consol
65.0
0.0
167.0
0.0
26.2
548.0
Consolidation Techniques and Procedures
3: Locating Errors in Working Papers
Errors
Most errors show up when the consolidated balance sheet
does not balance.
Common omissions:
– Non-controlling interest share (income)
– Goodwill
– Non-controlling interest (equity)
Check equality of DR and CR adjustments.
Verify totals for parent and subsidiary statements.
Re-calculate the consolidated amounts.
Consolidation Techniques and Procedures
4: Allocating Excess of Fair Value over Book
Value
Example with Excess Allocated
Pate pays $360 for 90% of Solo on 12/31/2009 when Solo's
equity consisted of $200 capital stock and $50 retained
earnings. Inventory (sold in 2010), land and buildings (20
years) were undervalued by $10, $30, and $80, respectively.
Equipment (10 years) was overvalued by $20.
Solo's income and dividends for 2010 were $60 and $20.
At year-end, Solo has dividends payable of $10 which Pate
has not yet recorded. There is $20 cash in transit from Solo to
Pate for the note.
Analysis at Acquisition
Cost of 90% of Solo
Implied value of Snap
Book value (200+50)
Excess
$360
$400
250
$150
Noncontrolling interest,
Inventori
Land
Building
Equipme
Goodwill
Unamort.
12/31/2009 *
$10
30
80
(20)
50
$150
$40
Amortizatio
in 2010 *
($10)
0
(4)
2
0
($12)
Allocated
Amt Amor
Inventorie
$10 1st yr
Land
30 Building
80 20
Equipment (20) 10
Goodwill
50 150
Unamort.
on
$0
30
76
(18)
50
$138
* Use the
12/31/2009
and 2010
amortization
in worksheet
entries for
2010.
Solo's Income & Dividend
2010
Solo's net income
Amortization
$60
($12)
Adjusted
$48
Solo's dividends
$20
Pate's 90% share
$43.2
$18.0
NCI 10% share
$4.8
$2.0
Pate's Worksheet Entries
1. Adjust for errors & omissions
Dividends receivable (B.S.)
9.0
9.0
Investment in Solo (B.S.)
Cash (B.S.)
20.0
20.0
Note receivable (B.S.)
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and bring Investment account to
its beginning balance
Income from Solo (I.S.)
Dividends (St. RE)
Investment in Solo (B.S.)
43.2
18.0
25.2
Pate: Entries (2 of 4)
4.
Record non-controlling interest in sub's earnings & dividends
Noncontrolling interest share (I.S.)
4.8
2.0
2.8
Dividends (St. RE)
Noncontrolling interest (B.S.)
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock (B.S.)
Retained earnings (St. RE, beg.)
Unamortized excess
Investment in Solo (B.S.)
Noncontrolling interest (B.S.)
200
50
150
360
40
Pate: Entries (3 of 4)
Allocate the unamortized excess according to beginning of
year balances.
Inventory
Land
10
30
Building, net
80
Goodwill
50
Equipment, net
Unamortized excess
20
150
Pate: Entries (4 of 4)
6. Amortize fair value/book value differentials
Cost of sales
10
10
Inventory
Operating (depreciation) expense
4
4
Buildings, net
Equipment, net
2
2
Operating (depreciation) expense
7. Eliminate other reciprocal balances
Dividends payable (B.S.)
Dividends receivable (B.S.)
9.0
9.0
Pate's 2010 Worksheet
Year ended 12/31/2010
Income statement:
Revenues
Income from Snap
Cost of goods sold
Operating expenses
Noncontrolling interest share
Net income/ Controlling
Statement of retained
Beginning retained earnings
Add net income
Deduct dividends
Ending retained earnings
Pate
Solo
900.0 300.0
43.2
(600.0 (150.0
(190.0 (90.0)
153.2
60.0
120.0
153.2
(100.0
50.0
60.0
(20.0)
173.2
90.0
DR
43.2
10.0
4.0
4.8
CR
2.0
50.0
18.0
2.0
Consol
1,200.0
0.0
(760.0)
(282.0)
(4.8)
153.2
120.0
153.2
(100.0)
173.2
Balance sheet, 12/31/2010:
Cash
Accounts receivable, net
Note receivable - solo
Inventories
Land
Building, net
Equipment, net
Investment in Solo
Dividends receivable
Goodwill
Unamortized excess
Total
Accounts payable
Dividends payable
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31
Total
Prep
13.0
76.0
20.0
90.0
60.0
190.0
150.0
394.2
Snap
15.0
25.0
60.0
30.0
110.0
120.0
DR
20.0
10.0
30.0
80.0
2.0
9.0
50.0
150.0
993.2
120.0
700.0
173.2
360.0
60.0
10.0
200.0
90.0
CR
20.0
10.0
4.0
20.0
9.0
25.2
360.0
9.0
150.0
9.0
200.0
40.0
2.8
993.2
360.0
Consol
48.0
101.0
0.0
150.0
120.0
376.0
252.0
0.0
0.0
50.0
0.0
1,097.0
180.0
1.0
700.0
173.2
42.8
1,097.0
Consolidation Techniques and Procedures
5: Consolidated Statement of Cash Flows
Consolidated Cash Flows
The consolidated statement of cash flows is prepared from
– Consolidated balance sheets, beginning & ending
– Consolidated income statement
– Other information
Procedure similar to an "unconsolidated" statement of cash
flows
Look at items specific to companies with
– Subsidiaries
– Equity investments
Investing & Financing Cash Flows
• Investing cash flows:
– Include cash acquisition and/or disposition of subsidiaries
– Include cash acquisition and/or disposition of equity
investees
• Financing cash flows:
– Include cash dividends paid to non-controlling interests
Operating Cash Flows
• Direct method:
– Include cash dividends received from equity investees
(not equity method income)
• Indirect method:
– Starting with consolidated net income to the controlling
interest share, ADD the noncontrolling interest share
– Deduct the excess of equity method income over cash
dividends received from equity investees
Consolidation Techniques and Procedures
6: Appendix – Trial Balance Format
Alternative Worksheet Format
• Worksheet format presented earlier used the basic financial
statements
• Alternative uses the ADJUSTED trial balances of the parent
and subsidiary.
• Columns on worksheet:
– Parent and subsidiary adjusted trial balances,
– DR and CR adjustments,
– Income statement,
– Statement of retained earnings, and
– Balance sheet columns.
Completing the Worksheet
1. Enter worksheet elimination entries into the DR and CR
columns.
2. Add accounts as needed (e.g., non-controlling interest,
goodwill, non-controlling interest share).
3. Carry consolidated balances to income statement, retained
earnings, or balance sheet columns, as appropriate.
4. Move consolidated net income, or controlling interest share,
to retained earnings.
5. Move ending retained earnings to the balance sheet.