1. Consolidated Statement

Question 1

Equity Method 20%-50% exercise significant influence. Do not consolidate.
Distribution of dividends by the invested reduces the investment balance.
Gain/loss by sub/investee result in a decrease of the investment account to zero balance.

Question 2

Equity method not appropriate when:
1. Bankruptcy
2. Investment in sub is temporary
3. A law suite or complaint is filed
4. A standstill agreement is signed under which the investor surrenders significant rights as a shareholder
5. Another small group has majority ownership and they operate the company without regards to investors
6. Investor can’t obtain the financial information necessary to apply EM
7. Investor can’t obtain representation on the board of directors

Question 3

Equity Method BS
1. record at cost FV of consideration + legal fees
Dr Investment in investee BS
Cr cash BS

2. Sub Earnings. Increase ownership % of earnings of investee
   Dr Investment in investee BS
   Cr Equity in earnings/ investee income IS
3. Decrease ownership % of cash dividends-dividends NOT income***
   Dr Cash or dividend receivable BS
   Cr Investment in investee BS

??? Investment - amortization of any difference between FV and CV of identifiable assets, including f FV greater then CV
Dr Equity in earnings IS
Cr Investment is Sub BS

Question 4

Consolidating 50% of voting stocks
Domestic or foreign must consolidate unless: 1. sub in legal reorganization or 2. bankruptcy or under restriction
Acquisition for stock use FV at date of transaction closed.

Question 5

Acquisition should adjust:
1. Common stock, APIC, RE of Sub are eliminated!! Consolidated equity equal parent’s equity only!!!
Plus Non-controling Interest !!!
2. Investment in Sub is eliminated in Parent’s books Cr posted on consolidated sheet
3. Non-controlling Interest is created in Equity section if not owned 100%
4. BS of Sub to s adjusted to FV, 100% on the acquisition date
5. Identifiable Intangible Assets of the Sub are recorded at FV.
6. Goodwill or gain if required if excess of the acquisition cost.
If deficiency cost vs. Sub MV then the shortage is recorded as gain.
7. Consolidating work paper eliminating journal entries:
C Dr Common stock - Sub
A Dr APIC - Sub
R Dr RE - Sub (beg bal+income-dividend= end bal RE)
I Cr Investment in Sub
N Cr Noncontrolin Interest
B Dr BS adjustment toFV
I Dr Identifiable Intan Asset to FV**
G Dr Goodwill
*BS adjustment to FV Sub asset and liability, recorded at FV on consolidation at the date of acquisition
**Identifiable Intangible Assets to FV (permits, patents, copyright etc.)

Question 6

Costs/expenses on acquisition treatment:
1. direct out of packet cost such as a finder’s fee or a legal fee are expensed - Dr Expense
2. Stock registration and issuance cost such as SEC filing fees are REDuction of the value of the stock issued - Dr APIC
3. Indirect costs are expensed as incurred - Dr Expense
4.*** Bond issue cost are capitalized and amortized- Dr Bond Issue Cost

Question 7

Sub owner % changed:
Non contro -> control
1. remeasure held equity interest to FV
2. Reflect in IS - gain

Control -> more or less control
1. equity transaction, no gain or loss recognized

Control -> non control
1. recognize gain or loss of the sale of the stock
2. remeasure the remaining nonconsolidating interest to FV
3. Recognize the adjustment to FV on IS.
Example:
On Jul 2004 Incestemnt in Sub 25% ownership $500 noncontroling
Aug 1 2009 Sub FV 100% $4,000 ($1,000 25%)
Aug 1 2009 purchase extra 50% $2,000 * need journal for this
** true up the FV to current MV***
Dr Investment in Sub $500
Cr Gain $500

Question 8

% of Noncontroling interest must be disclosed in the consolidated BS reported at FV
and IS in RE

Question 9

BS include 100% of the Subs assets and liabilities but not the Sub’s Equity.

Question 10

Intercompany Bond transaction-consolidation
Parent Group sued Bond with carry value of $300, Face value $250, premium $50.
Parent:
Dr cash 300
Cr bond payable 250
Cr premium on bond payable 50

Sub: original purchase $275
Dr investment in Parent 275
Cr cash 275
Eliminating entry: workpaper entry
Dr bond payable 250
Dr premium 50
Cr investment in parent 275
Cr gain in extinguishment of bond 25

Question 11

Intercompany sale of land- consolidation
*adjust to its original cost
Parent sold land to Sub for $200, initial cost to Parent $175
To record the sale on Parent’s books:
Dr cash $200
Cr land $175
Cr Intercompany gain on sale of land $25

Sub’s entry:
Dr land $200
Cr Cash $200

Eliminating entry:
Dr Intercompany gain on sale $25
Cr Land $25
***in the subsequent year
Dr RE $25
Cr Land $25

Question 12

On day of acquisition:
100% for $900
CV of Sub $600, all A&L have FV equal to CV except equipment remaining 5 years life with FV $100.
Comm stock $100
APIC $100
RE $400
————————-
BV $600

1. Formula to remember :
   BV Equity of Sub $600
   + FV asset > BV $100
   - FV liability > BV 0
   ————————————
   Ending value $700
2. Calc Goodwill:
   Purchase price 100% $900
   BV + excess of FV>BV ($700)
   —————————————
   Goodwill $200
3. Amortization of the asset FV >BV $100/5 years =$20/year $20 a year
4. Elimination journal entries:
   E Dr equity $600
   A Dr asset FV>BV $100*
   G Dr goodwill $200
   L Cr Liability FV>BV $0
   I Cr Investment in Sub $900
   N Cr Non-controling interest $0
   *net of excess depreciation (not on acquisition day)

Question 13

Consol after acquisition:
Acquired 100% for $900 cash.
CV of Sub $600, all A&L have FV equal to CV except equipment remaining 5 years life with FV $100.
Good will $200 impaired to $195.
Parent Income during 2022 $3,000 and Sub’s income $150.
Determine entries on the consolidation worksheet.

Subs Equity:
Comm stock $100
APIC $100
RE $400
————————-
BV $600

1. Formula to remember :
   BV Equity of Sub $600
   + FV asset > BV $100
   - FV liability > BV 0
   ————————————
   Ending Sub’s FV $700
2. Calc Goodwill:
   Purchase price 100% $900
   BV + excess of FV>BV ($700)
   —————————————
   Goodwill $200
   Now GW $195
3. Amortization of the asset FV >BV $100/5 years =$20/year $20 a year
4. Formula to remember :
   Begin. carry value of Sub-cost $900
   +% shares Net income $150
   -% share excess depreciation (20)
   -% share dividends $0
   ————————————
   Ending carry value investme $1,030
   - impairment ($5)
   —————————————-
   Ending Carry Value $1,025
5. Elimination journal entries:
   E Dr equity $750 (600+150)**
   A Dr asset FV>BV ($100-20)* $80
   G Dr goodwill $195
   L Cr Liability FV>BV $0
   I Cr Investment in Sub $1,025
   N Cr Non-controling interest $0
   *net of excess depreciation (not on acquisition day)

Question 14

Intercompany sale of Inventory-consolidation
*3 effects on FS to eliminate
1. Sales vs purchase
2. AR vs AP
3. Profit ending inventory
Example:
Parent, cost $8, sold inventory to Sub for $12, Sub has not yet paid for it (AR/AP!!).
Determine the elimination entries:
1.1 Sub does not sell any of the inventory
Sale $12 - $8 =$4.00
Elimination journal entries:
1. Sales vs purchase
Dr Sale $12
Cr COGS $8
Cr Inter-company profit $4

2. AR vs AP
   Dr AP $12
   Cr AR $12

1.2 Sub sells half of the inventory
50% of the profit eliminated
Dr Sale $12
Cr GOGS (plug) 12-2 $10
Cr Inventory profit *50% left in Sub $2
*remember adjust for % of profit left.

Question 15

Intercompany didivebds- consolidation
Cost Method - Income- need elimination
Equity Method - No Income - don’t need elimination * if Parent use Equity Method investment in Sub and Sub’s Equity are eliminated in consolidation
*** If dividends are declared but not yet paid it needs to be eliminated
Dr Dividends Payable
Cr Dividends Receivable

Cost Method journal entry:
1. Dr Dividend income
Cr RE
2. Dr Dividend Payable
Cr Dividends Receivable

Question 16

Intercompany PPE sale -consolidation
Two effects on FS:
1. Eliminate gain on sale, reinstate accumulated depreciation, plug PPE to entry
2. Eliminate of additional depreciation resulting from markup of asset
Example:
Parent sells PPE, cost $500 depreciation $200 to Sub for $450. Remaining life of the asset 5 years. Determine the elimination entries that should be recorded:

Cost $500 - dep $200 = $300 NBV
SP $450 - nbv $300 = $150 gain
New depreciation: $450/5 =$90.00
Old depreciation $300/5 =$60.00
Incremental depreciation 90-60=30

Parent sale entries:
Dr cash $450
Dr Acc. Dep $200
Cr Gain $150
Cr Cost $500
Sub’s purchase entry:
Dr PPE $450
Cr Cash $450

Entries to eliminate:
1. Eliminating gain on sale:
Dr Gain $150
Dr PPE (plug) $50
Cr acc. Dep $200
2. Incremental depreciation
Dr acct dep $30
Cr dep exp $30

Question 17

Intercompany sale of bond- consolidation
There are three effects:
1. Investment in bond vs bond payable
2. Interest revenue versus interest expense
3. Accrued interest receivable vs accrued interest payable
Example:
Parent issued 8% bond to external parties at 1000 face value. Saab purchased the outstanding bond on open market for $900 plus accrued interest bond pay interest annually.
Parent recording at sale:
Dr Cash $1,000
Cr bond payable $1000

Sub’s recording at purchase:
Dr investment in bond $900
Cr annual interest receivable $80*
Cr cash $980
* (1,000x8%)
To eliminate journal entries :
Dr bond payable par $1000
Cr gain (plug) $100
Cr investment in bond $900

Dr interest payable $80
Cr interest receivable $80
* no interest revenue or interest expense as interest was earned by third-party

Question 18

Inventory elimination -need to know!!!!
Profit in ending inventory
1. Calculate Intercompany sale (Consolidated revenue - P revenue - S revenue) 308-200-140= $32
** very tricky the revenue given P revenue $200, S revenue $140 and Consolidated revenue $308 doesn’t sum to P and S together
2. Multiply Intercompany sales by unsold inventory % for ending inventory - (Intercompany sale x unsold %) $32 x 37.5% of inventory still held by S = $12
3. Determine markup % on Intercompany sales (gross profit/revenue) P’s gross profit $50/$200 revenue = 25%
4. Apply markup % to ending inventory to determine profit in ending inventory (ending inventory x markup %) $12x 25%=$3
5. Subtract profit in ending inventory from ending inventory to arrive at carrying amount of inventory ie. cost (ending inventory - profit in ending inventory) $12-$3=9
% of the profit has to be eliminated:
Dr sale 100%
Cr COGS ( plug)
Cr Inventory profit **% of inventory stil held

Question 19

Reporting consolidated Equity

Equity
Parent paid in capital
Parent retained earnings ***includes parent net income + parent’s portion of Sub’s net income
Noncontroling interest

*** only Sub’s income since acquisition is included in net income, since the portion earned before acquisition belongs to the previous shareholders!!!

Question 20

If parent uses the Cost Method to account for its investment in a Sub, the parent will not recognize its share of the sub’s net Income.
Under the Cost Method, the parent recognizes only its share of dividends declared by the subsidiary, not its share of the Sub’s reported net income.

Question 21

Questions would have a lot of information about P paying dividends and Sub paying dividends, so if Sub doesn’t own any % of Parent, Parent can report all the dividends paired.

Question 22

When the Sub uses additional stock to outsiders, NCI ownership increases and Parent ownership decreases! !!!
Before parent owned 80% (16 parent’s shares out of 20)
Sub issued additional 5 to others. Now Parent percentage of shares is 64% (20+5/16 parents shares)

Question 23

Gross profit rate
Gross profit / sale

Need this to calculate the unsold inventory.

Question 24

P owns 75% of S, S owns 60% of V. All three need to be considered.

Question 25

Tricky ! check the Consolidated amount and the answer can be hiding there.
Consolidated Revenue $308
P’s Revenue $200
S’a revenue $140
——————————————
Inter-company sale $32,000

Question 26

After consolidation date, Sub’s income is added to Parent income, with respect to % of ownership.

Question 27

The excess of fair market value over book value of equipment would be recognized by writing up plant and equipment to fair value on the consolidated balance sheet. How is this not a good will?

Question 28

When there is mention about depression in the consolidated question you need to account for it, subtract from Sub’s Net income. !!!

Question 29

Inter company dividends
Cost method - dividends are income, needs to be eliminated
Equity method - dividends reduce carry value of Investment in Sub, no need to eliminate bc dividends are not income. Dividends receiver is recorded directly in Investment is Sub which is eliminated in consolidation.
Equity Method:
The dividends payable/receivable needs to be eliminated.
Cost Method:
1. Dr Dividend Income
Cr RE
2. Dr Dividends payable
Cr Dividends receivable

Question 30

The difference between Fair market value and book values of inventory or PPE would be recognized by adjusting inventories to Fair market value on the consolidated balance sheet.

Question 31

The investment account can include adjustments for the following:
1. Investee net income (gain or loss)
2. Excess depreciation for assets ( decrease). This is excess depreciable basis for the parent that is recognized only because of the acquisition date FMV adjustment.
3. Dividends received (decrease)
4. Goodwill impairment (decrease)

Question 32

Bond
Premium on a bond liability results from the sale of the bond at price in excess of par (face) value. Premium would be added to par value to get net carrying value.

Question 33

Inventory elimination entry:
Sub holds all the inventory
Dr sales $12
Cr cogs $8
Cr profit $4

Sub sells all the inventory
Dr sales $12
Cr cogs $12

Sub sells half it the inventory
Dr sales $12
Cogs (plug) $10
Profit $2***

***Gross profit rate: gross profit/ sales
multiply by the amount inventory left in Sub’s books

Question 34

When the carrying value is more then fair value then in consolidation the depreciation expense would be decreased and goodwill would be recognized.
The building would be written down to its lower fair value and the excess of cost over fair value would be assigned to recognize goodwill.
Since for consolidated purposes the building has a lower fair value than its carrying value, the depreciation expense taken on the carrying value would be greater than the depreciation expense for consolidated purposes.

Question 35

Stockholder equity
The portion of the subsidiary stockholders’ equity that is not eliminated is the noncontroling interest and it is reposted in the stockholders’ equity section of the consolidated BS.
P stockholders’ equity $100
+ Noncontroling interest equity $20
Total “consolidated” stockholders’ equity equals $120.
*remembe to include the noncontroling portion