Ch. 3 Consolidation: afterwards Flashcards
Subsequent
Coming after something in time
Why will a parent maintain separate legal status for a subsidiary corporation?
To better utilize its inherent value as a going concern
Objective of consolidation (through passage of time)
Combine asset, liability, revenue, expense and equity accounts
Of parent and its subsidiaries
When must a parent company report consolidated net income?
Subsequent to an acquisition
Because of separate record keeping systems, the subsidiary’s expenses typically are based on…
2) what is the consequence?
Their original book values, not acquisition date values parent must recognize
2) adjustments made that reflect amortization of excess of parent’s
Consideration transferred over subsidiary book value
What is removed from revenues and expenses on consolidated worksheet?
Effects of intra-entity transactions are removed
3 Other complications introduced by time factor, in consolidation process
1 parent must select/apply accounting method to monitor
Relationship between 2 companies
2 parents investment account is eliminated on worksheet
3 income figure accrued by parent is removed each period
parent must select/apply accounting method to monitor
Relationship between 2 companies, what is the complexity in the consolidation process?
Investment balance recorded by parent varies depending on
Method chosen
parents investment account is eliminated on consolidation worksheet, for what reason?
So subsidiary’s assets and liabilities can be consolidated
income figure accrued by parent is removed each period, why?
So subsidiary’s revenues and expenses can be included when
creating income statement for combined business entity
For internal record-keeping, the parent has a choice for…
Monitoring the activities of its subsidiaries
3 most prominent internal record-keeping methods a parent can use to monitor its subsidiaries
1 equity method
2 initial value method AKA cost method
3 partial equity method
Typically the fair value of the consideration transferred by the parent will serve as…
The recorded valuation basis on the parent’s books
Subsequent to acquisition date, the 3 methods produce difference
Account balances for parent’s…3 things
1 investment in its subsidiaries
2 income recognized from its subsidiaries activities
3 retained earnings accounts
Selection of an internal record keeping method by the parent does…
Not affect the totals ultimately reported for combined companies
What does a parent’s choice of an internal accounting method lead to?
Leads to distinct procedures for consolidating financial information from separate organizations
The internal reporting philosophy of the acquiring company often determines…
He accounting method choice for its subsidiary investment
Equity method, what does it embrace?
Embraces full accrual accounting in maintaining the investment
Account and related income over time
Under the equity method, when does the acquiring company accuse income?
When the subsidiary earns it
equity method: to match the additional fair value recorded in combination against income
Amortization expense stemming from original excess fair value allocations is recognized
Recognized through periodic adjusting entries
Treatment of unrealized gains on intra-entity transactions under the equity method?
2) treatment of subsidiary dividends
Deferred
2) reduce investment balance
When the parent has complete ownership, equity method earnings from the subsidiary, combined with the parent’s other income sources create what?
Create total income figure reflective of entire combined business
Entity
What is the equity method often referred to as?
Single-line consolidation
When is the equity method especially popular for internal reporting purposes?
Popular in Companies where management periodically (monthly,
Quarterly) measures subsidiary’s profitability
using accrual based income figures
initial value method: the parent recognizes income from its share of…
Any subsidiary dividends when declared
Because little time typically elapses between dividend declaration and cash distribution, the initial value method frequently reflects…
The cash basis for income recognition
How is the investment balance recorded on the parent’s financial records under the initial value method?
Investment balance remains on parent’s financial records at
Initial fair value assigned on acquisition date
Why might a parent select the initial value method for internal record keeping purposes? 2 and example
1 Parent doesn’t require an accrual based income measure of
Subsidiary performance
2 easy to apply, avoid complexity of equity method
Ex. Parent may wish to assess subsidiary performance on its
Ability to generate cashflows, on revenues generated or
Other non income basis
Partial equity method: parent recognizes the reported income…
Accruing from the subsidiary
Partial equity method: subsidiary dividends declared…
Reduce the investment balance
Differences between the partial equity method and equity method?
Under partial equity method equity no adjustments are recorded for amortization or deferral of unrealized gains
What parent companies would prefer using the partial equity method, when full equity method is unnecessary?
Parent companies that rely on internally designed performance
Measures (rather than GAAP net income)
to evaluate subsidiary Management or make resource allocations
If the parent chooses a particular internal record keeping method (initial value, equity or partial equity method), how will it affect amounts reported on consolidated financial statements to external users?
It will not affect amounts reported on consolidated financial
Statements to external users
Equity method: investment account
Continually adjusted to reflect current owner’s equity of acquired
Company
Equity method: income account
Income accrued as earned
Amortization and other adjustments are recognized
Equity method: advantages
Acquiring company totals give true representation of consolidation
Figures
Initial value method: investment account
Remains at acquisition date value assigned
Initial value method: income account
Dividends declared recorded as dividend income
Initial value method: advantages
Easy to apply
Often reflects cash flows from subsidiary
Partial equity method: investment account
Adjusted only for accrued income and dividends declared by target
Partial equity method: income account
Income accrued as earned
No other adjustments recognized
Partial equity method: advantages
Usually gives balances approximating consolidation figures
Easier to apply than equity method
Under the equity method, what is the journal entry to recognize amortizations on allocations made in acquisition of subsidiary?
12/31/14
Equity in Subsidiary Earnings. Xxx
Investment in Sun Company Xxx
Application of equity method: target’s assets and liabilities are adjusted to reflect allocations originated from their…
Acquisition date fair values
Application of equity method: because of a passage of time, what must be recognized in allocations of target’s assets and liabilities?
Income effects (amortizations)
Must be recognized
Application of equity method: reciprocal or intra-entity accounts
Reciprocal or intra entity accounts must be offset
Intra entity
Describes transfers of assets across business entities
affiliated Through common stock ownership or other control
Mechanisms
Computation of consolidated figures: Revenues
Revenues of parent and subsidiary added together
Computation of consolidated figures: COGS
COGS parent and subsidiary added together
Computation of consolidated figures: amortization expense
Balance of parent and subsidiary combines, along with additional
Amortization from recognition of excess fair value over book value
Computation of consolidated figures: depreciation expense
Depreciation expense of parent and sub added together,
along With reduction in asset depreciation (ex. Equipment acquired
At less than FMV)
Computation of consolidated figures: equity in subsidiary earnings
Investment income recorded by parent is eliminated so subsidiary’s
Revenues and expenses can be included in consolidated totals
Computation of consolidated figures: net income
Consolidated revenues less consolidated expenses
Computation of consolidated figures: retained earnings
Include only parent figure if not owned prior to statement date
Computation of consolidated figures: dividends declared
Parent company balance only
Because subsidiary’s dividends are attributable intra entity to
Parent (not an outside party)
Computation of consolidated figures: current assets
Parents book value plus subsidiary’s book value
Computation of consolidated figures: investment in subsidiary
Asset recorded by parent is eliminated
so subsidiary’s assets and liabilities can be included in consolidated
Totals
Computation of consolidated figures: trademarks, patented technology
Parent’s book value + sub’s book value
+ sub’s acquisition date fair value
Consolidation from use of equity method: equipment (acquired below fair value)
Parent’s book value + subsidiary’s book value
- fair value allocation reduction + current year expense reduction
Computation of consolidated figures: goodwill
Residual allocation
Goodwill is not amortized
Computation of consolidated figures: total assets
Vertical summation of consolidated assets
Computation of consolidated figures: liabilities
Parent’s book value + subsidiary’s book value
Computation of consolidated figures: common stock
Parent’s book value
Subsidiary shares owned by parent treated as if no longer outstanding
Computation of consolidated figures: additional paid-in capital
Parent’s book value
Subsidiary shares owned by parent treated as if they’re no longer
Outstanding