Chapter 2: Intercorporate Investments And Wholly Owned Subsidiaries (No Differential) Flashcards
Unconsolidated subsidiary
A subsidiary that is not consolidated with the parent company (shown as a balance sheet investment)
Basic consolidation entry with dividends
(not a journal entry: consolidation worksheet only)
Dr. subsidiary common stock (ending book value)
Dr. subsidiary retained earnings (beg. book value)
Dr. parent income from subsidiary
Cr. subsidiary dividends declared
Cr. Parent investment in subsidiary
(beginning retained earnings because net income and dividends are removed separately)
Consolidated retained earnings calculation
Parent beginning retained earnings
+ parent income from own operations
+ parent CUMULATIVE income from subsidiary
LESS parent dividend declared
= ending consolidated retained earnings
Second and following years of ownership consolidation
Adjusted trial balance data used on consolidation worksheet
must check that beginning (after consolidation entries) consolidated retained earnings = ending consolidated retained earnings of previous period
Equity method effect on consolidated income and consolidated ReE
If parent uses full equity method of accounting for the investment the the consolidated income should equal the parent’s net income
and
consolidated retained earnings should equal parent’s retained earnings
balancing debits and credits in the consolidation worksheet
DR and CR entries in income statement and retained earnings sections are unlikely to be balanced, but because totals carry down the balance sheet portion will be
Consolidation worksheet
a mechanism for combining the accounts of parent and subsidiary companies and making the necessary adjustments to present consolidated financial statements
changing to the equity method if ownership percentage increases
Investor:
- adds any cost of acquiring additional interest
- does equity accounting going forward from the date of acquisition
Equity accrual
under equity method of accounting
accrual of an investor’s proportion of investee’s gain or loss
usually an adjusting entry at the end of a period
Corporate joint ventures
A corporation owned and operated by a small group of businesses, none of which owns the majority of the venture’s common stock
Equity method accounting
Used when the investor has significant influence over investee
- this is generally when investor owns 20% or more of equity - but there are exceptions when influence is severely limited
- also used for corporate joint ventures
- original investment is recorded at cost
- investment is increased for proportion of investee’s income
- decreased for proportion of loss
- decreased for dividends (considered distributions of previous recognized income)
Securities carried at fair value
Investor lacks control/ significant influence
- usually holds less than 20% ownership
- use fair value method
- dividends recorded as
Dr Cash
Cr. dividend income
- year end fair value adjustments made to an unrealized holding gain or loss income account (which is a temp account)
Securities held at fair value: accounting for changes in # of shares
If from stock dividends/ splits/ reverse splits = no entry (no change in % ownership)
Purchases of additional shares
- recorded at total cost, same as initial purchases
- must evaluate to see if fair value still correct
sale of shares
- handled in same manner as sale of any other assets. If shares were purchased at different prices must determine which ones are being sold (cannot use weighted average method)
If no longer hold significant influence then stop using equity method to account for investment
Accounting for sale of shares of common stock held under equity method
Same as sale of any non-current asset
- investment account adjusted to date for share of investee’s earnings
- gain or loss based on difference between carrying amount and proceeds received
if only sell part of ownership must reassess if equity method remains appropriate
Calculating proportional income for equity method investment purchased mid-fiscal period
Investor accrues none of the income earned by the investee before the purchase date
investor may have to estimate amount of income, but if they hold significant influence they should be able to simply ask for post-purchase financial results
if estimating: assume income is earned uniformly throughout the year
year income x portion of the year x portion of ownership (shares held)
accounting for a stock dividend, split, reverse split under equity method
not entry
Accounting for the purchase of additional shares of stock held under the equity method
- Add cost of new shares to investment account
- apply equity method for revised percentage of ownership going forward
- must consider partial years. only recognize proportion of income from proportion of year held ownership
Transactions between individual companies within a consolidated entry
May legitimately report sales, receivables, payables
BUT the consolidated entity must only report transactions with parties outside the entity
hence the consolidation process
Accounting during the period for entities to be consolidated
Transactions are generally recorded without consideration of consolidation
- inter-company transactions may be recorded in separate accounts to facilitate elimination transactions
- adjusting and closing entries at the end of the period are prepared as usual (resulting balances go to the consolidation worksheet)
3 part consolidation worksheet
Sections for (in given order)
1) income statement
2) statement of retained earnings (or possibly statement of stockholder’s equity)
3) balance sheet
titles of all account names in first column
then columns for:
- parent adjusted trial balance numbers
- subsidiary adjusted trial balance numbers
- consolidation debit entries
- consolidation credit entries
- consolidated statement totals
Consolidation entries
Used in the consolidation worksheet to adjust totals of individual account balances to reflect what they would be if the companies were a single entity
Entries appear ONLY on the consolidation worksheet, they do not affect the books of either entity
also called “elimination” transactions
entries do not carry from period to period though some entries may be made in multiple periods
Basic consolidation entry
(Prof. Tam’s “Elimination rule # 1”)
Removes the parent’s investment in subsidiary account and the subsidiary’s stockholders equity accounts (common stock and retained earnings)
Dr subsidiary common stock
Dr subsidiary retained earnings
Cr investment in subsidiary
entry is on consolidation worksheet only
Accumulated depreciation consolidation entry
(Professor Tam’s elimination rule # 2)
Nets out accumulated depreciation at acquisition date against historical cost (because that is how it would be shown if asset had been purchased)
consolidation worksheet entry:
Dr accumulated depreciation
Cr asset
Exact same entry will be repeated every year of consolidation. Only removing the depreciation PRIOR to acquisition, not the depreciation accumulated after acquisition
Using the consolidation worksheet
1) enter the adjusted trial balance amounts of all parent and subsidiary accounts
2) complete income statement section
3) carry final line of income statement (income) down into the income line of retained earnings section with all adjustments on that line
4) work retained earnings section of the worksheet
5) carry final line of retained earnings section (ending retained earnings) down to retained earnings line of balance sheet, along with all adjustments on that line
6) work balance sheet section
Consolidated net income
All revenues and expenses of the individual consolidating companies arising from transactions with unaffiliated companies
includes 100% of revenues regardless of parent’s percentage of ownership
Consolidated net income calcuated
Parent’s income from own operations
excluding: investment income from consolidated subsidiaries
plus: net income of each consolidated subsidiary
adjusted for: differential write off (not discussed in this chapter)
under equity method:
parent company equity-method net income = consolidate net income if subsidiary is wholly owned
Consolidated retained earnings
The portion of consolidated enterprises undistributed earnings accruing to the parent company shareholders
Beginning consolidated retained earnings
+ consolidated net income attributable to the controlling interest
- dividends declared by the parent company
= ending consolidated retained earnings
Calculating consolidated retained earnings
= parent’s retained earnings from own operations
exclude: income from consolidated subsidiaries recognized by the parent
+ parent’s proportionate share of net income of each subsidiary since date of acquisition (adjusted for differential write off and goodwill impairment)
should = parent’s equity method retained earnings
accounting for the retained earnings of the subsidiary
Subsidiary’s retained earnings are completely eliminated in consolidation process.
Reasoning:
- retained earnings cannot be purchased
- parent’s share of subsidiary’s income since acquisition is already included in parent’s equity method net income or retained earnings
- non-controlling interest share of retained earnings is not included in consolidated retained earnings
Basic consolidation entry removes what accounts
Parent’s:
- equity method income from subsidiary
- investment in subsidiary account
Subsidiary’s
- dividends declared
- equity accounts
Elimination rule # 1
After combining adjusted trial balance accounts of parent and subsidiary:
- remove parent’s investment in subsidiary
- remove subsidiary’s common stock, paid in capital, and retained earnings
Elimination rule #2
Remove subsidiary’s accumulated depreciation accounts against their respective assets
Elimination rule # 3
Remove:
- dividends declared by subsidiary
- parent’s Income from subsidiary account
against
parent’s investment in subsidiary account
Accounts that do not appear on consolidated financials
Parent accounts:
- investment in subsidiary
- income from subsidiary
Subsidiary accounts
(all of subsidiary’s equity accounts)
- commons stock
- additional paid in capital
- retained earnings
- dividends declared
Equity method: other comprehensive income
Investor’s comprehensive income should include it’s proportionate share of each amount reported as “other comprehensive income” by the investee
cr: income reported by investee in OCI
Unrealized intercompany profit
Equity method
any intercompany profit remaining UNREALIZED at the end of the period must be deducted from the amount of income that otherwise would be reported
Unrealized = profit not recovered by subsidiary?
Entry:
Dr Income from subsidiary
Cr investment in subsidiary
(reverses out profit, once realized is reversed)
