Chapter 5 Flashcards
Eliminating entries - C
Current: Eliminate the current year equity method entries
Debit: Equity in income of sub (for credit balance of acct after parent records operating results of sub)
Credit: dividends (parents % of div declared)
Credit: Investment in sub (difference)
Eliminating entries - E
Equity: Eliminate the sub’s beginning of current year equity balances
Debit: sub’s equity accts (assuming they all have credit balances)
Credit: Investment in sub (total equity acct x parents %)
Credit: NCI (total equity accts x NCI %)
If sub has debit balance in equity acct or treasury stock acct, then credit them to eliminate them
Eliminating entries - R
Revalue: recognize the beginning of current year FV revaluations
Debit: increases in assets, decreases in liabilities, goodwill
Credit: any decreases in assets or increases in liabilities as well as investment in sub and NCI (for difference x CI and NCI %)
Entries E & R bring investment in sub account back to zero balance
Eliminating entries - O
Write-Off: write off sub’s asset and liability revaluations
Debits and credits offset changes in COGS, dep exp and amortization exp against inventory, plant assets and IAs
Debit: COGS, Credit: Inv
For PA and IAs, amount is BV-FV divided by remaining useful life. If asset is increasing, debit amrt/dep exp and credit asset. If asset is decreasing, debit asset and credit amrt/dep exp
Complete equity method
The parent co recognizes:
- its share of the subs net income or loss, adj for the allocation of the differences between FV and carrying amounts of sub’s NIA on the acq date
- goodwill impairment loss
- intercompany transactions
- parents share of dividends declared by sub
Cost method
The parent co accounts for the operations of a sub only to the extent that dividends are declared by the subsidiary (crediting Dividend Revenue from Subsidiary). Income or loss of the subsidiary is not recognized by the parent company.
Consolidated financial statements, complete equity vs. cost methods
Consolidated financial statements amounts are the same regardless of method used, but working paper entries are different
Complete equity method emphasizes ____ while cost method emphasizes _____
the complete equity method emphasizes economic substance while the cost method emphasizes legal form;
Under the complete equity method, the parents net income and RE amounts are identical to the related consolidated amounts
complete equity method is often called
one-line consolidation of the sub’s financial results on the parents books
The investment in sub acct is a one line summary of the A & L of the sub and the equity in income account is a one line summary of the adj revenues and adj expenses of the sub
Sub’s JE for dividends declared and paid
Debit: dividends declared
Credit: cash
For full amount of dividends paid
Parent’s JE for dividends
Debit: cash
Credit: investment in sub
For parents portion of dividends (dividends paid by sub x % parent owns)
Parents JE to record operating results of sub
Two entries:
First entry is for parent’s % of sub’s net income
Debit: Inv in sub
Credit: Equity in income of sub
Second entry is for parent’s % of sub’s revaluations
Debit: equity in income of sub
Credit: Inv in sub
Amount is revalued assets BV-FV, divided by remaining useful life where appropriate, all summed and multiplied by parents ownership %
Eliminating entries - N
Recognize the NCI in the sub’s income and dividends and the change in the NCI in equity of sub for the current period
Debit: NCI in net income for the amount of the (subs net income x NCI %) - (revalued assets BV-FV, divided by remaining useful life where appropriate, all summed and multiplied by NCI %)
Credit: Dividends declared (div paid x NCI %)
Credit: NCI (difference)
