Those damn consolidation entries Flashcards
A
Adjustment of Fair Values over the book value
Asset…
Asset
Investment in Sun Company
I
Removing subsidiary income so the subsidiary’s underlying revenue and expense accounts (and the current amortization expense) can be brought into the consolidation totals.
Equity in Subsidiary’s incomes (Accrual of income less amortization expense)
Investment in Sun Company
D
The dividends distributed by the subsidiary durng the year also must be eliminated from consolidating totals. dividends aid are an intra entity transfer essentially, and didn’t affect any outside party. “d” offsets the impact of this transaction by removing the subsidiary’s dividends paid account. The receipt of this money was recorded as a decrease in the investment account in subsidiary account. Now the investment in increased.
Investment in Subsidiary
Dividends Paid
E
Records the current year’s excess amortization expenses relating to the adjustment of sun’s assets to acquisition date fair values. Equity method amortization was eliminated within “I”, “E” records the current year expense attributed to each of the specific account allocations.
excess amortization expense
adjustments to all expenses resulting from excess acquisition-date fair value allocations
P
payable because it eliminates an intra-entity payable.
*C
=Converstion being made to equity method (full accrual) totals. This must be recorded before the other worksheet entries to align the beginning balances for the year. To convert parent’s beginning retained earnings from other internal accounting methods to equity method
Investment in Subsidiary
Retained Earnings beginning of the year for parent.
S
Removal of subsidiary’s beginning stockholders’ equity b balances for the year against the book value portion of the investment account. Subsidiary equity balances generated prior to the acquisition are not relevant to the business combination and should be deleted. The equity accounts of subsidiary and the investment in investee account on the parents books represent reciprocal balances.
Common Stock (sub)
APIC (sub)
RE (sub)
Investment in Sun Company
TI
To eliminate the effects of itra-entity transfer of inventory (transferred inventory). Must be made for all intra entity inventory transfers. The total sales figure is deleted regardless of upstream or downstream. Any gross profit does not effect elimination because entire amount of the transfer occurred between related parties and the total must be removed to consolidate
Sales
Cost of Goods sold (purchases component)
G (year 1)
Gross profit.
Despite entry TI, the inflated ending inventory figure causes cost of goods sold to be too low and, thus, profits to be too high by GP amount.
To remove portion of unrealized gross profit created by intra-entity sale. It reduces consolidated inventory account to its historical cost, and removes unrealized amount from recognized gp in year of transfer
Cost of Goods Sold (ending inventory component)
Inventory (balance sheet account)
*G (year 2)
To remove unrealized GP from beginning figures so that it is recognized currently in the period in which the earning process is completed. Reducing COGS (beginning inventory) through this worksheet entry increases the gross profit reported for this second year. For consolidation, GP on the transfer is recognized in period when items are actually sold to outside parties.
Retained Earnings (beginning balance of the seller)
COGS (beginning inventory component)
why *G, when we did G
G in Y1 removed the gross profit from consolidated inventory balances in year of transfer. However, the overstatement remains within the separate financial records of the buyer and seller. The effects of this deferred gross profit are carried into their beginning balances in subsequent years. Thus *G worksheet adjustment is necessary.
For consolidation purposes, the unrealized portion of the intra-entity gross profit must be adjusted in two successive years (from ending inventory in the year of transfer and from beginning inventory of the next period).
What is different about *G in year 2 when transfers have been downstream and the equity method used?
When using the equity method, the parent maintains appropriate income balances within its own individual financial records. The parent defers any unrealized gross profit at the end of Y1 through an equity method adjustment that decreases the investment in Subsidiary. With the profit deferred, RE of the parent/seller at the beginning of the following year is correct. Therefore no adjustment needed.
Equity in Subsidiary Earnings
COGS (beginning inventory component)
TL
Eliminate the effects of intra-entity transfer of land. The gain recorded carried through retained earnings and thus retains the inflated transfer price. For every subsequent consolidation until land is sold, the elimination process repeats.
Gain on Sale of Land
Land
*GL
Year of sale of land to outside party
Retained Earnings (of seller)
Gain on sale of Land.
