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Module 1 – Business Combination and ConsolidationStock Acquisition – Consolidated Financial Statements – AFTER Date of AcquisitionInstructor Comment: The following lesson module was developed to assist students in their understanding of the corresponding subject matter in the course textbook. The following is not a replacement for the detailed presentation provided by the authors of the text, but instead is an attempt to provide students with a pragmatic direct review with heavy emphasis on process.My recommendation is to approach the course material in the following sequence.Read/study the assigned corresponding sections of the text.Read the “Chapter Review” (PowerPoint) posted in D2L.Read/complete the corresponding instructor developed “Instructor Subject Matter Presentation” (THIS DOCUMENT) posted in D2L.Complete the assigned text questions, exercises and problems (author recommended solutions for assigned odd exercises posted in D2L).Review the corresponding instructor developed “Instructor Problem Solving Modules” posted in D2L.As discussed in ISMP #1 (Date of Acquisition) for stock acquisitions where significant influence and control exist, the acquirer (parent) is required by the SEC, for financial reporting purposes, to consolidate the acquired company (subsidiary). We discussed a 3-Step Process (below) to be followed in the creation of consolidated financial statements. The same 3-Step Process is applied in Stock Acquisition – After Date of Acquisition but involves increased complexity due to the fact that time has passed (ongoing operations of the acquired company must be consolidated).Unlike the accounting for stock acquisitions as of the date of acquisition (which required the preparation of the consolidated balance sheet only) the accounting for stockacquisitions after the date of acquisition require consolidation for all financial statements (income statement, statement of retained earnings, balance sheet and statement of cash flows). The focus of this ISMP will be on the income statement, statement of retained earnings and the balance sheet.3-Step Process: Step 1 – Assess the Business Scenario Step 2 – Prepare the CAD Step 3 – Determine Workpaper EntriesNote: Refer to ISMP #1 for further detail.The first two steps of the three step process are the same for stock acquisitions on the date of acquisition as they are for stock acquisitions after the date of acquisition. The key changes take place in Step 3.Step 3 - Determine the Required Workpaper Entries• Complete Workpaper• Complete Financial Statement(s)To determine the required workpaper entries for stock acquisitions after the date of acquisition the method of accounting used by the parent company for the Investment in Subsidiary must be determined. The company has two accounting options for maintaining the investment in subsidiary account, the “Cost Method” or the “Equity Method.” The accounting method used dictates the workpaper entries required for consolidation. In either case, the resulting consolidated financial statements are identical. The key to accurate consolidated financial statements is the development and application of the appropriate workpaper entries.RECORDING AND MAINTAINING THE INVESTMENT IN SUBSIDIARYCOST METHODRecording the initial Investment in Subsidiary is the same whether the Cost Method or the Equity Method is applied.AccountDebitCreditInvestment in Subsidiary$1,000,000*Cash$1,000,000- The method of payment in this example is cash, but other sources of funds could also be usedto pay for the investment (i.e. issuance of stock).Maintaining the Investment in Subsidiary is where significant differences exist between the Cost Method and Equity Method, creating the need for different workpaper entries. Maintainingthe “Investment in Subsidiary” account using the Cost Method could be described as NOT maintaining the “Investment in Subsidiary” account. Under the Cost Method there is no adjustment to the “Investment in Subsidiary” account balance (with the exception of instances where a liquidating dividend occurs). Thus, the only investment related entry, after the initial investment (purchase) entry, is the recording of dividend income.When a dividend is received the parent company makes the following investment related entry:AccountDebitCreditCash$40,000Dividend Income$40,000As you can see by the entry above the investment in subsidiary account is not affected. Therefore, the balance of the investment in subsidiary remains at the initial investment cost recorded on the date of acquisition.EQUITY METHODRecording the initial Investment in Subsidiary is the same whether the Cost Method or the Equity Method is applied.AccountDebitCreditInvestment in Subsidiary$1,000,000*Cash$1,000,000- The method of payment in this example is cash, but other sources of funds could also be usedto pay for the investment (i.e. issuance of stock).Maintaining the “Investment in Subsidiary” account using the Equity Method of accounting could be described as a continuous effort to maintain an accurate valuation for reporting purposes. The Equity Method attempts to account for all income and dividends (based on the ownership %) recorded by the subsidiary. Essentially, the change in the investment in subsidiary balance reflects the true value of the investment assuming income less dividends is a true reflection of value change.Therefore, the investment related entries, after the initial investment (purchase) entry, is the recording of income and dividends. The recording of income is accounted for using the following entry (assume the subsidiary is 80% owned and had income of $250,000):AccountDebitCreditInvestment in Subsidiary$200,000Equity in Subsidiary Income$200,000Clearly, the above entry impacts the investment in subsidiary account balance (increasing the account balance by $200,000).The accounting for dividend declared and paid follows the same logic. If the parent company is receiving dividends, the parent is essentially taking value out of the investment. The recording of dividend received is accounted for using the following entry (assume the subsidiary is 80% owned and declared a dividend of $50,000):AccountDebitCreditCash$40,000Investment in Subsidiary$40,000Clearly, the above entry impacts the investment in subsidiary account balance (decreasing the account balance by $40,000).Q1. – Calculation – What it the “Investment in Subsidiary” account balance at the end of the year (in the example above) using the Cost Method and Equity Method?WORKPAPER ENTRIES – ELIMINATION OF THE INVESTMENT IN SUBSIDIARYThe investment related entries (discussed above) must be taken into account when developing workpaper entries. The workpaper entries essentially eliminate the investment in subsidiary (key offset is the equity accounts of the subsidiary) which upon elimination allows for the consolidation of the parent and subsidiary, which combines the related income statement, statement of retained earnings, and balance sheet accounts of the parent and subsidiary.COST METHODWorkpaper entries required for the Cost Method must account for all of the investment entries made (or not made) to the investment in subsidiary account. In addition, for the Cost Method, the timing of the consolidation impacts the application of the workpaper entries. The two time periods are the Year of Acquisition and After Year of Acquisition.Cost Method -Year of Acquisition – Is the first year of ownership of the subsidiary. Thus, if the subsidiary was purchased on January 1, 2010 and we are reporting for the year ending December 31, 2010, we would be reporting Year of Acquisition.Assume the following base information:COST METHOD USED BY PARENTREAL EntryDe bitCreditJan. 1, 2010Investment in Subsidiary$500,000Cash$500,000Purchased 80% of subsidiary.Subsidiary Equity Position as of 1/ 1/ 2010:Common Stock$10,000APIC$300,000Retained Earnings$240,000$550,000CAD80%Ownership80%20%100%ParentNCITotal ImpliedFair Value Given Up$500,000$125,000$625,000Book Value Received$440,000$110,000$550,000Difference$60,000$15,000$75,000Land$60,000$15,000$75,000Balance$-$-$-100%80%During 2010, Subsidiary declared dividends in the amount of$50,000$40,000During 2010, Subsidiary had net income in the amount of$250,000$200,000Subsidiary Retained Earnings as of 12/31/2009 was$240,000For the Year of Acquisition –COST METHOD - the following three workpaper entries are required:1Eliminate (parents share) of current year subsidiary dividend income.REAL EntryDe bitCreditCash$40,000Dividend Income$40,000Workpaper Entry (1)De bitDividend Income$40,000Dividend Declared - Subsidiary$Cre dit40,0002Eliminate the Investment in Subsidiary account against (offset by) the subsidiary equity accounts.Workpaper Entry (2)De bitCre ditACommon Stock - Subsidiary$10,000AAPIC - Subsidiary$300,000BRetained Earnings - Subsidiary$240,000CDifference$75,000DInvestment in Subsidiary$500,000ENCI$125,000Notes:Remember, 100% of the sub's equity account balances needto be eliminated.ANo change from the date of acquisition.BWe need to eliminate RE balance as of the beginnng of the current year.CNever changes.DInvestment in Subsidiary (Investment Account Value at the Beg. Of the Current Year)ENCI (NCI Account Value at the Beg. Of the Current Year)Q2. – Short Answer - The adjustment to the “Investment in Subsidiary” account is as of the beginning of the year. What is the logic or reason the adjustment is as of the beginning of the year?3Distribute the difference between implied and book value of the equity acquired.Workpaper Entry (3)De bitCre ditLand$75,000Difference$75,000Cost Method - After Year of Acquisition – Is the second year of ownership and beyond. Thus, if the subsidiary was purchased on January 1, 2010 (continuing with the same example) and we are reporting for the year ending December 31, 2013, we would be reporting After Year of Acquisition.Additional Data:100%80%During 2013, Subsidiary declared dividends in the amount of$100,000$80,000During 2013, Subsidiary had net income in the amount of$350,000$280,000Subsidiary Retained Earnings as of 12/31/2009 was$240,000Subsidiary Retained Earnings as of 12/31/2012 was$450,000Cost Method - After Year of Acquisition- the following workpaper entries are made:1Establish Reciprocity (catch up impact of parent's share of the subsidiary's incomeless dividends).Subsidiary's Retained Earnings at the beginning of the current year (January 1, 2013)$ 450,000Subsidiary's Retained Earnings at acquisition (January 1, 2010)$ 240,000Difference - Represents the net earnings change (net income less dividends)$ 210,000NET Earnings ChangeParent's Share80%$ 168,000Investment in SubWorkpaper EntryDe bitCredit$42,000NCI's % is20%Investment in Subsidiary$168,000Retained Earnings 1/1 Current Year - Parent$168,0002Eliminate (parents share) of current year subsidiary dividend income.REAL EntryDe bit$Credit80,0002013Cash$80,000Dividend Income$De bit80,000Workpaper EntryCreditDividend IncomeDividend Declared - Subsidiary$80,0003Eliminate the Investment in Subsidiary account against (offset by) the subsidiary's equity accounts.At AcquisitionBeg. Current YearCAD80% Ownership80%20%100%Common Stock $ ParentNCITotal ImpliedAPIC $10,000300,000$10,000$ 300,000Fair Value Given UpBook Value Received DifferenceLand (1)Balance$500,000 $$450,000 $$50,000 $$50,000 $$-$125,00050,00075,00075,000-$625,000$550,000$75,000$75,000$-Retained Earn. $$240,000550,000$ 450, 000Workpaper EntryDe bitCredit$ 125,000 NCI (At acquisition)$ 42,000 NCI's % of Net Earnings ChangeACommon Stock - SubsidiaryAPIC - SubsidiaryRetained Earnings - Subsidiary CDifferenceInvestment in SubsidiaryNCI$10,000$300,000$450,000$75,000$835,000$668,000$167,000$835,000$ 167,000$ 500,000 Invest. in Sub (At acquisition)$ 168,000 Reciprocity Entry$ 668,000Notes:Remember, 100% of the sub'sequity account balances needNo change from the date of acquisition.to be eliminated.We need to eliminate RE balance as of the beginnng of the current year. CNever changes.DInvestment in Subsidiary (Investment Account Value at the Beg. Of the Current Year + Reciprocity) ENCI (NCI Value at acquisition + NCI % of Subsidiary Net Earnings since acquisition)4Distribute the difference between implied and book value of the equity acquired.Land$75,000Difference$75,000Equity Method -Year of Acquisition – Is the first year of ownership of the subsidiary. Thus, if the subsidiary was purchased on January 1, 2010 and we are reporting for the year ending December 31, 2010, we would be reporting Year of Acquisition.Review the following base data:EQUITY METHOD USED BY PARENTREAL EntryDe bitCreditJan. 1, 2010Investment in Subsidiary$500,000Cash$500,000Purchased 80% of subsidiarySubsidiary Equity Position as of 1/ 1/ 2010:Common Stock$10,000APIC$ 300,000Retained Earnings$ 240,000$ 550,000CAD80%Ownership80%20%100%ParentNCITotal ImpliedFair Value Given Up$500,000$125,000$625,000Book Value Received$440,000$110,000$550,000Difference$60,000$15,000$75,000Land$60,000$15,000$75,000Balance$-$-$-100%80%During 2010, Subsidiary declared dividends in the amount of$50,000$40,000During 2010, Subsidiary had net income in the amount of$250,000$200,000100%80%During 2011, Subsidiary declared dividends in the amount of$125,000$100,000During 2011, Subsidiary had net income in the amount of$125,000$100,000100%80%During 2012, Subsidiary declared dividends in the amount of$125,000$100,000During 2012, Subsidiary had net income in the amount of$135,000$108,000100%80%During 2013, Subsidiary declared dividends in the amount of$100,000$80,000During 2013, Subsidiary had net income in the amount of$350,000$280,000Investment in SubsidiaryRETAINED EARNINGS80%Bal anceSubsidiary Retained Earnings as of 12/31/2009 was$240,000$500, 000as of 1/1/2010Sub Income 2010$250,000$200,000$200,000Sub Dividend 2010$(50,000)$(40,000)$(40,000)Subsidiary Retained Earnings as of 12/31/2010 was$440,000$660,000as of 12/31/2010Sub Income 2011$125,000$100,000$100,000Sub Dividend 2011$(125,000)$(100,000)$(100,000)Subsidiary Retained Earnings as of 12/31/2011 was$440,000$660,000as of 12/31/2011Sub Income 2012$135,000$108,000$108,000Sub Dividend 2012$(125,000)$(100,000)$(100,000)Subsidiary Retained Earnings as of 12/31/2012 was$450,000$668,000as of 12/31/2012Required:PREPARE THE WORKPAPER (and related workpaper entries)THAT WOULD BE MADE IN THE PREPARATION OFTHE CONSOLIDATED FINANCIAL STATEMENTS ON DECEMBER 31, 2010Equity Method - Year of Acquisition- the following workpaper entries are made:Using the above information, the workpaper entries for the Equity Method – Year of Acquisition are as follows:Equity Method - Year of Acquisition- the following workpaper entries are made:1Eliminate (parents share) of current year subsidiary income (Equity in Subsidiary Income).REAL EntryDe bitCredit2010Investment in Subsidiary$200,000Equity in Sub Income$200,000Workpaper Entry (1)De bitCre dit Equity in Sub Income$200,000Investment in Subsidiary$200,0002Eliminate (parents share) of current year subsidiary dividends.REAL EntryDe bitCredit2010Cash$40,000Investment in Subsidiary$40,000Workpaper Entry (2)De bitCre dit Investment in Subsidiary$40,000Dividend Declared - Subsidiary$40,000Q3. – True/False – The entry to eliminate subsidiary dividends (above) will reduce the subsidiary dividends to zero? Explain your answer.3Eliminate the Invest. in Subsidiary account against (offset by) the subsidiary equity accounts.80%Ownership80%20%100%ParentNCITotal ImpliedFair Value Given Up$500,000$125,000$625,000Book Value Received$440,000$110,000$550,000Difference$60,000$15,000$75,000Land$60,000$15,000$75,000Balance$-$-$-Workpaper Entry (3)De bitCre ditACommon Stock - Subsidiary$10,000AAPIC - Subsidiary$300,000BRetained Earnings - Subsidiary$240,000CDifference$75,000DInvestment in Subsidiary$500,000ENCI$125,000At AcquisitionBeg. Current YearRE ChangeCommon Stock$ 10,000$10,000APIC$300,000$300,000Retained Earn.$240,000$240, 000$-$550,000$550,000Notes:Remember, 100% of the sub's equity account balances needto be eliminated.ANo change from the date of acquisition.BWe need to eliminate RE balance as of the beginnng of the current year.CNever changes.DInvestment in Subsidiary (Investment Account Value at the Beg. Of the Current Year)ENCI (NCI Account Value at the Beg. Of the Current Year )Q4. – Short Answer - Explain why the entry to eliminate the investment in subsidiary account is identical to the same entry for the Cost Method – Year of Acquisition?Parent Company and SubsidiaryConsolidated Statements WorkpaperFor the Year Ended December 31, 2010Workpaper (Elimination) EntriesConsolidatedParentSubsidiaryDe bitCreditNCIBal anceIncome StatementSales$1,000,000$480,000$1,480,000Equity in Subsidiary Income$200,000$-$200,000(1)$-Total Revenue$1,200,000$480,000$1,480,000COGS:Inventory 1/1$150,000$50,000$200,000Purchases$250,000$150,000$400,000Available for Sale$400,000$200,000$600,000Inventory 12/31$100,000$25,000$125,000Cost of Goods Sold$300,000$175,000$475,000Selling Expense$65,000$40,000$105,000General and Administrative Expenses$50,000$35,000$85,000Other Expenses$25,000$15,000$40,000Total Expenses$440,000$265,000$705,000Net/Consolidated Income$775,000Noncontrolling Interest In Consolidated Inc.$ 43,00043,000Net Income to Retained Earnings$760,000 $215,000$200,000$-$ 43,000 $732,0004Distribute the difference between implied and book value of the equity acquired.Workpaper Entry (4)De bitCre ditLand$75,000Difference$75,000The following 3- Section workpaper has been developed to exhibit how the workpaper entries are utilized in the workpaper to arrive at correctly stated consolidated balances.Calc. and InputNCI Portion of Sub Income$215,00020%NCI %$43,000$Workpaper (Elimination) EntriesConsolidatedParentSubsidiaryDe bitCreditBal anceRetained Earnings StatementRetained Earnings 1/1 Beg. Of Current YearParent Company$1,130,000$1,130,000Subsidiary$240,000$240,000(3)$-Net Income from above$760,000 $215,000$200,000$-$ 43,000 $732,000Dividend DeclaredParent Company$100,000$100,000Subsidiary$50,000$40,000(2)$ 10,000$-Retained Earnings 12/31 End of Current Year $1,790,000 $405,000$440,000$40,000$ 33,000 $1,762,000Workpaper (Elimination) EntriesConsolidatedParentSubsidiaryDe bitCreditBal anceBal ance SheetAssetsCash$350,000$120,000$470,000Accounts Receivable$150,000$100,000$250,000Inventory @ 12/31$100,000$25,000$125,000Investment in Subsidiary$660,000$-$40,000(2)$200,000(1)$-$500,000(3)Building$500,000$200,000$700,000Equipment$2,200,000$1,100,000$3,300,000Land$400,000$90,000$75,000(4)$565,000Other Assets$65,000$25,000$90,000Difference$-$-$75,000(3)$75,000(4)$-Total Assets$4,425,000$1,660,000$5,500,000LiabilitiesAccounts Payable$210,000$250,000$460,000Other Short-Term Liabilities$75,000$50,000$125,000Mortgage Payable$150,000$-$150,000Longt-Term Debt$1,400,000$645,000$2,045,000Total Liabilities$1,835,000$945,000$2,780,000EquityCommon StockParent Company$50,000$50,000Subsidiary Company$10,000$10,000(3)$-APICParent Company$750,000$-$750,000Subsidiary Company$300,000$300,000(3)$-Retained Earnings from above$1,790,000 $405,000$440,000$40,000$ 33,000 $1,762,0001/1 Noncontrolling Interest$125,000$ 125,00012/31 Noncontrolling Interest$ 158,0$158,000Total Equity$2,590,000$715,000$2,720,000$940,000$940,000Total Liabilities and Equity$4,425,000$1,660,000$5,500,000The Net Income calculated above is carried down to the Statement of Retained Earnings (blue line below).(3)00Equity Method - After Year of Acquisition – Is the second year of ownership and beyond. Thus, if the subsidiary was purchased on January 1, 2010 (continuing with the same example) and we are reporting for the year ending December 31, 2013, we would be reporting After Year of Acquisition. The same journal entries are used for the Equity Method – Year of Acquisition and Equity Method – After Year of Acquisition.Required:PREPARE THE WORKPAPER (and related workpaper entries)THAT WOULD BE MADE IN THE PREPARATIONOF THE CONSOLIDATED FINANCIAL STATEMENTS ON DECEMBER 31, 2013Equity Method - AFTER Year of Acquisition- the following workpaper entries are made:1Eliminate (parents share) of current year subsidiary income (Equity in Subsidiary Income).REAL EntryDe bitCredit2013Investment in Subsidiary$280,000Equity in Sub Income$280,000Workpaper Entry (1)De bitCre dit Equity in Sub Income$280,000Investment in Subsidiary$280,0002Eliminate (parents share) of current year subsidiary dividends.REAL EntryDe bitCredit2013Cash$80,000Investment in Subsidiary$80,000Workpaper Entry (2)De bitCre dit Investment in Subsidiary$80,000Dividend Declared - Subsidiary$80,0003Eliminate the Investment in Subsidiary account against (offset by) the subsidiary equity accounts.CAD80%Ownership80%20%100%ParentNCITotal ImpliedFair Value Given Up$500,000$125,000$625,000Book Value Received$1$110,000$550,000Difference$499,999$15,000$75,000Land$499,999$15,000$75,000Balance$-$-$-At AcquisitionBeg. Current YearRE ChangeCommon Stock$ 10,000$10,000APIC$300,000$300,000Retained Earn.$240,000$450, 000$210,000$550,000$760,000Workpaper Entry (3)De bitCre ditACommon Stock - Subsidiary$10,000AAPIC - Subsidiary$300,000BRetained Earnings - Subsidiary$450,000CDifference$75,000DInvestment in Subsidiary$668,000ENCI$167,000$835,000$835,000$125,000NCI (At acquisition)$42,000NCI's % of Net Earnings Change$167,000$500,000Investment in Sub (At acquisition)$168,000RE Change @80%$668,000Investment in Sub (At 12/31/12)Notes:Remember, 100% of the sub's equity account balances needto be eliminated.ANo change from the date of acquisition.BWe need to eliminate RE balance as of the beginnng of the current year.CNever changes.DInvestment in Subsidiary (Investment Account Value at the Beg. Of the Current Year)ENCI @ Acquisition + NCI % Ownership of Change in REQ5. – Short Answer – Why is the credit to the Investment in Subsidiary for $668,000 the same as the entry (to eliminate the investment in subsidiary account) used in the Cost Method – After Year of Acquisition (both were for a $668,000 credit)?4Distribute the difference between implied and book value of the equity acquired.Workpaper Entry (4)De bitCre ditLand$75,000Difference$75,000DIFFERENCES – ACCOUNTING FOR DEPRECIABLE ASSETSAssume that in the above example that the “Difference” between Fair Value Given Up and Book Value Received was due to the FMV of Equipment being greater than the related book value by$75,000 (instead of Land per above).Assumption: At purchase on January 1, 2010 the remaining useful life of the equipment (discussed in the preceding paragraph) of 10 years. The allocation of difference entry would be as follows:Note: The following entries would be necessary for the Cost Method and the Partial Equity Method.2010 EntryAccount EquipmentDifferenceDebit$75,000Credit$75,000Depreciation Expense$ 7,500Equipment$ 7,5002011 EntryAccount EquipmentDifferenceDebit$75,000Credit$75,000Beg. Retained Earnings – Parent$ 6,000Note 1NCI$ 1,500Depreciation ExpenseEquipment$ 7,500$15,000Note 1 – Impact of previous year depreciation expense on Parent RE and NCI (must be accounted for).

stock acquisition homework help

Question # 00048911 Posted By: solutionshere Updated on: 02/16/2015 12:05 AM Due on: 02/16/2015
Subject General Questions Topic General General Questions Tutorials:
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Module1 – Business Combination and Consolidation

Stock Acquisition – Consolidated Financial Statements – AFTERDateofAcquisition

Instructor Comment:The followinglesson module was developed to assist students in their understandingofthe corresponding subject matterin the coursetextbook. The followingis nota replacementfor thedetailedpresentation providedby theauthors ofthe text, but instead is an attempt to providestudents with a pragmaticdirect review with heavyemphasis on process.

Myrecommendation is to approach the coursematerial in the followingsequence.

1. Read/studytheassignedcorrespondingsections of thetext.

2. Read the “Chapter Review” (PowerPoint)posted in D2L.

3. Read/completethe correspondinginstructordeveloped “InstructorSubject Matter Presentation” (THIS DOCUMENT)posted in D2L.

4. Completethe assigned text questions, exercises and problems (author recommended solutions for assigned odd exercises posted in D2L).

5. Reviewthe correspondinginstructordeveloped“InstructorProblemSolving Modulesposted in D2L.

As discussed inISMP #1(DateofAcquisition) forstock acquisitions wheresignificant influence and control exist, the acquirer (parent)is required bytheSEC, for financialreportingpurposes, to consolidatethe acquired company(subsidiary).Wediscussed a3-StepProcess(below)to be followed in the creationof consolidated financialstatements. The same3-Step Process is appliedin Stock Acquisition –AfterDateofAcquisition but involves increasedcomplexitydueto the fact that timehas passed(ongoingoperations ofthe acquired companymust be consolidated).

Unlikethe accountingforstock acquisitions as ofthedateofacquisition (which required the preparation of the consolidated balancesheet only)the accounting for stock

acquisitionsafterthedateof acquisition requireconsolidation for all financial statements (incomestatement, statement of retainedearnings, balancesheet and statement of cash flows). The focus ofthisISMP will beon theincomestatement, statement of retained earningsand the balancesheet.

3-Step Process:

* Step 1 – Assess theBusiness Scenario* Step 2 – PreparetheCAD

* Step 3 – Determine Workpaper Entries

Note:RefertoISMP#1forfurtherdetail.


The first two steps ofthethreestep process arethesame forstockacquisitions on thedateof acquisition as theyareforstock acquisitions afterthedateofacquisition. The keychanges take placein Step 3.


Step3- Determine theRequired Workpaper Entries


•Complete Workpaper

•Complete Financial Statement(s)


To determinetherequired workpaper entriesforstock acquisitions afterthedateofacquisition themethod of accounting used bytheparent companyfortheInvestment in Subsidiarymust be determined. Thecompanyhas two accountingoptions formaintaining theinvestment in subsidiaryaccount, the “Cost Method”orthe “Equity Method.”The accounting method used dictates the workpaper entries requiredfor consolidation.In eithercase, the resulting consolidated financial statements areidentical. Thekeyto accurate consolidated financial statements is thedevelopment and application ofthe appropriate workpaper entries.

RECORDING ANDMAINTAININGTHE INVESTMENT INSUBSIDIARY

COST METHOD

RecordingtheinitialInvestment in Subsidiaryis the same whethertheCost Method orthe EquityMethod is applied.

Account

Debit

Credit

Investmentin Subsidiary

$1,000,000

*Cash

$1,000,000

* - Themethod ofpayment in this exampleis cash, but othersources of funds could also beused

to payfortheinvestment(i.e. issuanceofstock).

MaintainingtheInvestment in Subsidiaryis wheresignificant differencesexist between the Cost Method and EquityMethod, creatingtheneed for different workpaperentries. Maintaining


the“Investment in Subsidiary” account using theCost Methodcould bedescribedas NOT maintainingthe“Investment in Subsidiary”account. UndertheCost Method thereis no adjustment to the“Investment in Subsidiary”account balance(with the exception ofinstances wherealiquidatingdividend occurs). Thus, theonlyinvestment related entry,aftertheinitial investment (purchase) entry, is therecordingofdividend income.

When adividend is received theparent companymakes the followinginvestment related entry:

Account

Debit

Credit

Cash

$40,000

Dividend Income

$40,000

Asyoucan see bythe entryabovetheinvestment in subsidiaryaccount is not affected. Therefore, thebalanceoftheinvestment in subsidiaryremains at theinitial investment cost recorded on the dateofacquisition.

EQUITYMETHOD

RecordingtheinitialInvestment in Subsidiaryis the same whethertheCost Method orthe EquityMethod is applied.

Account

Debit

Credit

Investmentin Subsidiary

$1,000,000

*Cash

$1,000,000

* - Themethod ofpayment in this exampleis cash, but othersources of funds could also beused

to payfortheinvestment(i.e. issuanceofstock).

Maintainingthe“Investment in Subsidiary”account usingtheEquity Method of accounting could bedescribed as a continuous effort to maintain an accuratevaluationfor reporting purposes. The EquityMethod attempts to account for all income and dividends (based on the ownership %)recorded by thesubsidiary. Essentially, the changein theinvestment in subsidiary balancereflects the truevalueoftheinvestment assumingincomeless dividends is atrue reflection ofvalue change.

Therefore, the investment related entries,aftertheinitial investment (purchase) entry, is the recordingofincome anddividends. The recording ofincomeis accounted for usingthe followingentry(assume thesubsidiaryis 80% owned and had incomeof$250,000):


Account

Debit

Credit

Investmentin Subsidiary

$200,000

Equity in Subsidiary Income

$200,000

Clearly, the aboveentryimpacts the investment in subsidiaryaccount balance (increasingthe account balanceby$200,000).

The accounting fordividend declared and paid follows thesamelogic.Iftheparentcompanyis receivingdividends, the parent is essentiallytakingvalueout of theinvestment. The recording ofdividendreceived is accounted forusing thefollowingentry(assume thesubsidiaryis 80% owned and declared adividend of$50,000):

Account

Debit

Credit

Cash

$40,000

Investmentin Subsidiary

$40,000

Clearly, the aboveentryimpacts the investment in subsidiaryaccount balance (decreasingthe account balanceby$40,000).

Q1.– Calculation – What it the “Investment in Subsidiary”account balance at the end ofthe year (in theexample above)usingtheCost Method and EquityMethod?

WORKPAPERENTRIES – ELIMINATIONOFTHE INVESTMENTINSUBSIDIARY

Theinvestment relatedentries (discussed above)must betaken into account when developing workpaper entries. Theworkpaperentries essentiallyeliminatetheinvestment in subsidiary(key offset is the equityaccounts ofthesubsidiary)which upon elimination allows forthe consolidation of theparent and subsidiary,whichcombines the related incomestatement, statement of retained earnings, and balancesheetaccounts oftheparentand subsidiary.

COST METHOD

Workpaper entriesrequired fortheCost Methodmust account for all oftheinvestment entries made (ornot made)to theinvestment in subsidiaryaccount. Inaddition, fortheCost Method, thetimingofthe consolidation impacts the application ofthe workpaperentries. The two time periods arethe Yearof Acquisition and After Yearof Acquisition.


Cost Method -YearofAcquisition–Is thefirstyearofownership of thesubsidiary. Thus, ifthe subsidiarywas purchasedon January1, 2010 andwe are reporting fortheyear endingDecember31, 2010, we would bereportingYearof Acquisition.

Assumethefollowing baseinformation:

COST METHOD USEDBYPARENT

REALEntry

Debit

Credit

Jan.1,2010

InvestmentinSubsidiary

$

500,000

Cash

$

500,000

Purchased80%ofsubsidiary.

SubsidiaryEquityPositionasof1/1/2010:

CommonStock

$ 10,000

APIC

$ 300,000

RetainedEarnings

$ 240,000

$ 550,000

CAD

80%

Ownership

80%

20%

100%

Parent

NCI

TotalImplied

FairValueGiven Up

$

500,000

$

125,000

$

625,000

BookValueReceived

$

440,000

$

110,000

$

550,000

Difference

$

60,000

$

15,000

$

75,000

Land

$

60,000

$

15,000

$

75,000

Balance

$

-

$

-

$

-

100%

80%

During2010,Subsidiarydeclareddividendsintheamountof

$

50,000

$

40,000

During2010,Subsidiaryhadnetincomeinthe amountof

$

250,000

$

200,000

SubsidiaryRetainedEarningsasof12/31/2009was

$

240,000


For theYearof AcquisitionCOSTMETHOD-thefollowingthree workpaperentries arerequired:

1

Eliminate(parentsshare)ofcurrentyearsubsidiarydividendincome.

REALEntry

Debit

Credit

Cash

$ 40,000

DividendIncome

$ 40,000

WorkpaperEntry(1) Debit

DividendIncome $ 40,000

DividendDeclared-Subsidiary

$

Credit

40,000

2 EliminatetheInvestmentinSubsidiaryaccountagainst(offsetby)thesubsidiary equityaccounts.

WorkpaperEntry(2) Debit Credit

A

CommonStock-Subsidiary

$ 10,000

A

APIC-Subsidiary

$ 300,000

B

RetainedEarnings-Subsidiary

$ 240,000

C

Difference

$ 75,000

D

InvestmentinSubsidiary

$ 500,000

E

NCI

$ 125,000

Notes:

Remember,100%ofthesub's equityaccount balancesneed

tobeeliminated.

A

No changefromthedateofacquisition.

B

Weneedto eliminateREbalanceas ofthebeginnngofthecurrentyear.

C

Neverchanges.

D

Investment inSubsidiary(Investment AccountValueattheBeg.OftheCurrent Year)

E

NCI(NCIAccountValueat theBeg.OftheCurrentYear)

Q2. –Short Answer- The adjustment to the“Investment in Subsidiary” account is as ofthe beginningoftheyear. What is the logicorreasonthe adjustment is as ofthebeginningofthe year?

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