additional consolidation reporting issues

10-10-11

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Additional Consolidation Reporting Issues

10Electronic Presentation by

Douglas Cloud Pepperdine University

Baker / Lembke / KingBaker / Lembke / King

10-10-22


Peerless Products Corporation and SubsidiaryConsolidated Income Statement

For the Year Ended December 31, 20X2

Consolidated Income Statement, 20X2Consolidated Income Statement, 20X2

Sales$720,000

Gain on Sale of Land 30,000

$750,000 Less: Cost of Goods Sold $340,000

Depreciation Expense 74,800Other Expenses 105,000

-519,800Income Available to All Shareholders

$230,200 Income to Noncontrolling Interest

-15,000Consolidated Net Income

$215,200

10-10-33


Peerless Products Corporation and SubsidiaryConsolidated Statement of Cash Flows

For the Year Ended December 31, 20X2Cash Flows from Operating Activities:

Consolidated Net Income $215,200 Noncash Expenses, Revenues, Losses, and Gains included in Income:

Depreciation Expense 74,800 Income Assigned to Noncontrolling Interest 15,000 Gain on Sale of Land -30,000Increase in Accounts Receivable -105,000Increase in Inventory -95,000Increase in Accounts Payable 30,000

Net Cash Provided by Operating Activities

$l05,000

Top Top

portionportion

Top Top

portionportion

Consolidated Cash Flows Statement, 20X2Consolidated Cash Flows Statement, 20X2

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Consolidated Cash Flows Statement, 20X2Consolidated Cash Flows Statement, 20X2Peerless Products Corporation and Subsidiary

Consolidated Statement of Cash FlowsFor the Year Ended December 31, 20X2

Cash Flows from Investing Activities:Acquisition of Equipment -$100,000 Sale of Land 70,000

Net Cash Used in Investing Activities -$ 30,000

Cash Flows from Financing Activities:Dividends Paid:

To Parent Company Shareholders -$ 60,000To Noncontrolling Shareholders -8,000

Net Cash Used in Financing Activities -68,000

Net Increase in Cash$ 7,000

Bottom portionBottom portionBottom portionBottom portion

10-10-55


Consolidation Following a PoolingConsolidation Following a Pooling

When a business combination has qualified as a pooling of interests,

the consolidation is simplified because no new basis of

accounting has been established.

When a business combination has qualified as a pooling of interests,

the consolidation is simplified because no new basis of

accounting has been established.

10-10-66



On December 31, 20X0, Peerless Products Corporation exchanges 12,000 shares of its $10 par common stock for

90 percent of the 10,000 shares of Special Foods.

On December 31, 20X0, Peerless Products Corporation exchanges 12,000 shares of its $10 par common stock for

90 percent of the 10,000 shares of Special Foods.

(1) Investment in Special Foods Stock 270,000 Common Stock 120,000

Additional Paid-In Capital 60,000 Retained Earnings 90,000

Record acquisition of Special Foods stock.

$300,000 $300,000 x .90x .90

$300,000 $300,000 x .90x .90 $10 x $10 x

12,000 12,000 sharesshares

$10 x $10 x 12,000 12,000 sharesshares($200,000 x .90) ($200,000 x .90)

- $120,000- $120,000

($200,000 x .90) ($200,000 x .90) - $120,000- $120,000$100,000 x .90$100,000 x .90$100,000 x .90$100,000 x .90

10-10-77


Peerless Special Eliminations Item Products Foods Debits Credits Consolidated

Investment in Special Foods Stock 270,000

Common Stock 620,000 200,000Add. PI Capital 60,000Retained Earnings 390,000 100,000

Noncontrolling Interest

An entry is necessary to eliminate the investment balance.

An entry is necessary to eliminate the investment balance.

20X020X0

Consolidation Following a Pooling

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Investment in Special Foods Stock 270,000 (2) 270,000

Common Stock 620,000 200,000 (2) 200,000 620,000Add. PI Capital 60,000 60,000Retained Earnings 390,000 100,000 (2) 100,000 390,000

Noncontrolling Interest (2) 30,000 30,000


20X020X0

10-10-99


Special Foods reports net income of $50,000 for 20X1 and declares dividends of $30,000.

Special Foods reports net income of $50,000 for 20X1 and declares dividends of $30,000.

During 20X1, Peerless sells inventory that it purchased for $7,000 to Special Foods for $10,000. Special Foods

still holds all the inventory at the end of the year.

During 20X1, Peerless sells inventory that it purchased for $7,000 to Special Foods for $10,000. Special Foods

still holds all the inventory at the end of the year.


Original investment amount recorded $270,000 Income from subsidiary 45,000 Peerless’s share of dividends ($30,000 x .90) -27,000Balance of investment, December 31, 20X1 $288,000

10-10-1010



Income from Subsidiary 45,000

Dividends Declared (60,000 (30,000)


An entry is needed to eliminate the income from subsidiary.

An entry is needed to eliminate the income from subsidiary.

20X120X1


)

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Income from Subsidiary 45,000 (3) 45,000

Dividends Declared (60,000 (30,000) (3) 27,000



20X120X1

)

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Income to Noncontrolling Interest

Dividends Declared (60,000) (30,000) (3) 27,000


An entry should be made to assign income to noncontrolling interest.

An entry should be made to assign income to noncontrolling interest.


20X120X1

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Income to Noncontrolling Interest (4) 5,000 5,000


(4) 3,000 (60,000

Noncontrolling Interest (4) 2,000


20X120X1

)

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An entry is required to eliminate the beginning investment balance.

An entry is required to eliminate the beginning investment balance.


20X120X1

Retained Earnings, Jan. 1 390,000 100,000

Investment in Special FoodsStock 288,000 (3) 18,000

Common Stock 620,000 200,000


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Retained Earnings, Jan. 1 390,000 100,000 (5)100,000 390,000

Investment in Special FoodsStock 288,000 (3) 18,000

(5) 270,000Common Stock 620,000 200,000 (5)200,000 620,000


(5) 30 ,000 32,000


20X120X1

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An entry is needed to eliminate intercompany downstream sale of inventory.

An entry is needed to eliminate intercompany downstream sale of inventory.


20X120X1

Sales 400,000 200,000

Cost of Goods Sold 170,000 115,000

Inventory 100,000 75,000

10-10-1717



Sales 400,000 200,000 (6) 10,000 590,000

Cost of Goods Sold 170,000 115,000 (6) 7,000 278,000

Inventory 100,000 75,000 (6) 3,000 172,000


20X120X1

10-10-1818


Include in the consolidated income statement the revenue and expenses of the subsidiary as if it had been acquired at the beginning of the fiscal period, and deduct the parent’s share of the subsidiary’s preacquisition earnings at the bottom of the consolidated income statement.

Include in the consolidated income statement only the subsidiary’s revenue earned and expenses incurred subsequent to the date of combination.

Include in the consolidated income statement the revenue and expenses of the subsidiary as if it had been acquired at the beginning of the fiscal period, and deduct the parent’s share of the subsidiary’s preacquisition earnings at the bottom of the consolidated income statement.

Include in the consolidated income statement only the subsidiary’s revenue earned and expenses incurred subsequent to the date of combination.

Consolidation Following an Interim PurchaseConsolidation Following an Interim Purchase

The results of operations for a subsidiary purchased during the fiscal period are included in the consolidated income statement in one of two ways:

10-10-1919



On July 1, 20X1, Peerless Products purchases 80 percent of the common stock of Special Foods for

its underlying book value of $246,400.

On July 1, 20X1, Peerless Products purchases 80 percent of the common stock of Special Foods for

its underlying book value of $246,400.

Book value of Special Foods on January 1, 20X1: Common stock $200,000 Retained earnings 100,000

$300,000 Net income, January 1 to June 30, 20X1 20,000 Dividends, January 1 to June 30, 20X1 -12,000 Book value of Special Foods on July 1, 20X1 $308,000 Peerless’s ownership interest x .80 Book value on July 1, 20X1, of shares acquired $246,400

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The ownership situation on July 1, 20X1, is as follows:

P

S

7/1/X180%

Cost of investment $246,400 Book value (7/1/X1) Common stock-- Special Foods $200,000 Retained earnings-- Special Foods 108,000

$308,000Peerless’s share x .80 -246,400Differential $ -0- NCI

20%

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Parent Company EntriesParent Company Entries

On July 1, 20X1, Peerless Products records the purchase of Special Foods’ stock.

On July 1, 20X1, Peerless Products records the purchase of Special Foods’ stock.

July 1, 20X1

(7) Investment in Special Foods Stock 246,400 Cash 246,400

Record purchase of Special Foods stock.

During the second half of 20X1, Peerless records its share of Special Foods’ income.

During the second half of 20X1, Peerless records its share of Special Foods’ income.

(8) Investment in Special Foods Stock 24,000 Income from Subsidiary 24,000

Record equity-method income.

$30,000 $30,000 x. 80x. 80

$30,000 $30,000 x. 80x. 80

10-10-2222


Parent Company EntriesParent Company Entries

Peerless records dividends received from Special Foods during the second half of 20X1.

Peerless records dividends received from Special Foods during the second half of 20X1.

(9) Cash 14,400 Investment in Special Foods Stock 14,400

Record dividends from Special Foods.

$18,000 x .80$18,000 x .80$18,000 x .80$18,000 x .80

10-10-2323



An entry is needed to eliminate income from the subsidiary.

An entry is needed to eliminate income from the subsidiary.

20X120X1


Income from Subsidiary 24,000

Dividends Declared (60,000 (30,000)


)

10-10-2424



Income from Subsidiary 24,000 (10) 24,000

Dividends Declared (60,000 (30,000) (10) 14,400



20X120X1

)

10-10-2525




Income to Noncontrolling Interest



An entry is required to assign income to noncontrolling interest.

An entry is required to assign income to noncontrolling interest.

20X120X1

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Income to Noncontrolling Interest (11) 10,000 (10,000)


(11) 6,000



20X120X1

10-10-2727


Preacquisition Subsidiary Inc.Retained Earnings, Jan. 1 300,000 100,000 Dividend Decl. (60,000 (30,000 (10) 14,400

(11) 6,000

Investment in Special Foods 256,000 (10) 9,600

Common Stock 500,000 200,000 Noncontrolling Interest (11) 4,000


20X120X1

An entry is necessary to eliminate the beginning investment balance.

An entry is necessary to eliminate the beginning investment balance.


) )

10-10-2828




20X120X1

Preacquisition Subsidiary Inc. (12) 16,000 (16,000Retained Earnings, Jan. 1 300,000 100,000 (12)100,000 300,000Dividend Decl. (60,000 (30,000 (10) 14,400

(11) 6,0009,600 (60,000

Investment in Special Foods 256,000 (10) 9,600

(12)246,400Common Stock 500,000 200,000 (12)200,000 500,000 Noncontrolling Interest (11) 4,000

(12) 60,000 64,000

) )

)

)

10-10-2929


Peerless Products Corporation and SubsidiaryConsolidated Income Statement

For the Year Ended December 31, 20X1

Consolidated Income Statement, 20X1Consolidated Income Statement, 20X1

Sales$600,000

Cost of Goods Sold-285,000

Gross Margin$315,000

Expenses:Depreciation and Amortization $70,000Other Expenses 55,000

Total Expenses-125,000

$190,000 Preacquisition Subsidiary Income

-16,000Income to Noncontrolling Interest

-10,000Consolidated Net Income

$164,000

10-10-3030


Consolidated Earnings per ShareConsolidated Earnings per Share

Consol- idated

net income

+-

Adjust-ment for parent

securities

Percent owner-

ship held by parent

x

Income available

to common

share-holders of subsidi-

ary

+Shares held by parent

Diluted consoli-

dated EPS

=

x

Subsi-diary

diluted EPS

-

Weighted average of parent company shares

outstanding+

Shares of parent to be issued if dilutive

securities are converted and options exercised

10-10-3131


Consolidated Net IncomeConsolidated Net Income

Peerless’s separate operating income $140,000 Special Foods’ income before taxes 50,000 Total entity income before taxes $190,000 Consolidated income taxes (40%) -76,000Total entity income after taxes $114,000 Less: Income to noncontrolling shareholders ($30,000 x .20) -6,000Consolidated net income $108,000

10-10-3232


Special Food’s Earnings Per ShareSpecial Food’s Earnings Per Share

Special Foods’ net income $30,000 $30,000Interest effect of assumed conversion of

bonds, net of taxes ($100,000 x .06) x(1 - .40) 3,600

Income accruing to common stock $30,000 $33,600Weighted-average common shares

outstanding in 20X1 20,000 20,000Additional shares from assumed bond

conversion 4,000Weighted-average shares and share

equivalents 20,000 24,000

EPS $1.50 $1.40

Basic Diluted

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Chapter TenChapter Ten

The The EndEnd

additional consolidation reporting issues

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