ACCOUNTING-Stock Acquisition – Consolidated Financial Statements – AFTER Date Of Acquisition

QUESTION

Module1 – Business Combination
and Consolidation
.0/msohtmlclip1/01/clip_image001.gif”>Stock Acquisition – Consolidated
Financial Statements – AFTERDateofAcquisition

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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).

Unlike
the accountingforstock acquisitions
as ofthedateofacquisition (which required
the preparation of
the consolidated balancesheet
only)the accounting
for
stock
acquisitions after
thedateof 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:

.0/msohtmlclip1/01/clip_image003.gif” alt=”*”> Step 1 – Assess the
Business Scenario
.0/msohtmlclip1/01/clip_image003.gif” alt=”*”> Step
2 – PreparetheCAD
.0/msohtmlclip1/01/clip_image003.gif” alt=”*”> Step
3 – DetermineWorkpaper Entries

Note:RefertoISMP#1forfurtherdetail.

.0/msohtmlclip1/01/clip_image004.gif”>The first two
steps ofthethreestep process
arethesame forstockacquisitions
on thedateof acquisitionas theyareforstock
acquisitions afterthedateofacquisition.
The
keychanges take
placein Step 3.

Step3- Determine theRequired Workpaper Entries

•Complete Workpaper
•Complete Financial
Statement(s)

.0/msohtmlclip1/01/clip_image005.gif”>To determine
therequired
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 accountingmethod
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 thesame whethertheCost Method
orthe EquityMethod
is applied.

Account

Debit

Credit

Investment
in Subsidiary

$1,000,000

*Cash

$1,000,000

* – Themethod of
payment 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 usingtheCost 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 seebythe entryabovetheinvestment
in subsidiaryaccount
is not affected.
Therefore,
thebalanceoftheinvestment in subsidiaryremains at
theinitial investment cost
recorded on the
dateofacquisition.

EQUITYMETHOD

RecordingtheinitialInvestment
in Subsidiaryis thesame whethertheCost Method
orthe EquityMethod
is applied.

Account

Debit

Credit

Investment
in Subsidiary

$1,000,000

*Cash

$1,000,000

* – Themethod of
payment in this exampleis
cash, but othersources of funds
could also beused
to payfortheinvestment(i.e. issuanceofstock).

Maintainingthe“Investment in Subsidiary”account using
theEquity 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,
theinvestment 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

Investment
in Subsidiary

$200,000

Equity in
Subsidiary Income

$200,000

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

The accounting
for
dividend declared and
paid
follows the
samelogic.Iftheparentcompanyis receivingdividends, the
parent is essentiallytakingvalueout of
theinvestment. The recording ofdividendreceived
is accounted forusingthefollowingentry(assume
thesubsidiaryis
80% owned and declared adividend
of$50,000):

Account

Debit

Credit

Cash

$40,000

Investment
in 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
for
theCost 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.

.0/msohtmlclip1/01/clip_image006.gif”>.0/msohtmlclip1/01/clip_image007.gif”>.0/msohtmlclip1/01/clip_image008.gif”>

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

Assumethefollowing
base
information:

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

.0/msohtmlclip1/01/clip_image009.gif”>

.0/msohtmlclip1/01/clip_image010.gif”>For theYearof Acquisition–COSTMETHOD-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
to
beeliminated.

A

No changefromthedateofacquisition.

B

Weneedto
eliminateREbalanceas ofthebeginnngofthecurrentyear.

C

Neverchanges.

D

Investment
in
Subsidiary(Investment
AccountValueattheBeg.OftheCurrent Year)

E

NCI(NCIAccountValueat theBeg.OftheCurrentYear)

.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image009.gif”>Q2. –Short Answer- The adjustment
to the“Investment
in Subsidiary” account is as
ofthe beginningoftheyear. What is the
logicorreasonthe adjustment
is as ofthebeginningofthe year?

3 Distributethedifferencebetweenimpliedandbook
valueoftheequity acquired.

WorkpaperEntry(3) Debit Credit

Land

$ 75,000

Difference

$ 75,000

.0/msohtmlclip1/01/clip_image012.gif”>.0/msohtmlclip1/01/clip_image013.gif”>.0/msohtmlclip1/01/clip_image014.gif”>.0/msohtmlclip1/01/clip_image015.gif”>.0/msohtmlclip1/01/clip_image016.gif”>

Cost Method –
After YearofAcquisition–Is
the
secondyearofownership
and beyond. Thus, if
thesubsidiarywas
purchased
on January1, 2010
(continuingwith thesame example) and we
are
reportingfortheyearending
December31, 2013,
we
would bereportingAfterYearof Acquisition.

Additional Data:

100%

80%

During2013,Subsidiarydeclareddividendsintheamountof

$

100,000

$

80,000

During2013,Subsidiaryhadnetincomeintheamount
of

$

350,000

$

280,000

SubsidiaryRetainedEarningsasof12/31/2009 was

$

240,000

SubsidiaryRetainedEarningsasof12/31/2012 was

$

450,000

CostMethod-AfterYearofAcquisition

-thefollowingworkpaperentriesaremade:

1

EstablishReciprocity(catchupimpactofparent’sshareofthesubsidiary’sincome

lessdividends).

Subsidiary’sRetainedEarningsatthebeginningofthecurrentyear(January1,2013)

$ 450,000

Subsidiary’sRetainedEarningsatacquisition(January1,2010)

$ 240,000

Difference-Representsthenetearningschange(netincomelessdividends)

$ 210,000

NETEarningsChange

Parent’sShare

80%

$ 168,000

InvestmentinSub

WorkpaperEntry

Debit

Credit

$ 42,000

NCI’s%is

20%

InvestmentinSubsidiary

$ 168,000

RetainedEarnings1/1CurrentYear-Parent

$ 168,000

2

Eliminate(parentsshare)ofcurrentyearsubsidiarydividendincome.

REALEntry

Debit

$

Credit

80,000

2013

Cash

$

80,000

DividendIncome

$

Debit
80,000

WorkpaperEntry

Credit

DividendIncome

DividendDeclared-Subsidiary

$

80,000

3 EliminatetheInvestmentinSubsidiary accountagainst(offsetby) the subsidiary’sequity accounts.

AtAcquisition Beg.CurrentYear

CAD 80%Ownership 80% 20% 100% CommonStock $Parent NCI TotalImplied APIC $

10,000
300,000

$ 10,000
$
300,000

FairValueGivenUp
BookValueReceived Difference
Land(1)
Balance

$ 500,000
$
$ 450,000 $
$ 50,000 $
$ 50,000 $
$ – $

125,000
50,000
75,000
75,000
–

$ 625,000
$ 550,000
$ 75,000
$ 75,000
$ –

RetainedEarn.
$
$

240,000
550,000

$
450,000

WorkpaperEntry Debit Credit

$ 125,000 NCI(Atacquisition)
$
42,000 NCI’s%ofNetEarningsChange

A CommonStock- Subsidiary
A
APIC- Subsidiary
B
Retained Earnings- Subsidiary C Difference
D
InvestmentinSubsidiary
E
NCI

$ 10,000
$ 300,000
$ 450,000
$ 75,000

$ 835,000

$ 668,000
$ 167,000
$ 835,000

$ 167,000

$ 500,000 Invest.inSub (Atacquisition)
$ 168,000 ReciprocityEntry
$ 668,000

.0/msohtmlclip1/01/clip_image017.gif”>
Notes: Remember, 100%ofthesub’s
equityaccountbalancesneed
A
Nochangefromthe dateof
acquisition. tobeeliminated.
B
We needtoeliminateREbalanceasof
the beginnngof
thecurrentyear. C Neverchanges.
D InvestmentinSubsidiary(InvestmentAccountValueattheBeg.Of
theCurrentYear+Reciprocity)
E NCI(NCIValueatacquisition+NCI%of
SubsidiaryNetEarningssinceacquisition)

4

Distributethedifferencebetweenimpliedandbookvalueoftheequityacquired.

Land

$ 75,000

Difference

$ 75,000

Equity Method -YearofAcquisition–Is the firstyearofownership of
thesubsidiary.
Thus, if thesubsidiarywas purchased
on January1, 2010
and wearereportingfortheyearending
December31, 2010, wewould be
reportingYearof Acquisition.

.0/msohtmlclip1/01/clip_image018.gif”>.0/msohtmlclip1/01/clip_image019.gif”>.0/msohtmlclip1/01/clip_image019.gif”>

Reviewthefollowingbasedata:

EQUITYMETHOD USEDBYPARENT

REALEntry

Debit

Credit

Jan.1,2010

InvestmentinSubsidiary

$ 500,000

Cash

$ 500,000

Purchased80%ofsubsidiary

SubsidiaryEquityPositionasof1/1/2010:

Common
Stock

$ 10,000

APIC

$ 300,000

RetainedEarnings

$
240,000

$
550,000

CAD

80%

Ownership

80%

20%

100%

Parent

NCI

TotalImplied

FairValueGivenUp

$ 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,Subsidiaryhadnet incomeintheamountof

$ 250,000

$ 200,000

100%

80%

During2011,Subsidiarydeclareddividendsintheamountof

$ 125,000

$ 100,000

During2011,Subsidiaryhadnet incomeintheamountof

$ 125,000

$ 100,000

100%

80%

During2012,Subsidiarydeclareddividendsintheamountof

$ 125,000

$ 100,000

During2012,Subsidiaryhadnet incomeintheamountof

$ 135,000

$ 108,000

100%

80%

During2013,Subsidiarydeclareddividendsintheamountof

$ 100,000

$ 80,000

During2013,Subsidiaryhadnet incomeintheamountof

$ 350,000

$ 280,000

InvestmentinSubsidiary

RETAINEDEARNINGS

80%

Balance

SubsidiaryRetainedEarnings
as of12/31/2009
was $ 240,000

$ 500,000

asof1/1/2010

SubIncome2010

$ 250,000

$ 200,000

$ 200,000

SubDividend2010

$ (50,000)

$ (40,000)

$ (40,000)

SubsidiaryRetainedEarnings
as of12/31/2010
was $ 440,000

$ 660,000

asof12/31/2010

SubIncome2011

$ 125,000

$ 100,000

$ 100,000

SubDividend2011

$ (125,000)

$ (100,000)

$ (100,000)

SubsidiaryRetainedEarnings
as of12/31/2011
was $ 440,000

$ 660,000

asof12/31/2011

SubIncome2012

$ 135,000

$ 108,000

$ 108,000

SubDividend2012

$ (125,000)

$ (100,000)

$ (100,000)

SubsidiaryRetainedEarnings
as of12/31/2012
was $ 450,000

$ 668,000

asof12/31/2012

Required:

PREPARETHE WORKPAPER (andrelatedworkpaper entries)THATWOULDBEMADEINTHEPREPARATIONOF

THECONSOLIDATEDFINANCIALSTATEMENTSONDECEMBER31,2010

EquityMethod-YearofAcquisition

-thefollowingworkpaper entriesaremade:

.0/msohtmlclip1/01/clip_image020.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>

.0/msohtmlclip1/01/clip_image020.gif”>Usingtheaboveinformation,
the workpaper entries
for
theEquity Method
– Yearof Acquisitionare as follows:

EquityMethod-YearofAcquisition

-thefollowingworkpaperentriesaremade:

1 Eliminate(parentsshare)ofcurrentyearsubsidiaryincome(EquityinSubsi

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…beginning xx the xxxxxxx year 3 xxx Statement is xxxxx The xxxxx xx eliminate xxxxxxxxxx dividends will xxx reduce the xxxxxxxxxx dividends xx xxxx Parent xxxxxxx is having xxxx 80% stake xx the xxxxxxxxxxx xxxx 20% xx the total xxxxxxxx declared by xxx subsidiary xxxxxxx xx Non-Controlling xxxxxxxx 4 The xxxx eliminating entry xx “Investment xx xxxxxxxxxxxxx is xxxx in Equity xxxxxx & Cost xxxxxx in xxx xxxx of xxxxxxxxxxx In…

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190011.docx (16.41 KB)Preview: the xxxxxx and xxxx no entries xxx made for xxxxxxxx paid xxx xxxxxx declared xx the subsidiary xxxx eliminating entry xx Cost xxxxx xxxxxx method xxx same in xxx year of xxxxxxxxxxx 5In xxxxxxxxxxxxxx xxxxxx method xxx cost method xxxx shows the xxxx investment xxxxxxx xxx when xxxxxxxxxxx entries are xxxxx the investment xxxxxxx in xxxx xxxxxxx is xxxxxxxx with the xxxx amount This xx due xx xxx
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