CONSOLIDATION AFTER

ACQUISITION
• Effect of Internal Accounting Method “After
Consolidation”
• Acquisition Method Treatments refers to entries
− Receivables / Payables in the years after

− Sales / Inventory
− Investment / Subsidiary Equity
• Consolidation (Basic Example)
• Acquisition Method Treatments (continued)
− Income Reported by the Subsidiary
− Dividends Paid to the Parent
− Excesses between Subsidiary BV and FMVs
• Push Down Accounting
• Consolidation (More Complex Example)
− Assuming Equity Method Internally
− Assuming Initial Value Method Internally
 EFFECT OF INTERNAL ACCOUNTING
METHOD
Parent will use one of the following for internal
accounting:
• Initial Value (Cost) Method
• Equity Method
• Partial Equity Method

Effect:
Effect Each method requires different elimination
entries.
Result:
Result All methods yield same result after
consolidation.

Partial Equity Method:

Method
• Parent recognizes reported subsidiary income.
• Dividends reduce investment balance.
• No other equity adjustments are made.

Consolidation after Acquisition 2

 ACQUISITION METHOD
TREATMENTS
Treatment of Receivables / Payables

 Problem – Inappropriate for company to “owe

money to itself”
 Treatment:
Treatment Eliminate:
− Payable of borrower
− Receivable of lender

Example:
Example Parent makes a loan to the subsidiary
for $100,000.
Elimination Entry:
Entry
Note Payable 100,000
Note Receivable 100,000

Consolidation after Acquisition 3

 ACQUISITION METHOD
TREATMENTS
Treatment of Sales / Inventory
 Problem – Inappropriate for company to make
a profit by “selling to itself”
 Treatment:
Treatment Eliminate:
− Profit related to intercompany sale from
retained earnings of seller
− Profit related to the intercompany sale of
inventory of the buyer
− Sale from revenue on consolidated income
statement

Example:
Example Parent sells inventory that cost $200 to
a subsidiary for $220. The subsidiary has not sold
the inventory externally.
Parent Entry:
Entry
Cash 220
Sales 220
CoGS 200
Inventory 200

Subsidiary Entry:
Entry
Inventory 220
Cash 220

Elimination Entry:
Entry
Sales 220
CoGS 200
Inventory 20
Or if closed:

Consolidation after Acquisition 4

Retained Earnings 20
Inventory 20
ACQUISITION METHOD
TREATMENTS
Treatment of Investment / Subsidiary
Equity
 Problem – Inappropriate to report an
“investment in itself”
 Treatment:
Treatment Eliminate:
− Investment in the subsidiary
− Subsidiary common stock, APIC, and
retained earnings (removes subsidiary equity
from consolidated statements)

Example:
Example Parent obtains ownership of a
subsidiary.
Elimination Entry:
Entry
Common Stock (of Sub) 200,000
Retained Earnings (of Sub) 300,000
Investment in Subsidiary (of Parent)
500,000

Note:
Note This entry
is made each

Consolidation after Acquisition 5

 CONSOLIDATION
Basic Example
Mother, Corp. purchases all the common stock of
Daughter, Co. at their book values.

Other information:
information
 Daughter owes Mother $200 on account
 Last year, Daughter purchased $2,000 in inventory
from Mother.
 The original inventory cost to Mother was $1,500
(profit of $500).
 Daughter had not sold the inventory by year end.

Consolidation after Acquisition 6

 CONSOLIDATION
Basic Example (Continued)
Accounts Prior to Elimination

Mother Daughte
Balance Sheet Corp. r, Co.
Assets
Cash 2,000 1,000
Receivables 30,000 10,000
Inventory 32,000 20,000
Fixed Assets 127,000 86,000
Investment in
Daughter 100,000 0
Total Assets 291,000 117,000

Equities
Payables 20,000 2,000
Debt 70,000 15,000
Common Stock 150,000 70,000
Retained Earnings 51,000 30,000
Total Equities 291,000 117,000

The following eliminations are necessary for the

consolidated balance sheet. Eliminate:
(a) the $200 intercompany receivable / payable
(b) unrealized profit of $500 from intercompany sale from
the buyer inventory and seller retained earnings
(c) the $100,000 investment by Mother and the equity of
Daughter.

Consolidation after Acquisition 7

 CONSOLIDATION
Basic Example (Continued)
Elimination Entries

Balance
Eliminations
Sheet
Daughte Consolidat
Mother Debit Credit
r ed
Assets
Cash 2,000 1,000 3,000
Receivables 30,000 10,000 (a) 200 39,800
Inventory 32,000 20,000 (b) 500 51,500
Fixed Assets 127,000 86,000 213,000
Investment in (c)
100,000 0 0
Daughter 100,000
Total Assets 291,000 117,000 307,300

Equities
Payables 20,000 2,000 (a) 200 21,800
Debt 70,000 15,000 85,000
(c)
Common Stock 150,000 70,000 150,000
70,000
Retained
51,000 30,000 (c) 30,000 50,500
Earnings
(b) 500
Total Equities 291,000 117,000 100,700 100,700 307,300

(a) the $200 intercompany receivable / payable

(b) unrealized profit of $500 from intercompany sale from the
buyer inventory and seller retained earnings
(c) the $100,000 investment by Mother and the equity of
Daughter.

Thought Question:
Question Do any of the
entries need to be repeated in
subsequent periods?

Consolidation after Acquisition 8

 ACQUISITION METHOD
TREATMENTS
Income Reported by the Subsidiary

 Problem – Equity method recorded subsidiary

income as an increase in the value of the
investment.
 Treatment:
Treatment Eliminate:
− Investment of parent
− Income from Subsidiary of parent

Example:
Example During the year, the subsidiary
informed the parent of earnings of $400,000. The
parent uses the equity or partial equity method.

Original Entry by Parent:

Parent
Investment in Subsidiary (BS) 400,000
Equity in Subsidiary Income (IS) 400,000

Elimination Entry:
Entry
Equity in Subsidiary Income (IS) 400,000
Investment in Subsidiary 400,000

 Reason for Entry:

Entry Consolidated statements
should include 100% of subsidiary sales and
expenses (not proportional amount as a separate
line called “Equity in Subsidiary Income”)

Consolidation after Acquisition 9

 ACQUISITION METHOD
TREATMENTS
Dividends Paid to the Parent
 Problem – Equity method recorded dividend
from subsidiary as a decrease in the value of the
investment.
 Treatment:
Treatment Eliminate:
− Investment of parent
− Dividends Paid or RE of subsidiary

Example:
Example During the year, the subsidiary paid the
parent $50,000 in dividends. The parent uses the
equity or partial equity method.

Subsidiary Entry:
Entry
Dividends Paid 50,000
Cash 50,000

Parent Entry:
Entry
Cash 50,000
Investment in Subsidiary 50,000

Elimination Entry:
Entry
Investment in Subsidiary 50,000
Dividends Paid 50,000

Consolidation after Acquisition 10

 ACQUISITION METHOD
TREATMENTS
Excesses between Subsidiary BV and FMVs
 Problem – Assets of subsidiary must be
adjusted to fair market value
 Treatment:
Treatment
− Eliminate Investment of parent
− Increase Value of Assets of Subsidiary

Example:
Example A parent acquires a subsidiary whose
land was undervalued by $1,000.
Elimination Entry:
Entry
Land 1,000
Investment in Subsidiary 1,000

Note: Entry not needed if “Push Down” accounting is

used by subsidiary.

Consolidation after Acquisition 11

 PUSH DOWN ACCOUNTING
What it does:
does
Subsidiary restates assets and liabilities on OWN books at
FMV. (Goodwill determined in same manner.)

Justification:
Justification
Change in ownership justifies new basis of reporting.

Controversy:
Controversy
Is difference income or equity to the subsidiary?
Typically net assets are increased. Example:

Equipment 500
APIC or RE or Revaluation due to Consolidation
500

Current Requirements
Not required by the FASB, but the SEC
• required when subsidiary is “substantially wholly owned” (>
95%, NCI < 5%)
• encourages if subsidiary is publicly-traded
• discourages if ownership is < 80%

NOTE:
NOTE This is mostly an internal issue unless: The subsidiary is
substantially wholly owned, but NCI is publicly traded.
 SAB 54 and 73

Advantages:
Advantages “Push down” accounting
Push down eliminates several saves me from having to
consolidation entries: repeat several entries
each year.
• recognition of FMV of assets,
and
• amortization of excess amounts

Consolidation after Acquisition 12

Consolidation after Acquisition 13
 COMPREHENSIVE EXAMPLE
Gander Inc. obtains 100% of Gosling Co. on Jan 1, 2009 for
$490,000 in cash. Gander uses the equity method for internal
purposes.

Gander, Gosling,
Inc. Co.
Cash 120,000 60,000
Accounts Receivable 270,000 40,000
Inventory 550,000 100,000
Equipment (5 year 800,000 200,000
life)
Buildings 600,000 120,000
Land 170,000 80,000
Investment in 490,000
Gosling, Co.
Accounts Payable 50,000
LT Liabilities 150,000
Common Stock 300,000
Retained Earnings 100,000

On Jan 1, 2009, Gosling’s assets had fair market value of

Land 86,000
Building 144,000
Equipment 200,000

Gosling income and dividends:

2009 2010
Income 80,000 110,000
Dividends 10,000 30,000
The difference between BV and FMV follows:
FMV BV Difference
Land 86,000 80,000 6,000
Building 144,000 120,000 24,000
30,000

Consolidation after Acquisition 14

Fair Value Allocation and Annual Amortization:
Consideration (Acquisition FV) ................. $490,000
CS + RE =
Book value (assets minus equities) .......... (400,000)
$300,000 +
Excess fair value over book value ............ $90,000
$100,000 =
$400,000
Excess fair value assigned
Annual
Excess Life Amortizati
on
Land $6,000 indefinite -0-
Buildings 24,000 4 yrs. $6,000
Total 30,000
Goodwill 60,000 Indefini -0- Plug to find
te Goodwill
Total $90,000 $6,000

Consolidation Entries as of December 31, 2009

Elimination of Subsidiary Equity
Common Stock—Gosling................................ 300,000
Retained Earnings—1/1/09 ........................... 100,000
Investment in Gosling .............................. 400,000
Allocation of FMV Excess (not needed if Push-Down is used)
Land .............................................................. 6,000
Buildings ....................................................... 24,000
Goodwill ........................................................ 60,000
Investment in Gosling .............................. 90,000
Record Amortization of Excess (not needed if Push-Down is
used)
Depreciation expense.................................... 6,000
Buildings................................................... 6,000
Eliminate Subsidiary Income
Equity in Subsidiary Income (IS).................... 74,000
Investment in Gosling .............................. 74,000

Income – Amortization of Excess = $80,000 - $6,000 = If74,000

push-down is used,
Gosling would report
Eliminate Subsidiary Dividend $74,000 in income.
Investment in Gosling ................................... 10,000
Dividends Paid ......................................... 10,000

Consolidation after Acquisition 15

Consolidation Entries as of December 31, 2010
Elimination of Subsidiary Equity
Common Stock—Gosling ............................... 300,000
Retained Earnings—1/1/10 *.......................... 170,000
Investment in Gosling .............................. 470,000
* Beginning Balance + Net Income + Dividends = 100,000 + 80,000 – 10,000 = 170,000

Allocation of FMV Excess (not needed if Push-Down is used)

Land .............................................................. 6,000
Buildings *..................................................... 18,000
Goodwill ........................................................ 60,000
Investment in Gosling .............................. 84,000
* Original excess – prior year depreciation = $24,000 - $6,000 = $18,000

Record Amortization of Excess (not needed if Push-Down is

used)
Depreciation expense.................................... 6,000
Buildings................................................... 6,000
Eliminate Subsidiary Income
Equity in Subsidiary Income (IS)................... 104,000
Investment in Gosling .............................. 104,000
* Income – Amortization of Excess = $110,000 - $6,000 = 104,000

Eliminate Subsidiary Dividend

Investment in Gosling ................................... 30,000
Dividends Paid ......................................... 30,000

Consolidation after Acquisition 16