MicheleAEtzold,CPA-CHAPTER.ppt

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Consolidated Statements:Subsequent to Acquisition Fundamentals of Advanced Accounting 1th EditionFischer, Taylor, and Cheng Consolidated Statements Subsequent to Acquisition Two basic methods to maintain the parent’s investment account: Equity Method (Simple Sophisticated) Cost Method Equity Method of Accounting for Investments Equity Method: Parent records income when subsidiary reports income Parent used percent of ownership time sub’s net income to record investment income Dividends treated as return of investment – investment account is reduced Sophisticated Equity Method recognizes amortization on the parent’s ledger for the difference from book value to fair value. Cost Method of Accounting for Investments Cost Method: Parent records income when subsidiary declares dividends Most commonly used method No adjustments to investment account Example – Company P and Subsidiary Company S Parent purchases 90% of Sub’s stock for $145,000. Sub has equity accounts: Common Stock $100,000 Retained Earnings 50,000 20X1 – Sub: Net Income = $30,000, Dividends = $10,000 20X2 – Sub: Net Loss = ($10,000), Dividends = $5,000 DD Schedule Example – Company P and Subsidiary Company S Price paid: $ 145,000 Interest acquired: Common stock $ 100,000 Retained earnings 50,000 Total equity 150,000 Ownership interest × 90% 135,000 Excess cost 10,000 Annual Life Amort. Patent …………………………… $10,000 10 $1,000 Parent Recording of Subsidiary Income (Year 1) Parent Recording of Subsidiary Income (Year 2) Worksheet Procedures The RE of the Sub and the Investment account must be at the same point in time Eliminate entries during the year to complete alignment When adjusted to the same point in time, the excess upon elimination will agree with the DD on purchase date Sophisticated Equ