ACC 4100, Chapter 3: Consolidations – Subsequent to the Date of Acquisition

How do we consolidate when parent and subsidiary continue as separate legal entities?

when the parent and subsidiary both continue as separate, legal entities, we have to “consolidate” the two companies at the end of every reporting period

Initial value method

the “Investment in S” account remains on the parent’s balance sheet at its initial value, and cash received from S is recorded as dividend income

equity method

income is recognized by the parent whenever the subsidiary earns (or loses) income

Partial equity method

the parent recognizes income from the subsidiary, and dividends reduce the Investment account

excess depreciation and/or amortization associated with writing acquired assets and liabilities up (or down) to their fair values is handled by recording periodic adjusting entries; unrealized gains on intercompany transactions are deferred; and dividends reduce the carrying value of the Investment account

Subsequent Consolidation When the Equity Method is Used

Ignore goodwill!

Journal entires

Dr. investment in s
Cr. cash

Dr investment in S
Cr. equity in investee income
(Income)

Dr. cash
Cr. investment in S
(dividends)

Dr. equity in investee income
Cr. investment in S
(To record excess depreciation)

How do we determine excess depreciation?

Take assets (building, equipment, etc.)

ex: Building (10-year life)
Take the difference between book value and fair value (if fair value is greater than book value it is negative)
difference/life= x
The sum of the x's will equal to excess depreciation PER YEAR

To determine investment

Aquisition price + NI - Div - excess depreciation

What is the purpose of consolidating entries?

Zero out investment account and get rid of double counting with equity accounts (Common stock, additional paid in capital, retained earnings)

How do you record assets and liabilites if company continues on as separate legal entity?

Take the difference between their book value and fair value

How do you calculate goodwill?

Purchase price - the fair value