Consolidation after Acquisition – Steps 5 to 8 (Purcell Inc. example)

58.7 Step 5: Directly calculate consolidated ending R/E

The ending retained earnings (R/E) for the consolidated entity is found via a three‑step process:
- a) Opening consolidated R/E
- b) Current year consolidated net income
- c) Closing consolidated R/E
These steps underpin Steps 5a–5c and feed into Steps 6–8 (elimination entries and consolidated statements).

58.7a Step 5a: Calculate opening consolidated R/E

Opening consolidated R/E is the consolidated closing R/E from the prior period, plus the equity pickup from the acquisition of the subsidiary up to the beginning of the current year, adjusted for FV differential effects and goodwill impairment.
Formal sequence (as in the transcript):
- Subsidiary's increase in R/E since acquisition to beginning of year
- +/- Amortization to beginning of year of FV differentials (from Step 3, column ii)
- = Adjusted increase in subsidiary's R/E since acquisition to beginning of year
- - NCI portion
- = Equity pick-up since acquisition to beginning of year
- - Goodwill impairment to beginning of year (from Step 2)
- + Parent's opening R/E
- = Consolidated opening R/E
Conceptual formulas (LaTeX):

ext{Adjusted increase in subsidiary's R/E} = ext{Subsidiary's increase in R/E since acquisition to beginning}
\pm ext{FV differential amortization (beginning of year)}

ext{Equity pick-up} = ext{Adjusted increase} - ext{NCI portion}

ext{Consolidated opening R/E} = ext{Parent's opening R/E} + ext{Equity pick-up} - ext{Goodwill impairment (beginning of year)}
Purcell Inc. example (opening consolidated R/E):
- Increase in S’s R/E since acquisition: $650,600 - $446,000 = $204,600
- Amortization to date of FV differentials (Step 3): $108,000
- Adjusted increase: $204,600 - 108,000 = $96,600
- NCI portion (20%): $96,600 × 0.20 = $19,320
- Equity pick-up: $96,600 - $19,320 = $77,280
- Goodwill impairment to beginning of year (Step 2): assumed 0 for this line item in this example
- Parent's opening R/E: $1,363,600
- Consolidated opening R/E: $1,363,600 + $77,280 = $1,440,880
Important notes:
- The sign conventions depend on Step 3 (FV differential amortization) and Step 2 (goodwill impairment) results; the example shows a positive equity pickup after netting the NCI portion.
- The opening consolidated R/E reflects the aggregate equity position of the consolidated group at the start of the current period, incorporating the subsidiary’s equity pickup since acquisition.

58.7.2 Step 5b: Calculate consolidated net income

Purpose: derive the consolidated net income attributable to the parent and to NCI, to support both the consolidated income statement and the entries to eliminate intercompany effects.
Step-by-step (as shown):
- Start with subsidiary’s net income for the current period
- +/- Amortization for the current year of FV differentials (from Step 3, column iv)
- = Subsidiary’s adjusted net income
- - NCI portion
- = Parent’s share of subsidiary’s adjusted net income
- - Parent’s share of goodwill impairment loss for the year (from Step 2)
- - Parent’s share of subsidiary’s dividends (Note 1 below)
- + Parent’s net income
- = Consolidated net income attributable to parent
Note 1 (dividends):
- If the subsidiary declared dividends to the parent, those dividends would be recorded as investment income by the parent. Since this is an intercompany transaction, it must be reversed for consolidation by deducting the dividends that the subsidiary declared to the parent.
- Formally, when consolidating, reduce the parent’s investment income by the amount of intercompany dividends declared by the subsidiary.
NCI calculation (formulas):

ext{Consolidated net income attributable to NCI} = ext{NCI's share of adjusted net income} - ext{NCI's share of goodwill impairment loss}
Purcell Inc. example (current year, Year 3):
- S net income: $345,600
- Current period FV differential amortization: $(9,000)$
- S adjusted net income: $336,600
- NCI portion: $336,600 imes 20\% = $67,320
- S net income attributable to P (Parent): $269,280
- P’s share of goodwill impairment loss (Step 2): $(28,546)$
- P’s share of S’s adjusted net income: $240,734
- P’s net income: $473,700
- S dividends included in P’s net income: $116,000
- Consolidated net income attributable to P: $598,434
- Consolidated net income attributable to NCI:
- NCI's share of adjusted net income: $67,320
- Less NCI's share of goodwill impairment: $(4,454)$
- Consolidated net income attributable to NCI: $62,866
Formulas (LaTeX):

ext{S adjusted net income} = ext{Subsidiary net income} + ext{FV differential amortization (current year)}

ext{NCI portion} = ext{S adjusted net income} imes ext{NCI ownership}
ext{Consolidated net income attributable to P} = ext{S net income} + ext{FV amortization} - ext{NCI portion} - ext{P goodwill impairment} - ext{P dividends} + ext{P net income}

58.7.3 Step 5c: Calculate consolidated ending R/E

After opening R/E and net income have been determined, compute the ending consolidated R/E by accounting for dividends declared by the parent during the year.
Formula:

ext{Consolidated ending R/E} = ext{Opening consolidated R/E} + ext{Consolidated net income attributable to parent} - ext{Parent's dividends declared}
Purcell Inc. example (Year 3):
- Opening consolidated R/E (Step 5a): $1,440,880
- Consolidated net income attributable to P (Step 5b): $598,434
- P’s dividends declared: $(220,000)$
- Ending consolidated R/E: $1,819,314

58.9 Step 7: Prepare elimination entries

Objective: convert the individual financial statements of the parent and subsidiary into consolidated financial statements by eliminating intercompany balances, revenues, expenses, and other intercompany items.
Elimination entries are typically prepared in two groups:
1) Opening SFP accounts (to bring opening balances into consolidation):
- Eliminate the investment in the subsidiary (Step 1).
- Set up unimpaired goodwill as at the beginning of the year (Step 1).
- Adjust opening SFP amounts for unamortized FV differentials at the beginning of the year (Step 3, column iii).
- Eliminate the subsidiary’s common shares (Step 1).
- Adjust the subsidiary’s R/E (S’s stand-alone opening R/E) to the consolidated R/E (Step 5a – Equity pick-up subtotal).
- Set up the NCI SFP account at the beginning of the year (Step 6).
- Memory aid: If FV differential is positive in Step 3, column iii, credit the asset/liability; if negative, debit the asset/liability (the opposite for column iii).
  2) Current-period eliminations (for the year):
- Record current-period goodwill impairment (Step 2): DR Goodwill impairment loss; CR Goodwill.
- Elimination entry for amortization of FV differentials (Step 3, column iv):
  - If FV differential amortization is positive in Step 3, column iv, credit the related income/expense line on the consolidated statement of comprehensive income; if negative, debit accordingly.
- Intercompany balances and transactions (Step 4):
  - Eliminate intercompany liabilities and assets (DR Liabilities, CR Assets).
  - Eliminate intercompany revenues and expenses (DR Revenues, CR Expenses).
- Record consolidated net income attributable to NCI (Step 5b): DR Consolidated net income attributable to NCI (Step 5b); CR NCI - SFP (Step 5b).
- Eliminate subsidiary dividends declared (to reverse intercompany income and adjust SFP):
  - DR Dividend income/Other income; DR NCI - SFP; CR Dividends declared/retained earnings.
Purcell Inc. example (Step 7, Year 3 elimination entries):
- Opening SFP accounts adjustment entries include debits to retained earnings, common shares, goodwill, customer list, land, and long-term debt, offset by credits to the equity pickup, investment, equipment, and NCI SFP. These entries adjust the opening SFP balances to reflect consolidation.
- Current-period goodwill impairment entry: DR Goodwill impairment loss; CR Goodwill.
- FV differential amortization entries:
- Land: DR Gain/Loss on FV differential; CR Land
- Equipment: DR Equipment; CR Depreciation expense
- Long-term debt: DR Interest expense; CR Long-term debt
- Intercompany balances/revenues/expenses eliminations: DR Accounts payable; CR Accounts receivable; DR Sales; CR Computer expense, etc.
- Consolidated net income attributable to NCI: DR Consolidated net income attributable to NCI; CR NCI (SFP)
- Eliminate subsidiary dividends: DR Dividend income; DR NCI (SFP); CR Dividends declared/retained earnings
Note on the Purcell example: The elimination entries are illustrated with concrete numbers in the transcript (Year 3). See the detailed table in the transcript for exact debit/credit amounts per account. The key takeaway is the structure and sequence of eliminations, not merely the totals.

58.9a Let's look at an example (Year 3, Purcell Inc.)

Opening SFP elimination entries (opening balances) and the subsequent current-year eliminations follow the templates above, with the Purcell values used to demonstrate the flow. The example demonstrates how the opening SFP is adjusted, how current-period goodwill impairment and FV differential amortization are recorded, how intercompany balances are eliminated, and how NCI totals are updated.
Important concrete figures cited in the transcript include:
- Opening consolidated R/E: $1,440,880
- Purcell opening R/E (parent): $1,363,600
- Equity pickup (Step 5a): $77,280
- Subsidiary increase in R/E since acquisition: $204,600
- Amortization of FV differentials (beginning): $108,000
- Adjusted increase: $96,600
- NCI portion of opening equity pickup: $19,320
- Ending consolidated R/E (Step 5c): $1,819,314
- Step 5b consolidated net income attributable to parent: $598,434
- Step 5b consolidated net income attributable to NCI: $62,866
- S’s net income and related items used to compute consolidated income: S net income $345,600; FV differential amortization $(9,000)$; NCI portion $67,320; P's share of S’s adjusted net income $240,734; P net income $473,700; S dividends included $116,000; P ending consolidated R/E $1,819,314

58.10 Step 8: Prepare consolidated financial statements

After Steps 5–7, prepare the consolidated financial statements by adding together the parent and subsidiary statements and applying the elimination entries.
The consolidated retained earnings (Step 5c) serves as a plug for balancing the Consolidated SFP.
In practice, you aggregate the parent and subsidiary statements, apply the eliminations, and use the consolidated ending R/E from Step 5c to balance the consolidated SFP.

58.10a Let's look at an example (Purcell Inc.)

Consolidated statement of comprehensive income (Year 3) combines Purcell and Saxton while applying eliminations. The final line shows:
- Net income and comprehensive income: $661,300
- Attributable to NCI (Step 5b): $62,866
- Attributable to parent: $598,434
Consolidated statement of financial position (as at Dec 31, Year 3) shows the consolidated totals (Assets, Liabilities, Equity) including NCI and consolidated R/E. Ending R/E is the plug value noted in Note 1 and used to balance the SFP.
Note 1 (in the transcript): Ending R/E is plugged from Step 5c. It can also be calculated directly as:

ext{Purcell R/E} + ext{Saxton R/E} \
\ +/- ext{elimination entries to R/E} \
\ +/- ext{elimination entries to revenue and expense accounts}
The transcript provides a summarized reconciliation of consolidated retained earnings, showing how each elimination entry affects R/E (opening equity pickup, dividends, impairment, FV differential amortization, and the NCI impact).

Quick reference: key formulas (LaTeX)

Consolidated ending R/E:

ext{Consolidated ending R/E} = ext{Opening consolidated R/E} + ext{Consolidated net income attributable to parent} - ext{Parent's dividends declared}
Opening consolidated R/E (summary):

ext{Consolidated opening R/E} = ext{Parent's opening R/E} + igl( ext{Subsidiary's increase in R/E since acquisition} \pm ext{FV amortization (beginning)}igr) - ext{NCI portion} - ext{Goodwill impairment (beginning)}
Equity pickup from acquisition:

ext{Equity pickup} = ext{Adjusted increase in subsidiary's R/E} - ext{NCI portion}
Adjusted increase in subsidiary's R/E (beginning):

ext{Adjusted increase} = ext{Subsidiary's increase in R/E since acquisition} \\pm ext{FV differential amortization (beginning)}
NCI portion of adjusted net income:

ext{NCI portion} = ext{(Adjusted net income)} imes ext{NCI ownership percentage}
NCI consolidated net income:

ext{Consolidated net income attributable to NCI} = ext{NCI's share of adjusted net income} - ext{NCI's share of goodwill impairment}

Important notes for study

Step 5a focuses on the opening balance sheet impact of the acquisition, including equity pickup and goodwill impairment.
Step 5b computes how much of the current year’s consolidated net income is attributable to the parent versus NCI, after accounting for FV differential amortization and goodwill impairment.
Step 5c uses the results to determine the consolidated ending R/E, which then becomes the starting point for the next period.
Step 7 provides the detailed elimination entries to transform the stand-alone financial statements into consolidated statements, distinguishing between opening balances (Step 1, Step 6, Step 3) and current-period activities (Step 2, Step 3, Step 4, Step 5).
Step 8 confirms that consolidated financial statements are created by aggregating the adjusted parent and subsidiary statements after eliminations, with the consolidated R/E acting as a plug to balance the statements.
The Purcell Inc. example throughout these pages illustrates how these steps manifest with concrete numbers, including how dividends, intercompany transactions, and NCI are treated in consolidation.