Chapter 4: Consolidation

Techniques and Procedures

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

Pearson Education, Inc. publishing as Prentice Hall

4-1

Consolidation Techniques: Objectives

1. Prepare consolidation working papers for the
year of acquisition when the parent company
uses the full equity method to account for its
invesment in a subsidiary.
2. Prepare consolidation working papers for the
year subsequent to acquisition.
3. Locate errors in preparing consolidation working
papers.
4. Allocate excess fair value over book value to
include identifiable net assets.
Pearson Education, Inc. publishing as Prentice Hall

4-2

Objectives (continued)
5. Apply concepts to prepare a consolidated
statement of cash flows.
6. Appendix: Understand the alternative trial
balance consolidation working paper format.

Pearson Education, Inc. publishing as Prentice Hall

4-3

Consolidation Techniques and Procedures

1: Acquisition-Year Working Papers

Pearson Education, Inc. publishing as Prentice Hall

4-4

Preparing the Worksheet

Statements are entered onto the worksheet:
Income statement
Statement of retained earnings
Balance sheet
Columns needed:
Parent
Subsidiary
DR and CR columns for elimination entries
Consolidated
Pearson Education, Inc. publishing as Prentice Hall

4-5

Completing the Worksheet

Enter Parent and Sub. amounts at 100% of book value.
(Even if parent owns less)
Enter elimination entries into the DR and CR columns.
(Check totals)
Consolidated expenses, dividends and assets:
Add parent, subsidiary, plus DR, less CR
Consolidated revenues, liabilities and equity (other than
ending retained earnings):
Add parent, subsidiary, less DR, plus CR
Income, ending retained earnings and all subtotals and
totals:
Compute directly in consolidated column.

Pearson Education, Inc. publishing as Prentice Hall

4-6

Working Paper Entries

1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
4. Record noncontrolling interest in sub's
earnings & dividends
5. Eliminate reciprocal Investment & sub's equity
balances
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances
Pearson Education, Inc. publishing as Prentice Hall

4-7

Example: Prep & Snap Data

Prep pays $88 for 80% of Snap on 1/1/2009 when
Snap's equity consisted of $60 capital stock and
$30 retained earnings. All excess was due to
unrecorded patents with a 10-year life.
Snap's income and dividends follow:
2009

2010

Net income

$25

$30

Dividends

$15

$15

Pearson Education, Inc. publishing as Prentice Hall

4-8

Analysis
Cost of 80% of Snap

$88

Implied value of Snap ($88/.80)

Book value (60+30)
Excess

Patents

$110
90

Allocated to:

Amt Amort.

Patents

$20 10 yrs

$20

Unamort.
Bal.

Amortization

Unamort. Bal.

Amortization

Unamort. Bal.

on 1/1/2009

in 2009

on 12/31/2009

in 2010

on 12/31/2010

$20

$2

$18

$2

$16

Use these amounts in

2009 worksheet for
amortization expense
and patents.
Pearson Education, Inc. publishing as Prentice Hall

Use these amounts in

2010 worksheet for
amortization expense
and patents.
4-9

Income & Dividend Calculations

2009:
Snap's net income
Amortization
Adjusted income
Dividends
2010:
Snap's net income
Amortization
Adjusted income
Dividends

$25 Prep's 80% share

$18.4
(2)
$12.0
$23
NCI 20% share
$4.6
$15
$3.0
80% share
$30 Prep's$22.4
(2)
$12.0
$28
NCI 20% share
$5.6
$15
$3.0

Pearson Education, Inc. publishing as Prentice Hall

4-10

Prep's 2009 Worksheet Entries

1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance

Income from Snap (I.S.)

Dividends (St. RE)
Investment in Snap (B.S.)
Pearson Education, Inc. publishing as Prentice Hall

18.4
12.0
6.4
4-11

Prep 2009: Entries (2 of 3)

4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.)
4.6

Dividends (St. RE)

3.0

Noncontrolling interest (B.S.)

5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.)
60
Retained earnings (St. RE, beg.)

30

Patents (B.S.)

20

1.6

Investment in Snap (B.S.)

88

Noncontrolling interest (B.S.)

22

Pearson Education, Inc. publishing as Prentice Hall

4-12

Prep 2009: Entries (3 of 3)

6. Amortize fair value/book value differentials
Amortization Expense (I.S.)
2
Patents (B.S.)
2
7. Eliminate other reciprocal balances
none
Note that in last chapter, all worksheet entries were prepared
for the balance sheet. Here worksheet entries are
prepared for the income statement, statement of retained
earnings and balance sheet.
Pearson Education, Inc. publishing as Prentice Hall

4-13

Prep's 2009 Worksheet

Year ended 12/31/2009

Prep Snap

DR

CR Consol

Income statement:
Revenues
Income from Snap
Expenses

250.0

65.0

18.4
(200.0) (40.0)

Noncontrolling interest share

Net income/ Controlling share

68.4

315.0
18.4

0.0

2.0

(242.0)

4.6

(4.6)

25.0

68.4

Statement of retained earnings:

Beginning retained earnings
Add net income
Pearson Education, Inc. publishing as Prentice Hall
Deduct
dividends

5.0
68.4

30.0 30.0

5.0

25.0

(30.0) (15.0)

68.4
12.0

4-14
(30.0)

Balance sheet, 12/31/2009:

Prep Snap

DR

CR Consol

Cash

39.0

10.0

49.0

Other current assets

90.0

50.0

140.0

Investment in Snap

94.4

6.4

0.0

88.0
Plant & equipment, net

250.0

70.0

Patents
Total
Liabilities
Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling
interest,
Dec.Hall
31
Pearson Education, Inc.
publishing as Prentice

320.0
20.0

2.0

473.4 130.0
80.0
350.0
43.4

18.0
527.0

30.0

110.0

60.0 60.0

350.0

40.0

43.4
22.0
1.6

23.6
4-15

A Look at the Income Statement

Year ended 12/31/2009

Prep Snap

DR

CR Consol

Income statement:
Revenues
Income from Snap
Expenses
Noncontrolling interest share

250.0

65.0

18.4
(200.0) (40.0)

315.0
18.4

0.0

2.0

(242.0)

4.6

(4.6)

Income from Snap is eliminated.

Net income/ Controlling share
68.4 25.0
68.4
Expenses are adjusted for 2009 amortization - $2 on patents
Noncontrolling interest is proportional to Prep's Income from
Snap since Prep uses the equity method.
$18.4 x .20/.80 = $4.6
Pearson Education, Inc. publishing as Prentice Hall

4-16

A Look at Retained Earnings

Year ended 12/31/2009

Prep Snap

DR

CR Consol

30.0 30.0

5.0

Statement of retained earnings:

Beginning retained earnings
Add net income
Deduct dividends

5.0
68.4

25.0

(30.0) (15.0)

68.4
12.0

(30.0)

Beginning retained earnings of Snap is eliminated. 3.0

Ending
earnings are eliminated.
43.4 40.0
43.4
All of retained
Snap's dividends
Net income is not calculated across the line, but taken from the
consolidated income statement.
Ending retained earnings is calculated in the consolidated
column.
Pearson Education, Inc. publishing as Prentice Hall

4-17

A Look at Assets
Balance sheet:

Prep

Snap

DR

CR

Cash

39.0

10.0

49.0

Other current assets

90.0

50.0

140.0

Investment in Snap

94.4

6.4

Consol

0.0

88.0
Plant & equipment, net
Patents

250.0

70.0

320.0
20.0

2.0

Total
Investment in Snap is eliminated.
473.4 130.0
Patents at the start of 2009 were $20, and current
amortization is $2; they are $18 at the end of 2009.
The total is calculated in the consolidated column.
Pearson Education, Inc. publishing as Prentice Hall

18.0
527.0

4-18

A Look at Liabilities & Equity

Balance sheet:

Prep Snap

Liabilities

80.0

Capital stock
Retained earnings
Noncontrolling interest, Jan.1
Noncontrolling interest, Dec. 31

350.0
43.4

DR

CR Consol

30.0

110.0

60.0 60.0

350.0

40.0

43.4
22.0
1.6

23.6

Snap's capital stock is eliminated.

527.0
Total
Retained earnings are not calculated across473.4
the row; 130.0
they are taken from the statement
of retained earnings.
Noncontrolling interest at year-end is proportional to Prep's Investment in Snap
account.
$94.4 x .20/.80 = $23.6

Pearson Education, Inc. publishing as Prentice Hall

4-19

Consolidation Techniques and Procedures

2: Working Papers in Subsequent

Years
Pearson Education, Inc. publishing as Prentice Hall

4-20

Analysis, for 2010

Cost of 80% of Snap

$88

Implied value of Snap ($88/.80)

Book value (60+30)

90

Excess
Unamort. Bal. Amortization
Patents

$110

Allocated to:

Amt

Amort.

Patents

$20 10 yrs

$20
Unamort. Bal.

Amortization

Unamort. Bal.

on 1/1/2009

in 2009

on 12/31/2009

in 2010

on 12/31/2010

$20

$2

$18

$2

$16

Use these amounts in

2009 worksheet for
amortization expense
and patents.
Pearson Education, Inc. publishing as Prentice Hall

Use these amounts in

2010 worksheet for
amortization expense
and patents.
4-21

Income & Dividend Calculations

2009:
Snap's net income
Amortization
Adjusted income
Dividends
2010:
Snap's net income
Amortization
Adjusted income
Dividends

$25 Prep's 80% share

$18.4
(2)
$12.0
$23
NCI 20% share
$4.6
$15
$3.0
80% share
$30 Prep's$22.4
(2)
$12.0
$28
NCI 20% share
$5.6
$15
$3.0

Pearson Education, Inc. publishing as Prentice Hall

4-22

Prep's Worksheet Entries for 2010

1. Adjust for errors & omissions
none
2. Eliminate intercompany profits and losses
none
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance

Income from Snap (I.S.)

Dividends (St. RE)
Investment in Snap (B.S.)
Pearson Education, Inc. publishing as Prentice Hall

22.4
12.0
10.4
4-23

Prep 2010: Entries (2 of 3)

4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.)
5.6

Dividends (St. RE)

3.0

Noncontrolling interest (B.S.)

5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.)
60
Retained earnings (St. RE, beg.)

40

Patents (B.S.)

18

2.6

Investment in Snap (B.S.)

94.4

Noncontrolling interest (B.S.)

23.6

Pearson Education, Inc. publishing as Prentice Hall

4-24

Eliminating Investment in Snap

Entry 5 eliminates the Investment in Snap and
establishes the Noncontrolling Interest as of the
beginning of the current year.
Implied value of Snap at acquisition $88/.80

$110

Add the increase in retained earnings from

acquisition to the beginning of the current year
$40 at 1/1/2010 minus $30 at 1/1/2009

10

Less amortization for all prior periods

$2 patent amortization for 2009

(2)

Adjusted value of Snap at 1/1/2010

Investment in Snap (80% x $118) = $94.4

Noncontrolling interest (20% x $118) = $23.6

$118

Verify the $118 from the entry (60 + 40 + 18).

Pearson Education, Inc. publishing as Prentice Hall

4-25

Prep 2010: Entries (3 of 3)

6. Amortize fair value/book value differentials

Amortization Expense (I.S.)

Patents (B.S.)

2
2

7. Eliminate other reciprocal balances

Note payable Prep (B.S.)

Note receivable Snap (B.S.)

Pearson Education, Inc. publishing as Prentice Hall

10
10

4-26

Prep's 2010 Worksheet

Year ended 12/31/2010

Prep Snap

DR

CR Consol

Income statement:
Revenues
Income from Snap
Expenses

300.0

75.0

22.4
(244.0) (45.0)

Noncontrolling interest share

Net income/ Controlling share

375.0
22.4

0.0

2.0

(291.0)

5.6

(5.6)

78.4

30.0

78.4

Beginning retained earnings

43.4

40.0 40.0

43.4

Add net income

78.4

30.0

78.4

Statement of retained earnings:

Pearson Education, Inc. publishing as Prentice Hall

Deduct
dividends

(45.0) (15.0)

12.0

4-27
(45.0)

Balance sheet, 12/31/2010:

Prep Snap

Cash

45.0

Note receivable Snap

10.0

Other current assets

97.0

Investment in Snap

104.8

DR

CR Consol

20.0

65.0
10.0

70.0

0.0
167.0

10.4

0.0

94.4
Plant & equipment, net

240.0

60.0

Patents
Total

18.0

Capital stock
Retained earnings
Noncontrolling
interest,
Jan.1
Pearson Education, Inc.
publishing as Prentice
Hall

2.0

496.8 150.0

Note payable Prep

Liabilities

300.0
16.0
548.0

10.0 10.0
70.0
350.0
76.8

25.0

95.0

60.0 60.0

350.0

55.0

76.8
23.6

4-28

Consolidation Techniques and Procedures

3: Locating Errors in Working

Papers
Pearson Education, Inc. publishing as Prentice Hall

4-29

Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
Noncontrolling interest share (income)
Goodwill
Noncontrolling interest (equity)
Check equality of DR and CR adjustments.
Verify totals for parent and subsidiary statements.
Re-calculate the consolidated amounts.
Pearson Education, Inc. publishing as Prentice Hall

4-30

Consolidation Techniques and Procedures

4: Allocating Excess of Fair Value

over Book Value
Pearson Education, Inc. publishing as Prentice Hall

4-31

Example with Excess Allocated

Pate pays $360 for 90% of Solo on 12/31/2009
when Solo's equity consisted of $200 capital
stock and $50 retained earnings. Inventory (sold
in 2010), land and buildings (20 years) were
undervalued by $10, $30, and $80, respectively.
Equipment (10 years) was overvalued by $20.
Solo's income and dividends for 2010 were $60
and $20.
At year-end, Solo has dividends payable of $10
which Pate has not yet recorded. There is $20
cash in transit from Solo to Pate for the note.
Pearson Education, Inc. publishing as Prentice Hall

4-32

Analysis at Acquisition
Cost of 90% of Solo

$360

Allocated to:

Amt Amort

Implied value of Snap ($360/.90)

$400

Inventories

$10 1st yr

Book value (200+50)

250

Excess

$150

Land

30 -

Building

80 20 yrs

Equipment
Noncontrolling interest, 10%(400)
$40 Goodwill
Unamort. Bal. Amortization Unamort. Bal.
12/31/2009 *

in 2010 *

on 12/31/2010

Inventorie
s

$10

($10)

$0

Land

30

30

Building

80

(4)

76

Equipment

(20)

(18)

Pearson Education, Inc. publishing as Prentice Hall

(20) 10 yrs
50

150
* Use the
12/31/2009
and 2010
amortization
in worksheet
entries for
2010.
4-33

Solo's Income & Dividend

2010

Solo's net income

$60

Amortization
Adjusted

Solo's dividends

($12)
$48

Pate's 90% share

$43.2
$18.0

$20

NCI 10% share

$4.8
$2.0
Pearson Education, Inc. publishing as Prentice Hall

4-34

Pate's Worksheet Entries

1. Adjust for errors & omissions

Dividends receivable (B.S.)

9.0

Investment in Solo (B.S.)

Cash (B.S.)

9.0
20.0

Note receivable
(B.S.)
20.0
2. Eliminate
intercompany
profits and losses
none
3. Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Solo (I.S.)

43.2

Dividends (St. RE)

18.0

Investment in Solo (B.S.)

25.2

Pearson Education, Inc. publishing as Prentice Hall

4-35

Pate: Entries (2 of 4)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (I.S.)
4.8

Dividends (St. RE)

2.0

Noncontrolling interest (B.S.)

5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock (B.S.)
200
Retained earnings (St. RE, beg.)
Unamortized excess
Investment in Solo (B.S.)
Noncontrolling interest (B.S.)
Pearson Education, Inc. publishing as Prentice Hall

2.8

50
150
360
40
4-36

Pate: Entries (3 of 4)
Allocate the unamortized excess according to
beginning of year balances.
Inventory
10
Land
30
Building, net
80
Goodwill
50
Equipment, net
20
Unamortized excess
150
Pearson Education, Inc. publishing as Prentice Hall

4-37

Pate: Entries (4 of 4)
6. Amortize fair value/book value differentials
Cost of sales

10

Inventory
Operating (depreciation) expense

10
4

Buildings, net
Equipment, net

4
2

Operating (depreciation) expense

7. Eliminate other reciprocal balances

Dividends payable (B.S.)
Dividends receivable (B.S.)
Pearson Education, Inc. publishing as Prentice Hall

9.0
9.0
4-38

Pate's 2010 Worksheet

Year ended 12/31/2010

Pate

Solo

900.0

300.0

DR

CR

Consol

Income statement:
Revenues
Income from Snap

43.2

Cost of goods sold

(600.0
)

Operating expenses

(190.0
)

43.2

0.0

(150.0
)

10.0

(760.0)

(90.0)

4.0

Noncontrolling interest share

Net income/ Controlling share

1,200.0

4.8
153.2

60.0

120.0

50.0

Add
net income
153.2
Pearson Education, Inc. publishing as Prentice Hall

60.0

2.0

(282.0)
(4.8)
153.2

Statement of retained earnings:

Beginning retained earnings

50.0

120.0
153.2
4-39

Balance sheet, 12/31/2010:

Prep

Snap

DR

CR

Consol

Cash

13.0

15.0

20.0

Accounts receivable, net

76.0

25.0

Note receivable - solo

20.0

Inventories

90.0

60.0

10.0

Land

60.0

30.0

30.0

Building, net

190.0

110.0

80.0

4.0

376.0

Equipment, net

150.0

120.0

2.0

20.0

252.0

Investment in Solo

394.2

9.0

0.0

48.0
101.0
20.0

0.0

10.0

150.0
120.0

25.2
360.0
Dividends receivable

9.0

9.0

Goodwill

50.0

Unamortized excess

150.0 150.0

Total
Accounts payable
Pearson Education, Inc. publishing as Prentice Hall

Dividends payable

0.0
50.0
0.0

993.2

360.0

1,097.0

120.0

60.0

180.0

10.0

9.0

4-40

1.0

Consolidation Techniques and Procedures

5: Consolidated Statement of Cash

Flows
Pearson Education, Inc. publishing as Prentice Hall

4-41

Consolidated Cash Flows

The consolidated statement of cash flows is
prepared from
Consolidated balance sheets, beginning &
ending
Consolidated income statement
Other information
Procedure similar to an "unconsolidated"
statement of cash flows
Look at items specific to companies with
Subsidiaries
Equity investments
Pearson Education, Inc. publishing as Prentice Hall

4-42

Investing & Financing Cash Flows

Investing cash flows:
Include cash acquisition and/or disposition of
subsidiaries
Include cash acquisition and/or disposition of
equity investees
Financing cash flows:
Include cash dividends paid to
noncontrolling interests

Pearson Education, Inc. publishing as Prentice Hall

4-43

Operating Cash Flows

Direct method:
Include cash dividends received from equity
investees (not equity method income)
Indirect method:
Starting with consolidated net income to the
controlling interest share, ADD the
noncontrolling interest share
Deduct the excess of equity method income over
cash dividends received from equity investees

Pearson Education, Inc. publishing as Prentice Hall

4-44

Consolidation Techniques and Procedures

6: Appendix Trial Balance Format

Pearson Education, Inc. publishing as Prentice Hall

4-45

Alternative Worksheet Format

Worksheet format presented earlier used the
basic financial statements
Alternative uses the ADJUSTED trial balances
of the parent and subsidiary.
Columns on worksheet:
Parent and subsidiary adjusted trial
balances,
DR and CR adjustments,
Income statement,
Statement of retained earnings, and
Balance sheet columns.
Pearson Education, Inc. publishing as Prentice Hall

4-46

Completing the Worksheet

1. Enter worksheet elimination entries into the DR and
CR columns.
2. Add accounts as needed (e.g., noncontrolling interest,
goodwill, noncontrolling interest share).
3. Carry consolidated balances to income statement,
retained earnings, or balance sheet columns, as
appropriate.
4. Move consolidated net income, or controlling interest
share, to retained earnings.
5. Move ending retained earnings to the balance sheet.

Pearson Education, Inc. publishing as Prentice Hall

4-47

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
Pearson Education, Inc. publishing as Prentice Hall

4-48