FA4 Module 4 Consolidation Subsequent to Acquisition

Transcription

1 FA4 Module 4 Consolidation Subsequent to Acquisition Goodwill Impairment According to the Handbook, if an intangible asset is deemed to have an indefinite useful life then the asset is subject to an annual impairment test. (intangibles with an indefinite life are not amortized; only those with finite lives are.) For intangibles whose life is indefinite, except for goodwill, the impairment test involves comparing book-values to market values. Determining the fair value of goodwill is more involved, because while goodwill is a single number it results from the summation of the fair value of several individual assets. Thus, the impairment test for goodwill is a more complex process. Also note, that goodwill must be tested for impairment for each cash generating unit the company owns. Upon acquisition of another business, goodwill must be allocated to each cash generating unit (CGU). Going forward each unit s goodwill should be tested for impairment. The impairment test involves comparing the carrying value of the CGU to its recoverable amount. Recoverable amount is defined as the higher of 1) the fair value of the CGU less selling costs or; 2) its value in use (essentially the PV of future cash flows). If the recoverable amount is lower than the CGU s carrying value (book value) then goodwill is impaired. The difference between the recoverable amount and carry value is first allocated to goodwill to a maximum of its carry value (ie its carrying value after would be zero), and further difference would be allocated to remaining assets based on their carrying values. However, in allocating an impairment loss the company should not reduce carrying amount of any one asset below the highest of: 1) Its fair value less cost to sell (if determinable); 2) its value in use (if determinable) 3) zero Subsequent recovery of impairment losses on goodwill are not permitted. Consolidation When Recording on the Equity Basis The equity method reports an intercorporate investment through 2 accounts, the investment in X Co. account on the balance sheet and the equity earnings (investment income) account on the income statement. The essence of the equity method has the two legally separate companies reported as though they were one. Thus, the end results (net income and shareholder s equity, will be the same under the equity method as it would be under consolidation reporting, although the individual assets and liability amount will be different, this is because under the equity method the investment account will be listed as an asset, however, when you prepare consolidated statements, the investment account is broken into individual asset and liabilities amount and added to the parents individual account amounts). However, the details of the financial statements are very different. For consolidation, each line item of the two companies are added together and then adjusted for inter-company transactions, and Acquisition Differential amortization. Whereas for the equity method line by line items are not added together but rather ACCTG FA 4 - Consolidation Subsequent to Acquisition page 1

2 pushed through the investment in X Co. account or equity earnings. So basically when reporting on a consolidated basis when using the equity method of recording you need to pull apart the investment account in X Co. and report the components that make up that investment account in each of the line items of the financial statements. In the text they pull apart the equity method account balance by 2 working journal entries, one reverses the current year s equity method journal entries and the second reverses all previous year equity method journal entries and put the amounts into separate line items. You would DR R/E and common shares of the sub because this represents the net assets of the firm, of which you will be adding one by one, line by line, into the consolidated financial statements, thus to not get rid of these accounts would be to double count the net assets of the subsidiary when you add the two companies together. When using the cost or equity method of recording and reporting on a consolidated basis Always remember when using working journal entries, you are working from the viewpoint that the two companies have already been added together, and theses working journal entries will now correct for items that should not be included in the combined statement because the transaction either was not recorded (eg AD amortization, goodwill impairments) or was recorded but should not be from a single entity viewpoint (eg equity method journal entries, cost method journal entries, investment account in X Co. transactions, intercompany sale of inventory, etc.) Consolidation when recording on the equity basis If the parent uses the equity method to record its investment then in addition to intercompany transaction eliminating entries, two extra eliminating entries need to be made to reduce the "Investment in Subsidiary" account to zero. Assume Parent Co. paid $20,000 for a 100% investment in Sub Co. on Jan 1, 20X1. Sub Co. had the following information at this time: Carrying Value FMV Current assets 4,000 5,000 Capital assets 30,000 32,000 Current liabilities 18,000 18,000 Common shares 10,000 Retained earnings 6,000 Goodwill Calculation: Purchase Price 20,000 NBV of S: Common Shares 10,000 Retained Earnings 6,000 16,000 AD 4,000 AD allocation: Current assets (5,000-4,000) (1,000) Capital assets* (32,000-30,000) (2,000) Goodwill 1,000 *10 year useful life remaining ACCTG FA 4 - Consolidation Subsequent to Acquisition page 2

3 AD Schedule Begin Bal 20X1 20X2 Balance 20X3 Current assets 1,000 1, Capital Assets 2, , Goodwill 1, ,000 - It is now Dec 31, 20X3. Sub Co. opening R/E is $22,400. The opening balance in the Investment in Sub Co. account on the parent s books is $35,000 under the equity method. During 20X3 Sub Co. has $12,000 in net income and paid $5,000 in dividends. Under the equity method the following journal entries were made by Parent Co.: Cash 5,000 Investment in Sub Co. 5,000 to record dividends received. Investment in Sub Co. 12,000 Equity Earnings 12,000 to record Parent Co.'s share of Sub Co.'s net income Equity Earnings 200 Investment in Sub Co. 200 To record AD amortization (2,000/10) The following eliminating entry will negate the effects of the above journal entries: 1 Equity Earnings (P) 11,800 Dividends Declared (R/E) (S) 5,000 Investment in Sub Co. (P) 6,800 Dividends declared are CR because Sub Co. would have recorded the dividends, when in fact from a single entity view point no dividends have been paid. Eliminating entry 1 gets rid of the equity recording effects for 20X3, but what about the opening equity investment account balance? The following eliminating entry takes care of it: 2 Capital Assets (C) 1,600 Goodwill (C) 1,000 R/E (S) 22,400 Common Shares (S) 10,000 Investment in Sub Co. (P) 35,000 Note we are working with Beginning Balances in the investment account, because we already eliminated the current year s equity method journal entries. The debit of 22,400 to retained earnings gets rid of the effects of recording equity earnings throughout the investment period by Parent Co. The DR to common share eliminates the Sub s common shares because the Sub as a separate entity with its own common shares does not exist ACCTG FA 4 - Consolidation Subsequent to Acquisition page 3

4 from the consolidated view point. Remember, the common share of the parent and sub are added, this journal entry then removes the subs shares to leave only the parents shares remaining. Now the Investment in Sub Co. account is zero, and consolidation can occur by simply adding the two companies together, adjusting for any inter-company transactions as well as any AD amortization. Thus, assuming the only adjustment for the current year is for the AD the working entry would be: Amortization Exp 200 A/A 200 Consolidation When Recording on the Cost Basis Consolidation of financial statements would only occur after each separate entity has prepared its own financial statements. At this time the two or more entities' financial statements will be combined to reflect a single economic entity (substance over form). Thus, throughout the year each entity will record transactions in accordance with its own accounting policies. When it comes time to consolidate the entities, adjustments may be needed to eliminate intercompany transactions and most importantly to eliminate the investment account on the books of the parent company. The consolidated financial statements cannot report an investment in a subsidiary because under consolidation the two (or more) entities are viewed as one. (you cannot therefore report an investment in yourself). If the parent company has been using the cost method to record its investment in the subsidiary then it would have recorded its investment as follows: Investment in Subsidiary Cash XXX XXX The investment account will have to be eliminated because, in fact, the parent and subsidiary are viewed as one entity, thus parent cannot show on the balance sheet an investment in itself. Recall the investment account balance under the cost method is equal to the original amount (cost) invested, which is made up of the bookvalue of the subsidiary plus any acquisition differential. Thus to eliminate the original investment account we need to do the following elimination entry: DR Acquisition Differential xxx Con DR Goodwill xxx Con DR Common Shares (bookvalue) xxx S s DR Retained Earnings (bookvalue) xxx S s CR Investment in Subsidiary xxx P s From here the acquisition differential account can be disseminated into its various components. Also under the cost method the parent would have recorded the receipt of any dividends through the following journal entry: ACCTG FA 4 - Consolidation Subsequent to Acquisition page 4

5 Cash Dividend Income XXX XXX The subsidiary would record: Dividends (or R/E) Cash XXX XXX (Note how when combining the two entries the cash effect is eliminated.)when it comes time to consolidate the financial statements this entry will need to be adjusted or eliminated. The reason for the elimination is the fact that the parent and subsidiary are viewed as one entity, thus parent cannot receive dividends from itself. The eliminating entry would be: Dividend Income (p) Dividends Declared (s) XXX XXX This journal entry reverses the effect of the transaction in the books of the parent and subsidiary. This entry is only a "working journal entry" and thus does not get recorded in the books of either company. The method illustrated above is known as the worksheet approach. The direct approach is another way to achieve consolidation, it essentially is the same process as above except an actual eliminating journal entry is not formally journalized. The consolidation process always begins with adding the two sets of financial statements together (cash + cash, A/R + A/R, etc.) and then making adjustments for intercompany transactions using either the worksheet or direct approach. ACCTG FA 4 - Consolidation Subsequent to Acquisition page 5

6 Example Consolidation after acquisition when the cost method was used The first step in the consolidation process is to calculate goodwill and any fair market value increments. Eg: Assume P Co. bought 100% of S Co. by issuing $100,000 worth of shares to S Co. The book and fair values of S Co. at the time of purchase are: BV FMV Cash 20,000 Inventory 5,000 6,000 Building 20,000 19,000 Land 10,000 15,000 A/P 2,000 Bank Loan 3,000 Common Shares 20,000 Retained Earnings 20,000 Goodwill Calculation: Purchase Price 100,000 Book Value of Net Assets: Common Shares 20,000 Retained Earnings 20,000 40,000 AD 60,000 FMV Increments (AD allocation) Inventory (6,000-5,000) (1,000) Building (19,000-20,000) 1,000 Land (15,000-10,000) (5,000) (5,000) Goodwill 55,000 As a consolidated entity, the inventory, building and land will be on the "books" at the FMV, however, in the consolidation process we start by adding the two companies book values together and then adjust to reflect the values for the consolidated entity. Thus, we need to only "bump" the inventory, building, and land accounts up by their FMV increments, to get to full FMV. Since the building is an amortizable asset, each year S Co. will amortize the building based on the 20,000 book value, whereas from a single entity view point amortization should be based on 19,000. Therefore we need to adjust the amortization amounts each year. The inventory amount would have been expensed through COGS by the end of the year at 5,000 on the books of S Co., but from a single entity view point the COGS should be 6,000, thus we need to adjust by 1,000. The land account would reflect only the 10,000 but it should be valued at 15,000 from a single entity view point thus we need to "bump" the land account up by 5,000 each year. Further, since we paid more than the FMV of the net assets for our investment goodwill has been created. Thus, each year we need to test goodwill for impairment from a single entity view point. Lastly, the common shares and retained earnings of the subsidiary need to be eliminated because we have accounted for the net assets through adding the assets and liabilities of the subsidiary into the parent through the consolidation process. The eliminating entry from the acquisition would be: ACCTG FA 4 - Consolidation Subsequent to Acquisition page 6

7 Inventory 1,000 Land 5,000 Common Shares 20,000 Retained Earnings 20,000 Goodwill 55,000 Investment in S Co. 100,000 Building 1,000 At the end of the year we need to adjust for the inventory FMV effect on COGS: COGS 1,000 Inventory 1,000 Note in subsequent years we will need to adjust this amount through R/E. (remember these working entries need to be repeated each year since they are not recorded in the records) R/E 1,000 Inventory 1,000 Next we need to adjust for building amortization, assume amortization is calculated using SL, no salvage value and a 10 year useful life. A/A (1,000 / 10) 100 Amortization expense 100 In the next year the eliminating entry to catch up amortization would be: A/A 200 amortization expense 100 R/E 100 Next we need to adjust for goodwill impairment if any. Assume an impairment has been determined in the amount of $2,750. Loss due to goodwill impairment 2,750 Goodwill 2,750 In the next year the elimination entry to catch up goodwill would be: R/E 2,750 Goodwill 2,750 Assume the subsidiary declared and paid 10,000 in dividends the eliminating entry would be: Dividend Income 10,000 Dividends (R/E) 10,000 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 7

8 IMPORTANT: The text book uses an aggregate approach to adjust prior year s intercompany/fvi adjustments. So the text uses two entries to update the account balance to the current date, one to adjust the retained earnings for all prior year s equity earnings and another to update the AD to current balances. This method has NOT been demonstrated above. Textbook Approach The text book uses an aggregate approach to adjust prior year s intercompany/fvi adjustments. So the text uses two entries to update the account balance to the current date, one to adjust the retained earnings for all prior year s equity earnings and another to update the AD to current balances. The text first switches from the cost method to the equity method and then consolidates. The following would take place under the textbook approach: Assume the following additional facts: It is the second year of the investment. S Co. reported $40,000 in net income the first year and $10,000 in dividends. In the second year S Co. reported $45,000 in net income and $5,000 of dividends. Goodwill would be calculated as before. AD schedule would be as follows: Item Purchase Year 1 amort Balance, EOY1 Year 2, amort Balance, EOY2 Inventory 1,000 (1,000) Land 5, , ,000 Building (1,000) 100 (900) 100 (800) Goodwill 55,000 (2,750) 52, ,250 Total 60,000 (3,650) 56, ,450 Under the equity method, the opening investment account balance for year 2 should be: Purchase price 100,000 Net income of S year 1 40,000 Dividends of S year 1 (10,000) AD amortization (3,650) Balance 126,350 OR if we know the opening RE balance of S, we could simply take that amount and subtract the acquisition RE to determine the net increase or decrease in our equity position of S and then adjust for all prior year s AD amortizations. The working entry to adjust from the cost to equity method is (entry a ): Investment account (126, ,000) 26,350 Retained Earnings 26,350 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 8

9 To record the current year s equity earnings and remove the cost method recording of dividends, the following working entry is required (entry b ): Dividend revenue (p) 5,000 Investment account (p) 40,100 Investment income (45, ) (p) 45,100 Now we can consolidate with the following journal entries: Investment income (p) 45,100 Dividends Declared (s) 5,000 Investment account (p) 40,100 Retained Earnings (20,000+40,000-10,000) 50,000 Common Shares 20,000 AD 56,350 Investment account 126,350 Goodwill 52,250 Land 5,000 Building 900 AD 56,350 Acc. Depreciation 100 Depreciation expense 100 AD current year Reporting by the equity method when recording on the cost basis As stated earlier, the equity method views the investor and investee as one entity, just as the consolidation reporting requirement does. Thus, the equity method is often referred to as one line consolidation. The investor's interest in the equity of the investee is shown through a one line item on the balance sheet called "Investment in Investee", whereas consolidation separates out this item into assets, liabilities, and equity components. Therefore, the retained earnings of the investor company would be the same under the equity or consolidation procedure. Example: Co. A acquired 100% of Co. B for $20,000 in 20X1. Co. B's retained earnings at this time was $10,000. Any AD is allocated to goodwill. It is now 20X4 and Co. B's retained earnings is $45,000 before adjustments for $15,000 of 20X4 net income and $10,000 20X4 dividends. Co. A is using the cost method to record its investment in Co. B, but needs to report the investment on the equity basis. Goodwill impairment was determined to be $500 in 20X2. There has been no further goodwill impairment. ACCTG FA 4 - Consolidation Subsequent to Acquisition page 9

10 Under the equity basis the investment should be valued at: Original purchase price 20,000 Increase in Co. B retained earnings (45,000-10,000) (3) 35,000 Goodwill impairment (4) (500) 20X4 net income (2) 15,000 20X4 dividends (1) (10,000) 59,500 Co. A's "interest" in Co. B is worth $59,500. Under the cost method the investment account is listed at $20,000 - original cost. We need to "bump" the account upto $59,500. Throughout the current year 20X4, Co. A has recorded the following journal entries under the cost method: Cash 10,000 Dividend Income 10,000 to record receipt of dividend from Co.B Under the equity method, dividends should have been recorded as follows: Cash 10,000 Investment in Co. B 10,000 Thus, the eliminating entry would be: 1 Dividend Income 10,000 Investment in Co. B 10,000 Also, under the equity method the amount of income earned for the period should also be recorded. Since it was not under the cost method the eliminating entry would be: 2 Investment in Co. B 15,000 Equity Earnings (I/S) 15,000 Also, since the investment has been recorded under the cost method, the prior year's net incomes and dividends have not been recorded as they should be under the equity method, thus to record all prior year's income and dividends we look to Co. B' s increase in retained earnings since Co. A's investment. This amount is $35, Investment in Co.B 35,000 Retained Earnings 35,000 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 10

11 The 20X2 goodwill impairment was also not recorded under the cost method, and would be under the equity method, thus we need to do the following entry: 4 Retained Earnings 500 Investment in Co. B 500 The above four eliminating entries (entries 3 and 4 could have been combined into one) would be used under the worksheet approach to aid in reporting the investment in Co. B at equity. Note these entries would not enter the books of Co. A, these entries are only "working entries". Non Wholly Owned Subsidiaries If the parent does not own 100% of the common shares of its subsidiary, non-controlling interest (NCI) will have to be reported on both the balance sheet and income statement. The balance sheet NCI represents the net Fair value of the subsidiary that NCI shareholder s have claim to, under either the FVE or INA methods. Thus, the NCI s share of the subsidiary s net income would increase this account and dividends paid out to NCI shareholders would decrease the account. AD amortization would affect NCI balances as AD amortization is related to the fair market value increment. However, note that goodwill impairments would only affect NCI if the FVE method is used. NCI balances would be affected by intercompany transactions originating from the subsidiary to the parent (referred to as upstream transactions) more on this in module 5. Always remember, that NCI balances exist only in the consolidated world, thus any transactions between the subsidiary and parent must be eliminated because you cannot transact with yourself and thus any profits/losses created from the sub selling items to the parent must be eliminated. The NCI shareholders share of these intercompany transaction profits/losses also eliminated, because if the transaction did not happen, then any claim to these amounts also do not exist. ACCTG FA 4 - Consolidation Subsequent to Acquisition page 11

12 Chapter 5 Problem 13 Cost of 75% investment (FVE) 2,400,000 Implied value of 100% 3,200,000 Book value of Silver s net assets = Book value of Silver s shareholders equity Common shares 1,600,000 Retained earnings 400,000 2,000,000 Acquisition differential 1,200,000 Allocated: Inventory (30%) 360,000 Equipment (40%) 480, ,000 Balance goodwill (30%) 360,000 Amortization Schedule Balance Amortization Balance July 1 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Year 2 Year 2 Years 3 to 5 Year 6 Year 6 Inventory 360, ,000 Equipment 480,000 30, ,000 60, ,000 Goodwill 360,000 70,000 20, ,000 1,200, , ,000 80, ,000 Calculation of consolidated net income attributable to Pearl s shareholders Year 6 Net income Pearl 1,000,000 Less: Dividends from Silver (200,000 75%) 150, ,000 Net income Silver 400,000 Less: Acquisition differential amortization 80, ,000 75% 240,000 1,090,000 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 12

13 Calculation of consolidated retained earnings Jan. 1, Year 6 Retained earnings Pearl Jan. 1 2,900,000 Retained earnings Silver Jan.1 800,000 Acquisition retained earnings 400,000 Increase since acquisition 400,000 Less: AD amort. to end of Year 5 (390, ,000) 640, ,000 75% - 180,000 2,720,000 Calculation of non-controlling interest Dec. 31, Year 6 Silver Common shares 1,600,000 Retained earnings 1,000,000 2,600,000 Unamortized acquisition differential 480,000 3,080,000 25% 770,000 (a) Pearl Company Consolidated Income Statement for the Year Ended December 31, Year 6 Sales (4, ,000) 5,000,000 Cost of sales (2, ) 2,960,000 Miscellaneous expense ( ) 390,000 Admin expense ( ) 110,000 Income tax ( ) 370,000 3,830,000 Net income 1,170,000 Attributable to: Pearl s shareholders 1,090,000 Non-controlling interest [25% (400,000 80,000)] 80,000 1,170,000 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 13

14 Pearl Company Consolidated Retained Earnings Statement for the Year Ended December 31, Year 6 Balance Jan. 1 2,720,000) Net income 1,090,000) 3,810,000) Dividends 500,000) Balance Dec. 31 3,310,000) Pearl Company Consolidated Balance Sheet December 31, Year 6 Cash ( ) 400,000) Accounts receivable (200 75) 125,000) Inventory (2, ) 2,420,000) Plant and equipment (3, , ) 6,170,000) Accumulated depreciation ( ) (1,330,000) Goodwill 270,000) 8,055,000) Liabilities ( ) 1,125,000) Common shares 2,850,000) Retained earnings 3,310,000) Non-controlling interest 770,000) 8,055,000) ACCTG FA 4 - Consolidation Subsequent to Acquisition page 14

15 (b) Goodwill impairment loss entity theory (FVE) 20,000 Less: NCI s 5,000 Goodwill impairment loss parent company extension theory (INA) 15,000 NCI entity theory FVE 80,000 NCI s share of goodwill impairment loss 5,000 NCI parent company extension theory 85,000 (c) Goodwill entity theory 270,000 Less: NCI s 67,500 Goodwill parent company extension theory (INA) 202,500 NCI entity theory 770,000 NCI s share of goodwill impairment loss 67,500 NCI parent company extension theory (INA) 702,500 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 15

16 Chapter 5 Problem 9 (a) Cost of 80% investment 122,080 Implied value of 100% 152,600 Carrying amount of Little s net assets = Carrying amount of Little s shareholders equity July 1, Year 5 Common shares 54,000 Retained earnings 32,400 86,400 Acquisition differential 66,200 Allocated: FV CA Government contract 50,000 Equipment 21,600 28,400 Balance goodwill 37,800 Amortization Schedule Balance Amortization Balance July 1 year ending June 30 Year 5 June 30, Year 6 Year 6 Equipment (8 years) 21,600 2,700 18,900 Government contract (5 years)50,000 10,000 40,000 Goodwill 37,800 17,800 20,000 66,200 25,100 41,100 The government contract should be recognized as an identifiable asset because it can meet the separability test. It can be sold separately and provides future economic benefits. ACCTG FA 4 - Consolidation Subsequent to Acquisition page 16

17 (b) Calculation of consolidated net income attributable to Big s shareholders Year 6 Income of Big 109,620 Less: dividends from Little (13,500 80%) 10,800 98,820 Income of Little 39,420 Less: acquisition differential amortization 25,100 14,320 80% 11, ,276 Big Consolidated Income Statement for the Year Ended June 30, Year 6 Sales (270, ,000) 432,000 Cost of sales (140, ,380) 234,480 Misc. expense (31, ,200 2, ,000) 66,580 Goodwill impairment loss 17, ,860 Net income 113,140 Attributable to: Big s shareholders 110,276 Non-controlling interest [20% (39,420 25,100)] 2, ,140 Big Consolidated Retained Earnings Statement for the Year Ended June 30, Year 6 Balance July 1, Year 5 459,000 Net income 110, ,276 Dividends 32,400 Balance June 30, ,876 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 17

18 Calculation of non-controlling interest June 30, Year 6 Little Common shares 54,000 Retained earnings 58, ,320 Unamortized acquisition differential 41, ,420 20% 30,684 Big Consolidated Balance Sheet June 30, Year 6 Miscellaneous assets (835, ,820) 964,760 Equipment (162, ,600-21,600 20,000) 216,000 Accumulated depreciation (60, ,000-20,000-2,700) (87,300) Government contract 40,000 Goodwill 20,000 1,153,460 Liabilities (253, ,100) $315,900 Common shares 270,000 Retained earnings 536,876 Non-controlling interest 30,684 1,153,460 (c) Changes in non-controlling interest Bal. July 1, Year 5 [20% (86, ,200)] 30,520 Allocation of entity net income 2,864 33,384 Dividends (20% 13,500) 2,700 Balance June 30, ,684 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 18

19 Chapter 5 Problem 14 Cost of 80% investment 272,000 Implied value of 100% investment 340,000 Carrying amount of Bach s net assets = Carrying amount of Bach s shareholders equity Common shares 200,000 Retained earnings 30, ,000 Acquisition differential 110,000 Allocated: FV CA Inventory (50,000 20,000) 30,000 Land (45,000 25,000) 20,000 Equipment (78,000 60,000) 18,000 Misc. intangibles (42,000 0) 42, ,000 Goodwill 0 Non-controlling interest (20% x 340,000) 68,000 (a) Acquisition Differential Amortization Schedule Balance Amortization Balance Jan. 1 Dec. 31 Dec. 31 Dec. 31 Year 1 Years 1, 2, and 3 Year 4 Year 4 Inventory 30,000 30,000 Land 20,000 20,000 Equipment 18,000 3,600 1,200 13,200 Misc. intangibles 42,000 6,300 2,100 33, ,000 39,900 3,300 66,800 Calculation of consolidated net income attributable to Albeniz s shareholders Year 4 Net income Albeniz 29,700 Less: Dividends from Bach (8,000 80%) 6,400 23,300 Net income Bach 17,500 Less: Acq. diff. amort. 3,300 14,200 80% 11,360 34,660 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 19

20 Calculation of consolidated retained earnings Dec. 31, Year 4 Retained earnings Albeniz 170,000 Retained earnings Bach 163,500 Acquisition retained earnings 30,000 Increase since acquisition 133,500 Less: acq. diff. amortization (39, ,300) 43,200 Adjusted increase since acquisition 90,300 (b) 80% 72, ,240 Calculation of non-controlling interest Dec. 31, Year 4 (Method 1) Bach Common shares 200,000 Retained earnings 163, ,500 Unamortized acquisition differential 66, ,300 20% 86,060 Calculation of non-controlling interest Dec. 31, Year 4 (Method 2) NCI, date of acquisition (a) 68,000 Adjusted change in Bach s retained earnings (b) 90,300 NCI s share at 20% 18,060 Non-controlling interest Dec. 31, Year 4 86,060 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 20

21 (a) Albeniz Company Consolidated Income Statement for the Year Ended December 31, Year 4 Sales (600, ,000) 1,000,000 Interest income 6,700 1,006,700 Cost of goods sold (334, ,000) 559,000 Distribution expense (20, , , ,100) 93,300 Selling and admin. (207, ,000) 281,000 Financing expense (1, ,000) 7,700 Income taxes (20, ,500) 28, ,200 Net income 37,500 Attributable to: Albeniz s shareholders 34,660 Non-controlling interest [20% (17,500 3,300)] 2,840 37,500 (b) Albeniz Company Consolidated Balance Sheet December 31, Year 4 Cash (40, ,000) 61,000 Accounts receivable (92, ,000) 176,000 Inventories (56, ,000) 101,000 Land (20, , ,000) 100,000 Plant and equipment (200, , , ,000) 678,000 Accumulated deprec. (80, , , ,800) (194,800) Miscellaneous intangibles 33, ,800 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 21

22 Accounts payable (130, ,500) 226,500 Advances payable ( , ,000) 0 Common shares 400,000 Retained earnings 242,240 Non-controlling interest 86, ,800 ACCTG FA 4 - Consolidation Subsequent to Acquisition page 22