Chapter 03 - Consolidations - Subsequent to the Date of Acquisition CHAPTER CONSOLIDATIONS - SUBSEQUENT TO THE DATE OF ACQUISITION I Several factors serve to complicate the consolidation process when it occurs subsequent to the date of acquisition In all combinations within its own internal records the acquiring company will utilize a specific method to account for the investment in the acquired company Three alternatives are available a Initial value method (sometimes referred to as the cost method) b Equity method c Partial equity method Depending upon the method applied, the acquiring company will record earnings from its ownership of the acquired company This total must be eliminated on the consolidation worksheet and be replaced by the subsidiary’s revenues and expenses Under each of these three methods, the balance in the Investment account will also vary It too must be removed in producing consolidated statements and be replaced by the subsidiary’s assets and liabilities II For combinations subsequent to the acquisition date, certain procedures are required If the parent applies the equity method, the following process is appropriate A Assuming that the acquisition was made during the current fiscal period The parent adjusts its own Investment account to reflect the subsidiary’s income and dividend payments as well as any amortization expense relating to excess acquisition-date fair value over book value allocations and goodwill Worksheet entries are then used to establish consolidated figures for reporting purposes a Entry S offsets the subsidiary’s stockholders’ equity accounts against the book value component of the Investment account (as of the acquisition date) b Entry A recognizes the excess fair value over book value allocations made to specific subsidiary accounts and/or to goodwill c Entry I eliminates the investment income balance accrued by the parent d Entry D removes intra-entity dividend payments e Entry E enters the current excess amortization expenses on the excess fair over book value allocations f Entry P eliminates any intra-entity payable/receivable balances B Assuming that the acquisition was made during a previous fiscal period Most of the consolidation entries described above remain applicable regardless of the time that has elapsed since the combination was formed The amount of the subsidiary’s stockholders’ equity to be removed in Entry S will differ each period to reflect the balance as of the beginning of the current year 3-1 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition The allocations established by entry A will also change in each subsequent consolidation Only the unamortized balances remaining as of the beginning of the current period are recognized in this entry III For a combination where the parent has applied an accounting method other than the equity method, the consolidation procedures described above must be modified A If the initial value method is applied by the parent company, the intra-entity dividends eliminated in Entry I will only consist of the dividends transferred from the subsidiary No separate Entry D is needed B If the partial equity method is in use, the subsidiary income to be removed in Entry I is the equity accrual only; no amortization expense is included Intercompany dividends are eliminated through Entry D C In any time period after the year of acquisition The initial value method recognizes neither income in excess of dividend payments nor excess amortization expense Thus, for all years prior to the current period, both of these figures must be entered directly into the consolidation Entry*C is used for this purpose; it converts all prior amounts to equity method balances The partial equity method does not recognize excess amortization expenses Therefore, Entry*C converts the appropriate account balances to the equity method by recognizing the expense that relates to all of the past years IV Bargain purchases A As discussed in Chapter Two, bargain purchases occur when the parent company transfers consideration less than net fair values of the subsidiary’s assets acquired and liabilities assumed B The parent recognizes an excess of net asset fair value over the consideration transferred as a “gain on bargain purchase.” V Goodwill Impairment A When is goodwill impaired? Goodwill is considered impaired when the fair value of its related reporting unit falls below its carrying value Goodwill should not be amortized, but should be tested for impairment at the reporting unit level (operating segment or lower identifiable level) Goodwill should be at least qualitatively assessed for impairment annually If there are indicators of goodwill impairment, then without undergoing a qualitative assessment, goodwill should be tested for impairment at least annually Interim impairment testing is necessary in the presence of negative indicators such as an adverse change in the business climate or market, legal factors, regulatory action, an introduction of competition, or a loss of key personnel B How is goodwill tested for impairment? 3-2 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition VI All acquired goodwill should be assigned to reporting units It would not be unusual for the total amount of acquired goodwill to be divided among a number of reporting units Goodwill should be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit FASB permits an option to perform a qualitative analysis to assess whether further testing procedures are appropriate The analysis includes determining whether it is more likely than not (a probability of more than 50 percent) that goodwill is impaired If this likelihood is not judged to be attained, then no further testing is required If circumstances, or the qualitative analysis, indicate a possible decline in the fair value of a reporting unit below its carrying value, then goodwill is tested for impairment using a two-step approach a The first step compares the fair value of a reporting unit to its carrying amount If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired and no further analysis is necessary b The second step is a comparison of goodwill to its carrying amount If the implied value of a reporting unit’s goodwill is less than its carrying value, goodwill is considered impaired and a loss is recognized The loss is equal to the amount by which goodwill exceeds its implied value The implied value of goodwill should be calculated in the same manner that goodwill is calculated in a business combination That is, an entity should allocate the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the value assigned at a subsidiary’s acquisition date The excess “acquisition-date” fair value over the amounts assigned to assets and liabilities is the implied value of goodwill This allocation is performed only for purposes of testing goodwill for impairment and does not require entities to record the “stepup” in net assets or any unrecognized intangible assets C How is the impairment recognized in financial statements? The aggregate amount of goodwill impairment losses should be presented as a separate line item in the operating section of the income statement unless a goodwill impairment loss is associated with a discontinued operation A goodwill impairment loss associated with a discontinued operation should be included (on a net-of-tax basis) within the results of discontinued operations Contingent consideration A The fair value of any contingent consideration is included as part of the consideration transferred B If the contingency results in a liability (typically a cash payment), changes in the fair value of the contingency are recognized in income as they occur 3-3 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition C If the contingency calls for an additional equity issue at a later date, the acquisitiondate fair value of the contingency is not adjusted over time Any subsequent shares issued as a consequence of the contingency are recorded at the original acquisitiondate fair value This treatment is similar to other equity issues (e.g., common stock, preferred stock, etc.) in the parent’s owners’ equity section VII Push-down accounting A A subsidiary may record any acquisition-date fair value allocations directly in its own financial records rather than through the use of a worksheet Subsequent amortization expense of these allocations could also be recorded by the subsidiary B Push-down accounting reports the assets and liabilities of the subsidiary at the amount the new owner paid It also assists the new owner in evaluating the profitability that the subsidiary is adding to the business combination C Push-down accounting can also make the consolidation process easier since allocations and amortization need not be included as worksheet entries Answers to Discussion Questions How Does a Company Really Decide which Investment Method to Apply? Students can come up with dozens of factors that Pilgrim should consider in choosing its internal method of accounting for its subsidiary, Crestwood Corporation The following is only a partial list of possible points to consider  Use of the information If Pilgrim does not monitor its subsidiary’s income levels closely, applying the equity method may be not be fruitful A company must plan to use the data before the task of accumulation becomes worthwhile For example, Crestwood may use the information for evaluating the performance of the subsidiary’s managers  Size of the subsidiary If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important Income levels would probably be significant However, if the subsidiary is actually quite small in relation to the parent, the impact might not be material enough to warrant the extra effort  Size of dividend payments If Crestwood distributes most of its income as dividends, that figure will approximate equity income Little additional information would be accrued by applying the equity method In contrast, if dividends are small or not paid on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination  Amount of excess amortizations If Pilgrim has paid a significant amount in excess of book value, its annual amortization charges are high, and use of the equity method might be preferred to show the amortization effect each reporting period In this case, waiting until year end and recording all of the expense at one time through a worksheet entry might not be the best way to reflect the impact of the expense 3-4 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition  Amount of intra-entity transactions As with amortization, the volume of transfers can be an important element in deciding which accounting method to use If few intra-entity sales are made, monitoring the subsidiary through the application of the equity method is less essential Conversely, if the amount of these transactions IS significant, the added data can be helpful to company administrators evaluating operations  Sophistication of accounting systems If Pilgrim and Crestwood both have advanced accounting systems, application of the equity method may be relatively easy Unfortunately, if these systems are primitive, the cost and effort necessary to apply the equity method may outweigh any potential benefits  The timeliness and accuracy of income figures generated by Crestwood If the subsidiary reports operating results on a regular basis (such as weekly or monthly) and these figures prove to be reliable, equity totals recorded by Pilgrim may serve as valuable information to the parent However, if Crestwood's reports are slow and often require later adjustment, Pilgrim's use of the equity method will provide only questionable results Answers to Questions a CCES Corp., for its own recordkeeping, may apply the equity method to its Investment in Schmaling Under this approach, the parent's records parallel the activities of the subsidiary The parent accrues income as it is earned by the subsidiary Dividends paid by Schmaling reduce its book value; therefore, CCES reduces the investment account In addition, any excess amortization expense associated CCES's acquisition-date fair value allocations is recognized through a periodic adjustment By applying the equity method, both the parent’s income and investment balances accurately reflect consolidated totals The equity method is especially helpful in monitoring the income of the business combination This method can be, however, rather difficult to apply and a time consuming process b The initial value method The initial value method can also be utilized by CCES Corporation Any dividends received are recognized as income but no other investment entries are made Thus, the initial value method is easy to apply However, the resulting account balances of the parent may not provide a reasonable representation of the totals that result from consolidating the two companies c The partial equity method combines the advantages of the previous two techniques Income is accrued as earned by the subsidiary as under the equity method Similarly, dividends reduce the investment account However, no other entries are recorded; more specifically, amortization is not recognized by the parent The method is, therefore, easier to apply than the equity method but the subsidiary's individual totals will still frequently approximate consolidated balances a The consolidated total for equipment is made up of the sum of Maguire’s book value, Williams’ book value, and any unamortized excess acquisition-date fair value over book value attributable to Williams’ equipment b Although an Investment in Williams account is appropriately maintained by the parent, from a consolidation perspective the balance is intra-entity in nature Thus, the entire amount is eliminated in arriving at consolidated financial statements 3-5 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition c Only dividends paid to outside parties are included in consolidated statements Because Maguire owns 100 percent of Williams, all of the subsidiary's dividends are intra-entity Consequently, only the dividends paid by the parent company will be reported in the financial statements for this business combination d Any acquisition-date goodwill must still be reported for consolidation purposes Reductions to goodwill are made if goodwill is determined to be impaired e Unless intra-entity revenues have been recorded, consolidation is achieved in subsequent periods by adding the two book values together f Consolidated expenses are determined by combining the parent's and subsidiary amounts and then including any amortization expense associated with the acquisition-date fair value allocations As will be discussed in detail in Chapter Five, intra-entity expenses can also be present which require elimination in arriving at consolidated figures g Only the parent’s common stock outstanding is included in consolidated totals h The net income for a business combination is calculated as the difference between consolidated revenues and consolidated expenses Under the equity method, the parent accrues subsidiary earnings and amortization expense (from allocation of acquisition-date fair values) in the same manner as in the consolidation process The equity method parallels consolidation Thus, the parent’s net income and retained earnings each year will equal the consolidated totals In the consolidation process, excess amortizations must be recorded annually for any portion of the purchase price that is allocated to specific accounts (other than land or to goodwill opr other indefinite-lived assets) Although this expense can be simulated in total on the parent's books by an equity method entry, the actual amortization of each allocated fair value adjustment is appropriate for consolidation Hence, the effect of the parent's equity method amortization entry is removed as part of Entry I so that the amortization of specific accounts (e.g., depreciation) can be recorded (in consolidation Entry E) When a parent applies the initial value method, no accrual is recorded to reflect the subsidiary's change in book value subsequent to acquisition Recognition of excess amortizations relating to the acquisition is also omitted by the parent The partial equity method, in contrast, records the subsidiary’s book value increases and decreases but not amortizations Consequently, for both of these methods, a technique must be employed in the consolidation process to record the omitted figures Entry *C simply brings the parent's records (more specifically, the beginning retained earnings balance and the investment account) up-to-date as of the first day of the current year If the acquirer applies the initial value method, changes in the subsidiary's book value in previous years are recognized on the worksheet along with the appropriate amount of amortization expense For the partial equity method, only the amortization relating to these prior years needs to be recognized 3-6 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition No similar entry to *C is needed when the parent applies the equity method The parent will record changes in the subsidiary's book value as well as excess amortization each year Thus, under the equity method, the parent's investment and beginning retained earnings balances are both correctly established and need no further adjustment Lambert's loan payable and the receivable held by Jenkins are intra-entity accounts The consolidation process offsets these reciprocal balances The $100,000 is neither a debt to nor a receivable from an unrelated (or outside) party and is, therefore, not reported in consolidated financial statements Any interest income/expense recognized on this loan is also intra-entity in nature and must likewise be eliminated Because Benns applies the equity method, the $920,000 is composed of four balances: a b c d The original consideration transferred by the parent; The annual accruals made by Benns to recognize subsidiary income as it is earned The reductions that are created by the subsidiary's payment of dividends The periodic amortization recognized by Benns in connection with the identified acquisition-date fair value allocations The $100,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold A parent should consider recognizing an impairment loss for goodwill associated with a subsidiary when, at the reporting unit level, the fair value is less than its carrying amount A firm has the option to perform a qualitative assessment of whether a reporting unit’s fair value is more likely than not to be less than its carrying value before proceeding to the quantitative 2-step goodwill impairment testing procedure Goodwill is reduced when its carrying value is less than its implied fair value To compute an implied fair value for goodwill, the fair values of the reporting unit’s identifiable net assets are subtracted from its total fair value The impairment is recognized as a loss from continuing operations The acquisition-date fair value of the contingent payment is part of the consideration transferred by Reimers to acquire Rollins and thus is part of the overall fair value assigned to the acquisition If the contingency is a liability (to be settled in cash or other assets) then the liability is adjusted to fair value through time If the contingency is a component of equity (e.g., to be settled by the parent issuing equity shares), then the equity instrument is not adjusted to fair value over time 10 11 At present, the Securities and Exchange Commission requires the use of push-down accounting for the separate financial statements of a subsidiary where no substantial outside ownership exists Thus, if Company A owns all of Company B, the push-down method of accounting is appropriate for the separately issued statements of Company B The SEC normally requires push-down accounting where 95 percent of a subsidiary is acquired and the company has no outstanding public debt or preferred stock 3-7 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Push-down accounting may be required if 80-95 percent of the outstanding voting stock is acquired Push-down accounting uses the consideration transferred as the valuation basis for the subsidiary in consolidated reports For example, if a piece of land costs Company B $10,000 but Company A allocates a $13,000 fair value to the land in acquiring Company B, the land has a basis to the current owners of B of $13,000 If B's financial records had been united with A at the time of the acquisition, the land would have been reported at $13,000 Thus, keeping the $10,000 figure simply because separate incorporation is maintained is viewed, by proponents of push-down accounting, as unjustified 12 When push-down accounting is applied, the subsidiary adjusts the book value of its assets and liabilities based on the acquisition-date fair value allocations The subsidiary then recognizes periodic amortization expense on those allocations with definite lives Therefore, the subsidiary’s recorded income equals its impact on consolidated earnings The parent uses no special procedures when push-down accounting is being applied However, if the equity method is in use, amortization need not be recognized by the parent since that expense is included in the figure reported by the subsidiary Answers to Problems A B A D Willkom’s equipment book value—12/31/13 Szabo’s equipment book value—12/31/13 Original purchase price allocation to Szabo's equipment ($300,000 – $200,000) Amortization of allocation ($100,000 ÷ 10 years for years) Consolidated equipment $210,000 140,000 100,000 (30,000) $420,000 A B D B B Phoenix revenues Phoenix expenses Net income before Sedona effect Equity income from Sedona Consolidated net income -or- $498,000 350,000 148,000 55,000 $203,000 3-8 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Consolidated revenues $783,000 Consolidated expenses (includes $35K amortization) 580,000 Consolidated net income $203,000 10 A (same as Phoenix because of equity method use) 11 C Consideration transferred at fair value Book value acquired Excess fair over book value to equipment to customer list (4 year life) $600,000 420,000 180,000 80,000 $100,000 Three years since acquisition, ¼ of acquisition-date value ($25,000)remains 12 B 13 C 14 C The $60,000 excess acquisition-date fair value allocation to equipment is "pushed-down" to the subsidiary and increases its balance to $390,000 The consolidated balance is $810,000 ($420,000 plus $390,000) 15 (35 Minutes) (Determine consolidated retained earnings when parent uses various accounting methods Determine Entry *C for each of these methods) a CONSOLIDATED RETAINED EARNINGS EQUITY METHOD Herbert (parent) balance—1/1/12 $400,000 Herbert income—2012 40,000 Herbert dividends—2012 (subsidiary dividends are intercompany and, thus, eliminated) (10,000) Rambis income—2012 (not included in parent's income) 20,000 Amortization—2012 (12,000) Herbert income—2013 50,000 Herbert dividends—2013 (10,000) Rambis income—2013 30,000 Amortization—2013 (12,000) Consolidated retained earnings, 12/31/13 $496,000  PARTIAL EQUITY METHOD AND INITIAL VALUE METHOD Consolidated retained earnings are the same regardless of the method in use: the beginning balance plus the income less the dividends of the parent plus the income of the subsidiary less amortization expense Thus, December 31, 2013 consolidated retained earnings are $496,000 as computed above 3-9 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition b Investment in Rambis—equity method Rambis fair value 1/1/12 $574,000 Rambis income 2012 20,000 Rambis dividends 2012 (5,000) Herbert’s 2012 excess fair over book value amortization (12,000) Investment account balance 1/1/13 $577,000 Investment in Rambis—partial equity method Rambis fair value 1/1/12 $574,000 Rambis income 2012 20,000 Rambis dividends 2012 (5,000) Investment account balance 1/1/12 $589,000 Investment in Rambis—Initial value method Rambis fair value 1/1/12 $574,000 Investment account balance 1/1/13 $574,000 15 (continued) c ENTRY *C  EQUITY METHOD No entry is needed to convert the past figures to the equity method since that method has already been applied  PARTIAL EQUITY METHOD Amortization for the prior years (only 2012 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C: ENTRY *C Retained Earnings, 1/1/13 (Parent) 12,000 Investment in Rambis 12,000 (To record 2012 amortization in consolidated figures Expense was omitted because of application of partial equity method.)  INITIAL VALUE METHOD Amortization for the prior years (only 2012 in this case) has not been recorded and must be brought into the consolidation through worksheet entry *C In addition, only dividend income has been recorded by the parent ($5,000 in 2012) In this prior year, Rambis reported net income of $20,000 Thus, the parent has not recorded the $15,000 income in excess of dividends That amount must also be included in the consolidation through entry *C: 3-10 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition 5) Nike incurred a $202 million impairment charge for its long-lived assets in 2009, primarily attributable to Umbro’s trademark and an equity investment owned by Umbro Nike (2009 10-K p 46) tests other indefinite-lived intangibles for impairment by comparing the asset’s respective net book value to estimates of fair value (One-step) The test is done annually or more frequently if events or changes in circumstances indicate that the asset might be impaired (Same as goodwill) Nike (2009 10-K p 45) reviews its long-lived assets (including intangible assets with a finite life) for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable The assets are impaired if the total of the projected undiscounted future cash flows is less than the carrying amount of their long-lived assets, a loss is recognized for the difference between the fair value and carrying value of the assets (Two-step) FASB ASC AND IASB RESEARCH CASE GAAP prohibits reversal of impairment losses for goodwill prohibits reversal of impairment losses for goodwill IFRS also Requirements for goodwill impairment differ under IFRS Under IFRS, goodwill impairment testing uses a one-step approach: The recoverable amount of the CGU (cash-generating unit) or group of CGUs (i.e., the higher of its fair value minus costs to sell and its value in use) is compared with its carrying amount An impairment loss is recognized in operating results as the excess of carrying over the recoverable amount The impairment loss is allocated first to goodwill and then pro rata to the other assets of the CGU or group of CGUs to the extent that the impairment exceeds goodwill’s book value IAS 36 Impairment of Assets: 88 When, as described in paragraph 81, goodwill relates to a cash-generating unit but has not been allocated to that unit, the unit shall be tested for impairment, whenever there is an indication that the unit may be impaired, by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount Any impairment loss shall be recognised in accordance with paragraph 104 3-47 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition 90 A cash-generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit shall be regarded as not impaired If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity shall recognise the impairment loss in accordance with paragraph 104 104 An impairment loss shall be recognised for a cash-generating unit (the smallest group of cash-generating units to which goodwill or a corporate asset has been allocated) if, and only if, the recoverable amount of the unit (group of units) is less than the carrying amount of the unit (group of units) The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order: (a) first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and (b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units) These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised in accordance with paragraph 60 Excel Case Solution a Innovus employs initial value method to account for ChipTech Revenues Cost of good sold Depreciation expense Amortization expense Dividend income Net Income Retained earnings 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Chiptech Innovus (990,000) 500,000 100,000 55,000 (40,000) (375,000) ChipTech (210,000) 90,000 5,000 18,000 -0(97,000) (1,555,000) (375,000) 250,000 (1,680,000) (450,000) (97,000) 40,000 (507,000) 960,000 Adjustments (E) 20,000 (I) 40,000 (S)450,000 (*C) 60,000 (I) 40,000 355,000 Consolidated (1,200,000) 590,000 105,000 93,000 -0(412,000) (1,615,000) (412,000) 250,000 (1,777,000) 1,315,000 (*C) 60,000 670,000 (S) 580,000 (A) 150,000 3-48 -0- Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Equipment (net) Trademark Existing technology Goodwill Total assets Liabilities Common stock Additional paid-in capital Retained earnings 12/31 Total liabilities and equity 765,000 235,000 450,000 3,080,000 225,000 100,000 45,000 -0725,000 (780,000) (500,000) (120,000) (1,680,000) (3,080,000) (88,000) (100,000) (30,000) (507,000) (725,000) (A) 36,000 (A) 64,000 (A) 50,000 (E) 4,000 (E) 16,000 (S)100,000 (S) 30,000 850,000 850,000 990,000 367,000 93,000 500,000 3,265,000 (868,000) (500,000) (120,000) (1,777,000) (3,265,000) Excel Case Solution (continued) b Innovus employs initial value method to account for ChipTech and goodwill is impaired Revenues Cost of good sold Depreciation expense Amortization expense Impairment loss Dividend income Net Income Retained earnings 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Chiptech Innovus (990,000) 500,000 100,000 55,000 50,000 (40,000) (325,000) ChipTech (210,000) 90,000 5,000 18,000 -0(97,000) (I) 40,000 (1,555,000) (325,000) 250,000 (1,630,000) (450,000) (97,000) 40,000 (507,000) (S)450,000 960,000 Consolidated (1,200,000) 590,000 105,000 93,000 50,000 -0(362,000) (E) 20,000 (*C) 60,000 (I) 40,000 355,000 1,315,000 (*C) 60,000 620,000 (S)580,000 (A)100,000 Equipment (net) Trademark Existing technology Goodwill Total assets Liabilities Common stock Additional paid-in capital Retained earnings 12/31 (1,615,000) (362,000) 250,000 (1,727,000) 765,000 235,000 -0450,000 3,030,000 225,000 100,000 45,000 -0725,000 (780,000) (500,000) (88,000) (100,000) (120,000) (1,630,000) (30,000) (507,000) 3-49 (A) 36,000 (A )64,000 (S)100,000 (S) 30,000 (E) 4,000 (E) 16,000 -0990,000 367,000 93,000 450,000 3,215,000 (868,000) (500,000) (120,000) (1,727,000) Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Total liabilities and equity (3,030,000) (725,000) 800,000 800,000 (3,215,000) Alternatively, the goodwill impairment loss could have been recorded as an adjustment on the worksheet Excel Case Solution Part a: Investment in Wi-Free account balance 12/31/13 Wi-Free’s acquisition-date fair value Change in Wi-Free’s retained earnings for 2012 2012 amortization 2012 in-process R&D write-off 2013 reported Wi-Free income 2013 Wi-Free dividend 2013 amortization Balance 12/31/13 Part b: Totals Revenues Cost of goods sold Depreciation expense Amortization expense Equity in subsidiary earnings Net Income Retained earnings 1/1 Net income Dividends paid Retained earnings 12/31 Current assets Investment in Wi-Free Equipment (net) Computer software Internet domain name Goodwill Total assets Liabilities Hi-Speed Wi-Free (1,100,000) 625,000 140,000 50,000 (325,000) 122,000 12,000 11,000 (175,500) (460,500) -0(180,000) (1,552,500) (460,500) 250,000 (1,763,000) (450,000) (180,000) 50,000 (580,000) 1,034,000 856,000 345,000 $730,000 80,000 (4,500) (75,000) 180,000 (50,000) (4,500) $856,000 Consolidation Entries Debit Credit (E) 12,000 (I) 175,500 7,500 (D) 50,000 713,000 650,000 -0-03,253,000 305,000 130,000 100,000 -0880,000 (E) 7,500 (A)108,000 (A) 65,000 (870,000) (170,000) (P) 30,000 (1,425,000) 747,000 152,000 65,500 -0(460,500) (S)450,000 (D) 50,000 3-50 (E) Consolidated (P) 30,000 (I) 175,500 (S)580,000 (A)150,500 (A) 22,500 (E) 12,000 (1,552,500) (460,500) 250,000 (1,763,000) 1,349,000 1,018,000 765,000 196,000 65,000 3,393,000 (1,010,000) Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Common stock Additional paid-in capital Retained earnings 12/31 Total liab and equity (500,000) (120,000) (1,763,000) (3,253,000) (110,000) (20,000) (580,000) (880,000) (S)110,000 (S) 20,000 1,028,000 Chapter - Computer Project PECOS COMPANY AND SUARO COMPANY Consolidated Information Worksheet Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Suaro Land Equipment (net) Software Other intangibles Goodwill Total assets Liabilities Common stock Retained earnings (above) Total liabilities and equity Pecos (1,052,000) 821,000 Suaro (427,000) 262,000 0 (165,000) 0 200,000 (201,000) (165,000) 35,000 (331,000) 195,000 247,000 415,000 95,000 143,000 197,000 85,000 100,000 312,000 0 932,000 341,000 240,100 145,000 (1,537,100) (500,000) 3-51 (251,000) (350,000) (331,000) (932,000) 1,028,000 (500,000) (120,000) (1,763,000) (3,393,000) Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Consolidated Information Worksheet (continued) Fair Value Allocation Schedule Acquisition-date fair value 1,450,000 Book value 476,000 Excess fair value over book value 974,000 Land Brand Name Software IPR&D Goodwill Total (10,000) 60,000 100,000 300,000 524,000 974,000 Amortizations and Write-off 2012 2013 0 0 50,000 50,000 300,000 0 350,000 50,000 Suaro's Retained Earnings Changes 2012 2013 Income 75,000 165,000 Dividends 35,000 3-52 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Chapter - Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2013 EQUITY METHOD Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Suaro Pecos (1,052,000) 821,000 0 (115,000) (346,000) Suaro (427,000) 262,000 0 (165,000) (655,000) (346,000) 200,000 (801,000) (201,000) (165,000) 35,000 (331,000) 195,000 247,000 415,000 1,255,000 95,000 143,000 197,000 3-53 Consolidation Entries Debit Credit (E) 50,000 (I) 115,000 (S) 201,000 (D) (D) 35,000 (S) (A) 35,000 551,000 624,000 Consolidated Totals (1,479,000) 1,083,000 50,000 0 (346,000) (655,000) (346,000) 200,000 (801,000) 290,000 390,000 612,000 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition (I) Consolidated Worksheet (continued) Land Equipment (net) Software Other intangibles Brand name Goodwill Total assets Liabilities Common stock Retained earnings (above) Total liabilities and equity 115,000 341,000 240,100 145,000 0 2,838,100 85,000 100,000 312,000 0 932,000 (1,537,100) (500,000) (801,000) (2,838,100) (251,000) (350,000) (331,000) (932,000) (A) (A) 10,000 50,000 (E) 50,000 (A) (A) 60,000 524,000 (S) 350,000 1,385,000 1,385,000 416,000 340,100 312,000 145,000 60,000 524,000 3,089,100 (1,788,100) (500,000) (801,000) (3,089,100) Shaded items were provided on the Consolidated Information Worksheet Chapter – Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2013 PARTIAL EQUITY METHOD Revenues Operating expenses Pecos (1,052,000) 821,000 Suaro (427,000) 262,000 3-54 Consolidation Entries Debit Credit Consolidated Totals (1,479,000) 1,083,000 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Suaro 0 (165,000) (396,000) 0 (165,000) (E) 50,000 (I) 165,000 (1,005,000) (396,000) 200,000 (1,201,000) (201,000) (165,000) 35,000 (331,000) (*C) (S) 350,000 201,000 195,000 247,000 415,000 1,655,000 95,000 143,000 197,000 3-55 50,000 0 (346,000) (D) (D) 35,000 (S) (A) (I) (*C) 35,000 551,000 624,000 165,000 350,000 (655,000) (346,000) 200,000 (801,000) 290,000 390,000 612,000 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Consolidated Worksheet (continued) Land Equipment (net) Software Other intangibles Brand name Goodwill Total assets Liabilities Common stock Retained earnings (above) Total liabilities and equity 341,000 240,100 145,000 0 3,238,100 85,000 100,000 312,000 0 932,000 (1,537,100) (500,000) (1,201,000) (3,238,100) (251,000) (350,000) (331,000) (932,000) Shaded items were provided on the Consolidated Information Worksheet 3-56 (A) (A) (A) (S) (A) 10,000 50,000 (E) 50,000 60,000 524,000 350,000 1,785,000 416,000 340,100 312,000 145,000 60,000 524,000 3,089,100 (1,788,100) (500,000) (801,000) 1,785,000 (3,089,100) Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Chapter – Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2013 INITIAL VALUE METHOD Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Suaro Pecos (1,052,000) 821,000 0 (35,000) (266,000) Suaro (427,000) 262,000 0 (165,000) (930,000) (266,000) 200,000 (996,000) (201,000) (165,000) 35,000 (331,000) 195,000 247,000 415,000 1,450,000 95,000 143,000 197,000 3-57 Consolidation Entries Debit Credit (E) 50,000 (I) 35,000 (*C) (S) 275,000 201,000 (I) (S) (A) (*C) 35,000 551,000 624,000 275,000 Consolidated Totals (1,479,000) 1,083,000 50,000 0 (346,000) (655,000) (346,000) 200,000 (801,000) 290,000 390,000 612,000 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Consolidated Worksheet (continued) Land Equipment (net) Software Other intangibles Brand name Goodwill Total assets Liabilities Common stock Retained earnings (above) Total liabilities and equity 341,000 240,100 145,000 0 3,033,100 85,000 100,000 312,000 0 932,000 (1,537,100) (500,000) (996,000) (3,033,100) (251,000) (350,000) (331,000) (932,000) Shaded items were provided on the Consolidated Information Worksheet 3-58 (A) (A) (A) (S) (A) 10,000 50,000 (E) 50,000 60,000 524,000 350,000 1,545,000 1,545,000 416,000 340,100 312,000 145,000 60,000 524,000 3,089,100 (1,788,100) (500,000) (801,000) (3,089,100) Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Chapter – Computer Project PECOS COMPANY AND SUARO COMPANY Goodwill Impairment Loss Effects Without Impairment With Impairment Common shares outstanding 500,000 500,000 Consolidated net income/(loss) 346,000 (178,000) Consolidated assets, 1/1/13 2,943,100 2,943,100 Consolidated assets, 12/31/13 3,089,100 2,565,100 Consolidated equity, 1/1/13 1,155,000 1,155,000 Consolidated equity, 12/31/13 1,301,000 777,000 Consolidated liabilities 1,788,100 1,788,100 Earnings-per-share 0.69 -0.36 Return on assets 11.47% -6.46% Return on equity 28.18% -18.43% 1.37 2.30 Debt-to-equity 3-59 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Chapter – Computer Project Solution PECOS COMPANY AND SUARO COMPANY Consolidated Worksheet For the Year Ended December 31, 2013 EQUITY METHOD – GOODWILL IMPAIRMENT LOSS Revenues Operating expenses Amortization of intangibles Goodwill impairment loss Income of Suaro Net income Retained earnings—Pecos, 1/1 Retained earnings—Suaro, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in Suaro Pecos (1,052,000) 821,000 524,000 (115,000) 178,000 Suaro (427,000) 262,000 0 (165,000) (655,000) 178,000 200,000 (277,000) (201,000) (165,000) 35,000 (331,000) 195,000 247,000 415,000 731,000 95,000 143,000 197,000 Consolidated Worksheet (continued) 3-60 Consolidation Entries Debit Credit (E) 50,000 (I) 115,000 (S) 201,000 (D) (D) 35,000 (S) (A) (I) 35,000 551,000 100,000 115,000 Consolidated Totals (1,479,000) 1,083,000 50,000 524,000 178,000 (655,000) 178,000 200,000 (277,000) 290,000 390,000 612,000 Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Land Equipment (net) Software Other intangibles Brand name Goodwill Total assets Liabilities Common stock Retained earnings (above) Total liabilities and equity 341,000 240,100 145,000 0 2,314,100 85,000 100,000 312,000 0 932,000 (1,537,100) (500,000) (277,000) (2,314,100) (251,000) (350,000) (331,000) (932,000) Shaded items were provided on the Consolidated Information Worksheet 3-61 (A) 10,000 (A) 50,000 (E) 50,000 (A) 60,000 (S) 350,000 861,000 416,000 340,100 312,000 145,000 60,000 2,565,100 (1,788,100) (500,000) (277,000) 861,000 (2,565,100) ... company administrators evaluating operations  Sophistication of accounting systems If Pilgrim and Crestwood both have advanced accounting systems, application of the equity method may be relatively... eliminated Because Benns applies the equity method, the $920,000 is composed of four balances: a b c d The original consideration transferred by the parent; The annual accruals made by Benns to recognize... push-down accounting for the separate financial statements of a subsidiary where no substantial outside ownership exists Thus, if Company A owns all of Company B, the push-down method of accounting