Topic 2 Parent Company s Investment in Subsidiary

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Topic 2 – Parent Company’s

Investment in Subsidiary

1 – Parent Company’s Investment in Subsidiary Company

Investment in Subsidiary

2 – Consolidated Balance Sheet - Heading

Consolidated Balance Sheet

• In this Chapter

– P buys stock

S

3 – Parent Invests in Subsidiary

– S continues to exist

– How do you show S’s net assets?

• When P has effective control of S

– Consolidated FS

4 – Consolidated Balance Sheet

– Usually > 50% of S’s stock

• If P buys 100% of S

– Consolidated BS

Æ

same result as Chapter 1

– Get there differently

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• When P buys stock of S

– P does not record S’s assets & liabilities Just Investment in S as asset

5 – Recording Investment in Subsidiary on Parent’s Books

D. Investment in Subsidiary $500,000

Cr. Cash $500,000

– Just Investment in S as asset

• Journal entry on P’s books:

6 – Consolidation Worksheet - Heading

Consolidation Worksheet

• To get Consolidated BS

– Prepare Consolidation WS

7 – Consolidation Worksheet #1

• WS entries

– Done on WS

– Not done on P’s or S’s books

• Consolidation WS

– First two columns are trial balances of P & S • So S’s net assets recorded at BV

– Credit balances recorded with negative numbers

8 – Consolidation Worksheet #2 Trial Balances Eliminations and Adjustments Consol. Balance Sheet Account Titl P t S b D C NCI D C

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9 – EL Entry - Heading

EL Entry

• Combining P’s & S’s trial balances with no

dj

t

t

bl

10 – Double Counting

adjustments causes problems

• E.g., Can’t just add all S’s assets &

liabilities to P’s

– Double Counting

• E.g., Form P with $500K Cash

Parent

11 – Double Counting E.g. - # 101

Cash $500K CS $500K

• P buys stock of S with $500K Cash

Sub

Cash $500K CS $500K

Parent

Inv in S $500K CS $500K

• Put Balance Sheet of P & S together:

Sub

Parent

12 – Double Counting E.g. - # 102

C

bi

d

Cash $500K CS $500K

Parent

Inv in S $500K CS $500K

• And You Get:

Combined

Inv in S $500K

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• Combined ÆYou have 2 assets: – Investment in Sub

– Sub’s Cash

• Combined ÆYou have 2 equities that come from

i th t / d bt

owning those assets w/o debt

• BUT there is really only 1 asset ÆS’s Cash

• There is really only one equity stemming from that asset

Combined

Inv in S $500K

Cash $500K

CS $1,000K

• You need Elimination Entry (EL) to avoid double

counting

• Need to get rid of one asset & one equity

L

l th

lti

t

t &

lti

t

it

14 – Elimination (EL) Entry - #1

• Leave only the ultimate

asset & ultimate

equity

– $500K Cash is real asset

– $500K Equity of P’s stockholders is the real equity

• Get rid of intermediate

equity and intermediate

asset

P’ i i b i ll d b P ’

– P’s equity in sub is really owned by Parent’s stockholders

– P’s asset, “Investment in Subsidiary” is really the $500K Cash of the S

• EL entry:

– drops S’s Equity

– drops P’s Investment in S

15 – Elimination (EL) Entry - #2

p

• Amount = S’s Equity

• Leaves only S’s assets & liabilities (net assets)

Combined

Cash $500K

CS $500K

• E.g.,

– What if P has:

16 – Elimination (EL) Entry E.g. - # 101

Investment in Subsidiary Common Stock $500,000 500,000

– What if S has:

Cash Common Stock $500,000 500,000

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EL D. Common Stock (of Sub) $500,000

17 – Elimination (EL) E.g. - # 102

Cr. Investment in Subsidiary $500,000

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• Hard and fast rule

– Always debit part of S’s equity accounts that P

bought (100% in this case).

– Always credit Investment in S for the total of

the debits.

Account Titles

Trial Balance Eliminations & Adjustments Bal. Sheet Parent Sub. Debit Credit

Assets:

19 – Elimination (EL) Entry E.g. - # 103

Assets: Cash 500K $500K Inv in Sub. $500K _____ EL 500K _____ Total Assets $500K $500K $500K Equity P’s Com. Stk. (500K) ($500K) S’s Com. Stk. _____ (500K) EL 500K ______ Total L&Eq $(500K) $(500K) ($500K)

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• The only equity you end up with in

C

lid t d BS i P

t’

it

Consolidated BS is Parent’s equity

accounts (and NCI).

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21 – D Entry - Heading

D Entry

• Chapter 1

– Purchased assets recorded at FMV

• Chapter 2

22 – Distribution (D) Entry - #1

Chapter 2

– S’s assets will be recorded at same values

determined in Chapter 1

– Done in two parts

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– Part 1

WS t t

ith S’

t

t S’ BV

• WS starts with S’s assets at S’s BV

– Part 2

• D entry changes S’s assets from BV

to FMV

• D entry creates GW, if any

D entry creates GW, if any

• D entry records gain, if any

Investment in Subsidiary

C St k

$700,000 700 000

• What if P has:

24 – Distribution (D) Entry E.g. - # 101

Common Stock 700,000

– P paid $700,000 for S’s common stock

• What if S has:

Equipment Common Stock $500,000 500,000

– FMV of S’s assets is $500,000

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25 – Distribution (D) Entry E.g. - # 102

EL entry eliminates S’s equity purchased by P

EL D. Common Stock (of Sub) $500,000

EL Cr. Investment in Subsidiary $500,000

26 – Distribution (D) Entry E.g. - # 103

D entry creates GW:

D D. Goodwill $200,000

D Cr. Investment in Subsidiary $200,000

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• After you are done with D entry, there is

thi

l ft i I

t

t i S

nothing left in Investment in S.

Account Titles

Trial Balance Elim & Adjs

Bal. Sheet Parent Sub. Debit Credit

28 – Distribution (D) Entry E.g. - #3

Assets: Equipment 500K $500K Inv in Sub. $700K EL 500K D 200K Goodwill _____ _____ D 200K 200K $700K $500K $700K $700K $500K $700K Equity P’s Com. Stk. -700K ($700K) S’s Com. Stk. _____ -500K EL 500K _____ Total ($700K) ($500K) ($700K)

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29 – Non-Controlling Interest - Heading

Non-Controlling Interest

• What if P buys part of S

• As long as P owns > 50%, P&S still

consolidate

30 – Non-Controlling Interest

• You do the same as before

– EL Entry

• Eliminate the Sub’s Equity that P bought • Investment in Sub is Plug Number

D E t

– D Entry

• Write Everything to FMV & Create GW • Give NCI its % of Adjustments (Including GW) • Investment in Sub is Plug Number

Investment in Subsidiary $600,000

• What if P has:

31 – Non-Controlling Interest E.g. - #1

y Common Stock

, 600,000

– P paid $600,000 for 80% of S’s common stock

• What if S has:

Equipment Common Stock $500,000 500,000

– FMV of S’s equipment is $700,000

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• We need to figure out the GW.

• There are two ways to do this:

– P bought 80% of S for $600,000

• FMV of S’s Assets is $700,000 FMV f 80% f S i $560 000 • FMV of 80% of S is $560,000 • P overpaid by $40,000 ($600K - $560K) • P’s share of GW is $40,000

– P’s share of GW is 80% of Total GW

• Total GW x 80% = $40,000 • Total GW = $40,000/.80 • Total GW = $50,000

– NCI’s share of GW is the other 20%:

• NCI’s share: 20% of $50K = $10K

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• Second way to calculate GW:

– P bought 80% of S for $600,000

– We can use this to figure out the total value of

S and the GW

• FMV of S x 80% = $600K • FMV of S = $600K/80% = $750K

• S is worth $750K & its only asset is worth $700K • The Total GW is $50,000

– P’s share of GW is 80% x $50K = $40K

NCI’

h

f GW i 20%

$50K

$10K

– NCI’s share of GW is 20% x $50K = $10K

34 – Non-Controlling Interest E.g. - #2

• EL entry eliminates portion of S equity that

P bought (80%)

EL D. Common Stock $400,000

Cr. Investment in Subsidiary $400,000

P bought (80%)

Cr. Investment in Subsidiary $400,000

35 – Non-Controlling Interest E.g. - #3

• D entry adds $200,000 to Equipment’s BV of $500,000 (=700K FMV of Equip.)

• D entry also creates $50,000 of GW

• D entry (labeled NCI) increases NCI by 20% of increase in Equipment ($200,000) and GW ($50,000)q p ( , ) ( , )

• NCI’s share of Equipment increase: $200K x .2 = $40K • NCI’s share of GW increase: $50K x .2 = $10K • NCI increases by $50K [.2 x ($200K+$50K)] • NCI increase added to S’s RE

D D Equipment $200K

D Goodwill 50K

D Cr Investment in Subsidiary $200K

NCI Retained Earnings Subsidiary [.2x($200K+$50K)] 50K

Accounts

Trial Balance Elim & Adjs

NCI Bal. Sheet Parent Sub Debit Credit

Assets:

Equipment 500K D 200K $700K

36 – Non-Controlling Interest E.g. - #4

Inv in Sub. $600K EL 400K D 200K Goodwill _____ _____ D 50K 50K $600K $500K $750K Equity P’s C. Stk. (600K) ($600K) S’s C. Stk. (500K) EL 400K -100K S’ RE NCI 50K -50K NCI _____ _____ (150K)

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37 – NCI’s Share of GW

NCI’s Share of Goodwill

• Parent may have paid more than the FMV

of the S because it paid a premium

because it got control of the S

38 – NCI’s Share of Goodwill

because it got control of the S

– If true

Æ

the premium portion of the

overpayment (GW) does not apply to NCI

– If true

Æ

NCI will not increase by its share of

that premium.

• This won’t be on a test.

39 – NCI’s Share of GW

Bargain Purchase & NCI

• What if there is a Bargain Purchase with

NCI

• You do the same as before

40 – Non-Controlling Interest

– EL Entry

• Eliminate the Sub’s Equity that P bought • Investment in Sub is Plug Number

– D Entry

• Write Everything to FMVWrite Everything to FMV

• Give NCI its % of Adjustments (NOT Gain) • Calculate Gain

– P’s share of Net Assets not paid for. • Investment in Sub is Plug Number

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Investment in Subsidiary $500,000

• What if P has:

41 – Non-Controlling Interest E.g. - #1

y Common Stock

, 500,000

– P paid $500,000 for 80% of S’s common stock

• What if S has:

Equipment Common Stock $500,000 500,000

– FMV of S’s equipment is $700,000

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• In this situation:

– P bought 80% of S for $500,000

• FMV of S’s Assets is $700,000 • FMV of 80% of S is $560,000 • P under paid by $60,000 ($500K - $560K) • P’s Gain is $60,000

43 – Non-Controlling Interest E.g. - #2

• EL entry eliminates portion of S equity that

P bought (80%)

EL D. Common Stock $400,000

Cr. Investment in Subsidiary $400,000

P bought (80%)

Cr. Investment in Subsidiary $400,000

44 – Non-Controlling Interest E.g. - #3

• D entry adds $200,000 to Equipment’s BV of $500,000 (=700K FMV of Equip.)

• D entry (labeled NCI) increases NCI by 20% of increase in

E i ($200 000)

D D Equipment $200K

Equipment ($200,000)

• NCI’s share of Equipment increase: $200K x .2 = $40K • NCI increase added to S’s RE

D D Equipment $200K

D Cr Investment in Subsidiary $100K

D Gain $60K

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Accounts

Trial Balance Elim & Adjs

NCI Bal. Sheet Parent Sub Debit Credit

Assets:

Equipment 500K D 200K $700K

45 – Non-Controlling Interest E.g. - #4

Inv in Sub. $500K EL 400K D 100K $500K $500K $700K Equity P’s C. Stk. (500K) ($500K) S’s C. Stk. (500K) EL 400K -100K S’ RE NCI 40K -40K P’s Gain D 60K 60K NCI _____ _____ (140K) Total $500K $500K -$700K

46 – Preexisting Goodwill on Subsidiary’s Books - Heading

Preexisting Goodwill on Subsidiary’s Books

• If S has pre-existing GW on its BS

• S’s old GW

47 – Goodwill on Subsidiary’s Books

– Not included in allocation of purchase price

among net assets

– Not included in determining whether GW

exists

• Once determined that GW exists

– Adjust S’s old GW amount to new amount

Investment in Subsidiary $600,000

• What if P has:

48 – Non-Controlling Interest E.g. - #1

y Common Stock

, 600,000

Equipment $500 000

– P paid $600,000 for 80% of S’s common stock

• What if S has:

Equipment GW Common Stock $500,000 40,000 540,000

– FMV of S’s equipment is $700,000

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• In this situation:

– P bought 80% of S for $600,000

• FMV of S’s Assets is $700,000 • FMV of 80% of S is $560,000 • P overpaid by $40,000 ($600K - $560K) • P’s share of GW is $40,000

– P’s share of GW is 80% of Total GW

• Total GW x 80% = $40,000 • Total GW = $40,000/.80 • Total GW = $50 000 • Total GW = $50,000 50

• Second way to calculate GW:

– P bought 80% of S for $600,000

– We can use this to figure out the total value of

S and the GW

• FMV of S x 80% = $600K • FMV of S = $600K/80% = $750K

• S is worth $750K & its only asset is worth $700K • The Total GW is $50,000

51 – Non-Controlling Interest E.g. - #2

• EL entry eliminates portion of S equity that

P bought (80%)

EL D. Common Stock $432,000

Cr. Investment in Subsidiary $432,000

P bought (80%)

Cr. Investment in Subsidiary $432,000

52 – Non-Controlling Interest E.g. - #3

• D entry adds $200,000 to Equipment’s BV of $500,000 (=700K FMV of Equip.)

• D entry also creates $50,000 of GW

• D entry (labeled NCI) increases NCI by 20% of increase in Equipment ($200,000) and GW ($50,000)q p ( , ) ( , )

• NCI’s share of Equipment increase: $200K x .2 = $40K • NCI’s share of GW increase: $50K x .2 = $10K • NCI increases by $50K [.2 x ($200K+$50K)] • NCI increase added to S’s RE

D D Equipment $200K

D Goodwill 10K

D Cr Investment in Subsidiary $168K

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Accounts

Trial Balance Elim & Adjs

NCI Bal. Sheet Parent Sub Debit Credit

Assets:

Equipment 500K D 200K $700K

53 – Non-Controlling Interest E.g. - #4

Inv in Sub. $600K EL 432K D 168K Goodwill _____ ___40K D 10K 50K $600K $540K $750K Equity P’s C. Stk. (600K) ($600K) S’s C. Stk. (540K) EL 432K -108K S’ RE NCI 42K -42K NCI _____ _____ (150K) Total $600K $540K -$750K

54 – Push Down Accounting - Heading

Figure

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