Consolidated financial Statements Subsequent to Acquisition Date Cost Method

1
Chapter 6

• Consolidated financial Statements Subsequent to
  Acquisition Date- Cost Method

2
Direct Approach

• When we discussed the equity method, we found
  that
• Parents net income consolidated net income
• Parents R/E Consolidated R/E
• This relationship does not hold true for
  investments a/c for using the cost method.

3

• Companies that record their investment using the
  cost method, only record dividends received from
  the sub as investment income on their I/S.
• To calculate consolidated net income, we
  therefore need to make more adjustments than
  under the equity method if we are using the
  direct approach.

4
Consolidated net income

• Parent company net income
• Minus dividend income from sub
• Equals Parent company net income form its own
  operations
• Plus ownership by parent x subs net income
• Less purchase price discrepancy amortization
• Equals Consolidated net income and equity
  accounted net income of parent.

5
Consolidated R/E

• If we are using the cost method to record the
  investment we need to calculate consolidated R/E.
  There was no need to do this using the equity
  method.

6
Indirect approach

• To eliminate the dividends paid form the sub to
  the parent, the entry would be
• Dr. Investment income books of parent
• Cr. R/E books of sub

7

• Another way to do it would be as follows- this
  essentially established the equity based a/c
  method.
• Dr. Div income- on parent books (A)
• Dr. Investment in Sub Co. on parent books (B)
• Cr. Investment income on parents books(C)
• This entry converts from cost-equity

8

• Next eliminate the subs items on F/S of parent
• Dr. Investment income- parents books (C )
• Cr. Dividends Co S.or R/E of sub
• Cr. Investment in Sub Co (B)
• See examples on page 181 and 182 of the text

9
Some important concepts

• Consolidated R/E at acquisition only includes
  parents R/E
• Consolidated net income at any yr after
  acquisition is equal to parent net income plus
  parents of net income of sub minus purchase
  price discrepancy amortization
• Consolidated R/E after acquisition includes
  parents of net incomes of sub since
  acquisition less total amount of purchase price
  discrepancies.

10

• If the parent co has used the equity method since
  acquisition, then parent Co R/E consolidated
  R/E
• If Parent used cost method since acquisition,
  then R/E of Parent only includes their share of
  dividends of the sub since acquisition.

11
Preparation of Consolidated Financial Statements

• Please refer to page 199 for the basic steps to
  be followed. This is a very important chart.
• Please refer to Handout entitled
• Steps to the Direct Approach to Consolidation
• References to Minority interest should be read as
  Non controlling interest or NCI