just a quick recap
Step 1: calculate the acq differential at the time of the purchase
preparing information for the consolidation
Step 2a - schedule of amortization of the acq differential
Step 2b - listing all he intercompany transactions that result balances showing on the f/s in the year of consolidation
dividend from sub
rest of the intercompany transactions - mirror balances
Sales / COGS
rental income / rental expense
mgmt fee / mgmt fee expense
payable / receivable
Step 2c - intercompany result interomcpany profit/gain/loss
a) inventory Chapter 6
b) land (non-depreciable) Chapter 6
c) depreciable asset Chapter 7a
Sales inventory
will result 2 adjustments
1 adjustment for sure that will step 2b
for example, parent bought 5 units of inventory at the cost of $100 each, and sold all
to sub for $130
Parent Sub
Sales 650 xxxx
COGS 500 xxxx
Step 2b adjustment will require us to remove
Parent's - sales $650
Sub's - COGS $650 WHY?
COGS
Beg inventory
+ Purchase ($650 will be included in the purchase)
- Closing invenotry
when do we adjust for step 2c for inventory? If and only if there is unrealized profits!
previously, parent sold 5 units to Sub 150 5 units x ($130 - $100 cost)
is the $150 profit - realized or unrealized? will depend whether sub subsequently sold the inventory to 3rd
if yes, profit is realized
if no, unsold inventory will have unrealized profit
unrealized profit/gain/loss is a timing adjustment!
Rule of thumb when to make adjustment
When the profit/gain/loss is recognized in the year of consoldiation, but it is not yet realized - I will have to temporarily
remove it
in the year of consolidation, ask yourself, for all the unrealized profit/gain/loss in the past years, has any of it being
realized in the year consolidation, if yes, put them back
if the gain/loss/profit which is recognized in the year of consolidation and they are also realized - NO
Inventory - will apply FIFO
First in -first out = currently unsold inventory (i.e. unrealized profit) will be sold in the following year (i.e. realized in the follow
year)
Continuing from the example, let's say at the of the year, sub's ending inventory contains 3 units purchased from the parent
3 units is the unsold inventory
unrealized profit 3 unit x $30 profit 90
we need to know the tax implication!
assumin tax rate 20%
For step 2c, we will preare the following table
Inventory - parent sells before tax tax after tax
Unrealized profit inventory ($90) 90 18 72
few difficulties when we deal step 2c adjustmetns
1) which party (parent or sub) will have this adjustment?
ask yourself "between the parent and the sub in the initial, who makes the initial sales, that company will have
the adjustment
2) am I using before tax, or after tax figure?
anythign above the income tax expense line - before tax
anthing after - will after tax
3) I will tax adjustment! - introducing "Deferred Income Tax Asset/Liabilities"
similar treatment to the sale of land but we have differences
1) when land is sold, gain/loss is reported (net amount) this will be adjusted
2) the question have to tell you specficially that the land is sold in order to recongize the realized gain
n the year of consolidation
d the inventory to 3rd
zed - I will have to temporarily
years, has any of it being
ealized - NO
owing year (i.e. realized in the followin
3 units purchased from the parent
at company will have
realized gain
On January 1, Year 4, Parent Company acquired 90% of the common shares of Sub Incorporated for $11,250.
Sub had common shares of $8,000 and R/E $4,500 and there were no differences between FV and BV
Income Statement
For the year ended Dec 31, year 4
Parent Sub
Sales 20,000 8,000
COGS 13,000 4,300
Miscellaneous expense 1,400 900
Income tax expense 2,200 1,100
16,600 6,300
Net income 3,400 1,700
Balance Sheet
As of Dec 31, Year 4
Parent Sub
Inventory 7,500 4,000
Miscellaneous assets 21,650 19,200
investment in Sub 11,250 -
40,400 23,200
Liabilities 12,000 9,000
Common shares 15,000 8,000
R/E 13,400 6,200
40,400 23,200
Additional information for year 4
During Year 4, Sub made sales to parent amounting to $5,000 at gross profit rate of 30%. Sub had purchased these goods from
outsiders for 3,500
Later in Year 4, Parent sold 80% of these goods to outsiders for $6,150. At the end of year 4, parent inventory contained
the remaining goods purchased from Sub for $1,000
Tax rate at 40%
Step 1 acq differential
Acquisition cost (90%) 11,250
NCI 10% 1,250
total (100%) 12,500 (11,250 / 90%)
carrying value of sub
CS 8,000
R/E 4,500 12,500
Acq diff -
FV diff -
goodwill -
Step 2a - table for amortization of the acq differential
nil
Step 2b - intercompany transactions that result balance showing in the f/S in the year of consolidation
1) Dividend from sub xxxx
2) upstream sales
Sub - sales 5,000
Parent's COGS (purchase) 5,000
Step 2c - intercompany profit/gain/loss
before tax tax after tax
Ending inventory (unrealzied profit) - sub sells
$1,000 value x 30 gross profit margin 300 120 180
Deferred income tax asset 120
income tax epxnese 120
Parent's company
Consolidated statement of comprehensive income
for the year ended Dec 31, Year 4
Sales (20,000 + 8,000 - $5,000 sales) 23,000
COGS (13,000 + 4,300 - $5,000 + 300 unrealized profit) 12,600
Misc. expense ($1400 + 900) 2,300
Income tax exp (2,200 + 1,100 -120 tax unrealized profit) 3,180
consolidated NI 4,920
Attributed to
Parent 4,768
NCI 152
Parent's NI 3,400 (Step 2b, 2c, and 2a)
divend from sub -
adjusted parent's NI 3,400
Sub's NI 1,700
unrealizedc profit - 180
amoritz acq diff - 1,520
conso NI 4,920
parent (3400 + 1520*90%) 4,768
NCI (10% of 1520) 152
Consolidated the balance sheet vs consolidaed income statement
different treatment for the unrealized gain/profit/loss
consoliddated income statement
we need to adjust both
1) unraelized profit/gain/loss
2) realized profit gain loss from the prior year unrealized gain/loss/profit
Consolidated Balance sheet (any accounts showing on the balance sheet)
we will only care for adjustment for unrealized gain/loss/profit
realized gain/loss profit from prior year unrealized gain/loss profit - WE DON'T CARE!
we will calculate the cons. r/E as of Dec 31, year 4
Parent's ending balance R/E 13,400 (Step 2c and 2a)
Sub's balance as of Dec 31, year 4 6,200
Sub's r/e as of acq date 4,500
changes 1,700
unrealized profit - 180
Acc. Amort acq -
net chagnes 1,520
parent' % 90% 1,368
cons. R/e 14,768
R/E contains all the profit from prior years, include both realized and unrealized gain/loss profit
so each year, we are only removing any gain/loss/profit that remains unrealized
Realized profit/gain/loss, no adjustment because it is there already!
NCI as of acq date 1,250
net chagnes 1,520
NCI T 10% 152
NCI as of Dec 31, Year 4 1,402
parent's company
consoldiated staemetn of financial position
as of dec 31, year 4
Inventory (7500 + 4000 - 300) 11,200
Micel Asset (21650 +192000) 40,850
Inv in sub (11250 - 11250) -
Deferred income tax (DIT) 120
Goodwill -
total 52,170
Liabilties (12000 + 9000) 21,000
C/S 15,000
R/E 14,768
NCI 1,402
52,170
purchased these goods from
nt inventory contained
2b, 2c, and 2a) <--- only adjust the iten the has impact on the net income.
<--- if divident is paid, removed from net income, because it's part of the sub's profit.
Dec 31, Year 5
Income Statement
For the year ended Dec 31, year 5
Parent Sub
Sales 25,000 12,000
COGS 16,000 5,500
Miscellaneous expense 2,350 1,400
Income tax expense 2,600 2,000
20,950 8,900
Net income 4,050 3,100
Balance Sheet
As of Dec 31, Year 5
Parent Sub
Inventory 9,900 7,500
Miscellaneous assets 22,800 20,800
investment in Sub 11,250 -
43,950 28,300
Liabilities 14,000 11,000
Common shares 15,000 8,000
R/E 14,950 9,300
43,950 28,300
what happened to the previous unrealized profit on the sale of inventory?!!!!
we are making assumption of FIFO
step 2c
Inventory - sub sells before tax after
beginning inventory - realized profit 300 120 180
Calculation of Consolidated Net Income - Year 5
Net Income - Parent Co 4,050
Net income - Sub Inc. 3,100
add after-tax profit in opening inventory 180 3,280
Consolidated net income 7,330
Attributable to
Shareholders of parent ($4,050 + ($3,280 x 90%)) 7,002
Non-controlling interest ($3,280 x 10%) 328
Parent Company
Consolidated Statement of Income
For the year ended December 31, Year 5
Sales ($25,000 + $12,000) 37,000
Cost of goods sold (16,000 + 5,500 - 300) 21,200
Miscellaneous expense (2,350 + 1,400) 3,750
Income tax expense (2,600 + 2,000 + 120) 4,720
Net Income 7,330
Attributable to
Shareholders of parent ($4,050 + ($3,280 x 90%)) 7,002
Non-controlling interest ($3,280 x 10%) 328
From previous year:
Calculation of Consolidated Retained Earnings at year 4
Retained earnings - Parent Co. at the end of year 4 13,400
Retained earnings - Sub Inc. at the end of year 6,200
Acquisition retained earnings 4,500
Increase since acquisition 1,700
less profit in ending inventory (180)
Adjusted increase since acquisition 1,520
Parent Co's share 90% 1,368
Consolidated retained earnings 14,768
Parent Company
Consolidated Statement of Retained Earnings
For the year ended December 31, Year 5
Retained earnings as at January 1, Year 5 14,768
Add: consolidated net income 7,002
Less: dividend paid (2,500)
Retained earnings as at December 31, Year 5 19,270
We can verify the calculation:
Calculation of Consolidated Retained Earnings at Year 5
Retained earnings - Parent Co. 14,950
Retained earnings - Sub Inc. (Note 1) 9,300
Acquisition retained earnings 4,500
Increase since acquisition 4,800
Parent Co's share 90% 4,320
Consolidated retained earnings 19,270
Note 1
We do not adjust R/E of the Sub for the profit in opening inventory since the Retained Earnings in
Sub has already included the profit. That is why we ONLY need to remove any unrealized profit
Calculation of Non-Controlling Interest (Method 1)
Shareholders' equity - Sub Inc.
Common shares 8,000
Retained earnings 9,300
17,300
Non-controlling interest's share 10%
1,730
Calculation of Non-Controlling Interest (Method 2)
Non-controlling interest at date of acquisition
( [11,250/0.9] x 10%) 1,250
Sub's adjusted increase in R/E 4,800
NCI's share 10% 480
NCI as at December 31, Year 2 1,730
Parent Company
Consolidated Statement of Financial Position
As of December 31, Year 4
Inventory (9,900 + 7,500) 17,400
Assets (miscellaneous) 43,600
Investment in Sub inc. (11,250 - 11,250) -
61,000
Liabilities (14,000 + 11,000) 25,000
Common share 15,000
Retained earnings 19,270
Non-controlling interest 1,730
61,000
Problem 6-16
Step 1: acq differential as at Jan 1, year 3
Acquisition cost (80%) 1,600,000
NCI as of acq date 400,000 (2,000,000 x20%)
Total 100% 2,000,000 (1600000/80%)
net book value of the sub
C/S 500,000
R/E 1,000,000 1,500,000
Acq differential 500,000
Allocated to FV difference
AR - 20,000
inventory - 50,000
PPE (8 years) 35,000
LTD (mature on Jan 1, year 7) 100,000 65,000
Goodwill 435,000
consolidated dec 31, year 9
Step 2a: schedule of the amortization of the acq differential
1 2 3 4
Acq differential Bal as at acq Acc. Amort Current year amor
Jan 1, Y3 Y3 to Year 8 in Year 9
AR - 20,000 20,000 -
inventory - 50,000 50,000 -
PPE (8 years) 35,000 - 26,250 - 4,375
LTD (mature on Jan 1, year 7) 100,000 - 100,000 -
Goodwill 435,000 - 52,200 - 8,700
total 500,000 - 108,450 - 13,075
Step 2b: all intercompany transaction that result balances showing on th F/S in year 9
1) Dividend from sub ($100,000 x 80%) 80,000
2) inventory - parent sells
Parent's sales 2,000,000
Sub's COGS 2,000,000
3) inventory - sub sells
Sub's sales 1,500,000
Parent's cogs 1,500,000
4) dividend unpaid
sub' - payable 80,000
parent's - receivable 80,000
Step 2c: intercompany profit/gain/loss
Land - parent sells (we will indicate the sales date, the gain /loss calculation)
July 1, Year 7
Proceed 100,000
cost 150,000
unrealized loss in year 7 - 50,000 (one time adjustment in Year 7)
Before tax tax (40%) after tax
Unrealized loss July 1, Year 9 - 50,000 - 20,000 - 30,000
realized loss in Year 9 50,000 20,000 30,000
Unrealized loss dec 31, Year 9 - - -
before tax tax 40% after tax
inventory - parent sells
Beginning inventory (realized profit)
$312,500 x 20% profit margin) 62,500 25,000 37,500
Ending inventory (unrealized profit)
$500,000 x 20% 100,000 40,000 60,000
Inventory- sub sells
Beginning inventory (realized profit)
$857,140 value x 30% rate 257,142 102,857 154,285
ending inventory (unrealized profit)
$714,280 value x 30% profit rate 214,284 85,714 128,570
DIT asset
unsold inventory - parent 40,000
Unsold inventory - sub 85,714
125,714
we are not asked to do consolidated income statement
Parent Sub
sales xxxx xxxx - 2,000,000
COGS xxxx xxxx - 2,000,000
profit xxxx xxxx
Other income xxx xxxx - 80,000
gain on disposl of land - 50,000
dep exp xxx xxx 4,375
goodwill impairment 8,700
Income tax exp xxx xxxx - 20,000
Net income
what the realized loss get adjusted to the gain on of the land
Parent 150,000
sold to sub 100,000
Sub sold to 3rd party 190,000
sub would reported
gain ($190 - 100) 90,000
land woould been sold by parent (no sub) to the outsider
true gain/loss
Proceed 190,000
true cos 150,000
gain 40,000
Consolidated NI
parent's NI 1,000,000 (Step 2b, 2c, and 2a)
sub's dividend - 80,000
after tax realized loss - land - 30,000
realized profit - inventory 37,500
unrealized profit - inventory - 60,000
adjusted parent's NI 867,500
sub's NI 400,000
realized profit - inventory 154,285
unrealized profit - inventory - 128,570
Amort acq diff - 13,075 412,640
cons. NI 1,280,140
Attributable to
Parent (867,500 + 80% of 412640) 1,197,612
NCI (20% of the 412640) 82,528
directly cons. R/E as of dec 31, Year 9
parent's R/E as of Dec 31, y9 10,400,000 (step 2c and then 2a)
unrealized profit - inventory - 60,000
adjusted parent's R/E 10,340,000
Sub's R/E as of dEc 31, year 9 2,300,000
Sub's R/E as of acq dae 1,000,000
changes since acq 1,300,000
unrealized profit - inventory - 128,570
Acc. Amort of Acq diff - 121,525
net changes 1,049,905
Parent' % 80% 839,924
cons. R/E 11,179,924
NCI as of dec 31, y9
NCI as of acq date 400,000
net changes 1,049,905
NCI % 20% 209,981
NCI as of dec 31, y9 609,981
Most Company
Consolidated Balance sheet
As of Dec 31, year 9
Parent Sub adj
Cash 500,000 40,000
A/R 1,700,000 500,000 - 80,000
Inventories 2,300,000 1,200,000 - 100,000
PPE (net) 8,200,000 4,000,000 4,375
Investment in Sub 1,600,000 - - 1,600,000
Land 700,000 260,000
- - 125,714
Goodwill - - 374,100
Total 15,000,000 6,000,000
Current Liabilities 600,000 200,000 - 80,000
Long-term Liabilities 3,000,000 3,000,000
Common shares 1,000,000 500,000
Retained earnings 10,400,000 2,300,000
- -
Total 15,000,000 6,000,000
,000 x20%)
5
Bal as at cons.
Dec 31, Year 9
-
-
4,375
-
374,100
378,475
oss calculation)
time adjustment in Year 7)
<--- will be adjusted in SCI
<--- will be adjusted in the B/S
- 1,500,000 - 62,500 100,000 - 257,142 214,284
- 1,500,000
25,000 - 40,000 102,857 - 85,714
2b, 2c, and 2a)
2c and then 2a)
adj consolidated
540,000
2,120,000
- 214,284 3,185,716
12,204,375
-
960,000
125,714
374,100
19,509,905
720,000
6,000,000
1,000,000
11,179,924
609,981
19,509,905