CCFC 513 Lecture Notes - Lecture 4: Retained Earnings, Consolidated Financial Statement, Equity Method
25 Jun 2018
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CHAPTER 5: CONSOLIDATION SUBSEQUENT TO ACQUISITION DATE
Scenario 1: Buy net assets
Scenario 2: Buy shares
- Use equity method or cost method
- Make consolidated financial statement
What happens after date of acquisition? (Make reference to a building on the books of S)
- In Scenario 1, the title of building gets transferred to the parent and recorded in the
parent’s book at fair value
- In Scenario 2, it was a transaction between the parent and the shareholders so the
assets (i.e. building) did not change; subsidiary’s books remain unchanged
Rule #1: All fair value increments and decrements (e.g. adjustments) need to be amortized
- Inventory: the fair value increments/decrements of inventory would be amortized over
the remaining life of the inventory
- Same applies for all other assets or liabilities on the balance sheet
Effect of amortization on income statement
Assets (DR on balance sheet)
- The amortization of an asset will be a DR on the income statement because it is an
expense
- Example: Building amortization
Depreciation expense
100,000
Accumulated depreciation
100,000
Liabilities
- The amortization of liability will be a CR on the income statement
- Example: fair value decrements of a liability
Liability
100,000
Expense
100,000
5.1 Consolidation of a 100% Owned Subsidiary
Example 1: P purchased 100% of the outstanding common shares of S for $19,000
- Which method should be used? Cost or equity method?
- Under cost method, when dividends are paid, the entry to record the dividend received is
as follows:
Cash
2,500
Dividend income
2,500
Document Summary
What happens after date of acquisition? (make reference to a building on the books of s) In scenario 1, the title of building gets transferred to the parent and recorded in the parent"s book at fair value. In scenario 2, it was a transaction between the parent and the shareholders so the assets (i. e. building) did not change; subsidiary"s books remain unchanged. Rule #1: all fair value increments and decrements (e. g. adjustments) need to be amortized. Inventory: the fair value increments/decrements of inventory would be amortized over the remaining life of the inventory. Same applies for all other assets or liabilities on the balance sheet. The amortization of an asset will be a dr on the income statement because it is an expense. The amortization of liability will be a cr on the income statement. Example: fair value decrements of a liability. Example 1: p purchased 100% of the outstanding common shares of s for ,000.
