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class 4 slides final

class 4 slides final - RSM321 Class 4 Consolidation...

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1 Fall 2010 Advanced Financial Accounting RSM 321 Class 4: Consolidation Subsequent to Acquisition Date – Cost Method

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2 Cost Method and Consolidation Considerations A number of check calculations are useful to perform when the parent uses the cost method. Hilton refers to these as the “four calculations” or “supporting schedules” prior to attempting a consolidation. They are as follows: 1) Calculate Acquisition Differential Amortization and Impairment Schedule.
3 Cost Method and Consolidation Considerations 2) Calculate Consolidated Net Income: Parent Net Income (cost method) - Dividends from Sub. = Parent’s NI from own operations + Adjusted Sub. Net Income Sub Net income - Acquisition Differential Amortization = Adjusted Sub. Net Income = Consolidated Net Income Attributable to: Parent Parent’s NI from own operations + Parent’s % share of adjusted Sub NI = Parent’s NI, Equity Method NCI NCI % of Adjusted Sub. Net Income

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4 Cost Method and Consolidation Considerations 3) Calculate Parent Retained Earnings, Equity Method (= Consolidated Retained Earnings) at the start and end of the year. (see text, pg. 189 for explanation) Subsidiary R/E, start of the year - Subsidiary R/E, acquisition date = Change in subsidiary R/E since acquisition - acquisition differential amortization to start of year cost method X Parent’s ownership = Parent’s interest in subsidiary’s retained earnings + Parent’s retained earnings, start of year = Parent’s retained earnings, start of year, equity method + Parent’s NI, equity method (schedule above) - Parent’s dividends = Parent’s retained earnings, end of year, equity method
5 Cost Method and Consolidation Considerations 4) Calculate Non-controlling Interest at End of Year Sub’s Retained Earnings, end of year + Sub’s Common Shares, end of year = Sub’s Shareholder’s Equity, end of year + Unamortized acquisition differential, end of year X NCI % = NCI, end of year

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6 Cost Method and Consolidation Considerations Using the preceding four check calculations, the current year consolidation using the direct method is not difficult.
7 Remember!!! The four supporting schedules give you any consolidated numbers you need. Use your judgment as to optional schedules given the required but always do the 4 schedules first. We now use the illustrative numbers for Co. P and Co. S (p. 184 of text) for a 100% owned subsidiary Let’s start with the first supporting schedule using those numbers

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8 Calculation of Acquisition Differential –  Year 1 Company P purchased 100% of the outstanding common shares of Company S on January 1, Year 1, for \$19,000.
9 Supporting Schedule 1 – Acquisition Differential  Amortization and Impairment Schedule – Year 1 Thus, we have completed our first supporting schedule. Let’s now proceed to the second supporting schedule.

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class 4 slides final - RSM321 Class 4 Consolidation...

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