Chapter Consolidated Financial Statements Subsequent to Date of

Chapter Consolidated Financial Statements: Subsequent to Date of Purchase. Type Business Combination ACCT 501 by Professor Hsieh

Objectives of this Chapter n Prepare the consolidated financial statements for the parent company and its subsidiaries for the years following business combination for purchase-type business combination u. For wholly owned purchased subsidiaries u. For partially owned purchased subsidiaries Consolidated FS-Subsequent to date of purchase type 2

Accounting for Operating Results of wholly Owned Purchased Subsidiaries n In accounting for the operating results of purchased subsidiaries, a parent company may choose the equity method or the cost method of accounting. Consolidated FS-Subsequent to date of purchase type 3

Equity Method n The parent company recognizes its share of the subsidiary’s net income or loss and adjusted for the depreciation and amortization of the step up of a purchased subsidiary’s net assets on the date of business combination. The parent company also recognizes its share of dividends declared by the subsidiary. Consolidated FS-Subsequent to date of purchase type 4

Equity Method (contd. ) n Thus, the equity method is consistent with the accrual basis accounting. Equity method emphasizes the economic substance of the parentsubsidiary. Dividends declared by subsidiaries are not revenue to the parent company, rather, they are a liquidation of a portion of the parent company’s investment in the subsidiary. Consolidated FS-Subsequent to date of purchase type 5

Cost Method n Under this method, the parent company accounts for the operations of a subsidiary only to the extend that dividends are declared by the subsidiary. This method emphasizes the legal form of the parent-subsidiary relationship. Consolidated FS-Subsequent to date of purchase type 6

Choosing Between Equity Method and Cost Method n Consolidated financial statement amounts are the same regardless of whether a parent company uses the equity method or the cost method to account for a subsidiary’s operations. The differences are in the working paper elimination. Consolidated FS-Subsequent to date of purchase type 7

Choosing Between Equity Method and Cost Method (contd. ) n Equity method is appropriate for both pooled subsidiaries and purchased subsidiaries. The cost method is only appropriate for purchased subsidiaries. Consolidated FS-Subsequent to date of purchase type 8

Example of Equity Method for wholly Owned Purchased Subsidiary for First Year after Business Combination (textbook p 286 -296) n Assumed that Palm Corporation had used purchase accounting for the December 31, 1999, business combination with its wholly owned subsidiary- Starr Company. Starr had a net income of $60, 000 (income statement is on p 293 of the textbook) for the year ended December 31, 2000. Consolidated FS-Subsequent to date of purchase type 9

Example of Equity Method for wholly Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n On December 20, 2000, Starr’s board of directors declared a cash dividend of $0. 60 a share on the 40, 000 outstanding shares of common stock owned by Palm The divided was payable January 8, 2001, to stockholders recorded December 29, 2000. Consolidated FS-Subsequent to date of purchase type 10

Example of Equity Method for wholly Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n n Starr’s December 20, 2000, journal entry to record the dividend declaration is as follows: u 12/20 Dividends Declared 24, 000 Intercompany Dividend payable 24, 000 The intercompany dividend payable account must be eliminated in the preparation of consolidated financial statements for the Consolidated FS-Subsequent to date of purchase type 11

Example of Equity Method for wholly Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n Under the equity method, Palm Corp. prepares the following journal entries to record the dividend and net income of Starr for the year ended 12/31/2000: u 12/20/00 Intercompany Dividend Receivable 24, 000 Investment in Starr Company Stock 24, 000 Consolidated FS-Subsequent to date of purchase type 12 To record the dividends declared by Starr.

Example of Equity Method for wholly Owned Purchased Subsidiary for First Year after Business Combination (contd. ) u 12/31/00 Investment in Starr Company Stock 60, 000 Intercompany Investment Income 60, 000 To record the Palm’s share (100%) of net income on Starr under equity method Consolidated FS-Subsequent to date of purchase type 13

Adjustment of Purchased subsidiary’s Net Income n Since Palm’s acquisition of Starr is accounted for using the purchase method, adjustments are needed to adjust Starr’s net income for depreciation and amortization attributable to the step up of Starr’s net assets on 12/31/99. Consolidated FS-Subsequent to date of purchase type 14

Adjustment of Purchased subsidiary’s Net Income (contd. ) n Assumed that on 12/31/99, differences between the current fair values and carrying amounts of Starr’s net assets were as follows (also see p 236 and p 241 of chapter 6 of the textbook): Consolidated FS-Subsequent to date of purchase type 15

Adjustment of Purchased subsidiary’s Net Income (contd. ) Inventories (FIFO) Plant assets (net) Land yrs. ) Building(eco. life 10 $ 25, 000 $15, 00 0 30, 000 Machinery(eco. life 20, 000 65, 000 10 yrs. ) Patent (eco. life 5 yrs. ) Consolidated FS-Subsequent to date of purchase type 5, 000 16

Adjustment of Purchased subsidiary’s Net Income (contd. ) n Palm prepares the following journal entry to account for the depreciation and amortization of the step up on Starr’s net assets: u 12/31/2000 Intercompany Investment Income 30, 500 Investment in Starr Company Stock Consolidated FS-Subsequent to date of purchase type 30, 500 17

Adjustment of Purchased subsidiary’s Net Income (contd. ) n The annual depreciation and amortization of the step up are as follows: Inventory (to cost of goods sold) $25, 000 Building (30, 000/15) 2, 000 Machinery (20, 000/10) 2, 000 Patent (5, 000/5) 1, 000 Goodwill (15, 000/30) 500 Total depr. And amort. For year 2000 $30, 500 (income tax effects are disregarded) Consolidated FS-Subsequent to date of purchase type 18

Adjustment of Purchased subsidiary’s Net Income (contd. ) After the three foregoing journal entries, Palm Corp. ’s Investment in Starr Company’s Common Stock and intercompany Investment Income accounts are as follows: Investment in Starr’s Common Stock 12/31/99 450, 000 a 12/31/99 50, 000 b 12/31/00 60, 000 d 24, 000 c 12/20/00 30, 500 e 12/31/00 505, 000 n Consolidated FS-Subsequent to date of purchase type 19

Adjustment of Purchased subsidiary’s Net Income (contd. ) a. Issuance of common stock (by Palm) in the acquisition of Starr. b. Direct out-of-pocket costs of business combination. c. Recognition of dividend declared by the subsidiary-Starr. d. Recognition of wholly owned subsidiary’s (Starr) net income. e. Recognition of depre. and amor. on the step-up of Starr’s net assets. Consolidated FS-Subsequent to date of purchase type 20

Adjustment of Purchased subsidiary’s Net Income (contd. ) 12/31/00 Intercompany Investment Income 60, 000 a 30, 500 b 29, 500 12/20/00 Consolidated FS-Subsequent to date of purchase type 21

Development of the Elimination n Analysis of Investment in Starr Stock account (for the year ended 12/31/2000) Carrying Step-up Amount. Beginning Balances $390, 000 $110, 000 (on 12/31/99) Net Income(Starr) 60, 000 Amort. On Step-up (30, 500) Dividends Declared (24, 000) by Starr Ending Balance $426, 000 $79, 500 Total $500, 000 60, 000 (30, 500) (24, 000) $505, 000 Consolidated FS-Subsequent to date of purchase type 22

Development of the Elimination (contd. ) n Note: 1. The ending balance on the carrying amount (book value), $426, 000, equals the balance the total stockholder’s equity of Starr on 12/31/2000 as follows (see balance sheet section of Starr on p 293 of textbook): Consolidated FS-Subsequent to date of purchase type 23

Development of the Elimination (contd. ) Common Stock, $5 par Additional Paid-in Capital Retained Earnings (132, 000+60, 000 -24, 000) Total Stockholder’s Equity $200, 000 58, 000 168, 000 $426, 000 Consolidated FS-Subsequent to date of purchase type 24

Development of the Elimination (contd. ) n The $79, 500 balance on the Step-up column represents the unamortized excess amount (the difference between the current fair value of net assets and the carrying amount). The details are in the following table: Consolidated FS-Subsequent to date of purchase type 25

Development of the Elimination (contd. ) Inventories Plant assets(net): Land Building Machinery Total plant assets Patent Goodwill Totals Balances, Amort. for Balances, Dec. 31, 19 Year 2000 Dec. 99 31, 2000 $ 25, 000 $(25, 000) $ 15, 000 30, 000 20, 000 $ (2, 000) $15, 000 28, 000 18, 000 $ 65, 000 $ (4, 000) $61, 000 $ 5, 000 $ (1, 000) $ 4, 000 15, 000 (500) 14, 500 $110, 000 $(30, 500) $79, 50026 Consolidated FS-Subsequent to date of purchase type

Palm Corp. and subsidiary Working Paper Elimination (on 12/31/2000) n All three basic financial statements (the income statement, the statement of retained earnings and the balance sheet) must be consolidated for accounting period following the date of a purchase-type business combination. The items that must be included in the elimination are: Consolidated FS-Subsequent to date of purchase type 27

Palm Corp. and subsidiary Working Paper Elimination (on 12/31/2000) (contd. ) 1)The subsidiary’s beginning balance of stockholder’s equity accounts and its dividends and parent’s investment account; 2)the parent’s intercompany investment income ; 3)unamortized current fair value excess of the subsidiary; 4)certain operating expense o the subsidiary. Consolidated FS-Subsequent to date of purchase type 28

Palm Corp. and subsidiary Working Paper Elimination (on 12/31/2000) (contd. ) n Assuming that Starr allocates machinery depreciation and patent amortization entirely to cost of goods sold, goodwill amortization entirely to operating expense and building depreciation 50% each to cost of goods sold and operating expenses, the working paper elimination (in journal entry format) for Palm and subsidiary on 12/31/2000 is as follows: Consolidated FS-Subsequent to date of purchase type 29

Palm Corp. and subsidiary Working Paper Elimination (on 12/31/2000) (contd. ) Common Stock-Starr Additional Paid-in Capital-Starr Retained Earnings-Starr Investment Income-Palm Plant Assets (net)-Starr ($65, 000 -4, 000) Patent (net)-Starr ($5, 000 -1, 000) Goodwill (net)-Starr ($15, 000 -500) Cost of Goods Sold-Starr Operating Expenses-Starr Investment in Starr Common Stock Dividends Declared-Starr 200, 000 58, 000 132, 000 29, 500 61, 000 4, 000 14, 500 29, 000 1, 500 505, 000 24, 000 Consolidated FS-Subsequent to date of purchase type 30

Palm Corp. and subsidiary Working Paper Elimination (on 12/31/2000) (contd. ) n Note: 1. Income tax effects are disregarded 2. the computation of cost of goods sold and operating expense are as follows: Consolidated FS-Subsequent to date of purchase type 31

Palm Corp. and subsidiary Working Paper Elimination (on 12/31/2000) (contd. ) Inventories sold Building depreciation Machinery depreciation Patent amortization Goodwill amortization Totals Cost of Operating Goods Sold Expenses $25, 000 1, 000 $1, 000 2, 000 1, 000 500 $29, 000 $1, 500 Consolidated FS-Subsequent to date of purchase type 32

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (on p 293 textbook)AND SUBSIDIARY PALMof CORPORATION Working paper for Consolidated Financial Statements For Year Ended December 31, 2000 Income Statement Revenue: Net Sales Intercompany investment income Total revenue Costs and expenses: Cost of good sold Operating expenses Interest expenses Income taxes expense Total costs and expenses Palm Corporati on 1, 100, 000 Starr Eliminatio Consolidat Company ns ed Increase 680, 000 29, 500 1, 129, 500 700, 000 217, 667 49, 000 53, 333 1, 780, 000 (a)(29, 500) 680, 000 (29, 500) 1, 780, 000 450, 000 (a) 29, 000 130, 000 (a) 1, 500 1, 179, 000 349, 167 49, 000 93, 333 40, 000 1, 020, 000 620, 000 30, 500* 1, 670, 50033 Consolidated FS-Subsequent to date of purchase type

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) PALM CORPORATION AND SUBSIDIARY Working paper for Consolidated Financial Statements For Year Ended December 31, 2000 Statement of Retained Earnings Retained earnings, beginning of year Net income Subtotal Dividends declared Retained Palm Corporati on Starr Eliminatio Consolidat Compa ns ed ny Increase 134, 000 132, 000 (a) (132, 000) 134, 000 109, 500 60, 000 243, 500 192, 000 (60, 000) (192, 000) 109, 500 243, 500 (a) (24, 000)+ 30, 000 24, 000 (Continued) Consolidated FS-Subsequent to date of purchase type 34

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) PALM CORPORATION AND SUBSIDIARY Working paper for Consolidated Financial Statements For Year Ended December 31, 2000 Balance/Assets Cash Intercomapny receivable (payable) Inventories Other current assets Investment in Starr Company common stock Plant assets (net) Patent (net) Palm Starr Eliminatio Corporati Company ns on Increase 15, 900 72, 100 24, 000 136, 000 88, 000 505, 500 (24, 000) 115, 000 131, 000 Consolidat ed 88, 000 251, 000 219, 000 (a) (505, 500) 3, 500, 000 340, 000 (a) 841, 000 61, 000 440, 000 16, 000 (a) 20, 000 4, 000 Consolidated FS-Subsequent to date of purchase type 35

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) PALM CORPORATION AND SUBSIDIARY Working paper for Consolidated Financial Statements For Year Ended December 31, 2000 Liabilities Palm Starr Eliminatio Consolidat &Stockholders’ Corporati Compan ns ed Equity on y Increase Income taxes 40, 000 20, 000 60, 000 payable Other liabilities 190, 900 204, 100 395, 000 Common 400, 000 stock, $10 par Common stock, $5 200, 000 (a) par (200, 000) Additional paid-in capital 365, 000 58, 000 (a) 365, 000 (58, 000) Retained earnings 213, 500 168, 000 (168, 000) 213, 500 Consolidated FS-Subsequent to date of purchase type 36

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) n Note: 1. The intercompany receivable and payable, placed in adjacent columns on the same line, are offset without a formal elimination. 2. The FIFO method s used by Starr; thus, the $25, 000 difference attributable to the beginning inventories of Starr is allocated to the cost of goods sold for year 2000. Consolidated FS-Subsequent to date of purchase type 37

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) 3. The step up (current fair value excess on Starr’s net assets) is only included in the consolidated balance sheet for the unamortized balance. Step- up on land is not subject to amortization. Consolidated FS-Subsequent to date of purchase type 38

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) 4. The use of equity method results in: FParent company net income = consolidated net income FParent company retained earnings = consolidated retained earnings These equalities exist when the equity method is used and no intercompany profits accounted for in the determination of consolidated net assets. Consolidated FS-Subsequent to date of purchase type 39

Equity Method: Wholly Owned Subsidiary Subsequent to Date of Purchase-type Business Combination (contd. ) 5. Consolidated financial statements provide more information than those of the parent company despite the equalities in the net income and retained earnings. 6. The retained earnings of Palm on 12/31/2000 includes only $29, 500 share of the subsidiary’s adjusted net income for the year ended 12/31/2000. Consolidated FS-Subsequent to date of purchase type 40

Consolidated Financial Statements n The consolidated income statement, statement of retained earnings and balance sheet of Palm corp. and subsidiary for the year ended December 31, 2000 are as follows: (on p 294 and 295 of textbook) Consolidated FS-Subsequent to date of purchase type 41

Consolidated Financial Statements (contd. ) PALM CORPORATION AND SUBSIDIARY Consolidated Income Statement For Year Ended December 31, 2000 Net Sales Costs and expenses: Costs and goods sold Operating expenses Interest expense Income taxes expense Total costs and expenses Net income Basic earnings per share of common stock (40, 000 shares outstanding) $1, 780, 000 $1, 179, 000 349, 167 49, 000 93, 333 1, 670, 000 $109, 500 Consolidated FS-Subsequent to date of purchase type $ 2. 74 42

Consolidated Financial Statements (contd. ) PALM CORPORATION AND SUBSIDIARY Consolidated Statement of Retained Earnings For Year Ended December 31, 2000 Retained earnings, beginning of year: Add: Net income Subtotals Less: Dividends($0. 75 a share) Retained earnings, end of year $ 134, 000 109, 500 $ 243, 500 30, 000 $ 213, 500 Consolidated FS-Subsequent to date of purchase type 43

Consolidated Financial Statements (contd. ) PALM CORPORATION AND SUBSIDIARY Consolidated Balance Sheet For Year Ended December 31, 2000 Assets Current assets: Cash Inventories Other Total current assets Plant assets (net) Intangible assets: Patent(net) Goodwill (net) Total assets $ 88, 000 251, 000 219, 000 $ 558, 000 841, 000 $20, 000 14, 500 34, 500 $1, 433, 500 Consolidated FS-Subsequent to date of purchase type 44

Consolidated Financial Statements (contd. ) PALM CORPORATION AND SUBSIDIARY Consolidated Balance Sheet For Year Ended December 31, 2000 Liabilities $ Stockholders’ Equity Liabilities: Income taxes payable Other Total liabilities Stockholders’ equity: Common stock, $10 par Additional paid-in capital Retained earnings Total Liabilities& stockholders’ equity $ 60, 000 395, 000 $ 455, 000 $ 400, 000 365, 000 213, 500 978, 500 $1, 433, 500 Consolidated FS-Subsequent to date of purchase type 45

Closing Entries n Closing entries should be prepared for both the parent company and the subsidiary at the end of the fiscal year after the financial statements[1] being prepared. The closing entries for the subsidiary are prepared in the usual fashion. The closing entries for the parent company are prepared in the usual fashion except for the closing of the income summary to the retained earnings. Palm Corporation prepares the closing entries on 12/31/2000, after the consolidated financial statements have been prepared, as follows: Consolidated FS-Subsequent to date of purchase type 46

Closing Entries (contd. ) [1] Consolidated financial statements for the parent company and the regular F/S for the subsidiary. The parent and subsidiary are two separate legal entities. When consolidated F/S are prepared using the equity method, the economic substance of the parent-subsidiary relationship is being emphasized rather than their legal form. Consolidated FS-Subsequent to date of purchase type 47

Closing Entries (contd. ) Net Sales Intercompany Investment Income 1, 100, 000 Income Summary 1, 020, 000 Cost of Goods Sold Operating Expense Interest Expense Income Taxes Expense 29, 500 700, 000 217, 667 49, 000 53, 333 Consolidated FS-Subsequent to date of purchase type 48

Closing Entries (contd. ) Income Summary Retained Earnings of Subsidiary Retained Earnings b Retained Earnings Dividends Declared 109, 500 5, 500 104, 000 30, 000 Consolidated FS-Subsequent to date of purchase type 49

Closing Entries (contd. ) a. The portion of retained earnings which is contributed by the subsidiary. The computation is $29, 500 (adjusted net income of subsidiary) – 24, 000 (dividends declared by the subsidiary). This amount of retained earnings is NOT available for dividends to Palm’s stockholders. b. The portion of retained earnings which is contributed by the operation of the parent company. Consolidated FS-Subsequent to date of purchase type 50

Closing Entries (contd. ) n After the foregoing closing entries, the balances of Palm Corp. ’s Retained Earnings and Retained Earnings of subsidiary ledger accounts are as follows: Close Retained Earnings 134, 00 Beg. Balance 0 104, 50 Close net income 0 available for dividends to stockholders of Palm 30, 00 Consolidated FS-Subsequent to date of purchase type 51

Closing Entries (contd. ) Retained Earnings of Subsidiary 5, 500 Close net income not available for dividends to Consolidated FS-Subsequent to date of purchase type 52

Closing Entries (contd. ) n The balance of the retained earnings of subsidiary is equal to the net increase in the balance of Palm’s investment in Starr Company Stock account as shown below: $505, 500 ( the balance of the Investment account on 12/31/2000) - 500, 000 ( the balance of the Investment account on 12/31/99) $5, 500 Consolidated FS-Subsequent to date of purchase type 53

Example of Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (textbook p 297 -300) n The Palm-Starr example is continued to be used to illustrate the application of the equity method for a wholly owned purchased subsidiary for the second year after a business combination. On December 17, 2001, Starr declared a dividend of $40, 000, payable January 6, 2002, to Palm Corp. , the stockholder of record on December 28, 2001. For the year ended 12/31/2001, Starr had a net income of $90, 000. Consolidated FS-Subsequent to date of purchase type 54

Example of Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (contd. ) n After the posting of appropriate journal entries for 2001 under the equity method, selected ledger accounts for Palm Corp. are as follows: Investment in Starr’s Common Stock 12/31/99 450, 000 a 12/31/99 50, 000 b 12/31/00 60, 000 d 24, 000 c 12/20/00 30, 500 e 12/31/00 12/31/01 90, 000 f 40, 000 g 12/17/01 5, 500 h 12/31/01 12/31/00 505, 000 Consolidated FS-Subsequent to date of purchase type 55

Example of Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (contd. ) a. Issuance of common stock (by Palm) in the acquisition of Starr. b. Direct out-of-pocket costs of business combination. c. Recognition of dividend declared by the subsidiary-Starr for year 2000. d. Recognition of wholly owned subsidiary’s (Starr) net income for 2000. e. Recog. of depre. and amor. on the step-up of Starr’s net assets for 2000. Consolidated FS-Subsequent to date of purchase type 56

Example of Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (contd. ) Intercompany Investment Income 60, 000 a 12/31/00 30, 500 b 12/31/00 29, 500 d 29, 500 c 0 90, 000 e 12/31/00 5, 500 f 84, 500 12/20/00 12/21/00 12/31/01 Consolidated FS-Subsequent to date of purchase type 57

Example of Equity Method for Wholly Owned Purchased Subsidiary for Second Year After Business Combination (contd. ) a. Palm Corp. ’s share in the net income of Starr for the year ended 12/31/00 b. The adjustment for the amort. and depre. of stepup in net assets of Starr for year 2000. c. Palm Corp. ’s share in the adjusted net income of Starr. d. Closing entry prepared on 12/31/00 to close the intercompany Investment income balance to zero. e. Plam Corp’s share in the net income of Starr for the year ended 12/31/01. f. The adjustment for the amort. and derp. of step-up in net assets of Starr for the year of 2001. Consolidated FS-Subsequent to date of purchase type 58

Developing the Elimination for the Second Year Subsequent to the Business Combination n The working paper elimination for December 31, 2001, is similar to that for December 31, 2000, as follows: Common Stock-Starr Additional Paid-in Capital – Starr Retained Earnings-Starr Retained Earnings of Subsidiary-Palm Investment Income-Palm Plant Assets (net)-Starr ($61, 000 -4, 000) 200, 000 58, 000 162, 000 a 5, 500 84, 500 57, 000 Consolidated FS-Subsequent to date of purchase type 59

Developing the Elimination for the Second Year Subsequent to the Business Combination (contd. ) Patent (net)- Starr ($4, 000 -1, 000) Goodwill (net)- Starr ($14, 500 -500) Cost of Goods Sold-Starr Operating Expense-Starr Investment in Starr Common Stock Dividends Declared-Starr 3, 000 14, 000 b 1, 500 b 550, 000 24, 000 a. 168, 000 -5, 500 Consolidated FS-Subsequent to date of purchase type 60

Developing the Elimination for the Second Year Subsequent to the Business Combination (contd. ) b. The depre. and amor. on differences between current fair value and carrying amount of Starr’s net assets for year 2001 are as follows: Building Depre. Machinery Depre. Patent Amort. Goodwill Amort. Totals Cost of Operating Goods Sold Exp. $1, 000 2, 000 1, 000 500 $4, 000 $1, 500 Consolidated FS-Subsequent to date of purchase type 61

Working Paper for Consolidated Financial Statement for the Second Year following the Business Combination (Equity Method: Wholly Owned Purchase-Type Business Combination) n The following is a partial working paper for consolidated financial statement. The net income and dividends for Palm Corp. are assumed. (on textbook p 299) Consolidated FS-Subsequent to date of purchase type 62

Working Paper for Consolidated Financial Statement for the Second Year following the Business Combination (Equity Method: Wholly Owned Purchase-Type Business Combination) PALM CORPORATION AND SUBSIDIARY Partial Working paper for Consolidated Financial Statements For Year Ended December 31, 2001 Statement of Palm Starr Eliminatio Consolidat Retained Corporati Compa ns ed Earnings on ny Increase Retained earnings, 208, 000 168, 000 (a) 213, 500 beginning of (162, 500) year Net income 244, 500 90, 000 (90, 000)* 244, 500 Subtotal 452, 500 258, 000 (252, 500) 458, 000 Dividends declared 60, 000 40, 000 (a) 60, 000 * Decrease in intercompany investment income($84, 500), plus total increase (40, 000)+ in costs and expenses ($4, 000 +$1, 500), equals $90, 000. + A decrease in dividends and an increase in retained earnings. Retained (Continued) Consolidated FS-Subsequent to date of purchase type 63 earnings,

Working Paper for Consolidated Financial Statement for the Second Year following the Business Combination (Equity Method: Wholly Owned Purchase-Type Business Combination) PALM CORPORATION AND SUBSIDIARY Partial Working paper for Consolidated Financial Statements For Year Ended December 31, 2001 Balance Sheet Common Stock, $10 par Common Stock, $5 par Additional paid-in capital Retained earnings of subsidiary Total stockholders’ equity Total liabilities & stockholders’ equity Palm Corporati on Starr Eliminations Consolidat Company Increase ed 400, 000 200, 000 (a)(200, 000) 58, 000 208, 000 (a) (58, 000) (212, 500) 5, 500 1, 163, 000 (a) (5, 500) 365, 000 392, 500 365, 000 398, 000 1, 163, 000 476, 000 (476, 000) 1, 163, 000 x, xxx xxx, xxx (476, 000) x, xxx Consolidated FS-Subsequent to date of purchase type 64

Closing Entries n The closing entries for Palm is prepared in the usual way except for the closing of the income summary to retained earnings. As in the first year, the portion of retained earnings contributed by Starr should be reported separated from other retained earnings contributed by Plam. The closing entries pertaining the income summary are as follows: Income Summary 244, 500 Retained Earnings of 44, 500 Subsidiaries a Retained Earnings b 200, 000 Consolidated FS-Subsequent to date of purchase type 65

Closing Entries (contd. ) a. The portion of retained earnings contributed by the subsidiary and is not available for dividends to Palm’s stockholders. The computation is as follows: $ 84, 500…the adjusted net income of Starr - 40, 000…declared dividend by Starr $ 44, 500 b. the portion of retained earnings contributed by Palm ($244, 500 – 44, 500) Consolidated FS-Subsequent to date of purchase type 66

Closing Entries (contd. ) n Thus, the parent company’s ledger accounts for retained earnings are as follows after the closing entries: Retained Earnings 134, 000 Bal. On 12/31/99 104, 000 R/E contributed by Palm in Year 2002 Div. of 2000 30, 000 200, 000 R/E contributed by Palm in Year 2001 Div. of 2001 60, 000 348, 000 Bal. On 12/31/2001 Consolidated FS-Subsequent to date of purchase type 67

Closing Entries (contd. ) Retained Earnings of Subsidiary 5, 500 R/E contributed by Starr in year 2000, not available for dividends. 44, 500 R/E contributed by Starr in year 2001, not available for dividends. 50, 000 Bal. On 12/31/2001 Consolidated FS-Subsequent to date of purchase type 68

Accounting for Operating Results of Partially Owned Purchased Subsidiaries n The minority interest in net income (or net losses) needs to be computed and reported in the consolidated income statement (of a parent company and its partially owned purchased subsidiary) as an expense: minority interest in income (or loss) of subsidiary. In the balance sheet statement, the minority interest in net assets of subsidiary is reported as a liability. Consolidated FS-Subsequent to date of purchase type 69

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination n Continued with the Post Corporation. Sage Company consolidated equity example of Chapter 6 (Example 6. 2 in the Power. Point notes and pages 244 to 245 of the textbook), assume that Sage Company declared a $1 a share dividend on 11/24/2000, payable 12/16/2000 to stockholders of record 12/1/2000. Also, Sage had a net income of $90, 000 for the year-ended 12/31/2000 (note: Post owns 95% of the outstanding shares). Consolidated FS-Subsequent to date of purchase type 70

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n n Sage’s journal entries pertaining the declaration and payment of the dividend are as follows: Journal Entries for Sage (Year 2000) 11/24 Dividends Declared (40, 000 x $1) Dividends Payable ($40, 000 x 0. 05) Intercompany Dividends Payable ($40, 000 x 0. 95) 40, 000 2, 000 38, 000 To record declaration of dividend payable Dec. 16, 2000, to stockholders of record Dec. 1, 2000 Consolidated FS-Subsequent to date of purchase type 71

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n Journal Entries for Sage(Year 2000) (contd. ) 12/16 Dividends Payable Intercompany Dividends Payable 2, 000 38, 000 Cash 40, 000 To record payment of dividend declared Nov. 24, 2000, to stockholders of record Dec. 1, 2000 Consolidated FS-Subsequent to date of purchase type 72

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n n Following the equity method, Post’s journal entries for year 2000 include the following: Journal Entries for Post (Year 2000) 11/24 Intercompany Dividends Receivable Investment in Sage Company Common Stock 38, 000 To record dividend declared by Sage Company, payable Dec. 16, 2000, to stockholders of record Dec. 1, 2000. Consolidated FS-Subsequent to date of purchase type 73

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n Journal Entries for Post(Year 2000) (contd. ) 12/16 Cash Intercompany Dividends Receivable 2, 000 38, 000 To record receipt of dividend from Sage Company 12/31 Investment in Sage Company Common Stock ($90, 000 x 0. 95) 85, 500 Intercompany Investment Income 85, 500 To record 95% of net income of Sage Company for the year ended Dec. 31, 2000(Income tax effects are disregarded. ) Consolidated FS-Subsequent to date of purchase type 74

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n Similar to the adjustment on the wholly owned subsidiary’s net income, the net income of the partially owned subsidiary also needs to be adjusted for the depreciation of the assets step-up ($246, 000, see p 64 of chapter 6 notes) and the amortization of goodwill ($38, 000, see p 68 of chapter 6 notes). The assets step-up for Sage on 12/31/99 is as follows: Consolidated FS-Subsequent to date of purchase type 75

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) Inventories(FIFO cost) Plant assets (net): Land Building (economic life 20 years) Machinery (economic life 5 years) Leasehold (economic life 6 years) Total $ 26, 000 $ 60, 000 80, 000 50, 000 190, 000 30, 000 $246, 000 Consolidated FS-Subsequent to date of purchase type 76

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n The goodwill of for the purchase of 95% of Sage is calculated as follows: Cost of Post Corporation’s 95% interest in Sage Company Less: 95% of $1, 215, 000 aggregate current fair values of Sage’s identifiable net assets Goodwill acquired by Post (to be amortized over 40 years) $1, 192, 250 1, 154, 250 $ 38, 000 Consolidated FS-Subsequent to date of purchase type 77

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) Therefore, Post Corp. prepares the following journal entry on 12/31/2000 to reflect the effects of the depreciation on the assets step -up under the equity method: n Journal Entry for Post (12/31/2000) Intercompany Investment Income 42, 750 Investment in Sage Company Common Stock 42, 750 n Consolidated FS-Subsequent to date of purchase type 78

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n To amortize differences between current fair values and carrying amounts of Sage Company’s identifiable net assets on Dec. 31, 1999, as follows: Inventories– to cost of goods sold Building—depreciation ($80, 000/20) Machinery—depreciation ($50, 000/5) Leasehold—amortization ($30, 000/6) Total difference applicable to 2000 Amortization for 2000($45, 000 x 0. 95) (Income tax effects are disregarded. ) $26, 000 4, 000 10, 000 5, 000 $42, 750 Consolidated FS-Subsequent to date of purchase type 79

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n In addition, Post also prepares the following entry to recognize the amortization of goodwill: n Journal Entry for Post (12/31/2000) Amortization Expense ($38, 000/40) 950 Investment in Sage Company Common Stock 950 To amortize goodwill acquired in business combination with partially owned purchased subsidiary over an economic life of 40 years. Consolidated FS-Subsequent to date of purchase type 80

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n Note: goodwill in a business combination involving partially owned subsidiary is attributed to the parent company rather than the subsidiary under the FASB recommended treatment. This technique avoids charging any portion of the goodwill amortization to the minority interest, which did not acquire any goodwill. Consolidated FS-Subsequent to date of purchase type 81

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n After posing the foregoing entries, Post Corporation’s Investment in Sage Company Common Stock and Intercompany Investment Income ledger accounts are as follows: Consolidated FS-Subsequent to date of purchase type 82

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) Investment in Sage Company Common Stock Date Explanation Debit Credit Balance 1999 12/3 Issuance of common 1 stock 1, 140, 000 in business 00 dr combination 3 Direct out-of-pocket 1 costs of 52, 250 1, 192, 250 business combination dr 2000 11/2 Dividend declared by 38, 00 1, 154, 250 4 Sage 0 dr 12/3 Net income of Sage 85, 500 1, 239, 750 1 dr 3 Amortization of 1 differences Consolidated FS-Subsequent to date of purchase type 83

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) Intercompany Investment Income Date 2000 12/3 1 Explanation Debit Credi Balanc t e Net Income of 85, 500 Sage 0 cr Amortization of differences between current fair values and carrying amounts 42, 750 84 Consolidated FS-Subsequent to date of purchase type

Example 7. 3: Equity Method for Partially Owned Purchased Subsidiary for First Year after Business Combination (contd. ) n The $42, 750 balance of Post corporation’s Intercompany Investment Income account represents 95% of the $45, 000 adjusted net income ($90, 000$45, 000) of Sage Company for the year ended 12/31/2000. Consolidated FS-Subsequent to date of purchase type 85

Developing the elimination for Example 7. 3 n Using the equity method to account for the investment in Sage results in a balance in the Investment ledger account with three components: (1) the carrying amount of Sage’s identifiable net assets; (2)the “current fair value excess” , which is attributable to Sage’s identifiable net assets; and (3) the goodwill acquired by Post in the business combination with Sage. These components are analyzed as follows: Consolidated FS-Subsequent to date of purchase type 86

Developing the elimination for Example 7. 3 (contd. ) Post Corporation Analysis of Investment in Sage Company Common Stock Ledger Account (For Year Ended December 31, 2000) Beginning balances Net income of Sage ($90, 000 x 0. 95) Amortization of differences between current fair Carryin Current Goodw Total g Fair ill Amount Value Excess $920, 5 $233, 70 $38, 00 $1, 192, 2 50 0 0 50 85, 500 Consolidated FS-Subsequent to date of purchase type 85, 500 87

Developing the elimination for Example 7. 3 (contd. ) n Contd. Carryin Current Goodw g Fair ill Amount Value Excess Amortization of goodwill Dividend declared by Sage ($40, 000 x 0. 95) Ending balances (950) (38, 000 ) Total (950) (38, 000) $968, 0 $190, 95 $37, 05 $1, 196, 0 50 0 0 5088 Consolidated FS-Subsequent to date of purchase type

Developing the elimination for Example 7. 3 (contd. ) n The minority interest in Sage’s net assets (which is not recorded in a ledger account) is analyzed similarly, except that there is not goodwill attributable to the minority interest: Consolidated FS-Subsequent to date of purchase type 89

Developing the elimination for Example 7. 3 (contd. ) Post Corporation Analysis of Minority Interest in Net Assets of Sage Company For Year Ended December 31, 2000 Carryin Current Total g Fair Amount Value Excess $48, 450 $12, 300 $60, 750 4, 500 Beginning balances Net income of Sage($90, 000 x 0. 05) Amortization of differences between current fair values (2, 250) and carrying amounts of Sage’s identifiable net assets Consolidated FS-Subsequent to date of purchase type 90 ($45, 000 x 0. 05)

Developing the elimination for Example 7. 3 (contd. ) n Contd. Carryin Current Goodw g Fair ill Amount Value Excess Amortization of goodwill Dividend declared by Sage ($40, 000 x 0. 95) Ending balances (950) (38, 000 ) Total (950) (38, 000) $968, 0 $190, 95 $37, 05 $1, 196, 0 50 0 0 5091 Consolidated FS-Subsequent to date of purchase type

Developing the elimination for Example 7. 3 (contd. ) n The sum of the ending balances of the carrying amount columns of the above two tables equals $1, 019, 000 ($968, 050 +$50, 950). This amount agrees with the total stockholders’ equity of Sage Company on 12/31/2000 as follows: Common stock, $10 par Additional paid-in capital Retained earnings Total stockholders’ equity $ 400, 000 235, 000 384, 000 $1, 019, 000 Consolidated FS-Subsequent to date of purchase type 92

Developing the elimination for Example 7. 3 (contd. ) n Also, the sum of the ending balances of the carrying fair value excess columns of the above two tables equals $201, 000 ($190, 950 +$10, 050). This amount represents the unamortized identifiable assets step-up as follows: Consolidated FS-Subsequent to date of purchase type 93

Developing the elimination for Example 7. 3 (contd. ) Inventories Plant assets(net): Land Building Machinery Total plant assets Leasehold Totals Balances, Amortizatio Balances, Dec. 31, 19 n for Year Dec. 31, 20 2000 99 00 (p. 302) $ 26, 000 $ (26, 000) $ 60, 000 80, 000 50, 000 $ (4, 000) (10, 000) $ 60, 000 76, 000 40, 000 $190, 000 $ (14, 000) $176, 000 $ 30, 000 $ (5, 000) $ 25, 000 $246, 000 $ (45, 000) $201, 00094 Consolidated FS-Subsequent to date of purchase type

Developing the elimination for Example 7. 3 (contd. ) n Assuming that Sage Company allocates machinery depreciation and leasehold amortization entirely to cost of goods sold and building depreciation 50% each to cost of goods sold and operating expense, the working paper eliminations for Post Corp. and subsidiary on 12/31/200 are as follows: Consolidated FS-Subsequent to date of purchase type 95

Developing the elimination for Example 7. 3 (contd. ) POST CORPORATION AND SUBSIDIARY Working Paper Eliminations December 31, 2000 (a)Common Stock–Sage Additional Paid-in Capital–Sage Retained Earnings-Sage Intercompany Investment Income-Psot Plant Assets(net)-Sage($190, 000 -$14, 000) Leasehold(net)-Sage ($30, 000 -$5, 000) Goodwill (net)-Post($38, 000 -$950) Cost of Goods Sold-Sage Operating Expenses-Sage 400, 000(1) 235, 000(1) 334, 000(1) 42, 750(2) 176, 000(3) 25, 000(3) 37, 050(3) 43, 000(4) 2, 000(4) Consolidated FS-Subsequent to date of purchase type 96

Developing the elimination for Example 7. 3 (contd. ) n Contd. Investment in Sage Company Common Stock-Post Dividends Declared-Sage Minority Interest in Net Assets of Subsidiary ($60, 750 - $2, 000)[See(d)] 1, 196, 050(1) 40, 000(1) 58, 750(1) Consolidated FS-Subsequent to date of purchase type 97

Developing the elimination for Example 7. 3 (contd. ) n To carry out the following: (a) Eliminate intercompany investment and equity accounts of subsidiary at the beginning of year, and subsidiary dividends. (b) Provide for Year 2000 depreciation and amortization on differences between current fair values and carrying amounts of Sage’s identifiable net assets as follows: Consolidated FS-Subsequent to date of purchase type 98

Developing the elimination for Example 7. 3 (contd. ) Cost of Operating Goods Sold Expenses $ 26, 000 Inventories sold Building depreciation 2, 000 Machinery depreciation 10, 000 Leasehold amortization 5, 000 Totals $ 43, 000 $ 2, 000 Consolidated FS-Subsequent to date of purchase type 99

Developing the elimination for Example 7. 3 (contd. ) (c) Allocate unamortized differences between combination date current fair values and carrying amounts to appropriate assets. (d) Establish minority interest in net assets of subsidiary at beginning of year ($60, 750), less minority interest share of dividends declared by subsidiary during year ($40, 000 x 0. 05=$2, 000). (Income tax effects are disregarded. ) Consolidated FS-Subsequent to date of purchase type 100

Developing the elimination for Example 7. 3 (contd. ) (b)Minority Interest in Net Income of Subsidiary Minority Interest in Net Assets of Subsidiary 2, 250 Consolidated FS-Subsequent to date of purchase type 101

Developing the elimination for Example 7. 3 (contd. ) n To establish minority interest in subsidiary’s adjusted net income for Year 2000 as follows: Net income of subsidiary Net reduction of elimination (a) ($43, 000 +$2, 000) Adjuste net income of subsidiary Minority interest share ($45, 000 x 0. 05) n $ 90, 000 (45, 000) $45, 000 $ 2, 250 Notes: (on textbook p 305) Consolidated FS-Subsequent to date of purchase type 102

Working Paper for Example 7. 3: Consolidated Financial Statements for year Ended 12/31/2000 POST CORPORATION AND SUBSIDIARY Working Paper for Consolidated Financial Statements For Year Ended Dec. 31, 2000 Income Statement Revenue: Net Sales Intercompany investment income Total revenue Costs and expenses: Costs of goods sold Operating expenses Post Corp. Sage Compa ny Eliminatio Consolidat ns Inc. ed (Dec. ) 5, 611, 0 00 42, 750 1, 089, 0 00 6, 700, 000 5, 653, 7 50 1, 089, 0 00 3, 925, 0 700, 000 00 556, 950 129, 000 * (a) (42, 750) 6, 700, 000 (a) 4, 668, 000 43, 000 (a) 687, 950 2, 000 Interest and income taxes expense 710, 000 170, 000 Minority interest in net Consolidated FS-Subsequent to date of purchase type 880, 000 103

Working Paper for Example 7. 3: Consolidated Financial Statements for year Ended 12/31/2000 (contd. ) n Contd. Statement of Retained Earnings Retained earnings, beginning of year Net income Subtotal Dividends declared Retained earnings, end of year Post Corp. Sage Eliminatio Consolidat Compa ns Inc. ed ny (Dec. ) 1, 050, 00 334, 000 0 (a) (334, 000) 1, 050, 000 461, 800 90, 000 1, 511, 80 424, 000 0 158, 550 40, 000 (90, 000) (424, 000) 461, 800 1, 511, 800 (a) (40, 000)‡ 158, 550 1, 353, 25 384, 000 (384, 000) 1, 353, 250 0 Consolidated FS-Subsequent to date of purchase type 104

Working Paper for Example 7. 3: Consolidated Financial Statements for year Ended 12/31/2000 (contd. ) Contd. Balance Sheet/ Assets n Inventories Other current assets Investment in Sage Company common stock Plant assets (net) Leasehold (net) Goodwill (net) Post Corp. Sage Elimination Consolidat Compa s Inc. ed ny (Dec. ) 861, 000 439, 000 1, 300, 000 639, 000 371, 000 1, 196, 05 0 3, 600, 00 1, 150, 00 0 0 1, 010, 000 (a)(1, 196, 0 50) (a) 4, 926, 000 176, 000 (a) 25, 000 95, 000 (a) 132, 050 Consolidated FS-Subsequent to date of purchase type 105

Working Paper for Example 7. 3: Consolidated Financial Statements for year Ended 12/31/2000 (contd. ) n Contd. Liabilities &Stockholders’ Equity Liabilities Minority interest in net assets of subsidiary Post Corp. Sage Eliminatio Compan ns Inc. y (Dec. ) 2, 420, 55 941, 000 0 Consolidate d 3, 361, 550 (a) 58, 750 61, 000 (b) 2, 250 1, 057, 000 Common stock, $1 1, 057, 00 par 0 Common stock, $10 400, 000 (a) par (400, 000) Additional paid-in capital 1, 560, 25 235, 000 (a) 1, 560, 250 0 (235, 000) Consolidated FS-Subsequent to date of purchase type 106

Consolidated Financial Statements for Example 7. 3 n The consolidated income statement, statement of retained earnings, and balance sheet of Post Corporation and subsidiary for the year ended December 31, 2000, are as follows (the amounts are from the consolidated column in the previous working paper): Consolidated FS-Subsequent to date of purchase type 107

Consolidated Financial Statements for Example 7. 3 (contd. ) POST CORPORATION AND SUBSIDIARY Consolidated Income Statement For Year Ended December 31, 2000 Net Sales $ 6, 700, 000 Costs and expenses: Costs and goods sold $4, 668, 000 Operating expenses 687, 950 Interest and income taxes 880, 000 expense Minority interest in net income of subsidiary 2, 250 Total costs and expenses 6, 238, 200 Net income $ 461, 800 Basic earnings per share of common stock(1, 057, 000 shares outstanding) $ 0. 44 Consolidated FS-Subsequent to date of purchase type 108

Consolidated Financial Statements for Example 7. 3 (contd. ) POST CORPORATION AND SUBSIDIARY Consolidated Statement of Retained Earnings For Year Ended December 31, 2000 Retained earnings, beginning of year: Add: Net income Subtotals Less: Dividends ($0. 15 a share) Retained earnings, end of year $ 1, 050, 000 461, 800 $1, 511, 800 158, 550 $ 1, 353, 250 Consolidated FS-Subsequent to date of purchase type 109

Consolidated Financial Statements for Example 7. 3 (contd. ) POST CORPORATION AND SUBSIDIARY Consolidated Balance Sheet For Year Ended December 31, 2000 Assets Current assets: Inventories Other Total current assets Plant assets (net) Intangible assets: Leasehold (net) Goodwill (net) Total assets $ 1, 300, 000 1, 010, 000 $ 2, 310, 000 4, 926, 000 $ 25, 000 132, 050 157, 050 $7, 393, 050 Consolidated FS-Subsequent to date of purchase type 110

Consolidated Financial Statements for Example 7. 3 (contd. ) Contd. n Liabilities & Stockholders’ Equity Liabilities Other than minority interest Minority interest in net assets of subsidiary Total liabilities Stockholder’s equity: Common stock, $1 par Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity $3, 361, 550 61, 000 $3, 422, 550 $1, 057, 000 1, 560, 250 1, 353, 250 3, 970, 500 $7, 393, 050 Consolidated FS-Subsequent to date of purchase type 111

Closing Entries for Example 7. 3 n Post Corporation Closing Entries on 12/31/2000 Net Sales 5, 611, 000 Intercompany Investment Income 42, 750 Income Summary 5, 653, 750 To close revenue accounts. Income Summary 5, 191, 950 Cost of Goods Sold 3, 925, 000 Operating Expenses 556, 950 Interest and Income Taxes Expense 710, 000 To close expense accounts. Consolidated FS-Subsequent to date of purchase type 112

Closing Entries for Example 7. 3 (contd. ) Contd. Income Summary Retained Earnings of Subsidiary ($42, 750 -$38, 000) Retained Earnings ($461, 800 -$4, 750) n 461, 800 4, 750 457, 050 To close Income Summary account; to transfer net income legally available for dividends to retained earnings; and to segregate 95% share of adjusted net income of subsidiary not distributed as dividends. Retained Earnings Dividends Declared 158, 550 To close Dividends Declared account. Consolidated FS-Subsequent to date of purchase type 113

Closing Entries for Example 7. 3 (contd. ) n After posting the above closing entries, Post’s Retained Earnings and Retained Earnings of Subsidiary ledger accounts are as follows: Consolidated FS-Subsequent to date of purchase type 114

Closing Entries for Example 7. 3 (contd. ) Retained Earnings Date Explanation 1999 12/3 Balance 1 2000 12/3 Close net income 1 available for dividends 3 Close Dividends 1 Declared account Debit Credit Balance 1, 105, 000 cr 457, 05 1, 507, 050 0 cr 158, 55 1, 348, 500 0 cr 115 Consolidated FS-Subsequent to date of purchase type

Closing Entries for Example 7. 3 (contd. ) Retained Earnings of Subsidiary Date Explanation 2000 12/3 Close net income 1 not available for dividends Debit Credit 4, 750 Balance 4, 750 cr Consolidated FS-Subsequent to date of purchase type 116