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Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
CHAPTER 10
ADDITIONAL CONSOLIDATION REPORTING ISSUES
OVERVIEW OF CHAPTER
The following reporting issues related to the preparation of consolidated financial
statements are discussed in Chapter 10:
1. The consolidated statement of cash flows
2. Consolidation following an interim acquisition
3. Consolidation tax considerations
4. Consolidated earnings per share
This chapter discusses the consolidated statement of cash flows. A comprehensive
example is utilized to illustrate the indirect method. The example shows the use of a worksheet
to prepare a consolidated statement of cash flows from comparative consolidated balance sheets
and a consolidated income statement. The chapter also illustrates the differences between using
the direct and the indirect method.
An adjustment to the consolidation entries in the year of acquisition is required when a
business combination is completed during the year rather than at the beginning or end of the
year. When interim acquisitions occur, adjustments are needed for income earned and dividends
paid to the shareholders who held the shares prior to the date of acquisition. Consolidation
procedures used in the year of acquisition are illustrated.
Two consolidation issues related to income taxes also are discussed in the chapter. First,
the allocation of income tax expense between a parent company and its subsidiary when a
consolidated tax return is filed is discussed. Allocating the tax expense based upon the
contributions of the parent and subsidiary to consolidated income before taxes is suggested and
illustrated. This issue is important if there are noncontrolling shareholders because consolidated
net income and the income assigned to the noncontrolling interest depend on the allocation of the
consolidated income tax expense. The second tax issue relates to the income tax effect of
unrealized intercompany profit eliminations. If a parent and subsidiary present consolidated
financial statements but file separate income tax returns, unrealized intercompany profits will be
reported in the tax return of the selling affiliate but eliminated in the consolidated income
statement. This results in a temporary difference between the income reported in the tax return
and that reported in the consolidated income statement. Deferred income taxes must be
recognized in such situations.
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-2
The chapter concludes with an explanation of the computation of consolidated earnings
per share. While no adjustments related to the consolidation process are required in computing
basic consolidated earnings per share, a formula for the computation of diluted consolidated
earnings per share is presented. In the computation of diluted earnings per share, the parent's
share of the subsidiary's net income must be deducted from consolidated net income and an
adjusted amount added to consolidated net income based on the subsidiary's diluted earnings per
share and the adjusted number of subsidiary shares held by the parent. A comprehensive example
is provided in the chapter.
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 10-1 Prepare a consolidated statement of cash flows.
LO 10-2 Make calculations and record journal and worksheet entries related to an
interim acquisition.
LO 10-3 Make basic calculations and journal entries related to income taxes in the
consolidated financial statements.
LO 10-4 Make calculations related to consolidated earnings per share.
SYNOPSIS OF CHAPTER 10
Additional Consolidation Reporting Issues
Advanced Consolidation Issues at Google
LO 10-1 Prepare a consolidated statement of cash flows.
Consolidated Statement of Cash Flows
Preparation of a Consolidated Cash Flow Statement
Consolidated Cash Flow Statement Illustrated
Consolidated Cash Flow Statement-Direct Method
LO 10-2 Make calculations and record journal and worksheet entries related to an interim
acquisition.
Consolidation Following an Interim Acquisition
Parent Company Entries
Consolidation Worksheet
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-3
LO 10-3 Make basic calculations and journal entries related to income taxes in the
consolidated financial statements.
Consolidation Income Tax Issues
Allocating the Basis of Assets Acquired in a Business Combination
Tax Allocation Procedures When Separate Tax Returns are Filed
Allocation of Tax Expense When a Consolidated Return is Filed
Tax Effects of Unrealized Intercompany Profit Eliminations
LO 10-4 Make calculations related to consolidated earnings per share.
Consolidated Earnings per Share
Computation of Diluted Consolidated Earnings per Share
Computation of Consolidated Earnings per Share Illustrated
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-4
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO 10-1 Prepare a consolidated statement of cash flows.
• This chapter covers various topics related to consolidation that are not mentioned in
other chapters. Slide 2 provides a general overview of the various topics discussed in
the chapter.
• Slides 4-13 illustrate the preparation of a consolidated statement of cash flows.
LO 10-2 Make calculations and record journal and worksheet entries related to an interim
acquisition.
• Slide 17 explains how the consolidation process differs when a subsidiary is acquired
at an interim date.
• Slides 18-22 illustrate the consolidation process for an interim acquisition scenario.
LO 10-3 Make basic calculations and journal entries related to income taxes in the
consolidated financial statements.
• Slide 24 explains the process of allocating the basis of assets acquired in a business
combination.
• Slides 25-27 provide an illustration of how to allocate the basis of assets acquired in a
business combination.
• Slides 28-31 explains how tax expenses are allocated when a parent company and its
subsidiaries file a consolidated tax return.
• Slides 32-35 provide an illustration of how taxes are allocated when a consolidated
return is filed.
• Slide 36 explains the tax effects of unrealized profits when a consolidated return is
filed.
• Slides 37-39 explain the tax effects of unrealized profits when separate returns are
filed for the parent and its subsidiaries.
• Slides 40-47 provide an illustration of the tax effects of unrealized profits when
separate returns are filed.
• Slide 48 explains the tax effects of subsequent period profit realization when separate
returns are filed.
• Slides 49-54 provide a practice exercise to illustrate the accounting for subsequent
profit realization when separate returns are filed.
LO 10-4 Make calculations related to consolidated earnings per share.
• Slides 56-58 explain the calculation of consolidated EPS.
TEACHING IDEAS
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-5
1. Students could be asked to identify the elements on a Fortune 100 company's
consolidated statement of cash flows that would not appear if the company was a single-
corporate entity. How do these differences impact total cash flow?
2. Students could be asked to choose a large consolidated entity and review its disclosure of
earnings per share. Students should write a report summarizing the type of information
and reconciliation schedules presented in the company’s financial statement notes.
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-6
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C10-1
LO 10-4
20 min.
M
The Effect of Security Type on Earnings per Share
This case focuses on the dilutive effects of convertible preferred stock and
convertible bonds on the computation of consolidated net income and earnings
per share.
C10-2
LO 10-1
35 min.
M
Evaluating Consolidated Statements
A financially stressed parent company receives a significant cash loan from its
majority owned subsidiary. The parent company management does not want the
minority shareholders of the subsidiary to find out about the loan, which may not
be repaid. Determine whether information about this cash transfer needs to be
reported in the consolidate cash flow statement or other financial statements.
Also determine whether information of this type must be disclosed to minority
stockholders. Supporting authoritative support must be provided.
C10-3
LO 10-3
15 min.
M
Income Tax Expense
The student's basic understanding of income tax allocation procedures is tested in
this case. The conditions leading to a particular set of outcomes must be
described, along with the procedures used in reporting differences between the
amount of tax paid and tax expense accrued.
C10-4
LO 10-1
20 min.
M
Consolidated Cash Flows
A series of questions are included which test the student's understanding of the
relationship between accrual accounting and reported cash flows. The
consolidation context affects the answer to only the last question.
E10-1
LO 10-1
20 min.
M
Analysis of Cash Flows
Students must calculate the beginning of period consolidated cash balance and
any adjustments made to consolidated net income as a result of the ownership of
the subsidiary in deriving cash from operations. Given the increase in cash from
operations, consolidated net income must be calculated.
E10-2
LO 10-1
40 min.
M
Statement of Cash Flows
Students must calculate noncontrolling shareholders’ income and dividends, net
cash from operating activities, net cash used in investing and financing activities,
and changes in consolidated cash during the year.
E10-3
LO 10-1
15 min.
E
Computation of Operating Cash Flows
Cash collected from customers, cash paid to suppliers, and cash from operating
activities must be calculated.
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-7
E10-4
LO 10-1
15 min.
E
Consolidated Operating Cash Flows
Cash collected from customers, cash paid to suppliers, and cash from operating
activities must be calculated.
E10-5
LO 10-1
30 min.
M
Preparation of Statement of Cash Flows
Given a listing of changes in account balances and transactions, a consolidated
statement of cash flows is required.
E10-6
LO 10-1
30 min.
M
Wp
Direct Method Cash Flow Statement
Based on the information provided in E10-5, a consolidated statement of cash
flows must be prepared utilizing the direct method.
E10-7
LO 10-1
20 min.
M
Analysis of Consolidated Cash Flow Statement
A consolidated statement of cash flows is presented. Students have to explain the
rationale behind various accounting treatments.
E10-8
LO 10-2
25 min.
M
Midyear Acquisition
A midyear acquisition is made at net book value, with dividends paid by the
acquired company prior to the date of acquisition. Consolidated retained earnings
at the beginning and end of the year, consolidated net income, and the investment
account balance reported by the parent at the end of the period are computed.
E10-9
LO 10-2
25 min.
M
Purchase of Shares at Midyear
A midyear purchase is made at net book value, with dividends paid by the
acquired company prior to the date of acquisition. Equity-method journal entries
recorded by the parent during the year and consolidation entries needed to
prepare consolidated financial statements at the end of the year are required.
E10-10
LO 10-3
20 min.
M
Deferred Tax Assets and Liabilities Arising in Acquisition
Given details regarding a acquisition (a nontaxable transaction), deferred tax
assets and/ or liabilities must be computed.
E10-11
LO 10-3
15 min.
E
Tax Deferral on Gains and Losses
The entries to eliminate unrealized profits and the related tax effects of a
downstream inventory sale and an upstream sale of land are required.
E10-12
LO 10-3
15 min.
E
Unrealized Profits in Prior Year
Unrealized inventory profits at the start of the year on a downstream inventory
sale are realized. Unrealized profits at the start of the period on an upstream land
sale remain unrealized. Consolidation entries to remove the effects of the
transfers and recognize the related tax effects are required.
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-8
E10-13
LO 10-3
15 min.
M
Allocation of Income Tax Expense
Income tax expense reported on the consolidated tax return must be allocated to
the individual companies based on their realized, before tax earnings so that
income assigned to noncontrolling interest and consolidated net income can be
computed.
E10-14
LO 10-4
15 min.
M
Effect of Preferred Stock on Earnings per Share
Both the parent and subsidiary have preferred stock outstanding and pay
preferred dividends in the current period. Consolidated earnings per share is
computed.
E10-15
LO 10-4
20 min.
M
Effect of Convertible Bonds on Earnings per Share
Both the parent and subsidiary have bonds outstanding. The subsidiary’s bonds
are convertible. Consolidated earnings per share is computed.
E10-16
LO 10-4
20 min.
M
Effect of Convertible Preferred Stock on Earnings per Share
Primary and fully diluted earnings per share are computed. The subsidiary has
convertible preferred stock outstanding which is dilutive. The parent has
nonconvertible preferred stock outstanding.
P10- 17
LO 10-1
20 min.
M
Direct Method Computation of Cash Flows
The operating section of a consolidated statement of cash flows must be prepared
utilizing the direct method.
P10-18
LO 10-1
35 min.
M
Preparing a Statement of Cash Flows
A work paper for the purpose of developing a consolidated statement of cash
flows using the indirect method is required. Students must also prepare a
statement of cash flows - indirect method.
P10-19
LO 10-1
45 min.
M
Preparing a Statement of Cash Flows-Direct Method
Based on the information provided in P10-18, a work paper for the purpose of
developing a consolidated statement of cash flows using the direct method is
required. Students must also prepare a statement of cash flows - direct method.
P10-20
LO 10-1
50 min.
H
Consolidated Statement of Cash Flows
Given beginning and ending consolidated balance sheets and the consolidated
income statement for the period, a consolidation cash flow worksheet and
consolidated statement of cash flows are required. This is a comprehensive
problem, including a differential assigned to goodwill and equipment.
P10-21
LO 10-1
50 min.
Consolidated Statement of Cash Flows-Direct Method
Based on the information provided in P10-20, a work paper for the purpose of
developing a consolidated statement of cash flows using the direct method is
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-9
H
required. Students must also prepare a statement of cash flows - direct method.
P10-22
LO 10-1
40 min.
H
Consolidated Statement of Cash Flows
Consolidated balance sheets at the beginning and end of the period are given,
along with a consolidated income statement and retained earnings statement.
This is a comprehensive problem, but without a differential.
P10-23
LO 10-1
35 min
H
Consolidated Statement of Cash Flows-Direct Method
Based on the information provided in P10-22, a work paper for the purpose of
developing a consolidated statement of cash flows using the direct method is
required.
P10-24
LO 10-1
50 min.
H
Consolidated Statement of Cash Flows [AICPA Adapted]
Comparative consolidated balance sheets are presented along with additional data
on the financing and investing activities of the consolidated entity. Students are
asked to prepare a formal consolidated statement of cash flows.
P10-25
LO 10-1
60 min.
H
Statement of Cash Flows Prepared from Consolidation Worksheet
A comprehensive problem which requires preparation of a consolidation cash
flow worksheet and a consolidated statement of cash flows. A consolidated trial
balance at the start of the year and a completed consolidation worksheet at year-
end are given.
P10-26
LO 10-2
25 min.
M
Midyear Purchase of Controlling Interest
Parent company entries and first-year consolidation entries are required for an
investment acquired during the year. The differential is assigned to goodwill.
P10-27
LO 10-2
40 min.
H
Consolidation Involving a Midyear Purchase
Journal entries recorded by the acquiring company, consolidation entries at year-
end, and a consolidation worksheet are required following a midyear purchase of
a majority of a subsidiary’s stock at book value.
P10-28
LO 10-3
35 Min.
H
Deferred Tax Assets and Liabilities in a Consolidated Balance Sheet
The tax bases of the assets and liabilities of the companies must be computed, as
well as the fair value of the deferred tax assets/ liabilities. A consolidated
worksheet for the companies at the date of acquisition is prepared.
Chapter 10 - ADDITIONAL CONSOLIDATION REPORTING ISSUES
10-10
P10-29
LO 10-3
35 min.
H
Tax Allocation in Consolidated Balance Sheet
A consolidated balance sheet worksheet and consolidated balance sheet are
required. In addition to the normal consolidation entries, tax allocation
procedures are required for unrealized inventory profits at the start and end of the
year and for unrealized profit on an intercorporate sale of depreciable assets.
P10-30
LO 10-3
25 min.
H
Computations Involving Tax Allocation
Various transactions between a parent and its subsidiary are described. Basic
equity-method journal entries recorded by the parent are required, along with the
computation of consolidated net income, income assigned to noncontrolling
interest, and net assets assigned to noncontrolling interest in the consolidated
balance sheet at the end of the period. The companies file separate tax returns and
have a 40 percent income tax rate.
P10-31
LO 10-3
60 min.
H
Worksheet Involving Tax Allocation
All consolidation entries and a consolidation worksheet are required in a
comprehensive problem which requires tax allocation. Unrealized profits exist at
both the beginning and end of the period.
P10-32
LO 10-4
30 min.
H
Earnings per Share with Convertible Securities
Basic and diluted earnings per share are calculated. The subsidiary has
convertible bonds and convertible preferred stock outstanding.
P10-33
LO 10-4
40 min.
H
Comprehensive Earnings per Share
Basic and diluted earnings per share are calculated in this comprehensive
problem. The subsidiary has convertible bonds, convertible preferred stock, and
warrants outstanding.
