 Hello, and welcome to this session in which we would look at a consolidation problem that you could see an advanced accounting or a CPA exam. And on the CPA exam, you may not see a complete comprehensive consolidation problem like the one I'm going to be going over today. You might see a mini-consolidation problem. Nevertheless, the concept is the same. So in this session, I will explain the consolidation process and specifically subsequent to the date of acquisition, because in the prior session we looked at how do we consolidate on the date of acquisition. Now we're going to look a year after the acquisition, how do we consolidate? So it's very important as a CPA candidate to understand this whole problem for two reasons. You could see this in a simulation or from this problem, I can generate 20 different multiple choice questions. So on the multiple choice questions, they may ask you about one thing in the consolidation process. So if you understand the consolidation process, it's very easy to understand that small thing. And sometime you just need good basic. I'm going to repeat, good basic. So you don't need to know advanced consolidation as long as you know your basics, you're strong in your basics, you'll be able to answer many multiple choice questions that deals with consolidation because they only scratch the surface when it comes to the multiple choice. Now whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. Now most likely you have a CPA exam course, review course, that's fine. I'm not asking you to get rid of your CPA review course. I'm asking you to add me as a useful addition. I explain consolidation differently than your CPA review course. How so? Well, your CPA review course will assume you know the material and they would review it with you. I don't assume this. I'm going to teach you consolidation and once I teach you consolidation, your CPA review course will do a great job reviewing that information with you. Your risk to try me is one month of subscription, your potential gain is understanding and pass in the exam. If you're willing to take this trade off, go ahead and sign up, try me for a month and see how it works. And if not for anything, take a look at my website to find out how well or not while your university are doing on the CPA exam. I do have lectures and resources for other courses as well. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter and Reddit. Now we're going to look at a consolidation problem and I'm going to go over this problem step by step. I'm going to try to slow down. I'm going to try to tell you what questions you could be asked about in a form of a multiple choice. But again, as a simulation, you could see this as a mini simulation, not as comprehensive as the one I'm going to go over, because I'm going to go over the whole process. Starting with, we're going to be buying a subsidiary. We have the subsidiary's book value as of the beginning of the year. We have the fair value as the beginning of the year when we are making the purchase. Current assets, book value 320. The fair value is 320. Therefore, there's no difference. Trademark, we have a trademark on the books are worth 220. The fair value is 220. So the trademark, they have an additional 20,000 and fair value. We have to account for patent and technology on the books. It's worth 320. Fair value is 450. The difference is 120,000, 130,000 and they're telling us this has a 10-year remaining life. Now why are they telling us this has a 10-year remaining life? Because we are going to amortize this. And by the way, the trademark, it has an indefinite life. Therefore, it's not amortized. Equipment on the books are worth 150. Fair value is, I'm sorry, on the books are worth 180. Fair value is 150. They are $30,000 less. Again, they're giving us the life because what we're going to do, we're going to amortize this reduction in depreciation, because notice the fair value is less than the book value. Therefore, when we transfer this asset to our books, we're going to have less depreciation. Liabilities, 420 and 420, they're the same. The net book value, now how do you find the net book value? Sometimes the question is, find the net book value for this company. That's as simple as that. You could have a CPA question that tells, find the net book value. What's the net book value? It's asset minus liabilities, net. Okay, sometimes it's called net book value. Sometimes it's called net asset. Well, simply put, all what you are doing, all what you are doing is taking the assets. If you add up the assets and subtract the liabilities, you'll get the 600,000. Okay, asset minus liabilities. Now also, the net book value is the same thing as the equity. And let's take a look at the equity. 200,000, 20,000 and 380. 380 plus 20 equal to 400,000 plus 200 equal to 600,000. Notice the equity is 600,000, the net book value equal to 600,000. And that could be a question on the CPA exam. They could give you a lot of numbers and saying about assets liability and they'd say, what's the net book value for this company? And that's the net book value, 600,000. Now, why is the net book value important to understand? Because you need to understand the net book value of the fair value. So the company is worth fair value, net book value, fair value, net fair value, net identifiable fair value, 720. Why is that important? Because when you buy the company, you're going to say, well, how much should I pay above this amount? 720. The difference between the net book value and the net fair value is 120,000. So the company is worth 120,000 more on the books. Now, the first thing we're going to do is I'm going to take all these assets that I identify that they have either more value or less value and make a record of them. For example, the trademark, I'm going to have a $20,000 more to allocate to my trademarks. It has an indefinite life. The annual access amortization is zero. Why? Because it has an indefinite life. We don't amortize something that will have indefinite life. The patentant technology 100 and 130,000, it's going to last 10 years. So we're going to amortize it using the straight line, 13,000 per year. Equipment is $30,000 less, less. We're going to amortize this less depreciation over five years, and that's $6,000 less. Now, we're going to assume for this illustration that we paid for this company 900,000. Now, if we paid 900,000, what did we purchase? Well, we purchased the equity. The equity is 600,000. So paid 900 minus the 600, we have $300,000 remaining. What are we going to do with this 300,000? Well, we know what we're going to do with some of it. We're going to allocate 20,000 of this 300,000 to the trademark. We're going to allocate 130,000 to the patentant technology, and we are going to reduce this by 30,000. Because why? Because we purchase something that's worthless on fair value. When we do all of this, we're going to have a remaining. When we account for all of this, reducing this asset, increasing this asset, increasing this asset by allocating 300,000, we're going to have $180,000 remaining. Since this $180,000 remaining cannot go anywhere, in other words, we cannot connect it. We cannot allocate it. The correct term is allocate. We cannot allocate to any particular identifiable asset. Well, guess what? What do we call this? Hopefully we know this. We call this good will because we identified all the assets that we can. Everything else is good will. Therefore, we're going to have a good will that's worth $180,000. Remember, good will will have an indefinite life. Therefore, there's no annual access amortization. Now, when we net out our amortization that we're going to be booking, we're going to find out that every year we have to book an additional $7,000 in amortization because we purchase this company. And because we purchase this company and the fair value is more for two assets and less for one asset, well, we're going to have an access amortization to book every year because we have more assets on the books. Therefore, more assets that's being subject to depreciation, more amortization expense we have to book. Now, also on the CPA exam, they could give you this problem and ask you what is the annual access amortization as a result of this purchase. That's all what they can ask you about. Okay? Or they can ask you what is the new, what's the consolidated patent and technology balance? Well, it's going to be, for example, 450. It's going to be on the consolidated paper 450. So they could ask you many questions. But now we understand where all these numbers are coming from. Now we said we paid 900,000. Let's go through the journal entries when we purchase this company. When you purchase a company, you're going to have an investment in sub 900,000. You're going to credit cash 900,000 to record the acquisition of the sub. On August 1st, the company declared $40,000 of receivable. So the subsidiaries declared it, and we purchased the whole company. By the way, we purchased 100% of this company. We have no minority interests, no non-controlling interests. We're going to debit dividend receivable and credit the investment in son because what happened is the investment account goes down when they declare dividend. In other words, every time the company pays dividend, our investment goes down because we're taking out the money, the dividend, not the money, we're taking out. Actually, it's going to be the money soon. We're going to be taking the money out of income. Okay? Then they pay the cash. Then they pay the cash. We debit dividend receivable, credit cash. Now the company, the subsidiary made $100,000 in earning. That's going to increase our investment because as the company earned money, we're using the equity method as the company earns profit and meant to say money when the company earned income, we increase our investment and we credit equity and subsidiaries earning, which is an income account. Then the last thing we have to do, remember the $7,000 here, access amortization, we have to book that access amortization. We're going to reduce our earnings, basically like reducing earnings by $7,000 and reducing our investment by $7,000. Why did we do this? Because when we purchased this company, we had additional assets with additional values. As a result, those assets would reduce our value. So those are the entries that you have to do as far as purchasing the company accounting for the receivable. You're going to see this $40,000 again. Just write it down. You're going to see this $40,000 again in receivable. Okay? You're going to see this $100,000 again in earning and you're going to see the reduction. So 100 minus 7 is 93,000. You're going to see this earning again soon. Okay? But those are the journal entries that you have to make when you purchase this company. And what I'm going to do next, I'm going to show you what's going to happen at the end of the year when we're going to consolidate those two companies together, the parent and the sub. Okay? So remember, this is one, one, 2022. I'm going to move to the Excel sheet. I'm going to show you the balances for these companies, 12, 31, 22, which is the end of the year. It doesn't matter which particular year. Let's take a look at the Excel sheet and start the consolidation process. So this is the parent and subsidiary as of December 31st, 2021, I'm sorry, 2022 at the end of the year, 2022. And we have the parent, the sub, the consolidated entry and the consolidated balances. We have the income statement. We have the income statement for each company separately. And by the way, when it looks negative, those are credit balances. So revenues for the parent company, 1.5 million cost of goods sold 700,000, amortization expense 120, depreciation expense 80. Then they have additional income from the subsidiary equity and subsidiaries income 93,000. Remember, this 93,000 is 100,000 minus seven. Remember, I told you, you will see this because we are the parent company. The income comes to us and it's 93,000. Therefore, the parent company has net income of 93,000. The sub company has net income of 100,000, just following the same concept. The statement of retained earnings, the beginning retained earnings is 890, the net income, 693, dividend declared by the parent company is 120, retained earning as 1231, 1,413,000 credit balance. The same thing for the sub, we have beginning retained earning, giving net income of 100,000, dividend declared 40,000. You remember this dividend, I hope you do. Then we have the assets. We have 940,000 in current assets. Now we have an investment of 953,000. Now how did we come up with this 953,000? Let me just show you where this number is coming from. We started with 900,000 investment. Then we deducted 40,000 when we had the dividend. Remember, the dividend reduces our investment. Net income increased investment by 100,000, then the access amortization reduced it by 7,000. Therefore, our investment balance is 953,000. We have the trademark 600,000. Patent and technology equipment, those are the parent, book value, those are the subsidiaries, book value. Then we have liabilities, common stock for each one. And by the way, retained earnings goes from here to here. Retained earnings goes to the balance sheet, goes to the balance sheet. Now once again, you know, they could ask you a question as simple as, tell me what's the investment account as of 1231 before the consolidation. Well, 953, I showed you how to do so. So that's another question they can ask you. Now we're going to start the consolidation process. How do we start the consolidation process? The first thing you have to understand about the consolidation process is only the equity of the parent company will survive. So that's a very important concept on the CPA exam. They always ask you about this. You have parent and you have subsidiaries and you have the consolidated amount. And the consolidated amount, only the equity of the parent because the parent purchase the sub. Well, if the parent purchase the sub, there shouldn't be any sub equity. Well, what does that mean? It means let's start by eliminating all the equity of the sub. The sub has 200 in common stock, 20,000 in paid in capital. Let's do that. So what's going to happen now is I'm going to start to zero this down. So I'm going to debit common stock for the sub debit additional paid in capital for the sub debit retained earning for the sub. Okay, and let me show you the entry. So we're going to debit all of those. Let me just go ahead and show you the journal entry, then I will show it to you on a worksheet. And this is what the worksheet would look like. Okay, let me just change the colors here. There we go. Let me make it white. Okay, so what happened is this, I debited common stock for the sub. I debited additional paid in capital for the sub and I debited retained earning for the sub. Now, what do I credit? I credit them against investment. Therefore, I'm going to debit investment 600,000. Now, investment is debited 993. Don't worry about this. This is the 600,000 because I'm going to be using this investment account more, but this is the first entry. And the first entry is to do what? Is to eliminate the sub equity because the only thing that should survive, the only thing that should survive is the parent equity. The only thing that should survive is the parent equity. What does that mean? It means the 600,000 of the parent should be on the consolidated. The 120,000 of the parent should be the consolidated. And the dividend, which we're going to close the dividend soon, because I'm going to close the dividend separately, the only thing that's going to appear here, I'm going to show it to you up front before we even get there. The only thing that's going to be 120,000. I'm going to show you how I'm going to be eliminating this 40,000 in a moment. This 40,000 in a moment. And I'm just going to tell you that this is what's going to survive. Now, the second thing I'm going to do, do you guys remember we prepared this schedule? We said we're going to allocate more to the trademark, 20,000. We're going to allocate more to the patent and technology. We're going to allocate less to the equipment and we're going to add goodwill on the books. You remember we said this? We said we're going to have to do this, right? Let's do this. Now, we're going to adjust the fair value, which is recognize the allocation. Well, starting with the trademark, trademark, we're going to add 20,000. We're going to debit the trademark. We're going to notice here that we're going to debit the trademark account 20,000. We're going to debit the patent and technology. We're going to credit equipment. We're going to credit equipment. We're going to add goodwill of 180,000. And guess what? The difference will go into investment. Give me, give me investment in the sub. I'm going to credit the investment in the sub. Let me just make this bigger so you can see the whole entry. So I debited the trademark patent and technology to do what? To allocate this. And as a result, I'm going to credit. This is the credit of 300,000 up here in the formula. Okay. Remember I had 600,000 credited investment 600,000. No, I'm crediting investment 300,000. Remember when I bought the assets, I bought them with my investment account so I cannot have the assets and the investment. I cannot have both. Simply put, I'm going to go ahead and tell you the investment account has to be zero at the end. The investment account has to be zero because I cannot buy the asset, add the asset to my consolidated total, then keep my investment. Then I have the investment, which is a financial asset, and I have the physical asset on the books. You can't have both. So when you add the physical asset, you have to remove them against the investment. I hope this makes sense. So that's done. Now I have to eliminate any intercompany income. Well, intercompany income. What's the intercompany income? I earned 93,000 from this company. Okay. I have to eliminate this. I cannot have this 93,000 because this is intercompany income. So I'm going to debit 93,000 and I'm going to credit 93,000 of the investment. Now my investment is credited 993,000 in total, which is 60,000 to eliminate the book value of the equity of the sub 300,000 to add the assets and 93,000 to eliminate the intercompany income. Okay. So that's the, let me show you the entry. This way you can see the entry as well. Again, I don't want to keep repeating this. On the CPA exam, they can ask you about one particular transaction and all of this. They can ask you a question as a simple question or a tricky question as what is the investment account at the end in the consolidated balance sheet? It's zero. You cannot keep the investment account. Okay. Or what's the equity consolidated balances? Remember, the equity consolidated balances are only those of the parent company, which is 124 dividend, 604 common stock, 124 paid in capital. Also I have to eliminate any intercompany dividend again, because it's between the parent and the subsidiary. Well, as a result, I'm going to have to credit dividend, credit dividend, 40,000 to eliminate this debit. And I'm going to have to reduce my investment by 40,000, reduce my investment by 40,000. So this is the eliminate the intercompany dividend. And that's done. Now, if I take 953 plus 40, which is 993 minus 993, my investment account is zero. So this is important. So this is important. The investment account will be zero when you consolidate because you cannot have the investment account plus you want to have the assets because you already are adding the assets. You cannot have both. You cannot have both. Okay. Last thing I'm going to do in these entries is recognize access amortization of fair value. Remember, I had access amortization of net was 7,000. Let me show you the journal entry. I'm going to have to add 13,000 and access amortization. That's what's not showing amortization expense because the background have to change the background. There we go. 13,000. I'm going to have to debit equipment, debit equipment. Well, let's keep going with the expenses. Debit amortization expense, credit depreciation expense. So this is the 7,000 difference. I'm going to have to credit depreciation expense 6,000. I'm going to have to debit equipment in additional $6,000. Let me do that. I'm going to have to debit equipment $6,000. Where's the equipment account right here? Debit equipment. Why? Because this is against the depreciation expense and I'm going to have to credit patent and technology 13,000 because I'm reducing the patent and technology every year after year. This $130,000, it's going to be in chipped. I'm going to be using some of that depreciation, some of that amount little by little. So the following year, I will chip away from the 130,000, 13,000 every year. That will be the case. So this is the to recognize access amortization. Those are the entries. Now we're going to have to do the whole consolidation revenue. The parent company $1.5 million. The subsidiary $400,000. We have no debit, no credit. Therefore, the balance will be $1.9 million consolidated revenue. There is no debit, no credits. Cost of goods sold, $700,000 for the parent, $232,000 for the sub. Together is $9.32. If there's anything here, we'll have to net it out. Amortization expense, $120,000 for the parent, $32,000 for this sub. Then an additional $13,000 of amortization, which is what we're going to add. Therefore, the net amount is $165,000, which is parent plus sub plus debit minus credit. The same thing for depreciation. Depreciation for the parent company. Depreciation for the sub plus zero debit minus the credit will give us a balance of $110,000. The equity in the subsidiaries has to be zero because this is intercompany transaction. And now the net income for the consolidated company is, sorry, the net income for the consolidated company, $693,000. Immediately, once I have net income here, you can plug it here. No, not retained earnings. You can plug it here. You can plug it here. So net income goes from here to here, the consolidated net income, because the only thing that's going to survive is the consolidated net income. Again, the retained earnings, the only thing that's going to survive is the parent company retained earnings. Again, this is one of those from the equity account. The only thing that survived is the beginning company retained earnings. So this is gone, $380 and $380. And we have dividend, the only dividend that survived, $120 plus $40, minus $40 is $120. That's the only thing that survived. Therefore, the ending equity, retained earnings is the retained earnings of the parent company. As I told you, the only equity account that survived consolidation is the equity of the parent company. For retained earnings is $1,413,000. Simply put, if you have a simulation, you can fill out those quickly, especially if you are pressured under time. See, retained earnings, even without knowing what you need to do. $840 will survive, $693 will survive in the consolidation, and the dividend will survive. And the retained earnings should be that of the parent company. Now we're going to do the same thing with current assets. Current assets, $940 plus current assets, $500,000. We'll give us a total of $1,440,000. Now down the road, we're going to learn we might have to debit or credit. It doesn't really matter. Investment in the subcompany should be zero. We already know this. We already did this. Trademark, $600,000 plus $200,000 plus $20,000. And that's going to give us a total of $820. Patent and technology, $370 plus $288 plus $130 minus the $13,000 amortization, it's going to give us $775. Equipment, same concept. Parent plus the sub, plus the $6,000 addition minus the credit of $30,000. We'll give us $446. Goodwill, $00180. Goodwill is $180. Now we have total assets. And total assets are $3,481. Liabilities. Liabilities of the sub plus the liabilities of the parent company, $1,345. Additional paid in capital. Again, those are equity accounts. The only thing that's going to survive is the parent equity. And retained earnings, obviously it's going to go right from up there. Right from the statement of retained earnings. Right from the statement of retained earnings. And make sure your liabilities and equity equal to your assets. And what I did, I went through this whole process. Once again, will you be expected to solve something like this on the CPA exam? I doubt it. They're going to give you all of this. They might only give you to do those entries, for example, or maybe two or three entries like this. I doubted that they're going to give you a complete consolidated worksheet, or they might give you all the numbers that you need and you need to do the debits and the credits. Or they might take this, I will take this consolidated problem and give you 15 different multiple choice questions. I can ask you, what is the Goodwill? That's the only question I could ask you about this thing. Or what's consolidated net income? I can ask you again, what's the ending retained earning? Well, that's easy. It's the parent company ending retained earnings because the only thing that survive with the equity balances are only the parent company. So basically going over this consolidation, over this consolidation process using the equity method will help you tremendously understanding the concept for the CPA exam. Now, I don't, as I told you, I don't expect you to quit your CPA review course. I don't intend to do so, but I strongly encourage you to add me as a supplemental tool to your CPA review course because I explain the material differently than your CPA review course. I teach you. I don't review it. What is it? I did not review. I explain everything in detail, every single step in details. And this is what differentiates me from your CPA review course. Look, make this investment for a month. You don't like it. You cancel. You like it. It's, you feel it's benefiting you. You keep it. The CPA exam is worth it. It's a long-term investment. It's 20, 30 year investment. Take it seriously, study hard, good luck, and of course, stay safe.