 Hello, and welcome to the session in which we would look at a consolidation problem that could appear as a CPA simulation on the exam day, or you could see this in your advanced accounting course. It's very important that you understand consolidation from A to Z, at least a basic solid understanding. Because on the CPA exam, you might see a simulation like this one. It's very possible you might see a simulation like this one where you are asked to compute the investment account where you are asked to compute the consolidated net income. You are asked to compute, for example, the account balance sheet for equipment, the consolidated account for the equipment. So you have to be able to understand and be able to answer various questions. This exercise, again, it could be a simulation, an actual simulation, although it may be a little bit on the longer side of simulation, but it could also be in a form of a multiple choice where you are being asked one question. 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Take a look at my LinkedIn recommendation, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter, and Reddit. So let's take a look at this exercise that's going to illustrate the consolidation process. In this, there's a lot of information. It's going to be in this exercise. So you might, I can generate 15 multiple choice questions from this exercise alone or I can give it to you as a simulation on the exam day, so be prepared to deal with both. Adam purchased 100% of Ryan's company common stock on January 1st, 2020 by issuing 9,000 shares of $10 power value. So they did not pay cash. They purchased the most stocks. Adam's share had a $15 fair value. Well, I might ask you how much, what's the, the consideration transferred? It's 9,000 shares times 15. That's the first question I can ask you on that date, which is January 1st, 2020. Ryan reported net book value of 100,000. However, its equipment with a five year life remaining was undervalued by 5,000. What does that mean? It means their equipment, we need to add 5,000 to their equipment because it's undervalued in the company's accounting record. Also Ryan had developed a customer list with an assessed value of 30,000, although no value, no value had been recorded on Ryan's books. And the customer list has a life of 10 years. Excellent. So what do we need to generate from this, from this question? Well, first thing, again, I could ask you, what is the consideration paid by Adam? How much did Adam pay? Well, let's see, Adam paid 9,000 shares, let me get the calculator here and keep it up. We're going to need it for a little bit. Adam paid 9,000 shares and paid, the value was $15 per share, therefore consideration transferred was 135,000. Now for this 135,000, the net book value of Ryan was 100,000 minus the net book value of Ryan. We have access of 35,000. That's fine. What are we going to do with this access? Well, we are told that the equipment are undervalued, therefore we're going to allocate $5,000 to the equipment. Remember this equipment here was undervalued by 5,000, therefore I'm going to put down equipment and I'm going to allocate $5,000 to that equipment and I'm told this has a five-year life and because of that I would know that per year I'm going to have an amortization expense of $1,000. So I'm told the customer list, there is a customer list that's worth $30,000 also, so of the 35, minus 5 for the land, minus 30 for the customer list, voila, I allocated all my access paid, access amount paid divided by 10-year, it has a 10-year life, therefore I am going to amortize per year $3,000, so good. So that could be, again at this point I could ask you what is the access amortization per year, I could ask you what is the access amortization for equipment, I could ask you what is the access amortization for customer list, okay and stop there or I could have it as part of a simulation as I'm doing this right now. So notice there is no goodwill here, so we're keeping everything clean, okay. What else are we giving? We are giving Adam and Ryan income statement as of December 31st, 2020, which is the end of the first year and Adam and Ryan income statement as of December 31st, 2021. The first question we're going to try to answer using the equity method, could you compute Adam's investment account on December 31st, 2021, which is after two years. So what is the investment account on the consolidated, well not on the consolidated, on the consolidated will be zero, what is Adam investment account as of December 31st, 2021? Well what do we have to do? Well we have to start with our investment account. We started, let me get back to calculator here, I don't know why I took it out, we started with a value, let me put it right here, we started with a value of $135,000, this was the investment account. In 2020, Ryan earned $110,000, that's going to increase the net income, it's going to increase the investment account, which is we're going to debit the investment account if we're talking debits and credits. Also Ryan declared and paid $50,000, that's going to reduce our investment account by $50,000. Are we done yet? Absolutely not. What else do we have to worry about or what else do we have to do? We have to account for that, this access amortization, because that's additional expenses minus $4,000. Okay, now this is for year 2021, I'm sorry for year 2020, so if we want to compute this, if you want to compute the balance as of year December 31st, 2020, because I can ask you about this only, $135 plus, oops, $135 plus $110 minus $50 minus $4, the balance will be $191, if that's the case, I hope I did this right, I did not mistype any answers in there. Now they're asking us about year 2021, well in 2021 Ryan earned revenues minus expenses in additional $130,000 of net income, let me identify those. Ryan declared and paid $40,000 of dividend, declared that doesn't matter, that's going to reduce the investment. Then again we have this $4,000 to account for year after year of this access amortization because at least for the next five years because the equipment, we have to chip away the equipment for the next five years, let's see if I did this right, $130,000, $191,000 plus $130,000 minus $40,000 minus $5,000, and I'm getting an answer of $276,000, actually should be minus $4,000, not minus $5,000 minus $4,000, I don't know where I get the five from, therefore the answer will be $277,000. So this is what the investment account will be using the equity method, okay, we started with $135,000 plus net income minus dividend minus access amortization, this was the balance as of December 31st, 2020. Then in 2021 Ryan had income, then they paid dividend, then we have access amortization with the balance of $277,000, okay, so make sure you are comfortable with this, make sure you are comfortable with this, okay, let's take a look at another question, I'm gonna erase this because I wanna take a look at the second question, what is the consolidated net income for the year ending December 31st, 2021? So they're asking us about this year, what is the consolidated net income, what is the consolidated net income, well it's gonna be my net income, when I say mine, the parent net income plus the subsidiary's net income, right, so let's go through this, the parent net income $700,000 minus $460,000, that's gonna give us $240,000, that's $240,000, that's Adams which is the parent company, Ryan's net income which is $280 minus $150, which is $130,000, then remember, we have to account for the access amortization now because we purchase Ryan's company as a result, we have a customer list to amortize, we have equipment to depreciate more which is an expense, well that's gonna reduce this by $4,000, again where's the $4,000 coming from, it's this $4,000, now if I take $240,000 plus $130,000 minus $4,000, this should be $366,000, therefore what we say is the consolidated net income is $366,000, we could compute the consolidated income also obviously for December 31st 2020, net income for Adam, net income for Ryan minus $4,000 because we're gonna be chipping away those balances, let's take a look at this question, what is the consolidated equipment balance as of December 31st consolidated, equipment balance as of December 31st 2021, how would this answer be affected by the investment method applied, it will not be affected, so what is the equipment balance, well the equipment balance is what, well we have, let's see, equipment balance right here, we're dealing with this balance here, it's $500,000 for Adam plus $300,000 for Ryan's company, now we have $800,000, remember we over, we needed to over allocate an additional $5,000 to the equipment account because it was undervalued, that's $5,000, but remember they're asking us about the consolidated amount about the equipment balance, remember every year we are chipping away $1,000 of depreciation therefore, well we have two years because they're asking us about 2021, so I'm gonna deduct $2,000 which is $1,000 per year, it's $805 minus $3,000, the balance is $803,000, I could also ask you what is the customer list balance as of December 31st, 2021, well we're starting with $30,000 and we're gonna chip away, two years, we're just gonna chip away $6,000 of this, it will be $24,000, we're not being asked but just I want you to know this, I'm gonna remind you whether you're an accounting student or a CPA candidate, if you want an additional resource to help you understand your CPA material, please take a look at my website farhatlectures.com, I don't replace your CPA review course, consider making this investment in your career and your future, the CPA exam is a long-term investment, don't shortchange yourself, it's worth it, study hard, invest in yourself, that's the best investment you can make, good luck and of course stay safe