[NYCaccountant]

I get the fact that we have to add net income together for the sub and parent after aquisition. what I am not getting is why the change in net assets after the aquisition (net income or loss) for the sub does not flow into the retained earnings of the entire entity? Wley says that the formula should be Retained earnings of parent + Net Income of parent=Retained earnings of consolidated entity. I’m thinking it should be Retained earnings of parent + Net Income of parent + Net income of sub after the date of aquisition= retained earnings of consolidate entity. At year end, when you add the assets and liabilities of both sub and parent, you are adding the change of values in the subs assets and liabilities as well. I’m just thinking this should be reflected in retained earnings. If anyone can explain this better for me, it will be greatly appreciated.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[vlc1982]

“what I am not getting is why the change in net assets after the aquisition (net income or loss) for the sub does not flow into the retained earnings of the entire entity?”

After the acquisition, there is no sub. Therefore, no net income exists for the sub. At acquisition, any sub net income that exists to that date would be included in Retained Earnings already (since NI is closed to Retained Earnings). Also at acquisition, Retained Earnings for the sub is rolled into the consolidated entity (the parent). So, in effect, sub's NI is included in RE for the consolidated entity. It's just the NI that existed before the acquisition because any NI after the acquisition is considered income for the consolidated entity, not the sub.

I hope I understood your question correctly, and I hope everything I said is factual. Please feel free to correct me if I misstated something. In any case, I hope this helps.

FAR 66, 80
AUD 86
REG 76
BEC 74, 77 - DONE!!

Yaeger, Ninja MCQ for BEC
TX Candidate

[NYCaccountant]

“because any NI after the acquisition is considered income for the consolidated entity, not the sub” Ok, but lets say the net assets of the the sub changed from 200k to 300k AFTER the aquisition. When I combine the net assets of the sub and parent, I'll be missing an extra equity of 100k. For Example:

Initial Investment:

Investment in sub Dr.-200,000

Cash Cr. – 200,000 To record initial investment in sub for 100% of Net Assets, assuming book

values equal fair values.

Consolidating entry:

Sub Equity Dr-200,000 To Eliminate Subs Equity (200,000) just to keep it simple at the end of year 1.

Investment in Sub Cr. 200,000

During year 2, sub has net income of 100,000, which means their stockholders equity increased by 100,000. The equity section of the subs balance sheet increased 100,000 and is now valued at 300,000(200,000+100,000). We'll post the

eliminating entry to again:

Consolidating entry:

Sub Equity Dr-200,000 To Eliminate Subs Equity (200,000) just to keep it simple at the end of year 2.

Investment in Sub Cr. 200,000

We have not eliminated all of the subs equity this time and the balance is now 100k. Should this 100k flow to the net income of the entire entity and consequently be included in retained earnings of the entire entity? What am I missing?

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[vlc1982]

If I'm understanding your example correctly, consolidation took place in year 1, when you made the first consolidating entry. Therefore, any income received after the consolidating entry would be income for the consolidated entity.

Consolidating entries are only made one time – at the date of acquisition. Let's say, in your example, the first consolidating entry you listed did not take place (because you decided to consolidate in year 2), then only the second consolidating entry you listed would have been made, except it would be for 300k instead of 200k because NI increased another 100k in that last year.

Once you make the consolidating entries (which aren't actual journal entries anyway, just worksheet entries) nothing else should be allocated to the sub, because it doesn't exist anymore.

In summary, using your example, if date of acquisition was year 1 then the first entry you listed would be correct, and there would be no entry for year 2. If date of acquisition was year 2, then only the second entry you listed would be made, except it would be for 300k.

FAR 66, 80
AUD 86
REG 76
BEC 74, 77 - DONE!!

Yaeger, Ninja MCQ for BEC
TX Candidate

[NYCaccountant]

Forget it, I figured it out. During the year, I would record the subs net income using the equity method, and increase my initial investment by the amount of the subs net income. By year end, the investment equals the new equity of the sub and I reverse these entries out against each other. The parents net income already includes the subs net income, so I don't need to add it twice. Hopefully I got it right after some serious thought, but let me know if I am still wrong.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Author]

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