[jasonrobbins]

Hey All,

I’m having some trouble understanding the journal entries for Becker’s CAR IN BIG mnemonic in F3 (consolidations). Personally, I find it hard to understand journal entries without seeing the balance sheet. Becker doesn’t show you how the balance sheet changes based on the parent/sub consolidation and so I’m not sure who is getting debited and if a credit is for the income statement or for the balance sheet since some of the account names are confusing & could be for B/S or I/S.

Could someone please explain how these debits and credits change the balance sheet presentation for the sub and parent? Particularity, I’m most confused about how CAR IN BIG balances on the parent’s and sub’s B/S. I would send 50 karma points your way if you could do a quick balance sheet to explain!!

Here is the CAR IN BIG for your reference

Common Stock is debited from Sub

APIC is debited from Sub

Retained Earnings is debited from Sub

—-These are zeroed out but what is the effect on the sub’s balance sheet? Obviously equity goes down but what about the assets?

Investment in subsidiary is credited from the parent’s B/S

Noncontrolling interest is credited to parent, right?

Balance sheet adjustment to FV is debited— no idea where this goes on the balance sheet for assets

Identifiable Intangible assets to FV is debited- same thing, no idea which account this goes to

Goodwill is debited- this I know goes to assets

AUD- 97 1x
REG- 81 1x
BEC- 79 1x
FAR- 88 1x

DONE!

10/1/12 to 2/28/14

[Anonymous]

For some reason, I understood this a lot better this way: My explanations are probably not 100% correct, but it's how I think of them to make it easier to understand.

1) PARENT makes a regular investment JE (DR Investment Asset, CR Cash (or C/S or APIC if they issued stock instead of paying cash). The parent now has an investment in the sub recorded as an asset on the BS.

2) Next thing to keep in mind is you're now going to MERGE the sub INTO the parent. There are no separate F/S anymore! Think of the sub as a segment now – of course they could print our their own B/S, but it's not just “theirs”. It's a part of the whole. I sometimes catch myself wondering parent's F/S versus sub's F/S. It's easier if you force yourself to remember they're the SAME THING.

3) The CAR entries will 100% eliminate the equity (C/S, APIC, RE) of the sub. They don't have their own equity anymore, they are controlled by the parent. The parent owns the equity, so the sub doesn't have it anymore! Reverse it from the sub (all debits to reverse). I just remember that CAR items are debits.

4) IN: Remember how in #1 you increased the asset/investment on parent side? Now you're reversing it, because you're consolidating, and it doesn't need to be an “investment” on the B/S, because you OWN the thing, and all their stuff is yours! I think of it this way – it's not just a little “investment” anymore, you own them, so all their stuff will end up on your financials. A credit will reverse the investment you debited in step 1. NCI is a bit harder – it's the % of ownership that ISN'T yours (if applicable). I had to memorize the NCI formulas for GAAP and IFRS, and I remember it's an EQUITY item on the parent B/S (equity item = credit). IN items are credits (it's like a credit sandwich between the CAR and BIG debits).

5) BIG: You probably paid more than the net assets of the company are worth. All you're doing for the BIG entries is identifying why the heck you paid more for this company than they're worth on paper. Identify the differences! B/S Adjustments are basically when an asset is worth more than it's fair value – record the difference. For example, say they have a piece of equipment shown at 10K on the sub books, but it's fair value is 100K – record the 90K difference. Same with intangibles – maybe they have a patent only capitalized for registration costs at 5K, but it's worth 500K – record the 495K difference. Anything that's left is not specifically identifiable, so you assign it to goodwill. Also, I always remember that the G of BIG can be goodwill, OR gain. Goodwill when you paid MORE than the company's net assets were worth, and Gain when you paid LESS than the company's net assets were worth. Goodwill is a debit, Gain is a credit. I think of the G as as the plug! On a side note, if you buy the company for EXACTLY the fair value of ALL the sub's net assets, I suppose there conceivably would be no BIG entries – although that would probably never happen on the exam.

Hope that helps. I didn't like this section much, you're not alone.

[Anonymous]

For some reason, I understood this a lot better this way: My explanations are probably not 100% correct, but it's how I think of them to make it easier to understand.

1) PARENT makes a regular investment JE (DR Investment Asset, CR Cash (or C/S or APIC if they issued stock instead of paying cash). The parent now has an investment in the sub recorded as an asset on the BS.

2) Next thing to keep in mind is you're now going to MERGE the sub INTO the parent. There are no separate F/S anymore! Think of the sub as a segment now – of course they could print our their own B/S, but it's not just “theirs”. It's a part of the whole. I sometimes catch myself wondering parent's F/S versus sub's F/S. It's easier if you force yourself to remember they're the SAME THING.

3) The CAR entries will 100% eliminate the equity (C/S, APIC, RE) of the sub. They don't have their own equity anymore, they are controlled by the parent. The parent owns the equity, so the sub doesn't have it anymore! Reverse it from the sub (all debits to reverse). I just remember that CAR items are debits.

4) IN: Remember how in #1 you increased the asset/investment on parent side? Now you're reversing it, because you're consolidating, and it doesn't need to be an “investment” on the B/S, because you OWN the thing, and all their stuff is yours! I think of it this way – it's not just a little “investment” anymore, you own them, so all their stuff will end up on your financials. A credit will reverse the investment you debited in step 1. NCI is a bit harder – it's the % of ownership that ISN'T yours (if applicable). I had to memorize the NCI formulas for GAAP and IFRS, and I remember it's an EQUITY item on the parent B/S (equity item = credit). IN items are credits (it's like a credit sandwich between the CAR and BIG debits).

5) BIG: You probably paid more than the net assets of the company are worth. All you're doing for the BIG entries is identifying why the heck you paid more for this company than they're worth on paper. Identify the differences! B/S Adjustments are basically when an asset is worth more than it's fair value – record the difference. For example, say they have a piece of equipment shown at 10K on the sub books, but it's fair value is 100K – record the 90K difference. Same with intangibles – maybe they have a patent only capitalized for registration costs at 5K, but it's worth 500K – record the 495K difference. Anything that's left is not specifically identifiable, so you assign it to goodwill. Also, I always remember that the G of BIG can be goodwill, OR gain. Goodwill when you paid MORE than the company's net assets were worth, and Gain when you paid LESS than the company's net assets were worth. Goodwill is a debit, Gain is a credit. I think of the G as as the plug! On a side note, if you buy the company for EXACTLY the fair value of ALL the sub's net assets, I suppose there conceivably would be no BIG entries – although that would probably never happen on the exam.

Hope that helps. I didn't like this section much, you're not alone.

[Study Monk]

I am tired so I just skimmed over your question. That being said I can answer one of your questions

Could someone please explain how these debits and credits change the balance sheet presentation for the sub and parent?

The important thing to know is that no changes are made to subsidiary's or parents books. When you are consolidating the financials you are not actually doing any entries on anyone's actual books. There will be a work sheet involved and the information on the worksheet will get entered on the financial statements. The financial statements are not interconnected with the accounting system/books. Someone will just take the information from the excel file work sheet and move it to the word document financials(using these programs from simplicity).

The point I am trying to make is that this journal entry is really only a journal entry because that is the language us accountants use. You don't need to worry about whats happening on the subsidiaries side of things because nothing is happening. See if the CARINBIG journal entry was actually on the books then a subsidiary would not be able to declare dividends because it would not have equity. You could go further and the subsidiary wouldn't be able to close revenue, expenses, gains, and losses to the retained earnings at year end.

The end product after CARINBIG is you have only the consolidated financials. If the Subsidiary has to show financials for a loan for example they will only have evidence of the parent in the notes and maybe some segregated accounts like account receivable-parent/etc. No crazy equity changes.

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

I am tired so I just skimmed over your question. That being said I can answer one of your questions

Could someone please explain how these debits and credits change the balance sheet presentation for the sub and parent?

The important thing to know is that no changes are made to subsidiary's or parents books. When you are consolidating the financials you are not actually doing any entries on anyone's actual books. There will be a work sheet involved and the information on the worksheet will get entered on the financial statements. The financial statements are not interconnected with the accounting system/books. Someone will just take the information from the excel file work sheet and move it to the word document financials(using these programs from simplicity).

The point I am trying to make is that this journal entry is really only a journal entry because that is the language us accountants use. You don't need to worry about whats happening on the subsidiaries side of things because nothing is happening. See if the CARINBIG journal entry was actually on the books then a subsidiary would not be able to declare dividends because it would not have equity. You could go further and the subsidiary wouldn't be able to close revenue, expenses, gains, and losses to the retained earnings at year end.

The end product after CARINBIG is you have only the consolidated financials. If the Subsidiary has to show financials for a loan for example they will only have evidence of the parent in the notes and maybe some segregated accounts like account receivable-parent/etc. No crazy equity changes.

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Author]

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