PROFESSOR: OK, now let's talk about the consolidation in the second year. Again, the situation is that 100% acquisition at book value. So there is no differential, no non-controlling interest. So in the second year, we will continue to use the same example as we did earlier previously.

So in the second year, subsidiary reports income $75,000 and also paid a dividend $40,000. As we did in the first year, the subsidiary, the Peerless will record the income, the same income $75,000 through their equity master entry and $40,000 dividend will decrease the investment $40,000. So equity master entry is just a $75,000 and $40,000. $75,000 investment in subsidiary income from $75,000. And the dividend is a cash 40 and investment decrease $40,000.

As a result, the investment, and I think it's very useful and important for you to practice what will be the ending balance, what will be the ending balance, especially this investment amount? The beginning balance, from the previous year, the beginning balance from the previous year was $320,000. So that's a $320,000 from the previous year.

For this year, in the second year, $75,000 income increased the investment, and $40,000 dividend decrease the investment in subsidiary. As a reserve, the ending balance in the second year will be $395,000 minus $40,000 gives you the 355,000 OK, so that's the $355,000. And income from subsidiary in the second year, this again, is just the income, which is $75,000. So those two numbers should be eliminated through the consolidation process.

So again, now, let's quickly look at the consolidation entries. To facilitate the consolidation process it's very useful to prepare this book value calculation. In the right-hand side, the summarize the equity of the subsidiary, the starting from beginning balance and income and dividend. And you can see the ending balance is $200,000 and retained earnings $155,000.

And our investment is, actually, through the equity method, is just matches the beginning balance $320,000 of the investment. Their net income increase our investment, and their dividend decrease the investment, ending balance, $355,000. So essentially we need to eliminate $355,000 of our investment with their equity.

So what's the basic construct entry? So the commerce that we debit, we limit their beginning balance common stock $200,000. And their beginning balance retained earnings, $120,000 should be eliminated and income from sum should be eliminated at $75,000. So that's the debit part.

In the credit, dividend declared by the subsidiary needs to be eliminated by crediting $40,000, and the net amount is the same at $355,000. So we eliminate, finally, our investment in subsidiary. And also, we do the same elimination of the pre-acquisition accumulated depreciation.

Again, we repeat this process because these consolidation entries are made in the in the worksheet, not affecting the individual financial statement of each company. So therefore, we got to repeat this process. The same accumulated depreciation should be eliminated every year. So once we do that, now we are ready to prepare for consolidated financial statement.

So we combine the processes. Again, we combine the parent and subsidiary and do some adjustment. So for this part, starting from the income statement, so we add the parent and subsidiary number is, especially income from subsidiary $75,000, which is the based on activation number should be eliminated to avoid the double counting and making sure the balance is zero.

And as a result, the consolidated income number is $235,000. And that is, again, that's the same as the parent number. The reason is, again, because the parent uses active method, they already include the $75,000 income in their income statement. And we eliminate the $75,000, but we add the same $75,000 through the consolidation process.

So therefore, the post numbers should be identical. In the statement and now, we got to do statement retained earnings. But personally, we got to eliminate the beginning balance of the retained earnings and also net income is just copy and paste from the consolidated income statement, so that's just the same.

And we got to subtract dividend declared, especially we got to eliminate the dividend from the subsidiary. And again, if we do that, the ending balance of retained earnings of consolidated retained earnings should be the same as the parent's retained earnings. Again, the reason is simply because the parent uses equity method.

Now let's go to the balance sheet. So especially we got to focus on the one account we got to eliminate investment in subsidiary, $355,000 which is should be eliminated and making the balance posted number is zero, and the building and equipment accumulated depreciation, we do the same elimination of the pre-acquisition accumulated depreciation $300,000, resulting in the ending balance of a consolidated asset. Total asset is $1,605,000.

For the liability and the equity, for a liability just we just add together a common stock subsidiary. $200,000 should be eliminated by debiting. And retained earnings, it's just a copy and paste from the statement retained earnings ending balance.

As a result, we can verify this equality. Total asset is the same as total liability and equity. And as a result, we can verify the accuracy of the consolidation. And also, our focus is basically equity method. OK, so the test and the exam will be based on equity method, but it's good to know the parent can use the sum. The parent company or parent company may use the cost method, instead of equity method.

So cost method is similar to the fair value method. So according to cost method, parents record income based on the dividend. Dividend declared by the subsidiary. So they record dividend income. And their subsidiary income does not affect in the case cost method.

Unlike the fair value method, cost method does not record income for the fair value change. So the journal entry is just this kind of journal entry, the purchase and dividend income. And based on that, we do the this consolidation entry. So basically, we beginning balance of our investment with canceled with their equity, and dividend income and dividend declared should be eliminated.

And we do the eliminate the pre-acquisition of community position with the same as the previous example. So you can just read the textbook for more detail. But I'd like to point out the fact that the parent's income is then not the $50,000, just the $30,000 base, just the dividend income. And basically what you need to do, we got to eliminate this dividend income and add their substrate income, revenue expense, 100%.

As a result, our cost income $190,000, whereas, our parent income, $170,000. So you can see that in the case of cost method, these numbers are not the same. That's kind of obvious because unlike the-- different from the equity method, parents just record $30,000 income instead of the total $50,000. So that makes the difference of $20,000.

So that's the basic idea. So that's the basic idea. So because the reason the retained earnings, as well, is different. Consolidated retained earnings and the parent retained are different in the case of the cost method. But make sure this consolidated fund is the same. It's the same.

This last column is the same regardless of which method company uses either active method, cost method, it's just the same. Consolidated number are the same, but the equality between the parents and cost number are different. Equity method the same, whereas, cost method is different.

OK, now, let's take a look at the second-year example, another example, through the Excel worksheet. So now it is a second-year example. So this is a kind of continuation from the previous example.

So again, so activation happened two years ago, January 1, 20X8. The action price is $300,000, which was equal to the book value of the subsidiaries at the time. Now, the timeline, to make sure the timeline is the second year, which is December 31, 20X9. So this is the second year, two year after the acquisition.

So again, we got to make sure that, again, the parent uses active method to account for the investment. So their investment amount will reflect the effect of the consolidation. So there you can make sure that you see these trial balances. The parent report, the income from subsidiary $80,000, and their investment amount, their investment is $405,000 So that's how those are based on active method entries.

And if you look at the subsidiary's numbers, so they pay the dividend during the year, $30,000 and also income, their income is sales minus this cost of goods sold depreciation and selling and is a expense. If you do the calculation, $300,000, and if you subtract all the expenses, that should be the same as that is the same as $80,000.

That is kind of obvious because, again, that's because the parent uses active method and 100% ownership. So therefore, the income from subsidiary should be the same as the net income reported by the subsidiary, which is sales minus expenses, $80,000. And also accumulated depreciation is $30,000 in the second year.

So after the acquisition, $30,000 over-- so $30,000 and annual depreciation expense, $10,000 based on the idea what we can find out the pre-acquisition accumulated depreciation. Over two years, $30,000, after two years, $30,000 and annual depreciation expense, $10,000.

After two years after acquisition, the company should have reported total $20,000 of accumulated depreciation after the acquisition. So therefore, the difference of $10,000 should have been the pre-acquisition accumulated depreciation that needs to be eliminated through the consolidation process.

So now let's take a look at the journal entry, which is the active method. So active method investment amount, so the income from subsidiary is-- the subsidiary reporting income $80,000 that increase our investment and also that increases our income from subsidiary.

And dividend paid and declared by the subsidiary, that was the $30,000 that decreases our investment, that decreases our investment in subsidiary, $30,000 cash, and investment decreased by $30,000.

So if you see that the investment amount of $355,000, that is actually from carryover from the previous year. If you do reflect this information, the ending balance is that $405,000 of investment. Income from subsidiary is $80,000. Again, those are based on accumlated And those two number should be eliminated in the consolidated worksheet. Consolidation process in the worksheet will eliminate those amount and cancel with the subsidiary's equity.

So again, it's really useful to prepare this table to compare a subsidiary's equity with our investment. So this is the beginning balance of the equity, $200,000 $155,000. Again, that is the-- you can see that the number is that this is the beginning balance. Beginning balance equity $200,000, $155,000.

During the year, subsidiary report $80,000 income and declare dividend $30,000. As a result, the ending balance common stock at $200,000 and ending balance of retained earnings $205,000. That should be the same as our investment of $405,000.

So once we prepare this table, then we are ready to do some consolidated entry. Essentially, the thing is that we eliminate the equity of subsidiary, and we eliminate our investment. Common stock, the beginning balance is $200,000. And retained on its beginning balance $155,000, and income from subsidiary $80,000, and dividend declared $30,000 credit. We eliminate, we cancel with our investment ending balance, $405,000.

And in addition to that, because the consolidation is a journal entry is done on the worksheet, we got to the same elimination of the preaction accumulated depreciation. Again, that was the $10,000. So debit accumulated depreciation $10,000 and credit building and equipment $10,000.

So and once you do that, we are ready to complete this consolidated financial statement. So again, income from this subsidiary, in the second year, needs to be eliminated to avoid double counting because we add there, a subsidiary add sales and expenses entirely. So to avoid double count, we eliminate that one. And the consolidated number, that's a zero.

And after doing that, we can verify the quality of consolidated income $380,000. It's the same as the parent's income, $380,000. Again, the reason is because parent uses equity method.

So let's move on to our retained earnings statement. So firstly, we got to eliminate the beginning balance of retained earnings of subsidiary by debiting $155,000. And this net income is just same as-- this net income just copy and paste. The dividend declared, substituted dividend, needs to be eliminated by crediting in the worksheet $30,000.

As a result, you can verify this equality again. Consolidated retained $680,000 should be the same as $680,000 of the parent's retained earnings. In the balance sheet, we got to eliminate the investment, the ending balance investment, $405,000. In the worksheet we credit $405,000. And achieves the zero balance in the consolidated number.

And the building equipment and accumulated depreciation, again, we eliminate pre-accretion accumulated depreciation as if the asset is a new asset after the acquisition, $10,000 and $10,000. So that mixing making the total, the consolidated asset $1,525.000

Now, let's move on to the liability and equity. The liability is just the same. We just add together. Then the common stock, their common stock should be eliminated by debiting the worksheet $200,000. And then you can verify and earnings, again, just to copy and paste from this ending balance of retained earnings.

And as a result, you can verify this equality of the total asset, total liabilities, and equity. And so that completes. You can verify this accuracy by comparing these two numbers.