Consolidations

Subsequent to the
Date of Acquisition

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

rights reserved.

A business combination occurs when two or more separate businesses

join into a single accounting entity. The main goal of business
combination to make profit but there are other reasons companies.
Horizontal integration _two companies or more in the same
Business sector Phone _banking_ exchange money. To support and
Financial positions, and competitions.
Vertical integration_ two companies work in different sector like factory
for juice and factory make cans for Juices- to help both business success,
and provide each other with products. IBM Louts. And Conglomeration
two different companies two different sector for example bank and
industrial company _ diversity their risk.
Merger A Purchase B _ assets and liabilities transfer to A. B gone
Consolidation _ establish new Company combine of A and B with C
assets liabilities and financial statement for both companies transfer to C
Acquisitions_ Company A purchases more that 50 Percent B _influence
& controls the whole the company. Both companies still in business as
Separate legal entity_ financial records. We have Holding company or

Acquisitions_ Company A purchases more that 50

Percent B influence & controls the whole the company.
Both companies still in business as Separate legal
entity_ financial records. We have Holding
company or parent company (A) and subsidiary (B)
Consolidation of Financial Statements
A single set of financial statements is produced,
reporting the consolidated assets, liabilities, equities,
revenues, and expenses for the parent company and all
controlled subsidiary companies.

Business combination

One or more companies

become subsidiaries of a
common parent corporation.

Parent
Parent
Financial
Financial
Statements
Statements
_____
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Subsidiary
Subsidiary
Financial
Financial
Statements
Statements

Consolidated
Consolidated
Financial
Financial
Statements
Statements
_____
_____ _____
_____
_____
_____ _____
_____
_____
_____
_____ _____
_____
_____ _____
_____

_____
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Parent Company
Owns more than 50%
of another company
Affiliate

Parent Company
90%
ownership

Subsidiary A

80%
ownership

Subsidiary B

Consolidated financial statements provide

information that is not included in the separate
statements of the parent corporation.

A subsidiary can be excluded from consolidation in only two situations:

Control is likely to be temporary. Because you buying this

Stock price appreciation and you not looking to hold
theses stock for long period of time ( less than Year). Mean
No consolidated financial statement and we have to reclassify
our investment in this company As available for Sale Investment .

Control does not rest with the majority owner. Mean

We have less than 50% or the company become part
Of government assets as a result of liquidation .

Consolidated statements are prepared for and

as of the end of the parents fiscal period.
If the difference does not exceed three months

it is acceptable to use the subsidiarys

statements with disclosure.

Assets

Current assets
Cash
Other current assets
Total current assets
Plant assets
Less: Accum. depr.
Total plant assets
Investment in Skelly
Total assets

Penn
$ 20,000
45,000
$ 65,000
$ 75,000
15,000
$ 60,000
40,000
$165,000

Skelly

Consolidated

$10,000
15,000
$25,000
$45,000
5,000
$40,000
0
$65,000

$ 30,000
60,000
$ 90,000
$120,000
20,000
$100,000
0
$190,000

Liabilities

Penn

Current liabilities
Accounts payable
$ 20,000
Other current liabilities
25,000
Total current liabilities $ 45,000
Stockholders equity
Capital stock
$100,000
Retained earnings
20,000
Total stockholders equity $120,000
Total liabilities and
stockholders equity
$165,000

Skelly

Consolidated

$15,000
10,000
$25,000

$ 35,000
35,000
$ 70,000

$30,000
10,000
$40,000

$100,000
20,000
$120,000

$65,000

$190,000

Penn purchased all the stock of Skelly for $50,000.

Skelly stockholders equity is $40,000.

What is the consolidating (eliminating) entry?

Capital Stock
Retained Earnings
Goodwill
Investment in Skelly

30,000
10,000
10,000
50,000

To eliminate investment and equity

accounts and to assign the excess of investment
cost over book value acquired to goodwill

Assets

Current assets
Cash
Other current assets
Total current assets
Plant assets
Less: Accum. depr.
Total plant assets
Investment in Skelly
Goodwill
Total assets

Penn
$ 10,000
45,000
$ 55,000
$ 75,000
15,000
$ 60,000
50,000
$165,000

Skelly

Consolidated

$10,000
15,000
$25,000
$45,000
5,000
$40,000

$ 20,000
60,000
$ 80,000
$120,000
20,000
$100,000

$65,000

10,000
$190,000

Liabilities

Penn

Current liabilities
Accounts payable
$ 20,000
Other current liabilities
25,000
Total current liabilities $ 45,000
Stockholders equity
Capital stock
$100,000
Retained earnings
20,000
Total stockholders equity $120,000
Total liabilities and
stockholders equity
$165,000

Skelly

Consolidated

$15,000
10,000
$25,000

$ 35,000
35,000
$ 70,000

$30,000
10,000
$40,000

$100,000
20,000
$120,000

$65,000

$190,000

Minority interest in subsidiaries is generally

shown in a single amount in the liability section
of the consolidated balance sheet.
The alternatives are to include the minority interest
in consolidated stockholders equity or to place it
in a separate minority interest section.

The interest of minority

stockholders represents
equity investments in the
consolidated net assets by
stockholders of the company
affiliated with the parent.

Liabilities

Penn

Current liabilities
Accounts payable
$ 20,000
Other current liabilities
25,000
Total current liabilities $ 45,000
Minority interest
Stockholders equity
Capital stock
$100,000
Retained earnings
20,000
Total stockholders equity $120,000
Total liabilities and
stockholders equity
$165,000

Skelly

Consolidated

$15,000
10,000
$25,000

$ 35,000
35,000
$ 70,000
$ 4,000

$30,000
10,000
$40,000

$100,000
20,000
$120,000

$65,000

$194,000

1. Penn

acquired a 90% interest in Skelly on

January 1 for $50,000 when Skellys
stockholders equity was $40,000.
2. The accounts payable of Skelly includes
$5,000 owed to Penn.
3. During the year, Skelly had income of
$20,000 and declared $10,000 dividends.

What is the balance in the investment in

Skellys account at December 31?

Original investment January 1

+ 90% of Skellys net income
90% of Skellys dividends
Investment account balance

$50,000
18,000
9,000
$59,000

Capital Stock
30,000
Retained Earnings
20,000
Goodwill
14,000
Investment in Skelly
59,000
Minority Interest
5,000
To eliminate reciprocal investment and
equity balances, record goodwill, and
enter the minority interest

Dividends Payable
9,000
Dividends Receivable
9,000
To eliminate reciprocal dividends
receivable and payable
Accounts Payable
5,000
Accounts Receivable
5,000
To eliminate intercompany receivable
and accounts payable

The separate books of the affiliated

companies do not record cost/book
value differentials in acquisitions that
create parent-subsidiary relationships.
Working paper procedures are used
to adjust subsidiary book values to
reflect the cost/book differentials.

The adjusted amounts appear in the

consolidated balance sheet.
The amount of the adjustment to
individual assets and liabilities is
determined using an investment
cost-allocation schedule.

On Dec. 3, 2003, Pilot purchases 90% of Sand

Corporations outstanding common stock for
$5,000,000 cash plus 100,000 shares of $10
stock with a market value of $5,000,000.
Additional costs are $300,000.
$200,000 is recorded as cost of the investment.

Sand Corporation (000)

Book Value Fair Value

Cash
Net receivables
Inventories
Other current assets
Land
Building, net
Equipment, net
Total assets

$ 200
300
500
400
600
4,000
2,000
$8,000

Assets
$ 200
300
600
400
800
5,000
1,700
$9,000

Sand Corporation (000)

Liabilities
Accounts payable
Notes payable
Common stock
Paid-in capital
Retained earnings
Total liabilities and
stockholders equity

Book Value Fair Value

$ 700
1,400
4,000
1,000
900
$8,000

$ 700
1,300

Investment in Sand
10,000
Common Stock
Additional Paid-in Capital
4,000
Cash
To record 90% acquisition of Sand Corporation

1,000
5,000

Investment in Sand
200
Additional Paid-in Capital
100
Cash
To record additional costs of combining with
Sand

300

Investment in Sand
Book value of interest acquired
$5,900,000 90% =
Excess of cost over BV

$10,200,000
(5,310,000)
$ 4,890,000

Fair
Value
600
800
5,000
1,700
1,300

Inventories
Land
Building net
Equipment, net
Notes payable
Total allocated
Remainder to goodwill
Total

Book 90% =Excess

Value
Allocated
500
90
600
180
4,000
900
2,000
(270)
1,400
90
990
3,900
4,890

Adjustments and
Eliminations
Dr.
Cr.

Account Title
Cash
Receivables, net
Inventories
Other current assets
Land
Building, net
Equipment, net
Investment in Sand
Goodwill
Unamortized excess

Pilot
1,300
700
900
600
1,200
8,000
7,000
10,200

Sand
200
300
500 b
400
600 b
4,000 b
2,000

Total assets

29,900

8,000

90
180
900

b 3,900
a 4,890

Consolidated
Balance
Sheet
1,500
1,000
1,490
1,000
1,980
12,900
b
270
8,730
a 10,200
3,900
b 4,890
32,500

Account Title
Pilot Sand
Accounts payable
2,000
700
Notes payable
3,700 1,400
Common stock
11,000 4,000
Other paid-in capital 8,900 1,000
Retained earnings
4,300
900
Minority interest
Total liabilities and
stockholders equity

Adjustments and
Eliminations
Dr.
Cr.
b
90
a 4,000
a 1,000
a
900
a

29,900

8,000

590

Consolidated
Balance
Sheet
2,700
5,010
11,000
8,900
4,300
590

32,500

The difference between a consolidated and

an unconsolidated income statement of the
parent company lies in the detail presented
rather than the net income amount.

Amortize the excess of the

investment cost over the book
value in periods subsequent
to the acquisition.

Income for 2004:

Sands net income
Pilots income
(excluding income from Sand)

$ 800,000
$2,523,500

Dividends Paid:
Sand
Pilot

$ 300,000
$1,500,000

Amortization of excess:
Undervalued inventories sold in 2004
Undervalued land still held
Undervalued building (45 years useful life)
Overvalued equipment (5 years useful life)
Overvalued notes payable retired in 2004
Goodwill (no amortization)

Adjustments and
Eliminations
Dr.
Cr.

Account Title
Cash
Receivables, net
Inventories
Other current assets
Land
Building, net
Equipment, net
Investment in Sand
Goodwill
Unamortized excess

Pilot Sand
253.5 100
540
200
1,300
600
800
500
1,200
600 b
180
9,500 3,800 b
880
8,000 1,800
10,504
b 3,900
a 4,744

Total assets

32,097.5 7,600

Consolidated
Balance
Sheet
353.5
740
1,900
1,300
1,980
12,900
b
216
8,730
a 10,504
3,900
b 4,744
33,937.5

Account Title
Accounts payable
Notes payable
Common stock
Other paid-in capital
Retained earnings

Pilot
2,300
4,000
11,000
8,900
5,897.5

Sand
1,200

32,097.5 7,600

Consolidated
Balance
Sheet
3,500
4,000
11,000
8,900
5,897.5

4,000 a 4,000
1,000 a 1,000
1,400 a 1,400

Minority interest
Total liabilities and
stockholders equity

Adjustments and
Eliminations
Dr.
Cr.

640

640

33,937.5

Good Luck