Consolidated Financial Statements

Consolidated Financial Statements
A. Types of Business Combinations--a business combination occurs when the

operations of two or more companies are brought under common control by
exchanging cash, stock, debt, or some combination of the three as
consideration
1. Asset Acquisition--an asset acquisition is a business combination where
the acquiring company acquires all of the net assets of the acquired
company and the acquired company ceases to exist as a separate legal
entity
a. Merger--a merger is an asset acquisition where an existing company
acquires all the net assets of one or more other companies
b. Consolidation--a consolidation is an asset acquisition where a
newly formed company acquires all of the net assets of two or more
other companies
2. Stock Acquisition--a stock acquisition is a business combination where
the acquiring company acquires a controlling interest in the voting
stock of the acquired company and the acquired company continues to
exist as a separate legal entity
B. Date of Acquisition
1. Accounting
a. Asset Acquisition--the acquiring company records the identifiable
net assets of the acquired company at fair market value with any
difference between the amount paid for the acquired company and the
fair market value of the identifiable nets assets of the acquired
company recognized as goodwill
b. Stock Acquisition
1) Parent Company--the parent company records an investment in
common stock equal to the amount paid for the subsidiary
company
2) Worksheet--a worksheet is prepared to consolidate the balance
sheets of the parent company and the subsidiary company
a) Investment Elimination--an entry is prepared to eliminate
the investment in common stock against the percentage of
the owners' equity of the subsidiary company that is owned
by the parent company
I) Net Asset Adjustment--the identifiable net assets of
the subsidiary are adjusted for any difference between
their fair market value and their book value multiplied
by the percentage of the subsidiary company that is
owned by the parent company with any remaining
difference between the amount paid for the subsidiary
company and the book value of the identifiable net
assets of the subsidiary company multiplied by the
percentage of the subsidiary company that is owned by
1
the parent company recognized as goodwill
b) Minority Interest--an entry is prepared to reclassify the
percentage of the owners' equity of the subsidiary that is
not owned by the parent company as a separate element of
owners' equity called noncontrolling interest or minority
interest
I) Net Asset Adjustment--the identifiable net assets of
the subsidiary are adjusted for any difference between
their fair market value and their book value multiplied
by the percentage of the subsidiary company that is not
owned by the parent company with any remaining
difference between the fair market value of the
minority interest (the amount paid for the subsidiary
company by the parent company divided by the percentage
of the subsidiary company that is owned by the parent
company multiplied by the percentage of the subsidiary
company that is not owned by the parent company) and
the book value of the identifiable net assets of the
subsidiary company multiplied by the percentage of the
subsidiary company that is not owned by the parent
company recognized as goodwill
A) Purchase Premium--if the parent company pays a
premium to the stockholders of the subsidiary to
entice them to sell, the fair market value of the
minority interest should be determined by looking
to the fair market value of the stock or some other
measure
2. Illustrations--all of the illustrations will use the following balance
sheets for Company P and Company S as a common starting point
Company Company
P S _
Cash 70,000 25,000
Receivables 85,000 75,000
Inventory 45,000 30,000
Plant and Equipment 315,000 80,000
Land 60,000 40,000
575,000 250,000
Liabilities 75,000 50,000

Common Stock 350,000 100,000
Paid-in Capital 55,000 35,000
Retained Earnings _95,000 _65,000
575,000 250,000
2
a. Company P acquired 100% of Company S in a merger by issuing 4,000
shares of common stock with a par value of $35 and a market value
of $50; the market values of the identifiable net assets of Company
S are equal to their book values
Net Asset Adjustment = 4,000 x 50 – (250,000 – 50,000) = 0
Company P's Books:

Cash 25,000
Receivables 75,000
Inventory 30,000
Plant and Equipment 80,000
Land 40,000
Liabilities 50,000
Common Stock 140,000
(4,000 x 35)
Paid-in Capital 60,000
(4,000 x 15)
b. Company P acquired 100% of Company S in a stock acquisition by

issuing 4,000 shares of common stock with a par value of $35 and a
market value of $50; the market values of the identifiable net
assets of Company S are equal to their book values
Net Asset Adjustment = 4,000 x 50 – (250,000 – 50,000) = 0
Company P's Books:

Investment in Company S 200,000
(4,000 x 35)
(4,000 x 15)
Eliminations:
Common Stock--S 100,000
(100% x 100,000)
Paid-in Capital--S 35,000
(100% x 35,000)
Retained Earnings--S 65,000
(100% x 65,000)
3
Date of Acquisition
100% Investment
At Book Value
Company Company _ Eliminations _

P S _ _Debit __ Credit _ Consolidated
Cash 70,000 25,000 95,000
Receivables 85,000 75,000 160,000
Inventory 45,000 30,000 75,000
Investment in S 200,000 (1) 200,000
Plant and Equipment 315,000 80,000 395,000
Land 60,000 40,000 _ _ 100,000
775,000 250,000 200,000 825,000
Liabilities 75,000 50,000 125,000

Common Stock
Company P 490,000 490,000
Company S 100,000 (1) 100,000
Paid-in Capital
Company P 115,000 115,000
Company S 35,000 (1) 35,000
Retained Earnings
Company P 95,000 95,000
Company S _ _ _65,000 (1) 65,000 _ _
775,000 250,000 200,000 200,000 825,000
4
c. Company P acquired 80% of Company S in a stock acquisition by
Net Asset Adjustment = 3,200 x 50 / 80% - (250,000 – 50,000) =
0
Company P's Books:

(3,200 x 35)
(3,200 x 15)
Eliminations:
(80% x 100,000)
(80% x 35,000)
(80% x 65,000)

(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
Minority Interest 40,000
5
Date of Acquisition
80% Investment
At Book Value

Cash 70,000 25,000 95,000
Receivables 85,000 75,000 160,000
Inventory 45,000 30,000 75,000
Investment in S 160,000 (1) 160,000
Land 60,000 40,000 _ _ 100,000
735,000 250,000 160,000 825,000
Liabilities 75,000 50,000 125,000

Minority Interest (2) 40,000 40,000
Common Stock
Company P 462,000 462,000
Company S 100,000 (1) 80,000
(2) 20,000
Paid-in Capital
Company P 103,000 103,000
Company S 35,000 (1) 28,000
(2) 7,000
Retained Earnings
Company P 95,000 95,000
Company S 65,000 (1) 52,000
_ _ _ (2) 13,000 _ _
735,000 250,000 200,000 200,000 825,000
6
d. Company P acquired 100% of Company S in a merger by issuing 4,800
S are equal to their book values
Net Asset Adjustment = 4,800 x 50 – (250,000 – 50,000) =
40,000 Goodwill
Company P's Books:

Cash 25,000
Receivables 75,000
Inventory 30,000
Land 40,000
Goodwill 40,000
Liabilities 50,000
(4,800 x 35)
(4,800 x 15)
e. Company P acquired 100% of Company S in a stock acquisition by

40,000 Goodwill
Company P's Books:

(4,800 x 35)
(4,800 x 15)
Eliminations:
(100% x 100,000)
(100% x 35,000)
(100% x 65,000)
Goodwill 40,000
7
Date of Acquisition
100% Investment
Above Book Value

Cash 70,000 25,000 95,000
Receivables 85,000 75,000 160,000
Inventory 45,000 30,000 75,000
Investment in S 240,000 (1) 240,000
Land 60,000 40,000 100,000
Goodwill (1) 40,000_ _ 40,000
815,000 250,000 40,000 240,000 865,000
Liabilities 75,000 50,000 125,000

Common Stock
Company P 518,000 518,000
Company S 100,000 (1) 100,000
Paid-in Capital
Company P 127,000 127,000
Company S 35,000 (1) 35,000
Retained Earnings
Company P 95,000 95,000
Company S _ _ _65,000 (1) 65,000 _ _
815,000 250,000 240,000 240,000 865,000
8
f. Company P acquired 100% of Company S in a merger by issuing 4,800
S are equal to their book values except for plant and equipment
which has a fair market value of $105,000
40,000
(25,000) Plant and Equipment
(105,000 – 80,000)
15,000 Goodwill
Company P's Books:

Cash 25,000
Receivables 75,000
Inventory 30,000
Land 40,000
Goodwill 15,000
Liabilities 50,000
(4,800 x 35)
(4,800 x 15)
g. Company P acquired 100% of Company S in a stock acquisition by

assets of Company S are equal to their book values except for plant
and equipment which has a fair market value of $105,000
40,000
(105,000 – 80,000)
15,000 Goodwill
Company P's Books:

(4,800 x 35)
(4,800 x 15)
9
Eliminations:
(100% x 100,000)
(100% x 35,000)
(100% x 65,000)
Goodwill 15,000
10
Date of Acquisition
100% Investment
Above Book Value

Cash 70,000 25,000 95,000
Receivables 85,000 75,000 160,000
Inventory 45,000 30,000 75,000
Investment in S 240,000 (1) 240,000
Plant and Equipment 315,000 80,000 (1) 25,000 420,000
Land 60,000 40,000 100,000
Goodwill (1) 15,000_ _ 15,000
815,000 250,000 40,000 240,000 865,000
Liabilities 75,000 50,000 125,000

Common Stock
Company P 518,000 518,000
Company S 100,000 (1) 100,000
Paid-in Capital
Company P 127,000 127,000
Company S 35,000 (1) 35,000
Retained Earnings
Company P 95,000 95,000
Company S _ _ _65,000 (1) 65,000 _ _
815,000 250,000 240,000 240,000 865,000
11
h. Company P acquired 80% of Company S in a stock acquisition by
40,000 Goodwill
Company P's Books:

(3,840 x 35)
(3,840 x 15)
Eliminations:
(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
Goodwill 32,000
(80% x 40,000)

(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
Goodwill 8,000
(20% x 40,000)
12
Date of Acquisition
80% Investment
Above Book Value

Cash 70,000 25,000 95,000
Receivables 85,000 75,000 160,000
Inventory 45,000 30,000 75,000
Investment in S 192,000 (1) 192,000
Land 60,000 40,000 100,000
Goodwill (1) 32,000
(2) 8,000 _ _ 40,000
767,000 250,000 40,000 192,000 865,000
Liabilities 75,000 50,000 125,000

Common Stock
Company P 484,400 484,400
Company S 100,000 (1) 80,000
(2) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (1) 28,000
(2) 7,000
Retained Earnings
Company P 95,000 95,000
Company S 65,000 (1) 52,000
_ _ _ (2) 13,000 _ _
767,000 250,000 240,000 240,000 865,000
13
i. Company P acquired 80% of Company S in a stock acquisition by
assets of Company S are equal to their book values except for plant
and equipment which has a fair market value of $105,000
40,000
(105,000 – 80,000)
15,000 Goodwill
Company P's Books:

(3,840 x 35)
(3,840 x 15)
Eliminations:
(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
14
Date of Acquisition
80% Investment
Above Book Value

Cash 70,000 25,000 95,000
Receivables 85,000 75,000 160,000
Inventory 45,000 30,000 75,000
Investment in S 192,000 (1) 192,000
Plant and Equipment 315,000 80,000 (1) 20,000
(2) 5,000 420,000
Land 60,000 40,000 100,000
Goodwill (1) 12,000
(2) 3,000 _ 15,000
767,000 250,000 40,000 192,000 865,000
Liabilities 75,000 50,000 125,000

Common Stock
Company P 484,400 484,400
Company S 100,000 (1) 80,000
(2) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (1) 28,000
(2) 7,000
Retained Earnings
Company P 95,000 95,000
Company S 65,000 (1) 52,000
_ _ _ (2) 13,000 _ _
767,000 250,000 240,000 240,000 865,000
15
3. Special Considerations
a. Negative Goodwill
1) Accounting--if the fair market value of the identifiable net
assets of the acquired company exceeds the amount paid for the
acquired company, the excess is reported as an extraordinary
gain
2) Illustration--the illustration will use the balance sheets
for Company P and Company S at the date of acquisition as a
starting point; Company P acquired 100% of Company S by issuing
3,800 shares of common stock with a par value of $35 and a
(10,000)
Extraordinary Gain = 10,000
b. Nonacquisition Costs--costs incurred that are not part of the

acquisition cost of the acquired company
1) Accounting
a) Direct Costs--costs that are paid to individuals outside
the acquiring company, in addition to the acquisition cost
of the acquired company, are treated in one of the
following ways
I) Negotiation Costs--costs of negotiating the business
combination (such as accounting, legal, consulting, and
finder’s fees) are expensed
II) Stock Issue Costs--registration and issue costs of
equity securities issued in a business combination
reduce the fair market value of the securities issued
b) Indirect Costs--costs that are paid to individuals within
the acquiring company (such as management salaries,
salaries of accountants and lawyers employed by the
acquiring company, etc.) are expensed
2) Illustration--Company P acquired 100% of Company S in a stock
acquisition by issuing 4,000 shares of common stock with a par
value of $35 and a market value of $50; Company P paid $10,000
to a law firm to negotiate the acquisition; Company P paid
$3,000 to register and issue the shares of common stock;
Company P allocated $5,000 of managerial salaries to the cost
of the acquisition
16
Company P’s Books:
(4,000 x 50)
(4,000 x 35)
(4,000 x 15)
Expense 10,000
Cash 10,000

Cash 3,000
Expense 5,000
Cash 5,000
C. Subsequent Periods
1. Accounting--there are no accounting problems for the asset acquisition
form of business combination since there is only one set of accounting
records for the combining companies
a. Parent Company
1) Subsidiary Income--the parent company increases the investment
in common stock by the percentage of the subsidiary company
that is owned by the parent company multiplied by the net
income of the subsidiary company
a) Net Asset Adjustment--the net income of the subsidiary
company is adjusted for amortization of any net asset
adjustment at the date of acquisition that has not
previously been amortized
2) Subsidiary Dividend--the parent company decreases the
investment in common stock by the percentage of the subsidiary
company that is owned by the parent company multiplied by the
dividends declared of the subsidiary company
b. Worksheet--a worksheet is prepared to consolidate the income
statements, retained earnings statements, and balance sheets of the
parent company and the subsidiary company
1) Eliminations
a) Equity Method Elimination--an entry is prepared to
eliminate the subsidiary income and the intercompany
dividend declaration with the difference taken as an
adjustment to the investment in common stock
b) Investment Elimination--an entry is prepared to eliminate
the investment in common stock at the beginning of the year
against the percentage of the owners' equity of the
subsidiary company at the beginning of the year that is
owned by the parent company
17
I) Net Asset Adjustment--any net asset adjustment at the
date of acquisition that has not previously been
amortized is recognized
c) Minority Interest--an entry is prepared to reclassify the
percentage of the owners' equity of the subsidiary company
at the beginning of the year that is not owned by the
parent company as a separate element of owners' equity
called minority interest
I) Net Asset Adjustment--any net asset adjustment at the
date of acquisition that has not previously been
amortized is recognized
d) Net Asset Adjustment Amortization--an entry is prepared to
amortize any net asset adjustment at the date of
acquisition that has not previously been amortized
e) Minority Interest in Net Income--an entry is prepared to
reclassify the percentage of the net income and the
dividends declared of the subsidiary company that is not
owned by the parent company as the change in minority
interest during the year
I) Net Asset Adjustment--the net income of the subsidiary
2) Consolidated Net Income--consolidated net income is equal to
the net income of the parent company plus the net income of the
subsidiary company
a) Net Asset Adjustment--the net income of the subsidiary
3) Income Allocation--when the parent company owns less than 100%
of the subsidiary company, the consolidated net income must be
allocated to the two stockholder groups
a) Controlling Interest in Net Income--the controlling
interest in net income is equal to the net income of the
parent company plus the percentage of the net income of the
subsidiary company that is owned by the parent company
b) Minority Interest in Net Income--the minority interest in
net income is equal to the percentage of the net income of
the subsidiary company that is not owned by the parent
company
18
4) Reconciliation--the ending balances of the investment in common
stock account and the minority interest can be reconciled with
the ending owners’ equity of the subsidiary company
a) Investment in Common Stock--the investment in common stock
account is equal to the owners’ equity of the subsidiary
company multiplied by the percentage of the subsidiary
company that is owned by the parent company
I) Net Asset Adjustment--the owners’ equity of the
subsidiary company is adjusted for any net asset
adjustment at the date of acquisition that has not been
previously amortized
b) Minority Interest--the minority interest is equal to the
owners’ equity of the subsidiary company multiplied by the
percentage of the subsidiary company that is not owned by
the parent company
I) Net Asset Adjustment--the owners’ equity of the
adjustment at the date of acquisition that has not been
previously amortized
2. Illustrations--both of the illustrations will use illustration i. at
the date of acquisition as a common starting point
a. During year 1 Company S reported earnings of $15,000 and declared
dividends of $6,000; the plant and equipment has an estimated
useful life of 10 years
Company P's Books:
(80% x (15,000 - 25,000 / 10))
Subsidiary Income 10,000
Cash 4,800
(80% x 6,000)
Eliminations:
Dividends Declared--S 4,800
19
(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
Expense 2,500
Minority Interest in Net Income 2,500

(20% x 12,500)
(20% x 6,000)
Consolidated Net Income:

Company P Net Income 60,000
Company S Net Income 15,000
Net Asset Adjustment Amortization ( 2,500)
Consolidated Net Income 72,500
20
Income Allocation:
Company P Company S
Net Income 60,000 15,000
Adjusted Net Income 60,000 12,500
Subsidiary Income 10,000 ← ↓
(80% x 12,500)
Controlling Interest in Net Income 70,000

(20% x 12,500)
Reconciliation:
Company S
Retained Earnings 74,000
Owners’ Equity 209,000
Net Asset Adjustment:
(25,000 – 2,500)
Goodwill 15,000 37,500
Adjusted Owners’ Equity 246,500
Investment in S 197,200 ← ↓
(80% x 246,500)

(20% x 246,500)
21
First Subsequent Period

Income Statement:
Sales 450,000 100,000 550,000
Cost of Goods Sold 270,000 _60,000 _ _ _ _ 330,000
Gross Margin 180,000 40,000 220,000
Expenses 120,000 _25,000 (4) 2,500 _ _ 147,500
Consolidated Net Income 60,000 15,000 2,000 72,500
Subsidiary Income 10,000 (1) 10,000
Minority Interest in Net Income _ _ _ _ (5) 2,500 _ _ _ 2,500
Net Income--Carried Forward _70,000 _15,000 _ 15,000 _ _ _70,000
Retained Earnings Statement:

Retained Earnings 1/1:
Company P 95,000 95,000
Company S 65,000 (2) 52,000
(3) 13,000
Net Income--Brought Forward _70,000 _15,000 _ 15,000 _ _ _70,000
165,000 80,000 80,000 165,000
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (1) 4,800
_ _ _ _ _ _ (5) 1,200 _ _
Retained Earnings 12/31--Carried
Forward 120,000 _74,000 _ 80,000 _ 6,000 120,000
Balance Sheet:
Cash 77,800 30,000 107,800
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 90,000
Investment in S 197,200 (1) 5,200
(2) 192,000
Plant and Equipment 330,000 85,000 (2) 20,000 (4) 2,500
(3) 5,000 437,500
Land 60,000 40,000 100,000
Goodwill (2) 12,000
(3) 3,000 _ 15,000
807,000 270,000 40,000 199,700 917,300
Liabilities 90,000 61,000 151,000

Minority Interest (3) 48,000
(5) 1,300 49,300
Common Stock
Company P 484,400 484,400
Company S 100,000 (2) 80,000
(3) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (2) 28,000
(3) 7,000
Retained Earnings--Brought Forward 120,000 _74,000 80,000 6,000 120,000
807,000 270,000 255,000 255,000 917,300
22
b. During year 2 Company S reported earnings of $20,000 and declared
dividends of $8,000
Company P's Books:
(80% x (20,000 - 25,000 / 10))
Cash 6,400
(80% x 8,000)
Eliminations:

(80% x 100,000)
(80% x 35,000)
(80% x 74,000)
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 74,000)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
Expense 2,500
23
(20% x 17,500)
(20% x 8,000)

Income Allocation:
Company P Company S
Net Income 70,000 20,000
(80% x 12,500)

(20% x 12,500)
Reconciliation:
Company S
(25,000 – 2 x 2,500)
Goodwill 15,000 35,000
(80% x 256,000)

(20% x 256,000)
24
Second Subsequent Period

Income Statement:
Sales 500,000 140,000 640,000
Cost of Goods Sold 275,000 _77,000 _ _ _ _ 352,000
Gross Margin 225,000 63,000 288,000
Expenses 155,000 _43,000 (4) 2,500 _ _ 202,500
Consolidated Net Income 70,000 20,000 2,500 87,500
Net Income--Carried Forward _84,000 _20,000 _ 20,000 _ _ _84,000

Company P 120,000 120,000
Company S 74,000 (2) 59,200
(3) 14,800
Net Income--Brought Forward _84,000 _20,000 _ 20,000 _ _ _84,000
204,000 94,000 94,000 204,000
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (1) 6,400
_ _ _ _ _ _ (5) 1,600 _ _
Forward 140,000 _86,000 _ 94,000 _ 8,000 140,000
Balance Sheet:
Cash 75,200 31,000 106,200
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 98,000
Investment in S 204,800 (1) 7,600
(2) 197,200
(3) 4,500 450,000
Land 60,000 40,000 100,000
Goodwill (2) 12,000
(3) 3,000 _ 15,000
830,000 280,000 37,500 207,300 940,200
Liabilities 93,000 59,000 152,000

(5) 1,900 51,200
Common Stock
Company P 484,400 484,400
Company S 100,000 (2) 80,000
(3) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (2) 28,000
(3) 7,000
830,000 280,000 266,500 266,500 940,200
25
D. Intercompany Transactions
1. Intercompany Sales of Inventory
a. Accounting
1) Parent Company--in computing subsidiary income the following
adjustments are made
a) Upstream Sales--the net income of the subsidiary company is
increased for the gross profit from any intercompany sales
of inventory from the subsidiary company to the parent
company that had not been realized by a sale to outsiders
at the end of last year and is decreased for the gross
profit from any intercompany sales of inventory from the
subsidiary company to the parent company that has not been
realized by a sale to outsiders at the end of this year
b) Downstream Sales--the subsidiary income is increased for
the gross profit from any intercompany sales of inventory
from the parent company to the subsidiary company that had
not been realized by a sale to outsiders at the end of last
year and is decreased for the gross profit from any
intercompany sales of inventory from the parent company to
the subsidiary company that has not been realized by a sale
to outsiders at the end of this year
2) Worksheet
a) Eliminations--in addition to the five basic elimination
entries for subsequent periods, the following elimination
entries are necessary to adjust for the intercompany sales
of inventory
I) Current Year Sales--sales and cost of goods sold are
decreased for any intercompany sales of inventory made
during the year
II) Ending Inventory Adjustment--ending inventory is
decreased and cost of goods sold is increased to remove
the gross profit from any intercompany sales of
inventory that have not been realized by a sale to
outsiders at the end of this year
III) Beginning Inventory Adjustment--cost of goods sold is
decreased to remove the gross profit from any
intercompany sales of inventory that have not been
realized by a sale to outsiders at the end of last year
A) Upstream Sales--the beginning retained earnings of
the subsidiary is decreased
1) Investment Elimination--the entries to
eliminate the investment in common stock at the
beginning of the year and to reclassify the
minority interest at the beginning of the year
use the corrected beginning retained earnings
of the subsidiary
B) Downstream Sales--the beginning investment in
26
common stock is increased
1) Investment Elimination--the entry to eliminate
the investment in common stock at the beginning
of the year uses the corrected beginning
investment in common stock
b) Consolidated Net Income--consolidated net income is equal
to the net income of the parent company plus the net income
of the subsidiary company
II) Inventory Adjustment--consolidated net income is
increased for the gross profit from any intercompany
sales of inventory that had not been realized by a sale
to outsiders at the end of last year and is decreased
for the gross profit from any intercompany sales of
inventory that has not been realized by a sale to
outsiders at the end of this year
c) Income Allocation--when the parent company owns less than
100% of the subsidiary company, the consolidated net income
must be allocated to the two stockholder groups
I) Controlling Interest in Net Income--the controlling
interest in net income is equal to the net income of
the parent company plus the percentage of the net
income of the subsidiary company that is owned by the
parent company
A) Net Asset Adjustment--the net income of the
subsidiary company is adjusted for amortization of
any net asset adjustment at the date of acquisition
that has not previously been amortized
B) Inventory Adjustment--the net income of the selling
company is increased for the gross profit from any
intercompany sales of inventory that had not been
realized by a sale to outsiders at the end of last
intercompany sales of inventory that has not been
realized by a sale to outsiders at the end of this
year
27
II) Minority Interest in Net Income--the minority interest
in net income is equal to the percentage of the net
income of the subsidiary company that is not owned by
the parent company
B) Inventory Adjustment--the net income of the selling
company is increased for the gross profit from any
intercompany sales of inventory that had not been
realized by a sale to outsiders at the end of last
intercompany sales of inventory that has not been
realized by a sale to outsiders at the end of this
year
d) Reconciliation--the ending balances of the investment in
common stock account and the minority interest can be
reconciled with the ending owners’ equity of the subsidiary
company
I) Investment in Common Stock--the investment in common
stock account is equal to the owners’ equity of the
A) Net Asset Adjustment--the owners’ equity of the
been previously amortized
B) Inventory Adjustment--the owners’ equity of the
subsidiary company is decreased for the gross
profit from any intercompany sales of inventory
from the subsidiary company to the parent company
that has not been realized by a sale to outsiders
at the end of this year
II) Minority Interest--the minority interest is equal to
the owners’ equity of the subsidiary company multiplied
B) Inventory Adjustment--the owners’ equity of the
subsidiary company is decreased for the gross
profit from any intercompany sales of inventory
from the subsidiary company to the parent company
that has not been realized by a sale to outsiders
28
at the end of this year
b. Illustrations--all of the illustrations will use the illustrations
for subsequent periods as a common starting point
1) During year 1 Company S made sales of $20,000 to Company P at a
gross profit rate of 40%; the ending inventory of Company P
contains goods purchased from Company S at a cost of $2,000
Company P's Books:
(80% x (15,000 - 25,000 / 10 –
40% x 2,000))
Cash 4,800
(80% x 6,000)
Eliminations:
Sales 20,000
Cost of Goods Sold 20,000
Cost of Goods Sold 800

Inventory 800
(40% x 2,000)


(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)
29
(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x (12,500 – 800))
(20% x 6,000)

Ending Inventory Adjustment ( 800)
Income Allocation:
Company P Company S
Net Income 60,000 15,000
(80% x 11,700)

(20% x 11,700)
30
Reconciliation:
Company S
(25,000 – 2,500)
Goodwill 15,000 37,500
(80% x 245,700)

(20% x 245,700)
31
Upstream Sales of Inventory

Income Statement:
Sales 450,000 100,000 (1) 20,000 530,000
Cost of Goods Sold 270,000 _60,000 (2) 800 (1) 20,000 310,800
Gross Margin 180,000 40,000 20,800 20,000 219,200
Expenses 120,000 _25,000 (6) 2,500 _ _ 147,500
Consolidated Net Income 60,000 15,000 23,300 20,000 71,700
Net Income--Carried Forward _69,360 _15,000 _ 35,000 _ 20,000 _69,360

Company P 95,000 95,000
Company S 65,000 (4) 52,000
(5) 13,000
Net Income--Brought Forward _69,360 _15,000 _ 35,000 _ 20,000 _69,360
164,360 80,000 100,000 20,000 164,360
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (3) 4,800
_ _ _ _ _ _ (7) 1,200 _ _
Forward 119,360 _74,000 _ 100,000 _ 26,000 119,360
Balance Sheet:
Cash 77,800 30,000 107,800
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 (2) 800 89,200
Investment in S 196,560 (3) 4,560
(4) 192,000
(5) 5,000 437,500
Land 60,000 40,000 100,000
Goodwill (4) 12,000
(5) 3,000 _ 15,000
806,360 270,000 40,000 199,860 916,500
Liabilities 90,000 61,000 151,000

(7) 1,140 49,140
Common Stock
Company P 484,400 484,400
Company S 100,000 (4) 80,000
(5) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (4) 28,000
(5) 7,000
806,360 270,000 275,000 275,000 916,500
32
2) During year 2 Company S made sales of $25,000 to Company P at a
gross profit rate of 45%; the ending inventory of Company P
contains goods purchased from Company S at a cost of $3,000
Company P's Books:
(80% x (20,000 - 25,000 / 10 +
40% x 2,000 - 45% x 3,000))
Cash 6,400
(80% x 8,000)
Eliminations:
Retained Earnings--S 800
(40% x 2,000)
Sales 25,000

Inventory 1,350
(45% x 3,000)


(80% x 100,000)
(80% x 35,000)
(80% x (74,000 - 800))
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)
33
(20% x 100,000)
(20% x 35,000)
(20% x 73,200)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x (17,500 + 800 - 1,350))
(20% x 8,000)

Beginning Inventory Adjustment 800
Ending Inventory Adjustment ( 1,350)
Income Allocation:
Company P Company S
Net Income 70,000 20,000
(80% x 16,950)

(20% x 16,950)
34
Reconciliation:
Company S
(22,500 – 2,500)
Goodwill 15,000 35,000
(80% x 254,650)

(20% x 254,650)
35
Upstream Sales of Inventory

Income Statement:
Sales 500,000 140,000 (2) 25,000 615,000
Cost of Goods Sold 275,000 77,000 (3) 1,350 (1) 800
_ _ _ _ _ _ (2) 25,000 327,550
Gross Margin 225,000 63,000 26,350 25,800 287,450
Expenses 155,000 _43,000 (7) 2,500 _ _ 200,500

Company P 119,360 119,360
Company S 74,000 (1) 800
(5) 58,560
(6) 14,640
202,920 94,000 119,800 25,800 202,920
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (4) 6,400
_ _ _ _ _ _ (8) 1,600 _ _
Forward 138,920 _86,000 _ 119,800 _ 33,800 138,920
Balance Sheet:
Cash 75,200 31,000 106,200
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 (3) 1,350 96,650
Investment in S 203,720 (4) 7,160
(5) 196,560
(6) 4,500 450,000
Land 60,000 40,000 100,000
Goodwill (5) 12,000
(6) 12,000 _ 15,000
828,920 280,000 37,500 207,570 938,850
Liabilities 93,000 59,000 152,000

(8) 1,790 50,930
Common Stock
Company P 484,400 484,400
Company S 100,000 (5) 80,000
(6) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (5) 28,000
(6) 7,000
828,920 280,000 292,300 292,300 938,850
36
3) During year 1 Company P made sales of $20,000 to Company S at a
gross profit rate of 40%; the ending inventory of Company S
contains goods purchased from Company P at a cost of $2,000
Company P's Books:
(80% x (15,000 - 25,000 / 10) -
40% x 2,000)
Cash 4,800
(80% x 6,000)
Eliminations:
Sales 20,000

Inventory 800
(40% x 2,000)


(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)
37
(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x 12,500)
(20% x 6,000)

Income Allocation:
Company P Company S
Net Income 60,000 15,000
(80% x 12,500)

(20% x 12,500)
38
Reconciliation:
Company S
(25,000 – 2,500)
Goodwill 15,000 37,500
(80% x 246,500)

(20% x 246,500)
39
Downstream Sales of Inventory

Income Statement:
Sales 450,000 100,000 (1) 20,000 530,000
Cost of Goods Sold 270,000 _60,000 (2) 800 (1) 20,000 310,800
Gross Margin 180,000 40,000 20,800 20,000 219,200
Expenses 120,000 _25,000 (6) 2,500 _ _ 147,500
Net Income--Carried Forward 69,200 _15,000 _ 35,000 _ 20,000 _69,200

Company P 95,000 95,000
Company S 65,000 (4) 52,000
(5) 13,000
164,200 80,000 100,000 20,000 164,200
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (3) 4,800
_ _ _ _ _ _ (7) 1,200 _ _
Forward 119,200 _74,000 _ 100,000 _ 26,000 119,200
Balance Sheet:
Cash 77,800 30,000 107,800
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 (2) 800 89,200
Investment in S 196,400 (3) 4,400
(4) 192,000
(5) 5,000 437,500
Land 60,000 40,000 100,000
Goodwill (4) 12,000
(5) 3,000 _ 15,000
806,200 270,000 40,000 199,700 916,500
Liabilities 90,000 61,000 151,000

(7) 1,300 49,300
Common Stock
Company P 484,400 484,400
Company S 100,000 (4) 80,000
(5) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (4) 28,000
(5) 7,000
806,200 270,000 275,000 275,000 916,500
40
4) During year 2 Company P made sales of $25,000 to Company S at a
gross profit rate of 45%; the ending inventory of Company S
contains goods purchased from Company P at a cost of $3,000
Company P's Books:
(80% x (20,000 - 25,000 / 10) +
40% x 2,000 - 45% x 3,000)
Cash 6,400
(80% x 8,000)
Eliminations:
Investment in Company S 800
(40% x 2,000)
Sales 25,000

Inventory 1,350
(45% x 3,000)


(80% x 100,000)
(80% x 35,000)
(80% x 74,000)
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)
41
(20% x 100,000)
(20% x 35,000)
(20% x 74,000)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x 17,500)
(20% x 8,000)

Income Allocation:
Company P Company S
Net Income 70,000 20,000
(80% x 17,500)

(20% x 17,500)
42
Reconciliation:
Company S
(22,500 – 2,500)
Goodwill 15,000 35,000
(80% x 256,000)

(20% x 256,000)
43
Downstream Sales of Inventory

Income Statement:
Sales 500,000 140,000 (2) 25,000 615,000
Cost of Goods Sold 275,000 77,000 (3) 1,350 (1) 800
_ _ _ _ _ _ (2) 25,000 327,550
Gross Margin 225,000 63,000 26,350 25,800 287,450
Expenses 155,000 _43,000 (7) 2,500 _ _ 200,500

Company P 119,200 119,200
Company S 74,000 (5) 59,200
(6) 14,800
202,650 94,000 119,800 25,800 202,650
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (4) 6,400
_ _ _ _ _ _ (8) 1,600 _ _
Forward 138,650 _86,000 _ 119,800 _ 33,800 138,650
Balance Sheet:
Cash 75,200 31,000 106,200
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 (3) 1,350 96,650
Investment in S 203,450 (1) 800 (4) 7,050
(5) 197,200
(6) 4,500 450,000
Land 60,000 40,000 100,000
Goodwill (5) 12,000
(6) 3,000 _ 3,000
828,650 280,000 38,300 208,100 938,850
Liabilities 93,000 59,000 152,000

(8) 1,900 51,200
Common Stock
Company P 484,400 484,400
Company S 100,000 (5) 80,000
(6) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (5) 28,000
(6) 7,000
828,650 280,000 293,`00 293,100 938,850
44
2. Intercompany Sales of Fixed Assets
a. Accounting
decreased/increased for any gain/loss from the intercompany
sale of fixed assets from the subsidiary company to the
parent company during the current year and is
increased/decreased, if the fixed asset is depreciable, for
any gain/loss divided by the useful life of the fixed asset
until the fixed asset is either fully depreciated or sold
b) Downstream Sales--the subsidiary income is
decreased/increased for any gain/loss from the intercompany
sale of fixed assets from the parent company to the
subsidiary company during the current year and is
increased/decreased, if the fixed asset is depreciable, for
any gain/loss divided by the useful life of the fixed asset
until the fixed asset is either fully depreciated or sold
2) Worksheet
entries are necessary to adjust for the intercompany sale
of fixed assets
I) Gain/Loss Adjustment--any gain/loss on the intercompany
sale of fixed assets during the current year is
eliminated
A) Upstream Sale--for years after the year of sale the
beginning retained earnings of the subsidiary is
decreased/increased for the gain/loss less the
depreciation adjustments for the prior years until
the fixed asset is either fully depreciated or sold
of the subsidiary
B) Downstream Sales-- for years after the year of sale
the beginning investment in common stock is
decreased/increased for the gain/loss less the
depreciation adjustments for the prior years until
the fixed asset is either fully depreciated or sold
II) Depreciation Adjustment--depreciation expense is
45
adjusted, if the fixed is depreciable, for the
gain/loss divided by the useful life of the fixed asset
until the fixed asset is either fully depreciated or
sold
III) Fixed Asset Adjustment--the fixed asset is adjusted for
the gain/loss less the depreciation adjustments for the
current year and the prior years until the fixed asset
is either fully depreciated or sold
II) Fixed Asset Adjustment--consolidated net income is
decreased/increased for any gain/loss from the
intercompany sale of fixed assets during the current
year and is increased/decreased, if the fixed asset is
depreciable, for any gain/loss divided by the useful
life of the fixed asset until the fixed asset is either
fully depreciated or sold
parent company
B) Fixed Asset Adjustment--the net income of the
selling company is decreased/increased for any
gain/loss from the intercompany sale of fixed
assets during the current year and is
increased/decreased, if the fixed asset is
depreciable, for any gain/loss divided by the
useful life of the fixed asset until the fixed
asset is either fully depreciated or sold
the parent company
46
B) Fixed Asset Adjustment--the net income of the
selling company is decreased/increased for any
gain/loss from the intercompany sale of fixed
assets during the current year and is
increased/decreased, if the fixed asset is
depreciable, for any gain/loss divided by the
useful life of the fixed asset until the fixed
asset is either fully depreciated or sold
company
B) Fixed Asset Adjustment--the owners’ equity of the
subsidiary company is decreased/increased for any
gain/loss from any intercompany sale of fixed
assets from the subsidiary company to the parent
company less the depreciation adjustments that have
been recognized by the end of this year
B) Fixed Asset Adjustment--the owners’ equity of the
subsidiary company is decreased/increased for any
gain/loss from any intercompany sale of fixed
assets from the subsidiary company to the parent
company less the depreciation adjustments that have
been recognized by the end of this year
b. Illustrations--all of the illustrations will use illustration i. at
the acquisition date as a common starting point
1) During year 1 Company S sold plant and equipment with a book
value of $30,000 to Company P for $34,500; the plant and
47
equipment has an estimated useful life of 3 years
Company P's Books:
(80% x (19,500 - 25,000 / 10 –
(34,500 - 30,000) + 4,500 / 3))
Cash 4,800
(80% x 6,000)
Eliminations:
Gain on Sale of Fixed Assets 4,500
Depreciation Expense 1,500
(4,500 - 1,500)


(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
Expense 2,500
48
(20% x (17,000 - 4,500 + 1,500)
(20% x 6,000)

Gain Adjustment ( 4,500)
Depreciation Expense Adjustment 1,500
Income Allocation:
Company P Company S
Net Income 60,000 19,500
(80% x 14,000)

(20% x 14,000)
Reconciliation:
Company S
Net Gain Adjustment ( 3,000)
(4,500 – 1,500)
(25,000 – 2,500)
Goodwill 15,000 37,500
(80% x 248,000)

(20% x 248,000)
49
Upstream Sales of Fixed Assets

Income Statement:
Sales 450,000 100,000 550,000
Cost of Goods Sold 270,000 _60,000 330,000
Gross Margin 180,000 40,000 220,000
Expenses 120,000 _25,000 (5) 2,500 (1) 1,500 146,000
Gain on Sale of Fixed Assets 4,500 (1) 4,500

Company P 95,000 95,000
Company S 65,000 (3) 52,000
(4) 13,000
166,200 84,500 86,000 1,500 166,200
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (2) 4,800
_ _ _ _ _ _ (6) 1,200 _ _
Forward 121,200 _78,500 _ 86,000 _ 7,500 121,200
Balance Sheet:
Cash 77,800 34,500 112,300
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 90,000
Investment in S 198,400 (2) 6,400
(3) 192,000
(4) 5,000 (5) 2,500 434,500
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
808,200 274,500 40,000 203,900 918,800
Liabilities 90,000 61,000 151,000

(6) 1,600 49,600
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
808,200 274,500 261,000 261,000 918,800
50
2) During year 2 no other intercompany sales of fixed assets took
place
Company P's Books:
(80% x (20,000 - 25,000 / 10 +
4,500 / 3))
Cash 6,400
(80% x 8,000)
Eliminations:
(4,500 - 1,500)
(4,500 - 2 x 1,500)


(80% x 100,000)
(80% x 35,000)
(80% x (78,500 - 3,000))
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 75,500)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
51
Expense 2,500

(20% x (17,500 + 1,500))
(20% x 8,000)

Income Allocation:
Company P Company S
Net Income 70,000 20,000
(80% x 19,000)

(20% x 19,000)
Reconciliation:
Company S
Net Gain Adjustment ( 1,500)
(4,500 – 2 x 1,500)
(22,500 – 2,500)
Goodwill 15,000 35,000
(80% x 259,000)

(20% x 259,000)
52
Upstream Sales of Fixed Assets

Income Statement:
Sales 500,000 140,000 640,000
Cost of Goods Sold 275,000 _77,000 _ _ 352,000
Gross Margin 225,000 63,000 288,000
Expenses 155,000 _43,000 (5) 2,500 (1) 1,500 199,000

Company P 121,200 121,200
Company S 78,500 (1) 3,000
(3) 60,400
(4) 15,100
206,400 98,500 100,000 1,500 206,400
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (2) 6,400
_ _ _ _ _ _ (6) 1,600 _ _
Forward 142,400 _90,500 _ 100,000 _ 9,500 142,400
Balance Sheet:
Cash 75,200 35,500 110,700
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 98,000
Investment in S 207,200 (2) 8,800
(3) 198,400
(4) 4,500 (5) 2,500 448,500
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
832,400 284,500 37,500 211,200 943,200
Liabilities 93,000 59,000 152,000

(6) 2,200 51,800
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
832,400 284,500 272,500 272,500 943,200
53
3) During year 1 Company P sold plant and equipment with a book
value of $30,000 to Company S for $34,500; the plant and
equipment has an estimated useful life of 3 years
Company P's Books:
(80% x (15,000 - 25,000 / 10) –
(34,500 - 30,000) + 4,500 / 3)
Cash 4,800
(80% x 6,000)
Eliminations:
Gain on Sale of Fixed Assets 4,500
(4,500 - 1,500)


(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
54
Expense 2,500

(20% x 12,500)
(20% x 6,000)

Income Allocation:
Company P Company S
Net Income 64,500 15,000
(80% x 12,500)

(20% x 12,500)
Reconciliation:
Company S
(25,000 – 2,500)
Goodwill 15,000 37,500
(80% x 246,500)

(20% x 246,500)
55
Downstream Sales of Fixed Assets

Income Statement:
Sales 450,000 100,000 550,000
Gross Margin 180,000 40,000 220,000
Expenses 120,000 _25,000 (5) 2,500 (1) 1,500 146,000
Gain on Sale of Fixed Assets 4,500 (1) 4,500
Net Income--Carried Forward 71,500 _15,000 _ 16,500 _ 1,500 _71,500

Company P 95,000 95,000
Company S 65,000 (3) 52,000
(4) 13,000
166,500 80,000 81,500 1,500 166,500
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (2) 4,800
_ _ _ _ _ _ (6) 1,200 _ _
Forward 121,500 _74,000 _ 81,500 _ 7,500 121,500
Balance Sheet:
Cash 82,300 30,000 112,300
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 90,000
Investment in S 194,200 (2) 2,200
(3) 192,000
(4) 5,000 (5) 2,500 434,500
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
808,500 270,000 40,000 199,700 918,800
Liabilities 90,000 61,000 151,000

(6) 1,300 49,300
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
808,500 270,000 256,500 256,500 918,800
56
4) During year 2 no other intercompany sales of fixed assets took
place
Company P's Books:
(80% x (20,000 - 25,000 / 10) +
4,500 / 3)
Cash 6,400
(80% x 8,000)
Eliminations:
(4,500 - 1,500)
(4,500 - 2 x 1,500)


(80% x 100,000)
(80% x 35,000)
(80% x 74,000)
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)

(20% x 100,000)
(20% x 35,000)
(20% x 74,000)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
57
Expense 2,500

(20% x 17,500)
(20% x 8,000)

Income Allocation:
Company P Company S
Net Income 70,000 20,000
(80% x 17,500)

(20% x 17,500)
Reconciliation:
Company S
(22,500 – 2,500)
Goodwill 15,000 35,000
(80% x 256,000)

(20% x 256,000)
58
Downstream Sales of Fixed Assets

Income Statement:
Sales 500,000 140,000 640,000
Gross Margin 225,000 63,000 288,000
Expenses 155,000 _43,000 (5) 2,500 (1) 1,500 199,000

Company P 121,500 121,500
Company S 74,000 (3) 59,200
(4) 14,800
207,000 94,000 95,500 1,500 207,000
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (2) 6,400
_ _ _ _ _ _ (6) 1,600 _ _
Forward 143,000 _86,000 _ 95,500 _ 9,500 143,000
Balance Sheet:
Cash 79,700 31,000 110,700
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 98,000
Investment in S 203,300 (1) 3,000 (2) 9,100
(3) 197,200
(4) 4,500 (5) 2,500 448,500
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
833,000 280,000 40,500 210,300 943,200
Liabilities 93,000 59,000 152,000

(6) 1,900 51,200
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
833,000 280,000 271,000 271,000 943,200
59
3. Intercompany Bondholdings
a. Accounting
increased/decreased for any gain/loss on the early
extinguishment of debt (the difference between the amount
the parent company paid to acquire the bonds of the
subsidiary company and the carrying value of the bonds of
the subsidiary company that were acquired by the parent
company) and is decreased/increased for the interest
income/interest expense on the intercompany bondholdings
until the bonds either mature or are retired
b) Downstream Sales--the subsidiary income is
extinguishment of debt (the difference between the amount
the subsidiary company paid to acquire the bonds of the
parent company and the carrying value of the bonds of the
parent company that were acquired by the subsidiary
company) and is decreased/increased for the interest
income/interest expense on the intercompany bondholdings
until the bonds either mature or are retired
2) Worksheet
entries are necessary to adjust for the intercompany
bondholdings
I) Gain/Loss Adjustment--any gain/loss on the early
extinguishment of debt is recognized
A) Upstream Sale--for years after the year of early
extinguishment of debt the beginning retained
earnings of the subsidiary is increased/decreased
for the gain/loss less the interest income/interest
expense adjustments for the prior years until the
bonds either mature or are retired
of the subsidiary
B) Downstream Sales-- for years after the year of
early extinguishment of debt the beginning
investment in common stock is increased/decreased
for the gain/loss less the interest income/interest
expense adjustments for the prior years until the
60
II) Interest Adjustment--the intercompany interest
income/interest expense are eliminated
III) Intercompany Debt Adjustment--the intercompany
receivable/payable are eliminated
II) Bond Adjustment--consolidated net income is
extinguishment of debt during the current year and is
decreased/increased for the interest income/interest
expense on the intercompany bondholdings until the
parent company
B) Bond Adjustment--the net income of the issuing
company is increased/decreased for any gain/loss on
the early extinguishment of debt during the current
year and is decreased/increased for the interest
income/interest expense on the intercompany
bondholdings until the bonds either mature or are
retired
the parent company
61
B) Bond Adjustment--the net income of the issuing
company is increased/decreased for any gain/loss on
the early extinguishment of debt during the current
year and is decreased/increased for the interest
income/interest expense on the intercompany
bondholdings until the bonds either mature or are
retired
company
B) Bond Adjustment--the owners’ equity of the
subsidiary company is increased/decreased for any
gain/loss on the early extinguishment of debt on
intercompany bondholdings on which the subsidiary
was the issuing company less the interest
income/interest expense adjustments that have been
recognized by the end of this year
B) Bond Adjustment--the owners’ equity of the
subsidiary company is increased/decreased for any
gain/loss on the early extinguishment of debt on
intercompany bondholdings on which the subsidiary
was the issuing company less the interest
income/interest expense adjustments that have been
recognized by the end of this year
b. Illustrations--all of the illustrations will use illustration i. at
the acquisition date as a common starting point
1) On January 1 of year 1 Company P purchased 40% of the 8% bonds
of Company S for $20,400 when the bonds of Company S had a par
62
value of $50,000 and a carrying value of $52,000; the bonds
mature on December 31 of year 4
Company P's Books:
(80% x (11,500 - 25,000 / 10 +
400 - 1,500 + 1,400))
Cash 4,800
(80% x 6,000)
Eliminations:
Bonds Payable 20,000
(40% x 50,000)
Premium on Bonds Payable 600
(40% x (2,000 - 2,000 / 4))
Interest Income 1,500
(8% x 20,000 - (20,400 - 20,000) / 4)
Investment in Bonds 20,300
(20,400 - 100)
Interest Expense 1,400
(40% x (8% x 50,000 - 500))
Gain on Retirement 400
(20,400 - 40% x (50,000 + 2,000))


(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)
63
(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x (9,000 + 400 - 1,500 + 1,400))
(20% x 6,000)
Minority Interest 660

Gain Adjustment ( 400)
Interest Income Adjustment ( 1,500)
Interest Expense Adjustment 1,400
Income Allocation:
Company P Company S
Net Income 61,500 11,500
(80% x 9,300)

(20% x 9,300)
64
Reconciliation:
Company S
Net Gain Adjustment 300
(400 – 1,500 + 1,400)
(25,000 – 2,500)
Goodwill 15,000 37,500
(80% x 243,300)

(20% x 243,300)
65
Upstream Bondholdings

Income Statement:
Sales 450,000 100,000 550,000
Gross Margin 180,000 40,000 220,000
Expenses 120,000 _25,000 (5) 2,500 147,500
60,000 15,000 2,500 72,500
Interest Expense _ _ __3,500 _ _ (1) 1,400 _ 2,100
60,000 11,500 2,500 1,400 70,400
Interest Income 1,500 (1) 1,500
Gain on Retirement of Debt _ _ _ _ _ _ (1) 400 _ 400

Company P 95,000 95,000
Company S 65,000 (3) 52,000
(4) 13,000
163,940 76,500 78,300 1,800 163,940
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (2) 4,800
_ _ _ _ _ _ (6) 1,200 _ _
Retained Earnings 12/31--Carried Forward 118,940 _70,500 _ 78,300 _ 7,800 118,940
Balance Sheet:
Cash 59,000 30,000 89,000
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 90,000
Investment in Bonds 20,300 (1) 20,300
Investment in S 194,640 (2) 2,640
(3) 192,000
(4) 5,000 437,500
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
805,940 270,000 40,000 217,440 898,500
Accounts Payable 90,000 13,000 103,000

Bonds Payable 50,000 (1) 20,000 30,000
Premium on Bonds Payable 1,500 (1) 600 900
(6) 660 48,660
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
805,940 270,000 273,900 273,900 898,500
66
2) During year 2 no other purchases of intercompany bonds took
place
Company P's Books:
(80% x (16,500 - 25,000 / 10 –
1,500 + 1,400))
Cash 6,400
(80% x 8,000)
Eliminations:
(40% x (1,500 - 500))
(20,300 - 100)
Retained Earnings--S 300
(400 - 1,500 + 1,400)


(80% x 100,000)
(80% x 35,000)
(80% x (70,500 + 300))
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)
67
(20% x 100,000)
(20% x 35,000)
(20% x 70,800)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x (14,000 - 1,500 + 1,400))
(20% x 8,000)

Income Allocation:
Company P Company S
Net Income 71,500 16,500
(80% x 13,900)

(20% x 13,900)
68
Reconciliation:
Company S
Net Gain Adjustment 200
(400 – 2 x 1,500 + 2 x 1,400)
(22,500 – 2,500)
Goodwill 15,000 35,000
(80% x 249,200)

(20% x 249,200)
69
Upstream Bondholdings

Income Statement:
Sales 500,000 140,000 640,000
Gross Margin 225,000 63,000 288,000
Expenses 155,000 _43,000 (5) 2,500 200,500
70,000 20,000 2,500 87,500
Interest Expense _ _ _ 3,500 _ _ (1) 1,400 _ 2,100

Company P 118,940 118,940
Company S 70,500 (1) 300
(3) 56,640
(4) 14,160
201,560 87,000 88,700 1,700 201,560
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (2) 6,400
_ _ _ _ _ _ (6) 1,600 _ _
Balance Sheet:
Cash 58,000 31,000 89,000
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 98,000
Investment in S 199,360 (2) 4,720
(3) 194,640
(4) 4,500 450,000
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
827,560 280,000 37,500 222,060 923,000

Bonds Payable 50,000 (1) 20,000 30,000
(6) 1,180 49,840
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
827,560 280,000 281,600 281,600 923,000
70
3) On January 1 of year 1 Company S purchased 40% of the 8% bonds
of Company P for $20,400 when the bonds of Company P had a par
value of $50,000 and a carrying value of $52,000; the bonds
mature on December 31 of year
Company P’s Books:
(80% x (16,500 - 25,000 / 10) +
400 - 1,500 + 1,400)
Cash 4,800
(80% x 6,000)
Eliminations:
(40% x 50,000)
(40% x (2,000 - 2,000 / 4))
(8% x 20,000 - (20,400 - 20,000) / 4)
(20,400 - 100)
(40% x (8% x 50,000 - 500))
Gain on Retirement 400
(20,400 - 40% x (50,000 + 2,000))


(80% x 100,000)
(80% x 35,000)
(80% x 65,000)
(80% x 25,000)
Goodwill 12,000
(80% x 15,000)
71
(20% x 100,000)
(20% x 35,000)
(20% x 65,000)
(20% x 25,000)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x 14,000)
(20% x 6,000)

Income Allocation:
Company P Company S
Net Income 56,500 16,500
(80% x 14,000)

(20% x 14,000)
72
Reconciliation:
Company S
(25,000 – 2,500)
Goodwill 15,000 37,500
(80% x 248,000)

(20% x 248,000)
73
Downstream Bondholdings

Income Statement:
Sales 450,000 100,000 550,000
Gross Margin 180,000 40,000 220,000
Expenses 120,000 _25,000 (5) 2,500 147,500
60,000 15,000 2,500 72,500
Interest Expense _ 3,500 __ _ _ (1) 1,400 _ 2,100
56,500 15,000 2,500 1,400 70,400
Gain on Retirement of Debt _ _ _ _ _ _ (1) 400 _ 400

Company P 95,000 95,000
Company S 65,000 (3) 52,000
(4) 13,000
163,000 81,500 83,300 1,800 163,000
Dividends Declared:
Company P 45,000 45,000
Company S 6,000 (2) 4,800
_ _ _ _ _ _ (6) 1,200 _ _
Balance Sheet:
Cash 74,300 9,700 84,000
Receivables 87,000 80,000 167,000
Inventory 55,000 35,000 90,000
Investment in S 198,700 (2) 6,700
(3) 192,000
(4) 5,000 437,500
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
805,000 270,000 40,000 221,500 893,500

Bonds Payable 50,000 (1) 20,000 30,000
(6) 1,600 49,600
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
805,000 270,000 278,900 278,900 893,500
74
4) During year 2 no other purchases of intercompany bonds took
place
Company P's Books:
(80% x (21,500 - 20,000 / 10) –
1,500 + 1,400)
Cash 6,400
(80% x 8,000)
Eliminations:
(40% x (1,500 - 500))
(20,300 - 100)
Investment in Company S 300
(400 - 1,500 + 1,400)


(80% x 100,000)
(80% x 35,000)
(80% x 75,500)
(80% x (25,000 - 2,500))
Goodwill 12,000
(80% x 15,000)
75
(20% x 100,000)
(20% x 35,000)
(20% x 75,500)
(20% x 22,500)
Goodwill 3,000
(20% x 15,000)
Expense 2,500

(20% x 19,000)
(20% x 8,000)

Income Allocation:
Company P Company S
Net Income 66,500 21,500
(80% x 19,000)

(20% x 19,000)
76
Reconciliation:
Company S
(22,500 – 2,500)
Goodwill 15,000 35,000
(80% x 259,000)

(20% x 259,000)
77
Downstream Bondholdings

Income Statement:
Sales 500,000 140,000 640,000
Gross Margin 225,000 63,000 288,000
Expenses 155,000 _43,000 (5) 2,500 200,500
70,000 20,000 2,500 87,500
Interest Expense _ 3,500 _ _ _ (1) 1,400 _ 2,100

Company P 118,000 118,000
Company S 75,500
(3) 60,400
(4) 15,100
199,600 97,000 98,400 1,400 199,600
Dividends Declared:
Company P 64,000 64,000
Company S 8,000 (2) 6,400
_ _ _ _ _ _ (6) 1,600 _ _
Balance Sheet:
Cash 72,600 10,800 83,400
Receivables 90,000 81,000 171,000
Inventory 60,000 38,000 98,000
Investment in S 207,400 (1) 300
(2) 8,700
(3) 198,400
(4) 4,500 450,000
Land 60,000 40,000 100,000
Goodwill (3) 12,000
(4) 3,000 _ 15,000
830,000 280,000 37,500 230,100 917,400

Bonds Payable 50,000 (1) 20,000 30,000
(6) 2,200 51,800
Common Stock
Company P 484,400 484,400
Company S 100,000 (3) 80,000
(4) 20,000
Paid-in Capital
Company P 112,600 112,600
Company S 35,000 (3) 28,000
(4) 7,000
830,000 280,000 291,300 291,300 917,400
78

Consolidated Financial Statements

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Consolidated Financial Statements

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Consolidated Financial Statements

A. Types of Business Combinations--a business combination occurs when the

Liabilities 75,000 50,000

Company P's Books:

b. Company P acquired 100% of Company S in a stock acquisition by

Company P's Books:

Company Company _ Eliminations _

Liabilities 75,000 50,000 125,000

Company P's Books:

Common Stock--S 20,000

Company Company _ Eliminations _

Liabilities 75,000 50,000 125,000

Company P's Books:

e. Company P acquired 100% of Company S in a stock acquisition by

Company P's Books:

Company Company _ Eliminations _

Liabilities 75,000 50,000 125,000

Company P's Books:

g. Company P acquired 100% of Company S in a stock acquisition by

Company P's Books:

Company Company _ Eliminations _

Liabilities 75,000 50,000 125,000

Company P's Books:

Common Stock--S 20,000

Company Company _ Eliminations _

Liabilities 75,000 50,000 125,000

Company P's Books:

Common Stock--S 20,000

Company Company _ Eliminations _

Liabilities 75,000 50,000 125,000

Extraordinary Gain = 10,000

b. Nonacquisition Costs--costs incurred that are not part of the

Paid-in Capital 3,000

Common Stock--S 20,000

Minority Interest in Net Income 2,500

Consolidated Net Income:

Minority Interest in Net Income 2,500

Minority Interest 49,300

Company Company _ Eliminations _

Retained Earnings Statement:

Liabilities 90,000 61,000 151,000

Common Stock--S 80,000

Common Stock--S 20,000

Consolidated Net Income:

Minority Interest in Net Income 3,500

Minority Interest 51,300

Company Company _ Eliminations _

Retained Earnings Statement:

Liabilities 93,000 59,000 152,000

Cost of Goods Sold 800

Subsidiary Income 9,360

Common Stock--S 80,000

Minority Interest in Net Income 2,340

Consolidated Net Income:

Minority Interest in Net Income 2,340

Minority Interest 49,140

Company Company _ Eliminations _

Retained Earnings Statement:

Liabilities 90,000 61,000 151,000

Cost of Goods Sold 1,350

Subsidiary Income 13,560

Common Stock--S 80,000

Minority Interest in Net Income 3,390

Consolidated Net Income: