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CHAPTER FIVE
CONDOLIDATED FINANCIAL STATEMENTS
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5.1 Parent Company – Subsidiary relationship.
One of the important forms of business combination is the acquisition of shares of another company.
When acquiring shares, the terms investor and investee relationship comes in to existence. The investor
acquires the controlling interest in the investee company and thus a parent – subsidiary relationship is
established. The investee becomes a subsidiary of the acquiring company and the investor becomes the
parent company. In other words, the investee is affiliated to the parent company. But these companies
keep separate legal entity. A parent company and its subsidiary company are a single economic entity
even though they are separate legal entity. In recognition of this fact, consolidated financial statements
are issued to report the financial position and operating results of a parent company and its subsidiaries
as though they comprised a single accounting entity.
INVESTOR INVESTEE
=>Acquires controlling interest in the
Parent co. Outstanding common stock more than Subsidiary Co.
50% direct or indirect holding .

. Wholly own Or
. Partially owned
 Separate Legal Entity
 Single Economic and Accounting entity
 Investor’s direct or indirect holding of more than 50%shares in the investee’s outstanding
common Stock is an evidence of controlling interest
5.2 The Meaning of Controlling Interest:
If one company acquires more than 50% shares of another company, it can be said that the former
company has controlling interest in the latter company. In other words an investor’s direct or indirect
ownership of more than 50% of an investee’s outstanding common stock has been required to evidence
the controlling interest underlying a parent subsidiary relationship. However even though such a
common stock owner ship exists, other circumstances may negate the Parent company’s actual control
of the subsidiary. Such circumstances are:
 A subsidiary that is in liquidation or re organization in a court supervised bankruptcy proceedings is
not controlled by its parent company
 A foreign subsidiary in a country having severe production, monetary or income tax restrictions may
be subject to the authority of foreign country rather than the parent company.
5.3 Consolidation of Wholly Owned Subsidiary On date of Purchase Type Business Combination
In wholly owned subsidiary there is no question of controlling because all the shares are owned by the
parent company. In mutual discussion, they decide the purchase consideration to be issued to the
shareholders of the subsidiary company. And it can be in the form of shares, cash or other forms. So first
step in this is to find the purchase consideration and then to find what is the amount of expenses
incurred, direct or indirect. Then for the purpose of recording the value of goodwill it is to find the value
as it is explained in the before circumstances. It is the excess of investment over the current fair value of
net assets of the subsidiary. After that it is to prepare the working paper and consolidated balance sheet.
Illustration
On December 31, 2010, P Corporation issued 10000 shares of its $10 par common stock (Current Fair
Value $45 a share) to the shareholders of S company for all the outstanding $5 common stock of S
company. (Both companies keep separate legal entity after combination). There was no contingent
consideration. Out of pocket cost of business combination paid by P Corporation on December 31, 2010
consisted of the following.
Finders and legal fee relating business combination $50,000
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SEC registration 35,000

$85,000
The business combination qualified for purchase accounting. S company was to continue its corporate
existence as a wholly owned subsidiary of P Company. Both companies had December 31 as fiscal year.
The Income tax rate of each company was 40%. On December 31, 2010, the current fair value of S
company’s identifiable assets and liabilities were the same as carrying amounts except the for the three
assets listed below.
Inventories $135,000
Plant assets (net) 365,000
Patent (net) 25,000
Financial statements of P Corporation and S Company for the year ended December 31, 2010 just prior
to business combination were as follows.
P Corporation and S Company
Balance Sheets (Prior to Purchase type Business Combination)
For the year ended December 31, 2010
P Corporation S Company
Assets
Cash $100,000 $40,000
Inventories 150,000 110,000
Other current assets 110,000 70,000
Receivable from S company 25,000 ---
Plant assets (net) 450,000 300,000
Patent (net) --- 20,000
Total Assets $835,000 $540,000
Liabilities & Stock Holders’ Equity
Payable to P corporation ---- $25,000
Income tax payable $26,000 10,000
Other liabilities 325,000 115,000
Common Stock $10 Par 300,000 ---
Common Stock $5Par --- 200,000
Excess Over Par 50,000 58,000
Retained Earnings 134,000 132,000
Total Liabilities & Stockholders’ Equity $835,000 $540,000
Required: Show P Corporation’s journal and ledger accounts affected for purchase type business
combination (acquisition of 100% of subsidiary’s (S Company) outstanding common stock)
P Corporation (Combinor)
Journal Entries
December 31, 2010
Purchase consideration paid by P Corporation to S Company
10000 Shares x $45 = 450,000

Common Stock Excess over Par

10000X 10 =100,000 10000X 35 =350,000
1. Investment 450,000
Common Stock 100,000
Excess Over Par 350,000
(To record the issuance of 10000 shares of Common stock for all the outstanding Common stock of S
company in a Purchase type business combination)
2. Investment 50,000
Excess Over Par 35,000
Cash 85,000

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(To record the payment of out of pocket cost of business combination with S company, Legal fee &
finder’s fee as direct, and SEC Registration fee as Indirect)
 Computation of Good will or negative goodwill
Current fair value of Assets of S Company
Cash $40,000
Inventories 135,000
Other Current Assets 70,000
Plant Assets 365,000
Patent 25,000
Total $635,000
Current Fair value of liabilities
Payable to P Corporation $25,000
Income tax payable 10,000
Other Current Liabilities 115,000
Total $150,000
 Current fair value of net assets of S company
635,000- 150,000 = 485,000
 Investment = 450,000 + 50,000 = $500,000
Excess of investment over the current fair value of net assets of S company
(Or Good will) =$500,000- $ 485,000 = $15,000
Alternative method of Calculating Current fair value of Net Assets of S Company

Share Holders Equity + Revaluation Increment = Current Fair Value of Net assets

Shareholders’ Equity of S Company

Common stock $200,000
Excess Over Par 58,000
Retained Earnings 132,000
Total = $390,000
Revaluation Increment
Inventories $25,000
Plant Assets 65,000
Patent 5,000
Total = $95,000
Share Holders Equity + Revaluation Increment = Current Fair Value of Net assets
$390,000 + $95,000 = $485,000
There is no acquisition of net assets journal as the subsidiary company is keeping separate legal entity.
Ledger accounts of combinor affected by the business combination.
INVESTMENT ACCOUNT

Date Explanation Debit Credit Balance

2010,Dec31 Balance b/f Nil
Common stock 100,000 100,000dr
Excess Over Par 350,000 450,000dr
Cash 50,000 500,000dr
COMMON STOCK ACCOUNT
Date Explanation Debit Credit Balance
2010,Dec3 Balance b/f 300,000 300,000cr
1
Investment 100,000 400,000cr
CASH ACCOUNT
Date Explanation Debit Credit Balance
Advance Financial Accounting Chapter Five Consolidated Financial Statement
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2010,Dec3 Balance b/f 100,000dr

1
Excess over par 35,000 65000dr
Investment 50,000 15000dr
EXCESS OVER PAR
Date Explanation Debit Credit Balance
2010,Dec3 Balance b/f 50,000cr
1
cash 35,000 15000dr
Investment 350,000 365,000cr

5.4 Developing the Elimination:

The parent company’s investment account and the subsidiary’s stock holder’s equity accounts should
not appear in the consolidated balance sheet because they are essentially reciprocal (intercompany)
accounts. In other words these accounts are to be eliminated. Generally Accepted Accounting Principles
do not permit the write up of a going concern’s assets to their current fair values. But to confirm the
purchase accounting requirement which demands the use of current fair value for the consolidation.
Thus the excess of current fair value over the carrying amount (Revaluation increment) must be
incorporated in the consolidated balance sheet of P Corporation and subsidiary by means of the
elimination.
5.5 Working Paper for Consolidated Balance Sheet-wholly owned
The preparation of a consolidated balance sheet on the date of purchase type business combination
usually requires the use of a Working Paper for consolidated balance sheet.
Format of working paper for consolidated Balance sheet for wholly owned subsidiary on date of
purchase type business combination
Features of working paper for consolidated balance sheet on the date of purchase type business
combination
 The elimination is not entered either in the parent company’s or the subsidiary company’s accounting
records and it is only a part of the working paper for the preparation of the consolidated balance
sheet.
 The elimination is used to reflect difference between current fair values and carrying amounts of the
subsidiary’s identifiable net assets because subsidiary company did not write up its assets to current
fair value on the date of business combination.
 The elimination column in the working paper for consolidated balance sheet reflects the increase and
decrease, rather than debits and credits.
 Intercompany receivable and payable are placed on the same line of the working paper for
consolidated balance sheet and are combined to produce a consolidated amount of zero.
 The respective corporations are identified in the working paper elimination.
 The consolidated paid in capital amounts are those of the parent company only. Subsidiary’s paid in
capital amounts are always eliminated in the process of consolidation.
 Consolidated retained earnings on the date of purchase type business combination include only the
retained earnings of the parent company. This treatment is consistent with the theory that purchase
accounting reflects a fresh start in an acquisition of net assets, not a combining of existing stock
holders interest.
 The amount in the consolidated column of the working paper for consolidated balance sheet reflect
the financial position of a single economic entity comprising two legal entities, with all
intercompany balances of the two entities eliminated.
5.6 Preparation of Consolidated Balance Sheet
As S Company wants to continue as a separate corporation and generally accepted accounting principles
do not sanction write ups of assets of a going concern. Purchase accounting for business combination of
P Corporation and S Company requires a fresh start for the consolidated entity. This reflects the theory
that a business combination that meets the requirements for the purchase accounting is an acquisition of
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the combinee’s net assets (assets minus liabilities) by the combinor. The operating results of the P and S
prior to the date of their business combination are those of two separate economic as well as legal
entities. Accordingly a consolidated balance sheet is the only consolidated financial statement issued by
P on December 31, 2010, the date of the purchase type business combination of P and S. The parent
company’s investment account and the subsidiary’s stock holder’s equity accounts do not appear
in the consolidated balance sheet because they are essentially reciprocal (intercompany) accounts.
In other words these accounts are to be eliminated. Under purchase accounting theory , the parent
company’s ( combinor) assets and liabilities (other than intercompany ones) are reflected at carrying
amounts and the subsidiary company’s (combinee) assets and liabilities are ( other than intercompany
ones ) are reflected at current fair value in the consolidated balance sheet . Good will is recognized to
the extent to the cost of parents’ investment in 100% of the subsidiary’s outstanding common stock
exceeds the current fair value of the subsidiary’s identifiable net assets.
P Corporation and Subsidiary
Working paper for consolidated Balance Sheet
December 31, 2010
P S Elimination Consolidated
Corporation Company.
Assets
Cash 15,000 40,000
Inventories 150,000 110,000
Other Current Assets 110,000 70,000
Intercompany receivable and( Payable) 25,000 (25,000)
Investment in S co. C/S 500,000
Plant assets(net) 450,000 300,000
Patent 20,000
Good will
Total Assets 1250,000 515,000

Liabilities and Stock Holders’ Equity

Income tax payable 26,000 10,000
Other liabilities 325,000 115,000
Common stock $10Par 400,000
Common stock $5 Par 200,000
Excess Over Par 365,000 58,000
Retained Earning 134,000 132,000

Total Liabilities and stock holders’

equity 1250,000 515,000
Thus the Elimination Process is
S Company’s Share Holders Equity + Revaluation Increment of S company + Good will =
Investment by P Company.
S company’s Share Holders Equity Includes

Common stock Excess Over par Retained Earnings

$200,000 $58,000 $132,000
Total Shareholders’ equity = 390,000
Revaluation Increment

Inventory Plant Assets Patent

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CFV = $135,000 = 365,000 = 25,000

Carry Amount= 110,000 300,000 20,000
25,000 65,000 5,000
Total Revaluation Increment = 95,000
Good will Calculated = 15,000 & Investment by P Corporation = $500,000
So in Elimination process
Shareholders Equity + Revaluation Increment + Good will =Investment
$ 390,000 + $ 95,000 + $15,000 = $500,000
Thus the Elimination in the journal entry format
Common Stock (S) 200,000
Excess Over Par (S) 58,000
Retained Earnings (S) 132,000
Inventories 25,000
Plant Assets 65,000
Patent 5,000
Good will 15,000
Investment 500,000
To eliminate intercompany investment and equity accounts of subsidiary on the date of combination and
to allocate the excess of cost over the carrying amount of identifiable assets acquired with Remainder to
goodwill.
5.7 CONSOLIDATION OF PARTIALLY OWNED SUBSIDIARY
The consolidation of a parent company and its partially owned subsidiary differs from the consolidation
of a wholly owned subsidiary in one major respect that is the recognition of minority interest. Total
owners’ equity of the subsidiary company is to be divided in to two parts. That is parent company’s
share of owner’s equity and the minority interest shareholders equity. The parent company pays the
purchase consideration for the parent company share of the owners’ equity of subsidiary company and
the while calculating the goodwill also, it is to consider that value.
5.8 Minority interest in partially owned subsidiary is otherwise called non-controlling interest. It is
the term applied to the claim of shareholders other than the parent company. The parent company is
having the controlling interest to the net income or net losses and the net assets of the subsidiary
company. The minority interest in the subsidiary’s net income or net losses is displayed in the
consolidated income statement and the minority interest in the subsidiary’s net assets is displayed in the
consolidated balance sheet.
3.9. Working Paper for consolidated balance sheet for partially owned subsidiary
After developing the elimination as explained above and the elimination journal entry, next step is to
prepare the working paper for consolidated balance sheet. The preparation of consolidated balance sheet
on the date of purchase type business combination usually requires the use of working paper for
consolidated balance sheet. Even for parent company and partially owned subsidiary. The preparation
can method can be explained as follows, five columns are to be provided in the working paper. The first
one is to enter the items of financial statements, the second one is for the entering the balance of parent
company and third one is to enter the subsidiary company balance and the fourth column is to enter the
elimination and the last column is to consolidate the whole figures. It is worked as follows.
P Corporation and Subsidiary
Working paper for consolidated Balance Sheet
December 31, 2010
P S Elimination Consolidated
Corporation Company.
Assets
Cash 15,000 40,000 -- 55,000
Inventories 150,000 110,000 * 25,000 285,000

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Other Current Assets 110,000 70,000 -- 180,000

Inter-company receivable and( Payable)
25,000 (25,000) --- ---
Investment in S co. C/S 500,000 --- *(500,000) ----
Plant assets(net) 450,000 300,000 * 65,000 815,000
Patent 20,000 * 5,000 25,000
Good will -- -- * 15,000 15,000

Total Assets 1250,000 515,000 (390,000) 1375,000

Liabilities and Stockholders’ Equity

Income tax payable 26,000 10,000 -- 36,000
Other liabilities 325,000 115,000 -- 440,000
Common stock $10Par 400,000 -- -- 400,000
Common stock $5 Par --- 200,000 *(200,000 ---
)
Excess Over Par 365,000 58,000 *(58,000) 365,000
Retained Earning 134,000 132,000 *(132,000 134,000
)

Total Liabilities and stock holders’

equity 1250,000 515,000 (390,000) 1375,000
* Refer Elimination journal
5.10. CONSOLIDATED BALANCE SHEET
After preparing the working paper for consolidated balance sheet, the amounts in the consolidated
column of the working paper for consolidated balance sheet are presented in a customary fashion in the
consolidated balance sheet which is as follows.
P Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 2010
Assets
Cash $ 55,000
Inventories 285,000
Other Current Assets 180,000
Total Current Assets $520,000
Plant assets( net) 815,000
Intangible assets
Patent (net) $25,000
Good will 15,000 40,000
Total Assets $1,375,000
Liabilities and Stock Holders’ Equity
Liabilities
Income tax payable $ 36,000
Other liabilities 440,000
Total Liabilities $476,000
Stock Holders’ equity
Common stock $10 Par $400,000
Excess Over Par 365,000
Retained Earning 134,000 899,000
Total Liabilities and stock holders’ equity $1,375,000
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Note: in addition to the above consolidated balance sheet on December 31, 2010, P Corporation’s
published financial statements for the year ended December 31, 2010, include the unconsolidated
income statement and statement of retained earnings illustrated on page 12 &13

PARTIALY OWNED
SUBSIDIARY COMPANY’S

OWNER SHIP

CONTROLLING NON CONTROLLING

INTEREST INTEREST

CLAIMS OF CLAIMS OF
PARENT COMPANY MINORITY INTEREST

IN THE NET INCOME IN THE NET INCOME

OR LOSS OR LOSS

REPORTED IN THE
CONSOLIDATED
INCOME STATEMENT
AND AND
IN THE NET IN THE NET
ASSETS ASSETS

REPORTED IN THE
CONSOLIDATED
BALANCE SHEET.
Illustration on partial owned subsidiary
On December 31, 2010, Post Corporation issued 57000 shares of its $ 1 Par common stock ( Current
Fair Value $20 a share ) to the shareholders of Sage company in exchange for 38000 of the 40000
outstanding shares of Sage company’s $10 Par common stock in the purchase type business combination
. Out of pocket cost of business combination paid in cash by the Post Corporation on December 31,
2010, were as follows.
Finder’s and legal fee relating to business combination $52,250
SEC Registration statement cost 72,750
Total $125,000
Financial Statements of Post Corporation and Sage Company for their fiscal year ended December 31,
2010, prior to the business combination were as follows. There was no intercompany transaction prior to
the business combination.
POST CORPORATION AND SAGE COMPANY
Separate Financial Statements (Prior to business combination)
For the year ended December 31, 2010

POST SAGE
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CORPORATION COMPANY
Income statement
Net Sales $5,500,000 $1,000,000
Cost and Expenses
Cost of goods sold 3,850,000 650,000
Operating expenses 925,000 170,000
Interest expenses 75,000 40,000
Income tax expenses 260,000 . 56,000
Total cost and expenses $5,110,000 $ 916,000
Net Income 390,000 84,000

Statement of Retained Earnings

Retained earnings beginning $810,000 $ 290,000
Add: Net Income 390,000 84,000
Subtotal 1,200,000 374,000
Less: Dividends 150,000 40,000
Retained Earnings End $1,050,000 $ 334,000
========= =======

POST CORPORATION AND SAGE COMPANY

Separate Financial Statements (Prior to business combination)
For the year ended December 31, 2010

Balance Sheet Post Corporation Sage Company

Assets
Cash $ 200,000 $ 100,000
Inventories 800,000 500,000
Other Current Assets 550,000 215,000
Plant Assets (net) 3,500,000 1,100,000
Good will (net ) 100,000 ----
Total Assets $5,150,000 $1,915,000

Liabilities and Share Holders Equity

Income tax payable $ 100,000 $ 16,000
Other Liabilities 2,450,000 930,000
Common stock ($1 Par ) 1,000,000 ----
Common stock ($10 Par) ---- 400,000
Excess Over Par 550,000 235,000
Retained Earnings 1,050,000 334,000
Total Liabilities & Share Holders Equity $5,150,000 $1,915,000

On December 31, 2010, the current fair value of Sage company’s identifiable assets and liabilities were
the same as their carrying amounts, except the following assets.
CFV
December31, 2010.
Inventories $ 526,000
Plant Assets 1,290,000
Lease Hold 30,000
Required: Show
1. Journal Entries in the records of Post Corporation
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2. Necessary Ledger Accounts

3. Compute Minority Interest.
4. Develop elimination journal
5. Working Paper for consolidated balance sheet
6. The Consolidated Balance sheet.
Solution:
1. Combinor’s Journal entries for purchase type business combination acquisition of 95% of subsidiary’s
outstanding common stock.
- Total number of shares of sage company = $400,000/ 10 = 40000 shares
- Number of shares acquired by Post Corporation. 38000 out of 40000
- Percentage of shares acquired by Post corporation = 38000 x 100 = 95%
40000
Percentage of Minority Interest (40000-38000) = 2000 x 100 = 5%
40000
Purchase consideration given by Post corporation = 57000 shares of $1 Par and Current Fair value $20.
57000 X $20 = $1,140,000

Common Stock Excess over Par

57000 X $1 =$57000 57,000 X $19 = $1,083,000

POST CORPORATION (Combinor)

Journal Entries
December 31,2010

1. Investment in Sage Co. Common stock ------------------- 1,140,000

Common Stock ----------------------------------------------------------- 57,000
Excess over Par ------------------------------------------------------------- 1,083,000
To record the issuance of 57000 shares of Common stock for 38000 of the 40000 outstanding shares of
Sage Company Common Stock in a purchase type business combination.
2. Investment in Sage co. Common Stock --------------------------52,250
Excess over Par ------------------------------------------------------ 72,750
Cash ------------------------------------------------------------------------------- 125,000
To record the payment of out of pocket cost of business combination with sage company, finder’s and
legal fee relating to the combination are recorded as additional cost of investment , Cost associated with
SEC Registration are recorded as an offset to the Proceeds from the issuance of common stock.

2. LEDGER ACCOUNTS OF POST CORPORATION (COMBINOR)

(Affected by purchase type Business Combination)
a. INVESTMENT ACCOUNT
Date Explanation Debit Credit Balance
2010,Dec31 Balance forward Nil
Common stock 57,000 57,000dr
Excess Over Par 1,083,000 1,140,000dr
Direct out of pocket 52250 1192,250dr
cost

b. COMMON STOCK ($1Par) ACCOUNT

Date Explanation Debit Credit Balance
2010,Dec3 Balance forward $1,000,000cr
1
Investment 57,000 1,057,000cr
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c. CASH ACCOUNT
Date Explanation Debit Credit Balance
2010,Dec31 Balance forward $200,000dr
Investment 125,000 75,000dr
d. EXCESS OVER PAR ACCOUNT
Date Explanation Debit Credit Balance
2010,Dec31 Balance forward $550,000cr
Investment 1083,000 1630000cr
Cost of issuing 72,750 1,560,250
common stock cr

3. COMPUTATION OF MINORITY INTEREST

Minority interest is the share in the net assets of shareholders other than the Parent company holdings.
So First Total Current Fair Value of Net assets should be calculated.
Computation of Current Fair Value of Net assets of Subsidiary company (Sage Company)
Current Fair Value of Assets of Sage Company.
Cash $100,000
Inventories 526,000
Other Current Assets 215,000
Plant Assets 1,290,000
Lease Hold 30,000
Total $2,161,000
Current Fair Value of Liabilities of Sage Company
Income tax Payable $ 16,000
Other Liabilities 930,000
Total $946,000
Current Fair Value of net assets of Sage Company
Current Fair value of Assets ------------------------------------- $2,161,000
Less: Current Fair value of Liabilities --------------------------------- 946,000
Current Fair Value of Net Assets (of sage company) ---------$1,215,000.

It belongs to

Parent company 95% Minority Interest 5%)

$1,215,000 X 95% = $1,154,250 $1,215,000 X 5%= $60750
So Value of Minority interest = $60750
4. DEVELOPING ELIMINATION JOURNAL
In Partially owned subsidiary company elimination should equalize the following
Share Holders Equity + Revaluation Increment + Good will
=
Investment + Minority Interest
Step number 1.
Elimination of Shareholder’s equity of Sage Company
Sage company’s Share Holders Equity Includes

Common stock Excess Over par Retained Earnings

$400,000 $235,000 $334,000
Total Shareholders’ equity = $969,000
Step number 2
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Sage Company’s Revaluation Increment

Inventories Plant Assets Lease Hold

$26,000 $190,000 $30000
Total Revaluation Increment =$246,000
Shareholders equity + Revaluation increment = Current fair value of net assets
$969,000 + $246,000 = $1,215,000
$1215, 000
It belongs to

Parent Company Minority Interest

$1215, 000X 95%= 1154250 & $1215, 000X 5% =$60750

Total Investment = $1,192,250

Current Fair value of Net assets = 1,154,250
Excess of Investment = 38,000 = Good will
Share Holders Equity + Revaluation Increment + Good will
=
Investment + Minority Interest

$969,000 + $246,000 + 38,000 = $1,192,250 + $60750

POST CORPORATION AND SUBSIDIARY
Working Paper Elimination Journal (Partially Owned subsidiary)
December 31, 2010
Common Stock (Sage) 400,000
Excess Over par (Sage) 235,000
Retained Earnings 334,000
Inventories (Sage)(526,000- 500000) 26,000
Plant Assets (Sage)(1,290,000- 1,100,000) 190,000
Lease Hold (Sage)(30000-0) 30,000
Goodwill (1,192,250 – 1154,250) 38,000
Investment in Sage Co. 1,192,250
Minority Interest 60,750

(To eliminate intercompany investment and Equity accounts of subsidiary on date of purchase of
business combination, to allocate excess cost over carrying amounts of assets acquired, with remainder
to goodwill and to establish minority interest in the net assets of subsidiary on date of Business
combination. )
Working paper for consolidated balance sheet- Partially owned subsidiary
After developing the elimination as explained above and the elimination journal entry, next step is to
prepare the working paper for consolidated balance sheet. The preparation of consolidated balance sheet
on the date of purchase type business combination usually requires the use of working paper for
consolidated balance sheet. In the case of partially owned subsidiary, there is owners’ equity other than
parent company hold known a s minority interest.
Nature of Minority Interest
The appropriate classification and presentation of minority interest in consolidated financial statements
has been a problem for accountants, especially because it is recognized only in the consolidation process
and does not result from a business transaction or event of either the parent company or the subsidiary.
Two concepts for consolidated financial statements have been developed to account for minority interest

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1 The Parent company concept &

2 The Economic unit or Entity theory concept.
According to the parent theory concept, investment of the parent is replaced by the individual assets and
liabilities and subsidiary is considered as a branch. Minority interest is considered to be an outside group
and is treated as a liability. This liability increases in the subsequent years with the minority interest’s
share of net income or decreases with minority interest’s share of net loss in subsidiary. It is included in
the liability section of the consolidated balance sheet.
As per Economic unit or entity theory concept, subsidiary company is divided as an economic entity
with two classes of proprietary interest. One is major interest and the other is Minority interest. The
consolidation of financial statements is viewed as a consolidation of two entities. Minority interest is
treated as a part of capital and is included in the stock holder’s equity section of the balance sheet.
The preparation method can be explained as follows, five columns are to be provided in the working
paper. The first one is to enter the items of financial statements, the second one is for the entering the
balance of parent company and third one is to enter the subsidiary company balance and the fourth
column is to enter the elimination and the last column is to consolidate the whole figures. It is worked
as follows.
POST CORPORATION AND SUBSIDIARY
Working Paper For consolidated Balance Sheet (Partially Owned subsidiary)
December 31, 2010
Post Sage Elimination Consolidate
Corporation Company Increase/ d
(Decrease)
Assets
Cash $ 75,000 $ 100,000 175,000
Inventories 800,000 500,000 26,000 1,326,000
Other Current Assets 550,000 215,000 765,000
Investment in sage co. 1,192,250 --- (1,192,250) ----
Plant Assets (net) 3,500,000 1,100,000 190,000 4,790,000
Lease hold --- --- 30,000 30,000
Good will (net ) 100,000 ---- 38,000 138,000
Total Assets $6,217,000 $1,915,000 (908,250) 7,224,000

Liabilities and Share Holders

Equity
Income tax payable $ 100,000 $ 16,000 116,000
Other Liabilities 2,450,000 930,000 3,380,000
Minority Interest ---- ---- 60750 60750
Common stock ($1 Par ) 1,000,000 ---- 1,057,000
Common stock ($10 Par) ---- 400,000 (400,000) ----
Excess Over Par 1, 560,000 235,000 (235,000) 1,560,250
Retained Earnings 1,050,000 334,000 (334,000) 1,050,000
Total Liabilities & Share $6,217,250 $1,915,000 (908,250) 7,224,000
Holders Equity
5.10 Consolidated Balance sheet for partially owned subsidiary
After preparing the working paper for consolidated balance sheet, the amounts in the consolidated
column of the working paper for consolidated balance sheet are presented in a customary fashion in the
consolidated balance sheet which is as follows.

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POST CORPORATION AND SUBSIDIARY

Consolidated Balance Sheet (Partially Owned subsidiary)
December 31, 2010
Assets
Current Assets
Cash $ 175,000
Inventories 1,326,000
Other Current Assets 765,000
Total Current Assets $2,226,000
Plant Assets (net) 4,790,000
Intangible Assets
Lease hold 30,000
Good will (net ) 138,000 168,000
Total Assets $7,224,000

Liabilities and Share Holders Equity

Liabilities
Income tax payable 116,000
Other Liabilities 3,380,000
Minority Interest 60750
Total Liabilities $3,556,000
Share Holders Equity
Common stock ($1 Par ) 1,057,000
Excess Over Par 1,560,250
Retained Earnings 1,050,000 3,667,250

Total Liabilities & Share Holders Equity 7,224,000

5.11 .PUSH DOWN ACCOUNTING For a purchased subsidiary

A thorny question for accountants has been the appropriate basis of accounting for assets and liabilities
of a purchased subsidiary that, because of a substantial minority interest, loan agreements, legal
requirements or other commitments, issues separate financial statements to outsiders following the
purchase type business combination. Some Accountants have mentioned that because generally accepted
accounting principles do not permit the write up of assets by the going concern., the purchased
subsidiary should report assets, liabilities revenue and expense in its separate financial statements at
amount based on carrying amount prior to the business combination. Other accountants have
recommended that the values assigned to the purchased subsidiary’s net assets in the consolidated
financial statements should be PUSHED DOWN to the subsidiary for the incorporation in its separate
financial statements. These accountants believe that the business combination is an event that warrants
recognition of current fair values of the subsidiary’s net assets in the separate statements. The security
exchange commission

5.12. CONSOLIDATION OF FINANCIAL STATEMENTS: SUBSEQUENT TO DATE OF

BUSINESS COMBINATION
5.12.1. Accounting for Operating results of Purchase subsidiary
Consolidation of financial statements Subsequent to date of purchase means Preparation and
combination of financial statements after the date of purchase. After the date of business combination,
the parent company must account for the operating results of the subsidiary: The net income or net loss

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and dividends declared and paid by the subsidiary. In addition, number of intercompany transactions and
events that frequently occur in a parent company- subsidiary relationship must be recorded.

Parent Company must account for the operating results of Subsidiary Company
PARENT SUBSIDIARY
COMPANY COMPANY

Operating results are

Net income or loss & dividends

Paid by subsidiary

IN ACCOUNTING FOR OPERATING RESULTS

OF SUBSIIDARY COMPANY A PARENT COMPANY
MAY CHOOSE EITHER

EQUITY METHOD OR COST METHOD

Accounting for operating results of wholly owned purchased subsidiaries

5.12.2. Equity Method & Cost Method
In the equity method of accounting, the parent company recognizes its share of the subsidiary’s net
income or loss, adjusted for depreciation and amortization of differences between current fair values and
carrying amounts of purchased subsidiary’s net assets on the date of business combination as well as its
share of dividends declared by the subsidiary. This method is consistent with the accrual basis of
accounting because it recognizes in the carrying amount of the parent company’s investment in the
subsidiary when they are realized by the subsidiary as net income or loss , not when they are paid by the
subsidiary as dividend. Under this method dividend declared by the subsidiary do not constitute revenue
to the parent company, instead are liquidation of a portion of the parent company’s investment in the
subsidiary company.
Cost method
Under this method the parent company accounts for the operations of a subsidiary only to the extent that
dividends are declared by the subsidiary. Dividends declared by the subsidiary from net income
subsequent to the business combination are recognized as revenue by the parent company. Dividends
declared by the subsidiary in excess of post combination net income constitute a reduction of the
carrying amount of the parent company’s investment in the subsidiary.Net income or net loss is of the
subsidiary is not recognized by the parent company when the cost method of accounting is used.
5.12.3. Equity Method Journal for first year after business combination
In the record of Parent Company.
(To record the operating result of the subsidiary)
To record the net income of subsidiary: When net income is arised in the income statement of
subsidiary, it should be treated as again invested in the subsidiary company by the Parent company. So
when the net income is again invested, the investment account increases and the net income reduced
when it is transferred to investment. When investment increases, it should be debited and income is
reduced, it should be credited.
Debit: Investment ----------------- xxxx
Credit: Investment Income------------------ xxxx
(To record subsidiary company’s net income in the record of parent company)
When the subsidiary company declares the dividend, it becomes receivable for the parent company and ,
it should be treated as the return of the portion of investment . so when the dividend becomes receivable,
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dividend should be debited and when the investment is returned by the subsidiary , the investment
account reduces as far as the parent company is concerned and thus when the investment reduces, it
should be credited:
Debit: Dividend (receivable) xxx
Credit: Investment xxx
(To record the dividend declared by the Subsidiary company)
In the record of the subsidiary, Net income is arrived as per the financial statement that is income
statement. But when the dividend is declared, dividends becomes an expenses appropriation and thus
dividend is debited and, it becomes payable to the parent company, and as such payable should be
credited.
Debit: Dividend xxxx
Credit: Dividend Payable xxxx
(To record the dividend payable to Parent company)
5.12.4 Adjustment of net income of Subsidiary Company

Generally Accepted Accounting Principles do not permit to write up the assets of a going concern. The
subsidiary company is a going concern as it is not liquidated after the business combination. So financial
statements of the subsidiary is prepared using the carrying amounts. It means that the depreciation,
amortization etc are calculated on the carrying amounts and not on the current fair value. Purchase
accounting method requires the current fair value to be incorporated in the consolidated balance sheet. In
other words, depreciation is calculated in the income statement of the subsidiary is on the basis of
carrying amount but for the consolidation purposed, it should be on the basis of current fair value . As
such depreciation and amortization value included in the subsidiary’s income statement is less than as it
is required. As the depreciation expenses are less provided, the net income of the subsidiary is over
stated. So net income of the subsidiary company should be reduced to that extend. When the
depreciation and amortization expense on the excess of current fair value of assets over the carrying
amount that is on the revaluation increment, investment income reduces and when the investment
income reduces, investment account also reduced, because when the net income arises in the subsidiary
it is treated as again invested by the parent company as such when the income is reduced, investment
account reduces. So the adjusting journal in the record of Parent Company is:
Debit: Investment income xxxx
Credit: Investment xxxx
(To record the adjustment of over stated income of subsidiary in the record of Parent Company)
5.12.4. Developing the Elimination journal
Elimination Process in Consolidation of financial statements subsequent to date of purchase, wholly
owned subsidiary should equate as follows.
Share Holders Equity of subsidiary + Remaining balance of Revaluation increment + Cost of
goods sold + Operating Expenses + Investment income Balance.
=
Investment in S. co. + Dividend Balance
5.12.5. Working paper for consolidated financial statements subsequent to date of purchase
After developing the elimination as explained above and the elimination journal entry, next step is to
prepare the working paper for consolidated balance sheet. The preparation of consolidated balance sheet
on the date of purchase type business combination usually requires the use of working paper for
consolidated balance sheet. In the case of partially owned subsidiary, there is owners’ equity other than
parent company hold known a s minority interest. Financial statements include Income statement,
retained earnings statement and the balance sheet. So in the working paper also it is to provide the
segments of financial statements. The columns are Parent company balance, subsidiary company
balance, elimination and the consolidated column.
5.12.6. Consolidated financial statement under equity method:

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Financial statements include Income statement, retained earnings statement and the balance sheet. So in
the working paper also it is to provide the segments of financial statements. The figures in the last
column of the working paper are used to prepare the consolidated financial statements.
5.13. ACCOUNTING FOR OPERATING RESULTS OF SUBSIDIARY – COST METHOD
If the parent company is following cost method, the parent company records for the operating results of
a subsidiary only to the extent that dividends are declared by the subsidiary. Dividends declared by the
subsidiary from net income subsequent to the business combination are recognized as revenue by the
parent company. Dividends declared by the subsidiary in excess of post combination net income
constitute a reduction of the carrying amount of the parent company’s investment in the subsidiary.Net
income or net loss is of the subsidiary is not recognized by the parent company when the cost method of
accounting is used.
5.13.1. Working paper for consolidated financial statements – Cost Method
After developing the elimination as explained below and the elimination journal entry, next step is to
prepare the working paper for consolidated financial statements. The preparation of consolidated
financial statements subsequent to date of purchase type business combination usually requires the use
of working paper for consolidated financial statements. In the case of partially owned subsidiary, there is
owners’ equity other than parent company hold known a s minority interest. Financial statements
include Income statement, retained earnings statement and the balance sheet. So in the working paper
also it is to provide the segments of financial statements. The columns are Parent company balance,
subsidiary company balance, elimination and the consolidated column.
5.13.2. Developing Elimination – Cost Method
The working paper elimination should be carried out in four stages under cost method.
The first stage is to eliminate intercompany investment and Equity accounts of subsidiary on date of
Business combination, to allocate Revaluation Increment, with remainder to goodwill and to Establish
Minority interest in net assets of subsidiary on date of business combination. The second stage is To
provide for year 2 depreciation and amortization On revaluation increment of sage company’s
identifiable Assets and to amortize goodwill acquired in business Combination. The third stage is to
eliminate intercompany dividends and minority interest share thereof. The last stage is to establish the
minority interest in adjusted net income.
5.13.3. Consolidated financial Statement under cost.
Consolidated financial statements include consolidated income statement, consolidated retained earnings
statement and consolidated balance sheet. The figures in the last column (the consolidated column) of
the working paper is used to prepare the consolidated financial statements

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