Consolidated Financial Statements after Acquisition

Because time has elapsed and business activity has taken place between the
date of acquisition and the date of consolidated financial statements
preparation, a complete set of consolidated financial statements must be
prepared.

- A complete set of consolidated financial statements includes the

following statements:

1- Income statement.

2- Retained earnings statement.

3- Balance sheet.

Work paper Format:

- To prepare consolidated financial statements an accounting work

paper is used to accumulate, classify, and arrange data.

- The format includes a separate section for each of three basic

financial statements:

1- Income statement.
2- Retained earnings statement.
3- Balance sheet.
Example:

On January 1, 2010 “A” Company purchased 80 % of the outstanding

shares of “B” Company common stock for L.E. 1,600,000.

The trial balance for the two companies at December 31, 2010 was as
follows:

“A” Company “B” Company

Account Titles Dr Cr Dr Cr

Cash 790,000 180,000

Accounts 640,000 280,000

receivable

Inventory 560,000 320,000

1/1/ 2010

Investment in “B” 1,600,000

Company

Property & plant 1,800,000 1,650,000

(net)

Land 500,000 170,000

Accounts payable 450,000 240,000

Other liabilities
620,000 270,000
Common stock L.E.
10 par value 2,000,000 1,000,000

Other contributed
capital
400,000 600,000

Retained earnings

1
 1/1/2010

Dividends declared 2,100,000 400,000

Sales

Dividend income 200,000 100,000

Purchases
3,000,000 1,600,000
Expenses
80,000

1,860,000 950,000

700,000 460,000
------------- ------------- ------------ ------------
- - -- --
8,650,000 8,650,000 4,110,000 4,110,000

Other data:

1- On January 20, 2010 “B” Company paid L.E. 100,000 dividends.

2- Inventory 31/12/2010, 670,000 (A Company), and L.E. 430,000 (B
Company).

Required:

1-Prepare the journal entry to record the cash dividends.

2-Prepare a consolidated financial statements work paper at December 31,

2010.

3-Prepare the elimination entries at December 31, 2010.

4-Prepare a consolidated income statement.

5-Prepare a consolidated retained earnings statement.

6-Prepare a consolidated balance sheet at December 31, 2010.

2
 Solution
(1) Preparing journal entry to record cash dividends:

Dividends declared 100,000

Cash 100,000

(2) Preparing a consolidated financial statements work paper at December

31, 2010

Consolidated Financial Statements Work paper

“A” Company and “B” Company
For the Year Ended Dec. 31, 2010

“A” “B” Eliminations Non- Consolidated

Comp. Comp. Controlling Balances
Dr Cr Interest
Income
Statemen

Sales 3,000,000 1,600,000 4,600,000

(1)
Dividend 80,000 80,000 -0-
Income
------------ ------------ ------------
Total 3,080,000 1,600,000 4,600,000
Revenue
------------ ------------ -------------

Cost of
Goods
Sold

Inventory 560,000 320,000 880,000

1/1/2010

Purchases 1,860,000 950000 2,810,000

------------ ------------ -------------
2,420,000 1270000 3,690,000

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Inventory (670,000) (430000) (1100000)
31/12/
------------ ------------ --------------

Cost of 1,750,000 840,000 2,590,000

Goods
Sold
1,160,000
Expenses 700,000 460,000 -------------
------------ ------------ 3,750,000
Total 2,450,000 1300000
costs and
Expenses
------------ ------------ -------------

Combined 630,000 300,000 850,000

Income

Non-
controll. (60,000)
Interest in 60,000
net
Income

Net ------------ ------------ -------------

income -------------------- -----------------
To 630,000 300,000 790,000
retained 80,000 -0- 60,000
earning
------------ ------------ -------------
Retained -------------------- -----------------
Earnings
Statement

1/1/ 2010
Retained
Earnings 2100000 2100000
“A”
Comp.
(2)
“B” 400000 320000 80,000 -0-
Comp.

Net
Income
from
above 630,000 300,000 80,000 -0- 60,000 790,000

4
 -
Dividend
Declared

“A”
Company (200,000) (200,000)

“B” (1)
Company (100,000) 80,000 (20,000) -0-

31/12/201 ------------ ------------ -------------------- ----------------- --------------

Retained
earnings 2530000 600000 400000 80000 120,000 2,690,000
To
balance ------------ ------------ -------------------- ----------------- --------------
sheet

Balance
sheet

Cash
790,000 180,000 970,000
Accounts
Receivab. 640,000 280,000 920,000

Inventory 670,000 430,000 1,100,000

31/12
(2)
Investm. 1,600000 1,600,000 -0-
In “B”
Company

Property 1,800000 1,650000 3450000

&
equipme.

Land 500,000 170,000 670,000

------------ ------------ -------------

Total
Assets 6000000 2710000 7,110,000

------------ ------------ -------------

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Accounts 450,000 240,000 690,000
Payable

Other 620,000 270,000 890,000

liabilities

Common
stock

“A” 2,000,000 2,000,000

Company

“B” (2)
Company 1,000,000 800,000 200,000 -0-

Other
contribu.
Capital

“A”
Company 400,000 400,000

“B” (3)
Company 600,000 480,000 120,000 -0-

Retained
earnings
From 2,530,000 600,000 400,000 80,000 120,000 2,690,000
above
-----------------

Non- 440,000 440,000

controllin
g.
Interest

------------ ------------ -------------------- -------------

(1) (1)
Total
Equity 6000000 2710000 1680000 1680000 7,110,000

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1- Preparing the elimination entries at December 31, 2010:

Dr Cr

Dividend income 80,000

Dividend declared 80,000

Common Stock 800,000

Other contributed capital 480,000
Retained earnings 320,000

Investment in “B” Company 1,600,000

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4- Prepare a consolidated income statement:
Consolidated Income statement
“A” Company & “B” Company
For the year Ended Dc
Sales 4,600,000
Dividend Income -0-
------------------
Total revenues 4,600,000
-------------------
Cost of goods sold
Inventory 1/1/2010 880,000
Purchases 2,810,000
-------------------
Cost of goods available for sale 3,690,000
Less: Inventory 31/12/201o (1,100,000)
-------------------
Cost of goods sol 2,590,000
Expenses 1,160,000
--------------------
Total cost & Expenses 3,750,000
--------------------
Net combined Income 850,000
Non-controlling interest (60,000)
--------------------
Net Income 790,000

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5-Prepare a consolidated retained earnings statement:

Consolidated Retained Earnings Statement

“A” Company & “B” Company

For the Year Ended Dec. 31, 2010

Retained Earnings 1/1/2010 2,100,000

“A” Company
Net Income 790,000
Dividends Declared “A” Company (200,000)
---------------
Retained Earnings 31/12/2010 2,690,000

6- Prepare a consolidated balance sheet at December 31, 2010:

Consolidated Balance Sheet

“A” Company & “B” Company

At Dec. 31, 2010

Assets
Cash 970,000
Accounts receivable 920,000
Inventory, 31/12/2010 1,100,000
Property & Equipment 3,450,000
Land 670,000

Total Assets 7,110,000

Accounts payable 590,000

Other liabilities 990,000
Common stock “A” Company 2,000,000
Other contributed capital “A” Company 400,000
Retained earnings 31/12/2010 2,690,000
Non-controlling interest 440,000

Total Equity 7,110,000

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 Example:

On January 1, 2009 “A” Company purchased 80 % of the outstanding

shares of “B” Company common stock for L.E. 2,400,000.

The trial balance for the two companies at December 31, 2010 was as
follows:

“A” Company “B” Company

Account Titles Dr Cr Dr Cr

Cash 1,185,000 270,000

Accounts 960,000 420,000

receivable

Inventory 840,000 480,000

1/1/ 2010

Investment in 2,400,000
“B” Company

Property & 2,700,000 2,475,000

plant (net)

Land 750,000 255,000

Accounts 675,000 360,000

payable

Other 930,000 405,000

liabilities

Common
stock L.E. 10 3,000,000 1,500,000
par value

Other
contributed
capital 600,000 900,000

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Retained
earnings
1/1/2010 3,150,000 600,000

Dividends
declared
300,000 150,000
Sales

Dividend 4,500,000 2,400,000

income

120,000
Purchases

2,790,000 1,425,000

Expenses

1,050,000 690,000

-------------- -------------- ------------- --------------

12,975,000 12,975,000 6,165,000 6,165,000

Other data:

1- On January 20, 2010 “B” Company paid L.E. 150,000 dividends.

2- Inventory 31/12/2010, 1,005,000 (A Company), and L.E. 645,000 (B

Company).

Requirements:

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1-Prepare the journal entry to record the cash dividends.

2-Prepare a consolidated financial statements work paper at December 31,

2010.

3-Prepare the elimination entries at December 31, 2010.

4-Prepare a consolidated income statement.

5-Prepare a consolidated retained earnings statement.

6-Prepare a consolidated balance sheet at December 31, 2010.

Solution
(1) Preparing journal entry to record cash dividends:

Dividends declared 150,000

Cash 150,000

(2) Preparing a consolidated financial statements work paper at

December 31, 2010:

Consolidated Financial Statements Work paper

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 “A” Company and “B” Company
For the Year Ended Dec. 31, 2010

“A” “B” Eliminations Non- Consolidated

Comp. Comp. Controlli Balances
Dr Cr ng
Interest
Income
Statemen

Sales 4500000 2400000 6900000

(1)
Dividend 120,000 120,000 -0-
Income
------------ ------------ --------------
Total 4620000 2400000 6900000
Revenue
------------ ------------ --------------
Cost of
Goods
Sold

Inventory 840,000 480,000 1,320,000

1/1/2010

Purchases 2790000 1425000 4,215,000

------------ ------------ --------------
3630000 1905000 5,535,000

Inventory (1005000 (645000) (1650000)

31/12/
------------ ------------ --------------
Cost of
Goods 2625000 1260000 3885000
Sold

Expenses 1050000 690000 1740000

------------ ------------ --------------
Total 3675000 1950000 5625000
costs and
Expenses
------------ ------------ --------------
Combined
Income 945000 450000 1275000

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 Non-
controll.
Interest in 90,000 (90,000)
net
Income

Net
income ------------ ------------ -------------------- ------------- --------------
To
retained 945,000 450,000 120,000 -0- 1185000
earning 90,000

Retained ------------ ------------ -------------------- ------------- --------------

Earnings
Statement

1/1/ 2010
Retained
Earnings
“A”
Comp. 3150000 3,150,000

“B” (2)
Comp. 600000 480,000 120000 -0-

Net
Income 945000 450000 120,000 -0- 90,000 1,185,000
from
above

Dividend
Declared

“A”
Company (300000)
(300,000)
(1)
“B”
Company (150000) 120,000 (30000) -0-
31/12/201
Retained
earnings ------------ ------------ -------------------- ------------- --------------
To
balance 3795000 900000 600000 120000 180,000 4,035,000
sheet

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 ------------ ------------ -------------------- ------------- --------------

Balance
sheet

Cash 1185,000 270,000 1455000

Accounts 960,000 240,000 1380000

Receivab.

Inventory 1005000 645,000 1,650,000

31/12

Investm (2)
In “B” 2400000 2,400,000 -0-
Company

Property
& 2700000 2475000 5175000
equipme.

Land 750000 255000 1005000

------------ ------------ --------------

Total
Assets 9000000 4065000 10665000

------------ ------------ --------------

Accounts
Payable 675,000 360,000 1,035,000

Other
liabilities 930,000 405,000 1,335,000

Common
stock

“A” 3000000 3,000,000

Company

“B” (2)
Company 1500000 1,200,000 300,000 -0-

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Other
contribu.
Capital

“A”
Company 600,000 600,000

“B” (3)
Company 900,000 720,000 180,000 -0-

Retained 3795000 900000 600,000 120000 180000 4035000

earnings
From -------------
above

Non
control. 660,000 660,000
Interest in
net assets

------------ ------------ --------------------- --------------

Total (3) (1)
Equity 9000000 4065000 2520000 2520000 10665000

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