Consolidated Financial Statements-Date of Acquisition

33
Consolidated Financial
Statements—Date of Acquisition
Advanced Accounting, Fifth Edition
Slide
3-1
Learning
Learning Objectives
Objectives
1. Understand the concept of control as used in reference to consolidations.
2. Explain the role of a noncontrolling interest in business combinations.
3. Describe the reasons why a company acquires a subsidiary rather than its net
assets.
4. Describe the valuation and classification of accounts in consolidated financial
statements.
5. List the requirements for inclusion of a subsidiary in consolidated financial
statements.
6. Discuss the limitations of consolidated financial statements.
7. Record the investment in the subsidiary on the parent’s books at the date of
acquisition.
8. Prepare the consolidated workpapers and eliminating entries at the date of
acquisition.
9. Compute and allocate the difference between implied value and book value of the
acquired firm’s equity.
10. Discuss some of the similarities and differences between U.S. GAAP and IFRS
with respect to the preparation of consolidated financial statements at the date
of acquisition.
Slide
3-2
Stock
Stock Acquisition
Acquisition
Chapter Focus - Accounting for Stock Acquisitions

When one company controls another company through
direct or indirect ownership of its voting stock.
Acquiring company referred to as the parent.
Acquired company referred to as the subsidiary.
Other shareholders considered noncontrolling interest.
Parent records interest in subsidiary as an investment.
If a subsidiary owns a controlling interest in one or more

other companies, a chain of ownership is forged by which the
parent company controls other companies.
Slide
3-3
LO 2 Noncontrolling interest (NCI).
Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
The Securities and Exchange Commission defines a

subsidiary as an affiliate controlled by another entity,
directly or indirectly, through one or more
intermediaries.
Control means the possession, direct or indirect, of the

power to direct management and policies of another
entity, whether through the ownership of voting
shares, by contract, or otherwise.
Slide
3-4
LO 1 Meaning of control.
Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
Control using U.S. GAAP:
the direct or indirect ability to determine the

direction of management and policies through
ownership, contract, or otherwise
FASB ASC paragraph 810-10-15-8 states:
the usual condition for a controlling financial

interest is ownership of a majority voting
interest
Slide
3-5
Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
However, application of the majority voting interest

requirement may not identify the party with a
controlling financial interest because the controlling
financial interest may be achieved through
arrangements that do not involve voting interests.
The first step in determining whether the financial

statements should be consolidated is to determine if
the reporting entity has a variable interest in another
entity, referred to as a potential variable interest
entity (VIE).
Slide
3-6
Definitions
Definitions of
of Control
Control
Slide
3-7
Requirements
Requirements for
for the
the Inclusion
Inclusion of
of Subsidiaries
Subsidiaries
in
in the
the Consolidated
Financial Statements
Statements
Purpose of consolidated statements - to present the

operating results and the financial position of a parent and
all its subsidiaries as if they are one economic entity.
Circumstances when majority-owned subsidiaries should be

excluded from the consolidated statements:
1. Control does not rest with the majority owner.
2. Subsidiary operates under governmentally imposed

uncertainty so severe as to raise significant doubt about
the parent’s control.
Slide
3-8
LO 5 Requirements regarding consolidation of subsidiaries.
Reasons
Reasons For
For Subsidiary
Subsidiary Companies
Companies
Advantages to acquiring a controlling interest in

another company.
1. Stock acquisition is relatively simple.
2. Control of subsidiary can be accomplished with a smaller
investment.
3. Separate legal existence of affiliates provides an
element of protection of the parent’s assets.
Slide
3-9
LO 3 Acquiring assets or stock.
Consolidated
Financial Statements
Statements
Statements prepared for a parent company and its
subsidiaries are called consolidated financial
statements.
Ignore legal aspects of separate entities, focus on
economic entity under “control” of management.
Substance rather than form.
Not substitute for statements prepared by separate
subsidiaries, which may be used by:
 Creditors
 Noncontrolling stockholders
 Regulatory agencies
Slide
3-10
LO 4 Valuation and classification of subsidiary assets and liabilities.
Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
Recording Investments at Cost (Parent’s Books)

Stock investment is recorded at cost as measured by
fair value of the consideration given or consideration
received, whichever is more clearly evident.
Consideration given may include cash, other assets, debt

securities, stock of the acquiring company.
Slide
3-11
LO 7 Recording of investment at acquisition.
Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
E3-2: On January 1, 2011, Polo Company purchased 100% of

the common stock of Save Company by issuing 40,000 shares
of its (Polo’s) $10 par value common stock with a market price
of $17.50 per share. Polo incurred cash expenses of $20,000
for registering and issuing the common stock. The
stockholders’ equity section of the two company’s balance
sheets on December 31, 2010, were:
Polo Save
Common stock, $10 par value $350,000 $320,000
Other contributed capital 590,000 175,000
Retained earnings 380,000 205,000
Slide
3-12
Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
E3-2: Prepare the journal entry on the books of Polo

Company to record the purchase of the common stock of Save
Company and related expenses.
Investment in Save (40,000 x $17.50) 700,000

Common Stock 400,000
Other Contributed Capital 300,000
Other Contributed Capital 20,000

Cash 20,000
Slide
3-13
Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Assets and liabilities are summed, regardless of

whether the parent owns 100% or a smaller controlling
interest.
Noncontrolling interests (NCI) are reflected as a

component of owners’ equity.
Eliminations must be made to cancel the effects of
transactions among the parent and its subsidiaries.
A workpaper is frequently used to summarize the
effects of various additions and eliminations.
Slide
3-14
LO 8 Preparing consolidated statements using a workpaper.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Intercompany Accounts to Be Eliminated

Parent’s Accounts Subsidiary’s Accounts
Investment in subsidiary Against Equity accounts
Intercompany receivable (payable) Against Intercompany payable (receivable)
Advances to subsidiary (from subsidiary) Against Advances from parent (to parent)
Interest revenue (interest expense) Against Interest expense (interest revenue)
Dividend revenue (dividends declared) Against Dividends declared (dividend revenue)
Management fee received from

Against Management fee paid to parent
subsidiary
Sales to subsidiary (purchases of Purchases of inventory from parent

Against
inventory from subsidiary) (sales to parent)
Slide
3-15
LO 8 Preparing consolidated statements using a workpaper.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Investment Elimination
It is necessary to eliminate the investment account of the
parent company against the related stockholders’ equity
of the subsidiary to avoid double counting of these net
assets.
When parent’s share of subsidiary’s equity is eliminated

against the investment account, subsidiary’s net assets
are substituted for the investment account in the
consolidated balance sheet.
Slide
3-16
LO 8 Investment is eliminated for consolidated statements.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Investment Elimination
“Computation and Allocation of Difference between Implied
Value and Book Value”
Step 1: Determine percentage of stock acquired.
Step 2: Divide purchase price by the percentage acquired to

calculate the implied value of the subsidiary.
Step 3: Difference between step 2 and book value of

subsidiary’s equity must be allocated to adjust the
underlying assets and liabilities of the acquired company.
Slide LO 9 Computing and allocating the difference

3-17 between implied and book value (CAD).
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
The prior steps lead to the following possible cases:
Case 1. The implied value (IV) of the subsidiary is equal to the book value of
the subsidiary’s equity (IV = BV), and
a. The parent company acquires 100% of the subsidiary’s stock; or
b. The parent company acquires less than 100% of the subsidiary’s stock.
Case 2. The implied value of the subsidiary exceeds the book value of the
subsidiary’s equity (IV > BV), and
Case 3. The implied value of the subsidiary is less than the book value of the
subsidiary’s equity (IV < BV), and

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): Implied Value of Subsidiary Is Equal to Book Value

of Subsidiary Company’s Equity (IV BV)—100% of Stock
Acquired.
Illustration: Assume that on January 1, 2013, P Company

acquired all the outstanding stock (10,000 shares) of S
Company for cash of $160,000. What journal entry would P
Company make to record the shares of S Company acquired?
Investment in S Company $160,000

Cash $160,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The balance sheets of both companies immediately

after the acquisition of shares is as follows:
Balance Sheet P Company S Company

Implied value =
Cash $ 40,000 $ 40,000 Book value
Other current assets 280,000 100,000
Plant and equipment
Land
240,000
80,000
80,000
40,000
Price paid $160,000
Investment in Sill 160,000
Total assets $ 800,000 $ 260,000 % acquired 100%
Liabilities $ 120,000 $ 100,000 Implied value 160,000
Common stock 400,000 100,000
Other Contributed capital 80,000 20,000 Book value 160,000
Total Liab. and Equity $ 800,000 $ 260,000 Difference $0

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for

P and S on Jan. 1, 2013, date of acquisition, is presented below:
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 40,000 $ 40,000 $ 80,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 120,000
Investment in Sill 160,000 160,000
Total assets $ 800,000 $ 260,000 $ 1,060,000
Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 500,000
Other Contributed capital 80,000 20,000 100,000
Retained earnings 200,000 40,000 240,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 1,060,000
Adjusting and eliminating entries are made on the workpaper for the
preparation of consolidated statements.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for

Cash $ 40,000 $ 40,000 $ 80,000
Land 80,000 40,000 120,000
Investment in Sill 160,000 160,000 -
Total assets $ 800,000 $ 260,000 $ 900,000
Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 100,000 400,000
Other Contributed capital 80,000 20,000 20,000 80,000
Retained earnings 200,000 40,000 40,000 200,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 160,000 $ 160,000 $ 900,000
Solution on
Slide notes page LO 9 Computing and allocating the difference
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper entry to eliminate S Company’s

stockholders’ equity against the investment account is:
Common stock (S) 100,000

Other contributed capital (S) 20,000
Retained earnings (S) 40,000
Investment in S Company 160,000
This is a workpaper-only entry.

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): Note the following on the workpaper.
1. The investment account and related subsidiary’s

stockholders’ equity have been eliminated and the
subsidiary’s net assets substituted for the investment
account.
2. Consolidated assets and liabilities consist of the sum
of the parent and subsidiary assets and liabilities in
each classification.
3. Consolidated stockholders’ equity is the same as the
parent company’s stockholders’ equity.

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of

Subsidiary’s Stock Acquired (IV=BV) - Partial Ownership.

acquired 90% (9,000 shares) of the stock of S Company for
$144,000. What journal entry would P Company make to
record the shares of S Company acquired?

Cash $144,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The balance sheets of both companies immediately

Balance Sheet P Company S Company Implied value =

Cash
Other current assets
$ 56,000 $ 40,000
280,000 100,000
Book value
Plant and equipment 240,000 80,000
Land 80,000 40,000 Price paid $144,000
Investment in Sill 144,000
Common stock 400,000 100,000
Noncontrolling interest Difference $0
Total Liab. and Equity $ 800,000 $ 260,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): Computation and Allocation of Difference between

Implied and Book Values: 90% 10%
Parent Noncontrolling Total
Share Share Value
Purchase price and implied value $ 144,000 $ 16,000 $ 160,000
Less: Book value of equity acquired:
Common stock 90,000 10,000 100,000
Other contributed capital 18,000 2,000 20,000
Total book value $ 144,000 $ 16,000 $ 160,000
Difference between implied and book value $ - $ - $ -

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper to consolidate the balance sheets for

Cash $ 56,000 $ 40,000 $ 96,000
Land 80,000 40,000 120,000
Investment in Sill 144,000 144,000
Total assets $ 800,000 $ 260,000 $ 1,060,000
Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 500,000
Other Contributed capital 80,000 20,000 100,000
Noncontrolling interest -
Total Liab. and Equity $ 800,000 $ 260,000 $ 1,060,000
Solution on
Slide notes page LO 9 Computing and allocating the difference
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Cash $ 56,000 $ 40,000 $ 96,000
Land 80,000 40,000 120,000
Total assets $ 800,000 $ 260,000 $ 916,000
Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 100,000 400,000
Noncontrolling interest 16,000 16,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper entry to eliminate S Company’s

stockholders’ equity against the investment account is:
Common stock (S) 100,000

Noncontrolling interest in equity 16,000
(establish the NCI)

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): Implied Value Exceeds Book Value of Subsidiary

Company’s Equity (IV>BV)—Partial Ownership.


Cash $148,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers


Cash $ 52,000 $ 40,000 Implied value =
Other current assets 280,000 100,000 Book value
Land 80,000 40,000
Investment in Sill 148,000 Price paid $148,000
Difference (IV>BV)
Common stock 400,000 100,000
Noncontrolling interest Difference $25,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Share Share Value
Common stock 80,000 20,000 100,000
Total book value $ 128,000 $ 32,000 $ 160,000
Difference between implied and book value $ 20,000 $ 5,000 $ 25,000

Land revaluation (mark to market) (20,000) (5,000) (25,000)
Balance $ - $ - $ -
We assume the entire difference is attributable to

land with a current value higher than historical cost.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Cash $ 52,000 $ 40,000 $ 92,000
Land 80,000 40,000 25,000 145,000
Difference (IV>BV) 25,000 25,000 -
Total assets $ 800,000 $ 260,000 $ 937,000
Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 100,000 400,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): The workpaper (elimination) entries are as follows:
#1 Common stock (S) 100,000

Difference between IV and BV 25,000
#2 Land 25,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): Reasons an Acquiring Company May Pay More Than

Book Value.
1. Fair value of specific tangible or intangible assets of
the subsidiary may exceed its recorded value because
of appreciation.
2. Excess payment may indicate existence of goodwill.
3. Liabilities, generally long-term, may be overvalued.
4. A variety of market factors may affect the price paid.

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(b): Implied Value of Subsidiary is Less Than Book

Value (IV<BV)—Partial Ownership.


Cash $120,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers


Cash $ 80,000 $ 40,000 Implied value =
Other current assets 280,000 100,000 Book value
Land 80,000 40,000
Investment in Sill 120,000 Price paid $120,000
Difference (IV<BV)
Common stock 400,000 100,000
Noncontrolling interest Difference $10,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Share Share Value
Common stock 80,000 20,000 100,000
Total book value $ 128,000 $ 32,000 $ 160,000
Difference between implied and book value $ (8,000) $ (2,000) $ (10,000)

Plant & equipment (mark to market) 8,000 2,000 10,000
Balance $ - $ - $ -
Assume the difference is attributable to plant and

equipment, in this case an overvaluation of $10,000.
Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Cash $ 80,000 $ 40,000 $ 120,000
Land 80,000 40,000 10,000 110,000
Difference (IV>BV) 10,000 10,000 -
Total assets $ 800,000 $ 260,000 $ 930,000
Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 100,000 400,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(b): The workpaper (elimination) entries are as follows:
#1 Common stock (S) 100,000

#2 Difference between IV and BV 10,000

Plant and equipment 10,000

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Review Question
The noncontrolling interest in the subsidiary is
reported as:
a. Asset
b. Liability
c. Equity
d. Expense

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Subsidiary Treasury Stock Holdings

A subsidiary may hold some of its own shares as
treasury stock at the time the parent company
acquires its interest.
Because the treasury stock account represents a

contra stockholders’ equity account, it must be
eliminated by a credit when the investment account
and subsidiary company’s equity accounts are
eliminated on the workpaper.

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Other Intercompany Balance Sheet Eliminations

Intercompany accounts receivable, notes receivable,
and interest receivable, for example, must be
eliminated against the reciprocal accounts payable,
notes payable, and interest payable.
The full amount of all intercompany receivables and

payables is eliminated without regard to the
percentage of control held by the parent company.

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Adjusting Entries Prior to Eliminating Entries

At times, workpaper adjustments to accounting data
may be needed before appropriate eliminating entries
can be accomplished.
Make on workpaper in eliminations columns or
Adjust the subsidiary’s statements prior to their

entry on the workpaper.

Consolidated
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Review Question
Which of the following adjustments do not occur in the
consolidating process?
a. Elimination of parent’s retained earnings
b. Elimination of intra-company balances
c. Allocations of difference between implied and book
values
d. Elimination of the investment account

Limitations
Limitations of
of Consolidated
Consolidated Statements
Statements
For Example:
Little information of value in consolidated

statements because they contain insufficient detail
about the individual subsidiaries.
Highly diversified companies operating across

several industries, often the result of mergers and
acquisitions, are difficult to analyze or compare.
Slide
3-47
LO 6 Limitations of consolidated statements.
IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP
Slide
3-48 LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP
Slide
IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP
Slide
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
APPENDIX A
If a purchase acquisition is tax-free to the seller
 Tax bases of the acquired assets and liabilities are
carried forward at historical book values.
 Assets and liabilities of the acquired company are
recorded on the consolidated books at adjusted fair
value.
Under current guidelines, the tax effects of the difference

between consolidated book values and the tax bases must be
recorded as deferred tax liabilities or assets.
Slide
3-51
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
Illustration: Suppose that Purchasing Company acquires

90% of Selling Company by issuing stock valued at $800,000.
The only difference between book value and fair value relates
to depreciable plant and equipment. Plant and equipment has a
market value of $400,000 and a book value of $250,000. All
other book values approximate market values. Assume that the
combination qualifies as a nontaxable exchange. On the date of
acquisition, Selling Company’s book value of equity is $600,000,
which includes $150,000 of common stock and $450,000 of
retained earnings. Assume a 30% tax rate. Consider the
following Computation and Allocation Schedule with and without
considering deferred taxes.
Slide
3-52
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
Slide
3-53
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
Slide
3-54
Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
The workpaper entry to eliminate the investment account is
as follows:
Entries for allocation with and without deferred taxes.
Slide
3-55
Consolidation
Consolidation of
of Variable
Variable Interest
Interest Entities
Entities
APPENDIX B
FASB has issued guidance for the consolidation of special-
purpose entities (SPEs) through Interpretation No. 46(R)
“Consolidation of Variable Interest Entities” and SFAS No. 167,
“Amendments to FASB Interpretation No. 46(R)[ASC 810–10–
30].”
An enterprise shall consolidate a variable interest entity (VIE)
when that enterprise has a variable interest (or combination of
variable interests) that provides the enterprise with a
controlling financial interest on the basis of the certain
provisions (listed below).
FASB Statement No. 167 requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable
interest entity.
Slide
3-56
Copyright
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Slide
3-57

Consolidated Financial Statements-Date of Acquisition

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33

Advanced Accounting, Fifth Edition

Chapter Focus - Accounting for Stock Acquisitions

Other shareholders considered noncontrolling interest.

Parent records interest in subsidiary as an investment.

If a subsidiary owns a controlling interest in one or more

The Securities and Exchange Commission defines a

Control means the possession, direct or indirect, of the

Control using U.S. GAAP:

the direct or indirect ability to determine the

FASB ASC paragraph 810-10-15-8 states:

the usual condition for a controlling financial

However, application of the majority voting interest

The first step in determining whether the financial

Purpose of consolidated statements - to present the

Circumstances when majority-owned subsidiaries should be

1. Control does not rest with the majority owner.

2. Subsidiary operates under governmentally imposed

Advantages to acquiring a controlling interest in

Recording Investments at Cost (Parent’s Books)

Consideration given may include cash, other assets, debt

E3-2: On January 1, 2011, Polo Company purchased 100% of

E3-2: Prepare the journal entry on the books of Polo

Investment in Save (40,000 x $17.50) 700,000

Other Contributed Capital 20,000

Assets and liabilities are summed, regardless of

Noncontrolling interests (NCI) are reflected as a

Intercompany Accounts to Be Eliminated

Intercompany receivable (payable) Against Intercompany payable (receivable)

Interest revenue (interest expense) Against Interest expense (interest revenue)

Dividend revenue (dividends declared) Against Dividends declared (dividend revenue)

Management fee received from

Sales to subsidiary (purchases of Purchases of inventory from parent

When parent’s share of subsidiary’s equity is eliminated

Step 1: Determine percentage of stock acquired.

Step 2: Divide purchase price by the percentage acquired to

Step 3: Difference between step 2 and book value of

Slide LO 9 Computing and allocating the difference

Slide LO 9 Computing and allocating the difference

Case 1(a): Implied Value of Subsidiary Is Equal to Book Value

Illustration: Assume that on January 1, 2013, P Company

Investment in S Company $160,000

Slide LO 9 Computing and allocating the difference

Case 1(a): The balance sheets of both companies immediately

Balance Sheet P Company S Company

Slide LO 9 Computing and allocating the difference

Case 1(a): The workpaper to consolidate the balance sheets for

Liabilities $ 120,000 $ 100,000 $ 220,000

Case 1(a): The workpaper to consolidate the balance sheets for

Liabilities $ 120,000 $ 100,000 $ 220,000

Case 1(a): The workpaper entry to eliminate S Company’s

Common stock (S) 100,000

This is a workpaper-only entry.

Slide LO 9 Computing and allocating the difference

Case 1(a): Note the following on the workpaper.

1. The investment account and related subsidiary’s

Slide LO 9 Computing and allocating the difference

Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of

Illustration: Assume that on January 1, 2013, P Company

Investment in S Company $144,000

Slide LO 9 Computing and allocating the difference

Case 1(b): The balance sheets of both companies immediately

Balance Sheet P Company S Company Implied value =