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Consolidated Financial Statement Ch 3
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3 - 1©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
An Introduction to ConsolidatedFinancial Statements
Chapter 3
3 - 2©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 1
Recognize the benefits and
limitations of consolidated
financial statements.
3 - 3©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Business Combinations Consummated
Through Stock Acquisitions
Business combination
One or more companiesbecome subsidiaries of a
common parent corporation.
3 - 4©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Reporting Entity
SubsidiaryFinancialStatements_____ __________ __________ __________ _____
SubsidiaryFinancialStatements_____ __________ __________ __________ _____
ConsolidatedFinancialStatements_____ __________ __________ __________ _____
ConsolidatedFinancialStatements_____ __________ __________ __________ _____
ParentFinancialStatements_____ __________ __________ __________ _____
ParentFinancialStatements_____ __________ __________ __________ _____
3 - 5©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Reporting Entity
A parent company may acquire asubsidiary in a very different industry
from its own as a means of diversifyingits overall business risk.
There are also legal reasons for maintaining separate identities.
3 - 6©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Parent-Subsidiary Relationship
Parent Company
Owns more than 50%of another company
Affiliate
3 - 7©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Parent-Subsidiary Relationship
Parent Company
Subsidiary A
90%ownership
Subsidiary B
80%ownership
3 - 8©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 2
Understand the requirements for
inclusion of a subsidiary in
consolidated financial statements.
3 - 9©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidation Policy
Consolidated financial statements provideinformation that is not included in the separate
statements of the parent corporation.
3 - 10©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidation Policy
A subsidiary can be excluded fromconsolidation in only two situations:
1 Control is likely to be temporary.
2Control does not rest with the
majority owner.
3 - 11©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidation Policy
Consolidation policy is usually presentedunder the following headings:
Principles ofconsolidation
Basis ofconsolidation
3 - 12©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Parent and Subsidiary withDifferent Fiscal Periods
Consolidated statements are prepared for andas of the end of the parent’s fiscal period.
If the difference does not exceed three months…
it is acceptable to use the subsidiary’sstatements with disclosure.
3 - 13©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 3
Apply the consolidations concepts
to parent company recording of
the investment in a subsidiary
company at the date of acquisition.
3 - 14©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance Sheet at Dateof Acquisition (100% at Book
Value)Assets Penn Skelly ConsolidatedCurrent assets Cash $ 20,000 $10,000 $ 30,000 Other current assets 45,000 15,000 60,000Total current assets $ 65,000 $25,000 $ 90,000Plant assets $ 75,000 $45,000 $120,000 Less: Accum. depr. 15,000 5,000 20,000Total plant assets $ 60,000 $40,000 $100,000Investment in Skelly 40,000 0 0Total assets $165,000 $65,000 $190,000
3 - 15©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance Sheet at Dateof Acquisition (100% at Book
Value)Liabilities Penn Skelly ConsolidatedCurrent liabilities Accounts payable $ 20,000 $15,000 $ 35,000 Other current liabilities 25,000 10,000 35,000Total current liabilities $ 45,000 $25,000 $ 70,000Stockholders’ equity Capital stock $100,000 $30,000 $100,000 Retained earnings 20,000 10,000 20,000Total stockholders’ equity$120,000 $40,000 $120,000Total liabilities and stockholders’ equity $165,000 $65,000 $190,000
3 - 16©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 4
Allocate the excess of the
investment cost over the
book value of the subsidiary
at the date of acquisition.
3 - 17©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Parent Acquires 100% ofSubsidiary with Goodwill
Penn purchased all the stock of Skelly for $50,000.
What is the consolidating (eliminating) entry?
Skelly stockholder’s equity is $40,000.
3 - 18©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Parent Acquires 100% ofSubsidiary with Goodwill
Capital Stock 30,000Retained Earnings 10,000Goodwill 10,000
Investment in Skelly 50,000To eliminate reciprocal investment and equityaccounts and to assign the excess of investmentcost over book value acquired to goodwill
3 - 19©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 5
Prepare a consolidated balance
sheet at the date of acquisition,
including preparation
of eliminating entries.
3 - 20©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance Sheet at Dateof Acquisition (100% at Book
Value)Assets Penn Skelly ConsolidatedCurrent assets Cash $ 10,000 $10,000 $ 20,000 Other current assets 45,000 15,000 60,000Total current assets $ 55,000 $25,000 $ 80,000Plant assets $ 75,000 $45,000 $120,000 Less: Accum. depr. 15,000 5,000 20,000Total plant assets $ 60,000 $40,000 $100,000Investment in Skelly 50,000Goodwill 10,000Total assets $165,000 $65,000 $190,000
3 - 21©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance Sheet at Dateof Acquisition (100% at Book
Value)Liabilities Penn Skelly ConsolidatedCurrent liabilities Accounts payable $ 20,000 $15,000 $ 35,000 Other current liabilities 25,000 10,000 35,000Total current liabilities $ 45,000 $25,000 $ 70,000Stockholders’ equity Capital stock $100,000 $30,000 $100,000 Retained earnings 20,000 10,000 20,000Total stockholders’ equity$120,000 $40,000 $120,000Total liabilities and stockholders’ equity $165,000 $65,000 $190,000
3 - 22©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 6
Learn the concept of minority
interest when the parent
company acquires less than
100% of the subsidiary’s
outstanding common stock.
3 - 23©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance Sheet at Dateof Acquisition (100% at Book
Value)Assets Penn Skelly ConsolidatedCurrent assets Cash $ 10,000 $10,000 $ 20,000 Other current assets 45,000 15,000 60,000Total current assets $ 55,000 $25,000 $ 80,000Plant assets $ 75,000 $45,000 $120,000 Less: Accum. depr. 15,000 5,000 20,000Total plant assets $ 60,000 $40,000 $100,000Investment in Skelly 50,000Goodwill 14,000Total assets $165,000 $65,000 $194,000
3 - 24©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance Sheet at Dateof Acquisition (100% at Book
Value)Liabilities Penn Skelly ConsolidatedCurrent liabilities Accounts payable $ 20,000 $15,000 $ 35,000 Other current liabilities 25,000 10,000 35,000Total current liabilities $ 45,000 $25,000 $ 70,000Minority interest $ 4,000Stockholders’ equity Capital stock $100,000 $30,000 $100,000 Retained earnings 20,000 10,000 20,000Total stockholders’ equity$120,000 $40,000 $120,000Total liabilities andstockholders’ equity $165,000 $65,000 $194,000
3 - 25©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Minority Interest
Minority interest in subsidiaries is generallyshown in a single amount in the liability section
of the consolidated balance sheet.
The alternatives are to include the minority interestin consolidated stockholders’ equity or to place it
in a separate minority interest section.
3 - 26©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Minority Interest
The interest of minoritystockholders represents
equity investments in theconsolidated net assets by
stockholders of the companyaffiliated with the parent.
3 - 27©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 7
Prepare consolidated balance
sheets subsequent to the date
of acquisition, including
preparation of eliminating entries.
3 - 28©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance SheetAfter Acquisition
1. Penn acquired a 90% interest in Skelly on January 1 for $50,000 when Skelly’s stockholders’ equity was $40,000.
2. The accounts payable of Skelly includes $5,000 owed to Penn.
3. During the year, Skelly had income of $20,000 and declared $10,000 dividends.
3 - 29©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance SheetAfter Acquisition
What is the balance in the investment inSkelly’s account at December 31?
Original investment January 1 $50,000+ 90% of Skelly’s net income 18,000
– 90% of Skelly’s dividends – 9,000Investment account balance $59,000
3 - 30©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance SheetAfter Acquisition
Capital Stock 30,000Retained Earnings 20,000Goodwill 14,000
Investment in Skelly 59,000Minority Interest 5,000
To eliminate reciprocal investment andequity balances, record goodwill, andenter the minority interest
3 - 31©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Balance SheetAfter Acquisition
Dividends Payable 9,000Dividends Receivable 9,000
To eliminate reciprocal dividendsreceivable and payable
Accounts Payable 5,000Accounts Receivable 5,000
To eliminate intercompany receivableand accounts payable
3 - 32©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The separate books of the affiliatedcompanies do not record cost/book
value differentials in acquisitions thatcreate parent-subsidiary relationships.
Working paper procedures are usedto adjust subsidiary book values toreflect the cost/book differentials.
Effect of Allocation on Consolidated
Balance Sheet at Acquisition
3 - 33©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The adjusted amounts appear in theconsolidated balance sheet.
The amount of the adjustment toindividual assets and liabilities isdetermined using an investment
cost-allocation schedule.
Effect of Allocation on Consolidated
Balance Sheet at Acquisition
3 - 34©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Effect of Allocation on Consolidated
Balance Sheet at Acquisition
On Dec. 3, 2003, Pilot purchases 90% of SandCorporation’s outstanding common stock for$5,000,000 cash plus 100,000 shares of $10stock with a market value of $5,000,000.
Additional costs are $300,000.
$200,000 is recorded as cost of the investment.
3 - 35©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Effect of Allocation on Consolidated
Balance Sheet at Acquisition
AssetsCash $ 200 $ 200Net receivables 300 300Inventories 500 600Other current assets 400 400Land 600 800Building, net 4,000 5,000Equipment, net 2,000 1,700
Total assets $8,000 $9,000
Sand Corporation (000) Book Value Fair Value
3 - 36©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Effect of Allocation on Consolidated
Balance Sheet at Acquisition
LiabilitiesAccounts payable $ 700 $ 700Notes payable 1,400 1,300
Common stock 4,000Paid-in capital 1,000Retained earnings 900Total liabilities and stockholders’ equity $8,000
Sand Corporation (000) Book Value Fair Value
3 - 37©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Investment in Sand 10,000Common Stock 1,000Additional Paid-in Capital 4,000Cash 5,000
To record 90% acquisition of Sand Corporation
Assignment of Excess Costover Underlying Equity
3 - 38©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Investment in Sand 200Additional Paid-in Capital 100
Cash 300To record additional costs of combining withSand
Assignment of Excess Costover Underlying Equity
3 - 39©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Investment in Sand $10,200,000Book value of interest acquired$5,900,000 × 90% = (5,310,000)Excess of cost over BV $ 4,890,000
Allocation of Excess Costover Underlying Equity
3 - 40©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Allocation of Excess Costover Underlying Equity
Inventories 600 500 90Land 800 600 180Building net 5,000 4,000 900Equipment, net 1,700 2,000 (270)Notes payable 1,300 1,400 90Total allocated 990Remainder to goodwill 3,900Total 4,890
FairValue
BookValue
× 90% = ExcessAllocated–
3 - 41©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CashReceivables, netInventoriesOther current assetsLandBuilding, netEquipment, netInvestment in SandGoodwillUnamortized excess
Total assets
1,300 700 900 600 1,200 8,000 7,00010,200
29,900
200 300 500 400 600 4,000 2,000
8,000
b 90
b 180b 900
b 3,900a 4,890
b 270a 10,200
b 4,890
1,500 1,000 1,490 1,000 1,980 12,900 8,730
3,900
32,500
Consolidated Working PapersDecember 31, 2003
Adjustments and Consolidated Eliminations Balance
Account Title Pilot Sand Dr. Cr. Sheet
3 - 42©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accounts payableNotes payableCommon stockOther paid-in capitalRetained earnings
Minority interest
Total liabilities andstockholders’ equity
2,000 3,700 11,000 8,900 4,300
29,900
700 1,400 4,000 1,000 900
8,000
b 90 a 4,000a 1,000a 900
a 590
2,700 5,010 11,000 8,900 4,300
590
32,500
Consolidated Working PapersDecember 31, 2003
Adjustments and Consolidated Eliminations Balance
Account Title Pilot Sand Dr. Cr. Sheet
3 - 43©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 8
Apply the concepts underlying
preparation of a consolidated
income statement.
3 - 44©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Consolidated Income Statement
The difference between a consolidated andan unconsolidated income statement of theparent company lies in the detail presented
rather than the net income amount.
3 - 45©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 9
Amortize the excess of the
investment cost over the book
value in periods subsequent
to the acquisition.
3 - 46©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Effect of Amortization on Consolidated
Balance Sheet after Acquisition
Income for 2004:Sand’s net income $ 800,000Pilot’s income(excluding income from Sand) $2,523,500
3 - 47©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Effect of Amortization on Consolidated
Balance Sheet after Acquisition
Dividends Paid:Sand $ 300,000Pilot $1,500,000
3 - 48©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Effect of Amortization on Consolidated
Balance Sheet after Acquisition
Amortization of excess:Undervalued inventories sold in 2004
Undervalued land still heldUndervalued building (45 years useful life)Overvalued equipment (5 years useful life)Overvalued notes payable retired in 2004
Goodwill (no amortization)
3 - 49©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CashReceivables, netInventoriesOther current assetsLandBuilding, netEquipment, netInvestment in SandGoodwillUnamortized excess
Total assets
253.5 540 1,300 800 1,200 9,500 8,000 10,504
32,097.5
100 200 600 500 6003,8001,800
7,600
b 180b 880
b 3,900a 4,744
b 216a 10,504
b 4,744
353.5 740 1,900 1,300 1,980 12,900 8,730
3,900
33,937.5
Consolidated Working PapersDecember 31, 2004
Adjustments and Consolidated Eliminations Balance
Account Title Pilot Sand Dr. Cr. Sheet
3 - 50©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accounts payableNotes payableCommon stockOther paid-in capitalRetained earnings
Minority interest
Total liabilities andstockholders’ equity
2,300 4,000 11,000 8,900 5,897.5
32,097.5
1,200
4,0001,0001,400
7,600
a 4,000a 1,000a 1,400
a 640
3,500 4,000 11,000 8,900 5,897.5
640
33,937.5
Consolidated Working PapersDecember 31, 2004
Adjustments and Consolidated Eliminations Balance
Account Title Pilot Sand Dr. Cr. Sheet
3 - 51©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
End of Chapter 3
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