Chapter 4 Consolidated
financial statements—date of
acquisition
Terminology
Asset acquisition
 Stock acquisition
 Parent
 Subsidiary
 Non-controlling (minority )interest
 Affiliation
 Affiliated company
 Consolidated financial statements

Definition of subsidiary and control
Own a controlling interest in the voting
shares ,often more than 50%, directly or
indirectly or both
 Control the operation policies and management
rather than asset
 Have effective control despite a smaller
percentage ownership

The range of companies consolidated
Essentially all controlled corporations should be
consolidated
 Under below circumstances ,majority-owned
subsidiaries should be excluded:
ownership is temporary;
control does not rest with majority owner ;
exposed to foreign exchange restriction etc.

Consolidated financial statements


Necessity: unconsolidated financial statements of parent
company are insufficient to present the financial
position and results of operations of the economic unit
controlled by the parent company .
Consolidated financial statements include the full
complement of statements normally prepared for a
separate entity and represent essentially the sum of the
assets , liabilities , revenues and expenses of the
affiliates after eliminating the effect of any transactions
among the affiliated companies( intercompany
transactions )



The purpose of consolidated statements is to
present ,primarily for the benefit of the stockholders
and creditors of the parent company ,the results of
operations and the financial position of a parent
company and its subsidiaries essentially as if the
group were a single company with one or more
branches or divisions.
Focus on substance rather than form
They are not substitutes for the statements of separate
subsidiary
Investment at the date of acquisition
Purchase method
Asset
acquisition
Pooling method
Business
combination
Purchase method
Stock
acquisition
Pooling method
Recording investments at cost (p
company )




Investment in s company
260,000
cash
260,000 (250,000+10,000)
investment in s company
133,000
cash
133,000 (125,000+8,000)
investment in s company
260,000
common stock
200,000
other contributed capital
60,000
investment in s company (finder’s fee) 10,000
cash
10,000
Intercompany accounts to be eliminated
Parent’s account
Investment in subsidiary
Subsidiary’ s account
against
Equity accounts
Intercompany receivable (payable) against
Intercompany payable
(receivable)
Advances to subsidiary (from it)
against
Advances to parent (from it)
Interest revenue (interest expense)
against
Interest expense (interest
revenue)
Dividend revenue (Dividends
declared)
against
Dividend declared (Dividends
revenue)
Management fees received from
subsidiary
against
Management fee paid to parent
Sales to subsidiary (purchase of
inventory from subsidiary )
against
purchase of inventory from
parent (Sales to parent)
Difference between cost and book
value
CAD schedule
 Determine the percentage of acqisition:100%
acquisition or a smaller percetage
 Compare the purchase price (cost )to the book
value of the equity acquired
 Allocate the difference to adjust the underlying
assets and /or liabilities
CAD leads to the following possible
cases
Case 1. cost =the book value (of equity acquired)
(a)100% acquisition
(b) a smaller percentage acquisition
Case 2. cost >the book value (of equity acquired)
(a)100% acquisition
(b) a smaller percentage acquisition
Case 3. cost <the book value (of equity acquired)
(a)100% acquisition
(b) a smaller percentage acquisition
consolidated balance sheet
P
company
Cash
Other current assets
Plant and equipment
Land
Investment in S company
Total assets
Liabilities
Common stock
P company
S company
Other contributed capital
P company
S company
Retained earning
P company
S company
Total liabilities and equity
S
compan
y
Jan1,2010
eliminations
Dr.
Cr.
20,000
50,000
40,000
20,000
Consolidate
d balance
20,000
140,000
120,000
40,000
80,000
$400,000
40,000
190,000
160,000
60,000
$130,000
$450,000
60,000
50,000
110,000
(1)80,000
200,000
200,000
50,000
(1)50,000
40,000
40,000
10,000
(1)10,000
100,000
$400,000
100,000
20,000
$130,000
(1)20,000
$ 80,000
$80,000
$450,000
Note:
The investment account of P and equity of S
have been eliminated and the S’ net assets
substituted for the investment account
 Consolidated assets and liabilities consist of the
sum of P and S assets and liabilities in each
classification
 Consolidated equity is the same as the P’ equity

consolidated balance sheet
P company S
company
Cash
Other current assets
Plant and equipment
Land
Investment in S company
Total assets
Liabilities
Common stock
P company
S company
Other contributed capital
P company
S company
Retained earning
P company
S company
Non-controlling interest
Total liabilities and equity
Jan1,2010
eliminations
Dr.
Cr.
20,000
50,000
40,000
20,000
Consolidated
balance
28,000
140,000
120,000
40,000
80,000
$400,000
40,000
190,000
160,000
60,000
$130,000
$458,000
60,000
50,000
110,000
(1)72,000
200,000
200,000
50,000
(1)50,000
40,000
40,000
10,000
(1)10,000
100,000
100,000
20,000
$400,000
$130,000
(1)20,000
$ 80,000
(1)8,000
$80,000
8,000
$458,000
Note:
The investment account of P and equity of S
have been eliminated and the S’ net assets
substituted for the investment account
 Consolidated assets are greater since P took
8,000 less cash to acquire the investment
 An 8,000 non-controlling interest exists

consolidated balance sheet
P company
Cash
Other current assets
Plant and equipment
Land
Investment in S company
Consolidation difference
Total assets
Liabilities
Common stock
P company
S company
Other contributed capital
P company
S company
Retained earning
P company
S company
Non-controlling interest
Total liabilities and equity
26,000
140,000
120,000
40,000
74,000
S
company
20,000
50,000
40,000
20,000
Jan1,2010
eliminations
Dr.
Cr.
46,000
190,000
160,000
70,000
(2)10,000
(1)10,000
Consolidated
balance
(1)74,000
(2)10,000
$400,000
$130,000
$466,000
60,000
50,000
110,000
200,000
200,000
50,000
(1)50,000
40,000
40,000
10,000
(1)10,000
100,000
100,000
20,000
$400,000
$130,000
(1)20,000
$100,000
(1)16,000
$100,000
16,000
$466,000
consolidated balance sheet
Cash
Other current assets
Plant and equipment
Land
Investment in S company
Consolidation difference
Total assets
Liabilities
Common stock
P company
S company
Other contributed capital
P company
S company
Retained earning
P company
S company
Non-controlling interest
P
company
S
company
40,000
140,000
120,000
40,000
60,000
20,000
50,000
40,000
20,000
Jan1,2010
eliminations
Dr.
(2)4,000
Cr.
(2)4,000
(1)60,000
(1)4,000
Consolidated
balance
60,000
190,000
160,000
56,000
$400,000
$130,000
$466,000
60,000
50,000
110,000
200,000
200,000
50,000
(1)50,000
40,000
40,000
10,000
(1)10,000
100,000
100,000
20,000
$400,000
$130,000
(1)20,000
$84,000
(1)16,000
$84,000
16,000
$466,000
Other intercompany balance sheet
eliminations
Advance from P company
25,000
Advance to S company
25,000
 Accounts payable (to S)
100,000
Accounts receivable (from P) 100,000

A comprehensive illustration :more
than one subsidiary company
(1)common stock –S company
retained earnings
consolidation difference
investment in S company
non-controlling interest
200,000
70,000
7,000
250,000
27,000
(2) common stock –T company
retained earnings
consolidation difference
investment in T company
non-controlling interest
(3) plant and equipment
consolidation difference
100,000
40,000
3,000
115,000
28,000
10,000
10,000
(4) Cash
20,000
Advance to T company 20,000
(5) Accounts payable (to S)
6,000
Accounts receivable (from P) 6,000
(6) Accounts payable (to T)
5,000
Accounts receivable (from S) 5,000
P company
S company
T
company
eliminations
Dr.
Cash
Accounts receivable
Inventories
Advance to T company
Investment in S company
Investment in T company
Plant and equipment
Land
Consolidation difference
Total assets
Accounts payable
Notes payable
Common stock
P company
S company
T company
Retained earning
P company
S company
T company
Advance from P company
Non-controlling interest
Total liabilities and equity
82,000
68,000
76,000
20,000
250,000
115,000
200,000
24,000
36,000
59,000
64,000
4,000
10,000
15,000
85,000
Cr.
4)20,000
5)6)11,000
241,000
10,000
130,000
6,000
3)10,000
410,000
40,000
100,000
581,000
40,000
(3)10,000
165,000
25,000
1,044,000
5)6)11,000
139,000
100,000
500,000
500,000
200,000
100,000
(1)200,000
(2)100,000
250,000
250,000
70,000
40,000
835,000
142,000
126,000
155,000
4)20,000
1)250,000
2)115,000
1)2)10,000
835,000
Consolidated
balance
410,000
(1)70,000
(2)40,000
461,000
1)2)55,000
461,000
55,000
1,044,000