The following summarizes the acquisition and elimination portions of the consolidation
entries in the absence of intracompany transactions.
Definitions
Market value = cost of acquisition
Fair value
= current estimated value of acquired assets and liabilities
Book value = current accounting values (book values) of assetsa, liabilitiesl and owners’
equityo (net assets)
%
= percent of subsidiary acquired by parent
FV
= Fair value of acquired asseta or liabilityl
BV
= Book value of asseta or liabilityl or owners’ equityo of subsidiary
Premium
= Cost of acquisition – %BVo
Goodwill (1) = Cost of acquisition – %FVo or %(FVa–FVl) (Can be negative)
Goodwill (2) = Max(0,Goodwill(1))
Acquisition
Investment Entry
Investment in subsidiary
Miscellaneous debits
Miscellaneous credits
Cost of acquisition (Market value)
Day to day expenses assigned to acquisition
Reflects structure of the acquisition
Consolidation process
1. Add up the parent and the subsidiary
a. This puts the book values of the subsidiary into the parent’s statements as
the consolidation begins
b. Eliminations will be required
i. Remove double counting of the investment and the subsidiary’s
equity (Chapter 3)
ii. Adjust acquired assets and liabilities from book value to “fair value”
where fair value is used for the acquired portion of the subsidiary and
book value for any remaining minority interest
iii. Remove any intracompany transactions (Chapter 4 and 5)
2. Versions of the elimination entries for i and ii
Elimination entry
Comprehensive entry
Owners’ equity of subsidiary
BVo (net book value of subsidiary)
Fair value adjustment for assets
%(FVa – BVa)
Fair value adj for nonmarketable
Long-term assets
Max (0,%( FVa – BVa) – Min(0,Goodwill(1)))
Goodwill (2)
Maximum (0, Goodwill(1))
Investment in subsidiary
Cost of acquisition
Minority interest
BVo(1–%)
Fair value adjustment for liabilities
%(FVl – BVl)
Extraordinary gain
Max (0, Goodwill(1) –%FVa (nonmarketable))
Series of entries
1)
Owners’ equity of subsidiary
Investment in subsidiary
Minority interest
BVo (net book value of subsidiary)
%BVo
BVo(1–%)
2)
Premium
Investment in subsidiary
Cost of acquisition – %BVo
Cost of acquisition – %BVo
3)
Fair value adjustment for assets
%(FVa – BVa)
Fair value adj for nonmarketable
Long-term assets
Max (0,%( FVa – BVa) – Min(0,Goodwill(1)))
Goodwill (2)
Maximum (0, Goodwill(1))
Premium
Cost of acquisition – %BVo
Fair value adjustment for liabilities
%(FVl – BVl)
Extraordinary gain
Max (0, Goodwill(1) –%FVa (nonmarketable))