Slide
3-1
3
Consolidated Financial
Statements—Date of Acquisition
Advanced Accounting, Fourth Edition
Slide
3-2
Learning 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.
Slide
3-3
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.
Stock 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.
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3-4
LO 2 Noncontrolling interest (NCI).
Definitions of Subsidiary and 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
3-5
LO 1 Meaning of control.
Definitions of Subsidiary and Control
The FASB has defined control as the “ability of an
entity to direct the policies and management that guide
the ongoing activities of another entity so as to
increase its benefits and limit its losses from that
other entity’s activities.”
The FASB stressed the need to prepare consolidated
financial statements whenever control exists, even in
the absence of a majority ownership.
Slide
3-6
LO 1 Meaning of control.
Requirements for the Inclusion of Subsidiaries
in the Consolidated Financial 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
3-7
LO 5 Requirements regarding consolidation of subsidiaries.
Reasons For Subsidiary 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.
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3-8
LO 3 Acquiring assets or stock.
Consolidated Financial 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:
Slide
3-9

Creditors

Noncontrolling stockholders

Regulatory agencies
LO 4 Valuation and classification of subsidiary assets and liabilities.
Investments at the Date of 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
3-10
LO 7 Recording of investment at acquisition.
Investments at the Date of 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
Common stock, $10 par value
Slide
3-11
Save
$350,000 $320,000
Other contributed capital
590,000
175,000
Retained earnings
380,000
205,000
LO 7 Recording of investment at acquisition.
Investments at the Date of 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)
Common Stock
400,000
Other Contributed Capital
300,000
Other Contributed Capital
Cash
Slide
3-12
700,000
20,000
20,000
LO 7 Recording of investment at acquisition.
Consolidated Balance Sheets: Use of Workpapers
Assets and liabilities are summed, regardless of
whether the parent owns 100% or a smaller controlling
interest.
Noncontrolling interests 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
3-13
LO 8 Preparing consolidated statements using a workpaper.
Consolidated Balance Sheets: Use of 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
subsidiary
Against
Management fee paid to parent
Sales to subsidiary (purchases of
inventory from subsidiary)
Against
Purchases of inventory from parent
(sales to parent)
Slide
3-14
LO 8 Preparing consolidated statements using a workpaper.
Consolidated Balance Sheets: Use of 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
3-15
LO 8 Investment is eliminated for consolidated statements.
Consolidated Balance Sheets: Use of Workpapers
Investment Elimination
“Computation and Allocation of Difference between Implied
Value and Book Value”
1.
Determine percentage of stock acquired.
2. Divide purchase price by the percentage acquired to
calculate the implied value of the subsidiary.
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
3-16
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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
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 3. The implied value of the subsidiary is less than 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.
Slide
3-17
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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, 2010, 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
Cash
Slide
3-18
$160,000
$160,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(a): The balance sheets of both companies immediately
after the acquisition of shares is as follows:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
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3-19
$ 100,000
100,000
20,000
40,000
$ 260,000
Implied value =
Book value
Price paid
% acquired
$160,000
100%
Implied value 160,000
Book value
Difference
160,000
$0
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2010, date of acquisition, is presented below:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
Consolidated
Balances
$
80,000
380,000
320,000
120,000
160,000
$ 1,060,000
$
$
220,000
500,000
100,000
240,000
1,060,000
Adjusting and eliminating entries are made on the workpaper for the
preparation of consolidated statements.
Slide
3-20
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2010, date of acquisition, is presented below:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
Slide
3-21
Solution on
notes page
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
160,000
Consolidated
Balances
$
80,000
380,000
320,000
120,000
$
900,000
$
100,000
20,000
40,000
$ 160,000
$ 160,000
$
220,000
400,000
80,000
200,000
900,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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.
Slide
3-22
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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 equity.
Slide
3-23
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(b): Parent’s Cost of Investment Is Equal to Book Value of
Subsidiary’s Stock Acquired (IV=BV) - Partial Ownership.
Illustration: Assume that on January 1, 2010, P Company
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?
Investment in S Company
Cash
Slide
3-24
$144,000
$144,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(b): The balance sheets of both companies immediately
after the acquisition of shares is as follows:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 56,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
144,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-25
Implied value =
Book value
Price paid
% acquired
$144,000
90%
Implied value 160,000
Book value
Difference
160,000
$0
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(b): Computation and Allocation of Difference between
Implied and Book Values:
90%
Parent
Share
$ 144,000
Purchase price and implied value
Less: Book value of equity acquired:
Common stock
Other contributed capital
Retained earnings
Total book value
Difference between implied and book value
Slide
3-26
10%
Noncontrolling
Share
$
16,000
90,000
18,000
36,000
$ 144,000
$
10,000
2,000
4,000
16,000
$
$
-
-
Total
Value
$ 160,000
100,000
20,000
40,000
$ 160,000
$
-
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2010, date of acquisition, is presented below:
Eliminations
Debit
Credit
Consolidated
Balances
$
96,000
380,000
320,000
120,000
144,000
$ 1,060,000
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 56,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
144,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$
$ 800,000
$ 260,000
$
Slide
3-27
Solution on
notes page
220,000
500,000
100,000
240,000
1,060,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2010, date of acquisition, is presented below:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 56,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
144,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
Slide
3-28
$ 800,000
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
144,000
Consolidated
Balances
$
96,000
380,000
320,000
120,000
$
916,000
$
100,000
20,000
40,000
$ 160,000
16,000
$ 160,000
$
220,000
400,000
80,000
200,000
16,000
916,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 1(b): 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
Noncontrolling interest in equity
Slide
3-29
144,000
16,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 2(b): Implied Value Exceeds Book Value of Subsidiary
Company’s Equity (IV>BV)—Partial Ownership.
Illustration: Assume that on January 1, 2010, P Company
acquired 80% (8,000 shares) of the stock of S Company for
$148,000. What journal entry would P Company make to
record the shares of S Company acquired?
Investment in S Company
Cash
Slide
3-30
$148,000
$148,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 2(b): The balance sheets of both companies immediately
after the acquisition of shares is as follows:
Implied value =
Book value
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Difference (IV>BV)
Total assets
P Company S Company
$ 52,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
148,000
Price paid
$ 800,000
$ 260,000
% acquired
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-31
$148,000
80%
Implied value 185,000
Book value
160,000
Difference
$25,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 2(b): Computation and Allocation of Difference between
Implied and Book Values:
80%
Parent
Share
$ 148,000
Purchase price and implied value
Less: Book value of equity acquired:
Common stock
Other contributed capital
Retained earnings
Total book value
Difference between implied and book value
Land revaluation (mark to market)
Balance
20%
Noncontrolling
Share
$
37,000
80,000
16,000
32,000
$ 128,000
$
$
$
$
20,000
(20,000)
-
$
Total
Value
$ 185,000
20,000
4,000
8,000
32,000
100,000
20,000
40,000
$ 160,000
5,000
(5,000)
-
$
$
25,000
(25,000)
-
We assume the entire difference is attributable to
land with a current value higher than historical cost.
Slide
3-32
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 2(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2010, date of acquisition, is presented below:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Difference (IV>BV)
Total assets
P Company S Company
$ 52,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
148,000
$ 800,000
$ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
Slide
3-33
Eliminations
Debit
Credit
25,000
25,000
$ 800,000
$ 260,000
148,000
25,000
Consolidated
Balances
$
92,000
380,000
320,000
145,000
$
937,000
$
100,000
20,000
40,000
$ 210,000
37,000
$ 210,000
$
220,000
400,000
80,000
200,000
37,000
937,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 2(b): The workpaper (elimination) entries are as follows:
#1
Common stock (S)
100,000
Other contributed capital (S)
20,000
Retained earnings (S)
40,000
Difference between IV and BV
25,000
Investment in S Company
148,000
Noncontrolling interest in equity
#2
Land
25,000
Difference between IV and BV
Slide
3-34
37,000
25,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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.
Slide
3-35
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 3(b): Implied Value of Subsidiary is Less Than Book
Value (IV<BV)—Partial Ownership.
Illustration: Assume that on January 1, 2010, P Company
acquired 80% (8,000 shares) of the stock of S Company for
$120,000. What journal entry would P Company make to
record the shares of S Company acquired?
Investment in S Company
Cash
Slide
3-36
$120,000
$120,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 3(b): The balance sheets of both companies immediately
after the acquisition of shares is as follows:
Implied value =
Book value
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Difference (IV<BV)
Total assets
P Company S Company
$ 80,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
120,000
Price paid
$ 800,000
$ 260,000
% acquired
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
$ 800,000
$ 260,000
Slide
3-37
$120,000
80%
Implied value 150,000
Book value
160,000
Difference
$10,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 3(b): Computation and Allocation of Difference between
Implied and Book Values:
80%
Parent
Share
$ 120,000
Purchase price and implied value
Less: Book value of equity acquired:
Common stock
Other contributed capital
Retained earnings
Total book value
Difference between implied and book value
Plant & equipment (mark to market)
Balance
20%
Noncontrolling
Share
$
30,000
80,000
16,000
32,000
$ 128,000
$
$
$
$
(8,000)
8,000
-
$
Total
Value
$ 150,000
20,000
4,000
8,000
32,000
100,000
20,000
40,000
$ 160,000
(2,000)
2,000
-
$
$
(10,000)
10,000
-
Assume the difference is attributable to plant and
equipment, in this case an overvaluation of $10,000.
Slide
3-38
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 3(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2010, date of acquisition, is presented below:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Difference (IV>BV)
Total assets
P Company S Company
$ 80,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
120,000
$ 800,000
$ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 100,000
100,000
20,000
40,000
Slide
3-39
Eliminations
Debit
Credit
10,000
$ 800,000
$ 260,000
10,000
120,000
10,000
Consolidated
Balances
$
120,000
380,000
320,000
110,000
$
930,000
$
100,000
20,000
40,000
$ 170,000
30,000
$ 170,000
$
220,000
400,000
80,000
200,000
30,000
930,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Case 3(b): The workpaper (elimination) entries are as follows:
#1
Common stock (S)
100,000
Other contributed capital (S)
20,000
Retained earnings (S)
40,000
Difference between IV and BV
10,000
Investment in S Company
120,000
Noncontrolling interest in equity
#2
Difference between IV and BV
Plant and equipment
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30,000
10,000
10,000
LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Review Question
The noncontrolling interest in the subsidiary is
reported as:
a. Asset
b. Liability
c. Equity
d. Expense
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LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of Workpapers
Subsidiary Treasury Stock Holdings
Because the treasury stock account represents a
contra stockholders’ equity account, the parent
company’s share must be eliminated by a credit when
the investment account and subsidiary company’s
equity accounts are eliminated on the workpaper.
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LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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.
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LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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.
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LO 9 Computing and allocating the difference
between implied and book value (CAD).
Consolidated Balance Sheets: Use of 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
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LO 9 Computing and allocating the difference
between implied and book value (CAD).
Limitations of Consolidated 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.
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LO 6 Limitations of consolidated statements.
IFRS Versus U.S. GAAP
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LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS Versus U.S. GAAP
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LO 10 Similarities and differences between U.S. GAAP and IFRS.
IFRS Versus U.S. GAAP
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LO 10 Similarities and differences between U.S. GAAP and IFRS.
Deferred Taxes on the Date of 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 (SFAS No. 109
and SFAS No. 141R [ASC 805 and ASC 740]).
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Deferred Taxes on the Date of 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.
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Deferred Taxes on the Date of Acquisition
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Deferred Taxes on the Date of Acquisition
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Deferred Taxes on the Date of Acquisition
The workpaper entry to eliminate the investment account is
as follows:
Entries for allocation with and without deferred taxes.
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Consolidation of Variable Interest Entities
APPENDIX B
FASB has issued guidance for the consolidation of specialpurpose 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.
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Copyright
Copyright © 2011 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.
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