Chapter 3 An Introduction To Consolidated Financial Statements - STD

Chapter 3
An Introduction to Consolidated
Financial Statements
Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-1

Intro to Consolidations: Objectives
1. Recognize the benefits and limitations of consolidated

financial statements.
2. Understand the requirements for including a subsidiary

in consolidated financial statements.
3. Apply consolidation concepts to parent company

recording of an investment in a subsidiary company at the
date of acquisition
4. Record the fair value of the subsidiary at the date of

acquisition -

Objectives (continued)
5. Learn the concept of noncontrolling interest when a

parent company acquires less than 100 percent of a
subsidiary's outstanding common stock.
.
6. Prepare consolidated balance sheets subsequent to the
acquisition date, including preparation of eliminating
entries.
7. Amortize the excess of the fair value over the book value
in periods subsequent to the acquisition.
8. Apply the concepts underlying preparation of a

consolidated income statement.

An Introduction to Consolidated
Financial Statements
1: BENEFITS & LIMITATIONS

A BUSINESS COMBINATION UNDER GAAP INCLUDES
COMBINATIONS IN WHICH ONE OR MORE COMPANIES
BECOME SUBSIDIARIES OF A PARENT CORPORATION.
A. A CORPORATION THAT HOLDS A MAJORITY INTEREST

(OVER 50%) OF THE VOTING STOCK OF ANOTHER
CORPORATION IS REFERRED TO AS THE PARENT COMPANY.
B. THE INTEREST NOT HELD BY THE PARENT COMPANY IS

REFERRED TO AS THE NONCONTROLLING INTEREST.

Business Acquisitions
Business combinations through stock acquisitions
– Acquire controlling interest in voting stock

– More than 50%
– May have control through indirect ownership
Business combination occurs once

– Acquisition of additional subsidiary stock is
simply additional investment

Consolidated Statements
– Primarily benefit the owners and creditors

of the parent
– Not primarily intended for the

noncontrolling owners nor the subsidiary’s
creditors
– Subsidiaries issue separate statements for

the benefit of their owners and creditors

- GAAP states that the acquisition of additional shares
of a subsidiary is recorded by an increase in the
investment account and a reduction of the
noncontrolling interest.
- The parent company and subsidiary exist as separate

legal entities and maintain separate accounting
records.

- Consolidated financial statements are
prepared by the parent company for all
the companies under the control of a
single management team to reflect a
single reporting entity with multiple
divisions.
- The purpose of consolidated financial
statements is to present fairly, primarily
for the benefit of the owners and
creditors of the parent company, the
results of operations and the financial
position of a parent and all its
subsidiaries as if the consolidated group
were a single entity.
- The subsidiary will continue to report
the results of its separate operations to
its noncontrolling stockholders.
- The consolidated entity (the reporting

entity) has no transactions and it does not
maintain a ledger. The financial
statements of the separate legal entities
are combined only for external reporting
purposes.

PARENT AND SUBSIDIARY WITH
DIFFERENT FISCAL PERIODS
A Consolidated statements are

prepared for and as of the end of the
parent company’s fiscal period, but
May include subsidiary statements
with FYE within 3 months of parent's
FYE.

CONSOLIDATED FINANCIAL
STATEMENTS
A. A set of consolidated financial statements
includes a consolidated balance sheet, a
consolidated income statement and retained
earnings statement, and a consolidated
statement of cash flows.
B. The consolidated balance sheet, income

statement, and retained earnings statement
are prepared by combining the separate
financial statements of the parent company
and the subsidiary.
•Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-11
C. The consolidated cash flow
statement, however, is prepared
from the consolidated financial
statements for two consecutive
years.

THE CONSOLIDATED BALANCE SHEET
• The investment in subsidiary account on
the parent company balance sheet and
the stockholders’ equity accounts on the
subsidiary’s balance sheet are reciprocal,
both representing the net assets of the
subsidiary.
• The reciprocal investment in subsidiary on
the parent’s balance sheet and subsidiary
stockholders’ equity accounts are
eliminated in consolidation (and are
replaced by the individual assets and
liabilities of the subsidiary).
• Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-13
* A one-line consolidation (the investment
account) is replaced by details about individual
assets and liabilities controlled by a single
management group.
* Non-reciprocal accounts are combined.
* Reciprocal accounts are often eliminated
* The capital stock and retained earnings

amounts that appear in the consolidated balance
sheet are those of the parent company.
* Unimpaired cost-book value differentials
are added to (or subtracted from) the asset
and liability accounts that will appear in the
consolidated balance sheet.
Goodwill from the investment, which does
not appear in the separate company
statements, is added to the asset listing.
* Intercompany balances are eliminated.

An Introduction to Consolidated Financial Statements
2: SUBSIDIARIES

Who is a Subsidiary?
– A corporation becomes a subsidiary when another

corporation acquires controlling interest in its
outstanding voting stock.
– In a 100 percent acquisition, the investee

continues to operate as a separate legal entity.
– Subsidiaries, or affiliates, continue as separate

legal entities and prepare their own financial
reports.
CONSOLIDATION POLICY:
Under current GAAP, consolidation is

required for all corporations that are over
50% owned except (Cases where a
subsidiary may be excluded from
consolidation):

When Subsidiaries are excluded from
Consolidated?
Cases where a subsidiary may be excluded from
consolidation:
– Control doesn’t rest with majority owner
– Joint ventures
– Acquisitions of groups of assets that do not
constitute a business
– Combination between entities under common
control
– Combination of not-for-profit entities or
acquisition of a for-profit company by a not-for-
profit entity
3: CONSOLIDATED BALANCE
SHEET AT DATE OF ACQUISITON

Pen Example: Acquisition Cost = Fair
Value = Book Value
Sel’s Balance Sheet: BV=FV Pen acquires 100% of Sel for $40,
which equals the book value and fair
Cash $10
values of the net assets acquired.
Other current assets 15
Plant assets, net 40
Cost of acquisition $40
Total $65
Less 100% book value 40
Accounts payable $15
Other current liabilities 10 Excess of cost over book value $0
Capital stock 30
Retained earnings 10
To consolidate, eliminate Pen's
Total $65 Investment account and Sel's capital
stock and retained earnings.

Balance Sheets Separate Consolidated
Pen Sel Pen & Sub.
Cash $20 $10 $30
Other curr. assets 45 15 60

Plant assets, net 60 40 100
Investment in Sel 40 0 0
Total $165 $65 $190
Accounts payable $20 $15 $35
Other curr. liabilities 25 10 35
Capital stock 100 30 100
Retained earnings 20 10 20
Total $165 $65 $190

4: FAIR VALUE AT
ACQUISITION DATE

Cost, Fair Value, and Book Value
Acquisition cost, fair values of identifiable net

assets and book values may differ.
– Allocate excess or deficiency of cost over book
value and determine goodwill, if any.
– When BV = FV
• Cost > BV, excess is goodwill
• Cost < BV, excess is a gain on the bargain purchase

BV ≠ FV ≠ Cost
Difference between the book value of net

assets (BV) and the fair value of identifiable
net assets (FV) is assigned to the specific
assets or liabilities
– E.g., undervalued or overvalued inventories,
plant assets
– Unrecorded assets (patents) or liabilities
(existing contingencies)
Difference between FV and Cost is goodwill or
a gain on the bargain purchase

Example: BV ≠ FV but Cost = FV
Piper acquires 100% of Sandy for $310.
Sandy BV FV
BV = 100 + 145 = $245
Cash $40 $40
FV = 385 – 75 = $310
Receivables 30 30
Inventory 50 75
Plant, net 200 240
Cost – FV = $0
goodwill
Total $320 $385
Cost $310
Liabilities $75 $75
100% Book value 245
Capital stock 100
Excess of cost over BV $65
Retained earnings 145
Total $320

Piper and Sandy (cont.)
Allocate to: Amt Amort.
Inventory 100%(+25) 25 1st yr
Plant 100%(+40) 40 10 yrs
Total $65
Piper's elimination worksheet entry:

Capital stock (-SE) 100
Retained earnings (-SE) 145
Inventory (+A) 25
Plant (+A) 40
Investment in Sandy (-A) 310

Example: BV ≠ FV and Cost ≠ FV
Panda acquires 100% of Salty for $530.
Salty BV FV
Cash $100 $100
BV = 250 + 190 = $440
Receivables 40 40 FV = 580 – 85 = $495
Inventory 250 250 Cost – FV = $35 goodwill
Plant, net 130 190
Total $520 $580
Liabilities $80 $85

Cost $530
Capital stock 250
100% Book value 440
Retained Excess of cost over BV $90
earnings 190
Total $520

Panda and Salty (cont.)
Allocate to: Amount Amort.
Plant 60 4 yrs
Liabilities -5 5 yrs
Goodwill 35
Total $90
Panda's elimination worksheet entry:

Plant (+A) 60
Goodwill (+A) 35
Liabilities (+L) 5
Investment in Salty (-A) 530

Example: BV ≠ FV and Cost ≠ FV
Print acquires 100% of Sum for $185.

Sum BV FV
Cash $10 $10 BV = 75 + 105 = $180
Receivables 30 30 FV = 250 - 40 = $210
Inventory 80 90
Cost – FV = -$25:
Plant, net 100 120
Total $220 $250
Gain on bargain purchase
Liabilities $40 $40
Capital stock 75 Cost $185
Retained 100% BV 180
105
earnings
Excess of cost over BV $5
Total $220

Print and Sum (cont.)
Allocate to: Amt Amort.

Inventory 10 1st yr
Plant, land 20 -
Bargain purchase (25) Gain
Total $5
Print records the acquisition of Sum assuming a cash
purchase as follows. Note that the investment account is
recorded at its fair value and the bargain purchase is treated
immediately as a gain.
Investment in Sum (+A) 210
Gain on bargain purchase (R, +SE) 25
Cash (-A) 185

Worksheet Elimination Entry
Unamortized excess equals $30

• $10 for undervalued inventory
• $20 for undervalued land included in plant assets
Print’s elimination worksheet entry:

Unamortized excess (+A) 30
Investment in Sum (-A) 210
Inventory (+A) 10
Plant (+A) 20
Unamortized excess (-A) 30

Print Sum Adjustments Consolidated
BV BV DR CR
Cash $30 $10 $40
Receivables 50 30 80
Inventory 100 80 10 190
Plant, net 450 100 20 570
Investment in Sum 210 210 0
Unamortized excess 30 30
Total $840 $220 $880
Liabilities $270 $40 $310
Capital stock 200 75 75 200
Retained earnings 370 105 105 370
Total $840 $220 $880
240 240

5: NONCONTROLLING
INTERESTS

Noncontrolling Interest
Parent owns less than 100%

– Noncontrolling interest represents the minority
shareholders
– Part of stockholders' equity
– Measured at fair value, based on parent's
acquisition price
Parent pays $40,000 for an 85% interest

– Implied value of the full investee is
$40,000/85% = $47,059.
– Minority share = 15%(47,059) = $7,059

Example: Noncontrolling Interests
Popo acquires 80% of Sine for $400 when

Sine had capital stock of $200 and retained
earnings of $175. Sine's assets and liabilities
equaled their fair values except for buildings
which are undervalued by $50. Buildings
have a 10-year remaining life.
Cost of 80% of Sine $400 Allocate to:

Implied value of Sine Building $50
$500
(400/80%)
Goodwill 75
Book value (200+175) 375
Total $125
Excess over book value $125

Elimination Entry
Popo's elimination worksheet entry:

Building (+A) 50
Goodwill (+A) 75
Investment in Sine (-A) 400
Noncontrolling interest (+SE) 100
An unamortized excess account could have been used

for the excess assigned to the building and goodwill.

Popo Sine Adjustments Consolidated
BV BV DR CR
Cash $50 $10 $60
Inventory 80 100 180
Building, net 300 240 50 590
Investment in Sine 400 400 0
Goodwill 75 75
Total $960 $400 $1,085
Noncontrolling interest 100 100
Total $960 $400 $1,085
500 500

6: CONSOLIDATED
BALANCE SHEETS AFTER
ACQUISITION

Balance Sheets After Acquisition
In preparing a consolidated balance sheet

– Eliminate the parent's Investment in Subsidiary
– Eliminate the subsidiary's equity accounts
(common stock, retained earnings, etc.)
– Adjust asset and liability accounts for any
unamortized excess balance
– Record goodwill, if any
– Record Noncontrolling Interest, if any

Popo and Sine (cont.)
Cost of 80% of Sine $400 Allocate to:

Implied value of Sine $500 Building $50 10 yrs
Book value 375 Goodwill 75 -
Excess $125 Total $125
Beginning Current year's Ending

unamortized amortization unamortized
excess excess
Building 50 (5) 45
Goodwill 75 0 75
Total 125 (5) 120

After 1 year: Popo Sine Popo Sine
Cash $40 $15 Liabilities $100 $50
Receivables 110 85 Capital stock 250 200
Inventory 90 100 Retained earnings 574 185
Building, net 280 235
Investment in Sine 404
Total $924 $435 Total $924 $435
Popo's elimination worksheet entry:

Unamortized excess (+A) 120
Investment in Sine (80%) (-A) 404
Noncontrolling interest (20%) (+SE) 101
Building (+A) 45
Goodwill (+A) 75
Unamortized excess (-A) 120
Assume that Sine’s net income 5
thousands (80% * 5 = 4) +Investment
After 1 year: Popo Sine Adjustments Consolidated
BV BV DR CR
Cash $40 $15 $55
Inventory 90 100 190
Building, net 280 235 45 560
Investment in Sine 404 404 0
Goodwill 75 75
Unamortized excess 120 120
Total $924 $435 $1,075
Noncontrolling interest 101 101
Total $924 $435 $1,075
505 505

Key Balance Sheet Items
– Investment in Subsidiary does not exist on the

consolidated balance sheet
– Equity on the consolidated balance sheet consists
of the parent's equity plus the noncontrolling
interest.
– Noncontrolling interest is proportional to the
Investment in Subsidiary account when the
equity method is used.
– $101 = $404 x .20/.80

7: AMORTIZATIONS AFTER
ACQUISITION

Unamortized Excess
Excess assigned to assets and liabilities are

amortized according to the account
Balance sheet Amortization Income
account period statement
account
Inventories and Generally, 1st year Cost of sales and
other current other expense
assets
Buildings, Remaining life at Depreciation and
equipment, business amortization
patents combination expense
Land, copyrights Not amortized
Long-term debt Time to maturity Interest expense

Piper and Sandy (cont.)
Cost $310 Allocate to: Amt Amort.

100% BV 245 Inventory 25 1st yr
Plant 40 10 yrs
Excess $65
Total $65
Beginning Current Ending

unamortized year's unamortized
excess amortization excess
Inventory 25 (25) 0
Plant 40 (4) 36
Total 65 (29) 36

Panda and Salty (cont.)

100% BV 440 Plant 60 4 yrs
Excess $90 Liabilities -5 5 yrs

Goodwill 35 -
Total $90

unamortized year's unamortized
excess amortization excess
Plant 60 (15) 45
Liabilities (5) 1 (4)
Goodwill 35 0 35
Total 90 (14) 76

Print and Sum (cont.)

Inventory 10 1st yr
100% BV 180
Plant, land 20 -
Excess $5 Bargain purchase (25) Gain
Total $5

unamortize year's unamortized
d excess amortization excess
Inventory 10 (10) 0
Land 20 0 20
Total 30 (10) 20

8: CONSOLIDATED
INCOME STATEMENTS

Comprehensive Example, Data
Pil acquires 90% of Sad on 12/31/2011 for

$10,200 when Sad's equity consists of $4,000
common stock, $1,000 other paid in capital,
and $900 retained earnings. On that date
Sad's inventories, land, and buildings are
understated by $100, $200, and $1,000,
respectively, and its equipment and notes
payable are overstated by $300 and $100.

Allocate to:
Cost of 90% of Sad $10,200
Inventory $100 1st yr
Implied value of Sad
Land 200 -
10,200/.90 $11,333
Building 1,000 40 yrs
Book value
Equipment (300) 5 yrs
(4000+1000+900) 5,900
Note payable 100 1st yr
Excess over book value $5,433 Goodwill 4,333 -
Total $5,433
Unamortized Current Unamortized

excess 1/1/12 amortization excess
12/31/12
Inventory 100 (100) 0
Land 200 0 200
Building 1,000 (25) 975
Equipment (300) 60 (240)
Note payable 100 (100) 0
Goodwill 4,333 0 4,333
Total 5,433 (165) 5,268

Pil Sad Consol.*
Sales $9,523.50 $2,200.00 $11,723.50
Income from Sad 571.50 $0.00
Cost of sales (4,000.00) (700.00) (4,800.00)
Depreciation exp - bldg (200.00) (80.00) (305.00)
Depreciation exp - equip (700.00) (360.00) (1,000.00)
Other expense (1,800.00) (120.00) (1,920.00)
Interest expense (300.00) (140.00) (540.00)
Net income $3,095.00 $800.00
Total consolidated income $3,158.50
Noncontrolling interest share 63.50
Controlling interest share $3,095.00
• Cost of sales, building depreciation, and interest expense are increased by $100, $25,
and $100, and equipment depreciation is $60 lower than the sum of Pil and Sad.
• Sad's income $ 635

Key Income Statement Items
– The Income from Subsidiary account is

eliminated.
– Current period amortizations are included in the
appropriate expense accounts.
– Noncontrolling interest share of net income is
proportional to the Income from Subsidiary
under the equity method.
– $571.50 x .10/.90= $63.50
– Sad's income $ 635
– Popo : $ 635 x 90% = 571.5
– NCI : $ 635 x 10% = 63.5

Chapter 3 An Introduction To Consolidated Financial Statements - STD

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Chapter 3 An Introduction To Consolidated Financial Statements - STD

Încărcat de

Drepturi de autor:

Formate disponibile

Chapter 3

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-1

1. Recognize the benefits and limitations of consolidated

2. Understand the requirements for including a subsidiary

3. Apply consolidation concepts to parent company

4. Record the fair value of the subsidiary at the date of

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-2

5. Learn the concept of noncontrolling interest when a

8. Apply the concepts underlying preparation of a

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-3

1: BENEFITS & LIMITATIONS

A. A CORPORATION THAT HOLDS A MAJORITY INTEREST

B. THE INTEREST NOT HELD BY THE PARENT COMPANY IS

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-4

Business combinations through stock acquisitions

– Acquire controlling interest in voting stock

Business combination occurs once

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-5

– Primarily benefit the owners and creditors

– Not primarily intended for the

– Subsidiaries issue separate statements for

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-6

- The parent company and subsidiary exist as separate

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-7

- The consolidated entity (the reporting

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-9

A Consolidated statements are

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-10

B. The consolidated balance sheet, income

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-12

* Non-reciprocal accounts are combined.

* Reciprocal accounts are often eliminated

* The capital stock and retained earnings

* Intercompany balances are eliminated.

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-16

– A corporation becomes a subsidiary when another

– In a 100 percent acquisition, the investee

– Subsidiaries, or affiliates, continue as separate

Under current GAAP, consolidation is

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-18

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-20

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-21

Pen Sel Pen & Sub.

Cash $20 $10 $30

Other curr. assets 45 15 60

Total $165 $65 $190

Accounts payable $20 $15 $35

Other curr. liabilities 25 10 35

Capital stock 100 30 100

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-22

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-23

Acquisition cost, fair values of identifiable net

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-24

Difference between the book value of net

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-25

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-26

Piper's elimination worksheet entry:

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-27

Panda acquires 100% of Salty for $530.

Liabilities $80 $85

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-28

Panda's elimination worksheet entry:

Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-29