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33
Consolidated Financial
StatementsDate of Acquisition

Advanced Accounting, Fifth Edition


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Learning
Learning Objectives
Objectives

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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 parents 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 firms equity.

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
Stock Acquisition
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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LO 2 Noncontrolling interest (NCI).

Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
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.

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LO 1 Meaning of control.

Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
Control using U.S. GAAP:
the direct or indirect ability to determine the
direction of management and policies through
ownership, contract, or otherwise
FASB ASC paragraph 810-10-15-8 states:
the usual condition for a controlling financial
interest is ownership of a majority voting
interest

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LO 1 Meaning of control.

Definitions
Definitions of
of Subsidiary
Subsidiary and
and Control
Control
However, application of the majority voting interest
requirement may not identify the party with a
controlling financial interest because the controlling
financial interest may be achieved through
arrangements that do not involve voting interests.
The first step in determining whether the financial
statements should be consolidated is to determine if
the reporting entity has a variable interest in another
entity, referred to as a potential variable interest
entity (VIE).
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LO 1 Meaning of control.

Definitions
Definitions of
of Control
Control

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LO 1 Meaning of control.

Requirements
Requirements for
for the
the Inclusion
Inclusion of
of Subsidiaries
Subsidiaries
in
in the
the Consolidated
Consolidated Financial
Financial Statements
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 parents control.
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LO 5 Requirements regarding consolidation of subsidiaries.

Reasons
Reasons For
For Subsidiary
Subsidiary Companies
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 parents assets.

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LO 3 Acquiring assets or stock.

Consolidated
Consolidated Financial
Financial Statements
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:

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Creditors

Noncontrolling stockholders

Regulatory agencies

LO 4 Valuation and classification of subsidiary assets and liabilities.

Investments
Investments at
at the
the Date
Date of
of Acquisition
Acquisition
Recording Investments at Cost (Parents 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.

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LO 7 Recording of investment at acquisition.

Investments
Investments at
at the
the Date
Date of
of Acquisition
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 (Polos) $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 companys balance
sheets on December 31, 2010, were:

Polo
Common stock, $10 par value

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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
Investments at
at the
the Date
Date of
of Acquisition
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

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700,000

20,000
20,000

LO 7 Recording of investment at acquisition.

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Assets and liabilities are summed, regardless of
whether the parent owns 100% or a smaller controlling
interest.
Noncontrolling interests (NCI) 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.

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LO 8 Preparing consolidated statements using a workpaper.

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Intercompany Accounts to Be Eliminated
Subsidiarys
Parents Accounts
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)

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LO 8 Preparing consolidated statements using a workpaper.

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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 parents share of subsidiarys equity is eliminated
against the investment account, subsidiarys net assets
are substituted for the investment account in the
consolidated balance sheet.
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LO 8 Investment is eliminated for consolidated statements.

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Investment Elimination
Computation and Allocation of Difference between Implied
Value and Book Value
Step 1: Determine percentage of stock acquired.
Step 2: Divide purchase price by the percentage acquired
to calculate the implied value of the subsidiary.
Step 3: Difference between step 2 and book value of
subsidiarys equity must be allocated to adjust the
underlying assets and liabilities of the acquired company.

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LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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 subsidiarys equity (IV = BV), and
a. The parent company acquires 100% of the subsidiarys stock; or
b. The parent company acquires less than 100% of the subsidiarys stock.
Case 2. The implied value of the subsidiary exceeds the book value of the
subsidiarys equity (IV > BV), and
a. The parent company acquires 100% of the subsidiarys stock; or
b. The parent company acquires less than 100% of the subsidiarys stock.
Case 3. The implied value of the subsidiary is less than the book value of the
subsidiarys equity (IV < BV), and
a. The parent company acquires 100% of the subsidiarys stock; or
b. The parent company acquires less than 100% of the subsidiarys stock.
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LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): Implied Value of Subsidiary Is Equal to Book Value
of Subsidiary Companys Equity (IV BV)100% of Stock
Acquired.

Illustration: Assume that on January 1, 2013, 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

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$160,000
$160,000

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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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$ 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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, 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.
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LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, 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

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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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): The workpaper entry to eliminate S Companys
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.

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LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(a): Note the following on the workpaper.
1. The investment account and related subsidiarys
stockholders equity have been eliminated and the
subsidiarys 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 companys stockholders equity.
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3-25

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): Parents Cost of Investment Is Equal to Book Value of
Subsidiarys Stock Acquired (IV=BV) - Partial Ownership.

Illustration: Assume that on January 1, 2013, 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

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3-26

$144,000
$144,000

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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

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3-27

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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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

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3-28

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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, 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

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3-29

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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, 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

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3-30

$ 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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 1(b): The workpaper entry to eliminate S Companys
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

144,000
16,000

(establish the NCI)

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3-31

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): Implied Value Exceeds Book Value of Subsidiary
Companys Equity (IV>BV)Partial Ownership.
Illustration: Assume that on January 1, 2013, 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

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3-32

$148,000
$148,000

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(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
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

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3-33

Implied value =
Book value
$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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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
3-34

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 2(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, 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

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3-35

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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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


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3-36

37,000

25,000

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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.

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3-37

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(b): Implied Value of Subsidiary is Less Than Book
Value (IV<BV)Partial Ownership.
Illustration: Assume that on January 1, 2013, 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

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3-38

$120,000
$120,000

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(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
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
3-39

Implied value =
Book value
$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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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
3-40

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers
Case 3(b): The workpaper to consolidate the balance sheets for
P and S on Jan. 1, 2013, 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
3-41

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
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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

Slide
3-42

30,000
10,000
10,000

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Review Question
The noncontrolling interest in the subsidiary is
reported as:
a. Asset
b. Liability
c. Equity
d. Expense

Slide
3-43

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Subsidiary Treasury Stock Holdings


A subsidiary may hold some of its own shares as
treasury stock at the time the parent company
acquires its interest.
Because the treasury stock account represents a
contra stockholders equity account, it must be
eliminated by a credit when the investment account
and subsidiary companys equity accounts are
eliminated on the workpaper.
Slide
3-44

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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.

Slide
3-45

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
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 subsidiarys statements prior to their
entry on the workpaper.

Slide
3-46

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Consolidated
Consolidated Balance
Balance Sheets:
Sheets: Use
Use of
of Workpapers
Workpapers

Review Question
Which of the following adjustments do not occur in the
consolidating process?
a. Elimination of parents retained earnings
b. Elimination of intra-company balances
c. Allocations of difference between implied and book
values
d. Elimination of the investment account

Slide
3-47

LO 9 Computing and allocating the difference


between implied and book value (CAD).

Limitations
Limitations of
of Consolidated
Consolidated Statements
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.

Slide
3-48

LO 6 Limitations of consolidated statements.

IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP

Slide
3-49

LO 10 Similarities and differences between U.S. GAAP and IFRS.

IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP

Slide
3-50

LO 10 Similarities and differences between U.S. GAAP and IFRS.

IFRS
IFRS Versus
Versus U.S.
U.S. GAAP
GAAP

Slide
3-51

LO 10 Similarities and differences between U.S. GAAP and IFRS.

Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
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.

Slide
3-52

Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
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 Companys 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.
Slide
3-53

Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition

Slide
3-54

Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition

Slide
3-55

Deferred
Deferred Taxes
Taxes on
on the
the Date
Date of
of Acquisition
Acquisition
The workpaper entry to eliminate the investment account is
as follows:

Entries for allocation with and without deferred taxes.

Slide
3-56

Consolidation
Consolidation of
of Variable
Variable Interest
Interest Entities
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 81010
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.
Slide
3-57

Copyright
Copyright
Copyright 2012 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.
Slide
3-58