An Introduction to Consolidated Financial Statements

1
An Introduction to ConsolidatedFinancial
Statements
2
Business Combinations ConsummatedThrough Stock
Acquisitions
Business combination
One or more companies become subsidiaries of
a common parent corporation.
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The Reporting Entity
Subsidiary Financial Statements _____
_____ _____ _____ _____ _____ _____ _____
Parent Financial Statements _____ _____ _____
_____ _____ _____ _____ _____
Consolidated Financial Statements _____
_____ _____ _____ _____ _____ _____ _____
4
The Reporting Entity
A parent company may acquire a subsidiary in a
very different industry from its own as a means
of diversifying its overall business risk.
There are also legal reasons for maintaining
separate identities.
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The Parent-Subsidiary Relationship
Parent Company
Owns more than 50 of another company
Affiliate
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The Parent-Subsidiary Relationship
Parent Company
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Consolidation Policy
Consolidated financial statements
provide information that is not included in the
separate statements of the parent corporation.
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Consolidation Policy
A subsidiary can be excluded from consolidation
in only two situations
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Consolidation Policy
Consolidation policy is usually presented under
the following headings
Principles of consolidation
Basis of consolidation
10
Parent and Subsidiary withDifferent Fiscal
Periods
Consolidated statements are prepared for and as
of the end of the parents fiscal period.
If the difference does not exceed three months
it is acceptable to use the subsidiarys statement
s with disclosure.
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Consolidated Balance Sheet at Dateof Acquisition
(100 at Book Value)
Assets Penn Skelly Consolidated Current
assets Cash 20,000 10,000 30,000
Other current assets 45,000 15,000
60,000 Total current assets
65,000 25,000 90,000 Plant assets
75,000 45,000 120,000 Less Accum. depr.
15,000 5,000 20,000 Total plant
assets 60,000 40,000 100,000 Investment
in Skelly 40,000 0
0 Total assets 165,000 65,000 190,00
0
12
Consolidated Balance Sheet at Dateof Acquisition
(100 at Book Value)
Liabilities Penn Skelly
Consolidated Current liabilities Accounts
payable 20,000 15,000 35,000 Other
current liabilities 25,000 10,000
35,000 Total current liabilities
45,000 25,000 70,000 Stockholders equity
Capital stock 100,000 30,000 100,000
Retained earnings 20,000 10,000
20,000 Total stockholders equity 120,000 40,00
0 120,000 Total liabilities and stockholders
equity 165,000 65,000 190,000
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Learning Objective 4
Allocate the excess of the investment cost over
the book value of the subsidiary at the date of
acquisition.
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Parent Acquires 100 ofSubsidiary with Goodwill
Penn purchased all the stock of Skelly for
50,000.
Skelly stockholders equity is 40,000.
What is the consolidating (eliminating) entry?
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Parent Acquires 100 ofSubsidiary with Goodwill
Capital Stock 30,000 Retained
Earnings 10,000 Goodwill 10,000 Investme
nt in Skelly 50,000 To eliminate reciprocal
investment and equity accounts and to assign the
excess of investment cost over book value
acquired to goodwill
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Learning Objective 5
Prepare a consolidated balance sheet at the date
of acquisition, including preparation of
eliminating entries.
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Consolidated Balance Sheet at Dateof Acquisition
(100 at Book Value)
Assets Penn Skelly Consolidated Current
assets Cash 10,000 10,000 20,000
Other current assets 45,000 15,000
60,000 Total current assets
55,000 25,000 80,000 Plant assets
75,000 45,000 120,000 Less Accum. depr.
15,000 5,000 20,000 Total plant
assets 60,000 40,000 100,000 Investment
in Skelly 50,000 Goodwill
10,000 Total assets 165,000 65,000 190,000
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Consolidated Balance Sheet at Dateof Acquisition
(100 at Book Value)
Liabilities Penn Skelly
Consolidated Current liabilities Accounts
payable 20,000 15,000 35,000 Other
current liabilities 25,000 10,000
35,000 Total current liabilities
45,000 25,000 70,000 Stockholders equity
Capital stock 100,000 30,000 100,000
Retained earnings 20,000 10,000
20,000 Total stockholders equity 120,000 40,00
0 120,000 Total liabilities and stockholders
equity 165,000 65,000 190,000
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Consolidated Balance Sheet at Dateof Acquisition
(100 at Book Value)
Assets Penn Skelly Consolidated Current
assets Cash 10,000 10,000 20,000
Other current assets 45,000 15,000
60,000 Total current assets
55,000 25,000 80,000 Plant assets
75,000 45,000 120,000 Less Accum. depr.
15,000 5,000 20,000 Total plant
assets 60,000 40,000 100,000 Investment
in Skelly 50,000 Goodwill
14,000 Total assets 165,000 65,000 194,000
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Consolidated Balance Sheet at Dateof Acquisition
(100 at Book Value)
Liabilities Penn Skelly
Consolidated Current liabilities Accounts
payable 20,000 15,000 35,000 Other
current liabilities 25,000 10,000
35,000 Total current liabilities
45,000 25,000 70,000 Minority
interest 4,000 Stockholders
equity Capital stock 100,000 30,000 100,
000 Retained earnings 20,000 10,000
20,000 Total stockholders equity 120,000 40,
000 120,000 Total liabilities and stockholders
equity 165,000 65,000 194,000
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Minority Interest
Minority interest in subsidiaries is
generally shown in a single amount in the
liability section of the consolidated balance
sheet.
The alternatives are to include the minority
interest in consolidated stockholders equity or
to place it in a separate minority interest
section.
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Minority Interest
The interest of minority stockholders
represents equity investments in the consolidated
net assets by stockholders of the
company affiliated with the parent.
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Consolidated Balance SheetAfter Acquisition
Assumptions
1. Penn acquired a 90 interest in Skelly on
January 1 for 50,000 when Skellys
stockholders equity was 40,000. 2. The accounts
payable of Skelly includes 5,000 owed to
Penn. 3. During the year, Skelly had income of
20,000 and declared 10,000 dividends.
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Consolidated Balance SheetAfter Acquisition
What is the balance in the investment in Skellys
account at December 31?
Original investment January 1 50,000 90 of
Skellys net income 18,000 90 of Skellys
dividends 9,000 Investment account
balance 59,000
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Consolidated Balance SheetAfter Acquisition
Capital Stock 30,000 Retained
Earnings 20,000 Goodwill 14,000 Investment
in Skelly 59,000 Minority Interest
5,000 To eliminate reciprocal investment
and equity balances, record goodwill, and enter
the minority interest
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Consolidated Balance SheetAfter Acquisition
Dividends Payable 9,000 Dividends
Receivable 9,000 To eliminate reciprocal
dividends receivable and payable
Accounts Payable 5,000 Accounts
Receivable 5,000 To eliminate intercompany
receivable and accounts payable
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Effect of Allocation on ConsolidatedBalance
Sheet at Acquisition
The separate books of the affiliated companies do
not record cost/book value differentials in
acquisitions that create parent-subsidiary
relationships.
Working paper procedures are used to adjust
subsidiary book values to reflect the cost/book
differentials.
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Effect of Allocation on ConsolidatedBalance
Sheet at Acquisition
The adjusted amounts appear in the consolidated
balance sheet.
The amount of the adjustment to individual assets
and liabilities is determined using an
investment cost-allocation schedule.
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Effect of Allocation on ConsolidatedBalance
Sheet at Acquisition
On Dec. 3, 2003, Pilot purchases 90 of
Sand Corporations outstanding common stock
for 5,000,000 cash plus 100,000 shares of
10 stock with a market value of 5,000,000.
Additional costs are 300,000.
200,000 is recorded as cost of the investment.
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Effect of Allocation on ConsolidatedBalance
Sheet at Acquisition
Sand Corporation (000) Book Value Fair Value
Assets Cash 200 200 Net
receivables 300 300 Inventories
500 600 Other current assets
400 400 Land 600
800 Building, net 4,000
5,000 Equipment, net 2,000 1,700 Total
assets 8,000 9,000
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Effect of Allocation on ConsolidatedBalance
Sheet at Acquisition
Sand Corporation (000) Book Value Fair Value
Liabilities Accounts payable 700
700 Notes payable 1,400 1,300 Common
stock 4,000 Paid-in capital
1,000 Retained earnings 900 Total
liabilities and stockholders equity 8,000
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Assignment of Excess Costover Underlying Equity
Investment in Sand 10,000 Common
Stock 1,000 Additional Paid-in
Capital 4,000 Cash 5,000 To record
90 acquisition of Sand Corporation
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Assignment of Excess Costover Underlying Equity
Investment in Sand 200 Additional Paid-in
Capital 100 Cash 300 To record
additional costs of combining with Sand
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Allocation of Excess Costover Underlying Equity
Investment in Sand 10,200,000 Book value of
interest acquired 5,900,000 90
(5,310,000) Excess of cost over BV
4,890,000
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Allocation of Excess Costover Underlying Equity
Fair Value
Book Value
90
Excess Allocated

Inventories 600 500
90 Land 800 600 180 Building
net 5,000 4,000 900 Equipment,
net 1,700 2,000 (270) Notes
payable 1,300 1,400 90 Total
allocated 990 Remainder to
goodwill 3,900 Total 4,890
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Consolidated Working PapersDecember 31, 2003
Adjustments and Consolidated
Eliminations Balance Account Title
Pilot Sand Dr. Cr.
Sheet
Cash Receivables, net Inventories Other current
assets Land Building, net Equipment,
net Investment in Sand Goodwill Unamortized
excess Total assets
1,300 700 900 600 1,200
8,000 7,000 10,200 29,900
200 300 500 400 600
4,000 2,000 8,000
b 90 b 180 b 900 b
3,900 a 4,890
b 270 a 10,200 b 4,890
1,500 1,000 1,490
1,000 1,980 12,900 8,730
3,900 32,500
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Consolidated Working PapersDecember 31, 2003
Adjustments and
Consolidated Eliminations
Balance Account Title Pilot Sand
Dr. Cr. Sheet
Accounts payable Notes payable Common stock Other
paid-in capital Retained earnings Minority
interest Total liabilities and stockholders
equity
2,000 3,700 11,000 8,900
4,300 29,900
700 1,400 4,000 1,000 900
8,000
b 90 a 4,000 a 1,000 a 900
a 590
2,700 5,010 11,000
8,900 4,300 590 32,500
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Consolidated Income Statement
The difference between a consolidated and an
unconsolidated income statement of the parent
company lies in the detail presented rather than
the net income amount.
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Effect of Amortization on ConsolidatedBalance
Sheet after Acquisition
Income for 2004 Sands net income
800,000 Pilots income (excluding income from
Sand) 2,523,500
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Effect of Amortization on ConsolidatedBalance
Sheet after Acquisition
Dividends Paid Sand
300,000 Pilot 1,500,000
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Effect of Amortization on ConsolidatedBalance
Sheet after Acquisition
Amortization of excess Undervalued inventories
sold in 2004 Undervalued land still
held Undervalued building (45 years useful
life) Overvalued equipment (5 years useful
life) Overvalued notes payable retired in
2004 Goodwill (no amortization)
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Consolidated Working PapersDecember 31, 2004
Adjustments and
Consolidated Eliminations
Balance Account Title Pilot Sand
Dr. Cr. Sheet
Cash Receivables, net Inventories Other current
assets Land Building, net Equipment,
net Investment in Sand Goodwill Unamortized
excess Total assets
253.5 540 1,300 800
1,200 9,500 8,000 10,504 32,097.5
100 200 600 500 600 3,800 1,800
7,600
b 180 b 880 b 3,900 a 4,744
b 216 a 10,504 b 4,744
353.5 740 1,900
1,300 1,980 12,900 8,730
3,900 33,937.5
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Consolidated Working PapersDecember 31, 2004
Adjustments and Consolidated
Eliminations Balance Account Title
Pilot Sand Dr. Cr.
Sheet
Accounts payable Notes payable Common stock Other
paid-in capital Retained earnings Minority
interest Total liabilities and stockholders
equity
2,300 4,000 11,000 8,900
5,897.5 32,097.5
1,200 4,000 1,000 1,400 7,600
a 4,000 a 1,000 a 1,400
a 640
3,500 4,000 11,000
8,900 5,897.5 640
33,937.5