3-1

Baker / Lembke / King

The Reporting

3
Entity and
Consolidated
Financial Electronic Presentation by
Douglas Cloud

Statements Pepperdine University

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-2
Consolidated Financial Statements

Consolidated
Consolidated financial
financial statements
statements present
present the the
financial
financial position
position and
and results
results of
of operations
operations for for aa
parent
parent and
and one
one or
or more
more subsidiaries
subsidiaries asas ifif the
the
individual
individual entities
entities were
were actually
actually aa single
single
company..
company

Consolidated
Consolidated financial
financial statements
statements are
are primarily
primarily
for
for those
those having
having aa long-run
long-run interest
interest in
in the
the parent
parent
company,
company, suchsuch as
as the
the stockholders
stockholders and
and long-term
long-term
creditors
creditors of
of the
the parent
parent company.
company.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-3
Limitations of Consolidated Financial Statements

 The
 Thepoor
poorperformance
performanceor
orposition
positionof
ofone
oneor
ormore
more
companies
companiesmay maybe behidden.
hidden.
 Not
 Notall
allthe
theconsolidated
consolidatedretained
retainedearnings
earningsbalance
balanceisis
necessarily
necessarilyavailable
availableforfordividends
dividendsofofthe
theparent.
parent.
 Financial
 Financialratios
ratiosbased
basedon onconsolidated
consolidatedstatements
statementsare
are
not
notnecessarily
necessarilyrepresentative
representativeof ofany
anysingle
singlecompany
company
in
inthe
theconsolidation,
consolidation,including
includingthe
theparent.
parent.
 Similar
 Similaraccounts
accountsof ofdifferent
differentcompanies
companiesthatthatare
are
combined
combinedin inthe
theconsolidation
consolidationmaymaynot
notbebeentirely
entirely
comparable.
comparable.
 Additional
 Additionalinformation
informationabout
aboutindividual
individualcompanies
companies
may
mayrequire
requirevoluminous
voluminousfootnotes.
footnotes.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-4
Indirect Control

P owns 80 percent of X

X owns 60 percent of Z

Z
PP indirectly
indirectly controls
controls ZZ
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-5
Indirect Control

P
.90 .70

X Y

.40 .30
Z
PP indirectly
indirectly controls
controls ZZ
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-6
Indirect Control

P
.80
.90
.80
W X Y

.15 .30
.15

Z
PP indirectly
indirectly controls
controls ZZ
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-7
Indirect Control
• Ability to exercise control: some restrictions though
holding more than 50% of stocs
• Permanence of Control: hold permanently and
consistency
• Differences in:
– Fiscal periods
– Accounting methods
– Both do not affect the decision to consolidate.

In
In determining
determining control,
control, the
the
FASB
FASB hashas moved
moved beyond
beyond the
the
traditional
traditional view
view of
of legal
legal control
control
to
to one
one of
of effective
effective control.
control.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-8
Questions Preparer Should Ask
Are
Are there
there items
items included
included inin the
the
statements
statements that
that would
would notnot appear,
appear,or or
that
that would
would bebe stated
stated at
at aa different
different
amount,
amount, inin the
the statements
statements of of aa
single
single company?
company?

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-9
Questions Preparer Should Ask

Are
Are there
there any
any items
items that
that do
do not
not
appear
appear inin these
these statements
statements that
that
would
would appear
appear ifif the
the consolidated
consolidated
entity
entity were
were actually
actually aa single
single
company?
company?

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-10
Balance Sheets --December 31, 20X1
Popper Sun
On
On January
Assets January 1,1, 20X1,
20X1, Popper
Popper Company
Company purchased
purchased at
at book
book
Cash value all the common stock of Sun $Corporation.
5,000 $ 3,000
value all the common stock of Sun Corporation.
Receivable (net) 84,000 30,000
Inventory 95,000 60,000
Fixed Assets (net) 375,000 250,000
Other Assets 25,000 15,000
Investment in Sun Stock 300,000
Total Assets $884,000 $358,000
Liabilities and Equities
Short-Term Payables $ 60,000 $ 8,000
Long-Term Payables 200,000 50,000
Common Stock 500,000 200,000
Retained Earnings 124,000 100,000
Total Liabilities and Equities $884,000 $358,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-11
The Consolidation Process Illustrated
Additional data:
1. Popper uses the basic equity method to account for
its investments in Sun. The investment account is
carried at the book value of Sun’s net assets and is
adjusted for Popper’s share of Sun’s earnings and
dividends.
2. Sun owes Popper $1,000 on account at the end of the
year.
3. Sun purchases $6,000 of inventory from Popper
during 20X1. The inventory originally cost Popper
$4,000. Sun still holds all the inventory at the end of
the year.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-12
The Consolidated Entity

Parent
Parent

Subsidiary
Subsidiary

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-13
The Consolidated Entity

Popper’s
common
stock
Popper
Popper
Company
Company
Sun’s
common
stock Intercorporate
Sun Stockholdings
Sun
Corporation
Corporation

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-14
Consolidated Balance Sheet
Popper Company
Consolidated Balance Sheet
December 31, 20X1
Assets Liabilities and Equities
Cash $ 8,000 Short-Term Payables
$5,000
$5,000 ++$30,000
$3,000
$3,000 $ 67,000
$84,000
$84,000 ++ $30,000 250,000
Receivables (net) 113,000 Long-Term Payables
$95,000--$1,000
$95,000 ++$60,000
$1,000
$60,000
Inventory 153,000
--$2,000
Fixed Assets (net) 625,000 Common$375,000$2,000
$375,000
Stock ++$250,000
$250,000 500,000
Other Assets $25,000
40,000 Retained ++$15,000
Earnings
$25,000 $15,000 122,000
Total Assets $939,000 Total Liabil. and Equities $939,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-15
Consolidated Balance Sheet
Popper Company
Consolidated Balance Sheet
December 31, 20X1
Assets $60,000 + $8,000 Liabilities and Equities
$60,000 + $8,000
Cash --$1,000 $ 8,000 Short-Term Payables $ 67,000
$200,000 $1,000
$200,000++$50,000
Receivables (net) $50,000 113,000 Long-Term Payables 250,000
Inventory 153,000
$500,000
$500,000 ++$200,000
$200,000
Fixed$124,000
Assets (net)
++$100,000 625,000 Common Stock 500,000
-
Other Assets-$200,000
$124,000 $100,000
$200,000 40,000 Retained Earnings 122,000
--$100,000
$100,000 --$2,000
$2,000
Total Assets $939,000 Total Liabil. and Equities $939,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-16
Intercompany Receivable and Payable

Popper
Popper
Company
Company
Intercompany
receivable/payable
$1,000
Sun
Sun
Corporation
Corporation

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-17
Profits on Intercompany Sales
Cost of
goods
$4,000
Popper
Popper
Company
Company

Sales $6,000

Sun
Sun
Corporation
Corporation

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-18
Noncontrolling Interest

Those
Those shareholders
shareholders ofof the
the subsidiary
subsidiary other
other than
than
the
the parent
parent are
are referred
referred to
to as
as “noncontrolling”
“noncontrolling” oror
“minority”
“minority” shareholders.
shareholders.

Their
Their interests
interests must
must bebe included
included in in the
the consolidated
consolidated
statements.
statements. MostMost commonly
commonly this this interest
interest isis shown
shown
with
with liabilities
liabilitiesor
or between
between liabilities
liabilities and
and
stockholders’
stockholders’ equity
equity in
in the
the balance
balance sheet.
sheet.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-19
Consolidated Balance Sheet Workpaper
Popper Sun Consoli-
Item Company Corp. Debit Credit dated
Cash 5,000 3,000
Receivables (net) 84,000 30,000 (a) 1,000
Inventory 95,000 60,000
Fixed Assets (net) 375,000 250,000
Other Assets 25,000 15,000
Investment in Sun 300,000
884,000 358,000
Short-Term Pay. 60,000 8,000 (a) 1,000
Long-Term Pay. 200,000 50,000
Common Stock 500,000 200,000
Retained Earnings 124,000 100,000

884,000 358,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-20
Consolidated Balance Sheet Workpaper
Popper Sun Consoli-
Item Company Corp. Debit Credit dated
Cash 5,000 3,000
Receivables (net) 84,000 30,000 (a) 1,000
Inventory 95,000 60,000 (b) 2,000
Fixed Assets (net) 375,000 250,000
Other Assets 25,000 15,000
Investment in Sun 300,000
884,000 358,000
Short-Term Pay. 60,000 8,000 (a) 1,000
Long-Term Pay. 200,000 50,000
Common Stock 500,000 200,000
Retained Earnings 124,000 100,000 (b) 2,000

884,000 358,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-21
Consolidated Balance Sheet Workpaper
Popper Sun Consoli-
Item Company Corp. Debit Credit dated
Cash 5,000 3,000 8,000
Receivables (net) 84,000 30,000 (a) 1,000 113,000
Inventory 95,000 60,000 (b) 2,000 153,000
Fixed Assets (net) 375,000 250,000 625,000
Other Assets 25,000 15,000 40,000
Investment in Sun 300,000 (c)300,000
884,000 358,000 939,000
Short-Term Pay. 60,000 8,000 (a) 1,000 67,000
Long-Term Pay. 200,000 50,000 250,000
Common Stock 500,000 200,000 (c)200,000 500,000
Retained Earnings 124,000 100,000 (b) 2,000
(c)100,000 122,000
884,000 358,000 939,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-3-22
22

Additional
Considerations--
Different Approaches
to Consolidation

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-23
Proprietary Theory
Noncon-
Parent’s trolling
share share

Goodwill

Portion Fair value

included in increment
consolidated
financial
statements Book value
Recognition
Recognition of
of
Subsidiary
Subsidiary Net
Net Assets
Assets
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-24
Proprietary Theory
Noncon-
Parent’s trolling
share share

Revenue

Portion
included in
consolidated Expenses
financial
statements
Net income Recognition
Recognition of
of
Subsidiary
Subsidiary Net
Net Income
Income
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-25
Parent Company Theory
Noncon-
Parent’s trolling
share share

Goodwill

Portion Fair value

included in Increment
consolidated
financial
statements Book value
Recognition
Recognition of
of
Subsidiary
Subsidiary Net
Net Assets
Assets
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-26
Parent Company Theory
Noncon-
Parent’s trolling
share share

Revenue

Portion
included in
consolidated Expenses
financial
statements
Net income Recognition
Recognition of
of
Subsidiary
Subsidiary Net
Net Income
Income
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-27
Entity Theory
Noncon-
Parent’s trolling
share share

Goodwill

Portion Fair value

included in increment
consolidated
financial
statements Book value
Recognition
Recognition of
of
Subsidiary
Subsidiary Net
Net Assets
Assets
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-28
Entity Theory
Noncon-
Parent’s trolling
share share

Revenue

Portion
included in
consolidated Expenses
financial
statements
Net income Recognition
Recognition of
of
Subsidiary
Subsidiary Net
Net Income
Income
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-29
Baker / Lembke / King

Consolidation
as of the Date
of Acquisition
4
Electronic Presentation by
Douglas Cloud
Pepperdine University

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-30
Consolidation Workpaper

Trial Balance Data Elimination Entries

Account Titles Parent Subsidiary Debits Credits Consolidated

Work flow

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-31
Nature of Eliminating Entries

…to
…to reflect
reflect the
Eliminating
Eliminating the amounts
entries
amounts
entries are that
are used
that in
used in the
the
would
would appear
appear ififworkpaper
consolidation
consolidation all
all the
the legally
workpaper legally
to
to adjust
adjust
separate
the
the totalscompanies
separate
totals of
companies
of the were
the individual
were account
individual account
actually
balances
actuallyof
balances aof
asingle
single
the company.
the separate
company.
separate companies...
companies...

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-32
Full Ownership Purchased at Book Value
Peerless
Peerless purchases
purchases all
all of
of Special
Special Foods’
Foods’
outstanding
outstanding common
common stock
stock for
for $300,000.
$300,000.
Let’s
Let’s take
take aa look
look at
at the
the balance
balance
sheets
sheets of
of Peerless
Peerless andand Special
Special
Foods
Foods immediately
immediately before
before
combination.
combination.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-33
Balance Sheets Before Combination
Assets Peerless Special Foods
Cash $ 350,000 $ 50,000
Accounts Receivable 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Buildings and Equipment 800,000 600,000
Accumulated Depreciation (400,000) (300,000 )
Total Assets $1,100,000 $500,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 100,000 $100,000
Bonds Payable 200,000 100,000
Common Stock 500,000 200,000
Retained Earnings 300,000 100,000
Total Liabilities and Stockholders’ Equity $1,100,000 $500,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-34
Full Ownership Purchased at Book Value

P Investment
Investmentcost
cost $300,000
$300,000
Book
Bookvalue:
value:
Common
Commonstock--Special
stock--SpecialFoods
Foods $200,000
$200,000
100% Retained
Retainedearnings--Special
earnings--SpecialFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s
Peerless’sshare
share xx 1.00 (300,000)
1.00 (300,000
S Differential
Differential $$ -0-
-0-

January 1, 20X1 entry:

E(1) Investment in Special Foods Stock 300,000
Cash 300,000
Record purchase of Special Foods stock.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-35
Balance Sheets After Combination
Assets Peerless Special Foods
Cash $ 50,000 $ 50,000
Accounts Receivable 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Buildings and Equipment 800,000 600,000
Accumulated Depreciation (400,000) (300,000 )
Investment in Special Foods Stock 300,000
Total Assets $1,100,000 $500,000
Liabilities and Stockholders’ Equity
Accounts Payable $ 100,000 $100,000
Bonds Payable 200,000 100,000
Common Stock 500,000 200,000
Retained Earnings 300,000 100,000
Total Liabilities and Stockholders’ Equity $1,100,000 $500,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-36
100% Purchase at Book Value

Trial Balance Data Elimination Entries

Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 50,000 50,000 100,000
Accounts Rec. 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Land 175,000 40,000 215,000
Bldg. and Equip. 800,000 600,000 1,400,000
Inv. in Sp. Foods 300,000
Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000

Accounts Payable 100,000 100,000 200,000
Bonds Payable 200,000 100,000 300,000
Common Stock 500,000 200,000 500,000
Retained Earn. 300,000 100,000 300,000
Total Credits 1,500,000 800,000 2,000,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-37
100% Purchase at Book Value

Trial Balance Data Elimination Entries

Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 50,000 50,000 100,000
Accounts Rec. 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Land 175,000 40,000 215,000
Bldg. and Equip. 800,000 600,000 1,400,000
Inv. in Sp. Foods 300,000 (2) 300,000
Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000

Accounts Payable 100,000 100,000 200,000
Bonds Payable 200,000 100,000 300,000
Common Stock 500,000 200,000 (2)200,000 500,000
Retained Earn. 300,000 100,000 (2)100,000 300,000
Total Credits 1,500,000 800,000 300,000 300,000 2,000,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-38
100% Purchase at Book Value

Trial Balance Data Elimination Entries

Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 50,000 50,000 100,000
Accounts Rec. 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Land 175,000 40,000 215,000
Bldg. and Equip. 800,000 600,000 1,400,000
Inv. in Sp. Foods 300,000 300,000
Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000

Accounts Payable 100,000 100,000 200,000
Bonds Payable 200,000 100,000 300,000
Common Stock 500,000 200,000 200,000 500,000
Retained Earn. 300,000 100,000 100,000 300,000
Total Credits 1,500,000 800,000 300,000 300,000 2,000,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-39
Elimination Entry E(2)

Entry E(2)
Common Stock--Special Foods 200,000
Retained Earnings 100,000
Investment in Special Foods
Stock 300,000
Eliminate investment balance.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-40
Purchase At More Than Book Value

Reasons
Reasons the
the purchase
purchase price
price of
of aa company’s
company’s
stock
stock might
might exceed
exceed the
the stock’s
stock’s book value::
book value
 Errors or omissions on the books of the
subsidiary
 Excess of fair value over the book value of the
subsidiary’s net identifiable assets
 Existence of goodwill
 Other reasons

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-41
Purchase At More Than Book Value

P Investment
Investmentcost
cost $340,000
$340,000
Book
Bookvalue:
value:
Common
Commonstock--Special
stock--SpecialFoods
Foods $200,000
$200,000
100%
Retained
Retainedearnings--Special
earnings--SpecialFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s
Peerless’sshare
share xx 1.00
1.00 (300,000
(300,000)
S Differential
Differential $$ 40,000
40,000

January 1, 20X1 entry:

E(3) Investment in Special Foods Stock 340,000
Cash 340,000
Record purchase of Special Foods stock.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-42
Purchase Full Ownership At More Than Book Value

P Investment
Investmentcost
cost $340,000
$340,000
Book
Bookvalue:
value:
Common
Commonstock--Special
stock--SpecialFoods
Foods $200,000
$200,000
100%
Retained
Retainedearnings--Special
earnings--SpecialFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s
Peerless’sshare
share xx 1.00
1.00 (300,000
(300,000)
S Differential
Differential $$ 40,000
40,000

The elimination entry on the workpaper would be:

E(4) Common Stock--Special Foods 200,000
Retained Earnings 100,000
Differential 40,000
Investment in Special Foods Stock 340,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-43
Purchase Full Ownership At More Than Book Value

Trial Balance Data Elimination Entries

Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Bldg. and Equip. 800,000 600,000
Inv. in Sp. Foods 340,000 (4) 340,000
Differential (4) 40,000
Total Debits 1,500,000 800,000

Accum. Depr. 400,000 300,000

Accounts Payable 100,000 100,000
Bonds Payable 200,000 100,000
Common Stock 500,000 200,000 (4)200,000
Retained Earn. 300,000 100,000 (4)100,000
Total Credits 1,500,000 800,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-44
Purchase Full Ownership At More Than Book Value

Trial Balance Data Elimination Entries

Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000 (5) 40,000
Bldg. and Equip. 800,000 600,000
Inv. in Sp. Foods 340,000 (4) 340,000
Differential (4) 40,000 (5) 40,000
Total Debits 1,500,000 800,000

Accum. Depr. 400,000 300,000

Accounts Payable 100,000 100,000
Bonds Payable 200,000 100,000
Common Stock 500,000 200,000 (4)200,000
Retained Earn. 300,000 100,000 (4)100,000
Total Credits 1,500,000 800,000 380,000 380,000
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-45
Purchase Full Ownership At More Than Book Value

Trial Balance Data Elimination Entries

Account Titles Peerless Spec. Foods Debits Credits Consolidated
Cash 10,000 50,000 60,000
Accounts Rec. 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Land 175,000 40,000 (5) 40,000 255,000
Bldg. and Equip. 800,000 600,000 1,400,000
Inv. in Sp. Foods 340,000 (4) 340,000
Differential (4) 40,000 (5) 40,000
Total Debits 1,500,000 800,000 2,000,000

Accum. Depr. 400,000 300,000 700,000

Accounts Payable 100,000 100,000 200,000
Bonds Payable 200,000 100,000 300,000
Common Stock 500,000 200,000 (4)200,000 500,000
Retained Earn. 300,000 100,000 (4)100,000 300,000
Total Credits 1,500,000 800,000 380,000 380,000 2,000,000
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 3-46
Elimination Entry E(5)

Entry E(5)
Land 40,000
Differential 40,000

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 3-47
Existence of Goodwill
IfIf aa company
company purchases
purchases aasubsidiary
subsidiary at at aa price
price in
in excess
excess of
of
the
the total
total of
of the
the fair
fair value
value of
of the
the subsidiary’s
subsidiary’s net net identifiable
identifiable
assets,
assets, the
the additional
additional amount
amount generally
generally isisconsidered
considered to to be
be
aa payment
payment for for the
the excess
excess earning
earning power
power of of the
the acquired
acquired
company,
company, referred
referred toto as
as goodwill.
goodwill.

IfIf the
the fair
fair values
values of
of Special
Special Foods’
Foods’ assets
assets and
and liabilities
liabilities are
are
equal
equal to to their
their book
book values,
values, and
and the
the $40,000
$40,000 differential
differential isis
considered
considered aa payment
payment for
for goodwill,
goodwill, the the following
following
elimination
elimination entry
entry isis needed:
needed:
E(6) Goodwill 40,000
Differential 40,000
Assign differential to goodwill.
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 3-48
Illustration of Debit Differential

Peerless
Peerless Products
Products acquires
acquires all
all Special
Special Foods’
Foods’
capital
capital stock
stock for
for $400,000
$400,000 on on January
January 1,1, 20X1,
20X1,
by
by issuing
issuing $100,000
$100,000 ofof 99 percent
percent first
first mortgage
mortgage
bonds
bonds and
and paying
paying cash
cash of
of $300,000.
$300,000.
Differences
Differences Between
Between Fair
Fair and
and Book
Book Value:
Value:
Land:
Land: $15,000
$15,000
Buildings:
Buildings: $60,000
$60,000
Accumulated
Accumulated Depreciation:
Depreciation: ($10,000)
($10,000)
Bonds
Bonds Payable:
Payable: ($35,000).
($35,000). Total:
Total: $30,000
$30,000
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 3-49
Debit Differential
P Investment
Investmentcost
cost $400,000
$400,000
Book
Bookvalue:
value:
Common
Commonstock--Special
stock--SpecialFoods
Foods $200,000
$200,000
100% Retained
Retainedearnings--Special
earnings--SpecialFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s
Peerless’sshare
share xx 1.00
1.00 (300,000)
(300,000
S Differential
Differential $100,000
$100,000

January 1, 20X1 entry:

E(7) Investment in Special Foods Stock 400,000
Bonds Payable 100,000
Cash 300,000
Record purchase of Special Foods stock.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-50
Debit Differential
Cost of investment
$400,000

Excess of cost over

fair value of net
identifiable assets
$70,000
Total differential
$100,000 Fair value of net
identifiable assets
$330,000 Excess of fair value
over book value of
Book value of net net identifiable
identifiable assets assets
$300,000 $30,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-51
Debit Differential
The eliminations entered in the consolidation workpaper in
preparing the consolidated balance sheet immediately after the
combination are:
E(8) Common Stock--Special Foods 200,000
Retained Earnings 100,000
Differential 100,000
Investment in Special Foods Stock 400,000
Eliminate investment balance.
E(9) Inventory 15,000
Land 60,000
Goodwill 70,000
Buildings and Equipment 10,000
Premium on Bonds Payable 35,000
Differential 100,000
Assign differential.
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 3-52
80 Percent Purchase at Book Value

On
On January
January 1,
1, 20X1,
20X1, Peerless
Peerless Products
Products purchases
purchases
80
80 percent
percent of
of the
the outstanding
outstanding common
common stock
stock of
of
Special
Special Foods
Foods forfor $240,000
$240,000 cash.
cash. The
The purchase
purchase
price
pricerepresents
represents 8080 percent
percent of
of the
thebook
book value
valueofof
Special
Special Foods’
Foods’ stock
stock on
on the
the date
date of
of combination.
combination.

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 3-53
Purchase less than Book Value (Credit Differential)

• Due to various reasons, such as bargain

purchase, error or ommission, excess of book
value over fair value or diminution of
goodwill
• Called negative goodwill, be allocated
proportionately to assets other than monetary
assets and fair-value based assets.
• Case: Peerless purchased all Special Foods’
stock for $260,000.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-54
Purchase less than Book Value (Credit Differential

Book Fair Diff.

Value Value
Land $40,000 45,000 5,000
Equipment 600,000
Acc Depr (300,000)
Net 300,000 280,000 (20,000)
Total (15,000)

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 3-55
80 Percent Purchase at Book Value
Investment
Investmentcost
cost $240,000
$240,000
P
Book
Bookvalue:
value:
Common
Commonstock--Special
stock--SpecialFoods
Foods $200,000
$200,000
100% Retained
Retainedearnings--Special
earnings--SpecialFoods
Foods 100,000
100,000
$300,000
$300,000
Peerless’s
Peerless’sshare
share xx .8.8 (240,000
(240,000)
Differential
Differential $$ -0-
-0-
S
20%

NCI January 1, 20X1 entry:

E(14) Investment in Special Foods Stock 240,000

Cash 240,000
Record purchase of Special Foods stock.
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 3-56
80 Percent Purchase at Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Fd. Debits Credits Consolidated
Cash 110,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Bldg. and Equip. 800,000 600,000
Inv. in Sp. Foods 240,000 240,000
Total Debits 1,500,000 800,000
Accum. Depr. 400,000 300,000
Accounts Payable 100,000 100,000
Bonds Payable 200,000 100,000
Common Stock 500,000 200,000 200,000
Retained Earn. 300,000 100,000 100,000
Nonctrl. Interest 60,000
Total Credits 1,500,000 800,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-57
80 Percent Purchase at Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Fd. Debits Credits Consolidated
Cash 110,000 50,000
Accounts Rec. 75,000 50,000
Inventory 100,000 60,000
Land 175,000 40,000
Bldg. and Equip. 800,000 600,000
Inv. in Sp. Foods 240,000 240,000
Total Debits 1,500,000 800,000
Accum. Depr. 400,000 300,000
Accounts Payable 100,000 100,000
Bonds Payable 200,000 100,000
Common Stock 500,000 200,000 200,000
Retained Earn. 300,000 100,000 100,000
Nonctrl. Interest 60,000
300,000
Total Credits 1,500,000 800,000 300,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-58
80 Percent Purchase at Book Value
Trial Balance Data Elimination Entries
Account Titles Peerless Spec. Fd. Debits Credits Consolidated
Cash 110,000 50,000 160,000
Accounts Rec. 75,000 50,000 125,000
Inventory 100,000 60,000 160,000
Land 175,000 40,000 215,000
Bldg. and Equip. 800,000 600,000 1,400,000
Inv. in Sp. Foods 240,000 240,000
Total Debits 1,500,000 800,000 2,060,000
Accum. Depr. 400,000 300,000 700,000
Accounts Payable 100,000 100,000 200,000
Bonds Payable 200,000 100,000 300,000
Common Stock 500,000 200,000 200,000 500,000
Retained Earn. 300,000 100,000 100,000 300,000
Nonctrl. Interest 60,000 60,000
300,000
Total Credits 1,500,000 800,000 300,000 2,060,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-59
Elimination Entry E(15)

Entry E(15)
Common Stock--Special Foods 200,000
Retained Earnings 100,000
Investment in Special Foods
Stock 240,000
Noncontrolling Interest 60,000

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 3-60
Consolidated Balance Sheet--80 Percent
Peerless Products Corporation and Subsidiary
Consolidated Balance Sheet
January 1, 20X1
Assets:
Cash $ 160,000
Accounts Receivable 125,000
Inventory 160,000
Land 215,000
Building and Equipment $1,400,000
Accumulated Depreciation (700,000 ) 700,000
Total Assets $1,360,000

Continued
Continued

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-61
Consolidated Balance Sheet--80 Percent

Liabilities:
Accounts Payable $ 200,000
Bonds Payable 300,000

Noncontrolling Interest 60,000

Stockholders’ Equity:
Common Stock 500,000
Retained Earnings 300,000
Total Liabilities and Equity $1,360,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-62
Purchased other than Book Value

• More than book value (debit differential)

– Allocation based on the ownership percentage
• Less than book value (credit differential)
– Reduced proportionately the difference between
fair value and book value
• Intercorporate Receivables and Payables
– All should be eliminated during the
consolidation process

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-63
Chapter Four

The
End
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